As filed with the Securities and Exchange Commission on January 30, 1998
Registration No. 33-80784
File No. 811-8484
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X/
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Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 11 / X/
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY / X/
ACT OF 1940
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Amendment No. 14 / X/
(Check appropriate box or boxes)
MENTOR INSTITUTIONAL TRUST
(Exact name of registrant as specified in charter)
P.O. Box 1357
Richmond, Virginia 23286
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code (804) 782-3648
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PAUL F. COSTELLO, President
901 East Byrd Street
Richmond, Virginia 23219
(Name and address of agent for service)
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Copy to:
TIMOTHY W. DIGGINS, Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
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It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b)
[X] on January 31, 1998 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)
on (date) pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2) of Rule 485
<PAGE>
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
THIS POST-EFFECTIVE AMENDMENT RELATES SOLELY TO THE MENTOR FIXED-INCOME
PORTFOLIO, MENTOR U.S. CASH MANAGEMENT PORTFOLIO, AND MENTOR PERPETUAL
INTERNATIONAL PORTFOLIO. NO INFORMATION RELATING TO ANY OTHER SERIES OF THE
REGISTRANT IS AMENDED OR SUPERSEDED HEREBY.
<PAGE>
MENTOR INSTITUTIONAL TRUST
CROSS REFERENCE SHEET
(as required by Rule 404(c))
Part A: Mentor Fixed-Income Portfolio,
Mentor U.S. Cash Management Portfolio,
and Mentor Perpetual International Portfolio --
Institutional Class
N-1A Item No. Location
1. Cover Page............................ Cover Page
2. Synopsis.............................. Cover Page; Expense summary
3. Condensed Financial Information....... Financial highlights
4. General Description of Registrant..... Cover Page; Investment objectives
and policies; How the Portfolios
value their shares; How
distributions are made; General
5. Management of the Fund................ Investment objectives and
policies; Management
5A. Management's Discussion
of Fund Performance................. Not Applicable
6. Capital Stock and Other
Securities.......................... How the Portfolios value their
shares; How distributions are
made; Purchase of shares;
Redemption of shares
7. Purchase of Securities Being
Offered............................. Purchase of shares;
Redemption of shares
8. Redemption or Repurchase.............. Purchase of shares;
Redemption of shares
9. Pending Legal Proceedings............. Not Applicable
<PAGE>
Part A: Mentor Perpetual International Portfolio -- Class A and Class B
N-1A Item No. Location
1. Cover Page............................. Cover Page
2. Synopsis............................... Cover Page; Expense summary
3. Condensed Financial Information........ Financial highlights
4. General Description of Registrant...... Cover Page; Investment objective
and policies; How the Portfolio
values its shares; How
distributions are made; General
5. Management of the Fund................. Investment objective and policies;
Management
5A. Management's Discussion
of Fund Performance.................. Not Applicable
6. Capital Stock and Other
Securities........................... How the Portfolio values its
How shares; distributions are
Sales made; arrangements; How
to buy shares; How to sell
shares; How to exchange shares
7. Purchase of Securities Being
Offered.............................. How to buy shares; How to
exchange shares
8. Redemption or Repurchase............... How to sell shares; How to
exchange shares
9. Pending Legal Proceedings.............. Not Applicable
<PAGE>
Part A: Mentor Perpetual International Portfolio -- Class E
N-1A Item No. Location
1. Cover Page............................ Cover Page
2. Synopsis.............................. Cover Page; Expense summary
3. Condensed Financial Information....... Not Applicable
4. General Description of Registrant..... Cover Page; Investment objective
and policies; How the Portfolio
values its shares; How
distributions are made; General
5. Management of the Fund................ Investment objective and policies;
Management
5A Management's Discussion
of Fund Performance................. Not Applicable
6. Capital Stock and Other
Securities.......................... How the Portfolio values its
shares; How distributions are
made; Purchase of shares;
Redemption of shares
7. Purchase of Securities Being
Offered............................. Purchase of shares; Redemption of
shares
8. Redemption or Repurchase.............. Purchase of shares; Redemption of
shares
9. Pending Legal Proceedings............. Not Applicable
<PAGE>
Part B
N-1A Item No. Location
10. Cover Page............................. Cover Page
11. Table of Contents...................... Cover Page
12. General Information and History........ Cover Page
13. Investment Objectives and
Policies............................. Investment Restrictions; Certain
Investment Techniques; Ratings
14. Management of the Fund................. Management of the Trust
15. Control Persons and Principal
Holders of Securities................ Management of the Trust;
Principal Holders of Securities
16. Investment Advisory and Other
Services............................. Management of the Trust;
Investment Advisory and Other
Services; Members of Investment
Management Teams; Independent
Accountants; Custodian
17. Brokerage Allocation................... Management of the Trust;
Brokerage
18. Capital Stock and Other
Securities........................... Determination of Net Asset Value;
Tax Status
19. Purchase, Redemption and Pricing
of Securities Being Offered.......... Management of the Trust;
Determination of Net Asset Value
20. Tax Status............................. Tax Status
21. Underwriters........................... Not applicable
22. Calculations of Yield Quotations
of Money Market Funds................ Not Applicable
23. Financial Statements................... Financial Statements
<PAGE>
P R O S P E C T U S January 31, 1998
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, portfolio investment advisor, 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 FIXED-INCOME PORTFOLIO seeks a high level of long-term total
return by investing in a diversified portfolio of fixed-income securities and
income producing equity securities. Preservation of capital is a secondary
objective to the extent consistent with the Portfolio's primary objective of
seeking a high level of long-term total return. Mentor Investment Advisors, LLC
is the investment adviser for the Portfolio.
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.
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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 JANUARY 31, 1998 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.
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. Expenses shown are based on expenses incurred in respect of
Institutional Shares of the Portfolios for the 1997 fiscal year. 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:
<TABLE>
<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
</TABLE>
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
MENTOR
U.S. GOV'T MENTOR MENTOR
CASH FIXED- PERPETUAL
MANAGEMENT INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO
---------- --------- -------------
<S> <C> <C> <C>
Management Fees............................................................ 0.00% 0.00% 1.00%
12b-1 Fees................................................................. 0.00% 0.00% 0.00%
Other Expenses (after expense limitation)*................................. 0.06% 0.10% 0.10%
---------- --------- -------------
Total Portfolio Operating Expenses
(after expense limitation)*.............................................. 0.06% 0.10% 1.10%
</TABLE>
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* Other Expenses and Total Portfolio Operating Expenses for each of the
Portfolios 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 1997 fiscal
year would be 0.09% for the U.S. Government Cash Management Portfolio, and
0.15% for the Fixed-Income Portfolio; Other Expenses and Total Portfolio
Operating Expenses for the International Portfolio would have been 0.74% and
1.74%, respectively.
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:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Mentor U.S. Government Cash Management Portfolio................. $1 $ 2 $ 3 $ 8
Mentor Fixed-Income Portfolio.................................... 1 3 6 13
Mentor Perpetual International Portfolio......................... 11 35 61 134
</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.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the Portfolios' Institutional Shares presented
below have been derived from the Trust's financial statements which were audited
by KPMG Peat Marwick LLP, the Trust's independent auditors. Their reports dated
December 12, 1997 on the financial statements of the Trust for the fiscal year
ended October 31, 1997 is included in each Portfolio's Annual Report to
shareholders, which is incorporated into the Statement of Additional Information
by reference. A copy of the Annual Report may be obtained free of charge from
the Trust. (Until November 1, 1996 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. During the periods prior to October 31, 1996, the Fixed-Income
Portfolio invested only in investment grade fixed-income securities.)
<TABLE>
<CAPTION>
MENTOR U.S. GOVERNMENT CASH
MANAGEMENT PORTFOLIO
-----------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
10/31/97 10/31/96 10/31/95(B)
-------- -------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................................................ $ 1.00 $ 1.00 $ 1.00
Income from investment operations
Net investment income............................................................. 0.05 0.05 0.05
Net realized and unrealized gain (loss) on investments and foreign currency
related transactions............................................................ --* -- * --
-------- -------- -----------
Total from investment operations.................................................. 0.05 0.05 0.05
LESS DISTRIBUTIONS
Dividends from income............................................................. (0.05) (0.05 ) (0.05)
Distributions from capital gains.................................................. --* -- * --
-------- -------- -----------
Total distributions............................................................... (0.05) (0.05 ) (0.05)
NET ASSET VALUE, END OF PERIOD...................................................... $ 1.00 $ 1.00 $ 1.00
-------- -------- -----------
TOTAL RETURN........................................................................ 5.56% 5.60% 5.06%
-------- -------- -----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands)............................................ $259,950 $87,973 $69,997
Ratio of expenses to average net assets............................................. 0.06% 0.04% 0.04%(a)
Ratio of expenses to average net assets excluding waiver............................ 0.09% 0.12% 0.18%(a)
Ratio of net investment income to average net assets................................ 5.45% 5.54% 5.56%(a)
Portfolio turnover rate............................................................. -- -- --
Average commission rate on portfolio transactions................................... -- -- --
-------- -------- -----------
-------- -------- -----------
</TABLE>
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(a) Annualized.
(b) For the period from December 5, 1994 (commencement of operations) to October
31, 1995.
* Reflects net realized gain (loss) which was under $0.005 per share.
3
<PAGE>
<TABLE>
<CAPTION>
MENTOR PERPETUAL
MENTOR FIXED- INTERNATIONAL
INCOME PORTFOLIO PORTFOLIO
----------------------------------- ------------------------
YEAR YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
10/31/97 10/31/96 10/31/95(B) 10/31/97 10/31/96(C)
-------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $ 12.89 $ 13.71 $ 12.50 $ 12.12 $ 12.50
Income from investment operations
Net investment income...................................... 0.83 0.77 0.81 0.15 0.04
Net realized and unrealized gain (loss) on investments and
foreign currency related transactions.................... 0.21 (0.16 ) 1.14 1.67 (0.42)
-------- -------- ----------- -------- -------------
Total from investment operations........................... 1.04 0.61 1.95 1.82 (0.38)
LESS DISTRIBUTIONS
Dividends from income...................................... (0.82 ) (0.77 ) (0.74) (0.05 ) --
Distributions from capital gains........................... -- (0.66 ) -- -- --
-------- -------- ----------- -------- -------------
Total distributions........................................ (0.82 ) (1.43 ) (0.74) (0.05 ) --
NET ASSET VALUE, END OF PERIOD............................... $ 13.11 $ 12.89 $ 13.71 $ 13.89 $ 12.12
-------- -------- ----------- -------- -------------
TOTAL RETURN................................................. 8.39% 4.87% 15.90% 15.07% (3.04%)
-------- -------- ----------- -------- -------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands)..................... $61,738 $49,962 $34,053 $16,110 $ 8,741
Ratio of expenses to average net assets...................... 0.10% 0.05% 0.05%(a) 1.10% 1.10%(a)
Ratio of expenses to average net assets excluding waiver..... 0.15% 0.17% 0.22%(a) 1.74% 1.75%(a)
Ratio of net investment income to average net assets......... 6.52% 6.22% 6.75%(a) 1.20% 0.89%(a)
Portfolio turnover rate...................................... 194% 226% 302% 107% 59%
Average commission rate on portfolio transactions............ -- -- -- $0.0150 $0.0295
-------- -------- ----------- -------- -------------
-------- -------- ----------- -------- -------------
</TABLE>
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(a) Annualized.
(b) For the period from December 6, 1994 (commencement of operations) to October
31, 1995.
(c) For the period from May 29, 1996 (commencement of operations) to October 31,
1996.
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.
4
<PAGE>
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 FIXED-INCOME PORTFOLIO
THE INVESTMENT OBJECTIVE OF THE PORTFOLIO IS TO SEEK A HIGH LEVEL OF
LONG-TERM TOTAL RETURN. PRESERVATION OF CAPITAL IS A SECONDARY OBJECTIVE TO THE
EXTENT CONSISTENT WITH THE PORTFOLIO'S PRIMARY OBJECTIVE OF SEEKING A HIGH LEVEL
OF LONG-TERM TOTAL RETURN. The Portfolio will invest in U.S. Government
securities, fixed-income securities of corporations and other private issuers,
mortgage-backed securities, and other asset-backed securities, and income
producing equity securities, including preferred stocks, convertible securities,
and dividend paying common stocks. The Portfolio may also hold a portion of its
assets in cash or money market instruments. There can, of course, be no
assurance that the Portfolio will achieve its investment objectives.
The Portfolio will normally invest at least 90% of its assets (determined
at the time of investment) in securities 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 Investors Service,
Inc. or BBB- by Standard & Poor's Corporation, or determined by Mentor Advisors
to be of comparable quality. 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 may invest up to 10% of its assets in securities rated, at
the time of purchase, below Baa or BBB by Moody's or Standard & Poor's, or in
unrated securities determined by Mentor Advisors to be of comparable quality.
The Portfolio will not invest in a security rated, at the time of purchase,
below B by Moody's or Standard & Poor's, or in unrated securities determined by
Mentor Advisors to be of comparable quality. Securities rated below Baa or BBB,
which are commonly referred to as "junk bonds," are considered to be of poor
standing and predominantly speculative. The Portfolio will seek to maintain a
dollar-weighted average credit quality of at least A. For that purpose, the
rating of a security will be deemed to be the lower of the ratings assigned to
it by Moody's and Standard & Poor's. See Appendix A for descriptions of
securities ratings assigned by Moody's and Standard & Poor's.
Like those of other fixed-income securities, the values of lower-rated
securities will fluctuate in response to changes in interest rates. However, the
yields on such securities are also generally higher. In addition, the values of
such lower rated securities will also be affected by general economic and
business conditions affecting the specific industries of their issuers. Changes
by recognized rating agencies in their ratings of a fixed-income security and
changes in the ability of an issuer to make payments of interest and principal
may also affect the value of these investments.
5
<PAGE>
Investors should carefully consider their ability to assume the risks of
owning shares of a Portfolio that invests in lower-rated securities. The lower
ratings of certain securities reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payments of interest and principal would
likely make the values of securities held by the Portfolio more volatile and
could limit the Portfolio's ability to sell its securities at prices
approximating the values placed on such securities. In the absence of a liquid
trading market for its portfolio securities the Portfolio at times may be unable
to establish the fair value of such securities.
The rating assigned to a security by a rating agency does not reflect an
assessment of the volatility of the security's market value or of the liquidity
of an investment in the security.
The Portfolio will not be required to dispose of a security held by it if
the security's rating falls below the minimum applicable rating, although Mentor
Advisors will consider whether continued investment in the security is
consistent with the Portfolio's investment objectives.
The Portfolio may invest up to 25% of its assets in foreign securities. The
Portfolio may also buy and sell foreign currencies and options and futures
contracts on foreign currencies for hedging purposes in connection with its
foreign investments. See "Foreign securities" below for a description of risks
associated with foreign investments.
"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).
Mentor Advisors 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 Advisors considers consistent with
such defensive strategies.
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. See "Foreign securities" below for a
description of risks associated with foreign investments.
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
6
<PAGE>
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 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.
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 agency. 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 Appendix A 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 (FIXED-INCOME PORTFOLIO AND INTERNATIONAL PORTFOLIO
ONLY). Investment in foreign securities entails certain risks. Since foreign
securities are normally denominated and traded in foreign currencies, the value
of a Portfolio's assets may be affected favorably or unfavorably by currency
exchange rates and exchange control regulations, foreign withholding taxes and
restrictions or prohibitions on the repatriation of foreign currencies. 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
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practices comparable to those in the United States. The securities of some
foreign companies are less liquid and at times more volatile than securities of
comparable U.S. companies. Foreign brokerage commissions and other fees are also
generally higher than in the United States. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of a 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 a 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 a Portfolio may have limited recourse available to it in the event of
default. The laws of some foreign countries may limit a Portfolio's ability to
invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities. A 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 Fixed-Income Portfolio 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
Portfolio's mortgage-backed securities have less potential for capital
appreciation during periods of declining interest rates than other fixed-income
securities of comparable maturities, although such obligations may have a
comparable 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.
The Fixed-Income Portfolio may also invest in other types of
mortgage-related securities, including any securities that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans or real property, including collateralized mortgage obligation
"residual" interests. Residual interests are derivative mortgage securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans. The cash flow generated by the
mortgage assets underlying a series of
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mortgage securities is applied first to make required payments of principal of
and interest on the mortgage securities and second to pay the related
administrative expenses of the issuer. The residual generally represents the
right to any excess cash flow remaining after making the foregoing payments.
Each payment of such excess cash flow to a holder of the related residual
represents income and/or a return of capital. The amount of residual cash flow
resulting from a series of mortgage securities will depend on, among other
things, the characteristics of the mortgage assets, the coupon rate of each
class of the mortgage securities, prevailing interest rates, the amount of
administrative expenses, and the prepayment experience on the mortgage assets.
The values of residuals are extremely sensitive to changes in interest rates.
The yield to maturity on residual interests may be extremely sensitive to
prepayments on the related underlying mortgage assets in the same manner as an
interest-only class of stripped mortgage-backed securities. In addition, if a
series of mortgage securities includes a class that bears interest at an
adjustable rate, the yield to maturity on the related residual interest may also
be extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. In certain circumstances, there may be little or no
excess cash flow payable to residual holders. The Portfolio may fail to recoup
fully its initial investment in a residual.
Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals currently may
not have the liquidity of other more established securities trading in other
markets. Residuals also may be subject to certain restrictions on
transferability. As a result, the Portfolio may be unable to dispose of these
interests at prices approximating the values the Portfolio had previously
assigned to them.
