Rule 497(e)
Reg. No. 33-80784
File No. 811-8484
MENTOR INSTITUTIONAL TRUST
(Mentor U.S. Government Cash Management Portfolio,
Mentor Intermediate Duration Portfolio,
Mentor Fixed-Income Portfolio, and Mentor Perpetual International Portfolio)
Supplement to the Statement of Additional Information
dated March 11, 1996, as revised September 23, 1996
Mentor Investment Advisors, LLC ("Mentor Advisors") acts as investment
adviser of each of the Portfolios other than the Mentor Perpetual International
Portfolio. Mentor Advisors is a wholly owned subsidiary of Mentor Investment
Group, LLC ("Mentor Investment Group"), which in turn is a subsidiary of Wheat
First Butcher Singer, Inc. Mentor Investment Group serves as the administrator
to the Portfolios. Mentor Distributors, LLC serves as the Portfolios' principal
underwriter.
Effective November 1, 1996, the Mentor Cash Management Portfolio
changed its name to the Mentor U.S. Government Cash Management Portfolio.
Beginning November 1, 1996, that Portfolio will invest only in U.S. Government
securities and repurchase agreements with respect to such securities, as
described in the current Prospectus for Institutional Class Shares of the
Portfolios.
November 1, 1996
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MENTOR INSTITUTIONAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
(Mentor Cash Management Portfolio,
Mentor Intermediate Duration Portfolio,
Mentor Fixed-Income Portfolio, and Mentor Perpetual International Portfolio)
March 11, 1996, as revised through September 23, 1996
This Statement of Additional Information relates to Mentor Cash
Management Portfolio, Mentor Intermediate Duration Portfolio, Mentor
Fixed-Income Portfolio, and Mentor Perpetual International Portfolio (each a
"Portfolio" and collectively the "Portfolios"). Each of the Portfolios is a
series of shares of beneficial interest of Mentor Institutional Trust (the
"Trust"). Each Portfolio currently offers one class of shares, except for the
International Portfolio, which currently offers four classes of shares (Class A,
Class B, Class D and Class E shares). This Statement is not a prospectus and
should be read in conjunction with a prospectus of the Trust or any Portfolio of
the Trust. A separate Statement of Additional Information relates to the SNAP
Fund (the "SNAP Statement"). A copy of any prospectus or of the SNAP Statement
can be obtained upon request made to Mentor Distributors, Inc., the Trust's
distributor, at P.O. Box 1357, Richmond, Virginia 23286-0109, or calling Mentor
Distributors at 1-(800) 869-6042.
TABLE OF CONTENTS
CAPTION PAGE
GENERAL .....................................................2
INVESTMENT RESTRICTIONS.......................................2
CERTAIN INVESTMENT TECHNIQUES.................................4
MANAGEMENT OF THE TRUST......................................21
PRINCIPAL HOLDERS OF SECURITIES..............................24
INVESTMENT ADVISORY AND OTHER SERVICES.......................26
BROKERAGE....................................................28
DETERMINATION OF NET ASSET VALUE.............................31
TAX STATUS...................................................34
THE DISTRIBUTOR..............................................36
INDEPENDENT ACCOUNTANTS......................................37
CUSTODIAN....................................................37
PERFORMANCE INFORMATION......................................37
SHAREHOLDER LIABILITY........................................42
OFFICERS OF COMMONWEALTH.....................................42
OFFICER ....................................................43
RATINGS ....................................................44
FINANCIAL STATEMENTS.........................................47
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GENERAL
Mentor Institutional Trust (the "Trust") is a Massachusetts business
trust organized on February 8, 1994 as IMG Institutional Trust.
Commonwealth Investment Counsel, Inc. ("Commonwealth") serves as
investment adviser to Mentor Intermediate Duration Portfolio, Mentor
Fixed-Income Portfolio, and Mentor Cash Management Portfolio; Mentor Perpetual
Advisors, LLC serves as investment adviser to Mentor Perpetual International
Portfolio. Mentor Investment Group, Inc. ("Mentor") serves as administrator to
each of the Portfolios.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to a Portfolio without approval by the holders of a majority of the
outstanding shares of that Portfolio, a Portfolio may not:
1. Purchase any security (other than U.S. Government securities)
if as a result: (i) as to 75% of such Portfolio's total
assets, more than 5% of the Portfolio's total assets (taken at
current value) would then be invested in securities of a
single issuer, or (ii) more than 25% of the Portfolio's total
assets would be invested in a single industry; except that
Mentor Cash Management Portfolio may invest up to 100% of its
assets in securities of issuers in the banking industry.
2. Acquire more than 10% of the voting securities of any issuer.
3. Act as underwriter of securities of other issuers except to
the extent that, in connection with the disposition of
portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
4. Issue any class of securities which is senior to the
Portfolio's shares of beneficial interest.
5. Purchase or sell securities on margin (but a Portfolio may
obtain such short-term credits as may be necessary for the
clearance of transactions). (Margin payments in connection
with transactions in futures contracts, options, and other
financial instruments are not considered to constitute the
purchase of securities on margin for this purpose.)
6. 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
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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.)
7. (All Portfolios other than Mentor Perpetual International
Portfolio) Borrow money in excess of 5% of the value (taken at
the lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is
made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely
disposition of portfolio investments or for extraordinary or
emergency purposes.
(Mentor Perpetual International Portfolio) Borrow more than
33 1/3% of the value of its total assets less all liabilities
and indebtedness (other than such borrowings) not represented
by senior securities.
8. (All Portfolios other than Mentor Perpetual International
Portfolio) Pledge, hypothecate, mortgage, or otherwise
encumber its assets in excess of 15% of its total assets
(taken at current value) and then only to secure borrowings
permitted by these investment restrictions.
9. 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.
10. Make loans, except by purchase of debt obligations in which
the Portfolio may invest consistent with its investment
policies or by entering into repurchase agreements.
In addition, it is contrary to the current policy of each of the
Portfolios, which policy may be changed without shareholder approval, to:
1. Invest in oil, gas, or other mineral leases, rights, or
royalty contracts or in real estate (although the Portfolio
may invest in securities of issuers that invest or deal in the
foregoing types of assets or securities that are secured by or
represent interests in real estate).
2. Invest in (a) securities which at the time of such investment
are not readily marketable, (b) securities restricted as to
resale, and (c) repurchase agreements maturing in more than
seven days, if, as a result, more than 15% (10% with
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respect to Mentor Cash Management Portfolio) of the
Portfolio's net assets (taken at current value) would then be
invested in securities described in (a), (b), and (c).
3. Invest in securities of other registered investment companies,
except by purchases in the open market involving only
customary brokerage commissions and as a result of which not
more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition.
4. Make short sales or purchase puts, calls, straddles, spreads,
or any combination thereof (other than futures contracts,
options on futures contracts or indices, and options on
foreign currencies).
5. Invest in securities of any issuer if, to the knowledge of the
Portfolio, officers and Trustees of the Portfolio and officers
and directors of Commonwealth who beneficially own more than
0.5% of the shares or securities of that issuer together own
more than 5%.
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above as fundamental or to the extent
designated as such in a Prospectus with respect to a Portfolio, the other
investment policies described in this Statement or in a Prospectus are not
fundamental and may be changed by approval of the Trustees. As a matter of
policy, the Trustees would not materially change a Portfolio's investment
objectives without shareholder approval.
With respect to fundamental restriction 1, Mentor Cash Management
Portfolio currently expects to invest in certificates of deposit, commercial
paper, and banker's acceptances issued by issuers in the banking industry.
The Investment Company Act of 1940, as amended (the "1940 Act"),
provides that a "vote of a majority of the outstanding voting securities" of a
Portfolio means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, and (2) 67% or more of the shares present
at a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques
in which 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 "Investment objective(s) and
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policies" in the Trust's Prospectuses for a description of the investment
techniques available to a particular Portfolio.
Forward Commitments
A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the Portfolio enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in the value of the Portfolio's other assets.
Where such purchases are made through dealers, the Portfolios rely on the dealer
to consummate the sale. The dealer's failure to do so may result in the loss to
the Portfolio of an advantageous yield or price.
Although a Portfolio will generally enter into forward commitments with
the intention of acquiring securities for its portfolio or for delivery pursuant
to options contracts it has entered into, a Portfolio may dispose of a
commitment prior to settlement if its investment 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 for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Trust's present intention to enter into repurchase agreements only with
member banks of the Federal Reserve System and securities dealers meeting
certain criteria as to creditworthiness and financial condition established by
the Trustees of the Trust and only with respect to obligations of the U.S.
government or its agencies or instrumentalities or other high quality short term
debt obligations. Repurchase agreements may also be viewed as loans made by a
Portfolio which are collateralized by the securities subject to repurchase. The
investment adviser will monitor such transactions to ensure that the value of
the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, a Portfolio could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, a Portfolio may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if a Portfolio is
treated as an unsecured creditor and required to return the underlying
collateral to the seller's estate.
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When-Issued Securities
A Portfolio may from time to time purchase securities on a
"when-issued" basis. Debt securities are often issued on this basis. The price
of such securities, which may be expressed in yield terms, is fixed at the time
a commitment to purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase. During the period between purchase and
settlement, no payment is made by a Portfolio and no interest accrues to the
Portfolio. To the extent that assets of a Portfolio are held in cash pending the
settlement of a purchase of securities, that Portfolio would earn no income.
While a Portfolio may sell its right to acquire when-issued securities prior to
the settlement date, a Portfolio intends actually to acquire such securities
unless a sale prior to settlement appears desirable for investment reasons. At
the time a Portfolio makes the commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the amount due and
the value of the security in determining the Portfolio's net asset value. The
market value of the when-issued securities may be more or less than the purchase
price payable at the settlement date. A Portfolio will establish a segregated
account in which it will maintain cash and U.S. Government Securities or other
high-grade debt obligations at least equal in value to commitments for
when-issued securities. Such segregated securities either will mature or, if
necessary, be sold on or before the settlement date.
