Filed Pursuant to Rule 497(e)
File Number 33-45315
P R O S P E C T U S January 17, 1998
Mentor Institutional U.S. Government
Money Market Portfolio
Mentor Institutional U.S. Government Money Market Portfolio is a "money
market" fund, seeking as high a rate of current income as Mentor Investment
Advisors, LLC, the Portfolio's investment adviser, believes is consistent with
preservation of capital and maintenance of liquidity, through investments
exclusively in U.S. Government securities and repurchase agreements with
respect to U.S. Government securities. The Portfolio is a diversified
investment portfolio of Mentor Funds. An investment in shares of the Portfolio
is designed for institutional and high net-worth individual investors.
An investment in the Portfolio is neither insured nor guaranteed by the
U.S. Government. There can be no assurance that the Portfolio will be able to
maintain a stable net asset value of $1.00 per share.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. Investors can find more detailed
information in the January 17, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement, 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
Portfolio's address is P.O. Box 1357, Richmond, Virginia 23218-1357.
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Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Table of Contents
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Page
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Expense Summary ........................... 3
Financial Highlights ..................... 4
Investment Objectives and Policies ...... 4
Management .............................. 6
How the Portfolio Values its Shares ...... 7
Purchase of Shares ........................ 7
Redemption of Shares ..................... 8
How Distributions are Made ............... 9
Taxes .................................... 9
General ................................. 10
Performance Information .................. 10
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EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the estimated expenses the Portfolio expects
to incur during the current fiscal year. The Example shows the cumulative
expenses attributable to a hypothetical $1,000 investment in the Portfolio over
specified periods.
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Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases .................. None
Maximum Sales Load Imposed on Reinvested Dividends ...... None
Deferred Sales Load .................................... None
Redemption Fees .......................................... None
Exchange Fee ............................................. None
Annual Portfolio Operating Expenses:
(as a percentage of average net assets)
Management Fees .......................................... 0.22%
12b-1 Fees ............................................. 0.00%
Other Expenses .......................................... 0.11%
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Total Portfolio Operating Expenses .................. 0.33%
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Example
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
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1 year $ 3
3 years $11
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This information is provided to help investors understand the expenses of
investing in the Portfolio and an investor's share of the estimated operating
expenses of the Portfolio. The Example should not be considered a
representation of future performance; actual expenses may be more or less than
those shown.
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FINANCIAL HIGHLIGHTS
The financial highlights presented below for the Portfolio have been
derived from the financial statements of the Portfolio, which have been audited
by KPMG Peat Marwick LLP, independent auditors. The report of KPMG Peat Marwick
LLP, along with the Portfolio's financial statements and notes thereto, is
incorporated by reference in the Statement of Additional Information, which may
be obtained in the manner described on the cover page of this Prospectus. See
"Financial Statements" in the Statement of Additional Information.
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Mentor Institutional U.S. Government Money Market Portfolio
Financial Highlights
Period Ended September 30, 1997
Per Share Operating Performance
Net asset value, beginning of period ..................... $ 1.00
Income from investment operations
Net investment income .................................... 0.01
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Total from investment operations ........................ 0.01
Less distributions
Distributions from net investment income .................. (0.01)
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Total distributions .................................... (0.01)
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Net assets value, end of period ........................... 1.00
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Total Return ............................................. 1.39%(b)
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Ratios/Supplemental Data
Net assets, end of period (in thousands) .................. $ 61,805
Ratio of expense to average net assets ..................... 0.33%(a)
Ratio of net investment income to average net assets ...... 5.26%(a)
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(a) Annualized
(b) Not annualized for the period from June 27, 1997 (commencement of
operations) to September 30, 1997.
See notes to financial statements.
INVESTMENT OBJECTIVE AND POLICIES
Mentor Institutional U.S. Government Money Market Portfolio's investment
objective is to seek as high a rate of current income as Mentor Investment
Advisors, LLC ("Mentor Advisors") believes is consistent with preservation of
capital and maintenance of liquidity. The Portfolio invests exclusively in U.S.
Treasury bills, notes and bonds, and other obligations issued or guaranteed as
to principal or interest by the U.S. Government, its agencies, or
instrumentalities, and in repurchase agreements with respect to such
obligations. There can, of course, be no assurance that the Portfolio will
achieve its investment objective.
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Certain of the foregoing obligations, including U.S. Treasury bills, notes
and bonds, mortgage participation certificates issued or guaranteed by the
Government National Mortgage Association, and Federal Housing Administration
debentures, are supported by the full faith and credit of the United States.
Other U.S. Government securities issued by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. These securities include obligations supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of
Federal Home Loan Banks, and obligations supported only by the credit of an
instrumentality, such as Federal National Mortgage Association bonds.
Short-term U.S. Government obligations generally are considered among the
safest short-term investments. Because of their added safety, the yields
available from U.S. Government obligations are generally lower than the yields
available from comparable corporate debt securities. The U.S. Government
guarantee of securities owned by the Portfolio does not guarantee the net asset
value of the Portfolio's shares, which the Portfolio seeks to maintain at $1.00
per share.
Considerations of liquidity and preservation of capital mean that the
Portfolio may not necessarily invest in money market instruments paying the
highest available yield at a particular time. Consistent with its investment
objective, the Portfolio will attempt to maximize yields by portfolio trading
and by buying and selling portfolio investments in anticipation of or in
response to changing economic and money market conditions and trends. The
Portfolio may also invest to take advantage of what Mentor Advisors believes to
be temporary disparities in yields of different segments of the high-quality
money market or among particular instruments within the same segment of the
market. These policies, as well as the relatively short maturity of obligations
purchased by the Portfolio, may result in frequent changes in the securities
held by the Portfolio. The Portfolio will not usually pay brokerage commissions
in connection with the purchase or sale of portfolio securities.
The Portfolio's securities will be affected by general changes in interest
rates resulting in increases or decreases in the values of the obligations held
by the Portfolio. The value of the Portfolio's securities can be expected to
vary inversely to changes in prevailing interest rates. Withdrawals by
shareholders could require the sale of portfolio investments at a time when
such a sale might not otherwise be desirable.
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually
not more than one week), which the seller agrees to repurchase at a fixed time
and price, representing the Portfolio's cost plus interest. Under a securities
loan, the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is
a U.S. Government security. These transactions must be fully collateralized at
all times, but involve some risk to the Portfolio if the other party should
default on its obligations and the Portfolio is delayed or prevented from
recovering the collateral. If the other party should become involved in
bankruptcy or insolvency proceedings, it is possible that the Portfolio may be
treated as an unsecured creditor and be required to return the underlying
collateral to the other party's estate.
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Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective
and policies described herein are not fundamental and may be changed by the
Trustees without shareholder approval.
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MANAGEMENT
The Trustees of Mentor Funds (the "Trust") are responsible for generally
overseeing the conduct of the Portfolio's business. Mentor Investment Advisors,
LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, acts as
investment adviser to the Portfolio. The Portfolio pays management fees to
Mentor Advisors monthly at the following annual rates (based on the average
daily net assets of the Portfolio): 0.22% of the first $500 million of the
Portfolio's average net assets; 0.20% of the next $500 million; 0.175% of the
next $1 billion; 0.16% of the next $1 billion; and 0.15% of any amounts over $3
billion.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group,
LLC ("Mentor Investment Group") and its affiliates. Mentor Investment Group is
a subsidiary of Wheat First Butcher Singer, Inc. ("Wheat First Butcher
Singer"), a diversified financial services holding company. Wheat First Butcher
Singer, through other subsidiaries, also engages in securities brokerage,
investment banking, and related businesses. EVEREN Capital Corporation has a
20% ownership in Mentor Investment Group and may acquire additional ownership
based principally on the amount of Mentor Investment Group's revenues derived
from assets attributable to clients of EVEREN Securities, Inc. and its
affiliates. Mentor Advisors and its affiliates serve as investment adviser to
twenty-two separate investment portfolios in the Mentor Family of Funds with
total assets under management of more than $11 billion. All investment
decisions for the Portfolio are made by investment teams at Mentor Advisors.
Wheat First Butcher Singer, Mentor Investment Group's parent company, has
entered into an Agreement and Plan of Merger pursuant to which it is to be
acquired by First Union Corp. ("First Union"). First Union is a global
financial services company with approximately $140 billion in assets and $10
billion in total stockholders' equity. The proposed arrangement does not
contemplate any changes in the management or operations of Mentor Investment
Group or any of its subsidiaries, including Mentor Advisors. Consummation of
the acquisition, which is subject to a number of conditions, including
regulatory approvals, will result in the termination of the investment advisory
agreement between the Portfolio and Mentor Advisors. It is expected that, upon
consummation of the acquisition (which is expected to occur as early as January
1998), the Portfolio will enter into a new investment advisory agreement with
Mentor Advisors, which will be substantially identical to the agreement
currently in effect.
Subject to the general oversight of the Trustees of the Trust, Mentor
Advisors manages the Portfolio in accordance with the stated policies of the
Portfolio. Mentor Advisors makes investment decisions for the Portfolio and
places the purchase and sale orders for the Portfolio's portfolio transactions.
In selecting broker-dealers, Mentor Advisors may consider research and
brokerage services furnished to it and its affiliates. Subject to seeking the
best overall terms available, Mentor Advisors may consider sales of shares of
the Portfolio (and, if permitted by law, of other funds in the Mentor family)
as a factor in the selection of broker-dealers to execute portfolio
transactions for the Portfolio. Mentor Advisors may at times cause the
Portfolio to pay commissions to broker-dealers affiliated with Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise allocated
to the Portfolio are borne by the Portfolio, including but not limited to
taxes, interest, brokerage fees and commissions, fees to Trustees who are not
officers, directors, stockholders, or employees of Wheat First Butcher Singer
and its subsidiaries, SEC fees and related expenses, state Blue Sky
qualification fees, charges of the custodian and transfer and dividend
disbursing agents, outside auditing, accounting, and legal services, certain
investor servicing fees and expenses,
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charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders,
certain shareholder report charges, and charges relating to corporate matters.
HOW THE PORTFOLIO VALUES ITS SHARES
The Portfolio values its shares twice each day, once at 12:00 noon and
again at the close of regular trading on the New York Stock Exchange. The
Portfolio's investments are valued at amortized cost in accordance with
Securities and Exchange Commission Rule 2a-7. The Portfolio will not normally
have unrealized gains or losses so long as it values its investments by the
amortized cost method.
PURCHASE OF SHARES
The Portfolio offers its shares continuously at a price of $1.00 per
share. Because the Portfolio seeks to be fully invested at all times,
investments must be in Same Day Funds to be accepted. "Same Day Funds" are
funds credited by the applicable regional Federal Reserve Bank to the account
of the Portfolio at its designated bank.
Mentor Distributors, LLC, located at 901 East Byrd Street, Richmond,
Virginia 23219, serves as distributor of the Portfolio's shares. Mentor
Distributors is not obligated to sell any specific amount of shares of the
Portfolio.
An investor may make an initial purchase of shares in the Portfolio by
submitting completed application materials along with a purchase order, and by
making payment to Mentor Distributors or the Trust. Investors will be required
to make minimum initial investments of $500,000 and minimum subsequent
investments of $25,000. Investments made through advisory accounts maintained
with investment advisers registered under the Investment Advisers Act of 1940,
as amended (including "wrap" accounts), are not subject to these minimum
investment requirements. The Portfolio reserves the right at any time to change
the initial and subsequent investment minimums required of investors.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to Mentor Advisors, or (iii) a combination of
such securities and cash. Purchase of shares of the Portfolio in exchange for
securities is subject in each case to the determination by Mentor Advisors that
the securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by Mentor Advisors in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the
Portfolio's next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in the market
price of accepted securities at the time of valuation become the property of
the Portfolio and must be delivered to the Portfolio upon receipt by the
investor from the issuer. A gain or loss for federal income tax purposes would
be realized upon the exchange by an investor that is subject to federal income
taxation, depending upon the investor's basis in the securities tendered. A
shareholder who wishes to purchase shares by exchanging securities should
obtain instructions by calling Mentor Distributors at 1-800-869-6042.
Mentor Distributors, Mentor Advisors, and their affiliates, at their own
expense and out of their own assets, may provide compensation to dealers in
connection with sales of shares of the Portfolio. Such compensation may
include, but is not limited to, financial assistance to dealers in connection
with conferences, sales, or training programs for their employees, seminars for
the public, advertising or sales campaigns, or other dealer-sponsored
7
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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 Portfolio shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc.
In all cases Mentor Advisors or Mentor Distributors reserves the right to
reject any particular investment.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of its shares in the Portfolio
any day the New York Stock Exchange is open by sending a signed letter of
instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to the Portfolio c/o Mentor Funds, P.O.
Box 1357, Richmond, Virginia 23218-1357 or to Mentor Distributors. Redemptions
will be effected at the net asset value per share of the Portfolio next
determined after the receipt by the Portfolio of redemption instructions in
"good order" as described below. In order to receive that day's net asset
value, your request must be received before the close of regular trading on the
New York Stock Exchange. The Portfolio will only redeem shares for which it has
received payment. A check for the proceeds will normally be mailed on the next
business day after a request in good order is received.
A redemption request will be considered to have been made in "good order"
if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be redeemed,
and identifies the shareholder's Portfolio account number;
(2) the request is signed by each registered owner exactly as the shares
are registered; and
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed for transfer (or are accompanied by an
endorsed stock power) and accompany the redemption request.
If shares to be redeemed represent an investment made by check, the Trust
reserves the right not to transmit the redemption proceeds to the shareholder
until the check has been collected, which may take up to 15 days after the
purchase date.
The Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Mentor Distributors
usually requires additional documentation for the sale of shares by a
corporation, partnership, agent, fiduciary, or surviving joint owner. Contact
Mentor Distributors for details.
Mentor Distributors may facilitate any redemption request. There is no
extra charge for this service.
Other information concerning redemption. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law. In addition, the Portfolio
reserves the right, if conditions exist which make cash payments undesirable,
to honor any request for redemption by making payment in whole or in part in
securities valued in the same way as they would be valued for purposes of
computing the Portfolio's per share net asset value. If payment is made in
securities, a shareholder may incur brokerage expenses in converting those
securities into cash.
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HOW DISTRIBUTIONS ARE MADE
The Portfolio determines its net income as of the close of regular trading
on the New York Stock Exchange each day the Exchange is open. Each
determination of the Portfolio's net income includes (i) all accrued interest
on the Portfolio's investments, (ii) plus or minus all realized and unrealized
gains and losses on the Portfolio's investments, (iii) less all accrued
expenses of the Portfolio.
The Portfolio declares all of its net income as a distribution on each day
it is open for business, as a dividend to shareholders of record immediately
prior to the close of regular trading on the New York Stock Exchange.
Shareholders whose purchase of shares of the Portfolio are accepted at or
before 12:00 noon on any day will receive the dividend declared by the
Portfolio for that day; shareholders who purchase shares after 12:00 noon will
begin earning dividends on the next business day after the Portfolio accepts
their order. The Portfolio's net income for Saturdays, Sundays, and holidays is
declared as a dividend on the preceding business day. Dividends for the
immediately preceding calendar month will be paid on the fifteenth day of each
calendar month (or, if that day is not a business day, on the next business
day), except that the Portfolio's schedule for payment of dividends during the
month of December may be adjusted to assist in tax reporting and distribution
requirements. A shareholder that withdraws the entire balance of an account at
any time during a month will be paid all dividends declared through the time of
withdrawal. Since the net income of the Portfolio is declared as a dividend
each time it is determined, the net asset value per share of the Portfolio
normally remains at $1 per share immediately after each determination and
dividend declaration.
All Portfolio distributions will be invested in additional Portfolio
shares, unless the shareholder instructs the Portfolio otherwise.
TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as ordinary
income, except that any distributions of net capital gain will be taxed as
long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year the Trust will notify
shareholders of the amount and tax status of distributions paid by the
Portfolio for the preceding year. In buying or selling securities for the
Portfolio, Mentor Advisors will not normally take into account the effect any
purchase or sale of securities will have on the tax positions of the
Portfolio's shareholders.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends and distributions also may be subject to
state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of the Portfolio, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
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GENERAL
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Agreement and Declaration of Trust, which is governed by
Massachusetts law, is on file with the Secretary of State of The Commonwealth
of Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into eleven
series, one representing the Portfolio, the others representing other
Portfolios with varying investment objectives and policies. Certain of the
Trust's Portfolios offer more than one class of shares with different sales
charges and expenses. The Portfolio currently offers only one class of shares.
Each share has one vote, with fractional shares voting proportionally.
Shares of each series will vote together as a single series except when
required by law or determined by the Trustees. Shares of the Portfolio are
freely transferable, are entitled to dividends as declared by the Trustees,
and, if the Portfolio were liquidated, would receive the net assets of the
Portfolio. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares. Although neither the Portfolio nor the Trust is
required to hold annual meetings of shareholders, shareholders have the right
to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Agreement and Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and
dividend agent.
PERFORMANCE INFORMATION
The Portfolio's yield may from time to time be included in advertisements
about the Portfolio. The Portfolio's "yield" is calculated by determining the
percentage net change, excluding capital changes, in the value of an investment
in one share of the Portfolio over the base period, and multiplying the net
change by 365/7 (or approximately 52 weeks). The Portfolio's "effective yield"
represents a compounding of the yield by adding 1 to the number representing
the percentage change in the value of the investment during the base period,
raising that sum to a power equal to 365/7, and subtracting 1 from the result.
All data is based on the Portfolio's past investment results and does not
predict future performance. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses, and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These
factors should be considered when comparing the Portfolio's investment results
to those of other mutual funds and other investment vehicles.
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Quotations of yield for a period when an expense limitation was in effect
will be greater than if the limitation had not been in effect. The Portfolio's
performance may be compared to various indices. See the Statement of Additional
Information. Information may be presented in advertisements about the Portfolio
describing the background and professional experience of the Portfolio's
investment adviser or its investment personnel.
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Institutional U.S. Government
Money Market Portfolio
Account Information Form [MENTOR INVESTMENT GROUP LOGO]
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REGISTRATION (please print or type)
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Name (Agency or Charter Name)
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Attn:
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Street Address
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City State Zip Code
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Tax Identification No. (must be provided to avoid penalties or fines)
( )
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Phone Number
DEALER INFORMATION (FOR DEALER USE ONLY)
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/
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Dealer's Name Dealer Number / Branch Number
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Representative's Name Rep. No.
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Amount
Broker/Dealer Account No. --------------------------------------------
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Minimum Initial Investment: $500,000.
Under penalties of perjury, the undersigned hereby certify (1) that the Taxpayer
I.D. Number above is correct and (2) that the account owner is not subject to
backup withholding because (a) the undersigned have not been notified of being
subject to backup withholding as a result of failure to report all interest or
dividends, or (b) the I.R.S. has provided notification that the account owner is
no longer subject to backup withholding. [Cross out (2) if it is not correct.]
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DIVIDENDS: WILL BE REINVESTED UNLESS CHECKED FOR CASH PAYMENT. [ ] CASH
PAYMENT
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WIRE REDEMPTIONS [ ] Yes [ ] No
The undersigned hereby authorizes Mentor Funds to honor telephone or other
instructions from any person for the redemption of shares from our Fund account.
The funds will only be wire transferred to the bank account specified below.
__________________________________________ _____________________________________
Name of Bank Bank Account Number
________________________________________________________________________________
Address of Bank City State Zip Code
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AUTHORIZED SIGNERS
PLEASE TYPE OR PRINT NAMES AND TITLES OF AUTHORIZED SIGNERS. Persons signing as
representatives for the account warrant as individuals that all signatures
hereon are genuine and that the persons indicated hereon are authorized to sign.
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A. NAME: --------------------------------------------------
TITLE:
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B. NAME:
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TITLE:
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C. NAME:
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TITLE:
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D. NAME:
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TITLE:
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SIGNATURE SAMPLES-SIGN IN BOXES BELOW EXACTLY AS NAMES APPEAR IN THE LIST TO THE
LEFT with blue or black ballpoint. Note especially first name and middle
initial. PLEASE READ CERTIFICATION BELOW.
A.
B.
C.
D.
CERTIFICATION
The signers certify that they have the power and authority to establish this
account and to select the redemption privileges requested. The signers release
the Fund and its agents and representatives from all liability and agree to
indemnify the same from any and all losses, damages, or costs for acting in good
faith in accordance with the privileges selected. The signers certify that the
Fund's current prospectus has been received and that the authorizations hereon
shall continue until the Fund receives written notice of a modification signed
by all appropriate parties. This account is subject to the terms of the Fund's
prospectus, as amended from time to time and the terms on the reverse side, and
subject to acceptance by the Fund and to the laws of the State of Illinois. All
terms shall be binding upon the successors, representatives and assigns of the
signers.
PLEASE COMPLETE INCUMBENT'S CERTIFICATE ON REVERSE SIDE.
<PAGE>
INCUMBENT'S CERTIFICATE
The undersigned is Secretary or Clerk of _______ and hereby certifies that
(Name of Entity)
_____________________ was duly elected/appointed _____________________ effective
(Name of Finance Official) (Title of Office)
______________________ and is duly authorized by _____________________ to act on
(Date) (Name of Entity)
its behalf in connection with the establishment, purchase, redemption, or other
transactions with respect to shares of Mentor Institutional Money Market
Portfolio, and that __________________________________________ will notify in
(Name of Entity)
writing Mentor Funds or your investment dealer if there is any change to the
above.
In witness whereof, the undersigned has executed this Certificate this ___
day of
_______________________________________ , 19 ______ .
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________________________________________
SEAL Secretary or Clerk*
________________________________________
Signature of Finance Official
*If Finance Official is also Secretary or Clerk, a separate witnessing signature is
required.
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EXPEDITED PROCEDURES (ALSO SEE PURCHASE AND REDEMPTION SECTIONS IN PROSPECTUS.)
WIRE TRANSFER INVESTMENTS - Call your investment dealer to obtain your Fund
account number (only needed for your initial purchase of Fund shares by wire.)
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<S> <C>
Then have your bank wire transfer funds to: Be sure the wire instructions include your Fund account number
State Street Bank & Trust Company and the name(s) on your Fund account.
Boston, MA
(ABA Routing No. 0110-0002-8)
Attention Mutual Funds Division
Account 9902-181-8 Mentor Funds
</TABLE>
EXPEDITED WIRE REDEMPTIONS - call your investment dealer to have funds wired to
your specified bank account number.
- --------------------------------------------------------------------------------
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
Mentor Investment Group
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 Mentor Distributors, LLC
Mentor Funds
Mentor Institutional U.S. Government
Money Market Portfolio
-------------------------
PROSPECTUS
-------------------------
January 17, 1998
[MENTOR INVESTMENT GROUP LOGO]
<PAGE>
P R O S P E C T U S January 17, 1998
Mentor Institutional
Money Market Portfolio
Mentor Institutional Money Market Portfolio is a "money market" fund,
seeking as high a rate of current income as Mentor Investment Advisors, LLC,
the Portfolio's investment adviser, believes is consistent with preservation of
capital and maintenance of liquidity. The Portfolio is a diversified investment
portfolio of Mentor Funds. An investment in shares of the Portfolio is designed
for institutional and high net-worth individual investors.
An investment in the Portfolio is neither insured nor guaranteed by the
U.S. Government. There can be no assurance that the Portfolio will be able to
maintain a stable net asset value of $1.00 per share.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. Investors can find more detailed
information in the January 17, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement, please call at
1-800-382-0016. The Statement has been filed with the Securities and Exchange
Commission and is incorporated into this Prospectus by reference. The
Portfolio's address is P.O. Box 1357, Richmond, Virginia 23218-1357.
----------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Table of Contents
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Page
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Expense Summary ........................... 3
Investment Objectives and Policies ...... 3
Management .............................. 5
How the Portfolio Values its Shares ...... 6
Purchase of Shares ........................ 6
Redemption of Shares ..................... 7
How Distributions are Made ............... 8
Taxes .................................... 9
General ................................. 9
Performance Information .................. 10
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2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the estimated expenses the Portfolio expects
to incur during the current fiscal year. The Example shows the cumulative
expenses attributable to a hypothetical $1,000 investment in the Portfolio over
specified periods.
<TABLE>
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Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases .................. None
Maximum Sales Load Imposed on Reinvested Dividends ...... None
Deferred Sales Load .................................... None
Redemption Fees .......................................... None
Exchange Fee ............................................. None
Annual Portfolio Operating Expenses:
(as a percentage of average net assets)
Management Fees .......................................... 0.22%
12b-1 Fees ............................................. 0.00%
Other Expenses .......................................... 0.11%
-----
Total Portfolio Operating Expenses .................. 0.33%
</TABLE>
Example
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
<TABLE>
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1 year $ 3
3 years $11
</TABLE>
This information is provided to help investors understand the expenses of
investing in the Portfolio and an investor's share of the estimated operating
expenses of the Portfolio. The Example should not be considered a
representation of future performance; actual expenses may be more or less than
those shown.
INVESTMENT OBJECTIVE AND POLICIES
Mentor Institutional Money Market Portfolio's investment objective is to
seek as high a rate of current income as Mentor Investment Advisors, LLC
("Mentor Advisors") believes is consistent with preservation of capital and
maintenance of liquidity. The Portfolio will invest in high-quality, short-term
instruments including U.S. Government securities, banker's acceptances, prime
commercial paper, fixed-income securities of corporations and other private
issuers, and money market instruments. There can, of course, be no assurance
that the Portfolio will achieve its investment objective.
The Portfolio will invest in a portfolio of high-quality, short-term
instruments consisting of any or all of the following:
o U.S. Government securities: securities issued or guaranteed as to
principal or interest by the U.S. Government or by any of its agencies or
instrumentalities.
3
<PAGE>
o Banker's acceptances: negotiable drafts or bills of exchange, which have
been "accepted" by a domestic bank (or a foreign bank with an agency
domiciled in the United States), meaning, in effect, that the bank has
unconditionally agreed to pay the face value of the instrument on
maturity.
o Prime commercial paper: high-quality, short-term obligations issued by
banks, corporations, and other issuers organized under the laws of a
jurisdiction within the United States.
o Other short-term obligations: high-quality, short-term obligations of
corporate issuers.
o Repurchase agreements: with respect to U.S. Government or agency
securities.
The Portfolio will invest only in U.S. dollar-denominated high-quality
securities and other U.S. dollar-denominated money market instruments meeting
credit criteria which the Trustees of the Trust believe present minimal credit
risk. "High-quality securities" are (i) commercial paper or other short-term
obligations rated A-1 by Standard & Poor's and P-1 by Moody's Investors
Service, Inc., and (ii) obligations rated AAA or AA by Standard & Poor's and
Aaa or Aa by Moody's at the time of investment. The Portfolio will not invest
in securities rated below A-1 or P-1 (or securities not so rated whose issuer
does not have outstanding short-term debt obligations, of comparable priority
and security, rated A-1 or P-1). The Portfolio will maintain a dollar-weighted
average maturity of 90 days or less and will not invest in securities with
remaining maturities of more than 397 days. The Portfolio may invest in
variable or floating-rate securities which bear interest at rates subject to
periodic adjustment or which provide recovery of principal on demand. Under
certain conditions, these securities may be deemed to have remaining maturities
equal to the time remaining until the next interest adjustment date or the date
on which principal can be recovered on demand. The Portfolio will not purchase
securities of any issuer if, immediately thereafter, more than 5% of its total
assets would be invested in securities of that issuer. The Portfolio follows
investment and valuation policies designed to maintain a stable net asset value
of $1.00 per share, although there is no assurance that these policies will be
successful.
Considerations of liquidity and preservation of capital mean that the
Portfolio may not necessarily invest in money market instruments paying the
highest available yield at a particular time. Consistent with its investment
objective, the Portfolio will attempt to maximize yields by portfolio trading
and by buying and selling portfolio investments in anticipation of or in
response to changing economic and money market conditions and trends. The
Portfolio may also invest to take advantage of what Mentor Advisors believes to
be temporary disparities in yields of different segments of the high-quality
money market or among particular instruments within the same segment of the
market. These policies, as well as the relatively short maturity of obligations
purchased by the Portfolio, may result in frequent changes in the securities
held by the Portfolio. The Portfolio will not usually pay brokerage commissions
in connection with the purchase or sale of portfolio securities.
The Portfolio's securities will be affected by general changes in interest
rates resulting in increases or decreases in the values of the obligations held
by the Portfolio. The value of the Portfolio's securities can be expected to
vary inversely to changes in prevailing interest rates. Withdrawals by
shareholders could require the sale of portfolio investments at a time when
such a sale might not otherwise be desirable.
Concentration. The Portfolio may invest without limit in obligations of
domestic branches of U.S. banks and U.S. branches of foreign banks (if it can
be demonstrated that they are subject to the same regulations as U.S. banks).
At times when the Portfolio has concentrated its investments in bank
obligations, the value of its portfolio securities may be especially affected
by factors pertaining to the issuers of such obligations.
