As filed with the Securities and Exchange Commission on May 15, 1998
Registration No.
File No. 811-5159
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __
[ ] Post-Effective Amendment No. __
Mentor Funds
(Exact name of Registrant as Specified in Charter)
901 East Byrd Street
Richmond, Virginia 23219
(Address of Principal Executive Offices)
(804) 782-3648
(Area Code and Telephone Number)
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Paul F. Costello
901 East Byrd Street
Richmond, Virginia 23219
(Name and Address of Agent for Service)
Copies to:
Timothy W. Diggins, Esq.
Ropes & Gray
One International Place
Boston, MA 02110-2624
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Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.
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It is proposed that this filing will become effective on
June 14, 1998 pursuant to Rule 488.
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The Registrant has registered an indefinite number of its shares of
beneficial interest, pursuant to Rule 24f-2 under the Investment Company Act of
1940. In reliance upon Rule 24f-2, no filing fee is being paid at this time. The
Registrant filed a Form 24f-2 on December 24, 1997 for the fiscal year ended
September 30, 1997.
<PAGE>
Mentor Funds
Cross-Reference Sheet
as required by Rule 481(a)
Form N-14 Item Caption in Prospectus/Proxy Statement
1 Cross-Reference Sheet; Outside Front Cover of Prospectus
2 Outside Back Cover Page of Prospectus; Table of Contents
3 Overview of the Merger; Risk Factors
4 Approval or Disapproval of Agreement and Plan of Reorganization
5, 6 Information about the Funds
7 Voting Information
8, 9 Not Applicable
Form N-14 Item Caption in Statement of Additional Information
10 Cover Page
11 Table of Contents
12, 13 Additional Information about the Acquiring and Acquired Funds
14 Financial Statements
Form N-14 Item Caption in Part C
15 Indemnification
16 Exhibits
17 Undertakings
<PAGE>
MENTOR FUNDS
901 East Byrd Street
Richmond, Virginia 23219
June __, 1998
Dear Shareholder:
You are cordially invited to attend a Meeting of shareholders of
Mentor Strategy Portfolio, a series of Mentor Funds, to be held on [day], July
__, 1998, at 9:00 a.m., Richmond time, at the offices of Mentor Funds at 901
East Byrd Street, Richmond, Virginia. At the Meeting, shareholders will be asked
to vote on a proposed merger of the Strategy Portfolio into Mentor Balanced
Portfolio, another series of Mentor Funds. Each share of the Strategy Portfolio
would be exchanged at net asset value for shares of the Balanced Portfolio.
Although the Trustees would like very much to have each shareholder
attend the Meeting, they realize that this is not possible. Whether or not you
plan to be present at the Meeting, your vote is needed. Please complete, sign,
and return the enclosed proxy card promptly. A postage-paid envelope is enclosed
for this purpose.
We look forward to seeing you at the Meeting or receiving your proxy
card so your shares may be voted at the Meeting.
Sincerely yours,
Paul F. Costello
President
SHAREHOLDERS ARE URGED TO SIGN AND RETURN THE ENCLOSED PROXY
CARD IN THE ENCLOSED ENVELOPE SO AS TO BE REPRESENTED AT THE
MEETING.
<PAGE>
MENTOR FUNDS
Strategy Portfolio
NOTICE OF MEETING OF SHAREHOLDERS
July __, 1998
To the Shareholders:
Notice is hereby given that a Meeting of shareholders of Mentor
Strategy Portfolio, a series of Mentor Funds (the "Trust"), will be held at 901
East Byrd Street, Richmond, Virginia, on July __, 1998 at 9:00 a.m., Richmond
time, for the following purposes:
1. To approve or disapprove an Agreement and Plan of Reorganization
providing for the transfer of all of the assets of Mentor Strategy Portfolio to
Mentor Balanced Portfolio (the "Balanced Portfolio"), another series of the
Trust, in exchange for shares of the Balanced Portfolio and the assumption by
the Balanced Portfolio of all of the liabilities of the Strategy Portfolio, and
the distribution of such shares to the shareholders of the Strategy Portfolio in
complete liquidation of the Strategy Portfolio.
2. To consider such other business as may properly come before the
meeting.
Shareholders of record as of the close of business on June ___, 1998
are entitled to notice of, and to vote at, the meeting.
By order of the Board of Trustees
GEOFFREY B. SALE
Secretary
June __, 1998
<PAGE>
MENTOR FUNDS
901 East Byrd Street
Richmond, Virginia 23219
(804) 382-0016
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Prospectus/Proxy Statement
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June _____, 1998
This Prospectus/Proxy Statement relates to the proposed merger (the
"Merger") of the Mentor Strategy Portfolio (the "Strategy Portfolio"), a series
of Mentor Funds (the "Trust"), into Mentor Balanced Portfolio (the "Balanced
Portfolio"), another series of the Trust. The Merger is to be effected through
the transfer of all of the assets of the Strategy Portfolio to the Balanced
Portfolio in exchange for shares of beneficial interest of the Balanced
Portfolio (the "Merger Shares") and the assumption by the Balanced Portfolio of
all of the liabilities of the Strategy Portfolio, followed by the distribution
of the Merger Shares to the shareholders of the Strategy Portfolio in
liquidation of the Strategy Portfolio. As a result of the proposed Merger, each
shareholder of the Strategy Portfolio will receive in exchange for his or her
Strategy Portfolio shares a number of Balanced Portfolio shares equal in value
at the date of the exchange to the aggregate value of the shareholder's Strategy
Portfolio shares.
Because shareholders of the Strategy Portfolio are being asked to
approve a transaction which will result in their receiving shares of the
Balanced Portfolio, this Proxy Statement also serves as a Prospectus for the
Merger Shares of the Balanced Portfolio.
The Balanced Portfolio's investment objective is to seek capital growth
and current income. It pursues this objective by investing in a diversified
portfolio of equity and fixed-income securities which Mentor Investment
Advisors, LLC, the Portfolio's investment adviser, believes will produce both
capital growth and current income.
This Prospectus/Proxy Statement explains concisely what you should know
before investing in the Balanced Portfolio. Please read it and keep it for
future reference.
This Prospectus/Proxy Statement is accompanied by a current
Prospectus of the Trust dated January 17, 1998, as revised March 5, 1998
containing disclosures regarding the Strategy Portfolio's Class A and Class B
Shares, or Class Y Shares, as the case may be, and a prospectus dated May 12,
1998 for the Balanced Portfolio's Class A and Class B, or Class Y Shares, as the
case may be, in each case as any such Prospectus may be amended or supplemented
from time to time (the "Prospectuses"). The
1
<PAGE>
information regarding the Strategy Portfolio and the Balanced Portfolio
contained in the Prospectuses is incorporated into this Prospectus/Proxy
Statement by reference.
The following documents have been filed with the Securities and
Exchange Commission (the "SEC") and are also incorporated into this
Prospectus/Proxy Statement by reference: (i) the financial statements of the
Strategy Portfolio contained in the Annual Report to Shareholders of the Trust
for the year ended September 30, 1997 and the financial statements contained in
the Annual Report to Shareholders of the Balanced Portfolio for the year ended
September 30, 1997 (collectively, the "Annual Reports"); (ii) the current
Statement of Additional Information of the Trust, dated January 17, 1998, as
amended or supplemented from time to time (the "SAI"); and (iii) a Statement of
Additional Information dated June __, 1998 relating to the transaction described
in this Prospectus/Proxy Statement (the "Merger SAI").
For a free copy of any or all of the Prospectuses, Annual Reports, SAI,
or Merger SAI referred to above, please call 1-800-382-0016 or write to the
Trust at P.O. Box 1357, Richmond, Virginia, 23218-1357.
THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
<PAGE>
OVERVIEW OF THE MERGER
Proposed Transaction
The Trustees of the Trust have unanimously approved an Agreement and
Plan of Reorganization between the Strategy Portfolio and the Balanced Portfolio
(the "Agreement"), which is attached to this Prospectus/Proxy statement as
Appendix A. Pursuant to the terms of the Agreement, the Strategy Portfolio will
receive a number of Class A, Class B, and Class Y shares of the Balanced
Portfolio (the "Merger Shares") equal in value to the value of the net assets of
the Strategy Portfolio being transferred to the Balanced Portfolio and
attributable to the Class A, Class B, and Class Y shares, respectively, of the
Strategy Portfolio. Following the transfer, (i) the Strategy Portfolio will
distribute to each of its Class A, Class B, and Class Y shareholders, on a
tax-free basis, a number of full and fractional Class A, Class B, and Class Y
Merger Shares of the Balanced Portfolio equal in value to the aggregate value of
that shareholder's Class A, Class B, and/or Class Y Strategy Portfolio shares,
as the case may be, and (ii) the Strategy Portfolio will be liquidated.
The Class A, Class B, and Class Y shares of the Balanced Portfolio have
substantially identical characteristics to the corresponding classes of shares
of the Strategy Portfolio. Class A shares are sold at net asset value plus an
initial sales charge imposed by the Portfolio, which varies depending on the
size of the purchase. In connection with purchases of Class A shares with a
value of $1 million or more, no sales charge is imposed; however, a contingent
deferred sales charge (a "CDSC") of 1% is imposed on the proceeds of any
redemption of those shares during the one-year period following the date of
purchase. Class A shares are subject to a shareholder servicing fee paid at an
annual rate of 0.25% of the Portfolio's average daily net assets attributable to
its Class A shares.
Class B shares are sold at net asset value, without an initial sales
charge imposed by the Portfolio, but are subject to a CDSC if they are redeemed
within five years after purchase. (The CDSC is imposed at the rate of 4% during
the first year, declining to 1% during the fifth year.) Class B shares are
subject to a distribution fee paid at an annual rate of 0.75% of the average
daily net assets of the Portfolio attributable to its Class B shares. The Class
B shares of each Portfolio are also subject to a shareholder servicing fee paid
at an annual rate of 0.25% of the Portfolio's average daily net assets
attributable to its Class B shares. No CDSC will apply in connection with the
Merger. However, the Class B Merger Shares will be subject to a CDSC to the same
extent as were the Class B Strategy Portfolio shares in respect to which they
are issued. For the purposes of computing the CDSC, if any, payable on
redemption of Class B Merger Shares, the Merger Shares will be treated as having
been purchased as of the same date as the Class B Strategy Portfolio shares in
respect of which the Merger Shares were issued.
Class Y shares are sold at net asset value, without an initial sales
charge imposed by the Portfolio, and are not subject to a CDSC. Class Y shares
are not subject to any shareholder servicing or distribution plan payments.
3
<PAGE>
[The Trustees unanimously recommend that shareholders of the Strategy
Portfolio approve the Merger because it offers shareholders the opportunity to
pursue a substantially similar investment program in a mutual fund with greater
potential for growth in assets through increased sales of shares of the fund,
and concomitant potential for reduced operating expenses over time. See
"Operating Expenses" below and "Approval or Disapproval of Agreement and Plan of
Reorganization -- Background and Reasons for the Proposed Merger."]
Operating Expenses
The following tables summarize a shareholder's maximum transaction
costs from investing in shares of each Portfolio and each Portfolio's operating
expenses based on the expenses incurred by each Portfolio in the fiscal year
ended September 30, 1997. The Annual Portfolio Operating Expenses shown for the
Balanced Portfolio have been restated to give effect on a pro forma combined
basis to the proposed Merger, as if the Merger had occurred as of October 1,
1997. The Examples which follow show the estimated cumulative expenses
attributable to a hypothetical $1,000 investment in the Strategy Portfolio and
the Balanced Portfolio, over specified periods.
4
<PAGE>
<TABLE>
<CAPTION>
Balanced Portfolio*
Shareholder Transaction Expenses Strategy Portfolio Balanced Portfolio (Pro Forma)
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Class A Shares
Maximum Sales Load Imposed
on Purchases 5.75% 5.75% 5.75%
Maximum Sales Load Imposed
on Reinvested None None None
Dividends
Deferred Sales Load None(1) None(1) None(1)
Redemption Fee None None None
Exchange Fee None None None
Class B Shares
Maximum Sales Load Imposed
on Purchases None None None
Maximum Sales Load Imposed
on Reinvested Dividends None None None
Redemption Fee None None None
Exchange Fee None None None
Contingent Deferred Sales Charge
(as a percentage of offering
price)(2) 4.0% in the first year, 4.0% in the first year, 4.0% in the first year,
declining to 1% in the declining to 1% in the declining to 1% in the
fifth year, and fifth year, and fifth year, and
eliminated thereafter(3) eliminated thereafter(3) eliminated thereafter(3)
Class Y Shares
Maximum Sales Load Imposed on Purchases None None None
Maximum Sales Load Imposed on Reinvested
Dividends None None None
Deferred Sales Load None None None
Redemption Fee None None None
Exchange Fee
</TABLE>
(1) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1,000,000 that are redeemed within one year of purchase.
(2) The amount redeemed is computed as the lesser of the current net asset value
of the shares redeemed, and the original purchase price of the shares. See "How
to buy shares - Class B shares."
(3) Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1.00%, if the shares are redeemed
within one year of purchase. See "How to Buy Shares -- the BL Purchase Program."
*Expected expenses after giving effect to the Merger. It is expected that
outstanding Class B shares of the Balanced Portfolio will be converted to Class
Y shares of that Portfolio immediately prior to the Merger. Pro forma expenses
are presented giving effect to the conversion.
<PAGE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Balanced Portfolio*
(as a percentage of net assets) Strategy Portfolio Balanced Portfolio (Pro Forma)
- - --------------------------------------------------------------------------------------------------------------
<S> <C>
Class A Shares
Management Fees 0.85% 0.75% 0.75%
Rule 12b-1 Expenses None None None
Shareholder Service Fee 0.25% 0.25% 0.25%
Other Expenses 0.35% 0.35% 0.39%
----- ----- -----
Total Fund Operating Expenses 1.45% 1.35% 1.39%
Class B Shares
Management Fees 0.85% 0.75% 0.75%
Rule 12b-1 Expenses 0.75% 0.75% 0.75%
Shareholder Service Fee 0.25% 0.25% 0.25%
Other Expenses 0.35% 0.35% 0.39%
----- ----- -----
Total Fund Operating Expenses 2.20% 2.10% 2.14%
Class Y Shares
Management Fees 0.85% 0.75% 0.75%
Rule 12b-1 Expenses None None None
Shareholder Service Fee None None None
Other Expenses 0.35% 0.35% 0.39%
----- ----- -----
Total Fund Operating Expenses 1.20% 1.10% 1.14%
*Expected expenses after giving effect to the Merger. It is expected that
outstanding Class B shares of the Balanced Portfolio will be converted to Class
Y shares of that Portfolio immediately prior to the Merger. Pro forma expenses
are presented giving effect to the conversion.
5
<PAGE>
An investment of $1,000 would incur the following expenses, assuming 5%
annual return and redemption at the end of each period:
</TABLE>
<TABLE>
<CAPTION>
Example 1 Year 3 Years 5 Years 10 Years
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Class A
Strategy Portfolio $71 $101 $132 $221
Balanced Portfolio $70 $ 98 $127 $211
Balanced Portfolio* $71 $ 99 $129 $215
Class B (assuming redemption at end of period) (1)
Strategy Portfolio $62 $ 99 $128 $253
Balanced Portfolio $61 $ 96 $123 $243
Balanced Portfolio* $62 $ 97 $125 $247
Class Y
Strategy Portfolio $12 $ 38 $ 66 $145
Balanced Portfolio $11 $ 35 $ 61 $134
Balanced Portfolio* $12 $ 36 $ 63 $139
</TABLE>
(1) Assumes deduction of applicable CDSC.
* Reflects expected expenses after giving effect to Merger and conversion
of Class B shares of Balanced Portfolio into Class Y shares of that
Portfolio immediately prior to the Merger.
This information is provided to help investors understand the operating
expenses of the Portfolios. The Examples should not be considered
representations of future performance. Actual expenses may be more or less than
those shown. Because of Rule 12b-1 fees paid by the Portfolios, long-term
shareholders may pay more than the economic equivalent of the maximum front-end
sales load permitted under applicable broker-dealer sales rules.
Federal Income Tax Consequences
For federal income tax purposes, no gain or loss will be recognized by
the Strategy Portfolio or its shareholders as a result of the Merger, and the
tax basis of the Merger Shares received by the Strategy Portfolio shareholders
will be the same as the tax basis of each shareholder's Strategy Portfolio
shares. See "Information about the Merger - Federal Income Tax Consequences."
Comparison of Investment Objectives, Policies, and Restrictions
Mentor Investment Advisors, LLC ("Mentor Advisors") currently serves as
investment adviser to both Portfolios. The investment objectives, policies, and
restrictions of the Portfolios and certain differences between them are
summarized below. For a more detailed description of the investment techniques
used by the Portfolios, please see the accompanying Prospectuses, as well as the
SAI and the Merger SAI.
6
<PAGE>
The investment objective of the Balanced Portfolio is to seek capital
growth and current income. The Balanced Portfolio invests in a diversified
portfolio of equity and fixed-income securities which Mentor Advisors believes
will produce both capital growth and current income. The Portfolio may invest in
almost any type of security. The Portfolio's securities will include some
securities selected primarily to provide for growth in value, others selected
for current income, and others for stability of principal. Mentor Advisors
adjusts the proportions of the Portfolio's assets invested in the different
types of securities in order to adjust to changing market conditions. For
example, under certain market conditions, Mentor Advisors may judge that most of
the Portfolio's assets should be invested in equity securities, and that only a
relatively small portion of the Portfolio's assets should be invested in
fixed-income securities. At other times, Mentor Advisors may invest most of the
Portfolio's assets in fixed-income securities, with a corresponding reduction in
the portion of the Portfolio's assets invested in equity securities. Under
normal circumstances, the Portfolio invests at least 25% of its assets in
fixed-income securities and 25%of its assets in equity securities.
The Strategy Portfolio's investment objective is to seek high total
return on its investments. In seeking to achieve this objective, Mentor Advisors
actively allocates the Portfolio's assets among the major asset categories of
equity securities, fixed-income securities, and money market instruments. Total
return consists of current income (including dividends, interest, and, in the
case of discounted instruments, discount accruals) and capital appreciation
(including realized and unrealized capital gains and losses).
The Strategy Portfolio will normally invest some portion of its assets
in each asset category, but may invest without limit in any asset category.
Mentor Advisors actively allocates the Strategy Portfolio's assets
among the equity, debt, and money market sectors of the market. For example,
Mentor Advisors may at times believe that the equity market holds a higher
potential for total return than the debt market and that a relatively large
portion of the Portfolio's assets should be allocated to the equity market
sector. The reverse would be true at times when Mentor Advisors believes that
the potential for total return in the bond market is greater than that in the
equity market. Mentor Advisors might also allocate the Portfolio's investments
to short-term bonds and money market instruments in order to earn current return
and to reduce the potential adverse effect of declines in the bond and equity
markets. After determining the portions of the Portfolio's assets to be invested
in the various market sectors, Mentor Advisors attempts to select the securities
of companies within those sectors offering potential for above-average total
return.
Each of the Portfolios invests in debt securities (and, in the case of
the Balanced Portfolio, preferred stocks) of "investment grade" -- rated at the
time of investment at least Baa3 by Moody's Investors Service, Inc. or BBB- by
Standard & Poor's (or the equivalent by another nationally recognized rating
organization) or, if unrated, determined by Mentor Advisors to be of comparable
quality. The Balanced Portfolio seeks under normal market conditions to maintain
a portfolio of such securities with a dollar-weighted average rating of A or
better. Securities rated Baa or BBB lack outstanding investment characteristics
and have speculative characteristics and are subject to greater credit and
market risks than higher-rated securities. A substantial portion of each
Portfolio's fixed-income investments may be in mortgage-backed securities and
other asset backed securities. See "Risk Factors -- Mortgage- Backed Securities;
Other Asset-Backed Securities," below. The Balanced Portfolio may also engage in
interest rate transactions described under "Risk Factors -- Interest rate
transactions," below, in order to attempt to protect the value of its portfolio
from interest rate fluctuations and to adjust the interest-rate sensitivity of
its portfolio. The Strategy Portfolio does not engage in such transactions.
7
<PAGE>
The Balanced Portfolio may use "leverage" -- that is, it may borrow
money to purchase additional portfolio securities, which involves special risks.
The Strategy Portfolio does not use leverage. See "Risk Factors -- Leverage",
"--Reverse repurchase agreements; forward commitments", and "--Dollar roll
transactions", below.
Each Portfolio may invest without limit in foreign securities.
The Strategy Portfolio is managed by the Tactical Asset Allocation Team
at Mentor Advisors; the Balanced Portfolio is managed by the
Large-Capitalization Equity Growth Team and the Fixed-Income Team at Mentor
Advisors.
Comparison of Distribution Policies and Purchase, Exchange, and Redemption
Procedures
The Portfolios have substantially the same procedures for purchasing
shares. The Portfolios offer three classes of shares, Classes A, B, and Y. See
"Overview of the Merger," above, for a description of those three classes of
shares. Shares of each Portfolio can be exchanged at net asset value for shares
of the same class of certain other funds offered by the Mentor Family of
Portfolios, subject to certain investment minimums.
Redemption procedures for the Portfolios are also substantially
identical. Shares of a Portfolio may be redeemed on any day the New York Stock
Exchange is open at their net asset value next determined after receipt of the
redemption request, less any applicable CDSC. Shares can be redeemed through
your investment dealer, by calling Mentor Funds, or by submitting a written
redemption request directly to Mentor Funds, c/o Boston Financial Data Services,
Inc., 2 Heritage Drive, North Quincy, Massachusettes, 02171.
8
<PAGE>
RISK FACTORS
Certain risks associated with an investment in the Balanced Portfolio
are summarized below. The Balanced Portfolio shares a number of investment
policies with the Strategy Portfolio as described more fully above under
"Overview of Merger -- Comparison of Investment Objectives, Policies, and
Restrictions." Many of the risks of an investment in the Balanced Portfolio are
substantially similar to the risks of an investment in the Strategy Portfolio. A
more detailed description of certain of the risks associated with an investment
in the Balanced Portfolio may be found in the Balanced Portfolio's Prospectus
under the caption "Other Investment Practices and Risk Factors" and in the SAI.
The values of all securities and other instruments held by the Balanced
Portfolio vary from time to time in response to a wide variety of market
factors. Consequently, the net asset value per share of the Balanced Portfolio
will vary so that an investor's shares, when redeemed, may be worth more or less
than the amount invested.
Mortgage-backed securities; other asset-backed securities. The
Portfolio may invest in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including collateralized
mortgage obligations and certain stripped mortgage-backed securities and
"residual" interests therein. Interest and principal payments on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Mortgage-backed securities currently offer yields
higher than those available from many other types of fixed-income securities but
because of their prepayment aspects, their price volatility and yield
characteristics will change based on changes in prepayment rates. As a result,
mortgage-backed securities are less effective than other securities as a means
of "locking in" long-term interest rates. Generally, prepayment rates increase
if interest rates fall and decrease if interest rates rise. For many types of
mortgage-backed securities, this can result in unfavorable changes in price and
yield characteristics in response to changes in interest rates and other market
conditions. For example, as a result of their prepayment aspects, the
Portfolio's mortgage-backed securities have less potential for capital
appreciation during periods of declining interest rates than other fixed-income
securities of comparable maturities, although such obligations may have a
comparable risk of decline in market value during periods of rising interest
rates.
Mortgage-backed securities have yield and maturity characteristics that
are dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Stripped mortgage-backed securities are usually structured with two
classes that receive different portions of the interest and principal
distributions on a pool of mortgage assets. The Portfolio may invest in both the
interest-only -- or "IO" -- class and the principal-only -- or "PO" -- class.
The yield to maturity and price of 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.
<PAGE>
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 mortgages or other assets are likely to occur
under different scenarios. There can be no assurance that Mentor Advisors will
be able to predict the amount of principal or interest to be paid on any
security under different interest rate or market conditions or that its
predictions will be accurate, nor can there be any assurance that the Portfolio
will recover the entire amount of the principal paid by it to purchase any such
securities.
Zero-coupon bonds. The Portfolio may at times invest in so-called
"zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount from
face value and pay interest only at maturity rather than at intervals during the
life of the security. Because zero-coupon bonds do not pay current interest,
their value is subject to greater fluctuation in response to changes in market
interest rates than bonds that pay interest currently. Zero-coupon bonds allow
an issuer to avoid the need to generate cash to meet current interest payments.
