[MENTOR INVESTMENT GROUP LOGO]
MENTOR FUNDS
901 East Byrd Street
Richmond, Virginia 23219
October 9, 1998
DEAR SHAREHOLDER:
You are cordially invited to attend a Meeting of shareholders of Mentor
Strategy Portfolio, a series of Mentor Funds, to be held on Thursday, November
12, 1998, at 10:00 a.m., Richmond time, at the offices of Mentor Funds at 901
East Byrd Street, 4th Floor, Richmond, Virginia. At the Meeting, shareholders
will be asked to vote on a proposed merger of the Strategy Portfolio into
Mentor Balanced Portfolio, another series of Mentor Funds. Each share of the
Strategy Portfolio would be exchanged at net asset value for shares of the
Balanced Portfolio.
Although the Trustees would like very much to have each shareholder attend
the Meeting, they realize that this is not possible. Whether or not you plan to
be present at the Meeting, your vote is needed. Please complete, sign, and
return the enclosed proxy card promptly. A postage-paid envelope is enclosed
for this purpose.
We look forward to seeing you at the Meeting or receiving your proxy card
so your shares may be voted at the Meeting.
Sincerely yours,
/s/ Daniel J. Ludeman /s/ Paul F. Costello
- ----------------------- ----------------------
Daniel J. Ludeman Paul F. Costello
CHAIRMAN PRESIDENT
SHAREHOLDERS ARE URGED TO SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED ENVELOPE SO AS TO BE REPRESENTED AT THE MEETING.
<PAGE>
MENTOR FUNDS
901 East Byrd Street
Richmond, Virginia 23219
MENTOR STRATEGY PORTFOLIO
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NOTICE OF MEETING OF SHAREHOLDERS
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NOVEMBER 12, 1998
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a Meeting of shareholders of Mentor Strategy
Portfolio, a series of Mentor Funds (the "Trust"), will be held at 901 East
Byrd Street, 4th Floor, Richmond, Virginia, on November 12, 1998 at 10:00 a.m.,
Richmond time, for the following purposes:
1. To approve or disapprove an Agreement and Plan of Reorganization
providing for the transfer of all of the assets of Mentor Strategy
Portfolio to Mentor Balanced Portfolio (the "Balanced Portfolio"), another
series of the Trust, in exchange for shares of the Balanced Portfolio and
the assumption by the Balanced Portfolio of all of the liabilities of the
Strategy Portfolio, and the distribution of such shares to the
shareholders of the Strategy Portfolio in complete liquidation of the
Strategy Portfolio.
2. To consider such other business as may properly come before the Meeting.
Shareholders of record as of the close of business on September 23, 1998
are entitled to notice of, and to vote at, the Meeting.
By order of the Board of Trustees,
Geoffrey B. Sale
SECRETARY
October 9, 1998
<PAGE>
MENTOR FUNDS
901 East Byrd Street
Richmond, Virginia 23219
(800) 382-0016
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PROSPECTUS/PROXY STATEMENT
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NOVEMBER 12, 1998
This Prospectus/Proxy Statement relates to the proposed merger (the
"Merger") of Mentor Strategy Portfolio (the "Strategy Portfolio"), a series of
Mentor Funds (the "Trust"), into Mentor Balanced Portfolio (the "Balanced
Portfolio"), another series of the Trust. The Merger is to be effected through
the transfer of all of the assets of the Strategy Portfolio to the Balanced
Portfolio in exchange for shares of beneficial interest of the Balanced
Portfolio (the "Merger Shares") and the assumption by the Balanced Portfolio of
all of the liabilities of the Strategy Portfolio, followed by the distribution
of the Merger Shares to the shareholders of the Strategy Portfolio in
liquidation of the Strategy Portfolio. As a result of the proposed Merger, each
shareholder of the Strategy Portfolio will receive in exchange for his or her
Strategy Portfolio shares a number of Balanced Portfolio shares equal in value
at the date of the exchange to the aggregate value of the shareholder's
Strategy Portfolio shares.
Because shareholders of the Strategy Portfolio are being asked to approve
a transaction which will result in their receiving shares of the Balanced
Portfolio, this Proxy Statement also serves as a Prospectus for the Merger
Shares of the Balanced Portfolio.
The Balanced Portfolio's investment objective is to seek capital growth
and current income. It pursues this objective by investing in a diversified
portfolio of equity and fixed-income securities which Mentor Investment
Advisors, LLC, the Portfolio's investment adviser, believes will produce both
capital growth and current income.
This Prospectus/Proxy Statement explains concisely what you should know
before investing in the Balanced Portfolio. Please read it and keep it for
future reference.
This Prospectus/Proxy Statement is accompanied by a Prospectus dated May
12, 1998 for the Balanced Portfolio's Class A and Class B shares, or Class Y
shares, as the case may be, in each case as any such Prospectus may be amended
or supplemented from time to time. The information regarding the Balanced
Portfolio contained in the Prospectuses is incorporated into this
Prospectus/Proxy Statement by reference. This Prospectus/Proxy Statement is also
accompanied by the Annual and Semi-Annual Reports to shareholders of the
Balanced Portfolio for the periods ended September 30, 1997 and March 31, 1998,
respectively; the financial statements contained in those Reports are
incorporated into this Prospectus/Proxy Statement by reference.
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The following documents have been filed with the Securities and Exchange
Commission (the "SEC") and are also incorporated into this Prospectus/Proxy
Statement by reference: (i) the current Statement of Additional Information of
the Trust, dated January 17, 1998, as amended or supplemented from time to time
(the "SAI"); and (ii) a Statement of Additional Information dated October 7,
1998 relating to the transaction described in this Prospectus/Proxy Statement
(the "Merger SAI").
Information about the Strategy Portfolio is incorporated by reference to
the Prospectuses of the Trust dated January 17, 1998, as revised March 5, 1998,
and is available upon request from the Trust without charge. Proxy materials,
reports, proxy and information statements, and other information filed by the
Trust with respect to the Portfolios can be inspected and copied at the Public
Reference Facilities maintained by the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, Suite
1300, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates.
For a free copy of any or all of the Prospectuses referred to above, the
SAI, or the Merger SAI or of the Annual Report of the Trust for the period
ended September 30, 1997 or the Semi-Annual Report of the Trust for the period
ended March 31, 1998 (each of which Reports contains financial information
relating to the Strategy Portfolio), please call 1-800-382-0016 or write to the
Trust at 901 East Byrd Street, Richmond, Virginia, 23219.
THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS
THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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OVERVIEW OF THE MERGER
PROPOSED TRANSACTION
The Trustees of the Trust have unanimously approved an Agreement and Plan
of Reorganization between the Strategy Portfolio and the Balanced Portfolio
(the "Agreement"), which is attached to this Prospectus/Proxy Statement as
Appendix A. Pursuant to the terms of the Agreement, the Strategy Portfolio will
receive a number of Class A, Class B, and Class Y shares of the Balanced
Portfolio (the "Merger Shares") equal in value to the value of the net assets
of the Strategy Portfolio being transferred to the Balanced Portfolio and
attributable to the Class A, Class B, and Class Y shares, respectively, of the
Strategy Portfolio. Following the transfer, (i) the Strategy Portfolio will
distribute to each of its Class A, Class B, and Class Y shareholders, on a
tax-free basis, a number of full and fractional Class A, Class B, and Class Y
Merger Shares of the Balanced Portfolio equal in value to the aggregate value
of that shareholder's Class A, Class B, and/or Class Y Strategy Portfolio
shares, as the case may be, and (ii) the Strategy Portfolio will be liquidated.
The Class A, Class B, and Class Y shares of the Balanced Portfolio have
substantially identical characteristics to the shares of the corresponding
classes of the Strategy Portfolio. Class A shares are sold at net asset value
plus an initial sales charge imposed by the Portfolio, which varies depending
on the size of the purchase. In connection with purchases of Class A shares
with a value of $1 million or more, no sales charge is imposed; however, a
contingent deferred sales charge (a "CDSC") of 1% is imposed on the proceeds of
any redemption of those shares during the one-year period following the date of
purchase. Class A shares are subject to a shareholder servicing fee paid at an
annual rate of 0.25% of the Portfolio's average daily net assets attributable
to its Class A shares.
Class B shares are sold at net asset value, without an initial sales
charge imposed by the Portfolio, but are subject to a CDSC if they are redeemed
within five years after purchase. (The CDSC is imposed at the rate of 4% during
the first year, declining to 1% during the fifth year.) Class B shares are
subject to a distribution fee paid at an annual rate of 0.75% of the average
daily net assets of the Portfolio attributable to its Class B shares. The Class
B shares of each Portfolio are also subject to a shareholder servicing fee paid
at an annual rate of 0.25% of the Portfolio's average daily net assets
attributable to its Class B shares. No CDSC will apply in connection with the
Merger. However, the Class B Merger Shares will be subject to a CDSC to the
same extent as were the Class B Strategy Portfolio shares in respect of which
they are issued. For the purposes of computing the CDSC, if any, payable on
redemption of Class B Merger Shares, the Merger Shares will be treated as
having been purchased as of the same date as the Class B Strategy Portfolio
shares in respect of which the Merger Shares are issued.
Class Y shares are sold at net asset value, without an initial sales
charge imposed by the Portfolio, and are not subject to a CDSC. Class Y shares
are not subject to any shareholder servicing or distribution plan payments.
The Trustees unanimously recommend that shareholders of the Strategy
Portfolio approve the Merger because it offers shareholders the opportunity to
pursue a substantially similar investment program in a mutual fund with greater
potential for growth in assets through increased sales of shares, and
concomitant potential for reduced operating expenses over time. See "Operating
Expenses" below and "Approval or Disapproval of Agreement and Plan of
Reorganization -- Background and Reasons for the Proposed Merger."
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OPERATING EXPENSES
The following tables summarize a shareholder's maximum transaction costs
from investing in shares of each Portfolio and each Portfolio's operating
expenses based on the expenses incurred by each Portfolio in the fiscal year
ended September 30, 1997. The Annual Portfolio Operating Expenses shown for the
Balanced Portfolio have been restated to give effect on a pro forma combined
basis to the proposed Merger, as if the Merger had occurred as of October 1,
1997. The Examples which follow show the estimated cumulative expenses
attributable to a hypothetical $1,000 investment in the Strategy Portfolio and
the Balanced Portfolio, over specified periods.
<TABLE>
<CAPTION>
BALANCED
STRATEGY BALANCED PORTFOLIO*
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO (PRO FORMA)
- ------------------------------------ -------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
CLASS A SHARES
Maximum Sales Load Imposed
on Purchases 5.75% 5.75% 5.75%
Maximum Sales Load Imposed
on Reinvested Dividends None None None
Deferred Sales Load None(1) None(1) None(1)
Redemption Fee None None None
Exchange Fee None None None
CLASS B SHARES
Maximum Sales Load Imposed
on Purchases None None None
Maximum Sales Load Imposed
on Reinvested Dividends None None None
Redemption Fee None None None
Exchange Fee None None None
Contingent Deferred Sales Charge 4.0% in the first year, 4.0% in the first year, 4.0% in the first year,
(as a percentage of the lower declining to 1% in the declining to 1% in the declining to 1% in the
of the original purchase price or fifth year, and fifth year, and fifth year, and
redemption proceeds)(2) eliminated thereafter(3) eliminated thereafter(3) eliminated thereafter(3)
CLASS Y SHARES
Maximum Sales Load Imposed
on Purchases None None None
Maximum Sales Load Imposed
on Reinvested Dividends None None None
Deferred Sales Load None None None
Redemption Fee None None None
Exchange Fee
</TABLE>
- ----------
(1) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1,000,000 that are redeemed within one year of
purchase.
(2) The amount redeemed is computed as the lesser of the current net asset
value of the shares redeemed, and the original purchase price of the
shares.
(3) Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1.00%, if the shares are
redeemed within one year of purchase.
* Expected expenses after giving effect to the Merger. It is expected that
certain outstanding Class B shares of the Balanced Portfolio will be
converted to Class Y shares of that Portfolio prior to the Merger. Pro forma
expenses are presented giving effect to the conversion.
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ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
BALANCED
STRATEGY BALANCED PORTFOLIO*
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO (PRO FORMA)
- ---------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
CLASS A SHARES
Management Fees ........................ 0.85% 0.75% 0.75%
Rule 12b-1 Expenses .................... None None None
Shareholder Service Fee ................ 0.25% 0.25% 0.25%
Other Expenses ......................... 0.35% 0.35% 0.35%
-------- -------- ---------
Total Fund Operating Expenses ......... 1.45% 1.35% 1.35%
CLASS B SHARES
Management Fees ........................ 0.85% 0.75% 0.75%
Rule 12b-1 Expenses .................... 0.75% 0.75% 0.75%
Shareholder Service Fee ................ 0.25% 0.25% 0.25%
Other Expenses ......................... 0.35% 0.35% 0.35%
-------- -------- ---------
Total Fund Operating Expenses ......... 2.20% 2.10% 2.10%
CLASS Y SHARES
Management Fees ........................ 0.85% 0.75% 0.75%
Rule 12b-1 Expenses .................... None None None
Shareholder Service Fee ................ None None None
Other Expenses ......................... 0.35% 0.35% 0.35%
-------- -------- ---------
Total Fund Operating Expenses ......... 1.20% 1.10% 1.10%
</TABLE>
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* Expected expenses after giving effect to the Merger, as if the Merger had
occurred as of October 1, 1997. It is expected that certain outstanding
Class B shares of the Balanced Portfolio will be converted to Class Y shares
of that Portfolio prior to the Merger. Pro forma expenses are presented
giving effect to the conversion.
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EXAMPLE
An investment of $1,000 would incur the following expenses, assuming 5%
annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
CLASS A
Strategy Portfolio ............................... $71 $101 $132 $221
Balanced Portfolio ............................... $70 $ 98 $127 $211
Balanced Portfolio* .............................. $70 $ 98 $127 $211
CLASS B (assuming redemption at end of period) (1)
Strategy Portfolio ............................... $62 $ 99 $128 $253
Balanced Portfolio ............................... $61 $ 96 $123 $243
Balanced Portfolio* .............................. $61 $ 96 $123 $243
CLASS Y
Strategy Portfolio ............................... $12 $ 38 $ 66 $145
Balanced Portfolio ............................... $11 $ 35 $ 61 $134
Balanced Portfolio* .............................. $11 $ 35 $ 61 $134
</TABLE>
- ----------
(1) Assumes deduction of applicable CDSC.
* Reflects expected expenses after giving effect to Merger.
This information is provided to help investors understand the operating
expenses of the Portfolios. The Examples should not be considered
representations of future performance. Actual expenses may be more or less than
those shown. Because of Rule 12b-1 fees paid by the Portfolios, long-term
shareholders may pay more than the economic equivalent of the maximum front-end
sales load permitted under applicable broker-dealer sales rules.
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FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, no gain or loss will be recognized by the
Strategy Portfolio or its shareholders as a result of the Merger, and the tax
basis of the Merger Shares received by the Strategy Portfolio shareholders will
be the same as the tax basis of each shareholder's Strategy Portfolio shares.
See "Information about the Merger -- Federal income tax consequences."
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES, AND RESTRICTIONS
Mentor Investment Advisors, LLC ("Mentor Advisors") currently serves as
investment adviser to both Portfolios. The investment objectives, policies, and
restrictions of the Portfolios and certain differences between them are
summarized below. For a more detailed description of the investment techniques
used by the Balanced Portfolio, please see the accompanying Prospectus, as well
as the SAI and the Merger SAI.
The investment objective of the Balanced Portfolio is to seek capital
growth and current income. The Balanced Portfolio invests in a diversified
portfolio of equity and fixed-income securities which Mentor Advisors believes
will produce both capital growth and current income. The Portfolio may invest
in almost any type of security. The Portfolio's securities will include some
securities selected primarily to provide for growth in value, others selected
for current income, and others for stability of principal. Mentor Advisors
adjusts the proportions of the Portfolio's assets invested in the different
types of securities in response to changing market conditions. For example,
under certain market conditions, Mentor Advisors may judge that most of the
Portfolio's assets should be invested in equity securities, and that only a
relatively small portion of the Portfolio's assets should be invested in
fixed-income securities. At other times, Mentor Advisors may invest most of the
Portfolio's assets in fixed-income securities, with a corresponding reduction
in the portion of the Portfolio's assets invested in equity securities. Under
normal circumstances, the Portfolio invests at least 25% of its assets in
fixed-income securities and 25% of its assets in equity securities.
The Strategy Portfolio's investment objective is to seek high total return
on its investments. In seeking to achieve this objective, Mentor Advisors
actively allocates the Portfolio's assets among the major asset categories of
equity securities, fixed-income securities, and money market instruments. Total
return consists of current income (including dividends, interest, and, in the
case of discounted instruments, discount accruals) and capital appreciation
(including realized and unrealized capital gains and losses).
The Strategy Portfolio normally invests some portion of its assets in each
asset category, but may invest without limit in any asset category. Unlike the
Balanced Portfolio, however, the Strategy Portfolio is not required to invest
any portion of its assets in fixed-income securities or in equity securities.
For example, Mentor Advisors may at times believe that the equity market
holds a higher potential for total return than the debt market and that a
relatively large portion of the Portfolio's assets should be allocated to the
equity market sector. The reverse would be true at times when Mentor Advisors
believes that the potential for total return in the bond market is greater than
that in the equity market. Mentor Advisors might also allocate the Portfolio's
investments to short-term bonds and money market instruments in order to earn
current return and to reduce the potential adverse effect of declines in the
bond and equity markets. After determining the portions of the Portfolio's
assets to be invested in the various market sectors, Mentor Advisors attempts
to select the securities of companies within those sectors offering potential
for above-average total return.
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Each of the Portfolios invests in debt securities (and, in the case of the
Balanced Portfolio, preferred stocks) of "investment grade" -- rated at the
time of investment at least Baa3 by Moody's Investors Service, Inc. or BBB- by
Standard & Poor's (or the equivalent by another nationally recognized rating
organization) or, if unrated, determined by Mentor Advisors to be of comparable
quality. The Balanced Portfolio seeks under normal market conditions to
maintain a portfolio of such securities with a dollar-weighted average rating
of A or better; the Strategy Portfolio is not required to maintain any minimum
average rating of such securities. Securities rated Baa or BBB lack outstanding
investment characteristics and have speculative characteristics and are subject
to greater credit and market risks than higher-rated securities. A substantial
portion of each Portfolio's fixed-income investments may be in mortgage-backed
securities and other asset backed securities. See "Risk Factors --
Mortgage-backed securities; other asset-backed securities," below. The Balanced
Portfolio may also engage in interest rate transactions described under "Risk
Factors -- Interest rate transactions," below, in order to attempt to protect
the value of its portfolio from interest rate fluctuations and to adjust the
interest-rate sensitivity of its portfolio. The Strategy Portfolio does not
engage in such transactions.
The Balanced Portfolio may use "leverage" -- that is, it may borrow money
to purchase additional portfolio securities, which involves special risks. The
Strategy Portfolio does not use leverage. See "Risk Factors -- Leverage,"
"--Reverse repurchase agreements; forward commitments," and " -- Dollar roll
transactions," below.
Each Portfolio may invest without limit in foreign securities.
COMPARISON OF DISTRIBUTION POLICIES AND PURCHASE, EXCHANGE, AND REDEMPTION
PROCEDURES
The Portfolios have substantially the same procedures for purchasing
shares. The Portfolios offer three classes of shares, Classes A, B, and Y. See
"Overview of the Merger," above, for a description of those three classes of
shares. Shares of each Portfolio can be exchanged at net asset value for shares
of the same class of certain other mutual funds in the Mentor Family of Funds,
subject to certain investment minimums (which are the same for both
Portfolios).
Redemption procedures for the Portfolios are also substantially identical.
Shares of a Portfolio may be redeemed on any day the New York Stock Exchange is
open at their net asset value next determined after receipt of the redemption
request, less any applicable CDSC. Shares can be redeemed through your
investment dealer, by calling Mentor Funds, or by submitting a written
redemption request directly to Mentor Funds, c/o Boston Financial Data
Services, Inc., 2 Heritage Drive, North Quincy, Massachusetts, 02171.
Class A and Class B shares of the Balanced Portfolio are offered generally
to the public. Until recently, the only shareholders of the Balanced Portfolio
were persons or entities affiliated with Mentor Advisors.
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RISK FACTORS
Certain risks associated with an investment in the Balanced Portfolio are
summarized below. The Balanced Portfolio shares a number of investment policies
with the Strategy Portfolio as described more fully above under "Overview of
Merger -- Comparison of Investment Objectives, Policies, and Restrictions."
Many of the risks of an investment in the Balanced Portfolio are substantially
similar to the risks of an investment in the Strategy Portfolio. A more
detailed description of certain of the risks associated with an investment in
the Balanced Portfolio may be found in the Balanced Portfolio's Prospectus
under the caption "Other Investment Practices and Risk Factors" and in the SAI.