Collateralized mortgage obligations; other mortgage-related securities
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"), but they also may be collateralized by whole loans or
private pass-through certificates (such collateral collectively hereinafter
referred to as "Mortgage Assets"). CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans.
In a CMO, a series of bonds or certificates is generally issued in
multiple classes. Each class of CMOs is issued at a specific fixed or floating
rate coupon and has a stated maturity or final distribution date. Principal
prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on most classes of the CMOs on a monthly, quarterly,
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a CMO, payments of principal, including any principal prepayments, on the
Mortgage Assets are applied to the classes of the series in a pre-determined
sequence.
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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 zerocoupon 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.
Zero-coupon securities allow an issuer to avoid the need to generate
cash to meet current interest payments. Even though zero-coupon securities do
not pay current interest in cash, a
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Portfolio is nonetheless required to accrue interest income on them and to
distribute the amount of that interest at least annually to shareholders. Thus,
a Portfolio could be required at times to liquidate other investments in order
to satisfy its distribution requirement.
Options
A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance and 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
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gives the holder the right to sell, and obligates the writer to buy, a security
at the exercise price at any time before the expiration date. A put option is
"covered" if the writer segregates cash and high-grade short-term debt
obligations or other permissible collateral equal to the price to be paid if the
option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
Purchasing put and call options. A Portfolio may also purchase put
options to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Portfolio must pay. These costs will reduce any profit the Portfolio
might have realized had it sold the underlying security instead of buying the
put option.
A Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
A Portfolio may also purchase put and call options to enhance its
current return.
Options on foreign securities. The Trust may, on behalf of a Portfolio,
purchase and sell options on foreign securities if in the opinion of its
investment advisor the investment characteristics of such options, including the
risks of investing in such options, are consistent with the Portfolio's
investment objectives. It is expected that risks related to such options will
not differ materially from risks related to options on U.S. securities. However,
position limits and other rules of foreign exchanges may differ from those in
the U.S. In addition, options markets in some countries, many of which are
relatively new, may be less liquid than comparable markets in the U.S.
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Risks involved in the sale of options. Options transactions involve
certain risks, including the risks that a Portfolio's investment 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
investment 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 investment 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
Trust's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible that the Trust
and other clients of the Portfolios' investment advisers may be considered such
a group. These position limits may restrict the Trust'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 Trust's use of options.
Futures Contracts
In order to hedge against the effects of adverse market changes a
Portfolio may buy and sell futures contracts. A Portfolio may also, to the
extent permitted by applicable law, buy and sell futures contracts and options
on futures contracts to increase the Portfolio's current return. All such
futures and related options will, as may be required by applicable law, be
traded on exchanges that are licensed and regulated by the Commodity Futures
Trading Commission (the "CFTC").
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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.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index is composed of
100 selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 100 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 100 Index, contracts are
to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180, one
contract would be worth $18,000 (100 units x $180). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if a Portfolio enters into a futures contract to buy 100 units of
the S&P 100 Index at a specified future date at a contract price of $180 and the
S&P 100 Index is at $184 on that future date, the Portfolio will gain $400 (100
units x gain of $4). If the Portfolio enters into a futures contract to sell 100
units of the stock index at a specified future date at a contract price of $180
and the S&P 100 Index is at $182 on that future date, the Portfolio will lose
$200 (100 units x loss of $2).
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 subindexes the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities.
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
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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.
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 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 value of the
underlying index rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin
-13-
<PAGE>
payment equal to the difference between the delivery price of the futures
contract and the value of the index underlying the futures contract. Conversely,
if the price of the underlying index 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 value of the index 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 Trust 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.
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 index or
movements in the prices of a Portfolio's securities which are the subject of a
hedge. A Portfolio's investment adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related
-14-
<PAGE>
options on securities and indexes the movements of which will, in its judgment,
correlate closely with movements in the value of the underlying index and the
Portfolio's portfolio securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to its investment 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 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 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
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 investment adviser may still not result in a successful hedging
transaction over a very short time period.
Other Risks. A Portfolio will incur brokerage fees in connection with
its 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, which may be unlimited.
Reverse Repurchase Agreements
A Portfolio may enter into reverse repurchase agreements in which the
Portfolio sells securities and agrees to repurchase them at a mutually agreed
date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
-15-
<PAGE>
A Portfolio may also enter into reverse repurchase agreements in which
the Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
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, 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.
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.
Loans of Portfolio Securities
A Portfolio may lend its portfolio securities, provided: (1) the loan
is secured continuously by collateral consisting of U.S. Government Securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities of any Portfolio loaned will not at any
time exceed one-third (or such other limit as the Trustee may establish) of the
total assets of the Portfolio. Cash collateral received by a Portfolio may be
invested in any securities in which the Portfolio may invest consistent with its
investment policies. In addition, it is anticipated that a Portfolio may share
with the borrower some of the income received on the collateral for the loan or
that it will be paid a premium for the loan. Before a Portfolio enters into a
loan, its investment adviser considers all relevant facts and circumstances
including the creditworthiness of the
-16-
<PAGE>
borrower. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. Although
voting rights or rights to consent with respect to the loaned securities pass to
the borrower, a Portfolio retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by a Portfolio if the holders of such securities are asked to vote upon or
consent to matters materially affecting the investment. A Portfolio will not
lend portfolio securities to borrowers affiliated with the Portfolio.
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 due to limited publicly available
information, non-uniform accounting standards, lower trading volume and possible
consequent illiquidity, greater volatility in price, the possible imposition of
withholding or confiscatory taxes, the possible adoption of foreign governmental
restrictions affecting the payment of principal and interest, expropriation of
assets, nationalization, or other adverse political or economic developments.
Foreign companies may not be subject to auditing and financial reporting
standards and requirements comparable to those which apply to U.S. companies.
Foreign brokerage commissions and other fees are generally higher than in the
United States. It may be more difficult to obtain and enforce a judgment against
a foreign issuer.
In addition, to the extent that a Portfolio's foreign investments are
not United States dollar-denominated, the Portfolio may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.
In determining whether to invest in securities of foreign issuers, the
investment advisor 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.
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<PAGE>
Foreign Currency Transactions
A Portfolio may engage in currency exchange transactions to protect
against uncertainty in the level of future foreign currency exchange rates and
to increase current return. A Portfolio may engage in both "transaction hedging"
and "position hedging".
When it engages in transaction hedging, a Portfolio 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
portfolio 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 also 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
investment adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When it engages in position hedging, a Portfolio 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
-18-
<PAGE>
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 portfolio 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 portfolio 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.
A Portfolio may also seek to increase its current return by purchasing
and selling foreign currency on a spot basis, and by purchasing and selling
options on foreign currencies and on foreign currency futures contracts, and by
purchasing and selling foreign currency forward contracts.
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
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<PAGE>
deposit requirement, and no commissions are charged at any stage for trades. A
foreign currency futures contract is a standardized contract for the future
delivery of a specified amount of a foreign currency at a future date at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally purchase
or sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position and,
in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin on its futures
positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's investment 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
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<PAGE>
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 a Portfolio's
investments in foreign securities and to a Portfolio's 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 a Portfolio's domestic investments. For example, settlement of
transactions involving foreign securities or foreign currency may occur within a
foreign country, and a 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 fee for 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.
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<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 Principal Occupation
Name and Address with Portfolio During Past 5 Years
<S><C>
Stanley F. Pauley Trustee Chairman and Chief Executive
Officer, E.R. Carpenter Company
Incorporated; Trustee, The Mentor
Funds; Trustee, Cash Resource Trust.
Louis W. Moelchert, Jr. Trustee Vice President of Business and
Finance, University of Richmond;
Trustee, The Mentor Funds; Trustee,
Cash Resource Trust.
Thomas F. Keller Trustee Dean, Fuqua School of Business,
Duke University; Trustee, The Mentor
Funds; Trustee, Cash Resource Trust.
Arnold H. Dreyfuss Trustee Retired. Formerly, Chairman and
Chief Executive Officer, Hamilton
Beach/Proctor-Silex, Inc.; Trustee,
The Mentor Funds; Trustee, Cash
Resource Trust.
*Daniel J. Ludeman Chairman; Chairman and Chief Executive Officer
Trustee since July 1991, Mentor Investment
Group, Inc.; Managing Director of
Wheat, First Securities, Inc. since
August 1989; Managing Director of
Wheat First Butcher Singer since June
1991; Director, Wheat First Securities,
Inc. and Mentor Income Fund, Inc.;
Chairman and Trustee, The Mentor
Funds; Chairman and Trustee, Cash
Resource Trust.
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<PAGE>
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company.
Trustee, The Mentor Funds; Trustee,
Cash Resource Trust.
Paul F. Costello President Managing Director, Mentor
Investment Group, Inc. and Wheat
First Butcher Singer; President,
Mentor Income Fund, The Mentor
Funds, and Cash Resource Trust;
Executive Vice President and
Chief Administrative Officer,
America's Utility Fund, Inc.;
Director, Mentor Perpetual
Advisers, L.L.C. and Mentor Trust
Company; formerly, Director,
President and Chief Executive
Officer, First Variable Life
Insurance Company; President and
Chief Financial Officer, Variable
Investors Series Trust; President and
Treasurer, Atlantic Capital & Research,
Inc.; Vice President and Treasurer,
Variable Stock Portfolio, Inc., Monarch
Investment Series Trust, and GEICO Tax
Advantage Series Trust; Vice President,
Monarch Life Insurance Company, GEICO
Investment Services Company, Inc., Monarch
Investment Services Company, Inc., and Springfield
Life Insurance Company.
