-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, bakazJA9rDAIKEPMzr8gch4eWavFCvPNReL/Yv//5tIhlSc7Q3YvpsVGNClJZ+Ra x11jMIyXL4uNq+ehhMy30g== 0000916641-95-000266.txt : 19950823 0000916641-95-000266.hdr.sgml : 19950823 ACCESSION NUMBER: 0000916641-95-000266 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19950822 EFFECTIVENESS DATE: 19950822 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR FUNDS CENTRAL INDEX KEY: 0000883428 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 251679376 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-60083 FILM NUMBER: 95565917 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TOWER STREET 2: C/O FEDERATED INVESTORS CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 8047823648 MAIL ADDRESS: STREET 1: RIVERFRONT PLAZA STREET 2: WEST TOWER 901 E BYRD STREET CITY: RICHMOND STATE: VA ZIP: 23219 FORMER COMPANY: FORMER CONFORMED NAME: CAMBRIDGE SERIES TRUST DATE OF NAME CHANGE: 19920717 485BPOS 1 MENTOR 485BPOS As filed with the Securities and Exchange Commission on August 22, 1995 Registration No. 33-60083 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (x) Pre-Effective Amendment No. ( ) Post-Effective Amendment No. (1) (Check appropriate box or boxes) THE MENTOR FUNDS (Exact Name of Registrant as Specified in Charter) 901 East Byrd Street, Richmond, VA 23219 (Address of Principal Executive Offices) (804) 782-3648 (Area Code and Telephone Number) PAUL F. COSTELLO, President THE MENTOR FUNDS 901 East Byrd Street, Richmond, VA 23219 (Name and address of Agent for Service) Copy to: TIMOTHY W. DIGGINS, Esquire ROPES & GRAY One International Place Boston, Massachusetts 02110 It is proposed that the filing will become effective immediately upon filing pursuant to Rule 485(b). An indefinite amount of the Registrant's securities has been registered under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. In reliance upon such Rule, no filing fee is being paid at this time. A Rule 24f-2 notice for the Registrant was filed on November 28, 1994. THE MENTOR FUNDS CROSS-REFERENCE SHEET (as required by Rule 481(a)) Form N-14 Item No. Part A Caption in Prospectus/Proxy Statement of Mentor/Cambridge Growth Portfolio 1. Cross-Reference Sheet; Front Cover 2. Front Cover 3. Synopsis; Risk factors 4. Introduction; Proposal regarding approval or disapproval of Agreement and Plan of Reorganization; Background and reasons for the proposed reorganization; Information about the reorganization 5. Front Cover -- Incorporated by reference to specified documents 6. Front Cover -- Incorporated by reference to specified documents 7. Introduction; Proposal regarding approval or disapproval of Agreement and Plan of Reorganization; Information about the reorganization; Voting information 8. Not Applicable 9. Not Applicable Part B Caption in Statement of Additional Information 10. Cover Page 11. Cover Page 12. Cover Page -- Incorporated by reference to specified documents 13. Cover Page -- Incorporated by reference to specified documents 14. Independent Accountants and Financial Statements Part C The information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement. [MENTOR FUNDS LOGO] A Message from the President Dear Shareholder: Enclosed you will find several documents relating to the special meeting of shareholders of the Mentor/Cambridge Growth Portfolio (the "Growth Portfolio") to be held September 12, 1995 at 901 East Byrd Street, Richmond, Virginia. I hope this material will receive your immediate attention and that, if you cannot attend the meeting in person, you will vote your proxy promptly. The Trustees of The Mentor Funds are recommending that shareholders approve a merger of the Growth Portfolio into the Mentor Capital Growth Portfolio (the "Capital Growth Portfolio"), another series of The Mentor Funds. The merger would result in your Growth Portfolio shares being exchanged at net asset value and on a tax-free basis for shares of the Capital Growth Portfolio. Your Trustees believe that the merger of the Growth Portfolio with the Capital Growth Portfolio will offer shareholders of the Growth Portfolio an opportunity to pursue a substantially similar investment program with the potential for lower Portfolio operating expenses in the future. YOUR TRUSTEES BELIEVE THAT THE PROPOSED MERGER WITH THE CAPITAL GROWTH PORTFOLIO IS IN THE BEST INTERESTS OF SHAREHOLDERS AND RECOMMEND THAT YOU VOTE IN FAVOR OF IT. A Notice of Special Meeting of Shareholders, Prospectus/Proxy Statement, and form of proxy are enclosed. Please read them carefully. If you are unable to attend the meeting in person, we urge you to sign, date and return the proxy card so that your shares may be voted in accordance with your instructions. I URGE YOU TO GIVE THE ENCLOSED MATERIAL YOUR PROMPT ATTENTION. IF POSSIBLE, PLEASE RETURN THE COMPLETED PROXY BY SEPTEMBER 1, 1995, SO THAT YOUR PORTFOLIO WILL NOT HAVE TO INCUR THE EXPENSE OF ADDITIONAL MAILINGS. Your vote is important to us. We appreciate the time and consideration I am sure you will give this important matter. If you have questions about the proposal, please call 1-800-382-0016. Sincerely yours, /s/ PAUL F. COSTELLO Paul F. Costello, PRESIDENT MENTOR/CAMBRIDGE GROWTH PORTFOLIO, A SERIES OF THE MENTOR FUNDS NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS To the Shareholders of the Mentor/Cambridge Growth Portfolio: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of the Mentor/Cambridge Growth Portfolio (the "Growth Portfolio") will be held Tuesday, September 12, 1995 at 2:00 p.m. at the Riverfront Plaza Conference Suite, Riverfront Plaza -- West Tower, 20th Floor, 901 East Byrd Street, Richmond, Virginia, to consider the following: 1. To approve or disapprove an Agreement and Plan of Reorganization providing for the transfer of all of the assets of the Growth Portfolio to the Mentor Capital Growth Portfolio (the "Capital Growth Portfolio") in exchange for shares of the Capital Growth Portfolio and the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio, and the distribution of such shares to the shareholders of the Growth Portfolio in complete liquidation of the Growth Portfolio. 2. To transact such other business as may properly come before the meeting. The Trustees have fixed the close of business on July 31, 1995 as the record date for determination of shareholders entitled to notice of, and to vote at, the Special Meeting. By order of the Trustees /s/ PAUL F. COSTELLO Paul F. Costello, PRESIDENT WE URGE YOU TO MARK, SIGN, DATE, AND MAIL THE ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE PROVIDED SO THAT YOU WILL BE REPRESENTED AT THE SPECIAL MEETING. August 18, 1995 PROSPECTUS/PROXY STATEMENT August 18, 1995 Acquisition of the assets of Mentor/Cambridge Growth Portfolio 901 East Byrd Street Richmond, Virginia 23219 1-800-382-0016 By and in exchange for shares of Mentor Capital Growth Portfolio 901 East Byrd Street Richmond, Virginia 23219 1-800-382-0016 TABLE OF CONTENTS Synopsis............................................................................................. 3 Risk factors......................................................................................... 6 Proposal regarding approval or disapproval of Agreement and Plan of Reorganization................... 8 Background and reasons for the proposed reorganization............................................... 8 Information about the reorganization................................................................. 9 Other information.................................................................................... 12 Voting information................................................................................... 12 Agreement and Plan of Reorganization................................................................. Exhibit A Information exerpted from the Annual Report.......................................................... Exhibit B
This document will give you the information you need to vote on the proposed merger. Much of the information is required under rules of the Securities and Exchange Commission ("SEC"); some of it is technical. If there is anything you don't understand, please contact us at 1-800-382-0016 or call your financial advisor. This Prospectus/Proxy Statement relates to the proposed merger of the Mentor/Cambridge Growth Portfolio (the "Growth Portfolio") into the Mentor Capital Growth Portfolio (the "Capital Growth Portfolio") through the transfer of all of the assets of the Growth Portfolio to the Capital Growth Portfolio in exchange for Class A and Class B shares of beneficial interest of the Capital Growth Portfolio (the "Merger Shares") and the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio in liquidation of the Growth Portfolio. As a result of the proposed transaction, each shareholder of the Growth Portfolio will receive a number of full and fractional Class A or Class B Merger Shares, equal in value at the date of the exchange to the aggregate value of the shareholder's Class A or Class B Growth Portfolio shares, as the case may be. 1 This Prospectus/Proxy Statement explains concisely what you should know before investing in the Capital Growth Portfolio. Please read it and keep it for future reference. This Prospectus/Proxy Statement is accompanied by the Prospectus, dated May 30, 1995 (the "Prospectus"), of The Mentor Funds (the "Trust"). The Prospectus and the Trust Statement of Additional Information referred to below contain information about the Portfolios and are incorporated into this Prospectus/Proxy Statement by reference. The following documents have been filed with the Securities and Exchange Commission and are also incorporated into this Prospectus/Proxy Statement by reference: (i) the current Statement of Additional Information of the Trust, dated May 30, 1995, as amended from time to time (the "Trust Statement of Additional Information"); (ii) the Report of Independent Accountants and financial statements in respect of the Portfolios included in the Trust's Annual Report to Shareholders for the fiscal year ended September 30, 1994 (the "Annual Report"); (iii) the financial statements in respect of the Portfolios included in the Trust's Semi-Annual Report to Shareholders for the six months ended March 31, 1995 (the "Semi-Annual Report"); and (iv) a Statement of Additional Information dated August 18, 1995, relating to the transactions described in this Prospectus/Proxy statement. For a free copy of any or all of the Prospectus or Statements of Additional Information, or of the Annual or Semi-Annual Report, please contact us as at 1-800-382-0016. Proxy materials, information statements and other information filed by the Trust with respect to the Growth Portfolio and the Capital Growth Portfolio can be inspected and copied at the Public Reference Facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates. THE SECURITIES OFFERED BY THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF SUCH PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE CAPITAL GROWTH PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. 2 SYNOPSIS PROPOSED TRANSACTION The Trustees of The Mentor Funds (the "Trust"), an open-end, series investment company, have approved the merger of the Growth Portfolio into the Capital Growth Portfolio. Each of the Portfolios is a series of the Trust. The merger is proposed to be accomplished pursuant to an Agreement and Plan of Reorganization providing for the transfer of all of the assets of the Growth Portfolio to the Capital Growth Portfolio in exchange for the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio and for shares of the Capital Growth Portfolio. The completion of these transactions will result in the liquidation of the Growth Portfolio. As a result of the proposed transaction, the Growth Portfolio will receive a number of Class A and Class B Shares of the Capital Growth Portfolio (the "Merger Shares") equal in value to the value of the net assets of the Growth Portfolio being transferred and attributable to the Class A and Class B shares, respectively, of the Growth Portfolio. Following the transfer, each Class A and Class B shareholder of the Growth Portfolio will receive, on a tax-free basis, a number of full and fractional Class A or Class B Merger Shares of the Capital Growth Portfolio equal in value at the date of the exchange to the aggregate value of the shareholder's Growth Class A or Class B Portfolio shares, as the case may be. The Trustees of the Trust recommend that shareholders of the Growth Portfolio approve the merger because it offers shareholders the opportunity to pursue a substantially similar investment program with the potential for lower Portfolio operating expenses in the future. See "Background and Reasons for the Proposed Reorganization." EXPENSE SUMMARY The following tables summarize, for Class A and Class B shares, expenses (i) that the Growth Portfolio has incurred in its past fiscal year, (ii) that the Capital Growth Portfolio has incurred in its past fiscal year, and (iii) that the Capital Growth Portfolio expects to incur after giving effect to the proposed merger on a pro forma combined basis as if the merger had occurred as of March 31, 1995. As shown in the tables below, the Portfolios pay management fees and 12b-1 fees at the same rates, while the Capital Growth Portfolio currently incurs slightly lower operating expenses. The Examples show the estimated cumulative expenses attributable to a hypothetical $1,000 investment in each of the Portfolios over specified periods. 3 CLASS A SHARES
CURRENT EXPENSES PRO FORMA GROWTH CAPITAL GROWTH CAPITAL GROWTH PORTFOLIO PORTFOLIO PORTFOLIO Shareholder Transaction Expenses Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)(1)(2).............. 5.75% 5.75% 5.75% Maximum Deferred Sales Charge (as a percentage of the lower of original purchase price or redemption proceeds, as applicable).............. 1.00%(3) 1.00%(3) 1.00%(3) Annual Portfolio Operating Expenses (as a percentage of average net assets) Management Fees.................................... 0.80% 0.80% 0.80% 12b-1 Fees......................................... None None None Other Expenses..................................... 1.06% 1.05% 0.98% Total Portfolio Operating Expenses........... 1.86% 1.85% 1.78% CLASS B SHARES Shareholder Transaction Expenses Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................... None(4) None(4) None(4) Maximum Deferred Sales Charge(1)(2)................ 4.0% in first 4.0% in first 4.0% in first year, declining year, declining year, declining to 1.0% in fifth to 1.0% in fifth to 1.0% in fifth year, and year, and year, and eliminated eliminated eliminated thereafter(5) thereafter(5) thereafter(5) Annual Portfolio Operating Expenses (as a percentage of average net assets) Management Fees.................................... 0.80% 0.80% 0.80% 12b-1 Fees......................................... 0.75% 0.75% 0.75% Other Expenses..................................... 1.06% 1.05% 0.98% Total Portfolio Operating Expenses............ 2.61% 2.60% 2.53%
The tables are provided to help you understand an investor's share of the operating expenses which each Portfolio incurs. (1) Not applicable to shares issued in connection with the proposed merger. (2) Shares of the Growth Portfolio are not currently being offered to the public. The sales charge shown is the charge the Portfolio would be expected to impose if the shares were offered to the public. (3) 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 $1 million or more that are redeemed within one year of purchase. (4) Class B shares are sold without a front-end sales charge, but their higher 12b-1 fees may cause long-term shareholders to pay more than the economic equivalent of the maximum permitted front-end sales charge. (5) See "Description of the Merger Shares" on page 11 for how the CDSC will be determined for Class B Merger Shares. 4 EXAMPLES An investment of $1,000 would incur the following expenses, assuming (1) 5% annual return and (2) no redemption at the end of each period:
1 3 5 10 YEAR YEARS YEARS YEARS Class A shares: Growth Portfolio.................................................................. $75 $ 113 $152 $262 Capital Growth Portfolio.......................................................... $75 $ 112 $152 $262 Capital Growth Portfolio (Pro Forma).............................................. $75 $ 110 $148 $255 Class B shares: Growth Portfolio.................................................................. $26 $ 80 $139 $294 Capital Growth Portfolio.......................................................... $26 $ 81 $138 $293 Capital Growth Portfolio (Pro Forma).............................................. $26 $ 79 $135 $287
An investment of $1,000 would incur the following expenses, assuming (1) 5% annual return and (2) redemption at the end of each period:
1 3 5 10 YEAR YEARS YEARS YEARS Class A shares: Growth Portfolio................................................................. $75 $ 113 $152 $263 Capital Growth Portfolio......................................................... $75 $ 112 $152 $262 Capital Growth Portfolio (Pro Forma)............................................. $75 $ 110 $148 $255 Class B shares: Growth Portfolio................................................................. $66 $ 111 $150 $294 Capital Growth Portfolio......................................................... $66 $ 111 $149 $293 Capital Growth Portfolio (Pro Forma)............................................. $66 $ 109 $146 $287
The Examples do not represent past or future expense levels. Actual expenses may be greater or less than those shown. Federal regulations require the Examples to assume a 5% annual return, but actual annual return will vary. CERTAIN TAX CONSEQUENCES OF THE REORGANIZATION The closing of the proposed reorganization is subject to the receipt of an opinion of Ropes & Gray, legal counsel to the Trust, to the effect that for federal income tax purposes (i) no gain or loss will be recognized by the Growth Portfolio or the Growth Portfolio's shareholders as a result of the reorganization, (ii) the tax basis of the Merger Shares received by each Growth Portfolio shareholder will be the same as the tax basis of the shareholder's Growth Portfolio shares, and (iii) the tax basis of the assets of the Growth Portfolio held by the Capital Growth Portfolio as a result of the reorganization will be the same as the tax basis of such assets in the hands of the Growth Portfolio prior to the reorganization. See "Information about the Reorganization -- Federal income tax consequences." 5 INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS The investment objective of the Growth Portfolio is growth of capital through professional management and diversification of investments in securities its investment adviser believes to have potential of capital appreciation. The Growth Portfolio invests primarily in common stocks of companies with above average growth prospects, but can invest in any securities with potential for capital growth. The Portfolio's investments may include to a limited degree other common stocks and convertible securities, such as bonds and preferred stocks. The Portfolio also may trade securities for short-term profit. The investment objective of the Capital Growth Portfolio is to provide long-term appreciation of capital. The Capital Growth Portfolio invests primarily in common stocks of companies believed by its investment adviser to have appreciation potential, although it may invest any amount or proportion of its assets in any class or type of security believed by its adviser to offer the potential for capital appreciation over both the intermediate and long term. These may include, for example, preferred stocks, investment grade bonds, convertible preferred stocks, and convertible debentures. The Growth Portfolio may invest up to 10% of its assets in foreign securities; the Capital Growth Portfolio may invest up to 15% of its assets in such securities. Both Portfolios may also hold a portion of their assets in cash or money market instruments, and the Capital Growth Portfolio may invest in investment grade fixed-income securities, for temporary defensive purposes. Both Portfolios may engage in foreign currency, stock index futures and options strategies for hedging purposes. Unlike the Growth Portfolio, the Capital Growth Portfolio may engage in options transactions to earn additional income or increase its current return. Both Portfolios may enter into securities loans, repurchase agreements, and forward commitments on up to one-third of their total assets. The Portfolios have similar policies with respect to investments in restricted securities. Both Portfolios are currently managed by the same portfolio manager at Commonwealth Advisors. A commentary prepared by the portfolio manager of the Capital Growth Portfolio, and that was included in the Annual Report, is reprinted in Exhibit B hereto. At the time, Phoenix Investment Counsel, Inc. served as sub-adviser to the Portfolio. The commentary has not been revised or updated since its initial publication, DISTRIBUTIONS, PURCHASE, REDEMPTION, AND EXCHANGE PROCEDURES The Growth Portfolio declares and pays any net investment income to shareholders annually, while the Capital Growth Portfolio declares and pays net investment income to shareholders semi-annually. Each of the Portfolios distributes any net realized capital gains at least annually. The procedures for redeeming shares of the Growth Portfolio and shares of the Capital Growth Portfolio, and for exchanging such shares of each Portfolio for shares of other Mentor funds, are identical. Reinvestments of distributions by the Portfolios are made at net asset value for all classes of shares. Shares of both Portfolios may be redeemed any day the New York Stock Exchange is open at their net asset value next determined. Shares of the Growth Portfolio are not currently being offered for sale, except through reinvestment of distributions paid by the Portfolio. RISK FACTORS Because the Portfolios share similar investment objectives and policies, many of the risks of an investment in the Capital Growth Portfolio are similar to the risks of an investment in the Growth Portfolio. A more detailed 6 description of certain of the risks associated with an investment in the Capital Growth Portfolio is contained in the Prospectus. INVESTMENTS IN FIXED-INCOME SECURITIES. The Capital Growth Portfolio may invest a portion of its assets in fixed-income securities. The values of fixed-income 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 such securities. Conversely, during periods of rising interest rates, the value of the Portfolio's assets will generally decline. As of March 31, 1995, approximately 9.75% of the Capital Growth Portfolio's assets were invested in fixed-income securities. The Growth Portfolio does not normally invest in fixed-income securities. FOREIGN INVESTMENTS. The Capital Growth Portfolio may invest a higher portion of its assets in foreign securities than may the Growth Portfolio. Investments in foreign securities involve certain risks. Some of these risks include, for example, the negative effect of currency exchange rates, lack of public information about foreign companies, liquidity risks, and risks of adverse political and diplomatic developments. A more complete description of the risks associated with foreign securities is included in the Prospectus. OPTIONS AND FUTURES TRANSACTIONS. The Capital Growth Portfolio's use of options and futures transactions involves certain risks, including the risks that the Capital Growth Portfolio will be unable at times to close out such positions, that such transactions may not accomplish their purpose because of imperfect market correlations, or that Commonwealth Advisors may not forecast market movements correctly. OTHER INVESTMENT PRACTICES. To the extent that the Capital Growth Portfolio exercises its ability to engage in certain investment practices, such as repurchase agreements and securities lending, it may be delayed in recovering or unable to recover its collateral in the event of default by the other party. In the case of securities purchased for future delivery, the Portfolio runs the risk of a decline in the value of such securities before the settlement date and the risk that the other party should default on its obligation. INTRODUCTION This Prospectus/Proxy Statement is furnished in connection with the proposed merger of the Growth Portfolio by the transfer of all of its assets and liabilities to the Capital Growth Portfolio and the solicitation of proxies by and on behalf of the Trustees of the Growth Portfolio for use at the related Special Meeting of Shareholders (the "Meeting"). The Meeting is to be held on September 12, 1995 at 2:00 p.m. at the Riverfront Plaza Conference Suite, Riverfront Plaza -- West Tower, 20th Floor, 901 East Byrd Street, Richmond, Virginia. This Prospectus/Proxy Statement and the enclosed form of proxy are being mailed to shareholders on or about August 18, 1995. Any shareholder giving a proxy has the power to revoke it by mail (addressed to the Trust's Secretary at the principal office of the Trust, 901 East Byrd Street, Richmond, VA 23219) or in person at the Meeting, by executing a superseding proxy, or by submitting a notice of revocation to the Secretary of the Trust. All properly executed proxies received in time for the Meeting will be voted as specified in the proxy, or, if no specification is made, FOR the proposal (set forth in Proposal 1 of the Notice of Meeting) to implement the reorganization of the Growth Portfolio by the transfer of all of its assets to the Capital Growth Portfolio in exchange for the Merger Shares and the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio. At July 31, 1995, there were outstanding 679,733 Class A shares and 1,265,765 Class B shares of beneficial interest of the Growth Portfolio. Only shareholders of record on July 31, 1995 will be entitled to notice of and to vote at the Meeting. Each share is entitled to one vote, with fractional shares voting proportionally. 