As filed with the Securities and Exchange Commission on January 29, 1999
Registration No. 33-45315
File No. 811-6550
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
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Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 22 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [X]
ACT OF 1940
Amendment No. 24 [X]
(Check appropriate box or boxes)
MENTOR FUNDS
(Exact name of registrant as specified in charter)
901 East Byrd Street
Richmond, Virginia 23219
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code (804) 782-3648
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PAUL F. COSTELLO, President
901 East Byrd Street
Richmond, Virginia 23219
(Name and address of agent for service)
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Copy to:
TIMOTHY W. DIGGINS, Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
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It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
PARTS A AND B OF THIS AMENDMENT RELATE ONLY TO EACH OF THE PERPETUAL GLOBAL
EMERGING COMPANIES AND HIGH YIELD PORTFOLIOS OF THE REGISTRANT. NO INFORMATION
RELATING TO ANY OTHER PORTFOLIOS IS AMENDED, DELETED, OR SUPERSEDED BY PARTS A
AND B OF THIS AMENDMENT.
<PAGE>
P R O S P E C T U S April , 1999
(Class A and B Shares)
Mentor Perpetual Global Emerging Companies
Portfolio
Mentor Perpetual Global Emerging Companies Portfolio seeks long-term
capital appreciation by investing primarily in a diversified portfolio of
securities of emerging companies located anywhere in the world that Mentor
Perpetual Advisors, LLC believes offer the potential for capital appreciation.
The Portfolio is a series of shares of Mentor Funds.
The Portfolio may use "leverage" -- that is, it may borrow money to
purchase additional portfolio securities, which involves special risks. See
"Other Investment Practices and Risk Factors."
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus carefully and retain it for future reference. YOU CAN FIND MORE
DETAILED INFORMATION IN THE APRIL , 1999 STATEMENT OF ADDITIONAL INFORMATION,
AS AMENDED FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT OR FOR OTHER
INFORMATION, PLEASE 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. The address of Mentor Funds is
P.O. Box 1357, Richmond, Virginia 23218-1357.
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Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Expense Summary ...................................... 3
Investment Objectives and Policies ................... 5
Other Investment Practices and Risk Factors .......... 5
Valuing the Portfolio's Shares ....................... 10
Sales Arrangements ................................... 10
How To Buy Shares .................................... 11
Distribution Plans (Class B Shares) .................. 16
How To Sell Shares ................................... 16
How To Exchange Shares ............................... 18
How Distributions Are Made ........................... 18
Taxes ................................................ 18
Management ........................................... 19
Other Services ....................................... 20
General Information .................................. 20
Performance Information .............................. 21
APPENDIX ............................................. 23
</TABLE>
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EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur
in respect of its Class A and B shares during its first fiscal year. The
Examples show the cumulative expenses attributable to a hypothetical $1,000
investment in the Class A and Class B shares of the Portfolio over specified
periods.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES(1)
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<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ......................................... 5.75% None
Maximum Sales Charge Imposed on Reinvested Dividends ......................... None None
Exchange Fee ................................................................. None None
Contingent Deferred Sales Charge (as a percentage of the lower of the original
purchase price or redemption proceeds of shares redeemed)
Class A Shares: ............................................................ None(2)
</TABLE>
<TABLE>
<S> <C>
Class B Shares(3)(4): ......... 4% in the first year, declining to 1% in the fifth year,
and eliminated thereafter
</TABLE>
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(1) Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
(2) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that are purchased without an initial sales charge as part of an
investment of over $1 million that are redeemed within one year of
purchase.
(3) The amount redeemed is computed as the lesser of the current net asset
value of the shares redeemed, and the original purchase price of the
shares. See "How to Buy Shares."
(4) Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1.00% if the shares are redeemed
within one year of purchase. See "How to Buy Shares -- the BL Purchase
Program."
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ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
PERPETUAL
GLOBAL
EMERGING
COMPANIES
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<S> <C>
CLASS A SHARES
Investment Advisory Fee .................... 1.05%
12b-1 Fees ................................. None
Other Expenses
Shareholder Service Plan Fees ............. 0.25%
Other Expenses ............................ 0.45%
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Total Other Expenses ....................... 0.70%
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Total Portfolio Operating Expenses ......... 1.75%
CLASS B SHARES
Investment Advisory Fee .................... 1.05%
12b-1 Fees ................................. 0.75%
Other Expenses
Shareholder Service Plan Fees ............. 0.25%
Other Expenses ............................ 0.45%
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Total Other Expenses ....................... 0.70%
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Total Portfolio Operating Expenses ......... 2.50%
</TABLE>
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* Other Expenses are estimated based on the expenses the Portfolio expects to
incur during its first full year of operations.
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and no redemption at the end of each period:
<TABLE>
<CAPTION>
CLASS A CLASS B
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<S> <C> <C>
1 year .................. $ 74 $25
3 years ................. $109 $78
</TABLE>
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- --------
<S> <C> <C>
1 year .................. $ 74 $ 65
3 years ................. $109 $108
</TABLE>
THIS INFORMATION IS PROVIDED TO HELP INVESTORS UNDERSTAND THE EXPENSES OF
INVESTING IN THE PORTFOLIO AND AN INVESTOR'S SHARE OF THE ESTIMATED OPERATING
EXPENSES OF THE PORTFOLIO. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE PERFORMANCE; ACTUAL EXPENSES MAY VARY.
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INVESTMENT OBJECTIVES AND POLICIES
The Portfolio's investment objective is long-term capital appreciation.
The Portfolio seeks its investment objective by investing primarily in a
diversified portfolio of securities of emerging companies located anywhere in
the world that Mentor Perpetual believes offer the potential for capital
appreciation. The Portfolio is not intended to be a complete investment
program, and there is no assurance it will achieve its objective. The Portfolio
is a diversified investment company.
The Portfolio's investments will normally include common stocks, preferred
stocks, securities convertible into common stocks or preferred stocks, and
warrants to purchase common stocks or preferred stocks. The Portfolio may also
invest to a lesser extent in debt securities and other types of investments if
Mentor Perpetual believes they would help achieve the Portfolio's objective.
The Portfolio may hold a portion of its assets in cash or money market
instruments.
The Portfolio will normally invest at least 65% of its assets in
securities issued by emerging companies. "Emerging companies" are companies
that, in the opinion of Mentor Perpetual, have the potential, based on superior
or unique products or services, operating characteristics, or financing
capabilities, for more rapid growth than the world economy. It is likely that
many of those companies will be relatively small, with limited operating
history. See "Risk Factors -- Investments in smaller companies." The Portfolio
may invest the remainder of its assets in securities of companies, large or
small, that Mentor Perpetual believes offer the potential for long-term capital
appreciation.
Fixed-income securities in which the Portfolio may invest will be of
investment grade. A security will be deemed to be of "investment grade" if, at
the time of investment by the Portfolio, the security is rated at least Baa by
Moody's Investors Service, Inc. or BBB- by Standard & Poor's Ratings Service,
Inc., or at a comparable rating by another nationally recognized rating
organization, or, if unrated, determined by Mentor Perpetual to be of
comparable quality. Securities rated Baa or Baa3, or BBB or BBB- lack
outstanding investment characteristics and have speculative characteristics and
are subject to greater credit and market risks than higher-rated securities.
The Portfolio will not be required to dispose of a security held by it if the
security's rating falls below investment grade, although Mentor Perpetual will
consider whether continued investment in the security is consistent with the
Portfolio's investment objective.
Mentor Perpetual may under unusual circumstances implement temporary
"defensive" strategies in order to reduce fluctuations in the value of the
Portfolio's assets. At those times, the Portfolio may invest any portion of its
assets in cash or cash equivalents, money market instruments, or other
short-term, high-quality investments Mentor Perpetual considers consistent with
such defensive strategies. At such times, the Portfolio may invest without
limit in securities of issuers located in the United States. It is impossible
to predict when, or for how long, the Portfolio will use these defensive
strategies.
OTHER INVESTMENT PRACTICES AND RISK FACTORS
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of these practices and certain risks they may involve.
FOREIGN SECURITIES. The Portfolio may invest in securities principally
traded in foreign markets. Since foreign securities are normally denominated
and traded in foreign currencies, the values of the Portfolio's assets
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may be affected favorably or unfavorably by changes in currency exchange rates
and by exchange control regulations. There may be less information publicly
available about a foreign company than about a U.S. company, and foreign
companies are not generally subject to accounting, auditing, and financial
reporting standards and practices comparable to those in the United States. The
securities of some foreign companies are less liquid and at times more volatile
than securities of comparable U.S. companies. Foreign brokerage commissions and
other fees are also generally higher than in the United States. Foreign
settlement procedures and trade regulations may involve certain risks (such as
delay in payment or delivery of securities or in the recovery of the
Portfolio's assets held abroad) and expenses not present in the settlement of
domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. The laws of some foreign countries
may limit the Portfolio's ability to invest in securities of certain issuers
located in those foreign countries. Special tax considerations apply to foreign
securities. The Portfolio may buy or sell foreign currencies and options and
futures contracts on foreign currencies for hedging purposes in connection with
its foreign investments as described more fully below.
The Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization. Investments in
ADRs and GDRs are subject to many of the same risks of investing in foreign
securities generally.
The risks described above are typically increased to the extent that the
Portfolio invests in securities traded in underdeveloped and developing
nations, which are sometimes referred to as "emerging markets."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Portfolio may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future currency exchange rates. The Portfolio may engage in foreign
currency exchange transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect against changes in
the value of specific portfolio positions ("position hedging").
The Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which the
Portfolio contracts to purchase or sell a security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. The Portfolio may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection with transaction
hedging.
The Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange
currency at a future time at a rate or that may be higher or lower than the
spot rate. Foreign currency futures contracts are standardized exchange-traded
contracts and have margin requirements. For transaction hedging purposes, the
Portfolio may also purchase and sell call and put options on foreign currency
futures contracts and on foreign currencies.
The Portfolio may engage in position hedging to protect against a decline
in value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, the
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Portfolio may purchase or sell foreign currency futures contracts and foreign
currency forward contracts, and may purchase and sell put and call options on
foreign currency futures contracts and on foreign currencies. In connection
with position hedging, the Portfolio may also purchase or sell foreign
currencies on a spot basis.
Although there is no limit to the amount of the Portfolio's assets that
may be invested in foreign currency exchange and foreign currency forward
contacts, the Portfolio will only enter into such transactions to the extent
necessary to effect the hedging transactions described above.
OPTIONS AND FUTURES. The Portfolio may buy and sell call and put options
on securities it owns to hedge against changes in net asset value or to realize
a greater current return. In addition, through the purchase and sale of futures
contracts and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return. In addition, the Portfolio may buy and
sell options and futures contracts (including index futures contracts,
described below) to implement changes in its asset allocations among various
market sectors, pending the sale of its existing investments and reinvestment
in new securities.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that
the Portfolio will be able to utilize these instruments effectively for the
purposes stated above. Although the Portfolio will only engage in options and
futures transactions for limited purposes, those transactions involve certain
risks which are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and
may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index
futures" contract is a contract to buy or sell units of a particular bond or
stock index at an agreed price on a specified future date. Depending on the
change in value of the index between the time when the Portfolio enters into
and terminates an index futures or option transaction, the Portfolio realizes a
gain or loss. The Portfolio may also, to the extent consistent with applicable
law, buy and sell index futures and options to increase investment return.
RISKS RELATED TO OPTIONS AND FUTURE STRATEGIES. Options and futures
transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
security or index or of the securities held by the Portfolio that are the
subject of a hedge. The successful use by the Portfolio of the strategies
described above further depends on the ability of its investment adviser or
sub-adviser to forecast market movements correctly. Other risks arise from the
Portfolio's potential inability to close out futures or options positions.
Although the Portfolio will enter into options or futures transactions only if
its investment adviser or sub-adviser believes that a liquid secondary market
exists for such option or futures contract, there can be no assurance that a
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price. Transactions in options and futures contracts involve
brokerage costs and may require the Portfolio to segregate assets to cover its
outstanding positions. For more information, see the Statement of Additional
Information. Federal tax considerations may also limit the Portfolio's ability
to engage in options and futures transactions.
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The Portfolio's options and futures contract transactions will generally
be conducted on recognized exchanges. However, a Portfolio may purchase and
sell options in transactions in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would be unable to meet
their obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are not appropriate and when, in the opinion of Mentor Perpetual,
the pricing mechanism and liquidity of the over-the-counter markets are
satisfactory and the participants are responsible parties likely to meet their
contractual obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolio's assets. (For
options that are "in-the-money" at the time of purchase, the amount by which
the option is "in-the-money" is excluded from this calculation.)
PREMIUM SECURITIES. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although the Portfolio generally amortizes the amount of
any such premium into income, the Portfolio may recognize a capital loss if
such premium securities are called or sold prior to maturity and the call or
sale price is less than the purchase price. Additionally, the Portfolio may
recognize a capital loss if it holds such securities to maturity.
SECURITIES LOANS AND REPURCHASE AGREEMENTS. The Portfolio may lend
portfolio securities and may enter into repurchase agreements with banks,
broker/dealers, and other recognized financial institutions. The Portfolio may
enter into each type of transaction on up to one-third of its assets. These
transactions must be fully collateralized at all times, but involve some risk
to the Portfolio if the other party should default on its obligations and the
Portfolio is delayed or prevented from recovering the collateral.
The use of borrowed money, known as "leverage," increases the Portfolio's
market exposure and risk and may result in losses. When the Portfolio has
borrowed money for leverage and its investments increase or decrease in value,
its net asset value will normally increase or decrease more than if it had not
borrowed money for this purpose. The interest that the Portfolio must pay on
borrowed money will reduce its net investment income, and may also either
offset any potential capital gains or increase any losses. The Portfolio
currently intends to use leverage in order to adjust the dollar-weighted
average duration of their portfolios. The Portfolio will not always borrow
money for investment and the extent to which the Portfolio will borrow money,
and the amount it may borrow, depends on market conditions and interest rates.
Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse repurchase
agreements," "dollar-roll" transactions, and "forward commitments," described
below) that can exist at any one time will not exceed one-third of the value of
the Portfolio's total assets (less all liabilities of the Portfolio other than
the leverage).
REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. The Portfolio may
enter into "reverse" repurchase agreements with respect to up to one-third of
its assets. "Reverse" repurchase agreements generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the
securities at an agreed-upon
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price, date, and interest payment. The Portfolio also may enter into forward
commitments, in which the Portfolio buys securities for future delivery.
Reverse repurchase agreements and forward commitments involve leverage, and may
increase the Portfolio's overall investment exposure. Their use by the
Portfolio may result in losses.
DOLLAR-ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar-roll transactions with
respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar-roll transaction, the Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (I.E., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon
price. The mortgage-related securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories. Dollar-roll
transactions involve leverage, and may increase the Portfolio's overall
investment exposure. Their use by the Portfolio may result in losses.rates
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of
its portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of its portfolio, the Portfolio may enter into interest rate swaps
and other interest rate transactions, such as interest rate caps, floors, and
collars. Interest rate swaps involve the exchange by the Portfolio with another
party of different types of interest-rate streams (E.G. an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. The Portfolio intends to use
these interest rate transactions as a hedge and not as a speculative
investment. The Portfolio's ability to engage in certain interest rate
transactions may be limited by tax considerations.
The use of interest rate swaps and other interest rate transactions is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. If Mentor Perpetual is incorrect in its forecasts of market
values, interest rates, or other applicable factors, the investment performance
of the Portfolio would be less favorable than it would have been if this
investment technique were not used.
INDEXED SECURITIES. The Portfolio may invest in indexed securities, the
values of which are linked to currencies, interest rates, commodities, indices,
or other financial indicators. Investment in indexed securities involves
certain risks. In addition to the credit risk of the securities issuer and
normal risks of price changes in response to changes in interest rates, the
principal amount of indexed securities may decrease as a result of changes in
the value of the reference instruments. Also, in the case of certain indexed
securities where the interest rate is linked to a reference instrument, the
interest rate may be reduced to zero and any further declines in the value of
the security may then reduce the principal amount payable on maturity. Further,
indexed securities may be more volatile than the reference instruments
underlying indexed securities.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by the Portfolio is known as "portfolio turnover." As a
result of the Portfolio's investment policies, under certain market conditions
its portfolio turnover rate may be higher than that of other mutual funds.
Portfolio turnover generally involves some expense to the Portfolio,
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including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. Such
transactions may result in realization of taxable gains. The portfolio turnover
rate for the High Yield Portfolio is not expected to exceed 200% for its first
current fiscal year. The Portfolio turnover rate for the Perpetual Global
Emerging Companies Portfolio is not expected to exceed [ ]% for its first
fiscal year.
VALUING THE PORTFOLIO'S SHARES
The Portfolio calculates the net asset value of a share of each class by
dividing the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on the
New York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and
assets are valued at their fair values. The net asset value for Class A shares
will generally differ from that of Class B shares due to the variance in daily
net income realized by and dividends paid on each class of shares, and any
differences in the expenses of the different classes.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rates or at such other rates as may be used in
accordance with procedures approved by the Trustees. As a result, fluctuations
in the values of such currencies in relation to the U.S. dollar will affect the
net asset value of the Portfolio's shares even though there has not been any
change in the values of such securities as quoted in such foreign currencies.
SALES ARRANGEMENTS
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
CLASS A SHARES. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to Buy Shares -- Class A
shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge,
but are subject to a CDSC of up to 4% if redeemed within five or six years,
depending on the Portfolio. Class B shares also bear 12b-1 fees. Class B shares
provide an investor the benefit of putting all of the investor's money to work
from the time the investment is made, but will have a higher expense ratio and
pay lower dividends than Class A shares due to the 12b-1 fees. If you purchase
shares through an asset-allocation program, you may also be eligible to
purchase Class B shares through the "BL Purchase Program." See "How to Buy
Shares -- Class B shares."
WHICH ARRANGEMENT IS FOR YOU? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. Investors purchasing shares through an
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asset-allocation program may wish to purchase shares through the BL Purchase
Program. For more information about these sales arrangements, consult your
investment dealer or Mentor Services Company, Inc. ("Mentor Services Company").
Sales personnel may receive different compensation depending on which class of
shares they sell. Investors may be charged a fee if they effect transactions
through a broker or agent. Shares may only be exchanged for shares of the same
class of another Mentor fund and for shares of Cash Resource U.S. Government
Money Market Fund. See "How to Exchange Shares."
HOW TO BUY SHARES
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little at $50. Investments under
IRAs and investments under qualified retirement plans are subject to a minimum
initial investment of $250. The minimum initial investment may be waived for
current and retired Trustees, and current and retired employees of Mentor Funds
or Mentor Services Company or its affiliates. You can buy Portfolio shares BY
COMPLETING THE ENCLOSED NEW ACCOUNT FORM and sending it to c/o Mentor Funds
Boston Financial Data Services at 2 Heritage Drive, North Quincy MA 02171,
along with a check or money order made payable to Mentor Funds; THROUGH YOUR
FINANCIAL INSTITUTION, which may be an investment dealer, a bank, or another
institution; OR THROUGH AUTOMATIC INVESTING. If you do not have a dealer,
Mentor Services Company can refer you to one.
AUTOMATIC INVESTMENT PLAN. Once you have made the initial minimum
investment in a Portfolio, you can make regular investments of $50 or more on a
monthly or quarterly basis through automatic deductions from your bank checking
account. Application forms are available from your investment dealer or through
Mentor Services Company.
Shares are sold at a price based on a Portfolio's net asset value next
determined after Mentor Distributors, LLC ("Mentor Distributors") receives your
purchase order. In most cases, in order to receive that day's public offering
price, Mentor Distributors or your investment dealer must receive your order
before the close of regular trading on the New York Stock Exchange. If you buy
shares through your investment dealer, the dealer must ensure that Mentor
Distributors receives your order before the close of regular trading on the New
York Stock Exchange for you to receive that day's public offering price.
CLASS A SHARES. The public offering price of Class A shares is the net
asset value plus a sales charge. The Portfolio receives the net asset value.
The sales charge varies depending on the size of your purchase and is allocated
between your investment dealer and Mentor Distributors. The current sales
charges for the Portfolio are:
11
<PAGE>
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE OF AS A
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
--------------- -------------- ------------
<S> <C> <C> <C>
Less than $50,000......................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000............ 4.75% 4.99% 4.00%
$100,000 but less than $250,000........... 3.75% 3.90% 3.00%
$250,000 but less than $500,000 .......... 3.00% 3.09% 2.50%
$500,000 but less than $1 million......... 2.00% 2.04% 1.75%
$1 million or more........................ 0% 0% (see below)
</TABLE>
- ----------
* At the discretion of Mentor Distributors, the entire sales charge may at
times be reallowed to dealers. The Staff of the Securities and Exchange
Commission has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters.
There is no initial sales charge on purchases of Class A shares of $1
million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. A CDSC is also imposed on any shares
purchased without a sales charge as part of a purchase of shares of $1 million
or more under a purchase accumulation plan. Contact Mentor Services Company for
more information.
You may be eligible to buy Class A shares at reduced sales charges.
Consult your investment dealer or Mentor Services Company for details about
Quantity Discounts and Accumulated Purchases, Letters of Intent, the
Reinvestment Privilege, Concurrent Purchases, and the Automatic Investment
Plan. Descriptions are also included in the New Account Form or are available
from Mentor Services Company. Shares may be sold at net asset value to certain
categories of investors, including to shareholders of other investment
companies who invest in Mentor Funds in response to certain promotional
activities, and the CDSC may be waived under certain circumstances. The sales
charges shown above will not apply to shares purchased by you if you purchase
shares through EVEREN Securities, Inc. with the proceeds received by you within
the preceding 90 days from the sale of shares of most non-Mentor investment
companies and, to the extent permitted by applicable law, real estate
investment trusts. No CDSC will apply to these purchases. EVEREN Securities,
Inc., Mentor Distributors, Mentor Services Company, or their affiliates may
compensate your investment dealer in connection with any such purchase, in an
amount equal to a percentage of the purchase price of the shares. The amount of
such compensation, and the portion paid by Mentor Distributors, Mentor Services
Company, or their affiliates, will vary from time to time. Sales charges may
similarly not apply to shares purchased through financial institutions
affiliated with Mentor Investment Group or other financial institutions that
have made arrangements with Mentor Distributors. Contact your financial
institution or Mentor Services Company for more information. See "How to Buy
Shares -- General" below.
CLASS B SHARES. Class B shares are sold without an initial sales charge,
although a CDSC will be imposed if you redeem shares within five or six years
of purchase, depending on the Portfolio. The following types of shares may be
redeemed without charge: (i) shares acquired by reinvestment of distributions
and (ii) shares otherwise exempt from the CDSC, as described in the Example
below. The amount of CDSC is determined as a
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<PAGE>
percentage of the lesser of the current market value or the cost of the shares
being redeemed. The amount of the CDSC will depend on the number of years since
you invested in the shares being redeemed and the dollar amount being redeemed,
according to the following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEARS SINCE PURCHASE PAYMENT APPLICABLE AMOUNT
MADE REDEEMED
- ------------------------------ --------------------------
<S> <C>
1 4.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6 None
7+ None
</TABLE>
For information on how sales charges are calculated if you exchange your
shares, see "How To Exchange Shares."
THE BL PURCHASE PROGRAM. If you purchase Class B shares through an
asset-allocation program sponsored by your broker-dealer or other financial
institution, you may elect to participate in the BL Purchase Program. Shares
purchased through this Program are not subject to the CDSC shown above. Rather,
a CDSC of 1.00% will be imposed on redemptions of such shares within the first
year after purchase, based on the lower of the shares' cost and current net
asset value. Your broker-dealer or other financial institution is responsible
for making the election on your behalf to invest through the Program.
Accordingly, if you wish to purchase shares through this Program, you should
instruct your broker-dealer or financial institution to do so.
GENERAL
The Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by Mentor Funds' current and retired Trustees
(and their families), current and retired employees (and their families) of
Mentor Services Company, each investment adviser or sub-adviser, and each of
their affiliates, registered representatives and other employees (and their
families) of broker-dealers having sales agreements with Mentor Distributors,
employees (and their families) of financial institutions having sales
agreements with Mentor Distributors (or otherwise having an arrangement with a
broker-dealer or financial institution with respect to sales of Portfolio
shares), financial institution trust departments investing an aggregate of $1
million or more in one or more funds in the Mentor family, clients of certain
administrators of tax-qualified plans, employer-sponsored retirement plans,
tax-qualified plans when proceeds from repayments of loans to participants are
invested (or reinvested) in funds in the Mentor family, shares redeemed under
the Portfolio's Systematic Withdrawal Plan (limited to 10% of a shareholder's
account in any calendar year), and "wrap accounts" for the benefit of clients
of financial planners adhering to certain standards established by Mentor
Services Company or its affiliates. The Portfolio may sell shares without a
sales charge or a CDSC in connection with the acquisition by the Portfolio of
assets of an investment company or personal holding company. In addition, the
CDSC may be
13
<PAGE>
waived in the case of (i) redemptions of shares held at the time a shareholder
dies or becomes disabled, including the shares of a shareholder who owns the
shares with his or her spouse as joint tenants with right of survivorship,
provided that the redemption is requested within one year of the death or
initial determination of disability; (ii) redemptions in connection with the
following retirement plan distributions: (a) lump-sum or other distributions
from a qualified retirement plan following retirement; (b) distributions from
an IRA, Keogh Plan, or Custodial Account under Section 403(b)(7) of the
Internal Revenue Code following attainment of age 59 1/2; and (c) a tax-free
return of an excess contribution to an IRA; (iii) redemptions by pension or
profit sharing plans sponsored by Mentor Investment Group or an affiliate; and
(iv) redemptions by pension or profit sharing plans of which Mentor Investment
Group or any affiliate serves as a plan fiduciary. In addition, certain
retirement plans with over 200 employees may purchase Class A shares at net
asset value without a sales charge. In addition, the Portfolio may sell its
Class A shares without a sales charge and may waive the CDSC on shares redeemed
by shareholders investing through brokerage or similar accounts sponsored by
financial institutions having agreements with Mentor Distributors or Mentor
Services Company, Inc., where the shareholder pays account fees to its
financial institution based on the asset value of the shareholder's account
with the financial institution from time to time. The Portfolio may sell its
Class A shares without a sales charge to shareholders of other mutual funds who
invest in Mentor Funds in response to certain promotional activities (in which
case a CDSC of 1% may apply for a period of years after the purchase). Contact
Mentor Services Company. If you invest through a broker-dealer or other
financial institution, your broker-dealer or other financial institution will
be responsible for electing on your behalf to take advantage of any of these
reduced sales charges or waivers described above. Please instruct your
broker-dealer or other financial institution accordingly.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in,
shares of a Portfolio at net asset value.
In determining whether a CDSC is payable in respect of the shares
redeemed, a Portfolio will first redeem the shares held longest (together with
any shares received upon reinvestment of distributions with respect to those
shares). Any of the shares being redeemed which were acquired by reinvestment
of distributions will be redeemed without a CDSC, and amounts representing
capital appreciation will not be subject to a CDSC. See the Example below.
14
<PAGE>
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 of those shares (including shares purchased through reinvestment
of distributions on those 100 shares) at this time, your CDSC will be
calculated as follows:
o Proceeds of 50 shares redeemed at $12 per share $600
o Minus proceeds of 10 shares not subject to a CDSC because they were
acquired through dividend reinvestment (10 x $12) -120
o Minus appreciation on remaining shares, also not subject to CDSC (40
x $2) -80
----
o Amount subject to a CDSC $400
Mentor Distributors receives the entire amount of any CDSC you pay.
Consult Mentor Services Company for more information.
If you are considering redeeming or exchanging shares of the Portfolio or
transferring shares to another person shortly after purchase, you should pay
for those shares with a certified check to avoid any delay in redemption,
exchange, or transfer. Otherwise the Portfolio may delay payment until the
purchase price of those shares has been collected or, if you redeem by
telephone, until 15 calendar days after the purchase date.
To eliminate the need for safekeeping, certificates will not be issued for
your shares unless you request them.
Because of the relatively high cost of maintaining accounts, the Portfolio
reserves the right to redeem, upon not less than 60 days' notice, any Portfolio
account below $500 as a result of redemptions. A shareholder may, however,
avoid such a redemption by the Portfolio by increasing investment in shares of
the Portfolio to a value of $500 or more during such 60-day period.
Mentor Distributors, Mentor Perpetual, or affiliates thereof, at their own
expense and out of their own assets (or in conjunction with other entities),
may also periodically sponsor programs that offer additional compensation in
connection with sales of shares of the Portfolio. Compensation may include, but
is not limited to, financial assistance to dealers in connection with
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of Mentor Funds'
shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. Certain dealers may not sell all
classes of shares.
In all cases Mentor Perpetual or the Distributor reserve the right to
reject any particular investment.
REINVESTMENT PRIVILEGE. If you redeem Class A or B shares of any
Portfolio, you have a one-time right, within 60 days, to reinvest the
redemption proceeds plus the amount of CDSC you paid, if any, at the next-
determined net asset value. Front-end sales charges will not apply to such
reinvestment. Mentor Distributors
15
<PAGE>
must be notified in writing by you or by your financial institution of the
reinvestment for you to recover the CDSC, or to eliminate the front-end sales
charge. If you redeem shares in the Portfolio, there may be tax consequences.
DISTRIBUTION PLANS (CLASS B SHARES)
Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus, Ohio
43219, is the principal distributor for the Portfolios' shares. Mentor
Distributors is not obligated to sell any specific amount of shares of any
Portfolio. Mentor Distributors is a wholly owned subsidiary of BISYS Fund
Services, Inc.
The Portfolio has adopted a Distribution Plan under Rule 12b-1 with
respect to its Class B shares (each, a "Class B Plan") providing for payments
by the Portfolio to its distributor from the assets attributable to the
Portfolio's Class B shares at the annual rate set out under "Expense Summary --
Annual Portfolio Operating Expenses" above. (The Trustees may reduce the amount
of payments or suspend the Class B Plan for such periods as they may determine.
The Portfolio's distributor also receives the proceeds of any CDSC imposed on
redemptions of shares).
Payments under the Plans are intended to compensate the Portfolio's
distributor for services provided and expenses incurred by it as principal
underwriter of the Portfolio's Class B shares. The Portfolio's distributor may
select financial institutions (such as a broker/dealer or bank) to provide
sales support services as agents for their clients or customers who
beneficially own Class B shares of the Portfolios. Financial institutions will
receive fees from the Portfolio's distributor based upon Class B shares owned
by their clients or customers. The schedules of such fees and the basis upon
which such fees will be paid will be determined from time to time by the
Portfolio's distributor. The Portfolio's distributor may suspend or modify such
payments to dealers. Such payments are also subject to the continuation of the
relevant Class B Plan, the terms of any agreements between dealers and the
Portfolio's distributor, and any applicable limits imposed by the National
Association of Securities Dealers, Inc.
Mentor Services Company, a wholly owned subsidiary of Mentor Investment
Group, provides marketing-related services in respect of the Portfolio. Mentor
Services Company and its affiliates will receive from Mentor Distributors
substantially all amounts received or retained by Mentor Distributors in
respect of the distribution of the Portfolio's shares, including any amounts
paid to Mentor Distributors under the Portfolio's Class B Plans. In addition,
Mentor Services Company receives from Mentor Distributors an amount equal to
all CDSC's received by Mentor Distributors.
HOW TO SELL SHARES
You can sell your shares in the Portfolio to that Portfolio any day the
New York Stock Exchange is open, either directly to the Portfolio or through
your investment dealer. The Portfolio will only redeem shares for which it has
received payment.
SELLING SHARES DIRECTLY TO THE PORTFOLIO. Send a signed letter of
instruction and stock power form, along with any certificates that represent
shares you want to sell, to Mentor Funds, c/o Boston Financial Data Services,
Inc. ("BFDS"), 2 Heritage Drive, North Quincy, Massachusetts 02171. The price
you will receive is the net asset value next calculated after your request is
received in proper form less any applicable CDSC. In order to receive
16
<PAGE>
that day's net asset value, your request must be received before the close of
regular trading on the New York Stock Exchange. If you sell shares having a net
asset value of $50,000 or more or if you want your redemption proceeds payable
to you at a different address or to someone else, the signatures of registered
owners or their legal representatives must be guaranteed by a bank,
broker-dealer, or certain other financial institutions. Contact Mentor Services
Company for more information about where to obtain a signature guarantee. Stock
power forms are available from your investment dealer, Mentor Services Company,
and many commercial banks. Mentor Distributor usually requires additional
documentation for the sale of shares by a corporation, partnership, agent, or
fiduciary, or surviving joint owner. Contact Mentor Services Company for
details.
SELLING SHARES BY TELEPHONE. You may use the Telephone Redemption
Privilege to redeem shares from your account unless you have notified Mentor
Services Company of an address change within the preceding 15 days. Unless an
investor indicates otherwise on the New Account Form, Mentor Services Company
will be authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide Mentor Services Company with his or her account
registration and address as it appears on Mentor Services Company's records.
Mentor Services Company will employ these and other reasonable procedures to
confirm that instructions communicated by telephone are genuine; if it fails to
employ reasonable procedures, Mentor Services Company may be liable for any
losses due to unauthorized or fraudulent instructions. For more information,
consult Mentor Services Company. During periods of unusual market changes and
shareholder activity, you may experience delays in contacting Mentor Services
Company by telephone in which case you may wish to submit a written redemption
request, as described above, or contact your investment dealer, as described
below. The Telephone Redemption Privilege may be modified or terminated without
notice.
SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must receive
your request before the close of regular trading on the New York Stock Exchange
to receive that day's net asset value. Your dealer will be responsible for
furnishing all necessary documentation to Mentor Services Company, and may
charge you for its services.
SYSTEMATIC WITHDRAWAL PROGRAM. You may redeem Class A or B shares of the
Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program
are not subject to a CDSC, but the aggregate withdrawals of Class B shares in
any year are limited to 10% of the value of the account at the time of
enrollment. Contact Mentor Services Company for more information.
GENERAL. The Portfolio generally sends you payment for your shares the
business day after your request is received. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part in securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
17
<PAGE>
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in the
Portfolio worth at least $1,000 for shares of certain other portfolios in the
Mentor family at net asset value beginning 15 days after purchase. You may also
exchange shares of the Portfolio for shares of Cash Resource U.S. Government
Money Market Fund (the "Cash Fund"). If you exchange shares subject to a CDSC,
the transaction will not be subject to a CDSC. However, when you redeem the
shares acquired through the exchange, the redemption may be subject to the
CDSC, depending upon when you originally purchased the shares, using the
schedule of the Portfolio from which your first exchange was effected. For
purposes of computing the CDSC, the length of time you have owned your shares
will be measured from the date of original purchase and will not be affected by
any exchange.
For information on how to exchange your shares, contact Mentor Services
Company at 1-800-869-6042. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss. A
Telephone Exchange Privilege is currently available. Mentor Services Company's
procedures for telephonic transactions are described above under "How to Sell
Shares." The Telephone Exchange Privilege is not available if you were issued
certificates for shares which remain outstanding. Ask your investment dealer or
Mentor Services Company for a prospectus relating to the Cash Fund or the other
portfolios into which you may exchange your shares.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management
and have an adverse effect on all shareholders. In order to limit excessive
exchange activity and in other circumstances where Mentor Advisors or the
Trustees believe doing so would be in the best interests of the Portfolio, the
Trust reserves the right to revise or terminate the exchange privilege, limit
the amount or number of exchanges, or reject any exchange. Shareholders would
be notified of any such action to the extent required by law. See the Statement
of Additional Information to find out more about the exchange privilege.
HOW DISTRIBUTIONS ARE MADE
Dividends, if any, are declared and paid annually. The Portfolio will
distribute its net capital gain, if any, at least annually. All dividends and
distributions of net capital gain will be invested in additional shares of the
same class of the Portfolio unless a shareholder requests in writing to receive
the dividend or distribution in cash.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to you as ordinary income, except that any distributions of net capital
gain will be taxed as long-term capital gain, regardless of how long you have
held the shares (although the loss on a sale of shares held for six months or
less will be treated as long-term capital loss to the extent of any capital
gain distribution received with respect to those shares). Portfolio
distributions will be taxable to you even if they are paid from income or gains
earned by the Portfolio prior
18
<PAGE>
to your investment (and thus were included in the price paid for your shares).
Distributions will be taxable as described above whether received in cash or in
shares through the reinvestment of distributions. Early in each year Mentor
Funds will notify you of the amount and tax status of distributions paid to you
by the Portfolio for the preceding year. In buying or selling securities for
the Portfolio, Mentor Advisors and Mentor Perpetual, as applicable, will not
normally take into account the effect any purchase or sale of securities will
have on the tax positions of the Portfolio's shareholders.
PERPETUAL GLOBAL EMERGING COMPANIES PORTFOLIO ONLY. Shareholders of the
Portfolio who are U.S. citizens or residents may be able to claim a foreign tax
credit or deduction on their U.S. income tax returns with respect to foreign
taxes paid by the Portfolio. If, at the end of the fiscal year of the
Portfolio, more than 50% of the Portfolio's total assets are represented by
stock or securities of foreign corporations, the Portfolio intends to make an
election permitted by the Internal Revenue Code to treat any eligible foreign
taxes it paid as paid by its shareholders. In that case, shareholders who are
U.S. citizens, U.S. corporations, and, in some cases, U.S. residents, will be
required to include in U.S. taxable income their pro rata share of such taxes,
but may then be entitled to claim a foreign tax credit or deduction (but not
both) for their share of such taxes.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends, distributions, and redemption proceeds
also may be subject to foreign, state, and local taxes. Shareholders are urged
to consult their tax advisers regarding specific questions as to federal,
foreign, state, or local taxes. Non-U.S. investors should consult their tax
advisers concerning the tax consequences of ownership of shares of the
Portfolio, including the possibility that distributions may be subject to a 30%
United States withholding tax (or a reduced rate of withholding provided by
treaty).
MANAGEMENT
The Trustees of Mentor Funds are responsible for generally overseeing the
conduct of its business. MENTOR PERPETUAL ADVISORS, LLC is the investment
adviser to the Portfolio. The investment adviser is located at 901 East Byrd
Street, Richmond, Virginia.
All investment decisions made for the Portfolio by Mentor Perpetual are
made by investment management teams.
Mentor has over $14 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"). First Union is a leading financial services company with
approximately $234 billion in assets and $17 billion in total stockholders'
equity as of September 30, 1998. EVEREN Capital Corporation has a 20% ownership
in Mentor Investment Group and may acquire additional ownership based
principally on the amount of Mentor's revenues derived from assets attributable
to clients of EVEREN Securities, Inc. and its affiliates.
Mentor Perpetual, an investment advisory firm organized in 1995, is owned
equally by Perpetual plc, a diversified financial services holding company, and
Mentor Advisors. The Perpetual organization currently serves as investment
adviser for assets of more than $14 billion. Its clients include 28 unit and
investment trusts and other public investment pools including private
individuals, charities, pension plans, and life assurance companies.
19
<PAGE>
Mentor Advisors and Mentor Perpetual together serve as investment adviser
to 27 separate investment portfolios in the Mentor Family of Funds, including
that offered by this Prospectus. For a prospectus relating to certain of these
other investment portfolios, and for information concerning your eligibility to
purchase shares of those portfolios, contact Mentor Services Company.
The Portfolio pays management fees to Mentor Perpetual at the annual rates
described above under "Expense Summary -- Annual Portfolio Operating Expenses".
[The advisory fees paid by the Portfolio are higher than those paid by many
other mutual funds.] Mentor Perpetual may from time to time voluntarily waive
some or all of its investment advisory fees and may terminate any such
voluntary waiver at any time in its sole discretion [?].
OTHER SERVICES
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 0.10% of the
Portfolio's average daily net assets.
SHAREHOLDER SERVICING PLAN. Mentor Funds has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to Class A and Class B shares
of the Portfolio. Under the Service Plan, financial institutions will enter
into shareholder service agreements with Mentor Distributors to provide
administrative support services to their customers who are Portfolio
shareholders. In return for providing these support services, a financial
institution may receive payments at a rate not exceeding 0.25% of the average
daily net assets of the Class A or Class B shares of the Portfolio. These
administrative services may include, but are not limited to, the following
functions: providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer personnel, as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries
regarding the Portfolio; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Portfolio reasonably requests.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Advisors, by a Portfolio's
sub-adviser, or by Mentor Investment Group, or affiliates thereof, for
providing administrative support services to holders of Class A or Class B
shares of the Portfolio. These payments will be made directly by Mentor
Advisors and/or Mentor Investment Group, or their affiliates, and will not be
made from the assets of any of the Portfolio.
GENERAL INFORMATION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided
20
<PAGE>
without shareholder approval into two or more classes of shares having such
preferences and special or relative rights and privileges as the Trustees
determine. The Trust's shares are currently divided into twelve series with
varying investment objectives and policies. Certain of the Trust's Portfolios
offer more than one class of shares with different sales charges and expenses.
The Portfolio currently offers three classes of shares: Class A and Class
B shares, which are offered by this Prospectus; and Class Y (Institutional)
shares, which are not subject to any sales loads or shareholder servicing fees.