OTHER ASSET-BACKED SECURITIES. The Fixed-Income Portfolio 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
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 Fixed-Income Portfolio
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). The Portfolio may also purchase securities for
future delivery. "When-issued" securities and forward commitments may increase
the Portfolio's overall investment exposure and may result in losses.
REPURCHASE AGREEMENTS AND SECURITIES LOANS. The Portfolios may enter into
repurchase agreements and 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.
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 and may result in losses. When the
Portfolio has borrowed money for leverage and its investments increase or
decrease in value, the
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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 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.
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
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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. The Fixed-Income Portfolio and the
International Portfolio may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future currency exchange rates. The
Portfolios 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 Portfolios 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
Portfolios may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with transaction hedging.
The Portfolios may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange currency
at a future time at a rate or rates that may be higher or lower than the spot
rate. Foreign currency futures contracts are standardized exchange-traded
contracts and have margin requirements. For transaction hedging purposes, each
of the Portfolios may also purchase and sell call and put options on foreign
currency futures contracts and on foreign currencies.
The Portfolios may engage in position hedging to protect against a decline
in value relative to the U.S. dollar of the currencies in which 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 Portfolios 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 Portfolios may also
purchase or sell foreign currencies on a spot basis.
Although there is no limit to the amount of either Portfolio's assets that
may be invested in foreign currency exchange and foreign currency forward
contacts, each Portfolio will only enter into such transactions to the extent
necessary to effect the hedging transactions described above.
INTEREST RATE TRANSACTIONS. The Fixed-Income Portfolio may enter into
interest rate swaps and other interest rate transactions, such as interest rate
caps, floors, and collars, for hedging purposes or to realize a greater current
return. Interest rate swaps involve the exchange by the Portfolio with another
party of different types of interest-rate streams (E.G., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. The Portfolio's ability to
engage in certain interest rate transactions may be limited by tax
considerations. The use of interest rate swaps and other interest rate
transactions is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If Mentor Advisors is incorrect in its forecasts of
market values, interest rates, or other applicable factors, the investment
performance of the Portfolio would be less favorable than it would have been if
this investment technique were not used.
MANAGEMENT
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The Trustees of Mentor Institutional Trust ("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 and Fixed-Income
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
Perpetual receives investment advisory fees from the International Portfolio at
the annual rate set out in "Expense Summary -- Annual Portfolio Operating
Expenses", above. 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 over twenty
separate investment portfolios in the Mentor Family of Funds, with total assets
under management of more than $11 billion. All investment decisions for the U.S.
Government Cash Management and Fixed-Income 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.
Wheat First Butcher Singer, Mentor Investment Group's parent company, has
entered into an Agreement and Plan of Merger pursuant to which it is to be
acquired by First Union Corp. ("First Union"). First Union is a global financial
services company with approximately $140 billion in assets and $10 billion in
total stockholder's equity. The proposed arrangement does not contemplate any
changes in the management or operations of Mentor Investment Group or any of its
subsidiaries, including Mentor Advisors. Consummation of the acquisition, which
is subject to a number of conditions, including regulatory approvals, will
result in the termination of the Portfolios' investment advisory agreements. It
is expected that, upon consummation of the acquisition (which is expected to
occur as early as January 31, 1998), the Trust will enter into new investment
advisory agreements with Mentor Advisors and Mentor Perpetual, which will be
substantially identical to the agreements currently in effect.
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 $10 billion. Its
clients include 28 unit investment trusts and other public investment pools,
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 International 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 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.
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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. The portfolio
turnover rates for the Fixed-Income and International 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.
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 New
York Stock 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 PORTFOLIO distributes 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 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
New York Stock 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
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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, 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 long-term capital gain
distribution received with respect to those shares). Pursuant to the Taxpayer
Relief Act of 1997, long-term capital gains generally will be subject to a
maximum tax rate of 28% or 20% depending upon the holding period of the
Portfolio investment generating the gains. 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 stock or securities of foreign
corporations, the Portfolio intends to make an election permitted by the
Internal Revenue Code to treat any eligible foreign taxes it paid as paid by its
shareholders. In that case, shareholders who are U.S. citizens, U.S.
corporations, and, in some cases, U.S. residents, will be required to include in
U.S. taxable income their pro rata share of such taxes, but may then be entitled
to claim a foreign tax credit or deduction (but not both) for their share of
such taxes.
The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. Dividends and distributions also may be subject to
state, local and foreign taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state, local, or foreign
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).
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PURCHASE OF SHARES
Shares of the FIXED-INCOME 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 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, as amended (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.
or certain other financial institutions that have made arrangements with Mentor
Distributors 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. or such other financial institutions 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.
In all cases Mentor Advisors, Mentor Perpetual, and Mentor Distributors
reserve 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 the 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
15
<PAGE>
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.
GENERAL
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.
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, three 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, except when
required by law or determined by the Trustees. Shares of the Portfolios
16
<PAGE>
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.
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 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.
------------------------
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.
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.
17
<PAGE>
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
1998 MENTOR DISTRIBUTORS, LLC
MENTOR
INSTITUTIONAL
TRUST
----------------
PROSPECTUS
----------------
JANUARY 31, 1998
[LOGO]
<PAGE>
<PAGE>
P R O S P E C T U S January 31, 1998,
Class A and B shares
Mentor Perpetual International Portfolio
Mentor Perpetual International Portfolio seeks long-term capital
appreciation by investing in a diversified portfolio of equity securities of
issuers outside the United States. The Portfolio is a diversified investment
portfolio of Mentor Institutional Trust. Mentor Perpetual Advisors, LLC is the
Portfolio's investment adviser. THE PORTFOLIO MAY USE LEVERAGE -- THAT IS, IT
MAY BORROW MONEY TO PURCHASE ADDITIONAL PORTFOLIO SECURITIES, WHICH INVOLVES
SPECIAL RISKS.
This Prospectus sets forth concisely the information about the Portfolio
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 JANUARY 31, 1998 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 Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
------------------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown are based on expenses incurred in respect of Class A
and Class B shares for the period they were outstanding during the Portfolio's
last fiscal year. The Examples show the cumulative expenses attributable to a
hypothetical $1,000 investment in the Class A and Class B shares of the
Portfolio over specified periods.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B
------- ---------------------------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)1 5.75% None
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None2 4.0% in the first year,
(as a percentage of the lower of the original declining to 1.0% in the
purchase price or redemption proceeds)3 fifth year, and eliminated
thereafter4
Redemption Fees None None
Exchange Fee None None
</TABLE>
- ---------------
1 Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
2 A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1,000,000 that are redeemed within one year of purchase.
3 The amount redeemed is computed as the lesser of the current net asset value
of the shares redeemed, and the original purchase price of the shares. See "How
to buy shares -- Class B shares."
4 Shares purchased as part of asset-allocation plans pursuant to the BL Purchase
Program are subject to a CDSC of 1.00%, if the shares are redeemed within one
year of purchase. See "How to buy shares -- the BL Purchase Program."
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets) CLASS A CLASS B
------- -------
<S> <C> <C>
Management Fees 1.00% 1.00%
12b-1 Fees 0.00% 0.75%
Shareholder Service Fee 0.25% 0.25%
Other Expenses (after expense limitation)* 0.10% 0.10%
------- -------
Total Portfolio Operating Expenses (after expense limitation)* 1.35% 2.10%
</TABLE>
- ---------------
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation currently in effect. In the absence of the expense
limitation, Other Expenses would be 0.67% for Class A shares and 0.65% for Class
B shares, and Total Portfolio Operating Expenses would be 1.92% for Class A
shares and 2.65% for Class B shares.
2
<PAGE>
EXAMPLES
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
1 year $ 70 $ 61
3 years $ 98 $ 96
5 years $ 127 $ 123
10 years $ 211 $ 243
</TABLE>
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and no redemption at the end of each period:
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
1 year $ 70 $ 21
3 years $ 98 $ 66
5 years $ 127 $ 113
10 years $ 211 $ 243
</TABLE>
This information is provided to help investors understand the expenses of
investing in the Portfolio and an investor's share of the operating expenses for
the Portfolio. The Examples should not be considered a representation of future
performance; actual expenses may be more or less than those shown.
FINANCIAL HIGHLIGHTS
The financial highlights for the Class A and Class B shares of the
Portfolio presented below have been derived from the Trust's financial
statements which were audited by KPMG Peat Marwick LLP, the Trust's independent
auditors. Their reports dated December 12, 1997 on the financial statements of
the Trust for the fiscal year ended October 31, 1997 is included in each
Portfolio's Annual Report to shareholders, which is incorporated into the
Statement of Additional Information by reference. A copy of the Annual Report
may be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- -----------
PERIOD PERIOD
ENDED ENDED
10/31/97(B) 10/31/97(B)
----------- -----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........................................... $ 12.53 $ 12.53
Income from investment operations
Net investment income........................................................ 0.01 0.00
Net realized and unrealized gain (loss) on investments and
foreign currency related transactions..................................... 1.29 1.28
----------- -----------
Total from investment operations............................................. 1.30 1.28
LESS DISTRIBUTIONS
Dividends from income........................................................ -- --
Total distributions.......................................................... -- --
NET ASSET VALUE, END OF PERIOD................................................. $ 13.83 $ 13.81
----------- -----------
TOTAL RETURN................................................................... 10.38%(c) 10.22%(c)
----------- -----------
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands)....................................... $33,213 $19,371
Ratio of expenses to average net assets........................................ 1.35%(a) 2.10%(a)
Ratio of expenses to average net assets excluding waiver....................... 1.92%(a) 2.65%(a)
Ratio of net investment income to average net assets........................... 0.71%(a) 0.04%(a)
Portfolio turnover rate........................................................ 107% 107%
Average commission rate on portfolio transactions.............................. $0.0150 $0.0150
----------- -----------
----------- -----------
</TABLE>
- ---------------
(a) Annualized.
(b) For the period from December 27, 1996 (initial offering of Class A and Class
B shares) to October 31, 1997.
(c) Excluding applicable sales charges.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO'S INVESTMENT OBJECTIVE IS
LONG-TERM CAPITAL APPRECIATION. The Portfolio is designed for 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"), the Portfolio's investment adviser, 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 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.
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 Investors Service, Inc. or BBB- by Standard & Poor's Corporation, 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 also 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.
INVESTMENTS IN SMALLER COMPANIES. The 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
4
<PAGE>
companies, but investments in such companies may also 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. Investments in foreign securities entail certain risks.
Since foreign securities are normally denominated and traded in foreign
currencies, the values of the Portfolio's assets may be affected favorably or
unfavorably by currency exchange rates, exchange control regulations, foreign
witholding taxes and restrictions or prohibitions on the repatriation of foreign
currencies. There may be less information publicly available about a foreign
company than about a U.S. company, and foreign companies are not generally
subject to accounting, auditing, and financial reporting standards and practices
comparable to those in the United States. The securities of some foreign
companies are less liquid and at times more volatile than securities of
comparable U.S. companies. Foreign brokerage commissions and other fees are also
generally higher than in the United States. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of the Portfolio's assets held abroad)
and expenses not present in the settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation
of assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments which could
affect the value of the Portfolio's investments in certain foreign countries.
Legal remedies available to investors in certain foreign countries may be more
limited than those available with respect to investments in the United States or
in other foreign countries. 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
The Portfolio may engage in the other investment practices described below.
See the Statement of Additional Information for a more detailed description of
certain of these practices and risks they may involve.
LEVERAGE. The Portfolio may borrow money to invest in additional portfolio
securities. This practice, known as "leverage", increases the Portfolio's market
exposure and its risk and may result in losses. When the Portfolio
5
<PAGE>
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. The 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, the Portfolio may at times seek to hedge against fluctuations in net
asset value and, to the extent consistent with applicable law, to increase its
investment return.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index future"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of the
index between the time when the Portfolio enters into and terminates an index
futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return.
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 the securities held by the Portfolio that are the subject of a hedge.
The successful use by the Portfolio of the strategies described above further
depends on the ability of Mentor Perpetual to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out futures and options positions. Although the Portfolio will enter into
options and futures transactions only if Mentor Perpetual believes that a liquid
secondary market exists for such options or futures contract, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price.
The Portfolio generally expects that its options transactions will be
conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of Mentor Perpetual, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
6
<PAGE>
REPURCHASE AGREEMENTS AND SECURITIES LOANS. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually not
more than one week), which the seller agrees to repurchase at a fixed time and
price, representing the Portfolio's cost plus interest. Under a securities loan,
the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party should become involved in bankruptcy or
insolvency proceedings, it is possible that the Portfolio may be treated as an
unsecured creditor and be required to return the underlying collateral to the
other party's estate.
- ------------------------
Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective and
policies described herein are not fundamental and may be changed by the Trustees
without shareholder approval. As a matter of policy, the Trustees will not
materially change the Portfolio's investment objective without shareholder
approval. (Any such change could, of course, result in a change in the nature of
the securities in which the Portfolio may invest and the risks involved in an
investment in the Portfolio.)
MANAGEMENT
The Trustees of Mentor Institutional Trust (the "Trust") are responsible
for generally overseeing the conduct of the Portfolio's business. MENTOR
PERPETUAL ADVISORS, LLC, located at 901 East Byrd Street, Richmond, Virginia
23219, acts as investment adviser to the Portfolio. MENTOR INVESTMENT GROUP, LLC
("Mentor Investment Group") serves as administrator to the Portfolio. Mentor
Investment Group receives no compensation from the Portfolio for the performance
of such services. Mentor Investment Group has agreed to bear certain expenses of
the Portfolio pursuant to a voluntary expense limitation currently in effect.
This limitation may be terminated at any time.
Mentor Perpetual is an investment advisory firm owned equally by Perpetual
plc and Mentor Investment Group. The Perpetual organization currently serves as
investment adviser for assets of more than $10 billion. Its clients include 28
unit investment trusts and other public investment pools, 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.
Mentor Investment Group is a subsidiary of Wheat First Butcher Singer, Inc.
("Wheat First Butcher Singer"), a diversified financial services holding
company. Wheat First Butcher Singer, through other subsidiaries, also engages in
securities brokerage, investment banking, and related businesses. 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.
Wheat First Butcher Singer, Mentor Investment Group's parent company, has
entered into an Agreement and Plan of Merger pursuant to which it is to be
acquired by First Union Corp. ("First Union"). First Union is a global financial
services company with approximately $140 billion in assets and $10 billion in
total stockholder's
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equity. The proposed arrangement does not contemplate any changes in the
management or operations of Mentor Investment Group or any of its subsidiaries,
including Mentor Perpetual. Consummation of the acquisition, which is subject to
a number of conditions, including regulatory approvals, will result in the
termination of the Portfolio's investment advisory agreement. It is expected
that, upon consummation of the acquisition (which is expected to occur as early
as January 31, 1998), the Trust will enter into new investment advisory
agreement with Mentor Perpetual, which will be substantially identical to the
agreement currently in effect.
Subject to the general oversight of the Trustees, Mentor Perpetual manages
the Portfolio in accordance with the stated policies of the Portfolio. Mentor
Perpetual makes investment decisions for the Portfolio and places the purchase
and sale orders for the Portfolio's portfolio transactions. In selecting
broker-dealers, Mentor Perpetual may consider research and brokerage services
furnished to it and its affiliates. Subject to seeking the best overall terms
available, Mentor Perpetual may consider sales of shares of the 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 the Portfolio.
Mentor Perpetual may at times cause the Portfolio to pay commissions to
broker-dealers affiliated with Mentor Perpetual.
Expenses incurred in the operation of the Portfolio or otherwise allocated
to the Portfolio, including but not limited to taxes, interest, brokerage fees
and commissions, fees to Trustees who are not officers, directors, stockholders,
or employees of Wheat First Butcher Singer and its subsidiaries, Securities and
Exchange Commission 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, certain 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.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. The
investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's turnover rate is shown in
the section "Financial Highlights."
HOW THE PORTFOLIO VALUES ITS SHARES
The 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 for Class A shares will generally differ from that
of Class B shares due to the variance in daily net income realized by and
dividends paid on each class of shares, and any differences in the expenses of
the different classes.
Securities quoted in foreign currencies are translated into U.S. dollars at
the current exchange rates or at such other rates as the Trustees may determine
in computing net asset value. As a result, fluctuations in the values
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<PAGE>
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.
SALES ARRANGEMENTS
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
CLASS A SHARES. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to buy shares -- Class A
shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge,
but are subject to a CDSC of up to 4% if redeemed within five years. Class B
shares also bear 12b-1 fees. Class B shares provide an investor the benefit of
putting all of the investor's money to work from the time the investment is
made, but have a higher expense ratio and pay lower dividends than Class A
shares due to the 12b-1 fees. If you purchase shares through an asset-allocation
program, you may also be eligible to purchase Class B shares through the "BL
Purchase Program." See "How to buy shares -- Class B shares."
WHICH ARRANGEMENT IS FOR YOU? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. Investors purchasing shares through an asset-allocation program
may wish to purchase shares through the BL Purchase Program. For more
information about these sales arrangements, consult your investment dealer or
Mentor Distributors, LLC ("Mentor Distributors"). Sales personnel may receive
different compensation depending on which class of shares they sell. Shares may
only be exchanged for shares of the same class of certain other funds in the
Mentor family and for shares of Cash Resource U.S. Government Money Market Fund.
See "How to exchange shares."