4
<PAGE>
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually
not more than one week), which the seller agrees to repurchase at a fixed time
and price, representing the Portfolio's cost plus interest. Under a securities
loan, the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is
a U.S. Government security. These transactions must be fully collateralized at
all times, but involve some risk to the Portfolio if the other party should
default on its obligations and the Portfolio is delayed or prevented from
recovering the collateral. If the other party should become involved in
bankruptcy or insolvency proceedings, it is possible that the Portfolio may be
treated as an unsecured creditor and be required to return the underlying
collateral to the other party's estate.
----------------
Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective
and policies described herein are not fundamental and may be changed by the
Trustees without shareholder approval.
MANAGEMENT
The Trustees of Mentor Funds (the "Trust") are responsible for generally
overseeing the conduct of the Portfolio's business. Mentor Investment Advisors,
LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, acts as
investment adviser to the Portfolio. The Portfolio pays management fees to
Mentor Advisors monthly at the following annual rates (based on the average
daily net assets of the Portfolio): 0.22% of the first $500 million of the
Portfolio's average net assets; 0.20% of the next $500 million; 0.175% of the
next $1 billion; 0.16% of the next $1 billion; and 0.15% of any amounts over $3
billion.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group,
LLC ("Mentor Investment Group") and its affiliates. Mentor Investment Group is
a subsidiary of Wheat First Butcher Singer, Inc. ("Wheat First Butcher
Singer"), a diversified financial services holding company. Wheat First Butcher
Singer, through other subsidiaries, also engages in securities brokerage,
investment banking, and related businesses. EVEREN Capital Corporation has a
20% ownership in Mentor Investment Group and may acquire additional ownership
based principally on the amount of Mentor Investment Group's revenues derived
from assets attributable to clients of EVEREN Securities, Inc. and its
affiliates. Mentor Advisors and its affiliates serve as investment adviser to
twenty-two separate investment portfolios in the Mentor Family of Funds with
total assets under management of more than $11 billion. All investment
decisions for the Portfolio are made by investment teams at Mentor Advisors.
Wheat First Butcher Singer, Mentor Investment Group's parent company, has
entered into an Agreement and Plan of Merger pursuant to which it is to be
acquired by First Union Corp. ("First Union"). First Union is a global
financial services company with approximately $140 billion in assets and $10
billion in total stockholders' equity. The proposed arrangement does not
contemplate any changes in the management or operations of Mentor Investment
Group or any of its subsidiaries, including Mentor Advisors. Consummation of
the acquisition, which is subject to a number of conditions, including
regulatory approvals, will result in the termination of
5
<PAGE>
the investment advisory agreement between the Portfolio and Mentor Advisors. It
is expected that, upon consummation of the acquisition (which is expected to
occur as early as January 1998), the Portfolio will enter into a new investment
advisory agreement with Mentor Advisors, which will be substantially identical
to the agreement currently in effect.
Subject to the general oversight of the Trustees of the Trust, Mentor
Advisors manages the Portfolio in accordance with the stated policies of the
Portfolio. Mentor Advisors makes investment decisions for the Portfolio and
places the purchase and sale orders for the Portfolio's portfolio transactions.
In selecting broker-dealers, Mentor Advisors may consider research and
brokerage services furnished to it and its affiliates. Subject to seeking the
best overall terms available, Mentor Advisors may consider sales of shares of
the Portfolio (and, if permitted by law, of other funds in the Mentor family)
as a factor in the selection of broker-dealers to execute portfolio
transactions for the Portfolio. Mentor Advisors may at times cause the
Portfolio to pay commissions to broker-dealers affiliated with Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise allocated
to the Portfolio are borne by the Portfolio, including but not limited to
taxes, interest, brokerage fees and commissions, fees to Trustees who are not
officers, directors, stockholders, or employees of Wheat First Butcher Singer
and its subsidiaries, SEC fees and related expenses, state Blue Sky
qualification fees, charges of the custodian and transfer and dividend
disbursing agents, outside auditing, accounting, and legal services, certain
investor servicing fees and expenses, charges for the printing of prospectuses
and statements of additional information for regulatory purposes or for
distribution to shareholders, certain shareholder report charges, and charges
relating to corporate matters.
HOW THE PORTFOLIO VALUES ITS SHARES
The Portfolio values its shares twice each day, once at 12:00 noon and
again at the close of regular trading on the New York Stock Exchange. The
Portfolio's investments are valued at amortized cost in accordance with
Securities and Exchange Commission Rule 2a-7. The Portfolio will not normally
have unrealized gains or losses so long as it values its investments by the
amortized cost method.
PURCHASE OF SHARES
The Portfolio offers its shares continuously at a price of $1.00 per
share. Because the Portfolio seeks to be fully invested at all times,
investments must be in Same Day Funds to be accepted. "Same Day Funds" are
funds credited by the applicable regional Federal Reserve Bank to the account
of the Portfolio at its designated bank.
Mentor Distributors, LLC, located at 901 East Byrd Street, Richmond,
Virginia 23219, serves as distributor of the Portfolio's shares. Mentor
Distributors is not obligated to sell any specific amount of shares of the
Portfolio.
An investor may make an initial purchase of shares in the Portfolio by
submitting completed application materials along with a purchase order, and by
making payment to Mentor Distributors or the Trust. Investors will be required
to make minimum initial investments of $500,000 and minimum subsequent
investments of $25,000. Investments made through advisory accounts maintained
with investment advisers registered under the Investment Advisers Act of 1940,
as amended (including "wrap" accounts), are not subject to these minimum
6
<PAGE>
investment requirements. The Portfolio reserves the right at any time to change
the initial and subsequent investment minimums required of investors.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to Mentor Advisors, or (iii) a combination of
such securities and cash. Purchase of shares of the Portfolio in exchange for
securities is subject in each case to the determination by Mentor Advisors that
the securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by Mentor Advisors in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the
Portfolio's next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in the market
price of accepted securities at the time of valuation become the property of
the Portfolio and must be delivered to the Portfolio upon receipt by the
investor from the issuer. A gain or loss for federal income tax purposes would
be realized upon the exchange by an investor that is subject to federal income
taxation, depending upon the investor's basis in the securities tendered. A
shareholder who wishes to purchase shares by exchanging securities should
obtain instructions by calling Mentor Distributors at 1-800-869-6042.
Mentor Distributors, Mentor Advisors, and affiliates thereof, at their own
expense and out of their own assets, may provide compensation to dealers in
connection with sales of shares of the Portfolio. Such compensation may
include, but is not limited to, financial assistance to dealers in connection
with conferences, sales, or training programs for their employees, seminars for
the public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of Portfolio shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc.
In all cases Mentor Advisors or Mentor Distributors reserves the right to
reject any particular investment.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of its shares in the Portfolio
any day the New York Stock Exchange is open by sending a signed letter of
instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to the Portfolio c/o Mentor Funds, P.O.
Box 1357, Richmond, Virginia 23218-1357 or to Mentor Distributors. Redemptions
will be effected at the net asset value per share of the Portfolio next
determined after the receipt by the Portfolio of redemption instructions in
"good order" as described below. In order to receive that day's net asset
value, your request must be received before the close of regular trading on the
New York Stock Exchange. The Portfolio will only redeem shares for which it has
received payment. A check for the proceeds will normally be mailed on the next
business day after a request in good order is received.
A redemption request will be considered to have been made in "good order"
if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be redeemed,
and identifies the shareholder's Portfolio account number;
(2) the request is signed by each registered owner exactly as the shares
are registered; and
7
<PAGE>
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed for transfer (or are accompanied by an
endorsed stock power) and accompany the redemption request.
If shares to be redeemed represent an investment made by check, the Trust
reserves the right not to transmit the redemption proceeds to the shareholder
until the check has been collected, which may take up to 15 days after the
purchase date.
The Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Mentor Distributors
usually requires additional documentation for the sale of shares by a
corporation, partnership, agent, fiduciary, or surviving joint owner. Contact
Mentor Distributors for details.
Mentor Distributors may facilitate any redemption request. There is no
extra charge for this service.
Other information concerning redemption. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law. In addition, the Portfolio
reserves the right, if conditions exist which make cash payments undesirable,
to honor any request for redemption by making payment in whole or in part in
securities valued in the same way as they would be valued for purposes of
computing the Portfolio's per share net asset value. If payment is made in
securities, a shareholder may incur brokerage expenses in converting those
securities into cash.
HOW DISTRIBUTIONS ARE MADE
The Portfolio determines its net income as of the close of regular trading
on the New York Stock Exchange each day the Exchange is open. Each
determination of the Portfolio's net income includes (i) all accrued interest
on the Portfolio's investments, (ii) plus or minus all realized and unrealized
gains and losses on the Portfolio's investments, (iii) less all accrued
expenses of the Portfolio.
The Portfolio declares all of its net income as a distribution on each day
it is open for business, as a dividend to shareholders of record immediately
prior to the close of regular trading on the New York Stock Exchange.
Shareholders whose purchase of shares of the Portfolio are accepted at or
before 12:00 noon on any day will receive the dividend declared by the
Portfolio for that day; shareholders who purchase shares after 12:00 noon will
begin earning dividends on the next business day after the Portfolio accepts
their order. The Portfolio's net income for Saturdays, Sundays, and holidays is
declared as a dividend on the preceding business day. Dividends for the
immediately preceding calendar month will be paid on the fifteenth day of each
calendar month (or, if that day is not a business day, on the next business
day), except that the Portfolio's schedule for payment of dividends during the
month of December may be adjusted to assist in tax reporting and distribution
requirements. A shareholder that withdraws the entire balance of an account at
any time during a month will be paid all dividends declared through the time of
withdrawal. Since the net income of the Portfolio is declared as a dividend
each time it is determined, the net asset value per share of the Portfolio
normally remains at $1 per share immediately after each determination and
dividend declaration.
All Portfolio distributions will be invested in additional Portfolio
shares, unless the shareholder instructs the Portfolio otherwise.
8
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TAXES
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as ordinary
income, except that any distributions of net capital gain will be taxed as
long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year the Trust will notify
shareholders of the amount and tax status of distributions paid by the
Portfolio for the preceding year. In buying or selling securities for the
Portfolio, Mentor Advisors will not normally take into account the effect any
purchase or sale of securities will have on the tax positions of the
Portfolio's shareholders.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends and distributions also may be subject to
state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of the Portfolio, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
GENERAL
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Agreement and Declaration of Trust, which is governed by
Massachusetts law, is on file with the Secretary of State of The Commonwealth
of Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. The Trust's shares are currently divided into eleven
series, one representing the Portfolio, the others representing other
Portfolios with varying investment objectives and policies. Certain of the
Trust's Portfolios offer more than one class of shares with different sales
charges and expenses. The Portfolio currently offers only one class of shares.
Each share has one vote, with fractional shares voting proportionally.
Shares of each series will vote together as a single series except when
required by law or determined by the Trustees. Shares of the Portfolio are
freely transferable, are entitled to dividends as declared by the Trustees,
and, if the Portfolio were liquidated, would receive the net assets of the
Portfolio. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares. Although neither the Portfolio nor the Trust is
required to hold annual meetings of shareholders, shareholders have the right
to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Agreement and Declaration of Trust.
9
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In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and
dividend agent.
PERFORMANCE INFORMATION
The Portfolio's yield may from time to time be included in advertisements
about the Portfolio. The Portfolio's "yield" is calculated by determining the
percentage net change, excluding capital changes, in the value of an investment
in one share of the Portfolio over the base period, and multiplying the net
change by 365/7 (or approximately 52 weeks). The Portfolio's "effective yield"
represents a compounding of the yield by adding 1 to the number representing
the percentage change in the value of the investment during the base period,
raising that sum to a power equal to 365/7, and subtracting 1 from the result.
All data is based on the Portfolio's past investment results and does not
predict future performance. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses, and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These
factors should be considered when comparing the Portfolio's investment results
to those of other mutual funds and other investment vehicles.
Quotations of yield for a period when an expense limitation was in effect
will be greater than if the limitation had not been in effect. The Portfolio's
performance may be compared to various indices. See the Statement of Additional
Information. Information may be presented in advertisements about the Portfolio
describing the background and professional experience of the Portfolio's
investment adviser or its investment personnel.
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Institutional Money Market Portfolio
Account Information Form [MENTOR INVESTMENT GROUP LOGO]
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REGISTRATION (please print or type)
- -------------------------------------------------------------
Name (Agency or Charter Name)
- -------------------------------------------------------------
Attn:
- -------------------------------------------------------------
Street Address
- -------------------------------------------------------------
City State Zip Code
- -------------------------------------------------------------
Tax Identification No. (must be provided to avoid penalties or fines)
( )
- -------------------------------------------------------------
Phone Number
DEALER INFORMATION (FOR DEALER USE ONLY)
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/
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Dealer's Name Dealer Number / Branch Number
</TABLE>
<TABLE>
<S> <C>
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Representative's Name Rep. No.
</TABLE>
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-----------------------------------------
Amount
Broker/Dealer Account No. --------------------------------------------
</TABLE>
Minimum Initial Investment: $500,000.
Under penalties of perjury, the undersigned hereby certify (1) that the Taxpayer
I.D. Number above is correct and (2) that the account owner is not subject to
backup withholding because (a) the undersigned have not been notified of being
subject to backup withholding as a result of failure to report all interest or
dividends, or (b) the I.R.S. has provided notification that the account owner is
no longer subject to backup withholding. [Cross out (2) if it is not correct.]
- --------------------------------------------------------------------------------
DIVIDENDS: WILL BE REINVESTED UNLESS CHECKED FOR CASH PAYMENT. [ ] CASH
PAYMENT
- --------------------------------------------------------------------------------
WIRE REDEMPTIONS [ ] Yes [ ] No
The undersigned hereby authorizes Mentor Funds to honor telephone or other
instructions from any person for the redemption of shares from our Fund account.
The funds will only be wire transferred to the bank account specified below.
__________________________________________ _____________________________________
Name of Bank Bank Account Number
________________________________________________________________________________
Address of Bank City State Zip Code
- --------------------------------------------------------------------------------
AUTHORIZED SIGNERS
PLEASE TYPE OR PRINT NAMES AND TITLES OF AUTHORIZED SIGNERS. Persons signing as
representatives for the account warrant as individuals that all signatures
hereon are genuine and that the persons indicated hereon are authorized to sign.
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A. NAME: --------------------------------------------------
TITLE:
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B. NAME:
--------------------------------------------------
TITLE:
--------------------------------------------------
C. NAME:
--------------------------------------------------
TITLE:
--------------------------------------------------
D. NAME:
--------------------------------------------------
TITLE:
--------------------------------------------------
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SIGNATURE SAMPLES-SIGN IN BOXES BELOW EXACTLY AS NAMES APPEAR IN THE LIST TO THE
LEFT with blue or black ballpoint. Note especially first name and middle
initial. PLEASE READ CERTIFICATION BELOW.
A.
B.
C.
D.
CERTIFICATION
The signers certify that they have the power and authority to establish this
account and to select the redemption privileges requested. The signers release
the Fund and its agents and representatives from all liability and agree to
indemnify the same from any and all losses, damages, or costs for acting in good
faith in accordance with the privileges selected. The signers certify that the
Fund's current prospectus has been received and that the authorizations hereon
shall continue until the Fund receives written notice of a modification signed
by all appropriate parties. This account is subject to the terms of the Fund's
prospectus, as amended from time to time and the terms on the reverse side, and
subject to acceptance by the Fund and to the laws of the State of Illinois. All
terms shall be binding upon the successors, representatives and assigns of the
signers.
PLEASE COMPLETE INCUMBENT'S CERTIFICATE ON REVERSE SIDE.
<PAGE>
INCUMBENT'S CERTIFICATE
The undersigned is Secretary or Clerk of _______ and hereby certifies that
(Name of Entity)
_____________________ was duly elected/appointed _____________________ effective
(Name of Finance Official) (Title of Office)
______________________ and is duly authorized by _____________________ to act on
(Date) (Name of Entity)
its behalf in connection with the establishment, purchase, redemption, or other
transactions with respect to shares of Mentor Institutional Money Market
Portfolio, and that __________________________________________ will notify in
(Name of Entity)
writing Mentor Funds or your investment dealer if there is any change to the
above.
In witness whereof, the undersigned has executed this Certificate this ___
day of
_______________________________________ , 19 ______ .
<TABLE>
<S> <C>
________________________________________
SEAL Secretary or Clerk*
________________________________________
Signature of Finance Official
*If Finance Official is also Secretary or Clerk, a separate witnessing signature is
required.
</TABLE>
- --------------------------------------------------------------------------------
EXPEDITED PROCEDURES (ALSO SEE PURCHASE AND REDEMPTION SECTIONS IN PROSPECTUS.)
WIRE TRANSFER INVESTMENTS - Call your investment dealer to obtain your Fund
account number (only needed for your initial purchase of Fund shares by wire.)
<TABLE>
<S> <C>
Then have your bank wire transfer funds to: Be sure the wire instructions include your Fund account number
State Street Bank & Trust Company and the name(s) on your Fund account.
Boston, MA
(ABA Routing No. 0110-0002-8)
Attention Mutual Funds Division
Account 9902-181-8 Mentor Funds
</TABLE>
EXPEDITED WIRE REDEMPTIONS - call your investment dealer to have funds wired to
your specified bank account number.
- --------------------------------------------------------------------------------
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
Mentor Investment Group
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 Mentor Distributors, LLC
Mentor Funds
Mentor Institutional
Money Market Portfolio
-------------------------
PROSPECTUS
-------------------------
January 17, 1998
[MENTOR INVESTMENT GROUP LOGO]
P R O S P E C T U S January 17, 1998
Mentor Funds
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 (a
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. See
"Other Investment Practices."
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 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 17, 1998 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 Mentor Funds is P.O. Box 1357, Richmond, Virginia
23218-1357.
----------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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>
Expense Summary ........................... 3
Financial Highlights ..................... 6
Investment Objectives and Policies ...... 13
Other Investment Practices ............... 21
Valuing the Portfolios' Shares ............ 28
Sales Arrangements ........................ 28
How To Buy Shares ........................ 29
Distribution Plans (Class B Shares) ...... 33
How To Sell Shares ........................ 34
How To Exchange Shares .................. 35
Distributions and Taxes .................. 36
Management .............................. 37
Other Services ........................... 39
General ................................. 40
Performance Information .................. 41
APPENDIX ................................. 42
</TABLE>
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. The tables on this page and the next 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. Expenses shown are based
on those incurred for the last 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(1)
--------- ----------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)
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)(4):
</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 are 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."
(4) Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1.00% if the shares are redeemed
within one year of purchase. See "How to Buy Shares -the BL Purchase
Program."
3
<PAGE>
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Income Short-
Capital And Perpetual 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 ............... 0.70% 0.80% 0.85% 0.75% 1.10% 0.47%* 0.60% 0.34%*
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 ............... 0.33% 0.36% 0.35% 0.35% 0.54% 0.33% 0.37% 0.27%*
Total Portfolio Operating
Expenses .................. 1.28% 1.41% 1.45% 1.35% 1.89% 1.05%* 1.22% 0.86%*
</TABLE>
<TABLE>
<CAPTION>
Income Short-
Capital And Perpetual 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 ............... 0.70% 0.80% 0.85% 0.75% 1.10% 0.47%* 0.60% 0.34%*
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 ............... 0.33% 0.36% 0.35% 0.35% 0.54% 0.33% 0.37% 0.27%*
Total Portfolio Operating
Expenses .................. 2.03% 2.16% 2.20% 2.10% 2.64% 1.55%* 1.72% 1.16%*
</TABLE>
- ----------
* After expense limitation.
Mentor Investment Advisors, LLC has agreed to limit its Management Fees
from each of the Quality Income and Short-Duration Income Portfolios and Mentor
Investment Group has agreed to limit its administrative services fees from the
Short-Duration Income Portfolio until September 30, 1998 to the extent
necessary to limit the Total Portfolio Operating Expenses of those Portfolios
to the levels shown. In the absence of these expense limitations, Management
Fees for the Quality Income Portfolio and the Short-Duration Income Portfolio
would be 0.60% and 0.50%, respectively; Other Expenses for the Short-Duration
Income Portfolio would have been 0.37%; and Total Portfolio Operating Expenses
would have been as follows: Quality Income Portfolio, Class A - 1.18%, Class B
- - 1.68%; Short-Duration Income Portfolio, Class A - 1.12%, Class B - 1.42%.
4
<PAGE>
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 $ 96 $64 $ 124 $109 $203 $236
Capital Growth Portfolio ............ 71 22 100 68 130 116 217 249
Strategy Portfolio .................. 71 22 101 69 132 118 221 253
Income and Growth Portfolio ......... 70 21 98 66 127 113 211 243
Perpetual Global Portfolio ............ 76 27 113 82 154 140 266 297
Quality Income Portfolio ............ 58 16 79 49 103 84 170 185
Municipal Income Portfolio ............ 59 17 84 54 111 93 188 203
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 5%
annual return and 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 $61 $ 96 $ 94 $124 $119 $203 $236
Capital Growth Portfolio ............ 71 62 100 98 130 126 217 249
Strategy Portfolio .................. 71 62 101 99 132 128 221 253
Income and Growth Portfolio ......... 70 61 98 96 127 123 211 243
Perputual Global Portfolio ............ 76 67 113 112 154 150 266 297
Quality Income Portfolio ............ 58 56 79 79 103 94 170 185
Municipal Income Portfolio ............ 59 57 84 84 111 103 188 203
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 shares outstanding throughout each period)
The following tables have been derived from the Financial Highlights
included in Mentor Funds' financial statements, which have been audited by KPMG
Peat Marwick LLP, Mentor Funds' independent auditors. The report of KPMG Peat
Marwick LLP, along with the Portfolios' financial statements and notes thereto,
is incorporated by reference in the Statement of Additional Information, which
may be obtained in the manner described on the cover page of this Prospectus.
See "Financial Statements" in the Statement of Additional Information. 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 Growth Portfolio
-------------------------------------------
Year Year Period
Ended Ended Ended
9/30/97 9/30/96 9/30/95*
------------ ------------ -----------------
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period ............ $ 18.47 $ 16.08 $ 13.37
Income from investment operations
Net investment income (loss) .................. (0.17) (0.10) (0.01)
Net realized and unrealized gain (loss)
on investments .............................. 4.19 4.23 2.72
------------ ------------ -----------
Total from investment operations ............ 4.02 4.13 2.71
Less distributions
Distributions from net investment
income ....................................... - - -
Distributions in excess of net investment
income ....................................... - - -
Distributions from capital gains ............ (2.55) (1.74) -
Distributions in excess of capital gains ...... - - -
------------ ------------ -----------
Total Distributions ........................ (2.55) (1.74) -
------------ ------------ -----------
Net asset value, end of period .................. $ 19.94 $ 18.47 $ 16.08
============ ============ ===========
Total Return .................................... 25.81 % 29.15 % 20.27%
============ ============ ===========
Ratios/Supplemental Data
Net assets, end of period (in thousands) ...... $ 105,033 $ 40,272 $ 20,368
Ratio of expenses to average net assets ...... 1.28 % 1.28 % 1.36%(a)
Ratio of expenses to average net assets
excluding waiver .............................. 1.28 % 1.28 % 1.36%(a)
Ratio of net investment income (loss) to
average net assets ........................... (0.67%) (0.39%) (0.65%)(a)
Portfolio turnover rate ........................ 77% 105% 70%
Average commission rate on portfolio
transactions ................................. $ 0.0651 $ 0.0602 -
============ ============ ===========
<CAPTION>
Mentor Capital Growth Portfolio
------------------------------------------------------------------------------
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92**
----------- ----------- ----------- ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period ............ $19.36 $16.02 $ 14.88 $ 15.26 $ 14.21 $ 14.18
Income from investment operations
Net investment income (loss) .................. (0.02) 0.11 0.02 0.09 0.14 0.08
Net realized and unrealized gain (loss)
on investments .............................. 5.87 3.73 2.91 (0.30) 1.02 0.03
-------- -------- --------- ---------- --------- ------------
Total from investment operations ............ 5.85 3.84 2.93 (0.21) 1.16 0.11
Less distributions
Distributions from net investment
income ....................................... - - - (0.04) (0.11) (0.08)
Distributions in excess of net investment
income ....................................... - - - - - -
Distributions from capital gains ............ (2.79) (0.50) (1.79) (0.13) - -
Distributions in excess of capital gains ...... - - - - - -
-------- -------- --------- ---------- --------- ------------
Total Distributions ........................ (2.79) (0.50) (1.79) (0.17) (0.11) (0.08)
-------- -------- --------- ---------- --------- ------------
Net asset value, end of period .................. $22.42 $19.36 $ 16.02 $ 14.88 $ 15.26 $ 14.21
======== ======== ========= ========== ========= ============
Total Return .................................... 34.78 % 24.63 % 20.18% (1.37%) 8.21% 0.78%
========= ========= ========= ============ ========= ============
Ratios/Supplemental Data
Net assets, end of period (in thousands) ...... $ 65,703 $ 31,889 $ 29,582 $ 21,181 $ 31,360 $ 20,864
Ratio of expenses to average net assets ...... 1.41 % 1.43 % 1.87% 1.70% 1.49% 1.14%(a)
Ratio of expenses to average net assets
excluding waiver .............................. 1.41 % 1.43 % 1.87% 1.70% 1.59% 1.43%(a)
Ratio of net investment income (loss) to
average net assets ........................... 0.53 % 0.51 % 0.27% 0.53% 0.96% 1.54%(a)
Portfolio turnover rate ........................ 64% 98% 157% 149% 192% 61%
Average commission rate on portfolio
transactions ................................. $ 0.0697 $ 0.0688 - - - -
========= ========= ========= ============ ========= ============
<CAPTION>
Mentor Strategy Portfolio
-----------------------------------------
Year Year Period
Ended Ended Ended
9/30/97 9/30/96 9/30/95*
----------- ----------- -----------------
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period ............ $17.96 $15.24 $ 13.45
Income from investment operations
Net investment income (loss) .................. 0.31 0.08 -
Net realized and unrealized gain (loss)
on investments .............................. 1.68 2.86 1.79
-------- -------- -----------
Total from investment operations ............ 1.99 2.94 1.79
Less distributions
Distributions from net investment
income ....................................... - - -
Distributions in excess of net investment
income ....................................... - - -
Distributions from capital gains ............ (1.34) (0.22) -
Distributions in excess of capital gains ...... - - -
-------- -------- -----------
Total Distributions ........................ (1.34) (0.22) -
-------- -------- -----------
Net asset value, end of period .................. $18.61 $17.96 $ 15.24
======== ======== ===========
Total Return .................................... 11.97 % 19.36 % 13.31%
========= ========= ===========
Ratios/Supplemental Data
Net assets, end of period (in thousands) ...... $ 40,552 $ 20,372 $ 10,503
Ratio of expenses to average net assets ...... 1.45 % 1.42 % 1.65%(a)
Ratio of expenses to average net assets
excluding waiver .............................. 1.45 % 1.42 % 1.65%(a)
Ratio of net investment income (loss) to
average net assets ........................... 2.29 % 0.62 % (0.06%)(a)
Portfolio turnover rate ........................ 192% 125% 122%
Average commission rate on portfolio
transactions ................................. $ 0.0644 $ 0.0669 -
========= ========= ===========
</TABLE>
- ----------
* For the period from June 5, 1995 (initial offering of Class A shares) to
September 30, 1995.
** Reflects operations for the period from April 29, 1992 (commencement of
operations) to September 30, 1992.
(a) Annualized.
