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P R O S P E C T U S May 12, 1998
CLASS A AND B SHARES
Filed Pursuant to Rule 497(c)
File No. 33-45315
Mentor Balanced Portfolio
Mentor Balanced Portfolio seeks capital growth and current income. The
Portfolio is a series of shares of beneficial interest of Mentor Funds, an
open-end management investment company. The Portfolio invests in a diversified
portfolio of equity and fixed-income securities which Mentor Investment
Advisors, LLC, the Portfolio's investment adviser, believes will produce both
capital growth and current income. The Portfolio may use "leverage" -- that is,
it may borrow money to purchase additional portfolio securities, which involves
special risks. See "Other investment practices and risk factors -- Leverage."
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. INVESTORS CAN FIND MORE DETAILED
INFORMATION IN THE MAY 12, 1998 STATEMENT OF ADDITIONAL INFORMATION, AS AMENDED
FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT OR FOR OTHER INFORMATION,
CALL 1-800-869-6042. The Statement has been filed with the Securities and
Exchange Commission and is incorporated into this Prospectus by reference. The
Portfolio's address is P.O. Box 1357, Richmond, Virginia 23218-1357.
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Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
PAGE
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Expense Summary ...................................... 3
Financial Highlights ................................. 4
Investment Objective and Policies .................... 5
Other Investment Practices and Risk Factors .......... 7
Management ........................................... 10
How the Portfolio Values Its Shares .................. 10
Sales Arrangements ................................... 11
How To Buy Shares .................................... 11
Distribution Plan (Class B Shares) ................... 14
How To Sell Shares ................................... 15
How To Exchange Shares ............................... 16
How Distributions Are Made ........................... 16
Taxes ................................................ 16
Other Services ....................................... 17
General Information .................................. 17
Performance Information .............................. 18
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EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses of the Portfolio with respect to
its Class A and Class B shares based on its most recent fiscal year. Expenses
for Class A shares are estimated for the current fiscal year. The Examples show
the cumulative expenses attributable to a hypothetical $1,000 investment in the
Class A and Class B shares of the Portfolio over specified periods.
<TABLE>
<CAPTION>
CLASS A CLASS B
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<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)(1) ......................... 5.75% None
Maximum Sales Load Imposed on Reinvested Dividends .............. None None
Deferred Sales Load (as a percentage of the lower of the original None(2) 4.0% in the first year,
purchase price or redemption proceeds)(3) ...................... declining to 1.0% in the
fifth year, and
eliminated thereafter(4)
Redemption Fees ................................................. None None
Exchange Fee .................................................... None None
</TABLE>
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(1) Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
(2) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1,000,000 that are redeemed within one year of
purchase.
(3) The amount redeemed is computed as the lesser of the current net asset
value of the shares redeemed, and the original purchase price of the
shares. See "How to buy shares -- Class B shares."
(4) Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1.00%, if the shares are
redeemed within one year of purchase. See "How to Buy Shares -- the BL
Purchase Program."
CLASS A CLASS B
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ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees ............................. 0.75% 0.75%
12b-1 Fees .................................. None 0.75%
Other Expenses
Shareholder Service Fee .................... 0.25% 0.25%
Other Expenses ............................. 0.35% 0.35%
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Total Other Expenses ........................ 0.60% 0.60%
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Total Portfolio Operating Expenses ......... 1.35% 2.10%
EXAMPLES
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and no redemption at the end of each
period:
1 YEAR 3 YEARS 5 YEARS
-------- --------- --------
Class A ............ $70 $98 $127
Class B ............ $21 $66 $113
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An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
1 YEAR 3 YEARS 5 YEARS
-------- --------- --------
Class A ............ $70 $98 $127
Class B ............ $61 $96 $123
This information is provided to help you understand the expenses of
investing in the Portfolio and your share of the operating expenses of the
Portfolio. The Examples should not be considered a representation of future
performance; actual expenses may be more or less than those shown. Long-term
Class B shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the rules of the National Association of
Securities Dealers, Inc.
FINANCIAL HIGHLIGHTS
The financial highlights presented below for the Class B shares of the
Portfolio have been derived from the financial statements of the Balanced
Portfolio, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The report of KPMG Peat Marwick LLP, along with the Portfolio's
financial statements and notes thereto, is incorporated by reference into the
Statement of Additional Information, which may be obtained in the manner
described on the cover page of this Prospectus. See "Financial Statements" in
the Statement of Additional Information.
<TABLE>
<CAPTION>
MENTOR BALANCED PORTFOLIO
-----------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED
9/30/97 9/30/96 9/30/95* 12/31/94**
------------ ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ...................... $ 16.28 $ 14.85 $ 12.44 $ 12.50
Net investment income (loss) ............................. 0.43 0.42 0.36 0.22
Net realized and unrealized gain (loss) on
investments .......................................... 3.35 2.09 2.08 (0.09)
------- -------- -------- --------
Total from investment operations ......................... 3.78 2.51 2.44 0.13
LESS DISTRIBUTIONS
Dividends from net investment income ..................... (0.43) (0.48) (0.03) (0.19)
Distributions from capital gains ......................... (2.02) (0.60) -- --
------- -------- -------- --------
Total Distributions ..................................... (2.45) (1.08) (0.03) (0.19)
------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD ............................ $ 17.61 $ 16.28 $ 14.85 $ 12.44
======= ======== ======== ========
Total Return .............................................. 26.09% 18.00% 19.28% 1.00%
======= ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) ...................... $ 4,102 $ 3,825 $ 3,210 $ 2,911
Ratio of expenses to average net assets ................... 0.50% 0.50% 0.50%(a) 0.50%(a)
Ratio of expenses to average net assets excluding
waiver ................................................... 2.13% 2.06% 2.12%(a) 2.72%(a)
Ratio of net investment income (loss) to average net
assets ................................................... 2.78% 2.83% 3.26%(a) 3.32%(a)
Portfolio turnover rate ................................... 80% 103% 65% 71%
Average commission rate on portfolio transactions ......... $0.0696 $ 0.0694 -- --
======= ======== ======== ========
</TABLE>
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* For the period January 1, 1995 to September 30, 1995.
** For the period from June 21, 1994 (commencement of operations) to December
31, 1994.
(a) Annualized.
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INVESTMENT OBJECTIVE AND POLICIES
Mentor Balanced Portfolio's investment objective is to seek capital growth
and current income. The Portfolio invests in a diversified portfolio of equity
and fixed-income securities which Mentor Investment Advisors, LLC ("Mentor
Advisors") believes will produce both capital growth and current income. There
can, of course, be no assurance that the Portfolio will achieve its investment
objective. The Portfolio is a series of Mentor Funds (the "Trust"), an open-end
series investment company. The Trustees would not materially change the
Portfolio's investment objective without shareholder approval.
The Portfolio may invest in almost any type of security. The Portfolio's
securities will include some securities selected primarily to provide for
growth in value, others selected for current income, and other for stability of
principal.
Mentor Advisors will adjust the proportions of the Portfolio's assets
invested in the different types of securities in 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 will invest at
least 25% of its assets in fixed-income securities and 25% of its assets in
equity securities.
The Portfolio will invest in debt securities and preferred stocks of
investment grade, and the Portfolio will seek under normal market conditions to
maintain a portfolio of such securities with a dollar-weighted average rating
of A or better. A security will be considered to be of "investment grade" if,
at the time of investment by the Portfolio, it is rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard & Poor's Ratings Services
or the equivalent by another nationally recognized rating organization or, if
unrated, determined by Mentor Advisors to be of comparable quality. Securities
rated Baa or BBB lack outstanding investment characteristics and have
speculative characteristics and are subject to greater credit and market risks
than higher-rated securities. See the Statement of Additional Information for
descriptions of securities ratings assigned by Moody's and Standard & Poor's.
At times Mentor Advisors may decide that conditions in the securities
markets make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times, Mentor Advisors may
temporarily use alternative investment strategies primarily designed to reduce
fluctuations in the value of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio would be permitted to hold all or any
portion of its assets in high quality fixed-income securities, cash, or money
market instruments. It is impossible to predict when, or for how long, the
Portfolio will use these alternative strategies.
MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. The Portfolio
may invest in mortgage-backed certificates and other securities representing
ownership interests in mortgage pools, including collateralized mortgage
obligations and certain stripped mortgage-backed securities and "residual"
interests therein. Interest and principal payments on the mortgages underlying
mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Mortgage-backed securities currently offer yields
higher than those available from many other types of fixed-income securities
but because of their prepayment aspects, their price volatility and yield
characteristics will change based on changes in prepayment rates. As a result,
mortgage-backed securities are less effective than other securities as a means
of "locking in" long-term interest rates. Generally, prepayment rates increase
if interest rates fall and decrease if interest rates rise. For many types of
mortgage-backed securities, this can result in unfavorable changes in price and
yield characteristics in response to changes in interest rates and other market
conditions. For example, as a result of their prepayment aspects, the
Portfolio's mortgage-backed securities have less potential for capital
appreciation during periods of declining interest rates than other fixed-income
securities of comparable maturities, although such obligations may have a
comparable risk of decline in market value during periods of rising interest
rates.
Mortgage-backed securities have yield and maturity characteristics that
are dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when 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 sig-
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nificantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during
periods of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Stripped mortgage-backed securities are usually structured with two
classes that receive different portions of the interest and principal
distributions on a pool of mortgage assets. The Portfolio may invest in both
the interest-only -- or "IO" -- class and the principal-only -- or "PO" --
class. The yield to maturity and price of an IO class are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets, and a rapid rate of principal payments may have a
material adverse effect on the Portfolio's average duration and net asset
value. This would typically be the case in an environment of falling interest
rates. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Portfolio may under some circumstances fail to
recoup fully its initial investment in these securities. Conversely, POs tend
to increase in value if prepayments are greater than anticipated and decline if
prepayments are slower than anticipated. The secondary market for stripped
mortgage-backed securities may be more volatile and less liquid than that for
other mortgage-backed securities, potentially limiting the Portfolio's ability
to buy or sell those securities at any particular time.
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates, the
Portfolio might not be able to reinvest the proceeds in securities providing
the same investment return as the securities redeemed.
The Portfolio may invest in securities representing interests in other
types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security
interest in the underlying assets may be limited. For example, the laws of
certain states may prevent or restrict repossession of collateral from a
debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
property, including collateralized mortgage obligation "residual" interests, as
well as new types of mortgage-related securities that may be developed and
marketed from time to time. "Residual" interests represent the right to any
excess cash flow remaining after all other payments are made among the various
tranches of interests issued by structured mortgage-backed vehicles. The values
of such interests are extremely sensitive to changes in interest rates and in
prepayment rates on the underlying mortgages. In the event of a significant
change in interest rates or other market conditions, the value of an investment
by the Portfolio in such interests could be substantially reduced and the
Portfolio may be unable to dispose of the interests at prices approximating the
values the Portfolio had previously assigned to them or to recoup its initial
investment in the interests.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio may
invest in a wide variety of such securities, including mortgage- and other
asset-backed securities that will pay principal or interest only under certain
circumstances, or in amounts that may increase or decrease substantially
depending on changes in interest rates or other market factors. Such securities
may experience extreme price volatility in response to changes in interest
rates or other market factors; this may be especially true in the case of
securities where the amounts of principal or interest paid, or the timing of
such payments, varies widely depending on prevailing interest rates.
Mentor Advisors may not be able to obtain current market quotations for
certain mortgage-backed or asset-backed securities at all times, or to obtain
market quotations believed by it to reflect the values of such securities
accurately. In such cases, Mentor Advisors may be required to estimate the
value of such a security using quotations provided by pricing services or
securities dealers making a market in such securities, or based on other
comparable securities or other bench-mark securities or interest rates.
Mortgage-backed and other asset-backed securities in which 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 mort-
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gages 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.
OTHER INVESTMENT PRACTICES AND RISK FACTORS
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of these practices and certain risks they may involve.
LEVERAGE. The Portfolio may borrow money to invest in additional portfolio
securities to see current income. This technique, known as "leverage,"
increases the Portfolio's market exposure and risk. When the Portfolio has
borrowed money for leverage and its investments increase or decrease in value,
the Portfolio's net asset value will normally increase or decrease more than if
it had not borrowed money for this purpose. The interest that the Portfolio
must pay on borrowed money will reduce its net investment income, and may also
either offset any potential capital gains or increase any losses. The Portfolio
currently intends to use leverage in order to adjust the dollar-weighted
average duration of its portfolio, and the Portfolio will not always borrow
money for investment. The extent to which the Portfolio will borrow money, and
the amount it may borrow, depend on market conditions and interest rates.
Successful use of leverage depends on Mentor Advisors's ability to predict
market movements correctly. The amount of leverage (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 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.
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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
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
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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.
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.
9
<PAGE>
MANAGEMENT
The Trustees of Mentor Funds (the "Trust") are responsible for generally
overseeing the conduct of the Portfolio's business. MENTOR INVESTMENT ADVISORS,
LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, acts as
investment adviser to the Portfolio. Mentor Investment Group, LLC ("Mentor
Investment Group") serves as administrator to the Portfolio. As compensation
for its services as administrator, the Portfolio pays Mentor Investment Group a
fee, accrued daily and paid monthly, at an annual rate of 0.10% of the average
value of the Portfolio's daily assets.
Mentor Advisors has over $13 billion in assets under management and is a
wholly owned subsidiary of Mentor Investment Group and its affiliates. Mentor
Investment Group is a subsidiary of Wheat First Butcher Singer, Inc., which is
in turn a wholly owned subsidiary of First Union Corp. ("First Union"). First
Union is a leading financial services company with approximately $172 billion
in assets and $12 billion in total stockholders' equity as of March 31, 1998.
EVEREN Capital Corporation has a 20% ownership in Mentor Investment Group and
may acquire additional ownership based principally on the amount of Mentor
Investment Group's revenues derived from assets attributable to clients of
EVEREN Securities, Inc. and its affiliates. All investment decisions made for
the Portfolio are made by an investment team at Mentor Advisors.
Subject to the general oversight of the Trustees, Mentor Advisors manages
the Portfolio in accordance with the stated policies of the Portfolio. Mentor
Advisors makes investment decisions for the Portfolio and places the purchase
and sale orders for the Portfolio's portfolio transactions. In selecting
broker-dealers, Mentor Advisors may consider research and brokerage services
furnished to it and its affiliates. Subject to seeking the best overall terms
available, Mentor Advisors may consider sales of shares of the Portfolio (and,
if permitted by law, of other funds in the Mentor family) as a factor in the
selection of broker-dealers to execute portfolio transactions for the
Portfolio. Mentor Advisors may at times cause the Portfolio to pay commissions
to broker-dealers affiliated with Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise allocated
to the Portfolio, including but not limited to taxes, interest, brokerage fees
and commissions, fees to Trustees who are not officers, directors,
stockholders, or employees of Wheat First Butcher Singer and its subsidiaries,
Securities and Exchange Commission fees and related expenses, state Blue Sky
qualification fees, charges of the custodian and transfer and dividend
disbursing agents, outside auditing, accounting, and legal services, certain
investor servicing fees and expenses, charges for the printing of prospectuses
and statements of additional information for regulatory purposes or for
distribution to shareholders, certain shareholder report charges, and charges
relating to corporate matters, are borne by the Portfolio.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. The
investment policies of the 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 the Portfolio is known as "portfolio
turnover." Portfolio turnover generally involves some expense to the Portfolio,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. Such sales may
result in realization of taxable capital gains. The Portfolio's portfolio
turnover rates since inception are shown in the section "Financial Highlights."
HOW THE PORTFOLIO VALUES ITS SHARES
The Portfolio calculates the net asset value of its shares by dividing the
total value of its assets, less liabilities, by the number of its shares
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which approximates the fair market value of such investments.
All other securities and assets are valued at their fair values. The net asset
value for Class A shares will generally differ from that of Class B shares due
to the variance in daily net income realized by and dividends paid on each
class of shares, and any differences in the expenses of the different classes.
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<PAGE>
SALES ARRANGEMENTS
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
CLASS A SHARES. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to buy shares -- Class A
shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge,
but are subject to a CDSC of up to 4% if redeemed within five years. Class B
shares also bear 12b-1 fees. Class B shares provide an investor the benefit of
putting all of the investor's money to work from the time the investment is
made, but have a higher expense ratio and pay lower dividends than Class A
shares due to the 12b-1 fees. If you purchase shares through an
asset-allocation program, you may also be eligible to purchase Class B shares
through the "BL Purchase Program." See "How to buy shares -- Class B shares."
Which arrangement is best for you? The decision as to which class of
shares provides a suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class
A shares. Investors who prefer not to pay an initial sales charge might
consider Class B shares. Investors purchasing shares through an
asset-allocation program may wish to purchase shares through the BL Purchase
Program. For more information about these sales arrangements, consult your
investment dealer or Mentor Services Company, Inc. Sales personnel may receive
different compensation depending on which class of shares they sell. Investors
may be charged a fee if they effect transactions through a broker or agent.
Shares may only be exchanged for shares of the same class of certain other
funds in the Mentor family and for shares of Cash Resource U.S. Government
Money Market Fund. See "How to exchange shares."
HOW TO BUY SHARES
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little as $50. Investments under
IRAs and qualified retirement plans are subject to a minimum initial investment
of $250. The minimum initial investment may be waived for current and retired
Trustees, and current and retired employees of the Trust, Mentor Investment
Group or its affiliates. You can buy Portfolio shares by completing the
enclosed New Account Form and sending it to Boston Financial Data Services at 2
Heritage Drive, North Quincy, MA 02171, along with a check or money order made
payable to Mentor Funds, through your financial institution, which may be an
investment dealer, a bank, or another institution, or through automatic
investing. If you do not have a dealer, Mentor Services Company can refer you
to one.
AUTOMATIC INVESTMENT PLAN. Once you have made the initial minimum
investment in the Portfolio, you can make regular investments of $50 or more on
a monthly or quarterly basis through automatic deductions from your bank
checking account. Application forms are available from your investment dealer
or through Mentor Services Company.
Shares are sold at a price based on the Portfolio's net asset value next
determined after the Distributor receives your purchase order. In most cases,
in order to receive that day's public offering price, the Distributor must
receive your order before the close of regular trading on the New York Stock
Exchange. If you buy shares through your investment dealer, the dealer must
ensure that the Distributor receives your order before the close of regular
trading on the New York Stock Exchange for you to receive that day's public
offering price.
CLASS A SHARES. The public offering price of Class A shares is the net
asset value plus a sales charge. The Portfolio receives the net asset value.
The sales charge varies depending on the size of your purchase and is allocated
between your investment dealer and the Distributor. The current sales charges
for Class A shares of the Portfolio are as follows:
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<PAGE>
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF DEALER
PUBLIC OFFERING PRICE NET AMOUNT INVESTED COMMISSION*
----------------------- --------------------- ------------
<S> <C> <C> <C>
Less than $50,000 ........................ 5.75% 6.10% 5.00%
$50,000 but less than $100,000............ 4.75% 4.99% 4.00%
$100,000 but less than $250,000........... 3.75% 3.90% 3.00%
$250,000 but less than $500,000........... 3.00% 3.09% 2.50%
$500,000 but less than $1 million......... 2.00% 2.04% 1.75%
$1 million or more........................ 0% 0% (see below)
</TABLE>
- ----------
* At the discretion of the Distributor, the entire sales charge may at times be
reallowed to dealers. The Staff of the Securities and Exchange Commission has
indicated that dealers who receive more than 90% of the sales charge may be
considered underwriters.
There is no initial sales charge on purchases of Class A shares of $1
million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. A CDSC is also imposed on any shares
purchased without a sales charge as part of a purchase of shares of $1 million
or more under a purchase accumulation plan. Contact Mentor Services Company for
more information.
You may be eligible to buy Class A shares at reduced sales charges.
Consult your investment dealer or Mentor Services Company for details about
Quantity Discounts and Accumulated Purchases, Letters of Intent, the
Reinvestment Privilege, Concurrent Purchases, and the Automatic Investment
Plan. Descriptions are also included in the New Account Form or are available
from Mentor Services Company. Shares may be sold at net asset value to certain
categories of investors, including to shareholders of other mutual funds who
invest in the Portfolio in response to certain promotional activities, and the
CDSC may be waived under certain circumstances. The sales charges shown above
will not apply to shares purchased by you if you purchase shares through EVEREN
Securities, Inc. with the redemption proceeds received by you within the
preceding 90 days from the sale of shares of any non-Mentor open-end mutual
fund. No CDSC will apply to these purchases. EVEREN Securities, Inc. may
compensate your investment dealer in connection with any such purchase. Sales
charges may similarly not apply to shares purchased through other financial
institutions that have made arrangements with Mentor Distributors. Contact your
financial institution or Mentor Services Company for more information. See "How
to buy shares -- General" below.