HOW TO BUY SHARES
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little as $100. Investments under
IRAs and qualified retirement plans are subject to a minimum initial investment
of $250. The minimum initial investment may be waived for current and retired
Trustees, and current and retired employees of the Trust, Mentor Investment
Group, or its affiliates. You can buy Portfolio shares BY COMPLETING THE
ENCLOSED NEW ACCOUNT FORM and sending it to Boston Financial Data Services
("BFDS") at 2 Heritage Drive, North Quincy, Massachusetts 02171 along with a
check or money order made payable to Mentor Institutional Trust, THROUGH YOUR
FINANCIAL INSTITUTION, which may be an investment dealer, a bank, or another
institution, or THROUGH AUTOMATIC INVESTING. If you do not have a dealer, Mentor
Distributors can refer you to one.
AUTOMATIC INVESTMENT PLAN. Once you have made the initial minimum
investment in the Portfolio, you can make regular investments of $50 or more on
a monthly or quarterly basis through automatic deductions from your bank
checking account. Application forms are available from your investment dealer or
through Mentor Distributors.
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Shares are sold at a price based on the Portfolio's net asset value for
each class next determined after Mentor Distributors receives your purchase
order. In most cases, in order to receive that day's public offering price,
Mentor Distributors must receive your order before the close of regular trading
on the New York Stock Exchange. If you buy shares through your investment
dealer, the dealer must ensure that Mentor Distributors receives your order
before the close of regular trading on the New York Stock Exchange for you to
receive that day's public offering price.
CLASS A SHARES. The public offering price of Class A shares is the net
asset value plus a sales charge. The Portfolio receives the net asset value. The
sales charge varies depending on the size of your purchase and is allocated
between your investment dealer and Mentor Distributors. The current sales
charges for Class A shares of the Portfolio are as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
PUBLIC OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
--------------- --------------- ------------
<S> <C> <C> <C>
Less than $50,000........................................... 6.10% 5.82% 5.00%
$50,000 but less than $100,000.............................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000............................. 3.75% 3.90% 3.00%
$250,000 but less than $500,000............................. 3.00% 3.09% 2.50%
$500,000 but less than $1 million........................... 2.00% 2.04% 1.75%
$1 million or more.......................................... 0% 0% (see below)
</TABLE>
- ---------------
* At the discretion of Mentor Distributors, the entire sales charge may at times
be reallowed to dealers. The Staff of the Securities and Exchange Commission has
indicated that dealers who receive more than 90% of the sales charge may be
considered underwriters.
There is no initial sales charge on purchases of Class A shares of $1
million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. A CDSC is also imposed on any shares purchased
without a sales charge as part of a purchase of shares of $1 million or more
under a purchase accumulation plan. Contact Mentor Distributors for more
information.
You may be eligible to buy Class A shares at reduced sales charges. Consult
your investment dealer or Mentor Distributors for details about Quantity
Discounts and Accumulated Purchases, Letters of Intent, the Reinvestment
Privilege, Concurrent Purchases, and the Automatic Investment Plan. Descriptions
are also included in the New Account Form. Shares may be sold at net asset value
to certain categories of investors, including to shareholders of other mutual
funds who invest in the Portfolio in response to certain promotional activities,
and the CDSC may be waived under certain circumstances. The sales charges shown
above will not apply to shares purchased by you if you purchase shares through
EVEREN Securities, Inc. with the redemption proceeds received by you within the
preceding 90 days from the sale of shares of any non-Mentor open-end mutual
fund. No CDSC will apply to these purchases. EVEREN Securities, Inc. may
compensate your investment dealer in connection with any such purchase. Sales
charges may similarly not apply to shares purchased through other financial
institutions that have made arrangements with Mentor Distributors. Contact your
financial institution or Mentor Distributors for more information. See "How to
buy shares -- General" below.
CLASS B SHARES. Class B shares are sold without an initial sales charge,
although a CDSC will be imposed if you redeem shares within five years of
purchase. The following types of shares may be redeemed without charge: (i)
shares acquired by reinvestment of distributions and (ii) shares otherwise
exempt from the CDSC, as described
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in the Example below. The amount of CDSC is determined as a percentage of the
lesser of the current market value or the cost of the shares being redeemed. The
amount of the CDSC will depend on the number of years since you invested in the
shares being redeemed and the dollar amount being redeemed, according to the
following table:
<TABLE>
<CAPTION>
YEARS SINCE PURCHASE PAYMENT MADE CDSC
- --------------------------------- -----
<S> <C>
1 4.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6+ None
</TABLE>
THE BL PURCHASE PROGRAM. If you purchase Class B shares through an
asset-allocation program sponsored by your broker-dealer or other financial
institution, you may elect to participate in the BL Purchase Program. Shares
purchased through this program are not subject to the CDSC shown above. Rather,
a CDSC of 1.00% will be imposed on redemptions of such shares within the first
year after purchase, based on the lower of the shares' cost and current net
asset value. Your broker-dealer or other financial institution is responsible
for making the election on your behalf to invest through the Program.
Accordingly, if you wish to purchase shares through this Program, you should
instruct your broker-dealer or financial institution to do so.
GENERAL. Mentor Distributors, LLC, located at 901 East Byrd Street,
Richmond, Virginia 23219, serves as distributor of the Portfolio's shares.
Mentor Distributors is not obligated to sell any specific amount of shares of
the Portfolio.
The Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by the Trust's current and retired Trustees
(and their families), current and retired employees (and their families) of
Mentor Distributors, Mentor Perpetual, and their affiliates, registered
representatives and other employees (and their families) of broker-dealers
having sales agreements with Mentor Distributors, employees (and their families)
of financial institutions having sales agreements with Mentor Distributors (or
otherwise having an arrangement with a broker-dealer or financial institution
with respect to sales of Portfolio shares), financial institution trust
departments investing an aggregate of $1 million or more in one or more funds in
the Mentor family, clients of certain administrators of tax-qualified plans,
employer-sponsored retirement plans, tax-qualified plans when proceeds from
repayments of loans to participants are invested (or reinvested) in funds in the
Mentor family, shares redeemed under the Portfolio's Systematic Withdrawal Plan
(limited to 10% of a shareholder's account in any calendar year), and "wrap
accounts" for the benefit of clients of financial planners adhering to certain
standards established by Mentor Distributors or its affiliates. The Portfolio
may sell shares without a sales charge or a CDSC in connection with the
acquisition by the Portfolio of assets of an investment company or personal
holding company. In addition, the CDSC may be waived in the case of (i)
redemptions of shares held at the time a shareholder dies or becomes disabled,
including the shares of a shareholder who owns the shares with his or her spouse
as joint tenants with right of survivorship, provided that the redemption is
requested within one year of the death or initial determination of disability;
(ii) redemptions in connection with the following retirement plan distributions:
(a) lump-sum or other distributions from a qualified retirement plan following
retirement, (b) distributions from an IRA, Keogh Plan, or Custodial Account
under Section 403(b)(7) of the Internal Revenue Code following attainment of age
59 1/2, and (c) a tax-free return on an excess contribution to an IRA; (iii)
redemptions by pension or profit sharing plans sponsored by Mentor Investment
Group or an affiliate; and (iv) redemptions by pension or profit sharing plans
of which Mentor Investment Group or any affiliate serves as a plan fiduciary. In
addition, certain retirement plans with over 200 employees may purchase Class A
shares at net
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<PAGE>
asset value without a sales charge. The Portfolio may sell its Class A shares
without a sales charge to shareholders of other mutual funds who invest in other
funds in the Mentor family in response to certain promotional activities (in
which case a CDSC of 1% may apply for a period of years after purchase). Contact
Mentor Distributors for more information. If you invest through a broker-dealer
or other financial institution, your broker-dealer or other financial
institution will be responsible for electing on your behalf to take advantage of
any of these reduced sales charges or waivers described above. Please instruct
your broker-dealer or other financial institution accordingly.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in, shares
of the Portfolio at net asset value. See "How to exchange shares."
In determining whether a CDSC is payable in respect of the shares redeemed,
the Portfolio will first redeem the shares held longest (together with any
shares received upon reinvestment of distributions with respect to those
shares). Any of the shares being redeemed which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing capital
appreciation will not be subject to a CDSC. See the Example below.
EXAMPLE:
You have purchased 100 Class B shares at $10 per share. The second year
after your purchase, your investment's net asset value per share has increased
by $2 to $12, and you have gained 10 additional shares through dividend
reinvestment. If you redeem 50 of those shares (including shares purchased
through reinvestment of distributions on those 100 shares) at this time, your
CDSC will be calculated as follows:
<TABLE>
<S> <C>
(Bullet) Proceeds of 50 shares redeemed at $12 per share $600
(Bullet) Minus proceeds of 10 shares not subject to a CDSC
because they were acquired through dividend reinvestment
(10 x $12) -120
(Bullet) Minus appreciation on remaining shares, also not subject
to CDSC (40 x $2) -80
----
(Bullet) Amount subject to a CDSC $400
</TABLE>
Mentor Distributors receives the entire amount of any CDSC you pay. Consult
Mentor Distributors for more information.
If you are considering redeeming or exchanging shares of the Portfolio or
transferring shares to another person shortly after purchase, you should pay for
those shares with a certified check to avoid any delay in redemption, exchange,
or transfer. Otherwise the Portfolio may delay payment until the purchase price
of those shares has been collected or, if you redeem by telephone, until 15
calendar days after the purchase date.
Because of the relatively high cost of maintaining accounts, the Portfolio
reserves the right to redeem, upon not less than 60 days' notice, any Portfolio
account below $500 as a result of redemptions. A shareholder may, however, avoid
such a redemption by the Portfolio by increasing his investment in shares of the
Portfolio to a value of $500 or more during such 60-day period.
Mentor Distributors, Mentor Perpetual, and affiliates thereof, at their own
expense and out of their own assets, may also provide other compensation to
dealers in connection with sales of shares of the Portfolio. Compensation may
also include, but is not limited to, financial assistance to dealers in
connection with conferences, sales, or training programs for their employees,
seminars for the public, advertising or sales campaigns, or other
dealer-sponsored special events. In some instances, this compensation may be
made available only to certain
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<PAGE>
dealers whose representatives have sold or are expected to sell significant
amounts of shares. Dealers may not use sales of the Portfolio's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. Certain dealers may not sell all classes of shares.
In all cases Mentor Perpetual or Mentor Distributors reserves the right to
reject any particular investment.
REINVESTMENT PRIVILEGE. If you redeem Class A or B shares of the Portfolio,
you have a one-time right, within 60 days, to reinvest the redemption proceeds
plus the amount of CDSC you paid, if any, at the next-determined net asset
value. Front-end sales charges will not apply to such reinvestment. Mentor
Distributors must be notified in writing by you or by your financial institution
of the reinvestment for you to recover the CDSC, or to eliminate the front-end
sales charge. If you redeem shares in the Portfolio, there may be tax
consequences.
DISTRIBUTION PLAN (CLASS B SHARES)
Mentor Distributors, LLC, located at 901 East Byrd Street, Richmond,
Virginia 23219, is the principal distributor for the Portfolio's shares. Mentor
Distributors is not obligated to sell any specific amount of shares of the
Portfolio.
The Portfolio has adopted a Distribution Plan under Rule 12b-1 with respect
to its Class B shares (the "Plan") providing for payments by the Portfolio to
Mentor Distributors from the assets attributable to the Portfolio's Class B
shares at the annual rate set out under "Expense Summary -- Annual Portfolio
Operating Expenses" above. The Trustees may reduce the amount of payments or
suspend the Plan for such periods as they may determine. Mentor Distributors
also receives the proceeds of any CDSC imposed on redemptions of shares.
Payments under the Plan are intended to compensate Mentor Distributors for
services provided and expenses incurred by it as principal underwriter of the
Portfolio's Class B shares. Mentor Distributors may select financial
institutions (such as a broker/dealer or bank) to provide sales support services
as agents for their clients or customers who beneficially own Class B shares of
the Portfolio. Financial institutions will receive fees from Mentor Distributors
based upon Class B shares owned by their clients or customers. The schedules of
such fees and the basis upon which such fees will be paid will be determined
from time to time by Mentor Distributors. Mentor Distributors may suspend or
modify such payments to dealers. Such payments are also subject to the
continuation of the Plan, the terms of any agreements between dealers and Mentor
Distributors, and any applicable limits imposed by the National Association of
Securities Dealers, Inc.
HOW TO SELL SHARES
You can sell your shares to the Portfolio any day the New York Stock
Exchange is open, either directly to the Portfolio or through your investment
dealer. The Portfolio will only redeem shares for which it has received payment.
SELLING SHARES DIRECTLY TO THE PORTFOLIO. Send a signed letter of
instruction and stock power form, along with any certificates that represent
shares you want to sell, to Mentor Institutional Trust, c/o Boston Financial
Data Services, Inc., 2 Heritage Drive, North Quincy, Massachusetts 02171. The
price you will receive is the net asset value per share of the relevant class of
shares next calculated after your request is received in proper form less any
applicable CDSC. 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. If you sell shares having a net asset value of $50,000 or more or if
you want your redemption proceeds payable to you at a different address or to
someone else, the
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<PAGE>
signatures of registered owners or their legal representatives must be
guaranteed by a bank, broker-dealer, or certain other financial institutions.
Contact Mentor Distributors for more information about where to obtain a
signature guarantee. Stock power forms are available from your investment
dealer, Mentor Distributors, and many commercial banks. 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.
SELLING SHARES BY TELEPHONE. You may use Mentor Distributors' Telephone
Redemption Privilege to redeem shares from your account unless you have notified
Mentor Distributors of an address change within the preceding 15 days. Unless an
investor indicates otherwise on the New Account Form, Mentor Distributors will
be authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide Mentor Distributors with his or her account
registration and address as it appears on Mentor Distributors' records. Mentor
Distributors will employ these and other reasonable procedures to confirm that
instructions communicated by telephone are genuine; if it fails to employ
reasonable procedures, Mentor Distributors may be liable for any losses due to
unauthorized or fraudulent instructions. For more information, consult Mentor
Distributors. During periods of unusual market changes and shareholder activity,
you may experience delays in contacting Mentor Distributors by telephone in
which case you may wish to submit a written redemption request, as described
above, or contact your investment dealer, as described below. The Telephone
Redemption Privilege may be modified or terminated without notice.
SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer and Mentor
Distributors must receive your request before the close of regular trading on
the New York Stock Exchange to receive that day's net asset value. Your dealer
will be responsible for furnishing all necessary documentation to Mentor
Distributors, and may charge you for its services.
SYSTEMATIC WITHDRAWAL PROGRAM. You may redeem Class A or B shares of the
Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program are
not subject to a CDSC, but the aggregate withdrawals of Class B shares in any
year are limited to 10% of the value of the account at the time of enrollment.
Contact Mentor Distributors for more information.
GENERAL. The Portfolio generally sends you payment for your shares the
business day after your request is received. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven days,
as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part in securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in the
Portfolio worth at least $1,000 for shares of the same class of certain
Portfolios of Mentor Funds, a series investment company offering shares of
investment portfolios with different investment objectives and policies, at net
asset value beginning 15 days after purchase. You may also exchange shares of
the Portfolio for shares of Cash Resource U.S. Government Money Market Fund (the
"Cash Fund"). If you exchange shares subject to a CDSC, the transaction will not
be subject to a CDSC. However, when you redeem the shares acquired through the
exchange, the redemption may be subject to the CDSC, depending upon when you
originally purchased the shares, using the schedule of the Portfolio from
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<PAGE>
which your first exchange was effected. For purposes of computing the CDSC, the
length of time you have owned your shares will be measured from the date of
original purchase and will not be affected by any exchange. (If you exchange
your shares for shares of the Cash Fund, the period when you hold shares of the
Cash Fund will not be included in calculating the length of time you have owned
the shares subject to the CDSC, and any CDSC payable on redemption of your
shares will be reduced by the amount of any payment collected by the Cash Fund
under its distribution plan in respect of those shares. Contact Mentor
Distributors for information.)
To exchange your shares, simply complete an Exchange Authorization Form and
send it to Mentor Institutional Trust, c/o BFDS, 2 Heritage Drive, North Quincy,
Massachusetts 02171. Exchange Authorization Forms are available by calling or
writing Mentor Distributors. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss. A
Telephone Exchange Privilege is currently available. Mentor Distributors'
procedures for telephonic transactions are described above under "How to sell
shares -- Selling shares by telephone." The Telephone Exchange Privilege is not
available if you were issued certificates for shares which remain outstanding.
Ask you investment dealer or Mentor Distributors for a prospectus relating to
Mentor Funds or the Cash Fund. Shares of certain of the Portfolios may not be
available to residents of all states.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where Mentor Distributors or the Trustees
believe doing so would be in the best interests of the Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. Consult Mentor
Distributors before requesting an exchange by calling 1-800-869-6042. See the
Statement of Additional Information to find out more about the exchange
privilege.
HOW DISTRIBUTIONS ARE MADE
The 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. All Portfolio distributions will
be invested in additional Portfolio shares, unless the shareholder instructs the
Portfolio otherwise.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions 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). Pursuant to the Taxpayer Relief Act of
1997, long-term capital gains will be subject to a maximum tax rate of 28% or
20% depending upon the holding period of the Portfolio investment generating the
gains. 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 the Portfolio for the preceding year. In
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<PAGE>
buying or selling securities for the Portfolio, Mentor Perpetual 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.
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 eligible foreign
taxes it paid as paid by its shareholders. In that case, shareholders who are
U.S. citizens, U.S. corporations, and, in some cases, U.S. residents, will be
required to include in U.S. taxable income their pro rata share of such taxes,
but may then be entitled to claim a foreign tax credit or deduction (but not
both) for their share of such taxes.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends 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 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).
