PROSPECTUS JANUARY 15, 1996
THE MENTOR FUNDS
The Mentor Funds, an open-end management investment company, is offering
shares of eight different investment portfolios by this Prospectus: Mentor
Growth Portfolio, Mentor Capital Growth Portfolio, Mentor Strategy Portfolio (an
asset allocation total return fund), Mentor Income and Growth Portfolio, Mentor
Perpetual Global Portfolio (a global growth fund), Mentor Quality Income
Portfolio, Mentor Municipal Income Portfolio, and Mentor Short-Duration Income
Portfolio. CERTAIN OF THE PORTFOLIOS MAY USE "LEVERAGE" -- THAT IS, THEY MAY
BORROW MONEY TO PURCHASE ADDITIONAL PORTFOLIO SECURITIES, WHICH INVOLVES SPECIAL
RISKS.
The Mentor Funds provides investors an opportunity to design their own
investment programs by investing in a variety of Portfolios offering a wide
array of investment strategies. Each Portfolio pursues its investment objectives
through the investment policies described in this Prospectus. This Prospectus
sets forth concisely the information about The Mentor Funds that a prospective
investor should know before investing. Please read this Prospectus carefully and
retain it for future reference. You can find more detailed information in the
January 15, 1996 Statement of Additional Information, as amended from time to
time. For a free copy of the Statement or for other information, please call
1-800-382-0016. The Statement has been filed with the Securities and Exchange
Commission and is incorporated into this Prospectus by reference. The address of
The Mentor Funds is P.O. Box 1357, Richmond, Virginia 23286-0109.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Expenses Summary....................................................... 3
Financial Highlights................................................... 6
Investment Objectives and Policies..................................... 11
Valuing the Portfolios' Shares......................................... 25
Sales Arrangements..................................................... 25
Distribution Plans (Class B Shares).................................... 29
How To Sell Shares..................................................... 30
How To Exchange Shares................................................. 31
Distributions and Taxes................................................ 31
Management............................................................. 32
General................................................................ 35
Performance Information................................................ 36
APPENDIX............................................................... 37
</TABLE>
2
<PAGE>
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. The following tables summarize your maximum transaction costs from
investing in each of the Portfolios and expenses each Portfolio expects to incur
in the current fiscal year. The Examples show the cumulative expenses
attributable to a hypothetical $1,000 investment in each of the Portfolios over
specified periods.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)(1)
Mentor Growth Portfolio............................................................. 5.75% None
Mentor Capital Growth Portfolio..................................................... 5.75% None
Mentor Strategy Portfolio........................................................... 5.75% None
Mentor Income and Growth Portfolio.................................................. 5.75% None
Mentor Perpetual Global Portfolio................................................... 5.75% None
Mentor Quality Income Portfolio..................................................... 4.75% None
Mentor Municipal Income Portfolio................................................... 4.75% None
Mentor Short-Duration Income Portfolio.............................................. 1.00% None
Maximum Sales Charge Imposed on Reinvested Dividends.................................. None None
Exchange Fee.......................................................................... None None
Contingent Deferred Sales Charge (as a percentage of
the lower of the original purchase price or redemption proceeds of shares redeemed)
Class A Shares (all Portfolios):......................................................None(2)
Class B Shares(3):
</TABLE>
<TABLE>
<S> <C>
Growth, Capital Growth, Strategy, Income and 4.0% in the first year, declining to 1.0% in the fifth
Growth, and Global Portfolios year, and eliminated thereafter
Quality Income, Municipal Income, and 4.0% in the first year, declining to 1.0% in the sixth
Short-Duration Income Portfolios year, and eliminated thereafter
</TABLE>
(1) Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
(2) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1 million that are redeemed within one year of purchase.
(3) The amount redeemed is computed as the lesser of the current net asset value
of the shares redeemed, and the original purchase price of the shares. See
"How to Buy Shares -- Class B Shares."
(4) A CDSC of 1.00% is assessed on Class B shares that are purchased pursuant to
certain asset-allocation plans and that are not otherwise subject to the
CDSC shown in the table, if those shares are redeemed within one year of
purchase. Contact Mentor Distributors, Inc. for more information.
3
<PAGE>
ANNUAL PORTFOLIO OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<CAPTION>
INCOME SHORT-
CAPITAL AND QUALITY MUNICIPAL DURATION
GROWTH GROWTH STRATEGY GROWTH GLOBAL INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Management Fees
(after waiver)(1)... 0.70% 0.80% 0.85% 0.75% 1.10% 0.50%(2) 0.60% 0.40%(2)
12b-1 Fees.......... None None None None None None None None
Shareholder Service
Fees................ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after waiver)(1)... 0.37% 0.40% 0.37% 0.37% 0.65% 0.30% 0.30% 0.21%
Total Portfolio
Operating
Expenses(1)..... 1.32% 1.45% 1.47% 1.37% 2.00% 1.05% 1.15% 0.86%
<CAPTION>
INCOME SHORT-
CAPITAL AND QUALITY MUNICIPAL DURATION
GROWTH GROWTH STRATEGY GROWTH GLOBAL INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Management Fees
(after waiver)(1)... 0.70% 0.80% 0.85% 0.75% 1.10% 0.50%(2) 0.60% 0.40%(2)
12b-1 Fees.......... 0.75% 0.75% 0.75% 0.75% 0.75% 0.50% 0.50% 0.30%
Shareholder Service
Fees................ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after waiver)(1)... 0.37% 0.40% 0.37% 0.37% 0.65% 0.30% 0.30% 0.21%
Total Portfolio
Operating
Expenses(1)..... 2.07% 2.20% 2.22% 2.12% 2.75% 1.55% 1.65% 1.16%
</TABLE>
(1) The amounts shown in the tables reflect the expenses each of the
Portfolios expects to incur during the current fiscal year. If
Total Portfolio Operating Expenses of any Portfolio materially
exceed the amounts shown above, Mentor Investment Group, Inc.
intends to bear the Portfolio's expenses to that extent. Management
Fees for the Global Portfolio were reduced during fiscal 1995 by an
expense limitation to 1.05% of the Fund's average net assets. For
their last fiscal year, the Portfolios' Total Portfolio Operating
Expenses were as follows, without giving effect to any expense
limitations in effect during the year: Growth Portfolio, Class
A -- 1.36%, Class B -- 2.08%; Capital Growth Portfolio, Class
A -- 1.87%, Class B -- 2.56%; Strategy Portfolio, Class A -- 1.65%,
Class B -- 2.08%; Income and Growth Portfolio, Class A -- 1.69%,
Class B -- 2.43%; Global Portfolio, Class A -- 2.11%, Class
B -- 2.79%; Quality Income Portfolio, Class A -- 1.36%, Class
B -- 1.79%; Municipal Income Portfolio, Class Class A -- 1.43%,
Class B -- 1.92%; Short-Duration Income Portfolio, Class
A -- 1.00%, Class B -- 1.70%. For their last fiscal year, the
Portfolios' Other Expenses were as follows, without giving effect
to any expense limitations in effect during the year: Growth
Portfolio, Class A -- 0.41%, Class B -- 0.38%; Capital Growth
portfolio, Class A -- 0.82%, Class B -- 0.76%; Strategy Portfolio,
Class A -- 0.55%, Class B -- 0.23%; Income and Growth Portfolio,
Class A -- 0.69%, Class B -- 0.68%; Global Portfolio, Class
A -- 0.81%, Class B -- 0.74%; Quality Income Portfolio, Class
A -- 0.55%, Class B -- 0.49%; Municipal Income Portfolio, Class
A -- 0.58%, Class B -- 0.57%; Short-Duration Income Portfolio,
Class A -- 0.46%, Class B -- 0.65%. Other Expenses for the
Short-Duration Income Portfolio reflect the expense limitation
described above; in the absence of the limitation, the Portfolio's
Other Expenses would be 0.56% for both its Class A and Class B
shares, and its Total Portfolio Operating Expenses (without
reflecting the waiver of the Management Fees described below) would
be 1.31% and 1.61% for its Class A and Class B shares,
respectively.
(2) In order to limit the Portfolios' operating expenses, the
investment advisers of each of the Quality Income and
Short-Duration Income Portfolios have agreed to limit their
compensation until September 30, 1996; in the
absence of such limitations, these Portfolios' Management Fees
would be 0.60% and 0.50%, respectively, as would have been the case
if no expense limitations had been in effect during the last fiscal
year.
4
<PAGE>
The tables are provided to help you understand the expenses of
investing in each of the Portfolios and your share of the operating
expenses of each of the Portfolios. In the case of Class A shares for the
Growth, Strategy, and Short-Duration Income Portfolios, "Other expenses"
are estimated based on amounts for the 1995 fiscal period.
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming
5% annual return and no redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Portfolio............... $70 $21 $ 97 $65 $ 126 $ 111 $ 207 $ 240
Capital Growth Portfolio....... 71 22 101 69 132 118 221 253
Strategy Portfolio............. 72 23 101 69 133 119 223 255
Income and Growth Portfolio.... 71 22 98 66 128 114 213 245
Global Portfolio............... 77 28 117 85 159 145 277 308
Quality Income Portfolio....... 58 16 79 49 103 84 170 185
Municipal Income Portfolio..... 59 17 82 52 108 90 181 195
Short-Duration Income
Portfolio.................... 19 12 37 37 57 64 115 141
</TABLE>
You would pay the following expenses on a $1,000 investment assuming
redemption at the end of each period:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Portfolio............... $70 $61 $ 97 $95 $ 126 $ 121 $ 207 $ 240
Capital Growth Portfolio....... 71 62 101 99 132 128 221 253
Strategy Portfolio............. 72 63 101 99 133 129 223 255
Income and Growth Portfolio.... 71 62 98 96 128 124 213 245
Global Portfolio............... 77 68 117 115 159 155 277 308
Quality Income Portfolio....... 58 56 79 79 103 94 170 185
Municipal Income Portfolio..... 59 57 82 82 108 100 181 195
Short-Duration Income
Portfolio.................... 19 52 37 67 57 74 115 141
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
PERFORMANCE; ACTUAL EXPENSES MAY VARY.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following tables have been audited by KPMG Peat Marwick LLP,
The Mentor Funds' independent auditors. Their report dated November 10,
1995 on the Portfolios' financial statements for the period ended
September 30, 1995 is included in the Annual Report dated September 30,
1995, which is incorporated by reference. This table should be read in
conjunction with each Portfolio's financial statements and notes
thereto, which are included in the Statement of Additional Information
and which may be obtained free of charge from The Mentor Funds. The
Growth, Strategy, and Short-Duration Income Portfolios are successors
to the Mentor Growth, Strategy, and Short-Duration Income Funds, each
of which was a series of shares of beneficial interest of Mentor Series
Trust, a Massachusetts business trust. Each of those Funds offered only
one class of shares until June 1995. Until April 12, 1995, Mentor
Quality Income Portfolio was known as "Cambridge Government Income
Portfolio"; until that time, the Portfolio was required, among other
things, to invest at least 65% of its assets in U.S. Government
securities.
CLASS A SHARES
<TABLE>
<CAPTION>
MENTOR
INCOME
AND
MENTOR GROWTH MENTOR STRATEGY GROWTH
PORTFOLIO MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO PORTFOLIO
PERIOD YEAR YEAR YEAR YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95* 9/30/95 9/30/94 9/30/93 9/30/92** 9/30/95* 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.37 $ 14.88 $ 15.26 $ 14.21 $ 14.18 $ 13.45 $ 15.27
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.01) 0.02 0.09 0.14 0.08 -- 0.40
Net realized and
unrealized gain (loss)
on investments 2.72 2.91 (0.30) 1.02 0.03 1.79 2.14
Total from investment
operations 2.71 2.93 (0.21) 1.16 0.11 1.79 2.54
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- (0.04) (0.11) (0.08) -- (0.40)
In excess of net
investment income -- -- -- -- -- -- (0.03)
Distributions from
capital gains -- (1.79) (0.13) -- -- -- (0.25)
Distributions in excess
of capital -- -- -- -- -- -- --
Total Distributions -- (1.79) (0.17) (0.11) (0.08) -- (0.68)
NET ASSET VALUE, END OF
PERIOD $ 16.08 $ 16.02 $ 14.88 $ 15.26 $ 14.21 $ 15.24 $ 17.13
Total Return 20.27% 20.18% (1.37%) 8.21% 0.78% 13.31% 17.24%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $20,368 $29,582 $21,181 $31,360 $ 20,864 $10,503 $19,888
Ratio of expenses to
average net assets 1.36%(a) 1.87% 1.70% 1.49% 1.14%(a) 1.65%(a) 1.69%
Ratio of expenses to
average net asset
excluding waiver 1.36%(a) 1.87% 1.70% 1.59% 1.43%(a) 1.65%(a) 1.69%
Ratio of net investment
income
(loss) to average net
assets (0.65%)(a) 0.27% 0.53% 0.96% 1.54%(a) (0.06%)(a) 2.53%
Portfolio turnover rate 70% 157% 149% 192% 61% 122% 62%
<CAPTION>
MENTOR INCOME AND MENTOR PERPETUAL
GROWTH PORTFOLIO GLOBAL PORTFOLIO
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/94 9/30/93*** 9/30/95 9/30/94****
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.88 $ 14.14 $ 14.23 $ 14.18
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.31 0.09 0.05 (0.01)
Net realized and
unrealized gain (loss)
on investments 0.64 0.73 1.60 0.06
Total from investment
operations 0.95 0.82 1.65 0.05
LESS DISTRIBUTIONS
Dividends from net
investment income (0.30) (0.08) -- --
In excess of net
investment income -- -- -- --
Distributions from
capital gains (0.26) -- -- --
Distributions in excess
of capital -- -- -- --
Total Distributions (0.56) (0.08) -- --
NET ASSET VALUE, END OF
PERIOD $ 15.27 $ 14.88 $ 15.88 $ 14.23
Total Return 6.54% 5.54% 11.60% 0.35%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $ 17,773 $ 9,849 $ 6,854 $ 8,882
Ratio of expenses to
average net assets 1.75% 1.56%(a) 2.06% 2.09%(a)
Ratio of expenses to
average net asset
excluding waiver 1.75% 1.94%(a) 2.11% 3.18%(a)
Ratio of net investment
income
(loss) to average net
assets 2.20% 2.35%(a) 0.26% (0.10%)(a)
Portfolio turnover rate 78% 13% 155% 2%
</TABLE>
* For the period from June 5, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992
(commencement of operations) to September 30, 1992.
