P R O S P E C T U S October 14, 1998
Retail Shares
MENTOR FUNDS
MENTOR MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO
The Mentor Money Market Portfolios are designed for investors who seek
current income consistent with preservation of capital and maintenance of
liquidity. The Portfolios are diversified investment portfolios of Mentor Funds
(the "Trust").
An investment in a Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that a Portfolio will be able to maintain
a stable net asset value of $1.00 per share.
This Prospectus explains concisely what you should know before investing
in a Portfolio. Please read it carefully and keep it for future reference. You
can find more detailed information about the Portfolios in an October 14, 1998
Statement of Additional Information, as amended from time to time. For a free
copy of the Statement, call Mentor Services Company, Inc. at 1-800-869-6042.
The Statement has been filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference.
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SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. The following table summarizes your maximum transaction costs from
an investment in Retail Shares of each of the Portfolios and expenses each
Portfolio expects to incur in respect of its Retail Shares during the current
fiscal year. The Examples show the cumulative expenses attributable to a
hypothetical $1,000 investment in each Portfolio over specified periods. The
information presented below does not reflect any fees or charges imposed by
Financial Institutions through which you may invest in the Portfolios.
<TABLE>
<CAPTION>
MENTOR MENTOR
MENTOR U.S. GOVERNMENT TAX-EXEMPT
MONEY MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ----------------- -------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES None None None
Annual Portfolio Operating
Expenses (as a percentage
of average net assets)
Management Fees* ......... .18% .18% .21%
12b-1 Fees ............... .38% .38% .33%
Other Expenses ........... .28% .25% .17%
---- ----- -----
Total Fund Operating
Expenses ................ .84% .81% .71%
---- ----- -----
</TABLE>
* For purposes of determining the annual rate at which Management Fees are
payable by the Portfolios, a Portfolio's assets will be considered to
include the assets of certain Funds offered by Cash Resource Trust and
managed by Mentor Investment Advisors, LLC. See "Management," below.
EXAMPLES
Your investment of $1,000 in a Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Mentor Money Market Portfolio .......... $9 $27 $47 $104
Mentor U.S. Government
Money Market Portfolio ................ $8 $26 $45 $100
Mentor Tax-Exempt
Money Market Portfolio ................ $7 $23 -- --
</TABLE>
The table is provided to help you understand the expenses of investing in
each of the Portfolios and your share of the operating expenses which each of
the Portfolios expects to incur. The Examples do not represent past or future
expense levels. Actual returns and expenses may be greater or less than those
shown. Federal regulations require the Examples to assume a 5% annual return,
but actual annual return will vary. Because of the 12b-1 fees payable by the
Portfolios, long-term shareholders may pay more in aggregate sales charges than
the maximum initial sales charge permitted by the National Association of
Securities Dealers, Inc.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of Mentor Money Market Portfolio (the "Money
Market Portfolio") and Mentor U.S. Government Money Market Portfolio (the "U.S.
Government Money Market Portfolio") is to seek as high a rate of current income
as Mentor Investment Advisors, LLC, the Portfolios' investment advisor ("Mentor
Advisors"), believes is consistent with preservation of capital and maintenance
of liquidity. The investment objective of Mentor Tax-Exempt Money Market
Portfolio (the "Tax-Exempt Money Market Portfolio") is to seek as high a rate
of current income exempt from federal income tax as Mentor Advisors believes is
consistent with preservation of capital and maintenance of liquidity. The
Portfolios seek their objectives through the investment policies described
below. Because each of the Portfolios is a money market fund, it will only
invest in the types of investments described below under "Selection of
Investments."
The investment objective and policies of each Portfolio may, unless
otherwise specifically stated, be changed by the Trustees without shareholder
approval. None of the Portfolios is intended to be a complete investment
program, and there is no assurance a Portfolio will achieve its objective.
MENTOR MONEY MARKET PORTFOLIO
The Money Market Portfolio will invest in a portfolio of high-quality,
short-term instruments consisting of any or all of the following:
o U.S. Government securities: securities issued or guaranteed as to
principal or interest by the U.S. Government or by any of its agencies
or instrumentalities.
o Banker's acceptances: negotiable drafts or bills of exchange, which
have been "accepted" by a domestic bank (or a foreign bank with an
agency domiciled in the United States), meaning, in effect, that the
bank has unconditionally agreed to pay the face value of the
instrument on maturity.
o Prime commercial paper: high-quality, short-term obligations issued by
banks, corporations, and other issuers organized under the laws of a
jurisdiction within the United States.
o Other short-term obligations: high-quality, short-term obligations of
corporate issuers.
o Repurchase agreements: with respect to U.S. Government or agency
securities.
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The U.S. Government Money Market Portfolio invests exclusively in U.S.
Treasury bills, notes, and bonds, and other obligations issued or guaranteed as
to principal or interest by the U.S. Government, its agencies, or
instrumentalities, and in repurchase agreements with respect to such
obligations. Certain of these obligations, including U.S. Treasury bills,
notes, and bonds, mortgage participation certificates issued or guaranteed by
the Government National Mortgage Association, and Federal Housing
Administration debentures, are supported by the full faith and credit of the
United States. Other U.S. Government securities issued by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. These securities include obligations supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of
Federal Home Loan Banks, and obligations supported only by the credit of an
instrumentality, such as Federal National Mortgage Association bonds.
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Short-term U.S. Government obligations generally are considered among the
safest short-term investments. Because of their added safety, the yields
available from U.S. Government obligations are generally lower than the yields
available from comparable corporate debt securities. The U.S. Government
guarantee of securities owned by the Portfolio does not guarantee the net asset
value of the Portfolio's shares, which the Portfolio seeks to maintain at $1.00
per share.
MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO
The Tax-Exempt Portfolio invests, as a fundamental policy, at least 80% of
its net assets in Tax-Exempt Securitites (as described below). The Portfolio
may invest the remainder of its assets in investments of any kind in which any
of the other Portfolios may invest.
The Portfolio will invest in the following types of Tax-Exempt Securities:
(i) municipal notes; (ii) municipal bonds; (iii) municipal securities backed by
the U.S. government or any of its agencies or instrumentalities; (iv)
tax-exempt commercial paper; (v) participation interests in any of the
foregoing; and (vi) unrated securities or new types of tax-exempt instruments
which become available in the future if Mentor Advisors determines they meet
the quality standards discussed below (collectively, "Tax-Exempt Securities").
(In the case of any such new types of tax-exempt instruments, this Prospectus
would be revised as may be appropriate to describe such instruments.) In
connection with the purchase of Tax-Exempt Securities, the Portfolio may
acquire stand-by commitments, which give the Portfolio the right to resell the
security to the dealer at a specified price. Stand-by commitments may provide
additional liquidity for the fund but are subject to the risk that the dealer
may fail to meet its obligations. The Portfolio does not generally expect to
pay additional consideration for stand-by commitments or to assign any value to
them.
Tax-Exempt Securities are debt obligations issued by a state (including
the District of Columbia), a U.S. territory or possession, or any of their
political subdivisions, the interest from which is, in the opinion of bond
counsel, exempt from federal income tax. These securities are issued to obtain
funds for various public purposes, such as the construction of public
facilities, the payment of general operating expenses, or the refunding of
outstanding debts. They may also be issued to finance various private
activities, including the lending of funds to public or private institutions
for the construction of housing, educational, or medical facilitites and may
also include certain types of private activity and industrial development bonds
issued by public authorities to finance privately owned or operated facilities.
Short-term Tax-Exempt Securities are generally issued as interim financing in
anticipation of tax collections, revenue receipts, or bond sales to finance
various public puposes.
The two principal classifications of Tax-Exempt Securities are general
obligation and special obligation (or revenue) securities. General obligation
securitites involve the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The
characteristics and methods of enforcement of general obligation securities
vary according to the law applicable to the particular issuer. Special
obligation securities are payable only from the revenues derived from a
particular facility or class of facilities, or a specific revenue source and
generally are not payable from the unrestricted revenues of the issuer.
Industrial development and private activity bonds are in most cases special
obligation securities, the credit quality of which is directly related to the
private user of a facility.
For purposes of the Portfolio's policy to invest at least 80% of its net
assets in Tax-Exempt Securities, the Portfolio will not treat obligations as
Tax-Exempt Securitites for purposes of measuring compliance with such
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policy if they would give rise to interest income subject to federal
alternative minimum tax for individuals. To the extent that the Portfolio
invests in these securities, individual shareholders of the Portfolio,
depending on their own tax status, may be subject to federal alternative
minimum tax on the part of the Portfolio's distributions derived from these
securities. In addition an investment in the Portfolio may cause corporate
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax because tax-exempt income is generally included in the
alternative minimum taxable income of corporations.
The ability of governmental issuers to meet their obligations will depend
primarily on the availability of tax and other revenues to those governments
and on thier fiscal conditions generally. The amounts of tax and other revenues
available to governmental issuers may be affected from time to time by
economic, political, and demographic conditions affecting a particular state.
In addition, constitutional or statutory restrictions may limit a government's
power to raise revenues or increase taxes. The avalability of federal, state,
and local aid to issuers of such securities may also affect their ability to
meet their obligations. Payments of principal and interest on special
obligation securities will depend on the economic condition of the facility or
specific revenue source from whose revenues the payments will be made, which in
turn could be affected by economic, political, and demographic conditions
affecting a particular state. Any reduction in the actual or perceived ability
of an issuer of Tax-Exempt Securities in a particular state to meet its
obligations (including a reduction in the rating of its outstanding securities)
would likely affect adversely the market value and marketability of its
obligations and could adversely affect the values of Tax-Exempt Securities
issued by others in that state as well.
The Portfolio may invest without limit in high quality taxable money
market instruments of any type at any time when Mentor Advisors believes that
market conditions make pursuing the Portfolio's basic investment strategy
inconsistent with the best interests of shareholders. It is impossible to
predict when, or for how long, the Portfolio will use these alternative
defensive strategies.
SELECTION OF INVESTMENTS
Each Portfolio will invest only in U.S. dollar-denominated high-quality
securities and other U.S. dollar-denominated money market instruments meeting
credit criteria which the Trustees believe present minimal credit risk.
"High-quality securities," in the case of the Money Market Portfolio, are (i)
commercial paper or other short-term obligations rated A-1 by Standard & Poor's
and P-1 by Moody's Investors Service, Inc., and (ii) obligations rated AAA or
AA by Standard & Poor's and Aaa or Aa by Moody's at the time of investment. The
Portfolio will not invest in securities rated below A-1 or P-1 (or securities
not so rated whose issuer does not have outstanding short-term debt
obligations, of comparable priority and security, rated A-1 or P-1). Each
Portfolio will maintain a dollar-weighted average maturity of 90 days or less
and will not invest in securities with remaining maturities of more than 397
days. Each of the Portfolios follows investment and valuation policies designed
to maintain a stable net asset value of $1.00 per share, although there is no
assurance that these policies will be successful.
A Portfolio may invest in variable or floating-rate securities which bear
interest at rates subject to periodic adjustment or which provide for periodic
recovery of principal on demand. Under certain conditions, these securities may
be deemed to have remaining maturities equal to the time remaining until the
next interest adjustment date or the date on which principal can be recovered
on demand. Some of these securities may be supported by the right of the
holders under certain circumstances to demand that a specified bank,
broker-dealer, or other
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financial institution purchase the securities from the holders at par, or
otherwise to demand on short notice, payment of unpaid principal and interest
on the securities. Such securities are subject to the risk that the financial
institution in question may for any reason be unwilling or unable to meet its
obligation in respect of the securities, which would likely have an adverse
effect on the value of the securities.
Considerations of liquidity and preservation of capital mean that a
Portfolio may not necessarily invest in money market instruments paying the
highest available yield at a particular time. Consistent with its investment
objective, a Portfolio will attempt to maximize yields by portfolio trading and
by buying and selling portfolio investments in anticipation of or in response
to changing economic and money market conditions and trends. Each Portfolio may
also invest to take advantage of what Mentor Advisors believes to be temporary
disparities in the yields of different segments of the high-quality money
market or among particular instruments within the same segment of the market.
These policies, as well as the relatively short maturity of obligations
purchased by the Portfolios, may result in frequent changes in the investments
held by the Portfolios. The Portfolios will not usually pay brokerage
commissions in connection with the purchase or sale of portfolio securities.
The Portfolios' investments will be affected by general changes in
interest rates resulting in increases or decreases in the values of the
obligations held by the Portfolios. The values of a Portfolio's securities can
be expected to vary inversely to changes in prevailing interest rates.
Withdrawals by shareholders could require the sale of portfolio investments at
a time when such a sale might not otherwise be desirable.
DIVERSIFICATION AND CONCENTRATION POLICIES
Each Portfolio is a "diversified" investment company under the Investment
Company Act of 1940. This means that each Portfolio may invest up to 25% of its
total assets in the securities of one or more issuers, and is limited with
respect to the remaining portion of its assets to investing 5% or less of its
total assets in the securities of any one issuer (other than the U.S.
Government). However, under the current rules governing money market funds, the
Portfolios generally may not invest more than 5% of their assets in any one
issuer (other than the U.S. Government).
The Money Market Portfolio may invest without limit in obligations of
domestic branches of U.S. banks and U.S. branches of foreign banks (if it can
be demonstrated that they are subject to the same regulations as U.S. banks).
At times when the Portfolio has concentrated its investments in bank
obligations, the values of its portfolio securities may be especially affected
by factors pertaining to the issuers of such obligations.
The Tax-Exempt Money Market Portfolio will not invest more than 25% of its
total assets in any one industry. Governmental issuers of Tax-Exempt Securities
are not considered part of any "industry." However, Securities backed only by
the assets and revenues of nongovernmental users may for this purpose be deemed
to be issued by such nongovernmental users, and the 25% limitation would apply
to such obligations.
It is nonetheless possible that the Portfolio may invest more than 25% of
its assets in a broader segment of the Tax-Exempt Securities market, such as
revenue obligations of hospitals and other health care facilities, housing
agency revenue obligations, or airport revenue obligations. This would be the
case only if Mentor Advisors determined that the yields available from
obligations in a particular segment of the market justified the additional
risks associated with such concentration. Although such obligations could be
supported by the credit of governmental users or by the credit of
nongovernmental users engaged in a number of industries, economic, business,
political, and other developments generally affecting the revenues of such
users (for example, proposed
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legislation or pending court decisions affecting the financing of such projects
and market factors affecting the demand for their services or products) may
have a general adverse effect on all Tax-Exempt Securities in such a market
segment. The Portfolio reserves the right to invest more than 25% of its assets
in industrial development bonds and private activity bonds or notes.
The Portfolio also reserves the right to invest more than 25% of its
assets in securities relating to any one or more states (including the District
of Columbia), U.S. territories or possessions, or any of their political
subdivisions. As a result of such an investment, the performance of the
Portfolio may be especially affected by factors pertaining to the economy of
the relevant state and other factors specifically affecting the ability of
issuers of such securities to meet their obligations. As a result, the value of
the Portfolio's shares may fluctuate more widely than the value of shares of a
fund investing in securities relating to a greater number of different states.
OTHER INVESTMENT PRACTICES
A Portfolio may also engage to a limited extent in the following
investment practices, each of which involves certain special risks. The
Statement of Additional Information contains more detailed information about
these practices.
FOREIGN INVESTMENTS. The Money Market Portfolio may invest in obligations
of foreign issuers and in bank certificates of deposit and bankers' acceptances
payable in U.S. dollars and issued by foreign banks (including U.S. branches of
foreign banks) or by foreign branches of U.S. banks. These investments subject
the Portfolio to investment risks different from those associated with domestic
investments. Such risks include adverse political and economic developments in
foreign countries, the imposition of withholding taxes on interest income,
seizure or nationalization of foreign deposits, or the adoption of other
governmental restrictions which may adversely affect the payment of principal
and interest on such obligations. Legal remedies available to investors in
certain foreign countries may be more limited than those available with respect
to investments in the U.S. or in other foreign countries. Foreign settlement
procedures and trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of the Portfolio's assets
held abroad) and expenses not present in the settlement of domestic
investments. In addition, foreign securities may be less liquid than U.S.
securities, and foreign accounting and disclosure standards may differ from
U.S. standards. Special tax considerations apply to foreign investments.
REPURCHASE AGREEMENTS. Under a repurchase agreement, a 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. A Portfolio will enter into
repurchase agreements only with commercial banks and with registered
broker-dealers who are members of a national securities exchange or market
makers in government securities, and only if the debt instrument subject to the
repurchase agreement is a U.S. Government security. Although Mentor Advisors
will monitor repurchase agreement transactions to ensure that they will be
fully collateralized at all times, a Portfolio bears a risk of loss if the
other party defaults on its obligation and the Portfolio is delayed or
prevented from exercising its rights to dispose of the collateral. If the other
party should become involved in bankruptcy or insolvency proceedings, it is
possible that a Portfolio may be treated as an unsecured creditor and required
to return the collateral to the other party's estate.