Accordingly, such bonds may involve greater credit risks than bonds that pay
interest currently. Even though such bonds do not pay current interest in cash,
the Portfolio is nonetheless required for federal income tax purposes to accrue
interest income on such investments and to distribute such amounts at least
annually to shareholders. Thus, the Portfolio could be required at times to
liquidate other investments in order to satisfy this distribution requirement.
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Premium securities. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although the Portfolio generally amortizes the amount of
any such premium into income, the Portfolio may recognize a capital loss if such
premium securities are called or sold prior to maturity and the call or sale
price is less than the purchase price. Additionally, the Portfolio may elect not
to amortize the premium, in which case it would likely recognize a capital loss
if it holds such securities to maturity and may recognize a larger loss if the
security is sold or called prior to its maturity.
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.
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 "Options" and "Futures Contracts" in the
Statement of Additional Information.
<PAGE>
Index futures and options. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index future"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of the
index between the time when the Portfolio enters into and terminates an index
futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return. Certain provisions
of the Internal Revenue Code may limit the Portfolio's ability to engage in
futures and options transactions.
Risks related to options and futures strategies. Futures and options
transactions involve costs and may result in losses. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities in the Portfolio's portfolio that are the subject of
a hedge. The successful use by the Portfolio of the strategies described above
further depends on Mentor Advisors's ability to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out futures or options positions. Although the Portfolio will enter into options
or futures transactions only if Mentor Advisors believes that a liquid secondary
market exists for such option or futures contract, there can be no assurance
that the Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price. Transactions in options and futures contracts
involve brokerage costs and may require the Portfolio to segregate assets to
cover its outstanding positions. For more information, see the Statement of
Additional Information.
The Portfolio generally expects that its options and futures contract
transactions will be conducted on recognized exchanges. In certain instances,
however, the Portfolio may purchase and sell options in the over-the-counter
markets. The Portfolio's ability to terminate options in the over-the-counter
markets may be more limited than for exchange-traded options and may also
involve the risk that securities dealers participating in such transactions
would be unable to meet their obligations to the Portfolio. The Portfolio will,
however, engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of Mentor
Advisors, the pricing mechanism and liquidity of the over-the-counter markets
are satisfactory and the participants are responsible parties likely to meet
their contractual obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually not
more than one week), which the seller agrees to repurchase at a fixed time and
price, representing the Portfolio's cost plus interest. Under a securities loan,
the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange
or market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement
is a U.S. Government security. These transactions must be fully collateralized
at all times, but involve some risk to the Portfolio if the other party should
default on its obligations and the Portfolio is delayed or prevented from
recovering the collateral. If the other party should become involved in
bankruptcy or insolvency proceedings, it is possible that the Portfolio may
be treated as an unsecured creditor and be required to return the underlying
collateral to the other party's estate.
Foreign securities. The Portfolio may invest in securities principally
traded in foreign markets. Since foreign securities are normally denominated and
traded in foreign currencies, the values of the Portfolio's assets may be
affected favorably or unfavorably by currency exchange rates and exchange
control regulations. There may be less information publicly available about a
foreign company than about a U.S. company, and foreign companies are not
generally subject to accounting, auditing, and financial reporting standards and
practices comparable to those in the United States. The securities of some
foreign companies are less liquid and at times more volatile than securities of
comparable U.S. companies. Foreign brokerage commissions and other fees are also
generally higher than in the United States. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of the Portfolio's assets held abroad)
and expenses not present in the settlement of domestic investments.
<PAGE>
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. In the case of securities issued by
a foreign governmental entity, the issuer may in certain circumstances be unable
or unwilling to meet its obligations on the securities in accordance with their
terms, and the Portfolio may have limited recourse available to it in the event
of default. The laws of some foreign countries may limit the Portfolio's ability
to invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities. The Portfolio may buy or
sell foreign currencies and options and futures contracts on foreign currencies
for hedging purposes in connection with its foreign investments.
The Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization. Investments in
ADRs and GDRs are subject to many of the same risks of investing in foreign
securities generally.
Interest rate transactions. In order to attempt to protect the value of
the Portfolio's portfolio from interest rate fluctuations and to adjust the
interest-rate sensitivity of the Portfolio's portfolio, the Portfolio may enter
into interest rate swaps and other interest rate transactions, such as interest
rate caps, floors, and collars. Interest rate swaps involve the exchange by the
Portfolio with another party of different types of interest rate streams (e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). The purchase of an interest rate cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling the floor
to the extent that a specified index falls below a predetermined interest rate
or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values. The
Portfolio intends to use these interest rate transactions as a hedge and not as
a speculative investment. The Portfolio's ability to engage in certain interest
rate transactions may be limited by tax considerations. The use of interest rate
swaps and other interest rate transactions is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If Mentor Advisors is incorrect
in its forecasts of market values, interest rates, or other applicable factors,
the investment performance of the Portfolio would be less favorable than what it
would have been if this investment technique were not used.
Portfolio Turnover. The length of time a Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of a Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by a Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to a Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The portfolio turnover rates for the
Portfolios during the fiscal year ended September 30, 1997 were 80% for the
Balanced Portfolio and 192% for the Strategy Portfolio.
MEETING OF SHAREHOLDERS
This Prospectus/Proxy Statement is furnished in connection with a
meeting of Strategy Portfolio shareholders to be held on July __, 1998 (the
"Meeting"), and the solicitation of proxies by and on behalf of the Trustees of
the Trust for use at the Meeting. The Meeting is being held to consider the
proposed Merger of the Strategy Portfolio and the Balanced Portfolio by the
transfer of all of the Strategy Portfolio's assets and liabilities to the
Balanced Portfolio. This Prospectus/Proxy Statement and the enclosed form of
proxy are being mailed to shareholders on or about June __, 1998.
The Trustees of the Trust know of no matters other than those set forth
herein to be brought before the Meeting. If, however, any other matters properly
come before the Meeting, it is the Trustees' intention that proxies will be
voted on such matters in accordance with the judgment of the persons named in
the enclosed form of proxy.
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APPROVAL OR DISAPPROVAL OF AGREEMENT AND PLAN OF
REORGANIZATION
Summary of Proposal
The shareholders of the Strategy Portfolio are being asked to approve
the Merger between the Strategy Portfolio and the Balanced Portfolio. The Merger
is proposed to take place pursuant to the Agreement and Plan of Reorganization
between the Strategy Portfolio and the Balanced Portfolio (the "Agreement"), the
form of which is attached to this Prospectus/Proxy Statement as Appendix A.
The Agreement provides, among other things, for the transfer of all of
the assets of the Strategy Portfolio to the Balanced Portfolio in exchange for
(i) the assumption by the Balanced Portfolio of all of the liabilities of the
Strategy Portfolio and (ii) the issuance to the Strategy Portfolio of the Class
A, Class B, and Class Y Merger Shares, the number of which will be calculated
based upon the value of the net assets attributable to the Class A, Class B, and
Class Y shares, respectively, of the Strategy Portfolio acquired by the Balanced
Portfolio and the net asset value per Class A, Class B, and Class Y share of the
Balanced Portfolio, all as more fully described below under "Information About
the Merger."
After receipt of the Merger Shares, the Strategy Portfolio will cause
the Class A, B, and Y Merger Shares to be distributed to its Class A, B, and Y
shareholders, respectively, in complete liquidation of the Strategy Portfolio.
Each shareholder of the Strategy Portfolio will receive a number of full and
fractional Class A, B, or Y Merger Shares equal in value at the date of the
exchange to the aggregate value of the shareholder's Class A, B, or Class Y
Strategy Portfolio shares, as the case may be.
[Trustees' Recommendations. The Trustees of the Trust have voted
unanimously to approve the proposed Merger by and between the Strategy Portfolio
and the Balanced Portfolio and to recommend that shareholders of the Strategy
Portfolio also approve the Merger for such Portfolio.]
Required Shareholder Vote. Approval of the proposed Merger will require
the affirmative vote of a majority of the shares of the Strategy Portfolio cast
on the matter if a quorum is present. Shares of the Strategy Portfolio shall
vote together as a single class.
A shareholder of the Strategy Portfolio objecting to the proposed
Merger is not entitled under either Massachusetts law or the Trust's Declaration
of Trust (the "Declaration of Trust") to demand payment for or an appraisal of
his or her Strategy Portfolio shares if the Merger is consummated over his or
her objection. Shareholders may, however, redeem their shares at any time prior
to the Merger, and if the Merger is consummated, shareholders will still be free
at any time to redeem their Merger Shares, in each case for cash at net asset
value at the time of such
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redemption, less any applicable CDSC, or to exchange their Merger Shares for
shares of the same class of certain other funds offered by the Trust.
Background and Reasons for the Proposed Merger
[The Trustees of the Trust, including the Trustees who are not
"interested persons" of the Trust within the meaning of the Investment Company
Act of 1940, as amended (the "Independent Trustees"), have determined that the
Merger would be in the best interests of each Portfolio, and that the interests
of each Portfolio's shareholders would not be diluted as a result of effecting
the Merger. In evaluating the proposed Merger, the Trustees considered the
investment objectives and policies, the asset size, the fee structures, and the
operating histories of both Portfolios. The Trustees also consulted with Mentor
Advisors concerning the anticipated impact that the Merger would have on the
Portfolios and their shareholders with respect to a variety of factors,
including tax considerations. In addition, the Trustees considered that the
Strategy Portfolio had experienced significant redemptions during the past year,
and that, in light of its investment policies and its investment performance to
date, the Portfolio was unlikely under current market conditions to experience
any substantial increase in its size.
The principal reasons why the Trustees are recommending the Merger are
as follows:
(i) Appropriate investment objectives, diversification, etc. The
investment objective and policies of the Balanced Portfolio are similar to those
of the Strategy Portfolio, and the Trustees believe that an investment in shares
of the Balanced Portfolio will provide shareholders with an investment
opportunity comparable to that currently afforded by the Strategy.
(ii) Potential for lower operating expenses. The Trustees considered
that the Strategy Portfolio had experienced significant redemptions during the
past year, and that, in light of its investment policies and its investment
performance to date, the Portfolio was unlikely under current market conditions
to experience any substantial increase in its size. The Trustees also considered
the judgment of Mentor Advisors that, in light of its investment policies and
performance to date, the Balanced Portfolio could potentially experience
substantial increases in its assets due to increased sales of shares, leading
potentially to lower operating expenses due to economies of scale as the
Portfolio grows. Based on these factors, and the fact that the management fee
paid by the Balanced Portfolio is lower than that paid by the Strategy
Portfolio, the Trustees believed that the Merger offered shareholders of the
Strategy Portfolio the potential for lower operating expenses in the future.
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(iii) Continued investment in a mutual fund without recognition of gain
or loss for federal income tax purposes. The proposed reorganization will permit
the Strategy Portfolio shareholders to keep their investment in an open-end
mutual fund, without recognition of gain or loss for federal income tax
purposes. If the Strategy Portfolio were, for example, to liquidate and
shareholders were to receive the net asset value of their shares in liquidating
distributions, gain or loss would be recognized for federal income tax
purposes.]
Information About the Merger
Agreement and Plan of Reorganization. The proposed Agreement provides
that the Balanced Portfolio will acquire all of the assets of the Strategy
Portfolio in exchange for (i) the assumption by the Balanced Portfolio of all of
the liabilities of the Strategy Portfolio and (ii) the issuance of the Class A,
B, and Y Merger Shares, all as of the Exchange Date (defined in the Agreement to
be July ___, 1998 or such other date as may be agreed upon by the Portfolios).
The following discussion of the Agreement is qualified in its entirety by the
full text of the Agreement, the form of which is attached as Appendix A to this
Prospectus/Proxy Statement.
Under the Agreement, the Strategy Portfolio will sell all of its assets
to the Balanced Portfolio. In exchange, the Balanced Portfolio will assume all
of the liabilities of the Strategy Portfolio and deliver to the Strategy
Portfolio (i) a number of full and fractional Class A Merger Shares having an
aggregate net asset value equal to the value of the assets of the Strategy
Portfolio attributable to its Class A shares, less the value of the liabilities
of the Strategy Portfolio assumed by the Balanced Portfolio attributable to the
Class A shares of the Strategy Portfolio, (ii) a number of full and fractional
Class B Merger Shares having an aggregate net asset value equal to the value of
the assets of the Strategy Portfolio attributable to its Class B shares, less
the value of the liabilities of the Strategy Portfolio assumed by the Balanced
Portfolio attributable to the Class B shares of the Strategy Portfolio, and
(iii) a number of full and fractional Class Y Merger Shares having an aggregate
net asset value equal to the value of the assets of the Strategy Portfolio
attributable to its Class Y shares, less the value of the liabilities of the
Strategy Portfolio assumed by the Balanced Portfolio attributable to the Class Y
shares of the Strategy Portfolio.
Immediately following the Exchange Date, the Strategy Portfolio will
distribute pro rata to its shareholders of record as of the close of business on
the Exchange Date the full and fractional Merger Shares received by the Strategy
Portfolio, with (i) Class A Merger Shares being distributed to holders of Class
A shares of the Strategy Portfolio, (ii) Class B Merger Shares being distributed
to holders of Class B shares of the Strategy Portfolio, and (iii) Class Y Merger
Shares being distributed to holders of Class Y shares of the Strategy Portfolio.
As a result of the proposed transaction, each holder of Class A, Class B, and
Class Y shares of the Strategy Portfolio will receive a number of Class A, Class
B, and Class Y Merger Shares equal in aggregate value at the Exchange Date to
the value of the Class A, Class B, and Class Y shares, respectively, of the
Strategy Portfolio held by the shareholder. This distribution will be
accomplished by the establishment of accounts on the share records of the
Balanced Portfolio in the names of the Strategy Portfolio shareholders, each
account representing the number of full and
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fractional Class A, Class B, or Class Y Merger Shares due such shareholder.
Certificates for Merger Shares will not be issued.
The consummation of the Merger is subject to the conditions set forth
in the Agreement, any of which may be waived. The Agreement may be terminated
and the Merger abandoned at any time, before or after approval by the
shareholders of the Strategy Portfolio, prior to the Exchange Date, by mutual
consent of the Portfolios or, if any condition set forth in the Agreement has
not been fulfilled and has not been waived by the party entitled to its
benefits, by such party. The Agreement provides that the Merger need not be
consummated if the Trustees of the Trust shall have concluded in good faith,
prior to the Exchange Date, that the Merger would not be in the best interests
of the Strategy Portfolio's shareholders.
All legal and accounting fees and expenses, printing, filing, and proxy
solicitation expenses, portfolio transfer taxes (if any), brokerage, and similar
expenses and other fees and expenses incurred in connection with the
consummation of the transactions contemplated by the Agreement will be borne by
the Strategy Portfolio and the Balanced Portfolio in the same proportions as
their respective net asset values bear to each other.
Notwithstanding any of the foregoing, expenses will in any event be
paid by the party directly incurring such expenses if and to the extent that the
payment by any other party of such expenses would result in the disqualification
of the first party as a "regulated investment company" within the meaning of
Section 851 of the Internal Revenue Code of 1986, as amended (the "Code").
Description of the Merger Shares. Full and fractional Merger Shares
will be issued to the Strategy Portfolio's shareholders in accordance with the
procedure under the Agreement as described above. The Merger Shares are Class A,
Class B, and Class Y shares of the Balanced Portfolio, which have
characteristics identical to those of the corresponding class of the Strategy
Portfolio with respect to sales charges, CDSCs, and 12b-1 servicing and
distribution fees. See "Overview of the Merger" above for a description of
those three classes of shares.
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No CDSC will apply in connection with the Merger. However, Merger
Shares will be subject to a CDSC to the same extent as were the Strategy
Portfolio shares in respect to which they are issued. For the purposes of
computing the CDSC, if any, payable on redemption of Merger Shares, the Merger
Shares will be treated as having been purchased as of the same date as the
Strategy Portfolio shares in respect of which the Merger Shares were issued.
Class Y shares are sold at net asset value, without an initial sales
charge imposed by the Portfolio, and are not subject to a CDSC. Class Y shares
are not subject to any shareholder servicing of distribution plan payments.
Investment Advisory and Administrative Arrangements. Mentor Investment
Advisors, LLC serves as investment advisor to both Portfolios. The Balanced
Portfolio pays a management fee to Mentor Advisors at an annual rate of 0.75% of
the Portfolio's average daily net assets; the Strategy Portfolio pays a
management fee to Mentor Advisors at an annual rate of 0.85% of the Portfolio's
average daily net assets. Mentor Investment Group, LLC, located at 901 East Byrd
Street, Richmond, Virginia 23219, provides the Portfolios with certain
administrative personnel and services necessary to operate the Portfolios, such
as bookkeeping and accounting services. Each Portfolio pays a fee to Mentor
Investment Group for these services at an annual rate of 0.10% of the
Portfolio's average daily net assets. During the 1997 fiscal year, the Strategy
Portfolio and the Balanced Portfolio paid management fees to Mentor Advisors of
$2,807,549 and $8,854, respectively, and paid Mentor Investment Group $330,300
and $0, respectively, for services under the Administrative Services Agreement.
Shareholder Servicing Plan. The Trust has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to the Portfolios. Under the
Service Plan, financial institutions will enter into shareholder service
agreements with respect to the Portfolios to provide administrative support
services to their customers who are Portfolio shareholders. In return for
providing these support services, a financial institution may receive payments
at a rate not exceeding 0.25% of the average daily net assets of a Portfolio.
These administrative services may include, but are not limited to, the following
functions: providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer personnel, as necessary
or beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Portfolio; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as may reasonably be requested.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Advisors and/or the Trust, or
affiliates thereof, for providing administrative support services to holders of
the Portfolios' shares. These payments will be made directly by Mentor Advisors
and/or the Trust and will not be made from the assets of the
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Portfolios. During the 1997 fiscal year, the Strategy Portfolio made payments
of $825,750, under the Shareholder Service Plan; the Balanced Portfolio made no
payments under the Plan.
Declaration of Trust. Each of the Merger Shares will be fully paid and
nonassessable by the Balanced Portfolio when issued, will be transferable
without restriction, and will have no preemptive or conversion rights.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the
obligations of the trust. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust and/or the Balanced
Portfolio and requires that notice of such disclaimer be given in each
agreement, undertaking, or obligation entered into or executed by the Trust, the
Balanced Portfolio or the Trust's Trustees. The Declaration of Trust provides
for indemnification out of the Balanced Portfolio property for all loss and
expense of any shareholder held personally liable for the obligations of the
Balanced Portfolio. Thus, the risk of a shareholder's incurring financial loss
from shareholder liability is limited to circumstances in which the Balanced
Portfolio would be unable to meet its obligations. The likelihood of such a
circumstance is considered remote. The shareholders of the Strategy Portfolio
are currently subject to the same risk of shareholder liability under
Massachusetts law and the Declaration of Trust.
The Declaration of Trust provides that Trustees may be removed by
two-thirds vote of the Trustees or by vote of shareholders holding at least
two-thirds of the outstanding shares of the Trust. In addition, the Declaration
of Trust provides that shareholders holding 10% or more of the outstanding
shares of the Trust may call a meeting of shareholders to consider the removal
of any Trustee.
The Declaration of Trust provides that any Portfolio, including the
Strategy Portfolio, may be terminated at any time by the affirmative vote of a
"majority of the outstanding voting securities" of that Portfolio (as the quoted
phrase is defined in the 1940 Act) or by the Trustees by written notice to the
shareholders of that Portfolio. The Declaration of Trust provides that the Trust
may be terminated at any time by the affirmative vote of a "majority of the
outstanding voting securities" of each series of the Trust (as the quoted phrase
is defined in the 1940 Act), voting separately by series, or by the Trustees by
written notice to the shareholders of the Trust.
The Declaration of Trust provides that a number of shares in excess of
50% of the shares entitled to vote at the meeting will constitute a quorum for
that meeting.
Federal income tax consequences. As a condition to the Strategy
Portfolio's obligation to consummate the Merger, the Strategy Portfolio will
receive an opinion from Ropes & Gray, counsel to the Trust, to the effect that,
on the basis of the existing provisions of the Code, current administrative
rules, and court decisions, for federal income tax purposes: (i) under Section
361 of the Code, no gain or loss will be recognized by the Strategy Portfolio as
a result of the
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reorganization; (ii) under Section 354 of the Code, no gain or loss will be
recognized by shareholders of the Strategy Portfolio on the distribution of
Merger Shares to them in exchange for their shares of the Strategy Portfolio;
(iii) under Section 358 of the Code, the tax basis of the Merger Shares that the
Strategy Portfolio's shareholders receive in place of their Strategy Portfolio
shares will be the same as the basis of the Strategy Portfolio shares; (iv)
under Section 1223(1) of the Code, a shareholder's holding period for the Merger
Shares received pursuant to the Agreement will be determined by including the
holding period for the Strategy Portfolio shares exchanged for the Merger
Shares, provided that the shareholder held the Strategy Portfolio shares as a
capital asset; (v) under Section 1032 of the Code, no gain or loss will be
recognized by the Balanced Portfolio as a result of the reorganization; (vi)
under Section 362(b) of the Code, the Balanced Portfolio's tax basis in the
assets that the Balanced Portfolio receives from the Strategy Portfolio will be
the same as the Strategy Portfolio's basis in such assets; and (vii) under
Section 1223(2) of the Code, the Balanced Portfolio's holding period in such
assets will include the Strategy Portfolio's holding period in such assets. The
opinion will be based on certain factual certifications made by officers of the
Trust and the Balanced Portfolio and will also be based on customary
assumptions.
Prior to the Exchange Date, the Strategy Portfolio will declare a
distribution to shareholders which, together with all previous distributions,
will have the effect of distributing to shareholders all of its investment
company taxable income (computed without regard to the deduction for dividends
paid) and net realized capital gains, if any, through the Exchange Date.
Capitalization. The following table shows the capitalizations of the
Balanced Portfolio and the Strategy Portfolio as of March 31, 1998 and of the
Balanced Portfolio on a pro forma basis as of that date, giving effect to the
proposed acquisition by the Balanced Portfolio of the assets and liabilities of
the Strategy Portfolio at net asset value. It is expected that outstanding Class
B shares of the Balanced Portfolio will be converted to Class Y shares of that
Portfolio immediately prior to the Merger. The Pro forma capitalization
information is presented assuming such conversion immediately prior to the date
of the information presented:
March 31, 1998
<TABLE>
<CAPTION>
Balanced Portfolio:
Pro Forma
Balanced Portfolio Strategy Portfolio Combined
<S> <C>
Net Assets
Class A $0 $34,626,465 $34,606,328
Class B $4,254,305 $250,496,326 $250,350,650
Class Y $0 $1,070 $4,252,900
Shares outstanding
Class A 0 2,157,686 1,982,035
Class B 243,683 16,006,748 14,338,525
Class Y 0 67 243,580
Net asset value per share
Class A $0.00 $16.05 $17.46
Class B* $17.46 $15.65 $17.46
Class Y $0.00 $16.05 $17.46
</TABLE>
* Redemption price per share is equal to net asset value less
any applicable CDSC.
INFORMATION ABOUT THE PORTFOLIOS
Other information regarding the Strategy Portfolio and the Balanced
Portfolio, including information with respect to investment objectives,
policies, and restrictions and financial history may be found in the Merger SAI,
the Prospectuses, the SAI, and the Annual Reports, which are available upon
request by calling 1-800-382-0016. To the extent that any information in respect
of the Strategy Portfolio or the Balanced Portfolio found in any such document
is inconsistent with the information contained in this Prospectus/Proxy
Statement, this Prospectus/Proxy Statement should be deemed to supersede such
other document.
Proxy materials, reports, proxy and information statements, and other
information filed by the Trust with respect to the Portfolios can be inspected
and copied at the Public Reference Facilities maintained by the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World
Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates.
VOTING INFORMATION
Record date, quorum, and method of tabulation. Shareholders of record
of the Strategy Portfolio at the close of business on June __, 1998 (the "Record
Date") will be entitled to notice of and to vote at the Meeting or any
adjournment thereof. The holders of greater than 50% of shares of the Strategy
Portfolio outstanding at the close of business on the Record Date present in
person or represented by proxy will constitute a quorum for the Meeting.
Shareholders are entitled to one vote for each share held, with fractional
shares voting proportionally. Only shareholders of the Strategy Portfolio will
vote on the approval or disapproval of the Merger.
Votes cast by proxy or in person at the Meeting will be counted by
persons appointed by the Trust to act as tellers for the Meeting. The tellers
will count the total number of votes cast "for" approval of the proposal for
purposes of determining whether sufficient affirmative votes have been cast. The
tellers will count shares represented by proxies that reflect abstentions or
"broker non-votes" (i.e., shares held by a broker or nominee as to which (i)
instructions have not been received from the beneficial owners or the persons
entitled to vote and (ii) the broker or nominee does not have the discretionary
voting power on a particular matter) as shares that are present and entitled to
vote on the matter for purposes of determining the presence of a quorum.