*** Reflects operations for the period from May 24, 1993 (commencement
of operations) to September 30, 1993.
**** Reflects operations for the period from March 29, 1994
(commencement of operations) to September 30, 1994.
(a) Annualized.
6
<PAGE>
CLASS A SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR
SHORT-DURATION
INCOME MENTOR MUNICIPAL
MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO INCOME PORTFOLIO
YEAR YEAR YEAR YEAR PERIOD YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95 9/30/94 9/30/93 9/30/92** 9/30/95* 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.75 $ 14.04 $ 14.39 $ 14.30 $12.74 $ 14.42 $ 16.05
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.84 0.84 1.06 0.44 0.22 0.81 0.82
Net realized and
unrealized gain (loss)
on investments 0.61 (1.30) (0.31) 0.09 (0.03) 0.51 (1.54)
Total from investment
operations 1.45 (0.46) 0.75 0.53 0.19 1.32 (0.72)
LESS DISTRIBUTIONS
Dividends from net
investment income (0.85) (0.83) (1.06) (0.44) (0.22) (0.82) (0.81)
In excess of net
investment income (0.06) -- (0.04) -- (0.03) -- --
Distributions from
capital gains -- -- -- -- -- -- (0.10)
Distributions in excess
of capital -- -- -- -- -- -- --
Total Distributions (0.91) (0.83) (1.10) (0.44) (0.25) (0.82) (0.91)
NET ASSET VALUE, END OF
PERIOD $ 13.29 $ 12.75 $ 14.04 $ 14.39 $12.68 $ 14.92 $ 14.42
Total Return 11.82% (3.39%) 5.41% 3.37% 1.51% 9.46% (4.83%)
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $24,472 $30,142 $47,780 $ 36,740 $1,002 $20,460 $25,056
Ratio of expenses to
average net assets 1.32% 1.38% 1.04% 0.36%(a) 0.71%(a) 1.43% 1.24%
Ratio of expenses to
average net asset
excluding waiver 1.36% 1.39% 1.22% 1.21%(a) 1.00%(a) 1.43% 1.33%
Ratio of net investment
income
(loss) to average net
assets 6.73% 6.33% 7.31% 8.00%(a) 4.10%(a) 5.56% 5.43%
Portfolio turnover rate 368% 455% 102% 9% 126% 43% 87%
<CAPTION>
MENTOR MUNICIPAL
INCOME PORTFOLIO
YEAR YEAR
ENDED ENDED
9/30/93 9/30/92**
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.76 $ 14.29
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.92 0.32
Net realized and
unrealized gain (loss)
on investments 1.32 0.47
Total from investment
operations 2.24 0.79
LESS DISTRIBUTIONS
Dividends from net
investment income (0.92) (0.32)
In excess of net
investment income (0.03) --
Distributions from
capital gains -- --
Distributions in excess
of capital -- --
Total Distributions (0.95) (0.32)
NET ASSET VALUE, END OF
PERIOD $ 16.05 $ 14.76
Total Return 16.00% 5.34%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $ 29,245 $ 18,801
Ratio of expenses to
average net assets 0.71% 0.00%(a)
Ratio of expenses to
average net asset
excluding waiver 1.39% 1.26%(a)
Ratio of net investment
income
(loss) to average net
assets 5.92% 6.21%(a)
Portfolio turnover rate 88% 0%
</TABLE>
* For the period from June 16, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement
of operations) to September 30, 1992.
(a) Annualized.
7
<PAGE>
CLASS B SHARES
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
PERIOD YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95* 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54 $ 7.45
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.13) (0.15) (0.08) (0.06) (0.09) 0.02 0.13 0.01
Net realized and
unrealized gain (loss)
on investments 4.03 (0.47) 2.07 1.94 4.30 (1.10) 1.35 1.24
Total from investment
operations 3.90 (0.62) 1.99 1.88 4.21 (1.08) 1.48 1.25
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- -- -- -- (0.05) (0.12) (0.01)
Distributions in excess
of net investment
income -- -- -- -- -- -- -- --
Distributions from
capital gains -- (1.00) (1.02) (1.23) (0.42) (0.13) (0.27) (0.15)
Distributions in excess
of capital gains -- (0.01) -- -- -- -- -- --
Total Distributions -- (1.01) (1.02) (1.23) (0.42) (0.18) (0.39) (0.16)
NET ASSET VALUE, END OF
PERIOD $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54
Total Return 32.10% (4.48%) 15.60% 15.46% 50.30% (11.21%) 17.33% 16.78%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $246,326 $190,126 $186,978 $136,053 $108,719 $ 83,540 $107,315 $ 96,425
Ratio of expenses to
average
net assets 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25% 2.24% 2.19%
Ratio of expenses to
average net asset
excluding waiver 2.08%(a) 2.01% 2.02% 2.05% 2.17% 2.25% -- --
Ratio of net investment
income
(loss) to average net
assets (1.20%)(a) (1.20%) (1.12%) (0.76%) (0.80%) 0.26% 1.36% 0.16%
Portfolio turnover rate 70% 77% 64% 50% 40% 50% 26% 31%
<CAPTION>
MENTOR GROWTH PORTFOLIO
NINE
MOS. YEAR PERIOD
ENDED ENDED 4/16/85** TO
12/31/87 3/31/87 3/31/86
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.91 $ 9.34 $ 6.67
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.01) (0.01) (0.03)
Net realized and
unrealized gain (loss)
on investments (2.32) 0.92 2.70
Total from investment
operations (2.33) 0.91 2.67
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- --
Distributions in excess
of net investment
income -- -- --
Distributions from
capital gains (0.13) (0.34) --
Distributions in excess
of capital gains -- -- --
Total Distributions (0.13) (0.34) --
NET ASSET VALUE, END OF
PERIOD $ 7.45 9.91 $ 9.34
Total Return (23.47%) 9.74% 41.77%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $ 92,763 $113,317 $ 63,767
Ratio of expenses to
average
net assets 2.18%(a) 2.16% 2.43%(a)
Ratio of expenses to
average net asset
excluding waiver -- -- --
Ratio of net investment
income
(loss) to average net
assets (0.19%)(a) (0.18%) (0.53%)(a)
Portfolio turnover rate 33% 34% 35%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992
(commencement of operations) to September 30, 1992.
(a) Annualized.
8
<PAGE>
CLASS B SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR
INCOME
AND
GROWTH
MENTOR CAPITAL GROWTH PORTFOLIO MENTOR STRATEGY PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR PERIOD YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95 9/30/94 9/30/93 9/30/92** 9/30/95* 12/31/94 12/31/93*** 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 14.80 $ 15.23 $ 14.22 $ 14.18 $ 12.24 $ 12.70 $ 12.50 $ 15.28
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.25 (0.04) 0.05 0.46 -- (0.06) -- 0.28
Net realized and
unrealized gain (loss)
on investments 2.53 (0.26) 1.02 0.04 2.97 (0.40) 0.20 2.14
Total from investment
operations 2.78 (0.30) 1.07 0.50 2.97 (0.46) 0.20 2.42
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- (0.05) (0.46) -- -- -- (0.28)
In excess of net
investment income -- -- (0.01) -- -- -- -- (0.03)
Distributions from
capital gains (1.79) (0.13) -- -- -- -- -- (0.25)
Distributions in excess
of capital gains -- -- -- -- -- -- -- --
Total Distributions (1.79) (0.13) (0.06) (0.46) -- -- -- (0.56)
NET ASSET VALUE, END OF
PERIOD $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 15.21 $ 12.24 $ 12.70 $ 17.14
Total Return 19.26% (2.00%) 7.52% 0.61% 24.26% (3.61%) 1.60% 16.32%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $57,648 $41,106 $57,030 $25,468 $224,643 $179,274 $ 122,177 $46,678
Ratio of expenses to
average
net assets 2.56% 2.46% 2.24% 1.86%(a) 2.08%(a) 2.19% 2.06%(a) 2.43%
Ratio of expenses to
average
net asset excluding
waiver 2.56% 2.46% 2.34% 2.16%(a) 2.08%(a) 2.19% 2.06%(a) 2.43%
Ratio of net investment
income
to average net assets (0.41%) (0.22%) 0.21% 0.83%(a) 0.25%(a) (0.54%) 0.08%(a) 1.78%
Portfolio turnover rate 157% 149% 192% 61% 122% 143% 0% 62%
<CAPTION>
MENTOR INCOME AND
GROWTH PORTFOLIO
YEAR YEAR
ENDED ENDED
9/30/94 9/30/93****
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 14.91 $ 14.14
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.21 0.05
Net realized and
unrealized gain (loss)
on investments 0.61 0.77
Total from investment
operations 0.82 0.82
LESS DISTRIBUTIONS
Dividends from net
investment income (0.19) (0.05)
In excess of net
investment income -- --
Distributions from
capital gains (0.26) --
Distributions in excess
of capital gains -- --
Total Distributions (0.45) (0.05)
NET ASSET VALUE, END OF
PERIOD $ 15.28 $ 14.91
Total Return 5.66% 5.54%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $43,219 $18,127
Ratio of expenses to
average
net assets 2.44% 2.31%(a)
Ratio of expenses to
average
net asset excluding
waiver 2.44% 2.69%(a)
Ratio of net investment
income
to average net assets 1.51% 1.60%(a)
Portfolio turnover rate 78% 13%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992
(commencement of operations) to September 30, 1992.
*** Reflects operations for the period of October 29, 1993
(commencement of operations) to December 31, 1993.
**** Reflects operations for the period from May 24, 1993 (commencement
of operations) to September 30, 1993.
(a) Annualized.