6
<PAGE>
Class A Shares (continued)
<TABLE>
<CAPTION>
Mentor Income And Growth Portfolio
-----------------------------------------------------------------
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93*
----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of period ......... $19.16 $17.13 $ 15.27 $ 14.88 $ 14.14
Income from investment
operations
Net investment income
(loss) ..................... 0.44 0.37 0.40 0.31 0.09
Net realized and
unrealized gain (loss)
on investments ............ 3.39 2.75 2.14 0.64 0.73
-------- -------- --------- --------- -----------
Total from investment
operations .................. 3.83 3.12 2.54 0.95 0.82
Less Distributions
Distributions from net
investment income ......... (0.45) (0.35) (0.40) (0.30) (0.08)
Distributions in excess
of net investment
income ..................... (0.02) - (0.03) - -
Distributions from
capital gains ............... (1.92) (0.74) (0.25) (0.26) -
Distributions in excess
of capital gains ............ - - - - -
-------- -------- --------- --------- -----------
Total distributions ......... (2.39) (1.09) (0.68) (0.56) (0.08)
-------- -------- --------- --------- -----------
Net asset value, end of
period ..................... $20.60 $19.16 $ 17.13 $ 15.27 $ 14.88
======== ======== ========= ========= ===========
Total Return .................. 22.11 % 19.13 % 17.24% 6.54% 5.54%
========= ========= ========= ========= ===========
Ratios/Supplemental Data
Net assets, end of period
(in thousands) ............... $ 63,509 $ 24,210 $ 19,888 $ 17,773 $ 9,849
Ratio of expenses to
average net assets ......... 1.35 % 1.36 % 1.69% 1.75% 1.56%(a)
Ratio of expenses to
average net assets
excluding waiver ............ 1.35 % 1.36 % 1.69% 1.75% 1.94% (a)
Ratio of net investment
income (loss) to average
net assets .................. 2.63 % 2.08 % 2.53% 2.20% 2.35% (a)
Portfolio turnover rate ...... 75% 72% 62% 78% 13%
Average commission rate
on portfolio
transactions ............... $ 0.0515 $ 0.0492 - - -
========= ========= ========= ========= ===========
<CAPTION>
Mentor Perpetual Global Portfolio
-------------------------------------------------------
Year Year Year Period
Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94**
----------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of period ......... $17.86 $ 15.88 $ 14.23 $ 14.18
Income from investment
operations
Net investment income
(loss) ..................... 0.04 (0.04) 0.05 (0.01)
Net realized and
unrealized gain (loss)
on investments ............ 3.67 2.82 1.60 0.06
-------- ------------ ---------- -----------
Total from investment
operations .................. 3.71 2.78 1.65 0.05
Less Distributions
Distributions from net
investment income ......... - - - -
Distributions in excess
of net investment
income ..................... - - - -
Distributions from
capital gains ............... (0.63) (0.80) - -
Distributions in excess
of capital gains ............ - - - -
-------- ------------ ---------- -----------
Total distributions ......... (0.63) (0.80) - -
-------- ------------ ---------- -----------
Net asset value, end of
period ..................... $20.94 $ 17.86 $ 15.88 $ 14.23
======== ============ ========== ===========
Total Return .................. 21.59 % 18.40 % 11.60% 0.35%
========= ============ ========== ===========
Ratios/Supplemental Data
Net assets, end of period
(in thousands) ............... $ 46,556 $ 13,098 $ 6,854 $ 8,882
Ratio of expenses to
average net assets ......... 1.89 % 1.95 % 2.06% 2.09%(a)
Ratio of expenses to
average net assets
excluding waiver ............ 1.89 % 1.95 % 2.11% 3.18% (a)
Ratio of net investment
income (loss) to average
net assets .................. 0.07 % (0.21%) 0.26% (0.10%)(a)
Portfolio turnover rate ...... 128% 130% 155% 2%
Average commission rate
on portfolio
transactions ............... $ 0.0319 $ 0.0320 - -
========= ============ ========== ===========
<CAPTION>
Year Year Year
Ended Ended Ended
9/30/94 9/30/93 9/30/92***
------------ ----------- -----------------
<S> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of period ......... $ 14.04 $ 14.39 $ 14.30
Income from investment
operations
Net investment income
(loss) ..................... 0.84 1.06 0.44
Net realized and
unrealized gain (loss)
on investments ............ (1.30) (0.31) 0.09
---------- --------- ------------
Total from investment
operations .................. (0.46) 0.75 0.53
Less Distributions
Distributions from net
investment income ......... (0.83) (1.06) (0.44)
Distributions in excess
of net investment
income ..................... - (0.04) -
Distributions from
capital gains ............... - - -
Distributions in excess
of capital gains ............ - - -
---------- --------- ------------
Total distributions ......... (0.83) (1.10) (0.44)
---------- --------- ------------
Net asset value, end of
period ..................... $ 12.75 $ 14.04 $ 14.39
========== ========= ============
Total Return .................. (3.39%) 5.41% 3.37%
========== ========= ============
Ratios/Supplemental Data
Net assets, end of period
(in thousands) ............... $ 30,142 $ 47,780 $ 36,740
Ratio of expenses to
average net assets ......... 1.38% 1.04% 0.36%(a)
Ratio of expenses to
average net assets
excluding waiver ............ 1.39% 1.22% 1.21%(a)
Ratio of net investment
income (loss) to average
net assets .................. 6.33% 7.31% 8.00%(a)
Portfolio turnover rate ...... 455% 102% 9%
Average commission rate
on portfolio
transactions ............... - - -
========== ========= ============
</TABLE>
- ----------
* 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.
7
<PAGE>
Class A Shares (continued)
<TABLE>
<CAPTION>
Mentor Municipal Income Portfolio
-------------------------------------------------------------------------------
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92**
----------- ----------- ----------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period ...... $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76 $ 14.29
Income from investment operations
Net investment income (loss) ............ 0.81 0.82 0.81 0.82 0.92 0.32
Net realized and unrealized gain (loss) on
investments .............................. 0.49 0.12 0.51 (1.54) 1.32 0.47
--------- --------- --------- ------------ --------- ------------
Total from investment operations ......... 1.30 0.94 1.32 (0.72) 2.24 0.79
Less distributions
Distributions from net investment income (0.81) (0.82) (0.82) (0.81) (0.92) (0.32)
Distributions in excess of net investment
income ................................. - - - - (0.03) -
Distributions from capital gains ......... (0.03) - - (0.10) - -
Distributions in excess of capital gains - - - - - -
--------- --------- --------- ------------ --------- ------------
Total Distributions ..................... (0.84) (0.82) (0.82) (0.91) (0.95) (0.32)
--------- --------- --------- ------------ --------- ------------
Net asset value, end of period ............ $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76
========= ========= ========= ============ ========= ============
Total Return .............................. 8.89% 6.46% 9.46% (4.83%) 16.00% 5.34%
========= ========= ========= ============ ========= ============
Ratios/Supplemental Data
Net assets, end of period (in thousands) ... $ 29,394 $ 17,558 $ 20,460 $ 25,056 $ 29,245 $ 18,801
Ratio of expenses to average net assets ... 1.22% 1.24% 1.43% 1.24% 0.71% 0.00%(a)
Ratio of expenses to average net assets
excluding waiver ........................ 1.22% 1.24% 1.43% 1.33% 1.39% 1.26%(a)
Ratio of net investment income (loss) to
average net assets ........................ 5.09% 5.47% 5.56% 5.43% 5.92% 6.21%(a)
Portfolio turnover rate .................. 59% 46% 43% 87% 88% 0%
========= ========= ========= ============ ========= ============
<CAPTION>
Mentor Short Duration
Income Portfolio
------------------------------------------
Year Year Year
Ended Ended Ended
9/30/97 9/30/96 9/30/95*
----------- ----------- ------------------
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period ...... $ 12.50 $ 12.68 $ 12.74
Income from investment operations
Net investment income (loss) ............ 0.77 0.82 0.22
Net realized and unrealized gain (loss) on
investments .............................. 0.12 (0.23) (0.03)
--------- --------- -------------
Total from investment operations ......... 0.89 0.59 0.19
Less distributions
Distributions from net investment income (0.76) (0.77) (0.22)
Distributions in excess of net investment
income ................................. (0.01) - (0.03)
Distributions from capital gains ......... - - -
Distributions in excess of capital gains - - -
--------- --------- -------------
Total Distributions ..................... (0.77) (0.77) (0.25)
--------- --------- -------------
Net asset value, end of period ............ $ 12.62 $ 12.50 $ 12.68
========= ========= =============
Total Return .............................. 7.33% 4.80% 1.51%
========= ========= =============
Ratios/Supplemental Data
Net assets, end of period (in thousands) ... $ 27,619 $ 7,450 $ 1,002
Ratio of expenses to average net assets ... 0.86% 0.86% 0.71%(a)
Ratio of expenses to average net assets
excluding waiver ........................ 1.12% 1.26% 1.00%(a)
Ratio of net investment income (loss) to
average net assets ........................ 6.00% 5.90% 4.10%(a)
Portfolio turnover rate .................. 75% 411% 126%
========= ========= =============
</TABLE>
- ----------
* For the period from June 16, 1995 (initial offering of Class A shares) 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
<TABLE>
<CAPTION>
Mentor Growth Portfolio
--------------------------------------------------------
Year Year Period Year
Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95* 12/31/94
------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period ...... $ 18.29 $ 16.05 $ 12.15 $ 13.78
Income from investment operations .........
Net investment income (loss) ............ (0.22) (0.17) (0.13) (0.15)
Net realized and unrealized gain (loss)
on investments ........................... 4.01 4.15 4.03 (0.47)
------------ ------------ ----------- ------------
Total from investment operations ......... 3.79 3.98 3.90 (0.62)
Less distributions ........................
Distributions from net investment income - - - -
Distributions in excess of net investment
income ................................. - - - -
Distributions from capital gains ......... (2.55) (1.74) - (1.00)
Distributions in excess of capital gains - - - (0.01)
------------ ------------ ----------- ------------
Total Distributions ..................... (2.55) (1.74) - (1.01)
------------ ------------ ----------- ------------
Net asset value, end of period ............ $ 19.53 $ 18.29 $ 16.05 $ 12.15
============ ============ =========== ============
Total Return .............................. 24.66 % 28.18 % 32.10% (4.48%)
============ ============ =========== ============
Ratios/Supplemental Data ..................
Net assets, end of period (in thousands) ... $ 506,230 $ 371,578 $ 246,326 $ 190,126
Ratio of expenses to average net assets ... 2.03 % 2.03 % 2.08%(a) 2.01%
Ratio of expenses to average net assets
excluding waiver ........................ 2.03 % 2.03 % 2.08%(a) 2.01%
Ratio of net investment income (loss) to
average net assets ........................ (1.42%) (1.13%) (1.20%)(a) (1.20%)
Portfolio turnover rate .................. 77% 105% 70% 77%
Average commission rate on portfolio
transactions ........................... $ 0.0651 $ 0.0602 - -
============ ============ =========== ============
<CAPTION>
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
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>
Per Share Operating Performance
Net asset value, beginning of period ...... $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54 $ 7.45
Income from investment operations .........
Net investment income (loss) ............ (0.08) (0.06) (0.09) 0.02 0.13 0.01
Net realized and unrealized gain (loss)
on investments ........................... 2.07 1.94 4.30 (1.10) 1.35 1.24
------------ ------------ ------------ ---------- -------- -------
Total from investment operations ......... 1.99 1.88 4.21 (1.08) 1.48 1.25
Less distributions ........................
Distributions from net investment income - - - (0.05) (0.12) (0.01)
Distributions in excess of net investment
income ................................. - - - - - -
Distributions from capital gains ......... (1.02) (1.23) (0.42) (0.13) (0.27) (0.15)
Distributions in excess of capital gains - - - - - -
------------ ------------ ------------ ---------- -------- -------
Total Distributions ..................... (1.02) (1.23) (0.42) (0.18) (0.39) (0.16)
------------ ------------ ------------ ---------- -------- -------
Net asset value, end of period ............ $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54
============ ============ ============ ========== ======== =======
Total Return .............................. 15.60% 15.46% 50.30% (11.21%) 17.33% 16.78%
============ ============ ============ ============ ======== =======
Ratios/Supplemental Data ..................
Net assets, end of period (in thousands) ... $ 186,978 $ 136,053 $ 108,719 $ 83,540 $107,315 $96,425
Ratio of expenses to average net assets ... 2.02% 2.05% 2.17% 2.25% 2.24% 2.19%
Ratio of expenses to average net assets
excluding waiver ........................ 2.02% 2.05% 2.17% 2.25% - -
Ratio of net investment income (loss) to
average net assets ........................ (1.12%) (0.76%) (0.80%) 0.26% 1.36% 0.16%
Portfolio turnover rate .................. 64% 50% 40% 50% 26% 31%
Average commission rate on portfolio
transactions ........................... - - - - - -
============ ============ ============ ============ ======== =======
</TABLE>
- ----------
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
9
<PAGE>
Class B Shares (continued)
<TABLE>
<CAPTION>
Mentor Capital Growth Portfolio
---------------------------------------------------------------------------------
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92*
------------ ------------ ------------ ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value, beginning of
period ........................... $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 14.18
Income from investment operations
Net investment income (loss) ...... - (0.04) 0.25 (0.04) 0.05 0.46
Net realized and unrealized gain
(loss) on investments ............ 5.55 3.67 2.53 (0.26) 1.02 0.04
------------ ------------ ------------ ------------ --------- -----------
Total from investment operations ... 5.55 3.63 2.78 (0.30) 1.07 0.50
Less Distributions
Distributions from net investment
income ........................... - - - - (0.05) (0.46)
Distributions in excess of net
investment income - - - - (0.01) -
Distributions from capital gains (2.79) (0.50) (1.79) (0.13) - -
Distributions in excess of capital
gains ........................... - - - - - -
------------ ------------ ------------ ------------ --------- -----------
Total Distributions ............... (2.79) (0.50) (1.79) (0.13) (0.06) (0.46)
------------ ------------ ------------ ------------ --------- -----------
Net asset value, end of period ...... $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22
============ ============ ============ ============ ========= ===========
Total Return ........................ 33.88 % 23.64 % 19.26% (2.00%) 7.52% 0.61%
============ ============ ============ ============ ========= ===========
Ratios/Supplemental Data ............
Net assets, end of period (in
thousands) ........................ $ 113,587 $ 68,213 $ 57,648 $ 41,106 $ 57,030 $ 25,468
Ratio of expenses to average net
assets ........................... 2.16 % 2.18 % 2.56% 2.46% 2.24% 1.86% (a)
Ratio of expenses to average net
assets excluding waiver ............ 2.16 % 2.18 % 2.56% 2.46% 2.34% 2.16%(a)
Ratio of net investment income to
average net assets (loss) ......... (0.22%) (0.24%) (0.41%) (0.22%) 0.21% 0.83% (a)
Portfolio turnover rate ............ 64% 98% 157% 149% 192% 61%
Average commission rate on portfolio
transactions ..................... $ 0.0697 $ 0.0688 - - - -
============ ============ ============ ============ ========= ===========
<CAPTION>
Mentor Strategy Portfolio
--------------------------------------------------------------------------
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95** 12/31/94 12/31/93***
------------ ------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value, beginning of
period ........................... $17.79 $ 15.21 $ 12.24 $ 12.70 $ 12.50
Income from investment operations
Net investment income (loss) ...... 0.26 (0.03) - (0.06) -
Net realized and unrealized gain
(loss) on investments ............ 1.58 2.83 2.97 (0.40) 0.20
-------- ------------ ----------- ------------ ------------
Total from investment operations ... 1.84 2.80 2.97 (0.46) 0.20
Less Distributions
Distributions from net investment
income ........................... - - - - -
Distributions in excess of net
investment income - - - - -
Distributions from capital gains - (1.34) (0.22)
Distributions in excess of capital
gains ........................... - - - - -
-------- ------------ ----------- ------------ ------------
Total Distributions ............... (1.34) (0.22) - - -
-------- ------------ ----------- ------------ ------------
Net asset value, end of period ...... $18.29 $ 17.79 $ 15.21 $ 12.24 $ 12.70
======== ============ =========== ============ ============
Total Return ........................ 11.19 % 18.48 % 24.26% (3.61%) 1.60%
========= ============ =========== ============ ============
Ratios/Supplemental Data ............
Net assets, end of period (in
thousands) ........................ $ 301,885 $ 288,494 $ 224,643 $ 179,274 $ 122,177
Ratio of expenses to average net
assets ........................... 2.20 % 2.19 % 2.31% (a) 2.19% 2.06%(a)
Ratio of expenses to average net
assets excluding waiver ............ 2.20 % 2.19 % 2.31%(a) 2.19% 2.06%(a)
Ratio of net investment income to
average net assets (loss) ......... 1.54 % (0.19%) 0.02% (a) (0.54%) 0.08%
Portfolio turnover rate ............ 192% 125% 122% 143% 0%
Average commission rate on portfolio
transactions ..................... $ 0.0644 $ 0.0669 - - -
========= ============ =========== ============ ============
</TABLE>
- ----------
* Reflects operations for the period from April 29, 1992 (commencement of
operations) to September 30, 1992.
** For the period from January 1, 1995 to September 30, 1995.
*** Reflects operations for the period from October 29, 1993 (commencement of
operations) to December 31, 1993.
(a) Annualized.
10
<PAGE>
Class B Shares (continued)
<TABLE>
<CAPTION>
Mentor Income and Growth Portfolio
------------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93*
------------ ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of period ......... $19.18 $17.14 $ 15.28 $ 14.91 $ 14.14
Income from
investment
operations ..................
Net investment income
(loss) ..................... 0.34 0.23 0.28 0.21 0.05
Net realized and
unrealized gain
(loss) on
investments ............... 3.35 2.76 2.14 0.61 0.77
-------- -------- --------- --------- ------------
Total from investment
operations .................. 3.69 2.99 2.42 0.82 0.82
Less Distributions
Distributions from net
investment income ......... (0.34) (0.21) (0.28) (0.19) (0.05)
Distributions in excess
of net investment
income ..................... (0.02) - (0.03) - -
Distributions from
capital gains ............... (1.92) (0.74) (0.25) (0.26) -
Distributions in excess
of capital gains ............ - - - - -
-------- -------- --------- --------- ------------
Total Distributions ......... (2.28) (0.95) (0.56) (0.45) (0.05)
-------- -------- --------- --------- ------------
Net asset value, end of
period ..................... $20.59 $19.18 $ 17.14 $ 15.28 $ 14.91
======== ======== ========= ========= ============
Total Return .................. 21.24 % 18.26 % 16.32% 5.66% 5.54%
========= ========= ========= ========= ============
Ratios/Supplemental
Data
Net assets, end of period
(in thousands) ............... $ 107,816 $ 66,548 $ 46,678 $ 43,219 $ 18,127
Ratio of expenses to
average net assets ......... 2.10 % 2.13 % 2.43% 2.44% 2.31%(a)
Ratio of expenses to
average net assets
excluding waiver ............ 2.10 % 2.13 % 2.43% 2.44% 2.69%(a)
Ratio of net investment
income (loss) to
average net assets ......... 1.87 % 1.32 % 1.78% 1.51% 1.60%(a)
Portfolio turnover rate ...... 75% 72% 62% 78% 13%
Average commission rate
on portfolio
transactions ............... $ 0.0515 $ 0.0492 - - -
========= ========= ========= ========= ============
<CAPTION>
Mentor Perpetual Global Portfolio
--------------------------------------------------------
Year Year Year Year
Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94**
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of period ......... $ 17.46 $ 15.67 $ 14.15 $ 14.18
Income from
investment
operations ..................
Net investment income
(loss) ..................... (0.02) (0.05) (0.05) (0.04)
Net realized and
unrealized gain
(loss) on
investments ............... 3.51 2.64 1.57 0.01
------------ ------------ ------------ -----------
Total from investment
operations .................. 3.49 2.59 1.52 (0.03)
Less Distributions
Distributions from net
investment income ......... - - - -
Distributions in excess
of net investment
income ..................... - - - -
Distributions from
capital gains ............... (0.63) (0.80) - -
Distributions in excess
of capital gains ............ - - - -
------------ ------------ ------------ -----------
Total Distributions ......... (0.63) (0.80) - -
------------ ------------ ------------ -----------
Net asset value, end of
period ..................... $ 20.32 $ 17.46 $ 15.67 $ 14.15
============ ============ ============ ===========
Total Return .................. 20.74 % 17.39 % 10.74% (0.21%)
============ ============ ============ ===========
Ratios/Supplemental
Data
Net assets, end of period
(in thousands) ............... $ 89,030 $ 42,131 $ 12,667 $ 7,987
Ratio of expenses to
average net assets ......... 2.64 % 2.70 % 2.72% 2.79%(a)
Ratio of expenses to
average net assets
excluding waiver ............ 2.64 % 2.70 % 2.79% 3.93%(a)
Ratio of net investment
income (loss) to
average net assets ......... (0.68%) (0.91%) (0.40%) (0.82%)(a)
Portfolio turnover rate ...... 128% 130% 155% 2%
Average commission rate
on portfolio
transactions ............... $ 0.0319 $ 0.0320 - -
============ ============ ============ ===========
<CAPTION>
Year Year Year
Ended Ended Ended
9/30/94 9/30/93 9/30/92***
------------ ------------ -----------------
<S> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of period ......... $ 14.06 $ 14.40 $ 14.30
Income from
investment
operations ..................
Net investment income
(loss) ..................... 0.82 0.99 0.41
Net realized and
unrealized gain
(loss) on
investments ............... (1.37) (0.31) 0.10
---------- -------- ------------
Total from investment
operations .................. (0.55) 0.68 0.51
Less Distributions
Distributions from net
investment income ......... (0.75) (0.99) (0.41)
Distributions in excess
of net investment
income ..................... - (0.03) -
Distributions from
capital gains ............... - - -
Distributions in excess
of capital gains ............ - -
---------- --------
Total Distributions ......... (0.75) (1.02) (0.41)
---------- -------- ------------
Net asset value, end of
period ..................... $ 12.76 $ 14.06 $ 14.40
========== ======== ============
Total Return .................. (3.97%) 4.86% 3.24%
========== ======== ============
Ratios/Supplemental
Data
Net assets, end of period
(in thousands) ............... $ 77,888 $127,346 $ 65,661
Ratio of expenses to
average net assets ......... 1.88% 1.54% 0.83%(a)
Ratio of expenses to
average net assets
excluding waiver ............ 1.90% 1.72% 1.67%(a)
Ratio of net investment
income (loss) to
average net assets ......... 6.21% 6.81% 7.53%(a)
Portfolio turnover rate ...... 455% 102% 9%
Average commission rate
on portfolio
transactions ............... - - -
========== ======== ============
</TABLE>
- ----------
* 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.
*** Reflects operations for the period from April 29, 1992 (commencement of
operations) to September 30, 1992.
(a) Annualized.
11
<PAGE>
Class B Shares (continued)
<TABLE>
<CAPTION>
Mentor Municipal Income Portfolio
-----------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance ...............
Net asset value, beginnning of period ......... $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78
Income from investment operations
Net investment income (loss) .................. 0.71 0.75 0.74 0.74 0.82
Net realized and unrealized gain (loss)
on investments .............................. 0.52 0.11 0.52 (1.54) 1.32
---------- ---------- ---------- ----------- ----------
Total from investment operations ............ 1.23 0.86 1.26 (0.80) 2.14
Less Distributions
Distributions from net investment
income ....................................... (0.71) (0.76) (0.74) (0.73) (0.82)
Distributions in excess of net
investment income ........................... - - - - (0.04)
Distributions from capital gains ............... (0.08) - - (0.10) -
Distributions in excess of capital gains ...... - - - - -
---------- ---------- ---------- ----------- ----------
Total Distributions ........................... (0.79) (0.76) (0.74) (0.83) (0.86)
---------- ---------- ---------- ----------- ----------
Net asset value, end of period .................. $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06
========== ========== ========== =========== ==========
Total Return .................................... 8.33% 5.87% 9.01% (5.34%) 15.27%
========== ========== ========== =========== ==========
Ratios/Supplemental Data ........................
Net assets, end of period (in thousands) ...... $ 44,272 $ 37,191 $ 39,493 $ 46,157 $ 50,976
Ratio of expenses to average net assets ...... 1.72% 1.74% 1.92% 1.74% 1.21
Ratio of expenses to average net assets
excluding waiver .............................. 1.72% 1.74% 1.92% 1.86% 1.89%
Ratio of net investment income (loss) to
average net assets ........................... 4.60% 4.95% 5.07% 4.93% 5.42%
Portfolio turnover rate ........................ 59% 46% 43% 87% 88%
========== ========== ========== =========== ==========
<CAPTION>
Mentor Short-Duration
Income Portfolio
-----------------------------------------------------------
Year Year Year Period Period
Ended Ended Ended Ended Ended
9/30/92*** 9/30/97 9/30/96 9/30/95* 12/31/94**
------------------ ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance ...............
Net asset value, beginnning of period ......... $ 14.29 $ 12.50 $ 12.67 $ 12.18 $ 12.50
Income from investment operations
Net investment income (loss) .................. 0.29 0.73 0.73 0.59 0.41
Net realized and unrealized gain (loss)
on investments .............................. 0.49 0.12 (0.17) 0.52 (0.29)
------------- --------- --------- ------------ ------------
Total from investment operations ............ 0.78 0.85 0.56 1.11 0.12
Less Distributions
Distributions from net investment
income ....................................... (0.29) (0.72) (0.73) (0.59) (0.41)
Distributions in excess of net
investment income ........................... - (0.01) - (0.03) (0.03)
Distributions from capital gains ............... - - - - -
Distributions in excess of capital gains ...... - - - - -
------------- --------- --------- ------------ ------------
Total Distributions ........................... (0.29) (0.73) (0.73) (0.62) (0.44)
------------- --------- --------- ------------ ------------
Net asset value, end of period .................. $ 14.78 $ 12.62 $ 12.50 $ 12.67 $ 12.18
============= ========= ========= ============ ============
Total Return .................................... 5.28% 6.96% 4.53% 9.22% 0.95%
============= ========= ========= ============ ============
Ratios/Supplemental Data ........................
Net assets, end of period (in thousands) ...... $ 24,265 $ 27,089 $ 24,517 $ 19,871 17,144
Ratio of expenses to average net assets ...... 0.50%(a) 1.16% 1.16% 1.20% 1.29%(a)
Ratio of expenses to average net assets
excluding waiver .............................. 1.76%(a) 1.42% 1.56% 1.70%(a) 1.29%(a)
Ratio of net investment income (loss) to
average net assets ........................... 5.80%(a) 5.70% 5.60% 5.04%(a) 4.90%(a)
Portfolio turnover rate ........................ 0% 75% 411% 126% 166%
============= ========= ========= ============ ============
</TABLE>
- ----------
* For the period from January 1, 1995 to September 30, 1995.
** Reflects operations for the period from April 29, 1994 (commencement of
operations) to December 31, 1994.
*** Reflects operations for the period from April 29, 1992 (commencement of
operations) to September 30, 1992.
(a) Annualized.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Mentor Funds is offering shares of eight different diversified Portfolios
by this Prospectus with varying 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 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
immediately after and 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 Investment Advisors, LLC ("Mentor Advisors") is the investment
adviser to each of the Portfolios other than the Mentor Perpetual Global
Portfolio. Mentor Perpetual Advisors, LLC ("Mentor Perpetual") is the
investment adviser to the Global Portfolio.
Mentor Growth Portfolio
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 Mentor Advisors, have demonstrated earnings, asset values, or growth
potential not yet reflected in their market price. A key indication of such
undervaluation considered by Mentor Advisors 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. Mentor Advisors 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.
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Mentor Capital Growth Portfolio
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 Mentor 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
Mentor 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 Mentor Advisors believes offers the potential for capital
appreciation. In selecting investments, Mentor Advisors will attempt to
identify securities it believes will provide capital appreciation over the
intermediate or long term due to changes 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
The Strategy Portfolio's investment objective is to seek high total return
on its investments. In seeking to achieve this objective, Mentor Advisors
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).
Mentor Advisors 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,
Mentor Advisors 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 Mentor Advisors believes that
the potential for total return in the bond market is greater than that in the
equity market. Mentor Advisors 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, Mentor Advisors 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 Mentor Advisors 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, Mentor Advisors 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.
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Within the fixed-income sector, Mentor Advisors 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" 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 Mentor Advisors 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
Sub-Adviser: Wellington Management Company, LLP
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 Management Company, LLP ("Wellington
Management") believes exhibit sound fundamental characteristics and in
investment-grade fixed-income securities and U.S. Government securities, as
described below.
Wellington Management 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 Management will attempt
to identify securities it believes are conservatively valued. 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
Management's fundamental research and security valuations.
Within the fixed-income asset class, Wellington Management 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
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securities of any maturity, preferred stocks, and other fixed-income
instruments, including, for example, U.S. Government securities, corporate debt
securities (including zero-coupon securities) and debt securities issued by
foreign governments and by companies located outside the United States. 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 unrated,
are deemed by Wellington Management 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
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.
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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 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 investment grade securities or those of equivalent
quality as determined by Mentor 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
The Quality Income Portfolio's investment objective is to seek high
current income consistent with what Mentor 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 Mentor
Advisors to be of comparable quality. Securities rated Baa or BBB lack
outstanding investment characteristics and have speculative characteristics and
are subject to greater credit and market risks than higher-rated securities.
The Portfolio 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 Mentor Advisors to be of comparable
quality. A description of securities ratings is contained in the Appendix to
this Prospectus.
Mentor 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 any
portion of its assets 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),
and in other asset-backed securities which involve certain risks. The Portfolio
may also invest any portion of its assets in securities representing secured or
unsecured
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interests in other types of assets, such as automobile finance or credit card
receivables. 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.
Mentor Municipal Income Portfolio
Sub-Adviser: Van Kampen American Capital Management, Inc.
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
American Capital Management, Inc. ("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- by S&P or between Ba and B3 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
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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 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
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be issued by such nongovernmental users, and the 25% limitation would apply to
such obligations. 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 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
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 invest any 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). The Portfolio may also invest any
portion of its assets in securities representing secured or unsecured interests
in other types of assets, such as automobile finance or credit card
receivables. See "Other Investment Practice - Mortgage-backed securities;
other asset-backed securities" and " - Other mortgage-related securities"
below for a description of these securities and risks they may entail.