CLASS B SHARES. Class B shares are sold without an initial sales charge,
although a CDSC will be imposed if you redeem shares within five years of
purchase. The following types of shares may be redeemed without charge: (i)
shares acquired by reinvestment of distributions and (ii) shares otherwise
exempt from the CDSC, as described in the Example below. The amount of CDSC is
determined as a percentage of the lesser of the current market value or the
cost of the shares being redeemed. The amount of the CDSC will depend on the
number of years since you invested in the shares being redeemed and the dollar
amount being redeemed, according to the following table:
YEARS SINCE
PURCHASE PAYMENT MADE CDSC
- ----------------------- ----
1 4.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6+ None
THE BL PURCHASE PROGRAM. If you purchase Class B shares through an
asset-allocation program sponsored by your broker-dealer or other financial
institution, you may elect to participate in the BL Purchase Program. Shares
purchased through this program are not subject to the CDSC shown above. Rather,
a CDSC of 1.00% will be imposed on redemptions of such shares within the first
year after purchase, based on the lower of the
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<PAGE>
shares' cost and current net asset value. Your broker-dealer or other financial
institution is responsible for making the election on your behalf to invest
through the Program. Accordingly, if you wish to purchase shares through this
Program, you should instruct your broker-dealer or financial institution to do
so.
GENERAL. Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus,
Ohio 43219, serves as distributor of the Portfolio's shares. The Distributor is
not obligated to sell any specific amount of shares of the Portfolio. The
Distribution is a wholly owned subsidiary of BISYS Fund Services, Inc.
A Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by the Trust's current and retired Trustees
(and their families), current and retired employees (and their families) of
Mentor Investment Group, Mentor Advisors, and their affiliates, registered
representatives and other employees (and their families) of broker-dealers
having sales agreements with the Distributor, employees (and their families) of
financial institutions having sales agreements with the Distributor (or
otherwise having an arrangement with a broker-dealer or financial institution
with respect to sales of Portfolio shares), financial institution trust
departments investing an aggregate of $1 million or more in one or more funds in
the Mentor family, clients of certain administrators of tax-qualified plans,
employer-sponsored retirement plans, tax-qualified plans when proceeds from
repayments of loans to participants are invested (or reinvested) in funds in the
Mentor family, shares redeemed under the Portfolio's Systematic Withdrawal Plan
(limited to 10% of a shareholder's account in any calendar year), and "wrap
accounts" for the benefit of clients of financial planners adhering to certain
standards established by Mentor Services Company or its affiliates. The
Portfolio may sell shares without a sales charge or a CDSC in connection with
the acquisition by the Portfolio of assets of an investment company or personal
holding company. In addition, the CDSC may be waived in the case of (i)
redemptions of shares held at the time a shareholder dies or becomes disabled,
including the shares of a shareholder who owns the shares with his or her spouse
as joint tenants with right of survivorship, provided that the redemption is
requested within one year of the death or initial determination of disability;
(ii) redemptions in connection with the following retirement plan distributions:
(a) lump-sum or other distributions from a qualified retirement plan following
retirement, (b) distributions from an IRA, Keogh Plan, or Custodial Account
under Section 403(b)(7) of the Internal Revenue Code following attainment of age
59 1/2, and (c) a tax-free return on an excess contribution to an IRA; (iii)
redemptions by pension or profit sharing plans sponsored by Mentor Investment
Group or an affiliate; and (iv) redemptions by pension or profit sharing plans
of which Mentor Investment Group or any affiliate serves as a plan fiduciary. In
addition, certain retirement plans with over 200 employees may purchase Class A
shares at net asset value without a sales charge. The Portfolio may sell its
Class A shares without a sales charge to shareholders of other mutual funds who
invest in other funds in the Mentor family in response to certain promotional
activities (in which case a CDSC of 1% may apply for a period of years after
purchase). Contact Mentor Services Company. If you invest through a
broker-dealer or other financial institution, your broker-dealer or other
financial institution will be responsible for electing on your behalf to take
advantage of any of these reduced sales charges or waivers described above.
Please instruct your broker-dealer or other financial institution accordingly.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in, shares
of the Portfolio at net asset value.
In determining whether a CDSC is payable in respect of the shares redeemed,
the Portfolio will first redeem the shares held longest (together with any
shares received upon reinvestment of distributions with respect to those
shares). Any of the shares being redeemed which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing capital
appreciation will not be subject to a CDSC. See the Example below.
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<PAGE>
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 of those shares (including shares purchased through reinvestment
of distributions on those 100 shares) at this time, your CDSC will be calculated
as follows:
<TABLE>
<S> <C> <C>
o Proceeds of 50 shares redeemed at $12 per share $ 600
o Minus proceeds of 10 shares not subject to a CDSC because they were acquired through dividend -120
reinvestment (10 x $12)
o Minus appreciation on remaining shares, also not subject to CDSC (40 x $2) -80
-----
o Amount subject to a CDSC $ 400
</TABLE>
The Distributor receives the entire amount of any CDSC you pay. Consult the
Distributor for more information.
If you are considering redeeming or exchanging shares of the Portfolio or
transferring shares to another person shortly after purchase, you should pay for
those shares with a certified check to avoid any delay in redemption, exchange,
or transfer. Otherwise the Portfolio may delay payment until the purchase price
of those shares has been collected or, if you redeem by telephone, until 15
calendar days after the purchase date.
Because of the relatively high cost of maintaining accounts, the Portfolio
reserves the right to redeem, upon not less than 60 days' notice, any Portfolio
account below $500 as a result of redemptions. A shareholder may, however, avoid
such a redemption by the Portfolio by increasing his investment in shares of the
Portfolio to a value of $500 or more during such 60-day period.
The Distributor, Mentor Advisors, and affiliates thereof, at their own
expense and out of their own assets (or in conjunction with other entities), may
also periodically sponsor programs that offer additional compensation in
connection with sales of the Portfolio. Such compensation may also include, but
is not limited to, financial assistance to dealers in connection with
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of the Portfolio's
shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. Certain dealers may not sell all classes
of shares.
In all cases Mentor Advisors or the Distributor reserves the right to
reject any particular investment.
REINVESTMENT PRIVILEGE. If you redeem Class A or B shares of the Portfolio,
you have a one-time right, within 60 days, to reinvest the redemption proceeds
plus the amount of CDSC you paid, if any, at the next- determined net asset
value. Front-end sales charges will not apply to such reinvestment. The
Distributor must be notified in writing by you or by your financial institution
of the reinvestment for you to recover the CDSC, or to eliminate the front-end
sales charge. If you redeem shares in the Portfolio, there may be tax
consequences.
DISTRIBUTION PLAN (CLASS B SHARES)
The Portfolio has adopted a Distribution Plan (the "Plan") under Rule 12b-1
with respect to its Class B shares (the "Plan") providing for payments by the
Portfolio to the Distributor from the assets attributable to the Portfolio's
Class B shares at the annual rate set out under "Summary of Portfolio Expenses
- -- Annual Portfolio Operating Expenses" above. The Trustees may reduce the
amount of payments or suspend the Plan for such periods as they may determine.
The Distributor also receives the proceeds of any CDSC imposed on redemptions of
shares.
Payments under the Plan are intended to compensate the Distributor for
services provided and expenses incurred by it as principal underwriter of the
Portfolio's Class B shares. The Distributor may select financial institutions
(such as a broker/dealer or bank) to provide sales support services as agents
for their clients or customers who beneficially own Class B shares of the
Portfolio. Financial institutions will receive fees from the Distributor based
upon Class B shares owned by their clients or customers. The schedules of such
fees and the
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<PAGE>
basis upon which such fees will be paid will be determined from time to time by
the Distributor. The Distributor may suspend or modify such payments to dealers.
Such payments are also subject to the continuation of the Plan, the terms of any
agreements between dealers and the Distributor, and any applicable limits
imposed by the National Association of Securities Dealers, Inc.
Mentor Services Company, a wholly owned subsidiary of Mentor Investment
Group, provides marketing-related services in respect of the Portfolio. Mentor
Services Company and its affiliates will receive from the Distributor
substantially all amounts received or retained by the Distributor in respect of
the distribution of the Portfolio's shares, including any amounts paid to the
Distributor under the Portfolio's Distribution Plans. In addition, Mentor
Services Company receives from the Distributor an amount equal to all CDSCs
received by the Distributor.
HOW TO SELL SHARES
You can sell your shares to the Portfolio any day the New York Stock
Exchange is open, either directly to the Portfolio or through your investment
dealer. The Portfolio will only redeem shares for which it has received payment.
SELLING SHARES DIRECTLY TO THE PORTFOLIO. Send a signed letter of
instruction and stock power form, along with any certificates that represent
shares you want to sell, to Mentor Funds, c/o Boston Financial Data Services,
Inc. ("BFDS"), 2 Heritage Drive, North Quincy, Massachusetts 02171. The price
you will receive is the net asset value next calculated after your request is
received in proper form less any applicable CDSC. In order to receive that day's
net asset value, your request must be received before the close of regular
trading on the New York Stock Exchange. If you sell shares having a net asset
value of $50,000 or more or if you want your redemption proceeds payable to you
at a different address or to someone else, the signatures of registered owners
or their legal representatives must be guaranteed by a bank, broker-dealer, or
certain other financial institutions. Contact Mentor Services Company for more
information about where to obtain a signature guarantee. Stock power forms are
available from your investment dealer, Mentor Services Company, and many
commercial banks. The Distributor usually requires additional documentation for
the sale of shares by a corporation, partnership, agent, fiduciary, or surviving
joint owner. Contact Mentor Services Company for details.
SELLING SHARES BY TELEPHONE. You may use the Telephone Redemption Privilege
to redeem shares from your account unless you have notified Mentor Services
Company of an address change within the preceding 15 days. Unless an investor
indicates otherwise on the New Account Form, Mentor Services Company will be
authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide Mentor Services Company with his or her account
registration and address as it appears on Mentor Services Company's records.
Mentor Services Company will employ these and other reasonable procedures to
confirm that instructions communicated by telephone are genuine; if it fails to
employ reasonable procedures, Mentor Services Company may be liable for any
losses due to unauthorized or fraudulent instructions. For more information,
consult Mentor Services Company. During periods of unusual market changes and
shareholder activity, you may experience delays in contacting Mentor Services
Company by telephone in which case you may wish to submit a written redemption
request, as described above, or contact your investment dealer, as described
below. The Telephone Redemption Privilege may be modified or terminated without
notice.
SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must receive
your request before the close of regular trading on the New York Stock Exchange
to receive that day's net asset value. Your dealer will be responsible for
furnishing all necessary documentation to Mentor Services Company, and may
charge you for its services.
SYSTEMATIC WITHDRAWAL PROGRAM. You may redeem Class A or B shares of the
Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program are
not subject to a CDSC, but the aggregate withdrawals of Class B shares in any
year are limited to 10% of the value of the account at the time of enrollment.
Contact the Distributor for more information.
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<PAGE>
GENERAL. The Portfolio generally sends you payment for your shares the
business day after your request is received. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven days,
as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part in securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in the
Portfolio worth at least $1,000 for shares of the same class of certain other
Portfolios of Mentor Funds, with different investment objectives and policies,
at net asset value beginning 15 days after purchase. You may also exchange
shares of the Portfolio for shares of Cash Resource U.S. Government Money Market
Fund (the "Cash Fund"). If you exchange shares subject to a CDSC, the
transaction will not be subject to a CDSC. However, when you redeem the shares
acquired through the exchange, the redemption may be subject to the CDSC,
depending upon when you originally purchased the shares, using the schedule of
the Portfolio from which your first exchange was effected. For purposes of
computing the CDSC, the length of time you have owned your shares will be
measured from the date of original purchase and will not be affected by any
exchange.
For information on how to exchange your shares, contact Mentor Funds at
1-800-382-0016. For federal income tax purposes, an exchange is treated as a
sale of shares and generally results in a capital gain or loss. A Telephone
Exchange Privilege is currently available. The Distributor's procedures for
telephonic transactions are described above under "How to sell shares." The
Telephone Exchange Privilege is not available if you were issued certificates
for shares which remain outstanding. Ask you investment dealer or the
Distributor for a prospectus relating to other Portfolios of Mentor Funds or the
Cash Fund. Shares of certain of the Portfolios may not be available to residents
of all states.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where the Distributor or the Trustees
believe doing so would be in the best interests of the Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. Consult Mentor
Services Company before requesting an exchange by calling 1-800-869-6042. See
the Statement of Additional Information to find out more about the exchange
privilege.
HOW DISTRIBUTIONS ARE MADE
The Portfolio distributes net investment income and any net realized
capital gains at least annually. Distributions from capital gains are made after
applying any available capital loss carryovers. All Portfolio distributions will
be invested in additional Portfolio shares, unless the shareholder instructs the
Portfolio otherwise.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as ordinary
income, except that any distributions of net capital gain will be taxed as
long-term capital gain, regardless of how long a shareholder has held the shares
(although the loss on a sale of shares held for six months or less will be
treated as long-term capital loss to the extent of any capital gain distribution
received with respect to those shares). Distributions will be taxable as
described above whether received in cash or in shares through the reinvestment
of distributions. Early in each
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<PAGE>
year the Trust will notify shareholders of the amount and tax status of
distributions paid by the Portfolio for the preceding year. In buying or selling
securities for the Portfolio, Mentor Advisors will not normally take into
account the effect any purchase or sale of securities will have on the tax
positions of the Portfolio's shareholders.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends and distributions also may be subject to
state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of the Portfolio, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
OTHER SERVICES
SHAREHOLDER SERVICING PLAN. The Trust has adopted a Shareholder Servicing
Plan (the "Service Plan") with respect to the 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 their customers who are Portfolio shareholders. In return
for providing these support services, a financial institution may receive
payments at a rate not exceeding 0.25% of the average daily net assets of the
Class A or Class B shares of the Portfolio. These administrative services may
include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer personnel, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding the Portfolio; assisting
clients in changing dividend options, account designations, and addresses; and
providing such other services as the Portfolio reasonably requests.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Advisors and/or Mentor Investment
Group, or affiliates thereof, for providing administrative support services to
holders of Class A or Class B shares of the Portfolio. These payments will be
made directly by Mentor Advisors and/or Mentor Investment Group and will not be
made from the assets of the Portfolio.
GENERAL INFORMATION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Agreement and Declaration of Trust, which is governed by
Massachusetts law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into eleven
series, one representing the Portfolio, the others representing other Portfolios
with varying investment objectives and policies. Certain of the Trust's
Portfolios offer more than one class of shares with different sales charges and
expenses. The Portfolio currently offers shares in three classes: Class A and
Class B shares of the Portfolio, which are offered by this Prospectus; and Class
Y (Institutional) shares, which are not subject to any sales loads or
shareholder servicing fees. Contact Mentor Services Company for information
concerning Class Y shares and your eligibility to purchase shares of those
classes.
Each share has one vote, with fractional shares voting proportionally.
Shares of each class will vote together as a single class except when required
by law or determined by the Trustees. Shares of the Portfolio are freely
transferable, are entitled to dividends as declared by the Trustees, and, if the
Portfolio were liquidated, would receive the net assets of the Portfolio. The
Trust may suspend the sale of shares at any time and may refuse any order to
purchase shares. Although neither the Portfolio nor the Trust is required to
hold annual meetings of shareholders, shareholders have the right to call a
meeting to elect or remove Trustees, or to take other actions as provided in the
Agreement and Declaration of Trust.
17
<PAGE>
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 the 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 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.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and Trust
Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
PERFORMANCE INFORMATION
YIELD AND TOTAL RETURN DATA MAY FROM TIME TO TIME BE INCLUDED IN
ADVERTISEMENTS ABOUT CLASS A AND CLASS B SHARES OF THE PORTFOLIO. The
Portfolio's "yield" for each class of shares is calculated by dividing the
Portfolio's annualized net investment income per share during a recent 30-day
period by the maximum public offering price per share on the last day of that
period. "Total return" for the one-, five-, and ten-year periods (or for the
life of a class, if shorter) through the most recent calendar quarter represents
the average annual compounded rate of return on an investment of $1,000 in the
Portfolio at the maximum public offering price (in the case of Class A shares)
and reflecting (in the case of Class B shares) the deduction of any applicable
CDSC. Total return may also be presented for other periods. Investment
performance of different classes of shares of the Portfolio will differ. Any
quotation of investment performance not reflecting the maximum initial sales
charge or CDSC would be reduced if such sales charges were reflected. Quotations
of yield and total return for a period when an expense limitation was in effect
will be greater than if the limitation had not been in effect. The Portfolio's
performance may be compared to various indices. See the Statement of Additional
Information. Information may be presented in advertisements about the Portfolio
describing the background and professional experience of the Portfolio's
investment adviser or its investment personnel.
ALL DATA IS BASED ON THE PORTFOLIO'S PAST INVESTMENT RESULTS AND DOES NOT
PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of the Portfolio's
investments, the Portfolio's operating expenses and the class of shares
purchased. Investment performance also often reflects the risks associated with
the Portfolio's investment objective and policies. These factors should be
considered when comparing the Portfolio's investment results to those of other
mutual funds and other investment vehicles.
18
<PAGE>
[MENTOR INVESTMENT GROUP LOGO]
Mentor Balanced Portfolio
New Account Form and
Shareowner Options Form
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Type of Account
- --------------------------------------------------------------------------------
Use this one form to open any ONE of the following types of accounts. Please
check the appropriate one below.
[ ] Individual Account, Complete 1. [ ] Joint Account, Complete 1 and 2.
[ ] Custodial Account, (Gift to a Minor), Complete 3.
[ ] Trust Account, Complete 4.
[ ] Corporate (or Organization) Account, Complete 5.
[ ] Revise Existing Account --------------------------------------------------
Number
- --------------------------------------------------------------------------------
1. - -
- --------------------------------------------------------------------------------
Name Social Security Number
2. - -
- --------------------------------------------------------------------------------
Name Social Security Number
Shareowner Employment Information
This information is required in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers.
- ----------------------------------------------------------------------------
Occupation of Shareowner or Custodian
- ----------------------------------------------------------------------------
Employer's Name
- ----------------------------------------------------------------------------
Employer's Address
- ----------------------------------------------------------------------------
City State ZIP Code
- ----------------------------------------------------------------------------
Occupation of Co-Shareowner
- ----------------------------------------------------------------------------
Employer's Name
- ----------------------------------------------------------------------------
Employer's Address
- ----------------------------------------------------------------------------
City State ZIP Code
3. as custodian for
----------------------------------------------
Custodian's Name (only one custodian permitted)
- ----------------------------------------------------------------------------
Minor's Name (only one minor permitted)
- -
-------------------------------
Minor's Social Security Number
Under the ____ Uniform Gifts or ___ Uniform Transfers to Minors
State State
Act / /
------- -------- -------
Minor's Birthdate
4.
-------------------------------------------
Name of Trustee Name of Trust
/ /
----------------------------------------------------------------------------
Name of Second Trustee (if any) Date of Trust
----------------------------------------------------------------------------
Trust's Taxpayer Identification Number
5.
----------------------------------------------------------------------------
Name of Corporation (or other entity)
----------------------------------------------------------------------------
Taxpayer Identification Number
Business Type:
Corporation Partnership Organization
--- --- ---
Fiduciary Other
--- --- -------------------
Specify other type
(Please attach a certified copy of your corporate resolution)
- --------------------------------------------------------------------------------
Mailing Address of Account
- --------------------------------------------------------------------------------
All the information requested is needed to open your account.
- --------------------------------------------------------------------------------
Street Address or Box Number Apartment Number
- --------------------------------------------------------------------------------
City State ZIP Code
( ) ( )
- ------- --------------- ------- ---------------------
Area Code Daytime Phone Area Code Evening Phone
- --------------------------------------------------------------------------------
Fund Selection and Initial Investment
- --------------------------------------------------------------------------------
[ ] Next to the Portfolio name(s), indicate the amount you're investing in the
Portfolio. MINIMUM PER PORTFOLIO: $1,000
[ ] Be sure to check how you want your Dividend and Capital Gains distributions
handled: automatically reinvested to buy more shares or sent to you by
check.
[ ] Indicate the TOTAL amount you're investing at this time.
<TABLE>
<CAPTION>
Class
Fund Choice A B BL Amount Reinvest Cash
<S> <C>
Dividends [ ] [ ]
[ ] Balanced Portfolio [ ] [ ] [ ] $-------- Capital Gains [ ] [ ]
</TABLE>
TOTAL $-----------------
[ ] Check enclosed for total purchase above made payable to Mentor Funds.
[ ] Other payment method ________________________________________________
- --------------------------------------------------------------------------------
Telephone Exchange/
Telephone Redemption
- --------------------------------------------------------------------------------
I elect the following privileges as described in the prospectus:
Telephone Exchange: [ ] Yes Telephone Redemptions: [ ] Yes
[ ] No [ ] No
These privileges will automatically apply if neither box is checked.
By establishing these services and signing this form,
I acknowledge that:
I authorize Boston Financial Data Services, Inc. to accept and act upon
telephoned instructions to (1) exchange shares I own in any Portfolio(s) for
shares of any other Portfolio(s) or (2) redeem shares I own in any
Portfolio(s).
I understand that exchanges can be made only between accounts having identical
registrations.