9
<PAGE>
CLASS B SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR
SHORT
DURATION
MENTOR PERPETUAL INCOME
GLOBAL PORTFOLIO MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR PERIOD YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/95 9/30/94**** 9/30/95 9/30/94 9/30/93 9/30/92** 9/30/95*
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 14.15 $ 14.18 $ 12.76 $ 14.06 $ 14.40 $ 14.30 $ 12.18
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.05) (0.04) 0.79 0.82 0.99 0.41 0.59
Net realized and
unrealized gain (loss)
on investments 1.57 0.01 0.61 (1.37) (0.31) 0.10 0.52
Total from investment
operations 1.52 (0.03) 1.40 (0.55) 0.68 0.51 1.11
LESS DISTRIBUTIONS
Dividends from net
investment income -- -- (0.79) (0.75) (0.99) (0.41) (0.59)
In excess of net
investment income -- -- (0.06) -- (0.03) -- (0.03)
Distributions from
capital gains -- -- -- -- -- -- --
Distributions in excess
of
capital gains -- -- -- -- -- -- --
Total Distributions -- -- (0.85) (0.75) (1.02) (0.41) (0.62)
NET ASSET VALUE, END OF
PERIOD $ 15.67 $ 14.15 $ 13.31 $ 12.76 $ 14.06 $ 14.40 $ 12.67
Total Return 10.74% (0.21%) 11.33% (3.97%) 4.86% 3.24% 9.22%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $12,667 $ 7,987 $62,155 $77,888 $127,346 $65,661 $ 19,871
Ratio of expenses to
average
net assets 2.72% 2.79%(a) 1.74% 1.88% 1.54% 0.83%(a) 1.20%(a)
Ratio of expenses to
average net asset
excluding waiver 2.79% 3.93%(a) 1.79% 1.90% 1.72% 1.67%(a) 1.70%(a)
Ratio of net investment
income
(loss) to average net
assets (0.40%) (0.82%) 6.24% 6.21% 6.81% 7.53%(a) 5.04%(a)
Portfolio turnover rate 155% 2% 368% 455% 102% 9% 126%
<CAPTION>
MENTOR
SHORT
DURATION
INCOME
PORTFOLIO MENTOR MUNICIPAL INCOME PORTFOLIO
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/94*** 9/30/95 9/30/94 9/30/93 9/30/92**
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.50 $ 14.43 $ 16.06 $ 14.78 $ 14.29
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.41 0.74 0.74 0.82 0.29
Net realized and
unrealized gain (loss)
on investments (0.29) 0.52 (1.54) 1.32 0.49
Total from investment
operations 0.12 1.26 (0.80) 2.14 0.78
LESS DISTRIBUTIONS
Dividends from net
investment income (0.41) (0.74) (0.73) (0.82) (0.29)
In excess of net
investment income (0.03) -- -- (0.04) --
Distributions from
capital gains -- -- (0.10) -- --
Distributions in excess
of
capital gains -- -- -- --
Total Distributions (0.44) (0.74) (0.83) (0.86) (0.29)
NET ASSET VALUE, END OF
PERIOD $ 12.18 $ 14.95 $ 14.43 $ 16.06 $ 14.78
Total Return 0.95% 9.01% (5.34%) 15.27% 5.28%
Ratios/Supplemental Data
Net assets, end of period
(in thousands) $17,144 $39,493 $46,157 $50,976 $24,265
Ratio of expenses to
average
net assets 1.29%(a) 1.92% 1.74% 1.21 0.50%(a)
Ratio of expenses to
average net asset
excluding waiver 1.29%(a) 1.92% 1.86% 1.89% 1.76%(a)
Ratio of net investment
income
(loss) to average net
assets 4.90%(a) 5.07% 4.93% 5.42% 5.80%(a)
Portfolio turnover rate 166% 43% 87% 88% 0%
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1992
(commencement of operations) to September 30, 1992.
*** Reflects operations for the period of April 29, 1994 (commencement
of operations) to December 31, 1993.
**** Reflects operations for the period from May 24, 1994 (commencement
of operations) to September 30, 1994.
(a) Annualized.
10
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Mentor Funds is offering by this Prospectus shares of eight Portfolios
with differing investment objectives and policies. There can, of course, be no
assurance that any Portfolio will achieve its investment objective. The
differences in objectives and policies among the Portfolios can be expected to
affect the investment return of each Portfolio and the degree of market and
financial risk of an investment in each Portfolio. For a discussion of certain
investment practices in which the Portfolios may engage, and the risks they may
entail, see "Other Investment Practices" below. The investment objectives of the
Portfolios, other than those of the Strategy Portfolio and the Short-Duration
Income Portfolio, are fundamental policies and may not be changed without
shareholder approval. Except for the investment policies designated in this
Prospectus or the Statement of Additional Information as fundamental, the
investment policies described herein are not fundamental and may be changed by
approval of the Trustees without shareholder approval.
Any percentage limitation on a Portfolio's investments will apply only at
the time of investment; a Portfolio would not be considered to have violated any
such limitation, unless an excess or deficiency occurs or exists as a result of
an investment. In addition, a Portfolio will not necessarily dispose of a
security when its rating is reduced below any applicable minimum rating,
although the investment adviser or sub-adviser of the Portfolio will monitor the
investment to determine whether continued investment in the security will assist
in meeting the Portfolio's investment objective.
MENTOR GROWTH PORTFOLIO
INVESTMENT ADVISER: CHARTER ASSET MANAGEMENT, INC. ("CHARTER")
The Growth Portfolio's investment objective is long-term capital growth.
Although the Portfolio may receive current income from dividends, interest, and
other sources, income is only an incidental consideration.
The Portfolio attempts to achieve long-term capital growth by investing in
a diversified portfolio of securities. Under normal circumstances at least 75%
of the Portfolio's assets will be invested in common stocks of companies
domiciled or located in the United States. Although the Portfolio may invest in
companies of any size, the Portfolio invests principally in common stocks of
small to mid-sized companies. The Portfolio invests in companies that, in the
opinion of Charter, have demonstrated earnings, asset values, or growth
potential not yet reflected in their market price. A key indication of such
undervaluation considered by Charter is earnings growth which is above average
compared to the S&P 500 Index. Other important factors in selecting investments
include a strong balance sheet and product leadership in niche markets. Charter
believes that such investments may offer better than average potential for
long-term capital growth.
Small and mid-size companies may present greater opportunities for capital
growth than do larger companies because of high potential earnings growth, but
may also involve greater risk. They may have limited product lines, markets or
financial resources, or may depend on a limited management group. Their
securities may trade less frequently and in limited volume, and only in the
over-the-counter market or on a regional securities exchange. As a result, these
securities may change in value more than those of larger, more established
companies.
11
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC. ("COMMONWEALTH ADVISORS")
The investment objective of the Capital Growth Portfolio is to provide
long-term appreciation of capital. The Portfolio may invest in a wide variety of
securities which Commonwealth Advisors believes offers the potential for capital
appreciation over both the intermediate and long term. The Portfolio does not
invest for current income.
The Portfolio invests primarily in common stocks of companies believed by
Commonwealth Advisors to have the potential for capital appreciation. The
Portfolio may invest without limit in preferred stocks, investment-grade bonds,
convertible preferred stocks, convertible debentures and any other class or type
of security Commonwealth Advisors believes offers the potential for capital
appreciation. In selecting investments, Commonwealth Advisors will attempt to
identify securities it believes will provide capital appreciation over the
intermediate or long term due to change in the financial condition of issuers,
changes in financial conditions generally, or other factors. The Portfolio also
may invest in fixed-income securities, and cash or money market investments, for
temporary defensive purposes.
MENTOR STRATEGY PORTFOLIO
INVESTMENT ADVISER: WELLESLEY ADVISORS, INC. ("WELLESLEY")
The Strategy Portfolio's investment objective is to seek high total return
on its investments. In seeking to achieve this objective, Wellesley actively
allocates the Portfolio's assets among the major asset categories of equity
securities, fixed-income securities, and money market instruments. The Portfolio
will normally invest some portion of its assets in each asset category, but may
invest without limit in any asset category. Total return consists of current
income (including dividends, interest, and, in the case of discounted
instruments, discount accruals) and capital appreciation (including realized and
unrealized capital gains and losses).
Wellesley believes that the Portfolio has the potential to achieve
above-average investment returns at comparatively lower risk by actively
allocating its resources among the equity, debt, and money market sectors of the
market as opposed to relying solely on just one market sector. For example,
Wellesley may at times believe that the equity market holds a higher potential
for total return than the debt market and that a relatively large portion of the
Portfolio's assets should be allocated to the equity market sector. The reverse
would be true at times when Wellesley believes that the potential for total
return in the bond market is greater than that in the equity market. Wellesley
might also allocate the Portfolio's investments to short-term bonds and money
market instruments in order to earn current return and to reduce the potential
adverse effect of declines in the bond and equity markets. After determining the
portions of the Portfolio's assets to be invested in the various market sectors,
Wellesley attempts to select the securities of companies within those sectors
offering potential for above-average total return. The achievement of the
Portfolio's investment objective depends upon, among other things, the ability
of Wellesley to assess correctly the effects of economic and market trends on
different sectors of the market. The Portfolio's investments may include both
securities of U.S. issuers and securities traded principally in foreign markets.
The Portfolio may invest without limit in foreign securities. See "Other
Investment Practices -- Foreign Securities" for a description of risks
associated with investments in such securities.
Within the equity sector, Wellesley actively allocates the Portfolio's
assets to those industries and issuers it expects to benefit from major market
trends or which it otherwise believes offer the potential for above-average
total return. The Portfolio may purchase equity securities (including
convertible debt obligations and convertible preferred stock) sold on the New
York, American, and other U.S. or foreign stock exchanges and in the over-the-
counter market.
12
<PAGE>
Within the fixed-income sector, Wellesley seeks to maximize the return on
its investments by adjusting maturities and coupon rates as well as by
exploiting yield differentials among different types of investment-grade
securities. The Portfolio may invest in debt securities of any maturity,
preferred stocks, and other fixed-income instruments, including, for example,
U.S. Government securities and corporate debt securities (including zero-coupon
securities). A substantial portion of the Portfolio's investments in the
fixed-income sector may be in mortgage-backed securities, including
collateralized mortgage obligations ("CMOs") and certain other stripped
mortgage-backed securities, which have certain special risks. See "Other
Investment Practices -- Mortgage-backed securities; other asset-backed
securities" and " -- Other mortgage-related securities" for a description of
these risks. The Portfolio will only invest in debt securities which are rated
at the time of purchase Baa or better by Moody's Investors Service, Inc.
("Moody's") or BBB or better by Standard & Poor's ("S&P") or, if unrated, are
deemed by Wellesley to be of comparable quality. While bonds rated Baa or BBB
are considered to be of investment grade, they have speculative characteristics
as well. A description of securities ratings is contained in the Appendix to
this Prospectus.
The money market portion of the Portfolio will contain short-term
fixed-income securities issued by private and governmental institutions. Such
securities may include, for example, U.S. Government securities; bank
obligations; Eurodollar certificates of deposit issued by foreign branches of
domestic banks; obligations of savings institutions; fully insured certificates
of deposit; and commercial paper rated within the two highest grades by S&P or
the highest grade by Moody's or, if not rated, issued by a company having an
outstanding debt issue rated at least Aa by Moody's or AA by S&P.
MENTOR INCOME AND GROWTH PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC.
SUB-ADVISER: WELLINGTON MANAGEMENT COMPANY ("WELLINGTON")
The investment objective of the Income and Growth Portfolio is to provide a
conservative combination of income and growth of capital consistent with capital
protection. The Portfolio invests in a diversified portfolio of equity
securities of companies Wellington believes exhibit sound fundamental
characteristics and in investment-grade fixed-income securities and U.S.
Government securities, as described below.
Wellington will manage the allocation of assets among asset classes based
upon its analysis of economic conditions, relative fundamental values and the
attractiveness of each asset class, and expected future returns of each asset
class. The Portfolio will normally have some portion of its assets invested in
each asset class at all times but may invest without limit in any asset class.
The Portfolio may invest in a wide variety of equity securities, such as
common stocks and preferred stocks, as well as debt securities convertible into
equity securities or that are accompanied by warrants or other equity
securities. In selecting equity investments, Wellington will attempt to identify
securities of out-of-favor companies which Wellington believes are undervalued.
Within the equity asset class, the Portfolio seeks to achieve long-term
appreciation of capital and a moderate income level by selecting investments in
out-of-favor companies with sound fundamentals. These decisions are based
primarily on Wellington's fundamental research and security valuations.
Within the fixed-income asset class, Wellington seeks to invest in a
portfolio that provides as high a level of current income as is consistent with
prudent investment risk. The Portfolio may invest in debt securities of any
maturity, preferred stocks, and other fixed-income instruments, including, for
example, U.S. Government securities and corporate debt securities (including
zero-coupon securities). The Portfolio will only invest in debt securities which
are rated at the time of purchase Baa or better by Moody's or BBB or better by
S&P or which, if
13
<PAGE>
unrated, are deemed by Wellington to be of comparable quality. While
fixed-income securities rated Baa or BBB are considered to be of investment
grade, they have speculative characteristics as well. A description of
securities ratings is contained in the Appendix to this Prospectus.
The Portfolio may invest up to 10% of its assets in securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests in real estate. The Portfolio will limit its investment in
real estate investment trusts to 10% of its total assets. Such investments may
involve many of the risks of direct investment in real estate, such as declines
in the value of real estate, risks related to general and local economic
conditions, and adverse changes in interest rates. Other risks associated with
real estate investment trusts include lack of diversification, borrower default,
and voluntary liquidation.
MENTOR PERPETUAL GLOBAL PORTFOLIO
INVESTMENT ADVISER: MENTOR PERPETUAL ADVISORS, L.L.C. ("MENTOR PERPETUAL")
The investment objective of the Global Portfolio is to seek long-term
growth of capital through a diversified portfolio of marketable securities made
up primarily of equity securities, including common stocks, preferred stocks,
securities convertible into common stocks, and warrants. The Portfolio may also
invest in debt securities and other fixed-income securities of private or
governmental issuers (including zero-coupon securities) which Mentor Perpetual
believes to be consistent with the Portfolio's objective.