Terry L. Perkins Treasurer Vice President, Mentor Investment
Group, Inc.; Treasurer, Cash Resource Trust,
Mentor Income Fund Inc., The Mentor Funds,
and America's Utility Fund, Inc.;
formerly, Treasurer and Comptroller,
Ryland Capital Management, Inc.
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<PAGE>
Michael Wade Assistant Treasurer Associate Vice President, Mentor Investment Group,
Inc. since April 1994; Assistant Treasurer, Cash
Resource Trust, Mentor Income Fund, Inc., The Mentor
Funds, and America's Utility Fund, Inc.; formerly,
Senior Accountant, Wheat First Butcher Singer, Inc.,
April 1993 through March 1994; Audit Senior, BDO
Seidman, July 1989 through March 1993.
John M. Ivan Clerk Managing Director since October 1992,
Director of Compliance since October 1992,
Senior Vice President from 1990 to October
1992, and Assistant General Counsel
since 1985, Wheat, First Securities, Inc.;
Clerk, Cash Resource Trust; Secretary, The
Mentor Funds.
</TABLE>
The table below shows the fees paid to each Trustee by the Trust for
the 1995 fiscal year and the fees paid to each Trustee by all funds in the
Mentor family (including the Trust) during the 1995 calendar year.
<TABLE>
<CAPTION>
Total compensation
Aggregate compensation from all
Trustees from the Trust complex funds
- --------- ----------------------- -------------------
<S> <C>
Daniel J. Ludeman $ 0 $ 0
Arnold H. Dreyfuss 200 17,200
Thomas F. Keller 200 14,700
Louis W. Moelchert, Jr. 200 16,700
Stanley F. Pauley 150 16,675
Troy A. Peery, Jr. 150 16,175
- -------------
</TABLE>
The Trustees do not receive pension or retirement benefits from the
Trust.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with
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<PAGE>
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 June 1, 1996, the officers and Trustees of the Trust owned as a
group less than one percent of the outstanding shares of each Portfolio. To the
knowledge of the Trust, no person owned of record or beneficiary more than 5% of
the outstanding shares of any Portfolio as of that date, except the following:
<TABLE>
<CAPTION>
Shareholder Percentage Shares
----------- ----------- ------
<S> <C>
Cash Management Portfolio:
Farmers Telephone Coop Inc. 6.08% 5,997,964
PO Box 588
Kingstree, SC 29556-0588
Larry Ross 9.9% 9,762,629
JoAnn Ross JT WROS
259 College Street
Washington, PA 15301
Roanoke County Resource Authority 5.30% 5,223,311
P.O. Box 21009
Roanoke, VA 24018-0533
Spotsylvania County 5.77% 5,690,116
Attn: Larry Pritchett
P.O. Box 65
Spotsylvania, VA 22553-0065
Stafford County 5.93% 5,851,836
P.O. Box 68
Stafford, VA 22555-0068
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<PAGE>
Intermediate Duration Portfolio:
Wheat First FBO 74.09% 740,938
NationsBank
C/F McGuire Woods & Battle
Pens Plan U/A DTD 8/25/94
Attn: C. Singleton
1801 K Street NW
Washington, DC 20006-1301
Longwood College FDN Inc 18.77% 186,568
201 High Street
Farmville, VA 23909-1600
Fixed-Income Portfolio:
Wheat First Butcher Singer 5.74% 149,977
Eastern VA Restricted
Beth Shalom Home of Virginia
P.O. Box 29331
Richmond, VA 23242
International Portfolio (Class D):
Crestar Bank TTEE 58.82% 400,000
Carpenter Co PSP
UA DTD 6/30/74
P.O. Box 26665
Richmond, VA 23261
Wachovia Bank TTEE 41.18% 280,000
Helig-Meyers PSP
Settlement Section M31051
P.O. Box 3075
Winston-Salem, NC 27102
SNAP Fund:
City of Chesapeake 24.33% 241,939,283
P.O. Box 15245
Chesapeake, VA 23320
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<PAGE>
Commonwealth of Virginia 10.72% 106,633,884
Department of the Treasury
P.O. Box 1879
Richmond, VA 23215
Big Stone Gap 6.47% 64,364,870
Redevelopment and
Housing Authority
P. O. Box 536
Big Stone Gap, VA 24219
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
Each of Commonwealth and Mentor Perpetual act as investment advisers to
the respective Portfolios pursuant to Management Contracts with the Trust.
Mentor Investment Group acts as administrator to each of the Portfolios pursuant
to an Administration Agreement with the Trust. Subject to the supervision and
direction of the Trustees, each investment adviser manages a Portfolio's
portfolio in accordance with the stated policies of that Portfolio and of the
Trust. The investment advisers make investment decisions for the Portfolios and
place the purchase and sale orders for portfolio transactions. Mentor furnishes
each of the Portfolios with certain statistical and research data, clerical
help, and certain accounting, data processing, and other services required by
the Portfolios, assists in preparation of certain reports to shareholders of the
Portfolios, tax returns, and filings with the SEC and state Blue Sky
authorities, and generally assists in all aspects of the Portfolios' operations.
Each investment adviser and Mentor bear all their expenses in connection with
the performance of their services. In addition, the investment advisers and
Mentor pay the salaries of all officers and employees who are employed by them
and the Trust.
The investment advisers provide the Portfolios with investment officers
who are authorized to execute purchases and sales of securities. Investment
decisions for the Portfolios and for the other investment advisory clients of an
investment adviser and its affiliates are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In some instances, one client
may sell a particular security to another client. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in the
investment adviser's opinion is equitable to each and in accordance with the
amount being purchased or sold by each. There may be
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circumstances when purchases or sales of portfolio 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 Wheat First Butcher Singer handles purchases
and sales under guidelines approved by investment officers of the Trust. The
investment advisers employ professional staffs of portfolio managers who draw
upon a variety of resources, including Wheat for research information for their
respective Portfolios.
The proceeds received by each Portfolio for each issue or sale of its
shares, and all income, earnings, profits, and proceeds thereof, subject only to
the rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books of account, and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to any two or more
Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made.
Expenses incurred in the operation of a Portfolio or otherwise
allocated to a Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, investor servicing fees and expenses,
charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges and charges relating to corporate matters are borne
by the Portfolio.
Under its Management Contract dated May 15, 1996, Mentor International
Portfolio pays a quarterly fee to Mentor Perpetual Advisors, LLC based on the
average net assets of that Portfolio, as determined at the close of each
business day during the quarter at the annual rate of 1.00% of average net
assets.
Each of the Management Contracts and the Administration Agreement is
subject to annual approval (commencing in 1996 for Mentor Intermediate Duration
Portfolio, Mentor Fixed-Income Portfolio, and Mentor Cash Management Portfolio
and commencing in 1997 for Mentor Perpetual International Portfolio) 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, the investment
adviser in question, or Mentor, 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 investment adviser. The Administration
Agreement is
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terminable without penalty, immediately upon notice, by the Trustees or by vote
of the holders of a majority of the affected Portfolio's shares, and on not less
than thirty days' notice by Mentor. Each of the Agreements will terminate
automatically in the event of its assignment.
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors with respect to the International Portfolio's Class A,
Class B shares, and Class E shares. Pursuant to the Service Plan, financial
institutions will enter into shareholder service agreements with the
International Portfolio to provide administrative support services to their
customers who from time to time may be record or beneficial owners of shares of
the International Portfolio. In return for providing these support services, a
financial institution may receive payments from the Portfolio at a rate not
exceeding .25% of the average daily net assets of the Class A, Class B shares,
and Class E shares of the International Portfolio 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 International
Portfolio and its 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 International Portfolio;
assisting clients in changing dividend options, account designations and
addresses; and providing such other services as the International Portfolio
reasonably requests. The Plan (and any agreement entered into pursuant to the
Plan) may be terminated with respect to a particular class at any time by (i) a
vote of the majority of the Trustees who are not "interested persons" of the
Trust (as defined in the 1940 Act), (ii) a vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of a particular class, or (iii)
Mentor Distributors on 60 days notice.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by the investment adviser and/or Mentor, or
affiliates thereof, for providing administrative support services to holders of
Class A, Class B, and Class E shares of the International Portfolio. These
payments will be made directly by the investment adviser, a sub-adviser, and/or
Mentor, as applicable, and will not be made from the assets of the International
Portfolio.
BROKERAGE
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different brokers.
A particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions,
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which may be higher than those in the United States. There is generally no
stated commission in the case of securities traded in the over-the-counter
markets, but the price paid by the Portfolio usually includes an undisclosed
dealer commission or mark-up. In underwritten offerings, the price paid by the
Portfolio includes a disclosed, fixed commission or discount retained by the
underwriter or dealer. It is anticipated that most purchases and sales of
portfolio securities by Portfolios 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 Portfolios would not
ordinarily pay significant brokerage commissions with respect to securities
transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")), from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, the investment advisers receive brokerage and research services and
other similar services from many broker-dealers with which they place the
Portfolios' portfolio transactions and from third parties with which these
broker-dealers have arrangements. These services include such matters as general
economic and market reviews, industry and company reviews, evaluations of
investments, recommendations as to the purchase and sale of investments,
newspapers, magazines, pricing services, quotation services, news services and
personal computers utilized by the investment advisers' managers and analysts.
Where the services referred to above are not used exclusively by an 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 an investment 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 the Portfolios.
The investment advisers place all orders for the purchase and sale of
portfolio investments for the Portfolios and buy and sell investments for the
Portfolios through a substantial number of brokers and dealers. The investment
advisers seek the best overall terms available for the Portfolios, except to the
extent they may be permitted to pay higher brokerage commissions as described
below. In doing so, an investment adviser, having in mind a Portfolio's best
interests, considers all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security or other investment, the amount of the commission, the timing of
the transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker-dealer involved and the quality
of service rendered by the broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the Management
Contracts, the investment advisers may cause the Portfolios to pay a
broker-dealer which provides "brokerage
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and research services" (as defined in the 1934 Act) to them 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 advisers' 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. The investment advisers do not currently intend to
cause a Portfolio to make such payments. It is the position of the staff of the
Securities and Exchange Commission that Section 28(e) does not apply to the
payment of such greater commissions in "principal" transactions. Accordingly,
the investment advisers will use their 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, the investment advisers may consider sales of shares of a
Portfolio (and, if permitted by law, of the other Mentor funds) as a factor in
the selection of broker-dealers to execute portfolio transactions for a
Portfolio.