- --------------------------------------------------------------------------------
[ ] Letter of Intent
- --------------------------------------------------------------------------------
I understand that through accumulated investments I can reduce my sales charges
on Class A shares. I plan to invest over a 13-month period in Class A shares of
one or more of the Portfolios in Mentor Funds in an aggregate amount of at
least:
[ ] $50,000 [ ] $100,000
[ ] $250,000 [ ] $500,000 [ ] $1,000,000 (and above)
If the amount indicated is not invested within 13 months, reduced sales charge
do not apply.
[ ] I am already investing under an existing statement of intention.
- --------------------------------------------------------------------------------
[ ] Rights of Accumulation
- --------------------------------------------------------------------------------
[ ] I own Class A shares of more than one Portfolio in Mentor Funds, which may
entitle me to a reduced sales charge. My shareholder account numbers are:
- --------------------------------------------------------------------------------
[ ] The registration of some of my shares differs. Their account numbers are:
- --------------------------------------------------------------------------------
BE SURE TO COMPLETE THE REVERSE SIDE
<PAGE>
[ ] Systematic Investment Plan Via ACH
- --------------------------------------------------------------------------------
Check the box above and complete this section; then check the box next to Bank
Account Information and complete that section too.
I authorize State Street Bank & Trust Co. (service agent for Mentor Funds), to
withdraw money from my bank account to buy more shares for my account(s) in the
Portfolio(s) listed below.
Portfolio Amount ($50 minimum)
[ ] $
------------ ---------------------
[ ] $
------------ ---------------------
Please note: This service takes approximately 15 days to establish and will be
done on or about the 15th of each month.
- ---------------------------------------
[ ] Systematic Withdrawal Plan Via Check
- ---------------------------------------
You must have a minimum of $10,000 in your mutual fund account to qualify for
this optional service.
(Class B shares withdrawals will not be subject to the applicable CDSC up to
10% of account value at the time of plan inception.)
Check the box above and complete this section.
I authorize State Street Bank & Trust Co. (service agent for Mentor Funds), to
redeem shares from my account(s) in the Portfolio(s) listed below and mail a
check for the amount specified to the name and address on the account. State
Street Bank & Trust Co., is to do this on the 15th of each month. If the 15th
falls on a weekend or holiday, the transaction will take place the next
business day.
Fund Amount ($50 minimum)
[ ] $
------------ ---------------------
[ ] $
------------ ---------------------
Please send my Systematic Withdrawal Check to
[ ] Mailing Address of Account
[ ] Other*
----------------------------
Please note: This service takes approximately two (2) weeks to establish.
*Signature guarantee required
- ---------------------------------------
[ ] Bank Account Information
- ---------------------------------------
Complete this section only if you are signing-up for
[ ] Telephone Redemption, [ ] Systematic Investment Plan, or
[ ] Systematic Withdrawal Plan.
- ---------------------------------------
Bank Name ABA Number
- ---------------------------------------
Bank Address
- ---------------------------------------
City State ZIP Code
- ---------------------------------------
Name(s) on Bank Account
- ---------------------------------------
Bank Account Number
Checking Savings
- -- --
Please attach a check (marked "VOID") or a deposit ticket from this bank
account.
- ---------------------------------------
Signatures
- ---------------------------------------
This New Account Form must be signed for an account to be opened. The
signatures required for the various types of accounts are:
[ ] Individual Account, the individual's
[ ] Joint Account, both shareowners'
[ ] Custodial Account (Gift to a Minor), the custodian's
[ ] Corporate (or Organization) Account, an officer's (and the officer's
title must be included)
By signing this New Account Form below, I assure that:
[ ] I have received and read the prospectus for each of the Portfolios in which
I am investing, and I understand that the prospectus terms are incorporated
into this form by reference.
[ ] I authorize Mentor Funds, its affiliates and agents, to act on any
instructions believed to be genuine for any service authorized on this
form. I agree they will not be liable for any resulting loss or expense.
[ ] I am of legal age in my state and have the authority and legal capacity to
purchase mutual fund shares.
[ ] I understand that I may terminate the Telephone Redemption, Systematic
Investment Plan, and/or Systematic Withdrawal Plan at any time by writing
to Boston Financial Data Services.
[ ] I understand that I will receive 30 days' written notice from Boston
Financial Data Services, Transfer Agent, before any service on this form is
terminated.
[ ] I certify, under penalties of perjury, that:
1. The Social Security or Taxpayer Identification Number shown on this form is
correct. (If I fail to give the correct number or to sign this form, Mentor
Funds may reject, restrict, or redeem my investment. I may also be subject
to IRS Backup Withholding of a percentage of all distributions and
redemptions.)
2. I am NOT currently subject to IRS Backup Withholding because (a) I have not
been notified of it or (b) notification has been revoked. (Cross out "NOT"
if you are currently subject to Backup Withholding.)
- ---------------------------------------
I agree that none of Mentor Investment Group, LLC, Mentor Distributors, LLC,
Boston Financial Data Services, Mentor Funds, or any of their affiliates will
be responsible for the authenticity of any instructions given and shall be
fully indemnified and held harmless from any and all direct liabilities,
losses, or cost resulting from acting upon such transactions.
- -----------------------------------------------------
Shareowner (or Custodian) Date
- -----------------------------------------------------
Co-Shareowner Date
- -----------------------------------------------------
Corporate Officer or Trustee Date
- -----------------------------------------------------
Title of Corporate Officer or Trustee Date
- -----------------------------------------------------
Dealer Information
- ---------------------------------------
To be completed by Customer Account Representative:
- ---------------------------------------
Financial Institution Name
- ---------------------------------------
Address
- ---------------------------------------
City State ZIP Code
- ---------------------------------------
Dealer Number (If applicable)
- ---------------------------------------
Representative's Code Number
- ---------------------------------------
Representative's Full Name
- ---------------------------------------
Representative's Branch Office
- ---------------------------------------
Representative's Phone Number
- ---------------------------------------
Mailing Information
- ---------------------------------------
Send this completed form to:
Mentor Funds
c/o Boston Financial Data Services
P.O. Box 8507
Boston, MA 02266
If you have any questions please call 1-800-382-0016
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT
LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE
REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND
OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE
COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES. ADDITIONAL INFORMATION
CONCERNING THE SECURITIES OFFERED HEREBY AND THE PORTFOLIO IS TO BE FOUND IN THE
REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS THERETO AND FINANCIAL
STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE INSPECTED AT THE
OFFICE OF THE COMMISSION.
MENTOR FUNDS
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 MENTOR DISTRIBUTORS, LLC
------------------------------------------------
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
------------------------------------------------
MK 1233
MENTOR BALANCED
PORTFOLIO
----------
PROSPECTUS
----------
May 12, 1998
[MENTOR INVESTMENT GROUP LOGO]
<PAGE>
MENTOR FUNDS
MENTOR BALANCED PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
May 12, 1998
Mentor Funds (the "Trust") is an open-end series investment company. This
Statement of Additional Information is intended for distribution only in
respect of Mentor Balanced Portfolio (the "Balanced Portfolio"). It is not a
prospectus and should be read in conjunction with the relevant prospectus of the
Balanced Portfolio. A copy of a prospectus can be obtained upon request by
writing to Mentor Services Company, Inc., at 901 East Byrd Street, Richmond,
Virginia 23219, or by calling Mentor Distributors at 1-800-382-0016.
This Statement is in four parts. Part I contains information with respect
to Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio, Mentor
Municipal Income Portfolio, Mentor Income and Growth Portfolio, and Mentor
Perpetual Global Portfolio. Part II contains information with respect to Mentor
Growth Portfolio, Mentor Strategy Portfolio, Mentor Short-Duration Income
Portfolio, and Mentor Balanced Portfolio, which are the successors to Mentor
Growth Fund, Mentor Strategy Fund, Mentor Short-Duration Income Fund, and Mentor
Balanced Fund, respectively, each of which was previously a series of s hares of
Mentor Series Trust. Part III contains information with respect to Mentor
Institutional U.S. Government Money Market Portfolio and Mentor Institutional
Money Market Portfolio. Part IV provides general information with respect to the
Trust and all of the Portfolios.
<PAGE>
TABLE OF CONTENTS
INTRODUCTION.......................................................ii
PART I..............................................................1
INVESTMENT RESTRICTIONS.............................................1
PART II.............................................................4
INVESTMENT RESTRICTIONS.............................................4
PART III............................................................8
INVESTMENT RESTRICTIONS.............................................8
PART IV.............................................................8
CERTAIN INVESTMENT TECHNIQUES ......................................8
MANAGEMENT OF THE TRUST............................................30
INVESTMENT ADVISORY SERVICES.......................................34
ADMINISTRATIVE SERVICES............................................38
SHAREHOLDER SERVICING PLAN.........................................40
BROKERAGE TRANSACTIONS.............................................41
DISTRIBUTION.......................................................44
DETERMINING NET ASSET VALUE.......................................46
REDEMPTIONS IN KIND................................................48
TAXES..............................................................48
INDEPENDENT ACCOUNTANTS............................................53
CUSTODIAN..........................................................53
PERFORMANCE INFORMATION ...........................................53
MEMBERS OF INVESTMENT MANAGEMENT TEAMS.............................57
PERFORMANCE COMPARISONS............................................60
SHAREHOLDER LIABILITY..............................................66
FINANCIAL STATEMENTS...............................................66
-i-
<PAGE>
INTRODUCTION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992 as Cambridge Series Trust. This Statement relates to the following eleven
portfolios of the Trust (collectively, the "Portfolios" and each individually,
the "Portfolio"): Mentor Growth Portfolio (the "Growth Portfolio"); Mentor
Quality Income Portfolio (the "Quality Income Portfolio"); Mentor Balanced
Portfolio (the "Balanced Portfolio"); Mentor Capital Growth Portfolio (the
"Capital Growth Portfolio"); Mentor Perpetual Global Portfolio (the "Global
Portfolio"); Mentor Income and Growth Portfolio (the "Income and Growth
Portfolio"); Mentor Municipal Income Portfolio (the "Municipal Income
Portfolio"); Mentor Short-Duration Income Portfolio (the "Short-Duration Income
Portfolio"); Mentor Strategy Portfolio (the "Strategy Portfolio"); Mentor
Institutional U.S. Government Money Market Portfolio (the "Government Money
Market Portfolio"); and Mentor Institutional Money Market Portfolio (the
"Institutional Money Market Portfolio"). Each Portfolio (other than the
Balanced, Government Money Market, and Institutional Money Market Portfolios)
has three classes of shares of beneficial interest, Class A shares, Class B
shares, and Institutional Shares. The Balanced, Government Money Market, and
Institutional Money Market Portfolio each have one class of shares (Class A) of
beneficial interest.
With respect to the investment restrictions described below, all
percentage limitations on investments will apply at the time of investment and
shall not be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment. Except for the investment
restrictions listed below as fundamental or to the extent designated as such in
the Prospectus in respect of a Portfolio, the other investment policies
described in this Statement or in the Prospectus are not fundamental and may be
changed by approval of the Trustees. As a matter of policy, the Trustees would
not materially change a Portfolio's investment objective without shareholder
approval.
The Investment Company Act of 1940, as amended (the "1940 Act"),
provides that a "vote of a majority of the outstanding voting securities" of a
Portfolio means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, or (2) 67% or more of the shares present at
a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
-ii-
<PAGE>
PART I
The following information relates to each of the Capital Growth,
Quality Income, Municipal Income, Income and Growth, and the Global Portfolios,
except where otherwise noted.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be
changed without a vote of a majority of the outstanding voting securities of a
Portfolio:
1. The Portfolios will not issue senior securities except that a Portfolio
(other than the Municipal Income Portfolio) may borrow money directly or
through reverse repurchase agreements in amounts of up to one-third of the
value of its net assets, including the amount borrowed; and except to the
extent that a Portfolio may enter into futures contracts. The Municipal
Income Portfolio may borrow money from banks for temporary purposes in
amounts of up to 5% of its total assets. The Portfolios will not borrow
money or engage in reverse repurchase agreements for investment leverage,
but rather as a temporary, extraordinary, or emergency measure or to
facilitate management of the Portfolio by enabling it to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Portfolios will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase agreements are
outstanding, the Quality Income Portfolio will restrict the purchase of
portfolio securities to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements, but only to the
extent necessary to assure completion of the reverse repurchase agreements.
Notwithstanding this restriction, the Portfolios may enter into when-issued
and delayed delivery transactions.
2. The Portfolios will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as are
necessary for clearance of purchases and sales of securities. The deposit
or payment by a Portfolio of initial or variation margin in connection with
futures contracts or related options transactions is not considered the
purchase of a security on margin.
3. The Portfolios will not mortgage, pledge, or hypothecate any assets, except
to secure permitted borrowings. In these cases the Portfolios may pledge
assets having a value of 10% of assets taken at cost. For purposes of this
restriction, (a) the deposit of assets in escrow in connection with the
writing of covered put or call options and the purchase of securities on a
when-issued basis; and (b) collateral arrangements with respect to (i) the
purchase and sale of stock options (and options on stock indexes) and (ii)
initial or variation margin for futures contracts, will not be deemed to be
pledges of a Portfolio's assets. Margin deposits for the purchase and sale
of futures contracts and related options are not deemed to be a pledge.
<PAGE>
4. The Portfolios will not lend any of their respective assets except
portfolio securities up to
one-third of the value of total assets. (The Municipal Income Portfolio
will not lend portfolio securities.) This shall not prevent a Portfolio
from purchasing or holding U.S. government obligations, money market
instruments, variable amount demand master notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted by
a Portfolio's investment objective, policies and limitations or Declaration
of Trust. The Municipal Income Portfolio will not make loans except to the
extent the obligations the Portfolio may invest in are considered to be
loans.
5. The Portfolios (other than the Quality Income Portfolio) will not invest
more than 10% of the value of their net assets in restricted securities;
the Quality Income Portfolio will not invest more than 15% of the value of
its net assets in restricted securities.
6. None of the Portfolios will invest in commodities, except to the extent
that the Portfolios may engage in transactions involving futures contracts
or options on futures contracts, and except to the extent the securities
the Municipal Income Portfolio invests in are considered interests in
commodities or commodities contracts or to the extent the Portfolio
exercises its rights under agreements relating to such municipal
securities.
7. None of the Portfolios will purchase or sell real estate, including limited
partnership interests, except to the extent the securities the Income and
Growth Portfolio and Municipal Income Portfolio may invest in are
considered to be interests in real estate or to the extent the Municipal
Income Portfolio exercises its rights under agreements relating to such
municipal securities (in which case the Portfolio may liquidate real estate
acquired as a result of a default on a mortgage), although the Portfolios
may invest in securities of issuers whose business involves the purchase or
sale of real estate or in securities which are secured by real estate or
interests in real estate.
8. With respect to 75% of the value of its respective total assets, a
Portfolio will not purchase securities issued by any one issuer (other than
cash or securities issued or guaranteed by the government of the United
States or its agencies or instrumentalities and repurchase agreements
collateralized by such securities), if as a result more than 5% of the
value of its total assets would be invested in the securities of that
issuer. A Portfolio will not acquire more than 10% of the outstanding
voting securities of any one issuer.
9. A Portfolio will not invest 25% or more of the value of its respective
total assets in any one industry (other than securities issued by the U.S.
Government, its agencies or instrumentalities). As described in the Trust's
Prospectus, the Municipal Income Portfolio may from time to time invest
more than 25% of its assets in a particular segment of the municipal bond
market; however, that Portfolio will not invest more than 25% of its assets
in industrial development bonds in a single industry except as described in
the Trust's Prospectus.
-2-
<PAGE>
10. A Portfolio will not underwrite any issue of securities, except as a
Portfolio may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
In addition, the following practices are contrary to the current policy
of each of the Portfolios (except as otherwise noted), and may be changed
without shareholder approval: investing in (a) securities which at the time of
such investment are not readily marketable, (b) securities restricted as to
resale (excluding securities determined by the Trustees of the fund (or the
person designated by the Trustees of the fund to make such determinations) to be
readily marketable), and (c) repurchase agreements maturing in more than seven
days, if, as a result, more than 15% of the funds' net assets (taken at current
value) would be invested in securities described in (a), (b) and (c) above.
A proposal has been made to shareholders of the Quality Income
Portfolio (i) to make restrictions 1 and 3 above inapplicable to that Portfolio
and (ii) to make the following fundamental policies applicable to that
Portfolio:
The Quality Income Portfolio will not issue any class of securities
which are senior to the Portfolio's shares except that the Portfolio
may borrow money as contemplated by the following restriction.
The Quality Income Portfolio will not borrow more than 33 1/3% of the
value of its total assets less all liabilities and indebtedness (other
than such borrowings).
Shareholders could approve the proposal as early as January 1998.
PART II
The following information relates to each of the Balanced, Growth,
Short-Duration Income, and Strategy Portfolios, except where otherwise noted.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to a Portfolio without a vote of a majority of the outstanding shares of
that Portfolio, a Portfolio may not:
1. Issue any securities which are senior to the Portfolio's shares as
described herein and in the relevant prospectus, except that each of
the Portfolios other than the Growth Portfolio and the Strategy
Portfolio may borrow money to the extent contemplated by Restriction 4
below.
2. Purchase securities on margin (but a Portfolio may obtain such
short-term credits as may be necessary for the clearance of
transactions). (Margin payments in connection with transactions in
futures contracts, options, and other financial instruments are not
considered to constitute the purchase of securities on margin for this
purpose.)
-3-
<PAGE>
3. Make short sales of securities or maintain a short position, unless at
all times when a short position is open, it owns an equal amount of
such securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short ("short sale
against-the-box"), and unless not more than 25% of the Portfolio's net
assets (taken at current value) is held as collateral for such sales at
any one time.
4. Under the Taxpayer Relief Act of 1997, activities by a Portfolio which
lock-in gain on an appreciated financial instrument generally will be
treated as a "constructive sale" of such instrument which will trigger
gain (but not loss) for federal income tax purposes. Such activities
may create taxable income in excess of the available cash they
generate. For more information regarding the taxation of such
activities see "Taxes".
5. (Growth Portfolio and Strategy Portfolio) Borrow money or pledge its
assets except that a Portfolio may borrow from banks for temporary or
emergency purposes (including the meeting of redemption requests which
might otherwise require the untimely disposition of securities) in
amounts not exceeding 10% (taken at the lower of cost or market value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings; provided that a Portfolio will not
purchase additional portfolio securities when such borrowings exceed 5%
of its total assets. (Collateral or margin arrangements with respect to
options, futures contracts, or other financial instruments are not
considered to be pledges.)
(All other Portfolios included in Part II) Borrow more than 33 1/3% of
the value of its total assets less all liabilities and indebtedness
(other than such borrowings) not represented by senior securities.
6. Act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities
laws.
7. Purchase any security if as a result the Portfolio would then have more
than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years
old or (in the case of Growth Portfolio) in equity securities for which
market quotations are not readily available.
8. (as to the Growth Portfolio only) Purchase any security if as a result
the Portfolio would then hold more than 10% of any class of securities
of an issuer (taking all common stock issues of an issuer as a single
class, all preferred stock issues as a single class, and all debt
issues as a single class) or more than 10% of the outstanding voting
securities of an issuer.
9. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) more than 5% of
the Portfolio's total assets (taken at current value) would then be
invested in securities of a single issuer, or (ii) more than 25%
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of the Portfolio's total assets (taken at current value) would be
invested in a single industry; provided that the restriction set out in
(i) above shall apply, in the case of each Portfolio other than the
Growth Portfolio, only as to 75% of such Portfolio's total assets.
10. Invest in securities of any issuer if, to the knowledge of the Trust,
any officer or Trustee of the Trust or of Mentor Investment Advisors,
LLC as the case may be, owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers and Trustees who own more
than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
11. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell
securities which are secured by real estate and securities of companies
that invest or deal in real estate (or, in the case of any Portfolio
other than the Growth Portfolio, real estate or limited partnership
interests). (For purposes of this restriction, investments by a
Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the
purchase or sale of real estate or interests in real estate or real
estate mortgage loans.)
12. Make investments for the purpose of exercising control or management.
13. (as to the Growth Portfolio only) Participate on a joint or a joint and
several basis in any trading account in securities.
14. (as to the Growth Portfolio only) Purchase any security restricted as
to disposition under federal securities laws if as a result more than
5% of the Portfolio's total assets (taken at current value) would be
invested in restricted securities.
15. (as to the Growth Portfolio only) Invest in securities of other
registered investment companies, except by purchases in the open market
involving only customary brokerage commissions and as a result of which
not more than 5% of its total assets (taken at current value) would be
invested in such securities, or except as part of a merger,
consolidation or other acquisition.
16. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common
stocks of companies that invest in or sponsor such programs.
17. (as to the Growth Portfolio only) Make loans, except through (i)
repurchase agreements (repurchase agreements with a maturity of longer
than 7 days together with other illiquid assets being limited to 10% of
the Portfolio's assets,) and (ii) loans of portfolio securities
(limited to 33% of the Portfolio's total assets).
18. (as to the Growth Portfolio only) Purchase foreign securities or
currencies except foreign securities which are American Depository
Receipts listed on exchanges or otherwise traded in the United States
and certificates of deposit, bankers' acceptances and other obligations
of
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foreign banks and foreign branches of U.S. banks if, giving effect to
such purchase, such obligations would constitute less than 10% of the
Trust's total assets (at current value).