It is expected that the Portfolio's investments will normally be spread
broadly around the world, although (except as described in the next sentence)
there is no limit on the amount of the Portfolio's assets that may be invested
in any single country. Under normal circumstances, the Portfolio will invest at
least 65% of the value of its total assets in securities of at least three
countries, one of which may be the United States. The Portfolio may invest all
of its assets in securities of issuers outside the United States, and for
temporary defensive purposes may at times invest all of its assets in securities
of U.S. issuers. To the extent that the Portfolio invests a substantial portion
of its assets in securities of issuers located in a single country, it will be
more susceptible to adverse economic, business, political, or regulatory
conditions in or affecting that country than if it were to invest in a
geographically more diverse portfolio. The Portfolio may invest in closed-end
investment companies holding foreign securities. The Portfolio also may hold a
portion of its assets in cash or cash equivalents, including foreign and
domestic money market instruments.
It is likely that, at times, a substantial portion of the Portfolio's
assets will be invested in securities of issuers in emerging markets, including
under-developed and developing nations. Investments in emerging markets are
subject to the same risks applicable to foreign investments generally although
those risks may be increased due to conditions in such markets. For example, the
securities markets and legal systems in emerging markets may only be in a
developmental stage and may provide few, or none, of the advantages or
protections of markets or legal systems available in more developed countries.
Although many of the securities in which the Portfolio may invest are traded on
securities exchanges, they may trade in limited volume, and the exchanges may
not provide all of the conveniences or protections provided by securities
exchanges in more developed markets. The Portfolio may also invest a substantial
portion of its assets in securities traded in the over-the-counter markets and
not on any exchange, which may affect the liquidity of the investment and expose
the Portfolio to the credit risk of its counterparties in trading those
investments. See "Other Investment Practices -- Foreign securities."
Mentor Perpetual may seek investment opportunities in securities of large,
widely traded companies as well as securities of small, less well known
companies. Small companies may present greater opportunities for investment
return, but may also involve greater risk. They may have limited product lines,
markets, or financial resources, or may depend on a limited management group.
Their securities may trade less frequently and in
14
<PAGE>
limited volume. As a result the prices of these securities may fluctuate more
than prices of securities of larger, more established companies.
Except as described below, debt and fixed-income securities in which the
Portfolio may invest will be investmentgrade securities or those of equivalent
quality as determined by Perpetual. The Portfolio may invest up to 5% of its
total assets in debt securities rated Baa or below by Moody's, or BBB or below
by S&P, or deemed by Mentor Perpetual to be of comparable quality, and may
invest in securities rated as low as C by Moody's or D by S&P. Securities rated
Baa or BBB lack outstanding investment characteristics and have speculative
characteristics and are subject to greater credit and market risks than
higher-rated securities. Securities rated below investment grade are commonly
referred to as "junk bonds" and are predominately speculative. Securities rated
D may be in default with respect to payment of principal or interest. A
description of securities ratings is contained in the Appendix to this
Prospectus.
MENTOR QUALITY INCOME PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC.
The Quality Income Portfolio's investment objective is to seek high current
income consistent with what Commonwealth Advisors believes to be prudent risk.
The Portfolio may invest in debt securities, including both U.S. Government and
corporate obligations, and in other income-producing securities, including
preferred stocks and dividend-paying common stocks. The Portfolio may also hold
a portion of its assets in cash or money market instruments.
Corporate debt obligations and preferred stocks in which the Portfolio may
invest will be of investment grade. A security will be deemed to be of
"investment grade" if, at the time of investment by the Portfolio, it is rated
at least Baa3 by Moody's or BBB- by S&P or at a comparable rating by another
nationally recognized rating organization, or, if unrated, determined by
Commonwealth Advisors to be of comparable quality. Securities rated Baa or BBB
lack outstanding investment characteristics and have speculative characteristics
and are subject to greater credit and market risks than higher-rated securities.
The Portfolio will normally invest at least 80% of its assets in U.S. Government
securities and in other securities rated at least A by Moody's or S&P, or at a
comparable rating by another nationally recognized rating organization, or, if
unrated, determined by Commonwealth Advisors to be of comparable quality. A
description of securities ratings is contained in the Appendix to this
Prospectus.
Commonwealth Advisors may take full advantage of the entire range of
maturities of the securities in which the Portfolio may invest and may adjust
the average maturity of the Portfolio's securities from time to time, depending
on its assessment of relative yields on securities of different maturities and
expectations of future changes in interest rates. The Portfolio may invest in
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including CMOs and certain stripped mortgage-backed
securities (including certain "residual" interests), which involve certain
risks. See "Other Investment Practices -- Mortgage-backed securities; other
asset-backed securities" and " -- Other mortgage-related securities" below. The
Portfolio may also engage in a variety of interest rate transactions, including
swaps, caps, floors and collars. See "Other Investment Practices -- Interest
rate transactions" below for a description of risks associated with these
transactions.
15
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH ADVISORS, INC.
SUB-ADVISER: VAN KAMPEN/AMERICAN CAPITAL MANAGEMENT, INC. ("VAN KAMPEN")
The investment objective of the Municipal Income Portfolio is to provide
investors with a high level of current income exempt from federal regular income
tax, consistent with preservation of capital. Under normal market conditions,
the Portfolio will invest at least 80% of its total assets in tax-exempt
municipal securities rated investment grade, or deemed by Van Kampen to be of
comparable quality. The Portfolio may invest a substantial portion of its assets
in municipal securities that pay interest that is a tax preference item under
the federal alternative minimum tax. The Portfolio may not be a suitable
investment for investors who are already subject to federal alternative minimum
tax or who would become subject to federal alternative minimum tax as a result
of an investment in the Portfolio.
Tax-exempt municipal securities are debt obligations issued by or on behalf
of the governments of states (including the District of Columbia) and United
States territories or possessions, and their political subdivisions, agencies,
and instrumentalities, and certain interstate agencies, the interest on which,
in the opinion of bond counsel, is exempt from federal income tax. The Portfolio
may also invest up to 10% of its assets in tax-exempt money market funds, which
will be considered tax-exempt municipal securities for this purpose.
Up to 20% of the Portfolio's total assets may be invested in tax-exempt
municipal securities rated between BB and B-(inclusive) by S&P or between Ba and
B3 (inclusive) by Moody's (or equivalently rated short-term obligations) and
unrated tax-exempt securities that Van Kampen considers to be of comparable
quality. These securities are below investment grade and are considered to be of
poor standing and predominantly speculative. Assurance of interest and principal
payments or of maintenance of other terms of the securities' contract over any
long period of time may be small. The Portfolio will not invest in securities
rated below B- by S&P or below B3 by Moody's at the time of purchase. The
Portfolio may hold a portion of its assets in cash or money market instruments.
The two principal classifications of municipal securities are "general
obligation" and "special revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith, credit, and taxing power for the payment
of principal and interest. Special revenue bonds are usually payable only from
the revenues derived from a particular facility or class of facilities or from
the proceeds of a special excise tax or other specific revenue source and
generally are not payable from the unrestricted revenues of an issuer.
Industrial development bonds and private activity bonds are usually special
revenue bonds, the credit quality of which is normally directly related to the
credit standing of the private user involved.
There are, in addition, a variety of hybrid and special types of municipal
securities, including variable rate securities, municipal notes, and municipal
leases. Variable rate securities bear rates of interest that are adjusted
periodically according to formulae intended to minimize fluctuation in values of
the instruments. Municipal notes include tax, revenue, and bond anticipation
notes of short maturities, generally less than three years, which are issued to
obtain temporary funds for various public purposes. Municipal leases are
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered illiquid. They may
take the form of a lease, an installment purchase contract, a conditional sales
contract, or a participation certificate on any of the above. No more than 5% of
the net assets of the Portfolio will be invested in municipal leases. A more
detailed description of the types of municipal securities in which the Portfolio
may invest is included in the Statement of Additional Information.
RISKS OF LOWER-GRADE SECURITIES. Investors should carefully consider the
risks of owning shares of a mutual fund which invests in lower-grade securities,
commonly known as "junk bonds", before making an investment in
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the Portfolio. The lower ratings of certain securities held by the Portfolio
reflect a greater possibility that the financial condition of the issuer, or
adverse changes in general economic conditions, or both, may impair the ability
of the issuer to make payments of interest and principal. Lower-grade securities
generally involve greater credit risk than higher-grade municipal securities and
are more sensitive to adverse economic changes, significant increases in
interest rates, and individual issuer developments. The inability (or perceived
inability) of issuers to make timely payments of interest and principal would
likely make the values of securities held by the Portfolio more volatile and
could limit the Portfolio's ability to sell its securities at prices
approximating the values the Portfolio had placed on such securities. In the
absence of a liquid trading market for securities held by it, the Portfolio may
be unable at times to establish the fair value of such securities and may not be
able to dispose of such securities in a timely manner at a price which reflects
the value of such securities. The rating assigned to a security by Moody's or
S&P does not reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security. For more information
about the rating services' descriptions of lower-rated municipal securities, see
the Appendix to this Prospectus.
Van Kampen seeks to minimize the risks involved in investing in lower-grade
securities through diversification and careful investment analysis. However, the
amount of information about the financial condition of an issuer of lower-grade
municipal securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. When the Portfolio invests in
tax exempt securities in the lower rating categories, the achievement of the
Portfolio's goals is more dependent on Van Kampen's ability than would be the
case if the Portfolio were investing in securities in the higher rating
categories. To the extent that there is no established retail market for some of
the lower-grade securities in which the Portfolio may invest, trading in such
securities may be relatively inactive. During periods of reduced market
liquidity and in the absence of readily available market quotations for
lower-grade municipal securities held by the Portfolio, the valuation of the
Portfolio's securities becomes more difficult and the use of judgment may play a
greater role in the valuation of the Portfolio's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established market exists as compared with the effects on securities for which
such a market does exist. Further, the Portfolio may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established market does exist.
CONCENTRATION. The Portfolio generally will not invest more than 25% of its
total assets in any one industry. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that the Portfolio may
invest more than 25% of its assets in a broader segment of the municipal
securities market, such as revenue obligations of hospitals and other health
care facilities, housing agency revenue obligations, or airport revenue
obligations, if Van Kampen determines that the yields available from obligations
in a particular segment of the market justify the additional risks associated
with such concentration. Although such obligations could be supported by the
credit of governmental users, or by the credit of nongovernmental users engaged
in a number of industries, economic, business, political, and other developments
generally affecting the revenues of such users (for example, proposed
legislation or pending court decisions affecting the financing of such projects
and market factors affecting the demand for their services or products) may have
a general adverse effect on all municipal securities in such a market segment.
The Portfolio reserves the right to invest more than 25% of its assets in
industrial development or private activity bonds or in issuers located in any
individual state, although Van Kampen has no present intention to invest more
than 25% of the Portfolio's assets in issuers located in the same state. If the
Portfolio were to invest more than 25% of its assets in issuers located in
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one state, it would be more susceptible to adverse economic, business, or
regulatory conditions in or affecting that state than if it were to invest in a
geographically more diverse portfolio.
MENTOR SHORT-DURATION INCOME PORTFOLIO
INVESTMENT ADVISER: COMMONWEALTH INVESTMENT COUNSEL, INC. ("COMMONWEALTH
INVESTMENT COUNSEL")
The Short-Duration Income Portfolio's investment objective is to seek
current income. As a secondary objective, the Portfolio seeks preservation of
capital, to the extent consistent with its objective of current income. The
Portfolio will normally invest at least 65% of its assets in debt securities
with a "duration" of three years or less. The Portfolio may invest in U.S.
Government securities and debt obligations of private issuers and in preferred
stocks and dividend-paying common stocks, and may hold a portion of its assets
in cash or money market instruments.
The Portfolio may at times invest a substantial portion of its assets in
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including CMOs and certain other stripped
mortgage-backed securities (including certain "residual" interests). See "Other
Investment Practices -- Mortgage-backed securities; other asset-backed
securities" and " -- Other mortgage-related securities" below for a description
of these securities and risks they may entail. The Portfolio may also invest a
substantial portion of its assets in securities representing secured or
unsecured interests in other types of assets, such as automobile finance or
credit card receivables.
Traditionally, a debt security's "term to maturity" has been used to
evaluate the sensitivity of the security's price to changes in interest rates
(the security's interest-rate "volatility"). However, a security's term to
maturity measures only the period of time until the last payment of principal or
interest on the security, and does not take into account the timing of the
various payments of principal or interest to be made prior to the instrument's
maturity. By contrast, "duration" is a measure of the full stream of payments to
be received on a debt instrument, including both interest and principal
payments, based on their present values. Duration measures the periods of time
between the present time and the time when the various interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by their present values.