SECURITIES LENDING. A Portfolio may lend portfolio securities to
broker-dealers. These transactions must be fully collateralized at all times
with cash or short-term debt obligations, but involve some risk to a Portfolio
if the other party should default on its obligation and the Portfolio is
delayed or prevented from exercising its
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rights in respect of the collateral. Any investment of collateral by a
Portfolio would be made in accordance with the Portfolio's investment objective
and policies described above.
DIVIDENDS
The Trust determines the net income of each Portfolio as of the close of
regular trading on the New York Stock Exchange (the "Exchange") each day the
Exchange is open. Each determination of a Portfolio's net income includes (i)
all accrued interest on the Portfolio's investments, (ii) plus or minus all
realized and unrealized gains and losses on the Portfolio's investments, (iii)
less all accrued expenses of the Portfolio. Each Portfolio's investments are
valued at amortized cost according to Securities and Exchange Commission Rule
2a-7. A Portfolio will not normally have unrealized gains or losses so long as
it values its investments by the amortized cost method.
DAILY DIVIDENDS. Each Portfolio declares all of its net income as a
distribution on each day it is open for business, as a dividend to shareholders
of record immediately prior to the close of regular trading on the Exchange.
Shareholders whose purchase of shares of a Portfolio is accepted at or before
12:00 noon on any day will receive the dividend declared by the Portfolio for
that day; shareholders who purchase shares after 12:00 noon will begin earning
dividends on the next business day after the Portfolio accepts their order. A
Portfolio's net income for Saturdays, Sundays, and holidays is declared as a
dividend on the preceding business day. Dividends for any calendar month will
be paid on the last day of that month (or, if that day is not a business day,
on the next preceding business day), except that a Portfolio's schedule for
payment of dividends during the month of December may be adjusted to assist in
tax reporting and distribution requirements. A shareholder who withdraws the
entire balance of an account at any time during a month will be paid all
dividends declared through the time of the withdrawal. Since the net income of
each Portfolio is declared as a dividend each time it is determined, the net
asset value per share of each Portfolio normally remains at $1 per share
immediately after each determination and dividend declaration.
You can choose from two distribution options: (1) automatically reinvest
all distributions from a Portfolio in additional shares of that Portfolio; or
(2) receive all distributions in cash. If you wish to change your distribution
option, you should contact your Financial Institution (as defined below), who
will be responsible for forwarding the necessary instructions to the Trust's
transfer agent, Boston Financial Data Services ("BFDS"). If you do not select
an option when you open your account, all distributions will be reinvested. You
will receive a statement confirming reinvestment of distributions in additional
shares of a Portfolio promptly following the month in which the reinvestment
occurs.
TAX INFORMATION
FEDERAL TAXES. Each Portfolio intends to qualify as a "regulated
investment company" for federal income tax purposes and to meet all other
requirements that are necessary for it to be relieved of federal income taxes
on income (and gains, if any) it distributes to shareholders. Each Portfolio
will distribute substantially all of its net ordinary income (and net capital
gains, if any) on a current basis.
Dividends paid by the Tax-Exempt Money Market Portfolio that are derived
from exempt-interest income (known as "exempt-interest dividends") and that are
designated as such may be treated by the Portfolio's shareholders as items of
interest excludable from their federal gross income. (Shareholders should
consult their own tax adviser with respect to whether exempt-interest dividends
would be excludable from gross income if the
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shareholder were treated as a "substantial user" of facilities financed by an
obligation held by the Portfolio or a "related person" to such a user under the
Internal Revenue Code.) If a shareholder receives an exempt-interest dividend
with respect to any share held for six months or less, any loss on the sale or
exchange of that share will be disallowed to the extent of the amount of the
exempt-interest dividend. To the extent dividends paid to shareholders are
derived from taxable income (for example, from interest on certificates of
deposit) or from gains, such dividends will be subject to federal income tax,
whether they are paid in the form of cash or additional shares.
If the Tax-Exempt Money Market Portfolio holds certain "private activity
bonds" ("industrial development bonds" under prior law), dividends derived from
interest on such obligations will be classified as an item of tax preference
which could subject certain shareholders to alternative minimum tax liability.
Corporate shareholders must also take all exempt-interest dividends into
account in determining "adjusted current earnings" for purposes of calculating
their alternative minimum tax liability.
Shareholders receiving Social Security benefits or Railroad Retirement Act
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits. Early in each year the
Tax-Exempt Money Market Portfolio will notify you of the amount and tax status
of distributions paid to you by the Portfolio for the preceding year.
GENERAL. The foregoing is a summary of certain federal income tax
consequences of investing in the Portfolios. You should consult your tax
adviser to determine the precise effect of an investment in each Portfolio on
your particular tax situation.
BUYING AND SELLING SHARES OF THE PORTFOLIOS
HOW TO BUY SHARES. The Trust offers Retail Shares of the Portfolios
continuously at a price of $1.00 per share. The Trust determines the net asset
value of each Portfolio twice each day, as of 12:00 noon and as of the close of
regular trading on the Exchange. Retail Shares of each Portfolio are sold at
net asset value through a number of selected financial institutions, such as
investment dealers and banks (each, a "Financial Institution"). Your Financial
Institution is responsible for forwarding any necessary information and
documentation to BFDS. There is no sales charge on sales of shares, nor is any
minimum investment required for any of the Portfolios.
Because each Portfolio seeks to be fully invested at all times,
investments must be in Same Day Funds to be accepted. Investments which are
accepted at or before 12:00 noon will be invested at the net asset value
determined at that time; investments accepted after 12:00 noon will receive the
net asset value determined at the close of regular trading on the Exchange.
"Same Day Funds" are funds credited by the applicable regional Federal Reserve
Bank to the account of the Trust at its designated bank. When payment in Same
Day Funds is available to the Trust, the Trust will accept the order to
purchase shares at the net asset value next determined.
If you are considering redeeming shares or transferring shares to another
person shortly after purchase, you should pay for those shares with wired Same
Day Funds or a certified check to avoid any delay in redemption or transfer.
Otherwise, the Trust may delay payment for shares until the purchase price of
those shares has been collected which may be up to 15 calendar days after the
purchase date.
The Portfolio may refuse any order to buy shares.
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For more information on how to purchase shares of the Portfolios, contact
your Financial Institution or Mentor Services Company, Inc. ("Mentor Services
Company"), 901 East Byrd Street, Richmond, Virginia 23219. Mentor Services
Company's telephone number is 1-800-869-6042.
HOW TO SELL SHARES. You can redeem your Portfolio shares through your
Financial Institution any day the Exchange is open, or you may redeem your
shares by check. If you redeem shares through your Financial Institution, your
Financial Institution is responsible for communicating your redemption request
to BFDS and for forwarding any necessary information and documentation to BFDS.
Redemptions will be effected at the net asset value per share of the Portfolio
next determined after receipt of the redemption request in good order. The Fund
must receive your properly completed purchase documentation before you may sell
shares.
SELLING SHARES THROUGH YOUR FINANCIAL INSTITUTION. You may redeem your
shares through your Financial Institution. Your Financial Institution is
responsible for delivering your redemption request and all necessary
documentation to the Trust, and may charge you for its services (including, for
example, charges relating to the wiring of funds). Your Financial Institution
may accept your redemption instructions by telephone. Consult your Financial
Institution.
SELLING SHARES BY CHECK. If you would like the ability to write checks
against your investment in a Portfolio, you should provide the necessary
documentation to your Financial Institution and complete the signature card
which you may obtain by calling your Financial Institution. When a Portfolio
receives your properly completed documentation and card, you will receive
checks drawn on your Portfolio account and payable through the Portfolio's
designated bank. These checks may be made payable to the order of any person.
You will continue to earn dividends until the check clears. When a check is
presented for payment, a sufficient number of full and fractional shares of the
Portfolio in your account will be redeemed to cover the amount of the check.
Your Financial Institution may limit the availability of the check-writing
privilege or assess certain fees in connection with the checkwriting privilege.
Shareholders using Trust checks are subject to the Trust's designated
bank's rules governing checking accounts. There is currently no charge to the
shareholder for the use of checks, although one may be imposed in the future.
Shareholders would be notified in advance of the imposition of any such charge.
(In addition, if you deplete your original check supply, there may be a charge
to order additional checks.) You should make sure that there are sufficient
shares in your account to cover the amount of the check drawn. If there is an
insufficient number of shares in the account, the check will be dishonored and
returned, and no shares will be redeemed. Because dividends declared on shares
held in your account and prior withdrawals may cause the value of your account
to change, it is impossible to determine in advance your account's total value.
Accordingly, you should not write a check for the entire value of your account
or close your account by writing a check. You may revoke check-writing
authorization by written notice to your Financial Institution, which will be
responsible for forwarding the notice to the Portfolio.
SELLING SHARES BY MAIL. You may also sell shares of a Portfolio by sending
a written withdrawal request to your Financial Institution. You must sign the
withdrawal request and include a stock power with signature(s) guaranteed by a
bank, broker/dealer, or certain other financial institutions.
A Portfolio generally sends you payment for your shares the business day
after your request is received in good order. Under unusual circumstances, a
Portfolio may suspend repurchases, or postpone payment for more than seven
days, as permitted by federal securities law.
10
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HOW TO EXCHANGE SHARES
You can exchange your shares in any Portfolio for Retail Shares of any
other Mentor Money Market Portfolio in the Trust at net asset value, except as
described below. If you request an exchange through your Financial Institution,
your Financial Institution will be responsible for forwarding the necessary
documentation to BFDS. Exchange Authorization Forms are available from your
Financial Institution. For federal income tax purposes, an exchange is treated
as a sale of shares and may result in a capital gain or loss. The Trust
reserves the right to change or suspend the exchange privilege at any time.
Shareholders would be notified of any change or suspension. Consult your
Financial Institution or Mentor Services Company before requesting an exchange.
FINANCIAL INSTITUTIONS
Financial Institutions provide varying arrangements for their clients with
respect to the purchase and redemption of Portfolio shares and the confirmation
thereof and may arrange with their clients for other investment or
administrative services. When you effect transactions with a Portfolio
(including among other things the purchase, redemption, or exchange of
Portfolio shares) through a Financial Institution, the Financial Institution,
and not the Portfolio, will be responsible for taking all steps, and furnishing
all necessary documentation, to effect such transactions. Financial
Institutions have the responsibility to deliver purchase and redemption
requests to a Portfolio promptly. Some Financial Institutions may establish
minimum investment requirements with respect to a Portfolio. They may also
establish and charge fees and other amounts to their clients for their
services. Certain privileges, such as the check writing privilege or
reinvestment options, may not be available through certain Financial
Institutions or they may be available only under certain conditions. If your
Financial Institution holds your investment in a Portfolio in its own name,
then your Financial Institution will be the shareholder of record in respect of
that investment; your ability to take advantage of any investment options or
services of the Portfolio will depend on whether, and to what extent, your
Financial Institution is willing to take advantage of them on your behalf.
FINANCIAL INSTITUTIONS, INCLUDING FIRST UNION CORP. ("FIRST UNION"), AN
AFFILIATE OF MENTOR ADVISORS, MAY CHARGE FEES TO OR IMPOSE RESTRICTIONS ON YOUR
SHAREHOLDER ACCOUNT. CONSULT YOUR FINANCIAL INSTITUTION FOR INFORMATION ABOUT
ANY FEES OR RESTRICTIONS OR FOR FURTHER INFORMATION CONCERNING ITS SERVICES.
MANAGEMENT
The Trustees are responsible for generally overseeing the conduct of the
Trust's business. Mentor Investment Advisors, LLC, located at 901 East Byrd
Street, Richmond, Virginia 23219, serves as investment adviser to each of the
Portfolios, providing investment advisory services and advising and assisting
the officers of the Trust in taking such steps as are necessary or appropriate
to carry out the decisions of the Trustees. Subject to such policies as the
Trustees may determine, Mentor Advisors furnishes a continuing investment
program for the Portfolios and makes investment decisions on their behalf.
Mentor Advisors has over $13 billion in assets under management and is a
wholly owned subsidiary of Mentor Investment Group, LLC ("Mentor Investment
Group") and its affiliates. Mentor Investment Group is a subsidiary of Wheat
First Butcher Singer, Inc., which is in turn a wholly owned subsidiary of First
Union Corp. First Union is a leading financial services company with
approximately $172 billion in assets and $12 billion in total stockholders'
equity as of March 31, 1998. EVEREN Capital Corporation has a 20% ownership in
Mentor Investment Group and may acquire additional ownership based principally
on the amount of Mentor Investment Group's revenues derived from assets
attributable to clients of EVEREN Securities, Inc. and its affiliates.
11
<PAGE>
Each Portfolio pays management fees to Mentor Advisors monthly at the
following annual rates (based on the average daily net assets of the
Portfolio): 0.22% of the first $500 million of the Portfolio's average net
assets; 0.20% of the next $500 million; 0.175% of the next $1 billion; 0.16% of
the next $1 billion; and 0.15% of any amounts over $3 billion. For purposes of
determining the annual rate at which management fees are payable by the
Portfolios, a Portfolio's assets will be considered to include the assets of,
in the case of the Money Market Portfolio, Cash Resource Money Market Fund; in
the case of the U.S. Government Money Market Portfolio, Cash Resource U.S.
Government Money Market Fund; and in the case of the Tax-Exempt Money Market
Portfolio, Cash Resource Tax-Exempt Money Market Fund. Each of those Funds is
managed by Mentor Advisors and is a series of shares of Cash Resource Trust.
The Portfolios pay all expenses not assumed by Mentor Advisors, including
Trustees' fees, auditing, legal, custodial, investor servicing, and shareholder
reporting expenses, and payments under their Distribution Plans. General
expenses of the Trust will be charged to the assets of each Portfolio on a
basis that the Trustees deem fair and equitable, which may be based on the
relative assets of each Portfolio (and other series of shares of the Trust) or
the nature of the services performed and relative applicability to each
Portfolio. Expenses directly charged or attributable to a Portfolio will be
paid from the assets of that Portfolio.
Mentor Advisors places all orders for purchases and sales of the
investments of each Portfolio. In selecting broker-dealers, Mentor Advisors may
consider research and brokerage services furnished to it and its affiliates.
Subject to seeking the most favorable price and execution available, Mentor
Advisors may consider sales of shares of the Portfolios (and, if permitted by
law, of the other funds in the Mentor family) as a factor in the selection of
broker-dealers.
The Portfolios receive services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of the software to distinguish the Year 2000 from the
Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolios from this problem.
ADMINISTRATIVE SERVICES. Mentor Investment Group, LLC, located at 901 East
Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain
administrative personnel and services necessary to operate each Portfolio, such
as bookkeeping and accounting services. Mentor Investment Group provides these
services to each of the Portfolios at an annual rate of .02% of the Portfolio's
average daily net assets.
DISTRIBUTION SERVICES
Mentor Distributors, LLC ("Mentor Distributors"), 3435 Stelzer Road,
Columbus, Ohio 43219, is the distributor of the Portfolios' shares. Mentor
Distributors is a wholly owned subsidiary of BISYS Fund Services, Inc. Each
Portfolio has adopted a Distribution Plan (each, a "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 with respect to its Retail
Shares. The purpose of the Plans is to permit each of the Portfolios to
compensate Mentor Distributors for services provided and expenses incurred by
it in promoting the sale of Retail Shares of the Portfolio, reducing
redemptions, or maintaining or improving services provided to
12
<PAGE>
shareholders. The Plans provide for monthly payments by the Portfolios to
Mentor Distributors out of the Portfolios' assets attributable to the Retail
Shares, subject to the authority of the Trustees to reduce the amount of
payments or to suspend the Plans for such periods as they may determine. Any
material increase in amounts payable under a Plan would require shareholder
approval.
In order to compensate Financial Institutions for services provided in
connection with sales of Portfolio shares and the maintenance of shareholder
accounts (or, in the case of certain Financial Institutions which are banking
institutions, for certain administrative and shareholder services), Mentor
Distributors, Mentor Advisors, or their affiliates may make periodic payments
(from any amounts received under the Plans or from their other resources) to
any qualifying Financial Institution based on the average net asset value of
Retail Shares for which the Financial Institution is designated as the
financial institution of record. Such payments may be made at the annual rate
of between 0.15% and 0.40% in the case of the Money Market Portfolio and the
U.S. Government Money Market Portfolio, and between 0.15% and 0.33% in the case
of the Tax-Exempt Money Market Portfolio. These payments may be suspended or
modified at any time, and payments are subject to the continuation of each
Portfolio's Plan and of applicable agreements between Mentor Distributors and
the applicable Financial Institution. Financial Institutions receiving such
payments include First Union, an affiliate of Mentor Advisors.
HOW A PORTFOLIO'S PERFORMANCE IS CALCULATED
Yield and effective yield data of a Portfolio's Retail Shares may from
time to time be included in advertisements about the Portfolios. "Yield" is
calculated by dividing a Portfolio's annualized net investment income per
Retail Share during a recent seven-day period by the net asset value per share
on the last day of that period. "Effective yield" compounds that yield for a
year and is, for that reason, greater than a Portfolio's yield.
"Tax-equivalent" yield shows the affect on performance of the tax-exempt status
of distributions received from the Tax-Exempt Money Market Portfolio. It
reflects the approximate yield that a taxable investment must earn for
shareholders at stated income levels to produce an after-tax yield equivalent
to the Portfolio's tax-exempt yield. Quotations of yield for any period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. A Portfolio's performance may be compared to various indices.