The Trustees have determined that portfolio transactions for the Trust
may be effected through Wheat. 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 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 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 in over-the-counter securities in which Wheat
makes a market.
Under rules adopted by the SEC, Wheat 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 Wheat. Wheat will be required to pay fees charged to those persons
performing the floor brokerage elements out of the brokerage compensation it
receives from a Portfolio. The Trust has been advised by Wheat that on most
transactions, the floor brokerage generally constitutes from 5% and 10% of the
total commissions paid.
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DETERMINATION OF NET ASSET VALUE
The Trust determines net asset value per share of the Portfolios each
day the New York Stock Exchange (the "Exchange") is open. Currently, the
Exchange is closed Saturdays, Sundays, and the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Thanksgiving, and Christmas.
Mentor Intermediate Duration Portfolio, Mentor Fixed-Income Portfolio
and Mentor Perpetual International Portfolio. In respect of Mentor Intermediate
Duration Portfolio, Mentor Fixed-Income Portfolio, and Mentor Perpetual
International Portfolio, securities for which market quotations are readily
available are valued at prices which, in the opinion of the Trustees or a
Portfolio's investment 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 Portfolio
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, institutionalsize 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, its
investment 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.
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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 Portfolio's shares are computed as of such times. Also, because of the
amount of time required to collect and process trading information as to large
numbers of securities issues, the values of certain securities (such as
convertible bonds, U.S. Government securities, and tax-exempt securities) are
determined based on market quotations collected earlier in the day at the latest
practicable time prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of a
Portfolio's 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.
Mentor Cash Management Portfolio only. The valuation of Mentor Cash
Management Portfolio's portfolio securities is based upon its amortized cost,
which does not take into account unrealized securities gains or losses. This
method involves initially valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. By using amortized cost valuation, the Portfolio seeks to
maintain a constant net asset value of $1.00 per share, despite minor shifts in
the market value of its portfolio securities. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Portfolio
would receive if it sold the instrument. During periods of declining interest
rates, the quoted yield on shares of the Portfolio may tend to be higher than a
like computation made by a fund with identical investments utilizing a method of
valuation based on market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Portfolio would be able to obtain a somewhat higher yield if he
purchased shares of the Portfolio on that day, than would result from investment
in a fund utilizing solely market values, and existing investors in the
Portfolio would receive less investment income. The converse would apply on a
day when the use of amortized cost by the Portfolio resulted in a higher
aggregate portfolio value. However, as a result of certain procedures adopted by
the Trust, the Trust believes any difference will normally be minimal.
The valuation of the Portfolio's portfolio instruments at amortized
cost is permitted in accordance with Securities and Exchange Commission Rule
2a-7 and certain procedures adopted by the Trustees. Under these procedures, a
Portfolio must maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only instruments having remaining maturities of 397 days or
less, and invest in securities determined by the Trustees to be of high quality
with minimal credit risks. The Trustees have also established procedures
designed to stabilize, to the extent reasonably possible, the Portfolio's price
per share as computed for the purpose of distribution, redemption and repurchase
at $1.00. These procedures include review of the
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Portfolio's portfolio holdings by the Trustees, at such intervals as they may
deem appropriate, to determine whether a Portfolio's net asset value calculated
by using readily available market quotations deviates from $1.00 per share, and,
if so, whether such deviation may result in material dilution or is otherwise
unfair to existing shareholders. In the event the Trustees determine that such a
deviation may result in material dilution or is otherwise unfair to existing
shareholders, they will take such corrective action as they regard as necessary
and appropriate, including the sale of portfolio instruments prior to maturity
to realize capital gains or losses or to shorten the average portfolio maturity;
withholding dividends; redemption of shares in kind; or establishing a net asset
value per share by using readily available market quotations.
Since the net income of the Portfolio is declared as a dividend each
time it is determined, the net asset value per share of the Portfolio remains at
$1.00 per share immediately after such determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Portfolio
representing the reinvestment of dividend income is reflected by an increase in
the number of shares of the Portfolio in the shareholder's account on the last
day of each month (or, if that day is not a business day, on the next business
day). It is expected that the Portfolio's net income will be positive each time
it is determined. However, if because of realized losses on sales of portfolio
investments, a sudden rise in interest rates, or for any other reason the net
income of the Portfolio determined at any time is a negative amount, the
Portfolio will offset such amount allocable to each then shareholder's account
from dividends accrued during the month with respect to such account. If at the
time of payment of a dividend by the Portfolio (either at the regular monthly
dividend payment date, or, in the case of a shareholder who is withdrawing all
or substantially all of the shares in an account, at the time of withdrawal),
such negative amount exceeds a shareholder's accrued dividends, the Portfolio
will reduce the number of outstanding shares by treating the shareholder as
having contributed to the capital of the Portfolio that number of full and
fractional shares which represent the amount of the excess. Each shareholder is
deemed to have agreed to such contribution in these circumstances by its
investment in the Portfolio.
Should the Portfolio incur or anticipate any unusual or unexpected
significant expense or loss which would affect disproportionately the
Portfolio's income for a particular period, the Trustees would at that time
consider whether to adhere to the dividend policy described above or to revise
it in light of the then prevailing circumstances in order to ameliorate to the
extent possible the disproportionate effect of such expense or loss on then
existing shareholders. Such expenses or losses may nevertheless result in a
shareholder's receiving no dividends for the period during which the shares are
held and receiving upon redemption a price per share lower than that which was
paid.
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TAX STATUS
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to shareholders. As a series of Massachusetts business trust, 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 gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies; (b) derive less than 30% of its gross income from the sale or other
disposition of certain assets (including stock and securities) held less than
three months; (c) diversify its holdings so that, at the close of each quarter
of its taxable year, (i) at least 50% of the value of its total assets consists
of cash, cash items, U.S. Government Securities, and other securities limited
generally with respect to any one issuer to not more than 5% of the total assets
of the Portfolio and not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any issuer (other than U.S. Government Securities). 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 its interest, dividends, net short-term capital gain,
and certain other income each year.
An excise tax at the rate of 4% will be imposed on the excess, if any,
of each Portfolio's "required distribution" over its actual distributions in any
calendar year. Generally, the "required distribution" is 98% of the Portfolio's
ordinary income for the calendar year plus 98% of its capital gain net income
recognized during the one-year period ending on October 31 (or December 31, if
the Portfolio so elects) plus undistributed amounts from prior years. Each
Portfolio intends to make distributions sufficient to avoid imposition of the
excise tax. Distributions declared by a Portfolio during October, November, or
December to shareholders of record on a date in any such month and paid by the
Portfolio during the following January will be treated for federal tax purposes
as paid by the Portfolio and received by shareholders on December 31 of the year
in which declared.
Under federal income tax law, a portion of the difference between the
purchase price of zero-coupon securities in which a Portfolio has invested and
their face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will
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not receive cash interest payments from these securities. This original issue
discount (imputed income) will comprise a part of the net investment income of
the Portfolio which must be distributed to shareholders in order to maintain the
qualification of the Portfolio as a regulated investment company and to avoid
federal income tax at the level of the Portfolio.
Each Portfolio is required to withhold 31% of all income dividends and
capital gain distributions, and 31% of the gross proceeds of all redemptions of
Portfolio shares, in the case of any shareholder who does not provide a correct
taxpayer identification number, about whom a Portfolio is notified that the
shareholder has under reported income in the past, or who fails to certify to a
Portfolio that the shareholder is not subject to such withholding. Tax-exempt
shareholders are not subject to these back-up withholding rules so long as they
furnish the Portfolio with a proper certification.
Foreign currency-denominated securities and related hedging
transactions (Mentor Perpetual International Portfolio only). Mentor Perpetual
International Portfolio's transactions in foreign currencies, foreign
currency-denominated debt securities, and certain foreign currency options,
futures contracts, and forward contracts (and similar instruments) may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of the Portfolio's assets at year end consists of the
debt and equity 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 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.
Investment by the Portfolio in certain "passive foreign investment
companies" could subject the Portfolio to a U.S. federal income tax or other
charge on the proceeds from the sale of its investment in such a company;
however, this tax can be avoided by making an election to mark such investments
to market annually or to treat the passive foreign investment company as a
"qualified electing fund."
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to state
and federal taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state or local taxes. The foregoing
discussion relates solely to U.S.
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federal income tax law. Non-U.S. investors should consult their tax advisers
concerning the tax consequences of ownership of shares of the Portfolio,
including the possibility that distributions may be subject to a 30% United
States withholding tax (or a reduced rate of withholding provided by treaty).
THE DISTRIBUTOR
Mentor Distributors, Inc. ("Mentor Distributors") is the Trust's
distributor and service agent and is a wholly-owned subsidiary of Wheat First
Butcher Singer. Mentor Distributors is acting on a best efforts basis in the
continuous offering of the Trust's shares.
The International Portfolio makes payments to Mentor Distributors in
accordance with its Distribution Plan in respect of its Class B shares adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Continuance of the Plan is subject to annual approval by a vote of the
Trustees, including a majority of the Trustees who are not interested persons of
the Portfolio and who have no direct or indirect interest in the Plan or related
arrangements (the "Qualified Trustees"), cast in person at a meeting called for
that purpose. All material amendments to the Plan must be likewise approved by
the Trustees and the Qualified Trustees. The Plan may not be amended in order to
increase materially the costs which the Portfolio may bear for distribution
pursuant to such Plan without also being approved by a majority of the
outstanding Class B shares of the Portfolio. The Plan terminates automatically
in the event of its assignment and may be terminated without penalty, at any
time, by a vote of a majority of the Qualified Trustees or by a vote of a
majority of the outstanding Class B shares of the Portfolio.