19. (as to the Growth Portfolio only) Purchase warrants if as a result the
Portfolio would then have more than 5% of its total assets (taken at
current value) invested in warrants.
20. (as to each Portfolio other than the Growth Portfolio) Acquire more
than 10% of the voting securities of any issuer.
21. (as to each Portfolio other than the Growth Portfolio) Make loans,
except by purchase of debt obligations in which the Portfolio may
invest consistent with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of its total
assets (taken at current value), or through the lending of its
portfolio securities with respect to not more than 25% of its total
assets.
22. Purchase or sell commodities or commodity contracts, except that a
Portfolio may purchase or sell financial futures contracts, options on
financial futures contracts, and futures contracts, forward contracts,
and options with respect to foreign currencies, and may enter into swap
transactions. (This restriction applies to the Growth Portfolio.)
In addition, it is contrary to the current policy of each of the
Portfolios, which policy may be changed without shareholder approval, to invest
in (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the fund (or the person designated by the Trustees
of the fund to make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the funds' net assets (taken at current value) would be invested in
securities described in (a), (b) and (c) above.
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Shares of beneficial interest in the Mentor Balanced Portfolio have
been registered only in the Commonwealth of Virginia. These shares may not be
offered or sold in any other state without being registered or exempt from
registration.
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PART III
The following information relates to each of the Government Money
Market and the Institutional Money Market Portfolios, except where otherwise
noted.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to a Portfolio without approval by the holders of a majority of the
outstanding shares of that Portfolio, a Portfolio may not:
1. Purchase any security (other than U.S. Government securities)
if as a result: (i) as to 75% of such Portfolio's total
assets, more than 5% of the Portfolio's total assets (taken at
current value) would then be invested in securities of a
single issuer, or (ii) more than 25% of the Portfolio's total
assets would be invested in a single industry; except that the
Institutional Money Market Portfolio may invest up to 100% of
its assets in securities of issuers in the banking industry.
2. Acquire more than 10% of the voting securities of any issuer.
3. Act as underwriter of securities of other issuers except to
the extent that, in connection with the disposition of
portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
4. Issue any class of securities which is senior to the
Portfolio's shares of beneficial interest.
5. Purchase or sell real estate or interests in real estate,
including real estate mortgage loans, although it may purchase
and sell securities which are secured by real estate and
securities of companies that invest or deal in real estate or
real estate limited partnership interests. (For purposes of
this restriction, investments by a Portfolio in
mortgage-backed securities and other securities representing
interests in mortgage pools shall not constitute the purchase
or sale of real estate or interests in real estate or real
estate mortgage loans.)
6. Borrow money in excess of 5% of the value (taken at the lower
of cost or current value) of its total assets (not including
the amount borrowed) at the time the borrowing is made, and
then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes.
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<PAGE>
7. Purchase or sell commodities or commodity contracts, except
that a Portfolio may purchase or sell financial futures
contracts, options on futures contracts, and futures
contracts, forward contracts, and options with respect to
foreign currencies, and may enter into swap transactions.
8. Make loans, except by purchase of debt obligations in which
the Portfolio may invest consistent with its investment the
Portfolio may invest consistent with its investment policies,
by entering into repurchase agreements, or by lending its
portfolio securities.
In addition, it is contrary to the current policy of each Portfolio,
which policy may be changed without shareholder approval, to invest in (a)
securities which at the time of such investment are not readily marketable, (b)
Trustees of the Trust (or the person designated by the Trustees to make such
determinations) to be readily marketable), and (c) repurchase agreements
maturing in more then seven days, if, as a result, more than 10% of the
Portfolio's net assets (taken at current value) would then be invested in
securities described in (a), (b), and (c).
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above as fundamental or to the extent
designated as such in a Prospectus with respect to a Portfolio, the other
investment policies described in this Statement or in a Prospectus are not
fundamental and may be changed by approval of the Trustees.
PART IV
The following information relates to all of the Portfolios, except
where otherwise noted.
All information with respect to fees, expenses, and performance (except
where otherwise indicated) is based on a Portfolio's fiscal year end. All of the
Portfolios have a September 30 fiscal year end. Prior to September 30, 1995,
each of the Balanced, Growth, Short-Duration Income, and Strategy Portfolios had
a December 31 fiscal year end. Information concerning the expenses of those
Portfolios for fiscal 1995 is provided for the fiscal period January 1, 1995
through September 30, 1995. Certain information with respect to certain
Portfolios is given for partial fiscal years. See "Financial Highlights" in the
Trust's prospectus for information concerning the commencement of operations of
each of the Portfolios. No Institutional Shares were outstanding during any
period for which information is shown.
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<PAGE>
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques
in which one or more of the Portfolios may engage, and certain of the risks they
may entail. Certain of the investment techniques may not be available to a
Portfolio. See the Prospectus relating to a particular Portfolio for a
description of the investment techniques generally applicable to that Portfolio.
For purposes of this section, a Portfolio's investment adviser or subadviser (if
any) is referred to as an "Adviser".
Options
A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance or to protect against changes in
market prices.
Covered call options. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may also
be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, a Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying security. If the option is exercised, the Portfolio realizes a
gain or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus commissions)
plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
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<PAGE>
Covered put options. A Portfolio may write covered put options in order
to enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes
the risk that it may be required to purchase the underlying security for
an exercise price higher than its then current market value, resulting in a
potential capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
Purchasing put and call options. A Portfolio may also purchase put
options to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Portfolio must pay. These costs will reduce any profit the Portfolio
might have realized had it sold the underlying security instead of buying the
put option.
A Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
Options on foreign securities. A Portfolio may purchase and sell
options on foreign securities if in the opinion of its Adviser the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Portfolio's investment objectives. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may differ from those in the U.S. In addition,
options markets in some countries, many of which are relatively new, may be less
liquid than comparable markets in the U.S.
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<PAGE>
Risks involved in the sale of options. Options transactions involve
certain risks, including the risks that a Portfolio's Adviser will not forecast
interest rate or market movements correctly, that a Portfolio may be unable at
times to close out such positions, or that hedging transactions may not
accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close
out an option position. As a result, a Portfolio may be forced to continue to
hold, or to purchase at a fixed price, a security on which it has sold an option
at a time when its Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other
unforeseen events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Portfolio's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible that the
Portfolio and other clients of the Portfolio's Adviser may be considered such a
group. These position limits may restrict the Portfolio's ability to purchase or
sell options on particular securities.
Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that reason,
it may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification
as a "regulated investment company" under the Internal Revenue Code, may also
restrict the Portfolio's use of options.
Futures Contracts
In order to hedge against the effects of adverse market changes a
Portfolio that may invest in debt securities may buy and sell futures contracts
on debt securities of the type in which the Portfolio may invest and on indexes
of debt securities. In addition, a Portfolio that may invest in equity
securities may purchase and sell stock index futures to hedge against changes in
stock market prices. A Portfolio may also, to the extent permitted by applicable
law, buy and sell futures contracts and options on futures contracts to increase
its current return. All such futures and related options will, as may be
required by applicable law, be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission (the "CFTC").
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<PAGE>
Futures on Debt Securities and Related Options. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- a
Portfolio will legally obligate itself to accept the future delivery of the
underlying security and pay the agreed price. By selling futures on debt
securities -- assuming a "short" position -- it will legally obligate itself to
make the future delivery of the security against payment of the agreed price.
Open futures positions on debt securities will be valued at the most recent
settlement price, unless that price does not, in the judgment of persons acting
at the direction of the Trustees as to the valuation of a Portfolio's assets,
reflect the fair value of the contract, in which case the positions will be
valued by the Trustees or such persons.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions that may
result in a profit or a loss. While futures positions taken by a Portfolio will
usually be liquidated in this manner, a Portfolio may instead make or take
delivery of the underlying securities whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures are traded assumes responsibility for such closing transactions
and guarantees that a Portfolio's sale and purchase obligations under closed-out
positions will be performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish with
more certainty than would otherwise be possible the effective rate of return on
securities. A Portfolio may, for example, take a "short" position in the futures
market by selling contracts for the future delivery of debt securities held by
the Portfolio (or securities having characteristics similar to those held by the
Portfolio) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Portfolio's securities. When hedging of
this character is successful, any depreciation in the value of securities may
substantially be offset by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Portfolio expects to purchase particular securities when it has the necessary
cash, but expects the rate of return available in the securities markets at that
time to be less favorable than rates currently available in the futures markets.
If the anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Portfolio of
purchasing the securities may be offset, at least to some extent, by the rise in
the value of the futures position taken in anticipation of the subsequent
purchase.
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Successful use by a Portfolio of futures contracts on debt securities
is subject to its Adviser's ability to predict correctly movements in the
direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of an
increase in interest rates which would adversely affect the market prices of
debt securities held by it and the prices of such securities increase instead
the Portfolio will lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to meet daily margin
maintenance requirements. The Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
A Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to options
on securities except that options on futures contracts give the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an option of the same series.
There is no guarantee that such closing transactions can be effected. A
Portfolio will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements, and, in addition, net option premiums received will be
included as initial margin deposits. See "Margin Payments" below. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to a Portfolio because the
maximum amount at risk is the premium paid for the options plus transactions
costs. However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to a Portfolio when the
purchase or sale of the futures contracts would not, such as when there is no
movement in the prices of debt securities. The writing of a put or call option
on a futures contract involves risks similar to those risks relating to the
purchase or sale of futures contracts.
Index Futures Contracts and Options. A Portfolio may invest in debt
index futures contracts and stock index futures contracts, and in related
options. A debt index futures contract is a contract to buy or sell units of a
specified debt index at a specified future date at a price agreed upon when the
contract is made. A unit is the current value of the index. (Debt index futures
in which the Portfolios are presently expected to invest are not now available,
although such futures contracts are expected to become available in the future.)
A stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. A unit is the current value of the stock index.
For example, the Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 100 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract would
be worth $18,000 (100 units x $180). The stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract,
with the settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract. For example,
if a Portfolio enters into a futures contract to buy 100 units of the S&P 100
Index at a specified future date at a contract price of $180 and the S&P 100
Index is at $184 on that future date, the Portfolio will gain $400 (100 units x
gain of $4). If the Portfolio enters into a futures contract to sell 100 units
of the stock index at a specified future date at a contract price of $180 and
the S&P 100 Index is at $182 on that future date, the Portfolio will lose $200
(100 units x loss of $2).
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A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts with
respect to indexes or sub-indexes the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities.
Options on stock index futures. Options on index futures contracts are
similar to options on securities except that options on index futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in an index futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price
at any time during the period of the option. Upon exercise of the option, the
holder would assume the underlying futures position and would receive a
variation margin payment of cash or securities approximating the increase in the
value of the holder's option position. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash based on the difference between the exercise price of the
option and the closing level of the index on which the futures contract is based
on the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
Options on Indices. As an alternative to purchasing and selling call
and put options on index futures contracts, each of the Portfolios which may
purchase and sell index futures contracts may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options are
traded on national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount". This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier".
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A Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
Margin Payments. When a Portfolio purchases or sells a futures
contract, it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage of
the amount of the futures contract. This amount is known as "initial margin".
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to a Portfolio upon termination of the contract,
assuming a Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when a Portfolio sells a futures contract and the price of the
underlying security rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the market price of the securities underlying the futures contract. Conversely,
if the price of the underlying security falls below the delivery price of the
contract, the Portfolio's futures position increases in value. The broker
then must make a variation margin payment equal to the difference between
the delivery price of the futures contract and the market price of the
securities underlying the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
Special Risks of Transactions in Futures Contracts and Related Options
Liquidity risks. Positions in futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market for such
futures. Although the Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular time.
If there is not a liquid secondary market at a particular time, it may not be
possible to close a futures position at such time and, in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event financial futures are used
to hedge portfolio securities, such securities will not generally be sold until
the financial futures can be terminated. In such circumstances, an increase in
the price of the portfolio securities, if any, may partially or completely
offset losses on the financial futures.
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In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
such a market will develop. Although a Portfolio generally will purchase only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that a Portfolio would have to exercise the
options in order to realize any profit.
Hedging risks. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying securities or
index or movements in the prices of a Portfolio's securities which are the
subject of a hedge. A Portfolio's Adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in its
judgment, correlate closely with movements in the prices of the underlying
securities or index and the securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to its Adviser's ability to predict correctly
movements in the direction of the market. It is possible that, where a
Portfolio has purchased puts on futures contracts to hedge its portfolio
against a decline in the market, the securities or index on which the puts are
purchased may increase in value and the value of securities held in the
portfolio may decline. If this occurred, the Portfolio would lose money on
the puts and also experience a decline in value in its portfolio
securities. In addition, the prices of futures, for a number of reasons, may not
correlate perfectly with movements in the underlying securities or index due to
certain market distortions. First, all participants in the futures market are
subject to margin deposit requirements. Such requirements may cause investors to
close futures contracts through offsetting transactions which could distort the
normal relationship between the underlying security or index and futures
markets. Second, the margin requirements in the futures markets are less onerous
than margin requirements in the securities markets in general, and as a result
the futures markets may attract more speculators than the securities markets do.
Increased participation by speculators in the futures markets may also cause
temporary price distortions. Due to the possibility of price distortion, even a
correct forecast of general market trends by a Portfolio's Adviser may still not
result in a successful hedging transaction over a short time period.
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Other Risks. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while a Portfolio may
benefit from the use of futures and related options, unanticipated changes in
interest rates or stock price movements may result in a poorer overall
performance for the Portfolio than if it had not entered into any futures
contracts or options transactions. Moreover, in the event of an imperfect
correlation between the futures position and the portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss.
Forward Commitments
A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the Portfolio enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in the value of the Portfolio's other assets.
Where such purchases are made through dealers, the Portfolios rely on the dealer
to consummate the sale. The dealer's failure to do so may result in the loss to
the Portfolio of an advantageous yield or price. Although a Portfolio will
generally enter into forward commitments with the intention of acquiring
securities for its portfolio or for delivery pursuant to options contracts it
has entered into, a Portfolio may dispose of a commitment prior to settlement if
its Adviser deems it appropriate to do so. A Portfolio may realize short-term
profits or losses upon the sale of forward commitments.
Repurchase Agreements
A Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security subject to
the obligation of the seller to repurchase and the Portfolio to resell such
security at a fixed time and price (representing the Portfolio's cost plus
interest). It is the Trust's present intention to enter into repurchase
agreements only with member banks of the Federal Reserve System and securities
dealers meeting certain criteria as to creditworthiness and financial condition
established by the Trustees of the Trust and only with respect to obligations of
the U.S. government or its agencies or instrumentalities or other high quality
short term debt obligations. Repurchase agreements may also be viewed as loans
made by a Portfolio which are collateralized by the securities subject to
repurchase. A Portfolio's Adviser will monitor such transactions to ensure that
the value of the underlying securities will be at least equal at all times to
the total amount of the repurchase obligation, including the interest factor. If
the seller defaults, a Portfolio could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale including accrued
interest are less than the resale price provided in the agreement including
interest. In addition, if the seller should be involved in bankruptcy or
insolvency proceedings, a Portfolio may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if a
Portfolio is treated as an unsecured creditor and required to return the
underlying collateral to the seller's estate.
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Loans of Portfolio Securities
A Portfolio may lend its portfolio securities, provided: (1) the loan
is secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the total assets
of the Portfolio. In addition, it is anticipated that a Portfolio may share with
the borrower some of the income received on the collateral for the loan or that
it will be paid a premium for the loan. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Although voting rights or rights to consent with
respect to the loaned securities pass to the borrower, a Portfolio retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by a Portfolio if the holders of such
securities are asked to vote upon or consent to matters materially affecting the
investment. A Portfolio will not lend portfolio securities to borrowers
affiliated with the Portfolio.
Collateralized mortgage obligations; other mortgage-related securities
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"), but they also may be collateralized by whole loans or
private pass-through certificates (such collateral collectively hereinafter
referred to as "Mortgage Assets"). CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans.
In a CMO, a series of bonds or certificates is generally issued in
multiple classes. Each class of CMOs is issued at a specific fixed or floating
rate coupon and has a stated maturity or final distribution date. Principal
prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on most classes of the CMOs on a monthly, quarterly,
or semi-annual basis. The principal of and interest on the mortgage assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a CMO, payments of principal, including any principal prepayments, on the
mortgage assets are applied to the classes of the series in a pre-determined
sequence.
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Residual interests. Residual interests are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans. The cash flow generated
by the mortgage assets underlying a series of mortgage securities is applied
first to make required payments of principal of and interest on the mortgage
securities and second to pay the related administrative expenses of the issuer.
The residual generally represents the right to any excess cash flow remaining
after making the foregoing payments. Each payment of such excess cash flow to a
holder of the related residual represents income and/or a return of capital. The
amount of residual cash flow resulting from a series of mortgage securities will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of the mortgage securities, prevailing interest rates,
the amount of administrative expenses, and the prepayment experience on the
mortgage assets. In particular, the yield to maturity on residual interests may
be extremely sensitive to prepayments on the related underlying mortgage assets
in the same manner as an interest-only class of stripped mortgage-backed
securities. In addition, if a series of mortgage securities includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
residual interest may also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. In certain circumstances,
there may be little or no excess cash flow payable to residual holders. The
Portfolio may fail to recoup fully its initial investment in a residual.
Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals currently may
not have the liquidity of other more established securities trading in other
markets. Residuals may be subject to certain restrictions on transferability.
Foreign Securities
A Portfolio may invest in foreign securities and in certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks.
Investments in foreign securities may involve considerations different
from investments in domestic securities. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign brokerage commissions and custodian
fees are generally higher than in the United States. Investments in foreign
securities can involve other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets and imposition of withholding taxes on dividend or
interest payments. It may be more difficult to obtain and enforce a judgment
against a foreign issuer. In addition, foreign investments may be affected
favorably or unfavorably by changes in currency exchange rates, exchange control
regulations, foreign withholding taxes and restrictions or prohibitions on the
repatriation of foreign currencies. A Portfolio may incur costs in connection
with conversion between currencies.
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In determining whether to invest in securities of foreign issuers, the
Adviser of a Portfolio seeking current income will consider the likely impact of
foreign taxes on the net yield available to the Portfolio and its shareholders.
Income received by a Portfolio from sources within foreign countries may be
reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of a Portfolio's assets to be invested
in various countries is not known, and tax laws and their interpretations may
change from time to time and may change without advance notice. Any such taxes
paid by a Portfolio will reduce its net income available for distribution to
shareholders.
Foreign Currency Transactions
Except as otherwise described in the relevant Prospectus, a Portfolio
may engage without limit in currency exchange transactions, including foreign
currency forward and futures contracts, to protect against uncertainty in the
level of future foreign currency exchange rates. In addition, a Portfolio may
purchase and sell call and put options on foreign currency futures contracts and
on foreign currencies for hedging purposes.
A Portfolio may engage in both "transaction hedging" and "position
hedging". When a Portfolio engages in transaction hedging, it enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its securities. A Portfolio will engage in transaction hedging when it desires
to "lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging a Portfolio will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
A Portfolio may purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with transaction hedging. A
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes, a Portfolio may purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives a Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives a Portfolio the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives a Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives a Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. A Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of its
Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
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When a Portfolio engages in position hedging, it enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In connection
with position hedging, a Portfolio may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. A Portfolio may also purchase
or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of a
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency a Portfolio is obligated to deliver and if a
decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the security or
securities of a Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to a Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
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Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally purchase
or sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In
such event, it may not be possible to close a futures or related option
position and, in the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments of variation margin on its
futures positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence exchange rates
and investments generally.
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The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S.
options markets.
Settlement Procedures. Settlement procedures relating to investments in
foreign securities and to foreign currency exchange transactions may be more
complex than settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not present in
domestic investments. For example, settlement of transactions involving foreign
securities or foreign currency may occur within a foreign country, and the
Portfolio may be required to accept or make delivery of the underlying
securities or currency in conformity with any applicable U.S. or foreign
restrictions or regulations, and may be required to pay any fees, taxes or
charges associated with such delivery. Such investments may also involve the
risk that an entity involved in the settlement may not meet its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a feefor currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should a Portfolio
desire to resell that currency to the dealer.
Zero-Coupon Securities
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other mutual funds investing in securities making
current distributions of interest and having similar maturities.
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Zero-coupon securities may include U.S. Treasury bills issued directly
by the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Portfolio will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
When-Issued and Delayed Delivery Transactions
The Portfolios may engage in when-issued and delayed delivery
transactions. These transactions are arrangements in which a Portfolio purchases
securities with payment and delivery scheduled for a future time. A Portfolio
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring securities consistent with its investment objective and policies, not
for investment leverage, but a Portfolio may sell such securities prior to
settlement date if such a sale is considered to be advisable. No income accrues
to a Portfolio on securities in connection with such transactions prior to the
date the Portfolio actually takes delivery of securities. In when-issued and
delayed delivery transactions, a Portfolio relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause a
Portfolio to miss a price or yield considered to be advantageous.