OTHER SERVICES
SHAREHOLDER SERVICING PLAN. The Trust has adopted a Shareholder Servicing
Plan (the "Service Plan") with respect to the Class A and Class B shares of the
Portfolio. Under the Service Plan, financial institutions will enter into
shareholder service agreements with the Trust to provide administrative support
services to their customers who are Portfolio shareholders. In return for
providing these support services, a financial institution may receive payments
at a rate not exceeding 0.25% of the average daily net assets of the Class A or
Class B shares of the Portfolio. These administrative services may include, but
are not limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel, including clerical, supervisory,
and computer personnel, as necessary or beneficial to establish and maintain
shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Portfolio; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Portfolio reasonably requests.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Perpetual and/or Mentor Investment
Group, or affiliates thereof, for providing administrative support services to
holders of Class A or Class B shares of the Portfolio. These payments will be
made directly by Mentor Perpetual and/or Mentor Investment Group and will not be
made from the assets of the Portfolio.
GENERAL
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.
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
16
<PAGE>
rights and privileges as the Trustees determine. The Trust's shares are
currently divided into four series, one representing the Portfolio, the others
representing other Portfolios with varying investment objectives and policies.
The Portfolio's shares are currently divided into four classes. Only the
Portfolio's Class A and Class B shares are offered by this Prospectus. The
Portfolio also offers other classes of shares with different sales charges and
expenses. Because of these different sales charges and expenses, the investment
performance of the classes will vary. For more information, including your
eligibility to purchase any other class of shares, contact Mentor Distributors.
Each share has one vote, with fractional shares voting proportionally.
Shares of each series will vote together as a single series, except when
required by law or determined by the Trustees. Shares of the Portfolio are
freely transferable, are entitled to dividends as declared by the Trustees, and,
if the Portfolio 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 neither the Portfolio nor the Trust is required to
hold annual meetings of shareholders, shareholders have the right to call a
meeting to elect or remove Trustees, or to take other actions as provided in the
Agreement and Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and Trust
Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about Class A and Class B shares of the Portfolio. The
Portfolio's "yield" for each class of shares is calculated by dividing that
classes' annualized net investment income per share during a recent 30-day
period by the maximum public offering price per share 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 the Portfolio at the maximum public offering price
(in the case of Class A shares) and reflecting (in the case of Class B shares)
the deduction of any applicable CDSC. Total return may also be presented for
other periods or based on investment at reduced sales charge levels or at net
asset value. Investment performance of different classes of shares of the
Portfolio will differ. Any quotation of investment performance not reflecting
the maximum initial sales charge or CDSC would be reduced if such sales charges
were reflected. Quotations of yield and total return for a period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. The Portfolio's performance may be compared to various indices.
See the Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of the Portfolio's investment adviser or its investment personnel.
ALL DATA IS BASED ON THE 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 the Portfolio's
investments, the Portfolio's operating expenses and the class of shares
purchased. Investment performance also often reflects the risks associated with
the Portfolio's investment objective and policies. These factors should be
considered when comparing the Portfolio's investment results to those of other
mutual funds and other investment vehicles.
17
<PAGE>
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 PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT
LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE
REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND
OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE
COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES.
ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE
PORTFOLIO IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS
EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN,
WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Expense summary.................................. 2
Financial highlights............................. 3
Investment objective and policies................ 4
Management....................................... 7
How the Portfolio values its shares.............. 8
Sales arrangement................................ 9
How to buy shares................................ 9
Distribution plan (Class B shares)............... 13
How to sell shares............................... 13
How to exchange shares........................... 14
How distributions are made....................... 15
Taxes............................................ 15
Other services................................... 16
General.......................................... 16
Performance information.......................... 17
</TABLE>
MENTOR INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 382-0016
1998 MENTOR DISTRIBUTORS, LLC
MENTOR PERPETUAL
INTERNATIONAL
PORTFOLIO
CLASS A AND B SHARES
----------------
PROSPECTUS
----------------
January 31, 1998
[LOGO]
<PAGE>
<PAGE>
P R O S P E C T U S
Class E shares January 31, 1998
Mentor Perpetual International Portfolio
Mentor Perpetual International Portfolio seeks long-term capital
appreciation by investing in a diversified portfolio of equity securities of
issuers outside the United States. The Portfolio is a diversified investment
portfolio of Mentor Institutional Trust. Mentor Perpetual Advisors, LLC is the
Portfolio's investment adviser. An investment in shares of the Portfolio offered
by this Prospectus is designed for institutional and high net-worth individual
investors who invest or maintain their accounts in the Portfolio with the
assistance of a broker-dealer, financial consultant, or similar service
provider. THE PORTFOLIO MAY USE LEVERAGE -- THAT IS, IT MAY BORROW MONEY TO
PURCHASE ADDITIONAL PORTFOLIO SECURITIES, WHICH INVOLVES SPECIAL RISKS.
This Prospectus sets forth concisely the information about the Portfolio
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 January 31, 1998 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 Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
------------------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur in
respect of it Class E shares during the first fiscal year when those shares are
offered. The Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in Class E shares of the Portfolio over specified
periods.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees 1.00%
12b-1 Fees 0.00%
Shareholder Service Fee 0.25%
Other Expenses (after expense limitation) 0.10%*
------
Total Portfolio Operating Expenses (after
expense limitation) 1.35%*
------
------
</TABLE>
- ---------------
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation. In the absence of the expense limitation, Other Expenses are
expected to be 0.45% and Total Portfolio Operating Expenses are expected to be
1.70%.
EXAMPLE
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
- ------ -------
<S> <C>
$ 14 $43
</TABLE>
This information is provided to help investors understand the expenses of
investing in the Portfolio and an investor's share of the estimated operating
expenses of the Portfolio. The Example should not be considered a representation
of future performance; actual expenses may be more or less than those shown.
An investment in shares of the Institutional Class (Class D shares) of the
Portfolio is not subject to a shareholder service fee; those shares are sold to
institutional and high net-worth individual investors who do not invest or
maintain their accounts in the Portfolio through or with the assistance of a
broker-dealer, financial consultant, or similar service provider, or who
otherwise do not wish to take advantage of any benefits available to them as a
result of payments made under the Portfolio's Shareholder Servicing Plan. See
"Purchase of Shares -- Shareholder Servicing Plan; financial intermediaries".
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Mentor Perpetual 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, the Portfolio's
investment adviser ("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 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.
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 Investors Service, Inc. or BBB- by Standard & Poor's Corporation, 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.
INVESTMENTS IN SMALLER COMPANIES. The 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 also involve certain special risks. Such
companies may have
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<PAGE>
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. Investments in foreign securities entail certain risks.
Since foreign securities are normally denominated and traded in foreign
currencies, the values of the Portfolio's assets may be affected favorably or
unfavorably by currency exchange rates, exchange control regulations, foreign
witholding taxes and restrictions or prohibitions on the repatriation of foreign
currencies. There may be less information publicly available about a foreign
company than about a U.S. company, and foreign companies are not generally
subject to accounting, auditing, and financial reporting standards and practices
comparable to those in the United States. The securities of some foreign
companies are less liquid and at times more volatile than securities of
comparable U.S. companies. Foreign brokerage commissions and other fees are also
generally higher than in the United States. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of the Portfolio's assets held abroad)
and expenses not present in the settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation
of assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments which could
affect the value of the Portfolio's investments in certain foreign countries.
Legal remedies available to investors in certain foreign countries may be more
limited than those available with respect to investments in the United States or
in other foreign countries. 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
The Portfolio may engage in the other investment practices described below.
See the Statement of Additional Information for a more detailed description of
certain of these practices and risks they may involve.
LEVERAGE. The Portfolio may borrow money to invest in additional portfolio
securities. This practice, known as "leverage," increases the Portfolio's market
exposure and its risk and may result in loses. 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
4
<PAGE>
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. The 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, the Portfolio may at times seek to hedge against fluctuations in net
asset value and, to the extent consistent with applicable law, to increase its
investment return.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index future"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of the
index between the time when the Portfolio enters into and terminates an index
futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return.
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 the securities held by the Portfolio that are the subject of a hedge.
The successful use by the Portfolio of the strategies described above further
depends on the ability of Mentor Perpetual to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out futures or options positions. Although the Portfolio will enter into options
and futures transactions only if Mentor Perpetual believes that a liquid
secondary market exists for such options or futures contract, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price.
The Portfolio generally expects that its options transactions will be
conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of Mentor Perpetual, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
REPURCHASE AGREEMENTS AND SECURITIES LOANS. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually not
more than one week), which the seller agrees to repurchase at a fixed time and
price, representing the Portfolio's cost plus interest. Under a securities loan,
the Portfolio lends portfolio securities. The
5
<PAGE>
Portfolio will enter into repurchase agreements and securities loans only with
commercial banks and with registered broker-dealers who are members of a
national securities exchange or market makers in government securities, and in
the case of repurchase agreements, only if the debt instrument subject to the
repurchase agreement is a U.S. Government security. These transactions must be
fully collateralized at all times, but involve some risk to the Portfolio if the
other party should default on its obligations and the Portfolio is delayed or
prevented from recovering the collateral. If the other party should become
involved in bankruptcy or insolvency proceedings, it is possible that the
Portfolio may be treated as an unsecured creditor and be required to return the
underlying collateral to the other party's estate.
------------------------
Except for investment policies designated in this Prospectus or the
Statement of Additional as fundamental, the investment objective and policies
described herein are not fundamental and may be changed by the Trustees without
shareholder approval. As a matter of policy, the Trustees will not materially
change the Portfolio's investment objective without shareholder approval. (Any
such change could, of course, result in a change in the nature of the securities
in which the Portfolio may invest and the risks involved in an investment in the
Portfolio.)
MANAGEMENT
The Trustees of Mentor Institutional Trust (the "Trust") are responsible
for generally overseeing the conduct of the Portfolio's business. Mentor
Perpetual Advisors, LLC, located at 901 East Byrd Street, Richmond, Virginia
23219, acts as investment adviser to the Portfolio. Mentor Investment Group, LLC
("Mentor Investment Group") serves as administrator to the Portfolio. Mentor
Investment Group receives no compensation from the Portfolio for the performance
of such services. Mentor Investment Group has agreed to bear certain expenses of
the Portfolio pursuant to a voluntary expense limitation currently in effect.
This limitation may be terminated at any time.
Mentor Perpetual is an investment advisory firm owned equally by Perpetual
plc and Mentor Investment Advisors, LLC, an affiliate of Mentor Investment
Group. The Perpetual organization currently serves as investment adviser for
assets of more than $10 billion. Its clients include 28 unit investment trusts
and other public investment pools, 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.
Mentor Investment Group is a subsidiary of Wheat First Butcher Singer, Inc.
("Wheat First Butcher Singer"), a diversified financial services holding
company. Wheat First Butcher Singer, through other subsidiaries, also engages in
securities brokerage, investment banking, and related businesses. 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.
Wheat First Butcher Singer, Mentor Investment Group's parent company, has
entered into an Agreement and Plan of Merger pursuant to which it is to be
acquired by First Union Corp. ("First Union"). First Union is a global financial
services company with approximately $140 billion in assets and $10 billion in
total stockholder's equity. The proposed arrangement does not contemplate any
changes in the management or operations of Mentor Investment Group or any of its
subsidiaries, including Mentor Perpetual. Consummation of the acquisition, which
is subject to a number of conditions, including regulatory approvals, will
result in the termination of the Portfolio's investment advisory agreement. It
is expected that, upon consummation of the acquisition (which is expected to
occur as early as January 31, 1998), the Trust will enter into new investment
advisory agreement with Mentor Perpetual, which will be substantially identical
to the agreement currently in effect.
6
<PAGE>
Subject to the general oversight of the Trustees of the Trust, Mentor
Perpetual manages the Portfolio in accordance with the stated policies of the
Portfolio. Mentor Perpetual makes investment decisions for the Portfolio and
places the purchase and sale orders for the Portfolio's portfolio transactions.
In selecting broker-dealers, Mentor Perpetual may consider research and
brokerage services furnished to it and its affiliates. Subject to seeking the
best overall terms available, Mentor Perpetual may consider sales of shares of
the 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 the Portfolio. Mentor Perpetual may at times cause the Portfolio to pay
commissions to broker-dealers affiliated with Mentor Perpetual.
Expenses incurred in the operation of the Portfolio or otherwise allocated
to the Portfolio, including but not limited to taxes, interest, brokerage fees
and commissions, fees to Trustees who are not officers, directors, stockholders,
or employees of Wheat First Butcher Singer and its subsidiaries, Securities and
Exchange Commission 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, certain 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.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. The
investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's annual portfolio turnover
rate was 107% for its fiscal year ended October 31, 1997, and 59% for the fiscal
period December 19, 1995 to October 31, 1996.
HOW THE PORTFOLIO VALUES ITS SHARES
The 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.
Securities quoted in foreign currencies are translated into U.S. dollars at
the current exchange rates or at such other rates as the Trustees may determine
in computing net asset value. 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.
PURCHASE OF SHARES
Class E shares of the Portfolio are available to shareholders who invest or
maintain a Portfolio account with the assistance of a broker-dealer, financial
consultant, or similar service provider (a "financial intermediary").
Shares are sold at a price based on the Portfolio's net asset value next
determined after a purchase order is received by the Portfolio. In most cases,
in order to receive that day's public offering price, your order must be
received by the Trust or Mentor Distributors, LLC ("Mentor Distributors") before
the close of regular trading on the New York Stock Exchange.
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Mentor Distributors, LLC, located at 901 East Byrd Street, Richmond,
Virginia 23219, serves as distributor of the Portfolio's shares. Mentor
Distributors is not obligated to sell any specific amount of shares of the
Portfolio.
An investor may make an initial purchase of shares in the Portfolio by
submitting completed application materials along with a purchase order, and by
making payment to the Trust, or through a financial intermediary. If you
purchase shares through your financial intermediary, your financial intermediary
will be responsible for forwarding any necessary documentation and payments to
Mentor Distributors.
Investors will be required to make minimum initial investments of $500,000
and minimum subsequent investments of $25,000. Investments made through advisory
accounts maintained with investment advisers registered under the Investment
Advisers Act of 1940, as amended (including "wrap" accounts), are not subject to
these minimum investment requirements. The Portfolio reserves the right at any
time to change the initial and subsequent investment minimums required of
investors.
If you buy shares through a financial intermediary, the financial
intermediary must ensure that Mentor Distributors receives your order before the
close of regular trading on the New York Stock Exchange for you to receive that
day's public offering price.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to Mentor Perpetual, or (iii) a combination of
such securities and cash. Purchase of shares of the Portfolio in exchange for
securities is subject in each case to the determination by Mentor Perpetual that
the securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by Mentor Perpetual in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the
Portfolio's 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.
Mentor Distributors, Mentor Perpetual, and affiliates thereof, at their own
expense and out of their own assets, may provide compensation to dealers in
connection with sales of shares of the Portfolio. Such compensation may include,
but is not limited to, financial assistance to dealers in connection with
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. In addition, if an investor purchases shares of
the Portfolio through EVEREN Securities, Inc. or certain other financial
institutions that have made arrangements with Mentor Distributors with the
redemption proceeds received by the investor within the preceding 90 days from
the sale of shares of any non-Mentor open-end mutual fund, EVEREN Securities,
Inc. or such other financial institutions may compensate the investor's
investment consultant in connection with that purchase. Dealers may not use
sales of Portfolio shares to qualify for this compensation to the extent such
may be prohibited by the laws of any state or any self-regulatory agency, such
as the National Association of Securities Dealers, Inc.
In all cases Mentor Perpetual and Mentor Distributors reserves the right to
reject any particular investment.
SHAREHOLDER SERVICING PLAN; FINANCIAL INTERMEDIARIES. The Portfolio has
adopted a Shareholder Servicing Plan (the "Plan") with respect to its Class E
shares. Under the Plan, financial intermediaries may enter into shareholder
service agreements with Mentor Distributors to provide administrative support to
their customers
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who hold Class E shares of the Portfolio. In return for providing these support
services, a financial intermediary may receive payments from Mentor Distributors
at a rate not exceeding 0.25% of the average daily net assets of the Portfolio
attributable to the Class E shares held by its customers. These support services
may include, but are not limited to, the following: providing office space,
equipment, telephone facilities, and various personnel, including clerical,
supervisory, and computer personnel, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Portfolio; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as Mentor Distributors reasonably requests.
In addition to receiving payments under the Plan, financial intermediaries
may be compensated by Mentor Perpetual and/or Mentor Investment Group, or
affiliates thereof, for providing administrative support services to holders of
Class E shares of the Portfolio. These payments will be made directly by Mentor
Perpetual and/or Mentor Investment Group and will not be made from the assets of
the Portfolio.
When you effect transactions with the Portfolio (including, for example,
purchases, sales, or redemptions of shares) through a financial intermediary,
your financial intermediary, and not the Portfolio, will be responsible for
taking all steps, and furnishing all necessary documentation, to effect the
transactions. Your financial intermediary may charge for these services. Certain
financial intermediaries may not effect transactions with the Portfolio for
their clients.
REDEMPTION OF SHARES
You can sell your shares to the Portfolio any day the New York Stock
Exchange is open, either directly to the Portfolio or through your financial
intermediary.