The values of all securities and other instruments held by the Balanced
Portfolio vary from time to time in response to a wide variety of market
factors. Consequently, the net asset value per share of the Balanced Portfolio
will vary so that an investor's shares, when redeemed, may be worth more or
less than the amount invested.
The Strategy Portfolio may also engage in each of the investment practices
described below, other than those described under "Leverage," "Reverse
repurchase agreements; forward commitments," "Dollar roll transctions," and
"Interest rate transactions." Accordingly, the risks described below in respect
of those investment practices would apply to an investment in the Strategy
Portfolio.
MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. The Portfolio
may invest in mortgage-backed certificates and other securities representing
ownership interests in mortgage pools, including collateralized mortgage
obligations and certain stripped mortgage-backed securities and "residual"
interests therein. Interest and principal payments on the mortgages underlying
mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Mortgage-backed securities currently offer yields
higher than those available from many other types of fixed-income securities
but because of their prepayment aspects, their price volatility and yield
characteristics will change based on changes in prepayment rates. As a result,
mortgage-backed securities are less effective than other securities as a means
of "locking in" long-term interest rates. Generally, prepayment rates increase
if interest rates fall and decrease if interest rates rise. For many types of
mortgage-backed securities, this can result in unfavorable changes in price and
yield characteristics in response to changes in interest rates and other market
conditions. For example, as a result of their prepayment aspects, the
Portfolio's mortgage-backed securities have less potential for capital
appreciation during periods of declining interest rates than other fixed-income
securities of comparable maturities, although such obligations may have a
comparable risk of decline in market value during periods of rising interest
rates.
Mortgage-backed securities have yield and maturity characteristics that
are dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include
both interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed
securities, especially during periods of declining interest rates. Similarly,
during periods of rising interest rates, a reduction in the rate of prepayments
may significantly lengthen the effective durations of such securities.
Stripped mortgage-backed securities are usually structured with two
classes that receive different portions of the interest and principal
distributions on a pool of mortgage assets. The Portfolio may invest in both
the interest-only -- or "IO" -- class and the principal-only -- or "PO" --
class. The yield to maturity and price of
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<PAGE>
an IO class are extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the
Portfolio's average duration and net asset value. This would typically be the
case in an environment of falling interest rates. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the
Portfolio may under some circumstances fail to recoup fully its initial
investment in these securities. Conversely, POs tend to increase in value if
prepayments are greater than anticipated and decline if prepayments are slower
than anticipated. The secondary market for stripped mortgage-backed securities
may be more volatile and less liquid than that for other mortgage-backed
securities, potentially limiting the Portfolio's ability to buy or sell those
securities at any particular time.
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates, the
Portfolio might not be able to reinvest the proceeds in securities providing
the same investment return as the securities redeemed.
The Portfolio may invest in securities representing interests in other
types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security
interest in the underlying assets may be limited. For example, the laws of
certain states may prevent or restrict repossession of collateral from a
debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
property, including collateralized mortgage obligation "residual" interests, as
well as new types of mortgage-related securities that may be developed and
marketed from time to time. "Residual" interests represent the right to any
excess cash flow remaining after all other payments are made among the various
tranches of interests issued by structured mortgage-backed vehicles. The values
of such interests are extremely sensitive to changes in interest rates and in
prepayment rates on the underlying mortgages. In the event of a significant
change in interest rates or other market conditions, the value of an investment
by the Portfolio in such interests could be substantially reduced and the
Portfolio may be unable to dispose of the interests at prices approximating the
values the Portfolio had previously assigned to them or to recoup its initial
investment in the interests.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio may
invest in a wide variety of such securities, including mortgage- and other
asset-backed securities that will pay principal or interest only under certain
circumstances, or in amounts that may increase or decrease substantially
depending on changes in interest rates or other market factors. Such securities
may experience extreme price volatility in response to changes in interest
rates or other market factors; this may be especially true in the case of
securities where the amounts of principal or interest paid, or the timing of
such payments, varies widely depending on prevailing interest rates.
Mentor Advisors may not be able to obtain current market quotations for
certain mortgage-backed or asset-backed securities at all times, or to obtain
market quotations believed by it to reflect the values of such securities
accurately. In such cases, Mentor Advisors may be required to estimate the
value of such a security using quotations provided by pricing services or
securities dealers making a market in such securities, or based on
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<PAGE>
other comparable securities or other bench-mark securities or interest rates.
Mortgage-backed and other asset-backed securities in which the Portfolio may
invest may be highly illiquid, and the Portfolio may not be able to sell such a
security at a particular time or at the value it has placed on it.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, Mentor Advisors will be required to estimate the
extent to which the values of the securities are likely to change in response
to changes in interest-rate or other market conditions, and the rate at which
prepayments on the underlying mortgages or other assets are likely to occur
under different scenarios. There can be no assurance that Mentor Advisors will
be able to predict the amount of principal or interest to be paid on any
security under different interest- rate or market conditions or that its
predictions will be accurate, nor can there be any assurance that the Portfolio
will recover the entire amount of the principal paid by it to purchase any such
securities.
ZERO-COUPON BONDS. The Portfolio may at times invest in so-called
"zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. Because zero-coupon bonds do not pay current
interest, their value is subject to greater fluctuation in response to changes
in market interest rates than bonds that pay interest currently. Zero-coupon
bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks
than bonds that pay interest currently. Even though such bonds do not pay
current interest in cash, the Portfolio is nonetheless required for federal
income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
PREMIUM SECURITIES. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although the Portfolio amortizes the amount of any such
premium into income, the Portfolio may recognize a capital loss if such premium
securities are called or sold prior to maturity and the call or sale price is
less than the purchase price.
LEVERAGE. The Portfolio may borrow money to invest in additional portfolio
securities to seek current income. This technique, known as "leverage,"
increases the Portfolio's market exposure and risk. When the Portfolio has
borrowed money for leverage and its investments increase or decrease in value,
the Portfolio's net asset value will normally increase or decrease more than if
it had not borrowed money for this purpose. The interest that the Portfolio
must pay on borrowed money will reduce its net investment income, and may also
either offset any potential capital gains or increase any losses. The Portfolio
currently intends to use leverage in order to adjust the dollar-weighted
average duration of its portfolio, and the Portfolio will not always borrow
money for investment. The extent to which the Portfolio will borrow money, and
the amount it may borrow, depend on market conditions and interest rates.
Successful use of leverage depends on Mentor Advisors' ability to predict
market movements correctly. The amount of leverage (including leverage to the
extent employed by the Portfolio through "reverse" repurchase agreements,
"dollar-roll" transactions, and forward commitments, described below) that can
exist at any one time will not exceed 33 1/3% of the value of the Portfolio's
total assets (less all liabilities of the Portfolio other than the leverage).
REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. The Portfolio may
enter into "reverse" repurchase agreements with respect to up to one-third of
its assets. "Reverse" repurchase agreements generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the
securities at an agreed-upon
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price, date, and interest payment. The Portfolio may also enter into forward
commitments, in which the Portfolio buys securities for future delivery.
Reverse repurchase agreements and forward commitments involve leverage, and may
increase the Portfolio's overall investment exposure. Their use by the
Portfolio may result in losses.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar roll transactions with
respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar roll transaction, the Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (I.E., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon
price. The mortgage-related securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories. Dollar-roll
transactions may increase overall investment exposure and may result in losses.
OPTIONS AND FUTURES. The Portfolio may buy and sell call and put options
on securities it owns to hedge against changes in net asset value or to realize
a greater current return. In addition, through the purchase and sale of futures
contracts and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return. In addition, the Portfolio may buy and
sell options and futures contracts (including index futures contracts,
described below) to implement changes in its asset allocations among various
market sectors, pending the sale of its existing investments and reinvestment
in new securities.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that
the Portfolio will be able to utilize these instruments effectively for the
purposes stated above. Although the Portfolio will only engage in options and
futures transactions for limited purposes, those transactions involve certain
risks which are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and
may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index future"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of
the index between the time when the Portfolio enters into and terminates an
index futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return. Certain provisions
of the Internal Revenue Code may limit the Portfolio's ability to engage in
futures and options transactions.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. Futures and options
transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
security or index or of the securities in the Portfolio's portfolio that are
the subject of a hedge. The successful use by the Portfolio of the strategies
described above further depends on Mentor Advisors' ability to forecast market
movements correctly. Other risks arise from the Portfolio's potential inability
to close out futures or options positions. Although the Portfolio will enter
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into options or futures transactions only if Mentor Advisors believes that a
liquid secondary market exists for such option or futures contract, there can
be no assurance that the Portfolio will be able to effect closing transactions
at any particular time or at an acceptable price. Transactions in options and
futures contracts involve brokerage costs and may require the Portfolio to
segregate assets to cover its outstanding positions. For more information, see
the Statement of Additional Information.
The Portfolio generally expects that its options and futures contract
transactions will be conducted on recognized exchanges. In certain instances,
however, the Portfolio may purchase and sell options in the over-the-counter
markets. The Portfolio's ability to terminate options in the over-the-counter
markets may be more limited than for exchange-traded options and may also
involve the risk that securities dealers participating in such transactions
would be unable to meet their obligations to the Portfolio. The Portfolio will,
however, engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of Mentor
Advisors, the pricing mechanism and liquidity of the over-the-counter markets
are satisfactory and the participants are responsible parties likely to meet
their contractual obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolio's assets. (For
options that are "in-the-money" at the time of purchase, the amount by which
the option is "in-the-money" is excluded from this calculation.)
REPURCHASE AGREEMENTS; SECURITIES LOANS. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually
not more than one week), which the seller agrees to repurchase at a fixed time
and price, representing the Portfolio's cost plus interest. Under a securities
loan, the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is
a U.S. Government security. These transactions must be fully collateralized at
all times, but involve some risk to the Portfolio if the other party should
default on its obligations and the Portfolio is delayed or prevented from
recovering the collateral. If the other party should become involved in
bankruptcy or insolvency proceedings, it is possible that the Portfolio may be
treated as an unsecured creditor and be required to return the underlying
collateral to the other party's estate.
FOREIGN SECURITIES. The Portfolio may invest in securities principally
traded in foreign markets. Since foreign securities are normally denominated
and traded in foreign currencies, the values of the Portfolio's assets may be
affected favorably or unfavorably by currency exchange rates and exchange
control regulations. There may be less information publicly available about a
foreign company than about a U.S. company, and foreign companies are not
generally subject to accounting, auditing, and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign companies are less liquid and at times more volatile than securities of
comparable U.S. companies. Foreign brokerage commissions and other fees are
also generally higher than in the United States. Foreign settlement procedures
and trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of the Portfolio's assets held
abroad) and expenses not present in the settlement of domestic investments.
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In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. In the case of securities issued
by a foreign governmental entity, the issuer may in certain circumstances be
unable or unwilling to meet its obligations on the securities in accordance
with their terms, and the Portfolio may have limited recourse available to it
in the event of default. The laws of some foreign countries may limit the
Portfolio's ability to invest in securities of certain issuers located in those
foreign countries. Special tax considerations apply to foreign securities. The
Portfolio may buy or sell foreign currencies and options and futures contracts
on foreign currencies for hedging purposes in connection with its foreign
investments.
The Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization. Investments in
ADRs and GDRs are subject to many of the same risks of investing in foreign
securities generally.
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of
the Portfolio's portfolio from interest rate fluctuations and to adjust the
interest-rate sensitivity of the Portfolio's portfolio, the Portfolio may enter
into interest rate swaps and other interest rate transactions, such as interest
rate caps, floors, and collars. Interest rate swaps involve the exchange by the
Portfolio with another party of different types of interest rate streams (E.G.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). The purchase of an interest rate cap entitles
the purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling the
floor to the extent that a specified index falls below a predetermined interest
rate or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values. The
Portfolio intends to use these interest rate transactions as a hedge and not as
a speculative investment. The Portfolio's ability to engage in certain interest
rate transactions may be limited by tax considerations. The use of interest
rate swaps and other interest rate transactions is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If Mentor Advisors
is incorrect in its forecasts of market values, interest rates, or other
applicable factors, the investment performance of the Portfolio would be less
favorable than what it would have been if this investment technique were not
used.
PORTFOLIO TURNOVER. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. The
investment policies of a Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements.
A change in the securities held by a Portfolio is known as "portfolio
turnover." Portfolio turnover generally involves some expense to a Portfolio,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. Such sales may
result in realization of taxable capital gains. The portfolio turnover rates
for the Portfolios during the fiscal year ended September 30, 1997 were 80% for
the Balanced Portfolio and 192% for the Strategy Portfolio.
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MEETING OF SHAREHOLDERS
This Prospectus/Proxy Statement is furnished in connection with a meeting
of Strategy Portfolio shareholders to be held on November 12, 1998 (the
"Meeting"), and the solicitation of proxies by and on behalf of the Board of
Trustees of the Trust for use at the Meeting. The Meeting is being held to
consider the proposed Merger of the Strategy Portfolio and the Balanced
Portfolio by the transfer of all of the Strategy Portfolio's assets and
liabilities to the Balanced Portfolio. This Prospectus/Proxy Statement and the
enclosed form of proxy are being mailed to shareholders on or about October 9,
1998.
The Trustees of the Trust know of no matters other than those set forth
herein to be brought before the Meeting. If, however, any other matters
properly come before the Meeting, it is the Trustees' intention that proxies
will be voted on such matters in accordance with the judgment of the persons
named in the enclosed form of proxy.
APPROVAL OR DISAPPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION
SUMMARY OF PROPOSAL
The shareholders of the Strategy Portfolio are being asked to approve the
Merger between the Strategy Portfolio and the Balanced Portfolio. The Merger is
proposed to take place pursuant to the Agreement and Plan of Reorganization
between the Strategy Portfolio and the Balanced Portfolio (the "Agreement"),
which is attached to this Prospectus/Proxy Statement as Appendix A.
The Agreement provides, among other things, for the transfer of all of the
assets of the Strategy Portfolio to the Balanced Portfolio in exchange for (i)
the assumption by the Balanced Portfolio of all of the liabilities of the
Strategy Portfolio and (ii) the issuance to the Strategy Portfolio of the Class
A, Class B, and Class Y Merger Shares, the number of which will be calculated
based upon the value of the net assets attributable to the Class A, Class B,
and Class Y shares, respectively, of the Strategy Portfolio acquired by the
Balanced Portfolio and the net asset value per Class A, Class B, and Class Y
share of the Balanced Portfolio, all as more fully described below under
"Information About the Merger."
After receipt of the Merger Shares, the Strategy Portfolio will cause the
Class A, B, and Y Merger Shares to be distributed to its Class A, B, and Y
shareholders, respectively, in complete liquidation of the Strategy Portfolio.
Each shareholder of the Strategy Portfolio will receive a number of full and
fractional Class A, B, or Y Merger Shares equal in value at the date of the
exchange to the aggregate value of the shareholder's Class A, B, or Y Strategy
Portfolio shares, as the case may be.
TRUSTEES' RECOMMENDATIONS. The Trustees of the Trust have voted
unanimously to approve the proposed Merger between the Strategy Portfolio and
the Balanced Portfolio and to recommend that shareholders of the Strategy
Portfolio also approve the Merger for such Portfolio.
REQUIRED SHAREHOLDER VOTE. Approval of the proposed Merger will require
the affirmative vote of a majority of the shares of the Strategy Portfolio cast
on the matter if a quorum is present. Shares of the Strategy Portfolio shall
vote together as a single class.
A shareholder of the Strategy Portfolio objecting to the proposed Merger
is not entitled under either Massachusetts law or the Trust's Declaration of
Trust (the "Declaration of Trust") to demand payment for or an
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appraisal of his or her Strategy Portfolio shares if the Merger is consummated
over his or her objection. Shareholders may, however, redeem their shares at
any time prior to the Merger, and if the Merger is consummated, shareholders
will still be free at any time to redeem their Merger Shares, in each case for
cash at net asset value at the time of such redemption, less any applicable
CDSC, or to exchange their Merger Shares for shares of the same class of
certain other Portfolios offered by the Trust.
BACKGROUND AND REASONS FOR THE PROPOSED MERGER
The Trustees of the Trust, including the Trustees who are not "interested
persons" of the Trust within the meaning of the Investment Company Act of 1940,
as amended (the "Independent Trustees"), have determined that the Merger would
be in the best interests of each Portfolio, and that the interests of each
Portfolio's shareholders would not be diluted as a result of effecting the
Merger. In evaluating the proposed Merger, the Trustees considered the
investment objectives and policies, the asset sizes, the fee structures, and
the operating histories of both Portfolios. The Trustees also consulted with
Mentor Advisors concerning the anticipated impact that the Merger would have on
the Portfolios and their shareholders with respect to a variety of factors,
including tax considerations. In addition, the Trustees considered that the
Strategy Portfolio had experienced significant redemptions during the past
year, and that, in light of its investment policies and its investment
performance to date, the Portfolio was unlikely under current market conditions
to experience any substantial increase in its size.
The principal reasons why the Trustees are recommending the Merger are as
follows:
(i) APPROPRIATE INVESTMENT OBJECTIVES, DIVERSIFICATION, ETC. The
investment objective and policies of the Balanced Portfolio are substantially
similar to those of the Strategy Portfolio, and the Trustees believe that an
investment in shares of the Balanced Portfolio will provide shareholders with
an investment opportunity comparable to that currently afforded by the Strategy
Portfolio.
(ii) POTENTIAL FOR LOWER OPERATING EXPENSES. The Trustees considered that
the Strategy Portfolio had experienced significant redemptions during the past
year, and that, in light of its investment policies and its investment
performance to date, the Portfolio was unlikely under current market conditions
to experience any substantial increase in its size. The Trustees also
considered the judgment of Mentor Advisors that, in light of its investment
policies and performance to date, the Balanced Portfolio could potentially
experience substantial increases in its assets due to increased sales of
shares, leading potentially to lower operating expenses due to economies of
scale as the Portfolio grows. Based on these factors, and the fact that the
management fee paid by the Balanced Portfolio is lower than that paid by the
Strategy Portfolio, the Trustees believed that the Merger offered shareholders
of the Strategy Portfolio a mutual fund investment with the potential for lower
operating expenses in the future.
(iii) CONTINUED INVESTMENT IN A MUTUAL FUND WITHOUT RECOGNITION OF GAIN OR
LOSS FOR FEDERAL INCOME TAX PURPOSES. The proposed reorganization will permit
Strategy Portfolio shareholders to keep their investment in an open-end mutual
fund, without recognition of gain or loss for federal income tax purposes. If
the Strategy Portfolio were, for example, to liquidate and shareholders were to
receive the net asset value of their shares in liquidating distributions, gain
or loss would be recognized for federal income tax purposes.
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INFORMATION ABOUT THE MERGER
AGREEMENT AND PLAN OF REORGANIZATION. The proposed Agreement provides that
the Balanced Portfolio will acquire all of the assets of the Strategy Portfolio
in exchange for (i) the assumption by the Balanced Portfolio of all of the
liabilities of the Strategy Portfolio and (ii) the issuance of the Class A, B,
and Y Merger Shares, all as of the Exchange Date (defined in the Agreement to
be November 13, 1998 or such other date as may be agreed upon by the
Portfolios). The following discussion of the Agreement is qualified in its
entirety by the full text of the Agreement, the form of which is attached as
Appendix A to this Prospectus/Proxy Statement.
Under the Agreement, the Strategy Portfolio will sell all of its assets to
the Balanced Portfolio. In exchange, the Balanced Portfolio will assume all of
the liabilities of the Strategy Portfolio and deliver to the Strategy Portfolio
(i) a number of full and fractional Class A Merger Shares having an aggregate
net asset value equal to the value of the assets of the Strategy Portfolio
attributable to its Class A shares, less the value of the liabilities of the
Strategy Portfolio assumed by the Balanced Portfolio attributable to the Class
A shares of the Strategy Portfolio, (ii) a number of full and fractional Class
B Merger Shares having an aggregate net asset value equal to the value of the
assets of the Strategy Portfolio attributable to its Class B shares, less the
value of the liabilities of the Strategy Portfolio assumed by the Balanced
Portfolio attributable to the Class B shares of the Strategy Portfolio, and
(iii) a number of full and fractional Class Y Merger Shares having an aggregate
net asset value equal to the value of the assets of the Strategy Portfolio
attributable to its Class Y shares, less the value of the liabilities of the
Strategy Portfolio assumed by the Balanced Portfolio attributable to the Class
Y shares of the Strategy Portfolio.