7 The Trustees of the Trust know of no matters other than those set forth herein to be brought before the Meeting. If, however, any other matters properly come before the Meeting, it is the Trustees' intention that proxies will be voted on such matters in accordance with the judgment of the persons named in the enclosed form of proxy. PROPOSAL REGARDING APPROVAL OR DISAPPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION The shareholders of the Growth Portfolio are being asked to approve or disapprove a merger between the Capital Growth Portfolio and the Growth Portfolio pursuant to an Agreement and Plan of Reorganization between the Portfolios, dated as of July 8, 1995 (the "Agreement"), a copy of which is attached to this Prospectus/Proxy Statement as Exhibit A. The Agreement provides, among other things, for the transfer of all of the assets of the Growth Portfolio to the Capital Growth Portfolio in exchange for the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio and for the Class A and Class B Merger Shares, the number of which will be calculated based on the value of the net assets attributable to the Class A and Class B shares, respectively, of the Growth Portfolio acquired by the Capital Growth Portfolio and the net asset value per Class A and Class B share of the Capital Growth Portfolio, all as more fully described below under "Information About the Reorganization." After receipt of the Merger Shares, the Growth Portfolio will cause the Class A Merger Shares to be distributed to its Class A shareholders and the Class B Merger Shares to be distributed to its Class B shareholders, in complete liquidation of the Growth Portfolio. Each shareholder of the Growth Portfolio will receive a number of full and fractional Class A or Class B Merger Shares equal in value at the date of the exchange to the aggregate value of the shareholder's Class A or Class B Growth Portfolio shares, as the case may be. Prior to the date of the transfer (the "Exchange Date"), the Growth Portfolio will declare a distribution to shareholders which, together with all previous distributions, will have the effect of distributing to shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid) and net realized capital gains, if any, through the Exchange Date. The Trustees have voted unanimously to approve the proposed merger and to recommend that shareholders also approve the merger. The affirmative vote of more than fifty percent of the outstanding Class A and of the outstanding Class B shares of beneficial interest of the Growth Portfolio entitled to vote is necessary for the consummation of the proposed merger. A shareholder of the Growth Portfolio objecting to the proposed merger is not entitled under either Massachusetts law or the Declaration of Trust to demand payment for and an appraisal of his or her Growth Portfolio shares if the merger is consummated over his or her objection. If the merger is consummated, however, shareholders will be free at any time to redeem their Merger Shares, for cash at net asset value at the time of such redemption, or to exchange their Merger Shares for shares of certain other Portfolios offered by the Trust, at net asset value at the time of such exchange. In the event that this proposal is not approved by the shareholders of the Growth Portfolio, the Growth Portfolio will continue to be managed as a separate Portfolio in accordance with its current investment objective and policies, and the Trustees may consider such alternatives as may be in the best interests of the shareholders. 8 BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION The Trustees of the Trust, including the Trustees who are not "interested persons" of the Trust, have determined that the reorganization would be in the best interests of each Portfolio's shareholders, and that the interests of existing shareholders of each of the Portfolios would not be diluted as a result of effecting the reorganization. The Trustees have unanimously approved the proposed reorganization and have recommended its approval by shareholders. The principal reasons why the Trustees are recommending the reorganization are: (i) LIKELY REDUCTION IN SIZE OF THE GROWTH PORTFOLIO AND INCREASE IN EXPENSE RATIO. The Growth Portfolio is an open-end investment company, and shareholders are able to redeem their shares at any time at net asset value. However, shares of the Growth Portfolio are not currently being offered to the public. Commonwealth Advisors believes that, as a result of the lack of new investment and likely redemptions in the future, the amount of the Portfolio's assets will not increase significantly in coming years and may decline. Any such decline in the Portfolio's assets could result in an increase in the Portfolio's expense ratio, as the Portfolio's operating expenses are spread over a smaller asset base. The Trustees have therefore determined that it is in the best interests of the Portfolio's shareholders to combine the Portfolio with the Capital Growth Portfolio, a mutual fund whose shares are being offered to the public, in order to increase the asset base over which those expenses will be spread. (ii) CONTINUED INVESTMENT IN A MUTUAL FUND WITHOUT RECOGNITION OF GAIN OR LOSS FOR FEDERAL INCOME TAX PURPOSES. The proposed reorganization will permit Growth Portfolio shareholders to keep their investment in an open-end mutual fund, without recognition of gain or loss for federal income tax purposes. If the Growth Portfolio were to liquidate and shareholders were to receive the net asset value of their shares in liquidating distributions, gain or loss would be recognized for federal income tax purposes. (iii) APPROPRIATE INVESTMENT OBJECTIVES, ETC. The investment objective, policies, and restrictions of the Capital Growth Portfolio are substantially similar to the Growth Portfolio's, and the Trustees believe that an investment in shares of the Capital Growth Portfolio will provide shareholders with an investment opportunity comparable to that currently afforded by the Growth Portfolio. (iv) FAVORABLE EXPENSE RATIO. The Trustees believe that the combination of the Growth Portfolio with the Capital Growth Portfolio has the potential to provide savings in operating expenses for Growth Portfolio shareholders over time as such costs are absorbed over a larger asset base (including any assets attributable to the future sale of shares to the public by the Capital Growth Portfolio). This potential for increased savings is not available to the Growth Portfolio, for the reasons discussed above. Of course, there can be no assurance that the merger will result in savings in operating expenses to shareholders. Information on the Portfolios' operating expenses is set out above in the Synopsis under "Expense Summary". INFORMATION ABOUT THE REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION. The proposed Agreement and Plan of Reorganization provides that the Capital Growth Portfolio will acquire all of the assets of the Growth Portfolio in exchange for the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio and for the issuance of the Class A and Class B Merger Shares all as of the Exchange Date (defined in the Agreement to be the next full business day following the Valuation Time, which is in turn defined in the Agreement as 4:00 p.m. Richmond time on September 22, 1995 or such other date as may be agreed upon by the parties). The following discussion of the Agreement is qualified in its entirety by the full text of the Agreement, which is attached as Exhibit A to this Prospectus/Proxy Statement. 9 The Growth Portfolio will sell all of its assets to the Capital Growth Portfolio, and, in exchange, the Capital Growth Portfolio will assume all of the liabilities of the Growth Portfolio and deliver to the Growth Portfolio (i) a number of full and fractional Class A Merger Shares having an aggregate net asset value equal to the value of the assets of the Growth Portfolio attributable to its Class A shares, less the value of the liabilities of the Growth Portfolio assumed by the Capital Growth Portfolio attributable to the Class A shares of the Growth Portfolio, and (ii) a number of full and fractional Class B Merger Shares having a net asset value equal to the value of assets of the Growth Portfolio attributable to its Class B shares, less the value of the liabilities of the Growth Portfolio assumed by the Capital Growth Portfolio attributable to the Class B shares of the Growth Portfolio. Immediately following the Exchange Date, the Growth Portfolio will distribute pro rata to its shareholders of record as of the close of business on the Exchange Date the full and fractional Merger Shares received by the Growth Portfolio, with Class A Merger Shares being distributed to holders of Class A shares of the Growth Portfolio and Class B Merger Shares being distributed to holders of Class B shares of the Growth Portfolio. As a result of the proposed transaction, each holder of Class A and Class B shares of the Growth Portfolio will receive a number of Class A and Class B Merger Shares equal in aggregate value at the Exchange Date to the value of the Class A and Class B shares, respectively, of the Growth Portfolio held by the shareholder. This distribution will be accomplished by the establishment of accounts on the share records of the Capital Growth Portfolio in the names of such Growth Portfolio shareholders, each account representing the respective number of full and fractional Class A or Class B Merger Shares due such shareholder. New certificates for Merger Shares will be issued only upon written request. The consummation of the merger is subject to the conditions set forth in the Agreement. The Agreement may be terminated and the merger abandoned at any time, before or after approval by the shareholders, prior to the Exchange Date by mutual consent of the Capital Growth Portfolio and the Growth Portfolio or, if any condition set forth in the Agreement has not been fulfilled and has not been waived by the party entitled to its benefits, by such party. THE CAPITAL GROWTH PORTFOLIO WILL NOT PERMIT ANY GROWTH PORTFOLIO SHAREHOLDER HOLDING CERTIFICATES FOR GROWTH PORTFOLIO SHARES AT THE TIME OF THE MERGER TO RECEIVE CASH DIVIDENDS OR OTHER DISTRIBUTIONS, RECEIVE CERTIFICATES FOR MERGER SHARES, EXCHANGE MERGER SHARES FOR SHARES OF OTHER PORTFOLIOS OF THE TRUST OR OTHER INVESTMENT COMPANIES AFFILIATED WITH THE TRUST, OR PLEDGE OR REDEEM MERGER SHARES UNTIL THOSE CERTIFICATES FOR GROWTH PORTFOLIO SHARES HAVE BEEN SURRENDERED, OR, IN THE CASE OF LOST CERTIFICATES, AN ADEQUATE SURETY BOND HAS BEEN POSTED. IF A SHAREHOLDER IS NOT FOR THAT REASON PERMITTED TO RECEIVE CASH DIVIDENDS OR OTHER DISTRIBUTIONS ON MERGER SHARES, THE CAPITAL GROWTH PORTFOLIO WILL PAY ALL SUCH DIVIDENDS AND DISTRIBUTIONS IN ADDITIONAL SHARES, NOTWITHSTANDING ANY ELECTION THE SHAREHOLDER MAY HAVE MADE PREVIOUSLY TO RECEIVE DIVIDENDS AND DISTRIBUTIONS ON GROWTH PORTFOLIO SHARES IN CASH. All fees and expenses, including legal and accounting expenses, portfolio transfer taxes (if any) or other similar expenses incurred in connection with the consummation of the transactions contemplated by the Agreement will be allocated ratably between the two Portfolios in proportion to their net assets as of the day of the transfer, except that the costs of proxy materials and proxy solicitations will be borne by the Growth Portfolio. The estimated fees and expenses for the transaction are $55,000. However, to the extent that any payment by the Capital Growth Portfolio of such fees or expenses would result in the disqualification of the Capital Growth Portfolio or the Growth Portfolio as a "regulated investment company" within the meaning of Section 851 of the Internal Revenue Code of 1986, as amended (the "Code"), such fees and expenses will be paid directly by the party incurring them. 10 DESCRIPTION OF THE MERGER SHARES. Full and fractional Merger Shares will be issued to the Growth Portfolio's shareholders in accordance with the procedure under the Agreement as described above. The Merger Shares are Class A and Class B shares of the Capital Growth Portfolio. Investors purchasing Class A shares pay a sales charge at the time of purchase, but Growth Portfolio shareholders receiving Class A Merger Shares in the merger will not pay a sales charge on such shares. Class A shares of the Capital Growth Portfolio are generally not subject to redemption fees or Rule 12b-1 fees. Class B shares of the Capital Growth Portfolio are sold without a sales charge, but are subject to a CDSC of up to 4.0% if redeemed within five years of original purchase. Class B shares are also subject to a 12b-1 fee at the annual rate of 0.75% of the Capital Growth Portfolio's average daily net assets attributable to Class B shares. For purposes of determining the CDSC payable on redemption of Class B Merger Shares received by holders of Class B shares of the Growth Portfolio, as well as the conversion date of such shares, such shares will be treated as having been acquired as of the dates such shareholders originally acquired their Class B shares of the Growth Portfolio and the CDSC would be applied at the same rate as was in effect for the Growth Portfolio at the time the shares of the Growth Portfolio were originally purchased. In connection with the sale of Class B shares, Mentor Distributors pays commissions to broker-dealers from its own assets that it expects to recover over time through the receipt of distribution fees in connection with its Class B shares and the receipt of any CDSC on Class B shares. The total amount of such commissions paid by Mentor Distributors with respect to the Growth Portfolio before the consummation of the proposed reorganization will likely exceed the amounts recovered by Mentor Distributors by that time. Such unrecovered amounts do not represent a liability of the Growth Portfolio and, consequently, the Capital Growth Portfolio will not assume any such liability in connection with the consummation of the reorganization. However, to the extent Mentor Distributors has not fully recovered such commissions before the consummation of the proposed reorganization, it is anticipated that the Trustees will consider such unrecovered amounts, among other factors, in determining whether to continue payments of distribution fees in the future with respect to Class B shares of the Capital Growth Portfolio. Each of the Merger Shares will be fully paid and nonassessable when issued, will be transferable without restriction, and will have no preemptive or conversion rights, except that Class B Merger Shares will have the conversion rights specified above. The Declaration of Trust of the Trust permits the Trust to divide its shares, without shareholder approval, into two or more series of shares representing separate investment portfolios and to further divide any such series, without shareholder approval, into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees may determine. Like the Growth Portfolio's shares, the Capital Growth Portfolio's shares are currently divided into two classes, Class A and Class B. Under Massachusetts law, shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for the obligations of the trust. However, the Declaration of Trust disclaims shareholder liability for acts or obligations of the Trust and/or the Capital Growth Portfolio and requires that notice of such disclaimer be given in each agreement, undertaking, or obligation entered into or executed by the Trust, the Capital Growth Portfolio or the Trustees. The Declaration of Trust provides for indemnification out of Portfolio property for all loss and expense of any shareholder held personally liable for the obligations of the Capital Growth Portfolio. Thus, the risk of a shareholder's incurring financial loss from shareholder liability is limited to circumstances in which the Capital Growth Portfolio would be unable to meet its obligations. The likelihood of such a circumstance is remote. The shareholders of the Growth Portfolio are currently subject to this same risk of shareholder liability. FEDERAL INCOME TAX CONSEQUENCES. As a condition to the Growth Portfolio's obligation to consummate the reorganization, the Growth Portfolio will receive an opinion from Ropes & Gray, counsel to the Trust, to the effect that, on the basis of the existing provisions of the Internal Revenue Code of 1986, as amended (the 11 "Code"), current administrative rules and court decisions, for federal income tax purposes: (i) under Section 361 of the Code, no gain or loss will be recognized by the Growth Portfolio as a result of the reorganization; (ii) under Section 354 of the Code, no gain or loss will be recognized by shareholders of the Growth Portfolio on the distribution of Merger Shares to them in exchange for their shares of the Growth Portfolio; (iii) under Section 358 of the Code, the tax basis of the Merger Shares that the Growth Portfolio's shareholders receive in place of their Growth Portfolio shares will be the same as the basis of the Growth Portfolio shares exchanged; and (iv) under Section 1223(1) of the Code, a shareholder's holding period for the Merger Shares received pursuant to the Agreement will be determined by including the holding period for the Growth Portfolio shares exchanged for the Merger Shares, provided that the shareholder held the Growth Portfolio shares as a capital asset. CAPITALIZATION. The following tables show the capitalization of the Capital Growth Portfolio and the Growth Portfolio as of July 31, 1995 and on a pro forma basis as of that date, giving effect to the proposed acquisition of assets at net asset value: (UNAUDITED)
CAPITAL GROWTH PRO FORMA GROWTH PORTFOLIO PORTFOLIO COMBINED* Net assets (000's omitted) Class A................................................................ $18,801 $11,623 $30,424 Class B................................................................ $37,354 $21,207 $58,561 Shares outstanding (000's omitted) Class A................................................................ 1,110 679 1,797 Class B................................................................ 2,234 1,260 3,502 Net asset value per share Class A................................................................ $16.93 $17.12 $16.93 Class B................................................................ $16.72 $16.84 $16.72
* Pro Forma net assets reflect legal and accounting merger-related costs. Unaudited and pro forma financial statements of the Portfolios as of and for the six months ended March 31, 1995 are included in the Statement of Additional Information. Because the Agreement provides that the Capital Growth Portfolio will be the surviving Portfolio following the reorganization and because the Capital Growth Portfolio's investment objective and policies will remain unchanged, the pro forma financial statements reflect the transfer of the assets and liabilities of the Growth Portfolio to the Capital Growth Portfolio as contemplated by the Agreement. OTHER INFORMATION Other information relating to the Growth Portfolio, including information in respect of its investment objective and policies and financial history, is incorporated by reference to the Trust Statement of Additional Information, the Annual Report, and the Semi-Annual Report. THE TRUSTEES OF THE TRUST, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMEND APPROVAL OF THE AGREEMENT. 12 VOTING INFORMATION REQUIRED VOTE. Proxies are being solicited from the Growth Portfolio's shareholders by the Trustees for the Meeting to be held on September 12, 1995 at 2:00 p.m., at Riverfront Plaza Conference Suite, Riverfront Plaza -- West Tower, 20th Floor 901 East Byrd Street, Richmond, Virginia, or at such later time made necessary by adjournment. Unless revoked, all valid proxies will be voted in accordance with the specification thereon or, in the absence of specifications, FOR approval of the Agreement and Plan of Reorganization. The transactions contemplated by the Agreement and Plan of Reorganization will be consummated only if approved by the affirmative vote of the holders of more than fifty percent of the outstanding Class A and of the outstanding Class B shares of the Growth Fund entitled to vote. RECORD DATE, QUORUM AND METHOD OF TABULATION. Shareholders of record of the Growth Portfolio at the close of business on July 31, 1995 (the "Record Date") will be entitled to vote at the Meeting or any adjournment thereof. The holders of more than 50% of the Class A shares and of the Class B shares of the Growth Portfolio outstanding at the close of business on the Record Date present in person or represented by proxy will constitute a quorum for the Meeting. Shareholders are entitled to one vote for each share held, with fractional shares voting proportionally. Votes cast by proxy or in person at the meeting will be counted by persons appointed by the Trust as tellers for the Meeting. The tellers will count the total number of votes cast "for" approval of the proposal for purposes of determining whether sufficient affirmative votes have been cast. The tellers will count shares represented by proxies that reflect abstentions and "broker non-votes" (I.E., shares held by brokers or nominees as to which (i) instructions have not been received from the beneficial owners or the persons entitled to vote and (ii) the broker or nominee does not have the discretionary voting power on a particular matter) as shares that are present and entitled to vote on the matter for purposes of determining the presence of a quorum. Abstentions and broker non-votes have the effect of negative votes on the proposal. As of July 31, 1995, as shown on the books of the Growth Portfolio, there were issued and outstanding 679,733 Class A and 1,265,765 Class B shares of beneficial interest of the Growth Portfolio. As of July 31, 1995, the officers and Trustees of the Trust as a group beneficially owned less than 1% of the outstanding shares of each class of the Growth Portfolio. At July 31, 1995, to the best of the knowledge of the Growth Portfolio, no person owned beneficially 5% or more of the outstanding shares of either class of the Growth Portfolio. The votes of the shareholders of the Capital Growth Portfolio are not being solicited, since their approval or consent is not necessary for this transaction. As of July 31, 1995, the officers and Trustees of the Trust as a group beneficially owned less than 1% of the outstanding shares of the Capital Growth Portfolio. At July 31, 1995, to the best of the knowledge of the Capital Growth Portfolio, no person beneficially owned 5% or more of the outstanding shares of the Capital Growth Portfolio. SOLICITATION OF PROXIES. Solicitation of proxies by personal interview, mail, and telephone, may be made by officers and Trustees of the Trust and employees of Wheat First Butcher Singer, Inc. and its affiliates. In addition, the firm of Management Information Systems has been retained to assist in the solicitation of proxies, at a cost to the Portfolio which is not expected to exceed $2,500, plus reimbursement of the firm's out-of-pocket expenses. REVOCATION OF PROXIES. Any shareholder giving a proxy has the power to revoke it by mail (addressed to the Trust's Secretary at the principal office of the Trust, 901 East Byrd Street, Richmond, VA 23219) or in person at the Meeting, by executing a superseding proxy, or by submitting a notice of revocation to the Secretary of the Trust. 13 ADJOURNMENT. If sufficient votes in favor of the proposal are not received by the time scheduled for the Meeting, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of proxies. Any adjournment will require the affirmative vote of a plurality of the votes cast on the question in person or by proxy at the session of the Meeting to be adjourned. The persons named as proxies will vote in favor of such adjournment those proxies which they are entitled to vote in favor of the proposal. They will vote against any such adjournment those proxies required to be voted against the proposal. The Growth Portfolio pays the costs of any additional solicitation and of any adjourned session. 