Contact Mentor Services Company for information concerning Class Y shares and
your eligibility to purchase shares of that class.
Each share has one vote, with fractional shares voting proportionally.
Shares of each class will vote together as a single class except when required
by law or determined by the Trustees. Shares of the Portfolio are freely
transferable, are entitled to dividends as declared by the Trustees, and, if
the Portfolio was liquidated, would receive the net assets of the Portfolio.
The Trust may suspend the sale of shares at any time and may refuse any order
to purchase shares. Although neither the Portfolio nor the Trust is required to
hold annual meetings of shareholders, shareholders have the right to call a
meeting to elect or remove Trustees, or to take other actions as provided in
the Declaration of Trust.
The Portfolio receives services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of the software to distinguish the Year 2000 from the
Year 1900. Mentor Advisors and Mentor Perpetual is taking steps that they
believe are reasonably designed to address this potential "Year 2000" problem
and to obtain satisfactory assurances that comparable steps are being taken by
the Portfolio's other major service providers. There can be no assurance,
however, that these steps will be sufficient to avoid any adverse impact on the
Portfolio from this problem.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and
dividend agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about the Portfolio. The Portfolio's "yield" is calculated by
dividing the Portfolio's annualized net investment income per share of the
class in question during a recent 30-day period by the maximum public offering
price per share of that class on the last day of that period. "Total return"
for the one-, five-, and ten-year periods (or for the life of the Portfolio, if
shorter) through the most recent calendar quarter represents the average annual
compounded rate of return on an investment of $1,000 in the Portfolio at the
maximum public offering price (in the case of Class A shares) and reflecting
(in the case of Class B shares) the deduction of any applicable CDSC. Total
return may also be presented for other periods or based on investment at
reduced sales charge levels or at net asset value. Investment performance of
different classes of shares of the Portfolio will differ. Any quotation of
investment performance not reflecting a CDSC or maximum front-end sales charge
would be reduced if the CDSC or front-end
21
<PAGE>
sales charges were reflected. Quotations of yield or total return for a 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 for more information.
Information may be presented in advertisements about a Portfolio describing the
background and professional experience of the Portfolio's investment adviser,
sub-adviser, or any of their personnel.
ALL DATA ARE BASED ON THE PORTFOLIO'S PAST INVESTMENT RESULTS AND DO NOT
PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses, and which class of
shares you purchase. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These
factors should be considered when comparing the Portfolio's investment results
to those of other mutual funds and other investment vehicles.
As permitted by applicable law, performance information for the Portfolio
whose investment adviser or sub-adviser has changed may be presented only for
periods after the change was effected.
22
<PAGE>
APPENDIX
MOODY'S INVESTORS SERVICE, INC., BOND RATINGS
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 edged." 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.
Ba -- Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principle
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS
AAA -- An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
23
<PAGE>
A -- An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligations. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition, or the taking of a
similar action if payments on an obligation are jeopardized.
MOODY'S NOTE RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
24
<PAGE>
STANDARD AND POOR'S NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess overwhelming safety characteristics are given a plus sign (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of saety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
25
<PAGE>
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<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
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 INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1999 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
MENTOR FUNDS
MENTOR PERPETUAL GLOBAL EMERGING COMPANIES
PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
April , 1999
[MENTOR LOGO]
<PAGE>
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 INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1999 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
[MENTOR LOGO]
MENTOR FUNDS
MENTOR PERPETUAL GLOBAL EMERGING COMPANIES
PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
April , 1999
[EVEREN LOGO]
<PAGE>
P R O S P E C T U S April , 1999
Y (Institutional) Shares
Mentor Perpetual Global Emerging Companies
Portfolio
Mentor Perpetual Global Emerging Companies Portfolio seeks long-term
capital appreciation by investing primarily in a diversified portfolio of
securities of emerging companies located anywhere in the world that Mentor
Perpetual Advisors, LLC believes offer the potential for capital appreciation.
The Portfolio is a series of shares of Mentor Funds.
The Portfolio may use "leverage" -- that is, it may borrow money to
purchase additional portfolio securities, which involves special risks. See
"Other Investment Practices and Risk Factors."
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus carefully and retain it for future reference. YOU CAN FIND MORE
DETAILED INFORMATION IN THE APRIL , 1999 STATEMENT OF ADDITIONAL INFORMATION,
AS AMENDED FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT OR FOR OTHER
INFORMATION, PLEASE 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. The address of Mentor Funds is
P.O. Box 1357, Richmond, Virginia 23218-1357.
----------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Expense Summary ...................................... 3
Investment Objectives and Policies ................... 4
Other Investment Practices and Risk Factors .......... 4
Valuing the Portfolio's Shares ....................... 9
Purchase of Shares ................................... 9
Redemption of Shares ................................. 10
How To Exchange Shares ............................... 11
How Distributions Are Made ........................... 12
Taxes ................................................ 12
Management ........................................... 13
General Information .................................. 13
Performance Information .............................. 14
APPENDIX ............................................. 16
</TABLE>
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur
in respect of its Class Y shares during its first fiscal year. The Examples
show the cumulative expenses attributable to a hypothetical $1,000 investment
in Class Y of the Portfolio over specified periods.
<TABLE>
<CAPTION>
CLASS A
SHARES
--------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ......................... None
Maximum Sales Charge Imposed on Reinvested Dividends ......... None
Exchange Fee ................................................. None
Contingent Deferred Sales Charge ............................. None
</TABLE>
- ----------
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
<S> <C>
CLASS A SHARES
Investment Advisory Fee .................... 1.05%
12b-1 Fees ................................. None
Other Expenses
Shareholder Service Plan Fees ............. None
Other Expenses ............................ 0.45%
-----
Total Other Expenses ....................... 0.45%
-----
Total Portfolio Operating Expenses ......... 1.45%
</TABLE>
- ----------
* Other Expenses are estimated based on the expenses the Portfolio expects to
incur during its first full year of operations.
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and no redemption at the end of each period:
<TABLE>
<CAPTION>
<S> <C>
1 year ............ $
3 years ........... $
</TABLE>
THIS INFORMATION IS PROVIDED TO HELP INVESTORS UNDERSTAND THE EXPENSES OF
INVESTING IN THE PORTFOLIO AND AN INVESTOR'S SHARE OF THE ESTIMATED OPERATING
EXPENSES OF THE PORTFOLIO. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE PERFORMANCE; ACTUAL EXPENSES MAY VARY.
3
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Portfolio's investment objective is long-term capital appreciation.
The Portfolio seeks its investment objective by investing primarily in a
diversified portfolio of securities of emerging companies located anywhere in
the world that Mentor Perpetual believes offer the potential for capital
appreciation. The Portfolio is not intended to be a complete investment
program, and there is no assurance it will achieve its objective. The Portfolio
is a diversified investment company.
The Portfolio's investments will normally include common stocks, preferred
stocks, securities convertible into common stocks or preferred stocks, and
warrants to purchase common stocks or preferred stocks. The Portfolio may also
invest to a lesser extent in debt securities and other types of investments if
Mentor Perpetual believes they would help achieve the Portfolio's objective.
The Portfolio may hold a portion of its assets in cash or money market
instruments.
The Portfolio will normally invest at least 65% of its assets in
securities issued by emerging companies. "Emerging companies" are companies
that, in the opinion of Mentor Perpetual, have the potential, based on superior
or unique products or services, operating characteristics, or financing
capabilities, for more rapid growth than the world economy. It is likely that
many of those companies will be relatively small, with limited operating
history. See "Risk Factors -- Investments in smaller companies." The Portfolio
may invest the remainder of its assets in securities of companies, large or
small, that Mentor Perpetual believes offer the potential for long-term capital
appreciation.
Fixed-income securities in which the Portfolio may invest will be of
investment grade. A security will be deemed to be of "investment grade" if, at
the time of investment by the Portfolio, the security is rated at least Baa by
Moody's Investors Service, Inc. or BBB- by Standard & Poor's Ratings Service,
Inc., or at a comparable rating by another nationally recognized rating
organization, or, if unrated, determined by Mentor Perpetual to be of
comparable quality. Securities rated Baa or Baa3, or BBB or BBB- lack
outstanding investment characteristics and have speculative characteristics and
are subject to greater credit and market risks than higher-rated securities.
The Portfolio will not be required to dispose of a security held by it if the
security's rating falls below investment grade, although Mentor Perpetual will
consider whether continued investment in the security is consistent with the
Portfolio's investment objective.
Mentor Perpetual may under unusual circumstances implement temporary
"defensive" strategies in order to reduce fluctuations in the value of the
Portfolio's assets. At those times, the Portfolio may invest any portion of its
assets in cash or cash equivalents, money market instruments, or other
short-term, high-quality investments Mentor Perpetual considers consistent with
such defensive strategies. At such times, the Portfolio may invest without
limit in securities of issuers located in the United States. It is impossible
to predict when, or for how long, the Portfolio will use these defensive
strategies.
OTHER INVESTMENT PRACTICES AND RISK FACTORS
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of these practices and certain risks they may involve.
FOREIGN SECURITIES. The Portfolio may invest in securities principally
traded in foreign markets. Since foreign securities are normally denominated
and traded in foreign currencies, the values of the Portfolio's assets
4
<PAGE>
may be affected favorably or unfavorably by changes in currency exchange rates
and by exchange control regulations. There may be less information publicly
available about a foreign company than about a U.S. company, and foreign
companies are not generally subject to accounting, auditing, and financial
reporting standards and practices comparable to those in the United States. The
securities of some foreign companies are less liquid and at times more volatile
than securities of comparable U.S. companies. Foreign brokerage commissions and
other fees are also generally higher than in the United States. Foreign
settlement procedures and trade regulations may involve certain risks (such as
delay in payment or delivery of securities or in the recovery of the
Portfolio's assets held abroad) and expenses not present in the settlement of
domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. The laws of some foreign countries
may limit the Portfolio's ability to invest in securities of certain issuers
located in those foreign countries. Special tax considerations apply to foreign
securities. The Portfolio may buy or sell foreign currencies and options and
futures contracts on foreign currencies for hedging purposes in connection with
its foreign investments as described more fully below.
The Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization. Investments in
ADRs and GDRs are subject to many of the same risks of investing in foreign
securities generally.
The risks described above are typically increased to the extent that the
Portfolio invests in securities traded in underdeveloped and developing
nations, which are sometimes referred to as "emerging markets."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Portfolio may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future currency exchange rates. The Portfolio may engage in foreign
currency exchange transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect against changes in
the value of specific portfolio positions ("position hedging").
The Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which the
Portfolio contracts to purchase or sell a security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. The Portfolio may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection with transaction
hedging.
The Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange
currency at a future time at a rate or rates that may be higher or lower than
the spot rate. Foreign currency futures contracts are standardized exchange-
traded contracts and have margin requirements. For transaction hedging
purposes, the Portfolio may also purchase and sell call and put options on
foreign currency futures contracts and on foreign currencies.
The Portfolio may engage in position hedging to protect against a decline
in value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, the
5
<PAGE>
Portfolio may purchase or sell foreign currency futures contracts and foreign
currency forward contracts, and may purchase and sell put and call options on
foreign currency futures contracts and on foreign currencies. In connection
with position hedging, the Portfolio may also purchase or sell foreign
currencies on a spot basis.
Although there is no limit to the amount of the Portfolio's assets that
may be invested in foreign currency exchange and foreign currency forward
contacts, the Portfolio will only enter into such transactions to the extent
necessary to effect the hedging transactions described above.
OPTIONS AND FUTURES. The Portfolio may buy and sell call and put options
on securities it owns to hedge against changes in net asset value or to realize
a greater current return. In addition, through the purchase and sale of futures
contracts and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return. In addition, the Portfolio may buy and
sell options and futures contracts (including index futures contracts,
described below) to implement changes in its asset allocations among various
market sectors, pending the sale of its existing investments and reinvestment
in new securities.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that
the Portfolio will be able to utilize these instruments effectively for the
purposes stated above. Although the Portfolio will only engage in options and
futures transactions for limited purposes, those transactions involve certain
risks which are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and
may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index
futures" contract is a contract to buy or sell units of a particular bond or
stock index at an agreed price on a specified future date. Depending on the
change in value of the index between the time when the Portfolio enters into
and terminates an index futures or option transaction, the Portfolio realizes a
gain or loss. The Portfolio may also, to the extent consistent with applicable
law, buy and sell index futures and options to increase investment return.
RISKS RELATED TO OPTIONS AND FUTURE STRATEGIES. Options and futures
transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
security or index or of the securities held by the Portfolio that are the
subject of a hedge. The successful use by the Portfolio of the strategies
described above further depends on the ability of its investment adviser or
sub-adviser to forecast market movements correctly. Other risks arise from the
Portfolio's potential inability to close out futures or options positions.
Although the Portfolio will enter into options or futures transactions only if
its investment adviser or sub-adviser believes that a liquid secondary market
exists for such option or futures contract, there can be no assurance that a
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price. Transactions in options and futures contracts involve
brokerage costs and may require the Portfolio to segregate assets to cover its
outstanding positions. For more information, see the Statement of Additional
Information. Federal tax considerations may also limit the Portfolio's ability
to engage in options and futures transactions.
6
<PAGE>
The Portfolio's options and futures contract transactions will generally
be conducted on recognized exchanges. However, a Portfolio may purchase and
sell options in transactions in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would be unable to meet
their obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are not appropriate and when, in the opinion of Mentor Perpetual,
the pricing mechanism and liquidity of the over-the-counter markets are
satisfactory and the participants are responsible parties likely to meet their
contractual obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolio's assets. (For
options that are "in-the-money" at the time of purchase, the amount by which
the option is "in-the-money" is excluded from this calculation.)
PREMIUM SECURITIES. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although the Portfolio generally amortizes the amount of
any such premium into income, the Portfolio may recognize a capital loss if
such premium securities are called or sold prior to maturity and the call or
sale price is less than the purchase price. Additionally, the Portfolio may
recognize a capital loss if it holds such securities to maturity.
SECURITIES LOANS AND REPURCHASE AGREEMENTS. The Portfolio may lend
portfolio securities and may enter into repurchase agreements with banks,
broker/dealers, and other recognized financial institutions. The Portfolio may
enter into each type of transaction on up to one-third of its assets. These
transactions must be fully collateralized at all times, but involve some risk
to the Portfolio if the other party should default on its obligations and the
Portfolio is delayed or prevented from recovering the collateral.
The use of borrowed money, known as "leverage," increases the Portfolio's
market exposure and risk and may result in losses. When the Portfolio has
borrowed money for leverage and its investments increase or decrease in value,
its net asset value will normally increase or decrease more than if it had not
borrowed money for this purpose. The interest that the Portfolio must pay on
borrowed money will reduce its net investment income, and may also either
offset any potential capital gains or increase any losses. The Portfolio
currently intends to use leverage in order to adjust the dollar-weighted
average duration of their portfolios. The Portfolio will not always borrow
money for investment and the extent to which the Portfolio will borrow money,
and the amount it may borrow, depends on market conditions and interest rates.
Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse repurchase
agreements," "dollar-roll" transactions, and "forward commitments," described
below) that can exist at any one time will not exceed one-third of the value of
the Portfolio's total assets (less all liabilities of the Portfolio other than
the leverage).
REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. The Portfolio may
enter into "reverse" repurchase agreements with respect to up to one-third of
its assets. "Reverse" repurchase agreements generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the
securities at an agreed-upon
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price, date, and interest payment. The Portfolio also may enter into forward
commitments, in which the Portfolio buys securities for future delivery.
Reverse repurchase agreements and forward commitments involve leverage, and may
increase the Portfolio's overall investment exposure. Their use by the
Portfolio may result in losses.
DOLLAR-ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar-roll transactions with
respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar-roll transaction, the Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (I.E., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon
price. The mortgage-related securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories. Dollar-roll
transactions involve leverage, and may increase the Portfolio's overall
investment exposure. Their use by the Portfolio may result in losses.
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of
its portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of its portfolio, the Portfolio may enter into interest rate swaps
and other interest rate transactions, such as interest rate caps, floors, and
collars. Interest rate swaps involve the exchange by the Portfolio with another
party of different types of interest-rate streams (E.G. an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. The Portfolio intends to use
these interest rate transactions as a hedge and not as a speculative
investment. The Portfolio's ability to engage in certain interest rate
transactions may be limited by tax considerations.
The use of interest rate swaps and other interest rate transactions is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. If Mentor Perpetual is incorrect in its forecasts of market
values, interest rates, or other applicable factors, the investment performance
of the Portfolio would be less favorable than it would have been if this
investment technique were not used.
INDEXED SECURITIES. The Portfolio may invest in indexed securities, the
values of which are linked to currencies, interest rates, commodities, indices,
or other financial indicators. Investment in indexed securities involves
certain risks. In addition to the credit risk of the securities issuer and
normal risks of price changes in response to changes in interest rates, the
principal amount of indexed securities may decrease as a result of changes in
the value of the reference instruments. Also, in the case of certain indexed
securities where the interest rate is linked to a reference instrument, the
interest rate may be reduced to zero and any further declines in the value of
the security may then reduce the principal amount payable on maturity. Further,
indexed securities may be more volatile than the reference instruments
underlying indexed securities.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by the Portfolio is known as "portfolio turnover." As a
result of the Portfolio's investment policies, under certain market conditions
its portfolio turnover rate may be higher than that of other mutual funds.
Portfolio turnover generally involves some expense to the Portfolio,
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including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. Such
transactions may result in realization of taxable gains. The portfolio turnover
rate for the High Yield Portfolio is not expected to exceed 200% for its first
current fiscal year. The Portfolio turnover rate for the Perpetual Global
Emerging Companies Portfolio is not expected to exceed [ ]% for its first
fiscal year.
VALUING THE PORTFOLIO'S SHARES
The Portfolio calculates the net asset value of a share of each class by
dividing the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on the
New York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and
assets are valued at their fair values. The net asset value for Class A shares
will generally differ from that of Class B shares due to the variance in daily
net income realized by and dividends paid on each class of shares, and any
differences in the expenses of the different classes.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rates or at such other rates as may be used in
accordance with procedures approved by the Trustees. As a result, fluctuations
in the values of such currencies in relation to the U.S. dollar will affect the
net asset value of the Portfolio's shares even though there has not been any
change in the values of such securities as quoted in such foreign currencies.
PURCHASE OF SHARES
Mentor Distributors, LLC ("Mentor Distributors"), located at 3435 Stelzer
Road, Columbus, Ohio 43219, serves as distributor of the Portfolios' shares.
Mentor Distributors is not obligated to sell any specific amount of shares of
the Portfolio. Mentor Distributors is a wholly owned subsidiary of BISYS Fund
Services, Inc.
Y Shares of the Portfolio are sold at a price based on their net asset
value next determined after a purchase order is received by the Portfolio. In
most cases, in order to receive that day's public offering price, your order
must be received by the Portfolio or Mentor Distributors before the close of
regular trading on the New York Stock Exchange.
An investor may make an initial purchase of shares in the Portfolio by
submitting completed application materials along with a purchase order, and by
making payment c/o Mentor Funds to Boston Financial Data Services, Inc. at 2
Heritage Drive, North Quincy, MA 02171. Investors will be required to make
minimum initial investments of $500,000 and minimum subsequent investments of
$25,000. Investments made through advisory accounts maintained with investment
advisers registered under the Investment Advisers Act of 1940, as amended
(including "wrap" accounts), are not subject to these minimum investment
requirements. Contact Mentor Services Company, Inc. ("Mentor Services Company")
for information. The Portfolios reserve the right at any time to change the
initial and subsequent investment minimums required of investors.
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Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to the Portfolio's investment adviser, or
(iii) a combination of such securities and cash. Purchase of shares of a
Portfolio in exchange for securities is subject in each case to the
determination by the Portfolio's investment adviser that the securities to be
exchanged are acceptable for purchase by the Portfolio. Securities accepted by
a Portfolio's investment adviser in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the next
determination of net asset value after such acceptance. All dividends and
subscription or other rights which are reflected in the market price of
accepted securities at the time of valuation become the property of the
Portfolio and must be delivered to the Portfolio upon receipt by the investor
from the issuer. A gain or loss for federal income tax purposes would be
realized upon the exchange by an investor that is subject to federal income
taxation, depending upon the investor's basis in the securities tendered. A
shareholder who wishes to purchase shares by exchanging securities should
obtain instruction by calling Mentor Services Company at 1-800-869-6042.
Mentor Distributors, the investment adviser, or affiliates thereof, at
their own expenses and out of their own assets (or in conjunction with other
entities), may also periodically sponsor programs that offer additional
compensation in connection with sales of shares of the Portfolios. Compensation
may include, but is not limited to, financial assistance to dealers in
connection with conferences, sales, or training programs for their employees,
seminars for the public, advertising or sales campaigns, or other
dealer-sponsered special events. In some instances, this compensation may be
made available only to certain dealers whose representatives have sold or are
expected to sell significant amounts of shares. Dealers may not use sales of
Mentor Funds' shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. Certain dealers may not sell
all classes of shares.
In all cases the investment adviser and Mentor Distributors reserve the
right to reject any particular investment.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of its shares in the Portfolio
any day the New York Stock Exchange is open by sending a signed letter of
instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to Mentor Funds, c/o Boston Financial
Data Services, Inc., 2 Heritage Drive, North Quincy, MA 02171. Redemptions will
be effected at the net asset value per share next determined after the receipt
by the Portfolio of redemption instructions in "good order" as described below.
In order to receive that day's net asset value, your request must be received
before the close of regular trading on the New York Stock Exchange. The
Portfolio will only redeem shares for which it has received payment. A check
for the proceeds will normally be mailed on the next business day after a
request in good order is received.
A redemption request will be considered to have been made in "good order"
if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be redeemed,
and identifies the shareholder's Portfolio account number;
(2) the request is signed by each registered owner exactly as the shares
are registered; and
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed for transfer (or are accompanied by an endorsed
stock power) and accompany the redemption request.
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If shares to be redeemed represent an investment made by check, the Trust
reserves the right not to transmit the redemption proceeds to the shareholder
until the check has been collected, which may take up to 15 days after the
purchase date.
The Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Mentor Services Company
usually requires additional documentation for the sale of shares by a
corporation, partnership, agent, fiduciary, or surviving joint owner. Contact
Mentor Services Company at 1-800-869-6042 for details.
Mentor Services Company may facilitate any redemption request. There is no
extra charge for this service.
GENERAL. The Portfolio generally sends you payment for your shares the
business day after your request is received. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolios reserve the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part in securities valued in the same way as they would be valued
for purposes of computing the Portfolios' per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your Y Shares in the
Portfolio worth at least $500,000 for shares of the same class of any other
Portfolio of the Trust, at net asset value beginning 15 days after purchase.
You may also exchange Y Shares of a Portfolio for shares of Cash Resource U.S.
Government Money Market Fund (the "Cash Fund").
To exchange your shares, simply provide a letter of intent and send it to
the Trust, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss. A
Telephone Exchange Privilege is currently available. The Telephone Exchange
Privilege is not available if you were issued certificates for shares which
remain outstanding. Ask you investment dealer or Mentor Services Company for a
prospectus relating to the Cash Fund. Shares of certain of the Portfolios may
not be available to residents of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management
and have an adverse effect on all shareholders. In order to limit excessive
exchange activity and in other circumstances where Mentor Advisors or the
Trustees believe doing so would be in the best interests of a Portfolio, the
Trust reserves the right to revise or terminate the exchange privilege, limit
the amount or number of exchanges, or reject any exchange. Shareholders would
be notified of any such action to the extent required by law. Consult Mentor
Services Company before requesting an exchange by calling 1-800-869-6042. See
the Statement of Additional Information to find out more about the exchange
privilege.
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HOW DISTRIBUTIONS ARE MADE
Dividends, if any, are declared and paid annually. The Portfolio will
distribute its net capital gain, if any, at least annually. All dividends and
distributions of net capital gain will be invested in additional Class Y shares
of the Portfolio unless a shareholder requests in writing to receive the
dividend or distribution in cash.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to you as ordinary income, except that any distributions of net capital
gain will be taxed as long-term capital gain, regardless of how long you have
held the shares (although the loss on a sale of shares held for six months or
less will be treated as long-term capital loss to the extent of any capital
gain distribution received with respect to those shares). Portfolio
distributions will be taxable to you even if they are paid from income or gains
earned by the Portfolio prior to your investment (and thus were included in the
price paid for your shares). Distributions will be taxable as described above
whether received in cash or in shares through the reinvestment of
distributions. Early in each year Mentor Funds will notify you of the amount
and tax status of distributions paid to you by the Portfolio for the preceding
year. In buying or selling securities for the Portfolio, Mentor Advisors and
Mentor Perpetual, as applicable, will not normally take into account the effect
any purchase or sale of securities will have on the tax positions of the
Portfolio's shareholders.
PERPETUAL GLOBAL EMERGING COMPANIES PORTFOLIO ONLY. Shareholders of the
Portfolio who are U.S. citizens or residents may be able to claim a foreign tax
credit or deduction on their U.S. income tax returns with respect to foreign
taxes paid by the Portfolio. If, at the end of the fiscal year of the
Portfolio, more than 50% of the Portfolio's total assets are represented by
stock or securities of foreign corporations, the Portfolio intends to make an
election permitted by the Internal Revenue Code to treat any eligible foreign
taxes it paid as paid by its shareholders. In that case, shareholders who are
U.S. citizens, U.S. corporations, and, in some cases, U.S. residents, will be
required to include in U.S. taxable income their pro rata share of such taxes,
but may then be entitled to claim a foreign tax credit or deduction (but not
both) for their share of such taxes.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends, distributions, and redemption proceeds
also may be subject to foreign, state, and local taxes. Shareholders are urged
to consult their tax advisers regarding specific questions as to federal,
foreign, state, or local taxes. Non-U.S. investors should consult their tax
advisers concerning the tax consequences of ownership of shares of the
Portfolio, including the possibility that distributions may be subject to a 30%
United States withholding tax (or a reduced rate of withholding provided by
treaty).
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MANAGEMENT
The Trustees of Mentor Funds are responsible for generally overseeing the
conduct of its business. MENTOR PERPETUAL ADVISORS, LLC is the investment
adviser to the Portfolio. The investment adviser is located at 901 East Byrd
Street, Richmond, Virginia.
All investment decisions made for the Portfolio by Mentor Perpetual are
made by investment management teams.
Mentor has over $14 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"). First Union is a leading financial services company with
approximately $234 billion in assets and $17 billion in total stockholders'
equity as of September 30, 1998. EVEREN Capital Corporation has a 20% ownership
in Mentor Investment Group and may acquire additional ownership based
principally on the amount of Mentor's revenues derived from assets attributable
to clients of EVEREN Securities, Inc. and its affiliates.
Mentor Perpetual, an investment advisory firm organized in 1995, is owned
equally by Perpetual plc, a diversified financial services holding company, and
Mentor Advisors. The Perpetual organization currently serves as investment
adviser for assets of more than $14 billion. Its clients include 28 unit and
investment trusts and other public investment pools including private
individuals, charities, pension plans, and life assurance companies.
Mentor Advisors and Mentor Perpetual together serve as investment adviser
to 27 separate investment portfolios in the Mentor Family of Funds, including
that offered by this Prospectus. For a prospectus relating to certain of these
other investment portfolios, and for information concerning your eligibility to
purchase shares of those portfolios, contact Mentor Services Company.
The Portfolio pays management fees to Mentor Perpetual at the annual rates
described above under "Expense Summary -- Annual Portfolio Operating Expenses".
[The advisory fees paid by the Portfolio are higher than those paid by many
other mutual funds.] Mentor Perpetual may from time to time voluntarily waive
some or all of its investment advisory fees and may terminate any such
voluntary waiver at any time in its sole discretion [?].
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 0.10% of the
Portfolio's average daily net assets.
GENERAL INFORMATION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided
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without shareholder approval into two or more classes of shares having such
preferences and special or relative rights and privileges as the Trustees
determine. The Trust's shares are currently divided into twelve series with
varying investment objectives and policies. Certain of the Trust's Portfolios
offer more than one class of shares with different sales charges and expenses.
The Portfolio currently offers three classes of shares: Class A and Class
B shares, which are offered by this Prospectus; and Class Y (Institutional)
shares, which are not subject to any sales loads or shareholder servicing fees.
Contact Mentor Services Company for information concerning Class A and Class B
shares.
Each share has one vote, with fractional shares voting proportionally.
Shares of each class will vote together as a single class except when required
by law or determined by the Trustees. Shares of the Portfolio are freely
transferable, are entitled to dividends as declared by the Trustees, and, if
the Portfolio was liquidated, would receive the net assets of the Portfolio.
The Trust may suspend the sale of shares at any time and may refuse any order
to purchase shares. Although neither the Portfolio nor the Trust is required to
hold annual meetings of shareholders, shareholders have the right to call a
meeting to elect or remove Trustees, or to take other actions as provided in
the Declaration of Trust.
The Portfolio receives services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of the software to distinguish the Year 2000 from the
Year 1900. Mentor Advisors and Mentor Perpetual is taking steps that they
believe are reasonably designed to address this potential "Year 2000" problem
and to obtain satisfactory assurances that comparable steps are being taken by
the Portfolio's other major service providers. There can be no assurance,
however, that these steps will be sufficient to avoid any adverse impact on the
Portfolio from this problem.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and
dividend agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about Class Y shares of the Portfolio. The Portfolio's "yield"
is calculated by dividing the Portfolio's annualized net investment income per
Y share of the class in question during a recent 30-day period by the maximum
public offering price per Y share of that class on the last day of that period.
"Total return" of the Portfolio's Y shares for the one-, five-, and ten-year
periods (or for the life of the Class,if shorter) through the most recent
calendar quarter represents the average annual compounded rate of return on an
investment of $1,000 in the Portfolio's Y shares over the period. Total return
may also be presented for other periods or based on investment at reduced sales
charge levels or at net asset value. Investment performance of different
classes of shares of the Portfolio will differ. Any quotation of investment
performance not reflecting a CDSC or maximum front-end sales charge would be
reduced if the CDSC or front-end sales charges were reflected. Quotations of
yield or total return for a period when an expense limitation was in effect
will be greater than if the limitation had not been in effect. A Portfolio's
performance
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may be compared to various indices. See the Statement of Additional Information
for more information. Information may be presented in advertisements about a
Portfolio describing the background and professional experience of Mentor
Perpetual's or any of its personnel.
ALL DATA ARE BASED ON THE PORTFOLIO'S PAST INVESTMENT RESULTS AND DO NOT
PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses, and which class of
shares you purchase. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These
factors should be considered when comparing the Portfolio's investment results
to those of other mutual funds and other investment vehicles.
As permitted by applicable law, performance information for the Portfolio
whose investment adviser or sub-adviser has changed may be presented only for
periods after the change was effected.
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APPENDIX
MOODY'S INVESTORS SERVICE, INC., BOND RATINGS
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 edged." 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.
Ba -- Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principle
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS
AAA -- An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
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A -- An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligations. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition, or the taking of a
similar action if payments on an obligation are jeopardized.
MOODY'S NOTE RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
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STANDARD AND POOR'S NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess overwhelming safety characteristics are given a plus sign (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of saety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
18
<PAGE>
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<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
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 INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1999 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
MENTOR FUNDS
MENTOR PERPETUAL GLOBAL EMERGING COMPANIES
PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
Y SHARES
April , 1999
[MENTOR LOGO]
<PAGE>
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 INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1999 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
[MENTOR LOGO]
MENTOR FUNDS
MENTOR PERPETUAL GLOBAL EMERGING COMPANIES
PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
Y SHARES
April , 1999
[EVEREN LOGO]
<PAGE>
P R O S P E C T U S April , 1999
(Class A and B Shares)
Mentor High Yield Portfolio
Mentor High Yield Portfolio seeks high total return by investing primarily
in fixed income securities that Mentor Investment Advisors, LLC believes have
the potential for high current income, capital appreciation, or both. The
Portfolio is a series of shares of Mentor Funds.
The Portfolio invests primarily in lower-rated bonds, commonly known as
"junk bonds." Investments of this type are subject to a greater risk of loss of
principal and non-payment of interest. Investors should carefully assess the
risks associated with an investment in the Portfolio. The Portfolio may also
trade securities for short-term profits. For a description of these strategies
and the related risks, see "Investment objectives and policies" in this
Prospectus. The Portfolio may use "leverage" -- that is, it may borrow money to
purchase additional portfolio securities, which involves special risks. See
"Other Investment Practices and Risk Factors."
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus carefully and retain it for future reference. YOU CAN FIND MORE
DETAILED INFORMATION IN THE APRIL , 1999 STATEMENT OF ADDITIONAL INFORMATION,
AS AMENDED FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT OR FOR OTHER
INFORMATION, PLEASE 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. The address of Mentor Funds is
P.O. Box 1357, Richmond, Virginia 23218-1357.
----------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Expense Summary ...................................... 3
Investment Objectives and Policies ................... 5
Other Investment Practices and Risk Factors .......... 6
Valuing the Portfolio's Shares ....................... 14
Sales Arrangements ................................... 14
How To Buy Shares .................................... 15
Distribution Plans (Class B Shares) .................. 20
How To Sell Shares ................................... 20
How To Exchange Shares ............................... 22
How Distributions Are Made ........................... 22
Taxes ................................................ 22
Management ........................................... 23
Other Services ....................................... 23
General Information .................................. 24
Performance Information .............................. 25
APPENDIX ............................................. 27
</TABLE>
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur
in respect of its Class A and B shares during its first fiscal year. The
Examples show the cumulative expenses attributable to a hypothetical $1,000
investment in the Class A and Class B shares of the Portfolio over specified
periods.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES(1)
--------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ......................................... 4.75% None
Maximum Sales Charge Imposed on Reinvested Dividends ......................... None None
Exchange Fee ................................................................. None None
Contingent Deferred Sales Charge (as a percentage of the lower of the original
purchase price or redemption proceeds of shares redeemed)
Class A Shares: ............................................................ None(2)
</TABLE>
<TABLE>
<S> <C>
Class B Shares(3)(4): ......... 4.0% in the first year, declining to 1.0% in the sixth
year, and eliminated thereafter
</TABLE>
- ----------
(1) Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
(2) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that are purchased without an initial sales charge as part of an
investment of over $1 million that are redeemed within one year of
purchase.
(3) The amount redeemed is computed as the lesser of the current net asset
value of the shares redeemed, and the original purchase price of the
shares. See "How to Buy Shares."
(4) Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1.00% if the shares are redeemed
within one year of purchase. See "How to Buy Shares -- the BL Purchase
Program."
3
<PAGE>
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
HIGH
YIELD
-----------
<S> <C>
CLASS A SHARES
Investment Advisory Fee .................... 0.35%
12b-1 Fees ................................. None
Other Expenses
Shareholder Service Plan Fees ............. 0.25%
Other Expenses ............................ 0.35%
Total Other Expenses ....................... 0.60%
Total Portfolio Operating Expenses ......... 0.95%
CLASS B SHARES
Investment Advisory Fee .................... 0.35%
12b-1 Fees ................................. 0.50%
Other Expenses
Shareholder Service Plan Fees ............. 0.25%
Other Expenses ............................ 0.35%
Total Other Expenses ....................... 0.60%
Total Portfolio Operating Expenses ......... 1.45%
</TABLE>
- ----------
* Other Expenses are estimated based on the expenses the Portfolio expects to
incur during its first full year of operations.
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and no redemption at the end of each period:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- --------
<S> <C> <C>
1 year .................. $57 $15
3 years ................. $76 $46
</TABLE>
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- --------
<S> <C> <C>
1 year .................. $57 $55
3 years ................. $76 $76
</TABLE>
THIS INFORMATION IS PROVIDED TO HELP INVESTORS UNDERSTAND THE EXPENSES OF
INVESTING IN THE PORTFOLIO AND AN INVESTOR'S SHARE OF THE ESTIMATED OPERATING
EXPENSES OF THE PORTFOLIO. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE PERFORMANCE; ACTUAL EXPENSES MAY VARY.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Portfolio's investment objective is to seek high total return. It
seeks its objective by investing primarily in fixed income securities that
Mentor Investment Advisors LLC, ("Mentor Advisors"), the Portfolio's investment
adviser, believes have the potential for high current income, capital
appreciation, or both. The Portfolio is not intended to be a complete
investment program, and there is no assurance it will achieve its objective.
The Portfolio is a diversified investment company.
The Portfolio may invest in both lower-rated and higher-rated fixed-income
securities, including debt securities, convertible securities, and preferred
stocks that are consistent with its primary investment objective of high
current income. The Portfolio's remaining assets may be held in cash or money
market instruments, or invested in common stocks and other equity securities.
The Portfolio may at times hold a substantial portion of its assets in
mortgage-backed and other asset-backed securities.
The Portfolio may invest in certain securities because they offer high
current income. The Portfolio may invest in other securities because Mentor
Advisors expects them to appreciate in value as a result of declines in
long-term interest rates or of favorable developments affecting the business or
prospects of the issuer which may improve the issuer's financial condition and
credit rating.
The Portfolio may invest in securities of any maturity. Mentor Advisors
will adjust the expected average life of the investments held in the Portfolio
from time to time, depending on its assessment of relative yields and risks of
securities of different maturities and its expectations of future changes in
interest rates. At times when the expected average life of the investments held
by the Portfolio is longer, the values of the securities held by the Portfolio
will generally change more in response to changes in interest rates than at
times when the expected average life is shorter.
The Portfolio will normally invest at least 65% of its assets in
securities rated Baa or lower by Moody's or BBB or lower by Standard & Poor's
and in unrated securities determined by Mentor Advisors to be of comparable
quality. The Portfolio will normally invest a substantial portion of its assets
in securities rated below Baa by Moody's or BBB by Standard & Poor's and in
unrated securities determined by Mentor Advisors to be of comparable quality.
Securities rated below Baa by Moody's or BBB by Standard & Poor's are
considered to be predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligations.
Securities in the lowest rating categories may have extremely poor prospects of
attaining any real investment standing and may be in default. The rating
services' descriptions of securities in the lower rating categories, including
their speculative characteristics, are set forth in the Appendix to this
Prospectus. See "Other Investment Practices and Risk Factors -- lower-rated
securities," below.
The Portfolio may at times invest up to 10% of its assets in securities
rated in the lowest grades (Ca or C in the case of Moody's and CC, C, or D in
the case of Standard & Poor's) or in unrated securities determined by Mentor
Advisors to be of comparable quality, if Mentor Advisors believes that there
are prospects for an upgrade in a security's rating or a favorable conversion
of a security into other securities. The Portfolio might also invest in such
securities if Mentor Advisors were to believe that, upon completion of any
contemplated exchange offer or reorganization involving a security or its
issuer, the Portfolio would receive securities or other assets offering
significant opportunities for capital appreciation or future high rates of
current income.
5
<PAGE>
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate.
At times, Mentor Advisors may judge that conditions in the securities
markets make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times Mentor Advisors may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the value of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio may invest without limitation in money
market instruments and in U.S. Government or agency obligations, or invest in
any other fixed-income security Mentor Advisors considers consistent with such
defensive strategies. It is impossible to predict when, or for how long, the
Portfolio will use such alternative strategies.
The Portfolio will not invest more than 15% of its net assets (determined
at the time of investment) in securities determined to be illiquid. Certain
securities that are restricted as to resale may nonetheless be resold by the
Portfolio in accordance with Rule 144A under the Securities Act of 1933, as
amended. Such securities may be determined by Mentor Advisors to be liquid for
purposes of compliance with the limitation on the Portfolio's investment in
illiquid securities. There can, however, be no assurance that the Portfolio
will be able to sell such securities at any time when Mentor Advisors deems it
advisable to do so or at prices prevailing for comparable securities that are
more widely held.
OTHER INVESTMENT PRACTICES AND RISK FACTORS
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of these practices and certain risks they may involve.
LOWER-RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY
TO ASSUME THE RISKS OF OWNING SHARES OF A MUTUAL FUND THAT INVESTS IN
LOWER-RATED SECURITIES (SOMETIMES REFERRED TO AS "JUNK BONDS") BEFORE MAKING AN
INVESTMENT IN THE PORTFOLIO. The lower ratings of lower-rated securities held
by the Portfolio reflect a greater possibility that adverse changes in the
financial condition of the issuer, or in general economic conditions, or both,
or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payment of interest and principal would
likely make the values of securities held by the Portfolio more volatile and
could limit the Portfolio's ability to sell its securities at prices
approximating the values the Portfolio had placed on such securities. It is
possible that legislation may be adopted in the future limiting the ability of
certain financial institutions to purchase lower-rated securities; such
legislation may adversely affect the liquidity of such securities. In the
absence of a liquid trading market for securities held by it, the Portfolio may
be unable at times to establish the fair market value of such securities. The
rating assigned to a security by Moody's or Standard & Poor's does not reflect
an assessment of the volatility of the security's market value or of the
liquidity of an investment in the security. For more information about the
rating services' descriptions of lower-rated securities, see the Appendix to
this Prospectus.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
6
<PAGE>
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the values of these investments. Changes in the
values of portfolio securities generally will not affect cash income derived
from such securities, but will affect the Portfolio's net asset value. The
Portfolio will not necessarily dispose of a security when its rating is reduced
below its rating at the time of purchase, although Mentor Advisors will monitor
the investment to determine whether continued investment in the security will
assist in meeting the Portfolio's investment objectives.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may not have more traditional methods of financing available to
them, and may be unable to repay debt at maturity by refinancing. The risk of
loss due to default in payment of interest or principal by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness. Certain of the
lower-rated securities in which the Portfolio may invest are issued to raise
funds in connection with the acquisition of a company, in so-called "leveraged
buy-out" transactions. The highly leveraged capital structure of such issuers
may make them especially vulnerable to adverse changes in economic conditions.