If Plan payments are made to reimburse Mentor Distributors for payments
to dealers based on the average net asset value of Portfolio shares attributable
to shareholders for whom the dealers are designated as the dealer of record,
"average net asset value" attributable to a shareholder account means the
product of (i) the Portfolio's average daily share balance of the account and
(ii) the Portfolio's average daily net asset value per share (or the average
daily net asset value per share of the class, if applicable). For administrative
reasons, Mentor Distributors may enter into agreements with certain dealers
providing for the calculation of "average net asset value" on the basis of
assets of the accounts of the dealer's customers on an established day in each
quarter.
Financial institutions receiving payments from Mentor Distributors as
described above may be required to comply with various state and federal
regulatory requirements, including among others those regulating the activities
of securities brokers or dealers.
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INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, are the Portfolio's independent auditors, providing audit services, tax
return review, and other tax consulting services.
CUSTODIAN
The custodian of the Portfolios, Investors Fiduciary Trust Company, is
located at 127 West 10th Street, Richmond, Virginia 64105. A custodian's
responsibilities include generally safeguarding and controlling a Portfolio's
cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on a Portfolio's investments.
PERFORMANCE INFORMATION
Mentor Intermediate Duration Portfolio , Mentor Fixed-Income Portfolio
and Mentor Perpetual International Portfolio. With respect to Mentor
Intermediate Duration Portfolio, Mentor Fixed Income Portfolio and Mentor
Perpetual International Portfolio, total return is determined by calculating the
actual investment return on a $1,000 investment in the Portfolio at the
beginning of the applicable period, and, if applicable, at the maximum public
offering price for Class A shares, and net asset value for other classes of
shares. Total return may also be presented for other periods. Total return
calculations assume deduction of a Portfolio's maximum front-end or contingent
deferred sales charge, if applicable, and reinvestment of all Portfolio
distributions at net asset value on their respective investment dates. The
cumulative total return for the life of Mentor Intermediate Duration Portfolio
(commencement of operations - December 19, 1994) and Mentor Fixed-Income
Portfolio (commencement of operations December 6, 1994) through October 31, 1995
was 12.38 % and 15.90%, respectively. No shares of Mentor Perpetual
International Portfolio were outstanding during this period.
Each Portfolio's yield is presented for a specified thirty-day period
(the "base period"). Yield is based on the amount determined by (i) calculating
the aggregate amount of dividends and interest earned by a Portfolio during the
base period less expenses accrued for that period, and (ii) dividing that amount
by the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B) the
per share maximum public offering price for Class A shares, if applicable, and
net asset value per share for all other classes of shares on the last day of the
base period. The result is annualized on a compounding basis to determine the
yield. For this calculation, interest earned on debt obligations held by a
Portfolio is generally calculated using the yield to maturity (or first expected
call date) of such obligations based on their market values (or, in the case of
receivables-backed securities such as GNMA's, based on cost). Dividends on
equity securities are accrued daily at their stated dividend rates. The yield
for Mentor Intermediate Duration and Mentor Fixed-Income Portfolio for the
thirty-day period ended October 31, 1995 was 6.30% and
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6.36%, respectively. No shares of Mentor Perpetual International Portfolio were
outstanding during this period.
Mentor Cash Management Portfolio only. The yield of Mentor Cash
Management Portfolio is computed by determining the percentage net change,
excluding capital changes, in the value of an investment in one share of the
Portfolio over the base period, and multiplying the net change by 365/7 (or
approximately 52 weeks). The Portfolio's effective yield represents a
compounding of the yield by adding 1 to the number representing the percentage
change in value of the investment during the base period, raising that sum to a
power equal to 365/7, and subtracting 1 from the result.
Based on the seven-day period ended October 31, 1995, Mentor Cash
Management Portfolio's yield was 5.96% and its effective yield was 5.79%.
Total return or yield may be presented for other periods or without
giving effect to any front-end or contingent deferred sales charge. Any
quotation of total return or yield not reflecting such sales charges would be
reduced if such sales charges were reflected.
All data for each of the Portfolios are based on past performance and
do not predict future results.
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how the Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time to
time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below measure performance based on the
basis of their own criteria rather than on the basis of the standardized
performance measures described above.
Lipper Analytical Services, Inc. distributes mutual fund rankings
monthly. The rankings are based on total return performance calculated
by Lipper, reflecting generally changes in net asset value adjusted for
reinvestment of capital gains and income dividends. They do not reflect
deduction of any sales charges. Lipper rankings cover a variety of
performance periods, for example year-to-date, 1-year, 5-year, and
10-year performance. Lipper classifies mutual funds by investment
objective and asset category.
Morningstar, Inc. distributes mutual fund ratings twice a month. the
ratings are divided into five groups: highest, above average, neutral,
below average and lowest. They represent a fund's historical
risk/reward ratio relative to other funds with similar objectives. The
performance factor is a weighted-average assessment of the Portfolio's
3- year, 5-year, and 10-year total return performance (if available)
reflecting deduction of expenses and sales charges. Performance is
adjusted using quantitative techniques to reflect the risk profile of
the fund. The ratings are derived from a purely quantitative system
that does not utilize the subjective criteria customarily employed by
rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return
calculated by Weisenberger for periods such as year-to-date, 1-year,
3-year, 5-year and 10-year performance. Mutual funds are ranked in
general categories (e.g., international bond, international equity,
municipal bond, and maximum capital gain). Weisenberger rankings do not
reflect deduction of sales charges or fees.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the descriptions
appearing below. From time to time any or all of the Portfolios may distribute
evaluations by or excerpts from these publications to its shareholders or to
potential investors. The following illustrates the types of information provided
by these publications.
Business Week publishes mutual fund rankings in its Investment Figures
of the Week column. The rankings are based on 4-week and 52-week total
return reflecting changes in net asset value and the reinvestment of
all distributions. They do not reflect deduction of any sales charges.
Portfolios are not categorized; they compete in a large universe of
over 2,000 funds. The source for rankings is data generated by
Morningstar, Inc.
Investor's Business Daily publishes mutual fund rankings on a daily
basis. The rankings are depicted as the top 25 funds in a given
category. The categories are based loosely on the type of fund, e.g.,
growth funds, balanced funds, U.S. government funds, GNMA funds, growth
and income funds, corporate bond funds, etc. Performance periods for
sector equity funds can vary from 4 weeks to 39 weeks; performance
periods for other fund groups vary from 1 year to 3 years. Total return
performance reflects changes in net asset value and reinvestment of
dividends and capital gains. The rankings are based strictly on total
return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds;
an A rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical
Services. The Lipper total return data reflects changes in net asset
value and reinvestment of distributions, but does not reflect deduction
of any sales charges. The performance periods vary from short-term
intervals
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<PAGE>
(current quarter or year-to-date, for example) to long-term periods
(five-year or ten-year performance, for example). Barron's classifies
the funds using the Lipper mutual fund categories, such as Capital
Appreciation Portfolios, Growth Portfolios, U.S. Government Portfolios,
Equity Income Portfolios, Global Portfolios, etc. Occasionally,
Barron's modifies the Lipper information by ranking the funds in asset
classes. "Large funds" may be those with assets in excess of $25
million; "small funds" may be those with less than $25 million in
assets.
The Wall Street Journal publishes its Mutual Portfolio Scorecard on a
daily basis. Each Scorecard is a ranking of the top-15 funds in a given
Lipper Analytical Services category. Lipper provides the rankings based
on its total return data reflecting changes in net asset value and
reinvestment of distributions and not reflecting any sales charges. The
Scorecard portrays 4-week, year-to-date, one-year and 5-year
performance; however, the ranking is based on the one-year results. The
rankings for any given category appear approximately once per month.
Fortune magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Portfolios are
placed in stock or bond fund categories (for example, aggressive growth
stock funds, growth stock funds, small company stock funds, junk bond
funds, Treasury bond funds etc.), with the top-10 stock funds and the
top-5 bond funds appearing in the rankings. The rankings are based on
3- year annualized total return reflecting changes in net asset value
and reinvestment of distributions and not reflecting sales charges.
Performance is adjusted using quantitative techniques to reflect the
risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a
database of funds tracked for performance by Lipper Analytical
Services. The funds are placed in 23 stock or bond fund categories and
analyzed for five-year risk adjusted return. Total return reflects
changes in net asset value and reinvestment of all dividends and
capital gains distributions and does not reflect deduction of any sales
charges. Grades are conferred (from A to E): the top 20% in each
category receive an A, the next 20% a B, etc. To be ranked, a fund must
be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
Financial World publishes its monthly Independent Appraisals of Mutual
Portfolios, a survey of approximately 1000 mutual funds. Portfolios are
categorized as to type, e.g., balanced funds, corporate bond funds,
global bond funds, growth and income funds, U.S. government bond funds,
etc. To compete, funds must be over one year old, have over $1 million
in assets, require a maximum of $10,000 initial investment, and should
be available in at least 10 states in the United States. The funds
receive a composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund versus its
category, as well as taking into account its risk, reward to risk, and
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<PAGE>
fees. An A+ rated fund is one of the best, while a D- rated fund is one
of the worst. The source for Financial World rating is Schabacker
investment management in Rockville, Maryland.
Forbes magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds
are categorized by type, including stock and balanced funds, taxable
bond funds, municipal bond funds, etc. Data sources include Lipper
Analytical Services and CDA Investment Technologies. The ratings are
based strictly on performance at net asset value over the given cycles.