14 EXHIBIT A AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Agreement") is made as of July 8, 1995 in Richmond, Virginia, by and between The Mentor Funds (the "Trust"), on behalf of the Mentor/Cambridge Growth Portfolio (the "Growth Portfolio"), and the Trust, on behalf of the Mentor Capital Growth Portfolio (the "Capital Growth Portfolio"). Each of the Growth Portfolio and the Capital Growth Portfolio is a series of shares of the Trust. PLAN OF REORGANIZATION (a) The Growth Portfolio will sell, assign, convey, transfer and deliver to the Capital Growth Portfolio on the Exchange Date (as defined in Section 6) all of its properties and assets existing at the Valuation Time (as defined in Section 3(c) hereof). In consideration therefor, the Capital Growth Portfolio shall, on the Exchange Date, assume all of the liabilities of the Growth Portfolio existing at the Valuation Time and deliver to the Growth Portfolio (i) a number of full and fractional Class A shares of beneficial interest of the Capital Growth Portfolio (the "Class A Merger Shares") having an aggregate net asset value equal to the value of the assets of the Growth Portfolio attributable to Class A shares of the Growth Portfolio transferred to the Capital Growth Portfolio on such date less the value of the liabilities of the Growth Portfolio attributable to Class A shares of the Growth Portfolio assumed by the Capital Growth Portfolio on that date, and (ii) a number of full and fractional Class B shares of beneficial interest of the Capital Growth Portfolio (the "Class B Merger Shares") having an aggregate net asset value equal to the value of the assets of the Growth Portfolio attributable to Class B shares of the Growth Portfolio transferred to the Capital Growth Portfolio on such date less the value of the liabilities of the Growth Portfolio attributable to Class B shares of the Growth Portfolio assumed by the Capital Growth Portfolio on that date. (The Class A Merger Shares and the Class B Merger Shares shall be referred to collectively as the "Merger Shares.") It is intended that the reorganization described in this Plan shall be a reorganization within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code"). (b) Upon consummation of the transactions described in paragraph (a) of this Agreement, the Growth Portfolio shall distribute in complete liquidation to its Class A and Class B shareholders of record as of the Exchange Date Class A and Class B Merger Shares, each shareholder being entitled to receive that proportion of such Class A and Class B Merger Shares which the number of Class A or Class B shares of beneficial interest of the Growth Portfolio held by such shareholder bears to the number such Class A and Class B shares of the Growth Portfolio outstanding on such date. Certificates representing the Merger Shares will be issued only if the shareholder so requests. (c) As promptly as practicable after the liquidation of the Growth Portfolio as aforesaid, the Growth Portfolio shall be dissolved pursuant to the provisions of the Declaration of Trust of the Trust, as amended, and applicable law, and its legal existence terminated. A-1 AGREEMENT The Capital Growth Portfolio and the Growth Portfolio agree as follows: 1. Representations and Warranties of the Capital Growth Portfolio. The Capital Growth Portfolio represents and warrants to and agrees with the Growth Portfolio that: (a) The Capital Growth Portfolio is a series of shares of the Trust, a Massachusetts business trust duly established and validly existing under the laws of The Commonwealth of Massachusetts, and has power to own all of its properties and assets and to carry out its obligations under this Agreement. The Trust is not required to qualify as a foreign association in any jurisdiction. Each of the Trust and the Capital Growth Portfolio has all necessary federal, state and local authorizations to carry on its business as now being conducted and to carry out this Agreement. (b) The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and such registration has not been revoked or rescinded and is in full force and effect. (c) A statement of assets and liabilities, statements of operations, and statements of changes in net assets and schedules of investments (indicating their market values) of the Capital Growth Portfolio for the six months ended March 31, 1995 have been furnished to the Growth Portfolio. Such statements of assets and liabilities and schedules fairly present the financial position of the Capital Growth Portfolio as of their dates and said statements of operations and changes in net assets fairly reflect the results of its operations and changes in net assets for the periods covered thereby in conformity with generally accepted accounting principles. (d) The prospectus and statement of additional information dated May 30, 1995 (the "Prospectus"), previously furnished to the Growth Portfolio, did not as of such date and does not contain, with respect to the Trust or the Capital Growth Portfolio, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (e) There are no material legal, administrative or other proceedings pending or, to the knowledge of the Trust or the Capital Growth Portfolio, threatened against the Trust or the Capital Growth Portfolio, which assert liability on the part of the Trust or the Capital Growth Portfolio. (f) The Capital Growth Portfolio has no known liabilities of a material nature, contingent or otherwise, other than those shown as belonging to it on its statement of assets and liabilities as of March 31, 1995 and those incurred in the ordinary course of its business as an investment company since March 31, 1995. (g) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Capital Growth Portfolio of the transactions contemplated by this Agreement, except such as may be required under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), the 1940 Act, state securities or blue sky laws (which term as used herein shall include the laws of the District of Columbia and of Puerto Rico) or the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "H-S-R Act"). (h) The registration statement (the "Registration Statement") filed with the Securities and Exchange Commission (the "Commission") by the Trust on Form N-14 on behalf of the Capital Growth Portfolio and relating to the Merger Shares issuable hereunder, and the proxy statement of the Growth Portfolio included therein (the "Proxy Statement"), on the effective date of the Registration Statement (i) will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated A-2 therein or necessary to make the statements therein not misleading; and at the time of the shareholders' meeting referred to in Section 7(a) and at the Exchange Date, the prospectus, which is contained in the Registration Statement of which the Proxy Statement is a part, as amended or supplemented by any amendments or supplements filed with the Commission by the Trust, insofar as it does not relate to the Growth Portfolio, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that none of the representations and warranties in this subsection shall apply to statements in or omissions from the Registration Statement, the Prospectus or the Proxy Statement made in reliance upon and in conformity with information furnished by the Growth Portfolio for use in the Registration Statement, the Prospectus or the Proxy Statement. (i) There are no material contracts outstanding to which the Capital Growth Portfolio is a party, other than as will be disclosed in the Registration Statement, the Prospectus, or the Proxy Statement. (j) All of the issued and outstanding shares of beneficial interest of the Capital Growth Portfolio have been offered for sale and sold in conformity with all applicable federal securities laws. (k) The Trust is and will at all times through the Exchange Date qualify for taxation as a "regulated investment company" under Sections 851 and 852 of the Code. (l) The issuance of the Merger Shares pursuant to this Agreement will be in compliance with all applicable federal securities laws. (m) The Merger Shares to be issued to the Growth Portfolio have been duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable by the Capital Growth Portfolio, and no shareholder of the Capital Growth Portfolio will have any preemptive right of subscription or purchase in respect thereof. 2. Representations and Warranties of the Growth Portfolio. The Growth Portfolio represents and warrants to and agrees with the Capital Growth Portfolio that: (a) The Growth Portfolio is a series of shares of beneficial interest of the Trust, a Massachusetts business trust duly established and validly existing under the laws of The Commonwealth of Massachusetts, and has power to carry on its business as it is now being conducted and to carry out this Agreement. The Trust is not required to qualify as a foreign association in any jurisdiction. Each of the Trust and the Growth Portfolio has all necessary federal, state and local authorizations to own all of its properties and assets and to carry on its business as now being conducted and to carry out this Agreement. (b) The Trust is registered under the 1940 Act as an open-end management investment company and such registration has not been revoked or rescinded and is in full force and effect. (c) A statement of assets and liabilities, statements of operations, and statements of changes in net assets and schedules of investments (indicating their market values) of the Growth Portfolio for the six months ended March 31, 1995 have been furnished to the Capital Growth Portfolio. Such statements of assets and liabilities and schedules fairly present the financial position of the Growth Portfolio as of their dates, and said statements of operations and changes in net assets fairly reflect the results of its operations and changes in financial position for the periods covered thereby in conformity with generally accepted accounting principles. (d) The Prospectus which has been previously furnished to the Growth Portfolio, did not contain as of its date, with respect to the Trust and the Growth Portfolio, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. A-3 (e) There are no material legal, administrative or other proceedings pending or, to the knowledge of the Trust or the Growth Portfolio, threatened against the Trust or the Growth Portfolio which assert liability or may, if successfully prosecuted to their conclusion, result in liability on the part of the Trust or the Growth Portfolio, other than as have been disclosed in the Prospectus. (f) There are no material contracts outstanding to which the Growth Portfolio is a party, other than as will be disclosed in the Registration Statement, the Prospectus, or Proxy Statement. (g) The Growth Portfolio has no known liabilities of a material nature, contingent or otherwise, other than those shown on the Growth Portfolio's statement of assets and liabilities as of March 31, 1995 referred to above and those incurred in the ordinary course of its business as an investment company since such date. Prior to the Exchange Date, the Growth Portfolio will advise the Capital Growth Portfolio of all material liabilities, contingent or otherwise, incurred by it subsequent to March 31, 1995, whether or not incurred in the ordinary course of business. (h) As used in this Agreement, the term "Investments" shall mean the Growth Portfolio's investments shown on the schedule of its investments as of March 31, 1995 referred to in Section 2(c) hereof, as supplemented with such changes as the Growth Portfolio shall make, and changes resulting from stock dividends, stock split-ups, mergers and similar corporate actions. (i) The Growth Portfolio has filed or will file all federal and state tax returns which, to the knowledge of the Trust's officers, are required to be filed by the Growth Portfolio and has paid or will pay all federal and state taxes shown to be due on said returns or on any assessments received by the Growth Portfolio. All tax liabilities of the Growth Portfolio have been adequately provided for on its books, and no tax deficiency or liability of the Growth Portfolio has been asserted, and no question with respect thereto has been raised, by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. (j) At both the Valuation Time (as defined in Section 3(c)) and the Exchange Date, the Trust, on behalf of the Growth Portfolio, will have full right, power and authority to sell, assign, transfer and deliver the Investments and any other assets and liabilities of the Growth Portfolio to be transferred to the Capital Growth Portfolio pursuant to this Agreement. At the Exchange Date, subject only to the delivery of the Investments and any such other assets and liabilities as contemplated by this Agreement, the Capital Growth Portfolio will acquire the Investments and any such other assets and liabilities subject to no encumbrances, liens or security interests whatsoever and without any restrictions upon the transfer thereof. (k) No registration under the 1933 Act of any of the Investments would be required if they were, as of the time of such transfer, the subject of a public distribution by either of the Capital Growth Portfolio or the Growth Portfolio, except as previously disclosed to the Capital Growth Portfolio by the Growth Portfolio. (l) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Growth Portfolio of the transactions contemplated by this Agreement, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act, state securities or blue sky laws or the H-S-R Act. (m) The Registration Statement, the Prospectus and the Proxy Statement, on the Effective Date of the Registration Statement and insofar as they do not relate to the Capital Growth Portfolio (i) will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at the time of the shareholders' meeting referred to in Section 7(a) below and on the Exchange Date, the Prospectus, as amended or supplemented by any amendments or supplements filed with the Commission by the Trust, will not contain any untrue A-4 statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements of fact relating to the Trust or the Growth Portfolio contained in the Registration Statement, the Prospectus or the Proxy Statement, or omissions to state in any thereof a material fact relating to the Trust or the Growth Portfolio, as such Registration Statement, Prospectus and Proxy Statement shall be furnished to the Growth Portfolio in definitive form as soon as practicable following effectiveness of the Registration Statement and before any public distribution of the Prospectus or Proxy Statement. (n) The Trust is and will at all times through the Exchange Date qualify for taxation as a "regulated investment company" under Sections 851 and 852 of the Code. (o) At the Exchange Date, the Growth Portfolio will have sold such of its assets, if any, as are necessary to assure that, after giving effect to the acquisition of the assets of the Growth Portfolio pursuant to this Agreement, the Capital Growth Portfolio will remain a "diversified company" within the meaning of Section 5(b)(1) of the 1940 Act and in compliance with such other mandatory investment restrictions as are set forth in the prospectus and statement of additional information of the Trust dated May 30, 1995, as amended through the Exchange Date. 3. Reorganization. (a) Subject to the requisite approval of the shareholders of the Growth Portfolio and to the other terms and conditions contained herein (including the Growth Portfolio's obligation to distribute to its shareholders all of its investment company taxable income and net capital gain as described in Section 8(m) hereof), the Growth Portfolio agrees to sell, assign, convey, transfer and deliver to the Capital Growth Portfolio, and the Capital Growth Portfolio agrees to acquire from the Growth Portfolio, on the Exchange Date all of the Investments and all of the cash and other properties and assets of the Growth Portfolio, whether accrued or contingent (including cash received by the Growth Portfolio upon the liquidation by the Growth Portfolio of any investments purchased by the Growth Portfolio after March 31, 1995 and designated by the Capital Growth Portfolio as being unsuitable for it to acquire), in exchange for that number of shares of beneficial interest of the Capital Growth Portfolio provided for in Section 4 and the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio, whether accrued or contingent, existing at the Valuation Time. Pursuant to this Agreement, the Growth Portfolio will, as soon as practicable after the Exchange Date, distribute all of the Merger Shares received by it to the shareholders of the Growth Portfolio in exchange for their Class A and Class B shares of the Growth Portfolio. (b) The Growth Portfolio will pay or cause to be paid to the Capital Growth Portfolio any interest, cash or such dividends, rights and other payments received by it on or after the Exchange Date with respect to the Investments and other properties and assets of the Growth Portfolio, whether accrued or contingent, received by it on or after the Exchange Date. Any such distribution shall be deemed included in the assets transferred to the Capital Growth Portfolio at the Exchange Date and shall not be separately valued unless the securities in respect of which such distribution is made shall have gone "ex" such distribution prior to the Valuation Time, in which case any such distribution which remains unpaid at the Exchange Date shall be included in the determination of the value of the assets of the Growth Portfolio acquired by the Capital Growth Portfolio. (c) The Valuation Time shall be 4:00 p.m. Richmond time on September 22, 1995 or such earlier or later day as may be mutually agreed upon in writing by the parties hereto (the "Valuation Time"). 4. Exchange Date; Valuation Time. On the Exchange Date, the Capital Growth Portfolio will deliver to the Growth Portfolio (i) a number of full and fractional Class A Merger Shares having an aggregate net asset value equal to the value of the assets of the Growth Portfolio attributable to Class A shares of the Growth Portfolio transferred to the Capital Growth Portfolio on such date less the value of the liabilities of the Growth Portfolio attributable to Class A shares of the Growth Portfolio assumed by the Capital Growth Portfolio on that date and A-5 (ii) a number of full and fractional Class B Merger Shares having an aggregate net asset value equal to the value of the assets of the Growth Portfolio attributable to Class B shares of the Growth Portfolio transferred to the Capital Growth Portfolio on such date less the value of the liabilities of the Growth Portfolio attributable to Class B shares of the Growth Portfolio assumed by the Capital Growth Portfolio on that date, determined as hereinafter provided in this Section 4. (a) The net asset value of the Merger Shares to be delivered to the Growth Portfolio, the value of the assets attributable to the Class A and Class B shares of the Growth Portfolio, and the value of the liabilities attributable to the Class A and Class B shares of the Growth Portfolio to be assumed by the Capital Growth Portfolio, shall in each case be determined as of the Valuation Time. (b) The net asset value of the Class A and Class B Merger Shares shall be computed in the manner set forth in the Prospectus. The value of the assets and liabilities of the Class A and Class B shares of the Growth Portfolio shall be determined by the Capital Growth Portfolio, in cooperation with the Growth Portfolio, pursuant to procedures which the Capital Growth Portfolio would use in determining the fair market value of the Capital Growth Portfolio's assets and liabilities. (c) No adjustment shall be made in the net asset value of either the Growth Portfolio or the Capital Growth Portfolio to take into account differences in realized and unrealized gains and losses. (d) The Capital Growth Portfolio shall issue the Merger Shares to the Growth Portfolio in two certificates registered in the name of the Growth Portfolio, one representing Class A Merger Shares and one representing Class B Merger Shares. The Growth Portfolio shall distribute the Class A Merger Shares to the Class A shareholders of the Growth Portfolio by redelivering such certificate to the Capital Growth Portfolio's transfer agent which will as soon as practicable set up open accounts for each Class A Growth Portfolio shareholder in accordance with written instructions furnished by the Growth Portfolio. The Growth Portfolio shall distribute the Class B Merger Shares to the Class B shareholders of the Growth Portfolio by redelivering such certificate to the Capital Growth Portfolio's transfer agent which will as soon as practicable set up open accounts for each Class B Growth Portfolio shareholder in accordance with written instructions furnished by the Growth Portfolio. With respect to any Growth Portfolio shareholder holding share certificates as of the Exchange Date, the Capital Growth Portfolio will not permit such shareholder to receive dividends and other distributions on the Merger Shares (although such dividends and other distributions shall be credited to the account of such shareholder), receive certificates representing the Merger Shares, exchange the Merger Shares credited to such shareholder's account for shares of other portfolios in the Trust or the Cash Resource U.S. Government Money Market Fund, or pledge or redeem such Merger Shares until notified by the Growth Portfolio or the shareholder's agent that such shareholder has surrendered his or her outstanding Growth Portfolio certificates or, in the event of lost, stolen, or destroyed certificates, posted adequate bond. In the event that a shareholder shall not be permitted to receive dividends and other distributions on the Merger Shares as provided in the preceding sentence, the Capital Growth Portfolio shall pay any such dividends or distributions in additional Merger Shares, notwithstanding any election such shareholder shall have made previously with respect to the payment, in cash or otherwise, of dividends and distributions on shares of the Growth Portfolio. The Growth Portfolio will, at its expense, request that the shareholders of the Growth Portfolio surrender their outstanding Growth Portfolio certificates, or post adequate bond, as the case may be. (e) The Capital Growth Portfolio shall assume all liabilities of the Growth Portfolio, whether accrued or contingent, in connection with the acquisition of assets and subsequent dissolution of the Growth Portfolio or otherwise. A-6 5. Expenses, Fees, etc. (a) All fees and expenses, including legal and accounting expenses, portfolio transfer taxes (if any) or other similar expenses incurred in connection with the consummation by the Growth Portfolio and the Capital Growth Portfolio of the transactions contemplated by this Agreement will be allocated ratably between the Capital Growth Portfolio and the Growth Portfolio in proportion to their net assets as of the Valuation Time, except that the costs of proxy materials and proxy solicitation will be borne by the Growth Portfolio; provided, however, that such expenses will in any event be paid by the party directly incurring such expenses if and to the extent that the payment by the other party of such expenses would result in the disqualification of such party as a "regulated investment company" within the meaning of Section 851 of the Code. (b) In the event the transactions contemplated by this Agreement are not consummated by reason of the Capital Growth Portfolio's being either unwilling or unable to go forward other than by reason of the nonfulfillment or failure of any condition to the Capital Growth Portfolio's obligations referred to in Section 7(a) or Section 8, the Capital Growth Portfolio shall pay directly all reasonable fees and expenses incurred by the Growth Portfolio in connection with such transactions, including, without limitation, legal, accounting and filing fees. (c) In the event the transactions contemplated by this Agreement are not consummated by reason of the Growth Portfolio's being either unwilling or unable to go forward other than by reason of the nonfulfillment or failure of any condition to the Growth Portfolio's obligations referred to in Section 7(a) or Section 9, the Growth Portfolio shall pay directly all reasonable fees and expenses incurred by the Capital Growth Portfolio in connection with such transactions, including, without limitation, legal, accounting and filing fees. (d) In the event the transactions contemplated by this Agreement are not consummated for any reason other than (i) the Capital Growth Portfolio's or the Growth Portfolio's being either unwilling or unable to go forward or (ii) the nonfulfillment or failure of any condition to the Capital Growth Portfolio's or the Growth Portfolio's obligations referred to in Section 7(a), Section 8 or Section 9 of this Agreement, then each of the Capital Growth Portfolio and the Growth Portfolio shall bear all of its own expenses incurred in connection with such transactions. (e) Notwithstanding any other provisions of this Agreement, if for any reason the transactions contemplated by this Agreement are not consummated, no party shall be liable to the other party for any damages resulting therefrom, including, without limitation, consequential damages, except as specifically set forth above. 6. Exchange Date. Delivery of the assets of the Growth Portfolio to be transferred, assumption of the liabilities of the Growth Portfolio to be assumed, and the delivery of the Merger Shares to be issued shall be made at 901 East Byrd Street, Richmond Virginia, at 10:00 A.M. on the next full business day following the Valuation Time, or at such other time and date agreed to by the Capital Growth Portfolio and the Growth Portfolio, the date and time upon which such delivery is to take place being referred to herein as the "Exchange Date." 7. Meeting of Shareholders; Dissolution. (a) The Mentor Funds, on behalf of the Growth Portfolio, agrees to call a meeting of the Growth Portfolio's shareholders as soon as is practicable after the effective date of the Registration Statement for the purpose of considering the sale of all of its assets to and the assumption of all of its liabilities by the Capital Growth Portfolio as herein provided, adopting this Agreement, and authorizing the liquidation and dissolution of the Growth Portfolio. (b) The Growth Portfolio agrees that the liquidation and dissolution of the Growth Portfolio will be effected in the manner provided in the Trust's Declaration of Trust in accordance with applicable law and that on and after the Exchange Date, the Growth Portfolio shall not conduct any business except in connection with its liquidation and dissolution. A-7 (c) The Capital Growth Portfolio has, after the preparation and delivery to the Capital Growth Portfolio by the Growth Portfolio of a preliminary version of the Proxy Statement which was satisfactory to the Capital Growth Portfolio and to Ropes & Gray for inclusion in the Registration Statement, filed the Registration Statement with the Commission. Each of the Growth Portfolio and the Capital Growth Portfolio will cooperate with the other, and each will furnish to the other the information relating to itself required by the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder to be set forth in the Registration Statement, including the Prospectus and the Proxy Statement. 