The Portfolio may invest in lower-rated securities which trade
infrequently or in more limited volume than higher-rated securities (including
illiquid securities), or which are restricted as to resale. In addition, a
substantial portion of the Portfolio's assets may at times be invested in
securities as to which the Portfolio, by itself or together with other accounts
managed by Mentor Advisors and its affiliates hold a major portion or all of
such securities, which may limit the liquidity of such securities. The
Portfolio could find it difficult or impossible to sell illiquid securities
when Mentor Advisors believes it advisable to do so or may be able to sell such
securities only at prices lower than if such securities were more widely held.
In many cases, such securities may be purchased in private placements and,
accordingly, will be subject to restrictions on resale as a matter of contract
or under securities laws. Under such circumstances, it may also be more
difficult to determine the fair value of such securities for purposes of
computing the Portfolio's net asset value. In order to enforce its rights in
the event of a default under securities in cases where the Portfolio holds a
major portion or all of the outstanding issue, the Portfolio may be required to
take possession of and manage assets securing the issuer's obligations on such
securities, which may increase the Portfolio's operating expenses and adversely
affect the Portfolio's net asset value. The Portfolio may also be limited in
its ability to enforce its rights and may incur greater costs in enforcing its
rights in the event an issuer becomes the subject of bankruptcy proceedings.
The Portfolio may at times invest in so-called "payment-in-kind" bonds.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Payment-in-kind
bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks
than bonds that pay interest currently. Even though such bonds do not pay
current interest in cash, the Portfolio is nonetheless required for Federal
income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
7
<PAGE>
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates, the
Portfolio may not be able to reinvest the proceeds in securities providing the
same investment return as the securities redeemed.
Mentor Advisors seeks to minimize the risks involved in investing in
lower-rated securities through diversification and careful investment analysis.
When the Portfolio invests in high yield securities in the lower rating
categories, achievement of the Portfolio's goals depends more on its adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. The Portfolio
may invest in mortgage-backed certificates and other securities representing
ownership interests in mortgage pools, including CMOs. Interest and principal
payments on the mortgages underlying mortgage-backed securities are passed
through to the holders of the mortgage-backed securities. Mortgage-backed
securities currently offer yields higher than those available from many other
types of fixed-income securities but because of their prepayment aspects, their
price volatility and yield characteristics will change based on changes in
prepayment rates. As a result, mortgage-backed securities are less effective
than other securities as a means of "locking in" long-term interest rates.
Generally, prepayment rates increase if interest rates fall and decrease if
interest rates rise. For many types of mortgage-backed securities, this can
result in unfavorable changes in price and yield characteristics in response to
changes in interest rates and other market conditions. For example, as a result
of their prepayment aspects, mortgage-backed securities have less potential for
capital appreciation during periods of declining interest rates than other
fixed-income securities of comparable maturities, although such obligations may
have a comparable risk of decline in market value during periods of rising
interest rates.
Mortgage-backed securities have yield and maturity characteristics that
are dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include
both interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed
securities, especially during periods of declining interest rates. Similarly,
during periods of rising interest rates, a reduction in the rate of prepayments
may significantly lengthen the effective durations of such securities.
The Portfolio may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are usually structured with two classes that receive
different portions of the interest and principal distributions on a pool of
mortgage assets. The Portfolio may invest in both the interest-only -- or "IO"
- -- class and the principal-only -- or "PO" -- class. The yield to maturity and
price of an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the
Portfolio's net asset value. This would typically be the case in an environment
of falling interest rates. If the underlying mortgage assets experience greater
than anticipated prepayments of principal, the Portfolio may under some
circumstances fail to fully recoup its initial investment in these securities.
Conversely, POs tend to increase in value if prepayments are greater than
anticipated and decline if prepayments are slower than anticipated. The
secondary market for stripped mortgage-backed securities may be more volatile
and less liquid than that for other mortgage-backed securities, potentially
limiting the Portfolio's ability to buy or sell those securities at any
particular time.
8
<PAGE>
Certain mortgage-backed securities held by the Portfolio may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may invest in securities representing interests in other
types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security
interest in the underlying assets may be limited. For example, the laws of
certain states may prevent or restrict repossession of collateral from a
debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
property, including collateralized mortgage obligation "residual" interests.
"Residual" interests represent the right to any excess cash flow remaining
after all other payments are made among the various tranches of interests
issued by structured mortgage-backed vehicles. The values of such interests are
extremely sensitive to changes in interest rates and in prepayment rates on the
underlying mortgages. In the event of a significant change in interest rates or
other market conditions, the value of an investment by the Portfolio in such
interests could be substantially reduced and the Portfolio may be unable to
dispose of the interests at prices approximating the values the Portfolio had
previously assigned to them or to recoup its initial investment in the
interests. The Portfolio may invest in new types of mortgage-related securities
that may be developed and marketed from time to time. If the Portfolio was to
invest in such newly developed securities, shareholders would, where
appropriate, be notified and this Prospectus would be revised accordingly.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio may
invest in a wide variety of such securities, including mortgage-backed and
other asset-backed securities that will pay principal or interest only under
certain circumstances, or in amounts that may increase or decrease
substantially depending on changes in interest rates or other market factors.
Such securities may experience extreme price volatility in response to changes
in interest rates or other market factors; this may be especially true in the
case of securities where the amounts of principal or interest paid, or the
timing of such payments, varies widely depending on prevailing interest rates.
Mentor Advisors may not be able to obtain current market quotations for
certain mortgage-backed or asset-backed securities at all times, or to obtain
market quotations believed by it to reflect the values of such securities
accurately. In such cases, the Portfolio's investment adviser or sub-adviser
may be required to estimate the value of such a security using quotations
provided by pricing services or securities dealers making a market in such
securities, or based on other comparable securities or other bench-mark
securities or interest rates. Mortgage-backed and other asset-backed securities
in which the Portfolio may invest may be highly illiquid, and the Portfolio may
not be able to sell such a security at a particular time or at the value it has
placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, Mentor Advisors will be required to estimate the
extent to which the values of the securities are likely to change in response
to changes in interest rates or other market conditions, and the rate at which
prepayments on the underlying mortgages or other assets are likely to occur
under different scenarios. There can be no assurance that the Portfolio's
investment adviser will be able to predict the amount of principal or interest
to be paid on any security under
9
<PAGE>
different interest rate or market conditions or that its predictions will be
accurate, nor can there be any assurance that the Portfolio will recover the
entire amount of the principal paid by it to purchase any such securities.
ZERO-COUPON BONDS. The Portfolio may at times invest in so-called
"zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. Because zero-coupon bonds do not pay current
interest, their value is subject to greater fluctuation in response to changes
in market interest rates than bonds that pay interest currently. Zero-coupon
bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks
than bonds that pay interest currently. Even though such bonds do not pay
current interest in cash, the Portfolio is nonetheless required for federal
income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
PREMIUM SECURITIES. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although the Portfolio generally amortizes the amount of
any such premium into income, the Portfolio may recognize a capital loss if
such premium securities are called or sold prior to maturity and the call or
sale price is less than the purchase price. Additionally, the Portfolio may
recognize a capital loss if it holds such securities to maturity.
OPTIONS AND FUTURES. The Portfolio may buy and sell call and put options
on securities it owns to hedge against changes in net asset value or to realize
a greater current return. In addition, through the purchase and sale of futures
contracts and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return. In addition, the Portfolio may buy and
sell options and futures contracts (including index futures contracts,
described below) to implement changes in its asset allocations among various
market sectors, pending the sale of its existing investments and reinvestment
in new securities.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that
the Portfolio will be able to utilize these instruments effectively for the
purposes stated above. Although the Portfolio will only engage in options and
futures transactions for limited purposes, those transactions involve certain
risks which are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and
may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index
futures" contract is a contract to buy or sell units of a particular bond or
stock index at an agreed price on a specified future date. Depending on the
change in value of the index between the time when the Portfolio enters into
and terminates an index futures or option transaction, the Portfolio realizes a
gain or loss. The Portfolio may also, to the extent consistent with applicable
law, buy and sell index futures and options to increase investment return.
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<PAGE>
RISKS RELATED TO OPTIONS AND FUTURE STRATEGIES. Options and futures
transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
security or index or of the securities held by the Portfolio that are the
subject of a hedge. The successful use by the Portfolio of the strategies
described above further depends on the ability of its investment adviser or
sub-adviser to forecast market movements correctly. Other risks arise from the
Portfolio's potential inability to close out futures or options positions.
Although the Portfolio will enter into options or futures transactions only if
its investment adviser or sub-adviser believes that a liquid secondary market
exists for such option or futures contract, there can be no assurance that a
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price. Transactions in options and futures contracts involve
brokerage costs and may require the Portfolio to segregate assets to cover its
outstanding positions. For more information, see the Statement of Additional
Information. Federal tax considerations may also limit the Portfolio's ability
to engage in options and futures transactions.
The Portfolio's options and futures contract transactions will generally
be conducted on recognized exchanges. However, a Portfolio may purchase and
sell options in transactions in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would be unable to meet
their obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are not appropriate and when, in the opinion of Mentor Advisors,
the pricing mechanism and liquidity of the over-the-counter markets are
satisfactory and the participants are responsible parties likely to meet their
contractual obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolio's assets. (For
options that are "in-the-money" at the time of purchase, the amount by which
the option is "in-the-money" is excluded from this calculation.)
SECURITIES LOANS AND REPURCHASE AGREEMENTS. The Portfolio may lend
portfolio securities and may enter into repurchase agreements with banks,
broker/dealers, and other recognized financial institutions. The Portfolio may
enter into each type of transaction on up to one-third of its assets. These
transactions must be fully collateralized at all times, but involve some risk
to the Portfolio if the other party should default on its obligations and the
Portfolio is delayed or prevented from recovering the collateral.
LEVERAGE. The Portfolio may borrow money to invest in additional
securities. The Portfolio may engage in reverse repurchase agreements, forward
commitments, and dollar-roll transactions described below and in the Statement
of Additional Information, which may have the same economic effect as if the
Portfolio had borrowed money.
The use of borrowed money, known as "leverage," increases the Portfolio's
market exposure and risk and may result in losses. When the Portfolio has
borrowed money for leverage and its investments increase or decrease in value,
its net asset value will normally increase or decrease more than if it had not
borrowed money for this purpose. The interest that the Portfolio must pay on
borrowed money will reduce its net investment income, and may also either
offset any potential capital gains or increase any losses. The Portfolio
currently intends to use leverage in order to adjust the dollar-weighted
average duration of their portfolios. The Portfolio will not always borrow
money for investment and the extent to which the Portfolio will borrow money,
and the
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<PAGE>
amount it may borrow, depends on market conditions and interest rates.
Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse repurchase
agreements," "dollar-roll" transactions, and "forward commitments," described
below) that can exist at any one time will not exceed one-third of the value of
the Portfolio's total assets (less all liabilities of the Portfolio other than
the leverage).
REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. The Portfolio may
enter into "reverse" repurchase agreements with respect to up to one-third of
its assets. "Reverse" repurchase agreements generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the
securities at an agreed-upon price, date, and interest payment. The Portfolio
also may enter into forward commitments, in which the Portfolio buys securities
for future delivery. Reverse repurchase agreements and forward commitments
involve leverage, and may increase the Portfolio's overall investment exposure.
Their use by the Portfolio may result in losses.
DOLLAR-ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar-roll transactions with
respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar-roll transaction, the Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (I.E., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon
price. The mortgage-related securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories. Dollar-roll
transactions involve leverage, and may increase the Portfolio's overall
investment exposure. Their use by the Portfolio may result in losses.
FOREIGN SECURITIES. The Portfolio may invest in securities principally
traded in foreign markets. Since foreign securities are normally denominated
and traded in foreign currencies, the values of the Portfolio's assets may be
affected favorably or unfavorably by changes in currency exchange rates and by
exchange control regulations. There may be less information publicly available
about a foreign company than about a U.S. company, and foreign companies are
not generally subject to accounting, auditing, and financial reporting
standards and practices comparable to those in the United States. The
securities of some foreign companies are less liquid and at times more volatile
than securities of comparable U.S. companies. Foreign brokerage commissions and
other fees are also generally higher than in the United States. Foreign
settlement procedures and trade regulations may involve certain risks (such as
delay in payment or delivery of securities or in the recovery of the
Portfolio's assets held abroad) and expenses not present in the settlement of
domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. The laws of some foreign countries
may limit the Portfolio's ability to invest in securities of certain issuers
located in those foreign countries. Special tax considerations apply to foreign
securities. The Portfolio may buy or sell foreign currencies and options and
futures contracts on foreign currencies for hedging purposes in connection with
its foreign investments as described more fully below.
The Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization. Investments in
ADRs and GDRs are subject to many of the same risks of investing in foreign
securities generally.
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<PAGE>
The risks described above are typically increased to the extent that the
Portfolio invests in securities traded in underdeveloped and developing
nations, which are sometimes referred to as "emerging markets."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Portfolio may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future currency exchange rates. The Portfolio may engage in foreign
currency exchange transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect against changes in
the value of specific portfolio positions ("position hedging").
The Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which the
Portfolio contracts to purchase or sell a security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. The Portfolio may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection with transaction
hedging.
The Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange
currency at a future time at a rate or rates that may be higher or lower than
the spot rate. Foreign currency futures contracts are standardized exchange-
traded contracts and have margin requirements. For transaction hedging
purposes, the Portfolio may also purchase and sell call and put options on
foreign currency futures contracts and on foreign currencies.
The Portfolio may engage in position hedging to protect against a decline
in value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, the Portfolio may purchase or sell foreign currency futures
contracts and foreign currency forward contracts, and may purchase and sell put
and call options on foreign currency futures contracts and on foreign
currencies. In connection with position hedging, the Portfolio may also
purchase or sell foreign currencies on a spot basis.
Although there is no limit to the amount of the Portfolio's assets that
may be invested in foreign currency exchange and foreign currency forward
contacts, the Portfolio will only enter into such transactions to the extent
necessary to effect the hedging transactions described above.
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of
its portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of its portfolio, the Portfolio may enter into interest rate swaps
and other interest rate transactions, such as interest rate caps, floors, and
collars. Interest rate swaps involve the exchange by the Portfolio with another
party of different types of interest-rate streams (E.G. an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. The Portfolio intends to use
these interest rate transactions as a hedge and not as a speculative
investment. The Portfolio's ability to engage in certain interest rate
transactions may be limited by tax considerations.
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<PAGE>
The use of interest rate swaps and other interest rate transactions is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. If Mentor Advisors is incorrect in its forecasts of market
values, interest rates, or other applicable factors, the investment performance
of the Portfolio would be less favorable than it would have been if this
investment technique were not used.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by the Portfolio is known as "portfolio turnover." As a
result of the Portfolio's investment policies, under certain market conditions
its portfolio turnover rate may be higher than that of other mutual funds.
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestment in other securities. Such transactions may
result in realization of taxable gains. The portfolio turnover rate for the
High Yield Portfolio is not expected to exceed 200% for its first current
fiscal year.
VALUING THE PORTFOLIO'S SHARES
The Portfolio calculates the net asset value of a share of each class by
dividing the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on the
New York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and
assets are valued at their fair values. The net asset value for Class A shares
will generally differ from that of Class B shares due to the variance in daily
net income realized by and dividends paid on each class of shares, and any
differences in the expenses of the different classes.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rates or at such other rates as may be used in
accordance with procedures approved by the Trustees. As a result, fluctuations
in the values of such currencies in relation to the U.S. dollar will affect the
net asset value of the Portfolio's shares even though there has not been any
change in the values of such securities as quoted in such foreign currencies.
SALES ARRANGEMENTS
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
CLASS A SHARES. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to Buy Shares -- Class A
shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge,
but are subject to a CDSC of up to 4% if redeemed within five or six years,
depending on the Portfolio. Class B shares also bear 12b-1 fees. Class B shares
provide an investor the benefit of putting all of the investor's money to work
from the time the
14
<PAGE>
investment is made, but will have a higher expense ratio and pay lower
dividends than Class A shares due to the 12b-1 fees. If you purchase shares
through an asset-allocation program, you may also be eligible to purchase Class
B shares through the "BL Purchase Program." See "How to Buy Shares -- Class B
shares."
WHICH ARRANGEMENT IS FOR YOU? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. Investors purchasing shares through an asset-allocation program
may wish to purchase shares through the BL Purchase Program. For more
information about these sales arrangements, consult your investment dealer or
Mentor Services Company, Inc. ("Mentor Services Company"). Sales personnel may
receive different compensation depending on which class of shares they sell.
Investors may be charged a fee if they effect transactions through a broker or
agent. Shares may only be exchanged for shares of the same class of another
Mentor fund and for shares of Cash Resource U.S. Government Money Market Fund.
See "How to Exchange Shares."
HOW TO BUY SHARES
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little at $50. Investments under
IRAs and investments under qualified retirement plans are subject to a minimum
initial investment of $250. The minimum initial investment may be waived for
current and retired Trustees, and current and retired employees of Mentor Funds
or Mentor Services Company or its affiliates. You can buy Portfolio shares BY
COMPLETING THE ENCLOSED NEW ACCOUNT FORM and sending it to c/o Mentor Funds
Boston Financial Data Services at 2 Heritage Drive, North Quincy MA 02171,
along with a check or money order made payable to Mentor Funds; THROUGH YOUR
FINANCIAL INSTITUTION, which may be an investment dealer, a bank, or another
institution; OR THROUGH AUTOMATIC INVESTING. If you do not have a dealer,
Mentor Services Company can refer you to one.
AUTOMATIC INVESTMENT PLAN. Once you have made the initial minimum
investment in a Portfolio, you can make regular investments of $50 or more on a
monthly or quarterly basis through automatic deductions from your bank checking
account. Application forms are available from your investment dealer or through
Mentor Services Company.
Shares are sold at a price based on a Portfolio's net asset value next
determined after Mentor Distributors, LLC ("Mentor Distributors") receives your
purchase order. In most cases, in order to receive that day's public offering
price, Mentor Distributors or your investment dealer must receive your order
before the close of regular trading on the New York Stock Exchange. If you buy
shares through your investment dealer, the dealer must ensure that Mentor
Distributors receives your order before the close of regular trading on the New
York Stock Exchange for you to receive that day's public offering price.
CLASS A SHARES. The public offering price of Class A shares is the net
asset value plus a sales charge. The Portfolio receives the net asset value.
The sales charge varies depending on the size of your purchase and is allocated
between your investment dealer and Mentor Distributors.
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<PAGE>
The current sales charges for the Portfolio are:
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE OF AS A
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
--------------- -------------- ------------
<S> <C> <C> <C>
Less than $100,000........................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000........... 4.00% 4.17% 3.25%
$250,000 but less than $500,000........... 3.00% 3.09% 2.50%
$500,000 but less than $1 million......... 2.00% 2.04% 1.75%
$1 million or more........................ 0% 0% (see below)
</TABLE>
- ----------
* At the discretion of Mentor Distributors, the entire sales charge may at
times be reallowed to dealers. The Staff of the Securities and Exchange
Commission has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters.
There is no initial sales charge on purchases of Class A shares of $1
million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. A CDSC is also imposed on any shares
purchased without a sales charge as part of a purchase of shares of $1 million
or more under a purchase accumulation plan. Contact Mentor Services Company for
more information.
You may be eligible to buy Class A shares at reduced sales charges.
Consult your investment dealer or Mentor Services Company for details about
Quantity Discounts and Accumulated Purchases, Letters of Intent, the
Reinvestment Privilege, Concurrent Purchases, and the Automatic Investment
Plan. Descriptions are also included in the New Account Form or are available
from Mentor Services Company. Shares may be sold at net asset value to certain
categories of investors, including to shareholders of other investment
companies who invest in Mentor Funds in response to certain promotional
activities, and the CDSC may be waived under certain circumstances. The sales
charges shown above will not apply to shares purchased by you if you purchase
shares through EVEREN Securities, Inc. with the proceeds received by you within
the preceding 90 days from the sale of shares of most non-Mentor investment
companies and, to the extent permitted by applicable law, real estate
investment trusts. No CDSC will apply to these purchases. EVEREN Securities,
Inc., Mentor Distributors, Mentor Services Company, or their affiliates may
compensate your investment dealer in connection with any such purchase, in an
amount equal to a percentage of the purchase price of the shares. The amount of
such compensation, and the portion paid by Mentor Distributors, Mentor Services
Company, or their affiliates, will vary from time to time. Sales charges may
similarly not apply to shares purchased through financial institutions
affiliated with Mentor Investment Group or other financial institutions that
have made arrangements with Mentor Distributors. Contact your financial
institution or Mentor Services Company for more information. See "How to Buy
Shares -- General" below.
CLASS B SHARES. Class B shares are sold without an initial sales charge,
although a CDSC will be imposed if you redeem shares within five or six years
of purchase, depending on the Portfolio. The following types of
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<PAGE>
shares may be redeemed without charge: (i) shares acquired by reinvestment of
distributions and (ii) shares otherwise exempt from the CDSC, as described in
the Example below. The amount of CDSC is determined as a percentage of the
lesser of the current market value or the cost of the shares being redeemed.
The amount of the CDSC will depend on the number of years since you invested in
the shares being redeemed and the dollar amount being redeemed, according to
the following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEARS SINCE PURCHASE PAYMENT APPLICABLE AMOUNT
MADE REDEEMED
- ------------------------------ --------------------------
<S> <C>
1 4.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6 1.0%
7+ None
</TABLE>
For information on how sales charges are calculated if you exchange your
shares, see "How To Exchange Shares."
THE BL PURCHASE PROGRAM. If you purchase Class B shares through an
asset-allocation program sponsored by your broker-dealer or other financial
institution, you may elect to participate in the BL Purchase Program. Shares
purchased through this Program are not subject to the CDSC shown above. Rather,
a CDSC of 1.00% will be imposed on redemptions of such shares within the first
year after purchase, based on the lower of the shares' cost and current net
asset value. Your broker-dealer or other financial institution is responsible
for making the election on your behalf to invest through the Program.
Accordingly, if you wish to purchase shares through this Program, you should
instruct your broker-dealer or financial institution to do so.
GENERAL
The Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by Mentor Funds' current and retired Trustees
(and their families), current and retired employees (and their families) of
Mentor Services Company, each investment adviser or sub-adviser, and each of
their affiliates, registered representatives and other employees (and their
families) of broker-dealers having sales agreements with Mentor Distributors,
employees (and their families) of financial institutions having sales
agreements with Mentor Distributors (or otherwise having an arrangement with a
broker-dealer or financial institution with respect to sales of Portfolio
shares), financial institution trust departments investing an aggregate of $1
million or more in one or more funds in the Mentor family, clients of certain
administrators of tax-qualified plans, employer-sponsored retirement plans,
tax-qualified plans when proceeds from repayments of loans to participants are
invested (or reinvested) in funds in the Mentor family, shares redeemed under
the Portfolio's Systematic Withdrawal Plan (limited to 10% of a shareholder's
account in any calendar year), and "wrap accounts" for the benefit of clients
of financial planners adhering to certain standards established by Mentor
Services Company or its affiliates. The Portfolio may sell shares without a
sales charge or a CDSC in connection with the acquisition by the Portfolio of
assets of an investment company or personal holding company. In addition, the
CDSC may be
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<PAGE>
waived in the case of (i) redemptions of shares held at the time a shareholder
dies or becomes disabled, including the shares of a shareholder who owns the
shares with his or her spouse as joint tenants with right of survivorship,
provided that the redemption is requested within one year of the death or
initial determination of disability; (ii) redemptions in connection with the
following retirement plan distributions: (a) lump-sum or other distributions
from a qualified retirement plan following retirement; (b) distributions from
an IRA, Keogh Plan, or Custodial Account under Section 403(b)(7) of the
Internal Revenue Code following attainment of age 59 1/2; and (c) a tax-free
return of an excess contribution to an IRA; (iii) redemptions by pension or
profit sharing plans sponsored by Mentor Investment Group or an affiliate; and
(iv) redemptions by pension or profit sharing plans of which Mentor Investment
Group or any affiliate serves as a plan fiduciary. In addition, certain
retirement plans with over 200 employees may purchase Class A shares at net
asset value without a sales charge. In addition, the Portfolio may sell its
Class A shares without a sales charge and may waive the CDSC on shares redeemed
by shareholders investing through brokerage or similar accounts sponsored by
financial institutions having agreements with Mentor Distributors or Mentor
Services Company, Inc., where the shareholder pays account fees to its
financial institution based on the asset value of the shareholder's account
with the financial institution from time to time. The Portfolio may sell its
Class A shares without a sales charge to shareholders of other mutual funds who
invest in Mentor Funds in response to certain promotional activities (in which
case a CDSC of 1% may apply for a period of years after the purchase). Contact
Mentor Services Company. If you invest through a broker-dealer or other
financial institution, your broker-dealer or other financial institution will
be responsible for electing on your behalf to take advantage of any of these
reduced sales charges or waivers described above. Please instruct your
broker-dealer or other financial institution accordingly.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in,
shares of a Portfolio at net asset value.
In determining whether a CDSC is payable in respect of the shares
redeemed, a Portfolio will first redeem the shares held longest (together with
any shares received upon reinvestment of distributions with respect to those
shares). Any of the shares being redeemed which were acquired by reinvestment
of distributions will be redeemed without a CDSC, and amounts representing
capital appreciation will not be subject to a CDSC. See the Example below.
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<PAGE>
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 of those shares (including shares purchased through reinvestment
of distributions on those 100 shares) at this time, your CDSC will be
calculated as follows:
o Proceeds of 50 shares redeemed at $12 per share $600
o Minus proceeds of 10 shares not subject to a CDSC because they were
acquired through dividend reinvestment (10 x $12) -120
o Minus appreciation on remaining shares, also not subject to CDSC (40
x $2) -80
----
o Amount subject to a CDSC $400
Mentor Distributors receives the entire amount of any CDSC you pay. Consult
Mentor Services Company for more information.
If you are considering redeeming or exchanging shares of the Portfolio or
transferring shares to another person shortly after purchase, you should pay
for those shares with a certified check to avoid any delay in redemption,
exchange, or transfer. Otherwise the Portfolio may delay payment until the
purchase price of those shares has been collected or, if you redeem by
telephone, until 15 calendar days after the purchase date.
To eliminate the need for safekeeping, certificates will not be issued for
your shares unless you request them.
Because of the relatively high cost of maintaining accounts, the Portfolio
reserves the right to redeem, upon not less than 60 days' notice, any Portfolio
account below $500 as a result of redemptions. A shareholder may, however,
avoid such a redemption by the Portfolio by increasing investment in shares of
the Portfolio to a value of $500 or more during such 60-day period.
Mentor Distributors, Mentor Advisors, or affiliates thereof, at their own
expense and out of their own assets (or in conjunction with other entities),
may also periodically sponsor programs that offer additional compensation in
connection with sales of shares of the Portfolio. Compensation may include, but
is not limited to, financial assistance to dealers in connection with
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of Mentor Funds'
shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. Certain dealers may not sell all
classes of shares.
In all cases Mentor Advisors or the Distributor reserve the right to
reject any particular investment.
REINVESTMENT PRIVILEGE. If you redeem Class A or B shares of any
Portfolio, you have a one-time right, within 60 days, to reinvest the
redemption proceeds plus the amount of CDSC you paid, if any, at the next-
determined net asset value. Front-end sales charges will not apply to such
reinvestment. Mentor Distributors
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must be notified in writing by you or by your financial institution of the
reinvestment for you to recover the CDSC, or to eliminate the front-end sales
charge. If you redeem shares in the Portfolio, there may be tax consequences.
DISTRIBUTION PLANS (CLASS B SHARES)
Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus, Ohio
43219, is the principal distributor for the Portfolios' shares. Mentor
Distributors is not obligated to sell any specific amount of shares of any
Portfolio. Mentor Distributors is a wholly owned subsidiary of BISYS Fund
Services, Inc.
The Portfolio has adopted a Distribution Plan under Rule 12b-1 with
respect to its Class B shares (each, a "Class B Plan") providing for payments
by the Portfolio to its distributor from the assets attributable to the
Portfolio's Class B shares at the annual rate set out under "Expense Summary --
Annual Portfolio Operating Expenses" above. (The Trustees may reduce the amount
of payments or suspend the Class B Plan for such periods as they may determine.
The Portfolio's distributor also receives the proceeds of any CDSC imposed on
redemptions of shares).
Payments under the Plans are intended to compensate the Portfolio's
distributor for services provided and expenses incurred by it as principal
underwriter of the Portfolio's Class B shares. The Portfolio's distributor may
select financial institutions (such as a broker/dealer or bank) to provide
sales support services as agents for their clients or customers who
beneficially own Class B shares of the Portfolios. Financial institutions will
receive fees from the Portfolio's distributor based upon Class B shares owned
by their clients or customers. The schedules of such fees and the basis upon
which such fees will be paid will be determined from time to time by the
Portfolio's distributor. The Portfolio's distributor may suspend or modify such
payments to dealers. Such payments are also subject to the continuation of the
relevant Class B Plan, the terms of any agreements between dealers and the
Portfolio's distributor, and any applicable limits imposed by the National
Association of Securities Dealers, Inc.
Mentor Services Company, a wholly owned subsidiary of Mentor Investment
Group, provides marketing-related services in respect of the Portfolio. Mentor
Services Company and its affiliates will receive from Mentor Distributors
substantially all amounts received or retained by Mentor Distributors in
respect of the distribution of the Portfolio's shares, including any amounts
paid to Mentor Distributors under the Portfolio's Class B Plans. In addition,
Mentor Services Company receives from Mentor Distributors an amount equal to
all CDSC's received by Mentor Distributors.
HOW TO SELL SHARES
You can sell your shares in the Portfolio to that Portfolio any day the
New York Stock Exchange is open, either directly to the Portfolio or through
your investment dealer. The Portfolio will only redeem shares for which it has
received payment.
SELLING SHARES DIRECTLY TO THE PORTFOLIO. Send a signed letter of
instruction and stock power form, along with any certificates that represent
shares you want to sell, to Mentor Funds, c/o Boston Financial Data Services,
Inc. ("BFDS"), 2 Heritage Drive, North Quincy, Massachusetts 02171. The price
you will receive is the net asset value next calculated after your request is
received in proper form less any applicable CDSC. In order to receive
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that day's net asset value, your request must be received before the close of
regular trading on the New York Stock Exchange. If you sell shares having a net
asset value of $50,000 or more or if you want your redemption proceeds payable
to you at a different address or to someone else, the signatures of registered
owners or their legal representatives must be guaranteed by a bank,
broker-dealer, or certain other financial institutions. Contact Mentor Services
Company for more information about where to obtain a signature guarantee. Stock
power forms are available from your investment dealer, Mentor Services Company,
and many commercial banks. Mentor Distributor usually requires additional
documentation for the sale of shares by a corporation, partnership, agent, or
fiduciary, or surviving joint owner. Contact Mentor Services Company for
details.
SELLING SHARES BY TELEPHONE. You may use the Telephone Redemption
Privilege to redeem shares from your account unless you have notified Mentor
Services Company of an address change within the preceding 15 days. Unless an
investor indicates otherwise on the New Account Form, Mentor Services Company
will be authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide Mentor Services Company with his or her account
registration and address as it appears on Mentor Services Company's records.
Mentor Services Company will employ these and other reasonable procedures to
confirm that instructions communicated by telephone are genuine; if it fails to
employ reasonable procedures, Mentor Services Company may be liable for any
losses due to unauthorized or fraudulent instructions. For more information,
consult Mentor Services Company. During periods of unusual market changes and
shareholder activity, you may experience delays in contacting Mentor Services
Company by telephone in which case you may wish to submit a written redemption
request, as described above, or contact your investment dealer, as described
below. The Telephone Redemption Privilege may be modified or terminated without
notice.
SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must receive
your request before the close of regular trading on the New York Stock Exchange
to receive that day's net asset value. Your dealer will be responsible for
furnishing all necessary documentation to Mentor Services Company, and may
charge you for its services.
SYSTEMATIC WITHDRAWAL PROGRAM. You may redeem Class A or B shares of the
Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program
are not subject to a CDSC, but the aggregate withdrawals of Class B shares in
any year are limited to 10% of the value of the account at the time of
enrollment. Contact Mentor Services Company for more information.
GENERAL. The Portfolio generally sends you payment for your shares the
business day after your request is received. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part in securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
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HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in the
Portfolio worth at least $1,000 for shares of certain other portfolios in the
Mentor family at net asset value beginning 15 days after purchase. You may also
exchange shares of the Portfolio for shares of Cash Resource U.S. Government
Money Market Fund (the "Cash Fund"). If you exchange shares subject to a CDSC,
the transaction will not be subject to a CDSC. However, when you redeem the
shares acquired through the exchange, the redemption may be subject to the
CDSC, depending upon when you originally purchased the shares, using the
schedule of the Portfolio from which your first exchange was effected. For
purposes of computing the CDSC, the length of time you have owned your shares
will be measured from the date of original purchase and will not be affected by
any exchange.
For information on how to exchange your shares, contact Mentor Services
Company at 1-800-869-6042. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss. A
Telephone Exchange Privilege is currently available. Mentor Services Company's
procedures for telephonic transactions are described above under "How to Sell
Shares." The Telephone Exchange Privilege is not available if you were issued
certificates for shares which remain outstanding. Ask your investment dealer or
Mentor Services Company for a prospectus relating to the Cash Fund or the other
portfolios into which you may exchange your shares.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management
and have an adverse effect on all shareholders. In order to limit excessive
exchange activity and in other circumstances where Mentor Advisors or the
Trustees believe doing so would be in the best interests of the Portfolio, the
Trust reserves the right to revise or terminate the exchange privilege, limit
the amount or number of exchanges, or reject any exchange. Shareholders would
be notified of any such action to the extent required by law. See the Statement
of Additional Information to find out more about the exchange privilege.
HOW DISTRIBUTIONS ARE MADE
Dividends, if any, are declared daily and paid monthly. The Portfolio will
distribute its net capital gain, if any, at least annually. All dividends and
distributions of net capital gain will be invested in additional shares of the
same class of the Portfolio unless a shareholder requests in writing to receive
the dividend or distribution in cash.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to you as ordinary income, except that any distributions of net capital
gain will be taxed as long-term capital gain, regardless of how long you have
held the shares (although the loss on a sale of shares held for six months or
less will be treated as
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long-term capital loss to the extent of any capital gain distribution received
with respect to those shares). Portfolio distributions will be taxable to you
even if they are paid from income or gains earned by the Portfolio prior to
your investment (and thus were included in the price paid for your shares).
Distributions will be taxable as described above whether received in cash or in
shares through the reinvestment of distributions. Early in each year Mentor
Funds will notify you of the amount and tax status of distributions paid to you
by the Portfolio for the preceding year. In buying or selling securities for
the Portfolio, Mentor Advisors will not normally take into account the effect
any purchase or sale of securities will have on the tax positions of the
Portfolio's shareholders.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends, distributions, and redemption proceeds
also may be subject to foreign, state, and local taxes. Shareholders are urged
to consult their tax advisers regarding specific questions as to federal,
foreign, state, or local taxes. Non-U.S. investors should consult their tax
advisers concerning the tax consequences of ownership of shares of the
Portfolio, including the possibility that distributions may be subject to a 30%
United States withholding tax (or a reduced rate of withholding provided by
treaty).
MANAGEMENT
The Trustees of Mentor Funds are responsible for generally overseeing the
conduct of its business. MENTOR INVESTMENT ADVISORS, LLC is the investment
adviser to the Portfolio. The investment adviser is located at 901 East Byrd
Street, Richmond, Virginia.
All investment decisions made for the Portfolio by Mentor Advisors are
made by investment management teams.
Mentor Advisors has over $14 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"). First Union is a leading financial services
company with approximately $234 billion in assets and $17 billion in total
stockholders' equity as of December 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's revenues derived from assets
attributable to clients of EVEREN Securities, Inc. and its affiliates.
Mentor Advisors and Mentor Perpetual together serve as investment adviser
to 33 separate investment portfolios in the Mentor Family of Funds, including
that offered by this Prospectus. For a prospectus relating to certain of these
other investment portfolios, and for information concerning your eligibility to
purchase shares of those portfolios, contact Mentor Services Company.
The Portfolio pays management fees to Mentor Advisors at the annual rates
described above under "Expense Summary -- Annual Portfolio Operating Expenses".
Mentor Advisors may from time to time voluntarily waive some or all of its
investment advisory fees and may terminate any such voluntary waiver at any
time in its sole discretion [?].
OTHER SERVICES
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
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Portfolio, such as bookkeeping and accounting services. Mentor Investment Group
provides these services to each of the Portfolios at an annual rate of 0.10% of
the Portfolio's average daily net assets.
SHAREHOLDER SERVICING PLAN. Mentor Funds has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to Class A and Class B shares
of the Portfolio. Under the Service Plan, financial institutions will enter
into shareholder service agreements with Mentor Distributors to provide
administrative support services to their customers who are Portfolio
shareholders. In return for providing these support services, a financial
institution may receive payments at a rate not exceeding 0.25% of the average
daily net assets of the Class A or Class B shares of the Portfolio. These
administrative services may include, but are not limited to, the following
functions: providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer personnel, as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries
regarding the Portfolio; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Portfolio reasonably requests.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Advisors or by Mentor Investment
Group, or affiliates thereof, for providing administrative support services to
holders of Class A or Class B shares of the Portfolio. These payments will be
made directly by Mentor Advisors and/or Mentor Investment Group, or their
affiliates, and will not be made from the assets of any of the Portfolio.
GENERAL INFORMATION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into fourteen
series with varying investment objectives and policies. Certain of the Trust's
portfolios offer more than one class of shares with different sales charges and
expenses.
The Portfolio currently offers three classes of shares: Class A and Class
B shares, which are offered by this Prospectus; and Class Y (Institutional)
shares, which are not subject to any sales loads or shareholder servicing fees.
Contact Mentor Services Company for information concerning Class Y shares and
your eligibility to purchase shares of that class.
Each share has one vote, with fractional shares voting proportionally.
Shares of each class will vote together as a single class except when required
by law or determined by the Trustees. Shares of the Portfolio are freely
transferable, are entitled to dividends as declared by the Trustees, and, if
the Portfolio was liquidated, would receive the net assets of the Portfolio.
The Trust may suspend the sale of shares at any time and may refuse any order
to purchase shares. Although neither the Portfolio nor the Trust is required to
hold annual meetings of
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shareholders, shareholders have the right to call a meeting to elect or remove
Trustees, or to take other actions as provided in the Declaration of Trust.
The Portfolio receives services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of the software to distinguish the Year 2000 from the
Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by the
Portfolio's other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolio from this problem.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and
dividend agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about the Portfolio. The Portfolio's "yield" is calculated by
dividing the Portfolio's annualized net investment income per share of the
class in question during a recent 30-day period by the maximum public offering
price per share of that class on the last day of that period. "Total return"
for the one-, five-, and ten-year periods (or for the life of the Portfolio, if
shorter) through the most recent calendar quarter represents the average annual
compounded rate of return on an investment of $1,000 in the Portfolio at the
maximum public offering price (in the case of Class A shares) and reflecting
(in the case of Class B shares) the deduction of any applicable CDSC. Total
return may also be presented for other periods or based on investment at
reduced sales charge levels or at net asset value. Investment performance of
different classes of shares of the Portfolio will differ. Any quotation of
investment performance not reflecting a CDSC or maximum front-end sales charge
would be reduced if the CDSC or front-end sales charges were reflected.
Quotations of yield or total return for a 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 for more information. Information may be presented in
advertisements about a Portfolio describing the background and professional
experience of the Portfolio's investment adviser, sub-adviser, or any of their
personnel.
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ALL DATA ARE BASED ON THE PORTFOLIO'S PAST INVESTMENT RESULTS AND DO NOT
PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses, and which class of
shares you purchase. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These
factors should be considered when comparing the Portfolio's investment results
to those of other mutual funds and other investment vehicles.
As permitted by applicable law, performance information for the Portfolio
whose investment adviser or sub-adviser has changed may be presented only for
periods after the change was effected.
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APPENDIX
MOODY'S INVESTORS SERVICE, INC., BOND RATINGS
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 edged." 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.
Ba -- Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principle
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS
AAA -- An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
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A -- An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligations. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition, or the taking of a
similar action if payments on an obligation are jeopardized.