Abstentions and broker non-votes will have no effect on the proposal to approve
the Merger.
23
<PAGE>
Shares outstanding and beneficial ownership. As of the Record Date, as
shown on the books of the Trust, there were issued and outstanding _____ Class
A, _____ Class B, _____, and _____ Class Y shares of beneficial interest of the
Strategy Portfolio.
As of the Record Date, to the Trust's knowledge, the shareholders who
owned of record or beneficially 5% or more of the outstanding shares of either
Portfolio were as follows:
Percentage of
Portfolio's Shareholder Shares Owned Outstanding Shares
- - ---------------------- ------------ ------------------
Strategy Portfolio
CLASS A SHARES
[to be supplied]
CLASS B SHARES
[to be supplied]
CLASS Y SHARES
[to be supplied]
Balanced Portfolio
CLASS A SHARES
[to be supplied]
CLASS B SHARES
[to be supplied]
CLASS Y SHARES
[to be supplied]
24
<PAGE>
As of the Record Date, the officers and Trustees of the Trust as a
group beneficially owned less than 1% of the outstanding shares of each Class of
the Strategy Portfolio and the Balanced Portfolio.
Solicitation of proxies. The costs of solicitation of proxies will be
borne by the Portfolios in the same proportions as their respective net asset
values bear to each other. Solicitation of proxies by personal interview, mail,
telephone, and telegraph may be made by officers and Trustees of the Trust and
employees of Mentor Advisors and its affiliates.
The Trust may also arrange to have votes recorded by telephone. The
telephone voting procedure is designed to authenticate shareholders' identities,
to allow shareholders to authorize the voting of their shares in accordance with
their instructions, and to confirm that their instructions have been properly
recorded. The Trust has been advised by counsel that these procedures are
consistent with the requirements of applicable law. If these procedures were
subject to a successful legal challenge, such votes would not be counted at the
Meeting. The Trust is unaware of any such challenge at this time. Shareholders
would be called at the phone number the Trust (or a shareholder's financial
institution) has in its records for their accounts, and would be asked for their
Social Security number or other identifying information. The shareholders would
then be given an opportunity to authorize proxies to vote their shares at the
Meeting in accordance with their instructions. To ensure that the shareholders'
instructions have been recorded correctly, they will also receive a confirmation
of their instructions in the mail. A special toll-free number will be available
in case the information contained in the information is incorrect.
Revocation of proxies. Any shareholder giving a proxy has the power to
revoke it at any time before it is exercised by sending or delivering a written
revocation to the Secretary of the Trust (which will be effective when it is
received by the Secretary), by properly executing a later-dated proxy, or by
attending the Meeting, requesting return of such proxy, and voting in person.
All properly executed proxies received in time for the Meeting will be voted in
accordance with the specification made, or, if no specification is made, FOR the
proposal to implement the Merger.
Shareholder proposals at future meetings of shareholders. The
Declaration of Trust does not provide for annual meetings of shareholders and
the Trust does not currently intend to hold such a meeting for shareholders in
1998. Shareholder proposals for inclusion in a proxy statement for any
subsequent meeting of the Strategy Portfolio's shareholders must be received by
the Trust a reasonable period of time prior to any such meeting. If the Merger
is consummated, the Strategy Portfolio's existence will terminate July __, 1998
or shortly thereafter, after which there would be no meetings of the
shareholders of the Strategy Portfolio.
25
<PAGE>
Adjournment. In the event that sufficient votes in favor of the Merger
proposal are not received by the time scheduled for the Meeting, the persons
named as proxies may propose one or more adjournments of the Meeting for a
period of not more than 60 days in the aggregate to permit further solicitation
of proxies. Any adjournment will require the affirmative vote of a plurality of
the votes cast on the question in person or by proxy at the session of the
Meeting to be adjourned. The persons named as proxies will vote in favor of such
adjournment those proxies which they are entitled to vote in favor of the
proposal. They will vote against any such adjournment those proxies which they
have been instructed to vote against the proposal, and they will vote to abstain
any such proxies which they are required to abstain from voting on the proposal.
The costs of any such additional solicitation and of any adjourned session will
be borne by the Portfolios in the same proportions as their respective net asset
values bear to each other.
June __, 1998
26
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan or Reorganization (the "Agreement") is made as
of July ___, 1998 in Richmond, Virginia, by and between Mentor Funds, a
Massachusetts business trust (the "Trust"), on behalf of its Mentor Strategy
Portfolio series (the "Acquired Fund"), and the Trust, on behalf of its Mentor
Balanced Portfolio series (the "Acquiring Fund").
Plan of Reorganization
(a) The Acquired Fund will sell, assign, convey, transfer and deliver
to the Acquiring Fund on the Exchange Date (as defined in Section 6) all of its
properties and assets. In consideration therefor, the Acquiring Fund shall, on
the Exchange Date, assume all of the liabilities of the Acquired Fund existing
at the Valuation Time (as defined in Section 3(c)) and deliver to the Acquired
Fund (i) a number of full and fractional Class A shares of beneficial interest
of the Acquiring Fund (the "Class A Merger Shares") having an aggregate net
asset value equal to the value of the assets of the Acquired Fund attributable
to Class A shares of the Acquired Fund transferred to the Acquiring Fund on such
date less the value of the liabilities of the Acquired Fund attributable to
Class A shares of the Acquired Fund assumed by the Acquiring Fund on that date,
and (ii) a number of full and fractional Class B shares of beneficial interest
of the Acquiring Fund (the "Class B Merger Shares") having an aggregate net
asset value equal to the value of the assets of the Acquired Fund attributable
to Class B shares of the Acquired Fund transferred to the Acquiring Fund on such
date less the value of the liabilities of the Acquired Fund attributable to
Class B shares of the Acquired Fund assumed by the Acquiring Fund on that date,
and (iii) a number of full and fractional Class Y shares of beneficial interest
of the Acquiring Fund (the "Class Y Merger Shares") having an aggregate net
asset value equal to the value of the assets of the Acquired Fund attributable
to Class Y shares of the Acquired Fund transferred to the Acquiring Fund on such
date less the value of the liabilities of the Acquired Fund attributable to
Class Y shares of the Acquired Fund assumed by the Acquiring Fund on that date.
(The Class A, B, and Y Merger Shares are referred to collectively as the "Merger
Shares.") It is intended that the reorganization described in this Plan shall be
a reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").
(b) Upon consummation of the transactions described in paragraph (a) of
this Agreement, the Acquired Fund shall distribute in complete liquidation to
its Class A, Class B, and Class Y shareholders of record as of the Exchange Date
the Class A and Class C Merger Shares of the Acquiring Fund, each such
shareholder being entitled to receive that proportion of such Class A, Class B,
and Class Y Merger Shares which the number of Class A, Class B, and Class Y
shares of beneficial interest of the Acquired Fund held by such shareholder
bears to the number of Class A, Class B, and Class Y shares of the Acquired Fund
outstanding on such date. Certificates representing the Merger Shares will not
be issued. All issued and outstanding shares of the Acquired Fund will
simultaneously be canceled on the books of the Acquired Fund.
A-1
<PAGE>
(c) As promptly as practicable after the liquidation of the Acquired
Fund as aforesaid, the Acquired Fund shall be dissolved pursuant to the
provisions of the Declaration of Trust of the Trust, as amended, and applicable
law, and its legal existence terminated. Any reporting responsibility of the
Acquired Fund is and shall remain the responsibility of the Acquired Fund up to
and including the Exchange Date and, if applicable, such later date on which the
Acquired Fund is liquidated.
Agreement
The Acquiring Fund and the Acquired Fund agree as follows:
3. Representations, Warranties and Agreements of the Acquiring Fund.
The Acquiring Fund represents and warrants to and agrees with the Acquired Fund
that:
a. The Acquiring Fund is a series of shares of the Trust, a
Massachusetts business trust duly established and validly
existing under the laws of The Commonwealth of Massachusetts,
and has power to own all of its properties and assets and to
carry out its obligations under this Agreement. The Trust is
qualified as a foreign association in every jurisdiction where
required, except to the extent that failure so to qualify
would not have a material adverse effect on the Trust. Each
of the Trust and the Acquiring Fund has all necessary federal,
state and local authorizations to carry on its business as now
being conducted and to carry out this Agreement.
b. The Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management
investment company, and such registration has not been revoked
or rescinded and is in full force and effect.
c. Statements of assets and liabilities, statements of
operations, statements of changes in net assets and schedules
of investments (indicating their market values) of the
Acquiring Fund as of and for the year ended September 30, 1997
and as of and for the six months ended March 31, 1998 have
been furnished to the Acquired Fund, such statements and
schedules for the year ended September 30, 1997 having been
audited by KPMG Peat Marwick LLP, independent accountants.
Such statements of assets and liabilities and schedules fairly
present the financial position of the Acquiring Fund as of
their dates and such statements of operations and changes in
net assets fairly reflect the results of its operations and
changes in net assets for the period covered thereby in
conformity with generally accepted accounting principles
applied on a consistent basis.
d. The current prospectuses and statement of additional
information of the Trust, (collectively, the "Prospectus"),
which have previously been furnished to the Acquired Fund, did
not as of their dates and do not contain as of the date
hereof, with respect to the Trust and the Acquiring Fund, any
untrue statements
A-2
<PAGE>
of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading.
e. There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Trust or the
Acquiring Fund, threatened against the Trust or the Acquiring
Fund, which assert liability on the part of the Trust or the
Acquiring Fund. The Acquiring Fund knows of no facts which
might form the basis for the institution of such proceedings
and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body
which materially and adversely affects its business or its
ability to consummate the transactions herein contemplated.
f. The Acquiring Fund has no known liabilities of a material
nature, contingent or otherwise, other than those shown
belonging to it on its statement of assets and liabilities as
of March 31, 1998, those incurred in the ordinary course of
its business as an investment company since March 31, 1998
and those to be assumed pursuant to this Agreement. Prior to
the Exchange Date, the Acquiring Fund will endeavor to
quantify and to reflect on its balance sheet all of its
material known liabilities and will advise the Acquired Fund
of all material liabilities, contingent or otherwise, incurred
by it subsequent to March 31, 1998, whether or not incurred in
the ordinary course of business.
g. As of the Exchange Date, the Acquiring Fund [will have filed]
all federal and other tax returns and reports which, to the
knowledge of the Trust's officers, are required to be filed by
the Acquiring Fund and has paid or will pay all federal and
other taxes shown to be due on said returns or on any
assessments received by the Acquiring Fund. All tax
liabilities of the Acquiring Fund have been adequately
provided for on its books, and no tax deficiency or liability
of the Acquiring Fund has been asserted, and no question with
respect thereto has been raised or is under audit, by the
Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid.
h. No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the
Acquiring Fund of the transactions contemplated by this
Agreement, except such as may be required under the Securities
Act of 1933, as amended (the "1933 Act"), the Securities
Exchange Act of 1934, as amended (the "1934 Act"), the 1940
Act and state securities or blue sky laws (which term as used
herein shall include the laws of the District of Columbia and
of Puerto Rico).
i. The registration statement (the "Registration Statement")
filed with the Securities and Exchange Commission (the
"Commission") by the Trust on Form N-14 on behalf of the
Acquiring Fund and relating to the Merger Shares issuable
hereunder and the proxy statement of the Acquired Fund
relating to the meeting of the Acquired Fund's
A-3
<PAGE>
shareholders referred to in Section 7(a) herein (together with
the documents incorporated therein by reference, the "Acquired
Fund Proxy Statement"), on the effective date of the
Registration Statement, (i) will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act and the rules and regulations thereunder and (ii)
will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and
at the time of the shareholders meeting referred to in Section
7(a) and on the Exchange Date, the prospectuses which are
contained in the Registration Statement, as amended or
supplemented by any amendments or supplements filed with the
Commission by the Trust, and the Acquired Fund Proxy Statement
will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
provided, however, that none of the representations and
warranties in this subsection shall apply to statements in or
omissions from the Registration Statement or the Acquired Fund
Proxy Statement made in reliance upon and in conformity with
information furnished in writing by the Acquired Fund to the
Acquiring Fund or the Trust specifically for use in the
Registration Statement or the Acquired Fund Proxy Statement.
j. There are no material contracts outstanding to which the
Acquiring Fund is a party, other than as are or will be
disclosed in the Prospectus, the Registration Statement or the
Acquired Fund Proxy Statement.
k. To the best of its knowledge, all of the issued and
outstanding shares of beneficial interest of the Acquiring
Fund have been offered for sale and sold in conformity with
all applicable federal and state securities laws (including
any applicable exemptions therefrom), or the Acquiring Fund
has taken any action necessary to remedy any prior failure to
have offered for sale and sold such shares in conformity with
such laws.
l. The Acquiring Fund qualifies and will at all times through the
Exchange Date qualify for taxation as a "regulated investment
company" under Sections 851 and 852 of the Internal Revenue
Code of 1986, as amended (the "Code").
m. The issuance of the Merger Shares pursuant to this Agreement
will be in compliance with all applicable federal and state
securities laws.
n. The Merger Shares to be issued to the Acquired Fund have been
duly authorized and, when issued and delivered pursuant to
this Agreement, will be legally and validly issued and will be
fully paid and non-assessable by the Acquiring Fund, and no
shareholder of the Acquiring Fund will have any preemptive
right of subscription or purchase in respect thereof.
A-4
<PAGE>
o. All issued and outstanding shares of the Acquiring Fund are,
and at the Exchange Date will be, duly authorized, validly
issued, fully paid and non-assessable by the Acquiring Fund.
The Acquiring Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of
the Acquiring Fund shares, nor is there outstanding any
security convertible into any Acquiring Fund shares.
4. Representations, Warranties and Agreements of the Acquired Fund. The
Acquired Fund represents and warrants to and agrees with the Acquiring Fund
that:
a. The Acquired Fund is a series of shares of the Trust, a
Massachusetts business trust duly established and validly
existing under the laws of The Commonwealth of Massachusetts,
and has power to own all of its properties and assets and to
carry out this Agreement. The Trust is qualified as a foreign
association in every jurisdiction where required, except to
the extent that failure to so qualify would not have a
material adverse effect on the Trust. Each of the Trust and
the Acquired Fund has all necessary federal, state and local
authorizations to own all of its properties and assets and to
carry on its business as now being conducted and to carry out
this Agreement.
b. The Trust is registered under the 1940 Act as an open-end
management investment company, and such registration has not
been revoked or rescinded and is in full force and effect.
c. Statements of assets and liabilities, statements of
operations, statements of changes in net assets and schedules
of investments (indicating their market values) of the
Acquired Fund as of and for the fiscal year ended September
30, 1997 and as of and for the six months ended March 31, 1998
have been furnished to the Acquiring Fund, such statements and
schedules for the year ended September 30, 1997 having been
audited by KPMG Peat Marwick LLP, independent accountants.
Such statements of assets and liabilities and schedules fairly
present the financial position of the Acquired Fund as of
their dates and such statements of operations and changes in
net assets fairly reflect the results of its operations and
changes in net assets for the period covered thereby in
conformity with generally accepted accounting principles
applied on a consistent basis.
d. The Prospectus, which has been previously furnished to the
Acquiring Fund, did not contain as of such dates and does not
contain, with respect to the Trust and the Acquired Fund, any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading.
e. There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Trust or the
Acquired Fund, threatened against the Trust or the
A-5
<PAGE>
Acquired Fund, which assert liability on the part of the Trust
or the Acquired Fund. The Acquired Fund knows of no facts
which might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions
of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or
its ability to consummate the transactions herein
contemplated.
f. There are no material contracts outstanding to which the
Acquired Fund is a party, other than as will be disclosed in
the Trust's registration statement on Form N-1A or the
Prospectus.
g. The Acquired Fund has no known liabilities of a material
nature, contingent or otherwise, other than those shown on the
Acquired Fund's statement of assets and liabilities as of
March 31, 1998 referred to above and those incurred in the
ordinary course of its business as an investment company since
such date. Prior to the Exchange Date, the Acquired Fund will
endeavor to quantify and to reflect on its balance sheet all
of its material known liabilities and will advise the
Acquiring Fund of all material liabilities, contingent or
otherwise, incurred by it subsequent to March 31, 1998,
whether or not incurred in the ordinary course of business.
h. As of the Exchange Date, the Acquired Fund will have filed all
federal and other tax returns and reports which, to the
knowledge of the Trust's officers, are required to be filed by
the Acquired Fund and has paid or will pay all federal and
other taxes shown to be due on said returns or on any
assessments received by the Acquired Fund. All tax
liabilities of the Acquired Fund have been adequately provided
for on its books, and no tax deficiency or liability of the
Acquired Fund has been asserted, and no question with respect
thereto has been raised or is under audit, by the Internal
Revenue Service or by any state or local tax authority for
taxes in excess of those already paid.
i. At the Exchange Date, the Trust, on behalf of the Acquired
Fund, will have full right, power and authority to sell,
assign, transfer and deliver the Investments (as defined
below) and any other assets and liabilities of the Acquired
Fund to be transferred to the Acquiring Fund pursuant to this
Agreement. At the Exchange Date, subject only to the delivery
of the Investments and any such other assets and liabilities
as contemplated by this Agreement, the Acquiring Fund will
acquire the Investments and any such other assets and
liabilities subject to no encumbrances, liens or security
interests whatsoever and without any restrictions upon the
transfer thereof. As used in this Agreement, the term
"Investments" shall mean the Acquired Fund's investments shown
on the schedule of its investments as of March 31, 1998
referred to in Section 2(c) hereof, as supplemented with such
changes in the portfolio as the Acquired Fund shall make, and
changes resulting from stock dividends, stock split-ups,
mergers and similar corporate actions through the Exchange
Date.
A-6
<PAGE>
j. No registration under the 1933 Act of any of the Investments
would be required if they were, as of the time of such
transfer, the subject of a public distribution by either of
the Acquiring Fund or the Acquired Fund, except as previously
disclosed to the Acquiring Fund by the Acquired Fund.
k. No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquired Fund of the transactions contemplated by this
Agreement, except such as may be required under the 1933 Act,
1934 Act, the 1940 Act or state securities or blue sky laws.
l. The Registration Statement and the Acquired Fund Proxy
Statement, on the effective date of the Registration
Statement, (i) will comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder and (ii) will not contain
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading; and at the time of
the shareholders meeting referred to in Section 7(a) and on
the Exchange Date, the Acquired Fund Proxy Statement and the
Registration Statement will not contain any untrue statement
of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading; provided, however, that none of the
representations and warranties in this subsection shall apply
to statements in or omissions from the Registration Statement
or the Acquired Fund Proxy Statement made in reliance upon and
in conformity with information furnished in writing by the
Acquiring Fund to the Acquired Fund or the Trust specifically
for use in the Registration Statement or the Acquired Fund
Proxy Statement.
m. The Acquired Fund qualifies and will at all times through the
Exchange Date qualify for taxation as a "regulated investment
company" under Section 851 and 852 of the Code.
n. At the Exchange Date, the Acquired Fund will have sold such of
its assets, if any, as are necessary to assure that, after
giving effect to the acquisition of the assets of the Acquired
Fund pursuant to this Agreement, the Acquiring Fund will
remain a "diversified company" within the meaning of Section
5(b)(1) of the 1940 Act and in compliance with such other
mandatory investment restrictions as are set forth in the
Prospectus, as amended through the Exchange Date.
o. To the best of its knowledge, all of the issued and
outstanding shares of beneficial interest of the Acquired Fund
have been offered for sale and sold in conformity with all
applicable federal and state securities laws (including any
applicable exemptions therefrom), or the Acquired Fund has
taken any action necessary to remedy any prior failure to have
offered for sale and sold such shares in conformity with such
laws.
A-7
<PAGE>
p. All issued and outstanding shares of the Acquired Fund are,
and at the Exchange Date will be, duly authorized, validly
issued, fully paid and nonassessable by the Acquired Fund. The
Acquired Fund does not have outstanding any options, warrants
or other rights to subscribe for or purchase any of the
Acquired Fund shares, nor is there outstanding any security
convertible into any of the Acquired Fund shares.
5. Reorganization.
a. Subject to the requisite approval of the shareholders of the
Acquired Fund and to the other terms and conditions contained
herein (including the Acquired Fund's obligation to distribute
to its shareholders all of its investment company taxable
income and net capital gain as described in Section 8(m)
hereof), the Acquired Fund agrees to sell, assign, convey,
transfer and deliver to the Acquiring Fund, and the Acquiring
Fund agrees to acquire from the Acquired Fund, on the Exchange
Date all of the Investments and all of the cash and other
properties and assets of the Acquired Fund, whether accrued or
contingent (including cash received by the Acquired Fund upon
the liquidation by the Acquired Fund of any investments), in
exchange for that number of shares of beneficial interest of
the Acquiring Fund provided for in Section 4 and the
assumption by the Acquiring Fund of all of the liabilities of
the Acquired Fund, whether accrued or contingent, existing at
the Valuation Time (as defined below) except for the Acquired
Fund's liabilities, if any, arising in connection with this
Agreement. Pursuant to this Agreement, the Acquired Fund
will, as soon as practicable after the Exchange Date,
distribute all of the Merger Shares received by it to the
shareholders of the Acquired Fund in exchange for their Class
A, Class B, and Class Y shares of the Acquired Fund.
b. The Acquired Fund will pay or cause to be paid to the
Acquiring Fund any interest, cash or such dividends, rights
and other payments received by it on or after the Exchange
Date with respect to the Investments and other properties and
assets of the Acquired Fund, whether accrued or contingent,
received by it on or after the Exchange Date. Any such
distribution shall be deemed included in the assets
transferred to the Acquiring Fund at the Exchange Date and
shall not be separately valued unless the securities in
respect of which such distribution is made shall have gone
"ex" such distribution prior to the Valuation Time, in which
case any such distribution which remains unpaid at the
Exchange Date shall be included in the determination of the
value of the assets of the Acquired Fund acquired by the
Acquiring Fund.
c. The Valuation Time shall be 4:00 p.m. Eastern time on the
Exchange Date or such earlier or later day as may be mutually
agreed upon in writing by the parties hereto (the "Valuation
Time").
A-8
<PAGE>
6. Exchange Date: Valuation Time. On the Exchange Date, the Acquiring
Fund will deliver to the Acquired Fund (i) a number of full and fractional Class
A Merger Shares having an aggregate net asset value equal to the value of the
assets of the Acquired Fund attributable to Class A shares of the Acquired Fund
transferred to the Acquiring Fund on such date less the value of the liabilities
of the Acquired Fund attributable to Class A shares of the Acquired Fund assumed
by the Acquiring Fund on that date and (ii) a number of full and fractional
Class B Merger Shares having an aggregate net asset value equal to the value of
the assets of the Acquired Fund attributable to Class B shares of the Acquired
Fund transferred to the Acquiring Fund on such date less the value of the
liabilities of the Acquired Fund attributable to Class B shares of the Acquired
Fund assumed by the Acquiring Fund on that date, (iii) a number of full and
fractional Class Y Merger Shares having an aggregate net asset value equal to
the value of the assets of the Acquired Fund attributable to Class Y shares of
the Acquired Fund transferred to the Acquiring Fund on such date, less the value
of the liabilities of the Acquired Fund attributable to Class Y shares of the
Acquired Fund assumed by the Acquiring Fund on that date, determined as
hereinafter provided in this Section 6.
a. The net asset value of the Merger Shares to be delivered to
the Acquired Fund, the value of the assets attributable to the
Class A, Class B, and Class Y shares of the Acquired Fund, and
the value of the liabilities attributable to the Class A,
Class B, and Class Y shares of the Acquired Fund to be assumed
by the Acquiring Fund, shall in each case be determined as of
the Valuation Time.
b. The net asset value of the Class A, Class B, and Class Y
Merger Shares shall be computed in the manner set forth in the
Prospectus. The value of the assets and liabilities of the
Class A, Class B, and Class Y shares of the Acquired Fund
shall be determined by the Acquiring Fund, in cooperation with
the Acquired Fund, pursuant to procedures which the Acquiring
Fund would use in determining the fair market value of the
Acquiring Fund's assets and liabilities.
c. No adjustments shall be made in the net asset value of either
the Acquired Fund or the Acquiring Fund to take into account
differences in realized and unrealized gains and losses.
d. The Acquired Fund shall distribute the Class A Merger Shares
to the Class A shareholders of the Acquired Fund by furnishing
written instructions to the Acquiring Fund's transfer agent,
which will as soon as practicable set up open accounts for
each Class A Acquired Fund shareholder in accordance with such
written instructions. The Acquired Fund shall distribute the
Class B Merger Shares to the Class B shareholders of the
Acquired Fund by furnishing written instructions to the
Acquiring Fund's transfer agent, which will as soon as
practicable set up open accounts for each Class B Acquired
Fund shareholder in accordance with such written instructions.
