P R O S P E C T U S March 3, 1997
Institutional Shares
MENTOR INSTITUTIONAL TRUST
Mentor Institutional Trust offers investors an opportunity to design an
investment program by investing in Institutional Shares of one or more different
investment portfolios. An investment in shares of the Portfolios offered by this
Prospectus is designed for institutional and high net-worth individual investors
purchasing shares through investment advisory accounts with Mentor Investment
Advisors, LLC or its affiliates.
The MENTOR U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO is a "money market"
fund, seeking as high a rate of current income as Mentor Investment Advisors,
LLC believes is consistent with preservation of capital and maintenance of
liquidity, through investments exclusively in U.S. Government securities and
repurchase agreements with respect to U.S. Government securities. AN INVESTMENT
IN THIS PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
The MENTOR INTERMEDIATE DURATION PORTFOLIO and MENTOR FIXED-INCOME
PORTFOLIO seek a high level of long-term total return by investing in
diversified portfolios of investment-grade, fixed-income securities.
Preservation of capital is a secondary objective to the extent consistent with a
Portfolio's primary objective of seeking a high level of long-term total return.
MENTOR INTERMEDIATE DURATION PORTFOLIO will normally maintain a portfolio
duration of from two to five years. MENTOR FIXED-INCOME PORTFOLIO will normally
maintain a portfolio duration of from four to seven years. There is no limit on
the average weighted portfolio maturity these Portfolios may maintain, and a
Portfolio's average weighted maturity will likely be longer than its portfolio
duration. Mentor Investment Advisors, LLC is the investment adviser for these
Portfolios.
The MENTOR PERPETUAL INTERNATIONAL PORTFOLIO seeks long-term capital
appreciation by investing in a diversified portfolio of equity securities of
issuers located outside the United States. THIS PORTFOLIO MAY USE
"LEVERAGE" -- THAT IS, IT MAY BORROW MONEY TO PURCHASE ADDITIONAL PORTFOLIO
SECURITIES, WHICH INVOLVES SPECIAL RISKS. Mentor Perpetual Advisors, LLC is the
investment adviser for this Portfolio.
------------------------
This Prospectus sets forth concisely the information about the Portfolios
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. INVESTORS CAN FIND MORE DETAILED
INFORMATION IN THE MARCH 3, 1997 STATEMENT OF ADDITIONAL INFORMATION, AS AMENDED
FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT, CALL MENTOR DISTRIBUTORS,
LLC AT 1-800-869-6042. The Statement has been filed with the Securities and
Exchange Commission and is incorporated into this Prospectus by reference. The
Trust's address is P.O. Box 1357, Richmond, Virginia 23211.
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MENTOR DISTRIBUTORS, LLC
DISTRIBUTOR
SHARES OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. Expenses shown are, except for the International Portfolio, based on
expenses incurred in respect of Institutional Shares for the 1996 fiscal year.
For the International Portfolio, the expenses reflect those that the Portfolio
expects to incur in its first full fiscal year in respect of its Institutional
Shares. The Examples show the cumulative expenses attributable to a hypothetical
$1,000 investment in each Portfolio over specified periods. THE PORTFOLIOS ARE
BEING OFFERED TO INVESTORS PRINCIPALLY THROUGH INVESTMENT ADVISORY ACCOUNTS WITH
MENTOR INVESTMENT ADVISORS, LLC AND ITS AFFILIATES; EXPENSES SHOWN BELOW DO NOT
REFLECT ANY FEES OR EXPENSES ASSOCIATED WITH THOSE ACCOUNTS.
SHAREHOLDER TRANSACTION EXPENSES:
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<S> <C>
Maximum Sales Load Imposed on Purchases............................................................. None
Maximum Sales Load Imposed on Reinvested Dividends.................................................. None
Deferred Sales Load................................................................................. None
Redemption Fees..................................................................................... None
Exchange Fee........................................................................................ None
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ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
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<CAPTION>
MENTOR
U.S. GOV'T MENTOR MENTOR MENTOR
CASH INTERMEDIATE FIXED- PERPETUAL
MANAGEMENT DURATION INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ------------ --------- -------------
<S> <C>
Management Fees.............................................. 0.00% 0.00% 0.00% 1.00%
12b-1 Fees................................................... 0.00% 0.00% 0.00% 0.00%
Other Expenses (after expense limitation)*................... 0.06% 0.10% 0.10% 0.10%
---------- ------------ --------- -------------
Total Portfolio Operating Expenses
(after expense limitation)*................................ 0.06% 0.10% 0.10% 1.10%
</TABLE>
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* Other Expenses and Total Portfolio Operating Expenses for the U.S. Government
Cash Management Portfolio, Intermediate Duration Portfolio, and Fixed-Income
Portfolio reflect a voluntary expense limitation currently in effect. In the
absence of the expense limitation, Other Expenses and Total Portfolio
Operating Expenses for the Portfolios based on expenses for the 1996 fiscal
year would be 0.12% for the U.S. Government Cash Management Portfolio, 0.31%
for the Intermediate Duration Portfolio, and 0.17% for the Fixed-Income
Portfolio. Other Expenses and Total Portfolio Operating Expenses for the
International Portfolio also reflect a voluntary expense limitation currently
in effect. In the absence of the expense limitation, for the International
Portfolio, Other Expenses are estimated to be 0.45% and Total Portfolio
Operating Expenses are estimated to be 1.45%.
EXAMPLES
An investment of $1,000 in a Portfolio's Institutional Shares would incur
the following expenses, assuming 5% annual return, with or without redemption at
the end of each period:
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<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C>
Mentor U.S. Government Cash Management Portfolio................. $1 $ 2 $ 4 $8
Mentor Intermediate Duration Portfolio........................... 2 4 6 13
Mentor Fixed-Income Portfolio.................................... 2 4 6 13
Mentor Perpetual International Portfolio......................... 12 35 -- --
</TABLE>
This information is provided to help investors understand the expenses of
investing in each of the Portfolios' Institutional Shares and an investor's
share of the operating expenses of the Portfolios' Institutional Shares. The
Examples should not be considered representations of future performance; actual
expenses may be more or less than those shown.
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FINANCIAL HIGHLIGHTS
The financial highlights for the Portfolios' Institutional Shares presented
below have been derived from the Trust's financial statements which were audited
and reported on by KPMG Peat Marwick LLP, the Trust's independent auditors.
Their report dated December 13, 1996 on the financial statements of the Trust
for the fiscal period ended October 31, 1996 is included in the Trust's Annual
Report to shareholders for the 1996 fiscal year, which is incorporated herein by
reference. A copy of the Annual Report may be obtained free of charge from the
Trust. (During the period shown, the U.S. Government Cash Management Portfolio
was known as the Cash Management Portfolio and invested in a broad range of
money market instruments, not limited (as it currently is) to investments in
U.S. Government securities and repurchase agreements with respect to such
securities.)
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<CAPTION>
MENTOR
MENTOR U.S. GOVERNMENT PERPETUAL
CASH MENTOR INTERMEDIATE MENTOR FIXED- INTERNATIONAL
MANAGEMENT PORTFOLIO DURATION PORTFOLIO INCOME PORTFOLIO PORTFOLIO
----------------------- ----------------------- ----------------------- -------------
YEAR PERIOD YEAR PERIOD YEAR PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
10/31/96 10/31/95(b) 10/31/96 10/31/95(c) 10/31/96 10/31/95(d) 10/31/96(e)
-------- ----------- -------- ----------- -------- ----------- -------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................ $ 1.00 $ 1.00 $13.31 $ 12.50 $ 13.71 $ 12.50 $ 12.50
Income from investment operations
Net investment income............. 0.05 0.05 0.96 0.77 0.77 0.81 0.04
Net realized and unrealized gain
(loss) on investments and
foreign currency related
transactions.................... -- * -- (0.24) 0.75 (0.16 ) 1.14 (0.42)
-------- ----------- -------- ----------- -------- ----------- -------------
Total from investment
operations...................... 0.05 0.05 0.72 1.52 0.61 1.95 (0.38)
LESS DISTRIBUTIONS
Dividends from income............. (0.05) (0.05) (1.01) (0.71) (0.77) (0.74) --
Distributions from capital
gains........................... -- * -- (0.55) -- (0.66) -- --
-------- ----------- -------- ----------- -------- ----------- -------------
Total distributions............... (0.05) (0.05) (1.56) (0.71) (1.43) (0.74) --
NET ASSET VALUE, END OF PERIOD...... $ 1.00 $ 1.00 $12.47 $ 13.31 $ 12.89 $ 13.71 $ 12.12
-------- ----------- -------- ----------- -------- ----------- -------------
TOTAL RETURN........................ 5.60% 5.06% 5.90% 12.38% 4.87% 15.90% (3.04%)
-------- ----------- -------- ----------- -------- ----------- -------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
thousands)........................ $87,973 $69,997 $3,384 $11,966 $49,962 $34,053 $ 8,741
Ratio of expenses to average net
assets............................ 0.04% 0.04%(a) 0.05% 0.05%(a) 0.05% 0.05%(a) 1.10%(a)
Ratio of expenses to average net
assets excluding waiver........... 0.12% 0.18%(a) 0.31% 0.25%(a) 0.17% 0.22%(a) 1.75%(a)
Ratio of net investment income to
average net assets................ 5.54% 5.56%(a) 5.92% 6.52%(a) 6.22% 6.75%(a) 0.89%(a)
Portfolio turnover rate............. -- -- 215% 307% 226% 302% 59%
Average commission rate on portfolio
transactions...................... -- -- -- -- -- -- $0.0295
-------- ----------- -------- ----------- -------- ----------- -------------
-------- ----------- -------- ----------- -------- ----------- -------------
</TABLE>
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(a) Annualized.