There are some situations where even the standard duration calculation does
not properly reflect the interest-rate volatility of a security. For example,
floating and variable rate securities often have final maturities of ten years
or more; however, their interest-rate volatility is determined based principally
on the period of time until their interest rates are reset and on the terms on
which they may be reset. Another example where a security's interest-rate
volatility is not properly measured by its duration is the case of
mortgage-related securities. The stated final maturity of such securities may be
up to 30 years, but the actual cash flow on the securities will be determined by
the anticipated prepayment rates on the underlying mortgage loans. Therefore,
the duration of such a security can change if anticipated prepayment rates
change. In these and other similar situations, Commonwealth Investment Counsel
will estimate a security's duration using sophisticated analytical techniques
that take into account such factors as the expected prepayment rate on the
security and how the prepayment rate might change under various market
conditions, although there can be no assurance that any such estimation will
accurately predict actual prepayment rates or their effect on the volatility or
value of a security.
The Portfolio will invest in investment grade debt securities and preferred
stocks and, under normal market conditions, the Portfolio will seek to maintain
a portfolio of securities with a dollar-weighted average rating of A or better.
A security will be considered to be of "investment grade" if, at the time of
investment by the Portfolio, it is rated at least Baa3 by Moody's or BBB- by S&P
or the equivalent by another nationally recognized rating organization or, if
unrated, determined by Commonwealth Investment Counsel to be of comparable
quality.
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Securities rated Baa or BBB lack outstanding investment characteristics and have
speculative characteristics and are subject to greater credit and market risks
than higher-rated securities. A description of securities ratings is contained
in the Appendix to this Prospectus.
The Portfolio may also engage in a variety of interest rate transactions,
including swaps, caps, floors, and collars. See "Other Investment
Practices -- Interest rate transactions" below for a description of risks
associated with these transactions.
OTHER INVESTMENT PRACTICES
Each of the Portfolios (except as noted below) may engage in the other
investment practices described below. See the Statement of Additional
Information for a more detailed description of these practices and certain risks
they may involve.
MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. Each of the
Strategy, Short-Duration Income, Quality Income, and Income and Growth
Portfolios may invest in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including CMOs and, in the
case of the Quality Income and Short-Duration Income Portfolios, "residual"
interests therein (described more fully below). Interest and principal payments
on the mortgages underlying mortgage-backed securities are passed through to the
holders of the mortgage-backed securities. Mortgage-backed securities currently
offer yields higher than those available from many other types of fixed-income
securities but because of their prepayment aspects, their price volatility and
yield characteristics will change based on changes in prepayment rates. As a
result, mortgage-backed securities are less effective than other securities as a
means of "locking in" long-term interest rates. Generally, prepayment rates
increase if interest rates fall and decrease if interest rates rise. For many
types of mortgage-backed securities, this can result in unfavorable changes in
price and yield characteristics in response to changes in interest rates and
other market conditions. For example, as a result of their prepayment aspects,
mortgage-backed securities have less potential for capital appreciation during
periods of declining interest rates than other fixed-income securities of
comparable maturities, although such obligations may have a comparable risk of
decline in market value during periods of rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that are
dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Each of the Strategy, Short-Duration Income, and Quality Income Portfolios
may invest in stripped mortgage-backed securities. Stripped mortgage-backed
securities are usually structured with two classes that receive different
portions of the interest and principal distributions on a pool of mortgage
assets. A Portfolio may invest in both the interest-only -- or "IO" -- class
and the principal-only -- or "PO" -- class. The yield to maturity and price of
an IO class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's net
asset value. This would typically be the case in an environment of falling
interest rates. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may under some circumstances
fail to fully recoup its initial investment in these securities. Conversely, POs
tend to
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increase in value if prepayments are greater than anticipated and decline if
prepayments are slower than anticipated. The secondary market for stripped
mortgage-backed securities may be more volatile and less liquid than that for
other mortgage-backed securities, potentially limiting a Portfolio's ability to
buy or sell those securities at any particular time.
Certain mortgage-backed securities held by the Portfolios may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by a Portfolio during a time of declining interest rates,
the Portfolio may not be able to reinvest the proceeds in securities providing
the same investment return as the securities redeemed.
Each of the Quality Income, Short-Duration Income, and Strategy Portfolios
may invest in securities representing interests in other types of financial
assets, such as automobile-finance receivables or credit-card receivables. Such
securities may or may not be secured by the receivables themselves or may be
unsecured obligations of their issuers. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying assets may be
limited. For example, the laws of certain states may prevent or restrict
repossession of collateral from a debtor.
The Quality Income and Short-Duration Income Portfolios may also invest in
other types of mortgage-related securities, including any securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans or real property, including collateralized mortgage
obligation "residual" interests. "Residual" interests represent the right to any
excess cash flow remaining after all other payments are made among the various
tranches of interests issued by structured mortgage-backed vehicles. The values
of such interests are extremely sensitive to changes in interest rates and in
prepayment rates on the underlying mortgages. In the event of a significant
change in interest rates or other market conditions, the value of an investment
by the Portfolio in such interests could be substantially reduced and the
Portfolio may be unable to dispose of the interests at prices approximating the
values the Portfolio had previously assigned to them or to recoup its initial
investment in the interests. The Portfolios may invest in new types of
mortgage-related securities that may be developed and marketed from time to
time. If any of the Portfolios were to invest in such newly developed
securities, shareholders would, where appropriate, be notified and this
Prospectus would be revised accordingly.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolios may
invest in a wide variety of such securities, including mortgage-backed and other
asset-backed securities that will pay principal or interest only under certain
circumstances, or in amounts that may increase or decrease substantially
depending on changes in interest rates or other market factors. Such securities
may experience extreme price volatility in response to changes in interest rates
or other market factors; this may be especially true in the case of securities
where the amounts of principal or interest paid, or the timing of such payments,
varies widely depending on prevailing interest rates.
A Portfolio's investment adviser or sub-adviser may not be able to obtain
current market quotations for certain mortgage-backed or asset-backed securities
at all times, or to obtain market quotations believed by it to reflect the
values of such securities accurately. In such cases, a Portfolio's investment
adviser may be required to estimate the value of such a security using
quotations provided by pricing services or securities dealers making a market in
such securities, or based on other comparable securities or other bench-mark
securities or interest rates. Mortgage-backed and other asset-backed securities
in which a Portfolio may invest may be highly illiquid, and a Portfolio may not
be able to sell such a security at a particular time or at the value it has
placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, a Portfolio's investment adviser or sub-adviser will be
required to estimate the extent to which the values of the securities are
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likely to change in response to changes in interest rates or other market
conditions, and the rate at which prepayments on the underlying mortgages or
other assets are likely to occur under different scenarios. There can be no
assurance that a Portfolio's investment adviser or sub-adviser will be able to
predict the amount of principal or interest to be paid on any security under
different interest rate or market conditions or that its predictions will be
accurate, nor can there be any assurance that a Portfolio will recover the
entire amount of the principal paid by it to purchase any such securities.
ZERO-COUPON BONDS. Each of the Global, Income and Growth, Municipal Income,
Quality Income, Short-Duration Income, and Strategy Portfolios may at times
invest in so-called "zero-coupon" bonds. Zero-coupon bonds are issued at a
significant discount from face value and pay interest only at maturity rather
than at intervals during the life of the security. Because zero-coupon bonds do
not pay current interest, their value is subject to greater fluctuation in
response to changes in market interest rates than bonds that pay interest
currently. Zero-coupon bonds allow an issuer to avoid the need to generate cash
to meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds that pay interest currently. Even though such bonds do
not pay current interest in cash, a Portfolio is nonetheless required for
federal income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, a Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
PREMIUM SECURITIES. The Portfolios may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although a Portfolio generally amortizes the amount of any
such premium into income, the Portfolio may recognize a capital loss if such
premium securities are called or sold prior to maturity and the call or sale
price is less than the purchase price. Additionally, a Portfolio may recognize a
capital loss if it holds such securities to maturity.
OPTIONS AND FUTURES. Each of the Portfolios may buy and sell put and call
options on securities it owns or plans to purchase to hedge against changes in
net asset value or to realize a greater current return. In addition, through the
purchase and sale of futures contracts and related options, each of the
Portfolios may at times seek to hedge against fluctuations in net asset value.
In addition, to the extent consistent with applicable law, the Portfolios may
buy and sell futures contracts and related options to increase investment
return. The Strategy Portfolio may also buy and sell options and futures
contracts (including index options and futures contracts) to implement changes
in its asset allocations among various market sectors, pending the sale of its
existing investments and reinvestments in new securities.
INDEX FUTURES AND OPTIONS. Each of the Portfolios may buy and sell index
futures contracts ("index futures") and options on index futures and indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index futures"
contract is a contract to buy or sell units of a particular bond or stock index
at an agreed price on a specified future date. Depending on the change in value
of the index between the time when a Portfolio enters into and terminates an
index futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolios may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase investment return.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. OPTIONS AND FUTURES
TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN LOSSES. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities held by a Portfolio that are the subject of a hedge.
The successful use by a Portfolio of the strategies described above further
depends on the ability of its investment adviser or sub-adviser to forecast
market movements correctly.
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Other risks arise from a Portfolio's potential inability to close out futures or
options positions. Although a Portfolio will enter into options or futures
transactions only if its investment adviser or sub-adviser believes that a
liquid secondary market exists for such option or futures contract, there can be
no assurance that a Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. Transactions in options and futures
contracts involve brokerage costs and may require a Portfolio to segregate
assets to cover its outstanding positions. For more information, see the
Statement of Additional Information. Federal tax considerations may also limit a
Portfolio's ability to engage in options and futures transactions.
Each Portfolio's options and futures contract transactions will generally
be conducted on recognized exchanges. However, a Portfolio may purchase and sell
options in transactions in the over-the-counter markets. A Portfolio's ability
to terminate options in the over-the-counter markets may be more limited than
for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. A Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of its investment adviser or
sub-adviser, the pricing mechanism and liquidity of the over-the-counter markets
are satisfactory and the participants are responsible parties likely to meet
their contractual obligations.
LEVERAGE. The Short-Duration Income Portfolio may borrow money to invest in
additional securities to seek current income. This technique, known as
"leverage," increases the Portfolio's market exposure and risk. When the
Portfolio has borrowed money for leverage and its investments increase or
decrease in value, its net asset value will normally increase or decrease more
than if it had not borrowed money for this purpose. The interest that the
Portfolio must pay on borrowed money will reduce its net investment income, and
may also either offset any potential capital gains or increase any losses. The
Portfolio currently intends to use leverage in order to adjust the
dollar-weighted average duration of its portfolio. The Portfolio will not always
borrow money for investment and the extent to which the Portfolio will borrow
money, and the amount it may borrow, depends on market conditions and interest
rates. Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse" repurchase agreements,
"dollar-roll" transactions, and forward commitments, described below) that can
exist at any one time will not exceed one-third of the value of the Portfolio's
total assets.
SECURITIES LOANS, REPURCHASE AGREEMENTS, FORWARD COMMITMENTS, AND REVERSE
REPURCHASE AGREEMENTS. Each Portfolio, other than the Municipal Income
Portfolio, may lend portfolio securities and may enter into repurchase
agreements with banks, broker/dealers, and other recognized financial
institutions. Each of the Strategy and Short-Duration Income Portfolios may
enter into each type of transaction on up to 25% of its assets, and each of the
Growth, Capital Growth, Global, Income and Growth, and Quality Income Portfolios
may enter into each type of transaction on up to one-third of its assets. These
transactions must be fully collateralized at all times, but involve some risk to
a Portfolio if the other party should default on its obligations and the
Portfolio is delayed or prevented from recovering the collateral. Each
Portfolio, other than the Growth and Strategy Portfolios, may enter into
"reverse" repurchase agreements. Each of the Capital Growth, Quality Income,
Income and Growth, and Global Portfolios may do so with respect to up to
one-third of its assets, and the Municipal Income Portfolio may do so with
respect to up to 5% of its assets. "Reverse" repurchase agreements generally
involve the sale by a Portfolio of securities held by it and an agreement to
repurchase the securities at an agreed-upon price, date, and interest payment.
Each Portfolio also may enter into forward commitments, in which a Portfolio
buys securities for future delivery. Reverse repurchase agreements and forward
commitments may increase overall investment exposure and may result in losses.
DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, each Portfolio, other than the Growth, Strategy, and Municipal
Income Portfolios, may engage in dollar roll transactions with
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respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar roll transaction, a Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (I.E., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon price.
The mortgage-related securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories. Dollar-roll transactions may
increase overall investment exposure and may result in losses.