8. Conditions to the Capital Growth Portfolio's Obligations. The obligations of the Capital Growth Portfolio hereunder shall be subject to the following conditions: (a) That this Agreement shall have been adopted and the transactions contemplated hereby shall have been approved by the requisite vote of the holders of the outstanding shares of beneficial interest of the Growth Portfolio entitled to vote. (b) That the Growth Portfolio shall have furnished to the Capital Growth Portfolio a statement of the Growth Portfolio's assets and liabilities, with values determined as provided in Section 4 of this Agreement, together with a list of Investments with their respective tax costs, all as of the Valuation Time, certified on the Growth Portfolio's behalf by the Trust's President (or any Vice President) and Treasurer, and a certificate of both such officers, dated the Exchange Date, that there has been no material adverse change in the financial position of the Growth Portfolio since March 31, 1995 other than changes in the Investments and other assets and properties since that date or changes in the market value of the Investments and other assets of the Growth Portfolio, or changes due to dividends paid or losses from operations. (c) That the Growth Portfolio shall have furnished to the Capital Growth Portfolio a statement, dated the Exchange Date, signed by the Trust's President (or any Vice President) and Treasurer certifying that as of the Valuation Time and as of the Exchange Date all representations and warranties of the Growth Portfolio made in this Agreement are true and correct in all material respects as if made at and as of such dates and the Growth Portfolio has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such dates. (d) That the Growth Portfolio shall have delivered to the Capital Growth Portfolio a letter from KPMG Peat Marwick LLP dated the Exchange Date stating that such firm has employed certain procedures whereby it has obtained schedules of the tax provisions and qualifying tests for regulated investment companies as prepared for the fiscal year ended September 30, 1994 and the period October 1, 1994 to the Exchange Date (the latter period being based on unaudited data) and that, in the course of such procedures, nothing came to their attention which caused them to believe that the Growth Portfolio would not qualify as a regulated investment company for federal, state, or local income tax purposes or for federal excise tax purposes under Section 4982 of the Code, for the tax year ended September 30, 1994, and for the period from October 1, 1994 to the Exchange Date. (e) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement. (f) That the Capital Growth Portfolio shall have received an opinion of Ropes & Gray, in form satisfactory to the Capital Growth Portfolio and dated the Exchange Date, to the effect that (i) this Agreement has been duly authorized, executed, and delivered by the Trust on behalf of the Growth Portfolio and, assuming that the Registration Statement, the Prospectus and the Proxy Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and assuming due authorization, execution and delivery of this Agreement by the Trust on behalf of the Capital Growth Portfolio, is a valid and binding obligation of the Trust and the Growth Portfolio, (ii) the Trust, on A-8 behalf of the Growth Portfolio, has power to sell, assign, convey, transfer and deliver the assets contemplated hereby and, upon consummation of the transactions contemplated hereby in accordance with the terms of this Agreement, the Growth Portfolio will have duly sold, assigned, conveyed, transferred and delivered such assets to the Capital Growth Portfolio, (iii) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate the Trust's Declaration of Trust, as amended, or any provision of any agreement known to such counsel to which the Trust or the Growth Portfolio is a party or by which it is bound, and (iv) no consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Trust on behalf of the Growth Portfolio of the transactions contemplated hereby, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities or blue sky laws and the H-S-R Act, it being understood that with respect to investment restrictions as contained in the Trust's Declaration of Trust, Bylaws or then-current Registration Statement, such counsel may rely upon a certificate of an officer of the Trust whose responsibility it is to advise the Trust and the Growth Portfolio with respect to such matters. (g) That the Capital Growth Portfolio shall have received an opinion of Ropes & Gray, in form satisfactory to the Capital Growth Portfolio, with respect to the matters specified in Section 9(g) of this Agreement, and such other matters as the Capital Growth Portfolio may reasonably deem necessary or desirable. (h) That the Capital Growth Portfolio shall have received an opinion of Ropes & Gray dated the Exchange Date (which opinion would be based upon certain factual representations and subject to certain qualifications), to the effect that, on the basis of the existing provisions of the Code, current administrative rules, and court decisions, for federal income tax purposes (i) no gain or loss will be recognized by the Capital Growth Portfolio upon receipt of the Investments transferred to the Capital Growth Portfolio pursuant to this Agreement in exchange for the Merger Shares, (ii) the basis to the Capital Growth Portfolio of the Investments will be the same as the basis of the Investments in the hands of the Growth Portfolio immediately prior to such exchange, and (iii) the Capital Growth Portfolio's holding periods with respect to the Investments will include the respective periods for which the Investments were held by the Growth Portfolio. (i) That the assets of the Growth Portfolio to be acquired by the Capital Growth Portfolio will include no assets which the Capital Growth Portfolio, by reason of charter limitations or of investment restrictions disclosed in the Prospectus in effect on the Exchange Date, may not properly acquire. (j) That the Registration Statement shall have become effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Trust or the Capital Growth Portfolio, threatened by the Commission. (k) That the Trust shall have received from the Commission, any relevant state securities administrator, the Federal Trade Commission (the "FTC") and the Department of Justice (the "Department") such order or orders as Ropes & Gray deems reasonably necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act, any applicable state securities or blue sky laws and the H-S-R Act in connection with the transactions contemplated hereby, and that all such orders shall be in full force and effect. (l) That all actions taken by the Trust on behalf of the Growth Portfolio in connection with the transactions contemplated by this Agreement and all documents incidental thereto shall be satisfactory in form and substance to the Capital Growth Portfolio and Ropes & Gray. (m) That, prior to the Exchange Date, the Growth Portfolio shall have declared a dividend or dividends which, together with all previous such dividends, shall have the effect of distributing to the shareholders of the Growth Portfolio all of the Growth Portfolio's investment company taxable income for its taxable years ending A-9 on or after September 30, 1994 and on or prior to the Exchange Date (computed without regard to any deduction for dividends paid), and all of its net capital gain realized in each of its taxable years ending on or after September 30, 1994 and on or prior to the Exchange Date. (n) That the Growth Portfolio shall have furnished to the Capital Growth Portfolio a certificate, signed by the President (or any Vice President) and the Treasurer of the Trust, as to the tax cost to the Growth Portfolio of the securities delivered to the Capital Growth Portfolio pursuant to this Agreement, together with any such other evidence as to such tax cost as the Capital Growth Portfolio may reasonably request. (o) That the Growth Portfolio's custodian shall have delivered to the Capital Growth Portfolio a certificate identifying all of the assets of the Growth Portfolio held by such custodian as of the Valuation Time. (p) That the Growth Portfolio's transfer agent shall have provided to the Capital Growth Portfolio (i) the originals or true copies of all of the records of the Growth Portfolio in the possession of such transfer agent as of the Exchange Date, (ii) a certificate setting forth the number of shares of the Growth Portfolio outstanding as of the Valuation Time, and (iii) the name and address of each holder of record of any such shares and the number of shares held of record by each such shareholder. (q) That all of the issued and outstanding shares of beneficial interest of the Growth Portfolio shall have been offered for sale and sold in conformity with all applicable state securities or blue sky laws and, to the extent that any audit of the records of the Growth Portfolio or its transfer agent by the Capital Growth Portfolio or its agents shall have revealed otherwise, either (i) the Growth Portfolio shall have taken all actions that in the opinion of the Capital Growth Portfolio or its counsel are necessary to remedy any prior failure on the part of the Growth Portfolio to have offered for sale and sold such shares in conformity with such laws or (ii) the Growth Portfolio shall have furnished (or caused to be furnished) surety, or deposited (or caused to be deposited) assets in escrow, for the benefit of the Capital Growth Portfolio in amounts sufficient and upon terms satisfactory, in the opinion of the Capital Growth Portfolio or its counsel, to indemnify the Capital Growth Portfolio against any expense, loss, claim, damage or liability whatsoever that may be asserted or threatened by reason of such failure on the part of the Growth Portfolio to have offered and sold such shares in conformity with such laws. (r) That the Capital Growth Portfolio shall have received from KPMG Peat Marwick LLP a letter addressed to the Capital Growth Portfolio dated as of the Exchange Date satisfactory in form and substance to the Capital Growth Portfolio to the effect that, on the basis of limited procedures agreed upon by the Capital Growth Portfolio and described in such letter (but not an examination in accordance with generally accepted auditing standards), as of the Valuation Time the value of the assets of the Growth Portfolio to be exchanged for the Merger Shares has been determined in accordance with the provisions of the Trust's Declaration of Trust, pursuant to the procedures customarily utilized by the Capital Growth Portfolio in valuing its assets and issuing its shares. 9. Conditions to the Growth Portfolio's Obligations. The obligations of the Growth Portfolio hereunder shall be subject to the following conditions: (a) That this Agreement shall have been adopted and the transactions contemplated hereby shall have been approved by the requisite vote of the holders of the outstanding shares of beneficial interest of the Growth Portfolio entitled to vote. (b) That the Capital Growth Portfolio shall have furnished to the Growth Portfolio a statement of the Capital Growth Portfolio's net assets, together with a list of portfolio holdings with values determined as provided in Section 4, all as of the Valuation Time, certified on the Capital Growth Portfolio's behalf by the Trust's President (or any Vice President) and Treasurer (or any Assistant Treasurer), and a certificate of both such officers, dated the Exchange Date, to the effect that as of the Valuation Time and as of the Exchange Date there has been no A-10 material adverse change in the financial position of the Capital Growth Portfolio since March 31, 1995, other than changes in its portfolio securities since that date, changes in the market value of its portfolio securities, changes due to net redemptions, dividends paid or losses from operations. (c) That the Trust, on behalf of the Capital Growth Portfolio, shall have executed and delivered to the Growth Portfolio an Assumption of Liabilities dated as of the Exchange Date pursuant to which the Capital Growth Portfolio will assume all of the liabilities of the Growth Portfolio existing at the Valuation Time in connection with the transactions contemplated by this Agreement. (d) That the Capital Growth Portfolio shall have furnished to the Growth Portfolio a statement, dated the Exchange Date, signed by the Trust's President (or any Vice President) and Treasurer (or any Assistant Treasurer) certifying that as of the Valuation Time and as of the Exchange Date all representations and warranties of the Capital Growth Portfolio made in this Agreement are true and correct in all material respects as if made at and as of such dates, and that the Capital Growth Portfolio has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to each of such dates. (e) That there shall not be any material litigation pending or threatened with respect to the matters contemplated by this Agreement. (f) That the Growth Portfolio shall have received an opinion of Ropes & Gray, in form satisfactory to the Growth Portfolio and dated the Exchange Date, to the effect that (i) the Merger Shares to be delivered to the Growth Portfolio as provided for by this Agreement are duly authorized and upon such delivery will be validly issued and will be fully paid and nonassessable by the Trust and the Capital Growth Portfolio and no shareholder of the Capital Growth Portfolio has any preemptive right to subscription or purchase in respect thereof, (ii) this Agreement has been duly authorized, executed and delivered by the Trust on behalf of the Capital Growth Portfolio and, assuming that the Prospectus, the Registration Statement and the Proxy Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and assuming due authorization, execution and delivery of this Agreement by the Trust on behalf of the Growth Portfolio, is a valid and binding obligation of the Trust and the Capital Growth Portfolio, (iii) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate the Trust's Declaration of Trust, as amended, or By-laws, or any provision of any agreement known to such counsel to which the Trust or the Capital Growth Portfolio is a party or by which it is bound, it being understood that with respect to investment restrictions as contained in the Trust's Declaration of Trust, as amended, By-Laws or then-current prospectus or statement of additional information, such counsel may rely upon a certificate of an officer of the Trust whose responsibility it is to advise the Trust and the Capital Growth Portfolio with respect to such matters, (iv) no consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Trust on behalf of the Capital Growth Portfolio of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities or blue sky laws, and (v) the Registration Statement has become effective under the 1933 Act, and to the best of the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act. (g) That the Growth Portfolio shall have received an opinion of Ropes & Gray dated the Exchange Date (which opinion would be based upon certain factual representations and subject to certain qualifications), to the effect that, on the basis of the existing provisions of the Code, current administrative rules, and court decisions, for federal income tax purposes (i) no gain or loss will be recognized by the Growth Portfolio upon the transfer of A-11 the Investments to the Capital Growth Portfolio and the assumption by the Capital Growth Portfolio of the liabilities of the Growth Portfolio, or upon the distribution of the Merger Shares by the Growth Portfolio to its shareholders pursuant to this Agreement in exchange for the Merger Shares, (ii) the basis of the Merger Shares a Growth Portfolio shareholder receives in connection with the transaction will be the same as the basis of his or her Growth Portfolio shares exchanged thereof, and (iii) a Growth Portfolio shareholder's holding period for his or her Merger Shares will be determined by including the period for which he or she held the Growth Portfolio shares exchanged therefor. (h) That all actions taken by the Trust on behalf of the Capital Growth Portfolio in connection with the transactions contemplated by this Agreement and all documents incidental thereto shall be satisfactory in form and substance to the Growth Portfolio and Ropes & Gray. (i) That the Registration Statement shall have become effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Trust or the Capital Growth Portfolio, threatened by the Commission. (j) That the Trust shall have received from the Commission, any relevant state securities administrator, the FTC and the Department such order or orders as Ropes & Gray deems reasonably necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act, any applicable state securities or blue sky laws and the H-S-R Act in connection with the transactions contemplated hereby, and that all such orders shall be in full force and effect. 10. Indemnification. (a) The Growth Portfolio will indemnify and hold harmless, out of the assets of the Growth Portfolio but no other assets, the Capital Growth Portfolio and the Trust (and its trustees and its officers) (for purposes of this subparagraph, the "Indemnified Parties") against any and all expenses, losses, claims, damages and liabilities at any time imposed upon or reasonably incurred by any one or more of the Indemnified Parties in connection with, arising out of, or resulting from any claim, action, suit or proceeding in which any one or more of the Indemnified Parties may be involved or with which any one or more of the Indemnified Parties may be threatened by reason of any untrue statement or alleged untrue statement of a material fact relating to the Trust or the Growth Portfolio contained in the Registration Statement, the Prospectus or the Proxy Statement or any amendment or supplement to any of the foregoing, or arising out of or based upon the omission or alleged omission to state in any of the foregoing a material fact relating to the Trust or the Growth Portfolio required to be stated therein or necessary to make the statements relating to the Trust or the Growth Portfolio therein not misleading, including, without limitation, any amounts paid by any one or more of the Indemnified Parties in a reasonable compromise or settlement of any such claim, action, suit or proceeding, or threatened claim, action, suit or proceeding made with the consent of the Trust or the Growth Portfolio. The Indemnified Parties will notify the Trust and the Growth Portfolio in writing within ten days after the receipt by any one or more of the Indemnified Parties of any notice of legal process or any suit brought against or claim made against such Indemnified Party as to any matters covered by this Section 10(a). The Growth Portfolio shall be entitled to participate at its own expense in the defense of any claim, action, suit or proceeding covered by this Section 10(a), or, if it so elects, to assume at its expense by counsel satisfactory to the Indemnified Parties the defense of any such claim, action, suit or proceeding, and if the Growth Portfolio elects to assume such defense, the Indemnified Parties shall be entitled to participate in the defense of any such claim, action, suit or proceeding at their expense. The Growth Portfolio's obligation under this Section 10(a) to indemnify and hold harmless the Indemnified Parties shall constitute a guarantee of payment so that the Growth Portfolio will pay in the first instance any expenses, losses, claims, damages and liabilities required to be paid by it under this Section 10(a) without the necessity of the Indemnified Parties' first paying the same. A-12 (b) The Capital Growth Portfolio will indemnify and hold harmless, out of the assets of the Capital Growth Portfolio but no other assets, the Growth Portfolio and the Trust (and its trustees and its officers) (for purposes of this subparagraph, the "Indemnified Parties") against any and all expenses, losses, claims, damages and liabilities at any time imposed upon or reasonably incurred by any one or more of the Indemnified Parties in connection with, arising out of, or resulting from any claim, action, suit or proceeding in which any one or more of the Indemnified Parties may be involved or with which any one or more of the Indemnified Parties may be threatened by reason of any untrue statement or alleged untrue statement of a material fact relating to the Capital Growth Portfolio contained in the Registration Statement, the Prospectus or the Proxy Statement, or any amendment or supplement to any thereof, or arising out of, or based upon, the omission or alleged omission to state in any of the foregoing a material fact relating to the Trust or the Capital Growth Portfolio required to be stated therein or necessary to make the statements relating to the Trust or the Capital Growth Portfolio therein not misleading, including without limitation any amounts paid by any one or more of the Indemnified Parties in a reasonable compromise or settlement of any such claim, action, suit or proceeding, or threatened claim, action, suit or proceeding made with the consent of the Trust or the Capital Growth Portfolio. The Indemnified Parties will notify the Trust and the Capital Growth Portfolio in writing within ten days after the receipt by any one or more of the Indemnified Parties of any notice of legal process or any suit brought against or claim made against such Indemnified Party as to any matters covered by this Section 10(b). The Capital Growth Portfolio shall be entitled to participate at its own expense in the defense of any claim, action, suit or proceeding covered by this Section 10(b), or, if it so elects, to assume at its expense by counsel satisfactory to the Indemnified Parties the defense of any such claim, action, suit or proceeding, and, if the Capital Growth Portfolio elects to assume such defense, the Indemnified Parties shall be entitled to participate in the defense of any such claim, action, suit or proceeding at their own expense. The Capital Growth Portfolio's obligation under this Section 10(b) to indemnify and hold harmless the Indemnified Parties shall constitute a guarantee of payment so that the Capital Growth Portfolio will pay in the first instance any expenses, losses, claims, damages and liabilities required to be paid by it under this Section 10(b) without the necessity of the Indemnified Parties' first paying the same. 11. No Broker, etc. Each of the Growth Portfolio and the Capital Growth Portfolio represents that there is no person who has dealt with it or the Trust who by reason of such dealings is entitled to any broker's or finder's or other similar fee or commission arising out of the transactions contemplated by this Agreement. 12. Termination. The Growth Portfolio and the Capital Growth Portfolio may, by mutual consent of the trustees on behalf of each Portfolio, terminate this Agreement, and the Growth Portfolio or the Capital Growth Portfolio, after consultation with counsel and by consent of their trustees or an officer authorized by such trustees, may waive any condition to their respective obligations hereunder. If the transactions contemplated by this Agreement have not been substantially completed by December 31, 1995, this Agreement shall automatically terminate on that date unless a later date is agreed to by the Growth Portfolio and the Capital Growth Portfolio. 13. Rule 145. Pursuant to Rule 145 under the 1933 Act, the Capital Growth Portfolio will, in connection with the issuance of any Merger Shares to any person who at the time of the transaction contemplated hereby is deemed to be an affiliate of a party to the transaction pursuant to Rule 145(c), cause to be affixed upon the certificates issued to such person (if any) a legend as follows: A-13 "THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO THE MENTOR CAPITAL GROWTH PORTFOLIO OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE MENTOR/CAMBRIDGE GROWTH PORTFOLIO SUCH REGISTRATION IS NOT REQUIRED." and, further, the Capital Growth Portfolio will issue stop transfer instructions to the Capital Growth Portfolio's transfer agent with respect to such shares. The Growth Portfolio will provide the Capital Growth Portfolio on the Exchange Date with the name of any Growth Portfolio shareholder who is to the knowledge of the Growth Portfolio an affiliate of the Growth Portfolio on such date. 14. Covenants, etc. Deemed Material. All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf. 15. Sole Agreement; Amendments. This Agreement supersedes all previous correspondence and oral communications between the parties regarding the subject matter hereof, constitutes the only understanding with respect to such subject matter, may not be changed except by a letter of agreement signed by each party hereto, and shall be construed in accordance with and governed by the laws of The Commonwealth of Massachusetts. 