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These transactions are made to secure what is considered to be an
advantageous price or yield for a Portfolio. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred. However, liquid
assets of a Portfolio sufficient to make payment for the securities to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
Bank Instruments
A Portfolio may invest in the instruments of banks and savings and
loans whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances. However, the
above-mentioned instruments are not necessarily guaranteed by those
organizations. In addition to domestic bank obligations, such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances, a
Portfolio may invest in: Eurodollar Certificates of Deposit ("ECDs") issued by
foreign branches of U.S. or foreign banks; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar-denominated deposits in foreign branches of U.S. or
foreign banks; Canadian Time Deposits, which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located in the U.S.; and
Yankee Certificates of Deposit ("Yankee CDS"), which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held in the
U.S.
Dollar Rolls and Reverse Repurchase Agreements
A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-related securities, the mortgage-related securities that are purchased
typically will be of the same type and will have the same or similar interest
rate and maturity as those sold, but will be supported by different pools of
mortgages. The Portfolio forgoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but it is compensated by
the difference between the current sales price and the price for the future
purchase as well as by any interest earned on the proceeds of the securities
sold. A Portfolio could also be compensated through the receipt of fee income.
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A Portfolio may also enter into reverse repurchase agreements in which
the Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
Dollar rolls and reverse repurchase agreements may be viewed as a
borrowing by the Portfolio, secured by the security which is the subject of the
agreement. In addition to the general risks involved in leveraging, dollar rolls
and reverse repurchase agreements involve the risk that, in the event of the
bankruptcy or insolvency of the Portfolio's counterparty, the Portfolio would be
unable to recover the security which is the subject of the agreement, the amount
of cash or other property transferred by the counterparty to the Portfolio under
the agreement prior to such insolvency or bankruptcy is less than the value of
the security subject to the agreement, or the Portfolio may be delayed or
prevented, due to such insolvency or bankruptcy, from using such cash or
property or may be required to return it to the counterparty or its trustee or
receiver.
Convertible Securities
A Portfolio may invest in convertible securities. Convertible
securities are fixed income securities which may be exchanged or converted into
a predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for a
variety of investment strategies.
A Portfolio will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stock when, in its Adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Portfolio in achieving its investment objectives. Otherwise, the
Portfolio may hold or trade convertible securities. In selecting convertible
securities for the Portfolio, the Portfolio's Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument and the
investment potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the Portfolio's Adviser considers numerous factors, including the economic and
political outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.
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Warrants
A Portfolio may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period of
time. Warrants may have a life ranging from less than a year to twenty years or
may be perpetual. However, most warrants have expiration dates after which they
are worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the warrant
will expire as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock. Warrants acquired in units or attached to securities may
be deemed to be without value for purposes of a Portfolio's policy.
Swaps, Caps, Floors and Collars
A Portfolio may enter into interest rate, currency and index swaps and
the purchase or sale of related caps, floors and collars. A Portfolio expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. A Portfolio would use these transactions as hedges and not as
speculative investments and would not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by a
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio will not enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from another nationally recognized securities rating
organization or is determined to be of equivalent credit quality by the
Portfolio's Adviser. If there is a default by the counterparty, a Portfolio may
-28-
<PAGE>
have contractual remedies pursuant to the agreements related to the transaction.
As a result, the swap market has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than swaps.
Lower-rated Securities
A Portfolio may invest in lower-rated fixed-income securities (commonly
known as "junk bonds") to the extent described in the relevant Prospectus. The
lower ratings of certain securities held by a Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a Portfolio may be unable at times to establish the fair value of
such securities. The rating assigned to a security by Moody's Investors Service,
Inc. or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. Changes in the value
of portfolio securities generally will not affect cash income derived from such
securities, but will affect the Portfolio's net asset value. A Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although its Adviser will monitor the investment
to determine whether its retention will assist in meeting the Portfolio's
investment objective.
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent a
Portfolio invests in tax exempt securities in the lower rating categories, the
achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
-29-
<PAGE>
Indexed Securities
A Portfolio may invest in indexed securities, the values of which are
linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). Most indexed securities have maturities of
three years or less.
Indexed securities differ from other types of debt securities in which
a Portfolio may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Portfolio's securities denominated in linked
currencies. For example, if a Portfolio's Adviser considers that the Austrian
schilling is linked to the German deutschmark (the "D-mark"), the Portfolio
holds securities denominated in schillings and the Adviser believes that the
value of schillings will decline against the U.S. dollar, the Adviser may enter
into a contract to sell D-marks and buy dollars.
-30-
<PAGE>
Eurodollar Instruments
A Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. A Portfolio
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed-income
instruments are linked.
Segregation of Assets
A Portfolio may at times segregate assets in respect of certain
transactions in which the Portfolio enters into a commitment to pay money or
deliver securities at some future date (such as futures contracts or reverse
repurchase agreements, to the extent not used for leverage). Any such segregated
account will be maintained by the Trust's custodian and may contain cash, U.S.
government securities, liquid high grade debt obligations, or other appropriate
assets.
MANAGEMENT OF THE TRUST
The following table provides biographical information with respect to
each Trustee and officer of the Trust. Each Trustee who is an "interested
person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name and Address with Portfolio During Past 5 Years
- ---------------- -------------- -------------------
<S> <C>
*Daniel J. Ludeman Chairman; Trustee Chairman and Chief Executive
Officer, Mentor Investment
Group, LLC; Managing Director,
Wheat, First Securities, Inc.;
Director, Wheat First Butcher
Singer, Inc.; Chairman and
Director, Mentor Income Fund,
Inc. and America's Utility Fund,
Inc.; Chairman and Trustee,
Mentor Institutional Trust and
Cash Resource Trust.
Louis W. Moelchert, Jr. Trustee Vice President for Investments,
University of Richmond; Trustee,
Mentor Institutional Trust and Cash
Resource Trust; Director, America's
Utility Fund, Inc. and Mentor Income
Fund, Inc.
<PAGE>
Thomas F. Keller Trustee Professor of Business Administration
and former Dean, Fuqua School of
Business, Duke University; Trustee,
Mentor Institutional Trust and Cash
Resource Trust; Director, America's
Utility Fund, Inc. and Mentor Income
Fund, Inc.
Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corp.; formerly,
Chairman and Chief Executive Officer,
Hamilton Beach/Proctor-Silex, Inc.;
Trustee, Mentor Institutional Trust and
Cash Resource Trust; Director,
America's Utility Fund, Inc. and Mentor
Income Fund, Inc.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company;
Trustee, Mentor Institutional Trust and
Cash Resource Trust; Director,
America's Utility Fund, Inc. and Mentor
Income Fund, Inc.
*Peter J. Quinn, Jr. Trustee President, Mentor Distributors, LLC; Managing Director, Mentor Investment
Group, LLC and Wheat First Butcher Singer, Inc.; formerly, Senior Vice
President/Director of Mutual Funds, Wheat First Butcher Singer, Inc.;
Trustee, Mentor Institutional Trust and Cash Resource Trust; Director,
America's Utility Fund, Inc. and Mentor Income Fund, Inc.
Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee, Mentor
Institutional Trust and Case Resource Trust; Director, Mentor Income Fund,
Inc. and America's Utility Fund, Inc.; formerly, Vice Chancellor for
Development and University Relations, University of North Carolina at
Chapel Hill.
<PAGE>
Weston E. Edwards Trustee President, Weston Edwards &
Associates; Trustee, Mentor
Institutional Trust and Cash Resource
Trust; Director, Mentor Income Fund,
Inc. and America's Utility Fund, Inc.;
Founder and Chairman, The Housing
Roundtable; formerly, President, Smart
Mortgage Access, Inc.
Jerry R. Barrentine Trustee President, J.R. Barrentine &
Associates; Trustee, Mentor
Institutional Trust and Cash Resource
Trust; Director, Mentor Income Fund,
Inc. and America's Utility Fund, Inc.;
formerly, Executive Vice President and
Chief Financial Officer, Barclays/American Mortgage Director Corporation;
Managing Partner, Barrentine Lott & Associates.
J. Garnett Nelson Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee, Mentor Institutional Trust
and Cash Resource Trust; Director, Mentor Income Fund, Inc., America's
Utility Fund, Inc., GE Investment Funds, Inc., and Lawyers Title Corporation;
Member, Investment Advisory Committee, Virginia Retirement System; formerly,
Senior Vice President, The Life Insurance Company of Virginia.
Paul F. Costello President Managing Director, Mentor Investment Group, LLC, Wheat First Butcher Singer,
Inc., and Mentor Investment Advisors, LLC; President, Mentor Income Fund, Inc.,
America's Utility Fund, Inc., Mentor Institutional Trust, and Cash Resource
Trust; Director, Mentor Perpetual Advisors, LLC and Mentor Trust Company.
<PAGE>
Terry L. Perkins Treasurer Senior Vice President and Treasurer, Mentor Investment Group, LLC; Treasurer,
Cash Resource Trust, Mentor Income Fund, Inc., and Mentor Institutional Trust;
Treasurer and Senior Vice President, America's Utility Fund, Inc.; formerly,
Treasurer and Comptroller, Ryland Capital Management, Inc.
Michael Wade Assistant Vice President and Controller, Mentor Investment Group, LLC; Assistant
Treasurer Treasurer, Cash Resource Trust, Mentor Income Fund, Inc., Mentor Institutional
Trust, and America's Utility Fund, Inc.; formerly, Senior Accountant, Wheat
First Butcher Singer, Inc.; Audit Senior, BDO Seidman.
Geoffrey B. Sale Secretary Associate Vice President Mentor Investment Group, LLC; Clerk Mentor
Institutional Trust; Secretary Cash Resource Trust, Mentor Income Fund,
Inc., Mentor Funds and Mentor Variable Investment Portfolios.
</TABLE>
The table below shows the fees paid to each Trustee by the Trust
for the 1997 fiscal year and the fees paid to each Trustee by all funds in the
Mentor family (including the Trust) during the 1997 calendar year.
<PAGE>
Total compensation
Aggregate compensation from all
Trustees from the Trust complex funds (23 Funds)
- -------- ---------------------- -------------------------
Daniel J. Ludeman 0 0
Arnold H. Dreyfuss $6,000 $12,200
Thomas F. Keller $6,000 $12,200
Louis W. Moelchert, Jr. $6,000 $12,200
Stanley F. Pauley* $6,000 $12,200
Troy A. Peery, Jr. $5,500 $11,175
Peter J. Quinn, Jr. $ 0 $ 0
Arch T. Allen, III+ $ 0 $ 0
Weston E. Edwards+ $ 0 $ 0
Jerry R. Barrentine+ $ 0 $ 0
J. Barnett Nelson+ $ 0 $ 0
- -------------
* Resigned as Trustee effective December 22, 1997
+ Elected Trustee December 22, 1997
The Trustees do not receive pension or retirement benefits from the
Trust.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Trust,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.
PRINCIPAL HOLDERS OF SECURITIES
As of May 8, 1998, the officers and Trustees of the Trust owned as a
group less than 1% of the outstanding shares of any class of the Balanced
Portfolio. To the knowledge of the Trust, no person owned of record or
beneficially more than 5% of the outstanding shares of any class of the
Balanced Portfolio as of that date, except as set forth below:
-33-
<PAGE>
-34-
<TABLE>
<CAPTION>
Portfolio Holder Percentage Ownership
- ---------- ------ ---------------------
<S> <C>
<PAGE>
Balanced-Class B WFBS Foundation 96.00%
Attn: Bill Fields
P.O. Box 1357
Richmond, VA 23219
</TABLE>
- ------------------
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as
investment adviser to each Portfolio other than the Global Portfolio. Van Kampen
American Capital Management, Inc. ("Van Kampen") serves as sub-adviser to the
Municipal Income Portfolio; Wellington Management Company, LLP ("Wellington
Management") serves as sub-adviser to the Income and Growth Portfolio. Each of
these sub-advisers has complete discretion to purchase and sell portfolio
securities for its respective Portfolio consistent with the particular
Portfolio's investment objective, restrictions, and policies. Mentor Perpetual
Advisors, LLC ("Mentor Perpetual") serves as investment adviser to the Global
Portfolio.
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<PAGE>
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment
Group, LLC, ("Mentor Investment Group") which is a subsidiary of Wheat First
Butcher Singer, Inc. ("WFBS"). Mentor Perpetual is owned equally by Mentor
Advisors and Perpetual plc, a diversified financial services holding
company. EVEREN Capital Corporation has a 20% ownership in Mentor
Investment Group and may acquire additional ownership based principally on
the amount of Mentor Investment Group's revenues derived from assets
attributable to clients of EVEREN Securities, Inc. and its affiliates.
On October 31, 1996, Commonwealth Investment Counsel, Inc., the
investment adviser to the Short-Duration Income and Balanced Portfolios, was
reorganized as Mentor Investment Advisors, LLC. Also on October 31, 1996, each
of Commonwealth Advisors, Inc., the investment adviser to the Capital Growth,
Income and Growth, Municipal Income, and Quality Income Portfolios, Charter
Asset Management, Inc., the investment adviser to the Growth Portfolio, and
Wellesley Advisors, Inc., the investment adviser to the Strategy Portfolio,
transferred its rights and obligations under its respective advisory contract
with the Trust to Mentor Investment Advisors, LLC. In addition, Mentor
Investment Group, Inc. and Mentor Distributors, Inc. were reorganized as Mentor
Investment Group, LLC and Mentor Distributors, LLC, respectively.
On October 29, 1996, shareholders of the Municipal Income Portfolio
approved a new sub-advisory agreement with Van Kampen American Capital
Management, Inc., which became a subsidiary of Morgan Stanley Group, Inc.
Subject to the general oversight of the Trustees, each investment
adviser and/or sub- adviser manages the applicable Portfolio in accordance with
the stated policies of that Portfolio and of the Trust. Each makes investment
decisions for the Portfolio and places the purchase and sale orders for
portfolio transactions. The investment advisers and sub-advisers bear all their
expenses in connection with the performance of their services (except as may be
approved from time to time by the Trustees) and pay the salaries of all officers
and employees who are employed by them and the Trust.
Each Portfolio's investment adviser and/or sub-adviser provides the
Trust with investment officers who are authorized to execute purchases and sales
of securities. Investment decisions for the Trust and for the other investment
advisory clients of the investment advisers and sub-advisers and their
affiliates are made with a view to achieving their respective investment
objectives. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in the investment adviser's or
sub-adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or
sales of securities for one or more clients will have an adverse effect on other
clients. In the case of short-term investments, the
-36-
<PAGE>
Treasury area of Mentor Investment Group handles purchases and sales under
guidelines approved by investment officers of the Trust. Each investment adviser
and sub-adviser employs professional staffs of portfolio managers who draw upon
a variety of resources for research information for the Trust.
Expenses incurred in the operation of a Portfolio or otherwise
allocated to a Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, compensation paid under a Portfolio's 12b-1 plan
and the Shareholder Service Plan, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat, First Securities, Inc. and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, charges for the printing of
prospectuses and statements of additional information for regulatory purposes or
for distribution, and certain costs incurred by Mentor Investment Group in
responding to shareholder inquiries as approved by the Trustees from time to
time, to shareholders, certain shareholder report charges and charges relating
to corporate matters are borne by the Portfolio.
Under the applicable Management Contract with the Trust in respect of
each Portfolio, subject to such policies as the Trustees may determine, Mentor
Advisors or Mentor Perpetual, as the case may be, at its expense, furnishes
continuously an investment program for the Portfolio and makes investment
decisions on behalf of the Portfolio. Subject to the control of the Trustees,
Mentor Advisors or Mentor Perpetual, as the case may be, also manages,
supervises and conducts the other affairs and business of the Portfolio,
furnishes office space and equipment, provides bookkeeping and clerical services
(including determination of the Portfolio's net asset value, but excluding
shareholder accounting services) and places all orders for the purchase and sale
of the Portfolio's portfolio securities. Mentor Advisors or Mentor Perpetual, as
the case may be, may place portfolio transactions with broker-dealers which
furnish Mentor Advisors or Mentor Perpetual, without cost to it, certain
research, statistical and quotation services of value to Mentor Advisors or
Mentor Perpetual and their affiliates in advising the Portfolio and other
clients. In so doing, Mentor Advisors or Mentor Perpetual may cause a Portfolio
to pay greater brokerage commissions than it might otherwise pay.
Each Management Contract provides that Mentor Advisors or Mentor
Perpetual, as the case may be, shall not be subject to any liability to a
Portfolio or to any shareholder of a Portfolio for any act or omission in the
course of or connected with rendering services to a Portfolio in the absence of
its willful misfeasance, bad faith, gross negligence, or reckless disregard of
its duties.
Each of the Management Contracts is subject to annual approval
(beginning in 2000) by (i) the Trustees or (ii) vote of a majority (as
defined in the 1940 Act) of the outstanding voting securities of the affected
Portfolio, provided that in either event the continuance is also approved by a
majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust or the investment adviser in question, by vote cast in
person at a meeting called for the purpose of voting on such approval. The
Management Contracts are terminable without penalty, on not more than sixty
days' notice and not less than thirty days' notice, by the Trustees, by vote
of the holders of a
-37-
<PAGE>
majority of the affected Portfolio's shares, or by the applicable investment
adviser. Each terminates automatically in the event of its assignment (as
defined in the 1940 Act).
Management Fees
The investment adviser of each Portfolio receives an annual management
fee from such Portfolio (which is described in the relevant Prospectus). The
investment adviser pays a portion of that fee to any sub-adviser to the
Portfolio.
The Portfolios paid investment advisory fees in the amounts and for the
periods indicated below (amounts shown reflect fee waivers where applicable):
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $3,238,498 $2,313,470 $1,143,696
Capital Growth Portfolio.................... 1,063,903 728,536 465,031
Strategy Portfolio.......................... 2,807,549 2,287,369 1,262,809
Income and Growth Portfolio................. 947,267 575,647 460,486
Global Portfolio............................ 998,592 368,592 174,547
Quality Income Portfolio.................... 449,325 278,216 563,032
Municipal Income Portfolio.................. 370,232 344,784 380,281
Short-Duration Income Portfolio 129,833 54,833 --
Balanced Portfolio.......................... 8,854 6,790 --
Government Money Market Portfolio 29,982 -- --
</TABLE>
The investment advisers of the following Portfolios waived investment
advisory fees in the following amounts for the periods indicated below:
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Global Portfolio............................ -- -- $ 10,545
Quality Income Portfolio.................... $ 123,214 $ 217,329 --
Short-Duration Income Portfolio 55,521 83,567 65,901
Balanced Portfolio. . . . . . . . . . . . . . . . . 20,072 18,976 14,563
</TABLE>
-38-
<PAGE>
The investment advisers of the following Portfolios paid sub-advisory
fees to the Portfolios' sub-advisers in the following amounts for the periods
indicated below:
<TABLE>
<CAPTION>
Fiscal year Fiscal year Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Capital Growth Portfolio (1) -- -- $ 126,880
Income and Growth Portfolio $ 373,115 $236,071 193,845
Global Portfolio (2) -- -- 49,880
Quality Income Portfolio (3) -- -- 157,161
Municipal Income Portfolio 153,577 172,392 190,141
</TABLE>
- --------------------
(1) Prior to April 13, 1995, Phoenix Investment Counsel, Inc. ("Phoenix")
served as sub-adviser to the Capital Growth Portfolio. Commonwealth
Advisors paid subadvisory fees of $126,880 to Phoenix for fiscal year
1995.
(2) Prior to April 13, 1995, Scudder, Stevens & Clark ("Scudder") served as
sub-adviser to the Global Portfolio. Commonwealth Advisors paid
subadvisory fees of $49,880 to Scudder for fiscal year 1995.
(3) Prior to April 13, 1995, Pacific Investment Management Company
("Pacific") served as sub-adviser to the Quality Income Portfolio
(formerly the Cambridge Government Income Portfolio). Commonwealth
Advisors paid $157,161 in subadvisory fees to Pacific for fiscal year
1995.
ADMINISTRATIVE SERVICES
Mentor Investment Group, LLC serves as administrator to each of the
Portfolios pursuant to an Administration Agreement. Prior to June 1, 1994,
Cambridge Administrative Services ("CAS") provided administrative services to
the Capital Growth, Quality Income, Municipal Income, Income and Growth, and
Global Portfolios.
Pursuant to the Administration Agreement, Mentor Investment Group
provides continuous business management services to the Portfolios and, subject
to the general oversight of the Trustees, manages all of the business and
affairs of the Portfolios subject to the provisions of the Trust's Declaration
of Trust, By-laws and the 1940 Act, and other policies and instructions the
Trustees may from time to time establish. Mentor Investment Group pays the
compensation of all officers and executive employees of the Trust (except those
employed by or serving at the request of an investment adviser or sub-adviser)
and makes available to the Trust the services of its directors, officers, and
employees as elected by the Trustees or officers of the Trust. In addition,
Mentor Investment Group provides all clerical services relating to the
Portfolios' business. As compensation for its services, Mentor Investment Group
receives a fee from each Portfolio calculated daily at the annual rate of .10%
of a Portfolio's average daily net assets.