(b) For the period from December 5, 1994 (commencement of operations) to
October 31, 1995.
(c) For the period from December 19, 1994 (commencement of operations) to
October 31, 1995.
(d) For the period from December 6, 1994 (commencement of operations) to
October 31, 1995.
(e) For the period from May 29, 1996 (commencement of operations) to October 31,
1996.
* Reflects net realized gain (loss) which was under $0.01 per share.
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INVESTMENT OBJECTIVES AND POLICIES
MENTOR U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO
THE MENTOR U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO'S INVESTMENT OBJECTIVE IS
TO SEEK AS HIGH A RATE OF CURRENT INCOME AS MENTOR INVESTMENT ADVISORS, LLC
("MENTOR ADVISORS") BELIEVES IS CONSISTENT WITH PRESERVATION OF CAPITAL AND
MAINTENANCE OF LIQUIDITY. The Portfolio invests exclusively in U.S. Treasury
bills, notes, and bonds, and other obligations issued or guaranteed as to
principal or interest by the U.S. Government, its agencies, or
instrumentalities, and in repurchase agreements with respect to such
obligations. There can, of course, be no assurance that the Portfolio will
achieve its investment objective.
Certain of the foregoing obligations, including U.S. Treasury bills, notes,
and bonds, mortgage participation certificates issued or guaranteed by the
Government National Mortgage Association, and Federal Housing Administration
debentures, are supported by the full faith and credit of the United States.
Other U.S. Government securities issued by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. These securities include obligations supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of
Federal Home Loan Banks, and obligations supported only by the credit of an
instrumentality, such as Federal National Mortgage Association bonds.
Short-term U.S. Government obligations generally are considered among the
safest short-term investments. Because of their added safety, the yields
available from U.S. Government obligations are generally lower than the yields
available from comparable corporate debt securities. The U.S. Government
guarantee of securities owned by the Portfolio does not guarantee the net asset
value of the Portfolio's shares, which the Portfolio seeks to maintain at $1.00
per share.
Considerations of liquidity and preservation of capital mean that the
Portfolio may not necessarily invest in money market instruments paying the
highest available yield at a particular time. Consistent with its investment
objective, the Portfolio will attempt to maximize yields by portfolio trading
and by buying and selling portfolio investments in anticipation of or in
response to changing economic conditions and conditions and trends in the U.S.
Government securities money markets. The Portfolio may also invest to take
advantage of what Mentor Advisors believes to be temporary disparities in yields
of different segments in the U.S. Government securities money markets or among
particular instruments within the same segment of the markets. These policies,
as well as the relatively short maturity of obligations purchased by the
Portfolio, may result in frequent changes in the securities held by the
Portfolio. The Portfolio will not usually pay brokerage commissions in
connection with the purchase or sale of portfolio securities.
The Portfolio's securities will be affected by general changes in interest
rates resulting in increases or decreases in the values of the obligations held
by the Portfolio. The value of the Portfolio's securities can be expected to
vary inversely to changes in prevailing interest rates. Withdrawals by
shareholders could require the sale of portfolio investments at a time when such
a sale might not otherwise be desirable.
MENTOR INTERMEDIATE DURATION PORTFOLIO AND MENTOR FIXED-INCOME PORTFOLIO
The investment objective of both of these Portfolios is to seek a high
level of long-term total return. Preservation of capital is a secondary
objective to the extent consistent with a Portfolio's primary objective of
seeking a high level of long-term total return. The Portfolios will invest in
U.S. Government securities, fixed-income securities of corporations and other
private issuers, mortgage-backed securities, and other asset-backed securities.
Each of the Portfolios may also hold a portion of its assets in cash or money
market instruments. There can, of course, be no assurance that the Portfolios
will achieve their investment objectives.
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The INTERMEDIATE DURATION PORTFOLIO will normally maintain a portfolio
duration of from TWO TO FIVE YEARS.
The FIXED-INCOME PORTFOLIO will normally maintain a portfolio duration of
from FOUR TO SEVEN YEARS.
A Portfolio's "portfolio duration" at any time is the dollar-weighted
average duration of its portfolio securities at that time. In general, the net
asset value of a Portfolio with a longer portfolio duration will increase or
decrease to a greater degree in response to changes in interest rates than will
the net asset value of a Portfolio with a shorter portfolio duration.
(Typically, for example, the value of a security with a three-year duration will
increase by approximately three percent in response to a one-percent decline in
interest rates, and will decline by approximately three percent in response to a
one-percent rise in interest rates; similarly, the value of a security with a
seven-year duration will increase by approximately seven percent in response to
a one-percent decline in interest rates, and will decline by approximately seven
percent in response to a one-percent rise in interest rates; and so on.)
However, because issuers of securities with longer durations typically pay
interest on those securities at rates higher than in the case of securities with
shorter durations, the current income of a Portfolio with a longer portfolio
duration will typically be greater than that of a Portfolio with a shorter
portfolio duration.
Mentor Advisors may take full advantage of the entire range of maturities
of the securities in which a Portfolio may invest and may, through the purchase
and sale of securities with different durations, adjust each Portfolio's
portfolio duration from time to time, depending on its assessment of the
relative values of securities of different durations and maturities and
expectations of future changes in interest rates. There can be no assurance that
either Portfolio will be able to maintain any particular portfolio duration.
A Portfolio's "total return" consists of current income, including interest
payments and discount accruals, plus any increases in the values of the
Portfolio's investments (less any decreases in the values of any of its
investments and amortizations of premiums). A Portfolio may seek to increase its
total return by investing in investment-grade securities which Mentor Advisors
believes may appreciate in value as a result of changes in interest rates or
other market factors.
Traditionally, a debt security's "term to maturity" has been used to
evaluate the sensitivity of the security's price to changes in interest rates
(the security's interest-rate "volatility"). However, a security's term to
maturity measures only the period of time until the last payment of principal or
interest on the security, and does not take into account the timing of the
various payments of principal or interest to be made prior to the instrument's
maturity. By contrast, "duration" is a measure of the full stream of payments to
be received on a debt instrument, including both interest and principal
payments, based on their present values. Duration measures the periods of time
between the present time and the time when the various interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by their present values. Duration can be a more
accurate measure of interest rate volatility than term-to-maturity. There is no
limit on the average weighted maturity either Portfolio may maintain, and a
Portfolio's average weighted maturity will likely be longer than its portfolio
duration.
There are some situations where the standard duration calculation does not
properly reflect the interest-rate volatility of a security. For example,
floating and variable rate securities often have final maturities of ten years
or more; however, their interest-rate volatility is determined based principally
on the period of time until their interest rates are reset and on the terms on
which they may be reset. Another example where a security's interest-rate
volatility is not properly measured by the standard duration calculation is in
the case of mortgage-backed securities. The stated final maturity of such
securities may be up to 30 years, but the actual cash flow on the securities
will be determined by the prepayment rates on the underlying mortgage loans.
Therefore, the duration of such a security can change if prepayment rates
change. In these and other similar situations, Mentor Advisors will estimate a
security's duration using analytical techniques that take into account such
factors as the expected
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prepayment rate on the security and how the prepayment rate might change under
various market conditions. Because calculation of a security's duration may be
based in part on estimates such as these made by Mentor Advisors, a Portfolio's
ability to maintain a particular portfolio duration will depend on Mentor
Advisors' ability to make those estimates accurately.
The Fixed-Income Portfolio will normally invest at least 65% of its total
assets, determined at the time of investment, in fixed-income securities. A
fixed-income security is a debt security paying interest at a rate specified in
the terms of the security or determined based on a formula or factors specified
in the terms of the security.
The Portfolios will only invest in securities of investment grade. A
security will be deemed to be of "investment grade" if, at the time of
investment by a Portfolio, the security is rated at least Baa3 by Moody's or
BBB-by Standard & Poor's, or at a comparable rating by another nationally
recognized rating organization. Securities rated Baa or BBB lack outstanding
investment characteristics and have speculative characteristics and are subject
to greater credit and market risks than higher-rated securities. A Portfolio
will not be required to dispose of a security held by it if the security's
rating falls below investment grade, although Mentor Advisors will consider
whether continued investment in the security is consistent with the Portfolio's
investment objectives. See the Statement of Additional Information for
descriptions of securities ratings assigned by Moody's and Standard & Poor's.
Mentor Advisors may under unusual circumstances implement temporary
"defensive" strategies in order to reduce fluctuations in the value of a
Portfolio's assets. At those times, a Portfolio may invest any portion of its
assets in cash or cash equivalents, money market instruments, or other
short-term, high-quality investments Mentor Advisors considers consistent with
such defensive strategies, and may maintain a portfolio duration shorter than
would otherwise be consistent with its basic investment strategy.
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
THE INTERNATIONAL PORTFOLIO'S INVESTMENT OBJECTIVE IS LONG-TERM CAPITAL
APPRECIATION. The Portfolio is designed for institutional investors who believe
that investment in a diversified portfolio of securities of issuers located
outside the U.S. offers the potential for long-term capital appreciation.