Portfolios performing in the top 5% receive an A+ rating; the top 15%
receive an A rating; and so on until the bottom 5% receive an F rating.
Each fund exhibits two ratings, one for performance in "up" markets and
another for performance in "down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three-
and five-year total return performance reflecting changes in net asset
value and reinvestment of dividends and capital gains and not
reflecting deduction of any sales charges. Portfolios are ranked by
tenths: a rank of 1 means that a fund was among the highest 10% in
total return for the period; a rank of 10 denotes the bottom 10%.
Portfolios compete in categories of similar funds -- aggressive growth
funds, growth and income funds, sector funds, corporate bond funds,
global governmental bond funds, mortgage-backed securities funds, etc.
Kiplinger's also provides a risk-adjusted grade in both rising and
falling markets. Portfolios are graded against others with the same
objective. The average weekly total return over two years is
calculated. Performance is adjusted using quantitative techniques to
reflect the risk profile of the fund.
U.S. News and World Report periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch
Carre & Co., a Boston research firm. Over 2000 funds are tracked and
divided into 10 equity, taxable bond and tax-free bond categories.
Portfolios compete within the 10 groups and three broad categories. The
OPI is a number from 0-100 that measures the relative performance of
funds at least three years old over the last 1, 3, 5 and 10 years and
the last six bear markets. Total return reflects changes in net asset
value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges.
Results for the longer periods receive the most weight.
The 100 Best Mutual Portfolios You Can Buy (1992), authored by Gordon
K. Williamson. The author's list of funds is divided into 12 equity and
bond fund categories, and the 100 funds are determined by applying four
criteria. First, equity funds whose current management teams have been
in place for less than five years are eliminated. (The standard for
bond funds is three years.) Second, the author excludes any fund that
ranks in the bottom 20 percent of its category's risk level. Risk is
determined by
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<PAGE>
analyzing how many months over the past three years the fund has
underperformed a bank CD or a U.S. Treasury bill. Third, a fund must
have demonstrated strong results for current three-year and five-year
performance. Fourth, the fund must either possess, in Mr. Williamson's
judgment, "excellent" risk-adjusted return or "superior" return with
low levels of risk. Each of the 100 funds is ranked in five categories:
total return, risk/volatility, management, current income and expenses.
The rankings follow a fivepoint system: zero designates "poor"; one
point means "fair"; two points denote "good"; three points qualify as a
"very good"; four points rank as "superior"; and five points mean
"excellent."
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation, or instrument entered into or executed
by 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.
OFFICERS OF COMMONWEALTH
W. Hance West, Jr., CFA Managing Director, Total Return Portfolio Manager
Mr. West has eight years of investment management experience. Mr. West serves
as co- manager for the Mentor Income Fund (formerly RAC Income Fund), a $130
million closed- end bond fund. He holds his undergraduate degree in accounting
from Virginia Polytechnic Institute and his graduate degree in business from
University of Rochester.
P. Michael Jones, CFA Managing Director, Income Portfolio Manager Mr.
Jones has ten years of investment management experience. Mr. Jones is
responsible for the design and implementation of the fixed-income group's
proprietary analytical system. He earned his undergraduate degree from the
College of William and Mary.
Steven C. Henderson Associate Vice President, Income Portfolio Manager
Mr. Henderson has six years of investment management experience. He has an
undergraduate degree from the University of Richmond and a masters in business
administration from George Washington University.
Stephen R. McClelland Vice President, Total Return Portfolio Manager
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<PAGE>
Mr. McClelland has five years of investment management experience, all of which
have been at Commonwealth. He is a Certified Public Accountant and received his
undergraduate degree in accounting from Iowa State University and his graduate
business degree from Virginia Commonwealth University.
Keith Wantling Associate Vice President, Senior Research Analyst
Mr. Wantling has four years of experience. Mr. Wantling performs analysis and
screening for credit sensitive private label mortgage-backed securities and
directs the firm's portfolio analysis effort. He holds his undergraduate degree
in accounting information systems from Virginia Polytechnic Institute.
R. Preston Nuttall, CFA Managing Director, Director of Cash Management and
Portfolio Manager Mr. Nuttall has more than thirty years of investment
management experience. Prior to Commonwealth, he led short-term fixed-income
management for fifteen years at Capitoline Investment Services, Inc. He has his
undergraduate degree in economics from the University of Richmond and his
graduate degree in finance from the Wharton School at the University of
Pennsylvania.
Hubert R. White III Vice President, Portfolio Manager Mr. White has eleven years
of investment management experience. Prior to joining Commonwealth, he served
for five years as portfolio manager with Capitoline Investment Services. He has
his undergraduate degree in business from the University of Richmond.
Kathryn T. Allen Vice President, Portfolio Manager Ms. Allen has
fourteen years of investment management experience and specializes in tax-free
trades. Prior to joining Commonwealth, Ms. Allen was portfolio group manager at
PNC Institutional Management Corporation. She has her undergraduate degree in
commerce and business administration from the University of Alabama.
OFFICER OF MENTOR PERPETUAL
Rod Smyth Managing Director, Mentor Perpetual Mr. Smyth,
Managing Director of Mentor Perpetual, is responsible for overseeing the
investments and day-to-day operations of the Mentor Perpetual joint venture.
From his office in Richmond, Virginia he is the primary contact for marketing
and client service for the joint venture. Mr. Smyth has 12 years of investment
experience, including positions as market strategist (two years), portfolio
manager (five years) and institutional salesperson (five years). His previous
employers include Baring Securities, Ulster Bank Investment Managers, Citicorp
Scrimgeour Vickers, and Nomura International. He holds an M.A. in economics,
with honors, from Dundee University.
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<PAGE>
RATINGS
The rating services' descriptions of corporate bonds are:
Moody's Investors Service, Inc.:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Standard & Poor's:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
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<PAGE>
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
A-1 and Prime-1 Commercial Paper Ratings
The rating A-1 (including A-1+) is the highest commercial paper rating assigned
by S&P. Commercial paper rated A-1 by S&P has the following characteristics:
o liquidity ratios are adequate to meet cash requirements;
o long-term senior debt is rated "A" or better;
o the issuer has access to at least two additional channels of
borrowing;
o basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances;
o typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and
o the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. Issues rated A-1 that are
determined by S&P to have overwhelming safety characteristics are designated
A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
o evaluation of the management of the issuer;
o economic evaluation of the issuer's industry or industries
and an appraisal of speculative-type risks which may be
inherent in certain areas;
o evaluation of the issuer's products in relation to
competition and customer acceptance;
o liquidity;
o amount and quality of long-term debt;
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<PAGE>
o trend of earnings over a period of ten years;
o financial strength of parent company and the relationships
which exist with the issuer; and
o recognition by the management of obligations which may be
present or may arise as a result of public interest questions
and preparations to meet such obligations.
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<PAGE>
FINANCIAL STATEMENTS
<PAGE>
MENTOR CASH MANAGEMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
<S> <C> <C> <C>
BANK NOTE 4.29%
Harris Trust, 5.75%, 11/30/95 $ 3,000,000 $ 3,000,000
BANKERS ACCEPTANCES 22.81%
Chase Manhattan Bank, 5.70%, 12/29/95 1,058,874 1,049,150
Citibank, 5.72%, 11/10/95 2,000,000 1,997,140
Corestates Bank, 5.57%-5.62%, 2/20/96-2/23/96 2,000,000 1,965,029
Credit Suisse New York, 5.66%, 11/14/95 2,000,000 1,995,912
Mellon Bank, 5.71%-5.72%, 11/13/95-1/26/96 3,470,310 3,442,407
Nationsbank, 5.70%-5.75%, 2/23/96-3/20/96 3,000,000 2,940,245
State Street Bank & Trust Company, 5.63%, 1/30/96 2,616,492 2,579,665
Total Bankers Acceptances 15,969,548
COMMERCIAL PAPER 28.45%
ABN-Amro North America Finance, Inc.,
5.55%, 2/21/96 2,000,000 1,965,467
Associates Corporation of North America,
5.71%, 11/28/95 2,000,000 1,991,435
CS First Boston, 5.65%-5.71%, 11/9/95-1/18/96 2,000,000 1,986,489
Electronic Data Systems Corporation, 5.72%, 1/30/96 2,000,000 1,971,400
Internationale Nederlanden Funding Corporation, 5.72%,
11/22/95 3,000,000 2,989,990
Merrill Lynch & Company, Inc., 5.58%, 3/8/96 2,000,000 1,960,320
Morgan Stanley Group, Inc., 5.60%-5.73%,
12/20/95-1/25/96 3,000,000 2,971,227
National Rural Utilities Cooperative
Finance Corporation, 5.70%, 11/2/95 2,000,000 1,999,683
Rincon Securities, Inc., 5.70%-5.72%,
12/15/95-1/12/96 2,100,000 2,080,910
Total Commercial Paper 19,916,921
U.S. GOVERNMENT AGENCIES 8.57%
Federal Home Loan Bank, 5.17%, 11/6/95 2,000,000 1,999,688
Student Loan Market Association, 5.00%-5.75%,
8/9/96-8/4/97 (a) 4,000,000 3,998,434
Total U.S. Government Agencies 5,998,122
</TABLE>
5
<PAGE>
MENTOR CASH MANAGEMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
<S> <C> <C> <C>
REPURCHASE AGREEMENTS 35.67%
Goldman, Sachs & Company
Dated 10/31/95, 5.90%, due 11/1/95, collateralized by
$9,984,748 Federal Home Loan Mortgage Corporation, 7.50%,
1/1/00 $ 9,968,182 $ 9,968,182
Nationsbank Corporation
Dated 10/31/95, 5.85%, due 11/1/95, collateralized by
$13,900,000 U.S. Treasury Note, 7.75%, 11/30/99 15,000,000 15,000,000
Total Repurchase Agreements 24,968,182
TOTAL INVESTMENTS (COST $69,852,773) 99.79% 69,852,773
OTHER ASSETS LESS LIABILITIES 0.21% 144,206
NET ASSETS 100.00% $69,996,979
</TABLE>
(a) Floating Rate Securities -- The rates shown are the effective rates at
October 31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
MENTOR INTERMEDIATE DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Percent of Principal Market
Net Assets Amount Value
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES 63.22%
Federal Home Loan Mortgage Corporation,
10.50%, 2/1/03 $ 433,265 $ 459,465
Federal National Mortgage Association,
11.00%, 7/1/01 304,204 321,221
Government National Mortgage Association,
6.50%, 9/1/25, TBA* 550,000 533,841
U.S. Treasury Note, 7.50%, 1/31/97 500,000 511,245
U.S. Treasury Note, 7.38%, 11/15/97 700,000 722,911
U.S. Treasury Note, 5.50%, 2/28/99 2,100,000 2,085,342
U.S. Treasury Note, 7.50%, 11/15/01** 1,600,000 1,729,920
U.S. Treasury Note, 6.25%, 2/15/03 250,000 254,342
U.S. Treasury Note, 7.25%, 5/15/04 875,000 946,654
Total U.S. Government and Agency Securities
(cost $7,433,645) 7,564,941
CORPORATE BONDS 20.96%
Abbey National PLC, 6.69%, 10/17/05 200,000 200,560
Developers Diversified Realty, 7.63%, 5/15/00 250,000 251,830
Lehman Brothers, Inc., 9.88%, 10/15/00 525,000 591,958
Limited, Inc., 8.88%, 8/15/99 125,000 135,095
Occidental Petroleum, 8.75%, 2/14/03 300,000 314,133
Salomon, Inc., MTN, 9.75%, 7/15/97 300,000 314,355
Salomon, Inc., 6.00%, 1/12/98 250,000 245,530
Service Corporation International, 6.88%, 10/1/07 200,000 200,718
Travelers, Inc., 6.88%, 6/1/25 250,000 254,073
Total Corporate Bonds (cost $2,483,538) 2,508,252
</TABLE>
7
<PAGE>
MENTOR INTERMEDIATE DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Percent of Principal Market
Net Assets Amount Value
<S> <C> <C> <C>
SHORT-TERM INVESTMENT 17.17%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 10/31/95, 5.85%, due 11/1/95, collateralized
by $1,900,000 U.S. Treasury Note, 7.75%,
11/30/99 (cost $2,053,656) $ 2,053,656 $ 2,053,656
TOTAL INVESTMENTS (COST $11,970,839) 101.35% 12,126,849
OTHER ASSETS LESS LIABILITIES (1.35%) (161,052)
NET ASSETS 100.00% $11,965,797
</TABLE>
* At October 31, 1995 cost of securities purchased on a when-issued basis
totaled $536,418.