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
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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, Mentor Advisors
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 debt securities and preferred stocks of
investment grade 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 Mentor Advisors to be of comparable
quality. Securities rated Baa or BBB lack outstanding investment
characteristics and have speculative characteristics and are subject to greater
credit and market risks than higher-rated securities. 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.
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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 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, Income and Growth, 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
22
<PAGE>
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 or sub-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
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
23
<PAGE>
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 future 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. 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 not appropriate 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.
Securities loans and 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
24
<PAGE>
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.
Leverage. The Short-Duration Income Portfolio may borrow money to invest
in additional securities to seek current income. In addition, a proposal has
been made to shareholders of the Quality Income Portfolio to permit the
Portfolio to borrow money to invest in additional securities to seek currect
income. The Quality Income Portfolio will be permitted to do so commencing
February 1, 1998, unless this prospectus has been revised to provide
differently. Certain other Portfolios may engage in reverse repurchase
agreements, forward commitments, and dollar-roll transactions described below
and in the Statement of Additional Information, which may have the same
economic effect as if the Portfolios had borrowed money.
The use of borrowed money, known as "leverage," increases a Portfolio's
market exposure and risk and may result in losses. When a 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 Portfolios
currently intend to use leverage in order to adjust the dollar-weighted average
duration of their portfolios. A Portfolio will not always borrow money for
investment and the extent to which a 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 that can exist at
any one time will not exceed one-third of the value of a Portfolio's total
assets.
Reverse repurchase agreements; forward committments. Each Portfolio, other
than the Growth and Strategy Portfolios, may enter into "reverse" repurchase
agreements. Each of the Capital Growth, Quality Income, Short-Duration 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 involve leverage, and may increase a Portfolio's overall investment
exposure. Their use by a Portfolio may result in losses. The Short-Duration
Income Portfolio and the Quality Income Portfolio may enter into reverse
repurchase agreements to create investment leverage.
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 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 involve leverage, and may increase a Portfolio's overall
investment exposure. Their use by a Portfolio may result in losses.
25
<PAGE>
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% of their total assets. (Those percentage limitations do not
apply to American Depository Receipts, Global Depository Receipts, and other
U.S. dollar-denominated securities of issuers located outside the United
States.) 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.
A Portfolio may invest in American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs"), which represent interests in foreign securities
held by a bank, trust company, or other organization. Investments in ADRs and
GDRs are subject to many of the same risks of investing in foreign securities
generally.
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
26
<PAGE>
rates that may be higher or lower than the spot rate. Foreign currency futures
contracts are standardized exchange-traded contracts and have margin
requirements. For transaction hedging purposes, 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 its portfolio, each of 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
27
<PAGE>
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
Highlights."
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.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rates or at such other rates as may be used in
accordance with procedures approved by the Trustees. As a result, fluctuations
in the values of such currencies in relation to the U.S. dollar will affect the
net asset value of a Portfolio's shares even though there has not been any
change in the values of such securities as quoted in such foreign currencies.
SALES ARRANGEMENTS
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
Class A Shares. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to Buy Shares - Class A
shares."
Class B Shares. Class B shares are sold without an initial sales charge,
but are subject to a CDSC of up to 4% if redeemed within five 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. If you purchase
shares through an asset-allocation program, you may also be eligible to
purchase Class B shares through the "BL Purchase Program." See "How to Buy
Shares - Class B shares."
Which arrangement is for you? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. Investors purchasing shares through an
28
<PAGE>
asset-allocation program may wish to purchase shares through the BL Purchase
Program. For more information about these sales arrangements, consult your
investment dealer or Mentor Distributors, LLC ("Mentor Distributors"). Sales
personnel may receive different compensation depending on which class of shares
they sell. Shares may only be exchanged for shares of the same class of 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 Mentor Funds
or Mentor Distributors. You can buy Portfolio shares by completing the enclosed
New Account Form and sending it to Boston Financial Data Services at 2 Heritage
Drive, North Quincy MA 02171, along with a check or money order made payable to
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:
29
<PAGE>
<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% 6.10% 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.
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.
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 or are available
from Mentor Distributors. Shares may be sold at net asset value to certain
categories of investors, including to shareholders of other mutual funds who
invest in Mentor Funds in response to certain promotional activities, and the
CDSC may be waived under certain circumstances. The sales
30
<PAGE>
charges shown above will not apply to shares purchased by you if you purchase
shares through EVEREN Securities, Inc. with the redemption proceeds received by
you within the preceding 90 days from the sale of shares of any non-Mentor
open-end mutual fund. No CDSC will apply to these purchases. EVEREN Securities,
Inc. may compensate your investment dealer in connection with any such
purchase. Sales charges may similarly not apply to shares purchased through
other financial institutions that have made arrangements with Mentor
Distributors. Contact your financial institution or Mentor Distributors for
more information. See "How to Buy Shares - General" below.
Class B Shares. Class B shares are sold without an initial sales charge,
although a CDSC will be imposed if you redeem shares within five 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 the Example
below. The amount of CDSC is determined as a percentage of the lesser of the
current market value or the cost of the shares being redeemed. The amount of
the CDSC will depend on the number of years since you invested in the shares
being redeemed and the dollar amount being redeemed, according to the following
table:
<TABLE>
<CAPTION>
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>
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>
For information on how sales charges are calculated if you exchange your
shares, see "How To Exchange Shares."
The BL Purchase Program. If you purchase Class B shares through an
asset-allocation program sponsored by your broker-dealer or other financial
institution, you may elect to participate in the BL Purchase Program. Shares
purchased through this Program are not subject to the CDSC shown above. Rather,
a CDSC of 1.00% will be imposed on redemptions of such shares within the first
year after purchase, based on the lower of the shares' cost and current net
asset value. Your broker-dealer or other financial institution is responsible
for making the election on your behalf to invest through the Program.
Accordingly, if you wish to purchase shares through this Program, you should
instruct your broker-dealer or financial institution to do so.
General
A Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by Mentor Funds' current and retired Trustees
(and their families), current and retired employees (and their
31
<PAGE>
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 or its affiliates. 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 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|M/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 or an affiliate; and (iv) redemptions by pension or profit sharing plans
of which Mentor Investment Group or any affiliate serves as a plan fiduciary.
In addition, certain retirement plans with over 200 employees may purchase
Class A shares at net asset value without a sales charge. A Portfolio may sell
its Class A shares without a sales charge to shareholders of other mutual funds
who invest in 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. If you invest through a broker-dealer or other
financial institution, your broker-dealer or other financial institution will
be responsible for electing on your behalf to take advantage of any of these
reduced sales charges or waivers described above. Please instruct your
broker-dealer or other financial institution accordingly.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in,
shares of a Portfolio at net asset value.
In determining whether a CDSC is payable in respect of the shares
redeemed, a Portfolio will first redeem the shares held longest (together with
any shares received upon reinvestment of distributions with respect to those
shares). Any of the shares being redeemed which were acquired by reinvestment
of distributions will be redeemed without a CDSC, and amounts representing
capital appreciation will not be subject to a CDSC. See the Example below.
Example:
You have purchased 100 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:
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o Proceeds of 50 shares redeemed at $12 per share $600
o Minus proceeds of 10 shares not subject to a CDSC because they were
acquired through dividend reinvestment (10 x $12) -120
o Minus appreciation on remaining shares, also not subject to CDSC
(40 x $2) -80
o Amount subject to a CDSC $400
Mentor Distributors receives the entire amount of any CDSC you pay.
Consult Mentor Distributors
for more information.
If you are considering redeeming or exchanging shares of 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, certificates will not be issued for
your shares unless you request them.
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 investment in
shares of that Portfolio to a value of $500 or more during such 60-day period.
Mentor Distributors, Mentor Advisors, the 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 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 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.
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, LLC, located at 901 East Byrd Street, Richmond,
Virginia 23219, is the principal distributor for the Portfolios' shares. Mentor
Distributors is not obligated to sell any specific amount of shares of any
Portfolio.
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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 its distributor 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 Plan for such periods
as they may determine. A Portfolio's distributor also receives the proceeds of
any CDSC imposed on redemptions of shares.
Payments under the Plans are intended to compensate a Portfolio's
distributor for services provided and expenses incurred by it as principal
underwriter of a Portfolio's Class B shares. A Portfolio's distributor 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 a Portfolio's distributor 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 a Portfolio's
distributor. A Portfolio's distributor 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 a Portfolio's
distributor, 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 that Portfolio any day the
New York Stock Exchange is open, either directly to the Portfolio or through
your investment dealer. A Portfolio will only redeem shares for which it has
received payment.
Selling shares directly to a Portfolio. Send a signed letter of
instruction and stock power form, along with any certificates that represent
shares you want to sell, to 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. Contact Mentor
Distributors for more information about where to obtain a signature guarantee.
Stock power forms are available from your investment dealer, Mentor
Distributors, and many commercial banks. Mentor Distributors usually requires
additional documentation for the sale of shares by a corporation, partnership,
agent, 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
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employ reasonable procedures, Mentor Distributors may be liable for any losses
due to unauthorized or fraudulent instructions. For more information, consult
Mentor Distributors. During periods of unusual market changes and shareholder
activity, you may experience delays in contacting Mentor Distributors by
telephone in which case you may wish to submit a written redemption request, as
described above, or contact your investment dealer, as described below. The
Telephone Redemption Privilege may be modified or terminated without notice.
Selling shares through your investment dealer. Your dealer 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.
Other information concerning redemption. Under unusual circumstances, each
of the Portfolios may suspend redemptions, or postpone payment for more than
seven days, as permitted by federal securities law. In addition, each Portfolio
reserves the right, if conditions exist which make cash payments undesirable,
to honor any request for redemption by making payment in whole or in part in
securities valued in the same way as they would be valued for purposes of
computing the Portfolio's per share net asset value. If payment is made in
securities, a shareholder may incur brokerage expenses in converting those
securities into cash.
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 offered by this Prospectus and certain other portfolios in the Mentor
family 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 Mentor Funds, c/o Boston Financial Data Services, Inc., 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
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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 or the other portfolios into which you may exchange your shares. 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
Trust 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, quarterly for
the Income and Growth Portfolio, and annually for the Growth, Capital Growth,
Global, and Strategy Portfolios. Each Portfolio will distribute its net capital
gain, if any, at least annually. All dividends and distributions of 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. Each Portfolio will distribute substantially all
of its net investment income and capital gain net income on a current basis.
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). Pursuant to the
Taxpayer Relief Act of 1997, long-term capital gains generally will be subject
to a maximum tax rate of 28% or 20% depending upon the holding period of the
portfolio investment generating the gains. Distributions will be taxable as
described above whether received in cash or in shares through the reinvestment
of distributions. Early in each year Mentor Funds will notify you of the amount
and tax status of distributions paid to you by your Portfolio for the preceding
year. In buying or selling securities for each of the Portfolios, Mentor
Advisors and Mentor Perpetual, as applicable, will not normally take into
account the effect any purchase or sale of securities will have on the tax
positions of the Portfolios' shareholders.
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 any of these Portfolios for any particular period may
be more or less than the amount of net investment income actually earned by the
Portfolio during that period.
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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 or 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.
Global Portfolio only. Shareholders of the Portfolio who are U.S. citizens
or residents may be able to claim a foreign tax credit or deduction on their
U.S. income tax returns with respect to foreign taxes paid by the Portfolio.
If, at the end of the fiscal year of the Portfolio, more than 50% of the
Portfolio's total assets are represented by stock or securities of foreign
corporations, the Portfolio intends to make an election permitted by the
Internal Revenue Code to treat any eligible foreign taxes it paid as paid by
its shareholders. In that case, shareholders who are U.S. citizens, U.S.
corporations, and, in some cases, U.S. residents, will be required to include
in U.S. taxable income their pro rata share of such taxes, but may then be
entitled to claim a foreign tax credit or deduction (but not both) for their
share of such taxes.
The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. Dividends and distributions also may be subject to
foreign, state, and local taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, foreign, state, or local
taxes. Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of a Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
MANAGEMENT
The Trustees of Mentor Funds are responsible for generally overseeing the
conduct of its business. Mentor Investment Advisors, LLC is the investment
adviser to each of the Portfolios other than the Global Portfolio. Mentor
Perpetual Advisors, LLC is the investment adviser to the Global Portfolio. Each
of the investment advisers is located at 901 East Byrd Street, Richmond,
Virginia.
All investment decisions made for the Portfolios by Mentor Advisors and
Mentor Perpetual are made by investment management teams.
Mentor Advisors, formerly Commonwealth Investment Counsel, Inc., has over
$11 billion in assets under management. Mentor Advisors is a wholly owned
subsidiary of Mentor Investment Group, LLC ("Mentor Investment Group"), and its
affiliates. Mentor Investment Group is a subsidiary of Wheat First Butcher
Singer, Inc. Wheat First Butcher Singer, through other subsidiaries, also
engages in securities brokerage, investment banking, and related businesses.
EVEREN Capital Corporation has a 20% ownership in Mentor Investment Group and
may acquire additional ownership based principally on the amount of Mentor
Investment Group's revenues derived from assets attributable to clients of
EVEREN Securities, Inc. and its affiliates.
Wheat First Butcher Singer, Mentor Investment Group's parent company, has
entered into an Agreement and Plan of Merger pursuant to which it is to be
acquired by First Union Corp. ("First Union"). First Union is a global
financial services company with approximately $140 billion in assets and $10
billion in total stockholders' equity. The proposed arrangement does not
contemplate any changes in the management or operations of
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Mentor Investment Group or any of its subsidiaries, including Mentor Advisors.
Consummation of the acquisition, which is subject to a number of conditions,
including regulatory approvals, will result in the termination of the
Portfolios' investment advisory and sub-advisory agreements. It is expected
that, upon consummation of the acquisition (which is expected to occur as early
as January 1998), the Trust will enter into new investment advisory agreements
with Mentor Advisors and Mentor Perpetual (and will enter into related
sub-advisory agreements), which will be substantially identical to the
agreements currently in effect.
Mentor Perpetual, an investment advisory firm organized in 1995, is owned
equally by Perpetual plc, a diversified financial services holding company, and
Mentor Advisors. The Perpetual organization currently serves as investment
adviser for assets of more than $10 billion. Its clients include 28 unit
investment trusts and other public investment pools including private
individuals, charities, pension plans, and life assurance companies.
Mentor Advisors and Mentor Perpetual together serve as investment adviser
to twenty-two separate investment portfolios in the Mentor Family of Funds,
including those offered by this Prospectus. For a prospectus relating to
certain of these other investment portfolios, and for information concerning
your eligibility to purchase shares of those portfolios, contact Mentor
Distributors.
Each of the Portfolios (other than the Global Portfolio) pays management
fees to Mentor Advisors at the annual rates described above under "Expense
Summary - Annual Portfolio Operating Expenses"; and the Global Portfolio pays
fees to Mentor Perpetual at an annual rate of 1.10% of its average daily net
assets up to and including $75 million and 1.00% of its average daily net
assets 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 at any time in its sole discretion.
The Sub-Advisers
Van Kampen American Capital Management Inc. 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 wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is an
indirect wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
Morgan Stanley, Dean Witter, Discover & Co. and various of its subsidiaries,
including Morgan Stanley & Co. Incorporated, a registered broker-dealer, are
engaged in a wide range of financial services. As of September 30, 1997, Van
Kampen, together with its affiliates, advised or supervised approximately $67.5
billion of assets. For its services as sub-adviser, Van Kampen receives a fee
from Mentor Advisors at the following annual rate: 0.25% of the first $60
million of the Portfolio's average net assets and 0.20% of the Portfolio's
average net assets over $60 million.
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 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 $13 billion.
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Wellington Management Company, LLP serves as sub-adviser to the Income and
Growth Portfolio. Wellington Management, 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, 1997, Wellington Management had discretionary investment
management authority with respect to approximately $168.7 billion in assets.
Wellington Management 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,
Wellington Management receives a fee from Mentor Advisors at the following
annual rate: 0.325% of the first $50 million of the Portfolio's average net
assets, 0.275% of the next $150 million of the Portfolio's average net assets,
0.225% of the next $300 million of the Portfolio's average net assets, and
0.200% of the Portfolio's net assets over $500 million.
Paul D. Kaplan, Senior Vice President of Wellington Management, has served
as portfolio manager of the fixed-income and U.S. Government securities portion
of the Portfolio since its inception in May 1993. Mr. Kaplan has been a
portfolio manager with Wellington Management since 1982. As of November 30,
1996, Wellington Management's Equity Income Team, a group of equity portfolio
managers and senior investment professionals, assumed responsibility for
managing the equity securities portion of the Portfolio.
General. Subject to the general oversight of the Trustees, each
Portfolio's investment adviser or sub-adviser manages the relevant Portfolio's
investments in accordance with the stated policies of the Portfolio. Each makes
investment decisions for the Portfolio and places 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 Mentor Funds. Mentor
Funds pays all expenses not assumed by the investment advisers, sub-advisers,
or Mentor Investment Group, 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, an 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 Mentor Funds (and, if
permitted by law, of the other funds in the Mentor family) as a factor in the
selection of broker-dealers.
OTHER SERVICES
Administrative Services. Mentor Investment Group, LLC, 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 Investment Group provides these
services to each of the Portfolios at an annual rate of 0.10% of the
Portfolio's average daily net assets.
Shareholder Servicing Plan. 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 Mentor Distributors to provide
administrative support services to their customers who are Portfolio
shareholders. In return for providing these support services, a financial
institution may receive payments at a rate not exceeding 0.25% of the average
daily net assets of the Class A or Class B shares of a Portfolio. These
administrative services may include, but are not limited to, the following
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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, by a
Portfolio's sub-adviser, or by Mentor Investment Group, 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 an investment
adviser, sub-adviser, and/or Mentor Investment Group, and will not be made from
the assets of any of the Portfolios.
GENERAL
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of its Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
Mentor Funds is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of 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. Mentor Funds' shares are currently divided into eleven
series, eight of which are being offered by this Prospectus. Each series
offered by this Prospectus issues three classes of shares, Class A and Class B
and Y Shares. The sales charge and other expenses of a Portfolio's Y Shares
differ from those of its Class A and B shares, which will affect performance.
Contact Mentor Investment Group for information concerning the Y Shares of any
Portfolio at 1-800-869-6042. 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. Mentor Funds may suspend the sale of shares at any
time and may refuse any order to purchase shares. Although neither Mentor Funds
nor any Portfolio is required to hold annual meetings of shareholders,
shareholders have the right to call a meeting to elect or remove Trustees, or
to take other actions as provided in the Declaration of Trust.
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. State Street Bank and Trust Company,
through its subsidiary Boston Financial Data Services, Inc., serves as transfer
agent and dividend disbursing agent for the Portfolios. Mentor Funds'
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 of the
class in question during a recent 30-day period by the maximum public offering
price per share of that class on the last day of that period. "Total return"
for the one-, five-, and ten-year periods (or for the life of a 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 or maximum front-end sales charge
would be reduced if the CDSC or front-end 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 a Portfolio's
investments, a 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.
41
<PAGE>
APPENDIX
Moody's Investors Service, Inc., Bond 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 Bond 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.
42
<PAGE>
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.
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., Note 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 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.
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.
43
<PAGE>
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.
44
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Portfolio's official sales literature in connection with the offer of the
Portfolio's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Portfolio. This Prospectus does not constitute an offer in any State in which,
or to any person to whom, such offering may not lawfully be made. This
Prospectus omits certain information contained in the Registration Statement,
to which reference is made, filed with the Securities and Exchange Commission.
Items which are thus omitted, including contracts and other documents referred
to or summarized herein, may be obtained from the Commission upon payment of
the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
Mentor Investment Group
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 Mentor Distributors, LLC
Mentor Funds
Mentor Growth Portfolio
Mentor Perpetual Global Portfolio
Mentor Capital Growth Portfolio
Mentor Strategy Portfolio
Mentor Income and Growth Portfolio
Mentor Municipal Income Portfolio
Mentor Quality Income Portfolio
Mentor Short-Duration Income Portfolio
-------------------------
PROSPECTUS
-------------------------
January 17, 1998
[MENTOR INVESTMENT GROUP LOGO]
<PAGE>
Mentor Funds
New Account Form
and Shareowner Options Form
[MENTOR INVESTMENT GROUP LOGO]
<PAGE>
Use the attached form
to establish your
account in
Mentor Funds
<PAGE>
[MENTOR INVESTMENT GROUP LOGO]
New Account Form and
Shareowner Options Form
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Type of Account
- --------------------------------------------------------------------------------
Use this one form to open any ONE of the following types of accounts. Please
check the appropriate one below.
[ ] Individual Account, Complete 1. [ ] Joint Account, Complete 1 and 2. [ ]
Custodial Account, (Gift to a Minor), Complete 3.
[ ] Trust Account, Complete 4. [ ] Corporate (or Organization)
Account, Complete 5.
[ ] Revise Existing Account
Number
- --------------------------------------------------------------------------------
1. - -
Name Social Security Number
2. - -
Name Social Security Number
Shareowner Employment Information
This information is required in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers.
--------------------------------------------------------------------------
Occupation of Shareowner or Custodian
--------------------------------------------------------------------------
Employer's Name
--------------------------------------------------------------------------
Employer's Address
--------------------------------------------------------------------------
City State ZIP Code
--------------------------------------------------------------------------
Occupation of Co-Shareowner
--------------------------------------------------------------------------
Employer's Name
--------------------------------------------------------------------------
Employer's Address
--------------------------------------------------------------------------
City State ZIP Code
3. as custodian for
Custodian's Name (only one custodian permitted)
--------------------------------------------------------------------------
Minor's Name (only one minor permitted)
- -
Minor's Social Security Number
Under the Uniform Gifts or Uniform Transfers to Minors
State State
Act / /
Minor's Birthdate
4.
Name of Trustee Name of Trust
/ /
Name of Second Trustee (if any) Date of Trust
--------------------------------------------------------------------------
Trust's Taxpayer Identification Number
5.
Name of Corporation (or other entity)
Taxpayer Identification Number
Business Type:
Corporation Partnership Organization
Fiduciary Other
Specify other type
(Please attach a certified copy of your corporate resolution)
- -------------------------------------------------------------------------------
Mailing Address of Account
- -------------------------------------------------------------------------------
All the information requested is needed to open your account.
Street Address or Box Number Apartment Number
City State ZIP Code
( ) ( )
Area Code Daytime Phone Area Code Evening Phone
- -------------------------------------------------------------------------------
Fund Selection and Initial Investment
- -------------------------------------------------------------------------------
[ ] Next to the Portfolio name(s), indicate the amount you're investing in the
Portfolio. MINIMUM PER PORTFOLIO: $1,000
[ ] Be sure to check how you want your Dividend and Capital Gains distributions
handled: automatically reinvested to buy more shares or sent to you by
check.
[ ] Indicate the TOTAL amount you're investing at this time.
<TABLE>
<CAPTION>
Class
Fund Choice A B BL Amount Reinvest Cash
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends [ ] [ ]
[ ] Growth Portfolio [ ] [ ] [ ] $ -------- Capital Gains [ ] [ ]
Dividends [ ] [ ]
[ ] Capital Growth [ ] [ ] [ ] $ -------- Capital Gains [ ] [ ]
Portfolio
Dividends [ ] [ ]
[ ] Quality Income [ ] [ ] [ ] $ -------- Capital Gains [ ] [ ]
Portfolio
Dividends [ ] [ ]
[ ] Municipal [ ] [ ] [ ] $ -------- Capital Gains [ ] [ ]
Income Portfolio
Dividends [ ] [ ]
[ ] Income and [ ] [ ] [ ] $ -------- Capital Gains [ ] [ ]
Growth Portfolio
Dividends [ ] [ ]
[ ] Perpetual Global [ ] [ ] [ ] $ -------- Capital Gains [ ] [ ]
Portfolio
Dividends [ ] [ ]
[ ] Short-Duration [ ] [ ] [ ] $ -------- Capital Gains [ ] [ ]
Income Portfolio
Dividends [ ] [ ]
[ ] Strategy Portfolio [ ] [ ] [ ] $ -------- Capital Gains [ ] [ ]
</TABLE>
TOTAL $-----------------
[ ] Check enclosed for total purchase above made payable to Mentor Funds.
[ ] Other payment method
- --------------------------------------------------------------------------------
Telephone Exchange/
Telephone Redemption
- --------------------------------------------------------------------------------
I elect the following privileges as described in the prospectus:
Telephone Exchange: [ ] Yes Telephone Redemptions: [ ] Yes
[ ] No [ ] No
These privileges will automatically apply if neither box is checked.
By establishing these services and signing this form,
I acknowledge that:
I authorize Boston Financial Data Services, Inc. to accept and act upon
telephoned instructions to (1) exchange shares I own in any Portfolio(s) for
shares of any other Portfolio(s) or (2) redeem shares I own in any
Portfolio(s).
I understand that exchanges can be made only between accounts having identical
registrations.
- --------------------------------------------------------------------------------
[ ] Letter of Intent
- --------------------------------------------------------------------------------
I understand that through accumulated investments I can reduce my sales charges
on Class A shares. I plan to invest over a 13-month period in Class A shares of
one or more of the Portfolios in Mentor Funds in an aggregate amount of at
least:
[ ] $50,000 (applies only to equity funds)
[ ] $250,000 [ ] $500,000 [ ] $1,000,000 (and above)
If the amount indicated is not invested within 13 months, reduced sales charge
do not apply.
[ ] I am already investing under an existing statement of intention.
- --------------------------------------------------------------------------------
[ ] Rights of Accumulation
- --------------------------------------------------------------------------------
[ ] I own Class A shares of more than one Portfolio in Mentor Funds, which may
entitle me to a reduced sales charge. My shareholder account numbers are:
- -------------------------- --------------------------
--------------------------
[ ] The registration of some of my shares differs. Their account numbers are:
- -------------------------- --------------------------
--------------------------
BE SURE TO COMPLETE THE REVERSE SIDE
<PAGE>
- ---------------------------------------
[ ] Systematic Investment Plan
Via ACH
- ---------------------------------------
Check the box above and complete this section; then check the box next to Bank
Account Information and complete that section too.
I authorize State Street Bank & Trust Co. (service agent for Mentor Funds), to
withdraw money from my bank account to buy more shares for my account(s) in the
Portfolio(s) listed below.
<TABLE>
<S> <C>
Portfolio Amount ($100 minimum)
[ ] $
[ ] $
</TABLE>
Please note: This service takes approximately 15 days to establish and will be
done on or about the 15th of each month.
- ---------------------------------------
[ ] Systematic Withdrawal
Plan Via Check
- ---------------------------------------
You must have a minimum of $10,000 in your mutual fund account to qualify for
this optional service.
(Class B shares withdrawals will not be subject to the applicable CDSC up to
10% of account value at the time of plan inception.)
Check the box above and complete this section.
I authorize State Street Bank & Trust Co. (service agent for Mentor Funds), to
redeem shares from my account(s) in the Portfolio(s) listed below and mail a
check for the amount specified to the name and address on the account. State
Street Bank & Trust Co., is to do this on the 15th of each month. If the 15th
falls on a weekend or holiday, the transaction will take place the next
business day.
<TABLE>
<S> <C>
Fund Amount ($100 minimum)
[ ] $
[ ] $
</TABLE>
Please send my Systematic Withdrawal Check to
[ ] Mailing Address of Account
[ ] Other*
Please note: This service takes approximately two (2) weeks to establish.
*Signature guarantee required
- ---------------------------------------
[ ] Bank Account Information
- ---------------------------------------
Complete this section only if you are signing-up for
[ ] Telephone Redemption, [ ] Systematic Investment Plan, or
[ ] Systematic Withdrawal Plan.
- ---------------------------------------
Bank Name ABA Number
- ---------------------------------------
Bank Address
- ---------------------------------------
City State ZIP Code
- ---------------------------------------
Name(s) on Bank Account
- ---------------------------------------
Bank Account Number
Checking Savings
Please attach a check (marked "VOID") or a deposit ticket from this bank
account.
- ---------------------------------------
Signatures
- ---------------------------------------
This New Account Form must be signed for an account to be opened. The
signatures required for the various types of accounts are: [ ] Individual
Account, the individual's
[ ] Joint Account, both shareowners'
[ ] Custodial Account (Gift to a Minor), the custodian's
[ ] Corporate (or Organization) Account, an officer's (and the officer's
title must be included)
By signing this New Account Form below, I assure that:
- - I have received and read the prospectus for each of the Portfolios in which I
am investing, and I understand that the prospectus terms are incorporated
into this form by reference.
- - I authorize Mentor Funds, its affiliates and agents, to act on any
instructions believed to be genuine for any service authorized on this
form. I agree they will not be liable for any resulting loss or expense.
- - I am of legal age in my state and have the authority and legal capacity to
purchase mutual fund shares.
- - I understand that I may terminate the Telephone Redemption, Systematic
Investment Plan, and/or Systematic Withdrawal Plan at any time by writing
to Boston Financial Data Services.
- - I understand that I will receive 30 days' written notice from Boston
Financial Data Services, Transfer Agent, before any service on this form is
terminated.