See the Statement of Additional Information.
All data is based on a Portfolio's past investment results and does not
predict future performance. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of a Portfolio's
investments, a Portfolio's operating expenses, and the class of shares
purchased. Investment performance also often reflects the risks associated with
a Portfolio's investment objective and policies. These factors should be
considered when comparing a Portfolio's investment results to those of other
mutual funds and other investment vehicles.
13
<PAGE>
GENERAL INFORMATION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Agreement and Declaration of Trust, which is governed by
Massachusetts law, is on file with the Secretary of State of The Commonwealth
of Massachusetts.
The Trust is an open-end, management investment company with an unlimited
number of authorized shares of beneficial interest. Shares of the Trust may,
without shareholder approval, be divided into two or more series of shares
representing separate investment portfolios, and are currently divided into
eleven series of shares. Under the Agreement and Declaration of Trust, a
Portfolio's shares may be further divided, without shareholder approval, into
two or more classes of shares having such preferences or special or relative
rights and privileges as the Trustees may determine. Each Portfolio's shares
are currently divided into two classes, Retail Shares, which are offered by
this Prospectus, and Institutional Shares. Institutional Shares are not subject
to any 12b-1 fees, and may be subject to different expenses of other types.
Differences in expenses between the classes will affect performance. Contact
Mentor Services Company at 1-800-869-6042 for information concerning
Institutional Shares of a Portfolio and your eligibility to purchase those
shares. Each share has one vote, with fractional shares voting proportionally.
Shares of each Portfolio are freely transferable, are entitled to dividends as
declared by the Trustees, and, if a Portfolio were liquidated, would receive
the net assets of the Portfolio. The Trust may suspend the sale of shares of
any Portfolio at any time and may refuse any order to purchase shares. Although
the Trust is not required to hold annual meetings of its shareholders,
shareholders have the right to call a meeting to elect or remove Trustees, or
to take other actions as provided in the Agreement and Declaration of Trust.
Boston Financial Data Services, located at 2 Heritage Drive, North Quincy,
MA 02171, is the transfer agent and dividend-paying agent for the Trust. BFDS
engages at its own expense certain Financial Institutions, including affiliates
of First Union, to perform bookkeeping, data processing, and administrative
services pertaining to the maintenance of shareholder accounts.
If you own fewer shares of a Portfolio than a minimum amount set by the
Trustees, the Trust may choose to redeem your shares and pay you for them. You
will receive at least 30 days written notice before the Trust redeems your
shares, and you may purchase additional shares at any time to avoid a
redemption. The Trust may also redeem shares if you own shares of any Portfolio
or of the Trust above any maximum amount set by the Trustees. There is
presently no such minimum or maximum, but the Trustees may establish one at any
time, which could apply to both present and future shareholders.
The Trust may send a single copy of shareholder reports and communications
to an address where there is more than one registered shareholder with the same
last name, unless a shareholder at that address requests, by calling or writing
his Financial Institution or Mentor Services Company, that the Trust do
otherwise.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE
PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THIS
PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION STATEMENT,
TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND OTHER DOCUMENTS REFERRED
TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE COMMISSION UPON PAYMENT OF
THE PRESCRIBED FEES.
ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE
PORTFOLIO IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS
EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN,
WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION.
MENTOR FUNDS
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE
MK 1341
MENTOR FUNDS
MENTOR
MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
MENTOR TAX-EXEMPT
MONEY MARKET PORTFOLIO
-----------------------
PROSPECTUS
RETAIL SHARES
-----------------------
October 14, 1998
[LOGO]
<PAGE>
MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
(Mentor U.S. Government Money Market Portfolio
and Mentor Money Market Portfolio--Retail Shares)
October 14, 1998
This Statement of Additional Information relates to Retail Shares of
the Mentor U.S. Government Money Market Portfolio and Mentor Money Market
Portfolio (each a "Portfolio" and collectively the "Portfolios"). Each of the
Portfolios is a series of shares of beneficial interest of Mentor Funds (the
"Trust"). The Portfolios were previously known as the "Mentor Institutional U.S.
Government Money Market Portfolio" and "Mentor Institutional Money Market
Portfolio," respectively. This Statement is not a prospectus and should be read
in conjunction with the relevant prospectus. Separate statements of additional
information relate to the other Portfolios comprising the Trust. A copy of any
prospectus or statement of additional information can be obtained upon request
made to Mentor Services Company, Inc., at P.O. Box 1357, Richmond, Virginia
23218-1357, or calling Mentor Services Company, Inc. at 1-(800) 869-6042.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
<S> <C>
GENERAL ..................................................
INVESTMENT RESTRICTIONS....................................
CERTAIN INVESTMENT TECHNIQUES..............................
MANAGEMENT OF THE TRUST....................................
PRINCIPAL HOLDERS OF SECURITIES............................
INVESTMENT ADVISORY AND OTHER SERVICES.....................
BROKERAGE..................................................
DETERMINATION OF NET ASSET VALUE...........................
TAX STATUS.................................................
THE DISTRIBUTOR............................................
INDEPENDENT ACCOUNTANTS....................................
CUSTODIAN..................................................
PERFORMANCE INFORMATION....................................
SHAREHOLDER LIABILITY......................................
MEMBERS OF INVESTMENT MANAGEMENT TEAMS.....................
RATINGS ..................................................
</TABLE>
<PAGE>
GENERAL
Mentor Funds (the "Trust") is a Massachusetts business trust
organized on January 20, 1992 as Cambridge Series Trust.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be
changed with respect to a Portfolio without approval by the holders of a
majority of the outstanding shares of that Portfolio, a Portfolio may
not:
1. Purchase any security (other than U.S. Government
securities) if as a result: (i) as to 75% of such
Portfolio's total assets, more than 5% of the
Portfolio's total assets (taken at current value)
would then be invested in securities of a single
issuer, or (ii) more than 25% of the Portfolio's total
assets would be invested in a single industry; except
that the Institutional Money Market Portfolio may
invest up to 100% of its assets in securities of
issuers in the banking industry.
2. Acquire more than 10% of the voting securities of any
issuer.
3. Act as underwriter of securities of other issuers
except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed
to be an underwriter under certain federal securities
laws.
4. Issue any class of securities which is senior to the
Portfolio's shares of beneficial interest.
5. Purchase or sell real estate or interests in real
estate, including real estate mortgage loans, although
it may purchase and sell securities which are secured
by real estate and securities of companies that invest
or deal in real estate or real estate limited
partnership interests. (For purposes of this
restriction, investments by a Portfolio in
mortgage-backed securities and other securities
representing interests in mortgage pools shall not
constitute the purchase or sale of real estate or
interests in real estate or real estate mortgage
loans.)
6. Borrow money in excess of 5% of the value (taken at
the lower of cost or current value) of its total
assets (not including the amount borrowed) at the time
the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of
redemption requests (not for leverage) which might
otherwise require the untimely disposition of
portfolio investments or for extraordinary or
emergency purposes.
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<PAGE>
7. Purchase or sell commodities or commodity contracts,
except that a Portfolio may purchase or sell financial
futures contracts, options on futures contracts, and
futures contracts, forward contracts, and options with
respect to foreign currencies, and may enter into swap
transactions.
8. Make loans, except by purchase of debt obligations in
which the Portfolio may invest consistent with its
investment policies, by entering into repurchase
agreements, or by lending its portfolio securities.
In addition, it is contrary to the current policy of each
Portfolio, which policy may be changed without shareholder approval, to
invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale (excluding
securities determined by the Trustees of the Trust (or the person
designated by the Trustees to make such determinations) to be readily
marketable), and (c) repurchase agreements maturing in more than seven
days, if, as a result, more than 10% of the Portfolio's net assets
(taken at current value) would then be invested in securities described
in (a), (b), and (c).
All percentage limitations on investments will apply at the
time of investment and shall not be considered violated unless an excess
or deficiency occurs or exists immediately after and as a result of such
investment. Except for the investment restrictions listed above as
fundamental or to the extent designated as such in a Prospectus with
respect to a Portfolio, the other investment policies described in this
Statement or in a Prospectus are not fundamental and may be changed by
approval of the Trustees.
The Investment Company Act of 1940, as amended (the "1940
Act"), provides that a "vote of a majority of the outstanding voting
securities" of a Portfolio means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Portfolio, and (2)
67% or more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment
techniques in which each Portfolio may engage, and certain of the risks
they may entail.
Repurchase Agreements
A Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject
to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the
Portfolio's cost plus interest). It is the Trust's present intention to
enter into repurchase agreements only with member banks of the Federal
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<PAGE>
Reserve System and securities dealers meeting certain criteria as to
creditworthiness and financial condition established by the Trustees of
the Trust and only with respect to obligations of the U.S. government or
its agencies or instrumentalities or other high quality short term debt
obligations. Repurchase agreements may also be viewed as loans made by a
Portfolio which are collateralized by the securities subject to
repurchase. The investment adviser will monitor such transactions to
ensure that the value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation,
including the interest factor. If the seller defaults, a Portfolio could
realize a loss on the sale of the underlying security to the extent that
the proceeds of sale including accrued interest are less than the resale
price provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, a
Portfolio may incur delay and costs in selling the underlying security
or may suffer a loss of principal and interest if a Portfolio is treated
as an unsecured creditor and required to return the underlying
collateral to the seller's estate.
Loans of Portfolio Securities
A Portfolio may lend its portfolio securities, provided: (1)
the loan is secured continuously by collateral consisting of U.S.
Government Securities, cash, or cash equivalents adjusted daily to have
market value at least equal to the current market value of the
securities loaned; (2) the Portfolio may at any time call the loan and
regain the securities loaned; (3) a Portfolio will receive any interest
or dividends paid on the loaned securities; and (4) the aggregate market
value of securities of any Portfolio loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the
total assets of the Portfolio. Cash collateral received by a Portfolio
may be invested in any securities in which the Portfolio may invest
consistent with its investment policies. In addition, it is anticipated
that a Portfolio may share with the borrower some of the income received
on the collateral for the loan or that it will be paid a premium for the
loan. Before a Portfolio enters into a loan, its investment adviser
considers all relevant facts and circumstances including the
creditworthiness of the borrower. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible
delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights
or rights to consent with respect to the loaned securities pass to the
borrower, a Portfolio retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be
voted by a Portfolio if the holders of such securities are asked to vote
upon or consent to matters materially affecting the investment. A
Portfolio will not lend portfolio securities to borrowers affiliated
with the Portfolio.
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MANAGEMENT OF THE TRUST
The following table provides biographical information with respect to
each Trustee and officer of the Trust. Each Trustee who is an "interested
person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- ---------------------- ------------------------------------------------------
<S> <C> <C>
Daniel J. Ludeman* Chairman and Trustee Chairman and Chief Executive Officer Mentor
901 E. Byrd Street Investment Group, Inc.; Managing Director of
Richmond, VA 23219 Wheat First Butcher Singer, Inc. Director, Wheat,
First Securities, Inc.; Chairman and Director Mentor
Income Fund, Inc., and America's Utility Fund, Inc.;
Chairman and Trustee, Cash Resource Trust, Mentor
Variable Investment Portfolios and Mentor
Institutional Trust.
Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corporation; Trustee, Cash Resource
P.O. Box 18156 Trust, Mentor Variable Investment Portfolios and
Richmond, Virginia 23226 Mentor Institutional Trust; Director, Mentor Income
Fund, Inc. and America's Utility Fund, Inc.;
formerly, Chairman and Chief Executive Officer,
Hamilton Beach/Proctor-Silex, Inc.
Thomas F. Keller Trustee R.J. Reynolds Industries Professor of Business
Fuqua School of Business Administration and Former Dean of Fuqua School
Duke University of Business, Duke University; Director of LADD
Durham, NC 27706 Furniture, Inc., Wendy's International, Inc.,
American Business Products, Inc., Dimon, Inc., and
Biogen, Inc.; Director of Nations Balanced Target
Maturity Fund, Inc., Nations Government Income
Term Trust 2003, Inc., Nations Government Income
Term Trust 2004, Inc., Hatteras Income Securities,
Inc., Nations Institutional Reserves, Nations Fund
Trust, Nations Fund, Inc., Nations Fund Portfolios,
Inc., and Nations LifeGoal Funds, Inc. Trustee,
Cash Resource Trust, Mentor Variable Investment
Portfolios and Mentor Institutional Trust; Director,
Mentor Income Fund, Inc. and America's Utility
Fund, Inc.
Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of
University of Richmond Richmond; Trustee, Cash Resource Trust, Mentor Variable
Richmond, VA 23173 Investment Portfolios and Mentor Institutional Trust;
Director, Mentor Income Fund, Inc. and America's
Utility Fund, Inc.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company; Trustee, Cash Resource
Heilig-Meyers Company Trust, Mentor Variable Investment Portfolios and
2235 Staples Mill Road Mentor Institutional Trust; Director, Mentor Income
Richmond, Virginia 23230 Fund, Inc. and America's Utility Fund, Inc.
Peter J. Quinn, Jr.* Trustee Formerly, President, Mentor Distributors, Inc.;
901 E. Byrd Street Managing Director, Mentor Investment Group, LLC,
Richmond, VA 23219 and Wheat First Butcher Singer, Inc.; formerly,
Senior Vice President/Director of Mutual Funds,
Wheat First Butcher Singer, Inc.; Trustee, Cash
Resource Trust, Mentor Variable Investment Portfolios and
Mentor Institutional Trust; Director, Mentor Income
Fund, Inc. and America's Utility Fund, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------------- --------------------- -----------------------------------------------------
<S> <C> <C>
Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee,
c/o Cash Resource Trust Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; formerly, Vice Chancellor for
Development and University Relations, University
of North Carolina at Chapel Hill.
Weston E. Edwards Trustee President, Weston Edwards & Associates; Trustee
c/o Cash Resource Trust Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; Founder and Chairman, The Housing
Roundtable; formerly, President, Smart Mortgage
Access, Inc.
Jerry R. Barrentine Trustee President, J.R. Barretine & Associates; Trustee,
c/o Cash Resource Trust Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; formerly, Executive Vice President and
Chief Financial Officer, Barclays/American
Mortgage Director Corporation; Managing Partner,
Barrentine Lott & Associates.
J. Garnett Nelson Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee,
c/o Cash Resource Trust Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc., America's Utility Fund,
Inc., GE Investment Funds, Inc., and Lawyers Title
Corporation; Member, Investment Advisory
Committee, Virginia Retirement System; formerly,
Senior Vice President, The Life Insurance Company
of Virginia.
Paul F. Costello President Managing Director, Wheat First Butcher Singer, Inc.
901 E. Byrd Street and Mentor Investment Group, LLC; President,
Richmond, VA 23219 Cash Resource Trust, Mentor Income Fund, Inc., Mentor
Institutional Trust, Mentor Variable Investment
Portfolios and America's Utility Fund, Inc.;
Director, Mentor Perpetual Advisors, LLC
Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group,
901 E. Byrd Street LLC; Treasurer, Mentor Institutional Trust, Cash
Richmond, VA 23219 Resource Trust, Mentor Variable Investment Portfolios and
Mentor Income Fund, Inc.; Treasurer and Senior
Vice President, America's Utility Fund, Inc.;
formerly, Treasurer and Comptroller, Ryland Capital
Management, Inc.
Michael Wade Assistant Treasurer Vice President, Mentor Investment Group, LLC
901 E. Byrd Street Assistant Treasurer, Mentor Income Fund, Inc.,
Richmond, VA 23219 Cash Resource Trust, Mentor Institutional Trust, Mentor
Variable Investment Portfolios and America's Utility
Fund; formerly, Senior Accountant, Wheat First
Butcher Singer, Inc., Audit Senior, BDO Seidman.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------- -------------- -----------------------------------------------------
<S> <C> <C>
Geoffrey B. Sale Secretary Associate Vice President Mentor Investment Group,
901 E. Byrd Street LLC; Secretary, Cash Resource Trust, Mentor Institutional
Richmond, VA 23219 Trust, Mentor Variable Investment Portfolios; Clerk,
America's Utility Fund, Inc., Mentor Income Fund,
Inc.
</TABLE>
- -------------
* This Trustee is deemed to be an "interested person" of a Fund as defined in
the 1940 Act.
The table below shows the fees paid to each Trustee by the Trust
for the 1997 fiscal year and the fees paid to each Trustee by all funds in the
Mentor family (including the Trust) during the 1997 calendar year.