16. Declaration of Trust. A copy of the 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 on behalf of the Portfolios, as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees, officers or shareholders of the Trust individually but are binding only upon the assets and property of the Growth Portfolio and the Capital Growth Portfolio, respectively. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original. THE MENTOR FUNDS, on behalf of the MENTOR CAPITAL GROWTH PORTFOLIO By: /s/ PAUL F. COSTELLO President THE MENTOR FUNDS, on behalf of the MENTOR/CAMBRIDGE GROWTH PORTFOLIO By: /s/ PAUL F. COSTELLO President A-14 EXHIBIT B INFORMATION EXCERPTED FROM THE ANNUAL REPORT Set out below is a commentary that was prepared by the portfolio manager to the Mentor Capital Growth Portfolio (formerly, the Cambridge Capital Growth Portfolio) and that was included in the Annual Report. At the time of the Annual Report, Pheonix Investment Counsel, Inc. served as subadviser to the Portfolio. The commentary has not been revised or updated since its initial publication in November 1994. CAMBRIDGE CAPITAL GROWTH PORTFOLIO In reviewing the year [ending September 30, 1994], the largest factor affecting the capital markets has been the surge in economic growth and the attendant expectation that eventually inflation would reemerge as a problem. Although we have not, in fact, seen any strong signs of inflationary pressures in the data to date, concern is at a higher level now than when the Federal Reserve first began to raise rates last February. We have now experienced four quarters in a row in which GDP rose more than 3%, the unemployment rate has continued to tick down while the workweek is the longest it has been in years, the dollar continues to trend lower against major foreign currencies, and mid-term elections are taking precedence in Washington over fiscal policy administration. Based on the aforementioned factors, it would seem that in spite of the bond market's steep correction to date, there may indeed be more upside to interest rates and that the equity market's valuation at current levels continues to appear high in relation to that of fixed income alternatives. We are highly encouraged by the recent resurgent strength shown by quality growth stocks as a group. The earnings reports for the second and third quarters of 1994 showed excellent growth year over year and therefore are going to be incredibly high hurdles to overcome next year especially if the Fed succeeds in slowing the momentum of the economy. Companies which will show continued earnings momentum are going to become somewhat of a scarce item as we head into 1995 and we believe that the companies that have been most ignored by the market over the past two years, those with the quality growth that we focus on, will be direct beneficiaries. Some of the qualities such companies exhibit which set them apart in an investor's eyes include strong and stable earnings growth regardless of the point in the economic cycle, good balance sheets and other financial characteristics, excellent growth prospects looking forward and competent managements. Your portfolio benefited from many of the technology, telecommunications and capital goods sector names which were added over the past six months. Many of the companies in the technology sector in particular are achieving good price gains based on excellent financial performance both in the U.S. and overseas. The healthcare sector's good relative performance has also helped the portfolio. Over the course of the year, there were several stocks which were sold based on disappointing earnings, price performance or a change in the fundamental story of the company and these stocks also detracted from the overall performance of the portfolio. Included in this list would be the railroad stocks, and several technology holdings. The cash reserve position at the end of the fiscal year at 14.76% is substantially lower than at the same time last year as we have been able to invest in several very attractive quality growth names at reasonable valuations. We will continue to search for and invest in those stocks most appropriate for the objectives of the portfolio. CATHY DUDLEY B-1 ALL INVESTMENTS ARE SUBJECT TO CERTAIN RISKS. FOR EXAMPLE, THOSE WHICH INCLUDE COMMON STOCK ARE AFFECTED BY FLUCTUATING STOCK PRICES. INVESTMENTS OUTSIDE THE U.S. ARE SUBJECT TO ADDITIONAL RISKS, INCLUDING CURRENCY FLUCTUATIONS, POLITICAL AND SOCIAL INSTABILITY, DIFFERING SECURITIES REGULATIONS AND ACCOUNTING STANDARDS, LIMITED PUBLIC INFORMATION, POSSIBLE CHANGES IN TAXATION, AND PERIODS OF ILLIQUIDITY. ACCORDINGLY, INVESTORS SHOULD MAINTAIN A LONG-TERM PERSPECTIVE. Set out below is a performance comparison that was included in the Annual Report. The comparison has not been revised or updated since its initial publication in November 1994, except that the information has been restated to give effect to the sales charges and the CDSC now applicable to investments in the Fund, as if they had been in effect since the organization of the Fund. CAMBRIDGE CAPITAL GROWTH PORTFOLIO PERFORMANCE COMPARISON (unaudited) COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE IN CAMBRIDGE CAPITAL GROWTH PORTFOLIO CLASS A AND CLASS B SHARES AND S&P 500. [GRAPH] PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. (FOOTNOTES APPEAR ON FOLLOWING PAGE.) B-2 * Reflects operations of Cambridge Capital Growth Portfolio Class A and Class B Shares from the date of initial public investment 4/29/92 through 9/30/94. ** Represents a hypothetical investment of $10,000 in Cambridge Capital Growth Portfolio Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charge = $9,425). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. *** Represents a hypothetical investment of $10,000 in Cambridge Capital Growth Portfolio Class B Shares, after deducting the maximum deferred sales charge of 4% at 9/30/94. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. -- The S&P 500 is adjusted to reflect reinvestment of dividends on securities in the index. The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. B-3 THIS PROXY PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES RECOMMEND A VOTE FOR THE PROPOSAL BELOW. 1. To approve the Agreement and Plan of Reorganization providing for the transfer of all of the assets of the Mentor/Cambridge Growth Portfolio (the "Growth Portfolio") to the Mentor Capital Growth Portfolio (the "Capital Growth Portfolio") in exchange for shares of the Capital Growth Portfolio and the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio, and the distribution of such shares to the shareholders of the Growth Portfolio in complete liquidation of the Growth Portfolio. [_] FOR [_] AGAINST [_] ABSTAIN PLEASE SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE MENTOR/CAMBRIDGE GROWTH PORTFOLIO PROXY SOLICITED BY THE TRUSTEES A SERIES OF THE MENTOR FUNDS PROXY FOR SPECIAL MEETING OF SHAREHOLDERS -- SEPTEMBER 21, 1995 The undersigned hereby appoints Peter J. Quinn, Jr., Daniel J. Ludeman, and Paul F. Costello, and each of them, proxies, with power of substitution to each, and hereby authorizes them to represent and to vote, as designated on the reverse side, at the Special Meeting of Shareholders of the Mentor/Cambridge Growth Portfolio (the "Portfolio"), a series of The Mentor Funds, on Thursday, September 21, 1995 at 2:00 p.m. Eastern time, and at any adjournments thereof, all of the shares of the Portfolio which the undersigned would be entitled to vote if personally present. Date_________________________________ NOTE: Please sign exactly as your name appears on this card. All joint owners should sign. When signing as executor, administrator, attorney, trustee or guardian or as custodian for a minor, please give full title as such. If a corporation, please sign in full corporate name and indicate the signer's office. If a partner, sign in the partnership name. _____________________________________ Signature(s) MENTOR/CAMBRIDGE GROWTH PORTFOLIO, A SERIES OF THE MENTOR FUNDS NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS To the Shareholders of the Mentor/Cambridge Growth Portfolio: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of the Mentor/Cambridge Growth Portfolio (the "Growth Portfolio") will be held Thursday, September 21, 1995 at 2:00 p.m. at the Riverfront Plaza Conference Suite, Riverfront Plaza -- West Tower, 20th Floor, 901 East Byrd Street, Richmond, Virginia, to consider the following: 1. To approve or disapprove an Agreement and Plan of Reorganization providing for the transfer of all of the assets of the Growth Portfolio to the Mentor Capital Growth Portfolio (the "Capital Growth Portfolio") in exchange for shares of the Capital Growth Portfolio and the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio, and the distribution of such shares to the shareholders of the Growth Portfolio in complete liquidation of the Growth Portfolio. 2. To transact such other business as may properly come before the meeting. The Trustees have fixed the close of business on July 31, 1995 as the record date for determination of shareholders entitled to notice of, and to vote at, the Special Meeting. By order of the Trustees /s/ PAUL F. COSTELLO Paul F. Costello, PRESIDENT SUPPLEMENT DATED AUGUST 18, 1995 TO PROSPECTUS/PROXY STATEMENT DATED AUGUST 18, 1995 IMPORTANT NOTICE The Special Meeting of Shareholders of Mentor/Cambridge Growth Portfolio to which the enclosed Prospectus/Proxy Statement relates will be held on THURSDAY, SEPTEMBER 21, 1995 AT 2:00 P.M. at the Riverfront Plaza Conference Suite, Riverfront Plaza -- West Tower, 20th Floor, 901 East Byrd Street, Richmond, Virginia. Any reference in the Prospectus/Proxy Statement or other enclosed materials to a meeting date of September 12, 1995 is deleted, and replaced with a reference to the meeting date of Thursday, September 21, 1995. MENTOR CAPITAL GROWTH PORTFOLIO FORM N-14 PART B STATEMENT OF ADDITIONAL INFORMATION August 18, 1995 This Statement of Additional Information contains material which may be of interest to investors but which is not included in the Prospectus/Proxy Statement (the "Prospectus") of the Mentor Capital Growth Portfolio (the "Capital Growth Portfolio") dated August 18, 1995 relating to the sale of all or substantially all of the assets of the Mentor/Cambridge Growth Portfolio (the "Growth Portfolio") to the Capital Growth Portfolio. The Statement of Additional Information of The Mentor Funds (the "Trust") dated May 30, 1995, as revised, filed electronically on July 27, 1995 (File no. 811-6550), is incorporated herein by reference. This Statement is not a prospectus and is authorized for distribution only when it accompanies or follows delivery of a prospectus, and should be read in conjunction with the Prospectus. Investors may obtain a free copy of the Prospectus or the Statement of Additional Information by writing the Trust, 901 East Byrd Street, Richmond, Virginia, or by calling 1-800-382-0016. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS KPMG Peat Marwick LLP are the independent accountants for the Growth Portfolio and the Capital Growth Portfolio, providing audit services, tax return preparation and review and other tax consulting services and assistance and consultation in connection with the review of various Securities and Exchange Commission filings for the Portfolios. The (i) Report of Independent Accountants and financial statements relating to the Growth Portfolio and the Capital Growth Portfolio included in the Trust's Annual Report for the fiscal year ended September 30, 1994 (File no. 811-6550) (the "Annual Report"), filed electronically on December 1, 1994, and the (ii) unaudited financial statements relating to the Growth Portfolio and the Capital Growth Portfolio included in the Trust's Semi-Annual Report for the six months ended March 31, 1995, filed electronically on June 5, 1995 (File no. 811-6550), are incorporated by reference into this Statement of Additional Information. The financial statements included in the Annual Report and incorporated by reference into the Prospectus/Proxy Statement and this Statement of Additional Information have been so included and incorporated in reliance upon the reports of KPMG Peat Marwick LLP, given on their authority as experts in auditing and accounting. 1 Table of Contents Unaudited Pro Forma combined Financial Statements of the Capital Growth Portfolio and the Growth Portfolio as of September 30, 1994 . . . . . . . . . . . . . . . . . . 4 Unaudited Pro Forma combined Financial Statements of the Capital Growth Portfolio and the Growth Portfolio as of March 31, 1995 . . . . . . . . . . . . . . . . . . . . 14 2 MENTOR CAPITAL GROWTH PORTFOLIO AND MENTOR/CAMBRIDGE GROWTH PORTFOLIO PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED) The accompanying unaudited pro forma combining investment portfolio and statement of assets and liabilities of the Capital Growth and Growth Portfolios assumes that the exchange described in the next paragraph occurred on September 30, 1994 and on March 31, 1995 and the unaudited pro forma combining statement of operations of the Mentor Capital Growth Portfolio (the "Capital Growth Portfolio") as if the combination with the Mentor/Cambridge Growth Portfolio (the "Growth Portfolio") had been consummated on September 30, 1994 and on March 31, 1995. These financial statements are not indicative of future operations or actual results that would have occurred had the combination been consummated at the beginning of the fiscal period presented. These statements have been derived from the September 30, 1994 audited financial statements and the March 31, 1995 unaudited financial statements of the Capital Growth Portfolio and the Growth Portfolio, respectively, each of which is incorporated by reference into this Statement of Additional Information. The pro forma statements give effect to the proposed transfer of all the assets of the Growth Portfolio to the Capital Growth Portfolio in exchange for the assumption by the Capital Growth Portfolio of all of the liabilities of the Growth Portfolio and for a number of Merger Shares equal in value to the value of the net assets of the Growth Portfolio transferred to the Capital Growth Portfolio. Under generally accepted accounting principles, the historical cost of the investment securities will be carried forward to the surviving entity (the Capital Growth Portfolio) and the results of operations of the Capital Growth Portfolio for pre-combined periods will not be restated. The pro forma statements do not reflect the expenses of either Portfolio in carrying out its obligations under the Agreement and Plan of Reorganization. The unaudited pro forma combining statements should be read in conjunction with the separate financial statements of the Portfolios. 3 PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES SEPTEMBER 30, 1994
MENTOR/ MENTOR CAMBRIDGE CAPITAL PRO FORMA GROWTH GROWTH COMBINED PORTFOLIO PORTFOLIO (UNAUDITED) ASSETS Investments, at market value (combined cost $100,315,891)........ $41,999,246 $63,102,296 $105,101,542 Cash............................................................. 859,416 - 859,416 Receivables...................................................... - Investments sold.............................................. 832,966 741,914 1,574,880 Fund shares sold.............................................. 11,126 42,470 53,596 Dividends and interest........................................ 95,051 139,759 234,810 Deferred expenses................................................ 9,039 11,351 20,390 Other assets..................................................... - 5,101 5,101 Total assets................................................ 43,806,844 64,042,891 107,849,735 LIABILITIES Payables Investments purchased......................................... 141,000 1,342,854 1,483,854 Fund shares redeemed.......................................... 250,951 218,520 469,471 Accrued administration expenses............................... 5,285 7,531 12,816 Accrued distribution expenses................................. 21,847 53,090 74,937 Accrued expenses and other liabilities........................... 131,075 133,983 265,058 Total liabilities........................................... 550,158 1,755,978 2,306,136 NET ASSETS.................................................. $43,256,686 $62,286,913 $105,543,599 Net Assets represented by: Additional paid-in capital....................................... $43,860,672 $59,512,213 $103,372,885 Undistributed net investment loss................................ (962,826) - (962,826) Accumulated distributions in excess of net investment income..... - (28,051) (28,051) Undistributed realized gain (loss) on investment transactions.... (2,801,823) 1,177,205 (1,624,618) Net unrealized appreciation of investments....................... 3,160,663 1,625,546 4,786,209 Net Assets.................................................... $43,256,686 $62,286,913 $105,543,599 NET ASSET VALUE PER SHARE Class A Shares................................................... $ 14.68 $ 14.88 $ 14.88 Class B Shares................................................... $ 14.53 $ 14.80 $ 14.80 OFFERING PRICE PER SHARE Class A Shares (a)............................................... $ 15.53 $ 15.75 $ 15.75 Class B Shares................................................... $ 14.53 $ 14.80 $ 14.80 REDEMPTION PROCEEDS PER SHARE Class A Shares................................................... $ 14.68 $ 14.88 $ 14.88 Class B Shares (b)............................................... $ 14.38 $ 14.65 $ 14.65 SHARES OUTSTANDING Class A Shares................................................... 993,054 1,423,010 2,907,035 Class B Shares................................................... 1,974,036 2,778,026 4,208,575 Total Shares Outstanding.................................... 2,967,090 4,201,036 7,115,610
(a) Computation of offering price: 100/94.5 of net asset value. (b) Computation of redemption proceeds: 99/100 of net asset value. 4 PRO FORMA COMBINING STATEMENTS OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1994
MENTOR/ MENTOR CAMBRIDGE CAPITAL PRO FORMA GROWTH GROWTH PRO FORMA COMBINED PORTFOLIO PORTFOLIO ADJUSTMENTS (UNAUDITED) INVESTMENT INCOME Interest............................................. $ 72,373 $ 498,408 $ 0 $ 570,781 Dividends (Net of withholding taxes)*................ 525,699 1,152,741 0 1,678,440 Total investment income........................... 598,072 1,651,149 0 2,249,221 EXPENSES Management fee....................................... 410,955 590,693 1,001,648 Distribution fees.................................... 253,834 360,712 614,546 Transfer agent fee................................... 163,583 213,354 376,937 Shareholder services fees............................ 128,423 184,588 313,011 Administration fee................................... 64,195 92,278 156,473 Custodian fee........................................ 71,513 67,014 138,527 Registration expenses................................ 30,000 27,000 (27,000) 30,000 Shareholder reports and postage expenses............. 25,338 36,777 62,115 Organizational expenses.............................. 12,275 12,195 24,470 Professional fees.................................... 11,008 15,782 (11,008) 15,782 Directors' fees and expenses......................... 7,180 7,180 (7,180) 7,180 Miscellaneous........................................ 13,472 13,705 (13,472) 13,705 Total expenses.................................. 1,191,776 1,621,278 (58,660) 2,754,394 Deduct Waiver of administration fee........................... 6,569 0 6,569 Net Expenses........................................... 1,185,207 1,621,278 (58,660) 2,747,825 Net investment income (loss)........................... (587,135) 29,871 58,660 (498,604) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments.............. (514,259) 1,128,751 0 614,492 Change in unrealized depreciation.................... (5,796,253) (2,465,351) 0 (8,261,604) Net realized and unrealized loss on investments.................................. (6,310,512) (1,336,600) 0 (7,647,112) Net increase (decrease) in net assets resulting from operations........................................... $(6,897,647) $(1,306,729) $ 58,660 $(8,145,716)
* Withholding taxes for Capital Growth Portfolio was $1,534. 5 THE PRO FORMA COMBINING INVESTMENT PORTFOLIO OF MENTOR/CAMBRIDGE GROWTH PORTFOLIO AND MENTOR CAPITAL GROWTH PORTFOLIO SEPTEMBER 30, 1994
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PRO FORMA COMBINED GROWTH PORTFOLIO PORTFOLIO (UNAUDITED) SHARES VALUE SHARES VALUE SHARES VALUE COMMON STOCKS..................87.85% ** BASIC MATERIALS...................... 6.15% Air Products & Chemicals, Inc...... 8,000 $ 374,000 8,000 $ 374,000 Akzo Nobel......................... 5,000 $ 586,663 5,000 586,663 British Steel ORD.................. 200,000 544,784 200,000 544,784 Du Pont EI De Nemours & Company.......................... 17,000 986,000 17,000 986,000 Dutch State Mines.................. 7,500 635,958 7,500 635,958 Alco Standard Corporation.......... 8,000 497,000 8,000 497,000 Consolidated Papers, Inc........... 1,000 51,750 1,000 51,750 Kimberly Clark Corporation......... 8,000 470,000 8,000 470,000 Minerals Technologies, Inc......... 10,500 311,063 10,500 311,063 Monsanto Company................... 5,000 401,875 5,000 401,875 Morton International, Inc.......... 7,500 206,250 7,500 206,250 Newell Company..................... 28,000 623,000 28,000 623,000 Nucor Corporation.................. 11,500 805,000 11,500 805,000 3,739,938 2,753,405 6,493,343 CAPITAL GOODS & CONSTRUCTION......... 7.19% Automotive Industries*............. 14,400 349,200 14,400 349,200 Brown Boveri & Cie................. 800 689,709 800 689,709 Browning Ferris Industries, Inc.... 30,000 952,500 30,000 952,500 Flour Corporation.................. 12,000 597,000 12,000 597,000 PPG Industries, Inc................ 25,000 990,625 25,000 990,625 Raytheon Company................... 17,000 1,090,125 17,000 1,090,125 United Technologies Corporation.... 15,000 939,375 15,000 939,375 Emerson Electric Company*.......... 8,900 530,663 8,900 530,663 General Electric Company........... 14,100 678,562 14,100 678,562 Grainger, Inc...................... 3,500 207,375 3,500 207,375 Magna International, Inc........... 13,600 501,500 13,600 501,500 Trimas Corporation................. 2,500 56,875 2,500 56,875 2,324,175 5,259,334 7,583,509 CONSUMER CYCLICAL.................... 18.09% Ann Taylor Stores, Inc.*........... 5,700 205,200 5,700 205,200 Capital Cities/ABC................. 11,000 902,000 11,000 902,000 Carnival Corporation............... 25,000 1,096,875 25,000 1,096,875 Dayton-Hudson Corporation.......... 12,500 956,250 12,500 956,250 Harcourt General, Inc.............. 6,000 206,250 22,500 773,438 28,500 979,688 Marriott International, Inc........ 31,500 909,562 31,500 909,562 May Department Stores Company...... 30,000 1,181,250 30,000 1,181,250 Mirage Resorts, Inc................ 48,000 1,032,000 48,000 1,032,000 Price Costco, Inc.*................ 50,000 803,125 50,000 803,125 Toys R Us, Inc.*................... 38,000 1,353,750 38,000 1,353,750 Whirlpool Corporation.............. 15,000 770,625 15,000 770,625 Brinker International, Inc.*....... 21,300 511,200 21,300 511,200
6
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PRO FORMA COMBINED GROWTH PORTFOLIO PORTFOLIO (UNAUDITED) SHARES VALUE SHARES VALUE SHARES VALUE CONSUMER CYCLICAL (CONTINUED) CUC International, Inc............. 6,900 $ 227,700 6,900 $ 227,700 Duracell International, Inc........ 3,500 159,688 3,500 159,688 Franklin Quest Company*............ 13,500 506,250 13,500 506,250 General Nutrition Companies, Inc.*................. 12,900 287,025 12,900 287,025 Heilig-Meyers Company.............. 11,600 304,500 11,600 304,500 Home Depot, Inc.................... 19,300 810,600 30,000 1,260,000 49,300 2,070,600 International Game Technology...... 7,400 152,625 7,400 152,625 Kohl's Corporation*................ 3,000 145,500 3,000 145,500 Lone Star Steakhouse & Saloon, Inc.*.................. 2,000 50,750 2,000 50,750 Manpower, Inc...................... 26,500 725,438 26,500 725,438 McDonald's Corporation............. 14,000 367,500 14,000 367,500 Office Depot, Inc.*................ 10,800 280,800 10,800 280,800 Promus Companies, Inc.............. 21,000 706,125 21,000 706,125 Shaw Industries, Inc............... 20,900 300,438 20,900 300,438 Starbucks Corporation*............. 9,000 207,562 9,000 207,562 Station Casinos, Inc.*............. 7,900 106,650 7,900 106,650 The Bombay Company, Inc............ 4,900 64,925 4,900 64,925 The Walt Disney Company............ 6,000 233,250 6,000 233,250 Tribune Company.................... 4,400 237,600 4,400 237,600 Viacom, Inc. -- Class A*........... 384 15,696 384 15,696 Viacom, Inc. -- Class B*........... 2,909 115,633 2,909 115,633 Viacom, Inc. -- Rights*............ 4,800 6,300 4,800 6,300 Viking Office Products, Inc.*...... 18,800 568,700 18,800 568,700 Wal-Mart Stores, Inc............... 23,600 551,650 23,600 551,650 8,055,555 11,038,875 19,094,430 CONSUMER STAPLES..................... 11.05% Abbott Laboratories................ 4,100 128,638 40,000 1,255,000 44,100 1,383,638 Amgen, Inc.*....................... 15,000 798,750 15,000 798,750 Astra AB........................... 37,500 898,590 37,500 898,590 Columbia/HCA Healthcare Corporation...................... 25,000 1,087,500 25,000 1,087,500 Merck & Company, Inc............... 40,000 1,420,000 40,000 1,420,000 Schering-Plough Corporation........ 15,000 1,065,000 15,000 1,065,000 Campbell Soup Company.............. 10,800 426,600 10,800 426,600 Coca Cola Company.................. 15,000 729,375 15,000 729,375 Conagra, Inc....................... 12,600 396,900 12,600 396,900 CPC International, Inc............. 11,000 556,875 11,000 556,875 Gillette Company................... 7,000 495,250 7,000 495,250 Philip Morris Companies, Inc....... 9,900 605,138 14,000 855,750 23,900 1,460,888 Procter & Gamble Company........... 11,000 655,875 11,000 655,875 UST, Inc........................... 10,000 286,250 10,000 286,250 4,280,901 7,380,590 11,661,491