The Acquired Fund shall distribute the Class Y Merger Shares
to the Class Y shareholders of the Acquired Fund by furnishing
written instructions to the Acquiring Fund's transfer agent,
which will as soon as practicable set up open accounts for
each Class Y Acquired Fund shareholder in accordance with such
written instructions.
e. The Acquiring Fund shall assume all liabilities of the
Acquired Fund, whether accrued or contingent, in connection
with the acquisition of assets and subsequent dissolution of
the Acquired Fund or otherwise, except for the Acquired Fund's
liabilities, if any, pursuant to this Agreement.
A-9
<PAGE>
7. Expenses, Fees, etc.
a. All legal and accounting fees and expenses, printing, filing
and proxy solicitation expenses, portfolio transfer taxes (if
any), brokerage and similar expenses incurred in connection
with the transactions contemplated by the Agreement will be
borne by the Acquiring Fund and the Acquired Fund in the same
proportions as their respective net asset values bear to each
other, whether or not such transactions are consummated.
Notwithstanding any of the foregoing, expenses will in any
event be paid by the party directly incurring such expenses if
and to the extent that the payment by the other party of such
expenses would result in the disqualification of such party as
a "regulated investment company" within the meaning of Section
851 of the Code.
b. Notwithstanding any other provision of this Agreement, if for
any reason the transactions contemplated by this Agreement are
not consummated, no party shall be liable to the other party
for any damages resulting therefrom, including, without
limitation, consequential damages, except as specifically set
forth above.
8. Exchange Date. Delivery of the assets of the Acquired Fund to be
transferred, assumption of the liabilities of the Acquired Fund to be assumed
and the delivery of the Merger Shares to be issued shall be made at the offices
of Ropes & Gray, One International Place, Boston, Massachusetts 02110 as of
___________, or at such other date agreed to by the Acquiring Fund and the
Acquired Fund, the date and time upon which such delivery is to take place being
referred to herein as the "Exchange Date."
9. Meeting of Shareholders; Dissolution.
a. The Trust, on behalf of the Acquired Fund, agrees to call a
meeting of the Acquired Fund's shareholders as soon as is
practicable after the effective date of the Registration
Statement for the purpose of considering the sale of all of
its assets to and the assumption of all of its liabilities by
the Acquiring Fund as herein provided, adopting this
Agreement, and authorizing the liquidation and dissolution of
the Acquired Fund.
b. The Acquired Fund agrees that the liquidation and dissolution
of the Acquired Fund will be effected in the manner provided
in the Trust's Declaration of Trust in accordance with
applicable law and that on and after the Exchange Date, the
Acquired Fund shall not conduct any business except in
connection with its liquidation and dissolution.
c. The Acquiring Fund has, in consultation with the Acquired Fund
and based in part on information furnished by the Acquired
Fund, filed the Registration Statement with the Commission.
The Acquired Fund and the Acquiring Fund will cooperate with
each
A-10
<PAGE>
other and will furnish to each other the information relating
to itself required by the 1933 Act, the 1934 Act and the 1940
Act and the rules and regulations thereunder to be set forth
in the Registration Statement.
10. Conditions to the Acquiring Fund's Obligations. The obligations of
the Acquiring Fund hereunder shall be subject to the following conditions:
a. That this Agreement shall have been adopted and the
transactions contemplated hereby shall have been approved by
the requisite votes of the holders of the outstanding shares
of beneficial interest of the Acquired Fund entitled to vote.
b. That the Acquired Fund shall have furnished to the Acquiring
Fund a statement of the Acquired Fund's assets and
liabilities, with values determined as provided in Section 4
of this Agreement, together with a list of Investments with
their respective tax costs, all as of the Valuation Time,
certified on the Acquired Fund's behalf by the Trust's
President (or any Vice President) and Treasurer (or any
Assistant Treasurer), and a certificate of both such officers,
dated the Exchange Date, that there has been no material
adverse change in the financial position of the Acquired Fund
since March 31, 1998, other than changes in the Investments
and other assets of the Acquired Fund, or changes due to
dividends paid or losses from operations.
c. That the Acquired Fund shall have furnished to the Acquiring
Fund a statement, dated the Exchange Date, signed by the
Trust's President (or any Vice President) and Treasurer (or
any Assistant Treasurer) certifying that as of the Valuation
Time and as of the Exchange Date all representations and
warranties of the Acquired Fund made in this Agreement are
true and correct in all material respects as if made at and as
of such dates and the Acquired Fund has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such dates.
d. That the Acquired Fund shall have delivered to the Acquiring
Fund a letter from KPMG Peat Marwick LLP dated the Exchange
Date reporting on the results of applying certain procedures
agreed upon by the Acquiring Fund and described in such
letter, which limited procedures relate to schedules of the
tax provisions and qualifying tests for regulated investment
companies as prepared for the fiscal year ended September 30,
1997 and the period from September 30, 1997 to the Exchange
Date (the latter period being based on unaudited data) and
that, in the course of such procedures, nothing came to their
attention which caused them to believe that the Acquired Fund
(i) would not qualify as a regulated investment company for
federal, state, or local income tax purposes or (ii) would owe
any federal, state or local income tax or excise tax, for the
tax year ended September 30, 1997 and for the period from
September 30, 1997 to the Exchange Date.
A-11
<PAGE>
e. That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
f. That the Acquiring Fund shall have received an opinion of
Ropes & Gray dated the Exchange Date, to the effect that (i)
this Agreement has been duly authorized, executed and
delivered by the Trust on behalf of the Acquired Fund and,
assuming that the Registration Statement, the Prospectus and
the Acquired Fund Proxy Statement comply with the 1933 Act,
the 1934 Act and the 1940 Act and assuming due authorization,
execution and delivery of this Agreement by the Trust on
behalf of the Acquiring Fund, is a valid and binding
obligation of the Trust and the Acquired Fund; (ii) the Trust,
on behalf of the Acquired Fund, has power to sell, assign,
convey, transfer and deliver the assets contemplated hereby
and, upon consummation of the transactions contemplated hereby
in accordance with the terms of this Agreement, the Acquired
Fund will have duly sold, assigned, conveyed, transferred and
delivered such assets to the Acquiring Fund; (iii) the
execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not,
violate the Trust's Declaration of Trust or By-Laws or any
provision of any agreement know to such counsel to which the
Trust or the Acquired Fund is a party or by which it is bound;
and (iv) no consent, approval, authorization or order of any
court or governmental authority is required for the
consummation by the Trust on behalf of the Acquired Fund of
the transactions contemplated hereby, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and
such as may be required under state securities or blue sky
laws.
g. That the Acquiring Fund shall have received an opinion of
Ropes & Gray (which opinion would be based upon certain
factual representations and subject to certain qualifications)
with respect to the matters specified in Section 11(g) of this
Agreement.
h. That the Acquiring Fund shall have received an opinion of
Ropes & Gray dated the Exchange Date, (which opinion would be
based upon certain factual representations and subject to
certain qualifications), to the effect that, on the basis of
the existing provisions of the Code, current administrative
rules, and court decisions, for federal income tax purposes
(i) no gain or loss will be recognized by the Acquiring Fund
upon receipt of the Investments transferred to the Acquiring
Fund pursuant to this Agreement in exchange for the Merger
Shares; (ii) the basis to the Acquiring Fund of the
Investments will be the same as the basis of the Investments
in the hands of the Acquired Fund immediately prior to such
exchange; and (iii) the Acquiring Fund's holding periods with
respect to the Investments will include the respective periods
for which the Investments were held by the Acquired Fund.
i. That the assets of the Acquired Fund to be acquired by the
Acquiring Fund will include no assets which the Acquiring
Fund, by reason of charter limitations or of
A-12
<PAGE>
investment restrictions disclosed in the Registration
Statement in effect on the Exchange Date, may not properly
acquire.
j. That the Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge
of the Trust or the Acquiring Fund, threatened by the
Commission.
k. That the Trust shall have received from the Commission and any
relevant state securities administrator such order or orders
as are reasonably necessary or desirable under the 1933 Act,
the 1934 Act, the 1940 Act, and any applicable state
securities or blue sky laws in connection with the
transactions contemplated hereby, and that all such orders
shall be in full force and effect.
l. That all actions taken by the Trust on behalf of the Acquired
Fund in connection with the transactions contemplated by this
Agreement and all documents incidental thereto shall be
satisfactory in form and substance to the Acquiring Fund and
its counsel.
m. That, prior to the Exchange Date, the Acquired Fund shall have
declared a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing
to the shareholders of the Acquired Fund (i) all of the excess
of (x) the Acquired Fund's investment income excludable from
gross income under Section 103(a) of the Code over (y) the
Acquired Fund's deductions disallowed under Sections 265 and
171(a)(2) of the Code, (ii) all of the Acquired Fund's
investment company taxable income (as defined in Section 852
of the Code) for its taxable years ending on or after
September 30, 1997 and on or prior to the Exchange Date
(computed in each case without regard to any deduction for
dividends paid) in each case for its taxable years ending on
or after September 30, 1997 and on or prior to the Exchange
Date, and (iii) all of the Acquired Fund's net capital gain
realized (after reduction for any capital loss carryover), in
each case for the taxable year ending on September 30, 1997
and all subsequent taxable periods ending on or prior to the
Exchange Date.
n. That the Acquired Fund shall have furnished to the Acquiring
Fund a certificate, signed by the President (or any Vice
President) and the Treasurer (or any assistant Treasurer) of
the Trust, as to the tax cost to the Acquired Fund of the
securities delivered to the Acquiring Fund pursuant to this
Agreement, together with any such other evidence as to such
tax cost as the Acquiring Fund may reasonably request.
o. That the Acquired Fund's custodian shall have delivered to the
Acquiring Fund a certificate identifying all of the assets of
the Acquired Fund held or maintained by such custodian as of
the Valuation Time.
p. That the Acquired Fund's transfer agent shall have provided to
the Acquiring Fund (i) the originals or true copies of all of
the records of the Acquired Fund in the
A-13
<PAGE>
possession of such transfer agent as of the Exchange Date,
(ii) a certificate setting forth the number of shares of the
Acquired Fund outstanding as of the Valuation Time and (iii)
the name and address of each holder of record of any shares
and the number of shares held of record by each such
shareholder.
q. That all of the issued and outstanding shares of beneficial
interest of the Acquired Fund shall have been offered for sale
and sold in conformity with all applicable state securities or
blue sky laws (including any applicable exemptions therefrom)
and, to the extent that any audit of the records of the
Acquired Fund or its transfer agent by the Acquiring Fund or
its agents shall have revealed otherwise, either (i) the
Acquired Fund shall have taken all actions that in the opinion
of the Acquiring Fund or its counsel are necessary to remedy
any prior failure on the part of the Acquired Fund to have
offered for sale and sold such shares in conformity with such
laws or (ii) the Acquired Fund shall have furnished (or caused
to be furnished) surety, or deposited (or caused to be
deposited) assets in escrow, for the benefit of the Acquiring
Fund in amounts sufficient and upon terms satisfactory, in the
opinion of the Acquiring Fund or its counsel, to indemnify the
Acquiring Fund against any expense, loss, claim, damage or
liability whatsoever that may be asserted or threatened by
reason of such failure on the part of the Acquired Fund to
have offered and sold such shares in conformity with such
laws.
r. That the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated as
of the Exchange Date satisfactory in form and substance to the
Acquiring Fund reporting on the results of applying limited
procedures agreed upon by the Acquiring Fund and described in
such letter (but not an examination in accordance with
generally accepted auditing standards), which limited
procedures relate as of the Valuation Time to the procedure
customarily utilized by the Acquired Fund in valuing its
assets and issuing its shares.
11. Conditions to the Acquired Fund's Obligations. The obligations of
the Acquired Fund hereunder shall be subject to the following conditions:
a. That this Agreement shall have been adopted and the
transactions contemplated hereby shall have been approved by
the requisite votes of the holders of the outstanding shares
of beneficial interest of the Acquired Fund entitled to vote.
b. That the Acquiring Fund shall have furnished to the Acquired
Fund a statement of the Acquiring Fund's net assets, together
with a list of portfolio holdings with values determined as
provided in Section 4, all as of the Valuation Time, certified
on the Acquiring Fund's behalf by Mentor Funds' President (or
any Vice President) and Treasurer (or any Assistant
Treasurer), and a certificate of both such officers, dated the
Exchange Date, to the effect that as of the Valuation Time and
as of the Exchange Date there has been no material adverse
change in the financial position of the
A-14
<PAGE>
Acquiring Fund since March 31, 1998, other than changes in its
portfolio securities since that date, changes in the market
value of the portfolio securities, changes due to net
redemptions, dividends paid or losses from operations.
c. That the Trust, on behalf of the Acquiring Fund, shall have
executed and delivered to the Acquired Fund an Assumption of
Liabilities dated as of the Exchange Date pursuant to which
the Acquiring Fund will assume all of the liabilities of the
Acquired Fund existing at the Valuation Time in connection
with the transactions contemplated by this Agreement, other
than liabilities arising pursuant to this Agreement.
d. That the Acquiring Fund shall have furnished to the Acquired
Fund a statement, dated the Exchange Date, signed by the
Trust's President (or any Vice President) and Treasurer (or
any Assistant Treasurer) certifying that as of the Valuation
Time and as of the Exchange Date all representations and
warranties of the Acquiring Fund made in this Agreement are
true and correct in all material respects as if made at and as
of such dates, and that the Acquiring Fund has complied with
all of the agreements and satisfied all of the conditions on
its part to be performed or satisfied at or prior to each of
such dates; and that Mentor Funds shall have furnished to the
Acquired Fund a statement, dated the Exchange Date, signed by
an officer of Mentor Funds certifying that as of the Valuation
Time and as of the Exchange Date, to the best of Mentor Funds'
knowledge, after due inquiry, all representations and
warranties of the Acquiring Fund made in this Agreement are
true and correct in all material respects as if made at and as
of such date.
e. That there shall not be any material litigation pending or
threatened with respect to the matters contemplated by this
Agreement.
f. That the Acquired Fund shall have received an opinion of Ropes
& Gray dated the Exchange Date, to the effect that (i) the
Merger Shares to be delivered to the Acquired Fund as provided
for by this Agreement are duly authorized and upon such
delivery will be validly issued and will be fully paid and
non-assessable by the Trust and the Acquiring Fund and no
shareholder of the Acquiring Fund has any preemptive right to
subscription or purchase in respect thereof; (ii) this
Agreement has been duly authorized, executed and delivered by
the Trust on behalf of the Acquiring Fund and, assuming that
the Prospectus, the Registration Statement and the Acquired
Fund Proxy Statement comply with the 1933 Act, the 1934 Act
and the 1940 Act and assuming due authorization, execution and
delivery of this Agreement by the Trust on behalf of the
Acquired Fund, is a valid and binding obligation of the Trust
and the Acquiring Fund; (iii) the execution and delivery of
this Agreement did not, and the consummation of the
transactions contemplated hereby will not, violate the Trust's
Declaration of Trust or By-Laws, or any provision of any
agreement known to such counsel to which the Trust or the
Acquiring Fund is a party or by which it is bound; (iv) no
consent, approval, authorization or order of any court or
governmental
A-15
<PAGE>
authority is required for the consummation by the Trust on
behalf of the Acquiring Fund of the transactions contemplated
herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and such as may be required
under state securities or blue sky laws; and (v) the
Registration Statement has become effective under the 1933
Act, and to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act.
g. That the Acquired Fund shall have received an opinion of Ropes
& Gray dated the Exchange date (which opinion would be based
upon certain factual representations and subject to certain
qualifications), to the effect that, on the basis of the
existing provisions of the Code, current administrative rules,
and court decisions, for federal income tax purposes: (i) no
gain or loss will be recognized by the Acquired Fund as a
result of the reorganization; (ii) no gain or loss will be
recognized by shareholders of the Acquired Fund on the
distribution of Merger Shares to them in exchange for their
shares of the Acquired Fund; (iii) the tax basis of the Merger
Shares that the Acquired Fund's shareholders receive in place
of their Acquired Fund shares will be the same as the basis of
the Acquired Fund shares; and (iv) a shareholder's holding
period for the Merger Shares received pursuant to the
Agreement will be determined by including the holding period
for the Acquired Fund shares exchanged for the Merger Shares,
provided that the shareholder held the Acquired Fund shares as
a capital asset.
h. That all actions taken by the Trust on behalf of the Acquiring
Fund in connection with the transactions contemplated by this
Agreement and all documents incidental thereto shall be
satisfactory in form and substance to the Acquired Fund and
its counsel.
i. That the Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge
of the Trust or the Acquiring Fund, threatened by the
Commission.
j. That the Trust shall have received from the Commission and any
relevant state securities administrator such order or orders
as are reasonably necessary or desirable under the 1933 Act,
the 1934 Act, the 1940 Act, and any applicable state
securities or blue sky laws in connection with the
transactions contemplated hereby, and that all such orders
shall be in full force and effect.
k. The Board of Trustees of the Trust shall not have concluded in
the good faith exercise of its fiduciary duty that the
transactions contemplated hereby would not be in the best
interests of the shareholders of the Acquired Fund.
12. Indemnification.
A-16
<PAGE>
a. The Acquired Fund will indemnify and hold harmless, out of the
assets of the Acquired Fund (which shall be deemed to include
the assets of the Acquiring Fund represented by the Merger
Shares following the Exchange Date) but no other assets, the
trustees and officers of the Trust (for purposes of this
subparagraph, the "Indemnified Parties") against any and all
expenses, losses, claims, damages and liabilities at any time
imposed upon or reasonably incurred by any one or more of the
Indemnified Parties in connection with, arising out of, or
resulting from any claim, action, suit or proceeding in which
any one or more of the Indemnified Parties may be involved or
with which any one or more of the Indemnified Parties may be
threatened by reason of any untrue statement or alleged untrue
statement of a material fact relating to the Trust or the
Acquired Fund contained in the Registration Statement, the
Prospectus, the Acquired Fund Proxy Statement or any amendment
or supplement to any of the foregoing, or arising out of or
based upon the omission or alleged omission to state in any of
the foregoing a material fact relating to the Trust or the
Acquired Fund required to be stated therein or necessary to
make the statements relating to the Trust or the Acquired Fund
therein not misleading, including, without limitation, any
amounts paid by any one or more of the Indemnified Parties in
a reasonable compromise or settlement of any such claim,
action, suit or proceeding, or threatened claim, action, suit
or proceeding made with the consent of the Trust or the
Acquired Fund. The Indemnified Parties will notify the Trust
and the Acquired Fund in writing within ten days after the
receipt by any one or more of the Indemnified Parties of any
notice of legal process or any suit brought against or claim
made against such Indemnified Party as to any matters covered
by this Section 12(a). The Acquired Fund shall be entitled to
participate at its own expense in the defense of any claim,
action, suit or proceeding covered by this Section 12(a), or,
if it so elects, to assume at its expense by counsel
satisfactory to the Indemnified Parties the defense of any
such claim, action, suit or proceeding, and if the Acquired
Fund elects to assume such defense, the Indemnified Parties
shall be entitled to participate in the defense of any such
claim, action, suit or proceeding at their expense. The
Acquired Fund's obligation under Section 12(a) to indemnify
and hold harmless the Indemnified Parties shall constitute a
guarantee of payment so that the Acquired Fund will pay in the
first instance any expenses, losses, claims, damages and
liabilities required to be paid by it under this Section 12(a)
without the necessity of the Indemnified Parties' first paying
the same.
b. The Acquiring Fund will indemnify and hold harmless, out of
the assets of the Acquiring Fund but no other assets, the
trustees and officers of the Trust (for purposes of this
subparagraph, the "Indemnified Parties") against any and all
expenses, losses, claims, damages and liabilities at any time
imposed upon or reasonably incurred by any one or more of the
Indemnified Parties in connection with, arising out of, or
resulting from any claim, action, suit or proceeding in which
any one or more of the Indemnified Parties may be involved or
with which any one or more of the
A-17
<PAGE>
Indemnified Parties may be threatened by reason of any untrue
statement or alleged untrue statement of a material fact
relating to the Acquiring Fund contained in the Registration
Statement, the Prospectus, the Acquired Fund Proxy Statement
or any amendment or supplement to any of the foregoing, or
arising out of or based upon, the omission or alleged omission
to state in any of the foregoing a material fact relating to
the Trust or the Acquiring Fund required to be stated therein
or necessary to make the statements relating to the Trust or
the Acquiring Fund therein not misleading, including, without
limitation, any amounts paid by any one or more of the
Indemnified Parties in a reasonable compromise or settlement
of any such claim, action, suit or proceeding, or threatened
claim, action, suit or proceeding, made with the consent of
the Trust or the Acquiring Fund. The Indemnified Parties will
notify the Trust and the Acquiring Fund in writing within ten
days after the receipt by any one or more of the Indemnified
Parties of any notice of legal process or any suit brought
against or claim made against such Indemnified Party as to any
matters covered by this Section 12(b). The Acquiring Fund
shall be entitled to participate at its own expense in the
defense of any claim, action, suit or proceeding covered by
this Section 12(b), or, if it so elects, to assume at its
expense by counsel satisfactory to the Indemnified Parties the
defense of any such claim, action, suit or proceeding, and, if
the Acquiring Fund elects to assume such defense, the
Indemnified Parties shall be entitled to participate in the
defense of any such claim, action, suit or proceeding at their
own expense. The Acquiring Fund's obligation under this
Section 12(b) to indemnify and hold harmless the Indemnified
Parties shall constitute a guarantee of payment so that the
Acquiring Fund will pay in the first instance any expenses,
losses, claims, damages and liabilities required to be paid by
it under this Section 12(b) without the necessity of the
Indemnified Parties' first paying the same.
13. No Broker, etc. Each of the Acquired Fund and the Acquiring Fund
represents that there is no person who has dealt with it or the Trust who by
reason of such dealings is entitled to any broker's or finder's or other similar
fee or commission arising out of the transactions contemplated by this
Agreement.
14. Termination. The Acquired Fund and the Acquiring Fund may, by
mutual consent of the trustees of the Trust on behalf of each fund, terminate
this Agreement, and the Acquired Fund or the Acquiring Fund, after consultation
with counsel and by consent of their respective trustees or an officer
authorized by such trustees, may waive any condition to their respective
obligations hereunder. If the transactions contemplated by this Agreement have
not been substantially completed by July 1, 1998, this Agreement shall
automatically terminate on that date unless a later date is agreed to by the
Acquired Fund and the Acquiring Fund.
15. Rule 145. Pursuant to Rule 145 under the 1933 Act, the Acquiring
Fund will, in connection with the issuance of any Merger Shares to any person
who at the time of the transaction contemplated hereby is deemed to be an
affiliate of a party to the transaction pursuant to Rule 145(c), cause to be
affixed upon the certificates issued to such person (if any) a legend as
follows:
A-18
<PAGE>
"THESE SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT
TO THE PARTNERS FUND OR ITS PRINCIPAL UNDERWRITER UNLESS (i) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR (ii) IN THE OPINION
OF COUNSEL REASONABLY SATISFACTORY TO THE FUND SUCH
REGISTRATION IS NOT REQUIRED."
and, further, the Acquiring Fund will issue stop transfer instructions to the
Acquiring Fund's transfer agent with respect to such shares. The Acquired Fund
will provide the Acquiring Fund on the Exchange Date with the name of any
Acquired Fund shareholder who is to the knowledge of the Acquired Fund an
affiliate of the Acquired Fund on such date.
16. Covenants, etc. Deemed Material. All covenants, agreements,
representations and warranties made under this Agreement and any certificates
delivered pursuant to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding an investigation made by
them or on their behalf.
17. Sole Agreement; Amendments; Governing Law. This Agreement
supersedes all previous correspondence and oral communications between the
parties regarding the subject matter hereof, constitutes the only understanding
with respect to such subject matter, may not be changed except by a letter of
agreement signed by each party hereto, and shall be construed in accordance with
and governed by the laws of The Commonwealth of Massachusetts.