<PAGE>
<TABLE>
<CAPTION>
Aggregate compensation Total Compensation
Trustees from the Trust from all Complex Funds (28 FUNDS)
- -------- ---------------------- ----------------------------------
<S> <C>
Daniel J. Ludeman 0 --
Arnold H. Dreyfuss $6,000 15,200
Thomas F. Keller $6,000 15,200
Louis W. Moelchert, Jr. $6,000 26,200
Stanley F. Pauley* $6,000 14,175
Troy A. Peery, Jr. $5,500 --
Peter J. Quinn, Jr. $ 0 11,000
Arch T. Allen, III+ $ 0 28,000
Weston E. Edwards+ $ 0 20,000
Jerry R. Barrentine+ $ 0 20,000
J. Barnett Nelson+ $ 0
</TABLE>
- -------------
* Resigned as Trustee effective December 22, 1997
+ Elected Trustee December 22, 1997
The Trustees do not receive pension or retirement benefits from the
Trust.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Trust,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of June 30, 1998, the officers and Trustees of the Trust owned as
a group less than one percent of the outstanding shares of each Portfolio. To
the knowledge of the Trust, no person owned of record or beneficially more than
5% of the outstanding shares of either Portfolio as of that date except that (i)
the following persons owned of record Institutional Shares of the U.S.
Government Money Market Portfolio as follows:
Chase Manhattan Bank TTEE 64.05%
EVEREN Capital Corp 401K
Attn: Sandra Madrid
770 Broadway 10th Fl
New York, NY 10003-9522
Valley Childrens Hospital 7.78%
Attn: Darrell Fischer
1990 E. Gettysburg Ave.
Fresno, CA 93276-0244
and (ii) the following persons owned of record Institutional Shares of
the Money Market Portfolio as follows:
WHEAT FIRST F/A/O 10.27%
JAMES J BALZARINI &
SARA S BALZARINI JT TEN
1446 RESERVE DR
AKRON OH 44333-1095
DANIEL M TABAS 10.24%
915 MONTGOMERY AVE 4TH FL
ROYAL PLAZA
NABERTH PA 19072-1549
CITY OF HOPEWELL 8.83%
300 N MAIN ST
HOPEWELL VA 23860-2740
SUSSEX COUNTY 6.91%
PO BOX 1399
SUSSEX VA 23884-0399
GREENSVILLE COUNTY 5.78%
1750 E ATLANTIC ST RM 213
EMPORIA VA 23847-6584
DINWIDDIE COUNTY 5.73%
PO BOX 178
DINWIDDIE VA 23841-0178
EVEREN CLEARING CORP CUST 5.65%
FBO ALIK A KURI IRA
112 FRANCIS ST
KENT OH 44240
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisory Services
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as
investment adviser to each Portfolio pursuant to a Management Contract with
the Trust. Subject to the supervision and direction of the Trustees, Mentor
Advisors manages a Portfolio's portfolio in accordance with the stated
policies of that Portfolio and of the Trust. Mentor Advisors makes investment
decisions for the Portfolios and places the purchase and sale orders for
portfolio transactions. Mentor Advisors bears all of its expenses in connection
with the performance of its services. In addition, Mentor Advisors pays the
salaries of all officers and employees who are employed by it and the Trust.
Mentor Advisors provides the Portfolios with investment officers
who are authorized to execute purchases and sales of securities.
Investment decisions for the Portfolios and for the other investment
advisory clients of Mentor Advisors and its affiliates are made with a
view to achieving their respective investment objectives. Investment
decisions are the product of many factors in addition to basic
suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could
have been bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or
more other clients are selling the security. In some instances, one
client may sell a particular security to another client. It also
sometimes happens that two or more clients simultaneously purchase or
sell the same security, in which event each day's transactions in such
security are, insofar as possible, averaged as to price and allocated
between such clients in a
-8-
<PAGE>
manner which in an investment adviser's opinion is equitable to each and in
accordance with the amount being purchased or sold by each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by a Portfolio. Purchase and sale orders for a Portfolio may
be combined with those of other clients of Mentor Advisors in the interest
achieving the most favorable net results for the Portfolio.
The proceeds received by each Portfolio for each issue or sale
of its shares, and all income, earnings, profits, and proceeds thereof,
subject only to the rights of creditors, will be specifically allocated
to such Portfolio, and constitute the underlying assets of that
Portfolio. The underlying assets of each Portfolio will be segregated on
the Trust's books of account, and will be charged with the liabilities
in respect of such Portfolio and with a share of the general liabilities
of the Trust. Expenses with respect to a Portfolio may be allocated in
proportion to the net asset values of that Portfolio except where
allocations of direct expenses can otherwise be fairly made.
Expenses incurred in the operation of a Portfolio or otherwise
allocated to a Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, investor servicing fees and expenses,
charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges and charges relating to corporate matters are borne
by the Portfolio.
Each Management Contract is subject to annual approval (beginning in
2000) by (i) the Trustees or (ii) vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the affected Portfolio, provided
that in either event the continuance is also approved by a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust or Mentor Advisors, by vote cast in person at a meeting called for the
purpose of voting on such approval. Each Management Contract is terminable
without penalty, on not more than sixty days' notice and not less than thirty
days' notice, by the Trustees, by vote of the holders of a majority of the
affected Portfolio's shares, or by Mentor Advisors. Each Management Contract
terminates automatically in the event of its assignment (as defined in the 1940
Act).
-9-
<PAGE>
BROKERAGE
Transactions on U.S. stock exchanges, commodities markets, and
futures markets and other agency transactions involve the payment by a
Portfolio of negotiated brokerage commissions. Such commissions vary
among different brokers. A particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign investments often involve the
payment of fixed brokerage commissions, which may be higher than those
in the United States. There is generally no stated commission in the
case of securities traded in the over-the-counter markets, but the price
paid by the Portfolio usually includes an undisclosed dealer commission
or mark-up. In underwritten offerings, the price paid by the Portfolio
includes a disclosed, fixed commission or discount retained by the
underwriter or dealer. It is anticipated that most purchases and sales
of portfolio securities by a Portfolio will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, the Portfolios would not ordinarily pay significant
brokerage commissions with respect to securities transactions.
It has for many years been a common practice in the investment
advisory business for advisers of investment companies and other
institutional investors to receive brokerage and research services (as
defined in the Securities Exchange Act of 1934, as amended (the "1934
Act")) from broker-dealers that execute portfolio transactions for the
clients of such advisers and from third parties with which such
broker-dealers have arrangements. Consistent with this practice, Mentor
Advisors receives brokerage and research services and other similar
services from many broker-dealers with which it places the Portfolios'
portfolio transactions and from third parties with which these
broker-dealers have arrangements. These services include such matters as
general economic and market reviews, industry and company reviews,
evaluations of investments, recommendations as to the purchase and sale
of investments, newspapers, magazines, pricing services, quotation
services, news services and personal computers utilized by the
investment advisers' managers and analysts. Where the services referred
to above are not used exclusively by Mentor Advisors for research
purposes, Mentor Advisors, based upon its own allocations of expected
use, bears that portion of the cost of these services which directly
relates to its non-research use. Some of these services are of value to
Mentor Advisors and its affiliates in advising various of its clients
(including the Portfolios), although not all of these services are
necessarily useful and of value in managing the Portfolios.
Mentor Advisors places all orders for the purchase and sale of
portfolio investments for the Portfolios and buys and sells investments
for the Portfolios through a substantial number of brokers and dealers.
Mentor Advisors seeks the best overall terms available for the
Portfolios, except to the extent it may be permitted to pay higher
brokerage commissions as described below. In doing so, Mentor Advisors,
having in mind a Portfolio's best interests, considers all factors it
deems relevant, including, by way of illustration, price, the size of
the transaction, the nature of the market for the security or other
investment, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience
-10-
<PAGE>
and financial stability of the broker-dealer involved and the quality of
service rendered by the broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the
Management Contract, Mentor Advisors may cause a Portfolio to pay a
broker-dealer which provides "brokerage and research services" (as
defined in the 1934 Act) to it an amount of disclosed commission for
effecting securities transactions on stock exchanges and other
transactions for a Portfolio on an agency basis in excess of the
commission which another broker-dealer would have charged for effecting
that transaction. Mentor Advisors' authority to cause a Portfolio to pay
any such greater commissions is also subject to such policies as the
Trustees may adopt from time to time. Mentor Advisors does not currently
intend to cause a Portfolio to make such payments. It is the position of
the staff of the Securities and Exchange Commission that Section 28(e)
does not apply to the payment of such greater commissions in "principal"
transactions. Accordingly, Mentor Advisors will use its best efforts to
obtain the best overall terms available with respect to such
transactions, as described above.
Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and subject to such other
policies as the Trustees may determine, Mentor Advisors may consider
sales of shares of a Portfolio (and, if permitted by law, of the other
Mentor funds) as a factor in the selection of broker-dealers to execute
portfolio transactions for a Portfolio.
The Trustees have determined that portfolio transactions for
the Trust may be effected through Wheat, First Securities, Inc.
("Wheat") or EVEREN Securities, Inc. ("EVEREN"), broker-dealers
affiliated with Mentor Advisors. The Trustees have adopted certain
policies incorporating the standards of Rule 17e-l issued by the SEC
under the 1940 Act which requires, among other things, that the
commissions paid to Wheat and EVEREN must be reasonable and fair
compared to the commissions, fees, or other remuneration received by
other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. Wheat and EVEREN
will not participate in brokerage commissions paid by a Portfolio to
other brokers or dealers. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases
in which better prices and executions may be obtained elsewhere. A
Portfolio will in no event effect principal transactions with Wheat or
EVEREN in over-the-counter securities in which Wheat or EVEREN makes a
market, as the case may be.
Under rules adopted by the SEC, neither Wheat nor EVEREN may
execute transactions for a Portfolio on the floor of any national
securities exchange, but either may effect transactions for a Portfolio
by transmitting orders for execution and arranging for the performance
of this function by members of the exchange not associated with them.
Wheat and EVEREN will be required to pay fees charged to those persons
performing the floor brokerage elements out of the brokerage
compensation it receives from a Portfolio. The Trust has been
-11-
<PAGE>
advised by Wheat that, on most transactions, the floor brokerage
generally constitutes from 5% and 10% of the total commissions paid.
The U.S. Government Money Market Portfolio paid no brokerage fees for
the fiscal period ended September 30, 1997.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of a Portfolio is
determined twice each day as of 12:00 noon and as of the close of regular
trading (generally 4:00 p.m. New York time) on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is normally closed on
the following national holidays: New Year's Day, Dr. Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
The valuation of each Portfolio's portfolio securities is based
upon its amortized cost, which does not take into account unrealized
securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. By
using amortized cost valuation, each Portfolio seeks to maintain a
constant net asset value of $1.00 per share, despite minor shifts in the
market value of its portfolio securities. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price a
Portfolio would receive if it sold the instrument. During periods of
declining interest rates, the quoted yield on shares of a Portfolio may
tend to be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based on market prices and
estimates of market prices for all of its portfolio instruments. Thus,
if the use of amortized cost by a Portfolio resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in
the Portfolio would be able to obtain a somewhat higher yield if he
purchased shares of the Portfolio on that day, than would result from
investment in a fund utilizing solely market values, and existing
investors in the Portfolio would receive less investment income. The
converse would apply on a day when the use of amortized cost by a
Portfolio resulted in a higher aggregate portfolio value. However, as a
result of certain procedures adopted by the Trust, the Trust believes
any difference will normally be minimal.
The valuation of a Portfolio's portfolio instruments at
amortized cost is permitted in accordance with Securities and Exchange
Commission Rule 2a-7 and certain procedures adopted by the Trustees.
Under these procedures, a Portfolio must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments
having remaining maturities of 397 days or less, and invest in
securities determined by the Trustees to be of high quality with minimal
credit risks. The Trustees have also established procedures designed to
stabilize, to the extent reasonably possible, a Portfolio's price per
share as computed for the purpose of distribution, redemption and
repurchase at $1.00. These procedures include review of a Portfolio's
portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether a Portfolio's net asset value
calculated by using readily available market quotations deviates from
$1.00 per share, and, if so, whether such deviation may result in
material dilution or is otherwise unfair to existing shareholders. In
the event the Trustees
-12-
<PAGE>
determine that such a deviation may result in material dilution or is
otherwise unfair to existing shareholders, they will take such
corrective action as they regard as necessary and appropriate, including
the sale of portfolio instruments prior to maturity to realize capital
gains or losses or to shorten the average portfolio maturity;
withholding dividends; redemption of shares in kind; or establishing a
net asset value per share by using readily available market quotations.
Since the net income of a Portfolio is declared as a dividend
each time it is determined, the net asset value per share of a Portfolio
remains at $1.00 per share immediately after such determination and
dividend declaration. Any increase in the value of a shareholder's
investment in a Portfolio representing the reinvestment of dividend
income is reflected by an increase in the number of shares of a
Portfolio in the shareholder's account on the last day of each month
(or, if that day is not a business day, on the next business day). It is
expected that a Portfolio's net income will be positive each time it is
determined. However, if because of realized losses on sales of portfolio
investments, a sudden rise in interest rates, or for any other reason
the net income of a Portfolio determined at any time is a negative
amount, that Portfolio will offset such amount allocable to each then
shareholder's account from dividends accrued during the month with
respect to such account. If at the time of payment of a dividend by a
Portfolio (either at the regular monthly dividend payment date, or, in
the case of a shareholder who is withdrawing all or substantially all of
the shares in an account, at the time of withdrawal), such negative
amount exceeds a shareholder's accrued dividends, that Portfolio will
reduce the number of outstanding shares by treating the shareholder as
having contributed to the capital of the Portfolio that number of full
and fractional shares which represent the amount of the excess. Each
shareholder is deemed to have agreed to such contribution in these
circumstances by its investment in a Portfolio.
Should a Portfolio incur or anticipate any unusual or
unexpected significant expense or loss which would affect
disproportionately the Portfolio's income for a particular period, the
Trustees would at that time consider whether to adhere to the dividend
policy described above or to revise it in light of the then prevailing
circumstances in order to ameliorate to the extent possible the
disproportionate effect of such expense or loss on then existing
shareholders. Such expenses or losses may nevertheless result in a
shareholder's receiving no dividends for the period during which the
shares are held and receiving upon redemption a price per share lower
than that which was paid.
TAX STATUS
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to its shareholders. As series of Massachusetts business trust, the
Portfolios under present law will not be subject to any excise or income taxes
in Massachusetts.
Distributions from a Portfolio will be taxable to a shareholder whether
received in cash or additional shares. Such distributions that are designated as
capital gains dividends will be taxable as such, regardless of how long
Portfolio shares are held, while other taxable distributions will be taxed as
ordinary income.
In order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or foreign currencies, and other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies and (b) diversify its holdings so that, at the close of each quarter
of its taxable year, (i) at least 50% of the value of its total assets consists
of cash, cash items, U.S. Government Securities, securities of other regulated
investment companies, and other securities limited generally with respect to any
one issuer to not more than 5% of the total assets of a Fund and not more than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities (other than
those of U.S. Government Securities or other regulated investment companies) of
any issuer or of two or more issuers which the Fund controls and which are
engaged in the same, similar, or related trades or businesses. In order to
receive the favorable tax treatment accorded regulated investment companies and
their shareholders, moreover, a Portfolio must in general distribute at least
90% of the sum of its taxable net investment income,its net tax-exempt income,
and the excess, if
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<PAGE>
any, of net short-term capital gains over net long-term capital losses for such
year. To satisfy these requirements, a Portfolio may engage in investment
techniques that affect the amount, timing and character of its income and
distributions.
If a Portfolio failed to qualify as a regulated investment company accorded
special tax treatment in any taxable year, the Portfolio would be subject to tax
on its taxable income at corporate rates, and all distributions from earnings
and profits, including any distributions of net tax-exempt income and net
long-term capital gains, would be taxable to shareholders as ordinary income. In
addition, a Portfolio could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying as a regulated investment company that is accorded special tax
treatment.
An excise tax at the rate of 4% will be imposed on the excess, if any, of
each Portfolio's "required distribution" over its distributions in any calendar
year. Generally, the "required distribution" is 98% of the Portfolio's ordinary
income for the calendar year plus 98% of its capital gain net income realized
during the one-year period ending on October 31 (or December 31, if the
Portfolio so elects) plus undistributed amounts from prior years. Each Portfolio
intends to make distributions sufficient to avoid imposition of the excise tax.
Distributions declared by a Portfolio during October, November or December to
shareholders of record on a date in any such month and paid by the Portfolio
during the following January will be treated for federal tax purposes as paid by
the Portfolio and received by shareholders on December 31 of the year in which
declared.
Distributions from a Portfolio (other than exempt-interest dividends, as
discussed below) will be taxable to shareholders as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Net capital gain (that is, the excess of net gains from capital assets held for
more than one year over net losses from capital assets held for not more than
one year) of a Portfolio that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, generally
taxable to individuals at a 20% rate, regardless of how long a shareholder has
held the shares in the Portfolio. Some 1998 distributions of capital gains
realized in 1997 may be taxable to individuals at a 28% rate.
Each Portfolio is required to withhold 31% of all ordinary income dividends
and capital gain distributions, and 31% of the gross proceeds of all redemptions
of Portfolio shares, in the case of any shareholder who does not provide a
correct taxpayer identification number, about whom a Portfolio is notified that
the shareholder has underreported income in the past, or who fails to certify to
a Portfolio that the shareholder is not subject to such withholding.
Shareholders who fail to furnish their current tax identification numbers are
subject to a penalty of $50 for each such failure unless the failure is due to
reasonable cause and not willfull neglect. An individual's taxpayer
identification number is his or her Social Security number. Tax-exempt
shareholders are not subject to these back-up withholding rules so long as they
furnish the Portfolio with a proper certification.