** $1,600,000 principal amount of this security has been segregated for a
commitment to purchase
when-issued securities at October 31, 1995.
MTN - Medium Term Note
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
MENTOR FIXED-INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Percent of Principal Market
Net Assets Amount Value
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES 56.39%
Federal Home Loan Mortgage Corporation,
10.50%, 2/1/03 $ 433,265 $ 459,465
Federal National Mortgage Association,
11.00%, 7/1/01 437,756 462,245
Government National Mortgage Association,
6.50%, 9/1/25, TBA* 1,650,000 1,601,523
U.S. Treasury Note, 5.50%, 2/28/99 3,000,000 2,979,060
U.S. Treasury Note, 5.63%, 6/30/97 3,000,000 2,999,970
U.S. Treasury Note, 6.13%, 7/31/00 500,000 506,090
U.S. Treasury Note, 7.50%, 5/15/02 1,000,000 1,086,220
U.S. Treasury Note, 6.25%, 2/15/03 1,100,000 1,119,107
U.S. Treasury Note, 7.25%, 5/15/04 1,200,000 1,298,268
U.S. Treasury Bond, 7.13%, 2/15/23** 2,450,000 2,669,152
U.S. Treasury Bond, 7.50%, 11/15/24** 2,760,000 3,152,362
U.S. Treasury Bond, 7.63%, 2/15/25 750,000 870,292
Total U.S. Government and Agency Securities
(cost $18,247,812) 19,203,754
CORPORATE BONDS 28.55%
Abbey National PLC, 6.69%, 10/17/05 800,000 802,240
Developers Diversified Realty, 7.63%, 5/15/00 750,000 755,490
Lehman Brothers, Inc., 9.88%, 10/15/00 1,475,000 1,663,122
Limited, Inc., 8.88%, 8/15/99 375,000 405,285
Lockheed Martin Corporation, 9.38%, 10/15/99 1,000,000 1,108,670
Nationsbank, 9.38%, 9/15/09 750,000 906,232
Occidental Petroleum, 8.75%, 2/14/03 1,000,000 1,047,110
Salomon, Inc., MTN, 9.75%, 7/15/97 700,000 733,495
Salomon, Inc., 6.00%, 1/12/98 750,000 736,590
Service Corporation International, 6.88%, 10/1/07 800,000 802,872
Travelers, Inc., 6.88%, 6/1/25 750,000 762,218
Total Corporate Bonds (cost $9,631,873) 9,723,324
</TABLE>
9
<PAGE>
MENTOR FIXED-INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Percent of Principal Market
Net Assets Amount Value
<S> <C> <C> <C>
SHORT-TERM INVESTMENT 18.40%
REPURCHASE AGREEMENT
Nationsbank Corporation
Dated 10/31/95, 5.85%, due 11/1/95, collateralized by
$5,800,000 U.S. Treasury Note, 7.75%, 11/30/99 (cost
$6,265,720) $6,265,720 $ 6,265,720
TOTAL INVESTMENTS (COST $34,145,405) 103.34% 35,192,798
OTHER ASSETS LESS LIABILITIES (3.34%) (1,139,339)
NET ASSETS 100.00% $34,053,459
</TABLE>
* At October 31, 1995 cost of securities purchased on a when-issued basis
totaled $1,609,254.
** $5,210,000 principal amount of these securities have been segregated for a
commitment to purchase when-issued securities at October 31, 1995.
MTN - Medium Term Note
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
MENTOR INSTITUTIONAL TRUST
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Mentor Mentor Mentor
Cash Intermediate Fixed-
Management Duration Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
ASSETS
Investments, at market value * (Note 2)
Investment securities $44,884,591 $ 10,073,193 $28,927,078
Repurchase agreements 24,968,182 2,053,656 6,265,720
Total investments 69,852,773 12,126,849 35,192,798
Receivables
Interest 112,548 198,625 470,263
Fund shares sold 9,579 170,000 155,533
Due from management company (Note 4) 35,983 9,702 26,135
Deferred expenses (Note 2) 27,367 5,362 27,048
Total assets 70,038,250 12,510,538 35,871,777
LIABILITIES
Payables
Investments purchased - 536,418 1,609,254
Fund shares redeemed 5,097 - 189,408
Dividends 11,131 - -
Accrued expenses and other liabilities 25,043 8,323 19,656
Total liabilities 41,271 544,741 1,818,318
NET ASSETS $69,996,979 $ 11,965,797 $34,053,459
Net Assets represented by:
Additional paid-in capital $69,996,979 $ 11,278,113 $31,480,542
Undistributed net investment income - 54,440 172,353
Undistributed realized gain on investment
transactions - 477,234 1,353,171
Net unrealized appreciation of investments - 156,010 1,047,393
Net Assets $69,996,979 $ 11,965,797 $34,053,459
Shares Outstanding 69,996,979 898,741 2,484,138
NET ASSET VALUE PER SHARE $ 1.00 $ 13.31 $ 13.71
</TABLE>
* Investments at cost $69,852,773, $11,970,839 and $34,145,405 respectively.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
MENTOR INSTITUTIONAL TRUST
STATEMENTS OF OPERATIONS
PERIOD ENDED OCTOBER 31, 1995
<TABLE>
<CAPTION>
Mentor Mentor Mentor
Cash Intermediate Fixed-
Management Duration Income
Portfolio* Portfolio** Portfolio***
<S> <C> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $2,439,036 $ 668,347 $1,797,962
EXPENSES
Transfer agent fees 42,539 10,464 25,942
Custodian fees 14,749 10,158 16,836
Organizational expenses (Note 2) 6,857 1,347 6,779
Audit fees 6,762 1,356 3,555
Shareholder reports and postage expenses 3,977 895 2,222
Legal fees 3,395 800 2,345
Registration expenses 1,122 255 646
Directors' fees and expenses 441 130 329
Total expenses 79,842 25,405 58,654
Deduct
Reimbursement of expenses by management
company (Note 4) 63,607 20,703 45,996
Net expenses 16,235 4,702 12,658
Net investment income 2,422,801 663,645 1,785,304
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments (Note 2) - 468,099 1,341,178
Change in unrealized appreciation of investments - 156,010 1,047,393
Net realized and unrealized gain on investments - 624,109 2,388,571
Net increase in net assets resulting from operations $2,422,801 $1,287,754 $4,173,875
</TABLE>
* For the period from December 5, 1994 (commencement of operations) to October
31, 1995.
** For the period from December 19, 1994 (commencement of operations) to
October 31, 1995.