The Portfolio invests in a diversified portfolio of securities of issuers
located outside the United States. The Portfolio's investments will normally
include common stocks, preferred stocks, securities convertible into common
stocks or preferred stocks, and warrants to purchase common stocks or preferred
stocks. The Portfolio may also invest to a lesser extent in debt securities and
other types of investments if Mentor Perpetual Advisors, LLC ("Mentor
Perpetual") believes they would help achieve the Portfolio's objective. The
Portfolio may hold a portion of its assets in cash or money market instruments.
The Portfolio will not limit its investments to any particular type of
company. The Portfolio may invest in companies, large or small, whose earnings
are believed to be in a relatively strong growth trend, or in companies in which
significant further growth is not anticipated but whose market value per share
is thought to be undervalued.
It is likely that, at times, a substantial portion of the Portfolio's
assets will be invested in securities of issuers in emerging markets, including
under-developed and developing nations. Investments in emerging markets are
subject to the same risks applicable to foreign investments generally, although
those risks may be increased due to conditions in such markets. For example, the
securities markets and legal systems in emerging markets may only be in a
developmental stage and may provide few, or none, of the advantages or
protections of markets or legal systems available in more developed countries.
Although many of the securities in which the Portfolio may invest are traded on
securities exchanges, they may trade in limited volume, and the exchanges may
not provide
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all of the conveniences or protections provided by securities exchanges in more
developed markets. The Portfolio may also invest a substantial portion of its
assets in securities traded in the over-the-counter markets and not on any
exchange, which may affect the liquidity of the investment and expose the
Portfolio to the credit risk of its counterparties in trading those investments.
See "Other investment practices -- Foreign securities."
Fixed-income securities in which the Portfolio may invest will be of
investment grade. A security will be deemed to be of "investment grade" if, at
the time of investment by the Portfolio, the security is rated at least Baa3 by
Moody's or BBB- by Standard & Poor's, or at a comparable rating by another
nationally recognized rating organization. Securities rated Baa or BBB lack
outstanding investment characteristics and have speculative characteristics and
are subject to greater credit and market risks than higher-rated securities. The
Portfolio will not be required to dispose of a security held by it if the
security's rating falls below investment grade, although Mentor Perpetual will
consider whether continued investment in the security is consistent with the
Portfolio's investment objective. See the Statement of Additional Information
for descriptions of securities ratings assigned by Moody's and Standard &
Poor's.
Mentor Perpetual may under unusual circumstances implement temporary
"defensive" strategies in order to reduce fluctuations in the value of the
Portfolio's assets. At those times, the Portfolio may invest any portion of its
assets in cash or cash equivalents, money market instruments, or other
short-term, high-quality investments Mentor Perpetual considers consistent with
such defensive strategies. At such times, the Portfolio may invest without limit
in securities of issuers located in the United States. It is impossible to
predict when, or for how long, the Portfolio will use these defensive
strategies.
The International Portfolio may invest a substantial portion of its assets
in securities issued by small companies. Such companies may offer greater
opportunities for capital appreciation than larger companies, but investments in
such companies may involve certain special risks. Such companies may have
limited product lines, markets, or financial resources and may be dependent on a
limited management group. While the markets in securities of such companies have
grown rapidly in recent years, such securities may trade less frequently and in
smaller volume than more widely held securities. The values of these securities
may fluctuate more sharply than those of other securities, and the Portfolio may
experience some difficulty in establishing or closing out positions in these
securities at prevailing market prices. There may be less publicly-available
information about the issuers of these securities or less market interest in
such securities than in the case of larger companies, and it may take a longer
period of time for the prices of such securities to reflect the full value of
their issuers' underlying earnings potential or assets.
Some securities of smaller issuers may be restricted as to resale or may
otherwise be highly illiquid. The ability of the Portfolio to dispose of such
securities may be greatly limited, and the Portfolio may have to continue to
hold such securities during periods when Mentor Perpetual would otherwise have
sold the security. It is possible that Mentor Perpetual or its affiliates or
clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or at
more favorable prices, than the Portfolio.
FOREIGN SECURITIES. Investment in foreign securities entails certain risks.
Since foreign securities are normally denominated and traded in foreign
currencies, the value of the Portfolio's assets may be affected favorably or
unfavorably by currency exchange rates and exchange control regulations. There
may be less information publicly available about a foreign company than about a
U.S. company, and foreign companies are not generally subject to accounting,
auditing, and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign companies are less liquid and
at times more volatile than securities of comparable U.S. companies. Foreign
brokerage commissions and other fees are also generally higher than in the
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United States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment or delivery of securities or in the
recovery of the Portfolio's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation
of assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments which could
affect the value of the Portfolio's investments in certain foreign countries.
Legal remedies available to investors in certain foreign countries may be more
limited than those available with respect to investments in the United States or
in other foreign countries. In the case of securities issued by a foreign
governmental entity, the issuer may in certain circumstances be unable or
unwilling to meet its obligations on the securities in accordance with their
terms, and the Portfolio may have limited recourse available to it in the event
of default. The laws of some foreign countries may limit the Portfolio's ability
to invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities. The Portfolio may buy or
sell foreign currencies and options and futures contracts on foreign currencies
for hedging purposes in connection with its foreign investments.
OTHER INVESTMENT PRACTICES AND RISKS
Each of the Portfolios (except as noted below) may engage in the other
investment practices described below. See the Statement of Additional
Information for a more detailed description of these practices and certain risks
they may involve.
MORTGAGE-BACKED SECURITIES. The Intermediate Duration and Fixed-Income
Portfolios may invest in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including collateralized
mortgage obligations. Interest and principal payments on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Mortgage-backed securities currently offer yields
higher than those available from many other types of fixed-income securities,
but because of their prepayment aspects, their price volatility and yield
characteristics will change based on changes in prepayment rates. Generally,
prepayment rates increase if interest rates fall and decrease if interest rates
rise. For many types of mortgage-backed securities, this can result in
unfavorable changes in price and yield characteristics in response to changes in
interest rates and other market conditions. For example, as a result of their
prepayment aspects, the Portfolios' mortgage-backed securities have less
potential for capital appreciation during periods of declining interest rates
than other fixed-income securities of comparable maturities, although such
obligations may have a comparable or greater risk of decline in market value
during periods of rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that are
dependent on the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
OTHER ASSET-BACKED SECURITIES. The Intermediate Duration and Fixed-Income
Portfolios may invest in securities representing interests in other types of
financial assets, such as automobile-finance receivables or credit-card
receivables. Such securities are subject to many of the same risks as are
mortgage-backed securities, including
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prepayment risks, refinancing risks, and risks of foreclosure. They may or may
not be secured by the receivables themselves or may be unsecured obligations of
their issuers.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Intermediate Duration
and Fixed-Income Portfolios may purchase securities on a "when-issued" basis.
The price of such securities is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date (normally within one month of purchase). Each of these Portfolios may
also purchase securities for future delivery. "When-issued" securities and
forward commitments may increase a Portfolio's overall investment exposure and
may result in losses.
REPURCHASE AGREEMENTS; SECURITIES LOANS. The Portfolios may enter into
repurchase agreements and (in the case of the International Portfolio)
securities loans. Under a repurchase agreement, a Portfolio purchases a debt
instrument for a relatively short period (usually not more than one week), which
the seller agrees to repurchase at a fixed time and price, representing the
Portfolio's cost plus interest. Under a securities loan, a Portfolio lends
portfolio securities. A Portfolio will enter into repurchase agreements and (in
the case of the International Portfolio) securities loans only with commercial
banks and with registered broker-dealers who are members of a national
securities exchange or market makers in government securities, and in the case
of repurchase agreements, only if the debt instrument is a U.S. Government
security. Although Mentor Advisors or Mentor Perpetual, as the case may be, will
monitor these transactions to ensure that they will be fully collateralized at
all times, a Portfolio bears a risk of loss if the other party defaults on its
obligation and the Portfolio is delayed or prevented from exercising its rights
to dispose of the collateral. If the other party should become involved in
bankruptcy or insolvency proceedings, it is possible that the Portfolio may be
treated as an unsecured creditor and be required to return the underlying
collateral to the other party's estate.
BORROWING AND LEVERAGE. The International Portfolio may borrow money to
invest in additional portfolio securities. This practice, known as "leverage",
increases the Portfolio's market exposure and its risk. When the Portfolio has
borrowed money for leverage and its investments increase or decrease in value,
the Portfolio's net asset value will normally increase or decrease more than if
it had not borrowed money. The interest the Portfolio must pay on borrowed money
will reduce the amount of any potential gains or increase any losses. The extent
to which the Portfolio will borrow money, and the amount it may borrow, depend
on market conditions and interest rates. Successful use of leverage depends on
Mentor Perpetual's ability to predict market movements correctly.
OPTIONS AND FUTURES. Each of the Portfolios (other than the U.S. Government
Cash Management Portfolio) may buy and sell call and put options to hedge
against changes in net asset value or to realize a greater current return. In
addition, through the purchase and sale of futures contracts and related
options, these Portfolios may at times seek to hedge against fluctuations in net
asset value and, to the extent consistent with applicable law, to increase
investment return.
A Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that a
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and
may require a Portfolio to segregate assets to cover its outstanding positions.