SELLING SHARES DIRECTLY TO THE PORTFOLIO. A shareholder may redeem all or
any portion of its shares in the Portfolio any day the New York Stock Exchange
is open by sending a signed letter of instruction and stock power form, along
with any certificates that represent shares the shareholder wants to sell, to
the 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 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.
SELLING SHARES THROUGH YOUR FINANCIAL INTERMEDIARY. Your financial
intermediary must receive your request before the close of regular trading on
the New York Stock Exchange to receive that day's net asset value. If you redeem
your shares through a financial intermediary, your financial intermediary will
be responsible for delivering your redemption request and all necessary
documentation to the Portfolio and may charge you for its services.
GENERAL. A redemption request will be considered to have been made in "good
order" if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be
redeemed, and identifies the shareholder's Portfolio account
number;
(2) the request is signed by each registered owner exactly as the
shares are registered; and
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed for transfer (or are accompanied by an
endorsed stock power) and accompany the redemption request.
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If shares to be redeemed represent an investment made by check, the Trust
reserves the right not to transmit the redemption proceeds to the shareholder
until the check has been collected, which may take up to 15 days after the
purchase date.
The Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Mentor 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, the
Portfolio may suspend redemptions, or postpone payment for more than seven days,
as permitted by federal securities law. In addition, the Portfolio reserves the
right, if conditions exist which make cash payments undesirable, to honor any
request for redemption by making payment in whole or in part in securities
valued in the same way as they would be valued for purposes of computing the
Portfolio's per share net asset value. If payment is made in securities, a
shareholder may incur brokerage expenses in converting those securities into
cash.
HOW DISTRIBUTIONS ARE MADE
The 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.
All Portfolio distributions will be invested in additional Portfolio
shares, unless the shareholder instructs the Portfolio otherwise.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions 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 long-term gain
distribution received with respect to those shares). Pursuant to the Taxpayer
Relief Act of 1997, long-term capital gains generally will be subject to a
maximum tax rate of 28% or 20% depending upon the holding period of the
Portfolio investment generating the gains. 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 the Portfolio for the preceding
year. In buying or selling securities for the Portfolio, Mentor Perpetual 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.
Shareholders of the Portfolio who are U.S. citizens or residents may be
able to claim a foreign tax credit or deduction on their U.S. income tax returns
with respect to foreign taxes paid by the Portfolio. If, at the end of the
fiscal year of the Portfolio, more than 50% of the Portfolio's total assets are
represented by stock or securities of foreign corporations, the Portfolio
intends to make an election permitted by the Internal Revenue Code to treat any
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
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of such taxes, but may then be entitled to claim a foreign tax credit or
deduction (but not both) for their share of such taxes.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends 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 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).
GENERAL
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.
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, one representing the Portfolio, the others representing other Portfolios
with varying investment objectives and policies. The Portfolio's shares are
currently divided into four classes. Only shares of the Portfolio's Class E
shares are being offered by this Prospectus. The Portfolio also offers other
classes of shares with different sales charges and expenses. Because of these
different sales charges and expenses, the investment performance of the classes
will vary. FOR MORE INFORMATION, INCLUDING YOUR ELIGIBILITY TO PURCHASE ANY
OTHER CLASS OF SHARES, CONTACT MENTOR DISTRIBUTORS.
Each share has one vote, with fractional shares voting proportionally.
Shares of each series will vote together as a single series except when required
by law or determined by the Trustees. Shares of the Portfolio are freely
transferable, are entitled to dividends as declared by the Trustees, and, if the
Portfolio 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 neither the Portfolio nor the Trust is required to
hold annual meetings of shareholders, shareholders have the right to call a
meeting to elect or remove Trustees, or to take other actions as provided in the
Agreement and Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and Trust
Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about the Class E shares of the Portfolio. The Portfolio's
"yield" for each class of shares is calculated by dividing the Portfolio's
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 life of
the Class E shares of the Portfolio through the most recent calendar quarter
represents the average annual compounded rate of return on an investment of
$1,000 in the shares over the period. Total return may also be presented for
other periods or based on investment at reduced sales charge levels or at
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net asset value. Investment performance for different classes of shares of the
Portfolio will differ. Quotations of yield and total return for a period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. The Portfolio's performance may be compared to various indices.
See the Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of the Portfolio's investment adviser or its investment personnel.
ALL DATA IS BASED ON THE 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 the Portfolio's
investments, the Portfolio's operating expenses and the class of shares
purchased. Investment performance also often reflects the risks associated with
the Portfolio's investment objective and policies. These factors should be
considered when comparing the Portfolio's investment results to those of other
mutual funds and other investment vehicles.
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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 PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT
LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE
REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND
OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE
COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES.
ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE
PORTFOLIO IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS
EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN,
WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION.
MENTOR INVESTMENT GROUP
901 East Byrd Street
Richmond, VA 23219
(800) 382-0016
1998 MENTOR DISTRIBUTORS, LLC
MENTOR
PERPETUAL
INTERNATIONAL
PORTFOLIO
CLASS E SHARES
-------------------
PROSPECTUS
-------------------
JANUARY 31, 1998
APPENDIX A
SECURITIES RATINGS
The following rating services describe rated securities as follows:
MOODY'S INVESTORS SERVICE, INC.
BONDS
AAA -- Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated BAA are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
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CA -- Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S
BONDS
AAA -- Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree. A 4 Debt
rated 'A' has a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for bonds in higher-rated categories.
BB-B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB -- Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B -- Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC -- Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
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CC -- The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C -- The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
D -- Bonds rated 'D' are in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be used
on the filing of a bankruptcy petition if debt service payments are jeopardized.
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Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
MENTOR INSTITUTIONAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
(Mentor U.S. Government Cash Management Portfolio,
Mentor Fixed-Income Portfolio, and Mentor Perpetual International Portfolio)
January 31, 1998
This Statement of Additional Information relates to the Mentor U.S.
Government Cash Management 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, LLC, 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
------- ----
INVESTMENT RESTRICTIONS ...................................................
CERTAIN INVESTMENT TECHNIQUES .............................................
MANAGEMENT OF THE TRUST ...................................................
PRINCIPAL HOLDERS OF SECURITIES ...........................................
INVESTMENT ADVISORY AND OTHER SERVICES ....................................
BROKERAGE .................................................................
DETERMINATION OF NET ASSET VALUE ..........................................
TAX STATUS ................................................................
THE DISTRIBUTOR ...........................................................
INDEPENDENT ACCOUNTANTS ...................................................
CUSTODIAN .................................................................
PERFORMANCE INFORMATION ...................................................
SHAREHOLDER LIABILITY .....................................................
MEMBERS OF INVESTMENT MANAGEMENT TEAMS ....................................
RATINGS ...................................................................
FINANCIAL STATEMENTS ......................................................
<PAGE>
GENERAL
Mentor Institutional Trust (the "Trust") is a Massachusetts
business trust organized on February 8, 1994 as IMG Institutional Trust.
The Trust's name was changed to Mentor Institutional Trust as of June
20, 1995.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions applicable to all of
the Portfolios (except where otherwise noted), which may not be changed without
the affirmative vote of a "majority of the outstanding voting securities" of a
Portfolio, which is defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), to mean 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
present at the meeting in person or by proxy.
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 33%
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 invest
in (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees (or the person designated by the Trustees to make
such determinations) to be readily marketable), and (c) repurchase agreements
maturing in more than seven days, if, as a result, more than 15% of the
Portfolio's net assets (10% with respect to Mentor U.S. Government Cash
Management Portfolio) (taken at current value) would then be invested in the
aggregate in securities described in (a), (b), and (c) above.
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.
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
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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.
Repurchase Agreements
A Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Trust's present intention to enter into repurchase agreements only with
member banks of the Federal Reserve System and securities dealers meeting
certain criteria as to creditworthiness and financial condition established by
the Trustees of the Trust and only with respect to obligations of the U.S.
government or its agencies or instrumentalities or other high quality short term
debt obligations. Repurchase agreements may also be viewed as loans made by a
Portfolio which are collateralized by the securities subject to repurchase. The
investment adviser will monitor such transactions to ensure that the value of
the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, a Portfolio could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, a Portfolio may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if a Portfolio is
treated as an unsecured creditor and required to return the underlying
collateral to the seller's estate.
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When-Issued Securities
A Portfolio may from time to time purchase securities on a
"when-issued" basis. Debt securities are often issued on this basis. The price
of such securities, which may be expressed in yield terms, is fixed at the time
a commitment to purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase. During the period between purchase and
settlement, no payment is made by a Portfolio and no interest accrues to the
Portfolio. To the extent that assets of a Portfolio are held in cash pending the
settlement of a purchase of securities, that Portfolio would earn no income.
While a Portfolio may sell its right to acquire when-issued securities prior to
the settlement date, a Portfolio intends actually to acquire such securities
unless a sale prior to settlement appears desirable for investment reasons. At
the time a Portfolio makes the commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the amount due and
the value of the security in determining the Portfolio's net asset value. The
market value of the when-issued securities may be more or less than the purchase
price payable at the settlement date. A Portfolio will establish a segregated
account in which it will maintain cash and U.S. Government Securities or other
high-grade debt obligations at least equal in value to commitments for
when-issued securities. Such segregated securities either will mature or, if
necessary, be sold on or before the settlement date.
Collateralized mortgage obligations; other mortgage-related securities
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"), but they also may be collateralized by whole loans or
private pass-through certificates (such collateral collectively hereinafter
referred to as "Mortgage Assets"). CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans.
In a CMO, a series of bonds or certificates is generally issued in
multiple classes. Each class of CMOs is issued at a specific fixed or floating
rate coupon and has a stated maturity or final distribution date. Principal
prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on most classes of the CMOs on a monthly, quarterly,
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a CMO, payments of principal, including any principal prepayments, on the
Mortgage Assets are applied to the classes of the series in a pre-determined
sequence.
Residual interests. Residual interests are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans. The cash flow generated
by the mortgage assets underlying a series of mortgage securities is applied
first to make required payments of principal of and interest on the mortgage
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securities and second to pay the related administrative expenses of the issuer.
The residual generally represents the right to any excess cash flow remaining
after making the foregoing payments. Each payment of such excess cash flow to a
holder of the related residual represents income and/or a return of capital. The
amount of residual cash flow resulting from a series of mortgage securities will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of the mortgage securities, prevailing interest rates,
the amount of administrative expenses, and the prepayment experience on the
mortgage assets. In particular, the yield to maturity on residual interests may
be extremely sensitive to prepayments on the related underlying mortgage assets
in the same manner as an interest-only class of stripped mortgage-backed
securities. In addition, if a series of mortgage securities includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
residual interest may also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. In certain circumstances,
there may be little or no excess cash flow payable to residual holders. A
Portfolio may fail to recoup fully its initial investment in a residual.
Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals currently may
not have the liquidity of other more established securities trading in other
markets. Residuals may be subject to certain restrictions on transferability.
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
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particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Portfolio will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
Zero-coupon securities allow an issuer to avoid the need to generate
cash to meet current interest payments. Even though zero-coupon securities do
not pay current interest in cash, a 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
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gain or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus commissions)
plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
Covered put options. A Portfolio may write covered put options in order
to enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
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,
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as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
A Portfolio may also purchase put and call options to enhance its
current return.
Options on foreign securities. The Trust may, on behalf of a Portfolio,
purchase and sell options on foreign securities if in the opinion of its
investment advisor the investment characteristics of such options, including the
risks of investing in such options, are consistent with the Portfolio's
investment objectives. It is expected that risks related to such options will
not differ materially from risks related to options on U.S. securities. However,
position limits and other rules of foreign exchanges may differ from those in
the U.S. In addition, options markets in some countries, many of which are
relatively new, may be less liquid than comparable markets in the U.S.
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,
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it may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.
Government regulations, 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).
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A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts with
respect to indexes or sub-indexes the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities.
Options on 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.
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Margin Payments. When a Portfolio purchases or sells a futures
contract, it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage of
the amount of the futures contract. This amount is known as "initial margin".
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to a Portfolio upon termination of the contract,
assuming a Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when a Portfolio sells a futures contract and the value of the
underlying index rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin 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
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no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that a Portfolio would have to exercise the
options in order to realize any profit.
Hedging risks. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying index or
movements in the prices of a Portfolio's securities which are the subject of a
hedge. A Portfolio's investment adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related 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.
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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.
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
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the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities of any Portfolio loaned will not at any
time exceed one-third (or such other limit as the Trustee may establish) of the
total assets of the Portfolio. Cash collateral received by a Portfolio may be
invested in any securities in which the Portfolio may invest consistent with its
investment policies. In addition, it is anticipated that a Portfolio may share
with the borrower some of the income received on the collateral for the loan or
that it will be paid a premium for the loan. Before a Portfolio enters into a
loan, its investment adviser considers all relevant facts and circumstances
including the creditworthiness of the borrower. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Although voting rights or rights to consent with
respect to the loaned securities pass to the borrower, a Portfolio retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by a Portfolio if the holders of such
securities are asked to vote upon or consent to matters materially affecting the
investment. A Portfolio will not lend portfolio securities to borrowers
affiliated with the Portfolio.
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, exchange control regulations,
foreign withholding taxes and restrictions or prohibitions on the repatriation
of foreign currencies and may incur costs in connection with conversion between
currencies.
In determining whether to invest in securities of foreign issuers, the
investment advisor of a Portfolio seeking current income will consider the
likely impact of foreign taxes on the net yield available to the Portfolio and
its shareholders. Income received by a Portfolio from sources within foreign
countries may be reduced by withholding and other taxes imposed by such
-15-
<PAGE>
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.
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
-16-
<PAGE>
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 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
-17-
<PAGE>
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
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
-18-
<PAGE>
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.
Convertible Securities
A Portfolio may invest in convertible securities. Convertible
securities are generally fixed-income securities which may be exchanged for or
converted into a predetermined number of shares of the issuer's underlying
common stock at the option of the holder during a specified time period.
Convertible securities may take the form of convertible preferred stock,
convertible bonds or debentures, units
-19-
<PAGE>
consisting of "usable" bonds and warrants, or securities offering a combination
of several of these features. The investment characteristics of convertible
securities vary widely, which allows convertible securities to be employed for a
variety of investment strategies.
A Portfolio will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stock when, in its Adviser's
opinion, the investment characteristics of the underlying common stock will
assist the Portfolio in achieving its investment objectives. In selecting
convertible securities for a Portfolio, the Portfolio's Adviser evaluates the
investment characteristics of the convertible security as a fixed-income
instrument and the investment potential of the underlying equity security for
capital appreciation.
Swaps, Caps, Floors, and Collars
A Portfolio may enter into interest rate, currency, and index swaps and
may buy and sell caps, floors, and collars. A Portfolio would enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique, or to protect against any increase in the price
of securities the Portfolio anticipates purchasing at a later date. A Portfolio
would not sell interest rate caps or floors where it does not own securities or
other instruments providing the income stream the Portfolio may be obligated to
pay.
Interest rate swaps involve the exchange by a Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to a
notional principal amount. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them; an index swap is an agreement to
-20-
<PAGE>
swap cash flows on a notional amount based on changes in the values of one or
more reference indices. A cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined level. A floor entitles the purchaser to
receive payments on a notional principal amount from the party selling the floor
to the extent that a specified index falls below a predetermined level. A collar
is a combination of a cap and a floor intended to preserve a return within a
predetermined range of interest rates or values.
A Portfolio will not enter into any swap, cap, floor, or collar
transaction unless, at the time of entering into the transaction, the unsecured
long-term debt of the counterparty, combined with any credit enhancements, is
rated at least A by S&P or Moody's or has an equivalent rating from another
nationally recognized securities rating organization or, if unrated, is
determined to be of comparable credit quality by the Portfolio's Adviser.
Because the payment obligations of parties to swap, cap, floor, and
collar transactions are determined on the basis of notional principal amounts,
such transactions entail investment leverage. As a result, the value of a
Portfolio's positions in such transactions may, depending on the terms of the
transaction, be extremely volatile and may result in losses to the Portfolio.
Swap, cap, floor, and collar transactions are privately negotiated
transactions, and involve the risk that a Portfolio's counterparty will be
unable to meet its obligations to the Portfolio. In addition, a Portfolio may
under certain circumstances be unable to transfer or to terminate its position
in such a transaction; in such circumstances, the Portfolio might have to
maintain the position at a time when it might otherwise previously have
terminated it, or may only be able to terminate or transfer the position on
terms less favorable to its than might otherwise have been anticipated.
Lower-rated Securities
A Portfolio may invest in lower-rated fixed-income securities (commonly
known as "junk bonds") to the extent described in the relevant Prospectus. The
lower ratings of certain securities held by a Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a Portfolio may be unable at times to establish the fair value of
such securities. The rating assigned to a security by Moody's Investors Service,
Inc. or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
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<PAGE>
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. Changes in the value
of portfolio securities generally will not affect cash income derived from such
securities, but will affect the Portfolio's net asset value. A Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although its Adviser will monitor the investment
to determine whether its retention will assist in meeting the Portfolio's
investment objective.
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent a
Portfolio invests in tax exempt securities in the lower rating categories, the
achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
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<PAGE>
MANAGEMENT OF THE TRUST
The following table provides biographical information with respect to
each Trustee and officer of the Trust. Each Trustee who is an "interested
person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name and Address with Portfolio During Past 5 Years
- ---------------- -------------- -------------------------------
<S> <C>
Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of
Richmond; Trustee, Mentor Funds and Cash
Resource Trust; Director, America's Utility Fund, Inc.
and Mentor Income Fund, Inc.