*** For the period from December 6, 1994 (commencement of operations) to October
31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
MENTOR INSTITUTIONAL TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Mentor Mentor Mentor
Cash Intermediate Fixed-
Management Duration Income
Period Ended October 31, 1995 Portfolio* Portfolio** Portfolio***
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income $ 2,422,801 $ 663,645 $ 1,785,304
Net realized gain on investments - 468,099 1,341,178
Change in net unrealized appreciation of investments - 156,010 1,047,393
Increase in net assets from operations 2,422,801 1,287,754 4,173,875
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (2,422,801) (600,070) (1,600,958)
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Net proceeds from sale of shares 137,216,173 10,710,006 34,992,343
Reinvested distributions 2,407,807 599,637 1,600,958
Cost of shares redeemed (69,627,001) (31,530) (5,112,759)
Change in net assets from capital share transactions 69,996,979 11,278,113 31,480,542
Increase in net assets 69,996,979 11,965,797 34,053,459
NET ASSETS
Beginning of period - - -
End of period $ 69,996,979 $11,965,797 $ 34,053,459
</TABLE>
* For the period from December 5, 1994 (commencement of operations) to October
31, 1995.
** For the period from December 19, 1994 (commencement of operations) to
October 31, 1995.
*** For the period from December 6, 1994 (commencement of operations) to October
31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
MENTOR INSTITUTIONAL TRUST
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Mentor Mentor Mentor
Cash Intermediate Fixed-
Management Duration Income
Period Ended October 31, 1995 Portfolio* Portfolio** Portfolio***
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 12.50 $12.50
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.05 0.78 0.81
Net realized and unrealized gain on
investments - 0.74 1.14
Total from investment operations 0.05 1.52 1.95
LESS DISTRIBUTIONS
Dividends from income (0.05) (0.71) (0.74)
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 13.31 $13.71
Total Return 5.06% 12.38% 15.90%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 69,997 $ 11,966 $34,053
Ratio of expenses to average net assets 0.04%(a) 0.05%(a) 0.05%(a)
Ratio of expenses to average net assets
excluding waiver 0.18%(a) 0.25%(a) 0.22%(a)
Ratio of net investment income to average
net assets 5.56%(a) 6.52%(a) 6.75%(a)
Portfolio turnover rate - 307% 302%
</TABLE>
(a) Annualized.
* For the period from December 5, 1994 (commencement of operations) to October
31, 1995.
** For the period from December 19, 1994 (commencement of operations) to
October 31, 1995.
*** For the period from December 6, 1994 (commencement of operations) to October
31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
MENTOR INSTITUTIONAL TRUST
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE 1: ORGANIZATION
Mentor Institutional Trust, formerly IMG Institutional Trust, was organized on
February 8, 1994, and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. On June 27, 1995, the
name of the the Trust was changed to Mentor Institutional Trust ("Trust"). The
Trust consists of four separate diversified portfolios (hereinafter each
individually referred to as a "Portfolio" or collectively as the "Portfolios")
at October 31, 1995. These financial statements include the following
Portfolios:
Mentor Cash Management Portfolio
("Cash Management Portfolio")
Mentor Intermediate Duration Portfolio
("Intermediate Duration Portfolio")
Mentor Fixed-Income Portfolio
("Fixed-Income Portfolio")
The assets of each Portfolio of the Trust are segregated and a shareholder's
interest is limited to the Portfolio in which shares are held.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios:
A. Valuation of Securities
Securities held by the Cash Management Portfolio are stated at amortized cost,
which approximates market value. In the event that a deviation of 1/2 of 1% or
more exists between the Portfolio's $1.00 per share net asset value, calculated
at amortized cost, and the net asset value calculated by reference to
market-based values, or if there is any other deviation that the Board of
Trustees believes would result in a material dilution to shareholders or
purchasers, the Board of Trustees will promptly consider what action should be
initiated.
U.S. Government obligations held by the Intermediate Duration Portfolio and the
Fixed-Income Portfolio are valued at the mean between the over-the-counter bid
and asked prices as furnished by an independent pricing service. Listed
corporate bonds, other fixed income
15
<PAGE>
securities, mortgage backed securities, mortgage related and other related
securities are valued at the prices provided by an independent pricing service.
Security valuations not available from an independent pricing service are
provided by dealers reviewed by the Board of Trustees. In determining value, the
dealers use information with respect to transactions in such securities, market
transactions in comparable securities, various relationships between securities,
and yield to maturity. Any securities for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by the Board of Trustees.
B. Repurchase Agreements
It is the policy of the Trust to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book entry system, or to have
segregated within the custodian bank's possession all securities held as
collateral in support of repurchase agreement investments. Additionally,
procedures have been established by the Trust to monitor, on a daily basis, the
market value of each repurchase agreement's underlying securities to ensure the
existence of a proper level of collateral.
The Trust will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Trust's adviser to be creditworthy pursuant to guidelines established by the
Trustees. Risks may arise from the potential inability of counterparties to
honor the terms of the repurchase agreement. Accordingly, the Trust could
receive less than the repurchase price on the sale of collateral securities.
C. Security Transactions and Interest Income
Security transactions for the Portfolios are accounted for on a trade date
basis. Interest income is recorded on the accrual basis and includes
amortization of premium and discount on investments. Realized and unrealized
gains and losses on investment security transactions are calculated on an
identified cost basis.
16
<PAGE>
D. Expenses
Expenses arising in connection with a Portfolio are allocated to that Portfolio.
Other Trust expenses are allocated among the Portfolios in proportion to their
relative net assets.
E. Federal Taxes
No provision for federal income taxes has been made since it is each Portfolio's
intent to comply with the provisions applicable to regulated investment
companies under the Internal Revenue Code and to distribute to its shareholders
within allowable time limit substantially all taxable income and realized
capital gains.
F. When-Issued and Delayed Delivery Transactions
The Fixed-Income Portfolio and Intermediate-Duration Portfolio may engage in
when-issued or delayed delivery transactions. To the extent the Portfolios
engage in such transactions, they will do so for the purpose of acquiring
portfolio securities consistent with their investment objectives and policies
and not for the purpose of investment leverage. The Portfolios will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Portfolios will maintain security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
G. Deferred Expenses
Costs incurred by the Portfolios in connection with their initial share
registration and organization costs were deferred by the Portfolios and are
being amortized on a straight-line basis over a five-year period.
H. Distributions
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to deferral of wash sales.
17
<PAGE>
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly by the Cash Management
Portfolio. Dividends are declared and paid quarterly by the Fixed-Income
Portfolio and Intermediate Duration Portfolio. Capital gains realized by each
Portfolio, if any, will be distributed annually.
NOTE 4: INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENTS
Each Portfolio has entered into an Investment Management Agreement with
Commonwealth Investment Counsel, Inc. ("Commonwealth") to provide investment
advisory services to each of the Portfolios. Commonwealth receives no
compensation for its services. Commonwealth is a wholly-owned subsidiary of
Mentor Investment Group, Inc. (formerly Investment Management Group, Inc.),
which is a wholly-owned subsidiary of Wheat First Butcher Singer, Inc.
In order to limit the annual operating expenses of the Portfolios, Commonwealth
may bear certain expenses incurred in connection with the operation of the
Portfolios. For the period ended October 31, 1995 Commonwealth bore expenses of
$63,607, $20,703 and $45,996 respectively, for the Cash Management Portfolio,
Intermediate Duration Portfolio and Fixed-Income Portfolio.
Mentor Investment Group, Inc. ("Mentor") provides administrative personnel and
services to each Portfolio, pursuant to an Administration Agreement. Mentor
receives no compensation for such services.
18
<PAGE>
NOTE 5: INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term investments), for the
period ended October 31, 1995, were as follows:
Portfolio Purchases Sales
Cash Management - -
Intermediate Duration $ 40,537,215 $30,926,612
Fixed-Income 108,125,131 81,374,809
NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS
The cost of investments for federal income tax purposes amounted to $69,852,773
for the Cash Management, $11,970,839 for the Intermediate Duration and
$34,145,844 for the Fixed-Income at October 31, 1995. Gross unrealized
appreciation and depreciation of investments at October 31, 1995 were as
follows:
Gross Gross Net
Unrealized Unrealized Unrealized
Portfolio Appreciation Depreciation Appreciation
Cash Management - - -
Intermediate Duration $ 156,945 $ 935 $ 156,010
Fixed-Income 1,048,299 1,345 1,046,954
NOTE 7: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
Mentor Cash
Management Portfolio
Period Ended
10/31/95*
Shares sold 137,216,173
Shares issued upon reinvestment of distributions 2,407,807
Shares redeemed (69,627,001)
Change in net assets from capital share transactions 69,996,979
19
<PAGE>
Mentor Intermediate
Duration Portfolio
Period Ended
10/31/95**
Shares sold 855,389
Shares issued upon reinvestment of distributions 45,840
Shares redeemed (2,488)
Change in net assets from capital
share transactions 898,741
Mentor Fixed-Income
Portfolio
Period Ended
10/31/95***
Shares sold 2,759,545
Shares issued upon reinvestment of distributions 120,672
Shares redeemed (396,079)
Change in net assets from capital
share transactions 2,484,138
* For the period from December 5, 1994 (commencement of operations) to October
31, 1995.
** For the period from December 19, 1994 (commencement of operations) to
October 31, 1995.
*** For the period from December 6, 1994 (commencement of operations) to October
31, 1995.
20
<PAGE>
MENTOR INSTITUTIONAL TRUST
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
MENTOR INSTITUTIONAL TRUST
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of the Cash Management Portfolio, Intermediate
Duration Portfolio and Fixed Income Portfolio, portfolios of Mentor
Institutional Trust (the Trust) as of October 31, 1995 and the related
statements of operations, statements of changes in net assets and financial
highlights for the period from December 5, 1994 (commencement of operations) to
October 31, 1995 for the Cash Management Portfolio, for the period from December
19, 1994 (commencement of operations) to October 31, 1995 for the Intermediate
Duration Portfolio and for the period from December 6, 1994 (commencement of
operations) to October 31, 1995 for the Fixed-Income Portfolio. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Cash Management Portfolio, Intermediate Duration Portfolio and Fixed Income
Portfolio, portfolios of Mentor Institutional Trust as of October 31, 1995, and
the results of their operations, the changes in their net assets and their
financial highlights for the periods specified in the first paragraph above, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
December 8, 1995
21