- - I certify, under penalties of perjury, that:
1. The Social Security or Taxpayer Identification Number shown on this form
is correct. (If I fail to give the correct number or to sign this form,
Mentor Funds may reject, restrict, or redeem my investment. I may also be
subject to IRS Backup Withholding of a percentage of all distributions and
redemptions.)
2. I am NOT currently subject to IRS Backup Withholding because (a) I have
not been notified of it or (b) notification has been revoked. (Cross out
"NOT" if you are currently subject to Backup Withholding.)
- ---------------------------------------
I agree that none of Mentor Investment Group, LLC, Mentor Distributors, LLC,
Boston Financial Data Services, Mentor Funds, or any of their affiliates will
be responsible for the authenticity of any instructions given and shall be
fully indemnified and held harmless from any and all direct liabilities,
losses, or cost resulting from acting upon such transactions.
Shareowner (or Custodian) Date
Co-Shareowner Date
Corporate Officer or Trustee Date
Title of Corporate Officer or Trustee Date
- ---------------------------------------
Dealer Information
- ---------------------------------------
To be completed by Customer Account Representative:
- ---------------------------------------
Financial Institution Name
- ---------------------------------------
Address
- ---------------------------------------
City State ZIP Code
- ---------------------------------------
Dealer Number (If applicable)
- ---------------------------------------
Representative's Code Number
- ---------------------------------------
Representative's Full Name
- ---------------------------------------
Representative's Branch Office
- ---------------------------------------
Representative's Phone Number
- ---------------------------------------
Mailing Information
- ---------------------------------------
Send this completed form to:
Mentor Funds
c/o Boston Financial Data Services
P.O. Box 8507
Boston, MA 02266
If you have any questions please call 1-800-382-0016
<PAGE>
MENTOR DISTRIBUTORS, LLC, Distributor
- --------------------------------------------------------------------------------
P R O S P E C T U S January 17, 1998
Mentor Balanced Portfolio
Mentor Balanced Portfolio seeks capital growth and current income. The
Portfolio is a series of shares of beneficial interest of Mentor Funds, an
open-end management investment company. The Portfolio invests in a diversified
portfolio of debt and equity securities which Mentor Investment Advisors, LLC,
the Portfolio's investment adviser, believes will produce both capital growth
and current income. The Portfolio may use "leverage" -that is, it may borrow
money to purchase additional portfolio securities, which involves special
risks. See "Other investment practices and risk factors - Leverage" on page 7.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. You can find more detailed
information in the January 17, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement or for other
information, 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 Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
----------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Expense Summary ................................. 3
Financial Highlights .............................. 5
Investment Objectives and Policies ............... 6
Other Investment Practices and Risk Factors ...... 9
Management ....................................... 12
Valuing the Portfolios' Shares .................. 13
How to Buy Shares ................................. 13
How To Sell Shares .............................. 16
How To Exchange Shares ........................... 17
Distributions and Taxes ........................... 18
Other Services .................................... 18
General .......................................... 19
Custodian and Transfer and Dividend Agent ......... 19
Performance Information ........................... 20
</TABLE>
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. The following table summarizes expenses incurred by the Portfolio
based on its most recent fiscal year. The Example shows the cumulative expenses
attributable to a hypothetical $1,000 investment in the Portfolio over
specified periods.
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed On Purchases .................................... None
Maximum Sales Load Imposed on Reinvested Dividends ........................... None
Redemption Fees ............................................................ None
Exchange Fees ............................................................... None
Contingent Deferred Sales Charge (as a percentage of the lower of the original
purchase price or redemption proceeds of shares redeemed): .................. 5.0% in the first year,
declining to 1.0% in
the fifth year, and
eliminated thereafter
Annual Portfolio Operating Expenses:
(as a percentage of average net assets)
Management Fees* ............................................................ 0.20%
12b-1 Fees* .................................................................. 0.00%
Shareholders Service Fee* ................................................... 0.00%
Other Expenses* ............................................................ 0.30%
-----
Total Portfolio Operating Expenses* ....................................... 0.50%
</TABLE>
- ----------
* After waivers.
During the Portfolio's last fiscal year, the Portfolio's investment
adviser waived all Management Fees, the Portfolio's distributor waived all
12b-1 Fees and Shareholder Service Fees, and Mentor Investment Group, LLC
waived certain adminstrative fees. In the absence of the waivers, Management
Fees would have been 0.75%, 12b-1 Fees would have been 0.75%, Shareholder
Service Fees would have been 0.25%, Other Expenses would have been 0.31%, and
Total Portfolio Operating Expenses would have been 2.06%. Mentor Advisors,
Mentor Distributors, and/or Mentor Investment Group may waive all or a portion
of such fees for the current fiscal year.
Examples
Your investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and no redemption at the end of each
period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- ----------- --------- --------- ---------
<S> <C> <C> <C>
$5 $16 $28 $63
</TABLE>
3
<PAGE>
You would pay the following expenses on the same investment, assuming
redemption at the end of each period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- ------------ --------- --------- ---------
<S> <C> <C> <C>
$55 $46 $38 $63
</TABLE>
This information is provided to help you understand the expenses of
investing in the Portfolio and your share of the estimated operating expenses
of the Portfolio. The information concerning the Portfolio is based on the
expenses the Portfolio expects to incur during its first full fiscal year. The
Examples should not be considered a representation of future performance;
actual expenses may be more or less than those shown. Long-term 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.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented below for the Portfolio have been
derived from the financial statements of the Balanced Portfolio, which have
been audited by KPMG Peat Marwick LLP, independent auditors. The report of KPMG
Peat Marwick LLP, along with the Portfolio's financial statements and notes
thereto, is incorporated by reference into the Statement of Additional
Information, which may be obtained in the manner described on the cover page of
this Prospectus. See "Financial Statements" in the Statement of Additional
Information.
<TABLE>
<CAPTION>
Mentor Balanced Portfolio
---------------------------------------------------------------
Year Ended Year Ended Period Ended Period Ended
9/30/97 9/30/96 9/30/95* 12/31/94**
------------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period .................. $16.28 $ 14.85 $ 12.44 $ 12.50
Net Investment income (loss) ........................... 0.43 0.42 0.36 0.22
Net realized and unrealized gain (loss) on
investments .......................................... 3.35 2.09 2.08 (0.09)
-------- --------- ------------ ------------
Total from investment operations ........................ 3.78 2.51 2.44 0.13
Less distributions
Dividends from net investment income .................. (0.43) (0.48) (0.03) (0.19)
Distributions from capital gains ........................ (2.02) (0.60) - -
-------- --------- ------------ ------------
Total Distributions .................................... (2.45) (1.08) (0.03) (0.19)
-------- --------- ------------ ------------
Net asset value, end of period ........................$ 17.61 $ 16.28 $ 14.85 $ 12.44
========= ========= ============= ============
Total return ............................................. 26.09% 18.00% 19.28% 1.00%
========= ========== ============ ============
Ratios/Supplemental Data
Net assets, end of period (in 000's) ..................... $ 4,102 $ 3,825 $ 3,210 $ 2,911
Ratio of expenses to average net assets ............... 0.50% 0.50% 0.50%(a) 0.50%(a)
Ratio of expenses to average net assets excluding
waiver ................................................ 2.13% 2.06% 2.12%(a) 2.72%(a)
Ratio of net investment income (loss) to average
net assets ............................................. 2.78% 2.83% 3.26%(a) 3.32%(a)
Portfolio turnover rate ................................. 80% 103% 65% 71%
Average commission rate on portfolio transactions ...... $ 0.0696 $ 0.0694 - -
========= ========== ============ ============
</TABLE>
- ----------
* For the period January 1, 1995 to September 30, 1995.
** For the period from June 21, 1994 (commencement of operations) to December
31, 1994.
(a) Annualized.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Mentor Balanced Portfolio's investment objective is to seek capital growth
and current income. The Portfolio invests in a diversified portfolio of equity
and fixed-income securities which Mentor Advisors believes will produce both
capital growth and current income. There can, of course, be no assurance that
the Portfolio will achieve its investment objective. The Portfolio is a series
of Mentor Funds (the "Trust"), an open-end series investment company. The
Trustees would not materially change the Portfolio's investment objective
without shareholder approval.
The Portfolio may invest in almost any type of security. The Portfolio's
securities will include some securities selected primarily to provide for
growth in value, others selected for current income, and other for stability of
principal.
Mentor Advisors will adjust the proportions of the Portfolio's assets
invested in the different types of securities in order to adjust to changing
market conditions. For example, under certain market conditions, Mentor
Advisors may judge that most of the Portfolio's assets should be invested in
equity securities, and that only a relatively small portion of the Portfolio's
assets should be invested in fixed-income securities. At other times, Mentor
Advisors may invest most of the Portfolio's assets in fixed-income securities,
with a corresponding reduction in the portion of the Portfolio's assets
invested in equity securities. Under normal circumstances, the Portfolio will
invest at least 25% of its assets in fixed-income securities and 25% of its
assets in equity securities.
The Portfolio will invest in debt securities and preferred stocks of
investment grade, and the Portfolio will seek under normal market conditions 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
Investors Service, Inc. or BBB- by Standard & Poor's Corporation or the
equivalent by another nationally recognized rating organization or, if unrated,
determined by Mentor Advisors to be of comparable quality. Securities rated Baa
or BBB lack outstanding investment characteristics and have speculative
characteristics and are subject to greater credit and market risks than
higher-rated securities. See the Statement of Additional Information for
descriptions of securities ratings assigned by Moody's and Standard & Poor's.
At times Mentor Advisors may decide that conditions in the securities
markets make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times, Mentor Advisors may
temporarily use alternative investment strategies primarily designed to reduce
fluctuations in the value of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio would be permitted to hold all or any
portion of its assets in high quality fixed-income securities, cash, or money
market instruments. It is impossible to predict when, or for how long, the
Portfolio will use these alternative strategies.
Mortgage-backed securities; other asset-backed securities. The Portfolio
may invest in mortgage-backed certificates and other securities representing
ownership interests in mortgage pools, including collateralized mortgage
obligations and certain stripped mortgage-backed securities and "residual"
interests therein. 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
6
<PAGE>
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, the Portfolio's mortgage-backed securities have less potential for
capital appreciation during periods of declining interest rates than other
fixed-income securities of comparable maturities, although such obligations may
have a comparable 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.
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. The 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 are 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 average duration and 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, the Portfolio may under some circumstances fail to recoup fully its
initial investment in these securities. Conversely, POs tend to 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 the Portfolio's ability to buy
or sell those securities at any particular time.
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates, the
Portfolio might not be able to reinvest the proceeds in securities providing
the same investment return as the securities redeemed.
The Portfolio 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 Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
7
<PAGE>
property, including collateralized mortgage obligation "residual" interests, as
well as new types of mortgage-related securities that may be developed and
marketed from time to time. "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.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio may
invest in a wide variety of such securities, including mortgage- 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.
Mentor Advisors 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, Mentor Advisors 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 the Portfolio may
invest may be highly illiquid, and the Portfolio may not be able to sell such a
security at a particular time or at the value it has placed on it.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, Mentor Advisors will be required to estimate the
extent to which the values of the securities are likely to change in response
to changes in interest rate 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 Mentor Advisors 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 the Portfolio
will recover the entire amount of the principal paid by it to purchase any such
securities.
Zero-coupon bonds. The Portfolio 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, the 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, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
Premium securities. The Portfolio 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
8
<PAGE>
amount payable on maturity. Although the 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, the Portfolio
may elect not to amortize the premium, in which case it would likely recognize
a capital loss if it holds such securities to maturity and may recognize a
larger loss if the security is sold or called prior to its maturity.
OTHER INVESTMENT PRACTICES AND RISK FACTORS
The Portfolio 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.
Leverage. The Portfolio may borrow money to invest in additional portfolio
securities to see 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,
the Portfolio's 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, and the Portfolio will not always borrow
money for investment. The extent to which the Portfolio will borrow money, and
the amount it may borrow, depend on market conditions and interest rates.
Successful use of leverage depends on Mentor Advisors's ability to predict
market movements correctly. The amount of leverage that can exist at any one
time will not exceed 33- 1|M/3% of the value of the Portfolio's total assets
(less all liabilities of the Portfolio other than the leverage).
Options and futures. The Portfolio may buy and sell call and put options
on securities it owns to hedge against changes in net asset value or to realize
a greater current return. In addition, through the purchase and sale of futures
contracts and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return. In addition, the Portfolio may buy and
sell options and futures contracts (including index futures contracts,
described below) to implement changes in its asset allocations among various
market sectors, pending the sale of its existing investments and reinvestment
in new securities.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that
the Portfolio will be able to utilize these instruments effectively for the
purposes stated above. Although the Portfolio will only engage in options and
futures transactions for limited purposes, those transactions involve certain
risks which are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and
may require the Portfolio to segregate assets to cover its outstanding
positions. For more information, see "Options" and "Futures Contracts" in the
Statement of Additional Information.
Index futures and options. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index future"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the
9
<PAGE>
change in value of the index between the time when the Portfolio enters into
and terminates an index futures or option transaction, the Portfolio realizes a
gain or loss. The Portfolio may also, to the extent consistent with applicable
law, buy and sell index futures and options to increase its investment return.
Certain provisions of the Internal Revenue Code may limit the Portfolio's
ability to engage in futures and options transactions.
Risks related to options and futures strategies. Futures and options
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 in the Portfolio's portfolio that are
the subject of a hedge. The successful use by the Portfolio of the strategies
described above further depends on Mentor Advisors' ability to forecast market
movements correctly. Other risks arise from the Portfolio's potential inability
to close out futures or options positions. Although the Portfolio will enter
into options or futures transactions only if Mentor Advisors believes that a
liquid secondary market exists for such option or futures contract, there can
be no assurance that the Portfolio will be able to effect closing transactions
at any particular time or at an acceptable price. Transactions in options and
futures contracts involve brokerage costs and may require the Portfolio to
segregate assets to cover its outstanding positions. For more information, see
the Statement of Additional Information.
The Portfolio generally expects that its options and futures contract
transactions will be conducted on recognized exchanges. In certain instances,
however, the Portfolio may purchase and sell options in the over-the-counter
markets. The Portfolio's ability to terminate options in the over-the-counter
markets may be more limited than for exchange-traded options and may also
involve the risk that securities dealers participating in such transactions
would be unable to meet their obligations to the Portfolio. The Portfolio will,
however, engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of Mentor
Advisors, 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.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolio's assets. (For
options that are "in-the-money" at the time of purchase, the amount by which
the option is "in-the-money" is excluded from this calculation.)
Securities loans, repurchase agreements, forward commitments, and reverse
repurchase agreements. The Portfolio may lend portfolio securities amounting to
not more than 25% of its assets to broker-dealers and may enter into repurchase
agreements on up to 25% of its assets. These transactions must be fully
collateralized at all times, but involve some risk to the Portfolio if the
other party should default on its obligations and the Portfolio is delayed or
prevented from recovering the collateral. The Portfolio may also purchase
securities for future delivery. The Portfolio may also enter into "reverse"
repurchase agreements and "dollar-roll" transactions, which generally involve
the sale by the Portfolio of securities held by it and an agreement to
repurchase the securities (or, in the case of dollar rolls, similar
securities), at an agreed-upon price, date, and interest payment. Reverse
repurchase agreements, dollar-roll transactions, and forward commitments may
increase the Portfolio's overall investment exposure and may result in losses.
Foreign securities. The Portfolio may invest in securities principally
traded in foreign markets. Since foreign securities are normally denominated
and traded in foreign currencies, the values of the Portfolio's assets may be
affected favorably or unfavorably by currency exchange rates and exchange
control regulations. There
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<PAGE>
may be less information publicly available about a foreign company than about a
U.S. company, and foreign companies are not generally subject to accounting,
auditing, and financial reporting standards and practices comparable to those
in the United States. The securities of some foreign companies are less liquid
and at times more volatile than securities of comparable U.S. companies.
Foreign brokerage commissions and other fees are also generally higher than in
the United States. Foreign settlement procedures and trade regulations may
involve certain risks (such as delay in payment or delivery of securities or in
the recovery of the Portfolio's assets held abroad) and expenses not present in
the settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. In the case of securities issued
by a foreign governmental entity, the issuer may in certain circumstances be
unable or unwilling to meet its obligations on the securities in accordance
with their terms, and the Portfolio may have limited recourse available to it
in the event of default. The laws of some foreign countries may limit the
Portfolio's ability to invest in securities of certain issuers located in those
foreign countries. Special tax considerations apply to foreign securities. The
Portfolio may buy or sell foreign currencies and options and futures contracts
on foreign currencies for hedging purposes in connection with its foreign
investments.
The Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization. Investments in
ADRs or GDRs are subject to many of the same risks of investing in foreign
securities generally.
Interest rate transactions. In order to attempt to protect the value of
the Portfolio's portfolio from interest rate fluctuations and to adjust the
interest-rate sensitivity of the Portfolio's portfolio, the Portfolio 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 the
Portfolio with another party of different types of interest rate streams (e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). The purchase of an interest rate cap entitles
the purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling the
floor to the extent that a specified index falls below a predetermined interest
rate or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values. The
Portfolio intends to use these interest rate transactions as a hedge and not as
a speculative investment. The Portfolio's ability to engage in certain interest
rate transactions may be limited by tax considerations. The use of interest
rate swaps and other interest rate transactions is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If Mentor Advisors
is incorrect in its forecasts of market values, interest rates, or other
applicable factors, the investment performance of the Portfolio would be less
favorable than what it would have been if this investment technique were not
used.
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<PAGE>
MANAGEMENT
The Trustees of the Trust are responsible for generally overseeing the
conduct of its business. Mentor Investment Advisors, LLC, located at 901 East
Byrd Street, Richmond, Virginia 23219, acts as investment adviser to the
Portfolio. All investment decisions for the Portfolio are made by a team of
investment professionals at Mentor Advisors.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group,
Inc. ("Mentor Investment Group"), which is in turn a subsidiary of Wheat First
Butcher Singer, Inc. ("WFBS"). WFBS, through other subsidiaries, also engages
in securities brokerage, investment banking, and related businesses. EVEREN
Capital Corporation has a 20% ownership in Mentor Investment Group and may
acquire additional ownership based principally on the amount of Mentor
Investment Group's revenues derived from assets attributable to clients of
EVEREN Securities, Inc. and its affiliates. Mentor Advisors is the successor to
Commonwealth Investment Counsel, Inc. Mentor Advisors, together with its
affiliates, serves as investment adviser to twenty-two separate investment
portfolios in the Mentor Family of Funds.
Wheat First Butcher Singer, Mentor Investment Group's parent company, has
entered into an Agreement and Plan of Merger pursuant to which it is to be
acquired by First Union Corp. ("First Union"). First Union is a global
financial services company with approximately $140 billion in assets and $10
billion in total stockholders' equity. The proposed arrangement does not
contemplate any changes in the management or operations of Mentor Investment
Group or any of its subsidiaries, including Mentor Advisors. Consummation of
the acquisition, which is subject to a number of conditions, including
regulatory approvals, will result in the termination of the investment advisory
agreement between the Portfolio and Mentor Advisors. It is expected that, upon
consummation of the acquisition (which is expected to occur as early as January
of 1998), the Portfolio will enter into a new investment advisory agreement
with Mentor Advisors, which will be substantially identical to the agreement
currently in effect.
Subject to the general oversight of the Trustees, Mentor Advisors, as
investment adviser, manages the Portfolio's securities in accordance with the
stated policies of the Portfolio. Mentor Advisors makes investment decisions
for the Portfolio and places the purchase and sale orders for the Portfolio's
portfolio transactions. In addition, Mentor Advisors pays the salaries of all
officers and employees who are employed by both it and the Trust. The Portfolio
pays all expenses not assumed by Mentor Advisors or Mentor Investment Group's,
including, among other things, Trustee's fees, auditing, legal, accounting,
custodial, investor servicing, and shareholder reporting expenses, and payments
under its Plan of Distribution. All investment decisions made for the Portfolio
are made by an investment committee at Mentor Advisors made up of investment
professionals at Mentor Advisors.
Mentor Advisors places all orders for purchases and sales of the
Portfolio's securities. In selecting broker-dealers, Mentor Advisors may
consider research and brokerage services furnished to it and its affiliates.
Subject to seeking the best overall terms available, Mentor Advisors may
consider sales of shares of the Portfolio (and, if permitted by law, of the
other funds in the Mentor family) as a factor in the selection of
broker-dealers.
The Portfolio pays management fees to Mentor Advisors at the annual rate
described above under "Summary of Portfolio Expenses - Annual Portfolio
Operating Expenses." Mentor Advisors may from time to time voluntarily waive
some or all of its management fee and may terminate such voluntary waiver at
any time in its sole discretion.
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Portfolio turnover. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by the Portfolio is known as "portfolio turnover." As a
result of the Portfolio's investment policies, under certain market conditions
the Portfolio's portfolio turnover rate may be higher than that of other mutual
funds. Portfolio turnover generally involves some expense to the Portfolio,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. Such
transactions may result in realization of taxable capital gains. The
Portfolio's portfolio turnover rates since inception are shown in the section
"Financial Highlights."
VALUING THE PORTFOLIO'S SHARES
The Portfolio calculates the net asset value of its shares 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.
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 Mentor Funds
or Mentor Distributors. You can buy Portfolio shares from Mentor Distributors
by check or money order, 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 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 receive your order before the close of
regular trading on the New York Stock Exchange to receive that day's public
offering service.
Shares of the Portfolio are sold without an initial sales charge, although
a contingent deferred sales charge ("CDSC") will be imposed if you redeem
shares within five years of purchase. The following types of shares may be
redeemed without charge: (i) shares acquired by reinvestment of distributions
and (ii) shares otherwise exempt from the CDSC, as described in the Example
below. The amount of the CDSC is determined as a percentage of the lesser of
the current market value or the cost of the shares being redeemed. The amount
of the CDSC will depend on the number of years since you invested and the
dollar amount being redeemed, according to the following table:
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<TABLE>
<CAPTION>
Contingent Deferred Sales
Year Since Purchase Charge as a Percentage of
Payment Made Applicable Amount Redeemed
- ------------------------ ---------------------------
<S> <C>
1 5.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6+ None
</TABLE>
The CDSC shown above is not imposed upon the redemption of shares
purchased pursuant to certain asset- allocation plans. 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.
In determining whether a CDSC is payable in respect of the shares
redeemed, the Portfolio will first redeem shares held longest (together with
any shares received upon reinvestment of distributions with respect to those
shares). Any of the shares being redeemed which were acquired by reinvestment
of distributions will be redeemed without a CDSC, and amounts representing
capital appreciation will not be subject to a CDSC.
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>
o Proceeds of 50 shares redeemed at $12 per share $600
o Minus proceeds of 10 shares not subject to a CDSC
because they were acquired through dividend
reinvestment (10 x $12) -120
o Minus appreciation on remaining shares, also not subject to
CDSC (40 x $2) -80
------
o 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
The Portfolio may waive the CDSC on shares redeemed by the Trust's current
and retired Trustees (and their families), current and retired employees (and
their families) of Mentor Distributors, Mentor Advisors, and their affiliates,
registered representatives and other employees (and their families) of
broker-dealers having sales agreements with Mentor Distributors, employees (and
their families) of financial institutions having sales agreements with Mentor
Distributors (or otherwise having an arrangement with a broker-dealer or
financial institution
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<PAGE>
with respect to sales of Portfolio shares), financial institution trust
departments investing an aggregate of $1 million or more in one or more funds
in the Mentor family, clients of certain administrators of tax-qualified plans,
employer-sponsored retirement plans, tax-qualified plans when proceeds from
repayments of loans to participants are invested (or reinvested) in funds in
the Mentor family, shares redeemed under the Portfolio's Systematic Withdrawal
Plan (limited to 10% of a shareholder's account in any calendar year), and
"wrap accounts" for the benefit of clients of financial planners adhering to
certain standards established by Mentor Distributors. In addition, the
Portfolio may sell shares without a CDSC in connection with the acquisition by
the Portfolio of assets of an investment company or personal holding company.
In addition, the CDSC may be waived in the case of (i) redemptions of shares
held at the time a shareholder dies or becomes disabled, including the shares
of a shareholder who owns the shares with his or her spouse as joint tenants
with right of survivorship, provided that the redemption is requested within
one year of the death or initial determination of disability; (ii) redemptions
in connection with the following retirement plan distributions: (a) lump-sum or
other distributions from a qualified retirement plan following retirement, (b)
distributions from an IRA, Keogh Plan, or Custodial Account under Section
403(b)(7) of the Internal Revenue Code following attainment of age 59 1|M/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 or an affiliate; and (iv) redemptions by pension or profit sharing plans
of which Mentor Investment Group or any affiliate serves as a plan fiduciary.
If you invest through a broker-dealer or other financial institution your
broker-dealer or other financial institution will be responsible for electing
on your behalf to take advantage of any of these reduced sales charges or
waivers described above. Please instruct your broker-dealer or financial
institution accordingly.
If you are considering redeeming or exchanging shares of the Portfolio or
transferring shares to another person shortly after purchase, you should pay
for those shares with a certified check to avoid any delay in redemption,
exchange, or transfer. Otherwise the Portfolio may delay payment until the
purchase price of those shares has been collected or, if you redeem by
telephone, until 15 calendar days after the purchase date.
To eliminate the need for safekeeping, certificates will not be issued for
your shares unless you request them.
Because of the relatively high cost of maintaining accounts, the Portfolio
reserves the right to redeem, upon not less than 60 days' notice, any account
below $500 as a result of redemptions. A shareholder may, however, avoid such a
redemption by the Portfolio by increasing his investment in shares to a value
of $500 or more during such 60-day period.
Mentor Distributors, Mentor Advisors, 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. In addition, if an investor
purchases shares of the Portfolio through EVEREN Securities, Inc. with the
redemption proceeds received by the investor within the preceding 90 days from
the sale of shares of any non-Mentor open-end mutual fund, EVEREN Securities,
Inc. may compensate the investor's investment consultant in connection with
that purchase.
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<PAGE>
Dealers may not use sales of 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.
Reinvestment Privilege. If you redeem shares of the Portfolio, you have a
one-time right, within 60 days, to reinvest the redemption proceeds plus the
amount of CDSC you paid, if any, at the next-determined net asset value. Mentor
Distributors must be notified in writing by you or by your financial
institution of the reinvestment for you to recover the CDSC. If you redeem
shares in the Portfolio, there may be tax consequences.
HOW TO SELL SHARES
You can sell your shares in the 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 the Portfolio. Send a signed letter of
instruction or stock power form, along with any certificates that represent
shares you want to sell to Mentor Funds, c/o Boston Financial Data Services,
Inc. ("BFDS"), 2 Heritage Drive, North Quincy, Massachusetts 02171. The price
you will receive is the next net asset value 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 share 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.
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<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 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. Shares redeemed
under the Systematic Withdrawal program are not subject to a CDSC, but the
aggregate withdrawals of 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 the
Portfolio worth at least $1,000 for shares of the same class of certain other
funds in the Mentor family at net asset value beginning 15 days after purchase.
You may also exchange shares of the Portfolio for shares of Cash Resource U.S.
Government Money Market Fund (the "Cash Fund"). If you exchange shares subject
to a CDSC, the transaction will not be subject to the 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 any Portfolio into or from which you have exchanged your shares
that would result in your paying the highest CDSC applicable to your shares.
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 be included in
calculating the length of time you have owned the shares subject to the CDSC;
alternatively, Mentor Distributors may elect not to include the length of time
you hold shares of the Cash Fund, in which case any CDSC payable on redemption
of your shares will be reduced by the amount of any payment collected by the
Cash Fund under its distribution plan in respect of those shares. Contact
Mentor Distributors for information.)
To exchange your shares, simply complete an Exchange Authorization Form
and send it to Mentor 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 other Portfolios of Mentor
Funds or the 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 Distributions or the
Trustees believe doing so would be in the best interests of the Portfolio, the
Portfolio reserves the right to revise or terminate the exchange privilege,
limit the amount or number of exchanges or reject any exchange. Shareholders
would be notified of any such action to the extent required by law. Consult
Mentor Distributors before requesting an exchange by calling 1-800-382-0016.
See the Statement of Additional Information to find out more about the exchange
privilege.
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<PAGE>
Exchanges to and from the Portfolio are not available at the date of this
Prospectus. Consult Mentor Distributors as to the availability of such
exchanges in the future.
DISTRIBUTIONS AND TAXES
Dividends, if any, are declared and paid quarterly to all shareholders
invested in the Portfolio on a record date. Any next realized capital gain will
be distributed at least annually. All dividends and distributions will be
invested in additional shares unless a shareholder requests in writing to
receive the dividend or distribution in cash.
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders.