A-19
<PAGE>
18. Declaration of Trust. A copy of the Declaration of Trust of the
Trust is on file with the Secretary of State of The Commonwealth of
Massachusetts, and notice is hereby given that this instrument is executed on
behalf of the trustees of the Trust on behalf of the Acquired Fund and on behalf
of the Acquiring Fund, as trustees and not individually and that the obligations
of this instrument are not binding upon any of the trustees, officers or
shareholders of the Trust individually but are binding only upon the assets and
property of the Acquired Fund and the Acquiring Fund, as the case may be.
MENTOR FUNDS
on behalf of its Mentor Strategy
Portfolio series
By:____________________________
Name:
Title:
MENTOR FUNDS
on behalf of its Mentor Balanced
Portfolio series
By:_____________________________
Name:
Title:
A-20
<PAGE>
MENTOR FUNDS
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
June __, 1998
This Statement of Additional Information (the "SAI") relates to the
proposed merger (the "Merger") of Mentor Strategy Portfolio (the "Acquired
Fund"), a series of Mentor Funds, a Massachusetts business trust (the "Trust"),
into Mentor Balanced Portfolio (the "Acquiring Fund"), another series of the
Trust.
This SAI contains information which may be of interest to shareholders
but which is not included in the Prospectus/Proxy Statement dated June __, 1998
(the "Prospectus/Proxy Statement") of the Trust which relates to the Merger.
This SAI is not a prospectus and should be read in conjunction with the
Prospectus/Proxy Statement. The Prospectus/Proxy Statement has been filed with
the Securities and Exchange Commission and is available upon request and without
charge by writing to the Trust at 901 East Byrd Street, Richmond, Virginia 23219
or by calling 1-800-382-0016.
<PAGE>
Table of Contents
Item Page
- - ---- ----
I. Additional Information about the Acquiring and Acquired Funds..... 3
II. Financial Statements.............................................. 3
SAI-2
<PAGE>
I. Additional Information about the Acquiring and Acquired Funds.
This SAI is accompanied by the current Statement of Additional
Information of the Trust, dated January 17, 1998, and the current Statement of
Additional Information of the Trust in respect of the Balanced Portfolio, dated
May 8, 1998, which provide further information relating to the Acquired and
Acquiring Funds, including information in respect of their investment
objectives, policies, and financial histories.
The following documents, which have previously been filed with the
Securities and Exchange Commission, have been incorporated by reference into
Part A of this Registration Statement:
(1) Prospectus relating to Class A and Class B shares of various Portfolios
of the Trust, including the Acquired Fund, dated January 17, 1998
(Registration Nos. 33-43315 and 811-5159).
(2) Prospectus relating to Class Y shares of the Acquired Fund dated
January 17, 1998 (Registration Nos. 33-43315 and 811-6550).
(3) Prospectus relating to Class A and Class B shares of the Acquiring Fund
dated May 12, 1998 (Registration Nos.33-43315 and 811-6550).
(4) Prospectus relating to Class Y shares of the Acquiring Fund dated
May 12, 1998 (Registration Nos.33- 43315 and 811-6550).
(5) Statement of Additional Information of the Trust dated January 17, 1998
(Registration Nos. 33-43315 and 811-6550).
(6) Statement of Additional Information of the Trust in respect of Mentor
Balanced Portfolio dated May 12, 1998 (Registration Nos. 33-43315
and 811-6550).
(7) Financial statements of the Acquired Fund contained in the Annual
Report to Shareholders of the Trust for the year ended September 30,
1997 (Registration Nos. 33-43315 and 811-6550).
(8) Financial statements contained in the Annual Report to Shareholders of
the Acquiring Fund for the year ended September 30, 1997 (Registration
Nos. 33-43315 and 811-6550).
II. Financial Statements.
This SAI is accompanied by the Annual Reports of the Acquired and
Acquiring Funds for the year ended September 30, 1997, each of which contains
historical financial information regarding such Funds. Such reports have been
filed with the Securities and Exchange Commission, and the financial statements
and independent auditors' report contained in each Annual Report are
incorporated herein by reference.
Unaudited interim financial statements of the Acquired and Acquiring
Funds for the period ended March 31, 1998 are presented below, along with
unaudited pro forma financial information as of such date giving effect to the
Merger as of that date (assuming conversion of all outstanding Class B shares of
the Acquiring Fund to Class Y shares of the Acquiring Fund immediately prior to
the date of such financial statements).
SAI-3
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
--------------------- ------ ------------
<S> <C>
Common Stock 54.58%
Basic Materials 1.02%
Southdown, Inc. 34,250 $ 2,386,796
United Stationers, Inc. 8,500 525,406
-------------
2,912,202
-------------
Capital Goods & Construction 2.22%
Applied Power, Inc.-
Class A 12,600 485,100
Centex Corporation 27,800 1,059,875
Clayton Homes 41,300 836,325
Kuhlman Corporation 35,400 1,723,537
Oakwood Homes 21,200 776,450
Paccar, Inc. 24,100 1,435,456
-------------
6,316,743
-------------
Commercial Services 1.34%
Comdisco, Inc. 40,500 1,766,813
Omnicom Group, Inc. 43,800 2,061,338
-------------
3,828,151
-------------
Consumer Cyclical 7.21%
Best Buy Company, Inc. * 9,800 652,925
Bowne & Company 31,100 1,286,762
Chrysler Corporation 19,200 798,000
Ford Motor Company 13,600 881,450
General Motors
Corporation 11,000 741,813
Jacor Communications, Inc. * 37,300 2,200,700
McGraw-Hill Companies 9,100 692,169
Royal Caribbean Cruises,
Limited 26,400 1,849,650
Sinclair Broadcast Group * 47,800 2,754,475
Time Warner 25,800 1,857,600
Tribune Company 35,300 2,488,650
Walt Disney Company 13,000 1,387,750
Young Broadcasting * 59,900 2,995,000
-------------
20,586,944
-------------
Consumer Staples 1.35%
Express Scripts - Class A * 38,000 3,221,687
Sysco Corporation 24,400 625,250
-------------
3,846,937
-------------
Energy 0.98%
TransCanada Pipelines,
Limited 36,400 859,950
Westcoast Energy 34,800 852,600
Williams Companies 33,500 1,072,000
-------------
2,784,550
-------------
Financial 9.92%
Associated Banc-Corporation 32,000 1,726,000
Charter One Financial, Inc. 46,606 3,105,125
</TABLE>
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
--------------------- ------ ------------
<S> <C>
Common Stock (continued)
Financial (continued)
Dime Bancorp, Inc. 61,700 $ 1,854,856
First Republic Bancorp, Inc. 46,300 1,666,800
Marsh & McLennan
Companies, Inc. 9,800 855,663
North Fork Bancorp 74,500 2,877,563
Northern Trust Corporation 35,200 2,631,200
Old Republic International
Corporation 61,700 2,734,081
Onbancorp, Inc. 23,400 1,620,450
Price (T. Rowe) &
Associates, Inc. 35,000 2,463,125
Synovus Financial
Corporation 38,200 1,418,175
Travelers Group, Inc. 45,300 2,718,000
U.S. Bancorp 20,900 2,607,275
-------------
28,278,313
-------------
Health 3.76%
Health Management
Association - Class A * 55,350 1,584,394
McKesson Corporation 58,400 3,372,600
Paragon Health Network 54,333 1,079,868
Sunrise Assisted Living * 40,800 1,825,800
Watson Pharmacueticals * 79,100 2,847,600
-------------
10,710,262
-------------
Retail 7.83%
American Eagle Outfitters * 65,100 2,864,400
Costco Companies, Inc. * 91,000 4,857,125
Family Dollar Stores, Inc. 85,750 3,258,500
Federated Department
Stores * 71,700 3,714,956
G & K Services - Class A 6,800 298,350
Gap, Inc. 27,825 1,252,125
Linens 'n Things, Inc. * 25,300 1,389,919
Safeway, Inc. * 61,600 2,275,350
TJX Companies, Inc. 53,200 2,407,300
-------------
22,318,025
-------------
Technology 11.67%
AFC Cable System, Inc. * 54,500 2,118,688
Affiliated Computer Services
- Class A * 35,300 1,171,519
Airtouch Communications * 122,500 5,994,844
Applied Graphics
Technology * 41,800 2,011,656
AT&T Corporation 22,800 1,496,250
BCE, Inc. 35,600 1,486,300
CACI International * 54,500 1,199,000
Computer Task Group 14,400 593,100
</TABLE>
31
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Shares or
Principal
Percent of Net Assets Amount Market Value
--------------------- --------- ------------
<S> <C>
Common Stock (continued)
Technology (continued)
Dell Computer
Corporation * 37,000 2,504,437
EMC Corporation * 28,400 1,073,875
ICG Communications * 38,000 1,415,500
Intelligroup, Inc. * 70,200 1,136,362
Kellstrom Industries, Inc. * 128,900 3,246,669
Mobile Telecom Technical
Corporation * 63,000 1,409,625
OfficeMax * 30,800 550,550
Sprint Corporation 23,900 1,617,731
Telefonica de Espana 11,900 1,573,775
Torchmark 58,600 2,684,613
---------
33,284,494
----------
Transportation 2.69%
Airborne Freight
Corporation 57,000 2,144,625
Alaska Airgroup 30,800 1,668,975
American Classic Voyages
Company 30,900 710,700
AMR Corporation 9,300 1,331,644
Continental Airlines -
Class B * 30,900 1,817,306
----------
7,673,250
----------
Utilities 2.51%
Conectiv, Inc. - Class A 2,412 81,707
Duke Energy Corporation 7,300 434,806
FPL Group, Inc. 7,100 456,175
GTE Corporation 23,700 1,419,038
Illinova Corporation 13,800 416,587
IPALCO Enterprises, Inc. 9,800 441,613
New York State
Electric & Gas 11,500 458,562
NIPSCO Industries 16,000 448,000
U.S. West Communications
Group 24,600 1,346,850
U.S. West Media Group * 47,800 1,661,050
----------
7,164,388
----------
Miscellaneous 2.08%
Carlisle Companies, Inc. 33,400 1,640,775
Delia'S, Inc. * 45,800 1,099,200
Lennar Corporation 39,962 1,376,191
Rent Way, Inc. * 49,100 $ 1,166,125
Tyco International Limited 12,000 655,500
-------------
5,937,791
-------------
Total Common Stocks (cost
$ 112,521,982) 155,642,050
-------------
</TABLE>
<TABLE>
<CAPTION>
Shares or
Principal
Percent of Net Assets Amount Market Value
--------------------- --------- ------------
<S> <C>
U.S. Government Securities 33.20%
Common Stock (continued)
Miscellaneous (continued)
U.S. Treasury Note, 5.50%,
1/31/03 $ 12,000,000 11,912,160
U.S. Treasury Bond, 6.50%,
11/15/26 77,523,000 82,736,422
Total U.S. Government
Securities (cost
$ 87,088,991) 94,648,582
Short-Term Investment 11.08%
Repurchase Agreement
Goldman Sachs &
Company
Dated 03/31/98, 6.05%,
due 04/01/98,
collateralized by
$31,908,279 Federal
Home Loan Mortgage
Corporation, 7.00%,
11/01/27, market value
$ 32,227,218, (cost
$ 31,581,849) 31,581,849 31,581,849
-------------
Total Investments (cost
$ 231,192,822) 98.86% $ 281,872,481
-------------
Other Assets less Liabilities 1.14%
3,251,380
-------------
Net Assets 100.00% $ 285,123,861
=============
</TABLE>
* Non-income producing.
(a) American Depository Receipts.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $88,381,538 and $144,726,891, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $231,192,822. Net unrealized appreciation aggregated
$50,679,659, of which $50,806,778, related to appreciated investment securities
and $127,119, related to depreciated investment securities.
See notes to financial statements.
32
<PAGE>
Mentor Strategy Portfolio
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $ 250,290,632
Repurchase agreements 31,581,849
-----------
Total investments (cost
$ 231,192,822) 281,872,481
-----------
Collateral for securities
loaned (Note 2) 68,067,637
Receivables
Investments sold 1,797,664
Fund shares sold 272,519
Dividends and interest 2,126,104
Deferred expenses (Note 2) 15,138
-----------
Total assets 354,151,543
-----------
Liabilities
Payables
Securities loaned (Note 2) $68,067,637
Fund shares redeemed 811,048
Accrued expenses and other
liabilities 148,997
-----------
Total liabilities 69,027,682
-----------
Net Assets $285,123,861
============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 238,532,347
Accumulated net investment
income 1,104,109
Accumulated net realized loss on
investment transactions (5,192,254)
Net unrealized appreciation of
investments 50,679,659
-------------
Net Assets $ 285,123,861
=============
Net Asset Value per Share
Class A Shares $ 16.05
Class B Shares $ 15.65
Class Y Shares $ 16.05
Offering Price per Share
Class A Shares $ 17.03(a)
Class B Shares $ 15.65
Class Y Shares $ 16.05
Shares Outstanding
Class A Shares 2,157,686
Class B Shares 16,006,748
Class Y Shares 67
-----------
Total Shares Outstanding 18,164,501
===========
(a) Computation of offering price: 100/94.25 of net asset value.
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends $ 622,780
------------
Interest 3,720,968
------------
Total investment income
(Note 2) 4,343,748
------------
Expenses
Management fee (Note 3) $1,317,072
Distribution fee (Note 3) 1,020,717
Shareholder service fee (Note 5) 387,373
Transfer agent fee (Note 3) 231,465
Administration fee (Note 4) 154,950
Shareholder reports and postage
expenses 40,040
Custodian and accounting
fees (Note 3) 39,628
Registration expenses 28,555
Organizational expenses 10,048
Legal fees 6,270
Directors' fees and expenses 5,216
Audit fees 3,466
Miscellaneous 17,240
----------
Total expenses 3,262,040
------------
Net investment income 1,081,708
------------
Realized and unrealized gain (loss)
on investments
Net realized loss on
investments (Note 2) (5,098,824)
Change in unrealized appreciation
on investments 14,674,155
----------
Net gain on investments 9,575,331
------------
Net increase in net assets resulting
from operations $ 10,657,039
============
See notes to financial statements.
33
<PAGE>
Mentor Strategy Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
(Unaudited)
<S> <C>
Net Increase (Decrease) in Net Assets
Operations
Net investment income $ 1,081,708
Net realized gain (loss) on investments (5,098,824)
Change in unrealized appreciation on investments 14,674,155
-------------
Increase in net assets resulting from operations 10,657,039
-------------
Distributions to Shareholders
From net investment income
Class A (617,602)
Class B (4,725,533)
From net realized gain on investments
Class A (6,308,214)
Class B (48,259,012)
-------------
Total distributions to shareholders (59,910,360)
-------------
Capital Share Transactions (Note 6)
Proceeds from sale of shares 10,114,698
Reinvested distributions 58,353,503
Shares redeemed (76,527,795)
-------------
Change in net assets resulting from capital share transactions (8,059,594)
-------------
Increase (decrease) in net assets (57,312,916)
Net Assets
Beginning of period 342,436,777
-------------
End of period (including accumulated undistributed net investment
income of $1,090,770) $ 285,123,861
=============
</TABLE>
See notes to financial statements.
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
(Unaudited)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 18.61
--------
Income from investment operations
Net investment income 0.13
Net realized and unrealized gain on investments 0.56
--------
Total from investment operations 0.69
--------
Less distributions
From net investment income (0.29)
In excess of net investment income
From net realized capital gain (2.96)
--------
Total distributions (3.25)
--------
Net asset value, end of period $ 16.05
========
Total Return 4.48 %
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 34,627
Ratio of expenses to average net assets 1.45%(a)
Ratio of expenses to average net assets
excluding waiver 1.45%(a)
Ratio of net investment income (loss) to average net assets 1.36%(a)
Portfolio turnover rate 32%
Average commission rate on portfolio transactions $ 0.0659
</TABLE>
(a) Annualized.
See notes to financial statements.
34
<PAGE>
Mentor Strategy Portfolio
- - --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
(Unaudited)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 18.29
--------
Income from investment operations
Net investment income (loss) 0.05
Net realized and unrealized gain (loss)
on investments 0.56
--------
Total from investment operations 0.61
--------
Less distributions
From net investment income (0.29)
From net realized capital gain (2.96)
----------
Total distributions (3.25)
----------
Net asset value, end of period $ 15.65
==========
Total Return 4.06%
==========
Ratios / Supplemental Data
Net assets, end of period (in thousands) $250,496
Ratio of expenses to average net assets 2.20%(a)
Ratio of net investment income (loss) to
average net assets 0.61%(a)
Portfolio turnover rate 32%
Average commission rate on portfolio
transactions $ 0.0659
<CAPTION>
Class Y Shares
Period
Ended 3/31/98 (b)
(Unaudited)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 15.01
--------
Income from investment operations
Net investment income 0.10
Net realized and unrealized gain on investments 0.95
--------
Total from investment operations 1.05
--------
Less distributions
From net realized capital gain (0.01)
Net asset value, end of period $ 16.05
=========
Total Return 7.07%
=========
Ratios / Supplemental Data
Net assets, end of period $ 1,070
Ratio of expenses to average net assets 1.20%(a)
Ratio of net investment income (loss) to average net assets 1.89%(a)
Portfolio turnover rate 32%
Average commission rate on portfolio transactions $ 0.0659
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998.
See notes to financial statements.
35
Mentor Funds
Strategy Portfolio
Notes to Financial Statements
March 31, 1998 (Unaudited)
Note 1: Organization
Mentor Funds (formerly Cambridge Series Trust) is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. Mentor Funds consists of eleven separate Portfolios (hereinafter each
individually referred to as a "Portfolio" or collectively as the "Portfolios")
at March 31, 1998, as follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Capital Growth Portfolio ("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio ("Income and Growth Portfolio")
Mentor Perpetual Global Portfolio ("Global Portfolio")
Mentor Quality Income Portfolio ("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio ("Short-Duration Income Portfolio")
Mentor Municipal Income Portfolio ("Municipal Income Portfolio")
Mentor Balanced Portfolio ("Balanced Portfolio")
Mentor U.S. Government Institutional Money Market Portfolio ("Government
Portfolio")
Mentor Institutional Money Market Portfolio ("Money Market Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
The financial statements included in this report are for the Strategy Portfolio
only (hereinafter referred to as the "Portfolio").
Mentor Funds currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption which decreases depending on when shares were purchased and how
long they have been held. Class Y shares are sold to institutions and high
net-worth individual investors and are not subject to any sales or contingent
deferred sales charges.
Note 2: Significant Accounting Policies The following is a summary of
significant accounting policies consistently followed by the Portfolios in the
preparation of their financial statements. The policies are in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect amounts reported therein. Although actual
results could differ from these estimates, any such differences are expected to
be immaterial to the net assets of the Portfolio.
(a) Valuation of Securities - Listed securities held by the Strategy Portfolio
traded on national stock exchanges and over-the-counter securities quoted on the
NASDAQ National Market System are valued at the last reported sales price or,
lacking any sales, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by the Board of Trustees of the Portfolio as the primary market.
Securities traded in the over-the-counter market, other than those quoted on the
NASDAQ National Market System, are valued at the last available bid price.
Short-term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith under
Notes to Financial Statements (continued)
procedures established by and under the general supervision and responsibility
of the Board of Trustees.
(b) Repurchase Agreements- It is the policy of Mentor Funds to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system, or to have segregated within the custodian bank's
vault all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by Mentor Funds to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying securities to ensure the existence of a proper level of collateral.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Funds' adviser to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Portfolio Securities Loaned-The Portfolio is authorized by the Board of
Trustees to participate in securities lending transactions.
The Portfolio may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolio
continue to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolio record an asset and obligation for the market value of
that collateral. Cash received as collateral may be reinvested, in which case
that security is recorded as an asset of the Portfolio. Variations in the
market value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At March 31, 1998, the Portfolio had loaned securities to brokers which were
collateralized by cash. Income from securities lending activities amounted to
$40,678 for the six months ended March 31, 1998. The risks to the Portfolio
from securities lending are that the borrower may not provide additional
collateral when required or return the securities when due. At March 31, 1998,
the value of the securities on loan and the related cash collateral were
$66,714,498, and $68,067,637, respectively.
(d) Security Transactions and Investment Income- Security transactions for the
Portfolio are accounted for on trade date. Dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. Interest
income includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including original
issue discount as required by the Internal Revenue Code. Dividends to
shareholders and capital gain distributions, if any, are recorded on the
ex-dividend date.
(e) Federal Income Taxes - No provision for federal income taxes has been made
since it is each Portfolio's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains.
(f) When-Issued and Delayed Delivery Transactions- The Portfolio may engage in
when-issued or delayed delivery transactions. To the extent the Portfolio
engage in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objectives and policies and
not for the purpose of investment leverage. The Portfolio will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Portfolio will maintain security
positions such that sufficient
Notes to Financial Statements (continued)
liquid assets will be available to make payment for the securities purchased.
Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
(g) Futures Contracts- In order to gain exposure to or protect against declines
in security values, the Portfolio may buy and sell futures contracts. The
Portfolio may also buy or write put or call options on these futures contracts.
The Portfolio may sell futures contracts to hedge against declines in the value
of portfolio securities. The Portfolio may also purchase futures contracts to
gain exposure to market changes as it may be more efficient or cost effective
than actually buying securities. The Portfolio will segregate assets to cover
its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed.
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities.
(h) Options- In order to produce incremental earnings or protect against changes
in the value of portfolio securities, the Portfolio may buy and sell put and
call options, write covered call options on portfolio securities and write
cash-secured put options.
The Portfolio may purchase put options or write covered call options to hedge
against adverse movements in the value of portfolio holdings. The Portfolio may
also use options for speculative purposes, although they do not employ options
for this at the present time. The Portfolio will segregate assets to cover
their obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Portfolio will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a written
put option, or the cost of the security for a purchased put or call option is
adjusted by the amount of premium received or paid.
The risk in writing a call option is that the Portfolio gives up the opportunity
for profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Portfolio may incur a
loss if the market price of the security decreases and the option is exercised.
The risk in buying an option is that the Portfolio pays a premium whether or not
the option is exercised. The Portfolio also has the additional risk of not
being able to enter into a closing transaction if a liquid secondary market does
not exist. The Portfolio may also write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of the
counterparty. Notes to Financial Statements (continued)
(i) Interest-Rate Swaps- An interest-rate swap is a contract between two parties
on a specified principal amount (referred to as the notional principal) for a
specified period. In the most common instance, a swap involves the exchange of
streams of variable and fixed-rate interest payments. During the term of the
swap, changes in the value of the swap are recognized as unrealized gains or
losses by marking-to-market to reflect the market value of the swap. When the
swap is terminated, the Fund will record a realized gain or loss.
(j) Deferred Expenses- Costs incurred by the Portfolio in connection with its
initial share registration and organization costs were deferred by the Portfolio
and are being amortized on a straight-line basis over a five-year period.
(k) Distributions- Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for net operating losses and deferral of wash sales.
Note 3: Dividends Dividends are declared and paid annually to all shareholders
invested in the Strategy Portfolio Dividends will be reinvested in additional
shares of the same class and Portfolio on payment dates at the ex-dividend date
net asset value without a sales charge unless cash payments are requested by
shareholders in writing to the Mentor. Capital gains realized by each Portfolio,
if any, are paid annually.
Note 4: Investment Advisory and Management and Administration Agreements Mentor
Investment Advisors, LLC ("Mentor Advisors"), the Portfolio's investment
adviser, receives for its services an annual investment advisory fee of 0.85% as
a percentage of the average daily net assets of the Portfolio. For the six
months ended March 31, 1998, Mentor Advisors earned $1,317,072 in advisory fees.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC
("Mentor") which is in turn a partially owned subsidiary of Wheat First Union.
EVEREN Capital Corporation owns 20% of the outstanding interest in Mentor.
Administrative personnel and services are provided by Mentor, under an
Administration Agreement, at an annual rate of 0.10% of the average daily net
assets of the Portfolio. For the six months ended March 31, 1998, Mentor earned
$154,950 in administration fees.
The Portfolio also provides direct reimbursement to Mentor for certain legal and
compliance administration, investor relation and operation related costs not
covered under the Investment Management Agreement. For the six months ended
March 31, 1998, the Portfolio reimbursed Mentor $11,846 for such costs.
Note 5: Distribution Agreement and Other Transactions with Affiliates The
Portfolio has adopted a Distribution Plan (the Plan) pursuant to Rule 12b-1
under the Investment Company Act of 1940 with respect to its Class B shares.