Immediately following the Exchange Date, the Strategy Portfolio will
distribute pro rata to its shareholders of record as of the close of business
on the Exchange Date the full and fractional Merger Shares received by the
Strategy Portfolio, with (i) Class A Merger Shares being distributed to holders
of Class A shares of the Strategy Portfolio, (ii) Class B Merger Shares being
distributed to holders of Class B shares of the Strategy Portfolio, and (iii)
Class Y Merger Shares being distributed to holders of Class Y shares of the
Strategy Portfolio. As a result of the proposed transaction, each holder of
Class A, Class B, and Class Y shares of the Strategy Portfolio will receive a
number of Class A, Class B, and Class Y Merger Shares equal in aggregate value
at the Exchange Date to the value of the Class A, Class B, and Class Y shares,
respectively, of the Strategy Portfolio held by the shareholder. This
distribution will be accomplished by the establishment of accounts on the share
records of the Balanced Portfolio in the names of the Strategy Portfolio
shareholders, each account representing the number of full and fractional Class
A, Class B, or Class Y Merger Shares due such shareholder. Certificates for
Merger Shares will not be issued.
The consummation of the Merger is subject to the conditions set forth in
the Agreement, any of which may be waived. The Agreement may be terminated and
the Merger abandoned at any time before or after approval by the shareholders
of the Strategy Portfolio, prior to the Exchange Date, by mutual consent of the
Portfolios.
All legal and accounting fees and expenses, printing, filing, and proxy
solicitation expenses, portfolio transfer taxes (if any), brokerage, and
similar expenses and other fees and expenses incurred in connection with the
consummation of the transactions contemplated by the Agreement will be borne by
the Strategy Portfolio and the Balanced Portfolio in the same proportions as
their respective net asset values bear to each other.
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Notwithstanding any of the foregoing, expenses will in any event be paid
by the party directly incurring such expenses if and to the extent that the
payment by any other party of such expenses would result in the
disqualification of the first party as a "regulated investment company" within
the meaning of Section 851 of the Internal Revenue Code of 1986, as amended
(the "Code").
DESCRIPTION OF MERGER SHARES. Full and fractional Merger Shares will be
issued to the Strategy Portfolio's shareholders in accordance with the
procedure under the Agreement as described above. The Merger Shares are Class
A, Class B, and Class Y shares of the Balanced Portfolio, which have
characteristics substantially identical to those of the corresponding class of
the Strategy Portfolio with respect to sales charges, CDSCs, and distribution
fees. See "Overview of the Merger" above for a description of those three
classes of shares.
No CDSC will apply in connection with the Merger. However, Merger Shares
will be subject to a CDSC to the same extent as were the Strategy Portfolio
shares in respect to which they are issued. For the purposes of computing the
CDSC, if any, payable on redemption of Merger Shares, the Merger Shares will be
treated as having been purchased as of the same date as the Strategy Portfolio
shares in respect of which the Merger Shares are issued.
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS. Mentor Investment
Advisors, LLC serves as investment advisor to both Portfolios. The Balanced
Portfolio pays a management fee to Mentor Advisors at an annual rate of 0.75%
of the Portfolio's average daily net assets; the Strategy Portfolio pays a
management fee to Mentor Advisors at an annual rate of 0.85% of the Portfolio's
average daily net assets. Pursuant to an Administrative Services Agreement with
the Trust, Mentor Investment Group, LLC, located at 901 East Byrd Street,
Richmond, Virginia 23219, provides the Portfolios with certain administrative
personnel and services necessary to operate the Portfolios, such as bookkeeping
and accounting services. Each Portfolio pays a fee to Mentor Investment Group
for these services at an annual rate of 0.10% of the Portfolio's average daily
net assets. During the 1997 fiscal year, the Strategy Portfolio and the
Balanced Portfolio paid management fees to Mentor Advisors of $2,807,549 and
$8,854, respectively, and the Strategy Portfolio paid Mentor Investment Group
$330,300, for services under the Administrative Services Agreement; the
Balanced Portfolio made no payments during the year under the Administrative
Services Agreement.
SHAREHOLDER SERVICING PLAN. The Trust has adopted a Shareholder Servicing
Plan (the "Service Plan") with respect to the Portfolios. Under the Service
Plan, financial institutions will enter into shareholder service agreements
with respect to the Portfolios to provide administrative support services to
their customers who are Portfolio shareholders. In return for providing these
support services, a financial institution may receive payments at a rate not
exceeding 0.25% of the average daily net assets of a Portfolio. These
administrative services may include, but are not limited to, the following
functions: providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer personnel, as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries
regarding the Portfolio; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as may
reasonably be requested.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Advisors and/or Mentor Investment
Group, or affiliates thereof, for providing administrative support services to
holders of the Portfolios' shares. These payments will be made directly by
Mentor Advisors and/or
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Mentor Investment Group, or their affiliates, and will not be made from the
assets of the Portfolios. During the 1997 fiscal year, the Strategy Portfolio
made payments of $825,750, under the Shareholder Service Plan; the Balanced
Portfolio made no payments under the Plan.
DECLARATION OF TRUST. Each of the Merger Shares will be fully paid and
nonassessable by the Balanced Portfolio when issued, will be transferable
without restriction, and will have no preemptive or conversion rights.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the
obligations of the trust. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust and/or the Balanced
Portfolio and requires that notice of such disclaimer be given in each
agreement, undertaking, or obligation entered into or executed by the Trust,
the Balanced Portfolio or the Trust's Trustees. The Declaration of Trust
provides for indemnification out of the Balanced Portfolio property for all
loss and expense of any shareholder held personally liable for the obligations
of the Balanced Portfolio. Thus, the risk of a shareholder's incurring
financial loss from shareholder liability is limited to circumstances in which
the Balanced Portfolio would be unable to meet its obligations. The likelihood
of such a circumstance is considered remote. The shareholders of the Strategy
Portfolio are currently subject to the same risk of shareholder liability under
Massachusetts law and the Declaration of Trust.
The Declaration of Trust provides that a number of shares in excess of 50%
of the shares entitled to vote at a meeting will constitute a quorum for that
meeting.
FEDERAL INCOME TAX CONSEQUENCES. As a condition to the Strategy
Portfolio's obligation to consummate the Merger, the Strategy Portfolio will
receive an opinion from Ropes & Gray, counsel to the Trust, to the effect that,
on the basis of the existing provisions of the Code, current administrative
rules, and court decisions, for federal income tax purposes: (i) under Section
361 of the Code, no gain or loss will be recognized by the Strategy Portfolio
as a result of the reorganization; (ii) under Section 354 of the Code, no gain
or loss will be recognized by shareholders of the Strategy Portfolio on the
distribution of Merger Shares to them in exchange for their shares of the
Strategy Portfolio; (iii) under Section 358 of the Code, the tax basis of the
Merger Shares that the Strategy Portfolio's shareholders receive in place of
their Strategy Portfolio shares will be the same as the basis of the Strategy
Portfolio shares; (iv) under Section 1223(1) of the Code, a shareholder's
holding period for the Merger Shares received pursuant to the Agreement will be
determined by including the holding period for the Strategy Portfolio shares
exchanged for the Merger Shares, provided that the shareholder held the
Strategy Portfolio shares as a capital asset; (v) under Section 1032 of the
Code, no gain or loss will be recognized by the Balanced Portfolio as a result
of the reorganization; (vi) under Section 362(b) of the Code, the Balanced
Portfolio's tax basis in the assets that the Balanced Portfolio receives from
the Strategy Portfolio will be the same as the Strategy Portfolio's basis in
such assets; and (vii) under Section 1223(2) of the Code, the Balanced
Portfolio's holding period in such assets will include the Strategy Portfolio's
holding period in such assets. The opinion will be based on certain factual
certifications made by officers of the Trust and the Balanced Portfolio and
will also be based on customary assumptions.
Prior to the Exchange Date, the Strategy Portfolio will declare a
distribution to shareholders which, together with all previous distributions,
will have the effect of distributing to shareholders all of its investment
company taxable income (computed without regard to the deduction for dividends
paid) and net realized capital gains, if any, through the Exchange Date.
19
<PAGE>
Following the Merger, the Balanced Portfolio may sell any of the
investments acquired by it from the Strategy Portfolio in the Merger. Any such
sale may give rise to capital gains which would, depending on the Balanced
Portfolio's tax position, be required to be distributed to shareholders of the
Balanced Portfolio, including holders of Merger Shares.
CAPITALIZATION. The following table shows the capitalizations of the
Balanced Portfolio and the Strategy Portfolio as of March 31, 1998 and of the
Balanced Portfolio on a pro forma basis as of that date, giving effect to the
proposed acquisition by the Balanced Portfolio of the assets and liabilities of
the Strategy Portfolio at net asset value. The pro forma capitalization
information is presented assuming such conversion immediately prior to the date
of the information presented:
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------------------------
NET ASSET
NET ASSETS SHARES OUTSTANDING VALUE PER SHARE*
-------------- -------------------- -----------------
<S> <C> <C> <C>
CLASS A
Balanced Portfolio ................................ $ 0 0 $ 0.00
Strategy Portfolio ................................ $ 34,626,465 2,157,686 $ 16.05
Balanced Portfolio: Pro Forma Combined ............ $ 34,606,328 1,982,035 $ 17.46
CLASS B
Balanced Portfolio ................................ $ 4,254,305 243,683 $ 17.46
Strategy Portfolio ................................ $250,496,326 16,006,748 $ 15.65
Balanced Portfolio: Pro Forma Combined ** ......... $250,350,650 14,338,525 $ 17.46
CLASS Y
Balanced Portfolio ................................ $ 0 0 $ 0.00
Strategy Portfolio ................................ $ 1,070 67 $ 16.05
Balanced Portfolio: Pro Forma Combined ** ......... $ 4,252,900 243,580 $ 17.46
</TABLE>
- ----------
* Net asset values do not reflect deduction of any applicable CDSC.
** Reflects conversion of certain Class B shares of the Balanced Portfolio to
Class Y shares of that Portfolio prior to the Merger.
20
<PAGE>
VOTING INFORMATION
RECORD DATE, QUORUM, AND METHOD OF TABULATION. Shareholders of record of
the Strategy Portfolio at the close of business on September 23, 1998 (the
"Record Date") will be entitled to notice of and to vote at the Meeting or any
adjournment thereof. The holders of more than 50% of shares of the Strategy
Portfolio outstanding at the Record Date present in person or represented by
proxy will constitute a quorum for the Meeting. Shareholders are entitled to
one vote for each share held, with fractional shares voting proportionally.
Only shareholders of the Strategy Portfolio will vote on the approval or
disapproval of the Merger.
Votes cast by proxy or in person at the Meeting will be counted by persons
appointed to act as tellers for the Meeting. The tellers will count the total
number of votes cast "for" approval of the proposal for purposes of determining
whether sufficient affirmative votes have been cast. The tellers will count
shares represented by proxies that reflect abstentions or "broker non-votes"
(I.E., shares held by a broker or nominee as to which (i) instructions have not
been received from the beneficial owners or the persons entitled to vote and
(ii) the broker or nominee does not have the discretionary voting power on a
particular matter) as shares that are present and entitled to vote on the
matter for purposes of determining the presence of a quorum. Abstentions and
broker non-votes will have no effect on the proposal to approve the Merger.
SHARES OUTSTANDING AND BENEFICIAL OWNERSHIP. As of the Record Date, as
shown on the books of the Trust, there were issued and outstanding
1,611,588.125 Class A, 13,454,630.332 Class B, and 66.667 Class Y shares of
beneficial interest of the Strategy Portfolio.
As of the Record Date, to the Trust's knowledge, the shareholders who
owned of record or beneficially 5% or more of the outstanding shares of either
Portfolio were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
PORTFOLIO'S
SHARES OUTSTANDING
SHAREHOLDER OWNED SHARES
--------------------------------------- ---------------- --------------
<S> <C> <C> <C>
STRATEGY PORTFOLIO
Class A Shares ......... None
Class B Shares ......... None
Class Y Shares ......... None
BALANCED PORTFOLIO
Class A Shares ......... None
Class B Shares ......... Wheat First Butcher Singer Foundation 260,413.754 39.50*
901 East Byrd Street
Richmond, VA 23219
Class Y Shares ......... None
</TABLE>
As of the Record Date, the officers and Trustees of the Trust as a group
beneficially owned less than 1% of the outstanding shares of each Class of the
Strategy Portfolio and the Balanced Portfolio.
* It is expected that these shares will be converted to Class Y shares prior to
the Merger.
21
<PAGE>
SOLICITATION OF PROXIES. The costs of solicitation of proxies will be
borne by the Portfolios in the same proportions as their respective net asset
values bear to each other. Solicitation of proxies by personal interview, mail,
telephone, and telegraph may be made by officers and Trustees of the Trust and
employees of Mentor Advisors and its affiliates.
The Trust may also arrange to have votes recorded by telephone. The
telephone voting procedure is designed to authenticate shareholders'
identities, to allow shareholders to authorize the voting of their shares in
accordance with their instructions, and to confirm that their instructions have
been properly recorded. The Trust has been advised by counsel that these
procedures are consistent with the requirements of applicable law. If these
procedures were subject to a successful legal challenge, such votes would not
be counted at the Meeting. The Trust is unaware of any such challenge at this
time. Shareholders would be called at the phone number the Trust (or a
shareholder's financial institution) has in its records for their accounts, and
would be asked for their Social Security number or other identifying
information. The shareholders would then be given an opportunity to authorize
proxies to vote their shares at the Meeting in accordance with their
instructions. To ensure that the shareholders' instructions have been recorded
correctly, they will also receive a confirmation of their instructions in the
mail. A special toll-free number will be available in case the information
contained in the information is incorrect.
For shares that you own beneficially and hold in "street name" through a
financial institution, you may have the opportunity to vote via the Internet by
utilizing a program provided through ADP Investor Communication Services
("ADP"). The giving of such a proxy will not affect your right to vote in
person should you decide to attend the Meeting. To vote via the Internet you
will need the 12-digit "control" number that appears on your proxy card. To
vote via the Internet, please access ADP on the World Wide Web at
www.proxyvote.com. The Internet voting procedures are designed to authenticate
shareholder identities, to allow shareholders to give their voting
instructions, and to confirm that shareholders' instructions have been recorded
properly. Shareholders voting via the Internet should understand that there may
be costs associated with electronic access, such as usage charges from Internet
access providers and telephone companies, that must be borne by the
shareholders.
REVOCATION OF PROXIES. Any shareholder giving a proxy has the power to
revoke it at any time before it is exercised by sending or delivering a written
revocation to the Secretary of the Trust (which will be effective when it is
received by the Secretary), by properly executing a later-dated proxy, or by
attending the Meeting, requesting return of such proxy, and voting in person.
All properly executed proxies received in time for the Meeting will be voted in
accordance with the specification made, or, if no specification is made, FOR
the proposal to implement the Merger.
SHAREHOLDER PROPOSALS AT FUTURE MEETINGS OF SHAREHOLDERS. The Declaration
of Trust does not provide for annual meetings of shareholders and the Trust
does not currently intend to hold such a meeting for shareholders in 1998.
Shareholder proposals for inclusion in a proxy statement for any subsequent
meeting of the Strategy Portfolio's shareholders must be received by the Trust
a reasonable period of time prior to any such meeting. If the Merger is
consummated, the Strategy Portfolio's existence will terminate in November 1998
or shortly thereafter, after which there would be no meetings of the
shareholders of the Strategy Portfolio.
22
<PAGE>
ADJOURNMENT. In the event that sufficient votes in favor of the Merger
proposal are not received by the time scheduled for the Meeting, the persons
named as proxies may propose one or more adjournments of the Meeting for a
period of not more than 60 days in the aggregate to permit further solicitation
of proxies. Any adjournment will require the affirmative vote of a plurality of
the votes cast on the question in person or by proxy at the session of the
Meeting to be adjourned. The persons named as proxies will vote in favor of
such adjournment those proxies which they are entitled to vote in favor of the
proposal. They will vote against any such adjournment those proxies which they
have been instructed to vote against the proposal, and they will vote to
abstain any such proxies which they are required to abstain from voting on the
proposal. The costs of any such additional solicitation and of any adjourned
session will be borne by the Portfolios in the same proportions as their
respective net asset values bear to each other.
October 9, 1998
23
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan or Reorganization (the "Agreement") is made as of
September 22, 1998 in Richmond, Virginia, by and between Mentor Funds, a
Massachusetts business trust (the "Trust"), on behalf of its Mentor Strategy
Portfolio series (the "Acquired Fund"), and the Trust, on behalf of its Mentor
Balanced Portfolio series (the "Acquiring Fund").
PLAN OF REORGANIZATION
(a) The Acquired Fund will sell, assign, convey, transfer, and deliver to
the Acquiring Fund on the Exchange Date (as defined in Section 6) all of its
properties and assets. In consideration therefor, the Acquiring Fund shall, on
the Exchange Date, assume all of the liabilities of the Acquired Fund existing
at the Valuation Time (as defined in Section 3(c)) and deliver to the Acquired
Fund (i) a number of full and fractional Class A shares of beneficial interest
of the Acquiring Fund (the "Class A Merger Shares") having an aggregate net
asset value equal to the value of the assets of the Acquired Fund attributable
to Class A shares of the Acquired Fund transferred to the Acquiring Fund on
such date less the value of the liabilities of the Acquired Fund attributable
to Class A shares of the Acquired Fund assumed by the Acquiring Fund on that
date, and (ii) a number of full and fractional Class B shares of beneficial
interest of the Acquiring Fund (the "Class B Merger Shares") having an
aggregate net asset value equal to the value of the assets of the Acquired Fund
attributable to Class B shares of the Acquired Fund transferred to the
Acquiring Fund on such date less the value of the liabilities of the Acquired
Fund attributable to Class B shares of the Acquired Fund assumed by the
Acquiring Fund on that date, and (iii) a number of full and fractional Class Y
shares of beneficial interest of the Acquiring Fund (the "Class Y Merger
Shares") having an aggregate net asset value equal to the value of the assets
of the Acquired Fund attributable to Class Y shares of the Acquired Fund
transferred to the Acquiring Fund on such date less the value of the
liabilities of the Acquired Fund attributable to Class Y shares of the Acquired
Fund assumed by the Acquiring Fund on that date. (The Class A, B, and Y Merger
Shares are referred to collectively as the "Merger Shares.") It is intended
that the reorganization described in this Plan shall be a reorganization within
the meaning of Section 368 of the Internal Revenue Code of 1986, as amended
(the "Code").
(b) Upon consummation of the transactions described in paragraph (a) of
this Agreement, the Acquired Fund shall distribute in complete liquidation to
its Class A, Class B, and Class Y shareholders of record as of the Exchange
Date the Class A, Class B, and Class Y Merger Shares of the Acquiring Fund,
each such shareholder being entitled to receive that proportion of such Class
A, Class B, and Class Y Merger Shares which the number of Class A, Class B, and
Class Y shares of beneficial interest of the Acquired Fund held by such
shareholder bears to the number of Class A, Class B, and Class Y shares of the
Acquired Fund outstanding on such date. Certificates representing the Merger
Shares will not be issued. All issued and outstanding shares of the Acquired
Fund will simultaneously be canceled on the books of the Acquired Fund.
(c) As promptly as practicable after the liquidation of the Acquired Fund
as aforesaid, the Acquired Fund shall be dissolved pursuant to the provisions
of the Declaration of Trust of the Trust, as amended, and applicable law, and
its legal existence terminated. Any reporting responsibility of the Acquired
Fund is and shall remain the responsibility of the Acquired Fund up to and
including the Exchange Date and, if applicable, such later date on which the
Acquired Fund is liquidated.