The Administration Agreement must be approved at least annually with
respect to each Portfolio by a vote of a majority of the Trustees who are not
interested persons of Mentor Investment Group or the Trust. The Agreement may be
terminated at any time without penalty on 30 days notice by Mentor Investment
Group, or immediately in respect of any Portfolio upon notice by the Trustees or
by vote of a majority of the outstanding voting securities of that Portfolio.
The Agreement terminates automatically in the event of any assignment (as
defined in the 1940 Act).
-39-
<PAGE>
The Portfolios paid administrative service fees in the following
amounts for the periods indicated below (amounts shown reflect fee waivers where
applicable):
<TABLE>
<CAPTION>
Fiscal year Fiscal year Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $462,643 $ 330,496 $108,285
Capital Growth Portfolio.................... 132,988 91,067 66,032
Strategy Portfolio.......................... 330,300 269,102 146,572
Income and Growth Portfolio................. 126,302 76,753 69,316
Global Portfolio............................ 92,753 33,508 19,082
Quality Income Portfolio.................... 95,423 82,591 65,234
Municipal Income Portfolio.................. 61,705 57,464 72,055
</TABLE>
The administrators waived administrative fees in the amounts and for the
periods indicated below:
<TABLE>
<CAPTION>
Fiscal year Fiscal year Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Quality Income Portfolio.................... -- -- 41,651
Short-Duration Income Portfolio............. 37,151 $ 27,680 --
</TABLE>
The portfolios also provided direct reimbursement to Mentor for certain legal
and compliance administration, investor relation and operation costs not covered
under the Investment Management Agreement. These direct reimbursements were as
follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio 17,457 23,289 6,579
Capital Growth Portfolio 5,036 5,901 --
Strategy Portfolio 11,846 17,744 6,117
Income and Growth Portfolio 4,851 5,210 --
Global Portfolio 3,672 2,752 --
Quality Income Portfolio 3,617 5,005 --
Municipal Income Portfolio 2,293 3,465 --
Short-Duration Income Portfolio 1,443 1,842 --
Balanced Portfolio -- -- --
Government Money Market -- -- --
</TABLE>
SHAREHOLDER SERVICING PLAN
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors, LLC with respect to the Class A and Class B shares
each Portfolio. Pursuant to the Service Plan, financial institutions will enter
into shareholder service agreements with the Portfolios to provide
administrative support services to their customers who from time to time may be
record or beneficial owners of shares of one or more Portfolios. In return for
providing these support services, a financial institution may receive payments
from one or more Portfolios at
-40-
<PAGE>
a rate not exceeding .25% of the average daily net assets of the Class A or
Class B shares of the particular Portfolio or Portfolios owned by the financial
institution's customers for whom it is the holder of record or with whom it has
a servicing relationship. The Service Plan is designed to stimulate financial
institutions to render administrative support services to the Portfolios and
their shareholders. These administrative support services include, but are not
limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel including clerical, supervisory, and
computer personnel as necessary or beneficial to establish and maintain
shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Portfolios; assisting clients
in changing dividend options, account designations and addresses; and providing
such other services as the Portfolios reasonably request.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by the investment adviser, a sub-adviser, and/or
Mentor Investment Group, or affiliates thereof, for providing administrative
support services to holders of Class A or Class B shares of the Portfolios.
These payments will be made directly by the investment adviser, a sub- adviser,
and/or Mentor Investment Group, as applicable, and will not be made from the
assets of any of the Portfolios.
Shareholder Services Fees
During fiscal year 1997, the Portfolios incurred shareholder service
fees in respect of Class A and Class B shares under the Service Plan as follows
(amounts shown reflect fee waivers where applicable):
Class A Class B
Growth Portfolio.......................... $200,471 $956,135
Capital Growth Portfolio.................. 121,929 210,541
Strategy Portfolio........................ 97,981 727,769
Income and Growth Portfolio............... 117,034 198,722
Global Portfolio.......................... 79,427 152,456
Quality Income Portfolio.................. 96,471 142,087
Municipal Income Portfolio................ 60,943 93,320
Short-Duration Income Portfolio........... 44,783 47,894
Balanced Portfolio........................ -- --
Government Money Market Portfolio......... -- --
During fiscal year 1997, shareholder services fees of $9,642 were
waived in respect of the Balanced Portfolio.
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BROKERAGE TRANSACTIONS
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different brokers.
A particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter
markets, but the price paid by the Trust usually includes an undisclosed
dealer commission or mark-up. In underwritten offerings, the price paid by the
Trust includes a disclosed, fixed commission or discount retained by the
underwriter or dealer. It is anticipated that most purchases and sales of
securities by funds investing primarily in certain fixed-income securities will
be with the issuer or with underwriters of or dealers in those securities,
acting as principal. Accordingly, those funds would not ordinarily pay
significant brokerage commissions with respect to securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, each investment adviser or sub-adviser may receive brokerage and
research services and other similar services from many broker-dealers with which
such investment adviser or sub- adviser places a Portfolio's portfolio
transactions and from third parties with which these broker-dealers have
arrangements. These services include such matters as general economic and market
reviews, industry and company reviews, evaluations of investments,
recommendations as to the purchase and sale of investments, newspapers,
magazines, pricing services, quotation services, news services and personal
computers utilized by the investment adviser's or sub-adviser's managers and
analysts. Where the services referred to above are not used exclusively by the
investment adviser or sub-adviser for research purposes, the investment adviser
or sub-adviser, based upon its own allocations of expected use, bears that
portion of the cost of these services which directly relates to its non-research
use. Some of these services are of value to the investment adviser or
sub-adviser and its affiliates in advising various of its clients (including the
Portfolios), although not all of these services are necessarily useful and of
value in managing all or any of the Portfolios. The management fee paid by a
Portfolio is not reduced because its investment adviser or sub-adviser or any of
their affiliates receive these services even though the investment adviser or
sub-adviser might otherwise be required to purchase some of these services for
cash.
A Portfolio's investment adviser or sub-adviser, as the case may be,
places all orders for the purchase and sale of portfolio investments for the
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<PAGE>
Portfolio and buys and sells investments for the Portfolio through a substantial
number of brokers and dealers. The investment adviser or sub- adviser seeks the
best overall terms available for the Portfolio, except to the extent the
investment adviser or sub-adviser may be permitted to pay higher brokerage
commissions as described below. In doing so, the investment adviser or
sub-adviser, having in mind the Portfolio's best interests, considers all
factors it deems relevant, including, by way of illustration, price, the size of
the transaction, the nature of the market for the security or other investment,
the amount of the commission, the timing of the transaction taking into account
market prices and trends, the reputation, experience and financial stability of
the broker-dealer involved and the quality of service rendered by the
broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the advisory and
sub-advisory agreements, a Portfolio's investment adviser or sub-adviser may
cause the Portfolio to pay a broker-dealer which provides "brokerage and
research services" (as defined in the 1934 Act) to that adviser an amount of
disclosed commission for effecting securities transactions on stock exchanges
and other transactions for the Portfolio on an agency basis in excess of the
commission which another broker-dealer would have charged for effecting that
transaction. The investment adviser's or sub-adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Trustees may adopt from time to time. It is the position of the staff of
the Securities and Exchange Commission that Section 28(e) does not apply to the
payment of such greater commissions in "principal" transactions. Accordingly,
each investment adviser and sub-adviser will use its best efforts to obtain the
best overall terms available with respect to such transactions, as described
above.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to such other policies as the Trustees
may determine, an investment adviser or sub-adviser may consider sales of shares
of a Portfolio (and, if permitted by law, of the other funds in the Mentor
family) as a factor in the selection of broker-dealers to execute portfolio
transactions for a Portfolio.
The Trustees have determined that portfolio transactions for the Trust
may be effected through Wheat, First Securities, Inc. ("Wheat"), and EVEREN
Securities, Inc. ("EVEREN"), broker-dealers affiliated with Mentor Advisors and
Mentor Perpetual. The Trustees have adopted certain policies incorporating the
standards of Rule 17e-l issued by the SEC under the 1940 Act which requires,
among other things, that the commissions paid to Wheat and EVEREN must be
reasonable and fair compared to the commissions, fees, or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. Wheat and EVEREN will not
participate in brokerage commissions given by a Portfolio to other brokers or
dealers. Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. A Portfolio will in no event effect
principal transactions with Wheat and EVEREN in over-the-counter securities in
which Wheat or EVEREN makes a market.
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<PAGE>
Under rules adopted by the SEC, Wheat and EVEREN may not execute
transactions for a Portfolio on the floor of any national securities exchange,
but may effect transactions for a Portfolio by transmitting orders for execution
and arranging for the performance of this function by members of the exchange
not associated with them. Wheat and EVEREN will be required to pay fees charged
to those persons performing the floor brokerage elements out of the brokerage
compensation they receive from a Portfolio. The Trust has been advised by Wheat
that on most transactions, the floor brokerage generally constitutes from 5% and
10% of the total commissions paid.
Brokerage Commissions
The Portfolios paid brokerage commissions on brokerage transactions in
the following aggregate amounts for the periods indicated:
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $1,482,817 $1,864,300 $1,354,359
Capital Growth Portfolio.................... 275,151 299,554 416,744
Strategy Portfolio.......................... 1,349,443 1,144,804 1,297,178
Income and Growth Portfolio................. 302,628 146,323 125,986
Global Portfolio............................ 838,045 359,217 148,625
Quality Income Portfolio.................... 900 24,990 20,250
Municipal Income Portfolio.................. 5,044 2,422 4,037
Short-Duration Income Portfolio -- 1,560 2,717
Balanced Portfolio.......................... 4,752 7,385 3,436
Government Money Market Portfolio -- -- --
</TABLE>
The following table shows brokerage commissions paid by each of the
Portfolios to Wheat for the periods indicated:
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $101,434 $72,923 $53,120
Capital Growth Portfolio.................... 29,226 54,642 22,411
Strategy Portfolio.......................... 287,495 87,458 1,138
Income and Growth Portfolio................. 101,434 52,534 47,723
Global Portfolio............................ -- -- --
Quality Income Portfolio.................... -- -- --
Municipal Income Portfolio.................. -- -- --
Short-Duration Income Portfolio -- -- --
Balanced Portfolio.......................... 50 -- --
Government Money Market Portfolio -- -- --
</TABLE>
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<PAGE>
The following table shows brokerage commissions paid by each of the
Portfolios to EVEREN for the period indicated.
Fiscal year
1997
-----------
Growth Portfolio....................... $2,331
Capital Growth Portfolio............... 9,793
Strategy Portfolio..................... --
Income and Growth Portfolio............ --
Global Portfolio....................... --
Quality Income Portfolio............... --
Municipal Income Portfolio............. --
Short-Duration Income Portfolio........ --
Balanced Portfolio..................... --
Government Money Market Portfolio...... --
The brokerage commissions paid to Wheat for fiscal year 1997 amounted
to the following percentages of the aggregate brokerage commissions and
brokerage transactions paid by each Portfolio:
<TABLE>
<CAPTION>
Percent of aggregate
Percent of aggregate dollar amount of
commissions brokerage transactions
-------------------- ----------------------
<S> <C>
Growth Portfolio............................ 6.84% 4.78%
Capital Growth Portfolio.................... 10.62% 11.21%
Strategy Portfolio.......................... 21.30% 4.68%
Income and Growth Portfolio................. 33.52% 29.21%
Global Portfolio............................ -- --
Quality Income Portfolio.................... -- --
Municipal Income Portfolio.................. -- --
Short-Duration Income Portfolio -- --
Balanced Portfolio.......................... 1.05% 0.03%
Government Money Market Portfolio -- --
</TABLE>
The brokerage commissions paid to EVEREN for fiscal year 1997 amounted
to the following percentages of the aggregate brokerage commissions and
brokerage transactions paid by each Portfolio:
<TABLE>
<CAPTION>
Percent of aggregate
Percent of aggregate dollar amount of
commissions brokerage transactions
-------------------- -----------------------
<S> <C>
Growth Portfolio............................ 0.16% 0.09%
Capital Growth Portfolio.................... 3.56% 3.48%
Strategy Portfolio.......................... -- --
Income and Growth Portfolio................. -- --
Global Portfolio............................ -- --
Quality Income Portfolio.................... -- --
Municipal Income Portfolio.................. -- --
Short-Duration Income Portfolio -- --
Balanced Portfolio.......................... -- --
Government Money Market Portfolio -- --
</TABLE>
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<PAGE>
HOW TO BUY SHARES
Except under certain circumstances described in the Trust's or an individual
Portfolio's prospectus, Class A shares of the Portfolios are sold at their net
asset value plus an applicable sales charge on days the New York Stock Exchange
is open for business. Class B shares of the Portfolios (where applicable) and
Institutional Shares of the Portfolios are sold at their net asset value with no
sales charge on days the New York Stock Exchange is open for business. The
procedure for purchasing Class A, Class B and Institutional Shares of the
Portfolios is explained in the relevant Prospectus under the section entitled
"How to Buy Shares."
DISTRIBUTION
Each of the Portfolios makes payments to Mentor Distributors, LLC in
accordance with its respective Distribution Plan adopted in respect of Class A
and Class B shares pursuant to Rule 12b-1 under the Investment Company Act of
1940.
During fiscal year 1997, the Portfolios paid the following 12b-1 fees
in respect of Class B shares to Mentor Distributors as shown below:
Growth Portfolio............................ $2,989,388
Capital Growth Portfolio.................... 656,243
Strategy Portfolio.......................... 2,224,816
Income and Growth Portfolio................. 645,243
Global Portfolio............................ 481,581
Quality Income Portfolio.................... 317,465
Municipal Income Portfolio.................. 197,295
Short-Duration Income Portfolio 73,558
Balanced Portfolio.......................... --
Government Money Market Portfolio --
During fiscal year 1997, 12b-1 fees of $28,926 were waived in respect
of Class B shares of the Balanced Portfolio.
Contingent Deferred Sales Charges
During fiscal year 1997, Mentor Distributors received the following
contingent deferred sales charges with respect to Class B shares:
Growth Portfolio............................ $362,277
Capital Growth Portfolio.................... 40,502
Strategy Portfolio.......................... 727,513
Income and Growth Portfolio................. 57,856
Global Portfolio............................ 83,936
Quality Income Portfolio.................... 30,436
Municipal Income Portfolio.................. 26,274
Short-Duration Income Portfolio............. 33,870
Balanced Portfolio.......................... --
Government Money Market Portfolio........... --
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<PAGE>
Underwriting Commissions
The following table shows the approximate amount of underwriting
commissions retained by Mentor Distributors (and any predecessor) in respect of
Class A and Class B shares for each Portfolio for the periods indicated:
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $116,796 38,398 --
Capital Growth Portfolio.................... 63,786 $ 10,477 $ 1,314
Strategy Portfolio.......................... 62,145 31,801 --
Income and Growth Portfolio................. 59,230 15,762 2,708
Global Portfolio............................ 66,416 23,038 1,829
Quality Income Portfolio.................... 37,516 9,062 559
Municipal Income Portfolio.................. 21,433 4,110 247
Short-Duration Income Portfolio............. 867 186 --
Balanced Portfolio.......................... -- -- --
Government Money Market Portfolio........... -- -- --
</TABLE>
DETERMINING NET ASSET VALUE
A Portfolio determines the net asset value per share of each class once
each day the New York Exchange (the "Exchange") is open as of the close of
regular trading on the Exchange. Currently, the Exchange is closed Saturdays,
Sundays and the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, the Fourth of July, Labor Day, Thanksgiving and Christmas.
Securities for which market quotations are readily available are valued
at prices which, in the opinion of a Portfolio's investment adviser or
sub-adviser, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sale price or, if
no sales are reported (as in the case of some securities traded
over-the-counter), the last reported bid price, except that certain U.S.
Government securities are stated at the mean between the last reported bid and
asked prices. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost, which approximates market value. All other
securities and assets are valued at their fair value following procedures
approved by the Trustees. Liabilities are deducted from the total, and the
resulting amount is divided by the number of shares of the class outstanding.
Reliable market quotations are not considered to be readily available
for long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. These investments are stated at fair
value on the basis of valuations furnished by pricing services approved by the
Trustees, which determine valuations for normal, institutional- size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders.
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<PAGE>
If any securities held by a Portfolio are restricted as to resale, the
Portfolio's investment adviser or sub-adviser determines their fair values. The
fair value of such securities is generally determined as the amount which a
Portfolio could reasonably expect to realize from an orderly disposition of such
securities over a reasonable period of time. The valuation procedures applied in
any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any registration
expenses that might be borne by the Portfolio in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers
with respect to such securities and any available analysts' reports
regarding the issuer.
In the case of certain fixed-income securities, including certain less
common mortgage-backed securities, market quotations are not readily available
to the Portfolios on a daily basis, and pricing services may not provide price
quotations. In such cases, the Portfolio's investment adviser or sub-adviser is
typically able to obtain dealer quotations for each of the securities on at
least a weekly basis. On any day when it is not practicable for the investment
adviser or sub- adviser to obtain an actual dealer quotation for a security, the
investment adviser or sub-adviser may reprice the securities based on changes in
the value of a U.S. Treasury security of comparable duration. When the next
dealer quotation is obtained, the investment adviser or sub-adviser compares the
dealer quote against the price obtained by it using its U.S. Treasury-spread
calculation, and makes any necessary adjustments to its calculation methodology.
The investment adviser or sub-adviser attempts to obtain dealer quotes for each
security at least weekly, and on any day when there has been an unusual
occurrence affecting the securities which, in the investment adviser or
sub-adviser's view, makes pricing the securities on the basis of U.S.
Treasuries unlikely to provide a fair value of the securities.
Generally, trading in certain securities (such as foreign securities)
is substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of a class of shares are computed as of such times. Also, because of the amount
of time required to collect and process trading information as to large numbers
of securities issues, the values of certain securities (such as convertible
bonds, U.S. Government securities, and tax-exempt securities) are determined
based on market quotations collected earlier in the day at the latest
practicable time prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value
following procedures approved by the Trustees.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
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<PAGE>
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which net asset value is not calculated. A Portfolio calculates net asset
value per share of each class, and therefore effects sales, redemptions and
repurchases of its shares, as of the close of the Exchange once on each day on
which the Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when a classes' net asset value is calculated, such
securities will be valued at fair value as determined in good faith by
procedures approved as required by the Trustees.
REDEMPTIONS IN KIND
Although each Portfolio intends to redeem Class A, Class B and
Institutional Shares in cash, it reserves the right under certain circumstances
to pay the redemption price in whole or in part by a distribution of securities
from its investment portfolio. Redemptions in kind will be made in conformity
with applicable SEC rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner that the
Trustees determine to be fair and equitable. The Trust has elected to be
governed by Rule 18f-1 of the Investment Company Act of 1940, under which a
Portfolio is obligated to redeem shares for any one shareholder in cash only up
to the lesser of $250,000 or 1% of the respective classes' net asset value
during any 90-day period.
TAXES
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to shareholders. A Portfolio will not under present law be subject
to any excise or income taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other dispositions of stock, securities, or foreign currencies, and
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities, or currencies; and (b) diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the market value
of its total assets consists of cash and cash items, U.S. Government Securities,
securities of other regulated investment companies, and other securities limited
generally with respect to any one issuer to not more than 5% of the value of its
total assets and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities (other than those of the U.S. Government or other regulated
investment companies) of any issuer or of two or more issuers which the
Portfolio controls and which are engaged in the same, similar, or related trades
or businesses. In order to receive the favorable tax treatment accorded
regulated investment companies and their shareholders, moreover, a Portfolio
must in general distribute at least 90% of the sum of its taxable net investment
income, its net tax-exempt income, and the excess, if any, of net short-term
capital gains over net long-term capital losses for such year.
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<PAGE>
If a Portfolio failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Portfolio would be
subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax-exempt income
and net long-term capital gains, would be taxable to shareholders as
ordinary income. In addition, a Portfolio could be required to recognize
unrealized gains, pay substantial taxes and interest and make
substantial distributions before requalifying as a regulated investment company
that is accorded special tax treatment.
If a Portfolio fails to distribute in a calendar year substantially all
of its ordinary income for such year and substantially all of its capital gain
net income for the one-year period ending October 31, plus any retained amount
from the prior year, the Portfolio will be subject to a 4% excise tax on the
undistributed amounts. A dividend paid to shareholders by a Portfolio in January
of a year generally is deemed to have been paid by the Portfolio on December 31
of the preceding year, if the dividend was declared and payable to shareholders
of record on a date in October, November or December of that preceding year. A
Portfolio intends generally to make distributions sufficient to avoid imposition
of the 4% excise tax.
Distributions from a Portfolio (other than exempt-interest dividends,
as discussed below) will be taxable to shareholders as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), two different tax
rates apply to net capital gains (that is, the excess of net gains from capital
assets held for more than one year over net losses from capital assets held for
not more than one year). One rate (generally 28%) applies to net gains on
capital assets held for more than one year but not more than 18 months (28% rate
gains) and a second, preferred rate (generally 20%) applies to the balance of
such net capital gains ("adjusted net capital gains"). Distributions of net
capital gains will be treated in the hands of shareholders as 28% rate gains to
the extent designated by the Portfolio as deriving from net gains from assets
held for more than one year but not more than 18 months, and the balance will be
treated as adjusted net capital gains. Distributions of 28% rate gains and
adjusted net capital gains will be taxable to shareholders as such, regardless
of how long a shareholder has held the shares in the Portfolio.