7
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PRO FORMA COMBINED GROWTH PORTFOLIO PORTFOLIO (UNAUDITED) SHARES VALUE SHARES VALUE SHARES VALUE ENERGY............................... 6.41% Enron Corporation.................. 16,900 $ 511,225 25,000 $ 756,250 41,900 $1,267,475 British Petroleum PLC, ADS......... 13,000 984,750 13,000 984,750 Chevron Corporation................ 25,000 1,040,625 25,000 1,040,625 Dresser Industries, Inc............ 50,000 1,012,500 50,000 1,012,500 Royal Dutch Petroleum Company...... 8,500 912,688 8,500 912,688 Tidewater, Inc..................... 15,000 322,500 15,000 322,500 Mobil Corporation.................. 3,000 237,375 12,000 949,500 15,000 1,186,875 Repsol SA.......................... 1,200 36,579 1,200 36,579 785,179 5,978,813 6,763,992 FINANCIAL............................ 6.57% Bankers Life Holding Corporation... 7,200 169,200 7,200 169,200 American International Group, Inc.............................. 15,000 1,333,125 15,000 1,333,125 Boatmen's Bancshares, Inc.......... 14,000 434,875 14,000 434,875 Conseco, Inc....................... 6,500 291,688 6,500 291,688 Equity Residential Properties Trust............................ 7,500 238,125 7,500 238,125 Federal National Mortgage Association...................... 4,000 315,000 20,000 1,575,000 24,000 1,890,000 First USA, Inc..................... 12,100 425,012 12,100 425,012 General RE Corporation............. 3,400 359,975 3,400 359,975 MBNA Corporation................... 23,500 543,438 23,500 543,438 MGIC Investment Corporation........ 19,900 599,488 19,900 599,488 Nationsbank Corporation............ 10,000 490,000 10,000 490,000 Western National Corporation....... 12,000 162,000 12,000 162,000 4,028,801 2,908,125 6,936,926 HEALTH............................... 6.90% American Medical Holdings, Inc.*... 4,000 89,500 4,000 89,500 Columbia HCA Healthcare Corporation...................... 12,500 543,750 12,500 543,750 Cordis Corporation*................ 7,600 400,900 7,600 400,900 Forest Laboratories, Inc.*......... 8,000 394,000 8,000 394,000 Foundation Health Corporation*..... 1,900 66,975 1,900 66,975 Idexx Laboratories, Inc.*.......... 8,400 247,800 8,400 247,800 Integrated Health Services, Inc.*.................. 16,000 568,000 16,000 568,000 Johnson & Johnson.................. 6,000 309,750 6,000 309,750 Medtronic, Inc..................... 10,600 560,475 10,600 560,475 Mid Atlantic Medical Services, Inc.*.................. 9,400 282,000 9,400 282,000 Pfizer, Inc........................ 4,000 276,500 4,000 276,500 Schering Plough Corporation........ 11,800 837,800 11,800 837,800 United Healthcare Corporation...... 7,500 397,500 7,500 397,500 US Healthcare, Inc................. 6,500 302,656 17,500 814,844 24,000 1,117,500 Value Health, Inc.*................ 14,500 696,000 14,500 696,000 Warner Lambert Company............. 6,100 489,525 6,100 489,525 6,463,131 814,844 7,277,975
8
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PRO FORMA COMBINED GROWTH PORTFOLIO PORTFOLIO (UNAUDITED) SHARES VALUE SHARES VALUE SHARES VALUE TECHNOLOGY........................... 16.74% 3COM Corporation*.................. 7,200 $ 269,100 7,200 $ 269,100 Cirrus Logic, Inc.*................ 35,000 $ 980,000 35,000 980,000 Computer Associates International, Inc.............................. 30,000 1,335,000 30,000 1,335,000 Ericsson Telecommunication Company.......................... 15,000 806,250 15,000 806,250 Hewlett Packard Company............ 15,000 1,310,625 15,000 1,310,625 International Business Machines Corporation...................... 9,000 625,500 9,000 625,500 Perkin-Elmer Corporation........... 15,000 470,625 15,000 470,625 Philips Electronics Holdings Company.......................... 35,000 1,063,125 35,000 1,063,125 Xerox Corporation.................. 10,000 1,067,500 10,000 1,067,500 ADC Telecommunications, Inc.*...... 7,400 296,925 7,400 296,925 Applied Materials, Inc.*........... 10,400 486,200 10,400 486,200 AT&T Corporation................... 7,900 426,600 7,900 426,600 Cisco Systems, Inc.*............... 6,000 164,250 6,000 164,250 Compaq Computer Corporation*....... 12,100 394,763 12,100 394,763 Compuware Corporation*............. 8,000 376,500 8,000 376,500 EMC Corporation.................... 20,000 402,500 20,000 402,500 First Data Corporation............. 7,600 381,900 7,600 381,900 General Motors Corporation -- Class E...................... 10,400 395,200 23,000 874,000 33,400 1,269,200 Intel Corporation.................. 5,000 307,500 5,000 307,500 Linear Technology Corporation...... 8,000 354,500 8,000 354,500 Loral Corporation.................. 3,000 118,125 3,000 118,125 Maxim Integrated Products, Inc.*.................. 1,300 79,625 1,300 79,625 Microchip Technology, Inc.*........ 1,500 58,875 1,500 58,875 Microsoft Corporation*............. 8,000 449,000 8,000 449,000 Motorola, Inc...................... 10,800 569,700 10,800 569,700 Oracle Systems Corporation*........ 14,100 606,300 14,100 606,300 Parametric Technology Corporation*..................... 14,000 465,500 28,300 940,975 42,300 1,406,475 Reynolds & Reynolds Company........ 10,000 251,250 10,000 251,250 Scientific Atlanta, Inc............ 5,700 232,988 5,700 232,988 Silicon Graphics, Inc.*............ 23,000 592,250 23,000 592,250 Solectron Corporation*............. 3,500 92,313 3,500 92,313 Tellabs, Inc.*..................... 10,000 425,000 10,000 425,000 8,196,864 9,473,600 17,670,464 TRANSPORTATION & SERVICES............ 3.05% Conrail, Inc....................... 7,600 376,200 7,600 376,200 CSX Corporation.................... 10,000 685,000 10,000 685,000 Kansas City Southern Industries, Inc.............................. 5,800 205,175 5,800 205,175 Southwest Airlines Company......... 11,000 247,500 11,000 247,500 Union Pacific Corporation.......... 6,700 359,288 17,500 938,438 24,200 1,297,726 Wisconsin Central Transport*....... 9,900 405,900 9,900 405,900 1,594,063 1,623,438 3,217,501
9
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PRO FORMA COMBINED GROWTH PORTFOLIO PORTFOLIO (UNAUDITED) SHARES VALUE SHARES VALUE SHARES VALUE UTILITIES............................ 2.31% Ameritech Corporation.............. 20,000 $ 805,000 20,000 $ 805,000 Royal PTT Nederland................ 22,500 677,781 22,500 677,781 Sprint Corporation................. 25,000 953,125 25,000 953,125 2,435,906 2,435,906 MISCELLANEOUS........................ 1.16% Eastman Kodak Company.............. 7,500 388,125 7,500 388,125 ITT Corporation.................... 10,000 833,750 10,000 833,750 1,221,875 1,221,875 FOREIGN SECURITIES................... 2.24% AAlberts Industries................ 400 18,626 400 18,626 Amway Japan, Ltd................... 2,100 33,338 2,100 33,338 Atlas Copco AB..................... 4,500 56,469 4,500 56,469 BBC Brown Boveri................... 40 34,485 40 34,485 BMW Bayerische Motoren............. 50 24,125 50 24,125 BPB Industries..................... 5,500 26,191 5,500 26,191 British Petroleum Company.......... 3,500 22,048 3,500 22,048 Broken Hill Proprietary............ 1,400 20,347 1,400 20,347 Carter Holt Harvey................. 8,600 19,524 8,600 19,524 Cementos De Mexico ACP............. 1,400 12,575 1,400 12,575 Comercial Del Plata................ 3,000 10,446 3,000 10,446 Creative Technology, Ltd........... 500 8,833 500 8,833 CRH PLC............................ 10,000 54,644 10,000 54,644 DDI Corporation.................... 10 87,229 10 87,229 Ericsson........................... 2,000 106,262 2,000 106,262 Grupo Carso ADR+................... 500 11,500 500 11,500 Hagemeyer NV....................... 200 16,085 200 16,085 Honda Motors Company............... 4,000 66,633 4,000 66,633 Keiyo Company...................... 3,000 58,152 3,000 58,152 Keppel Corporation................. 5,000 40,459 5,000 40,459 Koninklijke Van Ommeren............ 1,300 34,378 1,300 34,378 Kyocera Corporation................ 1,000 71,479 1,000 71,479 Maderas Y Sinteticos Sociedad...... 800 22,800 800 22,800 Malaysian Helicopter............... 2,760 8,558 2,760 8,558 Matsushita Electric................ 4,000 63,806 4,000 63,806 Metsa Serla "B'.................... 400 19,241 400 19,241 Nokia AB........................... 500 58,073 500 58,073 Noranda, Inc....................... 1,100 22,237 1,100 22,237 Philips Electronics................ 1,900 57,999 1,900 57,999 Polygram NV........................ 400 17,315 400 17,315 Road Bulder Holdings............... 3,000 19,541 3,000 19,541 Sanyo Shinpan Finance Company...... 600 63,604 600 63,604 Sharp Corporation.................. 3,000 53,306 3,000 53,306 SIAM City Bank, Ltd................ 20,200 25,710 20,200 25,710 Siebe PLC.......................... 7,000 59,603 7,000 59,603 Siemens AG......................... 100 40,939 100 40,939 Stet Societa Finanz................ 13,600 42,078 13,600 42,078 Technology Resources Industries.... 6,900 28,259 6,900 28,259
10
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PRO FORMA COMBINED GROWTH PORTFOLIO PORTFOLIO (UNAUDITED) SHARES OR SHARES OR SHARES OR PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE FOREIGN SECURITIES (CONTINUED) Telecom Argentina................. 3,300 $ 22,121 3,300 $ 22,121 Telefonos De Mexico............... 700 43,750 700 43,750 TNT Limited....................... 10,300 18,217 10,300 18,217 Tokio Marine & Fire Insurance..... 5,000 59,566 5,000 59,566 Tokyo Electron, Ltd............... 2,000 63,806 2,000 63,806 Universal Robina Corporation...... 11,000 10,329 11,000 10,329 Veba AG........................... 200 66,288 200 66,288 Vodagone Group PLC................ 19,800 61,660 19,800 61,660 Wai Kee Holdings.................. 58,000 16,663 58,000 16,663 Wai Kee Holdings-Warrants*........ 10,600 178 10,600 178 Western Mining Corporation........ 3,700 21,548 3,700 21,548 Wilson & Horton, Ltd.............. 4,000 18,307 4,000 18,307 WMX Technologies, Inc............. 18,000 519,750 18,000 519,750 Woolworths, Ltd................... 3,862 8,059 3,862 8,059 2,367,139 2,367,139 TOTAL COMMON STOCKS................. 41,835,746 $50,888,805 92,724,551 PREFERRED STOCKS.................... 0.28%** Nokia AB.......................... 2,500 290,363 2,500 290,363 LONG-TERM INVESTMENTS............... 2.01%** CORPORATE BOND...................... 0.15% Argosy Gaming Corporation, 12.00%, 6/1/01.......................... $150,000 163,500 $ 150,000 163,500 GOVERNMENT BONDS.................... 1.86% U.S. Treasury Note, 6.00%, 6/30/96......................... 1,975,000 1,958,726 1,975,000 1,958,726 TOTAL LONG-TERM INVESTMENTS......... 163,500 1,958,726 2,122,226 SHORT-TERM INVESTMENTS.............. 9.44%** COMMERCIAL PAPER.................... 7.89% General Electric Company, 4.87%, 10/24/94........................ 1,500,000 1,495,333 1,500,000 1,495,333 Johnson & Johnson, 4.90%, 10/24/94........................ 745,000 742,668 745,000 742,668 Proctor & Gamble Corporation, 4.83%, 10/21/94................. 1,350,000 1,346,377 1,350,000 1,346,377 Exxon Imperial U.S., Inc., 4.82%, 10/24/94........................ 1,630,000 1,628,691 1,630,000 1,628,691 Private Export Funding Corporation, 4.73%, 10/14/94.... 1,245,000 1,242,873 1,245,000 1,242,873 Private Export Funding Corporation, 4.72%, 10/20/94.... 225,000 224,439 225,000 224,439 Bellsouth Telecommunications, Inc., 4.79%, 10/20/94........... 1,650,000 1,645,829 1,650,000 1,645,829 TOTAL COMMERCIAL PAPER.............. 8,326,210 8,326,210
11 [CAPTION] MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PRO FORMA COMBINED GROWTH PORTFOLIO PORTFOLIO (UNAUDITED) SHARES OR SHARES OR SHARES OR PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE U.S. GOVERNMENT AGENCIES............ 1.55% Federal Home Loan Mortgage Corporation, 4.70%, 10/4/94..... $1,240,000 $ 1,239,514 $1,240,000 $1,239,514 Federal National Mortgage Association, 4.76%, 10/26/94 400,000 398,678 400,000 398,678 TOTAL U.S. GOVERNMENT AGENCIES...... 1,638,192 1,638,192 TOTAL SHORT-TERM INVESTMENTS........ 0 9,964,402 9,964,402 TOTAL COMBINED INVESTMENTS.......... 99.58% (combined cost $100,315,891) Growth Portfolio $$38,863,630 and Capital Growth Portfolio $61,477,308)...................... $41,999,246 $63,102,296 $105,101,542
* Non-income producing. ** Percentages are based on Proforma combined net assets of $105,543,599, which correspond to a proforma combined net asset value per share of $14.83. + American Depository Receipt. CAMBRIDGE SERIES TRUST NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1994 (UNAUDITED) NOTE 1: ORGANIZATION Cambridge Series Trust ("Trust") is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Trust consists of six separate diversified portfolios. The assets of each Portfolio of the Trust are segregated and a shareholder's interest is limited to the Portfolio in which shares are held. The pro forma combined financial statements included in this report are for the Capital Growth Portfolio (hereinafter referred to as the "Portfolio") NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Portfolio: (a) Valuation of Securities- Listed equity securities held by the Portfolio are valued at last sale prices reported on national securities exchanges. Listed equity securities in which there were no sales are valued at the mean between the bid and asked prices. Unlisted equity securities are valued at the latest mean price. Bonds and other fixed-income securities are valued at the last sale price on a national securities exchange, if available. Otherwise, they are valued on the basis of prices furnished by an independent pricing service. Short-term obligations are ordinarily valued at the mean between the bid and asked prices as furnished by an independent pricing service. However, short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates value. (b) Repurchase Agreements- It is the policy of the Trust to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book entry system, or to have segregated within the custodian bank's vault all securities held as collateral in support of repurchase agreement investments. Additionally, procedures have been established by the Trust to monitor, on a daily basis, the market value of each repurchase agreement's underlying securities to ensure the existence of a proper level of collateral. The Trust will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Trust's adviser to be creditworthy pursuant to guidelines established by the Trustees. Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreement. Accordingly, the Trust could receive less than the repurchase price on the sale of collateral securities. (c) Borrowings- The Portfolio may, under certain circumstances, borrow money directly or through reverse repurchase agreements (arrangements in which the Portfolio sells a security for a percentage of its market value with an agreement to buy it back on a set date) or pledge securities. The Portfolio may borrow up to one-third of the value of its net assets and pledge up to 10% of the value of those assets to secure such borrowings. (d) Security Transactions and Investment Income- Security transactions for the Portfolio is accounted for on trade date. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Interest income includes interest and discount earned (net of premium) on short-term obligations, and interest earned on all other debt securities including original issue discount as required by the Internal Revenue Code of 1986, as amended (the "Code"). Dividends to shareholders and capital gain distributions, if any, are recorded on the ex-dividend date. 23 (e) Federal Taxes- No provision for federal income taxes has been made since it is the Portfolio's intent to comply with the provisions applicable to regulated investment companies under the Code and to distribute to its shareholders within allowable time limits substantially all taxable income and realized capital gains. At September 30, 1994, the Portfolio for federal tax purposes, had a capital loss carryforward of approximately $2,690,000. Pursuant to the Code, such capital loss carryforwards expire as follows: $1,065,000 in 2001 and $1,625,000 in 2002. Such capital loss carryforwards will reduce the Portfolio's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, and thus will reduce the amount of the distributions to shareholders which would otherwise relieve the Portfolio of any liability for federal tax. (f) Deferred Expenses- Costs incurred by the Portfolio in connection with its initial share registration, other than organization expenses, were deferred and are being amortized on a straight-line basis through April 1997. (g) Expenses- Expenses of the Portfolio (other than distribution services fees) and waivers and reimbursements, if any, are allocated to each class of shares based on their relative daily average net assets for the period. Expenses incurred by the Portfolio which do not specifically relate to an individual Portfolio are allocated among all Portfolios based on a Portfolio's relative net asset value size or as deemed appropriate by the administrator. (h) Dollar Roll Transactions- The Portfolio enters into dollar roll transactions, with respect to mortgage securities issued by GNMA, FNMA, FHLMC, in which the Portfolio sells mortgage securities to financial institutions and simultaneously agrees to repurchase substantially similar (same type, coupon and maturity) securities at a later date at an agreed upon price. During the period between the sale and repurchase, the Portfolio foregoes principal and interest paid on the mortgage security sold. The Portfolio is compensated by the interest earned on the cash proceeds of the initial sale and any additional fee income received on the sale. (i) Currency Transactions- Foreign currency amounts are converted into U.S. dollars at the current rate of such currencies against U.S. dollars as follows: assets and liabilities at the rate of exchange at the end of the respective period; purchases and sales of securities and income and expenses at the rate of exchange prevailing on the dates of such transactions. It is not practicable to isolate that portion of the results of operations arising from changes in the exchange rates from the portion arising from changes in the market prices of investment securities. (j) Distributions to shareholders are determined in accordance with income tax regulations. Distributions from taxable net investment income and net capital gains can exceed book basis net investment income and net capital gains. Effective October 1, 1993, the Portfolio adopted statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain and Return of capital Distributions by Investment Companies. As a result of this statement, the Portfolio changed the financial statement classification of distributions to shareholders to better disclose the differences between financial statement amounts and distributions determined in accordance with income tax regulations. Accordingly, the Portfolio has made reclassifications as of September 30, 1993 to reflect the adoption of the statement. The Portfolio reclassification resulted in an increase in undistributed net investment income of $416,855, a decrease in additional paid-in capital of $367,325 and a decrease in undistributed realized gain (loss) on investment transactions of $49,484. Differences between book basis investment income available for distribution and tax basis investment income available for distribution are primarily attributable to differences in the treatment on net operating losses. 13 NOTE 3: DIVIDENDS Dividends are declared and paid semi-annually to all shareholders invested in the Portfolio on the record date. Dividends will be reinvested in additional shares of the same class and Portfolio on payment dates at the ex-dividend date net asset value without a sales charge unless cash payments are requested by shareholders in writing to the Trust. Capital gains realized by each Portfolio, if any, will be distributed at least once every 12 months. NOTE 4: INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES Cambridge Investment Advisors, Inc., the Portfolio's investment adviser ("Investment Adviser"), receives for its services an annual investment advisory fee of 0.80% of the average daily net assets of the Portfolio. The Investment Adviser pays the sub-adviser an annual fee not to exceed 0.40% of the Portfolio assets. Under the Sub-Advisory Agreement, the sub-adviser may, from time to time, voluntarily waive some or all of its sub-advisory fee charged to the Investment Adviser and may terminate any such voluntary waiver at any time in its sole discretion. For the year ended September 30, 1994 the Investment Adviser and sub-adviser earned fees of $1,001,648 and $500,825 respectively. Administrative personnel and services are provided by Investment Management Group, Inc. ("IMG") at an annual rate of .125 of 1% on the first $1.5 billion of average aggregate dialy net assets of the Trust and .120 of 1% on average aggregate daily net assets in excess of $1.5 billion. Prior to June 1, 1994, administrative personnel and services were provided by Cambridge Administration Services ("CAS" at the same annual rate. IMG amy voluntarily waive some or all of its fee. aggregate daily net assets in excess of $1.5 billion. IMG may voluntarily waive some or all of its fee. During the year ended September 30, 1994, CAS earnd and waived administrative fees of $110,097 and $6,569 and IMG earned administrative fees of $46,376 respectively. The Class B shares of the Portfolio has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Each Portfolio will reimburse Cambridge Distributors, Inc. (the "Distributor"), from the assets of the Class B Shares of each Portfolio, for fees it paid which relate to the distribution and administration of each Portfolio's Class B Shares. The Plan provides that the Portfolio may incur distribution expenses up to 0.75% of 1% of the average daily net assets of the Class B shares of the Portfolio. The Trust has adopted a Shareholder Servicing Plan (the "Service Plan") with respect to Class A and Class B shares of theh Portfolio. Under the Service Plan, financial institutions will enter into shareholder service agreements with the Portfolio to provide administrative support services to their customers who from time to time may be owners of record or beneficial owners of Class A or Class B shares of the Portfolios. In return for providing these support services, a financial institution may receive payments from the Portfolio at a rate not exceeding .25 of 1% of the average daily net assets of the Class A or Class B shares of the Portfolio beneficially owned by the financial institution's customers for whom it is holder of record or with whom it has a servicing relationship. NOTE 5: INVESTMENT TRANSACTIONS Purchases, and sales of investments (excluding short-term investment), for the year ended September 30, 1994, were $157,096,646 and $173,177,586 respectively. NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS At September 30, 1994, the cost of investments for federal income tax purposes, exclusive of investments in short-term securities was $100,446,367 and aggregated net unrealized appreciation amounted to $4,655,175 of which $7,542,514 related to appreciated securites and $2,887,339 related to appreciated securities. NOTE 7: FORWARD CONTRACTS In connection with portfolio purchases and sales of securities denominated in a foreign currency, the Portfolio may enter into forward foreign currency exchange contracts ("contracts"). Additionally, from time to time the Portfolio may enter into contracts to hedge certain foreign currency assets. Contracts are recorded at market value. Realized gains and losses arising from such transactions are included in net gain (loss) on investments and forward foreign currency exchange contracts. The Portfolio is subject to the credit risk that the other party will not complete the obligations of the contract. 12 PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES MARCH 31, 1995 (UNAUDITED)