All Portfolio distributions will be taxable to you as ordinary income,
except that any distributions of net long-term capital gains will be taxed as
such, regardless of how long you have held the shares (although the loss on a
sale of shares held for less than six months will be treated as long-term
capital loss to the extent of any capital gain distribution received with
respect to those shares). Pursuant to the Taxpayer Relief Act of 1997,
long-term capital gains generally will be subject to a maxiumum tax rate of 28%
or 20% depending upon the holding period of the Portfolio investment generating
the gains. Distributions will be taxable as described above whether received in
cash or in shares through the reinvestment of distributions. Early in each year
the Mentor Family of Funds will notify you of the amount and tax status of
distributions paid to you by the Portfolio for the preceding year.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. You should consult your tax adviser to determine
the precise effect of an investment in the Portfolio on your particular tax
situation.
The Portfolio has agreed to indemnify Mentor Distributors against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
OTHER SERVICES
Administrative Services. Mentor Investment Group, LLC, located at 901 East
Byrd Street, Richmond, Virginia 23219, provides the Portfolio with certain
administrative personnel and services necessary to operate the Portfolio, such
as bookkeeping and accounting services. Mentor Investment Group provides these
services to the Portfolio at an annual rate of 0.10% of the Portfolio's average
daily net assets. In order to limit the Portfolio's expenses, Mentor Investment
Group has agreed to waive its fee for the current fiscal year. This waiver may
be terminated at any time. Mentor Investment Group, LLC is the successor to
Mentor Investment Group, Inc.
Shareholder Servicing Plan. Mentor Funds has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to the Portfolio. Under the
Service Plan, financial institutions will enter into shareholder service
agreements with the Portfolio to provide administrative support services to
their customers who are Portfolio shareholders. In return for providing these
support services, a financial institution may receive payments from the
Portfolios at a rate not exceeding 0.25% of the average daily net assets of the
Portfolio. These administrative services may include, but are not limited to,
the following functions: providing office space, equipment,
18
<PAGE>
telephone facilities, and various personnel, including clerical, supervisory,
and computer personnel, as necessary or beneficial to establish and maintain
shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Portfolio; assisting clients
in changing dividend options, account designations, and addresses; and
providing such other services as the Portfolio reasonably requests.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Advisors and/or Mentor Funds, or
affiliates thereof, for providing administrative support services to holders of
the Portfolio's shares. These payments will be made directly by Mentor Advisors
and/or Mentor Funds and will not be made from the assets of the Portfolio.
GENERAL
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
Mentor Funds is an open-end, diversified, series management investment
company with an unlimited number of authorized shares of beneficial interest.
Shares of 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. Mentor Funds' shares are
currently divided into eleven series, one representing the Portfolio, the
others representing other Portfolios with varying investment objectives and
policies. Each share has one vote, with fractional shares voting
proportionally. Shares of each class will vote together as a single class
except when required by law or determined by the Trustees. Shares of the
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets
of the Portfolio. Mentor Funds may suspend the sale of shares at any time and
may refuse any order to purchase shares. Although neither Mentor Funds nor the
Portfolio is required to hold annual meetings of shareholders, shareholders
have the right to call a meeting to elect or remove Trustees, or to take other
actions as provided in the Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
For additional information concerning the Mentor Family of Funds or any of
its Portfolios being offered for sale, contact Mentor Distributors, by calling
1-800-382-0016 or writing to Mentor Distributors at 901 East Byrd Street,
Richmond, Virginia 23219.
CUSTODIAN AND TRANSFER AND DIVIDEND AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. Boston Financial Data
Services, Inc. serves as the Portfolio's transfer and dividend agent. Mentor
Funds' 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 Portfolio. The Portfolio's "yield" is calculated by
dividing the Portfolio's annualized net investment income per share of the
class during a recent 30-day period by the maximum public offering price per
share on the last day of that period. A "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 reflecting the deduction of
any applicable contingent deferred sales charge. Total return may also be
presented for other periods or based on investment at reduced sales charge
levels or at net asset value. Any quotation of investment performance not
reflecting the contingent deferred sales charge would be reduced if such sales
charges were used. Quotations of yield or total return for any period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. The Portfolio's performance may be compared to various indices.
See the Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of Mentor Advisors or any of its personnel.
All data are based on the 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's securities, and the Portfolio's operating expenses. Investment
performance also often reflects the risks associated with the Portfolio's
investment objective and policies. These factors should be considered when
comparing the Portfolio's investment results to those of other mutual funds and
other investment vehicles.
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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Portfolio's official sales literature in connection with the offer of the
Portfolio's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Portfolio. This Prospectus does not constitute an offer in any State in which,
or to any person to whom, such offering may not lawfully be made. This
Prospectus omits certain information contained in the Registration Statement,
to which reference is made, filed with the Securities and Exchange Commission.
Items which are thus omitted, including contracts and other documents referred
to or summarized herein, may be obtained from the Commission upon payment of
the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
Mentor Investment Group
901 East Byrd Street
Richmond, VA 23219
(800) 382-0016
1998 Mentor Distributors, LLC
Mentor Balanced Portfolio
-------------------------
PROSPECTUS
-------------------------
January 17, 1998
[MENTOR INVESTMENT GROUP LOGO]
<PAGE>
P R O S P E C T U S January 17, 1998
Y (Institutional) Shares
Mentor Funds
Mentor Funds, an open-end management investment company, is offering
Y Shares of eight different investment portfolios to institutional and high
net-worth individual investors: Mentor Growth Portfolio, Mentor Capital
Growth Portfolio, Mentor Strategy Portfolio, Mentor Income and Growth
Portfolio, Mentor Perpetual Global Portfolio, Mentor Quality 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. See "Other
Investment Practices."
Mentor Funds provides investors an opportunity to invest 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
Mentor Funds that a prospective investor should know before investing.
Investors should read this Prospectus carefully and retain it for future
reference. More detailed information can be found in the January 17, 1998
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 Mentor Funds is
P.O. Box 1357, Richmond, Virginia 23218-1357.
----------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
ANDEXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THEACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Expense Summary ........................ 3
Investment Objectives and Policies ...... 4
Other Investment Practices ............... 12
Valuing the Portfolios' Shares ......... 19
How to Buy Shares ........................ 19
How To Sell Shares ..................... 20
How To Exchange Shares .................. 21
Distributions and Taxes .................. 22
Management .............................. 23
General ................................. 26
Performance Information .................. 26
APPENDIX ................................. 28
</TABLE>
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. Expenses shown reflect the estimated expenses each of the Portfolios
expects to occur during the current fiscal year with respect to its Y Shares.
The Examples show the cumulative expenses attributable to a hypothetical $1,000
investment in Y Shares of each Portfolio over specified periods.
Shareholder Transaction Expenses
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases .................. None
Maximum Sales Charge Imposed on Reinvested Dividends ...... None
Exchange Fee ............................................. None
Contingent Deferred Sales Charge ........................... None
</TABLE>
Annual Portfolio Operating Expenses
(As a percentage of average net assets)
<TABLE>
<CAPTION>
Income Short-
Capital and Perpetual 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>
Management Fees ......... 0.70% 0.80% 0.85% 0.75% 1.10% 0.47%* 0.60% 0.34%*
12b-1 Fees ............... None None None None None None None None
Shareholder Services Fee None None None None None None None None
Other Expenses ............ 0.33% 0.36% 0.35% 0.35% 0.54% 0.33% 0.37% 0.27%*
Total Portfolio Operating
Expenses ............... 1.03% 1.16% 1.20% 1.10% 1.64% 0.80%* 0.97% 0.61%*
</TABLE>
- ----------
* After expense limitation.
Mentor Investment Advisors, LLC has agreed to limit its Management Fees
from each of the Quality Income and Short-Duration Income Portfolios and Mentor
Investment Group has agreed to limit its administrative services fees from the
Short-Duration Income Portfolio until September 30, 1998. In the absence of
these expense limitations, Management Fees for the Quality Income Portfolio and
the Short-Duration Income Portfolio would be 0.60% and 0.50%, respectively,
Other Expenses for the Short-Duration Income Portfolio are expected to be
0.37%, and Total Portfolio Operating Expenses for the Quality Income Portfolio
and the Short-Duration Income Portfolio are expected to be 0.93% and 0.87%,
respectively.
3
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Examples
You would pay the following expenses on a $1,000 investment in Y Shares,
assuming 5% annual return and with or without redemption at the end of each
period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Growth Portfolio ..................... $11 $33 $57 $126
Capital Growth Portfolio ............ 12 37 64 141
Strategy Portfolio .................. 12 38 66 145
Income and Growth Portfolio ......... 11 35 61 134
Perpetual Global Portfolio ............ 17 52 89 194
Quality Income Portfolio ............ 8 26 44 99
Municipal Income Portfolio ............ 10 31 54 119
Short-Duration Income Portfolio ...... 6 20 34 76
</TABLE>
The Examples should not be considered a representation of future
performance; actual expenses may vary.
INVESTMENT OBJECTIVES AND POLICIES
Mentor Funds is offering Y Shares of eight different diversified
Portfolios by this Prospectus with varying 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 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
immediately after and 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 Investment Advisors, LLC ("Mentor Advisors") is the investment
adviser to each of the Portfolios other than the Mentor Perpetual Global
Portfolio. Mentor Perpetual Advisors, LLC ("Mentor Perpetual") is the
investment adviser to the Global Portfolio.
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<PAGE>
Mentor Growth Portfolio
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 Mentor Advisors, have demonstrated earnings, asset values, or growth
potential not yet reflected in their market price. A key indication of such
undervaluation considered by Mentor Advisors 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. Mentor Advisors 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.
Mentor Capital Growth Portfolio
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 Mentor 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
Mentor 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 Mentor Advisors believes offers the potential for capital
appreciation. In selecting investments, Mentor Advisors will attempt to
identify securities it believes will provide capital appreciation over the
intermediate or long term due to changes 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
The Strategy Portfolio's investment objective is to seek high total return
on its investments. In seeking to achieve this objective, Mentor Advisors
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).
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<PAGE>
Mentor Advisors 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,
Mentor Advisors 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 Mentor Advisors believes that
the potential for total return in the bond market is greater than that in the
equity market. Mentor Advisors 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, Mentor Advisors 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 Mentor Advisors 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, Mentor Advisors 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.
Within the fixed-income sector, Mentor Advisors 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 Mentor Advisors 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.
6
<PAGE>
Mentor Income and Growth Portfolio
Sub-adviser: Wellington Management Company, LLP
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 Management Company, LLP ("Wellington
Management") believes exhibit sound fundamental characteristics and in
investment-grade fixed-income securities and U.S. Government securities, as
described below.
Wellington Management 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 Management will attempt
to identify securities it believes are conservatively valued. 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
Management's fundamental research and security valuations.
Within the fixed-income asset class, Wellington Management 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, corporate debt securities (including
zero-coupon securities) and debt securities issued by foreign governments and
by companies located outside the United States. 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 unrated, are deemed by Wellington
Management 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
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.
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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 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 investment grade securities or those of equivalent
quality as determined by Mentor 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
The Quality Income Portfolio's investment objective is to seek high
current income consistent with what Mentor Advisors believes to be prudent
risk. The Portfolio may invest in debt securities, including both U.S.
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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 Mentor
Advisors to be of comparable quality. Securities rated Baa or BBB lack
outstanding investment characteristics and have speculative characteristics and
are subject to greater credit and market risks than higher-rated securities.
The Portfolio 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 Mentor Advisors to be of comparable
quality. A description of securities ratings is contained in the Appendix to
this Prospectus.
Mentor 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 any
portion of its assets 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),
and in other asset-backed securities, which involve certain risks. The
Portfolio may also invest any portion of its assets in securities representing
secured or unsecured interests in other types of assets such as automobile
finance or credit card receivables. 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.
Mentor Municipal Income Portfolio
Sub-adviser: Van Kampen American Capital Management, Inc.
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
American Capital Management, Inc. ("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.
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Up to 20% of the Portfolio's total assets may be invested in tax-exempt
municipal securities rated between BB and B- by S&P or between Ba and B3 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 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
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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. 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 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
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 invest any 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
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securities (including certain "residual" interests). The Portfolio may also
invest any portion of its assets in securities representing secured or
unsecured interests in other types of assets, such as automobile finance or
credit card receivables. 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
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, Mentor Advisors
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 debt securities and preferred stocks of
investment grade, 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 Mentor Advisors to be of comparable
quality. Securities rated Baa or BBB lack outstanding investment
characteristics and have speculative characteristics and are subject to greater
credit and market risks than higher-rated securities. 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.
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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 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.
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Each of the Quality Income, Short-Duration Income, Income and Growth, 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 or sub-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
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.
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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. 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
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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 not appropriate 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.
Securities loans and 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.
Leverage. The Short-Duration Income Portfolio may borrow money to invest
in additional securities to seek current income. In addition, a proposal has
been made to shareholders of the Quality Income Portfolio to permit the
Portfolio to borrow money to invest in additional securities to seek current
income. The Quality Income will permitted to do so commencing February 1, 1998,
unless this prospectus has been revised to provide differently. Certain other
Portfolios may engage in reverse repurchase agreements, forward commitments,
and dollar-roll transactions described below and in the Statement of Additional
Information, which may have the same economic effect as if the Portfolios had
borrowed money.
The use of borrowed money, known as "leverage," increases a Portfolio's
market exposure and risk and may result in losses. When a 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 Portfolios
currently intend to use leverage in order to adjust the dollar-weighted average
duration of their portfolios. A Portfolio will not always borrow money for
investment and the extent to which a 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 that can exist at
any one time will not exceed one-third of the value of a Portfolio's total
assets.
Reverse repurchase agreements; forward committments. Each Portfolio, other
than the Growth and Strategy Portfolios, may enter into "reverse" repurchase
agreements. Each of the Capital Growth, Quality Income, Short-Duration Income,
Income and Growth, and Global Portfolios may do so with respect to up to
one-third of its
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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
involve leverage, and may increase a Portfolio's overall investment exposure.
Their use by a Portfolio may result in losses. The Short-Duration Income
Portfolio and the Quality Income Portfolio may enter into reverse repurchase
agreement to create investment leverage.
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 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 involve leverage and may increase a Portfolio's overall investment
exposure. Their use by a Portfolio 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% of their total assets. (Those percentage limitations do not
apply to American Depository Receipts, Global Depository Receipts, and other
U.S. dollar-denominated securities of issuers located outside the United
States.) 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.
A Portfolio may invest in American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs"), which represent interests in foreign securities
held by a bank, trust company, or other organization. Investments in ADRs and
GDRs are subject to many of the same risks of investing in foreign securities
generally.
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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 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 its portfolio, each of 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.
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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.
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.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rates or at such other rates as may be used in
accordance with procedures approved by the Trustees. As a result, fluctuations
in the values of such currencies in relation to the U.S. dollar will affect the
net asset value of a Portfolio's shares even though there has not been any
change in the values of such securities as quoted in such foreign currencies.
HOW TO BUY SHARES
Mentor Distributors, LLC ("Mentor Distributors"), located at 901 East Byrd
Street, Richmond, Virginia 23219, serves as distributor of the Portfolios'
shares. Mentor Distributors is not obligated to sell any specific amount of
shares of any of the Portfolios.
Y Shares of each Portfolio are sold at a price based on their net asset
value next determined after a purchase order is received by the Portfolio. In
most cases, in order to receive that day's public offering price, your order
must be received by the Trust or Mentor Distributors before the close of
regular trading on the New York Stock Exchange.
An investor may make an initial purchase of shares in a Portfolio by
submitting completed application materials along with a purchase order, and by
making payment to Boston Financial Data Services, Inc. at 2 Heritage Drive,
North Quincy, MA 02171. Investors will be required to make minimum initial
investments of $1
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million and minimum subsequent investments of $25,000. Investments made through
advisory accounts maintained with investment advisers registered under the
Investment Advisers Act of 1940, as amended (including "wrap" accounts), are
not subject to these minimum investment requirements. Contact Mentor
Distributors for information. The Portfolios reserve the right at any time to
change the initial and subsequent investment minimums required of investors.
Shares of a Portfolio may be purchased by (i) paying cash, (ii) exchanging
securities acceptable to a Portfolio's investment adviser or sub-adviser, or
(iii) a combination of such securities and cash. Purchase of shares of a
Portfolio in exchange for securities is subject in each case to the
determination by a Portfolio's investment adviser or sub-adviser that the
securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by a Portfolio's investment adviser or sub-adviser in
exchange for Portfolio shares will be valued in the same manner as the
Portfolio's assets as of the time of the next determination of net asset value
after such acceptance. All dividends and subscription or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Portfolio and must be delivered to the Portfolio
upon receipt by the investor from the issuer. A gain or loss for federal income
tax purposes would be realized upon the exchange by an investor that is subject
to federal income taxation, depending upon the investor's basis in the
securities tendered. A shareholder who wishes to purchase shares by exchanging
securities should obtain instruction by calling Mentor Distributors at
1-800-869-6042.
Mentor Distributors, Mentor Advisors, Mentor Perpetual, the sub-advisers
or affiliates thereof, at their own expense and out of their own assets, may
provide compensation to dealers in connection with sales of shares of the
Portfolios. Such compensation may include, but is not limited to, financial
assistance to dealers in connection with conferences, sales, or training
programs for their employees, seminars for the public, advertising or sales
campaigns, or other dealer-sponsored special events. In some instances, this
compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell significant amounts of
shares. In addition, if an investor purchases shares of a Portfolio through
EVEREN Securities, Inc. with the redemption proceeds received by the investor
within the preceding 90 days from the sale of shares of any non-Mentor open-end
mutual fund, EVEREN Securities, Inc. may compensate the investor's investment
consultant in connection with that purchase. Dealers may not use sales of
Portfolio shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc.
In all cases a Portfolio's investment adviser, sub-adviser, and Mentor
Distributors reserve the right to reject any particular investment.
HOW TO SELL SHARES
A shareholder may redeem all or any portion of its shares in a Portfolio
any day the New York Stock Exchange is open by sending a signed letter of
instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to the Portfolio c/o Mentor Funds, P. O.
Box 1357, Richmond, Virginia 23218-1357 or to Mentor Distributors. Redemptions
will be effected at the net asset value per share next determined after the
receipt by the Portfolio of redemption instructions in "good order" as
described below. In order to receive that day's net asset value, your request
must be received before the close of regular trading on the New York Stock
Exchange. A Portfolio will only redeem shares for which it has received
payment. A check for the proceeds will normally be mailed on the next business
day after a request in good order is received.
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A redemption request will be considered to have been made in "good order"
if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be redeemed,
and identifies the shareholder's Portfolio account number;
(2) the request is signed by each registered owner exactly as the shares
are registered; and
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed for transfer (or are accompanied by an
endorsed stock power) and accompany the redemption request.
If shares to be redeemed represent an investment made by check, the Trust
reserves the right not to transmit the redemption proceeds to the shareholder
until the check has been collected, which may take up to 15 days after the
purchase date.
Each Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Mentor Distributors
usually requires additional documentation for the sale of shares by a
corporation, partnership, agent, fiduciary, or surviving joint owner. Contact
Mentor Distributors for details.
Mentor Distributors may facilitate any redemption request. There is no
extra charge for this service.
Other information concerning redemption. Under unusual circumstances, each
of the Portfolios may suspend redemptions, or postpone payment for more than
seven days, as permitted by federal securities law. In addition, each Portfolio
reserves the right, if conditions exist which make cash payments undesirable,
to honor any request for redemption by making payment in whole or in part in
securities value in the same way as they would be valued for purposes of
computing the Portfolio's per share net asset value. If payment is made in
securities, a shareholder may incur brokerage expenses in converting those
securities into cash.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your Y Shares in a
Portfolio worth at least $1,000 for shares of the same class of any other
Portfolio of the Trust, at net asset value beginning 15 days after purchase.
You may also exchange Y Shares of a Portfolio for shares of Cash Resource U.S.
Government Money Market Fund (the "Cash Fund").
To exchange your shares, simply complete an Exchange Authorization Form
and send it to the Trust, c/o Boston Financial Data Services, Inc., 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.
The Telephone Exchange Privilege is not available if you were issued
certificates for shares which remain outstanding. Ask you investment dealer or
Mentor Distributors for a prospectus relating to the Cash Fund. Shares of
certain of the Portfolios may not be available to residents of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management
and have an adverse effect on all shareholders. In order to limit excessive
exchange activity and in other circumstances where Mentor Distributors or the
Trustees believe doing so would
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be in the best interests of a Portfolio, the Trust 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, quarterly for
the Income and Growth Portfolio, and annually for the Growth, Capital Growth,
Global, and Strategy Portfolios. Each Portfolio will distribute its net capital
gain, if any, at least annually. All dividends and distributions of net capital
gain will be invested in additional Y Shares 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. Each Portfolio will distribute substantially all
of its net investment income and capital gain net income on a current basis.
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to shareholders as ordinary income, except that any distributions of
net capital gain will be taxed as long-term capital gain, regardless of how
long a shareholder has held the shares (although the loss on a sale of shares
held for six months or less will be treated as long-term capital loss to the
extent of any capital gain distribution received with respect to those shares).
Pursuant to the Taxpayer Relief Act of 1997, long-term capital gains generally
will be subject to a maximum tax rate of 28% or 20% depending upon the holding
period of the portfolio investment generating the gains. Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year Mentor Funds will notify
shareholders of the amount and tax status of distributions paid by their
Portfolios for the preceding year. In buying or selling securities for each of
the Portfolios, Mentor Advisors and Mentor Perpetual, as applicable, will not
normally take into account the effect any purchase or sale of securities will
have on the tax positions of the Portfolios' shareholders.
To permit the Quality Income, Municipal Income, and Short-Duration Income
Portfolios to maintain more stable monthly distributions, each of these
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 any of these Portfolios 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 Municipal
Income Portfolio as "exempt-interest dividends" are not generally subject to
federal income tax. The Municipal Income Portfolio may engage in investment
activities that produce taxable income, the distribution of which will be
taxable to shareholders as described above. Individual investors who receive
Social Security or railroad retirement benefits should consult their tax
advisers to determine what effect, if any, an investment in the Municipal
Income Portfolio may have on the taxation of their 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.
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Global Portfolio only. Shareholders of the Global Portfolio who are U.S.
citizens or residents may be able to claim a foreign tax credit or deduction on
their U.S. income tax returns with respect to foreign taxes paid by the
Portfolio. If, at the end of the fiscal year of the Portfolio, more than 50% of
the Portfolio's total assets are represented by stock or securities of foreign
corporations, the Portfolio intends to make an election permitted by the
Internal Revenue Code to treat any eligible foreign taxes it paid as paid by
its shareholders. In that case, shareholders who are U.S. citizens, U.S.
corporations, and, in some cases, U.S. residents, will be required to include
in U.S. taxable income their pro rata share of such taxes, but may then be
entitled to claim a foreign tax credit or deduction (but not both) for their
share of such taxes.
The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. Dividends and distributions also may be subject to
foreign, state, and local taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, foreign, state, or local
taxes. Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of a Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
MANAGEMENT
The Trustees of Mentor Funds are responsible for generally overseeing the
conduct of its business. Mentor Investment Advisors, LLC is the investment
adviser to each of the Portfolios other than the Global Portfolio. Mentor
Perpetual Advisors, LLC is the investment adviser to the Global Portfolio. Each
of the investment advisers is located at 901 East Byrd Street, Richmond,
Virginia.
All investment decisions made for the Portfolios by Mentor Advisors and
Mentor Perpetual are made by investment management teams.
Mentor Advisors, has over $11 billion in assets under management. Mentor
Advisors is a wholly owned subsidiary of Mentor Investment Group, LLC ("Mentor
Investment Group") and its affiliates. Mentor Investment Group is a subsidiary
of Wheat First Butcher Singer, Inc. Wheat First Butcher Singer, through other
subsidiaries, also engages in securities brokerage, investment banking, and
related businesses. EVEREN Capital Corporation has a 20% ownership in Mentor
Investment Group and may acquire additional ownership based principally on the
amount of Mentor Investment Group's revenues derived from assets attributable
to clients of EVEREN Securities, Inc. and its affiliates.
Wheat First Butcher Singer, Mentor Investment Group's parent company, has
entered into an Agreement and Plan of Merger pursuant to which it is to be
acquired by First Union Corp. ("First Union"). First Union is a global
financial services company with approximately $140 billion in assets and $10
billion in total stockholders' equity. The proposed arrangement does not
contemplate any changes in the management or operations of Mentor Investment
Group or any of its subsidiaries, including Mentor Advisors. Consummation of
the acquisition, which is subject to a number of conditions, including
regulatory approvals, will result in the termination of the Portfolios'
investment advisory and sub-advisory agreements. It is expected that, upon
consummation of the acquisition (which is expected to occur as early as January
1998), the Trust will enter into a new investment advisory agreements with
Mentor Advisors and Mentor Perpetual (and will enter into related sub-advisory
agreements), which will be substantially identical to the agreements currently
in effect.
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Mentor Perpetual, an investment advisory firm organized in 1995, is owned
equally by Perpetual plc, a diversified financial services holding company, and
Mentor Advisors. The Perpetual organization currently serves as investment
adviser for assets of more than $10 billion. Its clients include 28 unit
investment trusts and other public investment pools including private
individuals, charities, pension plans, and life assurance companies.
Mentor Advisors and Mentor Perpetual together serve as investment adviser
to twenty-two separate investment portfolios in the Mentor Family of Funds,
including those offered by this Prospectus. For a prospectus relating to
certain of these other investment portfolios, and for information concerning
your eligibility to purchase shares of those portfolios, contact Mentor
Distributors.
Each of the Portfolios (other than the Global Portfolio) pays management
fees to Mentor Advisors at the annual rates described above under "Expense
Summary - Annual Portfolio Operating Expenses", and the Global Portfolio pays
fees to Mentor Perpetual at an annual rate to 1.10% of its average daily net
assets up to and including $75 million and 1.00% of its average daily net
assets 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 at any time in its sole discretion.
The Sub-Advisers
Van Kampen American Capital Management Inc. 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 an
indirect wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
Morgan Stanley, Dean Witter, Discover & Co. and various of its subsidiaries,
including Morgan Stanley & Co. Incorporated, a registered broker-dealer, are
engaged in a wide range of financial services. As of September 30, 1997, Van
Kampen, together with its affiliates, advised or supervised approximately $67.5
billion of assets. For its services as sub-adviser, Van Kampen receives a fee
from Mentor Advisors at the following annual rate: 0.25% of the first $60
million of the Portfolio's average net assets and 0.20% of the Portfolio's
average net assets over $60 million.
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 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 $13 billion.
Wellington Management Company, LLP serves as sub-adviser to the Income and
Growth Portfolio. Wellington Management, 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, 1997, Wellington Management had discretionary investment
management authority with respect to approximately $168.7 billion in assets.
Wellington Management 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,
Wellington
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Management receives a fee from Mentor Advisors at the following annual rate:
0.325% of the first $50 million of the Portfolio's average net assets, 0.275%
of the next $150 million of the Portfolio's average net assets, 0.225% of the
next $300 million of the Portfolio's average net assets, and 0.200% of the
Portfolio's net assets over $500 million.
Paul D. Kaplan, Senior Vice President of Wellington Management, has served
as portfolio manager of the fixed-income and U.S. Government securities portion
of the Portfolio since its inception in May 1993. Mr. Kaplan has been a
portfolio manager with Wellington Management since 1982. As of November 30,
1996, Wellington Management's Equity Income Team, a group of equity portfolio
managers and senior investment professionals, assumed responsibility for
managing the equity securities portion of the Portfolio.
General. Subject to the general oversight of the Trustees, each
Portfolio's investment adviser or sub-adviser manages the relevant Portfolio's
investments in accordance with the stated policies of the Portfolio. Each makes
investment decisions for a Portfolio and places 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 Mentor Funds. Mentor
Funds pays all expenses not assumed by the investment advisers, sub-advisers,
or Mentor Investment Group, including, among other things, Trustees' fees,
auditing, accounting, legal, custodial, investor servicing, and shareholder
reporting expenses.
In selecting broker-dealers, an 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 Mentor Funds (and, if
permitted by law, of the other funds in the Mentor family) as a factor in the
selection of broker-dealers.
Administrative Services. Mentor Investment Group, LLC, 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 Investment Group provides these
services to each of the Portfolios at an annual rate of 0.10% of the
Portfolio's average daily net assets attributable to each class.
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 each Portfolio during the
periods ending September 30, 1997 and September 30, 1996, respectively, were:
Mentor Growth Portfolio - 77% and 105%; Mentor Capital Growth Portfolio - 64%
and 98%; Mentor Strategy Portfolio -192% and 125%; Mentor Income and Growth
Portfolio 75% and 72%; Mentor Perpetual Global Portfolio -128% and 130%; Mentor
Quality Income Portfolio - 100% and 254%; Mentor Municipal Income Portfolio 59%
and 46%; and Mentor Short-Duration Income Portfolio 75% and 41%.
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GENERAL
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of its Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
Mentor Funds is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of 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. Mentor Funds' shares are currently divided into eleven
series, eight of which are being offered by this Prospectus. Each series
offered by this Prospectus issues shares of three classes, Class A shares,
Class B shares, and Y Shares. The sales charges and other expenses of a
Portfolio's Class A and Class B shares differ from those of its Y Shares, which
will affect performance. Contact Mentor Investment Group for information
concerning the Class A or Class B shares of any Portfolio at 1-800-869-6042.