A-1
<PAGE>
AGREEMENT
The Acquiring Fund and the Acquired Fund agree as follows:
1. REPRESENTATIONS, WARRANTIES, AND AGREEMENTS OF THE ACQUIRING FUND. The
Acquiring Fund represents and warrants to and agrees with the Acquired Fund
that:
a. The Acquiring Fund is a series of shares of the Trust, a
Massachusetts business trust duly established and validly existing under
the laws of The Commonwealth of Massachusetts, and has power to own all of
its properties and assets and to carry out its obligations under this
Agreement. The Trust is qualified as a foreign association in every
jurisdiction where required, except to the extent that failure so to
qualify would not have a material adverse effect on the Trust. Each of the
Trust and the Acquiring Fund has all necessary federal, state, and local
authorizations to carry on its business as now being conducted and to carry
out this Agreement.
b. The Trust is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end management investment company, and
such registration has not been revoked or rescinded and is in full force
and effect.
c. Statements of assets and liabilities, statements of operations,
statements of changes in net assets, and schedules of investments
(indicating their market values) of the Acquiring Fund as of and for the
year ended September 30, 1997 and as of and for the six months ended March
31, 1998 have been furnished to the Acquired Fund, such statements and
schedules for the year ended September 30, 1997 having been audited by KPMG
Peat Marwick LLP, independent accountants. Such statements of assets and
liabilities and schedules fairly present the financial position of the
Acquiring Fund as of their dates, and such statements of operations and
changes in net assets fairly reflect the results of its operations and
changes in net assets for the period covered thereby in conformity with
generally accepted accounting principles applied on a consistent basis.
d. The current prospectuses and statement of additional information of
the Trust (collectively, the "Prospectus"), which have previously been
furnished to the Acquired Fund, did not as of their dates and do not
contain as of the date hereof, with respect to the Trust and the Acquiring
Fund, any untrue statements of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading.
e. There are no material legal, administrative, or other proceedings
pending or, to the knowledge of the Trust or the Acquiring Fund, threatened
against the Trust or the Acquiring Fund, which assert liability on the part
of the Trust or the Acquiring Fund. The Acquiring Fund knows of no facts
which might form the basis for the institution of such proceedings and is
not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body which materially and adversely
affects its business or its ability to consummate the transactions herein
contemplated.
f. The Acquiring Fund has no known liabilities of a material nature,
contingent or otherwise, other than those shown belonging to it on its
statement of assets and liabilities as of March 31, 1998, those incurred in
the ordinary course of its business as an investment company since March
31, 1998, and those to be assumed pursuant to this Agreement. Prior to the
Exchange Date, the Acquiring Fund will endeavor to quantify and to reflect
on its balance sheet all of its material known liabilities and will advise
the Acquired
A-2
<PAGE>
Fund of all material liabilities, contingent or otherwise, incurred by it
subsequent to March 31, 1998, whether or not incurred in the ordinary
course of business.
g. As of the Exchange Date, the Acquiring Fund will have filed all
federal and other tax returns and reports which, to the knowledge of the
Trust's officers, are required to be filed by the Acquiring Fund and has
paid or will pay all federal and other taxes shown to be due on said
returns or on any assessments received by the Acquiring Fund. All tax
liabilities of the Acquiring Fund have been adequately provided for on its
books, and no tax deficiency or liability of the Acquiring Fund has been
asserted, and no question with respect thereto has been raised or is under
audit, by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid.
h. No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated by this Agreement, except such as may
be required under the Securities Act of 1933, as amended (the "1933 Act"),
the Securities Exchange Act of 1934, as amended (the "1934 Act"), the 1940
Act, and state securities or blue sky laws (which term as used herein shall
include the laws of the District of Columbia and of Puerto Rico).
i. The registration statement (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") by the Trust on
Form N-14 on behalf of the Acquiring Fund and relating to the Merger Shares
issuable hereunder and the proxy statement of the Acquired Fund relating to
the meeting of the Acquired Fund's shareholders referred to in Section 7(a)
herein (together with the documents incorporated therein by reference, the
"Acquired Fund Proxy Statement"), on the effective date of the Registration
Statement, (i) complied in all material respects with the provisions of the
1933 Act, the 1934 Act, and the 1940 Act and the rules and regulations
thereunder and (ii) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and at the time of the
shareholders meeting referred to in Section 7(a) and on the Exchange Date,
the prospectuses which are contained in the Registration Statement, as
amended or supplemented by any amendments or supplements filed with the
Commission by the Trust, and the Acquired Fund Proxy Statement will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that none of the representations
and warranties in this subsection shall apply to statements in or omissions
from the Registration Statement or the Acquired Fund Proxy Statement made
in reliance upon and in conformity with information furnished in writing by
the Acquired Fund to the Acquiring Fund or the Trust specifically for use
in the Registration Statement or the Acquired Fund Proxy Statement.
j. There are no material contracts outstanding to which the Acquiring
Fund is a party, other than as are or will be disclosed in the Prospectus,
the Registration Statement, or the Acquired Fund Proxy Statement.
k. To the best of its knowledge, all of the issued and outstanding
shares of beneficial interest of the Acquiring Fund have been offered for
sale and sold in conformity with all applicable federal and state
securities laws (including any applicable exemptions therefrom), or the
Acquiring Fund has taken any action necessary to remedy any prior failure
to have offered for sale and sold such shares in conformity with such laws.
l. The Acquiring Fund qualifies and will at all times through the
Exchange Date qualify for taxation as a "regulated investment company"
under Sections 851 and 852 of the Code.
A-3
<PAGE>
m. The issuance of the Merger Shares pursuant to this Agreement will be
in compliance with all applicable federal and state securities laws.
n. The Merger Shares to be issued to the Acquired Fund have been duly
authorized and, when issued and delivered pursuant to this Agreement, will
be legally and validly issued and will be fully paid and non-assessable by
the Acquiring Fund, and no shareholder of the Acquiring Fund will have any
preemptive right of subscription or purchase in respect thereof.
o. All issued and outstanding shares of the Acquiring Fund are, and at
the Exchange Date will be, duly authorized, validly issued, fully paid, and
non-assessable by the Acquiring Fund. The Acquiring Fund does not have
outstanding any options, warrants, or other rights to subscribe for or
purchase any of the Acquiring Fund shares, nor is there outstanding any
security convertible into any Acquiring Fund shares.
2. REPRESENTATIONS, WARRANTIES, AND AGREEMENTS OF THE ACQUIRED FUND. The
Acquired Fund represents and warrants to and agrees with the Acquiring Fund
that:
a. The Acquired Fund is a series of shares of the Trust, a Massachusetts
business trust duly established and validly existing under the laws of The
Commonwealth of Massachusetts, and has power to own all of its properties
and assets and to carry out this Agreement. The Trust is qualified as a
foreign association in every jurisdiction where required, except to the
extent that failure so to qualify would not have a material adverse effect
on the Trust. Each of the Trust and the Acquired Fund has all necessary
federal, state, and local authorizations to own all of its properties and
assets and to carry on its business as now being conducted and to carry out
this Agreement.
b. The Trust is registered under the 1940 Act as an open-end management
investment company, and such registration has not been revoked or rescinded
and is in full force and effect.
c. Statements of assets and liabilities, statements of operations,
statements of changes in net assets, and schedules of investments
(indicating their market values) of the Acquired Fund as of and for the
fiscal year ended September 30, 1997 and as of and for the six months ended
March 31, 1998 have been furnished to the Acquiring Fund, such statements
and schedules for the year ended September 30, 1997 having been audited by
KPMG Peat Marwick LLP, independent accountants. Such statements of assets
and liabilities and schedules fairly present the financial position of the
Acquired Fund as of their dates, and such statements of operations and
changes in net assets fairly reflect the results of its operations and
changes in net assets for the period covered thereby in conformity with
generally accepted accounting principles applied on a consistent basis.
d. The Prospectus, which has been previously furnished to the Acquiring
Fund, did not contain as of its date and does not contain, with respect to
the Trust and the Acquired Fund, any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
e. There are no material legal, administrative, or other proceedings
pending or, to the knowledge of the Trust or the Acquired Fund, threatened
against the Trust or the Acquired Fund, which assert liability on the part
of the Trust or the Acquired Fund. The Acquired Fund knows of no facts
which might form the basis for the institution of such proceedings and is
not a party to or subject to the provisions of any order,
A-4
<PAGE>
decree, or judgment of any court or governmental body which materially and
adversely affects its business or its ability to consummate the
transactions herein contemplated.
f. There are no material contracts outstanding to which the Acquired
Fund is a party, other than as has been disclosed in the Trust's
registration statement on Form N-1A or the Prospectus.
g. The Acquired Fund has no known liabilities of a material nature,
contingent or otherwise, other than those shown on the Acquired Fund's
statement of assets and liabilities as of March 31, 1998 referred to above
and those incurred in the ordinary course of its business as an investment
company since such date. Prior to the Exchange Date, the Acquired Fund will
endeavor to quantify and to reflect on its balance sheet all of its
material known liabilities and will advise the Acquiring Fund of all
material liabilities, contingent or otherwise, incurred by it subsequent to
March 31, 1998, whether or not incurred in the ordinary course of business.
h. As of the Exchange Date, the Acquired Fund will have filed all
federal and other tax returns and reports which, to the knowledge of the
Trust's officers, are required to be filed by the Acquired Fund and has
paid or will pay all federal and other taxes shown to be due on said
returns or on any assessments received by the Acquired Fund. All tax
liabilities of the Acquired Fund have been adequately provided for on its
books, and no tax deficiency or liability of the Acquired Fund has been
asserted, and no question with respect thereto has been raised or is under
audit, by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid.
i. At the Exchange Date, the Trust, on behalf of the Acquired Fund, will
have full right, power, and authority to sell, assign, transfer, and
deliver the Investments (as defined below) and any other assets and
liabilities of the Acquired Fund to be transferred to the Acquiring Fund
pursuant to this Agreement. At the Exchange Date, subject only to the
delivery of the Investments and any such other assets and liabilities as
contemplated by this Agreement, the Acquiring Fund will acquire the
Investments and any such other assets and liabilities subject to no
encumbrances, liens, or security interests whatsoever and without any
restrictions upon the transfer thereof. As used in this Agreement, the term
"Investments" shall mean the Acquired Fund's investments shown on the
schedule of its investments as of March 31, 1998 referred to in Section
2(c) hereof, as supplemented with such changes in the portfolio as the
Acquired Fund shall make, and changes resulting from stock dividends, stock
split-ups, mergers, and similar corporate actions through the Exchange
Date.
j. No registration under the 1933 Act of any of the Investments would be
required if they were, as of the time of such transfer, the subject of a
public distribution by either of the Acquiring Fund or the Acquired Fund,
except as previously disclosed to the Acquiring Fund by the Acquired Fund.
k. No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated by this Agreement, except such as may
be required under the 1933 Act, 1934 Act, the 1940 Act, or state securities
or blue sky laws.
l. The Registration Statement and the Acquired Fund Proxy Statement, on
the effective date of the Registration Statement, (i) will comply in all
material respects with the provisions of the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and (ii) will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make
A-5
<PAGE>
the statements therein not misleading; and at the time of the shareholders
meeting referred to in Section 7(a) and on the Exchange Date, the Acquired
Fund Proxy Statement and the Registration Statement will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided, however, that none of the representations and
warranties in this subsection shall apply to statements in or omissions
from the Registration Statement or the Acquired Fund Proxy Statement made
in reliance upon and in conformity with information furnished in writing by
the Acquiring Fund to the Acquired Fund or the Trust specifically for use
in the Registration Statement or the Acquired Fund Proxy Statement.
m. The Acquired Fund qualifies and will at all times through the
Exchange Date qualify for taxation as a "regulated investment company"
under Section 851 and 852 of the Code.
n. At the Exchange Date, the Acquired Fund will have sold such of its
assets, if any, as are necessary to assure that, after giving effect to the
acquisition of the assets of the Acquired Fund pursuant to this Agreement,
the Acquiring Fund will remain a "diversified company" within the meaning
of Section 5(b)(1) of the 1940 Act and in compliance with such other
mandatory investment restrictions as are set forth in the Prospectus, as
amended through the Exchange Date.
o. To the best of its knowledge, all of the issued and outstanding
shares of beneficial interest of the Acquired Fund have been offered for
sale and sold in conformity with all applicable federal and state
securities laws (including any applicable exemptions therefrom), or the
Acquired Fund has taken any action necessary to remedy any prior failure to
have offered for sale and sold such shares in conformity with such laws.
p. All issued and outstanding shares of the Acquired Fund are, and at
the Exchange Date will be, duly authorized, validly issued, fully paid, and
nonassessable by the Acquired Fund. The Acquired Fund does not have
outstanding any options, warrants, or other rights to subscribe for or
purchase any of the Acquired Fund shares, nor is there outstanding any
security convertible into any of the Acquired Fund shares.
3. REORGANIZATION.
a. Subject to the requisite approval of the shareholders of the Acquired
Fund and to the other terms and conditions contained herein (including the
Acquired Fund's obligation to distribute to its shareholders all of its
investment company taxable income and net capital gain as described in
Section 8(m) hereof), the Acquired Fund agrees to sell, assign, convey,
transfer, and deliver to the Acquiring Fund, and the Acquiring Fund agrees
to acquire from the Acquired Fund, on the Exchange Date, all of the
Investments and all of the cash and other properties and assets of the
Acquired Fund, whether accrued or contingent (including cash received by
the Acquired Fund upon the liquidation by the Acquired Fund of any
investments), in exchange for that number of shares of beneficial interest
of the Acquiring Fund provided for in Section 4 and the assumption by the
Acquiring Fund of all of the liabilities of the Acquired Fund, whether
accrued or contingent, existing at the Valuation Time (as defined below)
except for the Acquired Fund's liabilities, if any, arising in connection
with this Agreement. Pursuant to this Agreement, the Acquired Fund will, as
soon as practicable after the Exchange Date, distribute all of the Merger
Shares received by it to the shareholders of the Acquired Fund in exchange
for their Class A, Class B, and Class Y shares of the Acquired Fund.
A-6
<PAGE>
b. The Acquired Fund will pay or cause to be paid to the Acquiring Fund
any interest, cash, or such dividends, rights, and other payments received
by it on or after the Exchange Date with respect to the Investments and
other properties and assets of the Acquired Fund, whether accrued or
contingent, received by it on or after the Exchange Date. Any such
distribution shall be deemed included in the assets transferred to the
Acquiring Fund at the Exchange Date and shall not be separately valued
unless the securities in respect of which such distribution is made shall
have gone "ex" such distribution prior to the Valuation Time, in which case
any such distribution which remains unpaid at the Exchange Date shall be
included in the determination of the value of the assets of the Acquired
Fund acquired by the Acquiring Fund.
c. The Valuation Time shall be 4:00 p.m. Eastern time on the Exchange
Date or such earlier or later day as may be mutually agreed upon in writing
by the parties hereto (the "Valuation Time").
4. EXCHANGE DATE: VALUATION TIME. On the Exchange Date, the Acquiring Fund
will deliver to the Acquired Fund (i) a number of full and fractional Class A
Merger Shares having an aggregate net asset value equal to the value of the
assets of the Acquired Fund attributable to Class A shares of the Acquired Fund
transferred to the Acquiring Fund on such date less the value of the
liabilities of the Acquired Fund attributable to Class A shares of the Acquired
Fund assumed by the Acquiring Fund on that date and (ii) a number of full and
fractional Class B Merger Shares having an aggregate net asset value equal to
the value of the assets of the Acquired Fund attributable to Class B shares of
the Acquired Fund transferred to the Acquiring Fund on such date less the value
of the liabilities of the Acquired Fund attributable to Class B shares of the
Acquired Fund assumed by the Acquiring Fund on that date, (iii) a number of
full and fractional Class Y Merger Shares having an aggregate net asset value
equal to the value of the assets of the Acquired Fund attributable to Class Y
shares of the Acquired Fund transferred to the Acquiring Fund on such date,
less the value of the liabilities of the Acquired Fund attributable to Class Y
shares of the Acquired Fund assumed by the Acquiring Fund on that date,
determined as hereinafter provided in this Section 4.
a. The net asset value of the Merger Shares to be delivered to he
Acquired Fund, the value of the assets attributable to the Class A, Class
B, and Class Y shares of the Acquired Fund, and the value of the
liabilities attributable to the Class A, Class B, and Class Y shares of the
Acquired Fund to be assumed by the Acquiring Fund, shall in each case be
determined as of the Valuation Time.
b. The net asset value of the Class A, Class B, and Class Y Merger
Shares shall be computed in the manner set forth in the Prospectus. The
value of the assets and liabilities of the Class A, Class B, and Class Y
shares of the Acquired Fund shall be determined by the Acquiring Fund, in
cooperation with the Acquired Fund, pursuant to procedures which the
Acquiring Fund would use in determining the fair market value of the
Acquiring Fund's assets and liabilities.
c. No adjustments shall be made in the net asset value of either the
Acquired Fund or the Acquiring Fund to take into account differences in
realized and unrealized gains and losses.
d. The Acquired Fund shall distribute the Class A Merger Shares to the
Class A shareholders of the Acquired Fund by furnishing written
instructions to the Acquiring Fund's transfer agent, which will as soon as
practicable set up open accounts for each Class A Acquired Fund shareholder
in accordance with such written instructions. The Acquired Fund shall
distribute the Class B Merger Shares to the Class B shareholders of the
Acquired Fund by furnishing written instructions to the Acquiring Fund's
transfer agent, which will as soon as practicable set up open accounts for
each Class B Acquired Fund shareholder in
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<PAGE>
accordance with such written instructions. The Acquired Fund shall
distribute the Class Y Merger Shares to the Class Y shareholders of the
Acquired Fund by furnishing written instructions to the Acquiring Fund's
transfer agent, which will as soon as practicable set up open accounts for
each Class Y Acquired Fund shareholder in accordance with such written
instructions.
e. The Acquiring Fund shall assume all liabilities of the Acquired Fund,
whether accrued or contingent, in connection with the acquisition of assets
and subsequent dissolution of the Acquired Fund or otherwise, except for
the Acquired Fund's liabilities, if any, pursuant to this Agreement. 5
5. EXPENSES, FEES, ETC.
a. All legal and accounting fees and expenses, printing, filing, and
proxy solicitation expenses, portfolio transfer taxes (if any), brokerage,
and similar expenses incurred in connection with the transactions
contemplated by the Agreement will be borne by the Acquiring Fund and the
Acquired Fund in the same proportions as their respective net asset values
bear to each other, whether or not such transactions are consummated.
Notwithstanding any of the foregoing, expenses will in any event be paid by
the party directly incurring such expenses if and to the extent that the
payment by the other party of such expenses would result in the
disqualification of such party as a "regulated investment company" within
the meaning of Section 851 of the Code.
b. Notwithstanding any other provision of this Agreement, if for any
reason the transactions contemplated by this Agreement are not consummated,
no party shall be liable to the other party for any damages resulting
therefrom, including, without limitation, consequential damages, except as
specifically set forth above.
6. EXCHANGE DATE. Delivery of the assets of the Acquired Fund to be
transferred, assumption of the liabilities of the Acquired Fund to be assumed,
and the delivery of the Merger Shares to be issued shall be made at the offices
of Ropes & Gray, One International Place, Boston, Massachusetts 02110 as of
November 13, or at such other date agreed to by the Acquiring Fund and the
Acquired Fund, the date and time upon which such delivery is to take place
being referred to herein as the "Exchange Date."
7. MEETING OF SHAREHOLDERS; DISSOLUTION.
a. The Trust, on behalf of the Acquired Fund, agrees to call a meeting
of the Acquired Fund's shareholders as soon as is practicable after the
effective date of this Agreement for the purpose of considering the sale of
all of its assets to and the assumption of all of its liabilities by the
Acquiring Fund as herein provided, adopting this Agreement, and authorizing
the liquidation and dissolution of the Acquired Fund.
b. The Acquired Fund agrees that the liquidation and dissolution of the
Acquired Fund will be effected in the manner provided in the Trust's
Declaration of Trust in accordance with applicable law and that on and
after the Exchange Date, the Acquired Fund shall not conduct any business
except in connection with its liquidation and dissolution.
c. The Acquiring Fund has, in consultation with the Acquired Fund and
based in part on information furnished by the Acquired Fund, filed the
Registration Statement with the Commission. The Acquired Fund
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<PAGE>
and the Acquiring Fund will cooperate with each other and will furnish to
each other the information relating to itself required by the 1933 Act, the
1934 Act, and the 1940 Act and the rules and regulations thereunder to be
set forth in the Registration Statement.