MENTOR/ MENTOR CAMBRIDGE CAPITAL GROWTH GROWTH PRO FORMA PORTFOLIO PORTFOLIO COMBINED ASSETS Investments, at market value (combined cost $85,543,356).......... $37,342,934 $59,226,871 $96,569,805 Receivables....................................................... - Investments sold............................................... 1,161,932 520,740 1,682,672 Fund shares sold............................................... 47,646 47,829 95,475 Dividends and interest......................................... 65,262 118,920 184,182 Forward currency contracts held................................ 12,453 159,712 172,165 Total assets................................................. 38,630,227 60,074,072 98,704,299 LIABILITIES Payables Investments purchased.......................................... 131,050 905,575 1,036,625 Fund shares redeemed........................................... 302,733 491,102 793,835 Accrued expenses and other liabilities............................ 789,534 137,851 927,385 Total liabilities............................................ 1,223,317 1,534,528 2,757,845 NET ASSETS................................................... $37,406,910 $58,539,544 $95,946,454 Net Assets represented by: Additional paid-in capital........................................ $34,767,770 $53,051,601 $87,819,371 Undistributed net investment loss................................. (172,160) - (172,160) Accumulated distributions in excess of net investment income...... - (96,678) (96,678) Undistributed realized loss on investment transactions............ (2,199,365) (431,421) (2,630,786) Net unrealized appreciation of investments and foreign currency related transactions........................................... 5,010,665 6,016,042 11,026,707 Net Assets................................................... $37,406,910 $58,539,544 $95,946,454 NET ASSET VALUE PER SHARE Class A Shares.................................................... $ 15.64 $ 15.63 $ 15.63 Class B Shares.................................................... $ 15.42 $ 15.47 $ 15.47 OFFERING PRICE PER SHARE Class A Shares (a)................................................ $ 16.55 $ 16.54 $ 16.54 Class B shares.................................................... $ 15.42 $ 15.47 $ 15.47 REDEMPTION PROCEEDS PER SHARE Class A Shares.................................................... $ 15.64 $ 15.63 $ 15.63 Class B Shares (b)................................................ $ 15.27 $ 15.32 $ 15.32 SHARES OUTSTANDING Class A Shares.................................................... 839,258 1,267,361 2,393,878 Class B Shares.................................................... 1,574,382 2,503,373 3,783,239 Shares Outstanding........................................... 2,413,640 3,770,734 6,177,117
(a) Computation of offering price: 100/94.5 of net asset value. (b) Computation of redemption proceeds: 99/100 of net asset value. 13 PRO FORMA COMBINING STATEMENTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1995 (UNAUDITED)
MENTOR/ MENTOR CAMBRIDGE CAPITAL GROWTH GROWTH PRO FORMA PRO FORMA PORTFOLIO PORTFOLIO ADJUSTMENTS COMBINED INVESTMENT INCOME Interest................................................ $ 16,288 $ 249,731 $ 0 $ 266,019 Dividends (Net of withholding taxes)*................... 283,444 458,103 0 741,547 Total investment income............................ 299,732 707,834 0 1,007,566 EXPENSES Management fee.......................................... 161,118 240,136 401,254 Distribution fees....................................... 99,537 148,326 247,863 Transfer agent fee...................................... 71,972 113,539 185,511 Shareholder services fees............................... 50,350 75,042 125,392 Administration fee...................................... 25,175 37,521 62,696 Custodian fee........................................... 13,441 15,792 29,233 Registration expenses................................... 24,492 33,746 (24,492) 33,746 Shareholder reports and postage expenses................ 4,651 9,181 13,832 Organizational expenses................................. 7,722 4,835 12,557 Legal and Audit fees.................................... 8,681 14,033 (8,681) 14,033 Directors' fees and expenses............................ 2,002 3,670 (2,002) 3,670 Miscellaneous........................................... 2,751 5,605 (2,751) 5,605 Total expenses..................................... 471,892 701,426 (37,926) 1,135,392 Net Expenses.............................................. 471,892 701,426 (37,926) 1,135,392 Net investment income (loss).............................. (172,160) 6,408 37,926 (127,826) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments................. 620,251 (373,054) 0 247,197 Change in unrealized appreciation of investments........ 1,850,002 4,390,496 0 6,240,498 Net realized and unrealized gain on investments.... 2,470,253 4,017,442 0 6,487,695 Net increase in net assets resulting from operations...... $2,298,093 $4,023,850 $37,926 $6,359,869
* Withholding taxes were $1,446 and $7,078, for the Mentor/Cambridge Growth Portfolio and Mentor Capital Growth Portfolio respectively. 14 THE PRO FORMA COMBINING INVESTMENT PORTFOLIO OF MENTOR/CAMBRIDGE GROWTH PORTFOLIO AND MENTOR CAPITAL GROWTH PORTFOLIO MARCH 31, 1995 (UNAUDITED)
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PORTFOLIO GROWTH PORTFOLIO PRO FORMA COMBINED SHARES VALUE SHARES VALUE SHARES VALUE COMMON STOCKS.................94.32%** BASIC MATERIALS....................... 2.66% Air Products & Chemicals, Inc....... 8,000 $ 417,000 8,000 $ 417,000 Alco Standard Corporation........... 9,000 652,500 9,000 652,500 Monsanto Company.................... 6,500 521,625 6,500 521,625 Newell Company...................... 26,000 663,000 26,000 663,000 Nucor Corporation................... 3,000 166,500 3,000 166,500 Scott Paper Company*................ 1,500 134,063 1,500 134,063 2,554,688 2,554,688 CAPITAL GOODS & CONSTRUCTION.......... 7.70% Boeing Company*..................... 2,500 134,688 17,000 915,875 19,500 1,050,563 Brown Boveri & Cie.................. 800 760,424 800 760,424 Browning Ferris Industries, Inc..... 30,000 1,020,000 30,000 1,020,000 General Electric Company............ 15,500 838,938 15,500 838,938 Grainger, Inc....................... 4,500 283,500 4,500 283,500 McDonnell Douglas Company*.......... 10,000 557,500 10,000 557,500 PPG Industries, Inc................. 20,000 755,000 20,000 755,000 Raytheon Company.................... 17,000 1,238,875 17,000 1,238,875 United Technologies Corporation..... 10,000 691,250 10,000 691,250 WMX Technologies, Inc............... 7,000 192,500 7,000 192,500 1,449,626 5,938,924 7,388,550 CONSUMER CYCLICAL..................... 16.16% Ann Taylor Stores, Inc.*............ 7,700 286,825 7,700 286,825 Capital Cities/ABC.................. 11,000 970,750 11,000 970,750 Carnival Corporation................ 50,000 1,168,750 50,000 1,168,750 CUC International, Inc.*............ 6,900 268,238 6,900 268,238 Duracell International, Inc......... 3,500 156,625 3,500 156,625 Franklin Quest Company*............. 11,500 362,250 11,500 362,250 Harcourt General, Inc............... 20,000 780,000 20,000 780,000 Home Depot, Inc..................... 17,300 765,525 25,000 1,106,250 42,300 1,871,775 LVMH Moet Hennessy.................. 4,000 786,816 4,000 786,816 Manpower, Inc....................... 19,500 626,437 19,500 626,437 Marriott International, Inc......... 31,500 1,094,625 31,500 1,094,625 McDonald's Corporation.............. 10,000 341,250 10,000 341,250 Nike Incorporated / B*.............. 11,500 858,187 11,500 858,187 Office Depot, Inc.*................. 10,800 268,650 10,800 268,650 Promus Companies, Inc............... 9,500 356,250 9,500 356,250 Staples, Inc.*...................... 14,000 369,250 14,000 369,250 Starbucks Corporation*.............. 14,000 336,000 20,000 480,000 34,000 816,000 The Walt Disney Company............. 10,000 533,750 20,000 1,067,500 30,000 1,601,250 Viacom, Inc. -- Class B*............ 7,909 353,928 23,000 1,029,250 30,909 1,383,178 Viking Office Products, Inc.*....... 9,000 279,000 9,000 279,000 Wal-Mart Stores, Inc................ 33,600 856,800 33,600 856,800 5,791,528 9,711,378 15,502,906
15
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PORTFOLIO GROWTH PORTFOLIO PRO FORMA COMBINED SHARES VALUE SHARES VALUE SHARES VALUE CONSUMER STAPLES...................... 12.34% Abbott Laboratories................. 22,100 $ 787,312 30,000 $ 1,068,750 52,100 $ 1,856,062 Astra AB............................ 25,000 663,997 25,000 663,997 Campbell Soup Company............... 8,800 425,700 8,800 425,700 Coca Cola Company................... 14,000 791,000 14,000 791,000 Colgate Palmolive Company........... 6,100 402,600 6,100 402,600 Conagra, Inc........................ 11,000 364,375 11,000 364,375 CPC International, Inc.............. 5,000 270,625 15,000 811,875 20,000 1,082,500 Gillette Company.................... 5,000 408,125 10,000 816,250 15,000 1,224,375 Merck & Company, Inc................ 28,000 1,193,500 28,000 1,193,500 Pepsico, Incorporated*.............. 4,000 156,000 4,000 156,000 Philip Morris Companies, Inc........ 9,900 645,975 20,500 1,337,625 30,400 1,983,600 Procter & Gamble Company............ 12,000 795,000 12,000 795,000 Sara Lee Corporation*............... 16,100 420,613 16,100 420,613 Seagram Company, Limited*........... 6,000 190,500 6,000 190,500 UST, Inc............................ 9,000 285,750 9,000 285,750 5,943,575 5,891,997 11,835,572 ENERGY................................ 8.18% Enron Corporation................... 16,900 557,700 25,000 825,000 41,900 1,382,700 Amoco Corporation*.................. 20,000 1,272,500 20,000 1,272,500 British Petroleum PLC, ADS+......... 9,000 754,875 9,000 754,875 Chevron Corporation................. 12,500 600,000 12,500 600,000 Dresser Industries, Inc............. 50,000 1,062,500 50,000 1,062,500 Royal Dutch Petroleum Company....... 10,000 1,200,000 10,000 1,200,000 Mobil Corporation................... 3,000 277,875 14,000 1,296,750 17,000 1,574,625 835,575 7,011,625 7,847,200 FINANCIAL............................. 5.46% American International Group, Inc.*............................. 3,700 385,725 3,700 385,725 Boatmen's Bancshares, Inc........... 13,000 393,250 13,000 393,250 Conseco, Inc........................ 3,300 131,588 3,300 131,588 First Financial Management Corporation....................... 10,000 722,500 12,000 867,000 22,000 1,589,500 First USA, Inc...................... 12,100 508,200 12,100 508,200 General RE Corporation.............. 3,400 448,800 3,400 448,800 MBNA Corporation.................... 23,500 681,500 23,500 681,500 MGIC Investment Corporation......... 15,900 647,925 15,900 647,925 Nationsbank Corporation............. 9,000 456,750 9,000 456,750 4,376,238 867,000 5,243,238 HEALTH................................ 12.86% American International*............. 10,000 1,042,500 10,000 1,042,500 CIGNA Corporation*.................. 17,500 1,308,125 17,500 1,308,125 Columbia HCA Healthcare Corporation....................... 10,000 430,000 29,000 1,247,000 39,000 1,677,000 Coram Healthcare Corporation........ 10,000 253,750 10,000 253,750 Humana Incorporated................. 37,500 960,938 37,500 960,938 Idexx Laboratories, Inc.*........... 5,000 207,500 5,000 207,500 Integrated Health Services, Inc.*... 8,500 321,937 8,500 321,937 Johnson & Johnson................... 15,000 892,500 15,000 892,500
16
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PORTFOLIO GROWTH PORTFOLIO PRO FORMA COMBINED SHARES VALUE SHARES VALUE SHARES VALUE HEALTH (CONTINUED) Lilly (Eli) & Company*.............. 3,000 $ 219,375 3,000 $ 219,375 Medtronic, Inc...................... 9,600 666,000 9,600 666,000 Merck & Company, Inc.*.............. 20,000 852,500 20,000 852,500 Pfizer, Inc......................... 4,000 343,000 4,000 343,000 R.P. Scherer Corporation............ 4,800 241,200 4,800 241,200 Schering Plough Corporation......... 6,600 490,875 6,600 490,875 United Healthcare Corporation*...... 7,500 350,625 15,000 $ 701,250 22,500 1,051,875 US Healthcare, Inc.................. 6,500 287,625 6,500 287,625 Value Health, Inc.*................. 6,500 248,625 25,000 956,250 31,500 1,204,875 Warner Lambert Company.............. 4,100 320,825 4,100 320,825 5,872,587 6,469,813 12,342,400 TECHNOLOGY............................ 20.60% 3COM Corporation*................... 7,200 407,700 10,000 566,250 17,200 973,950 Adobe Systems, Inc.*................ 3,000 148,500 3,000 148,500 AMP Incorporated*................... 11,000 396,000 11,000 396,000 Archer Daniels Company*............. 33,750 628,594 33,750 628,594 AT&T Corporation.................... 10,400 538,200 10,400 538,200 Bay Network, Inc.................... 21,500 792,812 21,500 792,812 Cisco Systems, Inc.*................ 3,000 114,375 22,500 857,813 25,500 972,188 Computer Associates International, Inc............................... 15,000 890,625 15,000 890,625 Compuware Corporation*.............. 10,000 370,000 17,500 647,500 27,500 1,017,500 Emerson Electric Company*........... 8,900 591,850 15,000 997,500 23,900 1,589,350 Ericsson Telecommunication Company........................... 10,000 618,125 10,000 618,125 First Data Corporation.............. 7,600 394,250 7,600 394,250 General Motors Corporation -- Class E........................... 10,400 404,300 22,000 1,190,750 32,400 1,595,050 Hewlett Packard Company............. 4,000 481,500 6,500 782,438 10,500 1,263,938 Informix Corporation*............... 10,000 343,750 10,000 343,750 Intel Corporation................... 2,500 212,188 7,500 636,563 10,000 848,751 LDDS Communications, Inc............ 6,000 140,250 6,000 140,250 Linear Technology Corporation....... 7,000 392,000 7,000 392,000 Loral Corporation................... 6,000 255,000 6,000 255,000 Microsoft Corporation*.............. 5,000 355,625 5,000 355,625 Motorola Inc.*...................... 6,000 327,750 14,000 764,750 20,000 1,092,500 Parametric Technology Corporation*...................... 10,000 400,000 10,000 400,000 Perkin-Elmer Corporation............ 15,000 436,875 15,000 436,875 Philips Electronics Holdings Company........................... 20,000 682,500 20,000 682,500 Reynolds & Reynolds Company......... 10,000 275,000 10,000 275,000 Silicon Graphics, Inc.*............. 15,000 532,500 15,000 532,500 Sun Microsystems, Inc............... 22,500 781,875 22,500 781,875 Tellabs, Inc.*...................... 8,000 466,000 8,000 466,000 Xerox Corporation................... 8,000 939,000 8,000 939,000 7,146,738 12,613,970 19,760,708
17
MENTOR/CAMBRIDGE MENTOR CAPITAL GROWTH PORTFOLIO GROWTH PORTFOLIO PRO FORMA COMBINED SHARES VALUE SHARES VALUE SHARES VALUE TRANSPORTATION & SERVICES............. 0.64% Kansas City Southern Industries, Inc................... 5,800 $ 235,625 5,800 $ 235,625 Wisconsin Central Transport*........ 7,900 376,238 7,900 376,238 611,863 611,863 UTILITIES............................. 2.01% Ameritech Corporation............... 27,500 $ 1,134,375 27,500 1,134,375 Royal PTT Nederland................. 22,500 798,246 22,500 798,246 1,932,621 1,932,621 MISCELLANEOUS......................... 3.94% Corning Incorporated*............... 12,000 432,000 12,000 432,000 Flour Corporation*.................. 5,000 241,250 5,000 241,250 ITT Corporation..................... 10,000 1,026,250 10,000 1,026,250 Nabisco Holdings Corporation........ 25,000 715,625 25,000 715,625 Service Corporation International*.................... 14,000 392,000 14,000 392,000 Smithkline Beecham -- A*............ 26,000 975,000 26,000 975,000 1,065,250 2,716,875 3,782,125 FOREIGN SECURITIES.................... 1.77% AAlberts Industries................. 400 21,053 400 21,053 Amada Company, Limited.............. 5,000 53,053 5,000 53,053 Astra AB A-F........................ 1,500 39,840 1,500 39,840 Atlas Copco AB...................... 2,800 33,769 2,800 33,769 British Petroleum Company........... 8,440 58,801 8,440 58,801 Carrefour Supermarch................ 60 30,325 60 30,325 DBS Land............................ 4,000 10,655 4,000 10,655 DDI Corporation..................... 6 51,843 6 51,843 Ericsson............................ 1,295 80,460 1,295 80,460 Gambro AB........................... 1,600 18,646 1,600 18,646 Genting Berhad...................... 2,000 18,029 2,000 18,029 Glaxo PLC........................... 3,000 34,396 3,000 34,396 Greencore Group PLC................. 3,000 20,541 3,000 20,541 Hagemeyer NV........................ 300 25,146 300 25,146 Honda Motors Company................ 3,000 51,152 3,000 51,152 Keiyo Company....................... 2,000 22,926 2,000 22,926 Keppel Corporation.................. 5,000 40,383 5,000 40,383 Koninklijke Van Ommeren............. 600 20,741 600 20,741 Kyocera Corporation................. 1,000 74,424 1,000 74,424 Lloyds Bank PLC..................... 2,400 24,009 2,400 24,009 Manweb PLC.......................... 2,500 26,187 2,500 26,187 Matsushita Electric................. 3,000 48,387 3,000 48,387 Marui Company, Ltd.................. 2,000 31,567 2,000 31,567 Nestle.............................. 30 29,284 30 29,284 Nokia AB............................ 433 63,109 433 63,109 Omron Corporation................... 2,000 39,401 2,000 39,401 Polygram NV......................... 600 33,294 600 33,294 Reed International PLC.............. 3,500 44,051 3,500 44,051 Repsol SA........................... 1,400 39,747 1,400 39,747 Road Builder Holdings............... 2,200 7,089 2,200 7,089
18
MENTOR/CAMBRIDGE GROWTH MENTOR CAPITAL PORTFOLIO GROWTH PORTFOLIO PRO FORMA COMBINED SHARES OR SHARES OR SHARES OR PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE FOREIGN SECURITIES (CONTINUED) Roche Holding AG-GEN............... 10 $ 57,774 10 $ 57,774 Sandvik AB B-F..................... 645 10,226 645 10,226 Sanyo Shinpan Finance Company...... 600 47,143 600 47,143 Sharp Corporation.................. 3,000 48,733 3,000 48,733 Singapore Press Holdings........... 1,000 16,932 1,000 16,932 Sumitomo Bank...................... 2,000 42,627 2,000 42,627 Sumitomo Corporation............... 3,000 27,304 3,000 27,304 Tabcorp Holdings, Ltd.............. 7,900 16,026 7,900 16,026 Technology Resources Industries.... 4,900 14,046 4,900 14,046 Telewest Communications............ 1,000 2,777 1,000 2,777 Tesco PLC.......................... 5,000 21,680 5,000 21,680 TNT Limited........................ 12,300 16,092 12,300 16,092 Tokyo Electron, Ltd................ 3,000 91,244 3,000 91,244 Unilever NV........................ 160 20,980 160 20,980 Veba AG............................ 200 72,555 200 72,555 Vodafone Group PLC................. 16,462 53,068 16,462 53,068 Wai Kee Holdings*.................. 52,000 8,339 52,000 8,339 Waterford Wedgewood................ 21,000 18,058 21,000 18,058 Wolter Kluwer...................... 225 17,354 225 17,354 1,695,266 1,695,266 TOTAL COMMON STOCKS.................. 37,342,934 $53,154,203 90,497,137 PREFERRED STOCKS..............0.38%** Nokia AB............................. 2,500 364,372 2,500 364,372 SHORT-TERM INVESTMENTS........5.95%** COMMERCIAL PAPER..................... 4.52% Abbott Labs, 5.96%, 5/3/95......... 243,000 241,793 243,000 241,793 McDonald's, 6.00%, 4/10/95......... 1,500,000 1,498,250 1,500,000 1,498,250 Wal-Mart Discount Stores, 6.10%, 4/13/95.......................... 1,295,000 1,292,806 1,295,000 1,292,806 Warner Lambert, 5.98%, 4/24/95..... 1,305,000 1,300,447 1,305,000 1,300,447 TOTAL COMMERCIAL PAPER............... 4,333,296 4,333,296 U.S. GOVERNMENT AGENCY............... 1.43% Federal National Mortgage Association, 6.00%, 4/3/95......... 1,375,000 1,375,000 1,375,000 1,375,000 TOTAL SHORT-TERM INVESTMENTS......... 5,708,296 5,708,296 TOTAL COMBINED INVESTMENTS........... 100.65% (combined cost $85,543,356 Growth Portfolio $32,332,447 and Capital Growth Portfolio $53,210,909)...... $37,342,934 $59,226,871 $96,569,805
* Non-income producing. ** Percentages are based on Proforma combined net assets of $95,946,454, which correspond to a proforma combined net asset value per share of $15.52. + American Depository Receipts. 19 THE MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS MARCH 31, 1995 (UNAUDITED) NOTE 1: ORGANIZATION The Mentor Funds (formerly Cambridge Series Trust ("Trust")), is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. On April 12, 1995 the name of the Trust was changed to The Mentor Funds ("Mentor"). Mentor consists of six separate diversified portfolios. The assets of each Portfolio of Mentor are segregated and a shareholder's interest is limited to the Portfolio in which shares are held. The pro forma combined financial statements included in this report are for the Mentor Capital Growth Portfolio (hereinafter referred to as the "Portfolio") NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Portfolio: (a) Valuation of Securities- Listed equity securities held by the Portfolio are valued at last sale prices reported on national securities exchanges. Listed equity securities in which there were no sales are valued at the mean between the bid and asked prices. Unlisted equity securities are valued at the latest mean price. Bonds and other fixed-income securities are valued at the last sale price on a national securities exchange, if available. Otherwise, they are valued on the basis of prices furnished by an independent pricing service. Short-term obligations are ordinarily valued at the mean between the bid and asked prices as furnished by an independent pricing service. However, short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates value. (b) Repurchase Agreements- It is the policy of Mentor to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book entry system, or to have segregated within the custodian bank's vault all securities held as collateral in support of repurchase agreement investments. Additionally, procedures have been established by Mentor to monitor, on a daily basis, the market value of each repurchase agreement's underlying securities to ensure the existence of a proper level of collateral. Mentor will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by Mentor's adviser to be creditworthy pursuant to guidelines established by the Mentor Trustees. Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreement. Accordingly, Mentor could receive less than the repurchase price on the sale of collateral securities. (c) Borrowings- The Portfolio may, under certain circumstances, borrow money directly or through reverse repurchase agreements (arrangements in which the Portfolio sells a security for a percentage of its market value with an agreement to buy it back on a set date) or pledge securities. The Portfolio may borrow up to one-third of the value of its net assets and pledge up to 10% of the value of those assets used to secure such borrowings. (d) Security Transactions and Investment Income- Security transactions for the Portfolio is accounted for on trade date. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Interest income includes interest and discount earned (net of premium) on short-term obligations, and interest earned on all other debt securities including original issue discount as required by the Internal Revenue Code. Dividends to shareholders and capital gain distributions, if any, are recorded on the ex-dividend date. 20 (e) Federal Taxes- No provision for federal income taxes has been made since it is the Portfolio's intent to comply with the provisions applicable to regulated investment companies under the Internal Revenue Code of 1986, as amended (the "Code") and to distribute to its shareholders within allowable time limit substantially all taxable income and realized capital gains. At September 30, 1994, the Portfolio for federal tax purposes, had a capital loss carryforward of approximately $2,690,000. Pursuant to the Code, such capital loss carryforwards expire as follows: $1,065,000 in 2001 and $1,625,000 in 2002. Such capital loss carryforwards will reduce the Portfolio's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, and thus will reduce the amount of the distributions to shareholders which would otherwise relieve the Portfolio of any liability for federal tax. (f) Expenses- Expenses of the Portfolio (other than distribution services fees) and waivers and reimbursements, if any, are allocated to each class of shares based on their relative daily average net assets for the period. Expenses incurred by the Portfolio which do not specifically relate to an individual Portfolio are allocated among all Portfolios based on a Portfolio's relative net asset value size or as deemed appropriate by the administrator. (g) Dollar Roll Transactions- The Portfolio enters into dollar roll transactions, with respect to mortgage securities issued by GNMA, FNMA, FHLMC, in which the Portfolio sells mortgage securities to financial institutions and simultaneously agrees to repurchase substantially similar (same type, coupon and maturity) securities at a later date at an agreed upon price. During the period between the sale and repurchase, the Portfolio foregoes principal and interest paid on the mortgage security sold. The Portfolio is compensated by the interest earned on the cash proceeds of the initial sale and any additional fee income received on the sale. (h) Currency Transactions- Foreign currency amounts are converted into U.S. dollars at the current rate of such currencies against U.S. dollars as follows: assets and liabilities at the rate of exchange at the end of the respective period; purchases and sales of securities and income and expenses at the rate of exchange prevailing on the dates of such transactions. It is not practicable to isolate that portion of the results of operations arising from changes in the exchange rates from the portion arising from changes in the market prices of investment securities. (i) Distributions to shareholders are determined in accordance with income tax regulations. Distributions from taxable net investment income and net capital gains can exceed book basis net investment income and net capital gains. Effective October 1, 1993, the Portfolio adopted statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain and Return of capital Distributions by Investment Companies. As a result of this statement, the Portfolio changed the financial statement classification of distributions to shareholders to better disclose the differences between financial statement amounts and distributions determined in accordance with income tax regulations. Accordingly, the Portfolio has made reclassifications as of September 30, 1993 to reflect the adoption of the statement. The Portfolio reclassification resulted in an increase in undistributed net investment income of $416,855, a decrease in additional paid-in capital of $367,325 and a decrease in undistributed realized gain (loss) on investment transactions of $49,507. Differences between book basis investment income available for distribution and tax basis investment income available for distribution are primarily attributable to differences in the treatment on net operating losses. 