For more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. The Portfolios (other than the U.S. Government
Cash Management Portfolio) may buy and sell index futures contracts ("index
futures") and options on index futures and on indices for hedging
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purposes (or may purchase warrants whose value is based on the value from time
to time of one or more foreign securities indices). An "index future" is a
contract to buy or sell units of a particular bond or stock index at an agreed
price on a specified future date. Depending on the change in value of the index
between the time when a Portfolio enters into and terminates an index future or
option transaction, the Portfolio realizes a gain or loss. The Portfolios (other
than the U.S. Government Cash Management Portfolio) may also, to the extent
consistent with applicable law, buy and sell index futures and options to
increase its investment return.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. OPTIONS AND FUTURES
TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN LOSSES. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities held by a Portfolio that are the subject of a hedge.
The successful use by a Portfolio of the strategies described above further
depends on the ability of its investment adviser to forecast market movements
correctly. Other risks arise from a Portfolio's potential inability to close out
futures or options positions. Although a Portfolio will enter into options or
futures transactions only if its investment adviser believes that a liquid
secondary market exists for such options or futures contracts, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. Certain provisions of the Internal
Revenue Code may limit a Portfolio's ability to engage in options and futures
transactions.
Each Portfolio generally expects that its options transactions will be
conducted on recognized exchanges. A Portfolio may in certain instances purchase
and sell options in the over-the-counter markets. A Portfolio's ability to
terminate options in the over-the-counter markets may be more limited than for
exchange-traded options and may also involve the risk that securities dealers
participating in such transactions would be unable to meet their obligations to
the Portfolio. A Portfolio will, however, 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 of the over-the-counter markets are satisfactory and the participants
are responsible parties likely to meet their obligations.
A Portfolio will not purchase futures or options on futures or sell futures
if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
FOREIGN CURRENCY EXCHANGE TRANSACTIONS (INTERNATIONAL PORTFOLIO ONLY). The
International Portfolio may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future currency exchange rates. The
Portfolio may engage in foreign currency exchange transactions in connection
with the purchase and sale of portfolio securities ("transaction hedging") and
to protect against changes in the value of specific portfolio positions
("position hedging").
The Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which it contracts
to purchase or sell a security and the settlement date, or to "lock in" the U.S.
dollar equivalent of a dividend or interest payment in a foreign currency. The
Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with transaction hedging.
The Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange currency
at a future time at a rate or rates that may be higher or lower than the spot
rate. Foreign currency futures contracts are standardized
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exchange-traded contracts and have margin requirements. For transaction hedging
purposes, the Portfolio may also purchase and sell call and put options on
foreign currency futures contracts and on foreign currencies.
The Portfolio may engage in position hedging to protect against a decline
in value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, the Portfolio may purchase or sell foreign currency futures
contracts and foreign currency forward contracts, and may purchase and sell put
and call options on foreign currency futures contracts and on foreign
currencies. In connection with position hedging, the Portfolio may also purchase
or sell foreign currencies on a spot basis.
Although there is no limit to the amount of the Portfolio's assets that may
be invested in foreign currency exchange and foreign currency forward contacts,
the Portfolio will only enter into such transactions to the extent necessary to
effect the hedging transactions described above.
MANAGEMENT
The Trustees of the Trust are responsible for generally overseeing the
conduct of the Trust's business. MENTOR INVESTMENT ADVISORS, LLC, located at 901
East Byrd Street, Richmond, Virginia 23219, acts as investment adviser to the
U.S. Government Cash Management, Fixed-Income, and Intermediate Duration
Portfolios. MENTOR PERPETUAL ADVISORS, LLC, located at 901 East Byrd Street,
Richmond, Virginia, acts as investment adviser to the International Portfolio.
Mentor Investment Group, LLC ("Mentor Investment Group") serves as administrator
to the Portfolios. Neither Mentor Advisors nor Mentor Investment Group receives
compensation from the Portfolios for the performance of such services. Mentor
Investment Group has agreed to bear certain expenses of the Portfolios pursuant
to a voluntary expense limitation currently in effect. This limitation may be
terminated at any time.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group,
which is in turn a subsidiary of Wheat First Butcher Singer, Inc. ("Wheat First
Butcher Singer"). Wheat First Butcher Singer, through other subsidiaries, also
engages in securities brokerage, investment banking, and related businesses.
Mentor Advisors and its affiliates serve as investment advisers to twenty-one
separate investment portfolios in the Mentor Family of Funds, with total assets
under management of more than $9 billion. All investment decisions for the U.S.
Government Cash Management, Fixed-Income, and Intermediate Duration Portfolios
are made by investment teams at Mentor Advisors.
EVEREN Capital Corporation has a 20% ownership interest in Mentor
Investment Group and may acquire additional ownership based principally on the
amount of Mentor Investment Group's revenues attributable to clients of EVEREN
Securities, Inc. and its affiliates.
Mentor Perpetual, an investment advisory firm organized in 1995, is owned
equally by Perpetual plc and Mentor Advisors. The Perpetual organization
currently serves as investment adviser for assets of more than $6 billion. Its
clients include 28 unit investment trusts and other public investment pools for
over 150 clients, including private individuals, charities, pension plans, and
life assurance companies. Mentor Perpetual currently serves as investment
adviser to the Mentor Perpetual Global Portfolio, an open-end mutual fund which
is a series of Mentor Funds. Investment decisions for the Portfolio are made by
a team of investment professionals at Mentor Perpetual.
Subject to the general oversight of the Trustees, Mentor Advisors and
Mentor Perpetual manage their respective Portfolios in accordance with the
stated policies of each Portfolio. Each of Mentor Advisors and Mentor Perpetual
makes investment decisions for its respective Portfolios and places the purchase
and sale orders for each Portfolio's portfolio transactions. In selecting
broker-dealers, Mentor Advisors and Mentor Perpetual may
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consider research and brokerage services furnished to them and their affiliates.
Subject to seeking the best overall terms available, Mentor Advisors and Mentor
Perpetual may consider sales of shares of a Portfolio (and, if permitted by law,
of other funds in the Mentor family) as a factor in the selection of
broker-dealers to execute portfolio transactions for that Portfolio. Mentor
Advisors and Mentor Perpetual may at times cause the Portfolios to pay
commissions to broker-dealers which are affiliated with Mentor Advisors or
Mentor Perpetual.
PORTFOLIO TURNOVER (ALL PORTFOLIOS OTHER THAN THE U.S. GOVERNMENT CASH
MANAGEMENT PORTFOLIO). The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by a Portfolio is known as "portfolio turnover." As a result
of each Portfolio's investment policies, under certain market conditions a
Portfolio's portfolio turnover rate may be higher than that of other mutual
funds. Portfolio turnover generally involves some expense to a Portfolio,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. Such
transactions may result in realization of taxable capital gains. Although it is
impossible to predict portfolio turnover, Mentor Perpetual expects that the
annual portfolio turnover rate for the International Portfolio for its first
full fiscal year will not exceed 200%. The portfolio turnover rates for the
Fixed-Income and Intermediate Duration Portfolios for the life of those
Portfolios are shown in the section "Financial Highlights."
HOW THE PORTFOLIOS VALUE THEIR SHARES
Each of the Portfolios (other than the U.S. Government Cash Management
Portfolio) calculates the net asset value of a share of each class by dividing
the total value of its assets attributable to that class, less liabilities
attributable to that class, by the number of shares of the class outstanding.
Shares are valued as of the close of regular trading on the New York Stock
Exchange each day the Exchange is open. Portfolio securities for which market
quotations are readily available are stated at market value. Short-term
investments that will mature in 60 days or less are stated at amortized cost,
which has been determined to approximate the fair market value of such
investments. All other securities and assets are valued at their fair values.
The net asset value of shares of different classes will generally differ due to
the variance in daily net income realized by and dividends paid on each class,
and any differences in the expenses of different classes.
INTERNATIONAL PORTFOLIO ONLY. Securities quoted in foreign currencies are
translated into U.S. dollars at the current exchange rates or at such other
rates as may be used in accordance with procedures approved by the Trustees. As
a result, fluctuations in the values of such currencies in relation to the U.S.
dollar will affect the net asset value of Portfolio shares even though there has
not been any change in the values of such securities as quoted in such foreign
currencies.
The U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO values its shares twice each
day, once at 12:00 noon and again at the close of regular trading on the
Exchange. The Portfolio's investments are valued at amortized cost according to
Securities and Exchange Commission Rule 2a-7. The Portfolio will not normally
have unrealized gains or losses so long as it values its investments by the
amortized cost method.
HOW DISTRIBUTIONS ARE MADE
The FIXED-INCOME and INTERMEDIATE DURATION PORTFOLIOS distribute net
investment income quarterly and any net realized capital gains at least
annually. The INTERNATIONAL PORTFOLIO distributes net investment income and any
net realized capital gains at least annually. Distributions from capital gains
are made after applying any available capital loss carryovers.
The U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO determines its net income as
of the close of regular trading on the New York Stock Exchange each day the
Exchange is open. Each determination of the Portfolio's
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net income includes (i) all accrued interest on the Portfolio's investments,
(ii) plus or minus all realized and unrealized gains and losses on the
Portfolio's investments, (iii) less all accrued expenses of the relevant class
of shares of the Portfolio.