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.
Mentor Funds may suspend the sale of shares at any time and may refuse any
order to purchase shares. Although neither Mentor Funds nor any Portfolio is
required to hold annual meetings of shareholders, shareholders have the right
to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Declaration of Trust.
In the interest of economy and convenience, the Portfolios will not issue
certificates for their shares except at the shareholder's request. 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. State Street Bank and Trust Company, through its subsidiary
Boston Financial Data Services, Inc., serves as transfer agent and dividend
disbursing agent for the Portfolios. Mentor Funds' independent auditors are
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about Y Shares of the Portfolios. A Portfolio's "Yield" is
calculated by dividing the Portfolio's annualized net investment income per Y
Share during a recent 30-day period by the net asset value per Y Share on the
last day of that period. "Total return" of a Portfolio's Y Shares for the
one-five- and ten-year period (or for a life of a class, if shorter) through
the most recent calendar quarter represents the average annual compounded rate
of return on an investment of $1,000 in the Portfolio's Y Shares that class of
shares over the period. Total return may also be presented for other periods.
Investment performance for different classes of shares of the Portfolios will
differ. Quotations of yield and total return for a period when an expense
limitation was in effect will be greater than if the limitation had not been in
effect. A Portfolio's performance may be compared to various indices. See the
Statement of Additional Information. Information may be presented in
advertisements about the Portfolios describing the background and professional
experience of the Portfolios' investment adviser or its investment personnel.
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All data is based on the Portfolios' past investment results and does not
predict future performance. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of a Portfolio's
investments, the Portfolio's operating expenses, and the class of shares
purchased. 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., Bond 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 Bond 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.
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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.
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., Note 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 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.
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.
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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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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by Mentor Funds. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and
Mentor Funds is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
Mentor Investment Group
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 Mentor Distributors, LLC
Mentor Funds
Mentor Growth Portfolio
Mentor Perpetual Global Portfolio
Mentor Capital Growth Portfolio
Mentor Strategy Portfolio
Mentor Income and Growth Portfolio
Mentor Municipal Income Portfolio
Mentor Quality Income Portfolio
Mentor Short-Duration Income Portfolio
-------------------------
PROSPECTUS
-------------------------
January 17, 1998
[MENTOR INVESTMENT GROUP LOGO]
<PAGE>
MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 17, 1998
Mentor Funds (the "Trust") is an open-end series investment company.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the relevant prospectus of the Trust. A copy of a prospectus
in respect of a Portfolio can be obtained upon request by writing to Mentor
Distributors, LLC, the Trust's distributor, at 901 East Byrd Street, Richmond,
Virginia 23219, or by calling Mentor Distributors at 1-800-382-0016.
This Statement is in four parts. Part I contains information with
respect to Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio,
Mentor Municipal Income Portfolio, Mentor Income and Growth Portfolio, and
Mentor Perpetual Global Portfolio. Part II contains information with respect to
Mentor Growth Portfolio, Mentor Strategy Portfolio, Mentor ShortDuration Income
Portfolio, and Mentor Balanced Portfolio, which are the successors to Mentor
Growth Fund, Mentor Strategy Fund, Mentor Short-Duration Income Fund, and Mentor
Balanced Fund, respectively, each of which was previously a series of shares of
Mentor Series Trust. Part III contains information with respect to Mentor
Institutional U.S. Government Money Market Portfolio and Mentor Institutional
Money Market Portfolio. Part IV provides general information with respect to the
Trust and all of the Portfolios.
<PAGE>
TABLE OF CONTENTS
INTRODUCTION.................................................................ii
PART I........................................................................1
INVESTMENT RESTRICTIONS.......................................................1
PART II.......................................................................3
INVESTMENT RESTRICTIONS.......................................................3
PART III......................................................................7
INVESTMENT RESTRICTIONS.......................................................7
PART IV.......................................................................8
CERTAIN INVESTMENT TECHNIQUES ................................................9
MANAGEMENT OF THE TRUST......................................................30
INVESTMENT ADVISORY SERVICES.................................................34
ADMINISTRATIVE SERVICES......................................................38
SHAREHOLDER SERVICING PLAN...................................................39
BROKERAGE TRANSACTIONS.......................................................41
HOW TO BUY SHARES...........................................................45
DISTRIBUTION.................................................................45
DETERMINING NET ASSET VALUE..................................................46
REDEMPTIONS IN KIND..........................................................48
TAXES........................................................................48
INDEPENDENT ACCOUNTANTS......................................................54
CUSTODIAN....................................................................54
PERFORMANCE INFORMATION .....................................................54
MEMBERS OF INVESTMENT MANAGEMENT TEAMS.......................................58
PERFORMANCE COMPARISONS......................................................63
SHAREHOLDER LIABILITY........................................................69
FINANCIAL STATEMENTS.........................................................70
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INTRODUCTION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992 as Cambridge Series Trust. This Statement relates to the following eleven
portfolios of the Trust (collectively, the "Portfolios" and each individually,
the "Portfolio"): Mentor Growth Portfolio (the "Growth Portfolio"); Mentor
Quality Income Portfolio (the "Quality Income Portfolio"); Mentor Balanced
Portfolio (the "Balanced Portfolio"); Mentor Capital Growth Portfolio (the
"Capital Growth Portfolio"); Mentor Perpetual Global Portfolio (the "Global
Portfolio"); Mentor Income and Growth Portfolio (the "Income and Growth
Portfolio"); Mentor Municipal Income Portfolio (the "Municipal Income
Portfolio"); Mentor Short-Duration Income Portfolio (the "Short-Duration Income
Portfolio"); Mentor Strategy Portfolio (the "Strategy Portfolio"); Mentor
Institutional U.S. Government Money Market Portfolio (the "Government Money
Market Portfolio"); and Mentor Institutional Money Market Portfolio (the
"Institutional Money Market Portfolio"). Each Portfolio (other than the
Balanced, Government Money Market, and Institutional Money Market Portfolios)
has three classes of shares of beneficial interest, Class A shares, Class B
shares, and Institutional Shares. The Balanced, Government Money Market, and
Institutional Money Market Portfolio each have one class of shares (Class A) of
beneficial interest.
With respect to the investment restrictions described below, all
percentage limitations on investments will apply at the time of investment and
shall not be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment. Except for the investment
restrictions listed below as fundamental or to the extent designated as such in
the Prospectus in respect of a Portfolio, the other investment policies
described in this Statement or in the Prospectus are not fundamental and may be
changed by approval of the Trustees. As a matter of policy, the Trustees would
not materially change a Portfolio's investment objective without shareholder
approval.
The Investment Company Act of 1940, as amended (the "1940 Act"),
provides that a "vote of a majority of the outstanding voting securities" of a
Portfolio means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, or (2) 67% or more of the shares present at
a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
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PART I
The following information relates to each of the Capital Growth,
Quality Income, Municipal Income, Income and Growth, and the Global Portfolios,
except where otherwise noted.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be
changed without a vote of a majority of the outstanding voting securities of a
Portfolio:
1. The Portfolios will not issue senior securities except that a Portfolio
(other than the Municipal Income Portfolio) may borrow money directly
or through reverse repurchase agreements in amounts of up to one-third
of the value of its net assets, including the amount borrowed; and
except to the extent that a Portfolio may enter into futures contracts.
The Municipal Income Portfolio may borrow money from banks for
temporary purposes in amounts of up to 5% of its total assets. The
Portfolios will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
Portfolio by enabling it to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Portfolios will not purchase any securities while
any borrowings in excess of 5% of its total assets are outstanding.
During the period any reverse repurchase agreements are outstanding,
the Quality Income Portfolio will restrict the purchase of portfolio
securities to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements, but only to the
extent necessary to assure completion of the reverse repurchase
agreements. Notwithstanding this restriction, the Portfolios may enter
into when-issued and delayed delivery transactions. (This restriction
will cease to apply to the Quality Income Portfolio on February 1,
1998.)
2. The Portfolios will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as are
necessary for clearance of purchases and sales of securities. The
deposit or payment by a Portfolio of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
3. The Portfolios will not mortgage, pledge, or hypothecate any assets,
except to secure permitted borrowings. In these cases the Portfolios
may pledge assets having a value of 10% of assets taken at cost. For
purposes of this restriction, (a) the deposit of assets in escrow in
connection with the writing of covered put or call options and the
purchase of securities on a when-issued basis; and (b) collateral
arrangements with respect to (i) the purchase and sale of stock options
(and options on stock indexes) and (ii) initial or variation margin for
futures contracts, will not be deemed to be pledges of a Portfolio's
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assets. Margin deposits for the purchase and sale of futures contracts
and related options are not deemed to be a pledge. (This restriction
will cease to apply to the Quality Income Portfolio on February 1,
1998.)
4. The Portfolios will not lend any of their respective assets except
portfolio securities up to one-third of the value of total assets. (The
Municipal Income Portfolio will not lend portfolio securities.) This
shall not prevent a Portfolio from purchasing or holding U.S.
government obligations, money market instruments, variable amount
demand master notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by a
Portfolio's investment objective, policies and limitations or
Declaration of Trust. The Municipal Income Portfolio will not make
loans except to the extent the obligations the Portfolio may invest in
are considered to be loans.
5. The Portfolios (other than the Quality Income Portfolio) will not
invest more than 10% of the value of their net assets in restricted
securities; the Quality Income Portfolio will not invest more than 15%
of the value of its net assets in restricted securities.
6. None of the Portfolios will invest in commodities, except to the extent
that the Portfolios may engage in transactions involving futures
contracts or options on futures contracts, and except to the extent the
securities the Municipal Income Portfolio invests in are considered
interests in commodities or commodities contracts or to the extent the
Portfolio exercises its rights under agreements relating to such
municipal securities.
7. None of the Portfolios will purchase or sell real estate, including
limited partnership interests, except to the extent the securities the
Income and Growth Portfolio and Municipal Income Portfolio may invest
in are considered to be interests in real estate or to the extent the
Municipal Income Portfolio exercises its rights under agreements
relating to such municipal securities (in which case the Portfolio may
liquidate real estate acquired as a result of a default on a mortgage),
although the Portfolios may invest in securities of issuers whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
8. With respect to 75% of the value of its respective total assets, a
Portfolio will not purchase securities issued by any one issuer (other
than cash or securities issued or guaranteed by the government of the
United States or its agencies or instrumentalities and repurchase
agreements collateralized by such securities), if as a result more than
5% of the value of its total assets would be invested in the securities
of that issuer. A Portfolio will not acquire more than 10% of the
outstanding voting securities of any one issuer.
9. A Portfolio will not invest 25% or more of the value of its respective
total assets in any one industry (other than securities issued by the
U.S. Government, its agencies or instrumentalities). As described in
the Trust's Prospectus, the Municipal Income Portfolio
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may from time to time invest more than 25% of its assets in a
particular segment of the municipal bond market; however, that
Portfolio will not invest more than 25% of its assets in industrial
development bonds in a single industry except as described in the
Trust's Prospectus.
10. A Portfolio will not underwrite any issue of securities, except as a
Portfolio may be deemed to be an underwriter under the Securities Act
of 1933 in connection with the sale of securities in accordance with
its investment objective, policies, and limitations.
Beginning February 1, 1998 (i) restrictions 1 and 3 above will be cease
to apply to the Quality Income Portfolio and (ii) the following fundamental
policies will become applicable to that Portfolio:
1. The Quality Income Portfolio will not issue any class of securities
which are senior to the Portfolio's shares except that the Portfolio
may borrow money as contemplated by the following restriction.
2. The Quality Income Portfolio will not borrow more than 33 1/3% of the
value of its total assets less all liabilities and indebtedness (other
than such borrowings).
In addition, the following practices are contrary to the current policy
of each of the Portfolios (except as otherwise noted), and may be changed
without shareholder approval: investing in (a) securities which at the time of
such investment are not readily marketable, (b) securities restricted as to
resale (excluding securities determined by the Trustees of the fund (or the
person designated by the Trustees of the fund to make such determinations) to be
readily marketable), and (c) repurchase agreements maturing in more than seven
days, if, as a result, more than 15% of the funds' net assets (taken at current
value) would be invested in securities described in (a), (b) and (c) above.
PART II
The following information relates to each of the Balanced, Growth,
Short-Duration Income, and Strategy Portfolios, except where otherwise noted.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to a Portfolio without a vote of a majority of the outstanding shares of
that Portfolio, a Portfolio may not:
1. Issue any securities which are senior to the Portfolio's shares as
described herein and in the relevant prospectus, except that each of
the Portfolios other than the Growth Portfolio
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and the Strategy Portfolio may borrow money to the extent contemplated
by Restriction 4 below.
2. Purchase securities on margin (but a Portfolio may obtain such
short-term credits as may be necessary for the clearance of
transactions). (Margin payments in connection with transactions in
futures contracts, options, and other financial instruments are not
considered to constitute the purchase of securities on margin for this
purpose.)
3. Make short sales of securities or maintain a short position, unless at
all times when a short position is open, it owns an equal amount of
such securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short ("short sale
against-the-box"), and unless not more than 25% of the Portfolio's net
assets (taken at current value) is held as collateral for such sales at
any one time.
4. (Growth Portfolio and Strategy Portfolio) Borrow money or pledge its
assets except that a Portfolio may borrow from banks for temporary or
emergency purposes (including the meeting of redemption requests which
might otherwise require the untimely disposition of securities) in
amounts not exceeding 10% (taken at the lower of cost or market value)
of its total assets (not including the amount borrowed) and pledge its
assets to secure such borrowings; provided that a Portfolio will not
purchase additional portfolio securities when such borrowings exceed 5%
of its total assets. (Collateral or margin arrangements with respect
to options, futures contracts, or other financial instruments are not
considered to be pledges.)
(All other Portfolios included in Part II) Borrow more than 33 1/3% of
the value of its total assets less all liabilities and indebtedness
(other than such borrowings) not represented by senior securities.
5. Act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities
laws.
6. Purchase any security if as a result the Portfolio would then have more
than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years
old or (in the case of Growth Portfolio) in equity securities for which
market quotations are not readily available.
7. (as to the Growth Portfolio only) Purchase any security if as a result
the Portfolio would then hold more than 10% of any class of securities
of an issuer (taking all common stock issues of an issuer as a single
class, all preferred stock issues as a single class, and all debt
issues as a single class) or more than 10% of the outstanding voting
securities of an issuer.
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8. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) more than 5% of
the Portfolio's total assets (taken at current value) would then be
invested in securities of a single issuer, or (ii) more than 25% of the
Portfolio's total assets (taken at current value) would be invested in
a single industry; provided that the restriction set out in (i) above
shall apply, in the case of each Portfolio other than the Growth
Portfolio, only as to 75% of such Portfolio's total assets.
9. Invest in securities of any issuer if, to the knowledge of the Trust,
any officer or Trustee of the Trust or of Mentor Investment Advisors,
LLC as the case may be, owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers and Trustees who own more
than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
10. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell
securities which are secured by real estate and securities of companies
that invest or deal in real estate (or, in the case of any Portfolio
other than the Growth Portfolio, real estate or limited partnership
interests). (For purposes of this restriction, investments by a
Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the
purchase or sale of real estate or interests in real estate or real
estate mortgage loans.)
11. Make investments for the purpose of exercising control or management.
12. (as to the Growth Portfolio only) Participate on a joint or a joint and
several basis in any trading account in securities.
13. (as to the Growth Portfolio only) Purchase any security restricted as
to disposition under federal securities laws if as a result more than
5% of the Portfolio's total assets (taken at current value) would be
invested in restricted securities.
14. (as to the Growth Portfolio only) Invest in securities of other
registered investment companies, except by purchases in the open market
involving only customary brokerage commissions and as a result of which
not more than 5% of its total assets (taken at current value) would be
invested in such securities, or except as part of a merger,
consolidation or other acquisition.
15. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common
stocks of companies that invest in or sponsor such programs.
16. (as to the Growth Portfolio only) Make loans, except through (i)
repurchase agreements (repurchase agreements with a maturity of longer
than 7 days together with other illiquid
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assets being limited to 10% of the Portfolio's assets,) and (ii) loans
of portfolio securities (limited to 33% of the Portfolio's total
assets).
17. (as to the Growth Portfolio only) Purchase foreign securities or
currencies except foreign securities which are American Depository
Receipts listed on exchanges or otherwise traded in the United States
and certificates of deposit, bankers' acceptances and other obligations
of foreign banks and foreign branches of U.S. banks if, giving effect
to such purchase, such obligations would constitute less than 10% of
the Trust's total assets (at current value).
18. (as to the Growth Portfolio only) Purchase warrants if as a result the
Portfolio would then have more than 5% of its total assets (taken at
current value) invested in warrants.
19. (as to each Portfolio other than the Growth Portfolio) Acquire more
than 10% of the voting securities of any issuer.
20. (as to each Portfolio other than the Growth Portfolio) Make loans,
except by purchase of debt obligations in which the Portfolio may
invest consistent with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of its total
assets (taken at current value), or through the lending of its
portfolio securities with respect to not more than 25% of its total
assets.
21. Purchase or sell commodities or commodity contracts, except that a
Portfolio may purchase or sell financial futures contracts, options on
financial futures contracts, and futures contracts, forward contracts,
and options with respect to foreign currencies, and may enter into swap
transactions. (This restriction applies to the Growth Portfolio.)
In addition, it is contrary to the current policy of each of the
Portfolios, which policy may be changed without shareholder approval, to invest
in (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the fund (or the person designated by the Trustees
of the fund to make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the funds' net assets (taken at current value) would be invested in
securities described in (a), (b) and (c) above.
Shares of beneficial interest in the Mentor Balanced Portfolio have
been registered only in the Commonwealth of Virginia. These shares may not be
offered or sold in any other state without being registered or exempt from
registration.
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PART III
The following information relates to each of the Government Money
Market and the Institutional Money Market Portfolios, except where otherwise
noted.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to a Portfolio without approval by the holders of a majority of the
outstanding shares of that Portfolio, a Portfolio may not:
1. Purchase any security (other than U.S. Government securities)
if as a result: (i) as to 75% of such Portfolio's total
assets, more than 5% of the Portfolio's total assets (taken at
current value) would then be invested in securities of a
single issuer, or (ii) more than 25% of the Portfolio's total
assets would be invested in a single industry; except that the
Institutional Money Market Portfolio may invest up to 100% of
its assets in securities of issuers in the banking industry.
2. Acquire more than 10% of the voting securities of any issuer.
3. Act as underwriter of securities of other issuers except to
the extent that, in connection with the disposition of
portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
4. Issue any class of securities which is senior to the
Portfolio's shares of beneficial interest.
5. Purchase or sell real estate or interests in real estate,
including real estate mortgage loans, although it may purchase
and sell securities which are secured by real estate and
securities of companies that invest or deal in real estate or
real estate limited partnership interests. (For purposes of
this restriction, investments by a Portfolio in
mortgage-backed securities and other securities representing
interests in mortgage pools shall not constitute the purchase
or sale of real estate or interests in real estate or real
estate mortgage loans.)
6. Borrow money in excess of 5% of the value (taken at the lower
of cost or current value) of its total assets (not including
the amount borrowed) at the time the borrowing is made, and
then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes.
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7. Purchase or sell commodities or commodity contracts, except
that a Portfolio may purchase or sell financial futures
contracts, options on futures contracts, and futures
contracts, forward contracts, and options with respect to
foreign currencies, and may enter into swap transactions.
8. Make loans, except by purchase of debt obligations in which
the Portfolio may invest consistent with its investment the
Portfolio may invest consistent with its investment policies,
by entering into repurchase agreements, or by lending its
portfolio securities.
In addition, it is contrary to the current policy of each Portfolio,
which policy may be changed without shareholder approval, to invest in (a)
securities which at the time of such investment are not readily marketable, (b)
Trustees of the Trust (or the person designated by the Trustees to make such
determinations) to be readily marketable), and (c) repurchase agreements
maturing in more then seven days, if, as a result, more than 10% of the
Portfolio's net assets (taken at current value) would then be invested in
securities described in (a), (b), and (c).
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above as fundamental or to the extent
designated as such in a Prospectus with respect to a Portfolio, the other
investment policies described in this Statement or in a Prospectus are not
fundamental and may be changed by approval of the Trustees.
PART IV
The following information relates to all of the Portfolios, except
where otherwise noted.
All information with respect to fees, expenses, and performance (except
where otherwise indicated) is based on a Portfolio's fiscal year end. All of the
Portfolios have a September 30 fiscal year end. Prior to September 30, 1995,
each of the Balanced, Growth, Short-Duration Income, and Strategy Portfolios had
a December 31 fiscal year end. Information concerning the expenses of those
Portfolios for fiscal 1995 is provided for the fiscal period January 1, 1995
through September 30, 1995. Certain information with respect to certain
Portfolios is given for partial fiscal years. See "Financial Highlights" in the
Trust's prospectus for information concerning the commencement of operations of
each of the Portfolios. No Institutional Shares were outstanding during any
period for which information is shown.
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<PAGE>
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques
in which one or more of the Portfolios may engage, and certain of the risks they
may entail. Certain of the investment techniques may not be available to a
Portfolio. See the Prospectus relating to a particular Portfolio for a
description of the investment techniques generally applicable to that Portfolio.
For purposes of this section, a Portfolio's investment adviser or subadviser (if
any) is referred to as an "Adviser".
Options
A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance or to protect against changes in
market prices.
Covered call options. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may also
be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, a Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying security. If the option is exercised, the Portfolio realizes a
gain or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus commissions)
plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
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<PAGE>
Covered put options. A Portfolio may write covered put options in order
to enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
Purchasing put and call options. A Portfolio may also purchase put
options to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Portfolio must pay. These costs will reduce any profit the Portfolio
might have realized had it sold the underlying security instead of buying the
put option.
A Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
Options on foreign securities. A Portfolio may purchase and sell
options on foreign securities if in the opinion of its Adviser the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Portfolio's investment objectives. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may
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differ from those in the U.S. In addition, options markets in some countries,
many of which are relatively new, may be less liquid than comparable markets in
the U.S.
Risks involved in the sale of options. Options transactions involve
certain risks, including the risks that a Portfolio's Adviser will not forecast
interest rate or market movements correctly, that a Portfolio may be unable at
times to close out such positions, or that hedging transactions may not
accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, a Portfolio may be forced to continue to hold,
or to purchase at a fixed price, a security on which it has sold an option at a
time when its Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other
unforeseen events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Portfolio's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible that the
Portfolio and other clients of the Portfolio's Adviser may be considered such a
group. These position limits may restrict the Portfolio's ability to purchase or
sell options on particular securities.
Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that reason,
it may be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification
as a "regulated investment company" under the Internal Revenue Code, may also
restrict the Portfolio's use of options.
Futures Contracts
In order to hedge against the effects of adverse market changes a
Portfolio that may invest in debt securities may buy and sell futures contracts
on debt securities of the type in which the Portfolio may invest and on indexes
of debt securities. In addition, a Portfolio that may invest in equity
securities may purchase and sell stock index futures to hedge against changes in
stock market prices. A Portfolio may also, to the extent permitted by applicable
law, buy and sell futures contracts and options on futures contracts to increase
its current return. All such futures
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<PAGE>
and related options will, as may be required by applicable law, be traded on
exchanges that are licensed and regulated by the Commodity Futures Trading
Commission (the "CFTC").
Futures on Debt Securities and Related Options. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- a
Portfolio will legally obligate itself to accept the future delivery of the
underlying security and pay the agreed price. By selling futures on debt
securities -- assuming a "short" position -- it will legally obligate itself to
make the future delivery of the security against payment of the agreed price.
Open futures positions on debt securities will be valued at the most recent
settlement price, unless that price does not, in the judgment of persons acting
at the direction of the Trustees as to the valuation of a Portfolio's assets,
reflect the fair value of the contract, in which case the positions will be
valued by the Trustees or such persons.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions that may
result in a profit or a loss. While futures positions taken by a Portfolio will
usually be liquidated in this manner, a Portfolio may instead make or take
delivery of the underlying securities whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures are traded assumes responsibility for such closing transactions
and guarantees that a Portfolio's sale and purchase obligations under closed-out
positions will be performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish with
more certainty than would otherwise be possible the effective rate of return on
securities. A Portfolio may, for example, take a "short" position in the futures
market by selling contracts for the future delivery of debt securities held by
the Portfolio (or securities having characteristics similar to those held by the
Portfolio) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Portfolio's securities. When hedging of
this character is successful, any depreciation in the value of securities may
substantially be offset by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Portfolio expects to purchase particular securities when it has the necessary
cash, but expects the rate of return available in the securities markets at that
time to be less favorable than rates currently available in the futures markets.
If the anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Portfolio of
purchasing the securities may be offset, at least to some extent, by the rise in
the value of the futures position taken in anticipation of the subsequent
purchase.
Successful use by a Portfolio of futures contracts on debt securities
is subject to its Adviser's ability to predict correctly movements in the
direction of interest rates and other factors
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affecting markets for debt securities. For example, if a Portfolio has hedged
against the possibility of an increase in interest rates which would adversely
affect the market prices of debt securities held by it and the prices of such
securities increase instead the Portfolio will lose part or all of the benefit
of the increased value of its securities which it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily margin maintenance requirements. The Portfolio may have
to sell securities at a time when it may be disadvantageous to do so.
A Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to options
on securities except that options on futures contracts give the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an option of the same series.
There is no guarantee that such closing transactions can be effected. A
Portfolio will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements, and, in addition, net option premiums received will be
included as initial margin deposits. See "Margin Payments" below. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to a Portfolio because the
maximum amount at risk is the premium paid for the options plus transactions
costs. However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to a Portfolio when the
purchase or sale of the futures contracts would not, such as when there is no
movement in the prices of debt securities. The writing of a put or call option
on a futures contract involves risks similar to those risks relating to the
purchase or sale of futures contracts.
Index Futures Contracts and Options. A Portfolio may invest in debt
index futures contracts and stock index futures contracts, and in related
options. A debt index futures contract is a contract to buy or sell units of a
specified debt index at a specified future date at a price agreed upon when the
contract is made. A unit is the current value of the index. (Debt index futures
in which the Portfolios are presently expected to invest are not now available,
although such futures contracts are expected to become available in the future.)
A stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. A unit is the current value of the stock index.
For example, the Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 100 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract would
be worth $18,000 (100 units x $180). The stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract,
with the settlement being the difference between the
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contract price and the actual level of the stock index at the expiration of the
contract. For example, if a Portfolio enters into a futures contract to buy 100
units of the S&P 100 Index at a specified future date at a contract price of
$180 and the S&P 100 Index is at $184 on that future date, the Portfolio will
gain $400 (100 units x gain of $4). If the Portfolio enters into a futures
contract to sell 100 units of the stock index at a specified future date at a
contract price of $180 and the S&P 100 Index is at $182 on that future date, the
Portfolio will lose $200 (100 units x loss of $2).
A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts with
respect to indexes or sub-indexes the movements of which will, in its judgment,
have a significant correlation with movements in the prices of the Portfolio's
securities.
Options on stock index futures. Options on index futures contracts are
similar to options on securities except that options on index futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in an index futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
holder would assume the underlying futures position and would receive a
variation margin payment of cash or securities approximating the increase in the
value of the holder's option position. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash based on the difference between the exercise price of the
option and the closing level of the index on which the futures contract is based
on the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
Options on Indices. As an alternative to purchasing and selling call
and put options on index futures contracts, each of the Portfolios which may
purchase and sell index futures contracts may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options are
traded on national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount". This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier".
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A Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
Margin Payments. When a Portfolio purchases or sells a futures
contract, it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage of
the amount of the futures contract. This amount is known as "initial margin".
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to a Portfolio upon termination of the contract,
assuming a Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when a Portfolio sells a futures contract and the price of the
underlying security rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the market price of the securities underlying the futures contract. Conversely,
if the price of the underlying security falls below the delivery price of the
contract, the Portfolio's futures position increases in value. The broker then
must make a variation margin payment equal to the difference between the
delivery price of the futures contract and the market price of the securities
underlying the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
Special Risks of Transactions in Futures Contracts and Related Options
Liquidity risks. Positions in futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market for such
futures. Although the Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular time.
If there is not a liquid secondary market at a particular time, it may not be
possible to close a futures position at such time and, in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event financial futures are used
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to hedge portfolio securities, such securities will not generally be sold until
the financial futures can be terminated. In such circumstances, an increase in
the price of the portfolio securities, if any, may partially or completely
offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
such a market will develop. Although a Portfolio generally will purchase only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that a Portfolio would have to exercise the
options in order to realize any profit.