EXEMPT-INTEREST DIVIDENDS. A Portfolio will be qualified to pay
exempt-interest dividends to its shareholders only if, at the close of each
quarter of the Portfolio's taxable year, at least 50% of the total value of the
Portfolio's assets consists of obligations the interest on which is exempt from
federal income tax. Distributions that a Portfolio properly designates as
exempt-interest dividends are treated as interest excludable from shareholders'
gross income for federal income tax purposes but may be taxable for federal
alternative minimum tax purposes and for state and local purposes. If a
Portfolio intends to be qualified to pay exempt-interest dividends, the
Portfolio may be limited in its ability to enter into taxable transactions
involving forward commitments, repurchase agreements, financial futures and
options contracts on financial futures, tax-exempt bond indices and other
assets.
Part or all of the interest on indebtedness, if any, incurred or continued
by a shareholder to purchase or carry shares of a Portfolio paying
exempt-interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the indebtedness,
multiplied by the percentage of a Portfolio's total distributions (not including
capital gain dividend) paid to the shareholder that are exempt-interest
dividends. Under rules used by the Internal Revenue Service for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase of shares may be considered to have been made
with borrowed funds even though such funds are not directly traceable to the
purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
A Portfolio which is qualified to pay exempt-interest dividends will inform
investors within 60 days of the Portfolio's fiscal year-end of the percentage of
its income distributions designated as tax-exempt. The percentage is applied
uniformly to all distributions made during the year. The percentage of income
designated as tax-exempt for any particular distribution may be substantially
different from the percentage of a Portfolio's income that was tax-exempt during
the period covered by the distribution.
Each Portfolio seeks to maintain a stable net asset value of $1.00 per
share; however, there can be no assurance that a Portfolio will be able to do
so. A shareholder may therefore recognize gain or loss on the sale or redemption
of shares of a Portfolio in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of that Portfolio within 30 days before or
after the sale or redemption. In general, any gain or loss arising from (or
treated as arising from) the sale or redemption of shares of a Portfolio will be
considered capital gain or loss and will be long-term capital gian or loss if
the shares were held for longer than one year. Long-term capital gain is
generally taxable to individuals at a 20% rate. However, any capital loss
arising from the sale or redemption of shares held for six months or less will
be disallowed to the extent of the amount of exempt-interest dividends received
on
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<PAGE>
such shares and (to the extent not disallowed) will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares.
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. A Portfolio's investment in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, a Portfolio may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to
state, local, foreign and other taxes. Shareholders are urged to consult their
tax advisers regarding specific questions as to federal, state, local, or
foreign taxes. The foregoing discussion relates solely to U.S. federal income
tax law. Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Fund, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
THE DISTRIBUTOR
Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus,
Ohio 43219, is the principal distributor of the Portfolios' shares, a
subsidiary of Wheat First Butcher Singer. Mentor Distributors is acting on a
best efforts basis in the continuous offering of the Trust's shares. Mentor
Distributors, LLC is a wholly owned subsidiary of BISYS Fund Services, Inc.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston,
Massachusetts 02110, are the Portfolios' independent auditors, providing
audit services, tax return review, and other tax consulting services.
CUSTODIAN
The custodian of the Portfolios, Investors Fiduciary Trust
Company, is located at 127 West 10th Street, Richmond, Virginia 64105. A
custodian's responsibilities include generally safeguarding and
controlling a Portfolio's cash and securities, handling the receipt and
delivery of securities, and collecting interest and dividends on a
Portfolio's investments.
PERFORMANCE INFORMATION
The yield of each Portfolio is computed by determining the
percentage net change, excluding capital changes, in the value of an
investment in one share of the Portfolio over the base period, and
multiplying the net change by 365/7 (or approximately 52 weeks). A
Portfolio's effective yield represents a compounding of the yield by
adding 1 to the number representing the
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<PAGE>
percentage change in value of the investment during the base period,
raising that sum to a power equal to 365/7, and subtracting 1 from the
result.
The U.S. Government Money Market Portfolio's yield and effective yield
for the seven-day period ended March 31, 1998 were 5.34% and 5.48%,
respectively.
The Money Market Portfolio's yield and effective yield for the
seven-day period ended March 31, 1998 were 5.39% and 5.53%, respectively.
All data for each of the Portfolios are based on past
performance and do not predict future results.
Independent statistical agencies measure a Portfolio's
investment performance and publish comparative information showing how
the Portfolio, and other investment companies, performed in specified
time periods. Agencies whose reports are commonly used for such
comparisons are set forth below. From time to time, a Portfolio may
distribute these comparisons to its shareholders or to potential
investors. The agencies listed below measure performance based on the
basis of their own criteria rather than on the basis of the standardized
performance measures described above.
Lipper Analytical Services, Inc. distributes mutual fund
rankings monthly. The rankings are based on total return
performance calculated by Lipper, reflecting generally changes
in net asset value adjusted for reinvestment of capital gains
and income dividends. They do not reflect deduction of any
sales charges. Lipper rankings cover a variety of performance
periods, for example year-to-date, 1-year, 5-year, and 10-year
performance. Lipper classifies mutual funds by investment
objective and asset category.
Morningstar, Inc. distributes mutual fund ratings twice a
month. the ratings are divided into five groups: highest, above
average, neutral, below average and lowest. They represent a
fund's historical risk/reward ratio relative to other funds
with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3- year, 5-year,
and 10-year total return performance (if available) reflecting
deduction of expenses and sales charges. Performance is
adjusted using quantitative techniques to reflect the risk
profile of the fund. The ratings are derived from a purely
quantitative system that does not utilize the subjective
criteria customarily employed by rating agencies such as
Standard & Poor's Corporation and Moody's Investor Service,
Inc.
Weisenberger's Management Results publishes mutual fund
rankings and is distributed monthly. The rankings are based
entirely on total return calculated by Weisenberger for periods
such as year-to-date, 1-year, 3-year, 5-year and 10-year
performance. Mutual funds are ranked in general categories
(e.g., international bond, international equity, municipal
bond, and maximum capital gain). Weisenberger rankings do not
reflect deduction of sales charges or fees.
Independent publications may also evaluate a Portfolio's
performance. Certain of those publications are listed below, at the
request of Mentor Distributors, which bears full responsibility for
their use and the descriptions appearing below. From time to time any or
all of the Portfolios may distribute evaluations by or excerpts from
these publications to its
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shareholders or to potential investors. The following illustrates the
types of information provided by these publications.
Business Week publishes mutual fund rankings in its Investment
Figures of the Week column. The rankings are based on 4-week
and 52-week total return reflecting changes in net asset value
and the reinvestment of all distributions. They do not reflect
deduction of any sales charges. Portfolios are not categorized;
they compete in a large universe of over 2,000 funds. The
source for rankings is data generated by Morningstar, Inc.
Investor's Business Daily publishes mutual fund rankings on a
daily basis. The rankings are depicted as the top 25 funds in a
given category. The categories are based loosely on the type of
fund, e.g., growth funds, balanced funds, U.S. government
funds, GNMA funds, growth and income funds, corporate bond
funds, etc. Performance periods for sector equity funds can
vary from 4 weeks to 39 weeks; performance periods for other
fund groups vary from 1 year to 3 years. Total return
performance reflects changes in net asset value and
reinvestment of dividends and capital gains. The rankings are
based strictly on total return. They do not reflect deduction
of any sales charges Performance grades are conferred from A+
to E. An A+ rating means that the fund has performed within the
top 5% of a general universe of over 2000 funds; an A rating
denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The
rankings are based on total return performance provided by
Lipper Analytical Services. The Lipper total return data
reflects changes in net asset value and reinvestment of
distributions, but does not reflect deduction of any sales
charges. The performance periods vary from short-term intervals
(current quarter or year-to-date, for example) to long-term
periods (five-year or ten-year performance, for example).
Barron's classifies the funds using the Lipper mutual fund
categories, such as Capital Appreciation Portfolios, Growth
Portfolios, U.S. Government Portfolios, Equity Income
Portfolios, Global Portfolios, etc. Occasionally, Barron's
modifies the Lipper information by ranking the funds in asset
classes. "Large funds" may be those with assets in excess of
$25 million; "small funds" may be those with less than $25
million in assets.
The Wall Street Journal publishes its Mutual Portfolio
Scorecard on a daily basis. Each Scorecard is a ranking of the
top-15 funds in a given Lipper Analytical Services category.
Lipper provides the rankings based on its total return data
reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The
Scorecard portrays 4-week, year-to-date, one-year and 5-year
performance; however, the ranking is based on the one-year
results. The rankings for any given category appear
approximately once per month.
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Fortune magazine periodically publishes mutual fund rankings
that have been compiled for the magazine by Morningstar, Inc.
Portfolios are placed in stock or bond fund categories (for
example, aggressive growth stock funds, growth stock funds,
small company stock funds, junk bond funds, Treasury bond funds
etc.), with the top-10 stock funds and the top-5 bond funds
appearing in the rankings. The rankings are based on 3- year
annualized total return reflecting changes in net asset value
and reinvestment of distributions and not reflecting sales
charges. Performance is adjusted using quantitative techniques
to reflect the risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a
database of funds tracked for performance by Lipper Analytical
Services. The funds are placed in 23 stock or bond fund
categories and analyzed for five-year risk adjusted return.
Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions
and does not reflect deduction of any sales charges. Grades are
conferred (from A to E): the top 20% in each category receive
an A, the next 20% a B, etc. To be ranked, a fund must be at
least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given
date.
Financial World publishes its monthly Independent Appraisals of
Mutual Portfolios, a survey of approximately 1000 mutual funds.
Portfolios are categorized as to type, e.g., balanced funds,
corporate bond funds, global bond funds, growth and income
funds, U.S. government bond funds, etc. To compete, funds must
be over one year old, have over $1 million in assets, require a
maximum of $10,000 initial investment, and should be available
in at least 10 states in the United States. The funds receive a
composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund
versus its category, as well as taking into account its risk,
reward to risk, and fees. An A+ rated fund is one of the best,
while a D- rated fund is one of the worst. The source for
Financial World rating is Schabacker investment management in
Rockville, Maryland.
Forbes magazine periodically publishes mutual fund ratings
based on performance over at least two bull and bear market
cycles. The funds are categorized by type, including stock and
balanced funds, taxable bond funds, municipal bond funds, etc.
Data sources include Lipper Analytical Services and CDA
Investment Technologies. The ratings are based strictly on
performance at net asset value over the given cycles.
Portfolios performing in the top 5% receive an A+ rating; the
top 15% receive an A rating; and so on until the bottom 5%
receive an F rating. Each fund exhibits two ratings, one for
performance in "up" markets and another for performance in
"down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing
Times), periodically publishes rankings of mutual funds based
on one-, three- and five-year total return performance
reflecting changes in net asset value and reinvestment of
dividends and
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<PAGE>
capital gains and not reflecting deduction of any sales
charges. Portfolios are ranked by tenths: a rank of 1 means
that a fund was among the highest 10% in total return for the
period; a rank of 10 denotes the bottom 10%. Portfolios compete
in categories of similar funds -- aggressive growth funds,
growth and income funds, sector funds, corporate bond funds,
global governmental bond funds, mortgage-backed securities
funds, etc. Kiplinger's also provides a risk-adjusted grade in
both rising and falling markets. Portfolios are graded against
others with the same objective. The average weekly total return
over two years is calculated. Performance is adjusted using
quantitative techniques to reflect the risk profile of the
fund.
U.S. News and World Report periodically publishes mutual fund
rankings based on an overall performance index (OPI) devised by
Kanon Bloch Carre & Co., a Boston research firm. Over 2000
funds are tracked and divided into 10 equity, taxable bond and
tax-free bond categories. Portfolios compete within the 10
groups and three broad categories. The OPI is a number from
0-100 that measures the relative performance of funds at least
three years old over the last 1, 3, 5 and 10 years and the last
six bear markets. Total return reflects changes in net asset
value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales
charges. Results for the longer periods receive the most
weight.
The 100 Best Mutual Portfolios You Can Buy (1992), authored by
Gordon K. Williamson. The author's list of funds is divided
into 12 equity and bond fund categories, and the 100 funds are
determined by applying four criteria. First, equity funds whose
current management teams have been in place for less than five
years are eliminated. (The standard for bond funds is three
years.) Second, the author excludes any fund that ranks in the
bottom 20 percent of its category's risk level. Risk is
determined by analyzing how many months over the past three
years the fund has underperformed a bank CD or a U.S. Treasury
bill. Third, a fund must have demonstrated strong results for
current three-year and five-year performance. Fourth, the fund
must either possess, in Mr. Williamson's judgment, "excellent"
risk-adjusted return or "superior" return with low levels of
risk. Each of the 100 funds is ranked in five categories: total
return, risk/volatility, management, current income and
expenses. The rankings follow a fivepoint system: zero
designates "poor"; one point means "fair"; two points denote
"good"; three points qualify as a "very good"; four points rank
as "superior"; and five points mean "excellent."
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the
Trust. However, the Agreement and Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust and requires
that notice of such disclaimer be given in each agreement, obligation,
or instrument entered into or executed by
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<PAGE>
the Trust or the Trustees. The Agreement and Declaration of Trust
provides for indemnification out of a Portfolio's property for all loss
and expense of any shareholder held personally liable for the
obligations of a Portfolio. Thus the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to
circumstances in which the Portfolio would be unable to meet its
obligations.
Financial Statements
The Independent Auditors' Report, financial highlights, and financial
statements included in the U.S. Government Money Market Portfolio's Annual
Report for the fiscal year ended September 30, 1997, filed electronically on
December 4, 1997 (File No. 811-6550; Accession No. 0000916641-97-001148, and the
unaudited financial statements of the U.S. Government Money Market Portfolio and
of the Money Market Portfolio filed electronically on July 9, 1998
(File No. 811-6550; Accession No. 0000916641-98-000790), are incorporated by
reference into this Statement of Additional Information.
MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of Mentor Advisors:
Mentor Investment Advisors, LLC
Cash Management
R. Preston Nuttall, CFA -- Managing Director, Chief Investment Officer
Mr. Nuttall has more than thirty years of investment management
experience. Prior to Mentor Advisors, he led short-term fixed-income
management for fifteen years at Capitoline Investment Services, Inc. He
has his undergraduate degree in economics from the University of
Richmond and his graduate degree in finance from the Wharton School at
the University of Pennsylvania.
Hubert R. White III -- Vice President, Portfolio Manager
Mr. White has eleven years of investment management experience. Prior to
joining Mentor Advisors, he served for five years as portfolio manager
with Capitoline Investment Services. He has his undergraduate degree in
business from the University of Richmond.
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<PAGE>
RATINGS
The rating services' descriptions of corporate bonds are:
Moody's Investors Service, Inc.:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge". Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Standard & Poor's:
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small
degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
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<PAGE>
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
A-1 and Prime-1 Commercial Paper Ratings
The rating A-1 (including A-1+) is the highest commercial paper rating
assigned by S&P. Commercial paper rated A-1 by S&P has the following
characteristics:
o liquidity ratios are adequate to meet cash requirements;
o long-term senior debt is rated "A" or better;
o the issuer has access to at least two additional channels of
borrowing;
o basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances;
o typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and
o the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether
the issuer's commercial paper is rated A-1, A-2 or A-3. Issues rated A-1
that are determined by S&P to have overwhelming safety characteristics
are designated A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings
are the following:
o evaluation of the management of the issuer;
o economic evaluation of the issuer's industry or industries
and an appraisal of speculative- type risks which may be
inherent in certain areas;
o evaluation of the issuer's products in relation to
competition and customer acceptance;
o liquidity;
o amount and quality of long-term debt;
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o trend of earnings over a period of ten years;
o financial strength of parent company and the relationships
which exist with the issuer; and
o recognition by the management of obligations which may be
present or may arise as a result of public interest.
<PAGE>
MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
(Mentor Tax-Exempt Money Market Portfolio)
October 14, 1998
This Statement of Additional Information relates to Retail Shares of the
Mentor Tax-Exempt Money Market Portfolio (the "Portfolio"). The Portfolio
is a series of shares of beneficial interest of Mentor Funds (the "Trust").
The Portfolio was previously known as the "Mentor Institutional Tax-Exempt
Money Market Portfolio." This Statement is not a prospectus and should be read
in conjunction with the relevant prospectus. Separate statements of
additional information relate to the other Portfolios comprising the Trust. A
copy of any prospectus or statement of additional information can be obtained
upon request made to Mentor Services Company, Inc., at P.O. Box 1357, Richmond,
Virginia 23218-1357, or calling Mentor Services Company, Inc. at
1-(800) 869-6042.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
<S> <C>
GENERAL ..................................................
INVESTMENT RESTRICTIONS....................................
CERTAIN INVESTMENT TECHNIQUES..............................
MANAGEMENT OF THE TRUST....................................
PRINCIPAL HOLDERS OF SECURITIES............................
INVESTMENT ADVISORY AND OTHER SERVICES.....................
BROKERAGE..................................................