Exempt-interest dividends. A Portfolio will be qualified to pay
exempt-interest dividends to its shareholders only if, at the close of each
quarter of the Portfolio's taxable year, at least 50% of the total value of the
Portfolio's assets consists of obligations the interest on which is exempt from
federal income tax. Distributions that the Portfolio properly designates as
exempt- interest dividends are treated by shareholders as interest excludable
from their gross income for federal income tax purposes but may be taxable for
federal alternative minimum tax purposes and for state and local purposes. If
the Portfolio intends to be qualified to pay exempt-interest dividends, the
Portfolio may be limited in its ability to enter into taxable transactions
involving forward commitments, or repurchase agreements, financial futures, and
options contracts on financial futures, tax-exempt bond indices, and other
assets.
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<PAGE>
Part or all of the interest on indebtedness, if any, incurred or
continued by a shareholder to purchase or carry shares of a Portfolio paying
exempt-interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the indebtedness,
multiplied by the percentage of a Portfolio's total distributions (not including
distributions from net long-term capital gains) paid to the shareholder that are
exempt-interest dividends. Under rules used by the Internal Revenue Service for
determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
A Portfolio which is qualified to pay exempt-interest dividends will
inform investors within 60 days of the Portfolio's fiscal year-end of the
percentage of its income distributions designated as tax-exempt. The percentage
is applied uniformly to all distributions made during the year. The percentage
of income designated as tax-exempt for any particular distribution may be
substantially different from the percentage of the Portfolio's income that was
tax-exempt during the period covered by the distribution.
Hedging transactions. If a Portfolio engages in transactions, including
hedging transactions in options, futures contracts, and straddles, or other
similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to the Portfolio, defer losses
to the Portfolio, cause adjustments in the holding periods of the Portfolio's
securities, or convert short-term capital losses into long-term capital losses.
These rules could therefore affect the amount, timing and character of
distributions to shareholders. A Portfolio will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the best
interests of the Portfolio.
Certain of a Portfolio's hedging activities (including its
transactions, if any, in foreign currencies or foreign currency-denominated
instruments) are likely to produce a difference between its book income and its
taxable income. If a Portfolio's book income exceeds its taxable income, the
distribution (if any) of such excess will be treated as a dividend to the extent
of the Portfolio's remaining earnings and profits (including earnings and
profits arising from tax-exempt income), and thereafter as a return of capital
or as gain from the sale or exchange of a capital asset, as the case may be. If
a Portfolio's book income is less than its taxable income, the Portfolio could
be required to make distributions exceeding book income to qualify as a
regulated investment company that is accorded special tax treatment.
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<PAGE>
Pursuant to the 1997 Act, new "constructive sale" provisions apply to
activities by a Portfolio which lock-in gain on an "appreciated financial
position." Generally, a "position" is defined to include stock, a debt
instrument, or partnership interest, or an interest in any of the foregoing,
including through a short sale, a swap contract, or a future or forward
contract. Under the 1997 Act, the entry into a short sale, a swap contract or a
future or forward contract relating to an appreciated direct position in any
stock or debt instrument, or the acquisition of stock or debt instrument at a
time when the Portfolio occupies an offsetting (short) appreciated position in
the stock or debt instrument, is treated as a "constructive sale" that gives
rise to the immediate recognition of gain (but not loss). The application of
these new provisions may cause a Portfolio to recognize taxable income from
these offsetting transactions in excess of the available cash generated by such
activities.
Return of capital distributions. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" in any
taxable year, the excess distribution will be treated as a return of capital to
the extent of your tax basis in your shares, and thereafter as capital gain. A
return of capital is not taxable, but it reduces your tax basis in your shares,
thus reducing any loss or increasing any gain on a subsequent taxable
disposition by you or your shares.
Securities issued or purchased at a discount. A Portfolio's investment
in securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, a Portfolio may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
Foreign currency-denominated securities and related hedging
transactions. A Portfolio's transactions in foreign currencies, foreign
currency-denominated debt securities and certain foreign currency options,
futures contracts, and forward contacts (and similar instruments) may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of a Portfolio's assets at year end consists of the
stock or securities of foreign corporations, the Portfolio may elect to permit
shareholders to claim a credit or deduction on their income tax returns for
their pro rata portion of qualified taxes paid by the Portfolio to foreign
countries in respect of foreign securities the Portfolio has held for at least
the minimum period specified in the Code. In such a case, shareholders will
include in gross income from foreign sources their pro rata shares of such
taxes. A shareholder's ability to claim a foreign tax credit or deduction in
respect of foreign taxes paid by the Portfolio may be subject to certain
limitations imposed by the Code, as a result of which a shareholder may not get
a full credit or deduction for the amount of such taxes. Shareholders who do not
itemize on their federal income tax returns may claim a credit (but no
deduction) for such foreign taxes.
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<PAGE>
Investment by a Portfolio in certain "passive foreign investment
companies" ("PFICs") could subject the Portfolio to a U.S. federal income tax
(including interest charges) on distributions received from the company or on
proceeds received from the disposition of shares in the company, which tax
cannot be eliminated by making distributions to Portfolio shareholders. However,
the Portfolio may elect to treat a passive foreign investment company as a
"qualified electing fund," in which case the Portfolio will be required to
include its share of the company's income and net capital gain annually,
regardless of whether it receives any distribution from the company. The
Portfolio also may make an election to mark the gains (and to a limited extent
losses) in such holdings "to the market" as though it had sold and repurchased
its holdings in those PFICs on the last day of the Portfolio's taxable year.
Such gains and losses are treated as ordinary income and loss. The qualified
electing fund and mark-to-market elections may have the effect of accelerating
the recognition of income (without the receipt of cash) and increase the amount
required to be distributed for the Portfolio to avoid taxation. Making either of
these elections therefore may require a Portfolio to liquidate other investments
(including when it is not advantageous to do so) to meet its distribution
requirement, which also may accelerate the recognition of gain and affect a
Portfolio's total return.
Sale or redemption of shares. The sale, exchange or redemption of
Portfolio shares may give rise to a gain or loss. In general, any gain realized
upon a taxable disposition of shares will be treated as 28% rate gains if the
shares have been held for more than 12 months but not more than 18 months, and
as adjusted net capital gains if the shares been held for more than 18 months.
Otherwise the gain on the sale, exchange or redemption of Portfolio shares will
be treated as short-term capital gain. In general, any loss realized upon a
taxable disposition of shares will be treated as long-term loss if the shares
have been held for more than 12 months, and otherwise as short-term capital
loss. However, if a shareholder sells shares at a loss within six months of
purchase, any loss will be disallowed for federal income tax purposes to the
extent of any exempt- interest dividends received on such shares. In addition,
any loss (not already disallowed as provided in the preceding sentence) realized
upon a taxable disposition of shares held for six months or less will be treated
as long-term, rather than short-term, to the extent of any long-term capital
gain distributions received by the shareholder with respect to the shares. All
or a portion of any loss realized upon a taxable disposition of Portfolio shares
will be disallowed if other Portfolio shares are purchased within 30 days before
or after the disposition. In such a case, the basis of the newly purchased
shares will be adjusted to reflect the disallowed loss.
Shares purchased through tax-qualified plans. Special tax rules apply
to investments through defined contribution plans and other tax-qualified plans.
Shareholders should consult their tax adviser to determine the suitability of
shares of a Portfolio as an investment through such plans and the precise effect
of an investment on their particular tax situation.
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<PAGE>
Backup withholding. A Portfolio generally is required to withhold and
remit to the U.S. Treasury 31% of the taxable dividends and other distributions
(including in redemption of portfolio shares) paid to any individual shareholder
who fails to furnish the Portfolio with a correct taxpayer identification number
(TIN), who has under reported dividends or interest income, or who fails to
certify to the Portfolio that he or she is not subject to such withholding.
Shareholders who fail to furnish their current TIN are subject to a penalty of
$50 for each such failure unless the failure is due to reasonable cause and not
wilful neglect. An individual's taxpayer identification number is his or her
social security number.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to
state, local, foreign and other taxes. Shareholders are urged to consult their
tax advisers regarding specific questions as to federal, state, local or foreign
taxes. The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
For a more complete discussion of shareholders' tax status, including a
discussion of the individual alternative minimum tax and the corporate
alternative minimum tax, see the section of the relevant prospectus in respect
of taxes.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, are the Trust's independent accountants, providing audit services, tax
return review and other tax consulting services.
CUSTODIAN
Investors Fiduciary Trust Company, located at 127 West 10th Street,
Kansas City, Missouri, is the custodian of each Portfolio, except that State
Street Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts serves as
custodian to the Global Portfolio and as the foreign custodian to each of the
other Portfolios in respect of foreign assets. A custodian's responsibilities
include generally safeguarding and controlling a Portfolio's cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on a Portfolio's investments.
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<PAGE>
PERFORMANCE INFORMATION (shown through September 30, 1997)
The table below shows the average annual total return of Class A shares
and Class B shares for the one-, five- and ten-year periods (or for the life of
a class if shorter)**:
<TABLE>
<CAPTION>
Since Inception
Class A Shares 1 Year 5 Years or 10 Years
-------------- ------ ------- ----------------
<S> <C>
Growth Portfolio*............................ 18.56% -- 30.05%
Capital Growth Portfolio..................... 27.04% -- 14.11%
Strategy Portfolio*.......................... 5.51% -- 16.55%
Income and Growth Portfolio.................. 15.09% -- 14.59%
Global Portfolio............................. 14.60% -- 12.76%
Quality Income Portfolio..................... 4.67% -- 4.71%
Municipal Income Portfolio................... 3.71% -- 6.52%
Short-Duration Income Portfolio*............. 6.23% -- 5.49%
<CAPTION>
Since Inception
Class B Shares 1 Year 5 Years or 10 Years
-------------- ------ ------- ----------------
<S> <C>
Growth Portfolio*............................ 20.66% 21.29% 13.92%
Capital Growth Portfolio..................... 29.88% -- 14.48%
Strategy Portfolio*.......................... 7.19% -- 12.42%
Income and Growth Portfolio.................. 17.24% -- 15.13%
Global Portfolio............................. 16.74% -- 13.23%
Quality Income Portfolio..................... 5.29% -- 4.99%
Municipal Income Portfolio................... 4.33% -- 6.80%
Short-Duration Income Portfolio*............. 2.96% -- 5.78%
Balanced Portfolio*.......................... 21.09% -- 19.18%
Government Money Market Portfolio............ -- -- --
</TABLE>
- ------------------
* Prior to May 30, 1995, the Balanced, Growth, Short-Duration Income,
and Strategy Portfolios only offered one class of shares. Total return
information prior to this date is shown under the Class B share table. As a
result, the annual total return information beyond the one-year period shown
above for the Balanced, Growth, Short-Duration Income, and Strategy Portfolios
reflects various sales charges currently not applicable to the Portfolios. The
Balanced, Growth, Short-Duration, and Strategy Portfolios are the successors to
Mentor Balanced Fund, Mentor Growth Fund, Mentor Short-Duration Income Fund, and
Mentor Strategy Fund, respectively, each of which was previously a series of
shares of beneficial interest of Mentor Series Trust. For fiscal 1994, none of
these Funds bore a front-end sales charge, but each of them was subject to a
maximum contingent deferred sales charge of 5%. The Balanced Portfolio currently
offers only one class of shares. Total return information for this Portfolio is
shown under the Class B share table.
**No Institutional Shares were outstanding for these periods.
- - - - - -
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<PAGE>
Total return for the one-, five-, and ten-year periods for each class
of shares of a Portfolio (or for the life of a class, if shorter) is determined
by calculating the actual dollar amount of investment return on a $1,000
investment in shares of that class at the beginning of the period, and then
calculating the annual compounded rate of return which would produce that
amount. Total return for a period of one year is equal to the actual return of
the particular class of a Portfolio during that period. Total return
calculations assume deduction of a classes' maximum front-end or contingent
deferred sales charge, if any, and reinvestment of all distributions at net
asset value on their respective reinvestment dates.
All data are based on past performance and do not predict future
results.
Yield and Tax-Equivalent Yield
The thirty-day yield for Class A shares and Class B shares of certain
of the Portfolios for the period ending September 30, 1997, was as follows*:
Class A Class B
Quality Income Portfolio 7.07% 6.91%
Municipal Income Portfolio 3.66% 3.35%
Short-Duration Income Portfolio 5.35% 5.11%
*No Institutional Shares were outstanding for these periods.
Yield for each class is presented for a specified thirty-day period
(the "base period"). Yield is based on the amount determined by (i) calculating
the aggregate amount of dividends and interest earned by a class of shares of a
Portfolio during the base period less expenses accrued for that period, and (ii)
dividing that amount by the product of (A) the average daily number of shares of
class outstanding during the base period and entitled to receive dividends and
(B) the net asset value per share of the class on the last day of the base
period. The result is annualized on a compounding basis to determine the yield.
For this calculation, interest earned on debt obligations held by a Portfolio is
generally calculated using the yield to maturity (or first expected call date)
of such obligations based on their market values (or, in the case of
receivables-backed securities such as GNMA's, based on costs). Dividends on
equity securities are accrued daily at their stated dividend rates.
To the extent that financial institutions and broker/dealers charge
fees in connection with services provided in conjunction with an investment in a
Portfolio, the performance will be reduced for those shareholders paying those
fees.
The tax-equivalent yield for Class A shares of the Municipal Income
Portfolio for the thirty-day period ending September 30, 1997, was 6.06%. The
tax-equivalent yield for that Portfolio's Class B shares was 5.55% for the same
period. The tax-equivalent yield for all classes of shares of the Municipal
Income Portfolio is calculated similarly to the yield, but is adjusted to
reflect the taxable yield that the Portfolio would have had to earn to equal its
actual yield, assuming a 39.6% tax rate (the maximum effective federal rate for
individuals) and assuming that income is 100% tax-exempt.
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<PAGE>
The Municipal Income Portfolio may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal bonds in
the Portfolio's investment portfolio generally remains free from federal regular
income tax but may be subject to state and local taxes. (Some portion of the
Portfolio's income may be subject to federal alternative minimum tax and state
and local taxes.) Capital gains, if any, are subject to federal, state and local
tax.
At times, a Portfolio's investment adviser or sub-adviser may reduce
its compensation or assume expenses of the Portfolio in order to reduce the
Portfolio's expenses. Any such fee reduction or assumption of expenses would
increase a classes' yield and total return during the period of the fee
reduction or assumption of expenses.
Total return may be presented for other periods or without giving
effect to any contingent deferred sales charge. Any quotation of total return or
yield not reflecting the front-end or contingent deferred sales charge would be
reduced if such sales charges were reflected.
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<PAGE>
EQUIVALENT YIELDS: TAX-EXEMPT VERSUS TAXABLE SECURITIES FOR THE MUNICIPAL
INCOME PORTFOLIO
The table below shows the effect of the tax status of tax-exempt securities on
the effective yield received by their individual holders under the federal
income tax laws currently in effect for 1997. It gives the approximate yield a
taxable security must earn at various income levels to produce after-tax yields
equivalent to those of tax-exempt securities yielding from 2.0% to 10.0%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997
-------
Taxable Income* Marginal Tax-exempt yield
---------------------- federal ----------------------------------------------------------------
income
Joint Single Rate tax** 2% 3% 4% 5% 6% 7% 8% 9% 10%
- --------------------------------------------------------------------------------------------------------------------
Equivalent taxable yield
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
$0 - 41,200 $0 - 24,650 15.00% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
41,201 - 99,600 24,651 - 59,750 28.00% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
99,601 - 151,750 59,751 - 124,650 31.00% 2.90% 4.35% 5.80% 7.25% 8.70% 10.15% 11.59% 13.04% 14.49%
151,751 - 271,050 124,651 - 271,050 36.00% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
over 271,051 over 271,051 39.60% 3.31% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
- ------------------
* This amount represents taxable income as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), after any deduction for
personal exemptions and the greater of the standard deduction or
itemized deductions. Income in the higher brackets may be affected by
the phase-out of personal exemptions and the limitation of itemized
deductions, based on Adjusted Gross Income, under the Code.
** These rates are the marginal federal income tax rates on taxable income
currently in effect for 1997 under the Code.
Of course, there is no assurance that the Municipal Income Portfolio
will achieve any specific tax-exempt yield. While it is expected that the
Portfolio will invest principally in obligations which pay interest exempt from
federal income tax, other income received by the Portfolio may be taxable. The
table does not take into account any state or local taxes payable on Portfolio
distributions.
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MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of the Portfolio's
investment advisers, as indicated.
Mentor Investment Advisors, LLC
Large Capitalization Quality Equity Growth
John G. Davenport, CFA -- Managing Director, Chief Equity Officer
Mr. Davenport has 11 years of investment management experience. He joined the
firm after leading equity research at the investment management firm of Lowe,
Brockenbrough, & Tattersall, Inc. Mr. Davenport graduated from the University
of Richmond and has an MBA from the University of Virginia.
Richard H. Skeppstrom II -- Vice President, Portfolio Manager
Mr. Skeppstrom has six years of investment management experience. Before
joining the firm he was a global portfolio analyst for Saudi International Bank
Portfolio Advisors. Mr. Skeppstrom began his career as a pension and benefit
analyst at Johnson & Higgins of Virginia. He has earned both an undergraduate
degree and an MBA from the University of Virginia.
Christopher W. Rusbuldt, CFA -- Vice President, Portfolio Manager
Mr. Rusbuldt joined the firm in 1995 and has five years' investment experience.
Previously, he was an equity research analyst for Wheat First Butcher Singer. He
began his career as a banker in the corporate group at NationsBank. Mr.
Rusbuldt is a graduate of the University of Virginia.
Richard L. Rice -- Vice President, Portfolio Manager
Mr. Rice has twenty-five years' experience in the securities industry. Before
joining Mentor, he was a partner in Parata Analytics Research. Prior
responsibilities include research for Signet Asset Management, senior research
analyst for Capitoline Investment Services, and positions in research at Atlanta
Corporation and Southwest Banking, Inc. Mr. Rice is a graduate of the University
of Florida and has completed graduate work at Georgia State University.
Steven A. Certo -- Portfolio Manager
Mr. Certo joined the firm in 1997, from the equity research department of Wheat
First Butcher Singer where he was a research analyst following the software
industry. Mr. Certo served five years as an intelligence officer in the US Navy.
His professional background also includes a year as an investment representative
for Edward Jones and Co. He is a graduate of Iona College and is a level III
candidate in the CFA program.
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<PAGE>
Active Fixed-Income
P. Michael Jones, CFA -- Managing Director, Chief Fixed-Income Officer Mr. Jones
has 10 years of investment management experience. He is the manager of Mentor
Short-Duration Income Portfolio and Mentor Quality Income Portfolio, as well as
Mentor Income Fund, a $120 million closed-end bond fund. Mr. Jones is
responsible for the design and implementation of the fixed-income group's
proprietary analytical system. He has worked as an investment manager at Ryland
Capital Management, Alliance Capital Management, and Central Fidelity Bank. Mr.
Jones earned an undergraduate degree from the College of William and Mary, and
is enrolled in the Wharton School of the University of Pennsylvania.
Steven C. Henderson -- Vice President, Portfolio Manager
Mr. Henderson has seven years of investment management experience. He is a
portfolio manager for Mentor Short-Duration Income Portfolio, Mentor Quality
Income Portfolio, and Mentor Income Fund. Prior to joining the firm, Mr.
Henderson was senior portfolio analyst at Ryland Capital Management, Inc. Before
Ryland Capital Management, Mr. Henderson was a financial analyst at Ryland
Mortgage Company. Mr. Henderson is a graduate of the University of Richmond and
received an MBA from George Washington University.
Stephen R. McClelland, CFA -- Vice President, Portfolio Manager
Mr. McClelland has six years of investment management experience. He is
responsible for managing institutional total-return portfolios and corporate
bond portfolios. Prior to joining Mentor, Mr. McClelland was a budget analyst
for three years at Wheat First Butcher Singer. He is a certified public
accountant. Mr. McClelland graduated from Iowa State University and earned an
MBA from Virginia Commonwealth University.
B. Keith Wantling -- Associate Vice President, Sector Specialist
Mr. Wantling has four years of investment experience. He is responsible for
monitoring and evaluating opportunities in the mortgage-backed securities
market. He designs and maintains spread tracking systems, prepayment data bases
and other tools necessary to determine relative value in the mortgage sector.
Prior to assuming his current duties, Mr. Wantling was instrumental in the
construction of the fixed-income department's proprietary analytical system.
E. Marc Cheatham III -- Systems/Research Analyst
Mr. Cheatham has primary responsibility for the fixed-income team's decision
support system. He builds proprietary analytical software based on
specifications provided by portfolio managers and analysts. In addition, he
builds and maintains the extensive historical databases used to monitor economic
and market conditions. Mr. Cheatham holds an undergraduate degree in computer
science from the University of Richmond.