Thomas F. Keller Trustee Professor of Business Administration and former Dean,
Fuqua School of Business, Duke University; Trustee,
Mentor Funds and Cash Resource Trust; Director, America's
Utility Fund, Inc. and Mentor Income Fund, Inc.
Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corporation; formerly, Chairman and
Chief Executive Officer, Hamilton Beach/Proctor-Silex,
Inc.; Trustee, Mentor Funds and Cash Resource Trust; Director,
America's Utility Fund, Inc. and Mentor Income Fund, Inc.
*Daniel J. Ludeman Chairman; Chairman and Chief Executive Officer, Mentor Investment
Trustee Group, LLC; Managing Director, Wheat First Butcher Singer,
Inc.; Director, Wheat, First Securities, Inc. ; Chairman
and Trustee, Mentor Funds and Cash Resource Trust; Chairman
and Director, America's Utility Fund, Inc. and Mentor
Income Fund, Inc.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company; Trustee,
Mentor Funds and Cash Resource Trust; Director, America's
Utility Fund and Mentor Income Fund, Inc.
*Peter J. Quinn, Jr. Trustee President, Mentor Distributors, LLC; Managing Director, Mentor
Investment Group, LLC, Wheat First Butcher Singer, Inc., and
Mentor Investment Advisors, LLC; Director, Mentor Perpetual
Advisors, LLC; Trustee, Cash Resource Trust and Mentor Funds;
Director, America's Utility Fund, Inc. and Mentor Income Fund, Inc.
Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee, Mentor
Funds and Cash Resource Trust; Director, Mentor Income Fund,
Inc. and America's Utility Fund, Inc.; formerly, Vice Chancellor for
Development and University Relations, University of North Carolina
at Chapel Hill.
Weston E. Edwards Trustee President, Weston Edwards & Associates; Trustee, Mentor Funds
and Cash Resource Trust; Director, Mentor Income Fund, Inc. and
America's Utility Fund, Inc.; Founder and Chairman, The Housing
Roundtable; formerly, President, Smart Mortgage Access, Inc.
Jerry R. Barrentine Trustee President, J.R. Barrentine & Associates; Trustee, Mentor Funds and
Cash Resource Trust; Director, Mentor Income Fund, Inc. and America's
Utility Fund, Inc.; formerly, Executive Vice Presdient and Chief
Financial Officer, Barclays/American Mortgage Director Corporation;
Managing Partner, Barrentine Lott & Associates.
J. Garnett Nelson Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee, Mentor Funds and
Cash Resource Trust; Director, Mentor Income Fund, Inc., America's
Utility Fund, Inc., GE Investment Funds, Inc., and Lawyers Title
Corporation; Member, Investment Advisory Committee, Virginia
Retirement System; formerly, Senior Vice President, The Life
Insurance Company of Virginia.
Paul F. Costello President Managing Director, Mentor Investment Group, LLC, Wheat First Butcher
Singer, Inc.; and Mentor Investment Advisors, LLC; President, Mentor
Income Fund, Inc., Mentor Funds, Cash Resource Trust, and America's
Utility Fund, Inc.; Director, Mentor Perpetual Advisors, LLC.
Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group, LLC;
Treasurer, Cash Resource Trust, Mentor Income Fund
Inc., and Mentor Funds; Treasurer and Senior Vice President
America's Utility Fund, Inc.; formerly, Treasurer and
Comptroller, Ryland Capital Management, Inc.
Michael Wade Assistant Vice President, Mentor Investment Group, LLC; Assistant
Treasurer Treasurer, Cash Resource Trust, Mentor Income Fund,
Inc., 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, and Assistant
General Counsel, Wheat, First Securities, Inc.; Managing
Director and Assistant Secretary, Wheat First Butcher Singer, Inc.
Mentor Investment Advisors, LLC; Clerk, Cash Resource Trust;
Secretary, Mentor Funds and America's Utility Fund, Inc.
</TABLE>
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<PAGE>
The table below shows the fees paid to each Trustee by the Trust for
the 1997 fiscal year and the fees paid to each Trustee by all funds in the
Mentor family (including the Trust) during the 1997 calendar year.
Total compensation
Aggregate compensation from all
Trustees from the Trust complex funds (23 funds)
- -------- ---------------------- ---------------------------
Daniel J. Ludeman 0 0
Arnold H. Dreyfuss $200 $15,200
Thomas F. Keller $175 $15,200
Louis W. Moelchert, Jr. $200 $15,200
Stanley F. Pauley* $200 $15,200
Troy A. Peery, Jr. $175 $14,175
Peter J. Quinn, Jr.+ 0 0
Arch T. Allen, III+ 0 0
Weston E. Edwards+ 0 0
Jerry R. Barrentine+ 0 0
J. Garnett Nelson+ 0 0
- -------------
* Resigned as Trustee effective December 22, 1997.
+ Elected Trustee December 22, 1997.
The Trustees do not receive pension or retirement benefits from the
Trust.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Trust,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.
PRINCIPAL HOLDERS OF SECURITIES
As of January 15, 1998, the officers and Trustees of the Trust owned
as a group less than one percent of the outstanding shares of each Portfolio. To
the knowledge of the Trust, no person owned of record or beneficiary more than
5% of the outstanding shares of any Portfolio as of that date, except the
following:
<TABLE>
<CAPTION>
Portfolio Holder Percentage Ownership
--------- ------ --------------------
<S> <C> Clark County Nevada 70.24%
U.S. Govt Cash Management P.O. Box 1357
(Institutional Shares) Richmond, VA 23218-1357
Fixed Income Wachovia Bank & Trust Co TTEE 8.58%
(Institutional Shares) Heilig Meyers PSP
Attn: Sherrie Prevette
P.O. Box 3075
Winston Salem, NC 27102-3075
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Reliance Trust Company FBO 8.47%
Maguire Woods Battle & Boothe
Target Benefit Pension Plan
3384 Peachtree Rd NE STE 900
Atlanta, GA 30326-1106
International
(Institutional Shares) Crestar Bank TTE 34.62%
Carpenter Co PSP
Attn: Barbara Crossman
P.O. Box 26665
Richmond, VA 23261-6665
Wachovia Bank & Trust Co TTEE 32.86%
Heilig Meyers PSP
Attn: Sherrie Prevette
P.O. Box 3075
Winston Salem, NC 27102-3075
Stanley Picherry 10.50%
322 Central Park West
New York, NY 10025-7629
Arthur Millman 16.45%
Madeline Milman JT
P.O. Box 567
Isle of Palms, SC 29451-0567
</TABLE>
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<PAGE>
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as
investment adviser to the 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 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 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
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<PAGE>
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 their Management Contracts, neither of the Fixed-Income or U.S.
Government Cash Management Portfolios pays a management fee. Under its
Management Contract, the International Portfolio pays a monthly fee to Mentor
Perpetual based on the average net assets of that Portfolio, as determined at
the close of each business day during the month at the annual rate of 1.00% of
average net assets.
For the fiscal periods indicated, the International Portfolio paid
management fees (net of fee waiver) and Mentor Perpetual waived management fees
in respect of the International Portfolio in the following amounts:
1997 1996 1995
-------- ------- ----
Fees paid $ 85,485 $12,402 --
Fees waived $137,516 $23,292 --
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Mentor Advisors bore expenses in respect of the U.S. Government
Cash Management Portfolio and Fixed-Income Portfolio in the following amounts
for the fiscal periods indicated:
1997 1996 1995
------- ------- --------
U.S. Government Cash
Management Portfolio $66,203 $70,426 $63,607
Fixed-Income Portfolio $24,294 $44,556 $45,996
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 shares, 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 0.25% of the average daily net
assets of the Class A, Class B shares, and 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
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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 paid shareholder service fees to Mentor
Distributors in the amount of $22,421 during the fiscal year ended October 31,
1997.
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.
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
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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.
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
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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 Fiscal
1997 1996 1995
------ ------ ------
Fixed-Income Portfolio -- -- --
U.S. Government Cash Management Portfolio -- -- --
International Portfolio $19,591 $57,678 --
None of the Portfolios paid brokerage commissions to Wheat or EVEREN
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, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, the Fourth of July, Labor Day, Thanksgiving, and
Christmas.
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Mentor Fixed-Income Portfolio and Mentor Perpetual International
Portfolio. In respect of 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.
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
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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 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.
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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 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 other income (including but not limited to
gains from options, futures, or forward contracts) derived with respect
to its business of investing in such stock, securities, or currencies,
and (b) diversify its holdings so that, at the close of each quarter of
its taxable year, (i) at least 50% of the market value of its total assets
consists
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of cash, cash items, U.S. Government Securities, securities of other regulated
investment companies, and other securities limited generally with respect to any
one issuer to not more than 5% of the total assets of 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 total assets is invested in the securities (other
than those of the U.S. Government or other regulated investment companies) of
any issuer or of two or more issuers which the Portfolio controls and which are
engaged in the same, similar, or related trades or businesses. In order to
receive the favorable tax treatment accorded regulated investment companies and
their shareholders, moreover, a Portfolio must in general distribute annually at
least 90% of the sum of its taxable net investment income, its net tax-exempt
income, and the excess, if any, of net short-term capital gains over net
long-term capital losses for such year. To satisfy these requirements, a
Portfolio may engage in investment techniques that affect the amount, timing,
and character of its income and distributions.
If a Portfolio failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Portfolio would be
subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax-exempt
income and net long-term capital gains, would be taxable to shareholders as
ordinary income. In addition, a Portfolio could be required to recognize
unrealized gains, pay substantial taxes and interest and make substantial
distributions before requalifying as a regulated investment company that is
accorded special tax treatment.
An excise tax at the rate of 4% will be imposed on the excess, if any,
of each Portfolio's "required distribution" over its 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 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.
Distributions from a Portfolio will be taxable to shareholders as
orindary income to the extent derived from the Portfolio's investment income and
net short-term gains. Pursuant to the Taxpayer Relief Act of 1997 (the "1997
Act"), two different tax rates apply to net capital gains (that is, the excess
of net gains from capital assets held for more than one year over net losses
from capital assets held for not more than one year). One rate (generally 28%)
applies to net gains on capital asets held for more than one year but not more
than 18 months (28% rate gains) and a second, preferred rate (generally 20%)
applies to the balance of such net capital gains ("adjusted net capital gains").
Distributions of net capital gains will be treated in the hands of shareholders
as 28% rate gains to the extent designated by the Portfolio as deriving from net
gains from assets held for more than one year but not more than 18 months, and
the balance will be treated as adjusted net capital gains. Distributions of 28%
rate gains and adjusted net capital gains will be taxable to shareholders as
such, regardless of how long a shareholder has held the shares in the Portfolio.
If a Portfolio engages in hedging transactions, including hedging
transactions in options, futures contracts, and straddles, or other
similar transactions, it will be subject to special tax rules (including
constructing sale, mark-to-market, straddle, wash sale, and short sale
rules), the effect of which may be to accelerate income to the
Portfolio, defer losses to the Portfolio, cause adjustments in the
holding periods of the Portfolio's securities, or convert short-term
capital losses into long-term capital losses. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. A Portfolio will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best
interests of the Portfolio.
Certain of a Portfolio's hedging activities (including its transactions,
if any, in foreign currencies or foreign currency-denominated
instruments) are likely to produce a difference between its book income
and its taxable income. If a Portfolio's book income exceeds its taxable
income, the distribution (if any) of such excess will be treated as a
dividend to the extent of the Portfolio's remaining earnings and profits
(including earnings and profits arising from tax-exempt income), and
thereafter as a return of capital or as gain from the sale or exchange
of a capital asset, as the case may be. If a Portfolio's book income is
less than its taxable income, the Portfolio could be required to make
distributions exceeding book income to qualify as a regulated investment
company that is accorded special tax treatment.
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 the
Portfolio with a correct taxpayer identification number or fails to certify to
the Portfolio that the shareholder is not subject to such withholding, or if the
Portfolio is notified that it must withhold because the shareholder has under
reported in the past. Shareholders who fail to furnish their current taxpayer
subject to a penalty of $50 for each such failure unless the failure is due to
reasonable cause and not willful neglect. An individual's taxpayer
identification number is his or her social security number. Tax-exempt
shareholders are not subject to these back-up withholding rules so long as they
furnish the Portfolio with a proper certification.
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
stock or securities of foreign corporations, the Portfolio may elect to permit
shareholders to claim a credit or deduction on their income tax returns for
their pro rata portion of qualified taxes paid by the Portfolio to foreign
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countries in respect of foreign securities the Portfolio has held for at least
the minimum period specified in the Code. In such a case, shareholders will
include in gross income from foreign sources their pro rata shares of such
taxes. A shareholder's ability to claim a foreign tax credit or deduction in
respect of foreign taxes paid by the Portfolio may be subject to certain
limitations imposed by the Code (including, with respect to a credit, a holding
period requirement imposed by the 1997 Act), 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 (including
interest charges) 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, local, foreign, and other taxes. Shareholders are urged to consult their
tax advisers regarding specific questions as to federal, state, local, or
foreign taxes. The foregoing discussion relates solely to U.S. federal income
tax law. Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
THE DISTRIBUTOR
Mentor Distributors, LLC, the Trust's distributor, is a wholly owned
subsidiary of Wheat First Butcher Singer, Inc. 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.
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 1940 Act. During the fiscal year ended October
31, 1997, the International Portfolio paid fees under the Distribution Plan in
the amount of $32,113.
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.
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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, Kansas City, Missouri 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. The custodian
does not determine the investment policies of the Trust or decide which
securities the Trust will buy or sell.
PERFORMANCE INFORMATION
Mentor Fixed-Income Portfolio and Mentor Perpetual International
Portfolio. With respect to the 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.
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The table below shows the total return through October 31, 1997 for
the Portfolios for the periods indicated:
1 Year Since Inception
------ ---------------
Fixed-Income Portfolio 8.39% 9.97%
International Portfolio (Institutional) 15.07% 7.99%
International Portfolio (Class A) N/A 4.03%
International Portfolio (Class B) N/A 6.22%
International Portfolio (Class E) N/A N/A
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.
The thirty-day yields for the Portfolios for the period ended October
31, 1997 were as follows:
30-day yield
------------
Fixed-Income Portfolio 5.18%
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, 1997, the U. S.
Government Cash Management Portfolio's yield was 5.53% and its effective yield
was 5.68%.
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Total return or yield may be presented for other periods or without
giving effect to any front-end or contingent deferred sales charge. Any
quotation of total return or yield not reflecting such sales charges would be
reduced if such sales charges were reflected.
All data for each of the Portfolios are based on past performance and
do not predict future results.
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how the Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time to
time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below measure performance based on the
basis of their own criteria rather than on the basis of the standardized
performance measures described above.
Lipper Analytical Services, Inc. distributes mutual fund rankings
monthly. The rankings are based on total return performance calculated
by Lipper, reflecting generally changes in net asset value adjusted for
reinvestment of capital gains and income dividends. They do not reflect
deduction of any sales charges. Lipper rankings cover a variety of
performance periods, for example year-to-date, 1-year, 5-year, and
10-year performance. Lipper classifies mutual funds by investment
objective and asset category.
Morningstar, Inc. distributes mutual fund ratings twice a month. the
ratings are divided into five groups: highest, above average, neutral,
below average and lowest. They represent a fund's historical
risk/reward ratio relative to other funds with similar objectives. The
performance factor is a weighted-average assessment of the Portfolio's
3-year, 5-year, and 10-year total return performance (if available)
reflecting deduction of expenses and sales charges. Performance is
adjusted using quantitative techniques to reflect the risk profile of
the fund. The ratings are derived from a purely quantitative system
that does not utilize the subjective criteria customarily employed by
rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return
calculated by Weisenberger for periods such as year-to-date, 1-year,
3-year, 5-year and 10-year performance. Mutual funds are ranked in
general categories (e.g., international bond, international equity,
municipal bond, and maximum capital gain). Weisenberger rankings do not
reflect deduction of sales charges or fees.
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Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the descriptions
appearing below. From time to time any or all of the Portfolios may distribute
evaluations by or excerpts from these publications to its shareholders or to
potential investors. The following illustrates the types of information provided
by these publications.
Business Week publishes mutual fund rankings in its Investment Figures
of the Week column. The rankings are based on 4-week and 52-week total
return reflecting changes in net asset value and the reinvestment of
all distributions. They do not reflect deduction of any sales charges.
Portfolios are not categorized; they compete in a large universe of
over 2,000 funds. The source for rankings is data generated by
Morningstar, Inc.
Investor's Business Daily publishes mutual fund rankings on a daily
basis. The rankings are depicted as the top 25 funds in a given
category. The categories are based loosely on the type of fund, e.g.,
growth funds, balanced funds, U.S. government funds, GNMA funds, growth
and income funds, corporate bond funds, etc. Performance periods for
sector equity funds can vary from 4 weeks to 39 weeks; performance
periods for other fund groups vary from 1 year to 3 years. Total return
performance reflects changes in net asset value and reinvestment of
dividends and capital gains. The rankings are based strictly on total
return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds;
an A rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical
Services. The Lipper total return data reflects changes in net asset
value and reinvestment of distributions, but does not reflect deduction
of any sales charges. The performance periods vary from short-term
intervals (current quarter or year-to-date, for example) to long-term
periods (five-year or ten-year performance, for example). Barron's
classifies the funds using the Lipper mutual fund categories, such as
Capital Appreciation Portfolios, Growth Portfolios, U.S. Government
Portfolios, Equity Income Portfolios, Global Portfolios, etc.
Occasionally, Barron's modifies the Lipper information by ranking the
funds in asset classes. "Large funds" may be those with assets in
excess of $25 million; "small funds" may be those with less than $25
million in assets.