DETERMINATION OF NET ASSET VALUE...........................
TAX STATUS.................................................
THE DISTRIBUTOR............................................
INDEPENDENT ACCOUNTANTS....................................
CUSTODIAN..................................................
PERFORMANCE INFORMATION....................................
SHAREHOLDER LIABILITY......................................
MEMBERS OF INVESTMENT MANAGEMENT TEAMS.....................
RATINGS ..................................................
</TABLE>
<PAGE>
GENERAL
Mentor Funds (the "Trust") is a Massachusetts business trust
organized on January 20, 1992 as Cambridge Series Trust.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be
changed with respect to the Portfolio without approval by the holders of a
majority of the outstanding shares of the Portfolio, the Portfolio may
not:
1. Purchase any security (other than U.S. Government
securities) if as a result: (i) as to 75% of such
Portfolio's total assets, more than 5% of the
Portfolio's total assets (taken at current value)
would then be invested in securities of a single
issuer, or (ii) more than 25% of the Portfolio's total
assets would be invested in a single industry;
2. Acquire more than 10% of the voting securities of any
issuer.
3. Act as underwriter of securities of other issuers
except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed
to be an underwriter under certain federal securities
laws.
4. Issue any class of securities which is senior to the
Portfolio's shares of beneficial interest.
5. Purchase or sell real estate or interests in real
estate, including real estate mortgage loans, although
it may purchase and sell securities which are secured
by real estate and securities of companies that invest
or deal in real estate or real estate limited
partnership interests. (For purposes of this
restriction, investments by a Portfolio in
mortgage-backed securities and other securities
representing interests in mortgage pools shall not
constitute the purchase or sale of real estate or
interests in real estate or real estate mortgage
loans.)
6. Borrow money in excess of 10% of the value (taken at
the lower of cost or current value) of its total
assets (not including the amount borrowed) at the time
the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of
redemption requests (not for leverage) which might
otherwise require the untimely disposition of
portfolio investments or for extraordinary or
emergency purposes.
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<PAGE>
7. Purchase or sell commodities or commodity contracts,
except that a Portfolio may purchase or sell financial
futures contracts, options on futures contracts, and
futures contracts, forward contracts, and options with
respect to foreign currencies, and may enter into swap
transactions.
8. Make loans, except by purchase of debt obligations in
which the Portfolio may invest consistent with its
investment policies, by entering into repurchase
agreements, or by lending its portfolio securities.
In addition, it is contrary to the current policy of the
Portfolio, which policy may be changed without shareholder approval, to
invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale (excluding
securities determined by the Trustees of the Trust (or the person
designated by the Trustees to make such determinations) to be readily
marketable), and (c) repurchase agreements maturing in more than seven
days, if, as a result, more than 10% of the Portfolio's net assets
(taken at current value) would then be invested in securities described
in (a), (b), and (c).
All percentage limitations on investments will apply at the
time of investment and shall not be considered violated unless an excess
or deficiency occurs or exists immediately after and as a result of such
investment. Except for the investment restrictions listed above as
fundamental or to the extent designated as such in a Prospectus with
respect to the Portfolio, the other investment policies described in this
Statement or in a Prospectus are not fundamental and may be changed by
approval of the Trustees.
The Investment Company Act of 1940, as amended (the "1940
Act"), provides that a "vote of a majority of the outstanding voting
securities" of the Portfolio means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Portfolio, and (2)
67% or more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment
techniques in which the Portfolio may engage, and certain of the risks
they may entail.
Repurchase Agreements
The Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject
to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the
Portfolio's cost plus interest). It is the Trust's present intention to
enter into repurchase agreements only with member banks of the Federal
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Reserve System and securities dealers meeting certain criteria as to
creditworthiness and financial condition established by the Trustees of
the Trust and only with respect to obligations of the U.S. government or
its agencies or instrumentalities or other high quality short term debt
obligations. Repurchase agreements may also be viewed as loans made by the
Portfolio which are collateralized by the securities subject to
repurchase. The investment adviser will monitor such transactions to
ensure that the value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation,
including the interest factor. If the seller defaults, the Portfolio could
realize a loss on the sale of the underlying security to the extent that
the proceeds of sale including accrued interest are less than the resale
price provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, the
Portfolio may incur delay and costs in selling the underlying security
or may suffer a loss of principal and interest if the Portfolio is treated
as an unsecured creditor and required to return the underlying
collateral to the seller's estate.
Tax-Exempt Securities
General description. As used in the prospectus and in this Statement
the term "Tax-Exempt Securities" includes debt obligations issued by a state,
its political subdivisions (for example, counties, cities, towns, villages,
districts and authorities) and their agencies, instrumentalities or other
governmental units, the interest from which is, in the opinion of bond counsel,
exempt from federal income tax. Such obligations are issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Tax-Exempt Securities may be issued include the refunding of
outstanding obligations or the payment of general operating expenses. Short-term
Tax-Exempt Securities are generally issued by state and local governments and
public authorities as interim financing in anticipation of tax collections,
revenue receipts, or bond sales to finance such public purposes. In addition,
certain types of "private activity" bonds may be issued by public authorities to
finance such projects as privately operated housing facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal,
student loans, or the obtaining of funds to lend to public or private
institutions for the construction of facilities such as educational, hospital
and housing facilities. Other types of private activity bonds, the proceeds of
which are used for the construction, repair or improvement of, or to obtain
equipment for, privately operated industrial or commercial facilities, may
constitute Tax-Exempt Securities, although the current federal tax laws place
substantial limitations on the size of such issues. Tax-Exempt Securities also
include tax-exempt commercial paper, which are promissory notes issued by
municipalities to enhance their cash flows.
Participation interests. The Portfolio may invest in Tax-Exempt
Securities either by purchasing them directly or by purchasing certificates of
accrual or similar instruments evidencing direct ownership of interest payments
or principal payments, or both, on Tax-Exempt Securities, provided that, in the
opinion of counsel to the initial seller of each such certificate or instrument,
any discount accruing on the certificate or instrument that is purchased at a
yield not greater than the coupon rate of interest on the related Tax-
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Exempt Securities will be exempt from federal income tax to the same extent as
interest on the Tax-Exempt Securities. The Portfolio may also invest in
Tax-Exempt Securities by purchasing from banks participation interests in all or
part of specific holdings of Tax-Exempt Securities. These participations may be
backed in whole or in part by an irrevocable letter of credit or guarantee of
the selling bank. The selling bank may receive a fee from a Fund in connection
with the arrangement.
Stand-by commitments. When the Portfolio purchases Tax-Exempt
Securities, it has the authority to acquire stand-by commitments from banks and
broker-dealers with respect to those Tax-Exempt Securities. A stand-by
commitment may be considered a security independent of the state tax-exempt
security to which it relates. The amount payable by a bank or dealer during the
time a stand-by commitment is exercisable, absent unusual circumstances, would
be substantially the same as the market value of the underlying Tax-Exempt
Security to a third party at any time. The Portfolio expects that stand-by
commitments generally will be available without the payment of direct or
indirect consideration. No Fund expects to assign any value to stand-by
commitments.
Yields. The yields on Tax-Exempt Securities depend on a variety of
factors, including general money market conditions, effective marginal tax
rates, the financial condition of the issuer, general conditions of the
tax-exempt security market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. The ratings of Moody's Investors
Service, Inc. and Standard & Poor's represent their opinions as to the quality
of the Tax-Exempt Securities which they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, Tax-Exempt Securities with the same maturity and interest
rate but with different ratings may have the same yield. Yield disparities may
occur for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, due to such factors as changes
in the overall demand or supply of various types of Tax-Exempt Securities or
changes in the investment objectives of investors. Subsequent to purchase by the
Portfolio, an issue of Tax-Exempt Securities or other investments may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the Portfolio. Neither event will require the elimination of an
investment from the Portfolio's portfolio, but Mentor Advisors will consider
such an event in its determination of whether the Portfolio should continue to
hold an investment in its portfolio.
"Moral obligation" bonds. The Portfolio does not currently intend to
invest in so-called "moral obligation" bonds, where repayment is backed by a
moral commitment of an entity other than the issuer, unless the credit of the
issuer itself, without regard to the "moral obligation," meets the investment
criteria established for investments by the Portfolio.
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Additional risks. Securities in which the Portfolio may invest,
including Tax-Exempt Securities, are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the federal Bankruptcy Code (including special provisions related to
municipalities and other public entities), and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that as a result of
litigation or other conditions the power, ability or willingness of issuers to
meet their obligations for the payment of interest and principal on their
Tax-Exempt Securities may be materially affected. There is no assurance that any
issuer of a Tax-Exempt Security will make full or timely payments of principal
or interest or remain solvent.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax-exemption for
interest on debt obligations issued by states and their political subdivisions.
Federal tax laws limit the types and amounts of tax-exempt bonds issuable for
certain purposes, especially industrial development bonds and private activity
bonds. Such limits may affect the future supply and yields of these types of
Tax-Exempt Securities. Further proposals limiting the issuance of tax-exempt
bonds may well be introduced in the future. If it appeared that the availability
of Tax-Exempt Securities for investment by the Portfolio and the value of the
Portfolio's portfolio could be materially affected by such changes in law, the
Trustees of the Trust would reevaluate the Portfolio's investment objectives and
policies and consider changes in the structure of the Portfolio or its
dissolution.
Loans of Portfolio Securities
The Portfolio may lend its portfolio securities, provided: (1)
the loan is secured continuously by collateral consisting of U.S.
Government Securities, cash, or cash equivalents adjusted daily to have
market value at least equal to the current market value of the
securities loaned; (2) the Portfolio may at any time call the loan and
regain the securities loaned; (3) a Portfolio will receive any interest
or dividends paid on the loaned securities; and (4) the aggregate market
value of securities of any Portfolio loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the
total assets of the Portfolio. Cash collateral received by the Portfolio
may be invested in any securities in which the Portfolio may invest
consistent with its investment policies. In addition, it is anticipated
that the Portfolio may share with the borrower some of the income received
on the collateral for the loan or that it will be paid a premium for the
loan. Before the Portfolio enters into a loan, its investment adviser
considers all relevant facts and circumstances including the
creditworthiness of the borrower. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible
delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights
or rights to consent with respect to the loaned securities pass to the
borrower, the Portfolio retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be
voted by the Portfolio if the holders of such securities are asked to vote
upon or consent to matters materially affecting the investment. The
Portfolio will not lend portfolio securities to borrowers affiliated
with the Portfolio.
-6-
<PAGE>
MANAGEMENT OF THE TRUST
The following table provides biographical information with respect to
each Trustee and officer of the Trust. Each Trustee who is an "interested
person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- ---------------------- ------------------------------------------------------
<S> <C> <C>
Daniel J. Ludeman* Chairman and Trustee Chairman and Chief Executive Officer Mentor
901 E. Byrd Street Investment Group, Inc.; Managing Director of
Richmond, VA 23219 Wheat First Butcher Singer, Inc. Director, Wheat,
First Securities, Inc.; Chairman and Director Mentor
Income Fund, Inc., and America's Utility Fund, Inc.;
Chairman and Trustee, Cash Resource Trust, Mentor
Variable Investment Portfolios and Mentor
Institutional Trust.
Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corporation; Trustee, Cash Resource
P.O. Box 18156 Trust, Mentor Variable Investment Portfolios and
Richmond, Virginia 23226 Mentor Institutional Trust; Director, Mentor Income
Fund, Inc. and America's Utility Fund, Inc.;
formerly, Chairman and Chief Executive Officer,
Hamilton Beach/Proctor-Silex, Inc.
Thomas F. Keller Trustee R.J. Reynolds Industries Professor of Business
Fuqua School of Business Administration and Former Dean of Fuqua School
Duke University of Business, Duke University; Director of LADD
Durham, NC 27706 Furniture, Inc., Wendy's International, Inc.,
American Business Products, Inc., Dimon, Inc., and
Biogen, Inc.; Director of Nations Balanced Target
Maturity Fund, Inc., Nations Government Income
Term Trust 2003, Inc., Nations Government Income
Term Trust 2004, Inc., Hatteras Income Securities,
Inc., Nations Institutional Reserves, Nations Fund
Trust, Nations Fund, Inc., Nations Fund Portfolios,
Inc., and Nations LifeGoal Funds, Inc. Trustee,
Cash Resource Trust, Mentor Variable Investment
Portfolios and Mentor Institutional Trust; Director,
Mentor Income Fund, Inc. and America's Utility
Fund, Inc.
Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of
University of Richmond Richmond; Trustee, Cash Resource Trust, Mentor Variable
Richmond, VA 23173 Investment Portfolios and Mentor Institutional Trust;
Director, Mentor Income Fund, Inc. and America's
Utility Fund, Inc.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company; Trustee, Cash Resource
Heilig-Meyers Company Trust, Mentor Variable Investment Portfolios and
2235 Staples Mill Road Mentor Institutional Trust; Director, Mentor Income
Richmond, Virginia 23230 Fund, Inc. and America's Utility Fund, Inc.
Peter J. Quinn, Jr.* Trustee Formerly, President, Mentor Distributors, Inc.;
901 E. Byrd Street Managing Director, Mentor Investment Group, LLC,
Richmond, VA 23219 and Wheat First Butcher Singer, Inc.; formerly,
Senior Vice President/Director of Mutual Funds,
Wheat First Butcher Singer, Inc.; Trustee, Cash
Resource Trust, Mentor Variable Investment Portfolios and
Mentor Institutional Trust; Director, Mentor Income
Fund, Inc. and America's Utility Fund, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------------- --------------------- -----------------------------------------------------
<S> <C> <C>
Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee,
c/o Cash Resource Trust Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; formerly, Vice Chancellor for
Development and University Relations, University
of North Carolina at Chapel Hill.
Weston E. Edwards Trustee President, Weston Edwards & Associates; Trustee
c/o Cash Resource Trust Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; Founder and Chairman, The Housing
Roundtable; formerly, President, Smart Mortgage
Access, Inc.
Jerry R. Barrentine Trustee President, J.R. Barretine & Associates; Trustee,
c/o Cash Resource Trust Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; formerly, Executive Vice President and
Chief Financial Officer, Barclays/American
Mortgage Director Corporation; Managing Partner,
Barrentine Lott & Associates.
J. Garnett Nelson Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee,
c/o Cash Resource Trust Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc., America's Utility Fund,
Inc., GE Investment Funds, Inc., and Lawyers Title
Corporation; Member, Investment Advisory
Committee, Virginia Retirement System; formerly,
Senior Vice President, The Life Insurance Company
of Virginia.
Paul F. Costello President Managing Director, Wheat First Butcher Singer, Inc.
901 E. Byrd Street and Mentor Investment Group, LLC; President,
Richmond, VA 23219 Cash Resource Trust, Mentor Income Fund, Inc., Mentor
Institutional Trust, Mentor Variable Investment
Portfolios and America's Utility Fund, Inc.;
Director, Mentor Perpetual Advisors, LLC
Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group,
901 E. Byrd Street LLC; Treasurer, Mentor Institutional Trust, Cash
Richmond, VA 23219 Resource Trust, Mentor Variable Investment Portfolios and
Mentor Income Fund, Inc.; Treasurer and Senior
Vice President, America's Utility Fund, Inc.;
formerly, Treasurer and Comptroller, Ryland Capital
Management, Inc.
Michael Wade Assistant Treasurer Vice President, Mentor Investment Group, LLC
901 E. Byrd Street Assistant Treasurer, Mentor Income Fund, Inc.,
Richmond, VA 23219 Cash Resource Trust, Mentor Institutional Trust, Mentor
Variable Investment Portfolios and America's Utility
Fund; formerly, Senior Accountant, Wheat First
Butcher Singer, Inc., Audit Senior, BDO Seidman.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------- -------------- -----------------------------------------------------
<S> <C> <C>
Geoffrey B. Sale Secretary Associate Vice President Mentor Investment Group,
901 E. Byrd Street LLC; Secretary, Cash Resource Trust, Mentor Institutional
Richmond, VA 23219 Trust, Mentor Variable Investment Portfolios; Clerk,
America's Utility Fund, Inc., Mentor Income Fund,
Inc.
</TABLE>
The table below shows the fees paid to each Trustee by the Trust
for the 1997 fiscal year and the fees paid to each Trustee by all funds in the
Mentor family (including the Trust) during the 1997 calendar year.
<PAGE>
<TABLE>
<CAPTION>
Aggregate compensation Total Compensation
Trustees from the Trust from all Complex Funds (28 Funds)
- -------- ---------------------- ----------------------------------
<S> <C>
Daniel J. Ludeman 0 --
Arnold H. Dreyfuss $6,000 15,200
Thomas F. Keller $6,000 15,200
Louis W. Moelchert, Jr. $6,000 26,200
Stanley F. Pauley* $6,000 14,175
Troy A. Peery, Jr. $5,500 --
Peter J. Quinn, Jr. $ 0 11,000
Arch T. Allen, III+ $ 0 28,000
Weston E. Edwards+ $ 0 20,000
Jerry R. Barrentine+ $ 0 20,000
J. Barnett Nelson+ $ 0
</TABLE>
- -------------
* Resigned as Trustee effective December 22, 1997
+ Elected Trustee December 22, 1997
The Trustees do not receive pension or retirement benefits from the
Trust.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Trust,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of October 14, 1998, the Portfolio had no shares outstanding.