8. CONDITIONS TO THE ACQUIRING FUND'S OBLIGATIONS. The obligations of the
Acquiring Fund hereunder shall be subject to the following conditions:
a. That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the requisite votes of the
holders of the outstanding shares of beneficial interest of the Acquired
Fund entitled to vote.
b. That the Acquired Fund shall have furnished to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, with values
determined as provided in Section 4 of this Agreement, together with a list
of Investments with their respective tax costs, all as of the Valuation
Time, certified on the Acquired Fund's behalf by the Trust's President (or
any Vice President) and Treasurer (or any Assistant Treasurer), and a
certificate of both such officers, dated the Exchange Date, that there has
been no material adverse change in the financial position of the Acquired
Fund since March 31, 1998, other than changes in the Investments and other
assets of the Acquired Fund, or changes due to dividends paid, or losses
from operations.
c. That the Acquired Fund shall have furnished to the Acquiring Fund a
statement, dated the Exchange Date, signed by the Trust's President (or any
Vice President) and Treasurer (or any Assistant Treasurer) certifying that
as of the Valuation Time and as of the Exchange Date all representations
and warranties of the Acquired Fund made in this Agreement are true and
correct in all material respects as if made at and as of such dates and the
Acquired Fund has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to such
dates.
d. That the Acquired Fund shall have delivered to the Acquiring Fund a
letter from KPMG Peat Marwick LLP dated the Exchange Date reporting on the
results of applying certain procedures agreed upon by the Acquiring Fund
and described in such letter, which limited procedures relate to schedules
of the tax provisions and qualifying tests for regulated investment
companies as prepared for the fiscal year ended September 30, 1997 and the
period from September 30, 1997 to the Exchange Date (the latter period
being based on unaudited data).
e. That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
f. That the Acquiring Fund shall have received an opinion of Ropes &
Gray dated the Exchange Date, to the effect that (i) this Agreement has
been duly authorized, executed, and delivered by the Trust on behalf of the
Acquired Fund and, assuming that the Registration Statement, the
Prospectus, and the Acquired Fund Proxy Statement comply with the 1933 Act,
the 1934 Act, and the 1940 Act and assuming due authorization, execution,
and delivery of this Agreement by the Trust on behalf of the Acquiring
Fund, is a valid and binding obligation of the Trust and the Acquired Fund;
(ii) the Trust, on behalf of the Acquired Fund, has power to sell, assign,
convey, transfer, and deliver the assets contemplated hereby and, upon
consummation of the transactions contemplated hereby in accordance with the
terms of this Agreement, the Acquired Fund will have duly sold, assigned,
conveyed, transferred, and delivered such assets to the Acquiring Fund;
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(iii) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, violate the
Trust's Declaration of Trust or By-Laws or any provision of any agreement
known to such counsel to which the Trust or the Acquired Fund is a party or
by which it is bound; and (iv) no consent, approval, authorization, or
order of any court or governmental authority is required for the
consummation by the Trust on behalf of the Acquired Fund of the
transactions contemplated hereby, except such as have been obtained under
the 1933 Act, the 1934 Act, and the 1940 Act and such as may be required
under state securities or blue sky laws.
g. That the Acquiring Fund shall have received an opinion of Ropes &
Gray (which opinion would be based upon certain factual representations and
subject to certain qualifications) with respect to the matters specified in
Section 9(g) of this Agreement.
h. That the Acquiring Fund shall have received an opinion of Ropes &
Gray dated the Exchange Date, (which opinion would be based upon certain
factual representations and subject to certain qualifications), to the
effect that, on the basis of the existing provisions of the Code, current
administrative rules, and court decisions, for federal income tax purposes
(i) no gain or loss will be recognized by the Acquiring Fund upon receipt
of the Investments transferred to the Acquiring Fund pursuant to this
Agreement in exchange for the Merger Shares; (ii) the basis to the
Acquiring Fund of the Investments will be the same as the basis of the
Investments in the hands of the Acquired Fund immediately prior to such
exchange; and (iii) the Acquiring Fund's holding periods with respect to
the Investments will include the respective periods for which the
Investments were held by the Acquired Fund.
i. That the assets of the Acquired Fund to be acquired by the Acquiring
Fund will include no assets which the Acquiring Fund, by reason of charter
limitations or of investment restrictions disclosed in the Registration
Statement in effect on the Exchange Date, may not properly acquire.
j. That the Registration Statement shall have become effective under the
1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of the Trust or the Acquiring Fund,
threatened by the Commission.
k. That the Trust shall have received from the Commission and any
relevant state securities administrator such order or orders as are
reasonably necessary or desirable under the 1933 Act, the 1934 Act, the
1940 Act, and any applicable state securities or blue sky laws in
connection with the transactions contemplated hereby, and that all such
orders shall be in full force and effect.
l. That all actions taken by the Trust on behalf of the Acquired Fund in
connection with the transactions contemplated by this Agreement and all
documents incidental there to shall be satisfactory in form and substance
to the Acquiring Fund and its counsel.
m. That, prior to the Exchange Date, the Acquired Fund shall have
declared a dividend or dividends which, together with all previous such
dividends, shall have the effect of distributing to the shareholders of the
Acquired Fund (i) all of the excess of (x) the Acquired Fund's investment
income excludable from gross income under Section 103(a) of the Code over
(y) the Acquired Fund's deductions disallowed under Sections 265 and
171(a)(2) of the Code, (ii) all of the Acquired Fund's investment company
taxable income (as defined in Section 852 of the Code) (computed in each
case without regard to any deduction for dividends paid) in each case for
its taxable years ending on or after September 30, 1998 and on or prior to
the
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<PAGE>
Exchange Date, and (iii) all of the Acquired Fund's net capital gain
realized (after reduction for any capital loss carryover), in each case for
the taxable year ending on September 30, 1998 and all subsequent taxable
periods ending on or prior to the Exchange Date.
n. That the Acquired Fund shall have furnished to the Acquiring Fund a
certificate, signed by the President (or any Vice President) and the
Treasurer (or any assistant Treasurer) of the Trust, as to the tax cost to
the Acquired Fund of the securities delivered to the Acquiring Fund
pursuant to this Agreement, together with any such other evidence as to
such tax cost as the Acquiring Fund may reasonably request.
o. That the Acquired Fund's custodian shall have delivered to the
Acquiring Fund a certificate identifying all of the assets of the Acquired
Fund held or maintained by such custodian as of the Valuation Time.
p. That the Acquired Fund's transfer agent shall have provided to the
Acquiring Fund (i) the originals or true copies of all of the records of
the Acquired Fund in the possession of such transfer agent as of the
Exchange Date, (ii) a certificate setting forth the number of shares of the
Acquired Fund outstanding as of the Valuation Time, and (iii) the name and
address of each holder of record of any shares and the number of shares
held of record by each such shareholder.
q. That all of the issued and outstanding shares of beneficial interest
of the Acquired Fund shall have been offered for sale and sold in
conformity with all applicable state securities or blue sky laws (including
any applicable exemptions there from) and, to the extent that any audit of
the records of the Acquired Fund or its transfer agent by the Acquiring
Fund or its agents shall have revealed otherwise, either (i) the Acquired
Fund shall have taken all actions that in the opinion of the Acquiring Fund
or its counsel are necessary to remedy any prior failure on the part of the
Acquired Fund to have offered for sale and sold such shares in conformity
with such laws or (ii) the Acquired Fund shall have furnished (or caused to
be furnished) surety, or deposited (or caused to be deposited) assets in
escrow, for the benefit of the Acquiring Fund in amounts sufficient and
upon terms satisfactory, in the opinion of the Acquiring Fund or its
counsel, to indemnify the Acquiring Fund against any expense, loss, claim,
damage, or liability whatsoever that may be asserted or threatened by
reason of such failure on the part of the Acquired Fund to have offered and
sold such shares in conformity with such laws.
r. That the Acquiring Fund shall have received from KPMG Peat Marwick
LLP a letter addressed to the Acquiring Fund dated as of the Exchange Date
satisfactory in form and substance to the Acquiring Fund reporting on the
results of applying limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), which limited procedures relate as
of the Valuation Time to the procedure customarily utilized by the Acquired
Fund in valuing its assets and issuing its shares.
9. CONDITIONS TO THE ACQUIRED FUND'S OBLIGATIONS. The obligations of the
Acquired Fund hereunder shall be subject to the following conditions:
a. That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the requisite votes of the
holders of the outstanding shares of beneficial interest of the Acquired
Fund entitled to vote.
b. That the Acquiring Fund shall have furnished to the Acquired Fund a
statement of the Acquiring Fund's net assets, together with a list of
portfolio holdings with values determined as provided in Section
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<PAGE>
4, all as of the Valuation Time, certified on the Acquiring Fund's behalf
by the Trust's President (or any Vice President) and Treasurer (or any
Assistant Treasurer), and a certificate of both such officers, dated the
Exchange Date, to the effect that as of the Valuation Time and as of the
Exchange Date there has been no material adverse change in the financial
position of the Acquiring Fund since March 31, 1998, other than changes in
its portfolio securities since that date, changes in the market value of
the portfolio securities, or changes due to net redemptions, dividends
paid, or losses from operations.
c. That the Trust, on behalf of the Acquiring Fund, shall have executed
and delivered to the Acquired Fund an Assumption of Liabilities dated as of
the Exchange Date pursuant to which the Acquiring Fund will assume all of
the liabilities of the Acquired Fund existing at the Valuation Time in
connection with the transactions contemplated by this Agreement, other than
liabilities arising pursuant to this Agreement.
d. That the Acquiring Fund shall have furnished to the Acquired Fund a
statement, dated the Exchange Date, signed by the Trust's President (or any
Vice President) and Treasurer (or any Assistant Treasurer) certifying that
as of the Valuation Time and as of the Exchange Date all representations
and warranties of the Acquiring Fund made in this Agreement are true and
correct in all material respects as if made at and as of such dates, and
that the Acquiring Fund has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied at
or prior to each of such dates; and that the Trust shall have furnished to
the Acquired Fund a statement, dated the Exchange Date, signed by an
officer of the Trust certifying that as of the Valuation Time and as of the
Exchange Date, to the best of the Trust's knowledge, after due inquiry, all
representations and warranties of the Acquiring Fund made in this Agreement
are true and correct in all material respects as if made at and as of such
date.
e. That there shall not be any material litigation pending or threatened
with respect to the matters contemplated by this Agreement.
f. That the Acquired Fund shall have received an opinion of Ropes & Gray
dated the Exchange Date, to the effect that (i) the Merger Shares to be
delivered to the Acquired Fund as provided for by this Agreement are duly
authorized and upon such delivery will be validly issued and will be fully
paid and non-assessable by the Trust and the Acquiring Fund and no
shareholder of the Acquiring Fund has any preemptive right to subscription
or purchase in respect thereof; (ii) this Agreement has been duly
authorized, executed, and delivered by the Trust on behalf of the Acquiring
Fund and, assuming that the Prospectus, the Registration Statement, and the
Acquired Fund Proxy Statement comply with the 1933 Act, the 1934 Act, and
the 1940 Act and assuming due authorization, execution, and delivery of
this Agreement by the Trust on behalf of the Acquired Fund, is a valid and
binding obligation of the Trust and the Acquiring Fund; (iii) the
execution and delivery of this Agreement did not, and the consummation of
the transactions contemplated hereby will not, violate the Trust's
Declaration of Trust or By-Laws, or any provision of any agreement known to
such counsel to which the Trust or the Acquiring Fund is a party or by
which it is bound; (iv) no consent, approval, authorization, or order of
any court or governmental authority is required for the consummation by the
Trust on behalf of the Acquiring Fund of the transactions contemplated
herein, except such as have been obtained under the 1933 Act, the 1934 Act,
and the 1940 Act and such as may be required under state securities or blue
sky laws; and (v) the Registration Statement has become effective under the
1933 Act, and to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act.
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g. That the Acquired Fund shall have received an opinion of Ropes & Gray
dated the Exchange date (which opinion would be based upon certain factual
representations and subject to certain qualifications), to the effect that,
on the basis of the existing provisions of the Code, current administrative
rules, and court decisions, for federal income tax purposes: (i) no gain or
loss will be recognized by the Acquired Fund as a result of the
reorganization; (ii) no gain or loss will be recognized by shareholders of
the Acquired Fund on the distribution of Merger Shares to them in exchange
for their shares of the Acquired Fund; (iii) the tax basis of the Merger
Shares that the Acquired Fund's shareholders receive in place of their
Acquired Fund shares will be the same as the basis of the Acquired Fund
shares; and (iv) a shareholder's holding period for the Merger Shares
received pursuant to the Agreement will be determined by including the
holding period for the Acquired Fund shares exchanged for the Merger
Shares, provided that the shareholder held the Acquired Fund shares as a
capital asset.
h. That all actions taken by the Trust on behalf of the Acquiring Fund
in connection with the transactions contemplated by this Agreement and all
documents incidental there to shall be satisfactory in form and substance
to the Acquired Fund and its counsel.
i. That the Registration Statement shall have become effective under the
1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of the Trust or the Acquiring Fund,
threatened by the Commission.
j. That the Trust shall have received from the Commission and any
relevant state securities administrator such order or orders as are
reasonably necessary or desirable under the 1933 Act, the 1934 Act, the
1940 Act, and any applicable state securities or blue sky laws in
connection with the transactions contemplated hereby, and that all such
orders shall be in full force and effect.
k. The Board of Trustees of the Trust shall not have concluded in the
good faith exercise of its fiduciary duty that the transactions
contemplated hereby would not be in the best interests of the shareholders
of the Acquired Fund.
10. INDEMNIFICATION.
a. The Acquired Fund will indemnify and hold harmless, out of the assets
of the Acquired Fund (which shall be deemed to include the assets of the
Acquiring Fund represented by the Merger Shares following the Exchange
Date) but no other assets, the Acquiring Fund and the trustees and officers
of the Trust (for purposes of this subparagraph, the "Indemnified Parties")
against any and all expenses, losses, claims, damages, and liabilities at
any time imposed upon or reasonably incurred by any one or more of the
Indemnified Parties in connection with, arising out of, or resulting from
any claim, action, suit, or proceeding in which any one or more of the
Indemnified Parties may be involved or with which any one or more of the
Indemnified Parties may be threatened by reason of any untrue statement or
alleged untrue statement of a material fact relating to the Acquired Fund
contained in the Registration Statement, the Prospectus, the Acquired Fund
Proxy Statement, or any amendment or supplement to any of the foregoing, or
arising out of or based upon the omission or alleged omission to state in
any of the foregoing a material fact relating to the Acquired Fund required
to be stated therein or necessary to make the statements relating to the
Acquired Fund therein not misleading, including, without limitation, any
amounts paid by any one or more of the Indemnified Parties in a reasonable
compromise or settlement of any such claim, action, suit, or proceeding, or
threatened claim, action, suit, or proceeding made with the consent of the
Trust or the Acquired
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Fund. The Indemnified Parties will notify the Trust and the Acquired Fund
in writing within ten days after the receipt by any one or more of the
Indemnified Parties of any notice of legal process or any suit brought
against or claim made against such Indemnified Party as to any matters
covered by this Section 10(a). The Acquired Fund shall be entitled to
participate at its own expense in the defense of any claim, action, suit,
or proceeding covered by this Section 10(a), or, if it so elects, to assume
at its expense by counsel satisfactory to the Indemnified Parties the
defense of any such claim, action, suit, or proceeding, and if the Acquired
Fund elects to assume such defense, the Indemnified Parties shall be
entitled to participate in the defense of any such claim, action, suit, or
proceeding at their expense. The Acquired Fund's obligation under Section
10(a) to indemnify and hold harmless the Indemnified Parties shall
constitute a guarantee of payment so that the Acquired Fund will pay in the
first instance any expenses, losses, claims, damages, and liabilities
required to be paid by it under this Section 10(a) without the necessity of
the Indemnified Parties' first paying the same.
b. The Acquiring Fund will indemnify and hold harmless, out of the
assets of the Acquiring Fund but no other assets, the Acquiring Fund and
the trustees and officers of the Trust (for purposes of this subparagraph,
the "Indemnified Parties") against any and all expenses, losses, claims,
damages, and liabilities at any time imposed upon or reasonably incurred by
any one or more of the Indemnified Parties in connection with, arising out
of, or resulting from any claim, action, suit, or proceeding in which any
one or more of the Indemnified Parties may be involved or with which any
one or more of the Indemnified Parties may be threatened by reason of any
untrue statement or alleged untrue statement of a material fact relating to
the Acquiring Fund contained in the Registration Statement, the Prospectus,
the Acquired Fund Proxy Statement or any amendment or supplement to any of
the foregoing, or arising out of or based upon, the omission or alleged
omission to state in any of the foregoing a material fact relating to the
Acquiring Fund required to be stated therein or necessary to make the
statements relating to the Acquiring Fund therein not misleading,
including, without limitation, any amounts paid by any one or more of the
Indemnified Parties in a reasonable compromise or settlement of any such
claim, action, suit, or proceeding, or threatened claim, action, suit, or
proceeding, made with the consent of the Trust or the Acquiring Fund. The
Indemnified Parties will notify the Trust and the Acquiring Fund in writing
within ten days after the receipt by any one or more of the Indemnified
Parties of any notice of legal process or any suit brought against or claim
made against such Indemnified Party as to any matters covered by this
Section 10(b). The Acquiring Fund shall be entitled to participate at its
own expense in the defense of any claim, action, suit, or proceeding
covered by this Section 10(b), or, if it so elects, to assume at its
expense by counsel satisfactory to the Indemnified Parties the defense of
any such claim, action, suit, or proceeding, and, if the Acquiring Fund
elects to assume such defense, the Indemnified Parties shall be entitled to
participate in the defense of any such claim, action, suit, or proceeding
at their own expense. The Acquiring Fund's obligation under this Section
10(b) to indemnify and hold harmless the Indemnified Parties shall
constitute a guarantee of payment so that the Acquiring Fund will pay in
the first instance any expenses, losses, claims, damages, and liabilities
required to be paid by it under this Section 10(b) without the necessity of
the Indemnified Parties' first paying the same.
11. NO BROKER, ETC. Each of the Acquired Fund and the Acquiring Fund
represents that there is no person who has dealt with it or the Trust who by
reason of such dealings is entitled to any broker's or finder's or other
similar fee or commission arising out of the transactions contemplated by this
Agreement.
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<PAGE>
12. TERMINATION. The Acquired Fund and the Acquiring Fund may, by mutual
consent of the trustees of the Trust on behalf of each Fund, terminate this
Agreement, and the Acquired Fund or the Acquiring Fund, after consultation with
counsel and by consent of their respective trustees or an officer authorized by
such trustees, may waive any condition to their respective obligations
hereunder. If the transactions contemplated by this Agreement have not been
substantially completed by December 31, 1998, this Agreement shall
automatically terminate on that date unless a later date is agreed to by the
Acquired Fund and the Acquiring Fund.
13. RULE 145. Pursuant to Rule 145 under the 1933 Act, the Acquiring Fund
will, in connection with the issuance of any Merger Shares to any person who at
the time of the transaction contemplated hereby is deemed to be an affiliate of
a party to the transaction pursuant to Rule 145(c), cause to be affixed upon
the certificates issued to such person (if any) a legend as follows:
"THESE SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO MENTOR
BALANCED PORTFOLIO OR ITS PRINCIPAL UNDERWRITER UNLESS (i) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (ii) IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE PORTFOLIO SUCH REGISTRATION IS NOT
REQUIRED."
and, further, the Acquiring Fund will issue stop transfer instructions to the
Acquiring Fund's transfer agent with respect to such shares. The Acquired Fund
will provide the Acquiring Fund on the Exchange Date with the name of any
Acquired Fund shareholder who is to the knowledge of the Acquired Fund an
affiliate of the Acquired Fund on such date.
14. COVENANTS, ETC. DEEMED MATERIAL. All covenants, agreements,
representations, and warranties made under this Agreement and any certificates
delivered pursuant to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding an investigation made by
them or on their behalf.
15. SOLE AGREEMENT; AMENDMENTS; GOVERNING LAW. This Agreement supersedes
all previous correspondence and oral communications between the parties
regarding the subject matter hereof, constitutes the only understanding with
respect to such subject matter, may not be changed except by a letter of
agreement signed by each party hereto, and shall be construed in accordance
with and governed by the laws of The Commonwealth of Massachusetts.
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<PAGE>
16. DECLARATION OF TRUST. A copy of the Declaration of Trust of the Trust
is on file with the Secretary of State of The Commonwealth of Massachusetts,
and notice is hereby given that this instrument is executed on behalf of the
trustees of the Trust on behalf of the Acquired Fund and on behalf of the
Acquiring Fund, as trustees and not individually and that the obligations of
this instrument are not binding upon any of the trustees, officers, or
shareholders of the Trust individually but are binding only upon the assets and
property of the Acquired Fund or the Acquiring Fund, as the case may be.
MENTOR FUNDS
on behalf of its Mentor Strategy
Portfolio series
By: /s/ Paul F. Costello
----------------------
Name: Paul F. Costello
Title: President
MENTOR FUNDS
on behalf of its Mentor Balanced
Portfolio series
By: /s/ Paul F. Costello
---------------------
Name: Paul F. Costello
Title: President
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<PAGE>
MENTOR STRATEGY PORTFOLIO
MENTOR FUNDS
PROXY SOLICITED BY THE BOARD OF TRUSTEES
PROXY FOR MEETING OF SHAREHOLDERS
NOVEMBER 12, 1998
The undersigned hereby appoints Daniel J. Ludeman, Peter J. Quinn, Jr., and Paul
F. Costello, and each of them separately, proxies, with power of substitution to
each, and hereby authorizes them to represent and to vote, as designated below,
at the Meeting of Shareholders of the Trust, on November 12, 1998 at 10:00 a.m.,
Richmond time, and at any adjournments thereof, all of the shares of Mentor
Strategy Portfolio which the undersigned would be entitled to vote if personally
present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSAL.
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the Meeting. The Board of Trustees recommends a vote
FOR the proposal.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE.
Please sign your name exactly as it appears on this card. If you are a joint
owner, each owner should sign. When signing as executor, administrator,
attorney, trustee, or guardian, or as custodian for a minor, please give your
full title as such. If you are signing for a corporation, please sign the full
corporate name and indicate the signer's office. If you are a partner, sign in
the partnership name.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ----------------------------------------- ---------------------------------
- ----------------------------------------- ---------------------------------
- ----------------------------------------- ---------------------------------
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
- ----------------------------------- THIS PROXY IS VALID ONLY WHEN SIGNED
MENTOR STRATEGY PORTFOLIO AND DATED.