FOREIGN SECURITIES. Each Portfolio other than the Growth and Municipal
Income Portfolios may invest in securities principally traded in foreign
markets. The Capital Growth and Income and Growth Portfolios will limit such
investments to 15% and 10%, respectively, of their total assets. Since foreign
securities are normally denominated and traded in foreign currencies, the values
of a Portfolio's assets may be affected favorably or unfavorably by changes in
currency exchange rates and by exchange control regulations. There may be less
information publicly available about a foreign company than about a U.S.
company, and foreign companies are not generally subject to accounting,
auditing, and financial reporting standards and practices comparable to those in
the United States. The securities of some foreign companies are less liquid and
at times more volatile than securities of comparable U.S. companies. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment or delivery of securities or in the
recovery of a Portfolio's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation
of assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments which could
affect the value of a Portfolio's investments in certain foreign countries.
Legal remedies available to investors in certain foreign countries may be more
limited than those available with respect to investments in the United States or
in other foreign countries. The laws of some foreign countries may limit a
Portfolio's ability to invest in securities of certain issuers located in those
foreign countries. Special tax considerations apply to foreign securities. A
Portfolio may buy or sell foreign currencies and options and futures contracts
on foreign currencies for hedging purposes in connection with its foreign
investments as described more fully below.
The risks described above are typically increased to the extent that a
Portfolio invests in securities traded in underdeveloped and developing nations,
which are sometimes referred to as "emerging markets."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Each Portfolio that may invest in
foreign securities may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future currency exchange rates. A
Portfolio may engage in foreign currency exchange transactions in connection
with the purchase and sale of portfolio securities ("transaction hedging") and
to protect against changes in the value of specific portfolio positions
("position hedging").
A Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which a Portfolio
contracts to purchase or sell a security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. A Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with transaction hedging.
A Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange currency
at a future time at a rate or rates that may be higher or lower than the spot
rate. Foreign currency futures contracts are standardized
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exchange-traded contracts and have margin requirements. For transaction hedging
purposes, a Portfolio may also purchase and sell call and put options on foreign
currency futures contracts and on foreign currencies.
A Portfolio may engage in position hedging to protect against a decline in
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, a Portfolio may purchase or sell foreign currency futures
contracts and foreign currency forward contracts, and may purchase and sell put
and call options on foreign currency futures contracts and on foreign
currencies. In connection with position hedging, a Portfolio may also purchase
or sell foreign currencies on a spot basis.
Although there is no limit to the amount of a Portfolio's assets that may
be invested in foreign currency exchange and foreign currency forward contacts,
a Portfolio will only enter into such transactions to the extent necessary to
effect the hedging transactions described above.
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of its
portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of the portfolio, the Global, Quality Income, and Short-Duration
Income Portfolios may enter into interest rate swaps and other interest rate
transactions, such as interest rate caps, floors, and collars. Interest rate
swaps involve the exchange by a Portfolio with another party of different types
of interest-rate streams (E.G., an exchange of floating rate payments for fixed
rate payments with respect to a notional amount of principal). The purchase of
an interest rate cap entitles the purchaser to receive payments on a notional
principal amount from the party selling the cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling the floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values. Each Portfolio intends to use these interest rate transactions
as a hedge and not as a speculative investment. A Portfolio's ability to engage
in certain interest rate transactions may be limited by tax considerations. The
use of interest rate swaps and other interest rate transactions is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If a
Portfolio's investment adviser or sub-adviser is incorrect in its forecasts of
market values, interest rates, or other applicable factors, the investment
performance of a Portfolio would be less favorable than it would have been if
this investment technique were not used.
INDEXED SECURITIES. The Global Portfolio may invest in indexed securities,
the values of which are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Investment in indexed securities
involves certain risks. In addition to the credit risk of the securities issuer
and normal risks of price changes in response to changes in interest rates, the
principal amount of indexed securities may decrease as a result of changes in
the value of the reference instruments. Also, in the case of certain indexed
securities where the interest rate is linked to a reference instrument, the
interest rate may be reduced to zero and any further declines in the value of
the security may then reduce the principal amount payable on maturity. Further,
indexed securities may be more volatile than the reference instruments
underlying indexed securities.
PORTFOLIO TURNOVER. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by a Portfolio is known as "portfolio turnover." As a result
of each Portfolio's investment policies, under certain market conditions its
portfolio turnover rate may be higher than that of other mutual funds. Portfolio
turnover generally involves some expense to a Portfolio, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. Such transactions may result in
realization of taxable gains. The portfolio turnover rates for the ten most
recent fiscal years (or for the life of a Portfolio if shorter) are contained in
the section "Financial
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Highlights." The relatively high portfolio turnover rate for the Quality Income
Portfolio during fiscal 1994 was due in substantial part to the implementation
of the investment program of Pacific Investment Management Company, which
differed from the investment program of the Portfolio's previous sub-adviser.
VALUING THE PORTFOLIOS' SHARES
Each Portfolio calculates the net asset value of a share of each class by
dividing the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on the
New York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and assets
are valued at their fair values. The net asset value for Class A shares will
generally differ from that of Class B shares due to the variance in daily net
income realized by and dividends paid on each class of shares, and any
differences in the expenses of the different classes.
SALES ARRANGEMENTS
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
CLASS A SHARES. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to Buy Shares -- Class A
shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge,
but are subject to a CDSC of up to 4% if redeemed within five or six years,
depending on the Portfolio. Class B shares also bear 12b-1 fees. Class B shares
provide an investor the benefit of putting all of the investor's money to work
from the time the investment is made, but will have a higher expense ratio and
pay lower dividends than Class A shares due to the 12b-1 fees. See "How to Buy
Shares -- Class B shares."
WHICH ARRANGEMENT IS FOR YOU? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. For more information about these sales arrangements, consult
your investment dealer or Mentor Distributors. Sales personnel may receive
different compensation depending on which class of shares they sell. Shares may
only be exchanged for shares of the same class of another Mentor fund and for
shares of Cash Resource U.S. Government Money Market Fund. See "How to Exchange
Shares."
HOW TO BUY SHARES
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little at $100. Investments under
IRAs and investments under qualified retirement plans are subject to a minimum
initial investment of $250. The minimum initial investment may be waived for
current and retired Trustees, and current and retired employees of The Mentor
Funds or Mentor Distributors. You can buy Portfolio shares BY COMPLETING THE
ENCLOSED NEW ACCOUNT FORM and sending it to Mentor Distributors along with a
check or
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<PAGE>
money order made payable to The Mentor Funds, THROUGH YOUR FINANCIAL
INSTITUTION, which may be an investment dealer, a bank, or another institution,
OR THROUGH AUTOMATIC INVESTING. If you do not have a dealer, Mentor Distributors
can refer you to one.
AUTOMATIC INVESTMENT PLAN. Once you have made the initial minimum
investment in a Portfolio, you can make regular investments of $50 or more on a
monthly or quarterly basis through automatic deductions from your bank checking
account. Application forms are available from your investment dealer or through
Mentor Distributors.
Shares are sold at a price based on a Portfolio's net asset value next
determined after Mentor Distributors receives your purchase order. In most
cases, in order to receive that day's public offering price, Mentor Distributors
or your investment dealer must receive your order before the close of regular
trading on the New York Stock Exchange. If you buy shares through your
investment dealer, the dealer must ensure that Mentor Distributors receives your
order before the close of regular trading on the New York Stock Exchange for you
to receive that day's public offering price.
CLASS A SHARES. The public offering price of Class A shares is the net
asset value plus a sales charge. The Portfolio receives the net asset value. The
sales charge varies depending on the size of your purchase and is allocated
between your investment dealer and Mentor Distributors. The current sales
charges for the GROWTH, CAPITAL GROWTH, STRATEGY, INCOME AND GROWTH, and GLOBAL
PORTFOLIOS are:
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE OF AS A
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
<S> <C> <C> <C>
Less than $50,000..................................................... 5.75% 5.82% 5.00%
$50,000 but less than $100,000........................................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000....................................... 3.75% 3.90% 3.00%
$250,000 but less than $500,000....................................... 3.00% 3.09% 2.50%
$500,000 but less than $1 million..................................... 2.00% 2.04% 1.75%
$1 million or more.................................................... 0% 0% (see below )
</TABLE>
The current sales charges for the MUNICIPAL INCOME and QUALITY INCOME
PORTFOLIOS are:
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE OF AS A
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
<S> <C> <C> <C>
Less than $100,000.................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000....................................... 4.00% 4.17% 3.25%
$250,000 but less than $500,000....................................... 3.00% 3.09% 2.50%
$500,000 but less than $1 million..................................... 2.00% 2.04% 1.75%
$1 million or more.................................................... 0% 0% (see below )
</TABLE>
* At the discretion of Mentor Distributors, the entire sales charge may at times
be reallowed to dealers. The Staff of the Securities and Exchange Commission
has indicated that dealers who receive more than 90% of the sales charge may
be considered underwriters.
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<PAGE>
Shares of the SHORT-DURATION INCOME PORTFOLIO are sold subject to a sales
charge of 1%.
There is no initial sales charge on purchases of Class A shares of $1
million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. (A CDSC is also imposed on any shares
purchased without a sales charge as part of a purchase of shares of $1 million
or more under a purchase accumulation plan. Contact Mentor Distributors for more
information.) Any of the shares which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing capital
appreciation will not be subject to a CDSC. In determining whether a CDSC is
payable in respect of the shares redeemed, the Portfolio will first redeem
shares not subject to any charge. Mentor Distributors receives the entire amount
of any CDSC you pay.
You may be eligible to buy Class A shares at reduced sales charges. Consult
your investment dealer or Mentor Distributors for details about Quantity
Discounts and Accumulated Purchases, Letters of Intent, the Reinvestment
Privilege, Concurrent Purchases, and the Automatic Investment Plan. Descriptions
are also included in the New Account Form and in the Statement of Additional
Information. Shares may be sold at net asset value to certain categories of
investors, including to shareholders of other mutual funds who invest in The
Mentor Funds in response to certain promotional activities, and the CDSC may be
waived under certain circumstances. See "How to Buy Shares -- General" below.
Mentor Distributors, the investment advisers, or certain sub-advisers, or
affiliates thereof, at their own expense and out of their own assets, may also
provide other compensation to dealers in connection with sales of shares of the
Portfolios. Compensation may also include, but is not limited to, financial
assistance to dealers in connection with conferences, sales, or training
programs for their employees, seminars for the public, advertising or sales
campaigns, or other dealer-sponsored special events. In some instances, this
compensation may be made available only to certain dealers whose representatives
have sold or are expected to sell significant amounts of shares. Dealers may not
use sales of The Mentor Funds' shares to qualify for this compensation to the
extent such may be prohibited by the laws of any state or any self-regulatory
agency, such as the National Association of Securities Dealers, Inc.
CLASS B SHARES. Class B shares are sold without an initial sales charge,
although a CDSC will be imposed if you redeem shares within five or six years of
purchase, depending on the Portfolio. The following types of shares may be
redeemed without charge: (i) shares acquired by reinvestment of distributions
and (ii) shares otherwise exempt from the CDSC, as described in "How to Buy
Shares -- General" below. For other shares, the amount of the charge is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. The amount of the CDSC will depend on the number
of years since you invested in the shares being redeemed and the dollar amount
being redeemed, according to the following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF CHARGE AS A PERCENTAGE OF
APPLICABLE AMOUNT APPLICABLE AMOUNT
REDEEMED (GROWTH, CAPITAL REDEEMED (QUALITY INCOME,
GROWTH, STRATEGY, INCOME MUNICIPAL INCOME, AND
YEARS SINCE PURCHASE PAYMENT AND GROWTH, AND GLOBAL SHORT- DURATION INCOME
MADE PORTFOLIOS) PORTFOLIOS)
<S> <C> <C> <C>
1 4.0% 4.0%
2 4.0% 4.0%
3 3.0% 3.0%
4 2.0% 2.0%
5 1.0% 1.0%
6 None 1.0%
7+ None None
</TABLE>
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<PAGE>
No CDSC is imposed upon the redemption of Class B shares purchased pursuant
to certain asset-allocation plans and that are not otherwise subject to the CDSC
shown above. However, a CDSC of 1.00% is imposed on redemptions of such shares
within the first year after purchase, based on the lower of the shares' cost and
current net asset value. Consult Mentor Distributors for more information.
Any of the shares being redeemed which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing capital
appreciation will not be subject to a CDSC. In determining whether a CDSC is
payable in respect of the shares redeemed, the Portfolio will first redeem
shares not subject to any charge. For this purpose, the amount of any increase
in a share's value above its initial purchase price is exempt from the CDSC.
Thus, when a share that has appreciated in value is redeemed during the five- or
six-year period, a CDSC is assessed only on its initial purchase price. For
information on how sales charges are calculated if you exchange your shares, see
"How to Exchange Shares."