The Wall Street Journal publishes its Mutual Portfolio Scorecard on a
daily basis. Each Scorecard is a ranking of the top-15 funds in a given
Lipper Analytical Services category. Lipper provides the rankings based
on its total return data reflecting changes in net asset value and
reinvestment of distributions and not reflecting any sales charges. The
Scorecard portrays 4-week, year-to-date, one-year and 5-year
performance; however, the ranking is based on the one-year results. The
rankings for any given category appear approximately once per month.
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Fortune magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Portfolios are
placed in stock or bond fund categories (for example, aggressive growth
stock funds, growth stock funds, small company stock funds, junk bond
funds, Treasury bond funds etc.), with the top-10 stock funds and the
top-5 bond funds appearing in the rankings. The rankings are based on
3-year annualized total return reflecting changes in net asset value
and reinvestment of distributions and not reflecting sales charges.
Performance is adjusted using quantitative techniques to reflect the
risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a
database of funds tracked for performance by Lipper Analytical
Services. The funds are placed in 23 stock or bond fund categories and
analyzed for five-year risk adjusted return. Total return reflects
changes in net asset value and reinvestment of all dividends and
capital gains distributions and does not reflect deduction of any sales
charges. Grades are conferred (from A to E): the top 20% in each
category receive an A, the next 20% a B, etc. To be ranked, a fund must
be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
Financial World publishes its monthly Independent Appraisals of Mutual
Portfolios, a survey of approximately 1000 mutual funds. Portfolios are
categorized as to type, e.g., balanced funds, corporate bond funds,
global bond funds, growth and income funds, U.S. government bond funds,
etc. To compete, funds must be over one year old, have over $1 million
in assets, require a maximum of $10,000 initial investment, and should
be available in at least 10 states in the United States. The funds
receive a composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund versus its
category, as well as taking into account its risk, reward to risk, and
fees. An A+ rated fund is one of the best, while a D- rated fund is one
of the worst. The source for Financial World rating is Schabacker
investment management in Rockville, Maryland.
Forbes magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds
are categorized by type, including stock and balanced funds, taxable
bond funds, municipal bond funds, etc. Data sources include Lipper
Analytical Services and CDA Investment Technologies. The ratings are
based strictly on performance at net asset value over the given cycles.
Portfolios performing in the top 5% receive an A+ rating; the top 15%
receive an A rating; and so on until the bottom 5% receive an F rating.
Each fund exhibits two ratings, one for performance in "up" markets and
another for performance in "down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three-
and five-year total return performance reflecting changes in net asset
value and reinvestment of dividends and 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.
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Kiplinger's also provides a risk-adjusted grade in both rising and
falling markets. Portfolios are graded against others with the same
objective. The average weekly total return over two years is
calculated. Performance is adjusted using quantitative techniques to
reflect the risk profile of the fund.
U.S. News and World Report periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch
Carre & Co., a Boston research firm. Over 2000 funds are tracked and
divided into 10 equity, taxable bond and tax-free bond categories.
Portfolios compete within the 10 groups and three broad categories. The
OPI is a number from 0-100 that measures the relative performance of
funds at least three years old over the last 1, 3, 5 and 10 years and
the last six bear markets. Total return reflects changes in net asset
value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges.
Results for the longer periods receive the most weight.
The 100 Best Mutual Portfolios You Can Buy (1992), authored by Gordon
K. Williamson. The author's list of funds is divided into 12 equity and
bond fund categories, and the 100 funds are determined by applying four
criteria. First, equity funds whose current management teams have been
in place for less than five years are eliminated. (The standard for
bond funds is three years.) Second, the author excludes any fund that
ranks in the bottom 20 percent of its category's risk level. Risk is
determined by analyzing how many months over the past three years the
fund has underperformed a bank CD or a U.S. Treasury bill. Third, a
fund must have demonstrated strong results for current three-year and
five-year performance. Fourth, the fund must either possess, in Mr.
Williamson's judgment, "excellent" risk-adjusted return or "superior"
return with low levels of risk. Each of the 100 funds is ranked in five
categories: total return, risk/volatility, management, current income
and expenses. The rankings follow a 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.
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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 10 years of investment management experience. He is the manager of
Mentor Short-Duration Income Portfolio and Mentor Quality Income Portfolio, as
well as Mentor Income Fund, a $120 million closed-end bond fund. Mr. Jones is
responsible for the design and implementation of the fixed-income group's
proprietary analytical system. He has worked as an investment manager at Ryland
Capital Management, Alliance Capital Management, and Central Fidelity Bank. Mr.
Jones earned an undergraduate degree from the College of William and Mary, and
is enrolled in the Wharton School of the University of Pennsylvania.
Steven C. Henderson -- Vice President, Portfolio Manager
Mr. Henderson has seven years of investment management experience. He is a
portfolio manager for Mentor Short-Duration Income Portfolio, Mentor Quality
Income Portfolio, and Mentor Income Fund. Prior to joining the firm,
Mr. Henderson was senior portfolio analyst at Ryland Capital Management, Inc.
Before Ryland Capital Management, Mr. Henderson was a financial analyst at
Ryland Mortgage Company. Mr. Henderson is a graduate of the University of
Richmond and received an MBA from George Washington University.
Stephen R. McClelland, CFA -- Vice President, Portfolio Manager
Mr. McClelland has six years of investment management experience. He is
responsible for managing institutional total-return portfolios and corporate
bond portfolios. Prior to joining Mentor, Mr. McClelland was a budget analyst
for three years at Wheat First Butcher Singer. He is a certified public
accountant. Mr. McClelland graduated from Iowa State University and earned
an MBA from Virginia Commonwealth University.
B. Keith Wantling -- Associate Vice President, Sector Specialist
Mr. Wantling has four years of investment experience. He is responsible
for monitoring and evaluating opportunities in the mortgage-backed
securities market. He designs and maintains spread tracking systems,
prepayment data bases and other tools necessary to determine relative
value in the mortgage sector. Prior to assuming his current duties, Mr.
Wantling was instrumental in the construction of the fixed-income
department's proprietary analytical system.
E. Marc Cheatham III -- Systems/Research Analyst
Mr. Cheatham has primary responsibility for the fixed-income team's decision
support system. He builds proprietary analytical software based on
specifications provided by portfolio managers and analysts. In addition, he
builds and maintains the extensive historical databases used to monitor economic
and market conditions. Mr Cheatham holds an undergraduate degree in computer
science from the University of Richmond.
Todd C. Kuimjian --Credit/Research Analyst
Mr. Kuimjian has three years of investment experience. He is responsible for
maintaining credit information on corporate issuers and assisting Mr. McClelland
in evaluating the risk/return characteristics of corporate securities. Prior to
assuming his current duties, Mr. Kuimjian served as an investment
accountant/systems analyst and later as a senior investment
administrator within Mentor's investment services group. He holds an
undergraduate degree from Virginia Polytechnic Institute and is also a
CPA.
Cash Management
R. Preston Nuttall, CFA -- Managing Director, Director of Cash Management
Mr. Nuttall oversees the investment of all short-term fixed-income assets
including five money-market funds and approximately 50 separately-invested
portfolios. Mr. Nuttall has over 30 years' of investment experience. Before
joining the firm, he directed short-term fixed-income management for 15 years at
Capitoline Investment Services, Inc. He is a graduate of the University of
Richmond and received an MBA from the University of Pennsylvania.
Hubert R. White III -- Vice President, Portfolio Manager
Mr. White currently manages four taxable money-market funds, cash positions for
11 other mutual funds. He has 11 years of investment management experience and
specializes in taxable fixed-income. Prior to joining the firm, Mr. White served
for five years as portfolio manager with Capitoline Investment Services.
Formerly, he was at Crestar Bank, where he began his career in 1982. Mr. White
is a graduate of University of Richmond.
Kathryn T. Allen -- Vice President, Portfolio Manager
Ms. Allen has 14 years of tax-free management investment experience. At Mentor
she manages the tax-exempt money-market fund, as well as intermediate-maturity
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tax-exempt portfolios. Prior to joining the firm, Ms. Allen was portfolio
manager at PNC Institutional Management Corporation. She began her career at
Bradford Securities Operations, Inc. and later joined AIM Management in
Houston, Texas. Ms. Allen is a graduate of the University of Alabama.
Thomas G. Morgan -- Vice President, Senior Credit Analyst
Mr. Morgan joined Mentor after two years with Capitoline Investment Services,
where he served as chief credit officer for five money-market funds, and shared
responsibility for the management of a money-market fund. Prior to his
experience with Capitoline, Mr. Morgan spent 12 years with Crestar Bank as a
financial analyst and senior credit analyst. A graduate of Westminster College,
Mr. Morgan brings 17 years of analytical and investment experience to the firm.
Gregory S. Kaplan -- Associate Vice President, Credit Analyst
Mr. Kaplan brings over six years of analytical and investment experience to
mentor. Prior to joining the firm, Mr. Kaplan served for four years as a credit
specialist analyzing commercial credit for NationsBank. He began his career in
the Investment Services division of Prudential Insurance. Mr. Kaplan is a
graduate of Rutgers University and earned his MBS from the Pamplin College of
Business at Virginia Polytechnic Institute and State University.
Mentor Perpetual Advisors, LLC
Rod Smyth -- Managing Director, Mentor Perpetual Advisors
Mr. Smyth is headquartered in Richmond, Virginia and has 13 years of investment
experience. His previous employers include Baring Securities, Ulster Bank
Investment Managers, Citicorp Scrimgeour Vickers, and Nomura International. He
is a graduate of Dundee University.
Martin Arbib -- Chairman, Perpetual Portfolio Management
Mr. Arbib is chairman and founder of Perpetual, a partner in the Mentor
Perpetual Advisors joint venture, where he currently leads investment
management. A Charter Accountant, he has 22 years' investment management
experience.
Scott McGlashan -- Far East Team Leader
Mr. McGlashan is lead manager of Mentor Perpetual Global Portfolio. He has 19
years' management experience, 13 years specializing in the Far East, and 11
years' tenure at Perpetual. He is a graduate of Yale and Cambridge University.
Kathryn Langridge -- Southeast Asia Team Leader
Ms. Langridge shares responsibility with Mr. McGlashan for Far East equity
investments. Before joining Perpetual in 1990, she spent eight years in Hong
Kong with the investment firm of Jardine Fleming. She specializes in equity
investments in the non-Japanese stock markets of the Far East. Ms. Langridge is
a graduate of Cambridge University.
Bob Yerbury -- American Team Leader
Mr. Yerbury has 24 years' investment management experience, with over 21 years'
experience in North American stock markets, and has been part of the Perpetual
team for 13 years. Before joining Perpetual, he was a portfolio manager with
Equity & Law Assurance Company. Mr. Yerbury is a graduate of Cambridge
University.
Stephen Whittaker -- UK Team Leader
Mr. Whittaker joined Perpetual eight years ago and has 16 years' investment
management experience. Prior to joining Perpetual, he was responsible for UK
equity funds for the Save & Prosper Group. He began his fund management career
with Rowe & Pitman after graduation from Manchester University.
Margaret Roddan -- Europe Team Leader
Ms. Roddan has 11 years of investment management experience, three years with
Perpetual. She joined Perpetual from Mercury Asset Management, where she shared
responsibility for management of continental European equity holdings. She began
her career with the National Provident Institution. Ms. Roddan is a graduate of
the Investment Management Program at the London Business School. She studied
finance at City University and is a graduate of Bristol University.
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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 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.
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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
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 financial statements, financial highlights, and Independent
Auditors' reports included in the Annual Reports for the Portfolios' fiscal year
ended October 31, 1997 and filed electronically on January 9, 1998 (File No.
811-8484), are incorporated by reference into this Statement of Additional
Information.
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PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements (Mentor U.S. Government Cash Management
Portfolio (formerly Mentor Cash Management Portfolio), and Mentor
Fixed-Income Portfolio; and Mentor Perpetual International
Portfolio):
Statements of Assets and Liabilities -- October 31, 1997. *
Statements of Operations -- fiscal year ended October 31, 1997. *
Statements of Changes in Net Assets -- for the years or periods
ended October 31, 1996 and 1997. *
Financial Highlights. *+
Mentor U.S. Government Cash Management Portfolio and Mentor
Fixed-Income Portfolio -- for the years or periods ended
October 31, 1995, 1996, and 1997
Mentor Perpetual International Portfolio -- for the years or
periods ended October 31, 1996 and 1997
Notes to Financial Statements. *
Independent Auditors' Reports *
(2) Supporting Schedules:
Schedule I -- Portfolio of Investments -- October 31, 1997 *
Schedules II through IX omitted because the required matter is
not present.
* Incorporated by reference into Part B of this Registration
Statement
+ Included in Part A of this Registration Statement
(b) Exhibits
(1)
(A) - Agreement and Declaration of Trust.1
(B) - Amendment to Agreement and Declaration of Trust.4
(2) - Bylaws.1
(3) - Inapplicable.
(4)
(A) - Form of certificate representing shares of beneficial
interest for each of the Portfolios.1
(B) - Portions of Agreement and Declaration of Trust Relating to
Shareholders' Rights.1
(C) - Portions of Bylaws Relating to Shareholders' Rights.1
(5)
(A) - Form of Management Contract (Fixed-Income, Intermediate Duration
and U.S. Government Cash Management Portfolio).1
(B) - Form of Management Contract (SNAP Fund).5
(C) - Form of Management Contract (Mentor Perpetual International
Portfolio).8
(D) - Instrument of Transfer of Management Contract (Fixed-Income,
Intermediate Duration, and U.S. Government Cash Management
Portfolios) 10
(E) - Instrument of Transfer of Management Contract (SNAP Fund) 11
(6) (A) - Form of Distribution Agreement.2
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<PAGE>
(6) (B) - Form of Assignment of Distribution Agreement.5
(C) - Instrument of Transfer of Distribution Agreement.10
(7) - Inapplicable.
(8)
(A) - Form of Custody Agreement.1
(B) - Form of Custody Agreement (SNAP Fund).5
(C) - Form of Transfer Agency and Services Agreement.3
(D) - Form of Transfer Agency and Services Agreement (SNAP Fund).5
(9) (A) - Form of Administration Agreement.1
(B) - Form of Shareholder Service Plan.9
(C) - Instrument of Transfer of Administration Agreement.10
(10) - Opinion of counsel, including consent.3
(11) - Consent of Independent Accountants.12
(12) - Inapplicable.
(13) - Inapplicable.
(14) - Inapplicable.
(15) - Form of Plan of Distribution pursuant to Rule 12b-1
(International Portfolio).12
(16) - Schedules for Computation of Performance.7
(17)(a) Financial Data Schedule -- Mentor U.S. Government Cash
Management Portfolio 12
(b) Financial Data Schedule -- Mentor Fixed-Income Portfolio 12
(c) Financial Data Schedule -- Mentor Perpetual International
Portfolio -- Class A 12
(d) Financial Data Schedule -- Mentor Perpetual International
Portfolio -- Class B 12
(e) Financial Data Schedule -- Mentor Perpetual International
Portfolio -- Institutional Class
(f) Financial Data Schedule -- SNAP Fund.11
(18) - Form of Rule 18f-3 Plan.9
1 Incorporated herein by reference to the Registrant's initial
Registration Statement on Form N-1A under the Investment Company Act of
1940 filed on April 15, 1994.
2 Incorporated herein by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A filed on June 28, 1994.
3 Incorporated herein by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A filed on November 18, 1994.
4 Incorporated herein by reference to Amendment No. 4 to the Registrant's
Registration Statement on Form N-1A filed on July 3, 1995.
5 Incorporated herein by reference to Amendment No. 5 to the Registrant's
Registration Statement on Form N-1A filed on July 24, 1995.
6 Incorporated herein by reference to Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A filed on September 5, 1995.
7 Incorporated herein by reference to Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A filed on March 11,
1996.
8 Incorporated herein by reference to Amendment No. 9 to Registrant's
Registration Statement on Form N-1A filed on May 24, 1996.
9 Incorporated herein by reference to Amendment No. 10 to Registrant's
Registration Statement on Form N-1A filed on July 3, 1996.
10 Incorporated by reference to Amendment No. 12 to Registrant's
Registration Statement on Form N1-A filed on January 2, 1997.
11 Incorporated berein by reference to Amendment No. 13 to
Registrant's Registration Statement on Form N-1A filed on October 10,
1997.
12 Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Record Holders of Securities
The following table shows the number of holders of record of shares
of beneficial interest of each series of shares of beneficial interest of Mentor
Institutional Trust (other than the SNAP Fund) as of January 15, 1998.
-2-
<PAGE>
Number of Record
Series Holders
Mentor U.S. Government Cash Management Portfolio 150
Mentor Fixed-Income Portfolio 228
Mentor Perpetual International Portfolio 4,702
Mentor Short-Duration Income Portfolio 0
Item 27. Indemnification
The information required by this item is incorporated herein by reference
from the Registrant's Initial Registration Statement on Form N-1A under the
Investment Company Act of 1940 (File No. 811-8484).
Item 28. Business and Other Connections of Investment Adviser
(a) The following is additional information with respect to the directors and
officers of Mentor Investment Advisors, LLC:
<TABLE>
<CAPTION>
BUSINESS, PROFESSION,
POSITION WITH VOCATION OR EMPLOYMENT
NAME INVESTMENT ADVISER DURING THE PAST TWO FISCAL YEARS
<S> <C> <C>
Daniel J. Ludeman Chairman Chairman and Chief Executive Officer, Mentor
Investment Group, LLC; Director, Wheat, First
Securities Inc.; Managing Director, Wheat First
Butcher Singer, Inc.