The U.S. Government Cash Management Portfolio declares all of its net
income as a distribution on each day it is open for business, as a dividend to
shareholders of record immediately prior to the close of regular trading on the
Exchange. Shareholders whose purchase of shares of the Portfolio is accepted at
or before 12:00 noon on any day will receive the dividend declared by the
Portfolio for that day; shareholders who purchase shares after 12:00 noon will
begin earning dividends on the next business day after the Portfolio accepts
their order. The Portfolio's net income for Saturdays, Sundays, and holidays is
declared as a dividend on the preceding business day. Dividends for the
immediately preceding calendar month will be paid on the fifteenth day of each
calendar month (or, if that day is not a business day, on the next business
day), except that the Portfolio's schedule for payment of dividends during the
month of December may be adjusted to assist in tax reporting and distribution
requirements. A shareholder that withdraws the entire balance of an account at
any time during a month will be paid all dividends declared through the time of
the withdrawal. Since the net income of the Portfolio is declared as a dividend
each time it is determined, the net asset value per share of the Portfolio
normally remains at $1 per share immediately after each determination and
dividend declaration.
------------------------
All Portfolio distributions will be invested in additional Portfolio shares
of the same class, unless the shareholder instructs a Portfolio otherwise.
TAXES
Each of the Portfolios intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolios will distribute substantially all of
their net investment income and capital gain net income on a current basis.
THE FOLLOWING IS INTENDED PRINCIPALLY FOR SHAREHOLDERS SUBJECT TO FEDERAL
INCOME TAXATION:
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to shareholders as ordinary income, except that any distributions of net
capital gain will be taxed as long-term capital gain, regardless of how long a
shareholder has held the shares (although the loss on a sale of shares held for
six months or less will be treated as long-term capital loss to the extent of
any capital gain distribution received with respect to those shares).
Distributions will be taxable as described above whether received in cash or in
shares through the reinvestment of distributions. Early in each year the Trust
will notify shareholders of the amount and tax status of distributions paid by a
Portfolio for the preceding year. In buying or selling securities for a
Portfolio, an investment adviser will not normally take into account the effect
any purchase or sale of securities will have on the tax positions of the
Portfolio's shareholders.
INTERNATIONAL PORTFOLIO ONLY. Shareholders of the Portfolio who are U.S.
citizens or residents may be able to claim a foreign tax credit or deduction on
their U.S. income tax returns with respect to foreign taxes paid by the
Portfolio. If, at the end of the fiscal year of the Portfolio, more than 50% of
the Portfolio's total assets are represented by securities of foreign
corporations, the Portfolio intends to make an election permitted by the
Internal Revenue Code to treat any foreign taxes it paid as paid by its
shareholders. In that case, shareholders who are U.S. citizens, U.S.
corporations, and, in some cases, U.S. residents will be required to include in
U.S. taxable income their pro rata share of such taxes, but may then be entitled
to claim a foreign tax credit or deduction (but not both) for their share of
such taxes.
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The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. Dividends and distributions also may be subject to
state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of a 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).
PURCHASE OF SHARES
Shares of the FIXED-INCOME, INTERMEDIATE DURATION, and INTERNATIONAL
PORTFOLIOS are sold at the net asset value next determined after a purchase
order is received by a Portfolio. In most cases, in order to receive that day's
public offering price, your order must be received by the Trust or Mentor
Distributors, LLC ("Mentor Distributors") before the close of regular trading on
the New York Stock Exchange.
The U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO offers its shares
continuously at a price of $1.00 per share. Because the Portfolio seeks to be
fully invested at all times, investments must be in Same Day Funds to be
accepted. "Same Day Funds" are funds credited by the applicable regional Federal
Reserve Bank to the account of the Portfolio at its designated bank.
------------------------
Mentor Distributors, LLC, located at 901 East Byrd Street, Richmond,
Virginia 23219, serves as distributor of the Portfolios' shares. Mentor
Distributors is not obligated to sell any specific amount of shares of any of
the Portfolios.
An investor may make an initial purchase of shares of any of the Portfolios
by submitting completed application materials along with a purchase order, and
by making payment to Mentor Distributors or the Trust. Investors will be
required to make minimum initial investments of $500,000 in Institutional Shares
of the Portfolios and minimum subsequent investments of $25,000. Investments
made through advisory accounts maintained with investment advisers registered
under the Investment Advisers Act of 1940 (including "wrap" accounts) are not
subject to these minimum investment requirements. The Portfolios reserve the
right at any time to change the initial and subsequent investment minimums
required of investors. If an investor purchases shares of any of the Portfolios,
other than the U.S. Government Cash Management Portfolio, through EVEREN
Securities, Inc., with the redemption proceeds received by the investor within
the preceeding 90 days from the sale of shares of any non-Mentor open-end mutual
fund, EVEREN Securities, Inc. may compensate the investor's investment
consultant in connection with that purchase.
Shares of the Portfolios may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to a Portfolio's investment adviser, or (iii) a
combination of such securities and cash. Purchase of shares of a Portfolio in
exchange for securities is subject in each case to the determination by the
Portfolio's investment adviser that the securities to be exchanged are
acceptable for purchase by the Portfolio. Securities accepted by a Portfolio's
investment adviser in exchange for shares will be valued in the same manner as
the Portfolio's assets as of the time of the next determination of net asset
value after such acceptance. All dividends and subscription or other rights
which are reflected in the market price of accepted securities at the time of
valuation become the property of the Portfolio and must be delivered to the
Portfolio upon receipt by the investor from the issuer. A gain or loss for
federal income tax purposes would be realized upon the exchange by an investor
that is subject to federal income taxation, depending upon the investor's basis
in the securities tendered. A shareholder who wishes to purchase shares by
exchanging securities should obtain instructions by calling Mentor Distributors
at 1-800-869-6042.
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In all cases Mentor Advisors, Mentor Perpetual, or Mentor Distributors
reserves the right to reject any investment.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of its shares in a Portfolio
any day the New York Stock Exchange is open by sending a signed letter of
instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to a Portfolio c/o: Mentor Institutional
Trust, P.O. Box 1357, Richmond, Virginia 23218-1357 or to Mentor Distributors.
Redemptions will be effected at the net asset value per share of the relevant
class of shares of the Portfolio next determined after the receipt by the
Portfolio of redemption instructions in "good order" as described below. In
order to receive that day's net asset value, your request must be received
before the close of regular trading on the New York Stock Exchange. The
Portfolio will only redeem shares for which it has received payment. A check for
the proceeds will normally be mailed on the next business day after a request in
good order is received.
A redemption request will be considered to have been made in "good order"
if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be
redeemed, and identifies the shareholder's Portfolio account number;
(2) the request is signed by each registered owner exactly as the shares
are registered; and
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed for transfer (or are accompanied by an
endorsed stock power) and accompany the redemption request.
If shares of a Portfolio to be redeemed represent an investment made by
check, the Trust reserves the right not to transmit the redemption proceeds to
the shareholder until the check has been collected, which may take up to 15 days
after the purchase date.
Each Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Mentor Distributors
usually requires additional documentation for the sale of shares by a
corporation, partnership, agent, fiduciary, or surviving joint owner. Contact
Mentor Distributors for details.
Mentor Distributors may facilitate any redemption request. There is no
extra charge for this service.
OTHER INFORMATION CONCERNING REDEMPTION. Under unusual circumstances, a
Portfolio may suspend repurchases, or postpone payment for more than seven days,
as permitted by federal securities laws. In addition, each Portfolio reserves
the right, if conditions exist which make cash payments undesirable, to honor
any request for redemption by making payment in whole or in part by securities
valued in the same way as they would be valued for purposes of computing the
Portfolio's per share net asset value. If payment is made in securities, a
shareholder may incur brokerage expenses in converting those securities into
cash.
MENTOR INSTITUTIONAL TRUST
Mentor Institutional Trust is a Massachusetts business trust organized on
February 8, 1994 as IMG Institutional Trust. A copy of the Agreement and
Declaration of Trust, which is governed by Massachusetts law, is on file with
the Secretary of State of The Commonwealth of Massachusetts.
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The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into five
series, four of which are being offered by this Prospectus. The International
Portfolio's shares are currently divided into four classes with different sales
charges and expenses. Only Institutional Shares of the Portfolio are being
offered by this Prospectus. Because of these different sales charges and
expenses, the investment performance of the classes will vary. For more
information, including information on your ability to purchase any other class
of shares of that Portfolio, contact Mentor Distributors.
Each share has one vote, with fractional shares voting proportionally.
Shares of each series will vote together as a single series, and shares of each
class will vote together as a single class, except when required by law or
determined by the Trustees. Shares of the Portfolios are freely transferable,
are entitled to dividends as declared by the Trustees, and, if a Portfolio were
liquidated, would receive the net assets of the Portfolio. The Trust may suspend
the sale of shares at any time and may refuse any order to purchase shares.
Although the Trust and the Portfolios are not required to hold annual meetings
of shareholders, shareholders have the right to call a meeting to elect or
remove Trustees, or to take other actions as provided in the Agreement and
Declaration of Trust.
In the interest of economy and convenience, a Portfolio will not issue
certificates for its shares except at the shareholder's request.
CUSTODIAN AND TRANSFER AND DIVIDEND AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolios' custodian. State Street Bank and Trust
Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolios' transfer and dividend
agent.
PERFORMANCE INFORMATION
The INTERMEDIATE DURATION PORTFOLIO, FIXED-INCOME PORTFOLIO, and
INTERNATIONAL PORTFOLIO. Yield and total return data may from time to time be
included in advertisements about the Portfolios. A Portfolio's "yield" for a
class of shares is calculated by dividing that classes' annualized net
investment income per share during a recent 30-day period by its net asset value
on the last day of that period. "Total return" for the one-, five-, and ten-year
periods (or for the life of a class, if shorter) through the most recent
calendar quarter represents the average annual compounded rate of return on an
investment of $1,000 in the relevant class of shares of a Portfolio over the
period.