MOODY'S NOTE RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
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STANDARD AND POOR'S NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess overwhelming safety characteristics are given a plus sign (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of saety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
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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 INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1999 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
MENTOR FUNDS
MENTOR HIGH YIELD PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
April , 1999
[MENTOR LOGO]
<PAGE>
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 INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1999 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
[MENTOR LOGO]
MENTOR FUNDS
MENTOR HIGH YIELD PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
April , 1999
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P R O S P E C T U S April , 1999
Y (Institutional) Shares
Mentor High Yield Portfolio
Mentor High Yield Portfolio seeks high total return by investing primarily
in fixed income securities that Mentor Investment Advisors, LLC believes have
the potential for high current income, capital appreciation, or both. The
Portfolio is a series of shares of Mentor Funds.
The Portfolio invests primarily in lower-rated bonds, commonly known as
"junk bonds." Investments of this type are subject to a greater risk of loss of
principal and non-payment of interest. Investors should carefully assess the
risks associated with an investment in the Portfolio. The Portfolio may also
trade securities for short-term profits. For a description of these strategies
and the related risks, see "Investment objectives and policies" in this
Prospectus. The Portfolio may use "leverage" -- that is, it may borrow money to
purchase additional portfolio securities, which involves special risks. See
"Other Investment Practices and Risk Factors."
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus carefully and retain it for future reference. YOU CAN FIND MORE
DETAILED INFORMATION IN THE APRIL , 1999 STATEMENT OF ADDITIONAL INFORMATION,
AS AMENDED FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT OR FOR OTHER
INFORMATION, PLEASE 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. The address of Mentor Funds is
P.O. Box 1357, Richmond, Virginia 23218-1357.
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Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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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TABLE OF CONTENTS
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Expense Summary ...................................... 3
Investment Objectives and Policies ................... 4
Other Investment Practices and Risk Factors .......... 5
Valuing the Portfolio's Shares ....................... 13
Purchase of Shares ................................... 13
Redemption of Shares ................................. 14
How To Exchange Shares ............................... 15
How Distributions Are Made ........................... 16
Taxes ................................................ 16
Management ........................................... 16
General Information .................................. 17
Performance Information .............................. 18
APPENDIX ............................................. 20
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EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur
in respect of its Class Y shares during its first fiscal year. The Examples
show the cumulative expenses attributable to a hypothetical $1,000 investment
in Class Y shares of the Portfolio over specified periods.
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ......................... None
Maximum Sales Charge Imposed on Reinvested Dividends ......... None
Exchange Fee ................................................. None
Contingent Deferred Sales Charge ............................. None
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ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
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Investment Advisory Fee .................... 0.35%
12b-1 Fees ................................. None
Other Expenses
Shareholder Service Plan Fees ............. None
Other Expenses ............................ 0.35%
Total Other Expenses ....................... 0.35%
Total Portfolio Operating Expenses ......... 0.70%
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* Other Expenses are estimated based on the expenses the Portfolio expects to
incur during its first full year of operations.
[Mentor Investment Advisors, LLC has agreed to limit its Management Fees
from the Portfolio.]
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and no redemption at the end of each period:
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1 year .................... $42
3 years ................... $56
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THIS INFORMATION IS PROVIDED TO HELP INVESTORS UNDERSTAND THE EXPENSES OF
INVESTING IN THE PORTFOLIO AND AN INVESTOR'S SHARE OF THE ESTIMATED OPERATING
EXPENSES OF THE PORTFOLIO. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE PERFORMANCE; ACTUAL EXPENSES MAY VARY.
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INVESTMENT OBJECTIVES AND POLICIES
The Portfolio's investment objective is to seek high total return. It
seeks its objective by investing primarily in fixed income securities that
Mentor Investment Advisors LLC, ("Mentor Advisors"), the Portfolio's investment
adviser, believes have the potential for high current income, capital
appreciation, or both. The Portfolio is not intended to be a complete
investment program, and there is no assurance it will achieve its objective.
The Portfolio is a diversified investment company.
The Portfolio may invest in both lower-rated and higher-rated fixed-income
securities, including debt securities, convertible securities, and preferred
stocks that are consistent with its primary investment objective of high
current income. The Portfolio's remaining assets may be held in cash or money
market instruments, or invested in common stocks and other equity securities.
The Portfolio may at times hold a substantial portion of its assets in
mortgage-backed and other asset-backed securities.
The Portfolio may invest in certain securities because they offer high
current income. The Portfolio may invest in other securities because Mentor
Advisors expects them to appreciate in value as a result of declines in
long-term interest rates or of favorable developments affecting the business or
prospects of the issuer which may improve the issuer's financial condition and
credit rating.
The Portfolio may invest in securities of any maturity. Mentor Advisors
will adjust the expected average life of the investments held in the Portfolio
from time to time, depending on its assessment of relative yields and risks of
securities of different maturities and its expectations of future changes in
interest rates. At times when the expected average life of the investments held
by the Portfolio is longer, the values of the securities held by the Portfolio
will generally change more in response to changes in interest rates than at
times when the expected average life is shorter.
The Portfolio will normally invest at least 65% of its assets in
securities rated Baa or lower by Moody's or BBB or lower by Standard & Poor's
and in unrated securities determined by Mentor Advisors to be of comparable
quality. The Portfolio will normally invest a substantial portion of its assets
in securities rated below Baa by Moody's or BBB by Standard & Poor's and in
unrated securities determined by Mentor Advisors to be of comparable quality.
Securities rated below Baa by Moody's or BBB by Standard & Poor's are
considered to be predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligations.
Securities in the lowest rating categories may have extremely poor prospects of
attaining any real investment standing and may be in default. The rating
services' descriptions of securities in the lower rating categories, including
their speculative characteristics, are set forth in the Appendix to this
Prospectus. See "Other Investment Practices and Risk Factors -- lower-rated
securities," below.
The Portfolio may at times invest up to 10% of its assets in securities
rated in the lowest grades (Ca or C in the case of Moody's and CC, C, or D in
the case of Standard & Poor's) or in unrated securities determined by Mentor
Advisors to be of comparable quality, if Mentor Advisors believes that there
are prospects for an upgrade in a security's rating or a favorable conversion
of a security into other securities. The Portfolio might also invest in such
securities if Mentor Advisors were to believe that, upon completion of any
contemplated exchange offer or reorganization involving a security or its
issuer, the Portfolio would receive securities or other assets offering
significant opportunities for capital appreciation or future high rates of
current income.
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Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate.
At times, Mentor Advisors may judge that conditions in the securities
markets make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times Mentor Advisors may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the value of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio may invest without limitation in money
market instruments and in U.S. Government or agency obligations, or invest in
any other fixed-income security Mentor Advisors considers consistent with such
defensive strategies. It is impossible to predict when, or for how long, the
Portfolio will use such alternative strategies.
The Portfolio will not invest more than 15% of its net assets (determined
at the time of investment) in securities determined to be illiquid. Certain
securities that are restricted as to resale may nonetheless be resold by the
Portfolio in accordance with Rule 144A under the Securities Act of 1933, as
amended. Such securities may be determined by Mentor Advisors to be liquid for
purposes of compliance with the limitation on the Portfolio's investment in
illiquid securities. There can, however, be no assurance that the Portfolio
will be able to sell such securities at any time when Mentor Advisors deems it
advisable to do so or at prices prevailing for comparable securities that are
more widely held.
OTHER INVESTMENT PRACTICES AND RISK FACTORS
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of these practices and certain risks they may involve.
LOWER-RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY
TO ASSUME THE RISKS OF OWNING SHARES OF A MUTUAL FUND THAT INVESTS IN
LOWER-RATED SECURITIES (SOMETIMES REFERRED TO AS "JUNK BONDS") BEFORE MAKING AN
INVESTMENT IN THE PORTFOLIO. The lower ratings of lower-rated securities held
by the Portfolio reflect a greater possibility that adverse changes in the
financial condition of the issuer, or in general economic conditions, or both,
or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payment of interest and principal would
likely make the values of securities held by the Portfolio more volatile and
could limit the Portfolio's ability to sell its securities at prices
approximating the values the Portfolio had placed on such securities. It is
possible that legislation may be adopted in the future limiting the ability of
certain financial institutions to purchase lower-rated securities; such
legislation may adversely affect the liquidity of such securities. In the
absence of a liquid trading market for securities held by it, the Portfolio may
be unable at times to establish the fair market value of such securities. The
rating assigned to a security by Moody's or Standard & Poor's does not reflect
an assessment of the volatility of the security's market value or of the
liquidity of an investment in the security. For more information about the
rating services' descriptions of lower-rated securities, see the Appendix to
this Prospectus.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
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Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the values of these investments. Changes in the
values of portfolio securities generally will not affect cash income derived
from such securities, but will affect the Portfolio's net asset value. The
Portfolio will not necessarily dispose of a security when its rating is reduced
below its rating at the time of purchase, although Mentor Advisors will monitor
the investment to determine whether continued investment in the security will
assist in meeting the Portfolio's investment objectives.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may not have more traditional methods of financing available to
them, and may be unable to repay debt at maturity by refinancing. The risk of
loss due to default in payment of interest or principal by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness. Certain of the
lower-rated securities in which the Portfolio may invest are issued to raise
funds in connection with the acquisition of a company, in so-called "leveraged
buy-out" transactions. The highly leveraged capital structure of such issuers
may make them especially vulnerable to adverse changes in economic conditions.
The Portfolio may invest in lower-rated securities which trade
infrequently or in more limited volume than higher-rated securities (including
illiquid securities), or which are restricted as to resale. In addition, a
substantial portion of the Portfolio's assets may at times be invested in
securities as to which the Portfolio, by itself or together with other accounts
managed by Mentor Advisors and its affiliates hold a major portion or all of
such securities, which may limit the liquidity of such securities. The
Portfolio could find it difficult or impossible to sell illiquid securities
when Mentor Advisors believes it advisable to do so or may be able to sell such
securities only at prices lower than if such securities were more widely held.
In many cases, such securities may be purchased in private placements and,
accordingly, will be subject to restrictions on resale as a matter of contract
or under securities laws. Under such circumstances, it may also be more
difficult to determine the fair value of such securities for purposes of
computing the Portfolio's net asset value. In order to enforce its rights in
the event of a default under securities in cases where the Portfolio holds a
major portion or all of the outstanding issue, the Portfolio may be required to
take possession of and manage assets securing the issuer's obligations on such
securities, which may increase the Portfolio's operating expenses and adversely
affect the Portfolio's net asset value. The Portfolio may also be limited in
its ability to enforce its rights and may incur greater costs in enforcing its
rights in the event an issuer becomes the subject of bankruptcy proceedings.
The Portfolio may at times invest in so-called "payment-in-kind" bonds.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Payment-in-kind
bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks
than bonds that pay interest currently. Even though such bonds do not pay
current interest in cash, the Portfolio is nonetheless required for Federal
income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
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Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates, the
Portfolio may not be able to reinvest the proceeds in securities providing the
same investment return as the securities redeemed.
Mentor Advisors seeks to minimize the risks involved in investing in
lower-rated securities through diversification and careful investment analysis.
When the Portfolio invests in high yield securities in the lower rating
categories, achievement of the Portfolio's goals depends more on its adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. The Portfolio
may invest in mortgage-backed certificates and other securities representing
ownership interests in mortgage pools, including CMOs. Interest and principal
payments on the mortgages underlying mortgage-backed securities are passed
through to the holders of the mortgage-backed securities. Mortgage-backed
securities currently offer yields higher than those available from many other
types of fixed-income securities but because of their prepayment aspects, their
price volatility and yield characteristics will change based on changes in
prepayment rates. As a result, mortgage-backed securities are less effective
than other securities as a means of "locking in" long-term interest rates.
Generally, prepayment rates increase if interest rates fall and decrease if
interest rates rise. For many types of mortgage-backed securities, this can
result in unfavorable changes in price and yield characteristics in response to
changes in interest rates and other market conditions. For example, as a result
of their prepayment aspects, mortgage-backed securities have less potential for
capital appreciation during periods of declining interest rates than other
fixed-income securities of comparable maturities, although such obligations may
have a comparable risk of decline in market value during periods of rising
interest rates.
Mortgage-backed securities have yield and maturity characteristics that
are dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include
both interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed
securities, especially during periods of declining interest rates. Similarly,
during periods of rising interest rates, a reduction in the rate of prepayments
may significantly lengthen the effective durations of such securities.
The Portfolio may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are usually structured with two classes that receive
different portions of the interest and principal distributions on a pool of
mortgage assets. The Portfolio may invest in both the interest-only -- or "IO"
- -- class and the principal-only -- or "PO" -- class. The yield to maturity and
price of an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the
Portfolio's net asset value. This would typically be the case in an environment
of falling interest rates. If the underlying mortgage assets experience greater
than anticipated prepayments of principal, the Portfolio may under some
circumstances fail to fully recoup its initial investment in these securities.
Conversely, POs tend to increase in value if prepayments are greater than
anticipated and decline if prepayments are slower than anticipated. The
secondary market for stripped mortgage-backed securities may be more volatile
and less liquid than that for other mortgage-backed securities, potentially
limiting the Portfolio's ability to buy or sell those securities at any
particular time.
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Certain mortgage-backed securities held by the Portfolio may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may invest in securities representing interests in other
types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security
interest in the underlying assets may be limited. For example, the laws of
certain states may prevent or restrict repossession of collateral from a
debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
property, including collateralized mortgage obligation "residual" interests.
"Residual" interests represent the right to any excess cash flow remaining
after all other payments are made among the various tranches of interests
issued by structured mortgage-backed vehicles. The values of such interests are
extremely sensitive to changes in interest rates and in prepayment rates on the
underlying mortgages. In the event of a significant change in interest rates or
other market conditions, the value of an investment by the Portfolio in such
interests could be substantially reduced and the Portfolio may be unable to
dispose of the interests at prices approximating the values the Portfolio had
previously assigned to them or to recoup its initial investment in the
interests. The Portfolio may invest in new types of mortgage-related securities
that may be developed and marketed from time to time. If the Portfolio was to
invest in such newly developed securities, shareholders would, where
appropriate, be notified and this Prospectus would be revised accordingly.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio may
invest in a wide variety of such securities, including mortgage-backed and
other asset-backed securities that will pay principal or interest only under
certain circumstances, or in amounts that may increase or decrease
substantially depending on changes in interest rates or other market factors.
Such securities may experience extreme price volatility in response to changes
in interest rates or other market factors; this may be especially true in the
case of securities where the amounts of principal or interest paid, or the
timing of such payments, varies widely depending on prevailing interest rates.
Mentor Advisors may not be able to obtain current market quotations for
certain mortgage-backed or asset-backed securities at all times, or to obtain
market quotations believed by it to reflect the values of such securities
accurately. In such cases, the Portfolio's investment adviser or sub-adviser
may be required to estimate the value of such a security using quotations
provided by pricing services or securities dealers making a market in such
securities, or based on other comparable securities or other bench-mark
securities or interest rates. Mortgage-backed and other asset-backed securities
in which the Portfolio may invest may be highly illiquid, and the Portfolio may
not be able to sell such a security at a particular time or at the value it has
placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, Mentor Advisors will be required to estimate the
extent to which the values of the securities are likely to change in response
to changes in interest rates or other market conditions, and the rate at which
prepayments on the underlying mortgages or other assets are likely to occur
under different scenarios. There can be no assurance that the Portfolio's
investment adviser will be able to predict the amount of principal or interest
to be paid on any security under
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different interest rate or market conditions or that its predictions will be
accurate, nor can there be any assurance that the Portfolio will recover the
entire amount of the principal paid by it to purchase any such securities.
ZERO-COUPON BONDS. The Portfolio may at times invest in so-called
"zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. Because zero-coupon bonds do not pay current
interest, their value is subject to greater fluctuation in response to changes
in market interest rates than bonds that pay interest currently. Zero-coupon
bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks
than bonds that pay interest currently. Even though such bonds do not pay
current interest in cash, the Portfolio is nonetheless required for federal
income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
PREMIUM SECURITIES. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although the Portfolio generally amortizes the amount of
any such premium into income, the Portfolio may recognize a capital loss if
such premium securities are called or sold prior to maturity and the call or
sale price is less than the purchase price. Additionally, the Portfolio may
recognize a capital loss if it holds such securities to maturity.
OPTIONS AND FUTURES. The Portfolio may buy and sell call and put options
on securities it owns to hedge against changes in net asset value or to realize
a greater current return. In addition, through the purchase and sale of futures
contracts and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return. In addition, the Portfolio may buy and
sell options and futures contracts (including index futures contracts,
described below) to implement changes in its asset allocations among various
market sectors, pending the sale of its existing investments and reinvestment
in new securities.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that
the Portfolio will be able to utilize these instruments effectively for the
purposes stated above. Although the Portfolio will only engage in options and
futures transactions for limited purposes, those transactions involve certain
risks which are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and
may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index
futures" contract is a contract to buy or sell units of a particular bond or
stock index at an agreed price on a specified future date. Depending on the
change in value of the index between the time when the Portfolio enters into
and terminates an index futures or option transaction, the Portfolio realizes a
gain or loss. The Portfolio may also, to the extent consistent with applicable
law, buy and sell index futures and options to increase investment return.
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RISKS RELATED TO OPTIONS AND FUTURE STRATEGIES. Options and futures
transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
security or index or of the securities held by the Portfolio that are the
subject of a hedge. The successful use by the Portfolio of the strategies
described above further depends on the ability of its investment adviser or
sub-adviser to forecast market movements correctly. Other risks arise from the
Portfolio's potential inability to close out futures or options positions.
Although the Portfolio will enter into options or futures transactions only if
its investment adviser or sub-adviser believes that a liquid secondary market
exists for such option or futures contract, there can be no assurance that a
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price. Transactions in options and futures contracts involve
brokerage costs and may require the Portfolio to segregate assets to cover its
outstanding positions. For more information, see the Statement of Additional
Information. Federal tax considerations may also limit the Portfolio's ability
to engage in options and futures transactions.
The Portfolio's options and futures contract transactions will generally
be conducted on recognized exchanges. However, a Portfolio may purchase and
sell options in transactions in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would be unable to meet
their obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are not appropriate and when, in the opinion of Mentor Advisors,
the pricing mechanism and liquidity of the over-the-counter markets are
satisfactory and the participants are responsible parties likely to meet their
contractual obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolio's assets. (For
options that are "in-the-money" at the time of purchase, the amount by which
the option is "in-the-money" is excluded from this calculation.)
SECURITIES LOANS AND REPURCHASE AGREEMENTS. The Portfolio may lend
portfolio securities and may enter into repurchase agreements with banks,
broker/dealers, and other recognized financial institutions. The Portfolio may
enter into each type of transaction on up to one-third of its assets. These
transactions must be fully collateralized at all times, but involve some risk
to the Portfolio if the other party should default on its obligations and the
Portfolio is delayed or prevented from recovering the collateral.
LEVERAGE. The Portfolio may borrow money to invest in additional
securities. The Portfolio may engage in reverse repurchase agreements, forward
commitments, and dollar-roll transactions described below and in the Statement
of Additional Information, which may have the same economic effect as if the
Portfolio had borrowed money.
The use of borrowed money, known as "leverage," increases the Portfolio's
market exposure and risk and may result in losses. When the Portfolio has
borrowed money for leverage and its investments increase or decrease in value,
its net asset value will normally increase or decrease more than if it had not
borrowed money for this purpose. The interest that the Portfolio must pay on
borrowed money will reduce its net investment income, and may also either
offset any potential capital gains or increase any losses. The Portfolio
currently intends to use leverage in order to adjust the dollar-weighted
average duration of their portfolios. The Portfolio will not always borrow
money for investment and the extent to which the Portfolio will borrow money,
and the
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amount it may borrow, depends on market conditions and interest rates.
Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse repurchase
agreements," "dollar-roll" transactions, and "forward commitments," described
below) that can exist at any one time will not exceed one-third of the value of
the Portfolio's total assets (less all liabilities of the Portfolio other than
the leverage).
REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. The Portfolio may
enter into "reverse" repurchase agreements with respect to up to one-third of
its assets. "Reverse" repurchase agreements generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the
securities at an agreed-upon price, date, and interest payment. The Portfolio
also may enter into forward commitments, in which the Portfolio buys securities
for future delivery. Reverse repurchase agreements and forward commitments
involve leverage, and may increase the Portfolio's overall investment exposure.
Their use by the Portfolio may result in losses.
DOLLAR-ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar-roll transactions with
respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar-roll transaction, the Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (I.E., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon
price. The mortgage-related securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories. Dollar-roll
transactions involve leverage, and may increase the Portfolio's overall
investment exposure. Their use by the Portfolio may result in losses.
FOREIGN SECURITIES. The Portfolio may invest in securities principally
traded in foreign markets. Since foreign securities are normally denominated
and traded in foreign currencies, the values of the Portfolio's assets may be
affected favorably or unfavorably by changes in currency exchange rates and by
exchange control regulations. There may be less information publicly available
about a foreign company than about a U.S. company, and foreign companies are
not generally subject to accounting, auditing, and financial reporting
standards and practices comparable to those in the United States. The
securities of some foreign companies are less liquid and at times more volatile
than securities of comparable U.S. companies. Foreign brokerage commissions and
other fees are also generally higher than in the United States. Foreign
settlement procedures and trade regulations may involve certain risks (such as
delay in payment or delivery of securities or in the recovery of the
Portfolio's assets held abroad) and expenses not present in the settlement of
domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. The laws of some foreign countries
may limit the Portfolio's ability to invest in securities of certain issuers
located in those foreign countries. Special tax considerations apply to foreign
securities. The Portfolio may buy or sell foreign currencies and options and
futures contracts on foreign currencies for hedging purposes in connection with
its foreign investments as described more fully below.
The Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization. Investments in
ADRs and GDRs are subject to many of the same risks of investing in foreign
securities generally.
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The risks described above are typically increased to the extent that the
Portfolio invests in securities traded in underdeveloped and developing
nations, which are sometimes referred to as "emerging markets."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Portfolio may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future currency exchange rates. The Portfolio may engage in foreign
currency exchange transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect against changes in
the value of specific portfolio positions ("position hedging").
The Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which the
Portfolio contracts to purchase or sell a security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. The Portfolio may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection with transaction
hedging.
The Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange
currency at a future time at a rate or rates that may be higher or lower than
the spot rate. Foreign currency futures contracts are standardized exchange-
traded contracts and have margin requirements. For transaction hedging
purposes, the Portfolio may also purchase and sell call and put options on
foreign currency futures contracts and on foreign currencies.
The Portfolio may engage in position hedging to protect against a decline
in value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, the Portfolio may purchase or sell foreign currency futures
contracts and foreign currency forward contracts, and may purchase and sell put
and call options on foreign currency futures contracts and on foreign
currencies. In connection with position hedging, the Portfolio may also
purchase or sell foreign currencies on a spot basis.
Although there is no limit to the amount of the Portfolio's assets that
may be invested in foreign currency exchange and foreign currency forward
contacts, the Portfolio will only enter into such transactions to the extent
necessary to effect the hedging transactions described above.
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of
its portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of its portfolio, the Portfolio may enter into interest rate swaps
and other interest rate transactions, such as interest rate caps, floors, and
collars. Interest rate swaps involve the exchange by the Portfolio with another
party of different types of interest-rate streams (E.G. an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. The Portfolio intends to use
these interest rate transactions as a hedge and not as a speculative
investment. The Portfolio's ability to engage in certain interest rate
transactions may be limited by tax considerations.
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The use of interest rate swaps and other interest rate transactions is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. If Mentor Advisors is incorrect in its forecasts of market
values, interest rates, or other applicable factors, the investment performance
of the Portfolio would be less favorable than it would have been if this
investment technique were not used.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by the Portfolio is known as "portfolio turnover." As a
result of the Portfolio's investment policies, under certain market conditions
its portfolio turnover rate may be higher than that of other mutual funds.
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestment in other securities. Such transactions may
result in realization of taxable gains. The portfolio turnover rate for the
High Yield Portfolio is not expected to exceed 200% for its first current
fiscal year.
VALUING THE PORTFOLIO'S SHARES
The Portfolio calculates the net asset value of a share of each class by
dividing the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on the
New York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and
assets are valued at their fair values. The net asset value for Class A shares
will generally differ from that of Class B shares due to the variance in daily
net income realized by and dividends paid on each class of shares, and any
differences in the expenses of the different classes.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rates or at such other rates as may be used in
accordance with procedures approved by the Trustees. As a result, fluctuations
in the values of such currencies in relation to the U.S. dollar will affect the
net asset value of the Portfolio's shares even though there has not been any
change in the values of such securities as quoted in such foreign currencies.
PURCHASE OF SHARES
Mentor Distributors, LLC ("Mentor Distributors"), located at 3435 Stelzer
Road, Columbus, Ohio 43219, serves as distributor of the Portfolios' shares.
Mentor Distributors is not obligated to sell any specific amount of shares of
the Portfolio. Mentor Distributors is a wholly owned subsidiary of BISYS Fund
Services, Inc.
Y Shares of the Portfolio are sold at a price based on their net asset
value next determined after a purchase order is received by the Portfolio. In
most cases, in order to receive that day's public offering price, your order
must be received by the Portfolio or Mentor Distributors before the close of
regular trading on the New York Stock Exchange.
An investor may make an initial purchase of shares in the Portfolio by
submitting completed application materials along with a purchase order, and by
making payment c/o Mentor Funds to Boston Financial Data Services, Inc. at 2
Heritage Drive, North Quincy, MA 02171. Investors will be required to make
minimum initial
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investments of $500,000 and minimum subsequent investments of $25,000.
Investments made through advisory accounts maintained with investment advisers
registered under the Investment Advisers Act of 1940, as amended (including
"wrap" accounts), are not subject to these minimum investment requirements.
Contact Mentor Services Company, Inc. ("Mentor Services Company") for
information. The Portfolios reserve the right at any time to change the initial
and subsequent investment minimums required of investors.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to the Portfolio's investment adviser, or
(iii) a combination of such securities and cash. Purchase of shares of a
Portfolio in exchange for securities is subject in each case to the
determination by the Portfolio's investment adviser that the securities to be
exchanged are acceptable for purchase by the Portfolio. Securities accepted by
a Portfolio's investment adviser in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the next
determination of net asset value after such acceptance. All dividends and
subscription or other rights which are reflected in the market price of
accepted securities at the time of valuation become the property of the
Portfolio and must be delivered to the Portfolio upon receipt by the investor
from the issuer. A gain or loss for federal income tax purposes would be
realized upon the exchange by an investor that is subject to federal income
taxation, depending upon the investor's basis in the securities tendered. A
shareholder who wishes to purchase shares by exchanging securities should
obtain instruction by calling Mentor Services Company at 1-800-869-6042.
Mentor Distributors, the investment adviser, or affiliates thereof, at
their own expenses and out of their own assets (or in conjunction with other
entities), may also periodically sponsor programs that offer additional
compensation in connection with sales of shares of the Portfolios. Compensation
may include, but is not limited to, financial assistance to dealers in
connection with conferences, sales, or training programs for their employees,
seminars for the public, advertising or sales campaigns, or other
dealer-sponsered special events. In some instances, this compensation may be
made available only to certain dealers whose representatives have sold or are
expected to sell significant amounts of shares. Dealers may not use sales of
Mentor Funds' shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. Certain dealers may not sell
all classes of shares.
In all cases the investment adviser and Mentor Distributors reserve the
right to reject any particular investment.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of its shares in the Portfolio
any day the New York Stock Exchange is open by sending a signed letter of
instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to Mentor Funds, c/o Boston Financial
Data Services, Inc., 2 Heritage Drive, North Quincy, MA 02171. Redemptions will
be effected at the net asset value per share next determined after the receipt
by the Portfolio of redemption instructions in "good order" as described below.
In order to receive that day's net asset value, your request must be received
before the close of regular trading on the New York Stock Exchange. The
Portfolio will only redeem shares for which it has received payment. A check
for the proceeds will normally be mailed on the next business day after a
request in good order is received.
A redemption request will be considered to have been made in "good order"
if the following conditions are satisfied:
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(1) the request is in writing, states the number of shares to be redeemed,
and identifies the shareholder's Portfolio account number;
(2) the request is signed by each registered owner exactly as the shares
are registered; and
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed for transfer (or are accompanied by an endorsed
stock power) and accompany the redemption request.
If shares to be redeemed represent an investment made by check, the Trust
reserves the right not to transmit the redemption proceeds to the shareholder
until the check has been collected, which may take up to 15 days after the
purchase date.
The Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Mentor Services Company
usually requires additional documentation for the sale of shares by a
corporation, partnership, agent, fiduciary, or surviving joint owner. Contact
Mentor Services Company at 1-800-869-6042 for details.
Mentor Services Company may facilitate any redemption request. There is no
extra charge for this service.
GENERAL. The Portfolio generally sends you payment for your shares the
business day after your request is received. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolios reserve the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part in securities valued in the same way as they would be valued
for purposes of computing the Portfolios' per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your Y Shares in the
Portfolio worth at least $500,000 for shares of the same class of any other
Portfolio of the Trust, at net asset value beginning 15 days after purchase.
You may also exchange Y Shares of a Portfolio for shares of Cash Resource U.S.
Government Money Market Fund (the "Cash Fund").
To exchange your shares, simply provide a letter of intent and send it to
the Trust, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss. A
Telephone Exchange Privilege is currently available. The Telephone Exchange
Privilege is not available if you were issued certificates for shares which
remain outstanding. Ask you investment dealer or Mentor Services Company for a
prospectus relating to the Cash Fund. Shares of certain of the Portfolios may
not be available to residents of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management
and have an adverse effect on all shareholders. In order to limit excessive
exchange activity and in other circumstances where Mentor Advisors or the
Trustees believe doing so would be
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in the best interests of a Portfolio, the Trust reserves the right to revise or
terminate the exchange privilege, limit the amount or number of exchanges, or
reject any exchange. Shareholders would be notified of any such action to the
extent required by law. Consult Mentor Services Company before requesting an
exchange by calling 1-800-869-6042. See the Statement of Additional Information
to find out more about the exchange privilege.
HOW DISTRIBUTIONS ARE MADE
Dividends, if any, are declared daily and paid monthly. The Portfolio will
distribute its net capital gain, if any, at least annually. All dividends and
distributions of net capital gain will be invested in additional Class Y shares
of the Portfolio unless a shareholder requests in writing to receive the
dividend or distribution in cash.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to you as ordinary income, except that any distributions of net capital
gain will be taxed as long-term capital gain, regardless of how long you have
held the shares (although the loss on a sale of shares held for six months or
less will be treated as long-term capital loss to the extent of any capital
gain distribution received with respect to those shares). Portfolio
distributions will be taxable to you even if they are paid from income or gains
earned by the Portfolio prior to your investment (and thus were included in the
price paid for your shares). Distributions will be taxable as described above
whether received in cash or in shares through the reinvestment of
distributions. Early in each year Mentor Funds will notify you of the amount
and tax status of distributions paid to you by the Portfolio for the preceding
year. In buying or selling securities for the Portfolio, Mentor Advisors will
not normally take into account the effect any purchase or sale of securities
will have on the tax positions of the Portfolio's shareholders.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends, distributions, and redemption proceeds
also may be subject to foreign, state, and local taxes. Shareholders are urged
to consult their tax advisers regarding specific questions as to federal,
foreign, state, or local taxes. Non-U.S. investors should consult their tax
advisers concerning the tax consequences of ownership of shares of the
Portfolio, including the possibility that distributions may be subject to a 30%
United States withholding tax (or a reduced rate of withholding provided by
treaty).
MANAGEMENT
The Trustees of Mentor Funds are responsible for generally overseeing the
conduct of its business. MENTOR INVESTMENT ADVISORS, LLC is the investment
adviser to the Portfolio. The investment adviser is located at 901 East Byrd
Street, Richmond, Virginia.
All investment decisions made for the Portfolio by Mentor Advisors are
made by investment management teams.
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Mentor Advisors has over $14 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"). First Union is a leading financial services
company with approximately $234 billion in assets and $17 billion in total
stockholders' equity as of December 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's revenues derived from assets
attributable to clients of EVEREN Securities, Inc. and its affiliates.
Mentor Advisors and Mentor Perpetual together serve as investment adviser
to 33 separate investment portfolios in the Mentor Family of Funds, including
that offered by this Prospectus. For a prospectus relating to certain of these
other investment portfolios, and for information concerning your eligibility to
purchase shares of those portfolios, contact Mentor Services Company.
The Portfolio pays management fees to Mentor Advisors at the annual rates
described above under "Expense Summary -- Annual Portfolio Operating Expenses".
Mentor Advisors may from time to time voluntarily waive some or all of its
investment advisory fees and may terminate any such voluntary waiver at any
time in its sole discretion [?].
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 0.10% of the
Portfolio's average daily net assets.
GENERAL INFORMATION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into fourteen
series with varying investment objectives and policies. Certain of the Trust's
portfolios offer more than one class of shares with different sales charges and
expenses.
The Portfolio currently offers three classes of shares: Class A and Class
B shares, which are offered by this Prospectus; and Class Y (Institutional)
shares, which are not subject to any sales loads or shareholder servicing fees.
Contact Mentor Services Company for information concerning Class A and B
shares.
Each share has one vote, with fractional shares voting proportionally.
Shares of each class will vote together as a single class except when required
by law or determined by the Trustees. Shares of the Portfolio are freely
transferable, are entitled to dividends as declared by the Trustees, and, if
the Portfolio was liquidated, would receive the net assets of the Portfolio.
The Trust may suspend the sale of shares at any time and may refuse any order
to purchase shares. Although neither the Portfolio nor the Trust is required to
hold annual meetings of
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shareholders, shareholders have the right to call a meeting to elect or remove
Trustees, or to take other actions as provided in the Declaration of Trust.
The Portfolio receives services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of the software to distinguish the Year 2000 from the
Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by the
Portfolio's other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolio from this problem.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and
dividend agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about Class Y shares of the Portfolio. The Portfolio's "yield"
is calculated by dividing the Portfolio's annualized net investment income per
Y share of the class in question during a recent 30-day period by the maximum
public offering price per Y share of that class on the last day of that period.
"Total return" of the Portfolio's Y shares for the one-, five-, and ten-year
periods (or for the life of the Class, if shorter) through the most recent
calendar quarter represents the average annual compounded rate of return on an
investment of $1,000 in the Portfolio's Y shares over the period. Total return
may also be presented for other periods. Investment performance of different
classes of shares of the Portfolio will differ. Quotations of yield or total
return for a 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 for
more information. Information may be presented in advertisements about a
Portfolio describing the background and professional experience of Mentor
Advisors or any of its personnel.
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ALL DATA ARE BASED ON THE PORTFOLIO'S PAST INVESTMENT RESULTS AND DO NOT
PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses, and which class of
shares you purchase. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These
factors should be considered when comparing the Portfolio's investment results
to those of other mutual funds and other investment vehicles.
As permitted by applicable law, performance information for the Portfolio
whose investment adviser or sub-adviser has changed may be presented only for
periods after the change was effected.
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APPENDIX
MOODY'S INVESTORS SERVICE, INC., BOND RATINGS
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 edged." 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.
Ba -- Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principle
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS
AAA -- An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
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A -- An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligations. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition, or the taking of a
similar action if payments on an obligation are jeopardized.
MOODY'S NOTE RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
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STANDARD AND POOR'S NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess overwhelming safety characteristics are given a plus sign (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of saety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
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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 INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1999 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
MENTOR FUNDS
MENTOR HIGH YIELD PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
Y SHARES
April , 1999
[MENTOR LOGO]
<PAGE>
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 INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1999 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
[MENTOR LOGO]
MENTOR FUNDS
MENTOR HIGH YIELD PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
Y SHARES
April , 1999
[EVEREN LOGO]
<PAGE>
MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
(MENTOR PERPETUAL GLOBAL EMERGING COMPANIES PORTFOLIO AND MENTOR HIGH YIELD
PORTFOLIO)
April , 1999
Mentor Funds (the "Trust") is an open-end series investment company. This
Statement of Additional Information is not a prospectus and should be read in
conjunction with the relevant prospectus of the Trust. A copy of a prospectus
in respect of a Portfolio can be obtained upon request by writing to Mentor
Services Company, Inc., at 901 East Byrd Street, Richmond, Virginia 23219, or
by calling Mentor Services Company at 1-800-869-6042.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction ................................... ii
Investment Restrictions ........................ 1
Certain Investment Techniques .................. 1
Management of the Trust ........................ 20
Principal Holders of Securities ................ 22
Investment Advisory Services ................... 23
Administrative Services ........................ 24
Shareholder Servicing Plan ..................... 25
Brokerage Transactions ......................... 25
How to Buy Shares .............................. 27
Distribution ................................... 27
Determining Net Asset Value .................... 27
Redemptions in Kind ............................ 29
Taxes .......................................... 29
Independent Accountants ........................ 33
Custodian ...................................... 33
Members of Investment Management Teams ......... 34
Performance Comparisons ........................ 37
Shareholder Liability .......................... 42
</TABLE>
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INTRODUCTION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992 as Cambridge Series Trust. This Statement relates to the following two
portfolios of the Trust (collectively, the "Portfolios" and each individually,
the "Portfolio"): Mentor Perpetual Global Emerging Companies Portfolio (the
"Perpetual Global Emerging Companies Portfolio") and Mentor High Yield
Portfolio ("the High Yield Portfolio"). Each Portfolio has three classes of
shares of beneficial interest, Class A shares, Class B shares, and Class Y
(Institutional) shares.
With respect to the investment restrictions described below, all
percentage limitations on investments will apply at the time of investment and
shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of such investment. Except for the
investment restrictions listed below as fundamental or to the extent designated
as such in the Prospectus in respect of a Portfolio, the other investment
policies described in this Statement or in the Prospectus are not fundamental
and may be changed by approval of the Trustees. As a matter of policy, the
Trustees would not materially change a Portfolio's investment objective without
shareholder approval.
The Investment Company Act of 1940, as amended (the "1940 Act"), provides
that a "vote of a majority of the outstanding voting securities" of a Portfolio
means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, or (2) 67% or more of the shares present
at a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
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INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to either 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, except as contemplated by restriction 6
below.
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 more than 33 1/3% of the value of its total assets less all
liabilities and indebtedness (other than such borrowings)
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 then
seven days, if, as a result, more than 15% of the Portfolio's net assets (taken
at current value) would then be invested in securities described in (a), (b),
and (c).
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques in
which one or more of the Portfolios may engage, and certain of the risks they
may entail. Certain of the investment techniques may not be available to a
Portfolio. See the Prospectus relating to a particular Portfolio for a
description of the investment
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techniques generally applicable to that Portfolio. For purposes of this
section, a Portfolio's investment adviser is referred to as an "Adviser".
OPTIONS
A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance or to protect against changes in
market prices.
COVERED CALL OPTIONS. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may
also be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call option, a
Portfolio gives up some or all of the opportunity to profit from an increase in
the market price of the securities covering the call option during the life of
the option. The Portfolio retains the risk of loss should the price of such
securities decline. If the option expires unexercised, the Portfolio realizes a
gain equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Portfolio realizes a gain
or loss equal to the difference between the Portfolio's cost for the underlying
security and the proceeds of sale (exercise price minus commissions) plus the
amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
COVERED PUT OPTIONS. A Portfolio may write covered put options in order to
enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a
potential capital loss unless the security later appreciates in value.
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A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may
be partially or entirely offset by the premium received on the terminated
option.
PURCHASING PUT AND CALL OPTIONS. A Portfolio may also purchase put options
to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs that the Portfolio must pay. These costs will reduce any profit the
Portfolio might have realized had it sold the underlying security instead of
buying the put option.
A Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. These costs will reduce any profit the
Portfolio might have realized had it bought the underlying security at the time
it purchased the call option.
A Portfolio may also purchase put and sell options to enhance its current
return.
OPTIONS ON FOREIGN SECURITIES. A Portfolio may purchase and sell options
on foreign securities if in the opinion of its Adviser the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Portfolio's investment objectives. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may differ from those in the U.S. In addition,
options markets in some countries, many of which are relatively new, may be
less liquid than comparable markets in the U.S.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve
certain risks, including the risks that a Portfolio's Adviser will not forecast
interest rate or market movements correctly, that a Portfolio may be unable at
times to close out such positions, or that hedging transactions may not
accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, a Portfolio may be forced to continue to hold,
or to purchase at a fixed price, a security on which it has sold an option at a
time when its Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to institute
special trading procedures or restrictions that might restrict the Portfolio's
use of options. The exchanges have established limitations on the maximum
number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible
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that the Portfolio and other clients of the Portfolio's Adviser may be
considered such a group. These position limits may restrict the Portfolio's
ability to purchase or sell options on particular securities.
Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that
reason, it may be more difficult to close out unlisted options than listed
options. Furthermore, unlisted options are not subject to the protection
afforded purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification as
a "regulated investment company" under the Internal Revenue Code, may also
restrict the Portfolio's use of options.