- ----------------------------------
1. Proposal to approve Agreement and Plan
of Reorganization.
For Against Abstain
[ ] [ ] [ ]
RECORD DATE SHARES:
Please be sure to sign and date this Proxy. Date
Shareholder sign here Co-owner sign here
Mark box at right if an address change or comment has
been noted on the reverse side of this card. [ ]
<PAGE>
MENTOR FUNDS
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
October 9, 1998
This Statement of Additional Information (the "SAI") relates to the
proposed merger (the "Merger") of Mentor Strategy Portfolio (the "Acquired
Fund"), a series of Mentor Funds, a Massachusetts business trust (the "Trust"),
into Mentor Balanced Portfolio (the "Acquiring Fund"), another series of the
Trust.
This SAI contains information which may be of interest to shareholders
but which is not included in the Prospectus/Proxy Statement dated October 9,
1998 (the "Prospectus/Proxy Statement") of the Trust which relates to the
Merger.
This SAI is not a prospectus and should be read in conjunction with the
Prospectus/Proxy Statement. The Prospectus/Proxy Statement has been filed with
the Securities and Exchange Commission and is available upon request and without
charge by writing to the Trust at 901 East Byrd Street, Richmond, Virginia 23219
or by calling 1-800-382-0016.
<PAGE>
Table of Contents
Item Page
- ---- ----
I. Additional Information about the Acquiring and Acquired Funds..... 3
II. Financial Statements.............................................. 3
SAI-2
<PAGE>
I. Additional Information about the Acquiring and Acquired Funds.
This SAI is accompanied by the current Statement of Additional
Information of the Trust, dated January 17, 1998, as amended or supplemented
from time to time, which provides further information relating to the Acquired
and Acquiring Funds, including information in respect of their investment
objectives, policies, and financial histories.
The following documents, which have previously been filed with the
Securities and Exchange Commission, have been incorporated by reference into
Part A of this Registration Statement:
(1) Prospectus relating to Class A and Class B shares of various Portfolios
of the Trust, including the Acquired Fund, dated January 17, 1998
(Registration Nos. 33-43315 and 811-5159).
(2) Prospectus relating to Class Y shares of the Acquired Fund dated
January 17, 1998 (Registration Nos. 33-43315 and 811-6550).
(3) Prospectus relating to Class A and Class B shares of the Acquiring Fund
dated May 12, 1998 (Registration Nos.33-43315 and 811-6550).
(4) Prospectus relating to Class Y shares of the Acquiring Fund dated
May 12, 1998 (Registration Nos.33- 43315 and 811-6550).
(5) Statement of Additional Information of the Trust dated January 17,
1998 (Registration Nos. 33-43315 and 811-6550).
(6) Financial statements contained in the Semi-Annual Report to
Shareholders of the Acquiring Fund for the period ended March 31, 1998
(Registration Nos. 33-43315 and 811-6550).
(7) Financial statements contained in the Annual Report to Shareholders of
the Acquiring Fund for the year ended September 30, 1997 (Registration
Nos. 33-43315 and 811-6550).
II. Financial Statements.
This SAI is accompanied by the Annual Report of the Acquired Fund for
the year ended September 30, 1997, which contains historical financial
information regarding such Fund. Such Annual Report has been filed with the
Securities and Exchange Commission, and the financial statements and independent
auditors' report contained in such Annual Report are incorporated herein by
reference.
Unaudited interim financial statements of the Acquired and Acquiring
Funds for the period ended March 31, 1998 are presented below, along with
unaudited pro forma financial information as of such date giving effect to the
Merger as of that date (assuming conversion of all outstanding Class B shares of
the Acquiring Fund to Class Y shares of the Acquiring Fund immediately prior to
the date of such financial statements).
SAI-3
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
--------------------- ------ ------------
<S> <C>
Common Stock 54.58%
Basic Materials 1.02%
Southdown, Inc. 34,250 $ 2,386,796
United Stationers, Inc. 8,500 525,406
-------------
2,912,202
-------------
Capital Goods & Construction 2.22%
Applied Power, Inc.-
Class A 12,600 485,100
Centex Corporation 27,800 1,059,875
Clayton Homes 41,300 836,325
Kuhlman Corporation 35,400 1,723,537
Oakwood Homes 21,200 776,450
Paccar, Inc. 24,100 1,435,456
-------------
6,316,743
-------------
Commercial Services 1.34%
Comdisco, Inc. 40,500 1,766,813
Omnicom Group, Inc. 43,800 2,061,338
-------------
3,828,151
-------------
Consumer Cyclical 7.21%
Best Buy Company, Inc. * 9,800 652,925
Bowne & Company 31,100 1,286,762
Chrysler Corporation 19,200 798,000
Ford Motor Company 13,600 881,450
General Motors
Corporation 11,000 741,813
Jacor Communications, Inc. * 37,300 2,200,700
McGraw-Hill Companies 9,100 692,169
Royal Caribbean Cruises,
Limited 26,400 1,849,650
Sinclair Broadcast Group * 47,800 2,754,475
Time Warner 25,800 1,857,600
Tribune Company 35,300 2,488,650
Walt Disney Company 13,000 1,387,750
Young Broadcasting * 59,900 2,995,000
-------------
20,586,944
-------------
Consumer Staples 1.35%
Express Scripts - Class A * 38,000 3,221,687
Sysco Corporation 24,400 625,250
-------------
3,846,937
-------------
Energy 0.98%
TransCanada Pipelines,
Limited 36,400 859,950
Westcoast Energy 34,800 852,600
Williams Companies 33,500 1,072,000
-------------
2,784,550
-------------
Financial 9.92%
Associated Banc-Corporation 32,000 1,726,000
Charter One Financial, Inc. 46,606 3,105,125
</TABLE>
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
--------------------- ------ ------------
<S> <C>
Common Stock (continued)
Financial (continued)
Dime Bancorp, Inc. 61,700 $ 1,854,856
First Republic Bancorp, Inc. 46,300 1,666,800
Marsh & McLennan
Companies, Inc. 9,800 855,663
North Fork Bancorp 74,500 2,877,563
Northern Trust Corporation 35,200 2,631,200
Old Republic International
Corporation 61,700 2,734,081
Onbancorp, Inc. 23,400 1,620,450
Price (T. Rowe) &
Associates, Inc. 35,000 2,463,125
Synovus Financial
Corporation 38,200 1,418,175
Travelers Group, Inc. 45,300 2,718,000
U.S. Bancorp 20,900 2,607,275
-------------
28,278,313
-------------
Health 3.76%
Health Management
Association - Class A * 55,350 1,584,394
McKesson Corporation 58,400 3,372,600
Paragon Health Network 54,333 1,079,868
Sunrise Assisted Living * 40,800 1,825,800
Watson Pharmacueticals * 79,100 2,847,600
-------------
10,710,262
-------------
Retail 7.83%
American Eagle Outfitters * 65,100 2,864,400
Costco Companies, Inc. * 91,000 4,857,125
Family Dollar Stores, Inc. 85,750 3,258,500
Federated Department
Stores * 71,700 3,714,956
G & K Services - Class A 6,800 298,350
Gap, Inc. 27,825 1,252,125
Linens 'n Things, Inc. * 25,300 1,389,919
Safeway, Inc. * 61,600 2,275,350
TJX Companies, Inc. 53,200 2,407,300
-------------
22,318,025
-------------
Technology 11.67%
AFC Cable System, Inc. * 54,500 2,118,688
Affiliated Computer Services
- Class A * 35,300 1,171,519
Airtouch Communications * 122,500 5,994,844
Applied Graphics
Technology * 41,800 2,011,656
AT&T Corporation 22,800 1,496,250
BCE, Inc. 35,600 1,486,300
CACI International * 54,500 1,199,000
Computer Task Group 14,400 593,100
</TABLE>
31
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Shares or
Principal
Percent of Net Assets Amount Market Value
--------------------- --------- ------------
<S> <C>
Common Stock (continued)
Technology (continued)
Dell Computer
Corporation * 37,000 2,504,437
EMC Corporation * 28,400 1,073,875
ICG Communications * 38,000 1,415,500
Intelligroup, Inc. * 70,200 1,136,362
Kellstrom Industries, Inc. * 128,900 3,246,669
Mobile Telecom Technical
Corporation * 63,000 1,409,625
OfficeMax * 30,800 550,550
Sprint Corporation 23,900 1,617,731
Telefonica de Espana 11,900 1,573,775
Torchmark 58,600 2,684,613
---------
33,284,494
----------
Transportation 2.69%
Airborne Freight
Corporation 57,000 2,144,625
Alaska Airgroup 30,800 1,668,975
American Classic Voyages
Company 30,900 710,700
AMR Corporation 9,300 1,331,644
Continental Airlines -
Class B * 30,900 1,817,306
----------
7,673,250
----------
Utilities 2.51%
Conectiv, Inc. - Class A 2,412 81,707
Duke Energy Corporation 7,300 434,806
FPL Group, Inc. 7,100 456,175
GTE Corporation 23,700 1,419,038
Illinova Corporation 13,800 416,587
IPALCO Enterprises, Inc. 9,800 441,613
New York State
Electric & Gas 11,500 458,562
NIPSCO Industries 16,000 448,000
U.S. West Communications
Group 24,600 1,346,850
U.S. West Media Group * 47,800 1,661,050
----------
7,164,388
----------
Miscellaneous 2.08%
Carlisle Companies, Inc. 33,400 1,640,775
Delia'S, Inc. * 45,800 1,099,200
Lennar Corporation 39,962 1,376,191
Rent Way, Inc. * 49,100 $ 1,166,125
Tyco International Limited 12,000 655,500
-------------
5,937,791
-------------
Total Common Stocks (cost
$ 112,521,982) 155,642,050
-------------
</TABLE>
<TABLE>
<CAPTION>
Shares or
Principal
Percent of Net Assets Amount Market Value
--------------------- --------- ------------
<S> <C>
U.S. Government Securities 33.20%
Common Stock (continued)
Miscellaneous (continued)
U.S. Treasury Note, 5.50%,
1/31/03 $ 12,000,000 11,912,160
U.S. Treasury Bond, 6.50%,
11/15/26 77,523,000 82,736,422
Total U.S. Government
Securities (cost
$ 87,088,991) 94,648,582
Short-Term Investment 11.08%
Repurchase Agreement
Goldman Sachs &
Company
Dated 03/31/98, 6.05%,
due 04/01/98,
collateralized by
$31,908,279 Federal
Home Loan Mortgage
Corporation, 7.00%,
11/01/27, market value
$ 32,227,218, (cost
$ 31,581,849) 31,581,849 31,581,849
-------------
Total Investments (cost
$ 231,192,822) 98.86% $ 281,872,481
-------------
Other Assets less Liabilities 1.14%
3,251,380
-------------
Net Assets 100.00% $ 285,123,861
=============
</TABLE>
* Non-income producing.
(a) American Depository Receipts.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $88,381,538 and $144,726,891, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $231,192,822. Net unrealized appreciation aggregated
$50,679,659, of which $50,806,778, related to appreciated investment securities
and $127,119, related to depreciated investment securities.
See notes to financial statements.
32
<PAGE>
Mentor Strategy Portfolio
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $ 250,290,632
Repurchase agreements 31,581,849
-----------
Total investments (cost
$ 231,192,822) 281,872,481
-----------
Collateral for securities
loaned (Note 2) 68,067,637
Receivables
Investments sold 1,797,664
Fund shares sold 272,519
Dividends and interest 2,126,104
Deferred expenses (Note 2) 15,138
-----------
Total assets 354,151,543
-----------
Liabilities
Payables
Securities loaned (Note 2) $68,067,637
Fund shares redeemed 811,048
Accrued expenses and other
liabilities 148,997
-----------
Total liabilities 69,027,682
-----------
Net Assets $285,123,861
============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 238,532,347
Accumulated net investment
income 1,104,109
Accumulated net realized loss on
investment transactions (5,192,254)
Net unrealized appreciation of
investments 50,679,659
-------------
Net Assets $ 285,123,861
=============
Net Asset Value per Share
Class A Shares $ 16.05
Class B Shares $ 15.65
Class Y Shares $ 16.05
Offering Price per Share
Class A Shares $ 17.03(a)
Class B Shares $ 15.65
Class Y Shares $ 16.05
Shares Outstanding
Class A Shares 2,157,686
Class B Shares 16,006,748
Class Y Shares 67
-----------
Total Shares Outstanding 18,164,501
===========
(a) Computation of offering price: 100/94.25 of net asset value.
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends $ 622,780
------------
Interest 3,720,968
------------
Total investment income
(Note 2) 4,343,748
------------
Expenses
Management fee (Note 3) $1,317,072
Distribution fee (Note 3) 1,020,717
Shareholder service fee (Note 5) 387,373
Transfer agent fee (Note 3) 231,465
Administration fee (Note 4) 154,950
Shareholder reports and postage
expenses 40,040
Custodian and accounting
fees (Note 3) 39,628
Registration expenses 28,555
Organizational expenses 10,048
Legal fees 6,270
Directors' fees and expenses 5,216
Audit fees 3,466
Miscellaneous 17,240
----------
Total expenses 3,262,040
------------
Net investment income 1,081,708
------------
Realized and unrealized gain (loss)
on investments
Net realized loss on
investments (Note 2) (5,098,824)
Change in unrealized appreciation
on investments 14,674,155
----------
Net gain on investments 9,575,331
------------
Net increase in net assets resulting
from operations $ 10,657,039
============
See notes to financial statements.
33
<PAGE>
Mentor Strategy Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
(Unaudited)
<S> <C>
Net Increase (Decrease) in Net Assets
Operations
Net investment income $ 1,081,708
Net realized gain (loss) on investments (5,098,824)
Change in unrealized appreciation on investments 14,674,155
-------------
Increase in net assets resulting from operations 10,657,039
-------------
Distributions to Shareholders
From net investment income
Class A (617,602)
Class B (4,725,533)
From net realized gain on investments
Class A (6,308,214)
Class B (48,259,012)
-------------
Total distributions to shareholders (59,910,360)
-------------
Capital Share Transactions (Note 6)
Proceeds from sale of shares 10,114,698
Reinvested distributions 58,353,503
Shares redeemed (76,527,795)
-------------
Change in net assets resulting from capital share transactions (8,059,594)
-------------
Increase (decrease) in net assets (57,312,916)
Net Assets
Beginning of period 342,436,777
-------------
End of period (including accumulated undistributed net investment
income of $1,090,770) $ 285,123,861
=============
</TABLE>
See notes to financial statements.
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
(Unaudited)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 18.61
--------
Income from investment operations
Net investment income 0.13
Net realized and unrealized gain on investments 0.56
--------
Total from investment operations 0.69
--------
Less distributions
From net investment income (0.29)
In excess of net investment income
From net realized capital gain (2.96)
--------
Total distributions (3.25)
--------
Net asset value, end of period $ 16.05
========
Total Return 4.48 %
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 34,627
Ratio of expenses to average net assets 1.45%(a)
Ratio of expenses to average net assets
excluding waiver 1.45%(a)
Ratio of net investment income (loss) to average net assets 1.36%(a)
Portfolio turnover rate 32%
Average commission rate on portfolio transactions $ 0.0659
</TABLE>
(a) Annualized.
See notes to financial statements.
34
<PAGE>
Mentor Strategy Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
(Unaudited)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 18.29
--------
Income from investment operations
Net investment income (loss) 0.05
Net realized and unrealized gain (loss)
on investments 0.56
--------
Total from investment operations 0.61
--------
Less distributions
From net investment income (0.29)
From net realized capital gain (2.96)
----------
Total distributions (3.25)
----------
Net asset value, end of period $ 15.65
==========
Total Return 4.06%
==========
Ratios / Supplemental Data
Net assets, end of period (in thousands) $250,496
Ratio of expenses to average net assets 2.20%(a)
Ratio of net investment income (loss) to
average net assets 0.61%(a)
Portfolio turnover rate 32%
Average commission rate on portfolio
transactions $ 0.0659
<CAPTION>
Class Y Shares
Period
Ended 3/31/98 (b)
(Unaudited)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 15.01
--------
Income from investment operations
Net investment income 0.10
Net realized and unrealized gain on investments 0.95
--------
Total from investment operations 1.05
--------
Less distributions
From net realized capital gain (0.01)
Net asset value, end of period $ 16.05
=========
Total Return 7.07%
=========
Ratios / Supplemental Data
Net assets, end of period $ 1,070
Ratio of expenses to average net assets 1.20%(a)
Ratio of net investment income (loss) to average net assets 1.89%(a)
Portfolio turnover rate 32%
Average commission rate on portfolio transactions $ 0.0659
</TABLE>
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998.
See notes to financial statements.
35
Mentor Funds
Strategy Portfolio
Notes to Financial Statements
March 31, 1998 (Unaudited)
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. Mentor Funds consists of eleven separate Portfolios (hereinafter each
individually referred to as a "Portfolio" or collectively as the "Portfolios")
at March 31, 1998, as follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Capital Growth Portfolio ("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio ("Income and Growth Portfolio")
Mentor Perpetual Global Portfolio ("Global Portfolio")
Mentor Quality Income Portfolio ("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio ("Short-Duration Income Portfolio")
Mentor Municipal Income Portfolio ("Municipal Income Portfolio")
Mentor Balanced Portfolio ("Balanced Portfolio")
Mentor U.S. Government Institutional Money Market Portfolio ("Government
Portfolio")
Mentor Institutional Money Market Portfolio ("Money Market 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 Strategy Portfolio
only (hereinafter referred to as the "Portfolio").
Mentor Funds currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% 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. Class Y shares are sold to institutions and high
net-worth individual investors and are not subject to any sales or contingent
deferred sales charges.
Note 2: Significant Accounting Policies The following is a summary of
significant accounting policies consistently followed by the Portfolios in the
preparation of their financial statements. The policies are in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect amounts reported therein. Although actual
results could differ from these estimates, any such differences are expected to
be immaterial to the net assets of the Portfolio.
(a) Valuation of Securities - Listed securities held by the Strategy 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 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 market
quotations are not readily available are valued at fair value as determined in
good faith under
Notes to Financial Statements (continued)
procedures established by and under the general supervision and responsibility
of the Board of Trustees.
(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) Portfolio Securities Loaned-The Portfolio is authorized by the Board of
Trustees to participate in securities lending transactions.
The Portfolio may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolio
continue to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolio record an asset and obligation for the market value of
that collateral. Cash received as collateral may be reinvested, in which case
that security is recorded as an asset of the Portfolio. Variations in the
market value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At March 31, 1998, the Portfolio had loaned securities to brokers which were
collateralized by cash. Income from securities lending activities amounted to
$40,678 for the six months ended March 31, 1998. The risks to the Portfolio
from securities lending are that the borrower may not provide additional
collateral when required or return the securities when due. At March 31, 1998,
the value of the securities on loan and the related cash collateral were
$66,714,498, and $68,067,637, respectively.
(d) Security Transactions and Investment Income- Security transactions for the
Portfolio are accounted for on trade date. Dividend income is recorded on the
ex-dividend date. Interest income 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.
(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.
(f) When-Issued and Delayed Delivery Transactions- The Portfolio may engage in
when-issued or delayed delivery transactions. To the extent the Portfolio
engage in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objectives and policies and
not for the purpose of investment leverage. The Portfolio will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Portfolio will maintain security
positions such that sufficient
Notes to Financial Statements (continued)
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, the Portfolio may buy and sell futures contracts. The
Portfolio may also buy or write put or call options on these futures contracts.
The Portfolio may sell futures contracts to hedge against declines in the value
of portfolio securities. The Portfolio 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 Portfolio will segregate assets to cover
its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolio is 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 Portfolio 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 Portfolio recognizes a realized gain or loss when the
contract is closed.
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.
(h) Options- In order to produce incremental earnings or protect against changes
in the value of portfolio securities, the Portfolio may buy and sell put and
call options, write covered call options on portfolio securities and write
cash-secured put options.
The Portfolio may purchase put options or write covered call options to hedge
against adverse movements in the value of portfolio holdings. The Portfolio may
also use options for speculative purposes, although they do not employ options
for this at the present time. The Portfolio will segregate assets to cover
their 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.
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. Notes to Financial Statements (continued)
(i) Interest-Rate Swaps- An interest-rate swap is a contract between two parties
on a specified principal amount (referred to as the notional principal) for a
specified period. In the most common instance, a swap involves the exchange of
streams of variable and fixed-rate interest payments. During the term of the
swap, changes in the value of the swap are recognized as unrealized gains or
losses by marking-to-market to reflect the market value of the swap. When the
swap is terminated, the Fund will record a realized gain or loss.
(j) Deferred Expenses- Costs incurred by the Portfolio in connection with its
initial share registration and organization costs were deferred by the Portfolio
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 are declared and paid annually to all shareholders
invested in the Strategy Portfolio 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 to the Mentor. Capital gains realized by each Portfolio,
if any, are paid annually.