The U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO. The Portfolio's yield may
from time to time be included in advertisements about the Portfolio. The
Portfolio's "yield" is calculated 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 the value of the investment during the base period, raising that sum
to a power equal to 365/7, and subtracting 1 from the result.
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PERFORMANCE INFORMATION FOR THE PORTFOLIOS DOES NOT REFLECT FEES OR
EXPENSES ASSOCIATED WITH INVESTMENT ADVISORY ACCOUNTS THROUGH WHICH SHAREHOLDERS
INVEST IN THE PORTFOLIOS. IF THOSE FEES AND EXPENSES WERE REFLECTED IN THE
PORTFOLIOS' INVESTMENT PERFORMANCE, THE PORTFOLIOS' YIELDS AND TOTAL RETURNS
WOULD BE LOWER.
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A Portfolio's performance may be compared to various indices. See the
Statement of Additional Information. Information may be presented in
advertisements about the Portfolios describing the background and professional
experience of a Portfolio's investment adviser or its investment personnel.
All data is based on a Portfolio's past investment results and does not
predict future performance. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of a Portfolio's
investments, Portfolio operating expenses, and which class of shares is
purchased. Investment performance also often reflects the risks associated with
a Portfolio's investment objectives and policies. These factors should be
considered when comparing a Portfolio's investment results to those of other
mutual funds and other investment vehicles.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT
LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE
REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND
OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE
COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES.
ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE
TRUST IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS
THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE
INSPECTED AT THE OFFICE OF THE COMMISSION.
MENTOR INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 382-0016
1997 MENTOR DISTRIBUTORS, LLC
MENTOR
INSTITUTIONAL
TRUST
----------------
PROSPECTUS
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March 3, 1997
[MENTOR INVESTMENT GROUP
LOGO]
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MENTOR INSTITUTIONAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
(MENTOR U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO,
MENTOR INTERMEDIATE DURATION PORTFOLIO,
MENTOR FIXED-INCOME PORTFOLIO, AND MENTOR PERPETUAL INTERNATIONAL PORTFOLIO)
MARCH 3, 1997
This Statement of Additional Information relates to the Mentor U.S.
Government Cash Management Portfolio, Mentor Intermediate Duration Portfolio,
Mentor Fixed-Income Portfolio, and Mentor Perpetual International Portfolio
(each a "Portfolio" and collectively the "Portfolios") of Mentor Institutional
Trust (the "Trust"). Each Portfolio currently offers one class of shares
(Institutional Shares), except for the International Portfolio, which currently
offers four classes of shares (Class A, Class B, Institutional Shares, and Class
E shares). This Statement is not a prospectus and should be read in conjunction
with the relevant prospectus. A separate Statement of Additional Information
relates to the SNAP Fund of the Trust (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
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INVESTMENT RESTRICTIONS.......................................................2
CERTAIN INVESTMENT TECHNIQUES.................................................4
MANAGEMENT OF THE TRUST......................................................20
PRINCIPAL HOLDERS OF SECURITIES..............................................22
INVESTMENT ADVISORY AND OTHER SERVICES.......................................24
BROKERAGE....................................................................27
DETERMINATION OF NET ASSET VALUE.............................................30
TAX STATUS...................................................................32
THE DISTRIBUTOR..............................................................34
INDEPENDENT ACCOUNTANTS......................................................35
CUSTODIAN....................................................................35
PERFORMANCE INFORMATION......................................................36
SHAREHOLDER LIABILITY........................................................41
MEMBERS OF INVESTMENT MANAGEMENT TEAMS.......................................41
RATINGS ....................................................................44
FINANCIAL STATEMENTS.........................................................47
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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 U.S. Government 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 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.
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(Mentor Perpetual International Portfolio) Borrow more than
331/3% 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 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 an investment adviser who
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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.
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 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.
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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.
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,
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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.
Zero-Coupon Securities
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of a Portfolio investing in zero- coupon securities may fluctuate over a
greater range than shares of other mutual funds investing in securities making
current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly
by the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS
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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 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.
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A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
Covered put options. A Portfolio may write covered put options in order
to enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
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
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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.
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.
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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").
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.
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In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts with
respect to indexes or sub- indexes the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities.
Options on index futures contracts are similar to options on securities
except that options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the holder would assume the underlying futures
position and would receive a variation margin payment of cash or securities
approximating the increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
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
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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 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
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<PAGE>
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 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.
-13-
<PAGE>
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.
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
-14-
<PAGE>
loaned; (2) the Portfolio may at any time call the loan and regain the
securities loaned; (3) a Portfolio will receive any interest or dividends paid
on the loaned securities; and (4) the aggregate market value of securities of
any Portfolio loaned will not at any time exceed one-third (or such other limit
as the Trustee may establish) of the total assets of the Portfolio. Cash
collateral received by a Portfolio may be invested in any securities in which
the Portfolio may invest consistent with its investment policies. In addition,
it is anticipated that a Portfolio may share with the borrower some of the
income received on the collateral for the loan or that it will be paid a premium
for the loan. Before a Portfolio enters into a loan, its investment adviser
considers all relevant facts and circumstances including the creditworthiness of
the borrower. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
Although voting rights or rights to consent with respect to the loaned
securities pass to the borrower, a Portfolio retains the right to call the loans
at any time on reasonable notice, and it will do so in order that the securities
may be voted by a Portfolio if the holders of such securities are asked to vote
upon or consent to matters materially affecting the investment. A Portfolio will
not lend portfolio securities to borrowers affiliated with the Portfolio.
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
-15-
<PAGE>
such countries. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes. It is impossible to determine the effective
rate of foreign tax in advance since the amount of a Portfolio's assets to be
invested in various countries is not known, and tax laws and their
interpretations may change from time to time and may change without advance
notice. Any such taxes paid by a Portfolio will reduce its net income available
for distribution to shareholders.
Foreign Currency Transactions
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.
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<PAGE>
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 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
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<PAGE>
may be any fixed number of days from the date of the contract as agreed by the
parties, at a price set at the time of the contract. In the case of a cancelable
forward contract, the holder has the unilateral right to cancel the contract at
maturity by paying a specified fee. The contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for trades. A foreign
currency futures contract is a standardized contract for the future delivery of
a specified amount of a foreign currency at a future date at a price set at the
time of the contract. Foreign currency futures contracts traded in the United
States are designed by and traded on exchanges regulated by the CFTC, such as
the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally purchase
or sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position and,
in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin on its futures
positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's investment adviser believes that a liquid secondary market
exists for such options. There can be no assurance that a liquid secondary
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<PAGE>
market will exist for a particular option at any specific time. Options on
foreign currencies are affected by all of those factors which influence exchange
rates and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
Settlement Procedures. Settlement procedures relating to 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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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; Director,
America's Utility Fund, Inc.
Thomas F. Keller Trustee Former 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
Trustee Officer, Mentor Investment Group,
LLC; Managing Director of Wheat,
First Securities, Inc.; Managing
Director of Wheat First Butcher
Singer; Director, Wheat First
Securities, Inc. and Mentor Income
Fund, Inc.; Chairman and Trustee, The
Mentor Funds; Chairman and Trustee,
Cash Resource Trust; Director,
America's Utility Fund, Inc.
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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, LLC, Wheat First
Butcher Singer, and Mentor
Investment Advisors, LLC; 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 Advisors, LLC and Mentor
Trust Company.
Terry L. Perkins Treasurer Senior Vice President, Mentor
Investment Group, LLC; 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.
Michael Wade Assistant Vice President, Mentor Investment
Treasurer Group, LLC; 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.,; Audit Senior,
BDO Seidman.
John M. Ivan Clerk Managing Director, Director of
Compliance, Senior Vice President,
and Assistant General Counsel,
Wheat, First Securities, Inc.;
Managing Director, Mentor
Investment Advisors, LLC; Clerk,
Cash Resource Trust; Secretary, The
Mentor Funds.
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The table below shows the fees paid to each Trustee by the Trust for
the 1996 fiscal year and the fees paid to each Trustee by all funds in the
Mentor family (including the Trust) during the 1996 calendar year.
Total compensation
Aggregate compensation from all
Trustees from the Trust complex funds (21 funds)
- -------- ---------------------- ------------------------
Daniel J. Ludeman 0 0
Arnold H. Dreyfuss $200 $12,200
Thomas F. Keller $175 $11,175
Louis W. Moelchert, Jr. $200 $12,200
Stanley F. Pauley $200 $12,200
Troy A. Peery, Jr. $175 $11,175
- -------------
The Trustees do not receive pension or retirement benefits from the
Trust.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Trust,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.