John G. Davenport Managing Director None
R. Preston Nuttall Managing Director Managing Director, Mentor Investment Group, LLC
Paul F. Costello Managing Director Managing Director, Wheat First Butcher
Singer, Inc. and Mentor Investment
Group, LLC; President, Mentor Funds,
Mentor Income Fund, Inc., Cash Resource
Trust, and America's Utility Fund, Inc.
Theodore W. Price Managing Director Managing Director, Mentor Investment Group, LLC
P. Michael Jones Managing Director Managing Director, Mentor Investment Group, LLC
Peter J. Quinn, Jr. Managing Director Managing Director, Mentor Investment Group, LLC;
Trustee, Mentor Funds and Cash Resource Trust.
Karen H. Wimbish Managing Director Managing Director, Mentor Investment Group, LLC.
Thomas L. Souders Treasurer Director and Chief Financial Officer, Wheat,
First Securities, Inc.; Treasurer; Mentor
Distributors, LLC
Robert P. Wilson Assistant Treasurer Managing Director and Treasurer, Wheat, First
Securities, Inc. Assistant Treasurer, Mentor
Distributors, LLC
John M. Ivan Secretary Managing Director, Assistant General Counsel, and
Director of Compliance Wheat, First Securities, Inc.;
Clerk, Cash Resource Trust; Secretary, Mentor Funds,
Mentor Distributors, LLC, and America's Utility Fund,
Inc.
</TABLE>
<PAGE>
(b) The following is additional information with respect to Mentor
Perpetual Advisors, LLC, the investment adviser to the Mentor Perpetual
International Portfolio:
<TABLE>
<CAPTION> BUSINESS, PROFESSION,
POSITION WITH VOCATION OR EMPLOYMENT
NAME INVESTMENT ADVISER DURING THE PAST TWO FISCAL YEARS
<S> <C> <C>
Scott A. McGlashan President Director, Perpetual
Portfolio Management
Limited
Martyn Arbib Director Chairman, Perpetual
Portfolio Management
Limited
Roger C. Cornick Director Deputy Chairman -
Marketing, Perpetual
Portfolio Management
Limited
Paul F. Costello Managing Director Managing Director, Wheat First Butcher
Singer, Inc. and Mentor Investment
Group, LLC; President, Mentor Funds,
Mentor Income Fund, Inc., Cash Resource
Trust, and America's Utility Fund, Inc.
Daniel J. Ludeman Chairman Chairman and Chief Executive Officer, Mentor
Investment Group, LLC; Director, Wheat, First
Securities Inc.; Managing Director, Wheat First
Butcher Singer, Inc.
David S. Mossop Director Director, Perpetual
Portfolio Management
Limited
Peter J. Quinn, Jr. Director Managing Director, Mentor
Investment Group, LLC; Trustee,
Mentor Funds and Cash Resource Trust.
Roderick A. Smyth Managing Director Managing Director, Mentor Investment
Group, LLC
</TABLE>
-6-
<PAGE>
Item 29. Principal Underwriters
(a) Mentor Distributors, LLC currently is acting as principal
underwriter for Mentor Funds and Cash Resource Trust.
(b) The following is information concerning officers and directors
of Mentor Distributors, LLC:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITERS WITH REGISTRANT
<S> <C> <C>
Peter J. Quinn, Jr. President and Trustee
901 East Byrd Street Director
Richmond, VA 23219
Paul F. Costello Senior Vice President President
901 East Byrd Street
Richmond, VA 23219
Thomas Lee Souders Treasurer --
901 East Byrd Street
Richmond, VA 23219
John Michael Ivan Secretary Clerk
901 East Byrd Street
Richmond, VA 23219
Howard T. Macrae, Jr. Assistant Secretary --
901 East Byrd Street
Richmond, VA 23219
Robert P. Wilson Assistant Treasurer --
901 East Byrd Street
Richmond, VA 23219
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliate of
the Registrant.
Item 30. Location of Accounts and Records
Persons maintaining physical possession of accounts, books and
other documents required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and the Rules promulgated thereunder are Registrant's
Secretary, John M. Ivan, Registrant's custodians, Investors Fiduciary Trust
Company ("IFTC") (all Portfolios other than SNAP Fund), and Central Fidelity
National Bank (SNAP Fund only), and Registrant's transfer agents, State
Street Bank and Trust Company (through Boston Financial Data Services, Inc.
("BFDS")) (all Portfolios other than SNAP Fund), and Central Fidelity National
-7-
<PAGE>
Bank (SNAP Fund only). The address of the Secretary is 901 East Byrd Street,
Richmond, Virginia, 23219. The address of BFDS is 2 Heritage Drive, North
Quincy, Massachusetts 02171. The address of IFTC is 127 West 10th Street, Kansas
City, Missouri, 64105. The address of Central Fidelity National Bank is 1021
East Cary Street, P.O. Box 27602, Richmond, Virginia 23261.
Item 31. Management Services
None.
Item 32. Undertakings
(a) The Registrant undertakes to furnish to each person to whom a prospectus of
the Registrant is delivered a copy of the Registrant's latest annual report
to shareholders, upon request are without change.
(b) Inapplicable.
(c) Inapplicable.
(d) The undersigned Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting on the removal of a
trustee or trustees when requested in writing to do so by the
holders of at least 10% of the Registrant's outstanding voting
securities and in connection with such meeting to comply with the
provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications.
NOTICE
A copy of the Agreement and Declaration of Trust of Mentor
Institutional Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts, and notice is hereby given that this instrument is executed on
behalf of the Registrant by an officer of the Registrant as an officer and not
individually and that the obligations of or arising out of this instrument are
not binding upon any of the Trustees, officers, or shareholders individually but
are binding only upon the assets and property of the Registrant.
-8-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to the Registration Statement to be signed on behalf
of the undersigned, thereunto duly authorized, in the City of Richmond, and
the Commonwealth of Virginia on this 30th day of January, 1998.
MENTOR INSTITUTIONAL TRUST
By: /s/ PAUL F. COSTELLO
Paul F. Costello
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
*
- - -------------------------------- Trustee January 30, 1998
Arnold H. Dreyfuss
*
- - -------------------------------- Trustee January 30, 1998
Thomas F. Keller
* Trustee January 30, 1998
- - --------------------------------
Daniel J. Ludeman
* Trustee January 30, 1998
- - --------------------------------
Louis W. Moelchert, Jr.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
* Trustee January 30, 1998
- - ---------------------------------
Troy A. Peery, Jr.
/s/ Peter J. Quinn, Jr. Trustee January 30, 1998
- - ---------------------------------
Peter J. Quinn, Jr.
Trustee
- - ---------------------------------
Arch T. Allen, III
Trustee
- - ---------------------------------
Weston E. Edwards
Trustee
- -----------------------------------
Jerry R. Barrentine
Trustee
- -----------------------------------
J. Garnett Nelson
/s/ PAUL F. COSTELLO President January 30, 1998
- -----------------------------
Paul F. Costello (Principal Executive Officer)
/s/ TERRY L. PERKINS Treasurer January 30, 1998
- ----------------------------
Terry L. Perkins (Principal Financial and
Accounting Officer)
*By /s/ PAUL F. COSTELLO January 30, 1998
----------------------
Paul F. Costello
Attorney-in-Fact
</TABLE>
-10-
POWER OF ATTORNEY
We, the undersigned Officers and Trustees of Mentor Institutional Trust
(the "Trust"), hereby severally constitute and appoint Daniel J. Ludeman, Paul
F. Costello, and Terry L. Perkins, and each of them singly, our true and lawful
attorneys, with full power to them and each of them, to sign for us, and in our
names and in the capacities indicated below, the Registration Statement on Form
N-1A of the Trust and any and all amendments (including post-effective
amendments) to said Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto our said attorneys, and each
of them acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratify and
confirm all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
WITNESS our hands and common seal on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C>
/s/Arnold H. Dreyfuss Trustee January 28, 1998
- ----------------------
Arnold H. Dreyfuss
Trustee January 28, 1998
- ----------------------
Thomas F. Keller
Trustee January 28, 1998
- ----------------------
Peter J. Quinn, Jr.
Trustee January 28, 1998
- ----------------------
Arch T. Allen, III
Trustee January 28, 1998
- ----------------------
Weston E. Edwards
-1-
<PAGE>
Trustee January 28, 1998
- ----------------------
Jerry R. Barrentine
Trustee January 28, 1998
- ----------------------
J. Garnett Nelson
</TABLE>
-2-
<PAGE>
POWER OF ATTORNEY
We, the undersigned Officers and Trustees of Mentor Institutional Trust
(the "Trust"), hereby severally constitute and appoint Daniel J. Ludeman, Paul
F. Costello, and Terry L. Perkins, and each of them singly, our true and lawful
attorneys, with full power to them and each of them, to sign for us, and in our
names and in the capacities indicated below, the Registration Statement on Form
N-1A of the Trust and any and all amendments (including post-effective
amendments) to said Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto our said attorneys, and each
of them acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratify and
confirm all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
WITNESS our hands and common seal on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C>
Trustee January 28, 1998
- ----------------------
Arnold H. Dreyfuss
/s/Thomas F. Keller Trustee January 28, 1998
- ----------------------
Thomas F. Keller
Trustee January 28, 1998
- ----------------------
Peter J. Quinn, Jr.
Trustee January 28, 1998
- ----------------------
Arch T. Allen, III
Trustee January 28, 1998
- ----------------------
Weston E. Edwards
-3-
<PAGE>
Trustee January 28, 1998
- ----------------------
Jerry R. Barrentine
Trustee January 28, 1998
- ----------------------
J. Garnett Nelson
</TABLE>
-4-
<PAGE>
EXHIBIT INDEX
Page
(11) Consent of Independent
Accountants
(15) Form of Plan of Distribution pursuant
to Rule 12b-1
(17)(a) Financial Data Schedule --
Mentor U.S. Government Cash Management
Portfolio
(17)(b) Financial Data Schedule --
Mentor Fixed-Income Portfolio
(17)(c) Financial Data Schedule --
Mentor Perpetual International
Portfolio -- Class A
(17)(d) Financial Data Schedule --
Mentor Perpetual International Portfolio -- Class B
(17 (e) Financial Data Schedule --
Mentor Perpetual International
Portfolio -- Institutional Class
-11-
CONSENT OF INDEPENDENT ACCOUNTANTS
The Trustees and Shareholders
Mentor Institutional Trust
We consent to the use of our reports dated December 12, 1997, incorporated by
reference herein and to the references to our firm under the captions "FINANCIAL
HIGHLIGHTS" in the prospectus and "INDEPENDENT ACCOUNTANTS" in the statement of
additional information.
/s/ KPMG Peat Marwick LLP
---------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
January 29, 1998
Exhibit 15
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
OF
MENTOR INSTITUTIONAL TRUST
This constitutes the PLAN OF DISTRIBUTION of Mentor Institutional Trust
(the "Trust") on behalf of the series of shares of beneficial interest of the
Trust identified on Exhibit A attached hereto and made a part hereof (each, a
"Portfolio").
1. Each Portfolio shall pay to the principal underwriter of the
Portfolio's shares (the "Distributor") a fee for services performed and expenses
incurred in respect of the distribution of shares of the Portfolio, or, where
applicable, of a class of shares of the Portfolio specified in Exhibit A, at the
annual rate set forth opposite the Portfolio's name on Exhibit A of such
Portfolio's average daily net assets attributable to its shares, or to such
class of shares, such fee to be calculated and accrued daily and paid monthly.
2. The amount set forth in paragraph 1 of this Plan shall be paid for
the Distributor's services as distributor of the shares of each Portfolio (or of
the applicable class of shares of any such Portfolio, as the case may be) in
accordance with the Distribution Agreement between the Distributor and the Trust
and may be spent by the Distributor or its agents on any activities or expenses
related to the sale and repurchase of the shares of the Portfolio (or any such
class of shares, as the case may be), including, but not limited to, commissions
and other compensation to persons who engage in or support distribution and
repurchase of shares; printing of prospectuses and reports for other than
existing shareholders;
-1-
<PAGE>
advertising; preparation and distribution of sales literature; and overhead,
travel, and telephone expenses.
3. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Trustees and
(b) those Trustees who are not "interested persons" of the Trust (as defined in
the Investment Company Act of 1940, as amended) and have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Plan and such related agreements.
5. This Plan shall continue in effect for successive periods of one
year from its execution for so long as such continuance is specifically approved
at least annually in the manner provided for approval of this Plan in paragraph
4.
6. Any person authorized to direct the disposition of monies paid or
payable by a Portfolio pursuant to this Plan or any related agreement shall
provide to the Trustees and the Trustees shall review, at least quarterly, a
written report of the amounts so expended and the purposes for which such
expenditures were made.
7. This Plan may be terminated at any time in respect of any or all of
the Portfolios by vote of a majority of the Rule 12b-1 Trustees or, in respect
of a Portfolio, by vote of that Portfolio's shares constituting a majority of
the outstanding voting securities of such Portfolio (or the class of shares in
question, as the case may be).
8. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in paragraph 1 hereof unless such amendment
is approved in the manner provided for initial approval in paragraph 3 hereof,
and no material amendment to the Plan
-2-
<PAGE>
shall be made unless such amendment is approved in the manner provided for
initial approval in paragraph 4 hereof.
9. While this Plan is in effect, the selection and nomination of
Trustees who are not interested persons (as defined in the Investment Company
Act of 1940, as amended) of the Trust shall be committed to the discretion of
the Trustees who are themselves not interested persons.
10. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 6 hereof for a period of
not less than six years from the date of execution this Plan, or of the
agreements or of such reports, as the case may be, the first two years in an
easily accessible place.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees or officers of the
Trust or shareholders of any Portfolio of the Trust but are binding only upon
the assets and property of the relevant Portfolio of the Trust.
-3-
<PAGE>
EXHIBIT A
12b-1 Fee
Class B
---------
Mentor Perpetual International Portfolio 0.75%
-4-
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MENTOR US GOVERNMENT CASH MANAGEMENT PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 260,508
<INVESTMENTS-AT-VALUE> 260,508
<RECEIVABLES> 756
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 8
<TOTAL-ASSETS> 261,272
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,322
<TOTAL-LIABILITIES> 1,332
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 259,950
<SHARES-COMMON-STOCK> 259,950
<SHARES-COMMON-PRIOR> 87,973
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 259,950
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,137
<OTHER-INCOME> 0
<EXPENSES-NET> 154
<NET-INVESTMENT-INCOME> 13,983
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 13,983
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 13,983
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 435,147
<NUMBER-OF-SHARES-REDEEMED> 276,139
<SHARES-REINVESTED> 12,969
<NET-CHANGE-IN-ASSETS> 171,977
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 220
<AVERAGE-NET-ASSETS> 256,310
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MENTOR FIXED INCOME PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 63,331
<INVESTMENTS-AT-VALUE> 64,899
<RECEIVABLES> 1,715
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 15
<TOTAL-ASSETS> 66,629
<PAYABLE-FOR-SECURITIES> 4,450
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 441
<TOTAL-LIABILITIES> 4,891
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 59,712
<SHARES-COMMON-STOCK> 4,708
<SHARES-COMMON-PRIOR> 3,875
<ACCUMULATED-NII-CURRENT> 273
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 254
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,499
<NET-ASSETS> 61,738
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,496
<OTHER-INCOME> 0
<EXPENSES-NET> 53
<NET-INVESTMENT-INCOME> 3,443
<REALIZED-GAINS-CURRENT> 299
<APPREC-INCREASE-CURRENT> 716
<NET-CHANGE-FROM-OPS> 4,458
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,343
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,278
<NUMBER-OF-SHARES-REDEEMED> 704
<SHARES-REINVESTED> 259
<NET-CHANGE-IN-ASSETS> 11,776
<ACCUMULATED-NII-PRIOR> 173
<ACCUMULATED-GAINS-PRIOR> (45)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 77
<AVERAGE-NET-ASSETS> 52,807
<PER-SHARE-NAV-BEGIN> 12.89
<PER-SHARE-NII> 0.83
<PER-SHARE-GAIN-APPREC> 0.21
<PER-SHARE-DIVIDEND> 0.82
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.11
<EXPENSE-RATIO> 0.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> METOR PERPETUAL INTERNATIONAL PORTFOLIO CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 65,482
<INVESTMENTS-AT-VALUE> 63,482
<RECEIVABLES> 8,210
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 69
<TOTAL-ASSETS> 72,112
<PAYABLE-FOR-SECURITIES> 3,340
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77
<TOTAL-LIABILITIES> 3,417
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 70,054
<SHARES-COMMON-STOCK> 2,402
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 170
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 54
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,583)
<NET-ASSETS> 68,695
<DIVIDEND-INCOME> 365
<INTEREST-INCOME> 126
<OTHER-INCOME> 0
<EXPENSES-NET> 297
<NET-INVESTMENT-INCOME> 194
<REALIZED-GAINS-CURRENT> 177
<APPREC-INCREASE-CURRENT> (1,434)
<NET-CHANGE-FROM-OPS> (1,063)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 37
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,447
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<TABLE> <S> <C>
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<NAME> MENTOR PERPETUAL INTERNATIONAL PORTFOLIO CLASS B
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<S> <C>
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<TABLE> <S> <C>
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<SERIES>
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<NAME> MENTOR PERPETUAL INTERNATIONAL PORTFOLIO-CLASS INST
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