Under a Distribution Agreement between the Portfolio and Mentor Distributors,
LLC ("Mentor Distributors") a wholly-owned subsidiary of BISYS Fund Services,
Inc., Mentor Distributors was appointed distributor of the Portfolio. To
compensate Mentor Distributors for the services it provides and for the expenses
it incurs under the Distribution Agreement, the Portfolio pays a distribution
fee under the Plan, which is accrued daily and paid monthly at the annual rate
of 0.75% of the Portfolios' average daily net assets for the Portfolio.
Notes to Financial Statements (continued)
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to Class A and Class B shares of the Portfolio. Under the Service Plan,
financial institutions will enter into shareholder service agreements with the
Distributor to provide administrative support services to its customers who from
time to time may be owners of record or beneficial owners of Class A or Class B
shares of the Portfolio. In return for providing these support services, a
financial institution may receive payments from the Distributor at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B shares
of the Portfolio beneficially owned by the financial institution's customers for
whom it is holder of record or with whom it has a servicing relationship.
Presently, the Portfolio's class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan. For
the six months ended March 31, 1998, distribution fees and shareholder servicing
fees were as follows:
Distribution Shareholder-Servicing Fees
Portfolio Fees Class A Class B
- - ---------------------------------------------------------------------------
Strategy $1,020,717 $47,044 $340,329
Note 6: Capital Share Transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
</TABLE>
<TABLE>
<CAPTION>
Mentor Strategy Portfolio
Six Months
Ended 3/31/98
Shares Dollar
------------------------------------
<S> <C>
Class A:
Shares sold 312,205 $4,763,997
Shares issued upon reinvestment of distributions 444,548 6,836,197
Shares redeemed (777,622) (12,080,085)
------------------------------------
Change in net assets from
capital share transactions (20,869) ($479,891)
====================================
Class B:
Shares sold 353,802 $5,349,703
Shares issued upon reinvestment of distributions 3,423,559 51,517,306
Shares redeemed (4,273,266) (64,447,709)
------------------------------------
Change in net assets from
capital share transactions (495,905) ($7,580,700)
====================================
Class Y (a)
Shares sold 67 $1,001
Shares issued upon reinvestment
of distributions - -
Shares redeemed - -
------------------------------------
Change in net assets from
capital share transactions 67 $1,001
====================================
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998.
Notes to Financial Statements (continued)
Year 2000
The Portfolio receives services from a number of providers which rely on the
smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of computer software to distinguish the Year 2000 from
the Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolio's other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the Portfolio
from this problem.
Additional Information
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 20,152,299 171,413
Troy A. Peery, Jr. 20,152,236 171,476
Arnold H. Dreyfuss 20,156,434 167,278
Thomas F. Keller 20,159,264 164,448
Peter J. Quinn, Jr. 20,157,621 166,091
Louis W. Moelchert, Jr. 20,158,819 164,893
Arch T. Allen, III 20,159,366 164,346
Weston E. Edwards 20,159,233 164,479
Jerry R. Barrentine 20,163,690 160,022
J. Garnett Nelson 20,163,690 160,022
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First
Butcher Singer, Inc., with First Union Corporation:
Affirmative 19,987,030
Against 124,613
Abstain 212,069
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of
an additional interest in Mentor Investment Group, LLC by EVEREN
Securities Holdings, Inc.:
Affirmative 19,973,828
Against 140,299
Abstain 209,585
<PAGE>
Mentor Balanced Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C>
COMMON STOCKS 55.86%
Basic Materials 7.75%
Bemis Company 1,800 $ 81,225
Emerson Electric Company 1,250 81,484
Morton International, Inc. 2,400 78,750
Sonoco Products Company 2,200 88,138
----------
329,597
----------
Capital Goods & Construction 6.27%
AlliedSignal, Inc. 2,050 86,100
W.W. Grainger, Inc. 875 89,961
Illinois Tool Works 1,400 90,650
----------
266,711
----------
Consumer Cyclical 7.93%
Automatic Data Processing 1,275 86,780
Federated Department Stores * 1,500 77,719
Interpublic Group Companies,
Inc. 1,380 85,733
Newell Company 1,800 87,188
----------
337,420
----------
Consumer Staples 6.56%
McDonald's Corporation 1,650 99,000
Sherwin-Williams Company 2,620 93,010
Sysco Corporation 3,400 87,125
----------
279,135
----------
Financial 13.62%
American Express Company 935 85,845
Banc One Corporation 1,451 91,771
Federal National Mortgage
Association 1,340 84,755
General Re Corporation 400 88,250
NationsBank Corporation 1,090 79,502
Norwest Corporation 2,000 83,125
UNUM Corporation 1,200 66,225
----------
579,473
----------
Health 4.14%
Johnson & Johnson 1,200 87,975
Schering-Plough 1,080 88,223
----------
176,198
----------
Technology 7.64%
Computer Sciences Corporation 1,560 85,800
Chancellor Media Corporation -
Class A * 1,750 80,281
WorldCom, Inc. * 2,000 86,125
Sun Microsystems, Inc. * 1,750 73,008
----------
325,214
----------
Transportation & Services 1.95%
Werner Enterprises, Inc. 3,250 82,875
----------
Total Common Stocks (cost
$ 1,663,773) 2,376,623
----------
</TABLE>
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C>
COMMON STOCKS (continued)
Fixed Income Securities 31.45%
U.S. Government Securities and
Agencies 21.20%
Federal National Mortgage
Association, 6.64%, 07/02/07 130,000 $ 136,636
Federal Home Loan Bank, 5.59%,
1/13/03 105,000 104,310
Government National Mortgage
Association, 6.50% - 7.38%,
5/15/09 - 11/20/22 291,968 297,842
U.S. Treasury Notes, 6.00% -
6.75%, 4/30/00 - 2/15/26 105,000 106,964
U.S. Treasury Bonds, 6.88% -
7.50%, 2/15/23 - 8/15/25 220,000 255,998
----------
Total U.S. Government Securities
and Agencies (cost $864,670) 901,750
----------
Corporate Bonds 10.25%
CS First Boston, 7.18%, 2/25/18,
CMO 25,000 25,251
Ford Motor Credit, 7.20%,
6/15/07 45,000 47,713
Key Auto Finance Trust Series
1997-2 Class A3, 6.10%,
11/15/00 50,000 50,093
Merrill Lynch, 6.64%, 9/19/02 45,000 45,975
NationsBank Corporation,
7.50%, 9/15/06 35,000 37,562
Norwest Corporation, 6.80%,
5/15/02 60,000 61,541
PNC Student Loan Trust, 6.73%,
1/25/07 75,000 76,904
Travelers Group, 8.63%, 2/01/07 40,000 45,951
Union Acceptance Corporation,
6.48%, 5/10/04 45,000 45,352
----------
Total Corporate Bonds (cost
$ 425,855) 436,342
----------
Total Fixed Income Securities
(cost $1,816,972) 1,338,092
----------
Short-Term Investment
Repurchase Agreement 12.37%
Goldman Sachs & Company
Dated 03/31/98, 6.05%, due
04/01/98, collateralized by
$532,328 Federal Home Loan
Mortgage Corporation, 7.00%,
11/01/27, market value
$538,482, (cost $526,447) 526,447 526,447
----------
Total Investments (cost
$ 3,480,745) 99.69% 4,241,162
----------
Other Assets less Liabilities 0.31% 13,143
----------
Net Assets 100.00% $4,254,305
==========
</TABLE>
1
<PAGE>
Mentor Balanced Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- - --------------------------------------------------------------------------------
* Non-income producing.
CMO Collateralized Mortgage Obligations
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $1,573,639 and $2,277,180, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $3,480,745. Net unrealized appreciation aggregated
$760,417, of which $766,587, related to appreciated investment securities and
$6,170, related to depreciated investment securities.
See notes to financial statements.
2
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
- - --------------------------------------------------------------------------------
Statement of Assets and Liabilities
Assets
Investments, at market value
(Note 2)
Investment securities $3,714,715
Repurchase agreements 526,447
-----------
Total investments (cost
$ 3,480,745) 4,241,162
Collateral for securities loaned
(Note 2) 932,129
Dividends and interest receivable 17,261
-----------
Total assets 5,190,552
-----------
Liabilities
Securities loaned (Note 2) 932,129
Accrued expenses and other
liabilities 4,118
-------
Total liabilities 936,247
-----------
Net Assets $4,254,305
===========
Net Assets represented by: (Note 2)
Additional paid-in capital $ 2,793,838
Accumulated undistributed net
investment income 48,366
Accumulated net realized gain on
investment transactions 651,684
Net unrealized appreciation of
investments 760,417
-----------
Net Assets $4,254,305
===========
Shares Outstanding 243,683
-----------
Net Asset Value and Offering Price
per Share $ 17.46
===========
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends $ 15,637
Interest net of premium 47,667
---------
Total investment income (Note 2) 63,304
---------
Expenses
Management fee (Note 3) 15,306
Distribution fee (Note 3) 15,306
Shareholder service fee (Note 5) 5,102
Custodian and accounting fees
(Note 3) 3,822
Administration fee (Note 4) 2,046
Registration expenses 278
Shareholder reports and postage
expenses 93
Legal fees 69
Audit fees 38
Directors' fees and expenses 57
Miscellaneous 190
------
Total expenses 42,307
---------
Deduct
Waiver of distribution fee (Note 3) 15,306
Waiver of management fee (Note 3) 10,086
Waiver of shareholder servicing fee
(Note 4) 5,102
Waiver of administration fee (Note 3) 2,046
---------
Net expenses 9,767
---------
Net investment income 53,537
---------
Realized and unrealized gain (loss) on
investments
Net realized gain on investments
(Note 2) 505,443
Change in unrealized appreciation on
investments (26,550)
-------
Net gain on investments 478,893
---------
Net increase in net assets resulting
from operations $ 532,430
=========
See notes to financial statements.
3
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
- - --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
Unaudited
<S> <C>
Net Increase in Net Assets
Operations
Net investment income $ 53,537
Net realized gain on investments 505,443
Change in unrealized appreciation on investments (26,550)
----------
Increase in net assets resulting from operations 532,430
----------
Distributions to Shareholders
From net investment income (93,188)
From net realized gain on investments (440,937)
----------
Total distributions to shareholders (534,125)
----------
Capital Share Transactions (Note 5)
Proceeds from sale of shares -
Reinvested distributions 534,125
Shares redeemed (380,000)
----------
Change in net assets resulting from capital share transactions 154,125
----------
Increase in net assets 152,430
Net Assets
Beginning of period 4,101,875
----------
End of period (including accumulated undistributed net investment income of $48,366) $4,254,305
==========
</TABLE>
See notes to financial statements.
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98
(Unaudited)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 17.61
--------
Income from investment operations
Net investment income 0.32
Net realized and unrealized gain (loss) on investments 1.88
--------
Total from investment operations 2.20
--------
Less distributions
From net investment income (0.41)
From net realized capital gain (1.94)
----------
Total distributions (2.35)
----------
Net asset value, end of period $ 17.46
==========
Total Return 13.91%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $4,254
Ratio of expenses to average net assets 0.50%(a)
Ratio of expenses to average net assets excluding waiver 2.08%(a)
Ratio of net investment income to average net assets 2.64%(a)
Portfolio turnover rate 41%
Average commission rate on portfolio transactions $ 0.0684
</TABLE>
(a) Annualized.
See notes to financial statements.
4
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
Notes to Financial Statements
Note 1: Organization
The Mentor Funds is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. Mentor Funds consists of
eleven separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at March 31, 1998 as follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Perpetual Global Portfolio ("Global Portfolio")
Mentor Capital Growth Portfolio ("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio ("Income and Growth Portfolio")
Mentor Municipal Income Portfolio ("Municipal Income Portfolio")
Mentor Quality Income Portfolio ("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio ("Short-Duration Income
Portfolio")
Mentor Balanced Portfolio ("Balanced Portfolio")
Mentor Institutional U.S. Government Money Market Portfolio ("Government
Portfolio")
Mentor Institutional Money Market Portfolio ("Money Market Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
The financial statements included in this report are for the Balanced Portfolio
only (hereinafter referred to as the "Portfolio"). The Balanced Portfolio
invests in common stocks and fixed income securities.
Shares of the Portfolio are sold without an initial sales charge, although a
contingent deferred sales charge may be imposed if shares are redeemed within 5
years of purchase. Shares of the Portfolio are not currently being offered to
the public.
Note 2: Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Portfolio in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the
Portfolio.
(a) Valuation of Securities - Listed securities held by the Portfolio and traded
on national stock exchanges and over-the-counter securities quoted on the NASDAQ
National Market System are valued at the last reported sales price or, lacking
any sales, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange designated
by the Board of Trustees of the Portfolio as the primary market. Securities
traded in the over-the-counter market, other than those quoted on the NASDAQ
National Market System, are valued at the last available bid price. Short-term
investments with remaining maturities of 60 days or less are carried at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith under procedures Notes to Financial Statements (continued)
established by and under the general supervision of the Board of Trustees.
U.S. Government obligations held by the Portfolio are valued at the mean between
the over-the-counter bid
5
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
and asked prices as furnished by an independent pricing service. Listed
corporate bonds, other fixed income securities, mortgage backed securities,
mortgage related, asset-backed and other related securities are valued at the
prices provided by an independent pricing service. Security valuations not
available from an independent pricing service are provided by dealers approved
by the Portfolio's Board of Trustees. In determining value, the dealers use
information with respect to transactions in such securities, market transactions
in comparable securities, various relationships between securities, and yield to
maturity.
(b) Repurchase Agreements - It is the policy of the Portfolio to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system, or to have segregated within the custodian bank's
vault all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by Mentor Funds to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying securities to ensure the existence of a proper level of collateral.
The Portfolio will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Portfolio's advisor to be creditworthy pursuant to guidelines established by the
Portfolio's Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly, the
Portfolio could receive less than the repurchase price on the sale of collateral
securities.
(c) Portfolio Securities Loaned - The Portfolio is authorized by the Board of
Trustees to participate in securities lending transactions.
The Portfolio may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolio
continues to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolio records an asset and obligation for the market value
of that collateral. Cash received as collateral may be reinvested, in which case
that security is recorded as an asset of the Portfolio. Variations in the market
value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At March 31, 1998, the Portfolio had loaned securities to brokers which were
collateralized by cash. Income from securities lending activities amounted to
$104 for the six months ended March 31, 1998. The risks to the Portfolio from
securities lending are that the borrower may not provide additional collateral
when required or return the securities when due. At March 31, 1998, the market
value of the securities on loan and the related cash collateral were $919,058,
and $932,129, respectively.
(d) Security Transactions and Investment Income - Security transactions for the
Portfolio are accounted for on a trade date basis. Dividend income is recorded
on the ex-dividend date and interest is recorded on the accrual basis. Interest
income includes interest and discount earned (net of premium) on short term
obligations, and interest earned on all other debt securities including original
issue discounts as required by the Internal Revenue Code. Realized and
unrealized gains and losses on investment security transactions are calculated
on an identified cost basis.
(e) Federal Income Taxes - No provision for federal income taxes has been made
since it is the Portfolio's policy to comply with the provisions applicable to
6
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains, if any.
(f) Distributions to Shareholders - Distributions from net investment income and
net realized capital gains, after offsetting capital loss carryovers are
distributed annually for the Portfolio.
Note 3: Investment Advisory and Management and Administration Agreements
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolio's investment
adviser, receives for its services an annual investment advisory fee of 0.75% as
a percentage of the average daily net assets of the Portfolio. In order to limit
the Portfolio's expenses Mentor Advisors and its affiliates have waived fees
payable to them, and as necessary borne expenses of the Portfolio, to the
extent the Portfolio's expenses (exclusive of brokerage, interest, taxes,
deferred organization expenses, and payments under the Portfolio's Distribution
Plan) exceed an annual rate of 0.50% of the Portfolio's average net assets. For
the six months ended March 31, 1998, Mentor Advisors earned management fees of
$15,306 and voluntarily waived $10,086 of such fees.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC
("Mentor") which is in turn a partially owned subsidiary of Wheat First Union.
EVEREN Capital Corporation owns 20% of the outstanding interest in Mentor.
Administrative personnel and services are provided by Mentor to the Portfolio,
under an Administration Agreement, at an annual rate of 0.10% of the average
daily net assets of the Portfolio. In order to limit the Portfolio's expenses,
Mentor agreed to waive its fees for the six months ended March 31, 1998.
Note 4: Distribution Agreement and Other Transactions with Affiliates Under a
Distribution Agreement Mentor Distributors, LLC ("Mentor Distributors") a
wholly-owned subsidiary of BISYS Fund Services, Inc., was appointed Distributor
for the Portfolio. To compensate Mentor Distributors for the services it
provides and for the expenses it incurs under the Distribution Agreement, the
Portfolio has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act of 1940 with respect to its Class B shares, under which
the Portfolio pays a distribution fee under the Plan, which is accrued daily and
paid monthly at the annual rate of 0.75% of the Portfolio's average daily net
assets.
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to each Portfolio. Under the Service Plan, financial institutions will
enter into shareholder service agreements with the Distributor to provide
administrative support services at an annual rate of 0.25% of the Portfolio's
average daily net assets. The total charges to be borne by the Portfolio, under
the Distribution and Shareholder Service Agreements is expected to remain at an
annual rate of 1% of the Portfolio's average daily net assets. For the six
months ended March 31, 1998 distribution and shareholder services fees were as
follows:
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Shareholder Servicing Fee
Distribution Fee Waived Servicing Fee Waived
------------------ ------------------ --------------- --------------
<S> <C>
Balanced Portfolio $15,306 $(15,306) $5,102 $(5,102)
</TABLE>
7
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
Note 5: Capital Share Transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
<TABLE>
<CAPTION>
Six Months
Ended
3/31/98
<S> <C>
Shares Dollars
------ -------
Shares sold - $ -
Shares issued upon reinvestment of distributions 33,848 534,125
Shares redeemed (23,064) (380,000)
------- ----------
Change in net assets from capital share transactions 10,784 $ 154,125
======= ==========
</TABLE>
Year 2000
The Portfolio receives services from a number of providers which rely on the
smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of computer software to distinguish the Year 2000 from
the Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolio's other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the Portfolio
from this problem.