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 of those shares (including shares purchased through reinvestment
of distributions on those 100 shares) at this time, your CDSC will be calculated
as follows:
<TABLE>
<S> <C>
(Bullet) Proceeds of 50 shares redeemed at $12 per share $600
(Bullet) Minus proceeds of 10 shares not subject to a CDSC
because they were acquired through dividend reinvestment (10
x $12) -120
(Bullet) Minus appreciation on remaining shares, also not
subject to CDSC (40 x $2) -80
(Bullet) Amount subject to a CDSC $400
</TABLE>
Mentor Distributors receives the entire amount of any CDSC you pay. Consult
Mentor Distributors for more information.
GENERAL
A Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by The Mentor Funds' current and retired
Trustees (and their families), current and retired employees (and their
families) of Mentor Distributors, each investment adviser or sub-adviser, and
each of their affiliates, registered representatives and other employees (and
their families) of broker-dealers having sales agreements with Mentor
Distributors, employees (and their families) of financial institutions having
sales agreements with Mentor Distributors (or otherwise having an arrangement
with a broker-dealer or financial institution with respect to sales of Portfolio
shares), financial institution trust departments investing an aggregate of $1
million or more in one or more funds in the Mentor family, clients of certain
administrators of tax-qualified plans, employer-sponsored retirement plans,
tax-qualified plans when proceeds from repayments of loans to participants are
invested (or reinvested) in funds in the Mentor family, shares redeemed under a
Portfolio's Systematic Withdrawal Plan (limited to 10% of a shareholder's
account in any calendar year), and "wrap accounts" for the benefit of clients of
financial planners adhering to certain standards established by Mentor
Distributors. A Portfolio may sell shares without a sales charge or a CDSC in
connection with the acquisition by the Portfolio of assets of an investment
company or personal holding company. In addition, the CDSC may be waived in the
case of (i) redemptions of
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<PAGE>
shares held at the time a shareholder dies or becomes disabled, including the
shares of a shareholder who owns the shares with his or her spouse as joint
tenants with right of survivorship, provided that the redemption is requested
within one year of the death or initial determination of disability; (ii)
redemptions in connection with the following retirement plan distributions: (a)
lump-sum or other distributions from a qualified retirement plan following
retirement; (b) distributions from an IRA, Keogh Plan, or Custodial Account
under Section 403(b)(7) of the Internal Revenue Code following attainment of age
59 1/2; and (c) a tax-free return of an excess contribution to an IRA; (iii)
redemptions by pension or profit sharing plans sponsored by Mentor Investment
Group, Inc. or an affiliate; and (iv) redemptions by pension or profit sharing
plans of which Mentor or any affiliate serves as a plan fiduciary. In addition,
certain retirement plans with over 200 employees may purchase Class A shares at
net asset value without a sales charge. A Portfolio may sell its Class A shares
without a sales charge to shareholders of the mutual funds who invest in The
Mentor Funds in response to certain promotional activities (in which case a CDSC
of 1% may apply for a period of years after the purchase). Contact Mentor
Distributors.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in, shares
of a Portfolio at net asset value.
If you are considering redeeming or exchanging shares of a Portfolio or
transferring shares to another person shortly after purchase, you should pay for
those shares with a certified check to avoid any delay in redemption, exchange,
or transfer. Otherwise the Portfolio may delay payment until the purchase price
of those shares has been collected or, if you redeem by telephone, until 15
calendar days after the purchase date.
To eliminate the need for safekeeping, The Mentor Funds will not issue
certificates for your shares unless you request them. Mentor Distributors may,
at its expense, provide additional promotional incentives or payments to dealers
that sell shares of the Portfolios. In some instances, these incentives or
payments may be offered only to certain dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all classes of
shares.
Because of the relatively high cost of maintaining accounts, each Portfolio
reserves the right to redeem, upon not less than 60 days' notice, any Portfolio
account below $500 as a result of redemptions. A shareholder may, however, avoid
such a redemption by a Portfolio by increasing his investment in shares of that
Portfolio to a value of $500 or more during such 60-day period.
REINVESTMENT PRIVILEGE. If you redeem Class A or B shares of any Portfolio,
you have a one-time right, within 60 days, to reinvest the redemption proceeds
plus the amount of CDSC you paid, if any, at the next-determined net asset
value. Front-end sales charges will not apply to such reinvestment. Mentor
Distributors must be notified in writing by you or by your financial institution
of the reinvestment for you to recover the CDSC, or to eliminate the front-end
sales charge. If you redeem shares in any of the Portfolios, there may be tax
consequences.
DISTRIBUTION PLANS (CLASS B SHARES)
Mentor Distributors, Inc., having its principal offices at 901 East Byrd
Street, Richmond, Virginia 23219, is the principal distributor for the
Portfolios' shares.
Each of the Portfolios has adopted a Distribution Plan under Rule 12b-1
with respect to its Class B shares (each, a "Class B Plan") providing for
payments by the Portfolio to Mentor Distributors from the assets attributable to
the Portfolio's Class B shares at the annual rate set out under "Summary of
Portfolio Expenses -- Annual Portfolio Operating Expenses" above. The Trustees
may reduce the amount of payments or suspend the Class B
29
<PAGE>
Plan for such periods as they may determine. Mentor Distributors also receives
the proceeds of any CDSC imposed on redemptions of shares.
Payments under the Plans are intended to compensate Mentor Distributors for
services provided and expenses incurred by it as principal underwriter of a
Portfolio's Class B shares. Mentor Distributors may select financial
institutions (such as a broker/dealer or bank) to provide sales support services
as agents for their clients or customers who beneficially own Class B shares of
the Portfolios. Financial institutions will receive fees from Mentor
Distributors based upon Class B shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by Mentor Distributors. Mentor Distributors may
suspend or modify such payments to dealers. Such payments are also subject to
the continuation of the relevant Class B Plan, the terms of any agreements
between dealers and Mentor Distributors, and any applicable limits imposed by
the National Association of Securities Dealers, Inc.
HOW TO SELL SHARES
You can sell your shares in any Portfolio to the Portfolio any day the New
York Stock Exchange is open, either directly to the Portfolio or through your
investment dealer. The Portfolio will only redeem shares for which it has
received payment.
SELLING SHARES DIRECTLY TO A PORTFOLIO. Send a signed letter of instruction
or stock power form, along with any certificates that represent shares you want
to sell, to The Mentor Funds, c/o Boston Financial Data Services, Inc. ("BFDS"),
2 Heritage Drive, North Quincy, Massachusetts 02171. The price you will receive
is the net asset value next calculated after your request is received in proper
form less any applicable CDSC. In order to receive that day's net asset value,
your request must be received before the close of regular trading on the New
York Stock Exchange. If you sell shares having a net asset value of $50,000 or
more or if you want your redemption proceeds payable to you at a different
address or to someone else, the signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer, or certain other
financial institutions. See the Statement of Additional Information for more
information about where to obtain a signature guarantee. Stock power forms are
available from your investment dealer, Mentor Distributors, and many commercial
banks. Mentor Distributors usually requires additional documentation for the
sale of shares by a corporation, partnership, agent, or fiduciary, or surviving
joint owner. Contact Mentor Distributors for details.
SELLING SHARES BY TELEPHONE. You may use Mentor Distributors' Telephone
Redemption Privilege to redeem shares from your account unless you have notified
Mentor Distributors of an address change within the preceding 15 days. Unless an
investor indicates otherwise on the New Account Form, Mentor Distributors will
be authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide Mentor Distributors with his or her account
registration and address as it appears on Mentor Distributors' records. Mentor
Distributors will employ these and other reasonable procedures to confirm that
instructions communicated by telephone are genuine; if it fails to employ
reasonable procedures, Mentor Distributors may be liable for any losses due to
unauthorized or fraudulent instructions. For information, consult Mentor
Distributors. During periods of unusual market changes and shareholder activity,
you may experience delays in contacting Mentor Distributors by telephone in
which case you may wish to submit a written redemption request, as described
above, or contact your investment dealer, as described below. The Telephone
Redemption Privilege may be modified or terminated without notice.
SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must receive
your request before the close of regular trading on the New York Stock Exchange
to receive that day's net asset value. Your dealer will be responsible for
furnishing all necessary documentation to Mentor Distributors, and may charge
you for its services.
30
<PAGE>
The Portfolio generally sends you payment for your shares the business day
after your request is received. Under unusual circumstances, the Portfolio may
suspend redemptions, or postpone payment for more than seven days, as permitted
by federal securities law.
SYSTEMATIC WITHDRAWAL PROGRAM. You may redeem Class A or B shares of a
Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program are
not subject to a CDSC, but the aggregate withdrawals of Class B shares in any
year are limited to 10% of the value of the account at the time of enrollment.
Contact Mentor Distributors for more information.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in a
Portfolio worth at least $1,000 for shares of the same class of any other
Portfolio at net asset value beginning 15 days after purchase. You may also
exchange shares of any Portfolio for shares of Cash Resource U.S. Government
Money Market Fund (the "Cash Fund"). If you exchange shares subject to a CDSC,
the transaction will not be subject to a CDSC. However, when you redeem the
shares acquired through the exchange, the redemption may be subject to the CDSC,
depending upon when you originally purchased the shares, using the schedule of
the Portfolio from which your first exchange was effected. For purposes of
computing the CDSC, the length of time you have owned your shares will be
measured from the date of original purchase and will not be affected by any
exchange. (If you exchange your shares for shares of the Cash Fund, the period
when you hold shares of the Cash Fund will not be included in calculating the
length of time you have owned the shares subject to the CDSC, and any CDSC
payable on redemption of your shares will be reduced by the amount of any
payment collected by the Cash Fund under its distribution plan in respect of
those shares. Contact Mentor Distributors for information.)
To exchange your shares, simply complete an Exchange Authorization Form and
send it to The Mentor Funds, c/o BFDS, 2 Heritage Drive, North Quincy,
Massachusetts 02171. Exchange Authorization Forms are available by calling or
writing Mentor Distributors. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss. A
Telephone Exchange Privilege is currently available. Mentor Distributors'
procedures for telephonic transactions are described above under "How to Sell
Shares." The Telephone Exchange Privilege is not available if you were issued
certificates for shares which remain outstanding. Ask your investment dealer or
Mentor Distributors for a prospectus relating to the Cash Fund. Shares of
certain of the Portfolios may not available to residents of all states.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where Mentor Distributors or the Trustees
believe doing so would be in the best interests of a Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. Consult Mentor
Distributors before requesting an exchange by calling 1-800-382-0016. See the
Statement of Additional Information to find out more about the exchange
privilege.
DISTRIBUTIONS AND TAXES
Dividends, if any, are declared daily and paid monthly for the Quality
Income, Short-Duration Income, and Municipal Income Portfolios. Any dividends
for the other Portfolios are declared and paid as follows: quarterly for the
Income and Growth Portfolio; and annually for the Capital Growth, Global,
Growth, and Strategy Portfolios. Each Portfolio will distribute its net capital
gain, if any, at least annually. All dividends and distributions of
31
<PAGE>
net capital gain will be invested in additional shares of the same class of a
Portfolio unless a shareholder requests in writing to receive the dividend or
distribution in cash.
Each Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders.
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to you as ordinary income, except that any distributions of net capital
gain will be taxed as long-term capital gain, regardless of how long you have
held the shares (although the loss on a sale of shares held for six months or
less will be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year The Mentor Funds will notify
you of the amount and tax status of distributions paid to you by your Portfolio
for the preceding year.
The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. You should consult your tax adviser to determine the
precise effect of an investment in a Portfolio on your particular tax situation.
To permit the Quality Income, Municipal Income, and Short-Duration Income
Portfolios to maintain more stable monthly distributions, each of those
Portfolios may from time to time pay out less than the entire amount of net
investment income earned in any particular period. Any such amount retained by a
Portfolio would be available to stabilize future distributions. As a result, the
distributions paid by either Portfolio for any particular period may be more or
less than the amount of net investment income actually earned by the Portfolio
during that period.
MUNICIPAL INCOME PORTFOLIO. Distributions designated by the Portfolio as
"exempt-interest dividends" are not generally subject to federal income tax. The
Portfolio may engage in investment activities that produce taxable income, the
distribution of which will be taxable to shareholders as described above. If you
receive Social Security and railroad retirement benefits, you should consult
your tax adviser to determine what effect, if any, an investment in the
Portfolio may have on the taxation of your benefits. In addition, an investment
in the Portfolio may result in liability for federal alternative maximum tax and
for state and local taxes, both for individual and corporate shareholders.
MANAGEMENT
The Trustees of The Mentor Funds are responsible for generally overseeing
the conduct of its business. COMMONWEALTH ADVISORS, INC. acts as investment
manager of each of the Portfolios other than the Growth, Short-Duration Income,
Global, and Strategy Portfolios. CHARTER ASSET MANAGEMENT, INC. acts as
investment manager to the Growth Portfolio; COMMONWEALTH INVESTMENT COUNSEL,
INC. acts as investment manager to the Short-Duration Income Portfolio; MENTOR
PERPETUAL ADVISORS, L.L.C. acts as investment manager to the Global Portfolio;
WELLESLEY ADVISORS, INC. acts as investment manager to the Strategy Portfolio.