FUTURES CONTRACTS
In order to hedge against the effects of adverse market changes a
Portfolio that may invest in debt securities may buy and sell futures contracts
on debt securities of the type in which the Portfolio may invest and on indexes
of debt securities. In addition, a Portfolio that may invest in equity
securities may purchase and sell stock index futures to hedge against changes
in stock market prices. A Portfolio may also, to the extent permitted by
applicable law, buy and sell futures contracts and options on futures contracts
to increase its current return. All such futures and related options will, as
may be required by applicable law, be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission (the "CFTC").
FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- a
Portfolio will legally obligate itself to accept the future delivery of the
underlying security and pay the agreed price. By selling futures on debt
securities -- assuming a "short" position -- it will legally obligate itself
to make the future delivery of the security against payment of the agreed
price. Open futures positions on debt securities will be valued at the most
recent settlement price, unless that price does not, in the judgment of persons
acting at the direction of the Trustees as to the valuation of a Portfolio's
assets, reflect the fair value of the contract, in which case the positions
will be valued by the Trustees or such persons.
Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions that may result in a
profit or a loss. While futures positions taken by a Portfolio will usually be
liquidated in this manner, a Portfolio may instead make or take delivery of the
underlying securities whenever it appears economically advantageous to do so. A
clearing corporation associated with the exchange on which futures are traded
assumes responsibility for such closing transactions and guarantees that a
Portfolio's sale and purchase obligations under closed-out positions will be
performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish with more
certainty than would otherwise be possible the effective rate of return on
securities. A Portfolio may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Portfolio (or securities having characteristics similar to those
held by the Portfolio) in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of the Portfolio's
securities. When hedging of this character is successful, any depreciation in
the value of securities may substantially be offset by appreciation in the
value of the futures position.
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On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Portfolio
expects to purchase particular securities when it has the necessary cash, but
expects the rate of return available in the securities markets at that time to
be less favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Portfolio of
purchasing the securities may be offset, at least to some extent, by the rise
in the value of the futures position taken in anticipation of the subsequent
purchase.
Successful use by a Portfolio of futures contracts on debt securities is
subject to its Adviser's ability to predict correctly movements in the
direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of
an increase in interest rates which would adversely affect the market prices of
debt securities held by it and the prices of such securities increase instead
the Portfolio will lose part or all of the benefit of the increased value of
its securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to meet daily margin
maintenance requirements. The Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
A Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to
options on securities except that options on futures contracts give the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option. As with options on securities, the holder or writer of an
option may terminate his position by selling or purchasing an option of the
same series. There is no guarantee that such closing transactions can be
effected. A Portfolio will be required to deposit initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements, and, in addition, net option
premiums received will be included as initial margin deposits. See "Margin
Payments" below. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to a Portfolio because the maximum amount at risk is the premium paid for
the options plus transactions costs. However, there may be circumstances when
the purchase of call or put options on a futures contract would result in a
loss to a Portfolio when the purchase or sale of the futures contracts would
not, such as when there is no movement in the prices of debt securities. The
writing of a put or call option on a futures contract involves risks similar to
those risks relating to the purchase or sale of futures contracts.
INDEX FUTURES CONTRACTS AND OPTIONS. A Portfolio may invest in debt index
futures contracts and stock index futures contracts, and in related options. A
debt index futures contract is a contract to buy or sell units of a specified
debt index at a specified future date at a price agreed upon when the contract
is made. A unit is the current value of the index. (Debt index futures in which
the Portfolios are presently expected to invest are not now available, although
such futures contracts are expected to become available in the future.) A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index.
For example, the Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 100 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 100 Index, contracts are
to buy or sell 100 units. Thus, if the value of the
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S&P 100 Index were $180, one contract would be worth $18,000 (100 units x
$180). The stock index futures contract specifies that no delivery of the
actual stocks making up the index will take place. Instead, settlement in cash
must occur upon the termination of the contract, with the settlement being the
difference between the contract price and the actual level of the stock index
at the expiration of the contract. For example, if a Portfolio enters into a
futures contract to buy 100 units of the S&P 100 Index at a specified future
date at a contract price of $180 and the S&P 100 Index is at $184 on that
future date, the Portfolio will gain $400 (100 units x gain of $4). If the
Portfolio enters into a futures contract to sell 100 units of the stock index
at a specified future date at a contract price of $180 and the S&P 100 Index is
at $182 on that future date, the Portfolio will lose $200 (100 units x loss of
$2).
A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts
with respect to indexes or sub-indexes the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.
OPTIONS ON STOCK INDEX FUTURES. Options on index futures contracts are
similar to options on securities except that options on index futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in an index futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
holder would assume the underlying futures position and would receive a
variation margin payment of cash or securities approximating the increase in
the value of the holder's option position. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash based on the difference between the exercise
price of the option and the closing level of the index on which the futures
contract is based on the expiration date. Purchasers of options who fail to
exercise their options prior to the exercise date suffer a loss of the premium
paid.
OPTIONS ON INDICES. As an alternative to purchasing and selling call and
put options on index futures contracts, each of the Portfolios which may
purchase and sell index futures contracts may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options
are traded on national securities exchanges. Index options are similar to
options on individual securities in that the purchaser of an index option
acquires the right to buy (in the case of a call) or sell (in the case of a
put), and the writer undertakes the obligation to sell or buy (as the case may
be), units of an index at a stated exercise price during the term of the
option. Instead of giving the right to take or make actual delivery of
securities, the holder of an index option has the right to receive a cash
"exercise settlement amount". This amount is equal to the amount by which the
fixed exercise price of the option exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the underlying index on the
date of the exercise, multiplied by a fixed "index multiplier".
A Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the
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options plus transactions costs. The writing of a put or call option on an
index involves risks similar to those risks relating to the purchase or sale of
index futures contracts.
MARGIN PAYMENTS. When a Portfolio purchases or sells a futures contract,
it is required to deposit with its custodian an amount of cash, U.S. Treasury
bills, or other permissible collateral equal to a small percentage of the
amount of the futures contract. This amount is known as "initial margin". The
nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to a Portfolio upon termination of the contract,
assuming a Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract
fluctuates. For example, when a Portfolio sells a futures contract and the
price of the underlying security rises above the delivery price, the
Portfolio's position declines in value. The Portfolio then pays the broker a
variation margin payment equal to the difference between the delivery price of
the futures contract and the market price of the securities underlying the
futures contract. Conversely, if the price of the underlying security falls
below the delivery price of the contract, the Portfolio's futures position
increases in value. The broker then must make a variation margin payment equal
to the difference between the delivery price of the futures contract and the
market price of the securities underlying the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures. Although the Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular
time. If there is not a liquid secondary market at a particular time, it may
not be possible to close a futures position at such time and, in the event of
adverse price movements, a Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event financial
futures are used to hedge portfolio securities, such securities will not
generally be sold until the financial futures can be terminated. In such
circumstances, an increase in the price of the portfolio securities, if any,
may partially or completely offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain
that such a market will develop. Although a Portfolio generally will purchase
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option or at any particular time. In the event no such
market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that a Portfolio would
have to exercise the options in order to realize any profit.
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HEDGING RISKS. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One
risk arises because of the imperfect correlation between movements in the
prices of the futures contracts and options and movements in the underlying
securities or index or movements in the prices of a Portfolio's securities
which are the subject of a hedge. A Portfolio's Adviser will, however, attempt
to reduce this risk by purchasing and selling, to the extent possible, futures
contracts and related options on securities and indexes the movements of which
will, in its judgment, correlate closely with movements in the prices of the
underlying securities or index and the securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for hedging
purposes is also subject to its Adviser's ability to predict correctly
movements in the direction of the market. It is possible that, where a
Portfolio has purchased puts on futures contracts to hedge its portfolio
against a decline in the market, the securities or index on which the puts are
purchased may increase in value and the value of securities held in the
portfolio may decline. If this occurred, the Portfolio would lose money on the
puts and also experience a decline in value in its portfolio securities. In
addition, the prices of futures, for a number of reasons, may not correlate
perfectly with movements in the underlying securities or index due to certain
market distortions. First, all participants in the futures market are subject
to margin deposit requirements. Such requirements may cause investors to close
futures contracts through offsetting transactions which could distort the
normal relationship between the underlying security or index and futures
markets. Second, the margin requirements in the futures markets are less
onerous than margin requirements in the securities markets in general, and as a
result the futures markets may attract more speculators than the securities
markets do. Increased participation by speculators in the futures markets may
also cause temporary price distortions. Due to the possibility of price
distortion, even a correct forecast of general market trends by a Portfolio's
Adviser may still not result in a successful hedging transaction over a short
time period.
OTHER RISKS. Portfolios will incur brokerage fees in connection with their
futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while a Portfolio may
benefit from the use of futures and related options, unanticipated changes in
interest rates or stock price movements may result in a poorer overall
performance for the Portfolio than if it had not entered into any futures
contracts or options transactions. Moreover, in the event of an imperfect
correlation between the futures position and the portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss.
FORWARD COMMITMENTS
A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or if the Portfolio enters into offsetting contracts for
the forward sale of other securities it owns. Forward commitments may be
considered securities in themselves, and involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date, which risk
is in addition to the risk of decline in the value of the Portfolio's other
assets. Where such purchases are made through dealers, the Portfolios rely on
the dealer to consummate the sale. The dealer's failure to do so may result in
the loss to the Portfolio of an advantageous yield or price. Although a
Portfolio will generally enter into forward commitments with the intention of
acquiring securities for its portfolio or for delivery pursuant to options
contracts it has entered into, a Portfolio may
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dispose of a commitment prior to settlement if its Adviser deems it appropriate
to do so. A Portfolio may realize short-term profits or losses upon the sale of
forward commitments.
REPURCHASE AGREEMENTS
A Portfolio may enter into repurchase agreements. A repurchase agreement
is a contract under which the Portfolio acquires a security subject to the
obligation of the seller to repurchase and the Portfolio to resell such
security at a fixed time and price (representing the Portfolio's cost plus
interest). It is the Trust's present intention to enter into repurchase
agreements only with member banks of the Federal Reserve System and securities
dealers meeting certain criteria as to creditworthiness and financial condition
established by the Trustees of the Trust and only with respect to obligations
of the U.S. government or its agencies or instrumentalities or other high
quality short term debt obligations. Repurchase agreements may also be viewed
as loans made by a Portfolio which are collateralized by the securities subject
to repurchase. A Portfolio's Adviser will monitor such transactions to ensure
that the value of the underlying securities will be at least equal at all times
to the total amount of the repurchase obligation, including the interest
factor. If the seller defaults, a Portfolio could realize a loss on the sale of
the underlying security to the extent that the proceeds of sale including
accrued interest are less than the resale price provided in the agreement
including interest. In addition, if the seller should be involved in bankruptcy
or insolvency proceedings, a Portfolio may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if a
Portfolio is treated as an unsecured creditor and required to return the
underlying collateral to the seller's estate.
LOANS OF PORTFOLIO SECURITIES
A Portfolio may lend its portfolio securities, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the total
assets of the Portfolio. In addition, it is anticipated that a Portfolio may
share with the borrower some of the income received on the collateral for the
loan or that it will be paid a premium for the loan. The risks in lending
portfolio securities, as with other extensions of credit, consist of possible
delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower, a
Portfolio retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by a Portfolio if
the holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. A Portfolio will not lend portfolio
securities to borrowers affiliated with the Portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS; OTHER MORTGAGE-RELATED SECURITIES
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"), but they also may be collateralized by whole loans or
private pass-through certificates (such collateral collectively hereinafter
referred to as
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"Mortgage Assets"). CMOs may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans.
In a CMO, a series of bonds or certificates is generally issued in
multiple classes. Each class of CMOs is issued at a specific fixed or floating
rate coupon and has a stated maturity or final distribution date. Principal
prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on most classes of the CMOs on a monthly,
quarterly, or semi-annual basis. The principal of and interest on the mortgage
assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In a CMO, payments of principal, including any principal
prepayments, on the mortgage assets are applied to the classes of the series in
a pre-determined sequence.
RESIDUAL INTERESTS. Residual interests are derivative mortgage securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans. The cash flow generated by the
mortgage assets underlying a series of mortgage securities is applied first to
make required payments of principal of and interest on the mortgage securities
and second to pay the related administrative expenses of the issuer. The
residual generally represents the right to any excess cash flow remaining after
making the foregoing payments. Each payment of such excess cash flow to a
holder of the related residual represents income and/or a return of capital.
The amount of residual cash flow resulting from a series of mortgage securities
will depend on, among other things, the characteristics of the mortgage assets,
the coupon rate of each class of the mortgage securities, prevailing interest
rates, the amount of administrative expenses, and the prepayment experience on
the mortgage assets. In particular, the yield to maturity on residual interests
may be extremely sensitive to prepayments on the related underlying mortgage
assets in the same manner as an interest-only class of stripped mortgage-backed
securities. In addition, if a series of mortgage securities includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
residual interest may also be extremely sensitive to changes in the level of
the index upon which interest rate adjustments are based. In certain
circumstances, there may be little or no excess cash flow payable to residual
holders. The Portfolio may fail to recoup fully its initial investment in a
residual.
Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals currently
may not have the liquidity of other more established securities trading in
other markets. Residuals may be subject to certain restrictions on
transferability.
FOREIGN SECURITIES
A Portfolio may invest in foreign securities and in certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks.
Investments in foreign securities may involve considerations different
from investments in domestic securities. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign brokerage commissions and custodian
fees are generally higher than in the United States. Investments in foreign
securities can involve other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets and imposition of withholding taxes on dividend or
interest payments. It may be more difficult
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to obtain and enforce a judgment against a foreign issuer. In addition, foreign
investments may be affected favorably or unfavorably by changes in currency
exchange rates, exchange control regulations, foreign withholding taxes and
restrictions or prohibitions on the repatriation of foreign currencies. A
Portfolio may incur costs in connection with conversion between currencies.
In determining whether to invest in securities of foreign issuers, the
Adviser of a Portfolio seeking current income will consider the likely impact
of foreign taxes on the net yield available to the Portfolio and its
shareholders. Income received by a Portfolio from sources within foreign
countries may be reduced by withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. It is impossible to determine the effective
rate of foreign tax in advance since the amount of a Portfolio's assets to be
invested in various countries is not known, and tax laws and their
interpretations may change from time to time and may change without advance
notice. Any such taxes paid by a Portfolio will reduce its net income available
for distribution to shareholders.
FOREIGN CURRENCY TRANSACTIONS
Except as otherwise described in the relevant Prospectus, a Portfolio may
engage without limit in currency exchange transactions, including foreign
currency forward and futures contracts, to protect against uncertainty in the
level of future foreign currency exchange rates. In addition, a Portfolio may
purchase and sell call and put options on foreign currency futures contracts
and on foreign currencies for hedging purposes.
A Portfolio may engage in both "transaction hedging" and "position
hedging". When a Portfolio engages in transaction hedging, it enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its securities. A Portfolio will engage in transaction hedging when it desires
to "lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging a Portfolio will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
A Portfolio may purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with transaction hedging. A
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes, a Portfolio may purchase exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives a Portfolio
the right to assume a short position in the futures contract until expiration
of the option. A put option on currency gives a Portfolio the right to sell a
currency at an exercise price until the expiration of the option. A call option
on a futures contract gives a Portfolio the right to assume a long position in
the futures contract until the expiration of the option. A call option on
currency gives a Portfolio the right to purchase a currency at the exercise
price until the expiration of the option. A Portfolio will engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of its Adviser, the
pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations.
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When a Portfolio engages in position hedging, it enters into foreign
currency exchange transactions to protect against a decline in the values of
the foreign currencies in which securities held by the Portfolio are
denominated or are quoted in their principle trading markets or an increase in
the value of currency for securities which a Portfolio expects to purchase. In
connection with position hedging, a Portfolio may purchase put or call options
on foreign currency and foreign currency futures contracts and buy or sell
forward contracts and foreign currency futures contracts. A Portfolio may also
purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of a
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is
less than the amount of foreign currency a Portfolio is obligated to deliver
and if a decision is made to sell the security or securities and make delivery
of the foreign currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received upon the sale of the security or
securities of a Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to a Portfolio of hedging against fluctuations
in currency exchange rates, the Portfolio may write covered call options on
those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract as agreed by the parties, at a price set at the time of the
contract. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are designed by
and traded on exchanges regulated by the CFTC, such as the New York Mercantile
Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange
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contracts are traded directly between currency traders so that no intermediary
is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may be
closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally
purchase or sell foreign currency futures contracts and related options only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board
of trade will exist for any particular contract or option or at any particular
time. In such event, it may not be possible to close a futures or related
option position and, in the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments of variation margin on its
futures positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Such options will be purchased or written only when a
Portfolio's Adviser believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary market will exist
for a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the U.S. options markets.
SETTLEMENT PROCEDURES. Settlement procedures relating to investments in
foreign securities and to foreign currency exchange transactions may be more
complex than settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not present in
domestic investments. For example, settlement of transactions involving foreign
securities or foreign currency may occur within a foreign country,
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and the Portfolio may be required to accept or make delivery of the underlying
securities or currency in conformity with any applicable U.S. or foreign
restrictions or regulations, and may be required to pay any fees, taxes or
charges associated with such delivery. Such investments may also involve the
risk that an entity involved in the settlement may not meet its obligations.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a feefor currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should a Portfolio desire
to resell that currency to the dealer.
ZERO-COUPON SECURITIES
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other mutual funds investing in securities making
current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by
their holder, typically a custodian bank or investment brokerage firm. A number
of securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under
the STRIPS program, a Portfolio will be able to have its beneficial ownership
of U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Portfolios may engage in when-issued and delayed delivery
transactions. These transactions are arrangements in which a Portfolio
purchases securities with payment and delivery scheduled for a future time. A
Portfolio engages in when-issued and delayed delivery transactions only for the
purpose of acquiring securities consistent with its investment objective and
policies, not for investment leverage, but a Portfolio may sell such securities
prior to settlement date if such a sale is considered to be advisable. No
income accrues to a Portfolio on securities in connection with such
transactions prior to the date the Portfolio actually takes delivery of
securities. In when-issued and delayed delivery transactions, a Portfolio
relies on the seller to complete the transaction. The seller's failure to
complete the transaction may cause a Portfolio to miss a price or yield
considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for a Portfolio. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred. However, liquid
assets of a Portfolio sufficient to make payment for the securities to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
BANK INSTRUMENTS
A Portfolio may invest in the instruments of banks and savings and loans
whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances. However, the
above-mentioned instruments are not necessarily guaranteed by those
organizations. In addition to domestic bank obligations, such as certificates
of deposit, demand and time deposits, savings shares, and bankers' acceptances,
a Portfolio may invest in: Eurodollar Certificates of Deposit ("ECDs") issued
by foreign branches of U.S. or foreign banks; Eurodollar Time Deposits
("ETDs"), which are U.S. dollar-denominated deposits in foreign branches of
U.S. or foreign banks; Canadian Time Deposits, which are U.S.
dollar-denominated deposits issued by branches of major Canadian banks located
in the U.S.; and Yankee Certificates of Deposit ("Yankee CDS"), which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches of foreign
banks and held in the U.S.
DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-related securities, the mortgage-related securities that are purchased
typically will be of the same type and will have the same or similar interest
rate and maturity as those sold, but will be supported by different pools of
mortgages. The Portfolio forgoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but it is compensated by the
difference between the current sales price and the price for the future
purchase as well as by any interest earned on the proceeds of the securities
sold. A Portfolio could also be compensated through the receipt of fee income.
A Portfolio may also enter into reverse repurchase agreements in which the
Portfolio sells securities and agrees to repurchase them at a mutually agreed
date and price. Generally, the effect of such a transaction is that
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the Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
Dollar rolls and reverse repurchase agreements may be viewed as a
borrowing by the Portfolio, secured by the security which is the subject of the
agreement. In addition to the general risks involved in leveraging, dollar
rolls and reverse repurchase agreements involve the risk that, in the event of
the bankruptcy or insolvency of the Portfolio's counterparty, the Portfolio
would be unable to recover the security which is the subject of the agreement,
the amount of cash or other property transferred by the counterparty to the
Portfolio under the agreement prior to such insolvency or bankruptcy is less
than the value of the security subject to the agreement, or the Portfolio may
be delayed or prevented, due to such insolvency or bankruptcy, from using such
cash or property or may be required to return it to the counterparty or its
trustee or receiver.
CONVERTIBLE SECURITIES
A Portfolio may invest in convertible securities. Convertible securities
are fixed income securities which may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for a
variety of investment strategies.
A Portfolio will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stock when, in its Adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Portfolio in achieving its investment objectives. Otherwise, the
Portfolio may hold or trade convertible securities. In selecting convertible
securities for the Portfolio, the Portfolio's Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Portfolio's Adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and practices.
WARRANTS
A Portfolio may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the
market value of the optioned common stock at issuance) valid for a specific
period of time. Warrants may have a life ranging from less than a year to
twenty years or may be perpetual. However, most warrants have expiration dates
after which they are worthless. In addition, if the market price of the common
stock does not exceed the warrant's exercise price during the life of the
warrant, the warrant will expire as worthless. Warrants have no voting rights,
pay no dividends, and have no rights with respect to the assets of the
corporation issuing them. The percentage increase or decrease in the market
price of the warrant may tend to be greater than the percentage increase or
decrease in the market price of the optioned common stock. Warrants acquired in
units or attached to securities may be deemed to be without value for purposes
of a Portfolio's policy.
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<PAGE>
SWAPS, CAPS, FLOORS AND COLLARS
A Portfolio may enter into interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. A Portfolio expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. A Portfolio would use these transactions as hedges and not as
speculative investments and would not sell interest rate caps or floors where
it does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by
a Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the purchaser
to receive payments on a notional principal amount from the party selling such
cap to the extent that a specified index exceeds a predetermined interest rate
or amount. The purchase of a floor entitles the purchaser to receive payments
on a notional principal amount from the party selling such floor to the extent
that a specified index falls below a predetermined interest rate or amount. A
collar is a combination of a cap and a floor that preserves a certain return
within a predetermined range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. A Portfolio will not
enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from another nationally recognized
securities rating organization or is determined to be of equivalent credit
quality by the Portfolio's Adviser. If there is a default by the counterparty,
a Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
LOWER-RATED SECURITIES
A Portfolio may invest in lower-rated fixed-income securities (commonly
known as "junk bonds") to the extent described in the relevant Prospectus. The
lower ratings of certain securities held by a Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a Portfolio may be unable at times to establish the fair value of
such securities. The rating assigned to a security by Moody's Investors
Service, Inc. or Standard & Poor's (or by any other nationally recognized
securities rating organization) does not reflect an assessment of the
volatility of the security's market value or the liquidity of an investment in
the security.
17
<PAGE>
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. Changes in the value
of portfolio securities generally will not affect cash income derived from such
securities, but will affect the Portfolio's net asset value. A Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although its Adviser will monitor the
investment to determine whether its retention will assist in meeting the
Portfolio's investment objective.
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available
by corporations whose securities are publicly traded. Therefore, to the extent
a Portfolio invests in tax exempt securities in the lower rating categories,
the achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
INDEXED SECURITIES
A Portfolio may invest in indexed securities, the values of which are
linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). Most indexed securities have maturities
of three years or less.
Indexed securities differ from other types of debt securities in which a
Portfolio may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or
the currency exchange rates between two currencies (neither of which need be
the currency in which the instrument is denominated). The reference instrument
need not be related to the terms of the indexed security. For example, the
principal amount of a U.S. dollar denominated indexed security may vary based
on the exchange rate of two foreign currencies. An indexed security may be
positively or negatively indexed; that is, its value may increase or decrease
if the value of the reference instrument increases. Further, the change in the
principal amount payable or the interest rate of an indexed security may be a
multiple of the percentage change (positive or negative) in the value of the
underlying reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities
may be more volatile than the reference instruments underlying indexed
securities.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to
18
<PAGE>
which the Portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Portfolio's securities are
or are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the Portfolio's securities denominated
in linked currencies. For example, if a Portfolio's Adviser considers that the
Austrian schilling is linked to the German deutschmark (the "D-mark"), the
Portfolio holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a contract to sell D-marks and buy dollars.
EURODOLLAR INSTRUMENTS
A Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. A Portfolio
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed-income
instruments are linked.
SEGREGATION OF ASSETS
A Portfolio may at times segregate assets in respect of certain
transactions in which the Portfolio enters into a commitment to pay money or
deliver securities at some future date (such as futures contracts or reverse
repurchase agreements, to the extent not used for leverage). Any such
segregated account will be maintained by the Trust's custodian and may contain
cash, U.S. government securities, liquid high grade debt obligations, or other
appropriate assets.
19
<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 (41)* Chairman Chairman and Chief Executive Officer Mentor Investment
c/o Mentor Funds and Trustee Group, Inc.; Chairman and Director Mentor Income Fund,
901 E. Byrd Street Inc., and America's Utility Fund, Inc.; Chairman and
Richmond, VA 23219 Trustee, Cash Resource Trust, Mentor Variable Investment
Portfolios and Mentor Institutional Trust.
Arnold H. Dreyfuss (70) Trustee Chairman, Eskimo Pie Corporation; Trustee, Cash Resource
P.O. Box 18156 Trust, Mentor Variable Investment Portfolios and Mentor
Richmond, Virginia 23226 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 (67) Trustee R.J. Reynolds Industries Professor of Business Adminis-
Fuqua School of Business tration and Former Dean of Fuqua School of Business, Duke
Duke University University; Director of LADD Furniture, Inc., Wendy's
Durham, NC 27706 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. (57) Trustee Vice President for Investments, University of Richmond;
University of Richmond Trustee, Cash Resource Trust, Mentor Variable Investment
Richmond, VA 23173 Portfolios and Mentor Institutional Trust; Director, Mentor
Income Fund, Inc. and America's Utility Fund, Inc.
Troy A. Peery, Jr. (52) Trustee Trustee, Cash Resource Trust, Mentor Variable Investment
Heilig-Meyers Company Portfolios and Mentor Institutional Trust; Director, Mentor
2235 Staples Mill Road Income Fund, Inc. and America's Utility Fund, Inc.
Richmond, Virginia 23230 Formerly, President of Heilig-Meyers Company.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------- -------------- --------------------------------------------------------------
<S> <C> <C>
Peter J. Quinn, Jr. (38)* Trustee Managing Director, Mentor Investment Group, LLC, and
c/o Mentor Funds Mentor Services Company, Inc.; Trustee, Cash Resource
901 E. Byrd Street Trust, Mentor Variable Investment Portfolios and Mentor
Richmond, VA 23219 Institutional Trust; Director, Mentor Income Fund, Inc. and
America's Utility Fund, Inc.
Arch T. Allen, III (58) Trustee Attorney at law, Raleigh, North Carolina; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 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 (64) Trustee President, Weston Edwards & Associates; Trustee Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; Founder and
Chairman, The Housing Roundtable; formerly, President,
Smart Mortgage Access, Inc.
Jerry R. Barrentine (64) Trustee President, J.R. Barretine & Associates; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 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 (59) Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 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 (38) President Managing Director, Mentor Investment Group, LLC;
c/o Mentor Funds President, Cash Resource Trust, Mentor Income Fund, Inc.,
901 E. Byrd Street Mentor Institutional Trust, Mentor Variable Investment
Richmond, VA 23219 Portfolios and America's Utility Fund, Inc.; Director, Mentor
Perpetual Advisors, LLC.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------------- -------------- ------------------------------------------------------------
<S> <C> <C>
Terry L. Perkins (51) Treasurer, Senior Vice President and Treasurer, Mentor Investment
c/o Mentor Funds Secretary Group, LLC; Treasurer, Mentor Institutional Trust, Cash
901 E. Byrd Street Resource Trust, Mentor Variable Investment Portfolios,
Richmond, VA 23219 Mentor Income Fund, Inc.
Michael Wade (32) Assistant Vice President and Controller, Mentor Investment Group,
c/o Mentor Funds Treasurer LLC Assistant Treasurer, Mentor Income Fund, Inc., Cash
901 E. Byrd Street Resource Trust, Mentor Institutional Trust, Mentor Variable
Richmond, VA 23219 Investment Portfolios and America's Utility Fund.
</TABLE>
The table below shows the fees paid to each Trustee by the Trust for the
1998 fiscal year and the fees paid to each Trustee by all funds in the Mentor
family (including the Trust) during the 1998 calendar year.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM ALL
FROM THE TRUST COMPLEX FUNDS (29 FUNDS)
(FISCAL YEAR END 1998) (CALENDAR YEAR 1998)
------------------------ ----------------------------
<S> <C> <C>
Daniel J. Ludeman ............... $ 0 $ 0
Arnold H. Dreyfuss .............. $4,994 $32,000
Thomas F. Keller ................ $4,121 $32,000
Louis W. Moelchert, Jr. ......... $4,811 $32,000
J. Garnett Nelson ............... $4,634 $40,000
Troy A. Peery, Jr. .............. $4,634 $32,000
Peter J. Quinn, Jr. ............. $ 0 $ 0
Jerry R. Barrentine ............. $4,811 $40,000
Weston E. Edwards ............... $4,634 $42,000
Arch T. Allen III ............... $4,634 $35,000
</TABLE>
- ----------
The Trustees do not receive pension or retirement benefits from the Trust.
The Declaration of Trust of the Trust provides that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its Shareholders by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of his or her duties. The
Trust, at its expense, provides liability insurance for the benefit of its
Trustees and officers.
PRINCIPAL HOLDERS OF SECURITIES
As of January , 1999, there were no outstanding shares of either Portfolio.
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<PAGE>
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as investment
adviser to the High Yield Portfolio. Mentor Perpetual Advisors, LLC ("Mentor
Perpetual") serves as investment adviser to the Perpetual Global Emerging
Companies Portfolio.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group,
LLC, ("Mentor Investment Group") which is a subsidiary of Wheat First Butcher
Singer, Inc. ("WFBS"). Mentor Perpetual is owned equally by Mentor Advisors and
Perpetual plc, a diversified financial services holding company. EVEREN Capital
Corporation has a 20% ownership in Mentor Investment Group and may acquire
additional ownership based principally on the amount of Mentor Investment
Group's revenues derived from assets attributable to clients of EVEREN
Securities, Inc. and its affiliates.
Subject to the general oversight of the Trustees, each investment adviser
manages the applicable Portfolio in accordance with the stated policies of that
Portfolio and of the Trust. Each makes investment decisions for the Portfolio
and places the purchase and sale orders for portfolio transactions. The
investment advisers and sub-advisers bear all their expenses in connection with
the performance of their services (except as may be approved from time to time
by the Trustees) and pay the salaries of all officers and employees who are
employed by them and the Trust.
Each Portfolio's investment adviser provides the Trust with investment
officers who are authorized to execute purchases and sales of securities.
Investment decisions for the Trust and for the other investment advisory
clients of the investment advisers and their affiliates are made with a view to
achieving their respective investment objectives. Investment decisions are the
product of many factors in addition to basic suitability for the particular
client involved. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at the
same time. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling the security. In some
instances, one client may sell a particular security to another client. It also
sometimes happens that two or more clients simultaneously purchase or sell the
same security, in which event each day's transactions in such security are,
insofar as possible, averaged as to price and allocated between such clients in
a manner which in the investment adviser's or sub-adviser's opinion is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of securities for one
or more clients will have an adverse effect on other clients. In the case of
short-term investments, the Treasury area of Mentor Investment Group handles
purchases and sales under guidelines approved by investment officers of the
Trust. Each investment adviser and sub-adviser employs professional staffs of
portfolio managers who draw upon a variety of resources for research
information for the Trust.
Expenses incurred in the operation of a Portfolio or otherwise allocated
to a Portfolio, including but not limited to taxes, interest, brokerage fees
and commissions, compensation paid under a Portfolio's 12b-1 plan and the
Shareholder Service Plan, fees to Trustees who are not officers, directors,
stockholders, or employees of Wheat, First Securities, Inc. and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, charges for the printing of
prospectuses and statements of additional information for regulatory purposes
or for distribution, and certain costs incurred by Mentor Investment Group in
responding to shareholder
23
<PAGE>
inquiries as approved by the Trustees from time to time, to shareholders,
certain shareholder report charges and charges relating to corporate matters
are borne by the Portfolio.
Under the applicable Management Contract with the Trust in respect of each
Portfolio, subject to such policies as the Trustees may determine, Mentor
Advisors or Mentor Perpetual, as the case may be, at its expense, furnishes
continuously an investment program for the Portfolio and makes investment
decisions on behalf of the Portfolio. Mentor Advisors or Mentor Perpetual, as
the case may be, may place portfolio transactions with broker-dealers which
furnish Mentor Advisors or Mentor Perpetual, without cost to it, certain
research, statistical and quotation services of value to Mentor Advisors or
Mentor Perpetual and their affiliates in advising the Portfolio and other
clients. In so doing, Mentor Advisors or Mentor Perpetual may cause a Portfolio
to pay greater brokerage commissions than it might otherwise pay.
Each Management Contract provides that Mentor Advisors or Mentor
Perpetual, as the case may be, shall not be subject to any liability to a
Portfolio or to any shareholder of a Portfolio for any act or omission in the
course of or connected with rendering services to a Portfolio in the absence of
its willful misfeasance, bad faith, gross negligence, or reckless disregard of
its duties.
Each of the Management Contracts is subject to annual approval (beginning
in 2001) by (i) the Trustees or (ii) vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the affected Portfolio, provided
that in either event the continuance is also approved by a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust or the investment adviser in question, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Management
Contracts are terminable without penalty, on not more than sixty days' notice
and not less than thirty days' notice, by the Trustees, by vote of the holders
of a majority of the affected Portfolio's shares, or by the applicable
investment adviser. Each terminates automatically in the event of its
assignment (as defined in the 1940 Act).
MANAGEMENT FEES
The investment adviser of each Portfolio receives an annual management fee
from such Portfolio (which is described in the relevant Prospectus).
ADMINISTRATIVE SERVICES
Mentor Investment Group, LLC serves as administrator to each of the
Portfolios pursuant to an Administration Agreement.
Pursuant to the Administration Agreement, Mentor Investment Group provides
continuous business management services to the Portfolios and, subject to the
general oversight of the Trustees, manages all of the business and affairs of
the Portfolios subject to the provisions of the Trust's Declaration of Trust,
By-laws and the 1940 Act, and other policies and instructions the Trustees may
from time to time establish. Mentor Investment Group pays the compensation of
all officers and executive employees of the Trust (except those employed by or
serving at the request of an investment adviser or sub-adviser) and makes
available to the Trust the services of its directors, officers, and employees
as elected by the Trustees or officers of the Trust. In addition, Mentor
Investment Group provides all clerical services relating to the Portfolios'
business. As compensation for its services, Mentor Investment Group receives a
fee from each Portfolio calculated daily at the annual rate of .10% of a
Portfolio's average daily net assets.
24
<PAGE>
The Administration Agreement must be approved at least annually with
respect to each Portfolio by a vote of a majority of the Trustees who are not
interested persons of Mentor Investment Group or the Trust. The Agreement may
be terminated at any time without penalty on 30 days notice by Mentor
Investment Group, or immediately in respect of any Portfolio upon notice by the
Trustees or by vote of a majority of the outstanding voting securities of that
Portfolio. The Agreement terminates automatically in the event of any
assignment (as defined in the 1940 Act).
SHAREHOLDER SERVICING PLAN
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors, LLC with respect to the Class A and Class B shares of
each Portfolio. Pursuant to the Service Plan, financial institutions will enter
into shareholder service agreements to provide administrative support services
to their customers who from time to time may be record or beneficial owners of
shares of one or more Portfolios. In return for providing these support
services, a financial institution may receive payments from one or more
Portfolios at a rate not exceeding .25% of the average daily net assets of the
Class A or Class B shares of the particular Portfolio or Portfolios owned by
the financial institution's customers for whom it is the holder of record or
with whom it has a servicing relationship. The Service Plan is designed to
stimulate financial institutions to render administrative support services to
the Portfolios and their shareholders. These administrative support services
include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding the Portfolios;
assisting clients in changing dividend options, account designations and
addresses; and providing such other services as the Portfolios reasonably
request.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by the investment adviser, a sub-adviser,
and/or Mentor Investment Group, or affiliates thereof, for providing
administrative support services to holders of Class A or Class B shares of the
Portfolios. These payments will be made directly by the investment adviser
and/or Mentor Investment Group or affiliates, as applicable, and will not be
made from the assets of any of the Portfolios.
BROKERAGE TRANSACTIONS
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different
brokers. A particular broker may charge different commissions according to such
factors as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets,
but the price paid by the Trust usually includes an undisclosed dealer
commission or mark-up. In underwritten offerings, the price paid by the Trust
includes a disclosed, fixed commission or discount retained by the underwriter
or dealer. It is anticipated that most purchases and sales of securities by
funds investing primarily in certain fixed-income securities will be with the
issuer or with underwriters of or dealers in those securities, acting as
principal. Accordingly, those funds would not ordinarily pay significant
brokerage commissions with respect to securities transactions.
25
<PAGE>
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, each investment adviser may receive brokerage and research services
and other similar services from many broker-dealers with which such investment
adviser or sub- adviser places a Portfolio's portfolio transactions and from
third parties with which these broker-dealers have arrangements. These services
include such matters as general economic and market reviews, industry and
company reviews, evaluations of investments, recommendations as to the purchase
and sale of investments, newspapers, magazines, pricing services, quotation
services, news services and personal computers utilized by the investment
adviser's managers and analysts. Where the services referred to above are not
used exclusively by the investment adviser for research purposes, the
investment adviser, based upon its own allocations of expected use, bears that
portion of the cost of these services which directly relates to its
non-research use. Some of these services are of value to the investment adviser
or sub-adviser and its affiliates in advising various of its clients (including
the Portfolios), although not all of these services are necessarily useful and
of value in managing all or any of the Portfolios. The management fee paid by a
Portfolio is not reduced because its investment adviser or sub-adviser or any
of their affiliates receive these services even though the investment adviser
might otherwise be required to purchase some of these services for cash.
A Portfolio's investment adviser 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. The
investment adviser seeks the best overall terms available for the Portfolio,
except to the extent the investment adviser may be permitted to pay higher
brokerage commissions as described below. In doing so, the investment adviser,
having in mind the Portfolio's best interests, considers all factors it deems
relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security or other investment, the
amount of the commission, the timing of the transaction taking into account
market prices and trends, the reputation, experience and financial stability of
the broker-dealer involved and the quality of service rendered by the
broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the advisory
agreements, a Portfolio's investment adviser may cause the Portfolio to pay a
broker-dealer which provides "brokerage and research services" (as defined in
the 1934 Act) to that adviser an amount of disclosed commission for effecting
securities transactions on stock exchanges and other transactions for the
Portfolio on an agency basis in excess of the commission which another
broker-dealer would have charged for effecting that transaction. The investment
adviser's authority to cause a Portfolio to pay any such greater commissions is
also subject to such policies as the Trustees may adopt from time to time. It
is the position of the staff of the Securities and Exchange Commission that
Section 28(e) does not apply to the payment of such greater commissions in
"principal" transactions. Accordingly, each investment adviser will use its
best efforts to obtain the best overall terms available with respect to such
transactions, as described above.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to such other policies as the Trustees may
determine, an investment adviser may consider sales of shares of a Portfolio
(and, if permitted by law, of the other funds in the Mentor family) as a factor
in the selection of broker-dealers to execute portfolio transactions for a
Portfolio.
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The Trustees have determined that portfolio transactions for the Trust may
be effected through Wheat, First Securities, Inc. ("Wheat"), First Union
Brokerage Services ("FUBS"), and EVEREN Securities, Inc. ("EVEREN"),
broker-dealers affiliated with Mentor Advisors and Mentor Perpetual. The
Trustees have adopted certain policies incorporating the standards of Rule
17e-l issued by the SEC under the 1940 Act which requires, among other things,
that the commissions paid to Wheat, FUBS, 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, FUBS, and EVEREN will not
participate in brokerage commissions given by a Portfolio to other brokers or
dealers. Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. A Portfolio will in no event effect
principal transactions with Wheat, FUBS, and EVEREN in over-the-counter
securities in which Wheat, FUBS, or EVEREN makes a market.
Under rules adopted by the SEC, Wheat, FUBS, and EVEREN may not execute
transactions for a Portfolio on the floor of any national securities exchange,
but may effect transactions for a Portfolio by transmitting orders for
execution and arranging for the performance of this function by members of the
exchange not associated with them. Wheat, FUBS, and EVEREN will be required to
pay fees charged to those persons performing the floor brokerage elements out
of the brokerage compensation they receive from a Portfolio. The Trust has been
advised by Wheat that on most transactions, the floor brokerage generally
constitutes from 5% and 10% of the total commissions paid.
HOW TO BUY SHARES
Except under certain circumstances described in the Trust's or an
individual Portfolio's prospectus, Class A shares of the Portfolios are sold at
their net asset value plus an applicable sales charge on days the New York
Stock Exchange is open for business. Class B shares of the Portfolios and
Institutional Shares of the Portfolios are sold at their net asset value with
no sales charge on days the New York Stock Exchange is open for business. The
procedure for purchasing Class A, Class B, and Institutional Shares of the
Portfolios is explained in the relevant Prospectus under the section entitled
"How to Buy Shares."