Additional Information
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 230,078 -
Troy A. Peery, Jr. 230,078 -
Arnold H. Dreyfuss 230,078 -
Thomas F. Keller 230,078 -
Peter J. Quinn, Jr. 230,078 -
Louis W. Moelchert, Jr. 230,078 -
Arch T. Allen, III 230,078 -
Weston E. Edwards 230,078 -
Jerry R. Barrentine 230,078 -
J. Garnett Nelson 230,078 -
8
<PAGE>
Mentor Funds
Balanced Portfolio
March 31, 1998 (Unaudited)
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 230,078
Against -
Abstain -
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 230,078
Against -
Abstain -
9
Mentor Balanced Portfolio
Pro Forma Combining Portfolio of Investments
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Mentor Strategy Portfolio Mentor Balanced Portfolio Pro Forma Combined
------------------------- ------------------------- --------------------
Shares Market Value Shares Market Value Shares Market Value
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks 54.63%
- - ----------------------------------------------------------------------------------------------------------------------------------
Basic Materials 1.12%
Bemis Company 1,800 $ 81,225 1,800 $ 81,225
Emerson Electric Company 1,250 81,484 1,250 81,484
Morton International, Inc. 2,400 78,750 2,400 78,750
Sonoco Products Company 2,200 88,138 2,200 88,138
Southdown, Inc. 34,250 $ 2,386,796 34,250 2,386,796
United Stationers, Inc. 8,500 525,406 8,500 525,406
- - ----------------------------------------------------------------------------------------------------------------------------------
2,912,202 329,597 3,241,799
- - ----------------------------------------------------------------------------------------------------------------------------------
Capital Goods & Construction 2.28%
AlliedSignal, Inc. 2,050 86,100 2,050 86,100
Applied Power, Inc. - Class A 12,600 485,100 12,600 485,100
Centex Corporation 27,800 1,059,875 27,800 1,059,875
Clayton Homes 41,300 836,325 41,300 836,325
Illinois Tool Works 1,400 90,650 1,400 90,650
Kuhlman Corporation 35,400 1,723,537 35,400 1,723,537
Oakwood Homes 21,200 776,450 21,200 776,450
Paccar, Inc. 24,100 1,435,456 24,100 1,435,456
W.W. Grainger, Inc. 875 89,961 875 89,961
- - ---------------------------------------------------------------------------------------------------------------------------------
6,316,743 266,711 6,583,454
- - ---------------------------------------------------------------------------------------------------------------------------------
Commercial Services 1.32%
Comdisco, Inc. 40,500 1,766,813 40,500 1,766,813
Omnicom Group, Inc. 43,800 2,061,338 43,800 2,061,338
- - ---------------------------------------------------------------------------------------------------------------------------------
3,828,151 3,828,151
- - ---------------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- - ---------------------------------------------------------------------------------------------------------------------------------
Consumer Cyclical 7.23%
Automatic Data Processing 1,275 $ 86,780 1,275 $ 86,780
Best Buy Company, Inc. * 9,800 $ 652,925 9,800 652,925
Bowne & Company 31,100 1,286,762 31,100 1,286,762
Chrysler Corporation 19,200 798,000 19,200 798,000
Federated Department Stores * 1,500 77,719 1,500 77,719
Ford Motor Company 13,600 881,450 13,600 881,450
General Motors Corporation 11,000 741,813 11,000 741,813
Interpublic Group Companies, Inc. 1,380 85,733 1,380 85,733
Jacor Communications, Inc. * 37,300 2,200,700 37,300 2,200,700
McGraw-Hill Companies 9,100 692,169 9,100 692,169
Newell Company 1,800 87,188 1,800 87,188
Royal Caribbean Cruises, Limited 26,400 1,849,650 26,400 1,849,650
Sinclair Broadcast Group * 47,800 2,754,475 47,800 2,754,475
Time Warner 25,800 1,857,600 25,800 1,857,600
Tribune Company 35,300 2,488,650 35,300 2,488,650
Walt Disney Company 13,000 1,387,750 13,000 1,387,750
Young Broadcasting* 59,900 2,995,000 59,900 2,995,000
- - ---------------------------------------------------------------------------------------------------------------------------------
20,586,944 337,420 20,924,364
- - ---------------------------------------------------------------------------------------------------------------------------------
Consumer Staples 1.43%
Express Scripts - Class A * 38,000 3,221,687 38,000 3,221,687
McDonald's Corporation 1,650 99,000 1,650 99,000
Sherwin-Williams Company 2,620 93,010 2,620 93,010
Sysco Corporation 24,400 625,250 3,400 87,125 27,800 712,375
- - ---------------------------------------------------------------------------------------------------------------------------------
3,846,937 279,135 4,126,072
- - ---------------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- - ---------------------------------------------------------------------------------------------------------------------------------
Energy 0.96%
TransCanada Pipelines, Limited 36,400 $ 859,950 36,400 $ 859,950
Westcoast Energy 34,800 852,600 34,800 852,600
Williams Companies 33,500 1,072,000 33,500 1,072,000
- - ---------------------------------------------------------------------------------------------------------------------------------
2,784,550 2,784,550
- - ---------------------------------------------------------------------------------------------------------------------------------
Financial 9.98%
American Express Company 935 $ 85,845 935 85,845
Associated Banc-Corporation 32,000 1,726,000 32,000 1,726,000
Banc One Corporation 1,451 91,771 1,451 91,771
Charter One Financial, Inc. 46,606 3,105,125 46,606 3,105,125
Dime Bancorp, Inc. 61,700 1,854,856 61,700 1,854,856
Federal National Mortgage Association 1,340 84,755 1,340 84,755
First Republic Bancorp, Inc. 46,300 1,666,800 46,300 1,666,800
General Re Corporation 400 88,250 400 88,250
Marsh & McLennan Companies, Inc. 9,800 855,663 9,800 855,663
NationsBank Corporation 1,090 79,502 1,090 79,502
North Fork Bancorp 74,500 2,877,563 74,500 2,877,563
Northern Trust Corporation 35,200 2,631,200 35,200 2,631,200
Norwest Corporation 2,000 83,125 2,000 83,125
Old Republic International Corporation 61,700 2,734,081 61,700 2,734,081
Onbancorp, Inc. 23,400 1,620,450 23,400 1,620,450
Price (T. Rowe) & Associates, Inc. 35,000 2,463,125 35,000 2,463,125
Synovus Financial Corporation 38,200 1,418,175 38,200 1,418,175
Travelers Group, Inc. 45,300 2,718,000 45,300 2,718,000
U.S. Bancorp 20,900 2,607,275 20,900 2,607,275
Common Stocks (continued)
- - ----------------------------------------------------------------------------------------------------------------------------------
Financial (continued)
UNUM Corporation 1,200 $ 66,225 1,200 $ 66,225
- - ----------------------------------------------------------------------------------------------------------------------------------
$ 28,278,313 579,473 28,857,786
- - ----------------------------------------------------------------------------------------------------------------------------------
Health 3.76%
Health Management Association - Class A * 55,350 1,584,394 55,350 1,584,394
Johnson & Johnson 1,200 87,975 1,200 87,975
McKesson Corporation 58,400 3,372,600 58,400 3,372,600
Paragon Health Network 54,333 1,079,868 54,333 1,079,868
Schering-Plough 1,080 88,223 1,080 88,223
Sunrise Assisted Living * 40,800 1,825,800 40,800 1,825,800
Watson Pharmacueticals * 79,100 2,847,600 79,100 2,847,600
- - ----------------------------------------------------------------------------------------------------------------------------------
10,710,262 176,198 10,886,460
- - ----------------------------------------------------------------------------------------------------------------------------------
Retail 7.72%
American Eagle Outfitters * 65,100 2,864,400 65,100 2,864,400
Costco Companies, Inc. * 91,000 4,857,125 91,000 4,857,125
Family Dollar Stores, Inc. 85,750 3,258,500 85,750 3,258,500
Federated Department Stores * 71,700 3,714,956 71,700 3,714,956
G & K Services - Class A 6,800 298,350 6,800 298,350
Gap, Inc. 27,825 1,252,125 27,825 1,252,125
Linens 'n Things, Inc. * 25,300 1,389,919 25,300 1,389,919
Safeway, Inc. * 61,600 2,275,350 61,600 2,275,350
TJX Companies, Inc. 53,200 2,407,300 53,200 2,407,300
- - ----------------------------------------------------------------------------------------------------------------------------------
22,318,025 22,318,025
- - ----------------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- - ----------------------------------------------------------------------------------------------------------------------------------
Technology 11.62%
AFC Cable System, Inc. * 54,500 $ 2,118,688 54,500 $ 2,118,688
Affiliated Computer Services - Class A * 35,300 1,171,519 35,300 1,171,519
Airtouch Communications * 122,500 5,994,844 122,500 5,994,844
Applied Graphics Technology * 41,800 2,011,656 41,800 2,011,656
AT&T Corporation 22,800 1,496,250 22,800 1,496,250
BCE, Inc. 35,600 1,486,300 35,600 1,486,300
CACI International * 54,500 1,199,000 54,500 1,199,000
Chancellor Media Corporation - Class A * 1,750 $ 80,281 1,750 80,281
Computer Sciences Corporation 1,560 85,800 1,560 85,800
Computer Task Group 14,400 593,100 14,400 593,100
Dell Computer Corporation * 37,000 2,504,437 37,000 2,504,437
EMC Corporation * 28,400 1,073,875 28,400 1,073,875
ICG Communications * 38,000 1,415,500 38,000 1,415,500
Intelligroup, Inc. * 70,200 1,136,362 70,200 1,136,362
Kellstrom Industries, Inc. * 128,900 3,246,669 128,900 3,246,669
Mobile Telecom Technical Corporation * 63,000 1,409,625 63,000 1,409,625
OfficeMax * 30,800 550,550 30,800 550,550
Sprint Corporation 23,900 1,617,731 23,900 1,617,731
Sun Microsystems, Inc. * 1,750 73,008 1,750 73,008
Telefonica de Espana~ 11,900 1,573,775 11,900 1,573,775
Torchmark 58,600 2,684,613 58,600 2,684,613
WorldCom, Inc. * 2,000 86,125 2,000 86,125
- - ----------------------------------------------------------------------------------------------------------------------------------
33,284,494 325,214 33,609,708
- - ----------------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- - ----------------------------------------------------------------------------------------------------------------------------------
Transportation 2.68%
Airborne Freight Corporation 57,000 $ 2,144,625 57,000 $ 2,144,625
Alaska Airgroup 30,800 1,668,975 30,800 1,668,975
American Classic Voyages Company 30,900 710,700 30,900 710,700
AMR Corporation 9,300 1,331,644 9,300 1,331,644
Continental Airlines - Class B * 30,900 1,817,306 30,900 1,817,306
Werner Enterprises, Inc. 3,250 $ 82,875 3,250 82,875
- - ----------------------------------------------------------------------------------------------------------------------------------
7,673,250 82,875 7,756,125
- - ----------------------------------------------------------------------------------------------------------------------------------
Utilities 2.48%
Conectiv, Inc. - Class A 2,412 81,707 2,412 81,707
Duke Energy Corporation 7,300 434,806 7,300 434,806
FPL Group, Inc. 7,100 456,175 7,100 456,175
GTE Corporation 23,700 1,419,038 23,700 1,419,038
Illinova Corporation 13,800 416,587 13,800 416,587
IPALCO Enterprises, Inc. 9,800 441,613 9,800 441,613
New York State Electric & Gas 11,500 458,562 11,500 458,562
NIPSCO Industries 16,000 448,000 16,000 448,000
U.S. West Communications Group 24,600 1,346,850 24,600 1,346,850
U.S. West Media Group * 47,800 1,661,050 47,800 1,661,050
- - ----------------------------------------------------------------------------------------------------------------------------------
7,164,388 7,164,388
- - ----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous 2.06%
Carlisle Companies, Inc. 33,400 1,640,775 33,400 1,640,775
Delia'S, Inc. * 45,800 1,099,200 45,800 1,099,200
Lennar Corporation 39,962 1,376,191 39,962 1,376,191
Common Stocks (continued)
- - ----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous (continued)
Rent Way, Inc. * 49,100 $ 1,166,125 49,100 $ 1,166,125
Tyco International Limited 12,000 655,500 12,000 655,500
- - ----------------------------------------------------------------------------------------------------------------------------------
5,937,791 5,937,791
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (cost $114,185,755) 155,642,050 2,376,623 158,018,673
- - ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities and 33.04%
Agencies
Federal National Mortgage
Association, 6.64%, 07/02/07 $ 130,000 136,636 $ 130,000 136,636
Federal Home Loan Bank,
5.59%, 1/13/03 105,000 104,310 105,000 104,310
Government National Mortgage Association,
6.50% - 7.38%, 5/15/09 -11/20/22 291,968 297,842 291,968 297,842
U.S. Treasury Notes, 5.50% -6.75%,
4/30/00 - 2/15/26 $ 12,000,000 11,912,160 105,000 106,964 12,105,000 12,019,124
U.S. Treasury Bonds, 6.50% -7.50%,
2/15/23 - 11/15/26 77,523,000 82,736,422 220,000 255,998 77,743,000 82,992,420
- - -----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government
Securities and Agencies (cost $87,953,661) 94,648,582 901,750 95,550,332
- - -----------------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 0.15%
CS First Boston, 7.18%, 2/25/18, CMO 25,000 25,251 25,000 25,251
Ford Motor Credit, 7.20%, 6/15/07 45,000 47,713 45,000 47,713
Key Auto Finance Trust Series 1997-2
Class A3, 6.10%, 11/15/00 50,000 50,093 50,000 50,093
Corporate Bonds (continued)
Merrill Lynch, 6.64%, 9/19/02 $ 45,000 $ 45,975 $ 45,000 $ 45,975
NationsBank Corporation, 7.50%, 9/15/06 35,000 37,562 35,000 37,562
Norwest Corporation, 6.80%,5/15/02 60,000 61,541 60,000 61,541
PNC Student Loan Trust, 6.73%,1/25/07 75,000 76,904 75,000 76,904
Travelers Group, 8.63%, 2/01/07 40,000 45,951 40,000 45,951
Union Acceptance Corporation, 6.48%,5/10/04 45,000 45,352 45,000 45,352
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (cost $425,855) 436,342 436,342
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Fixed Income Securities (cost $88,379,516) $ 94,648,582 1,338,092 95,986,674
- - -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Investment 11.10%
- - -----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company
Dated 03/31/98, 6.05%, due
04/01/98,
collateralized by $32,440,607
Federal
Home Loan Mortgage Corporation,
7.00%, 11/01/27, market value
$32,765,700, (cost $32,108,296) $ 31,581,849 31,581,849 526,447 526,447 32,108,296 32,108,296
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost 98.93%
$234,673,567) 281,872,481 4,241,162 286,113,643
- - ------------------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities 1.07% 3,251,380 13,143 3,096,235(a)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $ 285,123,861 $ 4,254,305 289,209,878
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
* Non-income producing.
~ American Depository Receipts.
CMO- Collateralized Mortgage
Obligations
(a) Reflects a pro forma adjustment of
$168,288.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, for Mentor Strategy Portfolio, Mentor Balanced Portfolio and the Pro
Forma Combined were as follows:
Purchases Sales
- - ------------------------------------------------------------------
Mentor Strategy Portfolio $ 88,381,538 $ 144,726,891
Mentor Balanced Portfolio 1,573,639 2,277,180
Pro Forma Combined 89,955,177 147,004,071
- - ------------------------------------------------------------------
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes were $231,192,822, $3,480,745 and $234,673,567 for Mentor
Strategy Portfolio, Mentor Balanced Portfolio and Pro Forma Combined,
respectively. Gross unrealized appreciation and depreciation of investments at
March 31, 1998, based on such costs were as follows:
Gross Gross Net
Unrealized Unrealized Unrealized
Appreciation Depreciation Appreciation
- - --------------------------------------------------------------------------------
Mentor Strategy Portfolio $ 50,806,778 $ (127,119) $ 50,679,659
Mentor Balanced Portfolio 766,587 (6,170) 760,417
Pro Forma Combined 51,573,365 (133,289) 51,440,076
- - --------------------------------------------------------------------------------
<PAGE>
Mentor Balanced Portfolio
Pro Forma Combining
Statements of Assets and Liabilities
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION> Mentor Mentor
Strategy Balanced Pro Forma Pro Forma
Portfolio Portfolio Adjustments Combined
<S> <C>
Assets
Investments, at market value
Investment securities $ 250,290,632 $ 3,714,715 $ - $ 254,005,347
Repurchase agreements 31,581,849 526,447 - 32,108,296
------------- ----------- ------------ -------------
Total investments (pro forma
combined cost $234,673,567) 281,872,481 4,241,162 - 286,113,643
Collateral for securities loaned 68,067,637 932,129 - 68,999,766
Receivables
Investments sold 1,797,664 - - 1,797,664
Fund shares sold 272,519 - - 272,519
Dividends and interest 2,126,104 17,261 - 2,143,365
Deferred expenses 15,138 - (15,138)(a) -
-------------- ------------ ------------- --------------
Total assets 354,151,543 5,190,552 (15,138) 359,326,957
-------------- ------------ ------------- --------------
Liabilities
Payables
Securities loaned 68,067,637 932,129 - 68,999,766
Fund shares redeemed 811,048 - - 811,048
Accrued expenses and other liabilities 148,997 4,118 153,150 (b) 306,265
-------------- ------------ ------------- --------------
Total liabilities 69,027,682 936,247 153,150 70,117,079
-------------- ------------ ------------- --------------
Net Assets $ 285,123,861 $ 4,254,305 $ (168,288) $ 289,209,878
Net Assets represented by:
Additional paid-in capital $ 238,532,347 $ 2,793,838 - 241,326,185
Accumulated net investment income 1,104,109 48,366 (168,288) 984,187
Accumulated net realized gain (loss) on
investment transactions (5,192,254) 651,684 - (4,540,570)
Net unrealized appreciation of investments 50,679,659 760,417 - 51,440,076
-------------- ------------ ------------- --------------
Net Assets $ 285,123,861 $ 4,254,305 $ (168,288) $ 289,209,878
============== ============ ============= ==============
Net Asset Value per Share
Class A Shares $ 16.05 $ 17.46
Class B Shares $ 15.65 $ 17.46 $ 17.46
Class Y Shares $ 16.05 $ 17.46
Offering Price per Share
Class A Shares $ 17.03* $ 18.53
Class B Shares $ 15.65 $ 17.46
Class Y Shares $ 16.05 $ 17.46
Shares Outstanding
Class A Shares 2,157,686 - (175,651)(c) 1,982,035
Class B Shares 16,006,748 243,683 (1,911,106)(c)(d) 14,338,525
Class Y Shares 67 - 243,513 (c)(d) 243,580
-------------- ------------ -------------
Total Shares Outstanding 18,164,501 243,683 16,564,140
============== ============ =============
</TABLE>
* Computation of offering price: 100/94.25 of net asset value.
(a) Adjustment to write-off organizational cost associated with the Strategy
Portfolio.
(b) Represents expenses accrued in connection with the combination.
(c) Reflects the adjustment for the conversion of shares from the Strategy
Portfolio to the Balanced Portfolio.
(d) Reflects the reclassification made in connection with recharacterization
of approximately 243,519 shares from Class B to Class Y.
See notes to proforma combining financial statements.
<PAGE>
Mentor Balanced Portfolio
Pro Forma Combining
Statements of Operations
March 31, 1998 (Unaudited)*
<TABLE>
<CAPTION>
Mentor Mentor
Strategy Portfolio Balanced Portfolio
<S> <C>
Investment income
Dividends $ 1,264,885 $ 32,160
Interest net of premium 10,016,516 95,121
-------------------- ------------------
Total investment income 11,281,401 127,281
-------------------- ------------------
Expenses
Management fee 2,741,587 30,082
Distribution fee 2,131,388 30,082
Shareholder service fee 806,348 10,028
Transfer agent fee 449,548 -
Administration fee 322,540 5,904
Shareholder reports and postage expenses 84,956 206
Custodian and accounting fees 81,178 8,767
Registration expenses 63,879 703
Organizational expenses 20,151 -
Legal and audit fees 19,931 200
Directors' fees and expenses 8,488 93
Miscellaneous 51,797 635
-------------------- ------------------
Total expenses 6,781,791 86,700
Deduct
Waiver of distribution fee - 25,847
Waiver of management fee - 24,862
Waiver of shareholder servicing fee - 10,028
Waiver of administration fee - 5,904
-------------------- ------------------
Net expenses 6,781,791 20,059
-------------------- ------------------
Net investment income 4,499,610 107,222
Realized and unrealized gain (loss) on investments
Net realized gain (loss) on investments 9,041,143 679,340
Change in unrealized appreciation on investments 53,900,145 401,624
-------------------- ------------------
Net gain on investments 62,941,288 1,080,964
-------------------- ------------------
Net increase in net assets resulting from operations $ 67,440,898 $ 1,188,186
==================== ==================
Pro Forma Pro Forma
Adjustments Combined
Investment income
Dividends $ - $ 1,297,045
Interest net of premium - 10,111,637
--------------- ----------------
Total investment income $ - 11,408,682
--------------- ----------------
Expenses
Management fee $ (321,889)(e) 2,449,780
Distribution fee (30,082)(f) 2,131,388
Shareholder service fee 217 (g) 816,593
Transfer agent fee 4,212 (g) 453,760
Administration fee (1,807)(e) 326,637
Shareholder reports and postage expenses 75,150 (h) 160,312
Custodian and accounting fees - 89,945
Registration expenses 20,000 (h) 84,582
Organizational expenses (5,013)(f) 15,138
Legal and audit fees 58,000 (h) 78,131
Directors' fees and expenses - 8,581
Miscellaneous - 52,432
--------------- ----------------
Total expenses (171,130) 6,667,279
Deduct
Waiver of distribution fee (25,847)(e) -
Waiver of management fee (24,862)(e) -
Waiver of shareholder servicing fee (10,028)(e) -
Waiver of administration fee (5,904)(e) -
--------------- ----------------
Net expenses (134,571) 6,667,279
--------------- ----------------
Net investment income 134,571 4,741,403
Realized and unrealized gain (loss) on investments
Net realized gain (loss) on investments - 9,720,483
Change in unrealized appreciation on investments - 54,301,769
--------------- ----------------
Net gain on investments - 64,022,252
--------------- ----------------
Net increase in net assets resulting from operations $ 134,571 $ 68,763,655
=============== ================
</TABLE>
(e) Reflects a decrease based on surviving portfolio's fee schedule and pro
forma combined assets.
(f) Reflects expected cost savings when the portfolios are combined.
(g) Reflects an increase based on surviving portfolio's combined assets or
number of shareholder accounts..
(h) Reflects expected costs related to the share registration and proxy
information.
* For the period from April 1, 1997 through March 31, 1998.
See notes to proforma combining financial statements.
<PAGE>
Mentor Balanced Portfolio
Notes to Pro Forma Combining Financial Statements
March 31, 1998 (Unaudited)
1. Basis of Combination - The Pro Forma Statement of Assets and Liabilities and
the related Pro Forma Statement of Operations ("Pro Forma Statements") reflect
the portfolios of Mentor Strategy Portfolio ("Strategy Portfolio") and Mentor
Balanced Portfolio ("Balanced Portfolio") as of and for the twelve-month period
ending March 31, 1998.
The Pro Forma Statements give effect to the proposed transfer of all assets and
liabilities of Strategy Portfolio in exchange for shares of Balanced Portfolio.
The Pro Forma Statements reflect the expense of each Portfolio in carrying out
its obligations under the Agreement and Plan of Reorganization (the
"Reorganization") as though the merger occurred at the beginning of the period
presented.
Under the Reorganization, Balanced Portfolio will acquire substantially all of
the assets and assume certain identified liabilities of Strategy Portfolio.
Thereafter, there will be a distribution of such shares of Balanced Portfolio to
shareholders of Strategy Portfolio in liquidation and subsequent termination
thereof. The information contained herein is based on the experience of each
Portfolio for the period ended March 31, 1998 and is designed to permit the
shareholders of the combined portfolio to evaluate the financial effect of the
proposed Reorganization. The expenses of Balanced Portfolio and Strategy
Portfolio in connection with the Reorganization (including the cost of any proxy
soliciting agents) will be borne by each portfolio relative to their respective
net asset values.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assumes the issuance of additional shares of Balanced Portfolio which would have
been issued at March 31, 1998 in connection with the proposed Reorganization.
The amount of additional shares assumed to be issued was calculated based on
total net assets of Strategy Portfolio as of March 31, 1998 of $285,123,861
(Class A $34,626,465, Class B $250,496,326 and Class Y $1,070) and the net asset
value per share of Balanced Portfolio of $17.46. Additional shares issued were
converted and distributed to the aforementioned Portfolio according to its
relative share value conversion ratio.
Under the Reorganization, the combined portfolio issues three classes of shares.
Class A shares are sold subject to a maximum sales charge of 5.75% payable at
the time of purchase. Class B shares are sold subject to a contingent deferred
sales charge payable upon redemption which decreases depending on when shares
were purchased and how long they have been held. Class Y shares are sold to
institutions and high net-worth individual investors and are not subject to any
sales or contingent deferred sales charges.
3. The Pro Forma Operations - The Pro Forma Statement of Operations assumes
similar rates of gross investment income for the investments of each Portfolio.
Accordingly, the combined gross investment income is equal to the sum of each
Portfolio's gross investment income. Pro Forma operating expenses include the
actual expenses of each Portfolio and the combined Portfolio, with certain
expenses adjusted to reflect the expected expenses of the combined entity. The
investment advisory, administration and distribution fees have been charged to
the combined portfolio based on the fee schedule in effect for Balanced
Portfolio at the combined level of average net assets for the period ended March
31, 1998.
<PAGE>
MENTOR FUNDS
Form N-14
PART C
OTHER INFORMATION
Item 15. Indemnification.
Under the terms of Article VI of Registrant's Declaration of Trust, the
Registrant is required to reimburse Trustees for all expenses incurred in
connection with litigation, proceedings and claims and the obligations of the
Trust under Article XI thereof and the By-Laws to indemnify its Trustees,
officers, employees, shareholders and agents, and any contract obligation to
indemnify principal underwriters under Section 3 of Article VII of the
Registrant's Declaration of Trust.
Under the terms of Article XI of Registrant's Declaration of Trust, the
Trustees , officers, employees, and agents of the Trust, in incurring any
liabilities or obligations, or in taking or omitting any other actions for or in
connection with the Trust, shall be deemed to be acting as a Trustee , officer,
employee, or agent of the Trust, and not in his own individual capacity.
If, notwithstanding Section 3 of Article XI of Registrant's Declaration
of Trust, any of the Trustees , officers, employees, and agents of the Trust
shall be held liable to any other person by omission of an express exculpatory
clause from any agreement, undertaking or obligation, the shareholder, Trustee,
officer, employee or agent shall be indemnified and reimbursed by the Trust.
This summary is qualified in its entirety by reference to the
Registrant's Declaration of Trust, incorporated by reference as Exhibit (1).
Item 16. Exhibits.
(1) (i) Conformed copy of Declaration of Trust of the
Registrant, with Amendments No. 1 and 2 (2);
(ii) Amendment No. 5 to the Declaration of Trust of the
Registrant (8);
(iii) Form of Amendment to the Declaration of Trust of the
Registrant (9);
(iv) Form of Proposed Amendment to the Declaration of
Trust of the Registrant to be dated as of May 12,
1998 (10);
(2) Copy of By-Laws of the Registrant (1);
(3) Not applicable;
(4) See Appendix A to the SAI (12);
(5) Applicable Sections of Registrant's Declaration of Trust and
By-Laws (1)(2)(8)(9);
<PAGE>
(6) (i) Form of Management Agreement of the Registrant
(Capital Growth, Income and Growth, Quality Income,
and Municipal Income Portfolios) (10);
(ii) Form of Investment Advisory Agreement (Municipal
Income Portfolio) (10);
(iii) Form of Investment Advisory Agreement (Income and
Growth Portfolio) (10);
(iv) Form of Investment Advisory and Management Agreement
(Perpetual Global Portfolio) (5);
(v) Form of Investment Advisory and Management Agreement
(Growth Portfolio) (10);
(vi) Form of Investment Advisory and Management Agreement
(Strategy Portfolio) (10);
(vii) Form of Investment Advisory and Management Agreement
(Short-Duration Income Portfolio) (10);
(viii) Form of Investment Advisory and Management Agreement
(Balanced Portfolio) (10);
(ix) Form of Investment Advisory and Management Agreement
(Institutional Money Market Portfolio) (10);
(x) Form of Investment Advisory and Management Agreement
(Institutional U.S. Government Money Market
Portfolio) (10);
(xi) Form of Investment Advisory and Management Agreement
(Growth Opportunities Portfolio) (7);
(xii) Form of Investment Advisory and Management Agreement
(Mentor High Income Portfolio) (10);
(xiii) Sub-Advisory Agreement (Mentor High Income Portfolio)
(10);
(xiv) Form of Investment Advisory and Management Agreement
(Mentor Asset Allocation Portfolio) (9);
(7) Form of Distribution Agreement of the Registrant (10);
(8) Not applicable;
(9) (i) Conformed copy of Custodian Contract of the
Registrant with Investors Fiduciary Trust Company
(2);
<PAGE>
(ii) Conformed copy of Custodian Contract of the
Registrant with State Street Bank and Trust Company
(2);
(iii) Form of Custodian Contract with State Street Bank and
Trust Company in respect of foreign securities (4);
(10) (i) Plan of Distribution (Class B Shares) (8);
(ii) Revised Exhibit A to Plan of Distribution (9);
(iii) Amended and Restated Rule 10f-3(d) Plan (6);
(11) Opinion and Consent of counsel as to legality of the
Securities being registered (7);
(12) Form of Opinion and Consent of counsel as to tax matters (12);
(13) Not applicable;
(14) Consent of Independent Auditors (12);
(15) Not applicable;
(16) Powers of Attorney (12).
- - ----------------------------
(1) Incorporated by reference to Registrant's Pre-Effective Amendment No. 1
on Form N-1A filed April 14, 1992.
(2) Incorporated by reference to Registrant's Pre-Effective Amendment No. 3
on Form N-1A filed May 14, 1993.
(3) Incorporated by reference to Registrant's Post-Effective Amendment No.
8 on Form N-1A filed January 27, 1995.
(4) Incorporated by reference to Registrant's Post-Effective Amendment No.
10 on Form N-1A filed January 15, 1996.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No.
11 on Form N-1A filed November 29, 1996.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No.
13 on Form N-1A filed March 4, 1997.
(7) Incorporated by reference to Registrant's Post-Effective Amendment No.
14 on Form N-1A filed November 7, 1997.
<PAGE>
(8) Incorporated by reference to Registrant's Post-Effective Amendment No.
15 on Form N-1A filed December 22, 1997.
(9) Incorporated by reference to Registrant's Post-Effective Amendment No.
16 on Form N-1A filed January 30, 1998.
(10) Incorporated by reference to Registrant's Post-Effective Amendment No.
17 filed on May 12, 1998.