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisory Services
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as
investment adviser to the Portfolio pursuant to a Management Contract with
the Trust. Subject to the supervision and direction of the Trustees, Mentor
Advisors manages the Portfolio's portfolio in accordance with the stated
policies of the Portfolio and of the Trust. Mentor Advisors makes investment
decisions for the Portfolio and places the purchase and sale orders for
portfolio transactions. Mentor Advisors bears all of its expenses in connection
with the performance of its services. In addition, Mentor Advisors pays the
salaries of all officers and employees who are employed by it and the Trust.
Mentor Advisors provides the Portfolio with investment officers
who are authorized to execute purchases and sales of securities.
Investment decisions for the Portfolio and for the other investment
advisory clients of Mentor Advisors and its affiliates are made with a
view to achieving their respective investment objectives. Investment
decisions are the product of many factors in addition to basic
suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could
have been bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or
more other clients are selling the security. In some instances, one
client may sell a particular security to another client. It also
sometimes happens that two or more clients simultaneously purchase or
sell the same security, in which event each day's transactions in such
security are, insofar as possible, averaged as to price and allocated
between such clients in a
-8-
<PAGE>
manner which in an investment adviser's opinion is equitable to each and in
accordance with the amount being purchased or sold by each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by a Portfolio. Purchase and sale orders for a Portfolio may
be combined with those of other clients of Mentor Advisors in the interest
achieving the most favorable net results for the Portfolio.
The proceeds received by the Portfolio for each issue or sale
of its shares, and all income, earnings, profits, and proceeds thereof,
subject only to the rights of creditors, will be specifically allocated
to the Portfolio, and constitute the underlying assets of the
Portfolio. The underlying assets of the Portfolio will be segregated on
the Trust's books of account, and will be charged with the liabilities
in respect of the Portfolio and with a share of the general liabilities
of the Trust. Expenses with respect to the Portfolio may be allocated in
proportion to the net asset values of the Portfolio except where
allocations of direct expenses can otherwise be fairly made.
Expenses incurred in the operation of the Portfolio or otherwise
allocated to the Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, investor servicing fees and expenses,
charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges and charges relating to corporate matters are borne
by the Portfolio.
The Management Contract is subject to annual approval (beginning in
2000) by (i) the Trustees or (ii) vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Portfolio, provided that in
either event the continuance is also approved by a majority of the Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Trust or Mentor
Advisors, by vote cast in person at a meeting called for the purpose of voting
on such approval. The Management Contract is terminable without penalty, on not
more than sixty days' notice and not less than thirty days' notice, by the
Trustees, by vote of the holders of a majority of the affected Portfolio's
shares, or by Mentor Advisors. The Management Contract terminates automatically
in the event of its assignment (as defined in the 1940 Act).
-9-
<PAGE>
BROKERAGE
Transactions on U.S. stock exchanges, commodities markets, and
futures markets and other agency transactions involve the payment by the
Portfolio of negotiated brokerage commissions. Such commissions vary
among different brokers. A particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign investments often involve the
payment of fixed brokerage commissions, which may be higher than those
in the United States. There is generally no stated commission in the
case of securities traded in the over-the-counter markets, but the price
paid by the Portfolio usually includes an undisclosed dealer commission
or mark-up. In underwritten offerings, the price paid by the Portfolio
includes a disclosed, fixed commission or discount retained by the
underwriter or dealer. It is anticipated that most purchases and sales
of portfolio securities by the Portfolio will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, the Portfolio would not ordinarily pay significant
brokerage commissions with respect to securities transactions.
It has for many years been a common practice in the investment
advisory business for advisers of investment companies and other
institutional investors to receive brokerage and research services (as
defined in the Securities Exchange Act of 1934, as amended (the "1934
Act")) from broker-dealers that execute portfolio transactions for the
clients of such advisers and from third parties with which such
broker-dealers have arrangements. Consistent with this practice, Mentor
Advisors receives brokerage and research services and other similar
services from many broker-dealers with which it places the Portfolios'
portfolio transactions and from third parties with which these
broker-dealers have arrangements. These services include such matters as
general economic and market reviews, industry and company reviews,
evaluations of investments, recommendations as to the purchase and sale
of investments, newspapers, magazines, pricing services, quotation
services, news services and personal computers utilized by the
investment advisers' managers and analysts. Where the services referred
to above are not used exclusively by Mentor Advisors for research
purposes, Mentor Advisors, based upon its own allocations of expected
use, bears that portion of the cost of these services which directly
relates to its non-research use. Some of these services are of value to
Mentor Advisors and its affiliates in advising various of its clients
(including the Portfolio), although not all of these services are
necessarily useful and of value in managing the Portfolio.
Mentor Advisors places all orders for the purchase and sale of
portfolio investments for the Portfolio and buys and sells investments
for the Portfolio through a substantial number of brokers and dealers.
Mentor Advisors seeks the best overall terms available for the
Portfolio, except to the extent it may be permitted to pay higher
brokerage commissions as described below. In doing so, Mentor Advisors,
having in mind the Portfolio's best interests, considers all factors it
deems relevant, including, by way of illustration, price, the size of
the transaction, the nature of the market for the security or other
investment, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience
-10-
<PAGE>
and financial stability of the broker-dealer involved and the quality of
service rendered by the broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the
Management Contract, Mentor Advisors may cause the Portfolio to pay a
broker-dealer which provides "brokerage and research services" (as
defined in the 1934 Act) to it an amount of disclosed commission for
effecting securities transactions on stock exchanges and other
transactions for the Portfolio on an agency basis in excess of the
commission which another broker-dealer would have charged for effecting
that transaction. Mentor Advisors' authority to cause the Portfolio to pay
any such greater commissions is also subject to such policies as the
Trustees may adopt from time to time. Mentor Advisors does not currently
intend to cause the Portfolio to make such payments. It is the position of
the staff of the Securities and Exchange Commission that Section 28(e)
does not apply to the payment of such greater commissions in "principal"
transactions. Accordingly, Mentor Advisors will use its best efforts to
obtain the best overall terms available with respect to such
transactions, as described above.
Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and subject to such other
policies as the Trustees may determine, Mentor Advisors may consider
sales of shares of the Portfolio (and, if permitted by law, of the other
Mentor funds) as a factor in the selection of broker-dealers to execute
portfolio transactions for the Portfolio.
The Trustees have determined that portfolio transactions for
the Trust may be effected through Wheat, First Securities, Inc.
("Wheat") or EVEREN Securities, Inc. ("EVEREN"), broker-dealers
affiliated with Mentor Advisors. The Trustees have adopted certain
policies incorporating the standards of Rule 17e-l issued by the SEC
under the 1940 Act which requires, among other things, that the
commissions paid to Wheat and EVEREN must be reasonable and fair
compared to the commissions, fees, or other remuneration received by
other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. Wheat and EVEREN
will not participate in brokerage commissions paid by the Portfolio to
other brokers or dealers. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases
in which better prices and executions may be obtained elsewhere. The
Portfolio will in no event effect principal transactions with Wheat or
EVEREN in over-the-counter securities in which Wheat or EVEREN makes a
market, as the case may be.
Under rules adopted by the SEC, neither Wheat nor EVEREN may
execute transactions for the Portfolio on the floor of any national
securities exchange, but either may effect transactions for the Portfolio
by transmitting orders for execution and arranging for the performance
of this function by members of the exchange not associated with them.
Wheat and EVEREN will be required to pay fees charged to those persons
performing the floor brokerage elements out of the brokerage
compensation it receives from the Portfolio. The Trust has been
-11-
<PAGE>
advised by Wheat that, on most transactions, the floor brokerage
generally constitutes from 5% and 10% of the total commissions paid.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Portfolio is
determined twice each day as of 12:00 noon and as of the close of regular
trading (generally 4:00 p.m. New York time) on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is normally closed on
the following national holidays: New Year's Day, Dr. Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
The valuation of the Portfolio's portfolio securities is based
upon its amortized cost, which does not take into account unrealized
securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. By
using amortized cost valuation, the Portfolio seeks to maintain a
constant net asset value of $1.00 per share, despite minor shifts in the
market value of its portfolio securities. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. During periods of
declining interest rates, the quoted yield on shares of the Portfolio may
tend to be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based on market prices and
estimates of market prices for all of its portfolio instruments. Thus,
if the use of amortized cost by the Portfolio resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in
the Portfolio would be able to obtain a somewhat higher yield if he
purchased shares of the Portfolio on that day, than would result from
investment in a fund utilizing solely market values, and existing
investors in the Portfolio would receive less investment income. The
converse would apply on a day when the use of amortized cost by the
Portfolio resulted in a higher aggregate portfolio value. However, as a
result of certain procedures adopted by the Trust, the Trust believes
any difference will normally be minimal.
The valuation of the Portfolio's portfolio instruments at
amortized cost is permitted in accordance with Securities and Exchange
Commission Rule 2a-7 and certain procedures adopted by the Trustees.
Under these procedures, the Portfolio must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments
having remaining maturities of 397 days or less, and invest in
securities determined by the Trustees to be of high quality with minimal
credit risks. The Trustees have also established procedures designed to
stabilize, to the extent reasonably possible, the Portfolio's price per
share as computed for the purpose of distribution, redemption and
repurchase at $1.00. These procedures include review of the Portfolio's
portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether the Portfolio's net asset value
calculated by using readily available market quotations deviates from
$1.00 per share, and, if so, whether such deviation may result in
material dilution or is otherwise unfair to existing shareholders. In
the event the Trustees
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<PAGE>
determine that such a deviation may result in material dilution or is
otherwise unfair to existing shareholders, they will take such
corrective action as they regard as necessary and appropriate, including
the sale of portfolio instruments prior to maturity to realize capital
gains or losses or to shorten the average portfolio maturity;
withholding dividends; redemption of shares in kind; or establishing a
net asset value per share by using readily available market quotations.
Since the net income of the Portfolio is declared as a dividend
each time it is determined, the net asset value per share of the Portfolio
remains at $1.00 per share immediately after such determination and
dividend declaration. Any increase in the value of a shareholder's
investment in the Portfolio representing the reinvestment of dividend
income is reflected by an increase in the number of shares of the
Portfolio in the shareholder's account on the last day of each month
(or, if that day is not a business day, on the next business day). It is
expected that the Portfolio's net income will be positive each time it is
determined. However, if because of realized losses on sales of portfolio
investments, a sudden rise in interest rates, or for any other reason
the net income of the Portfolio determined at any time is a negative
amount, the Portfolio will offset such amount allocable to each then
shareholder's account from dividends accrued during the month with
respect to such account. If at the time of payment of a dividend by the
Portfolio (either at the regular monthly dividend payment date, or, in
the case of a shareholder who is withdrawing all or substantially all of
the shares in an account, at the time of withdrawal), such negative
amount exceeds a shareholder's accrued dividends, the Portfolio will
reduce the number of outstanding shares by treating the shareholder as
having contributed to the capital of the Portfolio that number of full
and fractional shares which represent the amount of the excess. Each
shareholder is deemed to have agreed to such contribution in these
circumstances by its investment in the Portfolio.
Should the Portfolio incur or anticipate any unusual or
unexpected significant expense or loss which would affect
disproportionately the Portfolio's income for a particular period, the
Trustees would at that time consider whether to adhere to the dividend
policy described above or to revise it in light of the then prevailing
circumstances in order to ameliorate to the extent possible the
disproportionate effect of such expense or loss on then existing
shareholders. Such expenses or losses may nevertheless result in a
shareholder's receiving no dividends for the period during which the
shares are held and receiving upon redemption a price per share lower
than that which was paid.
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<PAGE>
TAX STATUS
Each Portfolio of the Trust intends to qualify each year and elect to be
taxed as a regulated investment company under Subchapter M of the United States
Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to its shareholders. As series of Massachusetts business trust, the
Portfolios under present law will not be subject to any excise or income taxes
in Massachusetts.
Distributions from a Portfolio will be taxable to a shareholder whether
received in cash or additional shares. Such distributions that are designated as
capital gains dividends will be taxable as such, regardless of how long
Portfolio shares are held, while other taxable distributions will be taxed as
ordinary income.
In order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or foreign currencies, and other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies and (b) diversify its holdings so that, at the close of each quarter
of its taxable year, (i) at least 50% of the value of its total assets consists
of cash, cash items, U.S. Government Securities, securities of other regulated
investment companies, and other securities limited generally with respect to any
one issuer to not more than 5% of the total assets of a Portfolio and not more
than 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets is invested in the securities (other
than those of U.S. Government Securities or other regulated investment
companies) of any issuer or of two or more issuers which the Portfolio controls
and which are engaged in the same, similar, or related trades or businesses. In
order to receive the favorable tax treatment accorded regulated investment
companies and their shareholders, moreover, a Portfolio must in general
distribute at least 90% of the sum of its taxable net investment income,its net
tax-exempt income, and the excess, if any, of net short-term capital gains over
net long-term capital losses for such year. To satisfy these requirements, a
Portfolio may engage in investment techniques that affect the amount, timing and
character of its income and distributions.
If a Portfolio failed to qualify as a regulated investment company accorded
special tax treatment in any taxable year, the Portfolio would be subject to tax
on its taxable income at corporate rates, and all distributions from earnings
and profits, including any distributions of net tax-exempt income and net
long-term capital gains, would be taxable to shareholders as ordinary income. In
addition, a Portfolio could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying as a regulated investment company that is accorded special tax
treatment.
An excise tax at the rate of 4% will be imposed on the excess, if any, of
each Portfolio's "required distribution" over its distributions in any calendar
year. Generally, the "required distribution" is 98% of the Portfolio's ordinary
income for the calendar year plus 98% of its capital gain net income realized
during the one-year period ending on October 31 (or December 31, if the
Portfolio so elects) plus undistributed amounts from prior years. Each Portfolio
intends to make distributions sufficient to avoid imposition of the excise tax.
Distributions declared by a Portfolio during October, November or December to
shareholders of record on a date in any such month and paid by the Portfolio
during the following January will be treated for federal tax purposes as paid by
the Portfolio and received by shareholders on December 31 of the year in which
declared.
Distributions from a Portfolio (other than exempt-interest dividends, as
discussed below) will be taxable to shareholders as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Net capital gain (that is, the excess of net gains from capital assets held for
more than one year over net losses from capital assets held for not more than
one year) of a Portfolio that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, generally
taxable to individuals at a 20% rate, regardless of how long a shareholder has
held the shares in the Portfolio. Some 1998 distributions of capital gains
realized in 1997 may be taxable to individuals at a 28% rate.
Each Portfolio is required to withhold 31% of all ordinary income dividends
and capital gain distributions, and 31% of the gross proceeds of all redemptions
of Portfolio shares, in the case of any shareholder who does not provide a
correct taxpayer identification number, about whom a Portfolio is notified that
the shareholder has underreported income in the past, or who fails to certify to
a Portfolio that the shareholder is not subject to such withholding.
Shareholders who fail to furnish their current tax identification numbers are
subject to a penalty of $50 for each such failure unless the failure is due to
reasonable cause and not willfull neglect. An individual's taxpayer
identification number is his or her Social Security number. Tax-exempt
shareholders are not subject to these back-up withholding rules so long as they
furnish the Portfolio with a proper certification.
EXEMPT-INTEREST DIVIDENDS. A Portfolio will be qualified to pay
exempt-interest dividends to its shareholders only if, at the close of each
quarter of the Portfolio's taxable year, at least 50% of the total value of the
Portfolio's assets consists of obligations the interest on which is exempt from
federal income tax. Distributions that a Portfolio properly designates as
exempt-interest dividends are treated as interest excludable from shareholders'
gross income for federal income tax purposes but may be taxable for federal
alternative minimum tax purposes and for state and local purposes. If a
Portfolio intends to be qualified to pay exempt-interest dividends, the
Portfolio may be limited in its ability to enter into taxable transactions
involving forward commitments, repurchase agreements, financial futures and
options contracts on financial futures, tax-exempt bond indices and other
assets.
Part or all of the interest on indebtedness, if any, incurred or continued
by a shareholder to purchase or carry shares of a Portfolio paying
exempt-interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the indebtedness,
multiplied by the percentage of a Portfolio's total distributions (not including
capital gain dividend) paid to the shareholder that are exempt-interest
dividends. Under rules used by the Internal Revenue Service for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase of shares may be considered to have been made
with borrowed funds even though such funds are not directly traceable to the
purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
A Portfolio which is qualified to pay exempt-interest dividends will inform
investors within 60 days of the Portfolio's fiscal year-end of the percentage of
its income distributions designated as tax-exempt. The percentage is applied
uniformly to all distributions made during the year. The percentage of income
designated as tax-exempt for any particular distribution may be substantially
different from the percentage of a Portfolio's income that was tax-exempt during
the period covered by the distribution.