DISTRIBUTION
Each of the Portfolios makes payments to Mentor Distributors, LLC in
accordance with its respective Distribution Plan adopted in respect of Class B
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
DETERMINING NET ASSET VALUE
A Portfolio determines the net asset value per share of each class once
each day the New York Exchange (the "Exchange") is open as of the close of
regular trading on the Exchange. Currently, the Exchange is closed Saturdays,
Sundays and the following holidays: New Year's Day, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Thanksgiving and Christmas.
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Securities for which market quotations are readily available are valued at
prices which, in the opinion of a Portfolio's investment adviser or
sub-adviser, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sale price or, if
no sales are reported (as in the case of some securities traded
over-the-counter), the last reported bid price, except that certain U.S.
Government securities are stated at the mean between the last reported bid and
asked prices. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost, which approximates market value. All other
securities and assets are valued at their fair value following procedures
approved by the Trustees. Liabilities are deducted from the total, and the
resulting amount is divided by the number of shares of the class outstanding.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. These investments are stated at fair
value on the basis of valuations furnished by pricing services approved by the
Trustees, which determine valuations for normal, institutional- size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders.
If any securities held by a Portfolio are restricted as to resale, the
Portfolio's investment adviser or sub-adviser determines their fair values. The
fair value of such securities is generally determined as the amount which a
Portfolio could reasonably expect to realize from an orderly disposition of
such securities over a reasonable period of time. The valuation procedures
applied in any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Portfolio in connection with
such disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities and any available analysts' reports
regarding the issuer.
In the case of certain fixed-income securities, including certain less
common mortgage-backed securities, market quotations are not readily available
to the Portfolios on a daily basis, and pricing services may not provide price
quotations. In such cases, the Portfolio's investment adviser is typically able
to obtain dealer quotations for each of the securities on at least a weekly
basis. On any day when it is not practicable for the investment adviser to
obtain an actual dealer quotation for a security, the investment adviser or
sub-adviser may reprice the securities based on changes in the value of a U.S.
Treasury security of comparable duration. When the next dealer quotation is
obtained, the investment adviser compares the dealer quote against the price
obtained by it using its U.S. Treasury-spread calculation, and makes any
necessary adjustments to its calculation methodology. The investment adviser
attempts to obtain dealer quotes for each security at least weekly, and on any
day when there has been an unusual occurrence affecting the securities which,
in the investment adviser's view, makes pricing the securities on the basis of
U.S. Treasuries unlikely to provide a fair value of the securities.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset
value of a class of shares are computed as of such times. Also, because of the
amount of time required to collect and process trading information as to large
numbers of securities issues, the values of certain securities (such as
convertible bonds, U.S. Government securities, and tax-exempt securities) are
determined based on market
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quotations collected earlier in the day at the latest practicable time prior to
the close of the Exchange. Occasionally, events affecting the value of such
securities may occur between such times and the close of the Exchange which
will not be reflected in the computation of net asset value. If events
materially affecting the value of such securities occur during such period,
then these securities will be valued at their fair value following procedures
approved by the Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading generally or in
a particular country or countries may not take place on all business days in
New York. Furthermore, trading takes place in Japanese markets on certain
Saturdays and in various foreign markets on days which are not business days in
New York and on which net asset value is not calculated. A Portfolio calculates
net asset value per share of each class, and therefore effects sales,
redemptions and repurchases of its shares, as of the close of the Exchange once
on each day on which the Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when a classes' net asset value is calculated, such
securities will be valued at fair value as determined in good faith by
procedures approved as required by the Trustees.
REDEMPTIONS IN KIND
Although each Portfolio intends to redeem Class A, Class B and
Institutional Shares in cash, it reserves the right under certain circumstances
to pay the redemption price in whole or in part by a distribution of securities
from its investment portfolio. Redemptions in kind will be made in conformity
with applicable SEC rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner that the
Trustees determine to be fair and equitable. The Trust has elected to be
governed by Rule 18f-1 of the 1940 Act, under which a Portfolio is obligated to
redeem shares for any one shareholder in cash only up to the lesser of $250,000
or 1% of the respective classes' net asset value during any 90-day period.
TAXES
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal
income tax on any of its net investment income or net realized capital gains
that are distributed to shareholders. A Portfolio will not under present law be
subject to any excise or income taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other dispositions of stock, securities, or foreign currencies, and other
income (including but not limited to gains from options, futures, or forward
contracts) derived with respect to its business of investing in such stock,
securities, or currencies; and (b) diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of
its total assets consists of cash and cash items, U.S. Government
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Securities, securities of other regulated investment companies, and other
securities limited generally with respect to any one issuer to not more than 5%
of the value of its total assets and not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of
its total assets is invested in the securities (other than those of the U.S.
Government or other regulated investment companies) of any issuer or of two or
more issuers which the Portfolio controls and which are engaged in the same,
similar, or related trades or businesses. In order to receive the favorable tax
treatment accorded regulated investment companies and their shareholders,
moreover, a Portfolio must in general distribute at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess, if
any, of net short-term capital gains over net long-term capital losses for such
year.
If a Portfolio failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Portfolio would be
subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax-exempt income
and net long-term capital gains, would be taxable to shareholders as ordinary
income. In addition, a Portfolio could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial distributions
before requalifying as a regulated investment company that is accorded special
tax treatment.
If a Portfolio fails to distribute in a calendar year substantially all of
its taxable ordinary income for such year and substantially all of its capital
gain net income for the one-year period ending October 31, plus any retained
amount from the prior year, the Portfolio will be subject to a 4% excise tax on
the undistributed amounts. A dividend paid to shareholders by a Portfolio in
January of a year generally is deemed to have been paid by the Portfolio on
December 31 of the preceding year, if the dividend was declared and payable to
shareholders of record on a date in October, November or December of that
preceding year. Each Portfolio intends generally to make distributions
sufficient to avoid imposition of the 4% excise tax.
Distributions from a Portfolio (other than exempt-interest dividends, as
discussed below) will be taxable to shareholders as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Distributions of net capital gain (that is, the excess of net gains from
capital assets held by the Portfolio for more than one year over net losses
from capital assets held for not more than one year) that are designed as
capital gain dividends will be taxable to shareholders as long-term capital
gain, which is generally taxable to individuals at a 20% rate.
Dividends and distributions on a Portfolio's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Portfolio's realized income and gains, even though such dividends and
distributions may economically represent a return of a particular shareholder's
investment. Such distributions are likely to occur in respect of shares
purchased at a time when a Portfolio's net asset value reflects gains that are
either unrealized, or realized but not distributed. Such realized gains may be
required to be distributed even when a Portfolio's net asset value also
reflects unrealized losses.
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 by shareholders as interest excludable
from their gross income for federal income tax purposes but may be taxable for
federal alternative minimum tax purposes and for state and local purposes. If a
Portfolio intends to be qualified to pay exempt-interest dividends,
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the Portfolio may be limited in its ability to enter into taxable transactions
involving forward commitments, or repurchase agreements, financial futures, and
options contracts on financial futures, tax-exempt bond indices, and other
assets.
Part or all of the interest on indebtedness, if any, incurred or continued
by a shareholder to purchase or carry shares of a Portfolio paying
exempt-interest dividends is not deductible. The portion of interest that is
not deductible is equal to the total interest paid or accrued on the
indebtedness, multiplied by the percentage of a Portfolio's total distributions
(not including distributions from net capital gain) paid to the shareholder
that are exempt-interest dividends. Under rules used by the Internal Revenue
Service for determining when borrowed funds are considered used for the purpose
of purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
A Portfolio which is qualified to pay exempt-interest dividends will
inform investors within 60 days of the Portfolio's fiscal year-end of the
percentage of its income distributions designated as tax-exempt. The percentage
is applied uniformly to all distributions made during the year. The percentage
of income designated as tax-exempt for any particular distribution may be
substantially different from the percentage of the Portfolio's income that was
tax-exempt during the period covered by the distribution.
HEDGING TRANSACTIONS. If a Portfolio engages in hedging transactions,
including hedging transactions in options, futures contracts, and straddles, or
other similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to the Portfolio, defer losses
to the Portfolio, cause adjustments in the holding periods of the Portfolio's
securities, or convert short-term capital losses into long-term capital losses.
These rules could therefore affect the amount, timing and character of
distributions to shareholders. Each Portfolio will endeavor to make any
available elections pertaining to such transactions in a manner believed to be
in the best interests of the Portfolio.
RETURN OF CAPITAL DISTRIBUTIONS. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" allocable
to such distribution, the excess distribution will be treated as a return of
capital to the extent of your tax basis in your shares, and thereafter as
capital gain. A return of capital is not taxable, but it reduces your tax basis
in your shares, thus reducing any loss or increasing any gain on a subsequent
taxable disposition by you or your shares.
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. A Portfolio's investment in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, a Portfolio may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
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FOREIGN CURRENCY-DENOMINATED SECURITIES AND RELATED HEDGING TRANSACTIONS.
A Portfolio's transactions in foreign currencies, foreign currency-denominated
debt securities and certain foreign currency options, futures contracts, and
forward contacts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value
of the foreign currency concerned.
Certain of a Portfolio's transactions, if any, in foreign currencies or
foreign currency-denominated instruments are likely to produce a difference
between its book income and its taxable income. If a Portfolio's book income
exceeds its taxable income, the distribution (if any) of such excess will be
treated as a dividend to the extent of the Portfolio's remaining earnings and
profits (including earnings and profits arising from tax-exempt income), and
thereafter as a return of capital or as gain from the sale or exchange of a
capital asset, as the case may be. If a Portfolio's book income is less than
its taxable income, the Portfolio could be required to make distributions
exceeding book income to qualify as a regulated investment company that is
accorded special tax treatment.
FOREIGN TAX CREDIT. If more than 50% of a Portfolio's assets at year end
consists of the stock or securities of foreign corporations, the Portfolio may
elect to permit shareholders to claim a credit or deduction on their income tax
returns for their pro rata portion of qualified taxes paid by the Portfolio to
foreign countries in respect of foreign securities the Portfolio has held for
at least the minimum period, if any, specified in the Code. In such a case,
shareholders will include in gross income from foreign sources their pro rata
shares of such taxes. A shareholder's ability to claim a foreign tax credit or
deduction in respect of foreign taxes paid by the Portfolio may be subject to
certain limitations imposed by the Code, as a result of which a shareholder may
not get a full credit or deduction for the amount of such taxes. Shareholders
who do not itemize on their federal income tax returns may claim a credit (but
no deduction) for such foreign taxes.
PASSIVE FOREIGN INVESTMENT COMPANIES. Investment by a Portfolio in certain
"passive foreign investment companies" ("PFICs") could subject the Portfolio to
a U.S. federal income tax (including interest charges) on distributions
received from the company or on proceeds received from the disposition of
shares in the company, which tax cannot be eliminated by making distributions
to Portfolio shareholders. However, the Portfolio in certain circumstances, may
elect to treat a passive foreign investment company as a "qualified electing
fund," in which case the Portfolio will be required to include its share of the
company's income and net capital gain in income annually, regardless of whether
it receives any distribution from the company. The Portfolio also may make an
election to mark the gains (and to a limited extent losses) in such holdings
"to the market" as though it had sold and repurchased its holdings in those
PFICs on the last day of the Portfolio's taxable year. Such gains and losses
are treated as ordinary income and loss, as are gains on disposition of the
stock and losses on disposition of the stock is to the extent of previous
inclusions in income. The qualified electing fund and mark-to-market elections
may have the effect of accelerating the recognition of income (without the
receipt of cash) and increasing the amount required to be distributed for the
Portfolio to avoid taxation. Making either of these elections therefore may
require a Portfolio to liquidate other investments (including when it is not
advantageous to do so) to meet its distribution requirement, which also may
accelerate the recognition of gain and affect a Portfolio's total return.
SALE OR REDEMPTION OF SHARES. The sale, exchange or redemption of
Portfolio shares may give rise to a gain or loss. In general, any gain realized
upon a taxable disposition of shares held for more than one year will be
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taxed as long-term capital gain. Such gain is, in the case of an individual,
generally taxed at a 20% rate. However, if a shareholder sells shares at a loss
within six months of purchase, any loss will be disallowed for federal income
tax purposes to the extent of any exempt-interest dividends received on such
shares. In addition, any loss (not already disallowed as provided in the
preceding sentence) realized upon a taxable disposition of shares held for six
months or less will be treated as long-term, rather than short-term, capital
loss to the extent of any long-term capital gain distributions received by the
shareholder with respect to the shares. All or a portion of any loss realized
upon a taxable disposition of Portfolio shares will be disallowed if other
Portfolio shares are purchased within 30 days before or after the disposition.
In such a case, the basis of the newly purchased shares will be adjusted to
reflect the disallowed loss.
SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS. Special tax rules apply to
investments through defined contribution plans and other tax-qualified plans.
Shareholders should consult their tax adviser to determine the suitability of
shares of a Portfolio as an investment through such plans and the precise
effect of an investment on their particular tax situation.
BACKUP WITHHOLDING. A Portfolio generally is required to withhold and
remit to the U.S. Treasury 31% of the taxable dividends and other distributions
(including in redemption of Portfolio shares) paid to any individual
shareholder who fails to furnish the Portfolio with a correct taxpayer
identification number (TIN), who has under- reported dividend or interest
income, or who fails to certify to the Portfolio that he or she is not subject
to such withholding. Shareholders who fail to furnish their current TIN are
subject to a penalty of $50 for each such failure unless the failure is due to
reasonable cause and not wilful neglect. An individual's taxpayer
identification number is his or her social security number.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and regulations. The Code and regulations are subject to change by legislative
or administrative actions. Dividends, distributions, and redemption proceeds
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).
INDEPENDENT ACCOUNTANTS
[ ] are the Trust's independent accountants, providing audit services,
tax return review and other tax consulting services.
CUSTODIAN
Investors Fiduciary Trust Company, located at 127 West 10th Street, Kansas
City, Missouri, is the custodian of each Portfolio, except that State Street
Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts serves as custodian
to the Perpetual Global Emerging Companies Portfolio and as the foreign
custodian to each of the other Portfolios in respect of foreign assets. A
custodian's responsibilities include generally safeguarding and controlling a
Portfolio's cash and securities, handling the receipt and delivery of
securities, and collecting interest and dividends on a Portfolio's investments.
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MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of the Portfolio's
investment advisers, as indicated.
MENTOR INVESTMENT ADVISORS, LLC
LARGE CAPITALIZATION QUALITY EQUITY GROWTH
JOHN G. DAVENPORT, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Davenport has 12 years of investment management experience. He joined the
firm after leading equity research at the investment management firm of Lowe,
Brockenbrough, & Tattersall, Inc. Mr. Davenport graduated from the University
of Richmond and has an MBA from the University of Virginia.
RICHARD H. SKEPPSTROM II -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Skeppstrom has 7 years of investment management experience. Before joining
the firm he was a global portfolio analyst for Saudi International Bank
Portfolio Advisors. Mr. Skeppstrom began his career as a pension and benefit
analyst at Johnson & Higgins of Virginia. He has earned both an undergraduate
degree and an MBA from the University of Virginia.
CHRISTOPHER W. RUSBULDT, CFA -- VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Rusbuldt joined the firm in 1995 and has 7 years' investment experience.
Previously, he was an equity research analyst for Wheat First Butcher Singer.
He began his career as a banker in the corporate group at NationsBank. Mr.
Rusbuldt is a graduate of the University of Virginia.
RICHARD L. RICE -- VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Rice has 22 years' experience in the securities industry. Before joining
Mentor, he was a partner in Parata Analytics Research. Prior responsibilities
include research for Signet Asset Management, senior research analyst for
Capitoline Investment Services, and positions in research at Atlanta
Corporation and Southwest Banking, Inc. Mr. Rice is a graduate of the
University of Florida and has completed graduate work at Georgia State
University.
STEVEN A. CERTO -- VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Certo joined the firm in 1997, from the equity research department of Wheat
First Butcher Singer where he was a research analyst following the software
industry. Mr. Certo served five years as an intelligence officer in the US
Navy. His professional background also includes a year as an investment
representative for Edward Jones and Co. He is a graduate of Iona College and is
a level III candidate in the CFA program.
ACTIVE FIXED-INCOME
P. MICHAEL JONES, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Jones has 12 years of investment management experience. He is the manager
of Mentor Short-Duration Income Portfolio and Mentor Quality Income Portfolio,
as well as Mentor Income Fund, a $120 million closed-end bond fund. Mr. Jones
is responsible for the design and implementation of the fixed-income group's
proprietary analytical system. He has worked as an investment manager at Ryland
Capital Management, Alliance Capital Management, and Central Fidelity Bank. Mr.
Jones earned an undergraduate degree from the College of William and Mary, and
an MBA from the Wharton School of the University of Pennsylvania.
DENNIS F. CLARY, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Clary joined Mentor in 1998 and has over 20 years of investment management
experience. Prior to joining Mentor's Fixed Income Team, he worked for three
years as a Vice President and Senior Portfolio Manager for
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First America Investment Corporation. He previously was employed for four years
as a Vice President and Portfolio Manager at CSI Asset Management, Inc. and
prior to that for four years in a similar role by Investment & Capital
Management Corporation. Mr. Clary received his BA and MBA degrees from Ohio
State University.
TIMOTHY ANDERSON, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Anderson has 8 years of investment management experience. He joined Mentor
in June, 1998. Prior to joining Mentor's Fixed-Income Team, he worked for two
years as a Senior Fixed Income Analyst at Investment Advisors, Inc. Previous to
that he was employed for five years as a Senior Investment Analyst at St. Paul
Fire & Marine Insurance Company and for two years as an Analyst for Duff &
Phelps Credit Rating Company. He received a BS degree from DePaul University
and an MBA degree from the University of Chicago.
TODD C. KUIMJIAN -- PORTFOLIO MANAGER
Mr. Kuimjian has 4 years of investment management experience. He joined the
Fixed-Income Team in January, 1997, initially as a Research Analyst and later
as a Portfolio Manager. Prior to joining the Fixed-Income Team, Mr. Kuimjian
served Mentor as an investment accountant/systems analyst and later as a senior
investment administrator within Mentor's investment services group. Mr.
Kuimjian is a Certified Public Accountant and received his BS degree from
Virginia Polytechnic Institute.
SMALL CAPITALIZATION EQUITY GROWTH
THEODORE W. PRICE, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Price has 30 years of investment management experience. Prior to
establishing the small/mid cap. management style, Mr. Price served for 10 years
as vice chairman and portfolio manager of the investment management subsidiary
of Wheat First Butcher Singer. In 1985, he established the equity retail mutual
fund, Mentor Growth Portfolio, which today represents nearly $600 million in
assets. He is a member of the Richmond Society of Financial Analysts. Mr. Price
earned both BA and MBA degrees from the University of Virginia.
LINDA A. ZIGLAR, CFA -- MANAGING DIRECTOR, PORTFOLIO MANAGER
Ms. Ziglar has 19 years investment management experience. Ms. Ziglar joined the
firm in 1991 after serving seven years as vice president of Federal Investment
Counseling and Federated Research Corporation in Pittsburgh. While at
Federated, Ms. Ziglar shared responsibility for the management of more than
$300 million in mutual fund and separate account assets. She is a member of the
Richmond Society of Financial Analysts, the Financial Analysts Federation, and
a former officer of the Pittsburgh Society of Financial Analysts. Ms. Ziglar is
a summa cum laude, Phi Beta Kappa graduate of Randolph-Macon Woman's College.
She earned an MBA from the University of Pittsburgh.
JEFFREY S. DRUMMOND, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Drummond joined the firm in 1993 after five years in investment strategy at
Wheat First Butcher Singer. While working with Wheat's chief investment
strategist, he shared responsibility for the management of the Strategic
Sectors Portfolio. He is a member of the Richmond Society of Financial
Analysts. Mr. Drummond graduated cum laude from the University of Richmond.
CASH MANAGEMENT
R. PRESTON NUTTALL, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Nuttall has more than 30 years of investment management experience. Prior
to Mentor Advisors, he led
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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 -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. White has 12 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.
GREGORY S. KAPLAN -- ASSOCIATE VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Kaplan brings over 6 years of analytical and investment experience to
Mentor. Prior to joining the firm, Mr. Kaplan served for four years as a credit
specialist analyzing commercial credit for NationsBank. He began his career in
the Investment Services division of Prudential Insurance. Mr. Kaplan is a
graduate of Rutgers University and earned his MBS from the Pamplin College of
Business at Virginia Polytechnic Institute and State University.
MENTOR PERPETUAL ADVISORS, LLC
MARTIN ARBIB -- CHAIRMAN, PERPETUAL PORTFOLIO MANAGEMENT
Mr. Arbib is chairman and founder of Perpetual, a partner in the Mentor
Perpetual Advisors joint venture, where he currently leads investment
management. A chartered Accountant, he has 22 years' investment management
experience.
BOB YERBURY -- CHIEF INVESTMENT OFFICER
Mr. Yerbury has 24 years' investment management experience, with over 21 years'
experience in North American stock markets, and has been part of the Perpetual
team for 13 years. Before joining Perpetual, he was a portfolio manager with
Equity & Law Assurance Company. Mr. Yerbury is a graduate of Cambridge
University.
STEPHEN WHITTAKER -- UK TEAM LEADER
Mr. Whittaker joined Perpetual eight years ago and has 16 years' investment
management experience. Prior to joining Perpetual, he was responsible for UK
equity funds for the Save & Prosper Group. He began his fund management career
with Rowe & Pitman after graduation from Manchester University.
MARGARET RODDAN -- EUROPE TEAM LEADER
Ms. Roddan has 11 years of investment management experience, three years with
Perpetual. She joined Perpetual from Mercury Asset Management, where she shared
responsibility for management of continental European equity holdings. She
began her career with the National Provident Institution. Ms. Roddan is a
graduate of the Investment Management Program at the London Business School.
She studied finance at City University and is a graduate of Bristol University.
SCOTT MCGLASHAN -- FAR EAST TEAM LEADER
Mr. McGlashan has 19 years' management experience, 13 years specializing in the
Far East, and 11 years' tenure at Perpetual. He is a graduate of Yale and
Cambridge University.
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<PAGE>
KATHRYN LANGRIDGE -- SOUTHEAST ASIA TEAM LEADER
Ms. Langridge shares responsibility with Mr. McGlashan for Far East equity
investments. Before joining Perpetual in 1990, she spent eight years in Hong
Kong with the investment firm of Jardine Fleming. She specializes in equity
investments in the non-Japanese stock markets of the Far East. Ms. Langridge is
a graduate of Cambridge University.
IAN BRADY -- AMERICAN TEAM LEADER
Mr. Brady is head of the North American team at Perpetual. He has 12 years'
investment management experience. Before joining Perpetual in 1997, he worked
for Britannia Investment Management, Legal & General and Standard Life. He is a
graduate of Aberdeen and Strathclyde Universities.
PERFORMANCE COMPARISONS
The performance of a Portfolio depends upon such variables as: portfolio
quality; average portfolio maturity; type of instruments in which the
particular Portfolio is invested; changes in the expenses of a particular
Portfolio and class of shares; and various other factors.
The performance of each Portfolio fluctuates on a daily basis largely
because net earnings and net asset value per share of each class fluctuate
daily. Both net earnings and net asset value per share are factors in the
computation of yield and total return for each class of the Portfolios.
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how a Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time
to time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below measure performance based on
their own criteria rather than on the standardized performance measures
described in the preceding section.
Lipper Analytical Services, Inc., ranks funds in various fund categories
by making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specified period of time.
From time to time, a Portfolio will quote its Lipper ranking in advertising and
sales literature.
Morningstar, Inc. distributes mutual fund ratings twice a month. The
ratings are divided into five groups: highest, above average, neutral, below
average, and lowest. They represent a Portfolio's historical risk/reward ratio
relative to other funds with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3-year, 5-year, and 10-year
total return performance (if available) reflecting deduction of expenses and
sales charges. Performance is adjusted using quantitative techniques to reflect
the risk profile of the Portfolio. The ratings are derived from a purely
quantitative system that does not utilize the subjective criteria customarily
employed by rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return calculated
by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and
10-year performance. Mutual funds are ranked in general categories (e.g.,
international bond, international equity, municipal bond, and maximum capital
gain). Weisenberger rankings do not reflect deduction of sales charges or fees.
37
<PAGE>
A Portfolio's shares also may be compared to the following indices:
Dow Jones Industrial Average ("DJIA") is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by Dow Jones & Company, it is cited as a
principal indicator of market conditions.
Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of funds
whose portfolios are invested primarily in common stocks. In addition, the
Standard & Poor's listed on its index. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated, in the Standard &
Poor's figures.
Consumer Price Index is generally considered to be a measure of inflation.
CDA Mutual Fund Growth Index is a weighted performance average of other
mutual funds with growth of capital objectives.
Lipper Growth Fund Index is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.
Lehman Brothers Government/Corporate (total) Index is comprised of
approximately 5,000 issues, which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine years. Tracked
by Shearson Lehman Brothers Inc., the index calculates total returns for one
month, three month, twelve month and ten year periods and year-to-date.
Lehman Brothers Government Index is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or any
agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.
Russell Growth 1000 (Russell 1000 Index) is a broadly diversified index
consisting of approximately 1,000 common stocks of companies with market values
between $20 million and $300 million that can be used to compare the total
returns of funds whose portfolios are invested primarily in growth common
stocks.
Lehman Brothers Aggregate Bond Index is a total return index measuring
both the capital price changes and income provided by the underlying universe
of securities, weighted by market value outstanding. The Aggregate Bond Index
is comprised of the Shearson Lehman Government Bond Index, Corporate Bond
Index, Mortgage-Backed Securities Index, and Yankee Bond Index. These indices
include: U.S. Treasury obligations, including bonds and notes; U.S. agency
obligations, including those of the Federal Farm Credit Bank, Federal Land
Bank, and the Bank for Cooperatives; foreign obligations; and U.S.
investment-grade corporate debt and mortgage-backed obligations. All corporate
debt included in the Aggregate Bond Index has a minimum S&P rating of BBB, a
minimum Moody's rating of Baa, or a minimum Fitch rating of BBB.
Salomon Brothers Mortgage-Backed Securities Index-15 Years includes the
average of all 15-year mortgage securities, which include Federal Home Loan
Mortgage Corporation (Freddie Mac), Federal National Mortgage Association
(Fannie Mae), and Government National Mortgage Association (Ginnie Mae).
38
<PAGE>
Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market. Returns
and attributes for the Index are calculated semi-monthly using approximately
29,000 municipal bonds, which are priced by Muller Data Corporation.
From time to time, certain of the Portfolios that invest in foreign
securities may advertise the performance of their classes of shares compared to
similar funds or portfolios using certain indices, reporting services, and
financial publications. These may include the following: Morgan Stanley Capital
International World Index, The Morgan Stanley Capital International EAFE
(Europe, Australia, Far East) index, J.P. Morgan Global Traded Bond Index,
Salomon Brothers World Government Bond Index, and the Standard & Poor's 500
Composite Stock Price Index (S&P 500). A Portfolio also may compare its
performance to the performance of unmanaged stock and bond indices, including
the total returns of foreign government bond markets in various countries. All
index returns are translated into U.S. dollars. The total return calculation
for these unmanaged indices may assume the reinvestment of dividends and any
distributions, if applicable, may include withholding taxes, and generally do
not reflect deductions for administrative and management costs.
Investors may use such indices or reporting services in addition to the
Trust or an individual Portfolio's prospectus to obtain a more complete view of
a particular Portfolio's performance before investing. Of course, when
comparing a Portfolio's performance to any index, conditions such as
composition of the index and prevailing market conditions should be considered
in assessing the significance of such comparisons. When comparing portfolios
using reporting services, or total return and yield, investors should take into
consideration any relevant differences in portfolios, such as permitted
portfolio compositions and methods used to value portfolio securities and
compute net asset value.
Advertisements and other sales literature for a Portfolio may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in a
Portfolio based on monthly reinvestment of dividends over a specified period of
time.
From time to time the Portfolios may advertise their performance, using
charts, graphs, and descriptions, compared to federally insured bank products,
including certificates of deposit and time deposits, and to monthly market
funds using the Lipper Analytical Service money market instruments average.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the
descriptions appearing below. From time to time any or all of the Portfolios
may distribute evaluations by or excerpts from these publications to its
shareholders or to potential investors. The following illustrates the types of
information provided by these publications.
Business Week publishes mutual fund rankings in its Investment Figures of
the Week column. The rankings are based on 4-week and 52-week total return
reflecting changes in net asset value and the reinvestment of all
distributions. They do not reflect deduction of any sales charges. Funds are
not categorized; they compete in a large universe of over 2,000 funds. The
source for rankings is data generated by Morningstar, Inc.
39
<PAGE>
Investor's Business Daily publishes mutual fund rankings on a daily basis.
The rankings are depicted as the top 25 funds in a given category. The
categories are based loosely on the type of fund, e.g., growth funds, balanced
funds, U.S. government funds, GNMA funds, growth and income funds, corporate
bond funds, etc. Performance periods for sector equity funds can vary from 4
weeks to 39 weeks; performance periods for other fund groups vary from 1 year
to 3 years. Total return performance reflects changes in net asset value and
reinvestment of dividends and capital gains. The rankings are based strictly on
total return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds; an A
rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical Services. The
Lipper total return data reflects changes in net asset value and reinvestment
of distributions, but does not reflect deduction of any sales charges. The
performance periods vary from short-term intervals (current quarter or
year-to-date, for example) to long-term periods (five-year or ten-year
performance, for example). Barron's classifies the funds using the Lipper
mutual fund categories, such as Capital Appreciation Funds, Growth Funds, U.S.
Government Funds, Equity Income Funds, Global Funds, etc. Occasionally,
Barron's modifies the Lipper information by ranking the funds in asset classes.
"Large funds" may be those with assets in excess of $25 million; "small funds"
may be those with less than $25 million in assets.
The Wall Street Journal publishes its Mutual Fund Scorecard on a daily
basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper
Analytical Services category. Lipper provides the rankings based on its total
return data reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The Scorecard portrays
4-week, year-to-date, one-year and 5-year performance; however, the ranking is
based on the one-year results. The rankings for any given category appear
approximately once per month.
Fortune magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Funds are placed in stock
or bond fund categories (for example, aggressive growth stock funds, growth
stock funds, small company stock funds, junk bond funds, Treasury bond funds
etc.), with the top-10 stock funds and the top-5 bond funds appearing in the
rankings. The rankings are based on 3-year annualized total return reflecting
changes in net asset value and reinvestment of distributions and not reflecting
sales charges. Performance is adjusted using quantitative techniques to reflect
the risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a database
of funds tracked for performance by Lipper Analytical Services. The funds are
placed in 23 stock or bond fund categories and analyzed for five-year risk
adjusted return. Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions and does not
reflect deduction of any sales charges. Grades are conferred (from A to E): the
top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a
fund must be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
Financial World publishes its monthly Independent Appraisals of Mutual
Funds, a survey of approximately 1000 mutual funds. Funds are categorized as to
type, e.g., balanced funds, corporate bond funds, global bond funds, growth and
income funds, U.S. government bond funds, etc. To compete, funds must be over
one year old, have over $1 million in assets, require a maximum of $10,000
initial investment, and should be available in at least 10 states in the United
States. The funds receive a composite past performance rating, which weighs
40
<PAGE>
the intermediate- and long-term past performance of each fund versus its
category, as well as taking into account its risk, reward to risk, and fees. An
A+ rated fund is one of the best, while a D- rated fund is one of the worst.
The source for Financial World rating is Schabacker investment management in
Rockville, Maryland.
Forbes magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond funds,
municipal bond funds, etc. Data sources include Lipper Analytical Services and
CDA Investment Technologies. The ratings are based strictly on performance at
net asset value over the given cycles. Funds performing in the top 5% receive
an A+ rating; the top 15% receive an A rating; and so on until the bottom 5%
receive an F rating. Each fund exhibits two ratings, one for performance in
"up" markets and another for performance in "down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value and
reinvestment of dividends and capital gains and not reflecting deduction of any
sales charges. Funds are ranked by tenths: a rank of 1 means that a fund was
among the highest 10% in total return for the period; a rank of 10 denotes the
bottom 10%. Funds compete in categories of similar funds -- aggressive growth
funds, growth and income funds, sector funds, corporate bond funds, global
governmental bond funds, mortgage-backed securities funds, etc. Kiplinger's
also provides a risk-adjusted grade in both rising and falling markets. Funds
are graded against others with the same objective. The average weekly total
return over two years is calculated. Performance is adjusted using quantitative
techniques to reflect the risk profile of the fund.
U.S. News and World Report periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co.,
a Boston research firm. Over 2000 funds are tracked and divided into 10 equity,
taxable bond and tax-free bond categories. Funds compete within the 10 groups
and three broad categories. The OPI is a number from 0-100 that measures the
relative performance of funds at least three years old over the last 1, 3, 5
and 10 years and the last six bear markets. Total return reflects changes in
net asset value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges. Results for
the longer periods receive the most weight.
The 100 Best Mutual Funds You Can Buy authored by Gordon K. Williamson.
The author's list of funds is divided into 12 equity and bond fund categories,
and the 100 funds are determined by applying four criteria. First, equity funds
whose current management teams have been in place for less than five years are
eliminated. (The standard for bond funds is three years.) Second, the author
excludes any fund that ranks in the bottom 20 percent of its category's risk
level. Risk is determined by analyzing how many months over the past three
years the fund has underperformed a bank CD or a U.S. Treasury bill. Third, a
fund must have demonstrated strong results for current three-year and five-year
performance. Fourth, the fund must either possess, in Mr. Williamson's
judgment, "excellent" risk-adjusted return or "superior" return with low levels
of risk. Each of the 100 funds is ranked in five categories: total return,
risk/volatility, management, current income and expenses. The rankings follow a
five-point system: zero designates "poor"; one point means "fair"; two points
denote "good"; three points qualify as a "very good"; four points rank as
"superior"; and five points mean "excellent."
41
<PAGE>
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of a Portfolio's property for all loss and expense of any
shareholder held personally liable for the obligations of a Portfolio. Thus the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
42
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Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) Financial Statements
(1) Audited Financial Statements and Financial Highlights (For all
Portfolios other than Mentor Asset Allocation Portfolio, Mentor Growth
Opportunities Portfolio, and Mentor Tax-Exempt Money Market Portfolio)
Financial Statements:
Portfolios of Investments -- September 30, 1998*
Statements of Assets and Liabilities -- September 30, 1998*
Statements of Operations -- year ended September 30, 1998*
Statements of Changes in Net Assets -- years/periods ended
September 30, 1998 and September 30, 1997*
Financial Highlights (+)*
Notes to Financial Statements*
Independent Auditors' Report*
_____________
* Included in Part B to this Registration Statement.
(+) Included in Part A to this Registration Statement.
(b) Exhibits:
(1)(i) Conformed copy of Declaration of Trust of the
Registrant, with Amendments No. 1 and 2 (2);
(ii) Amendment No. 5 to the Declaration of Trust of the
Registrant (12);
(iii) Form of Amendment to the Declaration of Trust of the
Registrant (13)
(iv) Form of Proposed Amendment to the Declaration of Trust
of the Registrant to be dated as of May 12, 1998 (14)
(v) Amendment No. 6 to the Declaration of Trust of the
Registrant (18)
(vi) Amendment No. 7 to the Declaration of Trust of the
Registrant (18)
(vii) Amendment No. 8 to the Declaration of Trust of the
Registrant (18)
(2) (i) Copy of By-Laws of the Registrant (1);
(ii) Amendment to By-Laws (18)
(3) Not applicable;
(4) Portions of Registrant's Declaration of Trust and By-Laws
relating to shareholder rights (1)(2)(12)(13);
(5)(i) Form Management Agreement of the Registrant
(Capital Growth, Income and Growth, Quality Income, and
Municipal Income Portfolios) (14);
(ii) Form of Investment Advisory Agreement
(Municipal Income Portfolio) (14);
(iii) Form of Investment Advisory Agreement
(Income and Growth Portfolio) (14);
(iv) Form of Investment Advisory and Management Agreement
(Perpetual Global Portfolio) (19);
(v) Form of Investment Advisory and Management
Agreement (Growth Portfolio) (19);
(vi) Form of Investment Advisory and Management Agreement (New
Opportunities Portfolio) (19);
(vii) Form of Investment Advisory and Management Agreement
(Short-Duration Income Portfolio) (19);
(viii) Form of Investment Advisory and Management
Agreement (Balanced Portfolio) (19);
(ix) Form of Investment Advisory and Management Agreement
(Institutional Money Market Portfolio) (19);
(x) Form of Investment Advisory and Management Agreement
(Institutional U.S. Government Money Market Portfolio)
(19);
(xi) Form of Investment Advisory and Management Agreement
(Growth Opportunities Portfolio) (19);
(xii) Form of Investment Advisory and Management Agreement
(Mentor High Income Portfolio) (19);
(xiii) Sub-Advisory Agreement (Mentor High Income Portfolio)(14);
(xiv) Form of Investment Advisory and Management Agreement
(Mentor Asset Allocation Portfolio) (19);
(xv) Form of Investment Advisory and Management Agreement
(Mentor Institutional Tax-Exempt Money Market Portfolio)
(19);
(xvi) Form of Investment Advisory and Management Agreement Mentor
Perpetual Global Emerging Companies Portfolio); (19)
(xvii) Form of Investment Advisory and Management Agreement
(Mentor High Yield Portfolio). (19)
(6) Form of Distribution Agreement of the Registrant (14)
(7) Not applicable;
(8)(i) Conformed copy of Custodian Contract of the Registrant
with Investors Fiduciary Trust Company (2);
(ii) Conformed copy of Custodian Contract of the Registrant
with State Street Bank and Trust Company (2);
(iii) Form of Administration Agreement of the
Registrant in respect of certain Portfolios (19);
(iv) Form of Custodian Contract with State Street Bank
and Trust Company in respect of foreign securities(7);
(v) Form of Administration Agreement of the Registrant in
respect of the Money Market Portfolios (17)
(9)(i) Conformed copy of Transfer Agency and Registrar
Agreement of the Registrant (2);
(ii) (a) Conformed copy of Shareholder Services Plan in respect
of certain Portfolios
(b) Form of Instrument of Transfer of Shareholder Services
Plan (8);
(iii) Form of New Amended and Restated Exhibit Shareholder
Service Plan in respect of certain Portfolios (19)
(9)(iii) Form of Agency Agreement with Investors Fiduciary Trust
Company (Money Market Portfolios) (17);
(9)(iv) Form of Draft Processing Agreement with Investors Fiduciary
Trust Company (Money Market Portfolios) (17)
(10) Not applicable;
(11)(i) Conformed copy of Consent of Independent Auditors (18);
(ii) Conformed copy of KPMG Peat Marwick LLP opinion on
Methodology and Procedures for Accounting for Multiple
Classes of Shares (5);
(12) Not applicable;
(13) Conformed copy of Initial Capital Understanding (1);
(14) Not applicable;
(15) Plan of Distribution (19)
(16)(i) Schedules for Computation of Performance
(all Portfolios)(8)
(18) Amended and Restated Rule 18f-3(d) Plan (18)
(24) Powers of Attorney (18)
(27)(i) Financial Data Schedules (18)
1. Incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed April 14, 1992.
2. Incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on Form N-1A filed May 14, 1993.
3. Incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed November 26, 1993.
4. Incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed August 3, 1994.
5. Incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed January 27, 1995.
6. Incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed March 15, 1995.
7. Incorporated by reference to Registrant's Post-Effective
Amendment No. 10 on Form N-1A filed January 15, 1996.
8. Incorporated by reference to Registrant's Post-Effective Amendment No. 11
on Form N-1A filed November 29, 1996.
9. Incorporated by reference to Registrant's Post-Effective Amendment No. 12
on Form N-1A filed January 22, 1997.
10. Incorporated by reference to Registrant's Post-Effective Amendment No. 13
on Form N-1A filed March 4, 1997.
11. Incorporated by reference to Registrant's Post-Effective Amendment
No. 14 on Form N-1A filed November 7, 1997.
12. Incorporated by reference to Registrant's Post-Effective Amendment No. 15
on Form N-1A filed December 22, 1997.
13. Incorporated by reference to Registrant's Post-Effective Amendment No. 16
on Form N-1A filed on January 30, 1998.
14. Incorporated by reference to Registrant's Post-Effective Amendment No. 17
on Form N-1A filed on May 7, 1998.
15. Incorporated by reference to Registrant's Post-Effective Amendment No. 18
on Form N-1A filed on May 12, 1998.
16. Incorporated by reference to Registrant's Post-Effective Amendment No. 19
on form N-1A filed on July 10, 1998.
17. Incorporated by reference to Registrant's Post-Effective Amendment No. 20
on form N-1A filed on July 31, 1998.
18. Incorporated by reference to Registrant's Post-Effective Amendment No. 21
on form N-1A filed on November 30, 1998.
19. Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant:
Reference is made to "Principal Holders of Securities" in Part
B of this Registration Statement
Item 26. Number of Holders of Securities as of December 31, 1998
Class A Class B Class Y
Non-Money Market Portfolios
Capital Growth Portfolio 10,969 15,618 --
Global Portfolio 3,873 8,824 --
Growth Portfolio 7,008 30,253 9
Income and Growth Portfolio 4,547 8,908 --
Municipal Income Portfolio 914 1,367 --
Quality Income Portfolio 2,891 4,890 --
Short-Duration Income Portfolio 1,366 2,140 --
Balanced Portfolio 3,117 13,296 6
High Income Portfolio 3,621 3,713 --
Perpetual Global Emerging Companies
Portfolio -- -- --
High Yield Portfolio -- -- --
Retail Institutional
Money Market Portfolios
Money Market Portfolio 4 4
U.S. Government Money Market Portfolio 4 74
Tax Exempt Money Market Portfolio 4 3
Item 27. Indemnification:
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed January 31, 1992 (File Nos.
33-45315 and 811-6550).
Item 28. Business and Other Connections of Investment Advisers
The business and other connections of each director, officer, or partner
of the entities below in which such director, officer, or partner is or has
been, at any time during the past two fiscal years, engaged for his own account
or in the capacity of director, officer, employee, partner, or trustee are set
forth in the following tables.
(a) The following is additional information with respect to the
directors and officers of Mentor Investment Advisors, LLC:
Business, Profession,
Vocation or Employment
Position with during the past
Name Investment Adviser two fiscal years
John G. Davenport Managing Director Managing Director,
Mentor Investment
Group, LLC.
R. Preston Nuttall Managing Director Managing Director,
Mentor Investment
Group, LLC.
Paul F. Costello Managing Director Managing Director,
Mentor Investment Group,
LLC; President, Mentor
Funds, Mentor
Institutional Trust, Cash
Resource Trust, Mentor
Income Fund, Inc.; and
America's Utility Fund,
Inc.; Senior Vice
President, Mentor
Distributors, LLC;
Managing Director, Mentor
Perpetual Advisors, LLC.
P. Michael Jones Managing Director Managing Director,
Mentor Investment
Group, LLC.
Peter J. Quinn, Jr. Managing Director Managing Director,
Mentor Investment
Group, LLC.
-3-
<PAGE>
Daniel J. Ludeman Chairman Chairman and Chief
Executive Officer,
Mentor Investment
Group, LLC.
Karen H. Wimbish Managing Director Managing Director,
Mentor Investment
Group, LLC.
Terry L. Perkins Treasurer Senior Vice President,
Secretary Mentor Investment Group,
L.L.C.
Michael A. Wade Controller Vice President, Mentor
Investment Group, L.L.C.
(b) The following is additional information with respect to the directors and
officers of Mentor Perpetual Advisors, LLC ("Mentor Perpetual"):
<TABLE>
Other Substantial
Position with the Business, Profession,
Name Investment Advisor Vocation or Employment
<S> <C> <C>
Scott A. McGlashan President Director, Perpetual
Portfolio Management
Limited.
Martyn Arbib Managing Director Chairman, Perpetual
Portfolio Management
Limited.
Roger C. Cormick Managing Director Deputy Chairman -
Marketing, Perpetual
Portfolio Management
Limited.
Paul F. Costello Managing Director Managing Director, Mentor
Investment Group, LLC
and Mentor Investment
Advisors, LLC; President,
Mentor Funds, Mentor
Institutional
Trust, Cash Resource
Trust, Mentor Income
Fund, Inc., and America's
Utility Fund, Inc.;
Senior Vice President,
Mentor Distributors, LLC.
Daniel J. Ludeman Managing Director Chairman and Chief
Executive Officer,
Mentor Investment
Group, LLC; Director,
Wheat First Securities,
Inc.; Managing Director,
Wheat First Butcher
Singer, Inc.
David S. Mossop Managing Director Director, Perpetual
Portfolio Management
Limited
Peter J. Quinn, Jr. Managing Director Managing Director,
Mentor Investment
Group, LLC.
Roderick A. Smyth Managing Director Managing Director,
Mentor Investment
Group, LLC.
* The address of Mentor Investment Group, LLC, Wheat, First Securities,
Inc., Wheat First Butcher Singer, Inc., Mentor Funds, Mentor Income
Fund, Inc., Mentor Investment Advisors, LLC, and Mentor Perpetual
Advisors, LLC is 901 East Byrd Street, Richmond, VA 23219. The address
of Ryland Capital Management, Inc. and RAC Income Fund, Inc. is 11000
Broken Land Parkway, Columbia, MD 21044. The address of Perpetual
Portfolio Management Limited is 48 Hart Street, Henley-on-Thames, Oxon,
England, RG92AZ.
</TABLE>
(c) Wellington Management Company, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 28 of officers
and partners of Wellington Management, together with any information as to
any business profession, vocation or employment of a substantial nature
engaged in by such officers and partners during the past two years, is
incorporated herein by reference from Schedules B and D of Form ADV filed
by Wellington Management pursuant to the Advisers Act (SEC File No.
801-15908).
(d) The following is additional information with respect to the directors
and officers of Van Kampen American Capital Management Inc., located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181-4486:
Other Substantial
Position with Business, Profession,
Name Investment Advisor Vocation or Employment
---- ------------------ ----------------------
Don G. Powell Chairman and Director Chairman and Director,
VK/AC Holding, Inc.,
Van Kampen American
Capital, Inc., Van
Kampen American Capital
Distributors, Inc.,
Van Kampen American
Capital Asset
Management, Inc., Van
Kampen American Capital
Investment Advisory
Corp., and Van
Kampen American Capital
Advisors, Inc.
Philip N. Duff Chief Executive Officer President and Chief
Executive Officer,
VK/AC Holding, Inc.
and Van Kampen American
Capital, Inc.
Dennis J. McDonnell President and Chief Executive Vice
Operating Officer President, VK/AC
Holding, Inc. and Van
Kampen American
Capital, Inc.;
President and Chief
Operating Officer, Van
Kampen American
Capital Advisors, Inc.,
Van Kampen American
Capital Asset
Management, Inc.,
and Van Kampen
American Capital
Investment Advisory
Corp.
Ronald A. Nyberg Executive Vice President Executive Vice
and General Counsel President and General
Counsel, VK/AC Holding,
Inc., Van Kampen
American Capital, Inc.,
Van Kampen American
Capital Distributors,
Inc., Van Kampen
American Asset
Management, Inc., Van
Kampen American
Investment Advisory
Corp., and Van Kampen
American Capital
Advisors, Inc.
William R. Rybak Executive Vice President Executive Vice
and Chief Financial President and Chief
Officer Financial Officer,
VK/AC Holding, Inc.,
Van Kampen American
Capital, Inc., Van
Kampen American Capital
Distributors, Inc.,
Van Kampen American
Capital Asset
Management Inc., Van
Kampen American
Capital Investment
Advisory Corp., and
Van Kampen American
Capital Advisors, Inc.
Peter W. Hegel Executive Vice President Executive Vice
President, Van Kampen
American Capital Asset
Management, Inc.,
Van Kampen American
Capital Investment
Advisory Corp., and
Van Kampen American
Capital Advisors, Inc.
Alan T. Sachtleben Executive Vice President Executive Vice
President, Van Kampen
American Capital
Asset Management, Inc.,
Van Kampen American
Capital Investment
Advisory Corp., and
Van Kampen American
Capital Advisors, Inc.
Item 29. Principal Underwriters:
(a) Mentor Distributors, LLC, the Fund's principal underwriter, acts as
principal underwriter for the following investment companies:
The Mentor Funds
o Mentor Growth Portfolio
o Mentor Short-Duration Income Portfolio
o Mentor Balanced Portfolio
o Mentor Capital Growth Portfolio
o Mentor Perpetual Global Portfolio
o Mentor High Income Portfolio
o Mentor Income and Growth Portfolio
o Mentor Quality Income Portfolio
o Mentor Municipal Income Portfolio
o Mentor U.S. Government Money Market Portfolio
o Mentor Money Market Portfolio
o Mentor Tax-Exempt Money Market Portfolio
o Mentor Perpetual Global Emerging Companies Portfolio
o Mentor High Yield Portfolio
Cash Resource Trust
o Cash Resource Money Market Fund
o Cash Resource U.S. Government Money Market Fund
o Cash Resource Tax-Exempt Money Market Fund
o Cash Resource California Tax-Exempt Money Market Fund
o Cash Resource New York Tax-Exempt Money Market Fund
Mentor Institutional Trust
o Mentor U.S. Government Cash Management Portfolio
o Mentor Fixed-Income Portfolio
o Mentor Perpetual International Portfolio
Mentor Investment Group
o Mentor Income Fund
o America's Utility Fund
Mentor Variable Investment Portfolios
o Mentor VIP Growth Portfolio
o Mentor VIP Strategy Portfolio
o Mentor VIP Balanced Portfolio
o Mentor VIP Capital Growth Portfolio
o Mentor VIP Perpetual International Portfolio
(b) Information concerning officers of Mentor Distributors, LLC:
-10-
Name And Principal Positions And Offices Positions And Offices
Business Address* With Underwriter With Registrant
- ----------------- -------------------- ---------------------
Lynn Mangum Chairman Inapplicable
D'Ray Moore President Inapplicable
Dennis Sheehan Executive Vice President Inapplicable
William J. Tomko Senior Vice President Inapplicable
Mark J. Rybarczyk Senior Vice President Inapplicable
Kevin J. Dell Vice President and Inapplicable
Secretary
Michael D. Burns Vice President Inapplicable
David Blackmore Vice President Inapplicable
Robert L. Tuch Assistant Secretary Inapplicable
Steven Ludwig Compliance Officer Inapplicable
*Principal Address for all Officers:
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-8000
(c) Inapplicable.
Item 30. Location of Accounts and Records
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules promulgated thereunder
are maintained by the Fund at 901 East Byrd Street, Richmond, Virginia
23219 or by Boston Financial Data Services, Inc., the Registrant's
transfer agent, at 2 Heritage Drive, North Quincy, Massachusetts
02171. Records relating to the duties of the Registrant's custodian
are maintained by the Registrant's Custodian, Investors Fiduciary
Trust Company, 127 West 10th Street, Kansas City, Missouri 64105.
Records relating to the duties of the Registrant's distributor are
maintained by the Registrant's Distributor, Mentor Distributors, LLC,
3435 Stelzer Road, Columbus, Ohio 43219-8000.
Item 31. Management Services
None.
Item 32. Undertakings:
(a) Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
be signed on its behalf by the undersigned, thereto duly authorized, in the City
of Richmond, and the Commonwealth of Virginia on this day of January, 1999.
MENTOR FUNDS
By: /s/ Paul F. Costello
----------------------------
Paul F. Costello
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacity and on the
day of January, 1999:
<TABLE>
<CAPTION>
Name Title
<S> <C>
*
- ----------------------- Chairman and Trustee
Daniel J. Ludeman (Chief Executive
Officer)
*
Trustee
- -----------------------
Peter J. Quinn, Jr.
*
- ---------------------- Trustee
Arnold H. Dreyfuss
* Trustee
- -----------------------
Thomas F. Keller
* Trustee
- -----------------------
Louis W. Moelchert, Jr.
* Trustee
- -----------------------
Troy A. Peery, Jr.
* Trustee
- -----------------------
Arch T. Allen, III
* Trustee
- -----------------------
Weston E. Edwards
* Trustee
- -----------------------
Jerry R. Barrentine
* Trustee
- -----------------------
J. Garnett Nelson
/s/ Paul F. Costello President
- ------------------------
Paul F. Costello
/s/ Terry L. Perkins Treasurer (Principal Financial
- ------------------------ and Accounting Officer)
Terry L. Perkins
/s/ Paul F. Costello Attorney-in-fact
- ------------------------
Paul F. Costello
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit 5(iv) Form of Investment Advisory and Management Agreement
(Perpetual Global Portfolio)
Exhibit 5(v) Form of Investment Advisory and Management Agreement (Growth
Portfolio)
Exhibit 5(vi) Form of Investment Advisory and Management Agreement (New
Opportunities Portfolio)
Exhibit 5(vii) Form of Investment Advisory and Management Agreement
(Short-Duration Income Portfolio)
Exhibit 5(viii) Form of Investment Advisory and Management Agreement
(Balanced Portfolio)
Exhibit 5(ix) Form of Investment Advisory and Management Agreement
(Institutional Money Market Portfolio)
Exhibit 5(x) Form of Investment Advisory and Management Agreement
(Institutional U.S. Government Money Market Portfolio)
Exhibit 5(xi) Form of Investment Advisory and Management Agreement (Growth
Opportunities Portfolio)
Exhibit 5(xii) Form of Investment Advisory and Management Agreement (Mentor
High Income Portfolio)
Exhibit 5(xiii) Sub-Advisory Agreement (Mentor High Income Portfolio)
Exhibit 5(xiv) Form of Investment Advisory and Management Agreement (Mentor
Asset Allocation Portfolio)
Exhibit 5(xv) Form of Investment Advisory and Management Agreement
(Mentor Institutional Tax-Exempt Money Market Portfolio)
Exhibit 5(xvi) Form of Investment Advisory and Management Agreement
(Mentor Perpetual Global Emerging Companies Portfolio)
Exhibit 5(xvii) Form of Investment Advisory and Management Agreement
(Mentor High Yield Portfolio)
Exhibit 8(iii) Form of Administration Agreement of the
Registrant in respect of certain Portfolios.
Exhibit 9(iii) Form of New Amended and Restated Exhibit Shareholder
Service Plan in respect of certain Portfolios
Exhibit 15 Form of Plan of Distribution
Exhibit 5(iv)
PERPETUAL GLOBAL PORTFOLIO
of
THE MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Management Contract dated as of February 1, 1998 between THE
MENTOR FUNDS, a Massachusetts business trust (the "Trust"), and MENTOR
PERPETUAL ADVISORS, LLC, a Virginia limited liability company (the
"Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the series of shares of beneficial interest of the
Trust designated for such purpose by the Trustees (the "Portfolio"), will
determine what investments shall be purchased, held, sold, or exchanged by
each of the Portfolios and what portion, if any, of the assets of a
Portfolio shall be held uninvested and shall, on behalf of each Portfolio,
make changes in the Portfolio's investments. In the performance of its
duties, the Manager will comply with the provisions of the Agreement and
Declaration of Trust and Bylaws of the Trust and each Portfolio's stated
investment objectives, policies, and restrictions, and will use its best
efforts to safeguard and promote the welfare of the Trust and to comply with
other policies which the Trustees may from time to time determine and shall
exercise the same care and diligence expected of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Trust as provided in Section 1(d), will furnish all necessary investment and
related management facilities, including, salaries of personnel, required
for it to execute its duties faithfully. The Manager will pay the
compensation, if any, of certain officers of the Trust carrying out the
investment management and related duties provided for by this Contract.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for each Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers
or dealers and the placing of such orders, the Manager shall give primary
consideration to securing for each Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described
below.
<PAGE>
In doing so, the Manager, bearing in mind the Trust's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market
for the security, the amount of the commission, the timing of the
transaction taking into account market prices and trends, the reputation,
experience, and financial stability of the broker or dealer involved, and
the quality of service rendered by the broker or dealer in other
transactions. Subject to such policies as the Trustees of the Trust may
determine, the Manager shall not be deemed to have acted unlawfully or to
have breached any duty created by this Contract or otherwise solely by
reason of its having caused the Portfolio to pay a broker or dealer that
provides brokerage and research services to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission that another broker or dealer would have charged for
effecting that transaction, if the Manager determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Manager's overall
responsibilities with respect to the Portfolio and to other clients of the
Manager as to which the Manager exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national
securities exchange to effect any transaction on the exchange for the
account of each Portfolio which is permitted by Section 11(a) of the
Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, and each
Portfolio hereby consents to the retention of compensation for such
transactions in accordance with Rule 11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Trust not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee
of, or be otherwise interested in, the Manager, and in any person controlled
by or under common control with the Manager, and that the Manager and any
person controlled by or under common control with the Manager may have an
interest in the Trust. It is also understood that the Manager and any person
controlled by or under common control with the Manager have and may have
advisory, management, service, or other contracts with other organizations
and persons, and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE TRUST TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any
consultants retained by the Manager, each Portfolio shall pay the Manager,
as promptly as possible after the last day of each month, a fee, calculated
daily, of 1.10% annually of the Portfolio's average daily net assets up to
$75 million, and 1.00% annually of the Portfolio's average daily net assets
-2-
<PAGE>
over $75 million. The first payment of the fee shall be made as promptly as
possible at the end of the month next succeeding the effective date of this
Agreement in respect of the Portfolio, and shall constitute a full payment
of the fee due the Manager for all services prior to that date. If this
Agreement is terminated as of any date not the last day of a month, such fee
shall be paid as promptly as possible after such date of termination, shall
be based on the average daily net assets of the Portfolio in that period
from the beginning of such month to such date of termination, and shall be
that proportion of such average daily net assets as the number of business
days in such period bears to the number of business days in such month. The
average daily net assets of the Portfolio shall in all cases be based only
on business days and be computed as of the time of the regular close of
business of the New York Stock Exchange, or such other time as may be
determined by the Trustees. Each such payment shall be accompanied by a
report of the Trust prepared either by the Trust or by a reputable firm of
independent accountants which shall show the amount properly payable to the
Manager under this Agreement and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be
amended unless such amendment be approved at a meeting by the affirmative
vote of a majority of the outstanding shares of the Portfolio, and by the
vote, cast in person at a meeting called for the purpose of voting on such
approval, of a majority of the Trustees of the Trust who are not interested
persons of the Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Contract as to
one or more Portfolios or as to the Trust as a whole by not more than sixty
days nor less than thirty days written notice delivered or mailed by
registered mail, postage prepaid, to the other party, or
(b) If (i) the Trustees of the Trust or the shareholders by the
affirmative vote of a majority of the outstanding shares of any Portfolio,
and (ii) a majority of the Trustees of the Trust who are not interested
persons of the Trust or of the Manager, by vote cast in person at a meeting
called for the purpose of voting on such approval, do not specifically
approve at least annually the continuance of this Contract, then this
Contract shall automatically terminate (as to the Trust as a whole or as to
the affected Portfolio, as the case may be) at the close of business on
January 31, 2000 or the expiration of one year from the effective date of
the last such continuance, whichever is later.
-3-
<PAGE>
Action by the Trust under (a) above may be taken either (i) by vote of
a majority of its Trustees, or (ii) by the affirmative vote of a majority of
the outstanding shares of the affected Portfolio.
Termination of this Contract pursuant to this Section 5 will be without
the payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority
of the outstanding shares" of a Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67%
or more of the shares of the Portfolio present (in person or by proxy) and
entitled to vote at such meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio entitled to vote at such meeting are
present in person or by proxy, or (b) of the holders of more than 50% of the
outstanding shares of the Portfolio entitled to vote at such meeting,
whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under said Act; the
term "specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder; and the term "brokerage and research
services" shall have the meaning given in the Securities Exchange Act of
1934, as amended, and the Rules and Regulations thereunder.
7. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and
duties hereunder, the Manager shall not be subject to any liability to the
Trust or to any shareholder of the Trust for any act or omission in the
course of, or connected with, rendering services hereunder.
8. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the
obligations of this instrument are not binding upon any of the Trustees,
officers, or shareholders of the Trust but are binding only upon the assets
and property of the Trust.
-4-
<PAGE>
IN WITNESS WHEREOF, THE MENTOR FUNDS and PERPETUAL INVESTMENT ADVISERS,
INC., have each caused this instrument to be signed in duplicate in its
behalf by its President or Vice President thereunto duly authorized, all as
of the day and year first above written.
THE MENTOR FUNDS
on behalf of PERPETUAL GLOBAL PORTFOLIO
By:____________________________
MENTOR PERPETUAL ADVISORS, LLC
By:___________________________
-5-
Exhibit 5(v)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT, made this 1st day of
February, 1998 by and between MENTOR FUNDS, a Massachusetts business trust (the
"Trust"), and MENTOR INVESTMENT ADVISORS, LLC, a Virginia limited liability
company (the "Adviser").
RECITALS OF THE PARTIES
A. The Trust is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940 (the "1940 Act") and
has registered the shares of beneficial interest of Mentor Growth Portfolio, a
series of shares of beneficial interest of the Trust (the "Portfolio"), for sale
to the public under the Securities Act of 1933 and various state securities
laws; and
B. The Trust, on behalf of the Portfolio, wishes to retain the Adviser
to provide investment advisory and management services to the Portfolio; and
C. The Adviser is willing to furnish such services on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and mutual covenants
herein contained, it is agreed as follows:
1. Information Furnished. The Trust, on behalf of the Portfolio, shall
at all times keep the Adviser fully informed with regard to the securities owned
by the Portfolio, its funds available, or to become available, for investment,
and generally as to its investments and investment program. It shall furnish the
Adviser with such other documents and information with regard to its investments
and investment program as the Trustees may from time to time reasonably request.
2. Research, Purchase, Sale, etc. of Securities.
(a) Subject to the direction and control of the Trustees of
the Trust, the Adviser shall regularly provide the Portfolio with investment
research, investment advice, and investment management and supervision and shall
furnish a continuous investment program for the Portfolio's portfolio of
securities consistent with the Portfolio's investment goals and policies. The
Adviser shall determine from time to time what securities will be purchased,
-1-
<PAGE>
retained or sold by the Portfolio, and shall implement those decisions, all
subject to the supervision and direction of the Trustees, the provisions of the
Agreement and Declaration of Trust and Bylaws of the Trust, the 1940 Act, the
applicable rules and regulations of the Securities and Exchange Commission, and
other applicable federal and state law, as well as the investment goals and
policies of the Portfolio.
(b) The Trust, on behalf of the Portfolio, hereby authorizes
any entity or person associated with the Adviser which is a member of a national
securities exchange to effect any transaction on the exchange for the account of
the Portfolio which is permitted by Section 11(a) of the Securities Exchange Act
of 1934 and Rule 11a2-2(T) thereunder, and the Portfolio hereby consents to the
retention of compensation for such transactions in accordance with Rule
11a2-2(T)(2)(iv).
3. Management Policies. In providing investment management services to
the Portfolio, the Adviser shall give primary consideration to securing the most
favorable price and efficient execution. In so doing, the Adviser may consider
the financial responsibility, research and investment information and other
services provided by brokers or dealers who may effect or be a party to any such
transaction or other transactions to which other clients of the Adviser may be a
party. The Portfolio recognizes that it is desirable that the Adviser have
access to supplemental investment and market research and security and economic
analyses provided by brokers and that such brokers may execute brokerage
transactions at a higher cost to the Portfolio than may result when allocating
brokerage to other brokers on the basis of seeking the most favorable price and
efficient execution. Therefore, the Adviser is authorized to pay higher
brokerage commissions for the purchase and sale of securities for the Portfolio
to brokers who provide such research and analyses, subject to review by the
Trustees from time to time with respect to the extent and continuation of this
practice. It is understood that the services provided by such brokers may be
useful to the Adviser in connection with its services to other clients.
4. Aggregation of Orders. On occasions when the Adviser deems the
purchase or sale of a security to be in the best interest of the Portfolio as
well as other clients, the Adviser, to the extent permitted by applicable laws
and regulations, may aggregate the securities to be so sold or purchased in
order to obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner it considers to be the most equitable and consistent with
its fiduciary obligations to the Portfolio and to such other clients.
5. Nonexclusive Agreement.
(a) The Trust understands that the Adviser now acts and will
continue to act as investment adviser to various fiduciary or other managed
accounts, and the Portfolio has no objection to the Adviser's so acting. In
addition, it is understood that the persons employed by the Adviser to assist in
the performance of its duties hereunder will not devote their full
-2-
<PAGE>
time to such service and nothing contained herein shall be deemed to limit or
restrict the right of the Adviser or any affiliate of the Adviser to engage in
and devote time and attention to other businesses or to render services of
whatever kind or nature.
(b) The Trust understands that from time to time hereafter the
Adviser may act as investment adviser to one or more other investment companies,
and the Trust has no objection to the Adviser's so acting, provided that when
two or more companies managed by the Adviser have available funds for investment
in money market instruments, available money market investments will be
allocated in accordance with a formula believed to be equitable to each company.
It is recognized that in some cases this procedure may adversely affect the size
of the position obtainable for the Portfolio.
6. Expenses.
(1) The Adviser shall maintain all books and records with
respect to the Portfolio's securities transactions and keep the Portfolio's
books of account in accordance with all applicable federal and state laws and
regulations. The Adviser shall authorize and permit any of its directors,
officers and employees, who may be elected as Trustees or officers of the Trust,
to serve in the capacities in which they are elected.
(2) The Adviser shall bear the cost of rendering the
investment management services to be performed by it under this Agreement, and
shall, at its own expense, pay the compensation of the officers and employees,
if any, of the Trust who are employees of the Adviser.
(3) Other than as herein specifically indicated, the Adviser
shall not be responsible for the Portfolio's expenses. Specifically, the Adviser
will not be responsible, except to the extent of the reasonable compensation of
employees of the Trust whose services may be used by the Adviser hereunder, for
any of the following expenses of the Portfolio, which expenses shall be borne by
the Portfolio: interest, taxes, governmental fees or membership dues; brokerage
commissions or charges, if any; fees of custodians, transfer agents, registrars
or other agents; expense of preparing share certificates; expenses relating to
the redemption or repurchase of the Portfolio's shares; expenses of registering
and qualifying Portfolio shares for sale under applicable federal and state law;
expenses of preparing, setting in print, printing and distributing prospectuses,
reports, notices and dividends to Portfolio shareholders; cost of stationery;
costs of shareholders' and other meetings of the Portfolio; traveling expenses
of officers, Trustees and employees of the Trust, if any; fees of the Trust's
independent Trustees and salaries of any officers or employees who are not
affiliated with the Adviser; and the Portfolio's pro rata portion of premiums on
any fidelity bond and other insurance covering the Trust and its officers and
Trustees.
(4) If, in any fiscal year, the Portfolio's total operating
expenses, exclusive of taxes, interest, brokerage fees, distribution fees and
extraordinary expenses (to the extent permitted by applicable state securities
laws and regulations), exceed the lowest applicable
-3-
<PAGE>
annual expense limitation established pursuant to statute or regulation of any
jurisdiction in which shares of the Portfolio are offered for sale, the Adviser
will reimburse (or assume expenses of) the Portfolio for the amount of such
excess. Such expense reimbursement (or assumption), will be estimated,
reconciled and paid (or assumed) on a monthly basis.
7. Salaries. No Trustee, officer or employee of the Trust shall receive
from the Trust any salary or other compensation as such Trustee, officer or
employee while he is at the same time a Trustee, officer or employee of the
Adviser or any affiliated company of the Adviser. This paragraph shall not apply
to Trustees, executive committee members, consultants and other persons who are
not regular members of the Adviser's or any affiliated company's staff.
8. Compensation of Adviser. As compensation for the services performed
and the facilities furnished and expenses assumed by the Adviser, including the
services of any consultants retained by the Adviser, the Portfolio shall pay the
Adviser, as promptly as possible after the last day of each month, a fee,
calculated daily, of .70 of 1% annually of the Portfolio's average daily net
assets. The first payment of the fee shall be made as promptly as possible at
the end of the month next succeeding the effective date of this Agreement, and
shall constitute a full payment of the fee due the Adviser for all services
prior to that date. If this Agreement is terminated as of any date not the last
day of a month, such fee shall be paid as promptly as possible after such date
of termination, shall be based on the average daily net assets of the Portfolio
in that period from the beginning of such month to such date of termination, and
shall be that proportion of such average daily net assets as the number of
business days in such period bears to the number of business days in such month.
The average daily net assets of the Portfolio shall in all cases be based only
on business days and be computed as of the time of the regular close of business
of the New York Stock Exchange, or such other time as may be determined by the
Trustees. Each such payment shall be accompanied by a report of the Trust
prepared either by the Trust or by a reputable firm of independent accountants
which shall show the amount properly payable to the Adviser under this Agreement
and the detailed computation thereof.
9. Responsibility of Adviser. The Adviser assumes no responsibility
under this Agreement other than to render the services called for hereunder, in
good faith, and shall not be responsible for any action of the Trustees in
following or declining to follow any advice or recommendation of the Adviser;
provided, however, that nothing in this Agreement shall protect the Adviser
against any liability to the Portfolio or its shareholders to which it would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties hereunder.
10. Limitation of Employment. Nothing in this Agreement shall limit or
restrict the right of any director, officer, or employee of the Adviser who may
also be a Trustee, officer, or employee of the Trust, to engage in any other
business or to devote his time and attention in part to the management or other
aspects of any other business whether of a similar nature or a dissimilar
nature, nor to limit or restrict the right of the Adviser to engage in any other
business or to render services of any kind, including investment advisory and
management services, to any other corporation, firm, individual or association.
11. Definitions. As used in this Agreement, the terms "securities," and
"net assets," shall have the meanings ascribed or attributed to them in the
Registration Statement of the Trust on Form N-1A; and the terms "assignment,"
"interested person," and "majority of the outstanding voting securities" shall
have the meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
-4-
<PAGE>
12. Term. Subject to the provisions of paragraphs 13 and 14 below, this
Agreement will remain in effect for two years from the date of its execution and
from year to year thereafter, provided that the Adviser does not notify the
Trust in writing at least sixty (60) days prior to the expiration date in any
year that it does not wish continuance of the Agreement for an additional year.
13. Termination. This Agreement shall terminate automatically in the
event of its assignment by the Adviser and shall not be assignable by the
Portfolio without the consent of the Adviser. This Agreement may also be
terminated at any time, without the payment of any penalty, by the Trustees or
by vote of a majority of the outstanding voting securities of the Portfolio by
sixty (60) days' written notice addressed to the Adviser at its principal place
of business.
14. Approval of Trustees. This Agreement shall be submitted for
approval to the Trustees annually and shall continue in effect only so long as
specifically approved annually by vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of such parties, cast in person
at a meeting called for that purpose, and either by vote of the holders of a
majority of the outstanding voting securities of the Portfolio or by majority
vote of the Trustees.
15. Agreement and Declaration of Trust. A copy of the Agreement and
Declaration of Trust of the Trust is on file with the Secretary of Sate of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the Trustees of the Trust as Trustees and not
individually and that the obligations of this instrument are not binding upon
any of the Trustees, officers, or shareholders of the Trust but are binding only
upon the assets and property of the Trust.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
MENTOR FUNDS
on behalf of Mentor Growth
Portfolio
By:____________________________
Title:
MENTOR INVESTMENT ADVISORS, LLC
By:____________________________
Title:
-6-
Exhibit 5(vi)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of February
1, 1998 between MENTOR FUNDS, a Massachusetts business trust (the "Trust"), and
MENTOR INVESTMENT ADVISORS, LLC, a Virginia limited liability company (the
"Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor New Opportunities Portfolio, a series of the
Trust (the "Portfolio"), will determine what investments shall be purchased,
held, sold, or exchanged by the Portfolio and what portion, if any, of the
assets of the Portfolio shall be held uninvested and shall make changes in the
Portfolio's investments. In the performance of its duties, the Manager will
comply with the provisions of the Agreement and Declaration of Trust and Bylaws
of the Portfolio and the Portfolio's stated investment objectives, policies, and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Portfolio and to comply with other policies which the Trustees may from
time to time determine and shall exercise the same care and diligence expected
of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience, and financial
stability of the broker or dealer involved, and the quality of service rendered
by the
A8-1
<PAGE>
broker or dealer in other transactions. Subject to such policies as the Trustees
of the Trust may determine, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Portfolio to pay a broker or dealer
that provides brokerage and research services to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission that another broker or dealer would have charged for
effecting that transaction, if the Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Portfolio and to other clients of the Manager as to which
the Manager exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and Rule 11a2-2(T) thereunder, and the Portfolio hereby consents to the
retention of compensation for such transactions in accordance with Rule
11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rates of 1.00% of the Portfolio's average daily net assets. The first
payment of the fee shall be made as promptly as possible at the end of the month
next succeeding the effective date of this Agreement, and shall constitute a
full payment of the fee due the Manager for all services prior to that date. If
this Agreement is terminated as of any date that is not the last day of a month,
such fee shall be paid as promptly as possible after
A8-2
<PAGE>
such date of termination, shall be based on the average daily net assets of the
Portfolio in that period from the beginning of such month to such date of
termination, and shall be that proportion of such average daily net assets as
the number of business days in such period bears to the number of business days
in such month. The average daily net assets of the Portfolio shall in all cases
be based only on business days and be computed as of the time of the regular
close of business of the New York Stock Exchange, or such other time as may be
determined by the Trustees. Each such payment shall be accompanied by a report
of the Trust prepared either by the Trust or by a reputable firm of independent
accountants which shall show the amount properly payable to the Manager under
this Agreement and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Agreement shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on January 31, 2000 (unless terminated automatically as set forth in
Section 4), and shall continue for successive one-year periods thereafter, if
approved in accordance with Section 6, until terminated by either party hereto
at any time by not more than sixty days nor less than thirty days written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Such action by the Trust with respect to termination may be taken either (i) by
vote of a majority of its Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Fund.
Termination of this Agreement pursuant to this Section 5 will be
without the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Agreement, this
Agreement shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
A8-3
<PAGE>
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust for the Fund as Trustees and not individually and that the
obligations of this instrument are not binding upon any of the Trustees,
officers, or shareholders of the Fund but are binding only upon the assets and
property of the Fund.
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT ADVISORS, LLC,
have each caused this instrument to be signed in duplicate in its behalf by its
President or Vice President thereunto duly authorized, all as of the day and
year first above written.
MENTOR FUNDS
on behalf of Mentor New Opportunities Portfolio
By:_____________________________________
MENTOR INVESTMENT ADVISORS, LLC
By:______________________________________
A8-4
Exhibit 5(vii)
Mentor Short-Duration Income Portfolio
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Management Contract dated as of February 1, 1998 between MENTOR
FUNDS, a Massachusetts business trust (the "Trust"), on behalf of the MENTOR
SHORT-DURATION INCOME PORTFOLIO, and MENTOR INVESTMENT ADVISORS, LLC, a Virginia
limited liability company (the "Manager")
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the series of shares of beneficial interest of the Trust
designated for such purpose by the Trustees (the "Portfolio"), will determine
what investments shall be purchased, held, sold, or exchanged by each of the
Funds and what portion, if any, of the assets of a Portfolio shall be held
uninvested and shall, on behalf of each Portfolio, make changes in the
Portfolio's investments. In the performance of its duties, the Manager will
comply with the provisions of the Agreement and Declaration of Trust and Bylaws
of the Trust and each Portfolio's stated investment objectives, policies, and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Trust and to comply with other policies which the Trustees may from time
to time determine and shall exercise the same care and diligence expected of the
Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Trust as provided in Section 1(d), will furnish all necessary investment and
related management facilities, including, salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Contract.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for each Portfolio's account with
brokers or dealers selected by
<PAGE>
the Manager. In the selection of such brokers or dealers and the placing of such
orders, the Manager shall give primary consideration to securing for each
Portfolio the most favorable price and execution available, except to the extent
it may be permitted to pay higher brokerage commissions for brokerage and
research services as described below. In doing so, the Manager, bearing in mind
the Trust's best interests at all times, shall consider all factors it deems
relevant, including, by way of illustration, price, the size of the transaction,
the nature of the market for the security, the amount of the commission, the
timing of the transaction taking into account market prices and trends, the
reputation, experience, and financial stability of the broker or dealer
involved, and the quality of service rendered by the broker or dealer in other
transactions. Subject to such policies as the Trustees of the Trust may
determine, the Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Contract or otherwise solely by reason of its
having caused the Portfolio to pay a broker or dealer that provides brokerage
and research services to the Manager an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission that
another broker or dealer would have charged for effecting that transaction, if
the Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the
Portfolio and to other clients of the Manager as to which the Manager exercises
investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of each
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and Rule 11a2-2(T) thereunder, and each Portfolio hereby consents to the
retention of compensation for such transactions in accordance with Rule
11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Trust not expressly assumed by the Manager pursuant to this Section 1 other
than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Trust. It is also understood that the Manager and any person controlled by
or under common control with the Manager have and may have advisory, management,
service, or other contracts with other organizations and persons, and may have
other interests and business.
<PAGE>
3. COMPENSATION TO BE PAID BY THE TRUST TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, each Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, of 0.50 of
1% annually of the Portfolio's average daily net assets. The first payment of
the fee shall be made as promptly as possible at the end of the month next
succeeding the effective date of this Agreement in respect of the Portfolio, and
shall constitute a full payment of the fee due the Manager for all services
prior to that date. If this Agreement is terminated as of any date not the last
day of a month, such fee shall be paid as promptly as possible after such date
of termination, shall be based on the average daily net assets of the Portfolio
in that period from the beginning of such month to such date of termination, and
shall be that proportion of such average daily net assets as the number of
business days in such period bears to the number of business days in such month.
The average daily net assets of the Portfolio shall in all cases be based only
on business days and be computed as of the time of the regular close of business
of the New York Stock Exchange, or such other time as may be determined by the
Trustees. Each such payment shall be accompanied by a report of the Trust
prepared either by the Trust or by a reputable firm of independent accountants
which shall show the amount properly payable to the Manager under this Agreement
and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment be approved at a meeting by the affirmative vote of a
majority of the outstanding shares of the Portfolio, and by the vote, cast in
person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Contract as to
one or more Funds or as to the Trust as a whole by not more than sixty days nor
less than thirty days written notice delivered or mailed by registered mail,
postage prepaid, to the other party, or
<PAGE>
(b) If (i) the Trustees of the Trust or the shareholders by the
affirmative vote of a majority of the outstanding shares of any Portfolio, and
(ii) a majority of the Trustees of the Trust who are not interested persons of
the Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically approve at least
annually the continuance of this Contract, then this Contract shall
automatically terminate at the close of business on January 31, 2000 or the
expiration of one year from the effective date of the last such continuance,
whichever is later.
Action by the Trust under (a) above may be taken either (i) by vote of
a majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the affected Portfolio.
Termination of this Contract pursuant to this Section 5 will be without
the payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority
of the outstanding shares" of a Portfolio means the affirmative vote, at a duly
called and held meeting of such shareholders, (a) of the holders of 67% or more
of the shares of the Portfolio present (in person or by proxy) and entitled to
vote at such meeting, if the holders of more than 50% of the outstanding shares
of the Portfolio entitled to vote at such meeting are present in person or by
proxy, or (b) of the holders of more than 50% of the outstanding shares of the
Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
7. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
<PAGE>
8. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees, officers, or
shareholders of the Trust but are binding only upon the assets and property of
the Trust.
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT ADVISORS, LLC,
have each caused this instrument to be signed in duplicate in its behalf by its
President or Vice President thereunto duly authorized, all as of the day and
year first above written.
MENTOR FUNDS
on behalf of the Mentor Short-Duration Income
Portfolio
By:____________________________
Title:
MENTOR INVESTMENT ADVISORS, LLC
By:____________________________
Title:
Exhibit 5(viii)
Mentor Balanced Portfolio
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Management Contract dated as of February 1, 1998 between MENTOR
FUNDS, a Massachusetts business trust (the "Trust"), on behalf of the MENTOR
BALANCED PORTFOLIO, and MENTOR INVESTMENT ADVISORS, LLC, a Virginia limited
liability company (the "Manager")
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the series of shares of beneficial interest of the Trust
designated for such purpose by the Trustees (the "Portfolio"), will determine
what investments shall be purchased, held, sold, or exchanged by each of the
Funds and what portion, if any, of the assets of a Portfolio shall be held
uninvested and shall, on behalf of each Portfolio, make changes in the
Portfolio's investments. In the performance of its duties, the Manager will
comply with the provisions of the Agreement and Declaration of Trust and Bylaws
of the Trust and each Portfolio's stated investment objectives, policies, and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Trust and to comply with other policies which the Trustees may from time
to time determine and shall exercise the same care and diligence expected of the
Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Trust as provided in Section 1(d), will furnish all necessary investment and
related management facilities, including, salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Contract.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for each Portfolio's account with
brokers or dealers selected by
<PAGE>
the Manager. In the selection of such brokers or dealers and the placing of such
orders, the Manager shall give primary consideration to securing for each
Portfolio the most favorable price and execution available, except to the extent
it may be permitted to pay higher brokerage commissions for brokerage and
research services as described below. In doing so, the Manager, bearing in mind
the Trust's best interests at all times, shall consider all factors it deems
relevant, including, by way of illustration, price, the size of the transaction,
the nature of the market for the security, the amount of the commission, the
timing of the transaction taking into account market prices and trends, the
reputation, experience, and financial stability of the broker or dealer
involved, and the quality of service rendered by the broker or dealer in other
transactions. Subject to such policies as the Trustees of the Trust may
determine, the Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Contract or otherwise solely by reason of its
having caused the Portfolio to pay a broker or dealer that provides brokerage
and research services to the Manager an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission that
another broker or dealer would have charged for effecting that transaction, if
the Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the
Portfolio and to other clients of the Manager as to which the Manager exercises
investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of each
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and Rule 11a2-2(T) thereunder, and each Portfolio hereby consents to the
retention of compensation for such transactions in accordance with Rule
11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Trust not expressly assumed by the Manager pursuant to this Section 1 other
than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Trust. It is also understood that the Manager and any person controlled by
or under common control with the Manager have and may have advisory, management,
service, or other contracts with other organizations and persons, and may have
other interests and business.