(11) Incorporated by reference to Registrant's Post-Effective Amendment No.
18 filed on May 12, 1998.
(12) Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by
any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) under the Securities Act of 1933,
the reoffering prospectus will contain the information called
for by the applicable registration form for the reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that
is filed under paragraph (1) above will be filed as a part of
an amendment to this Registration Statement and will not be
used until the amendment is effective, and that, in
determining any liability under the Securities Act of 1933,
each post-effective amendment shall be deemed to be a new
Registration Statement for the securities offered therein, and
the offering of the securities at that time shall be deemed to
be the initial bona fide offering of them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of Richmond in the
State of Virginia on the 8th day of May, 1998.
Mentor Funds
By:/s/Paul F. Costello
--------------------------------------------
Paul F. Costello
President and Principal Executive Officer
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - ---------- ----- -----
<S> <C>
*
- - -------------------------- Chairman and Trustee May 8, 1998
Daniel J. Ludeman (Chief Executive Officer)
*
- - -------------------------- Trustee May 8, 1998
Peter J. Quinn, Jr.
*
- - -------------------------- Trustee May 8, 1998
Arnold H. Dreyfuss
*
- - -------------------------- Trustee May 8, 1998
Thomas F. Keller
*
- - -------------------------- Trustee May 8, 1998
Louis W. Moelchert, Jr.
- - -------------------------- Trustee May 8, 1998
Troy A. Peery, Jr.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- - ---------- ----- ----
<S> <C>
*
- - ---------------------- Trustee May 8, 1998
Arch T. Allen, III
- - ---------------------- Trustee May 8, 1998
Weston E. Edwards
- - ---------------------- Trustee May 8, 1998
Jerry R. Barrentine
- - ---------------------- Trustee May 8, 1998
J. Garnett Nelson
/s/Paul F. Costello
- - ---------------------- President May 8, 1998
Paul F. Costello
/s/Paul F. Costello
- - ---------------------- Treasurer (Principal May 8, 1998
Terry L. Perkins Financial and Accounting
Officer)
/s/Paul F. Costello
- - ---------------------- Attorney-in-fact May 8, 1998
Paul F. Costello
</TABLE>
<PAGE>
Exhibit Index
Exhibit No.
- - -----------
Description
-----------
11 Opinion and Consent of Counsel
12 Opinion and Consent of Counsel as to
tax matters
14 Consent of Independent Auditors
16 Powers of Attorney
Exhibit 11
May 15, 1998
Mentor Funds
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
We are furnishing this opinion in connection with the Registration
Statement on Form N-14 (the "Registration Statement") of Mentor Funds (the
"Trust") relating to the registration of an indefinite number of shares of
beneficial interest of Mentor Balanced Portfolio (the "Balanced Portfolio"), a
series of shares of beneficial interest of the Trust (the "Shares").
In connection with this opinion, we have examined such records,
documents, and certificates of public officials and the Trust as we have deemed
necessary for the purpose of giving this opinion. We have assumed the
genuineness of all items submitted to us as originals and the conformity with
originals of all items submitted to us as copies.
We were not involved in the organization of the Trust, and assume
that in connection with the filing of the original registration statement of the
Trust under the Securities Act of 1933, as amended, you received an opinion of
other Massachusetts counsel to the effect that the Trust is an entity of the
type commonly known as a "Massachusetts business trust". We have not examined
independently the question of what law would govern the interpretation or
enforcement of any provision of the Declaration of Trust and have for this
purpose assumed that the Trust is a duly established and validly existing
unincorporated voluntary association with transferable shares under
Massachusetts law (commonly known as a "Massachusetts business trust") and that
the interpretation and enforcement of each provision of the Declaration of Trust
will be governed by the laws of The Commonwealth of Massachusetts.
We have made such examination of Massachusetts law as we have deemed
relevant for purposes of this opinion. We express no opinion as to the effect of
laws, rules, and regulations of any state or jurisdiction other than The
Commonwealth of Massachusetts. We understand that the Shares are to be issued in
accordance with the terms of an Agreement and Plan of Reorganization (the
"Agreement") between the Trust on behalf of the Balanced Portfolio and the Trust
on behalf of Mentor Strategy Portfolio, another series of shares of beneficial
interest of the Trust. We assume that the Board of Trustees of the Trust will
have duly adopted and approved the Agreement, in the form or in substantially
the form filed as part of the Registration Statement, in respect of each such
Portfolio prior to the time of the issuance of the Shares.
<PAGE>
Mentor Funds May 15, 1998
Based upon and subject to the foregoing, we are of the opinion that the
Shares, upon delivery thereof and payment therefor in accordance with the
Registration Statement, will be duly authorized, validly issued, fully paid, and
nonassessable by the Trust.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the
obligations of the trust. However, the Declaration of Trust disclaims liability
of any shareholder for any debt, claim, action, demand, suit, proceeding,
judgement, decree, liability, or obligation of any kind against, or with respect
to, the Trust or any series or class of the Trust. The Declaration of Trust
provides for indemnification by the Trust of any shareholder or former
shareholder to the full extent of any such liability. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
This opinion is intended only for your use in connection with the
offering of Shares and may not be relied upon by any other person.
We hereby consent to the inclusion of this opinion as an exhibit to the
Trust's Registration Statement to be filed with the Securities and Exchange
Commission.
Very truly yours,
/s/ ROPES & GRAY
------------------
ROPES & GRAY
July ___, 1998
Mentor Strategy Portfolio
Mentor Balanced Portfolio
Mentor Funds
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
We have acted as counsel in connection with the Agreement and Plan of
Reorganization dated as of _________, 1998, (the "Agreement"), between Mentor
Funds, a Massachusetts business trust (the "Trust"), on behalf of its Mentor
Strategy Portfolio series (the "Acquired Fund") and the Trust, on behalf of its
Mentor Balanced Portfolio series (the "Acquiring Fund"). The Agreement describes
a proposed transaction (the "Transaction") to occur on ___________, 1998 (the
"Exchange Date"), pursuant to which Acquiring Fund will acquire substantially
all of the assets of Acquired Fund in exchange for shares of beneficial interest
in Acquiring Fund (the "Acquiring Fund Shares") and the assumption by Acquiring
Fund of all of the liabilities of Acquired Fund following which the Acquiring
Fund Shares received by Acquired Fund will be distributed by Acquired Fund to
its shareholders in liquidation and termination of Acquired Fund. This opinion
as to certain federal income tax consequences of the Transaction is furnished to
you pursuant to Sections 10(g) and 11(g) of the Agreement. Capitalized terms not
defined herein are defined in the Agreement.
Acquired Fund is a series of the Trust, which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. Shares of Acquired Fund are redeemable at net
asset value at each shareholder's option. Acquired Fund has elected to be a
regulated investment company for federal income tax purposes under Section 851
of the Internal Revenue Code of 1986, as amended (the "Code").
Acquiring Fund is a series of the Trust. Shares of Acquiring Fund are
redeemable at net asset value at each shareholder's option.
For purposes of this opinion, we have considered the Agreement, the
Proxy Statement, the Registration Statement (including the items incorporated by
reference therein), and such other items as we have deemed necessary to render
this opinion. In addition, you have represented to us the following facts,
occurrences and information upon which you have
<PAGE>
Mentor Strategy Portfolio
Mentor Balanced Portfolio -2- July ___, 1998
indicated we may rely in rendering this opinion (whether or not contained or
reflected in the documents and items referred to above):
1. Acquired Fund will transfer to Acquiring Fund all of its assets, and
Acquiring Fund will assume all of the liabilities of Acquired Fund, as of the
Exchange Date.
2. The fair market value of the Acquiring Fund Shares received by each
Acquired Fund shareholder will be approximately equal to the fair market value
of the Acquired Fund shares surrendered in exchange therefor. The Acquired Fund
shareholders will receive no consideration other than Acquiring Fund Shares
(which may include fractional shares) in exchange for their shares of beneficial
interest in Acquired Fund (the "Acquired Fund Shares").
3. None of the compensation received by any shareholder-employees of
Acquired Fund, if any, will be separate consideration for, or allocable to, any
of their Acquired Fund Shares; none of the Acquiring Fund Shares received by any
Acquired Fund shareholder- employees will be separate consideration for, or
allocable to, any employment; and the compensation paid to any Acquiring Fund or
Acquired Fund shareholder-employees, if any, will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
4. There is no plan or intention by any Acquired Fund shareholder who
owns 5% or more of the total outstanding Acquired Fund Shares, and to the best
of the knowledge of the management of Acquired Fund, there is no plan or
intention on the part of the remaining Acquired Fund shareholders to sell,
exchange, or otherwise dispose of a number of Acquiring Fund Shares received in
the Transaction that would reduce Acquired Fund shareholders' ownership of
Acquiring Fund Shares to a number of Acquiring Fund Shares having a value, as of
the date of the Transaction, of less than 50 percent of the value of all of the
formerly outstanding Acquired Fund Shares as of the same date. For purposes of
this representation, Acquiring Fund Shares or Acquired Fund Shares surrendered
by Acquired Fund shareholders in redemption or otherwise disposed of, where such
dispositions, if any, appear to be initiated by Acquired Fund shareholders in
connection with or as a result of the Agreement or the Transaction, will be
treated as outstanding Acquired Fund Shares on the date of the Transaction.
5. Acquiring Fund has no plan or intention to reacquire any of the
Acquiring Fund Shares issued in the Transaction, except for Acquiring Fund
Shares reacquired in the ordinary course of its business as an open-end
investment company.
6. Acquiring Fund will acquire at least 90 percent of the fair market
value of the net assets and at least 70 percent of the fair market value of the
gross assets held by Acquired
<PAGE>
Mentor Strategy Portfolio
Mentor Balanced Portfolio -3- July ___, 1998
Fund immediately prior to the Transaction. For purposes of this representation,
(a) amounts paid by Acquired Fund, out of the assets of Acquired Fund, to
Acquired Fund shareholders in redemption of Acquired Fund Shares, where such
redemptions, if any, appear to be initiated by Acquired Fund shareholders in
connection with or as a result of the Agreement or the Transaction, (b) amounts
used by Acquired Fund to pay expenses of the Transaction, and (c) amounts used
to effect all redemptions and distributions (except for regular, normal
dividends declared and paid in order to ensure Acquired Fund's continued
qualification as a regulated investment company and to avoid fund-level tax
(including for this purpose any dividends referred to in representation 17
herein)) made by Acquired Fund immediately preceding the transfer will be
included as assets of Acquired Fund held immediately prior to the Transaction.
Further, to the best of the knowledge of the managements of each of Acquiring
Fund and Acquired Fund, this representation will remain true even if the
amounts, if any, that Acquiring Fund pays after the Transaction to Acquiring
Fund shareholders who are former Acquired Fund shareholders in redemption of
Acquiring Fund Shares received in exchange for Acquired Fund Shares, where such
redemptions, if any, appear to be initiated by such shareholders in connection
with or as a result of the Agreement or the Transaction, are considered to be
assets of Acquired Fund that were not transferred to Acquiring Fund.
7. Immediately after the Transaction, the shareholders of Acquired Fund
will be in control of Acquiring Fund within the meaning of Section 304(c) of the
Code.
8. The fair market value of the assets transferred to Acquiring Fund by
Acquired Fund will equal or exceed the sum of the liabilities to be assumed by
Acquiring Fund.
9. The total adjusted basis of the assets of Acquired Fund transferred
to Acquiring Fund will equal or exceed the sum of the liabilities to be assumed
by Acquiring Fund.
10. In the Transaction, Acquired Fund will transfer to Acquiring Fund
at least 50% of its historic business assets (see definition below).
11. Following the Transaction, Acquiring Fund will continue to use a
significant portion (in this case, at least 50%) of the historic business assets
of Acquired Fund. Specifically, Acquiring Fund will use such significant portion
of Acquired Fund's historic business assets in its business by continuing to
hold at least such portion of the total assets transferred to it by Acquired
Fund. That is, Acquiring Fund will continue to hold historic business assets of
Acquired Fund, defined for purposes of this opinion as those assets transferred
to it on the Exchange Date which were either (i) acquired by Acquired Fund prior
to its management's decision to propose to its Trustees that it transfer any or
all of its assets to Acquiring Fund, or (ii) acquired subsequent to such
decision but not with a view to the Agreement or the Transaction, in an amount
equal to at least 50% of the assets in Acquired Fund's portfolio held on the
Exchange Date, as increased by the amounts, if any, that
<PAGE>
Mentor Strategy Portfolio
Mentor Balanced Portfolio -4- July ___, 1998
Acquired Fund paid to its shareholders in redemption of its shares, where such
redemptions, if any, appear to have been initiated by such shareholders in
connection with or as a result of the Agreement or Transaction. In making this
determination, dispositions made in the ordinary course of Acquiring Fund's
business as an open-end investment company (i.e., dispositions made in the
ordinary course of business and independent of the Transaction) shall not be
taken into account.
12. At the time of the Transaction, Acquiring Fund will not have
outstanding any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire stock in Acquiring Fund that,
if exercised or converted, would affect the Acquired Fund shareholders'
acquisition or retention of control of Acquiring Fund as defined in Section
304(c) of the Code.
13. Acquiring Fund has no plan or intention to sell or otherwise
dispose of any of the assets of Acquired Fund acquired in the Transaction,
except for (i) dispositions made in the ordinary course of its business as a
series of an open-end investment company (i.e., dispositions made in the
ordinary course of business and independent of the Transaction) and (ii)
dispositions made by Acquiring Fund to realign its portfolio in order to reflect
its investment objective and conform to its investment restrictions and/or to
maintain its qualification as a "regulated investment company" for federal
income tax purposes under section 851 of the Code ("Realignment Dispositions"),
which Realignment Dispositions shall be limited to the extent required by the
above representation relating to the continued use by Acquiring Fund of the
historic business assets of Acquired Fund. For purposes of this representation,
Realignment Dispositions made by Acquired Fund, if any, will be considered to
have been made by Acquiring Fund.
14. The liabilities of Acquired Fund to be assumed by Acquiring Fund
were incurred by Acquired Fund in the ordinary course of its business and are
associated with the assets transferred to Acquiring Fund. For purposes of this
paragraph, expenses of the Transaction are not treated as liabilities.
15. The Transaction will offer shareholders of the Acquired Fund an
investment opportunity comparable to that currently provided by the Acquired
Fund, but with the potential for lower operating expenses due to economies of
scale.
16. All legal and accounting fees and expenses, printing, filing and
proxy solicitation expenses, portfolio transfer taxes (if any), brokerage and
similar expenses, and other fees and expenses incurred in connection with the
transactions contemplated by the Agreement will be borne equally by the
Acquiring Fund and the Acquired Fund; provided, however, that expenses will be
paid by the party directly incurring such expenses if and to the extent that the
payment by the other party of such expenses would result in the disqualification
of such party
<PAGE>
Mentor Strategy Portfolio
Mentor Balanced Portfolio -5- July ___, 1998
as a "regulated investment company" within the meaning of Section 851 of the
Code. All such fees and expenses incurred and borne by either of Acquiring
Fund, Acquired Fund and Mentor Investment Advisors, LLC shall be solely and
directly related to the Transaction and shall be paid directly by Acquired Fund,
Acquiring Fund and Mentor Investment Advisors, LLC, as the case may be, to the
relevant providers of services or other payees, in accordance with the
principles set forth in Rev. Rul. 73-54, 1973-1 C.B. 187.
Acquired Fund shareholders will pay their respective expenses, if any,
incurred in connection with the Transaction.
17. For federal income tax purposes, Acquired Fund qualifies as a
regulated investment company, and the provisions of Sections 851 through 855 of
the Code apply to Acquired Fund for its current taxable year beginning October
1, 1997 and will continue to apply to it through the Exchange Date.
In that regard, Acquired Fund will declare to Acquired Fund
shareholders of record on or prior to the Exchange Date a dividend or dividends
which together with all previous such dividends shall have the effect of
distributing all of Acquired Fund's investment company taxable income (see Code
Section 852) (computed without regard to any deduction for dividends paid) and
all of Acquired Fund's net realized capital gain (after reduction for any
capital loss carryover) in each case for both the taxable year ending September
30, 1997 and the short taxable period beginning on October 1, 1997 and ending on
the Exchange Date. Such dividends will be made to ensure continued qualification
of Acquired Fund as a regulated investment company for tax purposes and to
eliminate fund-level tax.
18. For federal income tax purposes, Acquiring Fund qualifies as a
regulated investment company, and the provisions of Section 851 through 855 of
the Code apply to Acquiring Fund for its current taxable year beginning October
1, 1997 and will continue to apply to it through the Exchange Date.
19. There is no intercorporate indebtedness existing between Acquired
Fund and Acquiring Fund.
20. Acquired Fund will distribute the Acquiring Fund Shares it receives
in the Transaction to its shareholders as provided in the Agreement.
21. Acquired Fund is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
Based on the foregoing representations and our review of the documents
and items referred to above, we are of the opinion that for federal income tax
purposes:
<PAGE>
Mentor Strategy Portfolio
Mentor Balanced Portfolio -6- July ___, 1998
(i) No gain or loss will be recognized by Acquired Fund upon the
transfer of Acquired Fund's assets to Acquiring Fund in exchange
for Acquiring Fund Shares and the assumption by Acquiring Fund of
the liabilities of Acquired Fund, or upon the distribution of
Acquiring Fund Shares by Acquired Fund to its shareholders in
liquidation;
(ii) No gain or loss will be recognized by the Acquired Fund
shareholders upon the exchange of their Acquired Fund Shares for
Acquiring Fund Shares;
(iii) The basis of Acquiring Fund Shares an Acquired Fund shareholder
receives in connection with the Transaction will be the same as the
basis of his or her Acquired Fund Shares exchanged therefor;
(iv) An Acquired Fund shareholder's holding period for his or her
Acquiring Fund Shares will be determined by including the period
for which he or she held the Acquired Fund Shares exchanged
therefor, provided that he or she held such Acquired Fund Shares as
capital assets;
(v) No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Acquired Fund in exchange for Acquiring
Fund Shares and the assumption by Acquiring Fund of the liabilities
of Acquired Fund;
(vi) The basis in the hands of Acquiring Fund of the assets of Acquired
Fund transferred to Acquiring Fund in the Transaction will be the
same as the basis of such assets in the hands of Acquired Fund
immediately prior to the transfer; and
(vii) The holding periods of the assets of Acquired Fund in the hands of
Acquiring Fund will include the periods during which such assets
were held by Acquired Fund.
Very truly yours,
Ropes & Gray
Exhibit 14
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Mentor Funds:
We consent to the use of our reports dated November 12, 1997, incorporated
herein by reference in this Registration Statement on Form N-14 (File No.
811-5159).
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
May 15, 1998
Exhibit 16
<PAGE>
POWER OF ATTORNEY
We, the undersigned Officers and Trustees of The Mentor Funds (the
"Trust"), hereby severally constitute and appoint Daniel J. Ludeman, Peter J.
Quinn, and Paul F. Costello and each of them and each of them, to sign for us,
and in our names and in the capacities indicated below, the Registration
Statement on Form N-14 of the Trust and any and all amendments (including
post-effective amendments) to said Registration Statement and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto our said attorneys, and each
of them acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratify and
confirm all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
WITNESS our hands and common seal on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C>
- - ----------------------- Trustee May __, 1998
Arch T. Allen, III
- - ----------------------- Trustee May __, 1998
Jerry R. Barrentine
- - ----------------------- Trustee May 7, 1998
Arnold H. Dreyfuss
- - ----------------------- Trustee May __, 1998
Weston E. Edwards
/s/ Thomas F. Keller
- - ----------------------- Trustee May __, 1998
Thomas F. Keller
<PAGE>
- - ----------------------- Chairman; Trustee May __, 1998
Daniel J. Ludeman
/s/ Louis W. Moelchert, Jr.
- - ----------------------- Trustee May 6, 1998
Louis W. Moelchert, Jr.
- - ----------------------- Trustee May __, 1998
J. Garnett Nelson
- - ----------------------- Trustee May __, 1998
Troy A. Peery, Jr.
/s/ Peter J. Quinn, Jr.
- - ----------------------- Trustee May __, 1998
Peter J. Quinn, Jr.
/s/ Paul F. Costello
- - ----------------------- President; Principal May __, 1998
Paul F. Costello Executive Officer
/s/ Terry L. Perkins
- - ----------------------- Treasurer; Principal May __, 1998
Terry L. Perkins Financial and
Accounting Officer
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned Officers and Trustees of The Mentor Funds (the
"Trust"), hereby severally constitute and appoint Daniel J. Ludeman, Peter J.
Quinn, and Paul F. Costello and each of them and each of them, to sign for us,
and in our names and in the capacities indicated below, the Registration
Statement on Form N-14 of the Trust and any and all amendments (including
post-effective amendments) to said Registration Statement and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto our said attorneys, and each
of them acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratify and
confirm all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
WITNESS our hands and common seal on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C>
- - ----------------------- Trustee May __, 1998
Arch T. Allen, III
- - ----------------------- Trustee May __, 1998
Jerry R. Barrentine
/s/Arnold H. Dreyfuss
- - ----------------------- Trustee May 7, 1998
Arnold H. Dreyfuss
- - ----------------------- Trustee May __, 1998
Weston E. Edwards
- - ----------------------- Trustee May __, 1998
Thomas F. Keller
<PAGE>
/s/ Daniel J. Ludeman
- - ----------------------- Chairman; Trustee May __, 1998
Daniel J. Ludeman
- - ----------------------- Trustee May 6, 1998
Louis W. Moelchert, Jr.
- - ----------------------- Trustee May __, 1998
J. Garnett Nelson
- - ----------------------- Trustee May __, 1998
Troy A. Peery, Jr.
/s/ Peter J. Quinn, Jr.
- - ----------------------- Trustee May __, 1998
Peter J. Quinn, Jr.
/s/ Paul F. Costello
- - ----------------------- President; Principal May __, 1998
Paul F. Costello Executive Officer
/s/ Terry L. Perkins
- - ----------------------- Treasurer; Principal May __, 1998
Terry L. Perkins Financial and
Accounting Officer
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned Officers and Trustees of The Mentor Funds (the
"Trust"), hereby severally constitute and appoint Daniel J. Ludeman, Peter J.
Quinn, and Paul F. Costello and each of them and each of them, to sign for us,
and in our names and in the capacities indicated below, the Registration
Statement on Form N-14 of the Trust and any and all amendments (including
post-effective amendments) to said Registration Statement and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto our said attorneys, and each
of them acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratify and
confirm all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
WITNESS our hands and common seal on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C>
/s/ Arch T. Allen, III
- - ----------------------- Trustee May __, 1998
Arch T. Allen, III
- - ----------------------- Trustee May __, 1998
Jerry R. Barrentine
- - ----------------------- Trustee May __, 1998
Arnold H. Dreyfuss
- - ----------------------- Trustee May __, 1998
Weston E. Edwards
- - ----------------------- Trustee May __, 1998
Thomas F. Keller
</TABLE>
<PAGE>
STRATEGY PORTFOLIO
MENTOR FUNDS
PROXY SOLICITED BY THE BOARD OF TRUSTEES
PROXY FOR MEETING OF SHAREHOLDERS
JULY ___, 1998
The undersigned hereby appoints Daniel J. Ludeman, Peter J. Quinn, Jr., and Paul
F. Costello, and each of them separately, proxies, with power of substitution to
each, and hereby authorizes them to represent and to vote, as designated below,
at the Meeting of Shareholders of the Trust, on July ___, 1998 at 9:00 a.m.,
Richmond time, and at any adjournments thereof, all of the shares of the
Strategy Portfolio which the undersigned would be entitled to vote if personally
present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSAL.
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the Meeting. The Board of Trustees recommends a
vote FOR the proposal.
TO VOTE, MARK BLOCKS BELOW IN
BLUE OR BLACK INK AS FOLLOWS: [ ] KEEP THIS PORTION FOR YOUR RECORDS
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED
STRATEGY PORTFOLIO
FOR AGAINST ABSTAIN
Proposal to approve Agreement and
Plan of Reorganization. [ ] [ ] [ ]
Please sign your name exactly as it appears on this card. If you are a joint
owner, each owner should sign. When signing as executor, administrator,
attorney, trustee, or guardian, or as custodian for a minor, please give your
full title as such. If you are signing for a corporation, please sign the full
corporate name and indicate the signer's office. If you are a partner, sign in
the partnership name.
- - ------------------------ ----------- ------------------------ --------
Signature Date Signature (Joint Owners) Date
[PLEASE SIGN WITHIN BOX]
-19-