PRINCIPAL HOLDERS OF SECURITIES
As of November 30, 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>
<TABLE>
<CAPTION>
SHAREHOLDER SHARES PERCENTAGE
----------- ------ ----------
<S> <C>
U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO (INSTITUTIONAL SHARES):
CLARK COUNTY, NEVADA 147,800,163.57 62.16%
500 South Grand Central Parkway
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P.O. Box 551220
Las Vegas, NV 89155-1220
INTERMEDIATE DURATION PORTFOLIO (INSTITUTIONAL SHARES):
LONGWOOD COLLEGE FOUNDATION INC. 196,289.50 72.37%
Longwood College
201 High Street
Farmville, VA 23901
VIRGINIAS ORGAN PROCUREMENT AGENCY 24,703.37 9.10%
1527 Huguenot Road
Suite 102
Midlothian, VA 23113
FIXED-INCOME PORTFOLIO (INSTITUTIONAL SHARES):
MCGUIRE WOODS BATTLE & BOOTHE 382,556.12 10.54%
Pension Fund
P.O. Box 26986
Richmond, VA 23261
HEILIG-MEYERS PROFIT SHARING PLAN 364,582.77 10.04%
Heilig Meyers Furniture
2235 Staples Mill Road
Richmond, VA 23230
INTERNATIONAL PORTFOLIO (INSTITUTIONAL SHARES):
CRESTAR BANK TTEE 401,632.6530 55.32%
Carpenter Co PSP
UA DTD 6/30/74 A/C 10741001
P.O. Box 26665
Richmond, VA 23261-6665
WACHOVIA BANK & TRUST CO TTEE 281,142.8570 38.72%
Heilig-Meyers PSP A/C 02-46976-60
P.O. Box 3075
Winston Salem, NC 27102-3075
WHEAT FIRST FBO A/C 2254-7301 41,218.4580 5.68%
The Gladys & Franklin Clark Foundation #1
809 Richmond Rd
Williamsburg, VA 23185-3543
</TABLE>
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INVESTMENT ADVISORY AND OTHER SERVICES
ALL FEE INFORMATION SET FORTH BELOW APPLIES ONLY TO THE PORTFOLIO'S
INSTITUTIONAL SHARES. NO OTHER CLASSES OF SHARES OF THE PORTFOLIOS WERE
OUTSTANDING FOR THE PERIODS FOR WHICH INFORMATION IS SHOWN.
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as
investment adviser to the Intermediate Duration Portfolio, Fixed-Income
Portfolio, and U.S. Government Cash Management Portfolio; Mentor Perpetual
Advisors, LLC serves as investment adviser to the International Portfolio.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC
("Mentor Investment Group") which is a subsidiary of Wheat First Butcher Singer,
Inc. Mentor Perpetual is owned equally by Mentor Advisors and Perpetual plc, a
diversified financial services holding company. EVEREN Capital Corporation has a
20% ownership in Mentor Investment Group and may acquire additional ownership
based principally on the amount of Mentor Investment Group's revenues derived
from assets attributable to clients of EVEREN Securities, Inc. and its
affiliates.
On October 31, 1996, Commonwealth Investment Counsel, Inc., the
previous investment adviser to the Intermediate Duration, U.S. Government Cash
Management, and Fixed Income Portfolios, was reorganized as Mentor Investment
Advisors, LLC.
Each of Mentor Advisors and Mentor Perpetual acts as investment adviser
to its respective Portfolio(s) pursuant to a Management Contract 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. Each investment adviser bears all of its expenses in
connection with the performance of its services. In addition, the investment
advisers 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
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<PAGE>
between such clients in a manner which in an investment adviser's opinion is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of 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, First
Securities, Inc., an affiliate of the investment advisers, 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.
Each of the Management Contracts is subject to annual approval by (i)
the Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the affected Portfolio, provided that in either
event the continuance is also approved by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust or the investment
adviser in question, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Management Contracts are terminable without
penalty, on not more than sixty days' notice and not less than thirty days'
notice, by the Trustees, by vote of the holders of a majority of the affected
Portfolio's shares, or by the investment adviser. Each terminates automatically
in the event of its assignment (as defined in the 1940 Act).
Under the Management Contract dated December 2, 1994, none of the
Fixed-Income, U.S. Government Cash Management, and Intermediate Duration
Portfolios pays a management fee. Under its Management Contract dated May 15,
1996, the International Portfolio pays a quarterly fee to Mentor Perpetual 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.
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For the fiscal period ended October 31, 1996, the International
Portfolio paid $12,402 in management fees (net of fee waiver), and Mentor
Perpetual waived management fees of $23,292 in respect of the International
Portfolio.
For the fiscal year ended October 31, 1996, Commonwealth Investment
Counsel, Inc. bore expenses of $70,426, $27,679, and $44,556 in respect of U.S.
Government Cash Management Portfolio, Intermediate Duration Portfolio, and
Fixed-Income Portfolio, respectively.
ADMINISTRATIVE SERVICES
Mentor Investment Group, LLC serves as administrator to each of the
Portfolios pursuant to an Administration Agreement.
Pursuant to that Agreement, Mentor Investment Group provides continuous
business management services to the Portfolios and, subject to the general
oversight of the Trustees, manages all of the business and affairs of the
Portfolios subject to the provisions of the Trust's Declaration of Trust,
By-laws and the 1940 Act, and other policies and instructions the Trustees may
from time to time establish. Mentor Investment Group pays the compensation of
all officers and executive employees of the Trust (except those employed by or
serving at the request of an investment adviser) and makes available to the
Trust the services of its directors, officers, and employees as elected by the
Trustees or officers of the Trust. In addition, Mentor Investment Group provides
all clerical services relating to the Portfolios' business. Mentor Investment
Group bears all of its expenses in connection with the performance of its
services, and does not receive a fee from the Portfolios for its services.
The Administration Agreement must be approved at least annually with
respect to each Portfolio by a vote of a majority of the Trustees who are not
interested persons of Mentor Investment Group or the Trust. The Agreement may be
terminated at any time without penalty on 30 days notice by Mentor Investment
Group, or immediately in respect of any Portfolio upon notice by the Trustees or
by vote of a majority of the outstanding voting securities of that Portfolio.
The Agreement terminates automatically in the event of its assignment (as
defined in the 1940 Act) in respect of a particular Portfolio.
SHAREHOLDER SERVICING PLAN
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors, LLC ("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 Mentor
Distributors at a rate not exceeding .25% of the average daily net assets of the
Class A, Class B shares, and
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Class E shares, as the case may be, 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 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.
The International Portfolio did not have any Class A, Class B or Class
E shares outstanding during the fiscal period ended October 31, 1996.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by the investment adviser and/or Mentor
Investment Group, 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 and/or
Mentor Investment Group, 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, 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.
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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 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.
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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, First Securities, Inc. ("Wheat") or EVEREN
Securities, Inc. ("EVEREN"), broker-dealers affiliated with Mentor Advisors and
Mentor Perpetual. The Trustees have adopted certain policies incorporating the
standards of Rule 17e-l issued by the SEC under the 1940 Act which requires,
among other things, that the commissions paid to Wheat and EVEREN must be
reasonable and fair compared to the commissions, fees, or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. Wheat and EVEREN will not
participate in brokerage commissions given by a Portfolio to other brokers or
dealers. Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. A Portfolio will in no event effect
principal transactions with Wheat or EVEREN in over-the-counter securities in
which Wheat or EVEREN makes a market, as the case may be.
Under rules adopted by the SEC, neither Wheat nor EVEREN may execute
transactions for a Portfolio on the floor of any national securities exchange,
but either may effect transactions for a Portfolio by transmitting orders for
execution and arranging for the performance of this function by members of the
exchange not associated with them. Wheat and EVEREN will be required to pay fees
charged to those persons performing the floor brokerage elements out of the
brokerage compensation it receives from a Portfolio. The Trust has been advised
by Wheat that, on most transactions, the floor brokerage generally constitutes
from 5% and 10% of the total commissions paid.
BROKERAGE COMMISSIONS
The Portfolios paid brokerage commissions on brokerage transactions in
the following amounts for the periods indicated:
Fiscal Fiscal
1995 1996
------ ------
Fixed-Income Portfolio -- --
U.S. Government Cash Management Portfolio -- --
Intermediate Duration Portfolio -- --
International Portfolio -- $57,678
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None of the Portfolios paid brokerage commissions to Wheat for the
periods shown above.
DETERMINATION OF NET ASSET VALUE
The Trust determines net asset value per share of each class of shares
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, institutional- size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders.
If any securities held by a Portfolio are restricted as to resale, 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 particular class of shares are computed as of such times. Also, because of
the amount of time required to collect and process trading information as to
large numbers of securities issues, the values of certain securities (such as
convertible bonds, U.S. Government securities, and tax-exempt securities) are
determined based on market quotations collected earlier in the day at the latest
practicable time prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value
following procedures approved by the Trustees.
MENTOR U.S. GOVERNMENT CASH MANAGEMENT PORTFOLIO ONLY. The valuation of
Mentor U.S. Government 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 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
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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.
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
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income or net realized capital gains that are distributed to shareholders. As a
regulated investment company, 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, or
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 one 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 the prior year. Each
Portfolio intends to make distributions sufficient to avoid imposition of the
excise tax. Distributions declared and payable to shareholders of record on a
date in October, November, or December 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 stated redemption price at maturity ("original issue discount") is
considered to be income to the Portfolio each year, even though the Portfolio
will 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 a shareholder's taxable
distributions and redemption proceeds if the shareholder does not provide a
Portfolio with a correct taxpayer identification number or fails to certify to a
Portfolio that the shareholder is not subject to such withholding, or if the
Portfolio is notified that it must withhold because the shareholder has
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under reported in the past. 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
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 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. federal income tax law. Non-U.S. investors
should consult their tax advisers concerning the tax consequences of ownership
of shares of the Portfolio, including the possibility that distributions may be
subject to a 30% United States withholding tax (or a reduced rate of withholding
provided by treaty).
THE DISTRIBUTOR
Mentor Distributors, LLC, the Trust's distributor, 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. Mentor
Distributors, LLC is the successor to Mentor Distributors, Inc.