21 NOTE 3: DIVIDENDS Dividends are declared and paid semi-annually to all shareholders invested in the Portfolio on the record date. Dividends will be reinvested in additional shares of the same class and Portfolio on payment dates at the ex-dividend date net asset value without a sales charge unless cash payments are requested by shareholders in writing to Mentor. Capital gains realized by the Portfolio, if any, will be distributed at least once every 12 months. NOTE 4: INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES The Portfolio's investment adviser ("Investment Adviser") receives for its services an annual investment advisory fee of 0.80% of the average daily net assets of the Portfolio. Prior to April 12, 1995, the Investment Adviser paid a sub-adviser an annual fee not to exceed 0.40% of the Portfolio assets. For the six months ended March 31, 1995 the Investment Adviser and sub-adviser earned fees of $401,254 and $200,627 respectively. Administrative personnel and services are provided by Mentor Investment Group, Inc. (formerly Investment Management Group, Inc.) at an annual rate of 0.125 of 1% on the first $1.5 billion of average aggregate daily net assets of the Portfolio and 0.120 of 1% on average aggregate daily net assets in excess of $1.5 billion. Mentor Investment Group may voluntarily waive part or all of its fee. For the six months ended March 31, 1995, Mentor Investment Group earned administrative fees of $62,696 for the Portfolio. Under a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Portfolio will reimburse Mentor Distributors, Inc. (formerly Cambridge Distributors, Inc.), from the assets of its Class B Shares for fees it paid which relate to the distribution and administration of the Portfolio's Class B Shares. The Plan provides that the Portfolio may incur distribution expenses up to 0.75% of 1% of the average daily net assets of its Class B shares. Mentor has adopted a Shareholder Servicing Plan (the "Service Plan") with respect to Class A and Class B shares of the Portfolio. Under the Service Plan, financial institutions will enter into shareholder service agreements with the Portfolio to provide administrative support services to their customers who from time to time may be owners of record or beneficial owners of Class A or Class B shares of the Portfolio. In return for providing these support services, a financial institution may receive payments from the Portfolio at a rate not exceeding .25 of 1% of the average daily net assets of the Class A or Class B shares of the Portfolio beneficially owned by the financial institution's customers for whom it is holder of record or with whom it has a servicing relationship. NOTE 5: INVESTMENT TRANSACTIONS Purchases, and sales of investments (excluding short-term investments), for the six months ended March 31, 1995, were $40,181,673 and $50,698,103 respectively. NOTE 6: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS The cost of investments for federal income tax purposes, exclusive of investments in short-term securities was $79,835,059 and aggregated net unrealized appreciation amounted to $11,026,449 of which $11,835,738 related to appreciated securities and $809,289 related to depreciated securities. NOTE 7: FORWARD CONTRACTS In connection with portfolio purchases and sales of securities denominated in a foreign currency, the Portfolio may enter into forward foreign currency exchange contracts ("contracts"). Additionally, from time to time the Portfolio may enter into contracts to hedge certain foreign currency assets. Contracts are recorded at market value. Realized gains and losses arising from such transactions are included in net gain (loss) on investments and forward foreign currency exchange contracts. The Portfolio is subject to the credit risk that the other party will not complete the obligations of the contract. For the six months ended March 31, 1995, the Portfolio had net realized loss of $5,205 on forward contracts. 22 MENTOR CAPITAL GROWTH PORTFOLIO FORM N-14 PART C OTHER INFORMATION Item 15. Indemnification The information required by this item is incorporated herein by reference to the Registrant's Initial Registration Statement on Form N-1A under the Securities Act of 1933 (File No. 33-45315) and the Investment Company Act of 1940 (File No. 811-6550). Item 16. Exhibits 1a. Agreement and Declaration of Trust dated January 20, 1992, with Amendments No. 1 and 2. -- Incorporated by reference to the Registrant's Post-Effective Amendment No. 3 on Form N-1A filed May 14, 1993. 1b. Conformed copy of Amendment dated April 12, 1995 to the Registrant's Agreement and Declaration of Trust -- Incorporated by reference to the Registrant's initial registration statement on Form N-14 (File No. 33-60083) filed on June 8, 1995. 2. By-Laws -- Incorporated by reference to the Registrant's Pre-Effective Amendment No. 1 on Form N1-A filed April 14, 1992. 3a. Copy of Class A specimen share certificate -- Incorporated by reference to the Registrant's Post-Effective Amendment No. 9 on Form N-1A filed March 15, 1995. 3b. Copy of Class B specimen share certificate -- Incorporated by reference to the Registrant's Post-Effective Amendment No. 9 on Form N-1A filed March 15, 1995. 4. Agreement and Plan of Reorganization -- constitutes Exhibit A included in Part A hereof. 5a. Portions of Agreement and Declaration of Trust Relating to Shareholders' Rights -- Incorporated by reference to the Registrant's Post-Effective Amendment No. 3 on Form N-1A filed May 14, 1993. 1 5b. Portions of By-Laws Relating to Shareholders' Rights -- Incorporated by reference to the Registrant's Pre-Effective Amendment No. 1 on Form N1-A filed April 14, 1992. 6a. Conformed copy of Management Agreement -- Incorporated by reference to the Registrant's Post-Effective Amendment No. 3 on Form N-1A filed May 14, 1993. 7a. Copy of Distributor's Contract of the Registrant with Distributors, Inc., through and including Exhibit I -- Incorporated by reference to the Registrant's Post-Effective Amendment No. 5 on Form N-1A filed November 26, 1993. 7b. Form of New Exhibit J to the Distributor's Contract in respect of the Class A and B shares of the Growth Portfolio -- Incorporated by reference to the Registrant's Post-Effective Amendment No. 9 on Form N-1A filed March 15, 1995. 8. Not applicable. 9. Copy of Custodian Agreement of the Registrant with Investors Fiduciary Trust Company -- Incorporated by reference to Registrant's Post-Effective Amendment No. 3 on Form N-1A. 10a. Conformed copy of Distribution Plan -- Incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form N-1A. 10b. Copy of 12b-1 Agreement (Sales Agreement) with Mentor Distributors, Inc. -- Incorporated by reference to Registrant's Post-Effective Amendment No. 3 on Form N-1A filed on May 14, 1993. 11. Opinion of Counsel including consent -- Incorporated by reference to the opinion of counsel filed as an exhibit to the Registrant's Registration Statement on Form N-1A prior to the original effective date of such Registration Statement. 12. Opinion of Ropes & Gray as to Tax Matters -- Exhibit 1. 13. Copy of Investor Servicing Agreement with Investors Fiduciary Trust Company -- Incorporated by reference to Pre- Effective Amendment No. 1 to the Registrant's Initial Registration Statement on Form N-1A. 14a. Consent of Independent Accountants -- Exhibit 2. 14b. Consent of Ropes & Gray -- Exhibit 3. 15. Not applicable. 2 16. Power of Attorney -- Incorporated by reference to the Registrant's initial Registration Statement on Form N-14 (File no. 33-60083) filed on June 8, 1995. 17. Copy of Registrant's Declaration under Rule 24f-2 -- Incorporated by reference to the Registrant's Initial Registration Statement on Form N-1A. Item 17. Undertakings (a) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) under the Act, the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (b) The undersigned Registrant agrees that every prospectus that is filed under paragraph (a) above will be filed as a part of an amendment to this Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the Act, each post-effective amendment shall be deemed to be a new Registration Statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. NOTICE A copy of the Agreement and Declaration of Trust, as amended, of the Trust is on file with the Secretary of State of The Commonwealth of Massachusetts, and notice is hereby given that this Registration Statement has been executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually, and the obligations of or arising out of this Registration Statement are not binding upon any of the Trustees, officers, or shareholders of the Registrant individually, but are binding only upon the assets and property of the Registrant. 3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, as amended, and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Richmond and The Commonwealth of Virginia on the 21st day of August, 1995. MENTOR CAPITAL GROWTH PORTFOLIO By: Paul F. Costello, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated. Signature Title Daniel J. Ludeman* Chairman and Trustee (Chief Executive Officer) Peter J. Quinn, Jr.* Trustee Arnold H. Dreyfuss* Trustee Thomas F. Keller Trustee Louis W. Moelchert, Jr.* Trustee Troy A. Peery, Jr.* Trustee Paul F. Costello* President Terry L. Perkins* Treasurer (Principal Financial and Accounting Officer) *By: Paul F. Costello, as Attorney-in-Fact August 21, 1995 4 Exhibit Index 12. Opinion of Ropes & Gray as to Tax Matters -- Exhibit 1. 14. Consent of Independent Accountants -- Exhibit 2. Consent of Ropes & Gray -- Exhibit 3. 5 EX-5 2 EXHIBIT 5 Exhibit 1 ROPES & GRAY ONE INTERNATIONAL PLACE BOSTON, MASSACHUSETTS 02110-2624 (617) 951-7000 TELECOPIER: (617) 951-7050 As of July 14, 1995 The Mentor Funds 901 East Byrd Street Richmond, Virginia 23219 Ladies and Gentlemen: We have acted as counsel in connection with the Agreement and Plan of Reorganization (the "Agreement") dated as of July 8, 1995 between Mentor/Cambridge Growth Portfolio (the "Transferor Fund") and Mentor Capital Growth Portfolio (the "Acquiring Fund"), each of which is a series of The Mentor Funds, a Massachusetts business trust. The Agreement describes a proposed transaction (the "Transaction"), to be determined (the "Exchange Date"), pursuant to which Acquiring Fund will acquire substantially all of the assets of Transferor Fund in exchange for the issuance by Acquiring Fund to Transferor Fund of shares of beneficial interest in Acquiring Fund (the "Acquiring Fund Shares") and the assumption by Acquiring Fund of all of the liabilities of Transferor Fund, following which the Acquiring Fund Shares will be distributed by the Transferor Fund to its shareholders in liquidation and termination of Transferor Fund. This opinion as to certain federal income tax consequences of the Transaction is furnished to you pursuant to sections 8(h) and 9(f) of the Agreement. Transferor Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. Shares of Transferor Fund are redeemable at net asset value at each shareholder's option. Transferor Fund has elected to be a regulated investment company for federal income tax purposes under section 851 of the Internal Revenue Code of 1986, as amended (the "Code"). Acquiring Fund is registered under the 1940 Act as an open-end management investment company. Shares of Acquiring Fund are redeemable at net asset value at each shareholder's option. Acquiring Fund has elected to be a regulated investment company for federal income tax purposes under section 851 of the Code. For purposes of this opinion, we have considered the Agreement, the Proxy Statement/Prospectus to be dated August 8, 1995 which will be distributed to Transferor Fund shareholders (including the items The Mentor Funds -2- As of July 14, 1995 incorporated by reference therein), and such other items as we have deemed necessary to render this opinion. In addition, you have represented to us the following facts, occurrences and information upon which you have indicated we may rely in rendering this opinion (whether or not contained or reflected in the documents and items referred to above): 1. Transferor Fund will transfer to Acquiring Fund substantially all of its assets, and Acquiring Fund will assume all of the liabilities of Transferor Fund (including those to which any transferred assets are subject), as of the Exchange Date. 2. The fair market value of the Acquiring Fund Shares received by each Transferor Fund shareholder will be approximately equal to the fair market value of Transferor Fund shares surrendered in exchange therefor. The shareholders of Transferor Fund will receive no consideration other than Acquiring Fund Shares (which may include fractional shares) in exchange for their shares of beneficial interest in the Transferor Fund ("Transferor Fund Shares"). 3. There is no plan or intention by any Transferor Fund shareholder who owns 5% or more of the outstanding Transferor Fund Shares, and to the best of the knowledge of the management of Transferor Fund, there is no plan or intention on the part of the remaining Transferor Fund shareholders to sell, exchange, or otherwise dispose of a number of Acquiring Fund Shares received in the Transaction such that the Transferor Fund shareholders' ownership of Acquiring Fund Shares, in the aggregate, would be reduced to a number of Acquiring Fund Shares having a value, as of the date of the Transaction, of less than 50 percent of the value of all of the formerly outstanding Transferor Fund Shares as of the same date. For purposes of this representation, Transferor Fund Shares surrendered in redemption by Transferor Fund shareholders, where such redemptions, if any, appear to be initiated by Transferor Fund shareholders in connection with or as a result of the Agreement or the Transaction, will be treated as outstanding Transferor Fund Shares on the date of the Transaction. 4. Acquiring Fund will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by Transferor Fund immediately prior to the Transaction. For purposes of this representation, (a) amounts paid by Transferor Fund, out of the assets of Transferor Fund, to Transferor Fund shareholders in redemption of Transferor Fund Shares, where such redemptions, if any, appear to be initiated by Transferor Fund shareholders in connection with or as a result of the Agreement or the Transaction, (b) amounts used by Transferor Fund to pay expenses of the Transaction, and (c) amounts used by Transferor Fund to effect any distributions (except for regular, normal dividends and dividends declared and paid in order to ensure Transferor Fund's continued qualification as a regulated investment company and to avoid imposition of fund-level tax) will be included as assets of Transferor Fund held immediately prior to the Transaction. The Mentor Funds -3- As of July 14, 1995 Further, for purposes of this representation, the amounts, if any, that Acquiring Fund pays after the Transaction to Acquiring Fund shareholders who are former Transferor Fund shareholders in redemption of Acquiring Fund Shares received in exchange for Transferor Fund Shares, where such redemptions, if any, appear to be initiated by such shareholders in connection with or as a result of the Agreement or the Transaction, will be considered to be assets of Transferor Fund that were not transferred to Acquiring Fund. 5. Acquiring Fund has no plan or intention to reacquire any of the Acquiring Fund Shares issued in the Transaction, except for Acquiring Fund Shares reacquired in the ordinary course of its business as an open-end investment company. 6. Transferor Fund will distribute the Acquiring Fund Shares it receives in the Transaction, as well as any other property. 7. The liabilities of Transferor Fund to be assumed by Acquiring Fund, and the liabilities, if any, to which the transferred assets will be subject, will have been incurred by Transferor Fund in the ordinary course of its business and will be associated with the assets transferred to Acquiring Fund. For purposes of this paragraph, expenses of the transaction are not treated as liabilities. 8. Both the fair market value and the total adjusted basis of the Transferor Fund assets transferred to Acquiring Fund will equal or exceed the sum of all of the liabilities assumed by Acquiring Fund, plus the amount of liabilities, if any, to which the transferred assets are subject. 9. Following the Transaction, Acquiring Fund will continue the historic business of Transferor Fund as an investment company, which is to pursue the objective of achieving capital appreciation, and will use a significant portion (at least 50%) of Transferor Fund's historic business assets in its business. For purposes of this representation, the Transferor's "historic business assets" include (i) all of the assets it holds on the Exchange Date that were not acquired in connection with or in anticipation of the Transaction or Agreement and (ii) all of the assets sold by Acquiring Fund or Transferor Fund in connection with or in anticipation of the Transaction or Agreement. Specifically, the Acquiring Fund will use such significant portion of the Transferor Fund's historic business assets in its business by continuing to hold the assets transferred to it by the Transferor Fund, except for dispositions made in the ordinary course of business as an open-end investment company (i.e., dispositions resulting from investment decisions made after the Transaction on the basis of investment considerations independent of the Transaction). 10. Except as provided in the preceding paragraph, Acquiring Fund has no plan or intention to sell or otherwise dispose of any of the assets of Transferor Fund acquired in the Transaction, except for dispositions made The Mentor Funds -4- As of July 14, 1995 in the ordinary course of its business as an open-end investment company (i.e., dispositions resulting from investment decisions made on the basis of investment considerations arising after, and independent of, the Transaction). 11. All fees and expenses, including legal and accounting expenses, portfolio transfer taxes (if any) or other similar expenses incurred in connection with the Transaction will be allocated ratably between the Acquiring Fund and Transferor Fund in proportion to their net assets, except that the costs of proxy materials and proxy solicitation will be borne by the Transferor Fund; provided, however, that such expenses will in any event be paid by the party directly incurring such expenses if and to the extent that the payment by the other party of such expenses would result in the disqualification of the party as a regulated investment company within the meaning of section 851 of the Code. 12. As of the Exchange Date, there will be no intercorporate indebtedness existing between Acquiring Fund and Transferor Fund. 13. For federal income tax purposes, Transferor Fund qualifies as a regulated investment company, and the provisions of sections 851 through 855 of the Code apply to Transferor Fund for its current taxable year beginning October 1, 1994 and will continue to apply to it through the Exchange Date. In that regard, Transferor Fund will declare to Transferor Fund shareholders of record on or prior to the Exchange Date a dividend or dividends which together with all previous such dividends shall have the effect of distributing (i) all of Transferor Fund's investment company taxable income (see Code section 852(b)(2)) for the taxable year ended September 30, 1994 and for the short taxable year of Transferor Fund beginning on October 1, 1994 and ending on the Exchange Date (computed in each case without regard to any deduction for dividends paid) and all of Transferor Fund's net capital gain (see Code section 1222(11)) realized in its taxable year ended September 30, 1994 and in its short taxable year beginning on October 1, 1994 ending on the Exchange Date (after reduction for any capital loss carryover). Such dividends will be made to ensure continued qualification of Transferor Fund as a regulated investment company for tax purposes and to eliminate fund-level income and excise tax liabilities. In addition, as of the Exchange Date, Transferor Fund will be diversified in the sense that it will meet the requirements of Section 368(a)(2)(F)(ii) of the Code, i.e., not more than twenty-five percent (25%) of the value of its total assets (as defined) will be invested in stock and securities (as defined) of any one issuer and not more than fifty percent (50%) of such total assets will be invested in stock and securities of five or fewer issuers. The Mentor Funds -5- As of July 14, 1995 14. For federal income tax purposes, Acquiring Fund qualifies as a regulated investment company, and the provisions of sections 851 through 855 of the Code apply to Acquiring Fund for its current taxable year beginning October 1, 1994, and will continue to apply to it through the Exchange Date. In addition, as of the Exchange Date, Acquiring Fund will be diversified in the sense that it will meet the requirements of section 368(a)(2)(F)(ii) of the Code, i.e., not more than twenty-five percent (25%) of the value of its total assets (as defined) will be invested in stock and securities (as defined) of any one issuer and not more than fifty percent (50%) of such total assets will be invested in stock and securities of five or fewer issuers. 15. Acquiring Fund does not own, directly or indirectly, nor has it owned during the past five years, directly or indirectly, any Transferor Fund shares. 16. Transferor Fund is not, and as of the Exchange Date will not be, under the jurisdiction of a court in a Title 11 or similar case within the meaning of section 368(a)(3)(A) of the Code. 17. None of the compensation received by any shareholder-employees of Transferor Fund, if any, will be separate consideration for, or allocable to, any of their Transferor Fund shares; none of the Acquiring Fund Shares received by any Transferor Fund shareholder-employee will be separate consideration for, or allocable to, any employment agreement; and the compensation paid to any Acquiring Fund or Transferor Fund shareholder- employees, if any, will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. Based on the foregoing and our review of the documents and items referred to above, we are of the opinion that for federal income tax purposes: (i) No gain or loss will be recognized by Acquiring Fund upon its receipt of the assets of Transferor Fund in exchange for Acquiring Fund Shares and the assumption by Acquiring Fund of the liabilities of Transferor Fund; (ii) The basis in the hands of Acquiring Fund of the assets of Transferor Fund transferred to Acquiring Fund will be the same as the basis of such assets in the hands of Transferor Fund immediately prior to the transfer; (iii) The holding periods of the assets of Transferor Fund transferred to Acquiring Fund will include the periods The Mentor Funds -6- As of July 14, 1995 during which such assets were considered held for federal income tax purposes by Transferor Fund; (iv) No gain or loss will be recognized by Transferor Fund upon the transfer of Transferor Fund's assets and liabilities to Acquiring Fund or upon the distribution of Acquiring Fund Shares by Transferor Fund to its shareholders in liquidation; (v) No gain or loss will be recognized by the Transferor Fund shareholders on the exchange of their Transferor Fund shares for Acquiring Fund Shares; (vi) The basis of the Acquiring Fund Shares received by Transferor Fund shareholders will be the same as the basis of the Transferor Fund shares exchanged therefor; and (vii) The holding periods of the Acquiring Fund Shares received by Transferor Fund shareholders will include the holding periods of the Transferor Fund shares exchanged therefor, provided that at the time of the Transaction the Transferor Fund shares are held by such shareholders as capital assets. Very truly yours, /s/ Ropes & Gray Ropes & Gray -7- EX-14 3 EXHIBIT 14A Exhibit 2 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Trustees of The Mentor Funds (formerly Cambridge Series Trust) We consent to the use of our report dated November 11, 1994 on the financial statements of the Mentor/Cambridge Growth Portfolio (formerly the Cambridge Growth Portfolio) and the Mentor Capital Growth Portfolio (formerly the Cambridge Capital Growth Portfolio), portfolios of The Mentor Funds, which is incorporated herein by reference, and to the reference to our firm under the heading "Independent Accountants and Financial Statements" in the Statement of Additional Information. KPMG Peat Marwick LLP August 22, 1995 EX-14 4 EXHIBIT 14B Exhibit 3 Ropes & Gray One International Place Boston, Massachusetts 02110-2624 August 21, 1995 The Mentor Funds 901 East Byrd Street Richmond, Virginia 23219 Ladies and Gentlemen: We consent to the reference to our firm in the prospectus/proxy statement constituting Part A of Post-Effective Amendment No. 1 to the Registration Statement of The Mentor Funds on Form N-14 under the caption "Information about the Reorganization -- Federal Income Tax Consequences." Very truly yours, /s/ Ropes & Gray Ropes & Gray -----END PRIVACY-ENHANCED MESSAGE-----