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<PAGE>
Todd C. Kuimjian -- Credit/Research Analyst
Mr. Kuimjian has three years of investment experience. He is responsible for
maintaining credit information on corporate issuers and assisting Mr. McClelland
in evaluating the risk/return characteristics of corporate securities. Prior to
assuming his current duties, Mr. Kuimjian served as an investment
accountant/systems analyst and later as a senior investment administrator
within Mentor's investment services group. He holds an undergraduate
degree from Virginia Polytechnic Institute and is also a CPA.
Small-to-Medium Capitalization Equity Growth
Theodore W. Price, CFA -- Managing Director, Chief Investment Officer
Prior to establishing the small/mid cap. management style, Mr. Price served for
10 years as vice chairman and portfolio manager of the investment management
subsidiary of Wheat First Butcher Singer. In 1985, he established the equity
retail mutual fund, Mentor Growth Portfolio, which today represents nearly $600
million in assets. He is a member of the Richmond Society of Financial Analysts.
Mr. Price earned both BA and MBA degrees from the University of Virginia.
Linda A. Ziglar, CFA -- Managing Director, Portfolio Manager
Ms. Ziglar joined the firm in 1991 after serving seven years as vice president
of Federal Investment Counseling and Federated Research Corporation in
Pittsburgh. While at Federated, Ms. Ziglar shared responsibility fro the
management of more than $300 million in mutual fund and separate account assets.
She is a member of the Richmond Society of Financial Analysts, the Financial
Analysts Federation, and a former officer of the Pittsburgh Society of Financial
Analysts. Ms. Ziglar is a summa cum laude, Phi Beta Kappa graduate of
Randolph-Macon Woman's College. She earned an MBA from the University of
Pittsburgh.
Jeffrey S. Drummond, CFA -- Vice President, Portfolio Manager
Mr. Drummond joined the firm in 1993 after five years in investment strategy at
Wheat First Butcher Singer. While working with Wheat's chief investment
strategist, he shared responsibility for the management of the Strategic Sectors
Portfolio. He is a member of the Richmond Society of Financial Analysts. Mr.
Drummond graduated cum laude from the University of Richmond.
Edward Rick IV -- Research Analyst
Mr. Rick joined the firm in 1994 after his experience with Davenport & Co. of
Virginia, where he focused on research of insider ownership and past earnings
performance of their universe of companies. He also organized research data for
the firm's leading retail analysts. Mr. Rick is a magna cum laude graduate of
the University of Richmond where he served as a business analyst for the
University's investment club, and later as leading manager. He is a candidate in
the Chartered Financial Analyst program.
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<PAGE>
Tactical Asset Allocation
Don R. Hays -- President, Portfolio Manager
Mr. Hays has more than 27 years' experience in securities selection and analysis
of the markets. In addition to managing Mentor Strategy Portfolio, he is
director of investment strategy for Wheat First Butcher Singer, a position he
has held since 1984. He has also been a partner at J.C. Bradford, where he
served as investment strategist for the firm and chairman of the investment
policy committee. He began his investment career as a financial consultant at
J.C. Bradford. Mr. Hays holds an undergraduate degree from Tennessee
Polytechnic University.
Katherine A. Duggan -- Portfolio Analyst
Ms. Duggan joined Wheat First Butcher Singer in 1996 as part of the investment
strategy department. Her responsibilities within the Mentor Strategy Portfolio
team have focused primarily on the trading of the Portfolio and updating
information used in the tactical asset allocation model employed in its
management. Ms. Duggan received her BSBA from the University of Richmond in
1996.
William P. Ryder -- Research Analyst
Mr. Ryder joined Wheat First Butcher Singer in 1991 as a member of its
investment strategy group, working as a research analyst on its growth and
growth and income model portfolios. In 1995 he became part of the team
responsible for managing the Mentor Strategy Portfolio. In that capacity he
focuses primarily on conducting economic analysis, industry group studies, and
asset allocation modeling. Mr. Ryder attended Virginia Commonwealth University
and has five years' investment experience.
Cash Management
R. Preston Nuttall, CFA -- Managing Director, Director of Cash Management
Mr. Nuttall oversees the investment of all short-term fixed-income assets
including five money-market funds and approximately 50 separately-invested
portfolios. Mr. Nuttall has over 30 years' of investment experience. Before
joining the firm, he directed short-term fixed-income management for 15 years at
Capitoline Investment Services, Inc. He is a graduate of the University of
Richmond and received an MBA from the University of Pennsylvania.
Hubert R. White III -- Vice President, Portfolio Manager
Mr. White currently manages four taxable money-market funds, cash positions for
11 other mutual funds. He has eleven years of investment management experience
and specializes in taxable fixed-income. Prior to joining the firm, Mr. White
served for five years as portfolio manager with Capitoline Investment Services.
Formerly, he was at Crestar Bank, where he began his career in 1982. Mr. White
is a graduate of University of Richmond.
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<PAGE>
Kathryn T. Allen -- Vice President, Portfolio Manager
Ms. Allen has 14 years of tax-free management investment experience. At Mentor
she manages the tax-exempt money-market fund, as well as intermediate-maturity
tax-exempt portfolios. Prior to joining the firm, Ms. Allen was portfolio
manager at PNC Institutional Management Corporation. She began her career at
Bradford Securities Operations, Inc. and later joined AIM Management in Houston,
Texas. Ms. Allen is a graduate of the University of Alabama.
Thomas G. Morgan -- Vice President, Senior Credit Analyst
Mr. Morgan joined Mentor after two years with Capitoline Investment Services,
where he served as chief credit officer for five money-market funds, and shared
responsibility for the management of a money-market fund. Prior to his
experience with Capitoline, Mr. Morgan spent 12 years with Crestar Bank as a
financial analyst and senior credit analyst. A graduate of Westminster College,
Mr. Morgan brings 17 years of analytical and investment experience to the firm.
Gregory S. Kaplan -- Associate Vice President, Credit Analyst
Mr. Kaplan brings over six years of analytical and investment experience to
mentor. Prior to joining the firm, Mr. Kaplan served for four years as a credit
specialist analyzing commercial credit for NationsBank. He began his career in
the Investment Services division of Prudential Insurance. Mr. Kaplan is a
graduate of Rutgers University and earned his MBS from the Pamplin College of
Business at Virginia Polytechnic Institute and State University.
Mentor Perpetual Advisors, LLC
Rod Smyth -- Managing Director, Mentor Perpetual Advisors
Mr. Smyth is headquartered in Richmond, Virginia and has 13 years of investment
experience. His previous employers include Baring Securities, Ulster Bank
Investment Managers, Citicorp Scrimgeour Vickers, and Nomura International. He
is a graduate of Dundee University.
Martin Arbib -- Chairman, Perpetual Portfolio Management
Mr. Arbib is chairman and founder of Perpetual, a partner in the Mentor
Perpetual Advisors joint venture, where he currently leads investment
management. A Charter Accountant, he has 22 years' investment management
experience.
Scott McGlashan -- Far East Team Leader
Mr. McGlashan is lead manager of Mentor Perpetual Global Portfolio. He has 19
years' management experience, 13 years specializing in the Far East, and 11
years' tenure at Perpetual. He is a graduate of Yale and Cambridge University.
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<PAGE>
Kathryn Langridge -- Southeast Asia Team Leader
Ms. Langridge shares responsibility with Mr. McGlashan for Far East equity
investments. Before joining Perpetual in 1990, she spent eight years in Hong
Kong with the investment firm of Jardine Fleming. She specializes in equity
investments in the non-Japanese stock markets of the Far East. Ms. Langridge is
a graduate of Cambridge University.
Bob Yerbury -- American Team Leader
Mr. Yerbury has 24 years' investment management experience, with over 21 years'
experience in North American stock markets, and has been part of the Perpetual
team for 13 years. Before joining Perpetual, he was a portfolio manager with
Equity & Law Assurance Company. Mr. Yerbury is a graduate of Cambridge
University.
Stephen Whittaker -- UK Team Leader
Mr. Whittaker joined Perpetual eight years ago and has 16 years' investment
management experience. Prior to joining Perpetual, he was responsible for UK
equity funds for the Save & Prosper Group. He began his fund management career
with Rowe & Pitman after graduation from Manchester University.
Margaret Roddan -- Europe Team Leader
Ms. Roddan has 11 years of investment management experience, three years with
Perpetual. She joined Perpetual from Mercury Asset Management, where she shared
responsibility for management of continental European equity holdings. She began
her career with the National Provident Institution. Ms. Roddan is a graduate of
the Investment Management Program at the London Business School. She studied
finance at City University and is a graduate of Bristol University.
PERFORMANCE COMPARISONS
The performance of a Portfolio depends upon such variables as:
portfolio quality; average portfolio maturity; type of instruments in which the
particular Portfolio is invested; changes in the expenses of a particular
Portfolio and class of shares; and various other factors.
The performance of each Portfolio fluctuates on a daily basis largely
because net earnings and net asset value per share of each class fluctuate
daily. Both net earnings and net asset value per share are factors in the
computation of yield and total return for each class of the Portfolios.
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<PAGE>
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how a Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time to
time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below measure performance based on
their own criteria rather than on the standardized performance measures
described in the preceding section.
Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified period of
time. From time to time, a Portfolio will quote its Lipper ranking in
advertising and sales literature.
Morningstar, Inc. distributes mutual fund ratings twice a month. The
ratings are divided into five groups: highest, above average, neutral, below
average, and lowest. They represent a Portfolio's historical risk/reward ratio
relative to other funds with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3-year, 5-year, and 10-year total
return performance (if available) reflecting deduction of expenses and sales
charges. Performance is adjusted using quantitative techniques to reflect the
risk profile of the Portfolio. The ratings are derived from a purely
quantitative system that does not utilize the subjective criteria customarily
employed by rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return calculated
by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and
10-year performance. Mutual funds are ranked in general categories (e.g.,
international bond, international equity, municipal bond, and maximum capital
gain). Weisenberger rankings do not reflect deduction of sales charges or fees.
A Portfolio's shares also may be compared to the following indices:
Dow Jones Industrial Average ("DJIA") is an unmanaged index
representing share prices of major industrial corporations, public utilities,
and transportation companies. Produced by Dow Jones & Company, it is cited as a
principal indicator of market conditions.
Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of funds
whose portfolios are invested primarily in common stocks. In addition, the
Standard & Poor's listed on its index. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated, in the Standard &
Poor's figures.
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Consumer Price Index is generally considered to be a measure of
inflation.
CDA Mutual Fund Growth Index is a weighted performance average of other
mutual funds with growth of capital objectives.
Lipper Growth Fund Index is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services, Inc.,
an independent mutual fund rating service.
Lehman Brothers Government/Corporate (total) Index is comprised of
approximately 5,000 issues, which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi- federal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine years. Tracked
by Shearson Lehman Brothers Inc., the index calculates total returns for one
month, three month, twelve month and ten year periods and year-to-date.
Lehman Brothers Government Index is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or any
agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.
Russell Growth 1000 (Russell 1000 Index) is a broadly diversified index
consisting of approximately 1,000 common stocks of companies with market values
between $20 million and $300 million that can be used to compare the total
returns of funds whose portfolios are invested primarily in growth common
stocks.
Lehman Brothers Aggregate Bond Index is a total return index measuring
both the capital price changes and income provided by the underlying universe of
securities, weighted by market value outstanding. The Aggregate Bond Index is
comprised of the Shearson Lehman Government Bond Index, Corporate Bond Index,
Mortgage-Backed Securities Index, and Yankee Bond Index. These indices include:
U.S. Treasury obligations, including bonds and notes; U.S. agency obligations,
including those of the Federal Farm Credit Bank, Federal Land Bank, and the Bank
for Cooperatives; foreign obligations; and U.S. investment-grade corporate debt
and mortgage-backed obligations. All corporate debt included in the Aggregate
Bond Index has a minimum S&P rating of BBB, a minimum Moody's rating of Baa, or
a minimum Fitch rating of BBB.
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Salomon Brothers Mortgage-Backed Securities Index-15 Years includes the
average of all 15-year mortgage securities, which include Federal Home Loan
Mortgage Corporation (Freddie Mac), Federal National Mortgage Association
(Fannie Mae), and Government National Mortgage Association (Ginnie Mae).
Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market. Returns
and attributes for the Index are calculated semi-monthly using approximately
29,000 municipal bonds, which are priced by Muller Data Corporation.
From time to time, certain of the Portfolios that invest in foreign
securities may advertise the performance of their classes of shares compared to
similar funds or portfolios using certain indices, reporting services, and
financial publications. These may include the following: Morgan Stanley Capital
International World Index, The Morgan Stanley Capital International EAFE
(Europe, Australia, Far East) index, J.P. Morgan Global Traded Bond Index,
Salomon Brothers World Government Bond Index, and the Standard & Poor's 500
Composite Stock Price Index (S&P 500). A Portfolio also may compare its
performance to the performance of unmanaged stock and bond indices, including
the total returns of foreign government bond markets in various countries.
All index returns are translated into U.S. dollars. The total return
calculation for these unmanaged indices may assume the reinvestment of dividends
and any distributions, if applicable, may include withholding taxes, and
generally do not reflect deductions for administrative and management
costs.
Investors may use such indices or reporting services in addition to the
Trust or an individual Portfolio's prospectus to obtain a more complete view of
a particular Portfolio's performance before investing. Of course, when comparing
a Portfolio's performance to any index, conditions such as composition of the
index and prevailing market conditions should be considered in assessing the
significance of such comparisons. When comparing portfolios using reporting
services, or total return and yield, investors should take into consideration
any relevant differences in portfolios, such as permitted portfolio compositions
and methods used to value portfolio securities and compute net asset value.
Advertisements and other sales literature for a Portfolio may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in a
Portfolio based on monthly reinvestment of dividends over a specified period of
time.
From time to time the Portfolios may advertise their performance, using
charts, graphs, and descriptions, compared to federally insured bank products,
including certificates of deposit and time deposits, and to monthly market funds
using the Lipper Analytical Service money market instruments average.
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Advertisements may quote performance information which does not reflect
the effect of the sales load.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the descriptions
appearing below. From time to time any or all of the Portfolios may distribute
evaluations by or excerpts from these publications to its shareholders or to
potential investors. The following illustrates the types of information provided
by these publications.
Business Week publishes mutual fund rankings in its Investment Figures
of the Week column. The rankings are based on 4-week and 52-week total return
reflecting changes in net asset value and the reinvestment of all distributions.
They do not reflect deduction of any sales charges. Funds are not categorized;
they compete in a large universe of over 2,000 funds. The source for rankings is
data generated by Morningstar, Inc.
Investor's Business Daily publishes mutual fund rankings on a daily
basis. The rankings are depicted as the top 25 funds in a given category. The
categories are based loosely on the type of fund, e.g., growth funds, balanced
funds, U.S. government funds, GNMA funds, growth and income funds, corporate
bond funds, etc. Performance periods for sector equity funds can vary from 4
weeks to 39 weeks; performance periods for other fund groups vary from 1
year to 3 years. Total return performance reflects changes in net asset
value and reinvestment of dividends and capital gains. The rankings are based
strictly on total return. They do not reflect deduction of any sales charges
Performance grades are conferred from A+ to E. An A+ rating means that the
fund has performed within the top 5% of a general universe of over 2000
funds; an A rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical Services. The
Lipper total return data reflects changes in net asset value and reinvestment of
distributions, but does not reflect deduction of any sales charges. The
performance periods vary from short-term intervals (current quarter or
year-to-date, for example) to long-term periods (five-year or ten-year
performance, for example). Barron's classifies the funds using the Lipper mutual
fund categories, such as Capital Appreciation Funds, Growth Funds, U.S.
Government Funds, Equity Income Funds, Global Funds, etc. Occasionally, Barron's
modifies the Lipper information by ranking the funds in asset classes. "Large
funds" may be those with assets in excess of $25 million; "small funds" may be
those with less than $25 million in assets.
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The Wall Street Journal publishes its Mutual Fund Scorecard on a daily
basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper
Analytical Services category. Lipper provides the rankings based on its total
return data reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The Scorecard portrays
4-week, year-to-date, one-year and 5-year performance; however, the ranking is
based on the one-year results. The rankings for any given category appear
approximately once per month.
Fortune magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Funds are placed in stock or
bond fund categories (for example, aggressive growth stock funds, growth stock
funds, small company stock funds, junk bond funds, Treasury bond funds etc.),
with the top-10 stock funds and the top-5 bond funds appearing in the rankings.
The rankings are based on 3-year annualized total return reflecting changes in
net asset value and reinvestment of distributions and not reflecting sales
charges. Performance is adjusted using quantitative techniques to reflect the
risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a
database of funds tracked for performance by Lipper Analytical Services. The
funds are placed in 23 stock or bond fund categories and analyzed for five-year
risk adjusted return. Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions and does not
reflect deduction of any sales charges. Grades are conferred (from A to E): the
top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a
fund must be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
Financial World publishes its monthly Independent Appraisals of Mutual
Funds, a survey of approximately 1000 mutual funds. Funds are categorized as to
type, e.g., balanced funds, corporate bond funds, global bond funds, growth and
income funds, U.S. government bond funds, etc. To compete, funds must be over
one year old, have over $1 million in assets, require a maximum of $10,000
initial investment, and should be available in at least 10 states in the United
States. The funds receive a composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund versus its category,
as well as taking into account its risk, reward to risk, and fees. An A+ rated
fund is one of the best, while a D- rated fund is one of the worst. The source
for Financial World rating is Schabacker investment management in Rockville,
Maryland.
Forbes magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond funds,
municipal bond funds, etc. Data sources include Lipper Analytical Services and
CDA Investment Technologies. The ratings are based strictly on performance at
net asset value over the given cycles. Funds performing in the top 5% receive an
A+ rating; the top 15% receive an A rating; and so on until the bottom 5%
receive an F rating. Each fund exhibits two ratings, one for performance in "up"
markets and another for performance in "down" markets.
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Kiplinger's Personal Finance Magazine (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value and
reinvestment of dividends and capital gains and not reflecting deduction of any
sales charges. Funds are ranked by tenths: a rank of 1 means that a fund was
among the highest 10% in total return for the period; a rank of 10 denotes the
bottom 10%. Funds compete in categories of similar funds -- aggressive growth
funds, growth and income funds, sector funds, corporate bond funds, global
governmental bond funds, mortgage-backed securities funds, etc. Kiplinger's also
provides a risk-adjusted grade in both rising and falling markets. Funds are
graded against others with the same objective. The average weekly total return
over two years is calculated. Performance is adjusted using quantitative
techniques to reflect the risk profile of the fund.
U.S. News and World Report periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co.,
a Boston research firm. Over 2000 funds are tracked and divided into 10 equity,
taxable bond and tax-free bond categories. Funds compete within the 10 groups
and three broad categories. The OPI is a number from 0-100 that measures the
relative performance of funds at least three years old over the last 1, 3, 5 and
10 years and the last six bear markets. Total return reflects changes in net
asset value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges. Results for
the longer periods receive the most weight.
The 100 Best Mutual Funds You Can Buy authored by Gordon K. Williamson.
The author's list of funds is divided into 12 equity and bond fund categories,
and the 100 funds are determined by applying four criteria. First, equity funds
whose current management teams have been in place for less than five years are
eliminated. (The standard for bond funds is three years.) Second, the author
excludes any fund that ranks in the bottom 20 percent of its category's risk
level. Risk is determined by analyzing how many months over the past three years
the fund has underperformed a bank CD or a U.S. Treasury bill. Third, a fund
must have demonstrated strong results for current three-year and five-year
performance. Fourth, the fund must either possess, in Mr. Williamson's judgment,
"excellent" risk-adjusted return or "superior" return with low levels of risk.
Each of the 100 funds is ranked in five categories: total return,
risk/volatility, management, current income and expenses. The rankings follow a
five-point system: zero designates "poor"; one point means "fair"; two points
denote "good"; three points qualify as a "very good"; four points rank as
"superior"; and five points mean "excellent."
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SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation, or instrument entered into or executed
by the Trust or the Trustees. The Agreement and Declaration of Trust provides
for indemnification out of a Portfolio's property for all loss and expense of
any shareholder held personally liable for the obligations of a Portfolio. Thus
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
FINANCIAL STATEMENTS
The Independent Auditors' Report, financial highlights, and financial
statements in respect of the Class A and Class B shares of each Portfolio
included in the Mentor Funds' Annual Report for the fiscal year ended September
30, 1997, and the Independent Auditors' Report, financial highlights, and
financial statements included in the Government Money Market Portfolio's Annual
Report for the fiscal year ended September 30, 1997, each filed electronically
on December 4, 1997 (File No. 811-6550), and the Independent Auditors'
Report, financial highlights, and financial statements included in the Balanced
Portfolio's Annual Report for the fiscal year ended September 30, 1997, filed
electronically on December 19, 1997 (File No. 811-6550), are incorporated by
reference into this Statement of Additional Information.
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