Each of the investment advisers, except Mentor Perpetual, is a wholly-owned
subsidiary of Mentor Investment Group, Inc. ("Mentor"), which is a wholly-owned
subsidiary of Wheat First Butcher Singer, Inc. Wheat First Butcher Singer,
through other subsidiaries, also engages in securities brokerage, investment
banking, and related businesses. Mentor Perpetual is owned equally by Mentor and
Perpetual plc, a diversified financial services holding company. Each of the
investment advisers is located at 901 East Byrd Street, Richmond, Virginia.
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<PAGE>
Each of the Portfolios pays management fees to its manager at the annual
rates described above under "Summary of Portfolio Expenses -- Annual Portfolio
Operating Expenses", except that the Global Portfolio pays fees equal to 1.10%
of its average daily net assets up to and including $75 million and 1.00% of the
average daily net assets of the Portfolio in excess of $75 million. The advisory
fees paid by the Growth, Capital Growth, Income and Growth, and Global
Portfolios are higher than those paid by many other mutual funds. An investment
adviser may from time to time voluntarily waive some or all of its investment
advisory fees and may terminate any such voluntary waiver of some or all of its
investment advisory fees at any time in its sole discretion.
Commonwealth Advisors was incorporated under the laws of Virginia in 1991
and has assets under management in excess of $300 million. All of its directors
and officers serve as directors or officers of other investment advisory firms
affiliated with Wheat First Butcher Singer. Commonwealth Advisors has served as
investment adviser to each of the Portfolios identified above since their
inception; however, prior to April 12, 1995, all investment decisions for each
of the Portfolios were made by sub-advisers to those Portfolios. For certain of
the Portfolios, Commonwealth Advisors now furnishes a continuous investment
program. All of the investment advisory personnel of Commonwealth Advisors have
substantial experience in the investment advisory field and provide advisory
services to other mutual funds in the Mentor family.
Charter is a registered investment adviser with total assets under
management exceeding $380 million. Charter provides investment management and
advisory services to a wide variety of individual and institutional clients.
Commonwealth Investment Counsel currently has assets under management in excess
of $4 billion, and serves as investment adviser to Cash Resource Trust and
Mentor Institutional Trust, both open-end investment companies, and Mentor
Income Fund, Inc., a closed-end investment company. Mentor Perpetual is a newly
organized investment advisory firm owned equally by Perpetual plc and Mentor.
The Perpetual organization currently serves as investment adviser for assets of
more than $6 billion. Its clients include 28 unit investment trusts and other
public investment pools for over 150 clients, including private individuals,
charities, pension plans, and life assurance companies. Wellesley is a newly
organized investment advisory firm with assets under management of approximately
$240 million. Each of its directors and officers serves as director and officer
of other investment advisory firms affiliated with Wheat First Butcher Singer.
All investment decisions made for the Portfolios by Commonwealth Advisors,
Charter, Commonwealth Investment Counsel, Mentor Perpetual, and Wellesley are
made by investment committees at the respective firms, made up of investment
professionals at those firms.
THE SUB-ADVISERS
VAN KAMPEN AMERICAN CAPITAL MANAGEMENT INC. ("Van Kampen") serves as
sub-adviser to the Municipal Income Portfolio. Van Kampen, located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, was incorporated in 1990 and
commenced operations in 1992. Van Kampen currently provides investment advice to
a wide variety of individual, institutional, and investment company clients. Van
Kampen is a wholly-owned subsidiary of Van Kampen American Capital, Inc., which,
in turn, is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc.
is indirectly controlled by Clayton & Dubilier Associates IV Limited
Partnership, the general partners of which are Joseph L. Rice, III, B. Charles
Ames, William A. Barby, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe, and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc., a New York-based private investment firm. As of December
1, 1995, Van Kampen, together with its affiliates, managed or supervised
approximately $55.5 billion of assets.
David C. Johnson, Senior Vice President of Van Kampen, is manager of the
Municipal Income Portfolio. Mr. Johnson joined Van Kampen in 1989 and has served
as portfolio manager of the Municipal Income Portfolio
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since its inception. Mr. Johnson has fourteen years of management experience in
the tax-free fixed-income sector. Currently, he is responsible for the
management and supervision of 52 Van Kampen municipal funds, including both open
and closed-end funds, with total assets exceeding $12 billion.
WELLINGTON MANAGEMENT COMPANY ("Wellington") serves as sub-adviser to the
Income and Growth Portfolio. Wellington, located at 75 State Street, Boston,
Massachusetts 02109, is a professional investment counseling firm which provides
investment services to investment companies, employee benefit plans, endowments,
foundations, and other institutions and individuals. As of September 30, 1995,
Wellington had discretionary investment management authority with respect to
approximately $102.4 billion in assets. Wellington and its predecessor
organizations have provided investment advisory services to investment companies
since 1933 and to investment counseling clients since 1960. For its services as
sub-adviser, Commonwealth Advisors pays Wellington a fee at the annual rate
expressed as a percentage of the Portfolio's assets as follows: 0.325% on the
first $50 million in assets, 0.275% on the next $150 million in assets, 0.225%
on the next $300 million in assets, and 0.200% on assets over $500 million.
Paul D. Kaplan, Senior Vice President of Wellington, and Arnold C.
Schneider III, Senior Vice President of Wellington, have served as portfolio
managers to the Portfolio since its inception in May 1993. Mr. Kaplan manages
the fixed-income and U.S. Government securities portion of the Portfolio, and
Mr. Schneider manages the equity securities portion of the Portfolio. Mr. Kaplan
has been a portfolio manager with Wellington since 1982 and Mr. Schneider has
been a portfolio manager with Wellington since 1987.
GENERAL. Subject to the general oversight of the Trustees, each Portfolio's
investment adviser or sub-adviser manages its respective Portfolio in accordance
with the stated policies of the Portfolio. Each makes investment decisions for a
Portfolio and places the purchase and sale orders for the Portfolio's
transactions. In addition, each pays the salaries of all officers and employees
who are employed by both it and The Mentor Funds. The Mentor Funds pays all
expenses not assumed by the investment advisers and sub-advisers, or Mentor,
including, among other things, Trustees' fees, auditing, accounting, legal,
custodial, investor servicing, and shareholder reporting expenses, and payments
under the Portfolios' Class B Plans.
In selecting broker-dealers, the investment adviser or sub-adviser may
consider research and brokerage services furnished to it and its affiliates.
Subject to seeking the best overall terms available, a Portfolio's investment
adviser or sub-adviser may consider sales of shares of The Mentor Funds (and, if
permitted by law, of the other funds in the Mentor family) as a factor in the
selection of broker-dealers.
Until April 12, 1995, Scudder, Stevens & Clark served as sub-adviser to the
Perpetual Global Portfolio; Phoenix Investment Counsel, Inc. served as
sub-adviser to the Mentor Capital Growth Portfolio; and Pacific Investment
Management Company served as sub-adviser to the Mentor Quality Income Portfolio
(when that Portfolio was known as the Cambridge Government Income Portfolio).
OTHER SERVICES
ADMINISTRATIVE SERVICES. Mentor Investment Group, Inc., located at 901 East
Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain
administrative personnel and services necessary to operate each Portfolio, such
as bookkeeping and accounting services. Mentor provides these services to each
of the Portfolios at an annual rate of 0.10% of each Portfolio's average net
assets.
SHAREHOLDER SERVICING PLAN. The Mentor Funds has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to Class A and Class B shares
of each Portfolio. Under the Service Plan, financial institutions will enter
into shareholder service agreements with The Mentor Funds to provide
administrative support services
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to their customers who are Portfolio shareholders. In return for providing these
support services, a financial institution may receive payments at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B shares
of a Portfolio. These administrative services may include, but are not limited
to, the following functions; providing office space, equipment, telephone
facilities, and various personnel, including clerical, supervisory, and computer
personnel, as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries regarding the Portfolios; assisting clients in changing dividend
options, account designations, and addresses; and providing such other services
as the Portfolios reasonably request.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by a Portfolio's investment adviser, a
sub-adviser, and/or Mentor, or affiliates thereof, for providing administrative
support services to holders of Class A or Class B shares of the Portfolios.
These payments will be made directly by a Portfolio's investment adviser,
sub-adviser, and/or Mentor and will not be made from the assets of any of the
Portfolios.
GENERAL
The Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Declaration of Trust of The Mentor Funds, which is governed
by Massachusetts law, is on file with the Secretary of State of the Commonwealth
of Massachusetts.
The Mentor Funds is an open-end, diversified, series management investment
company with an unlimited number of authorized shares of beneficial interest.
Shares of The Mentor Funds may, without shareholder approval, be divided into
two or more series of shares representing separate investment portfolios. Any
such series of shares may be further divided without shareholder approval into
two or more classes of shares having such preferences and special or relative
rights and privileges as the Trustees determine. The Mentor Funds' shares are
currently divided into nine series, eight of which are being offered by this
Prospectus. Each series offered by this prospectus issues shares of two classes,
Class A and Class B. Each share has one vote, with fractional shares voting
proportionally. Shares of each series will vote together as a single series
except when required by law or determined by the Trustees. Shares of each
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets of
that Portfolio. The Mentor Funds may suspend the sale of shares at any time and
may refuse any order to purchase shares. Although The Mentor Funds is not
required to hold annual meetings of its shareholders, shareholders have the
right to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Declaration of Trust.
In June, 1995, Mentor Growth Fund, Mentor Strategy Fund, and Mentor
Short-Duration Income Fund, series of shares of Mentor Series Trust, a
Massachusetts business trust, were reorganized as the Mentor Growth Portfolio,
Mentor Strategy Portfolio, and Mentor Short-Duration Income Portfolio,
respectively.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as custodian for each Portfolio, except that State Street
Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts 02266 serves as
custodian for the Global Portfolio. Boston Financial Data Services, Inc. is
transfer agent and dividend disbursing agent for the Portfolios. The Trust's
independent auditors are KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110.
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PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about the Portfolios. A Portfolio's "yield" is calculated by
dividing the Portfolio's annualized net investment income per share during a
recent 30-day period by the maximum public offering price per share on the last
day of that period. "Total return" for the one-, five- and ten-year periods (or
for the life of the Portfolio, if shorter) through the most recent calendar
quarter represents the average annual compounded rate of return on an investment
of $1,000 in the Portfolio at the maximum public offering price (in the case of
Class A shares) and reflecting (in the case of Class B shares) the deduction of
any applicable CDSC. Total return may also be presented for other periods or
based on investment at reduced sales charge levels or at net asset value.
Investment performance of different classes of shares of a Portfolio will
differ. Any quotation of investment performance not reflecting a CDSC would be
reduced if such sales charges were reflected. Quotations of yield or total
return for a period when an expense limitation was in effect will be greater
than if the limitation had not been in effect. A Portfolio's performance may be
compared to various indices. See the Statement of Additional Information for
more information. Information may be presented in advertisements about a
Portfolio describing the background and professional experience of the
Portfolio's investment adviser, sub-adviser, or any of their personnel.
ALL DATA ARE BASED ON A PORTFOLIO'S PAST INVESTMENT RESULTS AND DO NOT
PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of the Portfolio, the
Portfolio's operating expenses, and which class of shares you purchase.
Investment performance also often reflects the risks associated with a
Portfolio's investment objective and policies. These factors should be
considered when comparing a Portfolio's investment results to those of other
mutual funds and other investment vehicles.
As permitted by applicable law, performance information for a Portfolio
whose investment adviser or sub-adviser has changed may be presented only for
periods after the change was effected.
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APPENDIX
MOODY'S INVESTORS SERVICE, INC., LONG-TERM MUNICIPAL DEBT RATINGS
AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium-grade
obligations, (I.E., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA -- Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD AND POOR'S LONG-TERM MUNICIPAL DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposure to adverse
conditions.
PLUS (+) OR MINUS (-): The ratings from "A" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC., SHORT-TERM LOAN RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
STANDARD AND POOR'S MUNICIPAL NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus sign (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2 -- Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1 -- Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
P-2 -- Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
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THE MENTOR FUNDS
PROSPECTUS
AN OPEN-END MANAGEMENT
INVESTMENT COMPANY
(Bullet) Mentor Growth Portfolio
(Bullet) Mentor Capital Growth Portfolio
(Bullet) Mentor Strategy Portfolio
(Bullet) Mentor Income and Growth Portfolio
(Bullet) Mentor Perpetual Global Portfolio
(Bullet) Mentor Quality Income Portfolio
(Bullet) Mentor Municipal Income Portfolio
(Bullet) Mentor Short-Duration Income Portfolio
January 15, 1996
(Mentor Logo)