Each Portfolio seeks to maintain a stable net asset value of $1.00 per
share; however, there can be no assurance that a Portfolio will be able to do
so. A shareholder may therefore recognize gain or loss on the sale or redemption
of shares of a Portfolio in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of that Portfolio within 30 days before or
after the sale or redemption. In general, any gain or loss arising from (or
treated as arising from) the sale or redemption of shares of a Portfolio will be
considered capital gain or loss and will be long-term capital gian or loss if
the shares were held for longer than one year. Long-term capital gain is
generally taxable to individuals at a 20% rate. However, any capital loss
arising from the sale or redemption of shares held for six months or less will
be disallowed to the extent of the amount of exempt-interest dividends received
on
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such shares and (to the extent not disallowed) will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares.
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. A Portfolio's investment in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, a Portfolio may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to
state, local, foreign and other taxes. Shareholders are urged to consult their
tax advisers regarding specific questions as to federal, state, local, or
foreign taxes. The foregoing discussion relates solely to U.S. federal income
tax law. Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
THE DISTRIBUTOR
Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus,
Ohio 43219, is the principal distributor of the Portfolio's shares. Mentor
Distributors is acting on a best efforts basis in the continuous offering of the
Trust's shares. Mentor Distributors, LLC is a wholly owned subsidiary of BISYS
Fund Services, Inc.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP are the Portfolio's independent auditors,
providing audit services, tax return review, and other tax consulting services.
CUSTODIAN
The custodian of the Portfolio, Investors Fiduciary Trust
Company, is located at 127 West 10th Street, Richmond, Virginia 64105. A
custodian's responsibilities include generally safeguarding and
controlling a Portfolio's cash and securities, handling the receipt and
delivery of securities, and collecting interest and dividends on a
Portfolio's investments.
PERFORMANCE INFORMATION
The yield of the Portfolio is computed by determining the
percentage net change, excluding capital changes, in the value of an
investment in one share of the Portfolio over the base period, and
multiplying the net change by 365/7 (or approximately 52 weeks). The
Portfolio's effective yield represents a compounding of the yield by
adding 1 to the number representing the
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percentage change in value of the investment during the base period,
raising that sum to a power equal to 365/7, and subtracting 1 from the
result.
EQUIVALENT YIELDS: TAX-EXEMPT VERSUS TAXABLE SECURITIES
The table below shows the effect of the tax status of Tax-Exempt
Securities on the effective yield received by their individual holders under
the federal income tax laws in effect for 1998. It gives the approximate yield
a taxable security must earn at various income levels to produce after-tax
yields equivalent to those of Tax-Exempt Securities yielding from 4.0% to 8.0%.
<TABLE>
<CAPTION>
FEDERAL FEDERAL EFFECTIVE
TAXABLE TAX FEDERAL
INCOME BRACKET RATE
- ------------------ ----------- ----------
<S> <C> <C>
MARRIED
$ 0-42,350 15.00% 15.00%
$ 42,351-102,300 28.00% 28.00%
$102,301-124,500 31.00% 31.00%
$124,501-155,950 31.00% 31.93%
$155,951-278,450 36.00% 37.08%
OVER $278,450 39.60% 40.79%
SINGLE
$ 0-25,350 15.00% 15.00%
$ 25,351-61,400 28.00% 28.00%
$ 61,401-124,500 31.00% 31.00%
$124,501-128,500 31.00% 31.93%
$128,101-278,450 36.00% 37.08%
OVER $278,450 39.60% 40.79%
<CAPTION>
TAX-FREE YIELD
4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
FEDERAL ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TAXABLE
INCOME TAXABLE EQUIVALENT YIELD
- ------------------ --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MARRIED
$ 0-42,350 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41%
$ 42,351-102,300 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11%
$102,301-124,500 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59%
$124,501-155,950 5.88% 6.61% 7.35% 8.08% 8.81% 9.55% 10.28% 11.02% 11.75%
$155,951-278,450 6.36% 7.15% 7.95% 8.74% 9.54% 10.33% 11.13% 11.92% 12.71%
OVER $278,450 6.76% 7.60% 8.44% 9.29% 10.13% 10.98% 11.82% 12.67% 13.51%
SINGLE
$ 0-25,350 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41%
$ 25,351-61,400 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11%
$ 61,401-124,500 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59%
$124,501-128,500 5.88% 6.61% 7.35% 8.08% 8.81% 9.55% 10.28% 11.02% 11.75%
$128,101-278,450 6.36% 7.15% 7.95% 8.74% 9.54% 10.33% 11.13% 11.92% 12.71%
OVER $278,450 6.76% 7.60% 8.44% 9.29% 10.13% 10.98% 11.82% 12.67% 13.51%
</TABLE>
- -------------
Note: This table reflects the following:
1 Taxable income, as reflected in the above table, equals Federal adjusted
gross income (AGI), less personal exemptions and itemized deductions.
However, certain itemized deductions are reduced by the lesser of (i) three
percent of the amount of the taxpayer's AGI over $124,500, or (ii) 80
percent of the amount of such itemized deductions otherwise allowable. The
effect of the three percent phase out on all itemized deductions and not
just those deductions subject to the phase out is reflected above in the
Federal tax rates through the use of higher effective Federal tax rates. In
addition, the effect of the 80 percent cap on overall percent cap on
overall itemized deductions is not reflected on this table. Federal income
tax rules also provide that personal exemptions are phased out at a rate of
two percent for each $2,500 (or fraction thereof) of AGI in excess of
$186,800 for married taxpayers filing a joint tax return and $124,500 for
single taxpayers. The effect of the phase out of personal exemptions is not
reflected in the above table.
2 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the table.
3 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest marginal tax rates applicable to the income levels
indicated within each bracket.
4 Interest earned on all municipal obligations may cause certain investors to
be subject to tax on a portion of their Social Security and/or railroad
retirement benefits. The effect of this provision is not included in the
above table.
Of course, there is no assurance that the Tax-Exempt Money Market Portfolio
will achieve any specific tax-exempt yield. While it is expected that the
Tax-Exempt Money Market Portfolio will invest principally in obligations which
pay interest exempt from federal income tax, other income received by the
Tax-Exempt Money Market Portfolio may be taxable. The table does not take into
account any state or local taxes payable on Tax-Exempt Money Market Portfolio
distributions.
Independent statistical agencies measure the Portfolio's
investment performance and publish comparative information showing how
the Portfolio, and other investment companies, performed in specified
time periods. Agencies whose reports are commonly used for such
comparisons are set forth below. From time to time, the Portfolio may
distribute these comparisons to its shareholders or to potential
investors. The agencies listed below measure performance based on the
basis of their own criteria rather than on the basis of the standardized
performance measures described above.
Lipper Analytical Services, Inc. distributes mutual fund
rankings monthly. The rankings are based on total return
performance calculated by Lipper, reflecting generally changes
in net asset value adjusted for reinvestment of capital gains
and income dividends. They do not reflect deduction of any
sales charges. Lipper rankings cover a variety of performance
periods, for example year-to-date, 1-year, 5-year, and 10-year
performance. Lipper classifies mutual funds by investment
objective and asset category.
Morningstar, Inc. distributes mutual fund ratings twice a
month. the ratings are divided into five groups: highest, above
average, neutral, below average and lowest. They represent a
fund's historical risk/reward ratio relative to other funds
with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3- year, 5-year,
and 10-year total return performance (if available) reflecting
deduction of expenses and sales charges. Performance is
adjusted using quantitative techniques to reflect the risk
profile of the fund. The ratings are derived from a purely
quantitative system that does not utilize the subjective
criteria customarily employed by rating agencies such as
Standard & Poor's Corporation and Moody's Investor Service,
Inc.
Weisenberger's Management Results publishes mutual fund
rankings and is distributed monthly. The rankings are based
entirely on total return calculated by Weisenberger for periods
such as year-to-date, 1-year, 3-year, 5-year and 10-year
performance. Mutual funds are ranked in general categories
(e.g., international bond, international equity, municipal
bond, and maximum capital gain). Weisenberger rankings do not
reflect deduction of sales charges or fees.
Independent publications may also evaluate the Portfolio's performance. Certain
of those publications are listed below, at the request of Mentor Distributors,
which bears full responsibility for their use and the descriptions appearing
below. From time to time the Portfolio may distribute evaluations by or excerpts
from these publications to its
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<PAGE>
shareholders or to potential investors. The following illustrates the
types of information provided by these publications.
Business Week publishes mutual fund rankings in its Investment
Figures of the Week column. The rankings are based on 4-week
and 52-week total return reflecting changes in net asset value
and the reinvestment of all distributions. They do not reflect
deduction of any sales charges. Portfolios are not categorized;
they compete in a large universe of over 2,000 funds. The
source for rankings is data generated by Morningstar, Inc.
Investor's Business Daily publishes mutual fund rankings on a
daily basis. The rankings are depicted as the top 25 funds in a
given category. The categories are based loosely on the type of
fund, e.g., growth funds, balanced funds, U.S. government
funds, GNMA funds, growth and income funds, corporate bond
funds, etc. Performance periods for sector equity funds can
vary from 4 weeks to 39 weeks; performance periods for other
fund groups vary from 1 year to 3 years. Total return
performance reflects changes in net asset value and
reinvestment of dividends and capital gains. The rankings are
based strictly on total return. They do not reflect deduction
of any sales charges Performance grades are conferred from A+
to E. An A+ rating means that the fund has performed within the
top 5% of a general universe of over 2000 funds; an A rating
denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The
rankings are based on total return performance provided by
Lipper Analytical Services. The Lipper total return data
reflects changes in net asset value and reinvestment of
distributions, but does not reflect deduction of any sales
charges. The performance periods vary from short-term intervals
(current quarter or year-to-date, for example) to long-term
periods (five-year or ten-year performance, for example).
Barron's classifies the funds using the Lipper mutual fund
categories, such as Capital Appreciation Portfolios, Growth
Portfolios, U.S. Government Portfolios, Equity Income
Portfolios, Global Portfolios, etc. Occasionally, Barron's
modifies the Lipper information by ranking the funds in asset
classes. "Large funds" may be those with assets in excess of
$25 million; "small funds" may be those with less than $25
million in assets.
The Wall Street Journal publishes its Mutual Portfolio
Scorecard on a daily basis. Each Scorecard is a ranking of the
top-15 funds in a given Lipper Analytical Services category.
Lipper provides the rankings based on its total return data
reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The
Scorecard portrays 4-week, year-to-date, one-year and 5-year
performance; however, the ranking is based on the one-year
results. The rankings for any given category appear
approximately once per month.
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<PAGE>
Fortune magazine periodically publishes mutual fund rankings
that have been compiled for the magazine by Morningstar, Inc.
Portfolios are placed in stock or bond fund categories (for
example, aggressive growth stock funds, growth stock funds,
small company stock funds, junk bond funds, Treasury bond funds
etc.), with the top-10 stock funds and the top-5 bond funds
appearing in the rankings. The rankings are based on 3- year
annualized total return reflecting changes in net asset value
and reinvestment of distributions and not reflecting sales
charges. Performance is adjusted using quantitative techniques
to reflect the risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a
database of funds tracked for performance by Lipper Analytical
Services. The funds are placed in 23 stock or bond fund
categories and analyzed for five-year risk adjusted return.
Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions
and does not reflect deduction of any sales charges. Grades are
conferred (from A to E): the top 20% in each category receive
an A, the next 20% a B, etc. To be ranked, a fund must be at
least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given
date.
Financial World publishes its monthly Independent Appraisals of
Mutual Portfolios, a survey of approximately 1000 mutual funds.
Portfolios are categorized as to type, e.g., balanced funds,
corporate bond funds, global bond funds, growth and income
funds, U.S. government bond funds, etc. To compete, funds must
be over one year old, have over $1 million in assets, require a
maximum of $10,000 initial investment, and should be available
in at least 10 states in the United States. The funds receive a
composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund
versus its category, as well as taking into account its risk,
reward to risk, and fees. An A+ rated fund is one of the best,
while a D- rated fund is one of the worst. The source for
Financial World rating is Schabacker investment management in
Rockville, Maryland.
Forbes magazine periodically publishes mutual fund ratings
based on performance over at least two bull and bear market
cycles. The funds are categorized by type, including stock and
balanced funds, taxable bond funds, municipal bond funds, etc.
Data sources include Lipper Analytical Services and CDA
Investment Technologies. The ratings are based strictly on
performance at net asset value over the given cycles.
Portfolios performing in the top 5% receive an A+ rating; the
top 15% receive an A rating; and so on until the bottom 5%
receive an F rating. Each fund exhibits two ratings, one for
performance in "up" markets and another for performance in
"down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing
Times), periodically publishes rankings of mutual funds based
on one-, three- and five-year total return performance
reflecting changes in net asset value and reinvestment of
dividends and
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<PAGE>
capital gains and not reflecting deduction of any sales
charges. Portfolios are ranked by tenths: a rank of 1 means
that a fund was among the highest 10% in total return for the
period; a rank of 10 denotes the bottom 10%. Portfolios compete
in categories of similar funds -- aggressive growth funds,
growth and income funds, sector funds, corporate bond funds,
global governmental bond funds, mortgage-backed securities
funds, etc. Kiplinger's also provides a risk-adjusted grade in
both rising and falling markets. Portfolios are graded against
others with the same objective. The average weekly total return
over two years is calculated. Performance is adjusted using
quantitative techniques to reflect the risk profile of the
fund.
U.S. News and World Report periodically publishes mutual fund
rankings based on an overall performance index (OPI) devised by
Kanon Bloch Carre & Co., a Boston research firm. Over 2000
funds are tracked and divided into 10 equity, taxable bond and
tax-free bond categories. Portfolios compete within the 10
groups and three broad categories. The OPI is a number from
0-100 that measures the relative performance of funds at least
three years old over the last 1, 3, 5 and 10 years and the last
six bear markets. Total return reflects changes in net asset
value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales
charges. Results for the longer periods receive the most
weight.
The 100 Best Mutual Portfolios You Can Buy (1992), authored by
Gordon K. Williamson. The author's list of funds is divided
into 12 equity and bond fund categories, and the 100 funds are
determined by applying four criteria. First, equity funds whose
current management teams have been in place for less than five
years are eliminated. (The standard for bond funds is three
years.) Second, the author excludes any fund that ranks in the
bottom 20 percent of its category's risk level. Risk is
determined by analyzing how many months over the past three
years the fund has underperformed a bank CD or a U.S. Treasury
bill. Third, a fund must have demonstrated strong results for
current three-year and five-year performance. Fourth, the fund
must either possess, in Mr. Williamson's judgment, "excellent"
risk-adjusted return or "superior" return with low levels of
risk. Each of the 100 funds is ranked in five categories: total
return, risk/volatility, management, current income and
expenses. The rankings follow a fivepoint system: zero
designates "poor"; one point means "fair"; two points denote
"good"; three points qualify as a "very good"; four points rank
as "superior"; and five points mean "excellent."
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the
Trust. However, the Agreement and Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust and requires
that notice of such disclaimer be given in each agreement, obligation,
or instrument entered into or executed by
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<PAGE>
the Trust or the Trustees. The Agreement and Declaration of Trust
provides for indemnification out of the Portfolio's property for all loss
and expense of any shareholder held personally liable for the
obligations of the Portfolio. Thus the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to
circumstances in which the Portfolio would be unable to meet its
obligations.
MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of Mentor Advisors:
Mentor Investment Advisors, LLC
Cash Management
R. Preston Nuttall, CFA -- Managing Director, Chief Investment Officer
Mr. Nuttall has more than thirty years of investment management
experience. Prior to Mentor Advisors, he led short-term fixed-income
management for fifteen years at Capitoline Investment Services, Inc. He
has his undergraduate degree in economics from the University of
Richmond and his graduate degree in finance from the Wharton School at
the University of Pennsylvania.
Hubert R. White III -- Vice President, Portfolio Manager
Mr. White has eleven years of investment management experience. Prior to
joining Mentor Advisors, he served for five years as portfolio manager
with Capitoline Investment Services. He has his undergraduate degree in
business from the University of Richmond.
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<PAGE>
RATINGS
The rating services' descriptions of corporate bonds are:
Moody's Investors Service, Inc.:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge". Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Standard & Poor's:
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small
degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
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<PAGE>
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
A-1 and Prime-1 Commercial Paper Ratings
The rating A-1 (including A-1+) is the highest commercial paper rating
assigned by S&P. Commercial paper rated A-1 by S&P has the following
characteristics:
o liquidity ratios are adequate to meet cash requirements;
o long-term senior debt is rated "A" or better;
o the issuer has access to at least two additional channels of
borrowing;
o basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances;
o typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and
o the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether
the issuer's commercial paper is rated A-1, A-2 or A-3. Issues rated A-1
that are determined by S&P to have overwhelming safety characteristics
are designated A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings
are the following:
o evaluation of the management of the issuer;
o economic evaluation of the issuer's industry or industries
and an appraisal of speculative- type risks which may be
inherent in certain areas;
o evaluation of the issuer's products in relation to
competition and customer acceptance;
o liquidity;
o amount and quality of long-term debt;
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<PAGE>
o trend of earnings over a period of ten years;
o financial strength of parent company and the relationships
which exist with the issuer; and
o recognition by the management of obligations which may be
present or may arise as a result of public interest.