Note 4: Investment Advisory and Management and Administration Agreements Mentor
Investment Advisors, LLC ("Mentor Advisors"), the Portfolio's investment
adviser, receives for its services an annual investment advisory fee of 0.85% as
a percentage of the average daily net assets of the Portfolio. For the six
months ended March 31, 1998, Mentor Advisors earned $1,317,072 in advisory fees.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC
("Mentor") which is in turn a partially owned subsidiary of Wheat First Union.
EVEREN Capital Corporation owns 20% of the outstanding interest in Mentor.
Administrative personnel and services are provided by Mentor, under an
Administration Agreement, at an annual rate of 0.10% of the average daily net
assets of the Portfolio. For the six months ended March 31, 1998, Mentor earned
$154,950 in administration fees.
The Portfolio also provides direct reimbursement to Mentor for certain legal and
compliance administration, investor relation and operation related costs not
covered under the Investment Management Agreement. For the six months ended
March 31, 1998, the Portfolio reimbursed Mentor $11,846 for such costs.
Note 5: Distribution Agreement and Other Transactions with Affiliates The
Portfolio has adopted a Distribution Plan (the Plan) pursuant to Rule 12b-1
under the Investment Company Act of 1940 with respect to its Class B shares.
Under a Distribution Agreement between the Portfolio and Mentor Distributors,
LLC ("Mentor Distributors") a wholly-owned subsidiary of BISYS Fund Services,
Inc., Mentor Distributors 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 pays a distribution
fee under the Plan, which is accrued daily and paid monthly at the annual rate
of 0.75% of the Portfolios' average daily net assets for the Portfolio.
Notes to Financial Statements (continued)
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to Class A and Class B shares of the Portfolio. Under the Service Plan,
financial institutions will enter into shareholder service agreements with the
Distributor to provide administrative support services to its customers who from
time to time may be owners of record or beneficial owners of Class A or Class B
shares of the Portfolio. In return for providing these support services, a
financial institution may receive payments from the Distributor at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B shares
of the Portfolio 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 Portfolio's class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan. For
the six months ended March 31, 1998, distribution fees and shareholder servicing
fees were as follows:
Distribution Shareholder-Servicing Fees
Portfolio Fees Class A Class B
- ---------------------------------------------------------------------------
Strategy $1,020,717 $47,044 $340,329
Note 6: 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>
Mentor Strategy Portfolio
Six Months
Ended 3/31/98
Shares Dollar
------------------------------------
<S> <C>
Class A:
Shares sold 312,205 $4,763,997
Shares issued upon reinvestment of distributions 444,548 6,836,197
Shares redeemed (777,622) (12,080,085)
------------------------------------
Change in net assets from
capital share transactions (20,869) ($479,891)
====================================
Class B:
Shares sold 353,802 $5,349,703
Shares issued upon reinvestment of distributions 3,423,559 51,517,306
Shares redeemed (4,273,266) (64,447,709)
------------------------------------
Change in net assets from
capital share transactions (495,905) ($7,580,700)
====================================
Class Y (a)
Shares sold 67 $1,001
Shares issued upon reinvestment
of distributions - -
Shares redeemed - -
------------------------------------
Change in net assets from
capital share transactions 67 $1,001
====================================
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998.
Notes to Financial Statements (continued)
Year 2000
The Portfolio receives services from a number of providers which rely on the
smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of computer software to distinguish the Year 2000 from
the Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolio's other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the Portfolio
from this problem.
Additional Information
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 20,152,299 171,413
Troy A. Peery, Jr. 20,152,236 171,476
Arnold H. Dreyfuss 20,156,434 167,278
Thomas F. Keller 20,159,264 164,448
Peter J. Quinn, Jr. 20,157,621 166,091
Louis W. Moelchert, Jr. 20,158,819 164,893
Arch T. Allen, III 20,159,366 164,346
Weston E. Edwards 20,159,233 164,479
Jerry R. Barrentine 20,163,690 160,022
J. Garnett Nelson 20,163,690 160,022
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First
Butcher Singer, Inc., with First Union Corporation:
Affirmative 19,987,030
Against 124,613
Abstain 212,069
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of
an additional interest in Mentor Investment Group, LLC by EVEREN
Securities Holdings, Inc.:
Affirmative 19,973,828
Against 140,299
Abstain 209,585
<PAGE>
Mentor Balanced Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C>
COMMON STOCKS 55.86%
Basic Materials 7.75%
Bemis Company 1,800 $ 81,225
Emerson Electric Company 1,250 81,484
Morton International, Inc. 2,400 78,750
Sonoco Products Company 2,200 88,138
----------
329,597
----------
Capital Goods & Construction 6.27%
AlliedSignal, Inc. 2,050 86,100
W.W. Grainger, Inc. 875 89,961
Illinois Tool Works 1,400 90,650
----------
266,711
----------
Consumer Cyclical 7.93%
Automatic Data Processing 1,275 86,780
Federated Department Stores * 1,500 77,719
Interpublic Group Companies,
Inc. 1,380 85,733
Newell Company 1,800 87,188
----------
337,420
----------
Consumer Staples 6.56%
McDonald's Corporation 1,650 99,000
Sherwin-Williams Company 2,620 93,010
Sysco Corporation 3,400 87,125
----------
279,135
----------
Financial 13.62%
American Express Company 935 85,845
Banc One Corporation 1,451 91,771
Federal National Mortgage
Association 1,340 84,755
General Re Corporation 400 88,250
NationsBank Corporation 1,090 79,502
Norwest Corporation 2,000 83,125
UNUM Corporation 1,200 66,225
----------
579,473
----------
Health 4.14%
Johnson & Johnson 1,200 87,975
Schering-Plough 1,080 88,223
----------
176,198
----------
Technology 7.64%
Computer Sciences Corporation 1,560 85,800
Chancellor Media Corporation -
Class A * 1,750 80,281
WorldCom, Inc. * 2,000 86,125
Sun Microsystems, Inc. * 1,750 73,008
----------
325,214
----------
Transportation & Services 1.95%
Werner Enterprises, Inc. 3,250 82,875
----------
Total Common Stocks (cost
$ 1,663,773) 2,376,623
----------
</TABLE>
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C>
COMMON STOCKS (continued)
Fixed Income Securities 31.45%
U.S. Government Securities and
Agencies 21.20%
Federal National Mortgage
Association, 6.64%, 07/02/07 130,000 $ 136,636
Federal Home Loan Bank, 5.59%,
1/13/03 105,000 104,310
Government National Mortgage
Association, 6.50% - 7.38%,
5/15/09 - 11/20/22 291,968 297,842
U.S. Treasury Notes, 6.00% -
6.75%, 4/30/00 - 2/15/26 105,000 106,964
U.S. Treasury Bonds, 6.88% -
7.50%, 2/15/23 - 8/15/25 220,000 255,998
----------
Total U.S. Government Securities
and Agencies (cost $864,670) 901,750
----------
Corporate Bonds 10.25%
CS First Boston, 7.18%, 2/25/18,
CMO 25,000 25,251
Ford Motor Credit, 7.20%,
6/15/07 45,000 47,713
Key Auto Finance Trust Series
1997-2 Class A3, 6.10%,
11/15/00 50,000 50,093
Merrill Lynch, 6.64%, 9/19/02 45,000 45,975
NationsBank Corporation,
7.50%, 9/15/06 35,000 37,562
Norwest Corporation, 6.80%,
5/15/02 60,000 61,541
PNC Student Loan Trust, 6.73%,
1/25/07 75,000 76,904
Travelers Group, 8.63%, 2/01/07 40,000 45,951
Union Acceptance Corporation,
6.48%, 5/10/04 45,000 45,352
----------
Total Corporate Bonds (cost
$ 425,855) 436,342
----------
Total Fixed Income Securities
(cost $1,816,972) 1,338,092
----------
Short-Term Investment
Repurchase Agreement 12.37%
Goldman Sachs & Company
Dated 03/31/98, 6.05%, due
04/01/98, collateralized by
$532,328 Federal Home Loan
Mortgage Corporation, 7.00%,
11/01/27, market value
$538,482, (cost $526,447) 526,447 526,447
----------
Total Investments (cost
$ 3,480,745) 99.69% 4,241,162
----------
Other Assets less Liabilities 0.31% 13,143
----------
Net Assets 100.00% $4,254,305
==========
</TABLE>
1
<PAGE>
Mentor Balanced Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
* Non-income producing.
CMO Collateralized Mortgage Obligations
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $1,573,639 and $2,277,180, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $3,480,745. Net unrealized appreciation aggregated
$760,417, of which $766,587, related to appreciated investment securities and
$6,170, related to depreciated investment securities.
See notes to financial statements.
2
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
Assets
Investments, at market value
(Note 2)
Investment securities $3,714,715
Repurchase agreements 526,447
-----------
Total investments (cost
$ 3,480,745) 4,241,162
Collateral for securities loaned
(Note 2) 932,129
Dividends and interest receivable 17,261
-----------
Total assets 5,190,552
-----------
Liabilities
Securities loaned (Note 2) 932,129
Accrued expenses and other
liabilities 4,118
-------
Total liabilities 936,247
-----------
Net Assets $4,254,305
===========
Net Assets represented by: (Note 2)
Additional paid-in capital $ 2,793,838
Accumulated undistributed net
investment income 48,366
Accumulated net realized gain on
investment transactions 651,684
Net unrealized appreciation of
investments 760,417
-----------
Net Assets $4,254,305
===========
Shares Outstanding 243,683
-----------
Net Asset Value and Offering Price
per Share $ 17.46
===========
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends $ 15,637
Interest net of premium 47,667
---------
Total investment income (Note 2) 63,304
---------
Expenses
Management fee (Note 3) 15,306
Distribution fee (Note 3) 15,306
Shareholder service fee (Note 5) 5,102
Custodian and accounting fees
(Note 3) 3,822
Administration fee (Note 4) 2,046
Registration expenses 278
Shareholder reports and postage
expenses 93
Legal fees 69
Audit fees 38
Directors' fees and expenses 57
Miscellaneous 190
------
Total expenses 42,307
---------
Deduct
Waiver of distribution fee (Note 3) 15,306
Waiver of management fee (Note 3) 10,086
Waiver of shareholder servicing fee
(Note 4) 5,102
Waiver of administration fee (Note 3) 2,046
---------
Net expenses 9,767
---------
Net investment income 53,537
---------
Realized and unrealized gain (loss) on
investments
Net realized gain on investments
(Note 2) 505,443
Change in unrealized appreciation on
investments (26,550)
-------
Net gain on investments 478,893
---------
Net increase in net assets resulting
from operations $ 532,430
=========
See notes to financial statements.
3
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
Unaudited
<S> <C>
Net Increase in Net Assets
Operations
Net investment income $ 53,537
Net realized gain on investments 505,443
Change in unrealized appreciation on investments (26,550)
----------
Increase in net assets resulting from operations 532,430
----------
Distributions to Shareholders
From net investment income (93,188)
From net realized gain on investments (440,937)
----------
Total distributions to shareholders (534,125)
----------
Capital Share Transactions (Note 5)
Proceeds from sale of shares -
Reinvested distributions 534,125
Shares redeemed (380,000)
----------
Change in net assets resulting from capital share transactions 154,125
----------
Increase in net assets 152,430
Net Assets
Beginning of period 4,101,875
----------
End of period (including accumulated undistributed net investment income of $48,366) $4,254,305
==========
</TABLE>
See notes to financial statements.
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
(Unaudited)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 17.61
--------
Income from investment operations
Net investment income 0.32
Net realized and unrealized gain (loss) on investments 1.88
--------
Total from investment operations 2.20
--------
Less distributions
From net investment income (0.41)
From net realized capital gain (1.94)
----------
Total distributions (2.35)
----------
Net asset value, end of period $ 17.46
==========
Total Return 13.91%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $4,254
Ratio of expenses to average net assets 0.50%(a)
Ratio of expenses to average net assets excluding waiver 2.08%(a)
Ratio of net investment income to average net assets 2.64%(a)
Portfolio turnover rate 41%
Average commission rate on portfolio transactions $ 0.0684
</TABLE>
(a) Annualized.
See notes to financial statements.
4
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
Notes to Financial Statements
Note 1: Organization
The Mentor Funds is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. Mentor Funds consists of
eleven separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at March 31, 1998 as follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Perpetual Global Portfolio ("Global Portfolio")
Mentor Capital Growth Portfolio ("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio ("Income and Growth Portfolio")
Mentor Municipal Income Portfolio ("Municipal Income Portfolio")
Mentor Quality Income Portfolio ("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio ("Short-Duration Income
Portfolio")
Mentor Balanced Portfolio ("Balanced Portfolio")
Mentor Institutional U.S. Government Money Market Portfolio ("Government
Portfolio")
Mentor Institutional Money Market Portfolio ("Money Market 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
only (hereinafter referred to as the "Portfolio"). The Balanced Portfolio
invests in common stocks and fixed income securities.
Shares of the Portfolio are sold without an initial sales charge, although a
contingent deferred sales charge may be imposed if shares are redeemed within 5
years of purchase. Shares of the Portfolio are not currently being offered to
the public.
Note 2: Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Portfolio in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of 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 market
quotations are not readily available are valued at fair value as determined in
good faith under procedures Notes to Financial Statements (continued)
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
5
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
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 the Portfolio 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.
The Portfolio will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Portfolio's advisor to be creditworthy pursuant to guidelines established by the
Portfolio's Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly, the
Portfolio could receive less than the repurchase price on the sale of collateral
securities.
(c) Portfolio Securities Loaned - The Portfolio is authorized by the Board of
Trustees to participate in securities lending transactions.
The Portfolio may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolio
continues to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolio records an asset and obligation for the market value
of that collateral. Cash received as collateral may be reinvested, in which case
that security is recorded as an asset of the Portfolio. Variations in the market
value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At March 31, 1998, the Portfolio had loaned securities to brokers which were
collateralized by cash. Income from securities lending activities amounted to
$104 for the six months ended March 31, 1998. The risks to the Portfolio from
securities lending are that the borrower may not provide additional collateral
when required or return the securities when due. At March 31, 1998, the market
value of the securities on loan and the related cash collateral were $919,058,
and $932,129, respectively.
(d) 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.
(e) 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
6
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
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.
(f) 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
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolio's investment
adviser, receives for its services an annual investment advisory fee of 0.75% as
a percentage of the average daily net assets of the Portfolio. In order to limit
the Portfolio's expenses Mentor Advisors and its affiliates have waived fees
payable to them, and as necessary borne expenses of the Portfolio, to the
extent the Portfolio's expenses (exclusive of brokerage, interest, taxes,
deferred organization expenses, and payments under the Portfolio's Distribution
Plan) exceed an annual rate of 0.50% of the Portfolio's average net assets. For
the six months ended March 31, 1998, Mentor Advisors earned management fees of
$15,306 and voluntarily waived $10,086 of such fees.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC
("Mentor") which is in turn a partially owned subsidiary of Wheat First Union.
EVEREN Capital Corporation owns 20% of the outstanding interest in Mentor.
Administrative personnel and services are provided by Mentor to the Portfolio,
under an Administration Agreement, at an annual rate of 0.10% of the average
daily net assets of the Portfolio. In order to limit the Portfolio's expenses,
Mentor agreed to waive its fees for the six months ended March 31, 1998.
Note 4: Distribution Agreement and Other Transactions with Affiliates Under a
Distribution Agreement Mentor Distributors, LLC ("Mentor Distributors") a
wholly-owned subsidiary of BISYS Fund Services, Inc., was appointed Distributor
for 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 with respect to its Class B shares, under which
the Portfolio pays a distribution fee under the Plan, which is accrued daily and
paid monthly at the annual rate of 0.75% of the Portfolio's average daily net
assets.
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to each Portfolio. Under the Service Plan, financial institutions will
enter into shareholder service agreements with the Distributor to provide
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 six
months ended March 31, 1998 distribution and shareholder services fees were as
follows:
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Shareholder Servicing Fee
Distribution Fee Waived Servicing Fee Waived
------------------ ------------------ --------------- --------------
<S> <C>
Balanced Portfolio $15,306 $(15,306) $5,102 $(5,102)
</TABLE>
7
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
Note 5: 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>
Six Months
Ended
3/31/98
<S> <C>
Shares Dollars
------ -------
Shares sold - $ -
Shares issued upon reinvestment of distributions 33,848 534,125
Shares redeemed (23,064) (380,000)
------- ----------
Change in net assets from capital share transactions 10,784 $ 154,125
======= ==========
</TABLE>
Year 2000
The Portfolio receives services from a number of providers which rely on the
smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of computer software to distinguish the Year 2000 from
the Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolio's other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the Portfolio
from this problem.