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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.
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.
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PERFORMANCE INFORMATION
MENTOR INTERMEDIATE DURATION PORTFOLIO, MENTOR FIXED-INCOME PORTFOLIO
AND MENTOR PERPETUAL INTERNATIONAL PORTFOLIO. With respect to the Intermediate
Duration Portfolio, Fixed Income Portfolio and International Portfolio, total
return for the one-, five-, and ten-year periods for each class of shares (or
for the life of a class, if shorter) is determined by calculating the actual
dollar amount of investment return on a $1,000 investment in a Portfolio at the
beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount. Total return for a period of one year is
equal to the actual return of a Portfolio during that period. Total return
calculations assume deduction of a Portfolio's maximum front-end or contingent
deferred sales charge, if any, and reinvestment of all Portfolio distributions
at net asset value per share of the relevant class on their respective
reinvestment dates.
The table below shows the total return through October 31, 1996 for the
Institutional Shares* of the Portfolios for the periods indicated:
1 Year Since Inception
------ ---------------
Fixed-Income Portfolio 4.87% 10.81%
Intermediate Duration Portfolio 5.90% 9.76%
International Portfolio N/A (3.04%)
- --------------------
* Only Institutional Shares of the Portfolios were outstanding during the
period.
The yield for each class of shares of a Portfolio 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 particular class 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 that class 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.
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The thirty-day yields for Institutional Shares* of the Portfolios for
the period ended October 31, 1996 were as follows:
30-day yield
------------
Fixed-Income Portfolio 6.51%
Intermediate Duration Portfolio 6.30%
International Portfolio
- -------------------------
* Only Institutional Shares of the Portfolios were outstanding during the
period.
MENTOR CASH MANAGEMENT PORTFOLIO ONLY. The yield of the U.S. Government
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, 1996, the U. S.
Government Cash Management Portfolio's yield was 5.62% and its effective yield
was 5.78%.*
- -------------------------
* Prior to November 1, 1996, the U.S. Government Cash Management Portfolio was
known as the Mentor Cash Management Portfolio and invested in a broad range of
money market instruments, not limited (as the Portfolio presently is) to
investments in U.S. Government securities and repurchase agreements with respect
to such securities. The change in the Portfolio's investment policies will have
an impact on the Portfolio's future yield.
------------------------
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
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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
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sector equity funds can vary from 4 weeks to 39 weeks; performance
periods for other fund groups vary from 1 year to 3 years. Total return
performance reflects changes in net asset value and reinvestment of
dividends and capital gains. The rankings are based strictly on total
return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds;
an A rating denotes the top 10%; an A- is given to the top 15%, etc.
BARRON'S periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical
Services. The Lipper total return data reflects changes in net asset
value and reinvestment of distributions, but does not reflect deduction
of any sales charges. The performance periods vary from short-term
intervals (current quarter or year-to-date, for example) to long-term
periods (five-year or ten-year performance, for example). Barron's
classifies the funds using the Lipper mutual fund categories, such as
Capital Appreciation Portfolios, Growth Portfolios, U.S. Government
Portfolios, Equity Income Portfolios, Global Portfolios, etc.
Occasionally, Barron's modifies the Lipper information by ranking the
funds in asset classes. "Large funds" may be those with assets in
excess of $25 million; "small funds" may be those with less than $25
million in assets.
THE WALL STREET JOURNAL publishes its Mutual Portfolio Scorecard on a
daily basis. Each Scorecard is a ranking of the top-15 funds in a given
Lipper Analytical Services category. Lipper provides the rankings based
on its total return data reflecting changes in net asset value and
reinvestment of distributions and not reflecting any sales charges. The
Scorecard portrays 4-week, year-to-date, one-year and 5-year
performance; however, the ranking is based on the one-year results. The
rankings for any given category appear approximately once per month.
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
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<PAGE>
ranked, a fund must be at least one year old, accept a minimum
investment of $25,000 or less and have had assets of at least $25
million as of a given date.
FINANCIAL WORLD publishes its monthly Independent Appraisals of Mutual
Portfolios, a survey of approximately 1000 mutual funds. Portfolios are
categorized as to type, e.g., balanced funds, corporate bond funds,
global bond funds, growth and income funds, U.S. government bond funds,
etc. To compete, funds must be over one year old, have over $1 million
in assets, require a maximum of $10,000 initial investment, and should
be available in at least 10 states in the United States. The funds
receive a composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund versus its
category, as well as taking into account its risk, reward to risk, and
fees. An A+ rated fund is one of the best, while a D- rated fund is one
of the worst. The source for Financial World rating is Schabacker
investment management in Rockville, Maryland.
FORBES magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds
are categorized by type, including stock and balanced funds, taxable
bond funds, municipal bond funds, etc. Data sources include Lipper
Analytical Services and CDA Investment Technologies. The ratings are
based strictly on performance at net asset value over the given cycles.
Portfolios performing in the top 5% receive an A+ rating; the top 15%
receive an A rating; and so on until the bottom 5% receive an F rating.
Each fund exhibits two ratings, one for performance in "up" markets and
another for performance in "down" markets.
KIPLINGER'S PERSONAL FINANCE MAGAZINE (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three-
and five-year total return performance reflecting changes in net asset
value and reinvestment of dividends and 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
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<PAGE>
capital gains distributions and does not reflect deduction of any sales
charges. Results for the longer periods receive the most weight.
THE 100 BEST MUTUAL PORTFOLIOS YOU CAN BUY (1992), authored by Gordon
K. Williamson. The author's list of funds is divided into 12 equity and
bond fund categories, and the 100 funds are determined by applying four
criteria. First, equity funds whose current management teams have been
in place for less than five years are eliminated. (The standard for
bond funds is three years.) Second, the author excludes any fund that
ranks in the bottom 20 percent of its category's risk level. Risk is
determined by analyzing how many months over the past three years the
fund has underperformed a bank CD or a U.S. Treasury bill. Third, a
fund must have demonstrated strong results for current three-year and
five-year performance. Fourth, the fund must either possess, in Mr.
Williamson's judgment, "excellent" risk-adjusted return or "superior"
return with low levels of risk. Each of the 100 funds is ranked in five
categories: total return, risk/volatility, management, current income
and expenses. The rankings follow a five- point system: zero designates
"poor"; one point means "fair"; two points denote "good"; three points
qualify as a "very good"; four points rank as "superior"; and five
points mean "excellent."
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.
MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of the Portfolios'
investment advisers, as indicated.
MENTOR INVESTMENT ADVISORS, LLC
ACTIVE FIXED-INCOME
P. MICHAEL JONES, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER Mr. Jones
has eleven 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.
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STEVEN C. HENDERSON -- ASSOCIATE VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Henderson has seven 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, PORTFOLIO MANAGER
Mr. McClelland has six years of investment management experience, all of which
have been at Mentor Advisors. 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
Mr. Wantling has five 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.
CASH MANAGEMENT
R. PRESTON NUTTALL, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Nuttall has more than thirty years of investment management experience.
Prior to Mentor Advisors, he led short-term fixed-income management for fifteen
years at Capitoline Investment Services, Inc. He has his undergraduate degree in
economics from the University of Richmond and his graduate degree in finance
from the Wharton School at the University of Pennsylvania.
HUBERT R. WHITE III -- VICE PRESIDENT, PORTFOLIO MANAGER
Mr. White has eleven years of investment management experience. Prior to joining
Mentor Advisors, he served for five years as portfolio manager with Capitoline
Investment Services. He has his undergraduate degree in business from the
University of Richmond.
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 Mentor Advisors, 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.
MENTOR PERPETUAL ADVISORS, LLC
SCOTT MCGLASHAN -- FAR EAST SPECIALIST, PORTFOLIO MANAGER
Mr. McGlashan has nineteen years of investment management experience, twelve
years specializing in the Far East, and ten years' tenure in the Perpetual
organization. He has earned degrees from Yale University and Cambridge
University.
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ROBERT YERBURY -- AMERICAN SPECIALIST, PORTFOLIO MANAGER
Mr. Yerbury has twenty-four years of investment management experience, with over
twenty years experience in North American stock markets, and has been part of
the Perpetual team for twelve years. He received his undergraduate degree in
mathematics from Cambridge University.
STEPHEN WHITTAKER -- UNITED KINGDOM SPECIALIST, PORTFOLIO MANAGER
Mr. Whittaker has sixteen years of investment management experience. Prior to
his employment at Perpetual, Mr. Whittaker was responsible for a wide range of
UK equity funds for the Save & Prosper Group. He earned a law degree from
Manchester University.
MARGARET RODDAN -- EUROPEAN SPECIALIST, PORTFOLIO MANAGER
Ms. Roddan has eleven years of investment management experience. Ms. Roddan
joined the Perpetual organization from Mercury Asset Management, where she
shared responsibility for managing more than $750 million in continental
European equity holdings. She is a graduate of the Investment Management
Programme at the London Business School, studied Finance at City University, and
holds an undergraduate degree in economic history from Bristol University.
ROD SMYTH -- MANAGING DIRECTOR
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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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.
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
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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;
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
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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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FINANCIAL STATEMENTS
The Report of Independent Auditors, financial highlights, and financial
statements in respect of each Portfolio's Institutional Shares included in the
Trust's Annual Report for the fiscal year ended October 31, 1996 and filed
electronically on December 31, 1996 (File No. 811-8484), are incorporated by
reference into this Statement of Additional Information.
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