<PAGE>
3. COMPENSATION TO BE PAID BY THE TRUST TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, each Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, of 0.75 of
1% annually of the Portfolio's average daily net assets. The first payment of
the fee shall be made as promptly as possible at the end of the month next
succeeding the effective date of this Agreement in respect of the Portfolio, and
shall constitute a full payment of the fee due the Manager for all services
prior to that date. If this Agreement is terminated as of any date not the last
day of a month, such fee shall be paid as promptly as possible after such date
of termination, shall be based on the average daily net assets of the Portfolio
in that period from the beginning of such month to such date of termination, and
shall be that proportion of such average daily net assets as the number of
business days in such period bears to the number of business days in such month.
The average daily net assets of the Portfolio shall in all cases be based only
on business days and be computed as of the time of the regular close of business
of the New York Stock Exchange, or such other time as may be determined by the
Trustees. Each such payment shall be accompanied by a report of the Trust
prepared either by the Trust or by a reputable firm of independent accountants
which shall show the amount properly payable to the Manager under this Agreement
and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment be approved at a meeting by the affirmative vote of a
majority of the outstanding shares of the Portfolio, and by the vote, cast in
person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Contract as to
one or more Funds or as to the Trust as a whole by not more than sixty days nor
less than thirty days written notice delivered or mailed by registered mail,
postage prepaid, to the other party, or
<PAGE>
(b) If (i) the Trustees of the Trust or the shareholders by the
affirmative vote of a majority of the outstanding shares of any Portfolio, and
(ii) a majority of the Trustees of the Trust who are not interested persons of
the Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically approve at least
annually the continuance of this Contract, then this Contract shall
automatically terminate at the close of business on January 31, 2000 or the
expiration of one year from the effective date of the last such continuance,
whichever is later.
Action by the Trust under (a) above may be taken either (i) by vote of
a majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the affected Portfolio.
Termination of this Contract pursuant to this Section 5 will be without
the payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority
of the outstanding shares" of a Portfolio means the affirmative vote, at a duly
called and held meeting of such shareholders, (a) of the holders of 67% or more
of the shares of the Portfolio present (in person or by proxy) and entitled to
vote at such meeting, if the holders of more than 50% of the outstanding shares
of the Portfolio entitled to vote at such meeting are present in person or by
proxy, or (b) of the holders of more than 50% of the outstanding shares of the
Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
7. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
<PAGE>
8. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees, officers, or
shareholders of the Trust but are binding only upon the assets and property of
the Trust.
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT ADVISORS, LLC,
have each caused this instrument to be signed in duplicate in its behalf by its
President or Vice President thereunto duly authorized, all as of the day and
year first above written.
MENTOR FUNDS
on behalf of the Mentor Balanced Portfolio
By:____________________________
Title:
MENTOR INVESTMENT ADVISORS, LLC
By:____________________________
Title:
Exhibit 5(ix)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of February
1, 1998 and amended November 10, 1998 between MENTOR FUNDS, a Massachusetts
business trust (the "Trust"), and MENTOR INVESTMENT ADVISORS, LLC, a Virginia
limited liability company (the "Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor Money Market Portfolio, a series of the Trust
(the "Portfolio"), will determine what investments shall be purchased, held,
sold, or exchanged by the Portfolio and what portion, if any, of the assets of
the Portfolio shall be held uninvested and shall make changes in the Portfolio's
investments. In the performance of its duties, the Manager will comply with the
provisions of the Agreement and Declaration of Trust and Bylaws of the Portfolio
and the Portfolio's stated investment objectives, policies, and restrictions,
and will use its best efforts to safeguard and promote the welfare of the
Portfolio and to comply with other policies which the Trustees may from time to
time determine and shall exercise the same care and diligence expected of the
Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature
<PAGE>
of the market for the security, the amount of the commission, the timing of the
transaction taking into account market prices and trends, the reputation,
experience, and financial stability of the broker or dealer involved, and the
quality of service rendered by the broker or dealer in other transactions.
Subject to such policies as the Trustees of the Trust may determine, the Manager
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Agreement or otherwise solely by reason of its having caused the
Portfolio to pay a broker or dealer that provides brokerage and research
services to the Manager an amount of commission for effecting a portfolio
investment transaction in excess of the amount of commission that another broker
or dealer would have charged for effecting that transaction, if the Manager
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Manager's overall responsibilities with respect to the Portfolio and to other
clients of the Manager as to which the Manager exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and Rule 11a2-2(T) thereunder, and the Portfolio hereby consents to the
retention of compensation for such transactions in accordance with Rule
11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
following annual rates (as a percentage of the Portfolio's average daily net
assets): 0.22% of the first $500 million; 0.20% of the next $500 million; 0.175%
of the next $1 billion; 0.16% of the next $1 billion; 0.15% of any amounts over
$3 billion;
-2-
<PAGE>
provided, however, that for purposes of determining the annual rate at which
such fee will be computed and paid, the Portfolio's assets will be deemed to
include the assets of Cash Resource Money Market Fund, a series of shares of
Cash Resource Trust. The first payment of the fee shall be made as promptly as
possible at the end of the month next succeeding the effective date of this
Agreement, and shall constitute a full payment of the fee due the Manager for
all services prior to that date. If this Agreement is terminated as of any date
that is not the last day of a month, such fee shall be paid as promptly as
possible after such date of termination, shall be based on the average daily net
assets of the Portfolio in that period from the beginning of such month to such
date of termination, and shall be that proportion of such average daily net
assets as the number of business days in such period bears to the number of
business days in such month. The average daily net assets of the Portfolio shall
in all cases be based only on business days and be computed as of the time of
the regular close of business of the New York Stock Exchange, or such other time
as may be determined by the Trustees. Each such payment shall be accompanied by
a report of the Trust prepared either by the Trust or by a reputable firm of
independent accountants which shall show the amount properly payable to the
Manager under this Agreement and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on January 31, 2000 (unless terminated automatically as set forth in
Section 4), and shall continue for successive one-year periods thereafter, if
approved in accordance with Section 6, until terminated by either party hereto
at any time by not more than sixty days nor less than thirty days written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Such action by the Trust with respect to termination may be taken either (i) by
vote of a majority of its Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 will be without
the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Contract, this
Contract shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as
-3-
<PAGE>
specifically approved annually by vote of a majority of the Trustees of the
Trust who are not interested persons of the Trust or of the Manager, by vote
cast in person at a meeting called for the purpose of voting on such approval.
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees, officers, or
shareholders of the Trust but are binding only upon the assets and property of
the Trust.
-4-
<PAGE>
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT ADVISORS, LLC,
have each caused this instrument to be signed in duplicate in its behalf by its
President or Vice President thereunto duly authorized, all as of the day and
year first above written.
MENTOR FUNDS
on behalf of Mentor Money
Market Portfolio
By:_____________________________________
MENTOR INVESTMENT ADVISORS, LLC
By:______________________________________
-5-
Exhibit 5(x)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of February
1, 1998 and amended November 10, 1998 between MENTOR FUNDS, a Massachusetts
business trust (the "Trust"), and MENTOR INVESTMENT ADVISORS, LLC, a Virginia
limited liability company (the "Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor U.S. Government Money Market Portfolio, a
series of the Trust (the "Portfolio"), will determine what investments shall be
purchased, held, sold, or exchanged by the Portfolio and what portion, if any,
of the assets of the Portfolio shall be held uninvested and shall make changes
in the Portfolio's investments. In the performance of its duties, the Manager
will comply with the provisions of the Agreement and Declaration of Trust and
Bylaws of the Portfolio and the Portfolio's stated investment objectives,
policies, and restrictions, and will use its best efforts to safeguard and
promote the welfare of the Portfolio and to comply with other policies which the
Trustees may from time to time determine and shall exercise the same care and
diligence expected of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience, and financial
stability of the broker or dealer involved, and the quality of service rendered
by the broker or dealer in other transactions. Subject to such policies as the
Trustees of the Trust
<PAGE>
may determine, the Manager shall not be deemed to have acted unlawfully or to
have breached any duty created by this Agreement or otherwise solely by reason
of its having caused the Portfolio to pay a broker or dealer that provides
brokerage and research services to the Manager an amount of commission for
effecting a portfolio investment transaction in excess of the amount of
commission that another broker or dealer would have charged for effecting that
transaction, if the Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Manager's overall responsibilities with respect to
the Portfolio and to other clients of the Manager as to which the Manager
exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and Rule 11a2-2(T) thereunder, and the Portfolio hereby consents to the
retention of compensation for such transactions in accordance with Rule 11a2-
2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
following annual rates (as a percentage of the Portfolio's average daily net
assets): 0.22% of the first $500 million; 0.20% of the next $500 million; 0.175%
of the next $1 billion; 0.16% of the next $1 billion; 0.15% of any amounts over
$3 billion; provided, however, that for purposes of determining the annual rate
at which such fee will be computed and paid, the Portfolio's assets will be
deemed to include the assets of Cash Resource U.S. Government Money Market Fund,
a series of shares of Cash Resource Trust. The first payment of the fee shall be
made as promptly as possible at the end of the month next succeeding the
effective date of this Agreement, and shall constitute a full payment of the fee
due the Manager for all services prior to that date. If this Agreement is
terminated as of any date that is not the last day of a month, such
<PAGE>
fee shall be paid as promptly as possible after such date of termination, shall
be based on the average daily net assets of the Portfolio in that period from
the beginning of such month to such date of termination, and shall be that
proportion of such average daily net assets as the number of business days in
such period bears to the number of business days in such month. The average
daily net assets of the Portfolio shall in all cases be based only on business
days and be computed as of the time of the regular close of business of the New
York Stock Exchange, or such other time as may be determined by the Trustees.
Each such payment shall be accompanied by a report of the Trust prepared either
by the Trust or by a reputable firm of independent accountants which shall show
the amount properly payable to the Manager under this Agreement and the detailed
computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on January 31, 2000 (unless terminated automatically as set forth in
Section 4), and shall continue for successive one-year periods thereafter, if
approved in accordance with Section 6, until terminated by either party hereto
at any time by not more than sixty days nor less than thirty days written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Such action by the Trust with respect to termination may be taken either (i) by
vote of a majority of its Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 will be without
the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Contract, this
Contract shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
<PAGE>
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of Mentor
Institutional Trust (the "Trust") is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the Trustees of the Trust for the Fund as Trustees and
not individually and that the obligations of this instrument are not binding
upon any of the Trustees, officers, or shareholders of the Fund but are binding
only upon the assets and property of the Fund.
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT
ADVISORS, LLC, have each caused this instrument to be signed in duplicate in its
behalf by its President or Vice President thereunto duly authorized, all as of
the day and year first above written.
MENTOR FUNDS
on behalf of Mentor Institutional
U.S. Government Money Market Portfolio
By:_____________________________________
MENTOR INVESTMENT ADVISORS, LLC
By:______________________________________
Exhibit 5(xii)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of March 31,
1998 between MENTOR FUNDS, a Massachusetts business trust (the "Trust"), and
MENTOR INVESTMENT ADVISORS, LLC, a Virginia limited liability company (the
"Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor High Income Portfolio, a series of the Trust
(the "Portfolio"), will determine what investments shall be purchased, held,
sold, or exchanged by the Portfolio and what portion, if any, of the assets of
the Portfolio shall be held uninvested and shall make changes in the Portfolio's
investments. In the performance of its duties, the Manager will comply with the
provisions of the Agreement and Declaration of Trust and Bylaws of the Trust and
the Portfolio's stated investment objectives, policies, and restrictions, and
will use its best efforts to safeguard and promote the welfare of the Portfolio
and to comply with other policies which the Trustees may from time to time
determine and shall exercise the same care and diligence expected of the
Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience, and financial
stability of the broker or dealer involved, and the quality of service rendered
by the
<PAGE>
broker or dealer in other transactions. Subject to such policies as the Trustees
of the Trust may determine, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Portfolio to pay a broker or dealer
that provides brokerage and research services to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission that another broker or dealer would have charged for
effecting that transaction, if the Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Portfolio and to other clients of the Manager as to which
the Manager exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934, as amended and Rule 11a2-2(T) thereunder, and the Portfolio hereby
consents to the retention of compensation for such transactions in accordance
with Rule 11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rate of 0.70% of the Portfolio's average daily net assets. The first
payment of the fee shall be made as promptly as possible at the end of the month
next succeeding the effective date of this Agreement, and shall constitute a
full payment of the fee due the Manager for all services prior to that date. If
this Agreement is terminated as of any date that is not the last day of a month,
such fee shall be paid as promptly as possible after such date of termination,
shall be based on the average daily net assets of the Portfolio in that
-2-
<PAGE>
period from the beginning of such month to such date of termination, and shall
be that proportion of such average daily net assets as the number of business
days in such period bears to the number of business days in such month. The
average daily net assets of the Portfolio shall in all cases be based only on
business days and be computed as of the time of the regular close of business of
the New York Stock Exchange, or such other time as may be determined by the
Trustees. Each such payment shall be accompanied by a report of the Trust
prepared either by the Trust or by a reputable firm of independent accountants
which shall show the amount properly payable to the Manager under this Agreement
and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Agreement shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on March 30, 2000 (unless terminated automatically as set forth in
Section 4), and shall continue for successive one-year periods thereafter, if
approved in accordance with Section 6, until terminated by either party hereto
at any time by not more than sixty days nor less than thirty days written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Such action by the Trust with respect to termination may be taken either (i) by
vote of a majority of its Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Portfolio.
Termination of this Agreement pursuant to this Section 5 will be
without the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Agreement, this
Agreement shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
-3-
<PAGE>
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust for the Portfolio as Trustees and not individually and
that the obligations of this instrument are not binding upon any of the
Trustees, officers, or shareholders of the Fund but are binding only upon the
assets and property of the Portfolio.
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT
ADVISORS, LLC, have each caused this instrument to be signed in duplicate in its
behalf by its President or Vice President thereunto duly authorized, all as of
the day and year first above written.
MENTOR FUNDS
on behalf of Mentor High Income Portfolio
By:_____________________________________
MENTOR INVESTMENT ADVISORS, LLC
By:______________________________________
-4-
Exhibit 5(xiv)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of February
1, 1998 between MENTOR FUNDS, a Massachusetts business trust (the "Trust"), and
MENTOR INVESTMENT ADVISORS, LLC, a Virginia limited liability company (the
"Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor Asset Allocation Portfolio, a series of the
Trust (the "Portfolio"), will determine what investments shall be purchased,
held, sold, or exchanged by the Portfolio and what portion, if any, of the
assets of the Portfolio shall be held uninvested and shall make changes in the
Portfolio's investments. In the performance of its duties, the Manager will
comply with the provisions of the Agreement and Declaration of Trust and Bylaws
of the Trust and the Portfolio's stated investment objectives, policies, and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Portfolio and to comply with other policies which the Trustees may from
time to time determine and shall exercise the same care and diligence expected
of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience, and financial
stability of the broker or dealer involved, and the quality of service rendered
by the
<PAGE>
broker or dealer in other transactions. Subject to such policies as the Trustees
of the Trust may determine, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Portfolio to pay a broker or dealer
that provides brokerage and research services to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission that another broker or dealer would have charged for
effecting that transaction, if the Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Portfolio and to other clients of the Manager as to which
the Manager exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934, as amended and Rule 11a2-2(T) thereunder, and the Portfolio hereby
consents to the retention of compensation for such transactions in accordance
with Rule 11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rates of 0.85% of the Portfolio's average daily net assets. The first
payment of the fee shall be made as promptly as possible at the end of the month
next succeeding the effective date of this Agreement, and shall constitute a
full payment of the fee due the Manager for all services prior to that date. If
this Agreement is terminated as of any date that is not the last day of a month,
such fee shall be paid as promptly as possible after such date of termination,
shall be based on the average daily net assets of the Portfolio in that
-2-
<PAGE>
period from the beginning of such month to such date of termination, and shall
be that proportion of such average daily net assets as the number of business
days in such period bears to the number of business days in such month. The
average daily net assets of the Portfolio shall in all cases be based only on
business days and be computed as of the time of the regular close of business of
the New York Stock Exchange, or such other time as may be determined by the
Trustees. Each such payment shall be accompanied by a report of the Trust
prepared either by the Trust or by a reputable firm of independent accountants
which shall show the amount properly payable to the Manager under this Agreement
and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Agreement shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on January 31, 2000 (unless terminated automatically as set forth in
Section 4), and shall continue for successive one-year periods thereafter, if
approved in accordance with Section 6, until terminated by either party hereto
at any time by not more than sixty days nor less than thirty days written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Such action by the Trust with respect to termination may be taken either (i) by
vote of a majority of its Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Portfolio.
Termination of this Agreement pursuant to this Section 5 will be
without the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Agreement, this
Agreement shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
-3-
<PAGE>
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of Mentor
Institutional Trust (the "Trust") is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the Trustees of the Trust for the Portfolio as Trustees
and not individually and that the obligations of this instrument are not binding
upon any of the Trustees, officers, or shareholders of the Fund but are binding
only upon the assets and property of the Portfolio.
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT
ADVISORS, LLC, have each caused this instrument to be signed in duplicate in its
behalf by its President or Vice President thereunto duly authorized, all as of
the day and year first above written.
MENTOR FUNDS
on behalf of Mentor Asset Allocation Portfolio
By:_____________________________________
MENTOR INVESTMENT ADVISORS, LLC
By:______________________________________
-4-
Exhibit 5(xv)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of August
11, 1998 and amended November 10, 1998 between MENTOR FUNDS, a Massachusetts
business trust (the "Trust"), and MENTOR INVESTMENT ADVISORS, LLC, a Virginia
limited liability company (the "Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor Tax-Exempt Money Market Portfolio, a series of
the Trust (the "Portfolio"), will determine what investments shall be purchased,
held, sold, or exchanged by the Portfolio and what portion, if any, of the
assets of the Portfolio shall be held uninvested and shall make changes in the
Portfolio's investments. In the performance of its duties, the Manager will
comply with the provisions of the Agreement and Declaration of Trust and Bylaws
of the Portfolio and the Portfolio's stated investment objectives, policies, and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Portfolio and to comply with other policies which the Trustees may from
time to time determine and shall exercise the same care and diligence expected
of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all
<PAGE>
factors it deems relevant, including, by way of illustration, price, the size of
the transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience, and financial stability of the broker or
dealer involved, and the quality of service rendered by the broker or dealer in
other transactions. Subject to such policies as the Trustees of the Trust may
determine, the Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of its
having caused the Portfolio to pay a broker or dealer that provides brokerage
and research services to the Manager an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission that
another broker or dealer would have charged for effecting that transaction, if
the Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the
Portfolio and to other clients of the Manager as to which the Manager exercises
investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934 and Rule 11a2-2(T) thereunder, and the Portfolio hereby consents to the
retention of compensation for such transactions in accordance with Rule
11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
following annual rates (as a percentage of the Portfolio's average daily net
assets): 0.22% of the first $500 million; 0.20% of the next $500 million; 0.175%
of
-2-
<PAGE>
the next $1 billion; 0.16% of the next $1 billion; 0.15% of any amounts over $3
billion; provided, however, that for purposes of determining the annual rate at
which such fee will be computed and paid, the Portfolio's assets will be deemed
to include the assets of Cash Resource Tax-Exempt Money Market Fund, a series of
shares of Cash Resource Trust. The first payment of the fee shall be made as
promptly as possible at the end of the month next succeeding the effective date
of this Agreement, and shall constitute a full payment of the fee due the
Manager for all services prior to that date. If this Agreement is terminated as
of any date that is not the last day of a month, such fee shall be paid as
promptly as possible after such date of termination, shall be based on the
average daily net assets of the Portfolio in that period from the beginning of
such month to such date of termination, and shall be that proportion of such
average daily net assets as the number of business days in such period bears to
the number of business days in such month. The average daily net assets of the
Portfolio shall in all cases be based only on business days and be computed as
of the time of the regular close of business of the New York Stock Exchange, or
such other time as may be determined by the Trustees. Each such payment shall be
accompanied by a report of the Trust prepared either by the Trust or by a
reputable firm of independent accountants which shall show the amount properly
payable to the Manager under this Agreement and the detailed computation
thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on August 10, 2000 (unless terminated automatically as set forth in
Section 4), and shall continue for successive one-year periods thereafter, if
approved in accordance with Section 6, until terminated by either party hereto
at any time by not more than sixty days nor less than thirty days written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Such action by the Trust with respect to termination may be taken either (i) by
vote of a majority of its Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 will be without
the payment of any penalty.
-3-
<PAGE>
6. ANNUAL/APPROVAL.
For additional terms after the initial term of this Contract, this
Contract shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees, officers, or
shareholders of the Trust but are binding only upon the assets and property of
the Trust.
-4-
<PAGE>
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT ADVISORS, LLC,
have each caused this instrument to be signed in duplicate in its behalf by its
President or Vice President thereunto duly authorized, all as of the day and
year first above written.
MENTOR FUNDS
on behalf of Mentor Tax-Exempt Money
Market Portfolio
By:_____________________________________
MENTOR INVESTMENT ADVISORS, LLC
By:______________________________________
-5-
Exhibit 5(xvi)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of February
10, 1999 between MENTOR FUNDS, a Massachusetts business trust (the "Trust"), and
MENTOR PERPETUAL ADVISORS, LLC, a Virginia limited liability company (the
"Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor Perpetual Global Emerging Companies Portfolio,
a series of the Trust (the "Portfolio"), will determine what investments shall
be purchased, held, sold, or exchanged by the Portfolio and what portion, if
any, of the assets of the Portfolio shall be held uninvested and shall make
changes in the Portfolio's investments. In the performance of its duties, the
Manager will comply with the provisions of the Agreement and Declaration of
Trust and Bylaws of the Trust and the Portfolio's stated investment objectives,
policies, and restrictions, and will use its best efforts to safeguard and
promote the welfare of the Portfolio and to comply with other policies which the
Trustees may from time to time determine and shall exercise the same care and
diligence expected of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience, and financial
stability of the broker or dealer involved, and the quality of service rendered
by the broker or dealer in other transactions. Subject to such policies as the
Trustees of the Trust may determine, the
<PAGE>
Manager shall not be deemed to have acted unlawfully or to have breached any
duty created by this Agreement or otherwise solely by reason of its having
caused the Portfolio to pay a broker or dealer that provides brokerage and
research services to the Manager an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission that
another broker or dealer would have charged for effecting that transaction, if
the Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the
Portfolio and to other clients of the Manager as to which the Manager exercises
investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934, as amended and Rule 11a2-2(T) thereunder, and the Portfolio hereby
consents to the retention of compensation for such transactions in accordance
with Rule 11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rate of 1.10% of the Portfolio's average daily net assets up to $75
million, and 1.00% of the Portfolio's average daily net assets over $75 million.
The first payment of the fee shall be made as promptly as possible at the end of
the month next succeeding the effective date of this Agreement, and shall
constitute a full payment of the fee due the Manager for all services prior to
that date. If this Agreement is terminated as of any
<PAGE>
date that is not the last day of a month, such fee shall be paid as promptly as
possible after such date of termination, shall be based on the average daily net
assets of the Portfolio in that period from the beginning of such month to such
date of termination, and shall be that proportion of such average daily net
assets as the number of business days in such period bears to the number of
business days in such month. The average daily net assets of the Portfolio shall
in all cases be based only on business days and be computed as of the time of
the regular close of business of the New York Stock Exchange, or such other time
as may be determined by the Trustees. Each such payment shall be accompanied by
a report of the Trust prepared either by the Trust or by a reputable firm of
independent accountants which shall show the amount properly payable to the
Manager under this Agreement and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Agreement shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on February 9, 2001 (unless terminated automatically as set forth in
Section 4), and shall continue for successive one-year periods thereafter, if
approved in accordance with Section 6, until terminated by either party hereto
at any time by not more than sixty days nor less than thirty days written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Such action by the Trust with respect to termination may be taken either (i) by
vote of a majority of its Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Portfolio.
Termination of this Agreement pursuant to this Section 5 will be
without the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Agreement, this
Agreement shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
<PAGE>
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust for the Portfolio as Trustees and not individually and
that the obligations of this instrument are not binding upon any of the
Trustees, officers, or shareholders of the Fund but are binding only upon the
assets and property of the Portfolio.
<PAGE>
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT
ADVISORS, LLC, have each caused this instrument to be signed in duplicate in its
behalf by its President or Vice President thereunto duly authorized, all as of
the day and year first above written.
MENTOR FUNDS
on behalf of Mentor Perpetual Global Emerging
Companies Portfolio
By:_____________________________________
MENTOR PERPETUAL ADVISORS, LLC
By:______________________________________
Exhibit 5 (xvii)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of February
10, 1999 between MENTOR FUNDS, a Massachusetts business trust (the "Trust"), and
MENTOR PERPETUAL ADVISORS, LLC, a Virginia limited liability company (the
"Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor Perpetual lobal Emerging Companies Portfolio,
a series of the Trust (the "Portfolio"), will determine what investments shall
be purchased, held, sold, or exchanged by the Portfolio and what portion, if
any, of the assets of the Portfolio shall be held uninvested and shall make
changes in the Portfolio's investments. In the performance of its duties, the
Manager will comply with the provisions of the Agreement and Declaration of
Trust and Bylaws of the Trust and the Portfolio's stated investment objectives,
policies, and restrictions, and will use its best efforts to safeguard and
promote the welfare of the Portfolio and to comply with other policies which the
Trustees may from time to time determine and shall exercise the same care and
diligence expected of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience, and financial
stability of the broker or dealer involved, and the quality of service rendered
by the broker or dealer in other transactions. Subject to such policies as the
Trustees of the Trust may determine, the
<PAGE>
Manager shall not be deemed to have acted unlawfully or to have breached any
duty created by this Agreement or otherwise solely by reason of its having
caused the Portfolio to pay a broker or dealer that provides brokerage and
research services to the Manager an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission that
another broker or dealer would have charged for effecting that transaction, if
the Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the
Portfolio and to other clients of the Manager as to which the Manager exercises
investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934, as amended and Rule 11a2-2(T) thereunder, and the Portfolio hereby
consents to the retention of compensation for such transactions in accordance
with Rule 11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rate of 1.10% of the Portfolio's average daily net assets up to $75
million, and 1.00% of the Portfolio's average daily net assets over $75 million.
The first payment of the fee shall be made as promptly as possible at the end of
the month next succeeding the effective date of this Agreement, and shall
constitute a full payment of the fee due the Manager for all services prior to
that date. If this Agreement is terminated as of any
<PAGE>
date that is not the last day of a month, such fee shall be paid as promptly as
possible after such date of termination, shall be based on the average daily net
assets of the Portfolio in that period from the beginning of such month to such
date of termination, and shall be that proportion of such average daily net
assets as the number of business days in such period bears to the number of
business days in such month. The average daily net assets of the Portfolio shall
in all cases be based only on business days and be computed as of the time of
the regular close of business of the New York Stock Exchange, or such other time
as may be determined by the Trustees. Each such payment shall be accompanied by
a report of the Trust prepared either by the Trust or by a reputable firm of
independent accountants which shall show the amount properly payable to the
Manager under this Agreement and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Agreement shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on February 9, 2001 (unless terminated automatically as set forth in
Section 4), and shall continue for successive one-year periods thereafter, if
approved in accordance with Section 6, until terminated by either party hereto
at any time by not more than sixty days nor less than thirty days written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Such action by the Trust with respect to termination may be taken either (i) by
vote of a majority of its Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Portfolio.
Termination of this Agreement pursuant to this Section 5 will be
without the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Agreement, this
Agreement shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
<PAGE>
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
<PAGE>
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust for the Portfolio as Trustees and not individually and
that the obligations of this instrument are not binding upon any of the
Trustees, officers, or shareholders of the Fund but are binding only upon the
assets and property of the Portfolio.
<PAGE>
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT
ADVISORS, LLC, have each caused this instrument to be signed in duplicate in its
behalf by its President or Vice President thereunto duly authorized, all as of
the day and year first above written.
MENTOR FUNDS
on behalf of Mentor Perpetual Global Emerging
Companies Portfolio
By:_____________________________________
MENTOR PERPETUAL ADVISORS, LLC
By:______________________________________
Exhibit 8 (iii)
MENTOR FUNDS
901 East Byrd Street
Richmond, Virginia 23219
February 1, 1998, as amended
February 10, 1999
Mentor Investment Group, LLC
901 East Byrd Street
Richmond, Virginia 23219
Re: Administration Agreement
Dear Gentlemen:
Mentor Funds, a Massachusetts business trust (the "Fund"), is engaged
in the business of an investment company. The Fund currently has ten series of
shares (each, a "Series"), and the Trustees of the Fund may in their discretion
authorize additional series of shares from time to time. The Fund desires that
you act as administrator of one or more Series specified by the Trustees from
time to time on Exhibit A hereto (each, a "Specified Series") of the Fund, and
you are willing to act as such administrator and to perform such services under
the terms and conditions hereinafter set forth. Accordingly, the Fund agrees
with you as follows:
1. Delivery of Fund Documents. The Fund has furnished you with
copies properly certified or authenticated of each of the following:
(a) Agreement and Declaration of Trust of the Fund.
(b) By-laws of the Fund as in effect on the date hereof.
(c) Resolutions of the Trustees of the Fund selecting you as
administrator and approving the form of this Agreement.
The Fund will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
2. Administrative Services. You will continuously provide business
management services to each of the Specified Series and will generally, subject
to the general oversight of the
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<PAGE>
Trustees and except as provided in the next following paragraph, manage all of
the business and affairs of each of the Specified Series, subject always to the
provisions of the Fund's Declaration of Trust and By-laws and of the Investment
Company Act of 1940, as amended (the "1940 Act"), and subject, further, to such
policies and instructions as the Trustees may from time to time establish. You
shall, except as provided in the next following paragraph, advise and assist the
officers of the Fund in taking such steps as are necessary or appropriate to
carry out the decisions of the Trustees and the appropriate committees of the
Trustees regarding the conduct of the business of each of the Specified Series.
Notwithstanding any provision of this Agreement, you will not at any
time provide, or be required to provide, to the Fund or to any person with
respect to the Fund investment research, advice, or supervision, or in any way
advise the Fund or any person acting on behalf of the Fund as to the value of
securities or other investments or as to the advisability of investing in,
purchasing, or selling securities or other investments.
3. Allocation of Charges and Expenses. You will pay the compensation
and expenses of all officers and executive employees of the Fund (other than
such persons who serve as such and who are employees of or serve at the request
of any investment adviser to the Fund) and will make available, without expense
to the Fund, the services of such of your directors, officers, and employees as
may duly be elected Trustees or officers of the Fund, subject to their
individual consent to serve and to any limitations imposed by law. You will
provide all clerical services relating to the business of each of the Specified
Series. You will not be required to pay any expenses of the Fund other than
those specifically allocated to you in this paragraph 3. In particular, but
without limiting the generality of the foregoing, you will not be required to
pay: clerical salaries not relating to the services described in paragraph 2
above; fees and expenses incurred by the Fund in connection with membership in
investment company organizations; brokers' commissions; payment for portfolio
pricing services to a pricing agent, if any; legal, auditing, or accounting
expenses; taxes or governmental fees; the fees and expenses of the transfer
agent of the Fund; the cost of preparing share certificates or any other
expenses, including clerical expenses, incurred in connection with the issue,
sale, underwriting, redemption, or repurchase of shares of the Fund; the
expenses of and fees for registering or qualifying securities for sale; the fees
and expenses of Trustees of the Fund who are not affiliated with you; the cost
of preparing and distributing reports and notices to shareholders; public and
investor relations expenses; or the fees or disbursements of custodians of the
Fund's assets, including expenses incurred in the performance of any obligations
enumerated by the Agreement and Declaration of Trust or By-Laws of the Fund
insofar as they govern agreements with any such custodian.
4. Compensation. As compensation for the services performed and the
facilities furnished and expenses assumed by you, including the services of any
consultants retained by you, each Specified Series shall pay you, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rate of .10 of 1% of the Specified Series average daily net assets.
-2-
<PAGE>
The first payment of the fee shall be made as promptly as possible at the end of
the month next succeeding the effective date of this Agreement in respect of
such Specified Series, and shall constitute a full payment of the fee due you
for all services prior to that date. If this Agreement is terminated as of any
date not the last day of a month, such fee shall be paid as promptly as possible
after such date of termination, shall be based on the average daily net assets
of the Specified Series in that period from the beginning of such month to such
date of termination, and shall be that proportion of such average daily net
assets as the number of business days in such period bears to the number of
business days in such month. The average daily net assets of a Specified Series
shall in all cases be based only on business days and be computed as of the time
of the regular close of business of the New York Stock Exchange, or such other
time as may be determined by the Trustees. Each such payment shall be
accompanied by a report of the Fund prepared either by the Fund or by a
reputable firm of independent accountants which shall show the amount properly
payable to you under this Agreement and the detailed computation thereof.
5. Limitation of Liability. You shall not be liable for any error of
judgement or mistake of law or for any loss suffered by the Fund in connection
with the matters to which this Agreement relates except a loss resulting from
willful misfeasance, bad faith, or gross negligence on your part in the
performance of your duties, or from reckless disregard by you of your
obligations and duties under this Agreement. Any person, even though also
employed by you, who may be or become an employee of and paid by the Fund shall
be deemed, when acting within the scope of his or her employment by the Fund, to
be acting in such employment solely for the Fund and not as your employee or
agent.
6. Duration and Termination of this Agreement. This Agreement shall
remain in force until January 31, 2000 and continue from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually with respect to each Specified Series by the vote of a majority
of the Trustees who are not interested persons of you or of the Fund, cast in
person at a meeting called for the purpose of voting on such approval and by a
vote of the Trustees. This Agreement may, on 30 days notice, be terminated at
any time without the payment of any penalty by you, and, immediately upon
notice, by the Trustees or, as to a Specified Series, by vote of a majority of
the outstanding voting securities of that Specified Series. This Agreement shall
automatically terminate in the event of its assignment. In interpreting the
provisions of this Agreement, the definitions contained in Section 2(a) of the
1940 Act, as modified by rule 18f-2 under the Act (particularly the definitions
of "interested person", "assignment", and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the Securities and Exchange Commission
by any rule, regulation, or order.
7. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge, or termination is sought, and no amendment of this Agreement shall be
effective as to a Specified Series until approved by the Trustees, including a
majority of the Trustees who are not interested persons of you or of the Fund,
cast in person at a meeting called for the purpose of voting on such approval.
8. Miscellaneous. The captions in this Agreement are included for
convenience or reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction of effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
-3-
<PAGE>
9. Limitation of Liability of the Trustees and Shareholders. A copy of
the Agreement and Declaration of Trust of the Fund is on file with the Secretary
of The Commonwealth of Massachusetts, and notice is hereby given that this
instrument is executed on behalf of the Trustees of the Fund as Trustees and not
individually and that the obligations of this instrument are not binding upon
any of the Trustees, officers, or shareholders individually but are binding only
upon the assets and property of the appropriate Series.
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Fund, whereupon this letter shall become a binding contract.
Yours very truly,
MENTOR FUNDS
By: ___________________________
Title:
The foregoing Agreement is hereby accepted as of the date thereof.
MENTOR INVESTMENT GROUP, LLC
By: _____________________________
Title:
-4-
<PAGE>
EXHIBIT A
Mentor Growth Portfolio
Mentor Capital Growth Portfolio
Mentor Balanced Portfolio
Mentor Income and Growth Portfolio
Mentor Perpetual Global Portfolio
Mentor High Income Portfolio
Mentor Quality Income Portfolio
Mentor Municipal Income Portfolio
Mentor Short-Duration Income Portfolio
Mentor Perpetual Global Emerging Companies Portfolio
Mentor High Yield Portfolio
-5-
Exhibit 9 (iii)
AMENDED AND RESTATED
EXHIBIT TO THE
SHAREHOLDER SERVICE PLAN
MENTOR FUNDS
Mentor Growth Portfolio
Mentor Capital Growth Portfolio
Mentor Balanced Portfolio
Mentor Income and Growth Portfolio
Mentor Perpetual Global Portfolio
Mentor High Income Portfolio
Mentor Quality Income Portfolio
Mentor Municipal Income Portfolio
Mentor Short-Duration Income Portfolio
Mentor Perpetual Global Emerging Companies Portfolio
Mentor High Yield Portfolio
This Plan is adopted by Mentor Funds (the "Trust") (formerly Cambridge Series
Trust) with respect to the Portfolios of the Trust, and with respect to the
class A and B of shares of such Portfolios, set forth above.
In compensation for services provided pursuant to this Plan, Administrators will
be paid a monthly fee computed at the annual rate not to exceed 0.25 of 1% of
the average aggregate net asset value of the shares of all participating classes
or Portfolios, as the case may be, held during each month.
WITNESS the due execution hereof this 10th day of February 1999.
MENTOR FUNDS
By:__________________
President
-1-
Exhibit 15
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
OF
MENTOR FUNDS
This constitutes the PLAN OF DISTRIBUTION of Mentor Funds (the "Trust")
on behalf of the series of shares of beneficial interest of the Trust identified
on Exhibit A attached hereto and made a part hereof (each, a "Portfolio").
1. Each Portfolio shall pay to the principal underwriter of the
Portfolio's shares (the "Distributor") a fee for services performed and expenses
incurred in respect of the distribution of shares of the Portfolio, or, where
applicable, of a class of shares of the Portfolio specified in Exhibit A, at the
annual rate set forth opposite the Portfolio's name on Exhibit A of such
Portfolio's average daily net assets attributable to its shares, or to such
class of shares, such fee to be calculated and accrued daily and paid monthly.
2. The amount set forth in paragraph 1 of this Plan shall be paid for
the Distributor's services as distributor of the shares of each Portfolio (or of
the applicable class of shares of any such Portfolio, as the case may be) in
accordance with the Distribution Agreement between the Distributor and the Trust
and may be spent by the Distributor or its agents on any activities or expenses
related to the sale and repurchase of the shares of the Portfolio (or any such
class of shares, as the case may be), including, but not limited to, commissions
and other compensation to persons who engage in or support distribution and
repurchase of shares; printing of prospectuses and reports for other than
existing shareholders;
-1-
<PAGE>
advertising; preparation and distribution of sales literature; and overhead,
travel, and telephone expenses.
3. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Trustees and
(b) those Trustees who are not "interested persons" of the Trust (as defined in
the Investment Company Act of 1940, as amended) and have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Plan and such related agreements.
4. This Plan shall continue in effect for successive periods of one
year from its execution for so long as such continuance is specifically approved
at least annually in the manner provided for approval of this Plan in paragraph
3.
5. Any person authorized to direct the disposition of monies paid or
payable by a Portfolio pursuant to this Plan or any related agreement shall
provide to the Trustees and the Trustees shall review, at least quarterly, a
written report of the amounts so expended and the purposes for which such
expenditures were made.
6. This Plan may be terminated at any time in respect of any or all of
the Portfolios by vote of a majority of the Rule 12b-1 Trustees or, in respect
of a Portfolio, by vote of that Portfolio's shares constituting a majority of
the outstanding voting securities of such Portfolio (or the class of shares in
question, as the case may be).
7. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in paragraph 1 hereof unless such amendment
is approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act of
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<PAGE>
1940, as amended) of the affected Portfolio or class of Portfolio, as the case
may be, and no material amendment to the Plan shall be made unless such
amendment is approved in the manner provided for approval of this Plan in
paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of
Trustees who are not interested persons (as defined in the Investment Company
Act of 1940, as amended) of the Trust shall be committed to the discretion of
the Trustees who are themselves not interested persons.
9. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 5 hereof for a period of
not less than six years from the date of execution this Plan, or of the
agreements or of such reports, as the case may be, the first two years in an
easily accessible place.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees or officers of the
Trust or shareholders of any Portfolio of the Trust but are binding only upon
the assets and property of the relevant Portfolio of the Trust.
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<PAGE>
EXHIBIT A
Class of Shares 12b-1 Fee
--------------- ---------
Mentor Growth Portfolio B 0.75%
Mentor Capital Growth Portfolio B 0.75%
Mentor Strategy Portfolio B 0.75%
Mentor Income and Growth Portfolio B 0.75%
Mentor Perpetual Global Portfolio B 0.75%
Mentor Quality Income Portfolio B 0.50%
Mentor Municipal Income Portfolio B 0.50%
Mentor Short-Duration Income Portfolio B 0.30%
Mentor Balanced Portfolio B 0.75%
Mentor Growth Opportunities Portfolio B 0.75%
Mentor High Income Portfolio B 0.50%
Mentor Asset Allocation Portfolio B 0.75%
Mentor High Yield Portfolio B 0.50%
Mentor Perpetual Global Emerging B 0.75%
CompaniesPortfolio
Mentor U.S. Gov. MM Portfolio Retail 0.38%
Mentor MM Portfolio Retail 0.38%
Mentor Tax-Exempt MM Portfolio Retail 0.33%
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