Additional Information
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 230,078 -
Troy A. Peery, Jr. 230,078 -
Arnold H. Dreyfuss 230,078 -
Thomas F. Keller 230,078 -
Peter J. Quinn, Jr. 230,078 -
Louis W. Moelchert, Jr. 230,078 -
Arch T. Allen, III 230,078 -
Weston E. Edwards 230,078 -
Jerry R. Barrentine 230,078 -
J. Garnett Nelson 230,078 -
8
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 230,078
Against -
Abstain -
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 230,078
Against -
Abstain -
9
Mentor Balanced Portfolio
Pro Forma Combining Portfolio of Investments
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Mentor Strategy Portfolio Mentor Balanced Portfolio Pro Forma Combined
------------------------- ------------------------- --------------------
Shares Market Value Shares Market Value Shares Market Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks 54.63%
- ----------------------------------------------------------------------------------------------------------------------------------
Basic Materials 1.12%
Bemis Company 1,800 $ 81,225 1,800 $ 81,225
Emerson Electric Company 1,250 81,484 1,250 81,484
Morton International, Inc. 2,400 78,750 2,400 78,750
Sonoco Products Company 2,200 88,138 2,200 88,138
Southdown, Inc. 34,250 $ 2,386,796 34,250 2,386,796
United Stationers, Inc. 8,500 525,406 8,500 525,406
- ----------------------------------------------------------------------------------------------------------------------------------
2,912,202 329,597 3,241,799
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Goods & Construction 2.28%
AlliedSignal, Inc. 2,050 86,100 2,050 86,100
Applied Power, Inc. - Class A 12,600 485,100 12,600 485,100
Centex Corporation 27,800 1,059,875 27,800 1,059,875
Clayton Homes 41,300 836,325 41,300 836,325
Illinois Tool Works 1,400 90,650 1,400 90,650
Kuhlman Corporation 35,400 1,723,537 35,400 1,723,537
Oakwood Homes 21,200 776,450 21,200 776,450
Paccar, Inc. 24,100 1,435,456 24,100 1,435,456
W.W. Grainger, Inc. 875 89,961 875 89,961
- ---------------------------------------------------------------------------------------------------------------------------------
6,316,743 266,711 6,583,454
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial Services 1.32%
Comdisco, Inc. 40,500 1,766,813 40,500 1,766,813
Omnicom Group, Inc. 43,800 2,061,338 43,800 2,061,338
- ---------------------------------------------------------------------------------------------------------------------------------
3,828,151 3,828,151
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- ---------------------------------------------------------------------------------------------------------------------------------
Consumer Cyclical 7.23%
Automatic Data Processing 1,275 $ 86,780 1,275 $ 86,780
Best Buy Company, Inc. * 9,800 $ 652,925 9,800 652,925
Bowne & Company 31,100 1,286,762 31,100 1,286,762
Chrysler Corporation 19,200 798,000 19,200 798,000
Federated Department Stores * 1,500 77,719 1,500 77,719
Ford Motor Company 13,600 881,450 13,600 881,450
General Motors Corporation 11,000 741,813 11,000 741,813
Interpublic Group Companies, Inc. 1,380 85,733 1,380 85,733
Jacor Communications, Inc. * 37,300 2,200,700 37,300 2,200,700
McGraw-Hill Companies 9,100 692,169 9,100 692,169
Newell Company 1,800 87,188 1,800 87,188
Royal Caribbean Cruises, Limited 26,400 1,849,650 26,400 1,849,650
Sinclair Broadcast Group * 47,800 2,754,475 47,800 2,754,475
Time Warner 25,800 1,857,600 25,800 1,857,600
Tribune Company 35,300 2,488,650 35,300 2,488,650
Walt Disney Company 13,000 1,387,750 13,000 1,387,750
Young Broadcasting* 59,900 2,995,000 59,900 2,995,000
- ---------------------------------------------------------------------------------------------------------------------------------
20,586,944 337,420 20,924,364
- ---------------------------------------------------------------------------------------------------------------------------------
Consumer Staples 1.43%
Express Scripts - Class A * 38,000 3,221,687 38,000 3,221,687
McDonald's Corporation 1,650 99,000 1,650 99,000
Sherwin-Williams Company 2,620 93,010 2,620 93,010
Sysco Corporation 24,400 625,250 3,400 87,125 27,800 712,375
- ---------------------------------------------------------------------------------------------------------------------------------
3,846,937 279,135 4,126,072
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- ---------------------------------------------------------------------------------------------------------------------------------
Energy 0.96%
TransCanada Pipelines, Limited 36,400 $ 859,950 36,400 $ 859,950
Westcoast Energy 34,800 852,600 34,800 852,600
Williams Companies 33,500 1,072,000 33,500 1,072,000
- ---------------------------------------------------------------------------------------------------------------------------------
2,784,550 2,784,550
- ---------------------------------------------------------------------------------------------------------------------------------
Financial 9.98%
American Express Company 935 $ 85,845 935 85,845
Associated Banc-Corporation 32,000 1,726,000 32,000 1,726,000
Banc One Corporation 1,451 91,771 1,451 91,771
Charter One Financial, Inc. 46,606 3,105,125 46,606 3,105,125
Dime Bancorp, Inc. 61,700 1,854,856 61,700 1,854,856
Federal National Mortgage Association 1,340 84,755 1,340 84,755
First Republic Bancorp, Inc. 46,300 1,666,800 46,300 1,666,800
General Re Corporation 400 88,250 400 88,250
Marsh & McLennan Companies, Inc. 9,800 855,663 9,800 855,663
NationsBank Corporation 1,090 79,502 1,090 79,502
North Fork Bancorp 74,500 2,877,563 74,500 2,877,563
Northern Trust Corporation 35,200 2,631,200 35,200 2,631,200
Norwest Corporation 2,000 83,125 2,000 83,125
Old Republic International Corporation 61,700 2,734,081 61,700 2,734,081
Onbancorp, Inc. 23,400 1,620,450 23,400 1,620,450
Price (T. Rowe) & Associates, Inc. 35,000 2,463,125 35,000 2,463,125
Synovus Financial Corporation 38,200 1,418,175 38,200 1,418,175
Travelers Group, Inc. 45,300 2,718,000 45,300 2,718,000
U.S. Bancorp 20,900 2,607,275 20,900 2,607,275
Common Stocks (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Financial (continued)
UNUM Corporation 1,200 $ 66,225 1,200 $ 66,225
- ----------------------------------------------------------------------------------------------------------------------------------
$ 28,278,313 579,473 28,857,786
- ----------------------------------------------------------------------------------------------------------------------------------
Health 3.76%
Health Management Association - Class A * 55,350 1,584,394 55,350 1,584,394
Johnson & Johnson 1,200 87,975 1,200 87,975
McKesson Corporation 58,400 3,372,600 58,400 3,372,600
Paragon Health Network 54,333 1,079,868 54,333 1,079,868
Schering-Plough 1,080 88,223 1,080 88,223
Sunrise Assisted Living * 40,800 1,825,800 40,800 1,825,800
Watson Pharmacueticals * 79,100 2,847,600 79,100 2,847,600
- ----------------------------------------------------------------------------------------------------------------------------------
10,710,262 176,198 10,886,460
- ----------------------------------------------------------------------------------------------------------------------------------
Retail 7.72%
American Eagle Outfitters * 65,100 2,864,400 65,100 2,864,400
Costco Companies, Inc. * 91,000 4,857,125 91,000 4,857,125
Family Dollar Stores, Inc. 85,750 3,258,500 85,750 3,258,500
Federated Department Stores * 71,700 3,714,956 71,700 3,714,956
G & K Services - Class A 6,800 298,350 6,800 298,350
Gap, Inc. 27,825 1,252,125 27,825 1,252,125
Linens 'n Things, Inc. * 25,300 1,389,919 25,300 1,389,919
Safeway, Inc. * 61,600 2,275,350 61,600 2,275,350
TJX Companies, Inc. 53,200 2,407,300 53,200 2,407,300
- ----------------------------------------------------------------------------------------------------------------------------------
22,318,025 22,318,025
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Technology 11.62%
AFC Cable System, Inc. * 54,500 $ 2,118,688 54,500 $ 2,118,688
Affiliated Computer Services - Class A * 35,300 1,171,519 35,300 1,171,519
Airtouch Communications * 122,500 5,994,844 122,500 5,994,844
Applied Graphics Technology * 41,800 2,011,656 41,800 2,011,656
AT&T Corporation 22,800 1,496,250 22,800 1,496,250
BCE, Inc. 35,600 1,486,300 35,600 1,486,300
CACI International * 54,500 1,199,000 54,500 1,199,000
Chancellor Media Corporation - Class A * 1,750 $ 80,281 1,750 80,281
Computer Sciences Corporation 1,560 85,800 1,560 85,800
Computer Task Group 14,400 593,100 14,400 593,100
Dell Computer Corporation * 37,000 2,504,437 37,000 2,504,437
EMC Corporation * 28,400 1,073,875 28,400 1,073,875
ICG Communications * 38,000 1,415,500 38,000 1,415,500
Intelligroup, Inc. * 70,200 1,136,362 70,200 1,136,362
Kellstrom Industries, Inc. * 128,900 3,246,669 128,900 3,246,669
Mobile Telecom Technical Corporation * 63,000 1,409,625 63,000 1,409,625
OfficeMax * 30,800 550,550 30,800 550,550
Sprint Corporation 23,900 1,617,731 23,900 1,617,731
Sun Microsystems, Inc. * 1,750 73,008 1,750 73,008
Telefonica de Espana~ 11,900 1,573,775 11,900 1,573,775
Torchmark 58,600 2,684,613 58,600 2,684,613
WorldCom, Inc. * 2,000 86,125 2,000 86,125
- ----------------------------------------------------------------------------------------------------------------------------------
33,284,494 325,214 33,609,708
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Transportation 2.68%
Airborne Freight Corporation 57,000 $ 2,144,625 57,000 $ 2,144,625
Alaska Airgroup 30,800 1,668,975 30,800 1,668,975
American Classic Voyages Company 30,900 710,700 30,900 710,700
AMR Corporation 9,300 1,331,644 9,300 1,331,644
Continental Airlines - Class B * 30,900 1,817,306 30,900 1,817,306
Werner Enterprises, Inc. 3,250 $ 82,875 3,250 82,875
- ----------------------------------------------------------------------------------------------------------------------------------
7,673,250 82,875 7,756,125
- ----------------------------------------------------------------------------------------------------------------------------------
Utilities 2.48%
Conectiv, Inc. - Class A 2,412 81,707 2,412 81,707
Duke Energy Corporation 7,300 434,806 7,300 434,806
FPL Group, Inc. 7,100 456,175 7,100 456,175
GTE Corporation 23,700 1,419,038 23,700 1,419,038
Illinova Corporation 13,800 416,587 13,800 416,587
IPALCO Enterprises, Inc. 9,800 441,613 9,800 441,613
New York State Electric & Gas 11,500 458,562 11,500 458,562
NIPSCO Industries 16,000 448,000 16,000 448,000
U.S. West Communications Group 24,600 1,346,850 24,600 1,346,850
U.S. West Media Group * 47,800 1,661,050 47,800 1,661,050
- ----------------------------------------------------------------------------------------------------------------------------------
7,164,388 7,164,388
- ----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous 2.06%
Carlisle Companies, Inc. 33,400 1,640,775 33,400 1,640,775
Delia'S, Inc. * 45,800 1,099,200 45,800 1,099,200
Lennar Corporation 39,962 1,376,191 39,962 1,376,191
Common Stocks (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous (continued)
Rent Way, Inc. * 49,100 $ 1,166,125 49,100 $ 1,166,125
Tyco International Limited 12,000 655,500 12,000 655,500
- ----------------------------------------------------------------------------------------------------------------------------------
5,937,791 5,937,791
- ----------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (cost $114,185,755) 155,642,050 2,376,623 158,018,673
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities and 33.04%
Agencies
Federal National Mortgage
Association, 6.64%, 07/02/07 $ 130,000 136,636 $ 130,000 136,636
Federal Home Loan Bank,
5.59%, 1/13/03 105,000 104,310 105,000 104,310
Government National Mortgage Association,
6.50% - 7.38%, 5/15/09 -11/20/22 291,968 297,842 291,968 297,842
U.S. Treasury Notes, 5.50% -6.75%,
4/30/00 - 2/15/26 $ 12,000,000 11,912,160 105,000 106,964 12,105,000 12,019,124
U.S. Treasury Bonds, 6.50% -7.50%,
2/15/23 - 11/15/26 77,523,000 82,736,422 220,000 255,998 77,743,000 82,992,420
- -----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government
Securities and Agencies (cost $87,953,661) 94,648,582 901,750 95,550,332
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 0.15%
CS First Boston, 7.18%, 2/25/18, CMO 25,000 25,251 25,000 25,251
Ford Motor Credit, 7.20%, 6/15/07 45,000 47,713 45,000 47,713
Key Auto Finance Trust Series 1997-2
Class A3, 6.10%, 11/15/00 50,000 50,093 50,000 50,093
Corporate Bonds (continued)
Merrill Lynch, 6.64%, 9/19/02 $ 45,000 $ 45,975 $ 45,000 $ 45,975
NationsBank Corporation, 7.50%, 9/15/06 35,000 37,562 35,000 37,562
Norwest Corporation, 6.80%,5/15/02 60,000 61,541 60,000 61,541
PNC Student Loan Trust, 6.73%,1/25/07 75,000 76,904 75,000 76,904
Travelers Group, 8.63%, 2/01/07 40,000 45,951 40,000 45,951
Union Acceptance Corporation, 6.48%,5/10/04 45,000 45,352 45,000 45,352
- -----------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (cost $425,855) 436,342 436,342
- -----------------------------------------------------------------------------------------------------------------------------------
Total Fixed Income Securities (cost $88,379,516) $ 94,648,582 1,338,092 95,986,674
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Investment 11.10%
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company
Dated 03/31/98, 6.05%, due
04/01/98,
collateralized by $32,440,607
Federal
Home Loan Mortgage Corporation,
7.00%, 11/01/27, market value
$32,765,700, (cost $32,108,296) $ 31,581,849 31,581,849 526,447 526,447 32,108,296 32,108,296
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost 98.93%
$234,673,567) 281,872,481 4,241,162 286,113,643
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities 1.07% 3,251,380 13,143 3,096,235(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $ 285,123,861 $ 4,254,305 289,209,878
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
* Non-income producing.
~ American Depository Receipts.
CMO- Collateralized Mortgage
Obligations
(a) Reflects a pro forma adjustment of
$168,288.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, for Mentor Strategy Portfolio, Mentor Balanced Portfolio and the Pro
Forma Combined were as follows:
Purchases Sales
- ------------------------------------------------------------------
Mentor Strategy Portfolio $ 88,381,538 $ 144,726,891
Mentor Balanced Portfolio 1,573,639 2,277,180
Pro Forma Combined 89,955,177 147,004,071
- ------------------------------------------------------------------
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes were $231,192,822, $3,480,745 and $234,673,567 for Mentor
Strategy Portfolio, Mentor Balanced Portfolio and Pro Forma Combined,
respectively. Gross unrealized appreciation and depreciation of investments at
March 31, 1998, based on such costs were as follows:
Gross Gross Net
Unrealized Unrealized Unrealized
Appreciation Depreciation Appreciation
- --------------------------------------------------------------------------------
Mentor Strategy Portfolio $ 50,806,778 $ (127,119) $ 50,679,659
Mentor Balanced Portfolio 766,587 (6,170) 760,417
Pro Forma Combined 51,573,365 (133,289) 51,440,076
- --------------------------------------------------------------------------------
<PAGE>
Mentor Balanced Portfolio
Pro Forma Combining
Statements of Assets and Liabilities
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION> Mentor Mentor
Strategy Balanced Pro Forma Pro Forma
Portfolio Portfolio Adjustments Combined
<S> <C>
Assets
Investments, at market value
Investment securities $ 250,290,632 $ 3,714,715 $ - $ 254,005,347
Repurchase agreements 31,581,849 526,447 - 32,108,296
------------- ----------- ------------ -------------
Total investments (pro forma
combined cost $234,673,567) 281,872,481 4,241,162 - 286,113,643
Collateral for securities loaned 68,067,637 932,129 - 68,999,766
Receivables
Investments sold 1,797,664 - - 1,797,664
Fund shares sold 272,519 - - 272,519
Dividends and interest 2,126,104 17,261 - 2,143,365
Deferred expenses 15,138 - (15,138)(a) -
-------------- ------------ ------------- --------------
Total assets 354,151,543 5,190,552 (15,138) 359,326,957
-------------- ------------ ------------- --------------
Liabilities
Payables
Securities loaned 68,067,637 932,129 - 68,999,766
Fund shares redeemed 811,048 - - 811,048
Accrued expenses and other liabilities 148,997 4,118 153,150 (b) 306,265
-------------- ------------ ------------- --------------
Total liabilities 69,027,682 936,247 153,150 70,117,079
-------------- ------------ ------------- --------------
Net Assets $ 285,123,861 $ 4,254,305 $ (168,288) $ 289,209,878
Net Assets represented by:
Additional paid-in capital $ 238,532,347 $ 2,793,838 - 241,326,185
Accumulated net investment income 1,104,109 48,366 (168,288) 984,187
Accumulated net realized gain (loss) on
investment transactions (5,192,254) 651,684 - (4,540,570)
Net unrealized appreciation of investments 50,679,659 760,417 - 51,440,076
-------------- ------------ ------------- --------------
Net Assets $ 285,123,861 $ 4,254,305 $ (168,288) $ 289,209,878
============== ============ ============= ==============
Net Asset Value per Share
Class A Shares $ 16.05 $ 17.46
Class B Shares $ 15.65 $ 17.46 $ 17.46
Class Y Shares $ 16.05 $ 17.46
Offering Price per Share
Class A Shares $ 17.03* $ 18.53
Class B Shares $ 15.65 $ 17.46
Class Y Shares $ 16.05 $ 17.46
Shares Outstanding
Class A Shares 2,157,686 - (175,651)(c) 1,982,035
Class B Shares 16,006,748 243,683 (1,911,106)(c)(d) 14,338,525
Class Y Shares 67 - 243,513 (c)(d) 243,580
-------------- ------------ -------------
Total Shares Outstanding 18,164,501 243,683 16,564,140
============== ============ =============
</TABLE>
* Computation of offering price: 100/94.25 of net asset value.
(a) Adjustment to write-off organizational cost associated with the Strategy
Portfolio.
(b) Represents expenses accrued in connection with the combination.
(c) Reflects the adjustment for the conversion of shares from the Strategy
Portfolio to the Balanced Portfolio.
(d) Reflects the reclassification made in connection with recharacterization
of approximately 243,519 shares from Class B to Class Y.
See notes to proforma combining financial statements.
<PAGE>
Mentor Balanced Portfolio
Pro Forma Combining
Statements of Operations
March 31, 1998 (Unaudited)*
<TABLE>
<CAPTION>
Mentor Mentor
Strategy Portfolio Balanced Portfolio
<S> <C>
Investment income
Dividends $ 1,264,885 $ 32,160
Interest net of premium 10,016,516 95,121
-------------------- ------------------
Total investment income 11,281,401 127,281
-------------------- ------------------
Expenses
Management fee 2,741,587 30,082
Distribution fee 2,131,388 30,082
Shareholder service fee 806,348 10,028
Transfer agent fee 449,548 -
Administration fee 322,540 5,904
Shareholder reports and postage expenses 84,956 206
Custodian and accounting fees 81,178 8,767
Registration expenses 63,879 703
Organizational expenses 20,151 -
Legal and audit fees 19,931 200
Directors' fees and expenses 8,488 93
Miscellaneous 51,797 635
-------------------- ------------------
Total expenses 6,781,791 86,700
Deduct
Waiver of distribution fee - 25,847
Waiver of management fee - 24,862
Waiver of shareholder servicing fee - 10,028
Waiver of administration fee - 5,904
-------------------- ------------------
Net expenses 6,781,791 20,059
-------------------- ------------------
Net investment income 4,499,610 107,222
Realized and unrealized gain (loss) on investments
Net realized gain (loss) on investments 9,041,143 679,340
Change in unrealized appreciation on investments 53,900,145 401,624
-------------------- ------------------
Net gain on investments 62,941,288 1,080,964
-------------------- ------------------
Net increase in net assets resulting from operations $ 67,440,898 $ 1,188,186
==================== ==================
Pro Forma Pro Forma
Adjustments Combined
Investment income
Dividends $ - $ 1,297,045
Interest net of premium - 10,111,637
--------------- ----------------
Total investment income $ - 11,408,682
--------------- ----------------
Expenses
Management fee $ (321,889)(e) 2,449,780
Distribution fee (30,082)(f) 2,131,388
Shareholder service fee 217 (g) 816,593
Transfer agent fee 4,212 (g) 453,760
Administration fee (1,807)(e) 326,637
Shareholder reports and postage expenses 75,150 (h) 160,312
Custodian and accounting fees - 89,945
Registration expenses 20,000 (h) 84,582
Organizational expenses (5,013)(f) 15,138
Legal and audit fees 58,000 (h) 78,131
Directors' fees and expenses - 8,581
Miscellaneous - 52,432
--------------- ----------------
Total expenses (171,130) 6,667,279
Deduct
Waiver of distribution fee (25,847)(e) -
Waiver of management fee (24,862)(e) -
Waiver of shareholder servicing fee (10,028)(e) -
Waiver of administration fee (5,904)(e) -
--------------- ----------------
Net expenses (134,571) 6,667,279
--------------- ----------------
Net investment income 134,571 4,741,403
Realized and unrealized gain (loss) on investments
Net realized gain (loss) on investments - 9,720,483
Change in unrealized appreciation on investments - 54,301,769
--------------- ----------------
Net gain on investments - 64,022,252
--------------- ----------------
Net increase in net assets resulting from operations $ 134,571 $ 68,763,655
=============== ================
</TABLE>
(e) Reflects a decrease based on surviving portfolio's fee schedule and pro
forma combined assets.
(f) Reflects expected cost savings when the portfolios are combined.
(g) Reflects an increase based on surviving portfolio's combined assets or
number of shareholder accounts..
(h) Reflects expected costs related to the share registration and proxy
information.
* For the period from April 1, 1997 through March 31, 1998.
See notes to proforma combining financial statements.
<PAGE>
Mentor Balanced Portfolio
Notes to Pro Forma Combining Financial Statements
March 31, 1998 (Unaudited)
1. Basis of Combination - The Pro Forma Statement of Assets and Liabilities and
the related Pro Forma Statement of Operations ("Pro Forma Statements") reflect
the portfolios of Mentor Strategy Portfolio ("Strategy Portfolio") and Mentor
Balanced Portfolio ("Balanced Portfolio") as of and for the twelve-month period
ending March 31, 1998.
The Pro Forma Statements give effect to the proposed transfer of all assets and
liabilities of Strategy Portfolio in exchange for shares of Balanced Portfolio.
The Pro Forma Statements reflect the expense of each Portfolio in carrying out
its obligations under the Agreement and Plan of Reorganization (the
"Reorganization") as though the merger occurred at the beginning of the period
presented.
Under the Reorganization, Balanced Portfolio will acquire substantially all of
the assets and assume certain identified liabilities of Strategy Portfolio.
Thereafter, there will be a distribution of such shares of Balanced Portfolio to
shareholders of Strategy Portfolio in liquidation and subsequent termination
thereof. The information contained herein is based on the experience of each
Portfolio for the period ended March 31, 1998 and is designed to permit the
shareholders of the combined portfolio to evaluate the financial effect of the
proposed Reorganization. The expenses of Balanced Portfolio and Strategy
Portfolio in connection with the Reorganization (including the cost of any proxy
soliciting agents) will be borne by each portfolio relative to their respective
net asset values.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assumes the issuance of additional shares of Balanced Portfolio which would have
been issued at March 31, 1998 in connection with the proposed Reorganization.
The amount of additional shares assumed to be issued was calculated based on
total net assets of Strategy Portfolio as of March 31, 1998 of $285,123,861
(Class A $34,626,465, Class B $250,496,326 and Class Y $1,070) and the net asset
value per share of Balanced Portfolio of $17.46. Additional shares issued were
converted and distributed to the aforementioned Portfolio according to its
relative share value conversion ratio.
Under the Reorganization, the combined portfolio issues three classes of shares.
Class A shares are sold subject to a maximum sales charge of 5.75% 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. Class Y shares are sold to
institutions and high net-worth individual investors and are not subject to any
sales or contingent deferred sales charges.
3. The Pro Forma Operations - The Pro Forma Statement of Operations assumes
similar rates of gross investment income for the investments of each Portfolio.
Accordingly, the combined gross investment income is equal to the sum of each
Portfolio's gross investment income. Pro Forma operating expenses include the
actual expenses of each Portfolio and the combined Portfolio, with certain
expenses adjusted to reflect the expected expenses of the combined entity. The
investment advisory, administration and distribution fees have been charged to
the combined portfolio based on the fee schedule in effect for Balanced
Portfolio at the combined level of average net assets for the period ended March
31, 1998.