Hedging risks. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying securities or
index or movements in the prices of a Portfolio's securities which are the
subject of a hedge. A Portfolio's Adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in its
judgment, correlate closely with movements in the prices of the underlying
securities or index and the securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to its Adviser's ability to predict correctly
movements in the direction of the market. It is possible that, where a Portfolio
has purchased puts on futures contracts to hedge its portfolio against a decline
in the market, the securities or index on which the puts are purchased may
increase in value and the value of securities held in the portfolio may decline.
If this occurred, the Portfolio would lose money on the puts and also experience
a decline in value in its portfolio securities. In addition, the prices of
futures, for a number of reasons, may not correlate perfectly with movements in
the underlying securities or index due to certain market distortions. First, all
participants in the futures market are subject to margin deposit requirements.
Such requirements may cause investors to close futures contracts through
offsetting transactions which could distort the normal relationship between the
underlying security or index and futures markets. Second, the margin
requirements in the futures markets are less onerous than margin requirements in
the securities markets in general, and as a result the futures markets may
attract more speculators than the securities markets do. Increased participation
by speculators in the futures markets may also cause temporary price
distortions. Due to the possibility of price distortion, even a correct forecast
of general market trends by a Portfolio's Adviser may still not result in a
successful hedging transaction over a short time period.
Other Risks. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts
and options on futures will be purchased
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and sold to reduce certain risks, those transactions themselves entail certain
other risks. Thus, while a Portfolio may benefit from the use of futures and
related options, unanticipated changes in interest rates or stock price
movements may result in a poorer overall performance for the Portfolio than if
it had not entered into any futures contracts or options transactions. Moreover,
in the event of an imperfect correlation between the futures position and the
portfolio position which is intended to be protected, the desired protection may
not be obtained and the Portfolio may be exposed to risk of loss.
Forward Commitments
A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the Portfolio enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in the value of the Portfolio's other assets.
Where such purchases are made through dealers, the Portfolios rely on the dealer
to consummate the sale. The dealer's failure to do so may result in the loss to
the Portfolio of an advantageous yield or price. Although a Portfolio will
generally enter into forward commitments with the intention of acquiring
securities for its portfolio or for delivery pursuant to options contracts it
has entered into, a Portfolio may dispose of a commitment prior to settlement if
its Adviser deems it appropriate to do so. A Portfolio may realize short-term
profits or losses upon the sale of forward commitments.
Repurchase Agreements
A Portfolio may enter into repurchase agreements. A repurchase
agreement is a contract under which the Portfolio acquires a security subject to
the obligation of the seller to repurchase and the Portfolio to resell such
security at a fixed time and price (representing the Portfolio's cost plus
interest). It is the Trust's present intention to enter into repurchase
agreements only with member banks of the Federal Reserve System and securities
dealers meeting certain criteria as to creditworthiness and financial condition
established by the Trustees of the Trust and only with respect to obligations of
the U.S. government or its agencies or instrumentalities or other high quality
short term debt obligations. Repurchase agreements may also be viewed as loans
made by a Portfolio which are collateralized by the securities subject to
repurchase. A Portfolio's Adviser will monitor such transactions to ensure that
the value of the underlying securities will be at least equal at all times to
the total amount of the repurchase obligation, including the interest factor. If
the seller defaults, a Portfolio could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale including accrued
interest are less than the resale price provided in the agreement including
interest. In addition, if the seller should be involved in bankruptcy or
insolvency proceedings, a Portfolio may incur delay and costs in selling the
underlying security or may suffer a loss of
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principal and interest if a Portfolio is treated as an unsecured creditor and
required to return the underlying collateral to the seller's estate.
Loans of Portfolio Securities
A Portfolio may lend its portfolio securities, provided: (1) the loan
is secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the total assets
of the Portfolio. In addition, it is anticipated that a Portfolio may share with
the borrower some of the income received on the collateral for the loan or that
it will be paid a premium for the loan. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Although voting rights or rights to consent with
respect to the loaned securities pass to the borrower, a Portfolio retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by a Portfolio if the holders of such
securities are asked to vote upon or consent to matters materially affecting the
investment. A Portfolio will not lend portfolio securities to borrowers
affiliated with the Portfolio.
Collateralized mortgage obligations; other mortgage-related securities
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"), but they also may be collateralized by whole loans or
private pass-through certificates (such collateral collectively hereinafter
referred to as "Mortgage Assets"). CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans.
In a CMO, a series of bonds or certificates is generally issued in
multiple classes. Each class of CMOs is issued at a specific fixed or floating
rate coupon and has a stated maturity or final distribution date. Principal
prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on most classes of the CMOs on a monthly, quarterly,
or semi-annual basis. The principal of and interest on the mortgage assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a CMO, payments of principal, including any principal prepayments, on the
mortgage assets are applied to the classes of the series in a pre-determined
sequence.
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Residual interests. Residual interests are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans. The cash flow generated
by the mortgage assets underlying a series of mortgage securities is applied
first to make required payments of principal of and interest on the mortgage
securities and second to pay the related administrative expenses of the issuer.
The residual generally represents the right to any excess cash flow remaining
after making the foregoing payments. Each payment of such excess cash flow to a
holder of the related residual represents income and/or a return of capital. The
amount of residual cash flow resulting from a series of mortgage securities will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of the mortgage securities, prevailing interest rates,
the amount of administrative expenses, and the prepayment experience on the
mortgage assets. In particular, the yield to maturity on residual interests may
be extremely sensitive to prepayments on the related underlying mortgage assets
in the same manner as an interest-only class of stripped mortgage-backed
securities. In addition, if a series of mortgage securities includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
residual interest may also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. In certain circumstances,
there may be little or no excess cash flow payable to residual holders. The
Portfolio may fail to recoup fully its initial investment in a residual.
Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals currently may
not have the liquidity of other more established securities trading in other
markets. Residuals may be subject to certain restrictions on transferability.
Foreign Securities
A Portfolio may invest in foreign securities and in certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks.
Investments in foreign securities may involve considerations different
from investments in domestic securities. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign brokerage commissions and custodian
fees are generally higher than in the United States. Investments in foreign
securities can involve other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets and imposition of withholding taxes on dividend or
interest payments. It may be more difficult to obtain and enforce a judgment
against a foreign issuer. In addition, foreign investments may be affected
favorably or unfavorably by changes in currency exchange rates, exchange control
regulations, foreign
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withholding taxes and restrictions or prohibitions on the repatriation of
foreign currencies. A Portfolio may incur costs in connection with conversion
between currencies.
In determining whether to invest in securities of foreign issuers, the
Adviser of a Portfolio seeking current income will consider the likely impact of
foreign taxes on the net yield available to the Portfolio and its shareholders.
Income received by a Portfolio from sources within foreign countries may be
reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of a Portfolio's assets to be invested
in various countries is not known, and tax laws and their interpretations may
change from time to time and may change without advance notice. Any such taxes
paid by a Portfolio will reduce its net income available for distribution to
shareholders.
Foreign Currency Transactions
Except as otherwise described in the relevant Prospectus, a Portfolio
may engage without limit in currency exchange transactions, including foreign
currency forward and futures contracts, to protect against uncertainty in the
level of future foreign currency exchange rates. In addition, a Portfolio may
purchase and sell call and put options on foreign currency futures contracts and
on foreign currencies for hedging purposes.
A Portfolio may engage in both "transaction hedging" and "position
hedging". When a Portfolio engages in transaction hedging, it enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its securities. A Portfolio will engage in transaction hedging when it desires
to "lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging a Portfolio will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
A Portfolio may purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with transaction hedging. A
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes, a Portfolio may purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives a Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives a
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Portfolio the right to sell a currency at an exercise price until the expiration
of the option. A call option on a futures contract gives a Portfolio the right
to assume a long position in the futures contract until the expiration of the
option. A call option on currency gives a Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. A Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of its
Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When a Portfolio engages in position hedging, it enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In connection
with position hedging, a Portfolio may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. A Portfolio may also purchase
or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of a
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency a Portfolio is obligated to deliver and if a
decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the security or
securities of a Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to a Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
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Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally purchase
or sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position and,
in the event of adverse price movements, a Portfolio would continue to be
required to make daily cash payments of variation margin on its futures
positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's Adviser believes that a liquid secondary market
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exists for such options. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. Options on
foreign currencies are affected by all of those factors which influence exchange
rates and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
Settlement Procedures. Settlement procedures relating to investments in
foreign securities and to foreign currency exchange transactions may be more
complex than settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not present in
domestic investments. For example, settlement of transactions involving foreign
securities or foreign currency may occur within a foreign country, and the
Portfolio may be required to accept or make delivery of the underlying
securities or currency in conformity with any applicable U.S. or foreign
restrictions or regulations, and may be required to pay any fees, taxes or
charges associated with such delivery. Such investments may also involve the
risk that an entity involved in the settlement may not meet its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should a Portfolio desire
to resell that currency to the dealer.
Zero-Coupon Securities
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep
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discount from their face or par value and are subject to greater market value
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest. As a result, the net
asset value of shares of a Portfolio investing in zero-coupon securities may
fluctuate over a greater range than shares of other mutual funds investing in
securities making current distributions of interest and having similar
maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly
by the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Portfolio will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S.
Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
When-Issued and Delayed Delivery Transactions
The Portfolios may engage in when-issued and delayed delivery
transactions. These transactions are arrangements in which a Portfolio purchases
securities with payment and delivery scheduled for a future time. A Portfolio
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring securities consistent with its investment objective
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and policies, not for investment leverage, but a Portfolio may sell such
securities prior to settlement date if such a sale is considered to be
advisable. No income accrues to a Portfolio on securities in connection with
such transactions prior to the date the Portfolio actually takes delivery of
securities. In when-issued and delayed delivery transactions, a Portfolio relies
on the seller to complete the transaction. The seller's failure to complete the
transaction may cause a Portfolio to miss a price or yield considered to be
advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for a Portfolio. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred. However, liquid
assets of a Portfolio sufficient to make payment for the securities to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
Bank Instruments
A Portfolio may invest in the instruments of banks and savings and
loans whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances. However, the
above-mentioned instruments are not necessarily guaranteed by those
organizations. In addition to domestic bank obligations, such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances, a
Portfolio may invest in: Eurodollar Certificates of Deposit ("ECDs") issued by
foreign branches of U.S. or foreign banks; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar-denominated deposits in foreign branches of U.S. or
foreign banks; Canadian Time Deposits, which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located in the U.S.; and
Yankee Certificates of Deposit ("Yankee CDS"), which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held in the
U.S.
Dollar Rolls and Reverse Repurchase Agreements
A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-related securities, the mortgage-related securities that are purchased
typically will be of the same type and will have the same or similar interest
rate and maturity as those sold, but will be supported by different pools of
mortgages. The Portfolio forgoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but it is compensated by the
difference between the current sales price and the price for the future purchase
as well as by any interest earned on the proceeds of the securities sold. A
Portfolio could also be compensated through the receipt of fee income.
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A Portfolio may also enter into reverse repurchase agreements in which
the Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
Dollar rolls and reverse repurchase agreements may be viewed as a
borrowing by the Portfolio, secured by the security which is the subject of the
agreement. In addition to the general risks involved in leveraging, dollar rolls
and reverse repurchase agreements involve the risk that, in the event of the
bankruptcy or insolvency of the Portfolio's counterparty, the Portfolio would be
unable to recover the security which is the subject of the agreement, the amount
of cash or other property transferred by the counterparty to the Portfolio under
the agreement prior to such insolvency or bankruptcy is less than the value of
the security subject to the agreement, or the Portfolio may be delayed or
prevented, due to such insolvency or bankruptcy, from using such cash or
property or may be required to return it to the counterparty or its trustee or
receiver.
Convertible Securities
A Portfolio may invest in convertible securities. Convertible
securities are fixed income securities which may be exchanged or converted into
a predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for a
variety of investment strategies.
A Portfolio will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stock when, in its Adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Portfolio in achieving its investment objectives. Otherwise, the
Portfolio may hold or trade convertible securities. In selecting convertible
securities for the Portfolio, the Portfolio's Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument and the
investment potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the Portfolio's Adviser considers numerous factors, including the economic and
political outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.
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Warrants
A Portfolio may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period of
time. Warrants may have a life ranging from less than a year to twenty years or
may be perpetual. However, most warrants have expiration dates after which they
are worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the warrant
will expire as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock. Warrants acquired in units or attached to securities may
be deemed to be without value for purposes of a Portfolio's policy.
Swaps, Caps, Floors and Collars
A Portfolio may enter into interest rate, currency and index swaps and
the purchase or sale of related caps, floors and collars. A Portfolio expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. A Portfolio would use these transactions as hedges and not as
speculative investments and would not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by a
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such 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 such 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.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio will not enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
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equivalent rating from another nationally recognized securities rating
organization or is determined to be of equivalent credit quality by the
Portfolio's Adviser. If there is a default by the counterparty, a Portfolio may
have contractual remedies pursuant to the agreements related to the transaction.
As a result, the swap market has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than swaps.
Lower-rated Securities
A Portfolio may invest in lower-rated fixed-income securities (commonly
known as "junk bonds") to the extent described in the relevant Prospectus. The
lower ratings of certain securities held by a Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a Portfolio may be unable at times to establish the fair value of
such securities. The rating assigned to a security by Moody's Investors Service,
Inc. or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. Changes in the value
of portfolio securities generally will not affect cash income derived from such
securities, but will affect the Portfolio's net asset value. A Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although its Adviser will monitor the investment
to determine whether its retention will assist in meeting the Portfolio's
investment objective.
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent a
Portfolio invests in tax exempt securities in the lower rating categories, the
achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
-28-
<PAGE>
Indexed Securities
A Portfolio may invest in indexed securities, the values of which are
linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). Most indexed securities have maturities of
three years or less.
Indexed securities differ from other types of debt securities in which
a Portfolio may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the 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 reference
instruments. Further, in the case of certain indexed securities in which 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. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Portfolio's securities denominated in linked
currencies. For example, if a Portfolio's Adviser considers that the Austrian
schilling is linked to the German deutschmark (the "Dmark"), the Portfolio holds
securities denominated in schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars.
-29-
<PAGE>
Eurodollar Instruments
A Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. A Portfolio
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed-income instruments
are linked.
Segregation of Assets
A Portfolio may at times segregate assets in respect of certain
transactions in which the Portfolio enters into a commitment to pay money or
deliver securities at some future date (such as futures contracts or reverse
repurchase agreements, to the extent not used for leverage). Any such segregated
account will be maintained by the Trust's custodian and may contain cash, U.S.
government securities, liquid high grade debt obligations, or other appropriate
assets.
MANAGEMENT OF THE TRUST
Officers and Trustees
The officers and Trustees of the Trust are listed below, along with
their addresses, principal occupations, and present positions, including any
positions held with affiliated persons or Mentor Distributors, LLC.
<TABLE>
<CAPTION>
Positions with
Name and Address the Trust Principal Occupations During Past Five Years
<S> <C>
Daniel J. Ludeman *(40) Chairman and Trustee Chairman and Chief Executive Officer, Mentor
901 East Byrd Street Investment Group, LLC; Managing Director of Wheat,
Richmond, Virginia 23219 First Securities, Inc.; Director, Wheat First
Butcher Singer, Inc.; Managing Director, Wheat
First Securities, Inc.; Chairman and Director,
Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; Chairman and Trustee, Cash Resource
Trust and Mentor Institutional Trust.
Peter J. Quinn, Jr. *(37) Trustee President, Mentor Distributors, LLC; Managing
901 E. Byrd Street Director, Mentor Investment Group, LLC and Wheat
Richmond, Virginia 23219 First Butcher Singer, Inc.; formerly, Senior Vice
President/Director of Mutual Funds, Wheat First
Butcher Singer, Inc.; Trustee, Cash Resource Trust;
formerly, President of the Trust.
-30-
<PAGE>
Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of
University of Richmond Richmond; Trustee, Cash Resource Trust and
Richmond, Virginia 23173 Mentor Institutional Trust; Director, America's
Utility Fund, Inc.
Thomas F. Keller (66) Trustee Professor of Business Administration and former
Fuqua School of Business Dean, Fuqua School of Business, Duke University;
Duke University Trustee, Cash Resource Trust and Mentor
Durham, North Carolina 27706 Institutional Trust.
Arnold H. Dreyfuss (69) Trustee Chairman, Eskimo Pie Corporation; formerly,
P.O. Box 18156 Chairman and Chief Executive Officer, Hamilton
Richmond, Virginia 23226 Beach/Proctor-Silex, Inc. Trustee, Cash Resource
Trust and Mentor Institutional Trust.
Troy A. Peery, Jr. (51) Trustee President, Heilig-Meyers Company. Trustee, Cash
2235 Staples Mill Road Resource Trust and Mentor Institutional Trust.
Richmond, Virginia 23230
Arch T. Allen, III (57) Trustee Attorney; Formerly Director, America's Utility Fund;
1214 Cowper Drive Formerly Vice Chancellor for Development University
Raleigh, North Carolina 27608 of North Carolina at Chapel Hill.
Weston E. Edwards (63) Trustee President, Weston Edwards & Associates; Director,
361 Forest Avenue, Suite 205 Mentor Income Fund, Inc.; Founder and Chairman,
Laguna Beach, California 92651 The Housing Roundtable; formerly President of
Smart Mortgage Access, Inc.
Jerry R. Barrentine (63) Trustee President, J.R. Barrentine & Associates. Director,
17716 River Ford Drive Mentor Income Fund; formerly, Executive Vice
Davidson, North Carolina 28036 President and CFO, Barclays American/Mortgage
Director Corporation and Managing Partner,
Barrentine Lott & Associates, Inc.
J. Garnett Nelson (58) Trustee Consultant, Mid-Atlantic Holdings, LLC; Director,
101 Shockoe Slip Mentor Income Fund; Director, GE Investment Funds, Inc.
Richmond, Virginia 23219 and Lawyers Title Corporation; Member of the Investment
Advisory Committee, Virginia Retirement Systems;
formerly, Senior Vice President, The Life Insurance
Company of Virginia.
Paul F. Costello (37) President Managing Director, Wheat First Butcher Singer, Inc. and
901 East Byrd Street Mentor Investment Group, LLC; President, Cash Resource
Richmond, Virginia 23219 Trust, Mentor Income Fund, Inc., Mentor Institutional
Trust, and America's Utility Fund, Inc.; Managing Director,
Mentor Investment Advisors, LLC; Director, Mentor Perpetual
Advisors, LLC and Mentor Trust Company.
-31-
<PAGE>
Terry L. Perkins (50) Treasurer Senior Vice President, Mentor Investment Group, LLC;
901 East Byrd Street Treasurer, Cash Resource Trust, Mentor Income Fund, Inc.,
Richmond, Virginia 232 and Mentor Institutional Trust; Treasurer and Senior Vice
President, America's Utility Fund, Inc.; formerly, Treasurer
and Comptroller, Ryland Capital Management, Inc.
-32-
<PAGE>
John M. Ivan (41) Secretary Managing Director, Director of Compliance, and
901 East Byrd Street Assistant General Counsel, Wheat, First Securities,
Richmond, Virginia 23219 Inc.; Managing Director and Assistant Secretary,
Wheat First Butcher Singer, Inc. (formerly WFS
Financial Corporation); Clerk, Cash Resource
Trust, Mentor Institutional Trust; Secretary, Mentor
Income Fund, Inc. and America's Utility Fund, Inc.
</TABLE>
* This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
Trustees' Compensation
The table below shows the fees paid to each Trustee by the Trust for the current
fiscal year and the estimated fees to be paid to each Trustee by all funds in
the Mentor family (including the Trust) during the 1997 calendar year.
<TABLE>
<CAPTION>
Total compensation
Aggregate compensation from all
Trustees from the Trust complex funds (23 funds)
- -------- ---------------------------- ------------------------
<S> <C>
Daniel J. Ludeman $0 $0
Arnold H. Dreyfuss 6,000 12,200
Thomas F. Keller 6,000 12,200
Louis W. Moelchert, Jr. 6,000 12,200
Stanley F. Pauley 6,000 12,200
Troy A. Peery, Jr. 5,500 11,175
Peter J. Quinn, Jr. 0 0
</TABLE>
- --------------------
The Trustees do not receive pension or retirement benefits from the
Trust.
The Trust's Declaration of Trust provides that the Trustees will be
liable for their willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
-33-
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of December 8, 1997, the officers and Trustees of the Trust owned as
a group less than 1% of the outstanding shares of any class of each Portfolio.
To the knowledge of the Trust, no person owned of record or beneficially more
than 5% of the outstanding shares of any class of a Portfolio as of that date,
except as set forth below+:
- --------
+ As of December 8, 1997, no Portfolio has any Institutional Shares
outstanding.
Percentage
Portfolio Holder Ownership
- --------- ------ ----------
Growth-Class A Bank of New York TTEE 29.19%
Wheat First Butcher Singer 401K
Attn: Greg Tyrka
P.O. Box 11010
New York, NY 10286-1010
Strategy-Class A Bank of New York TTEE 13.50%
Wheat First Butcher Singer 401K
Attn: Greg Tyrka
P.O. Box 11010
New York, NY 10286-1010
Strategy-Class A Plumbers & Pipe Fitters Local 5.73%
Union 354
Attn: Richard G. Hall
150 River Ave #200
Pittsburgh, PA 15212-5844
Strategy-Class A Chase Manhattan Bank TTEE 7.38%
EVEREN Capital Corp 401K
Attn: Sandra Madrid
770 Broadway 10th Fl.
New York, NY 10003-9522
Short Duration-Class A Wheat First Butcher Singer FBO 5.24%
Northern Virginia Electric Co-Op
Attn: Wilbur Rollins
P.O. Box 2710
Manassas, VA 20108-0875
-34-
<PAGE>
Municipal Income-Class B Evelyn G. Freyman TTEE 6.06%
2500 Virginia Ave. NW #504S
Washington, DC 20037-1901
Balanced-Class B WFBS Foundation 96.00%
Attn: Bill Fields
P.O. Box 1357
Richmond, VA 23219
Government Money Market Chase Manhattan Bank TTEE 55.83%
EVEREN Capital Corp 401K
Attn: Sandra Madrid
770 Broadway 10th Fl
New York, NY 10003-9522
Government Money Market Valley Childrens Hospital 7.50%
Attn: Darrell Fischer
1990 E. Gettysburg Ave.
Fresno, CA 93276-0244
Government Money Market L. Dooley & K. Waterman TTEE 5.90%
Telenetworks ESOP Plan
2455 Bennett Valley Rd., Ste 301B
Santa Rosa, CA 95404-5654
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as
investment adviser to each Portfolio other than the Global Portfolio. Van Kampen
American Capital Management, Inc. ("Van Kampen") serves as sub-adviser to the
Municipal Income Portfolio; Wellington Management Company, LLP ("Wellington
Management") serves as sub-adviser to the Income and Growth Portfolio. Each of
these sub-advisers has complete discretion to purchase and sell portfolio
securities for its respective Portfolio consistent with the particular
Portfolio's investment objective, restrictions, and policies. Mentor Perpetual
Advisors, LLC ("Mentor Perpetual") serves as investment adviser to the Global
Portfolio.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment
Group, LLC, ("Mentor Investment Group") which is a subsidiary of Wheat First
Butcher Singer, Inc. ("WFBS"). Mentor Perpetual is owned equally by Mentor
Advisors and Perpetual plc, a diversified financial services holding company.
EVEREN Capital Corporation has a 20% ownership in Mentor Investment Group and
may acquire additional ownership based principally on the amount of Mentor
Investment Group's revenues derived from assets attributable to clients of
EVEREN Securities, Inc. and its affiliates.
-35-
<PAGE>
On October 31, 1996, Commonwealth Investment Counsel, Inc., the
investment adviser to the Short-Duration Income and Balanced Portfolios, was
reorganized as Mentor Investment Advisors, LLC. Also on October 31, 1996, each
of Commonwealth Advisors, Inc., the investment adviser to the Capital Growth,
Income and Growth, Municipal Income, and Quality Income Portfolios, Charter
Asset Management, Inc., the investment adviser to the Growth Portfolio, and
Wellesley Advisors, Inc., the investment adviser to the Strategy Portfolio,
transferred its rights and obligations under its respective advisory contract
with the Trust to Mentor Investment Advisors, LLC. In addition, Mentor
Investment Group, Inc. and Mentor Distributors, Inc. were reorganized as Mentor
Investment Group, LLC and Mentor Distributors, LLC, respectively.
On October 29, 1996, shareholders of the Municipal Income Portfolio
approved a new sub-advisory agreement with Van Kampen American Capital
Management, Inc., which became a subsidiary of Morgan Stanley Group, Inc.
Subject to the general oversight of the Trustees, each investment
adviser and/or subadviser manages the applicable Portfolio in accordance with
the stated policies of that Portfolio and of the Trust. Each makes investment
decisions for the Portfolio and places the purchase and sale orders for
portfolio transactions. The investment advisers and sub-advisers bear all their
expenses in connection with the performance of their services (except as may be
approved from time to time by the Trustees) and pay the salaries of all officers
and employees who are employed by them and the Trust.
Each Portfolio's investment adviser and/or sub-adviser provides the
Trust with investment officers who are authorized to execute purchases and sales
of securities. Investment decisions for the Trust and for the other investment
advisory clients of the investment advisers and sub-advisers and their
affiliates are made with a view to achieving their respective investment
objectives. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in the investment adviser's or
sub-adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or
sales of securities for one or more clients will have an adverse effect on other
clients. In the case of short-term investments, the Treasury area of Mentor
Investment Group handles purchases and sales under guidelines approved by
investment officers of the Trust. Each investment adviser and sub-adviser
employs professional staffs of portfolio managers who draw upon a variety of
resources for research information for the Trust.
-36-
<PAGE>
Expenses incurred in the operation of a Portfolio or otherwise
allocated to a Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, compensation paid under a Portfolio's 12b-1 plan
and the Shareholder Service Plan, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat, First Securities, Inc. and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, charges for the printing of
prospectuses and statements of additional information for regulatory purposes or
for distribution, and certain costs incurred by Mentor Investment Group in
responding to shareholder inquiries as approved by the Trustees from time to
time, to shareholders, certain shareholder report charges and charges relating
to corporate matters are borne by the Portfolio.
Under the applicable Management Contract with the Trust in respect of
each Portfolio, subject to such policies as the Trustees may determine, Mentor
Advisors or Mentor Perpetual, as the case may be, at its expense, furnishes
continuously an investment program for the Portfolio and makes investment
decisions on behalf of the Portfolio. Subject to the control of the Trustees,
Mentor Advisors or Mentor Perpetual, as the case may be, also manages,
supervises and conducts the other affairs and business of the Portfolio,
furnishes office space and equipment, provides bookkeeping and clerical services
(including determination of the Portfolio's net asset value, but excluding
shareholder accounting services) and places all orders for the purchase and sale
of the Portfolio's portfolio securities. Mentor Advisors or Mentor Perpetual, as
the case may be, may place portfolio transactions with broker-dealers which
furnish Mentor Advisors or Mentor Perpetual, without cost to it, certain
research, statistical and quotation services of value to Mentor Advisors or
Mentor Perpetual and their affiliates in advising the Portfolio and other
clients. In so doing, Mentor Advisors or Mentor Perpetual may cause a Portfolio
to pay greater brokerage commissions than it might otherwise pay.
Each Management Contract provides that Mentor Advisors or Mentor
Perpetual, as the case may be, shall not be subject to any liability to a
Portfolio or to any shareholder of a Portfolio for any act or omission in the
course of or connected with rendering services to a Portfolio in the absence of
its willful misfeasance, bad faith, gross negligence, or reckless disregard of
its duties.
Each of the Management Contracts is subject to annual approval by (i)
the Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the affected Portfolio, provided that in either
event the continuance is also approved by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust or the investment
adviser in question, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Management Contracts are terminable without
penalty, on not more than sixty days' notice and not less than thirty days'
notice, by the Trustees, by vote of the holders of a majority of the affected
Portfolio's shares, or by the applicable investment adviser. Each terminates
automatically in the event of its assignment (as defined in the 1940 Act).
-37-
<PAGE>
Management Fees
The investment adviser of each Portfolio receives an annual management
fee from such Portfolio (which is described in the relevant Prospectus). The
investment adviser pays a portion of that fee to any sub-adviser to the
Portfolio.
The Portfolios paid investment advisory fees in the amounts and for the
periods indicated below (amounts shown reflect fee waivers where applicable):
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $3,238,498 $2,313,470 $1,143,696
Capital Growth Portfolio.................... 1,063,903 728,536 465,031
Strategy Portfolio.......................... 2,807,549 2,287,369 1,262,809
Income and Growth Portfolio................. 947,267 575,647 460,486
Global Portfolio............................ 998,592 368,592 174,547
Quality Income Portfolio.................... 449,325 278,216 563,032
Municipal Income Portfolio.................. 370,232 344,784 380,281
Short-Duration Income Portfolio 129,833 54,833 --
Balanced Portfolio.......................... 8,854 6,790 --
Government Money Market Portfolio........... 29,982 -- --
</TABLE>
The investment advisers of the following Portfolios waived investment
advisory fees in the following amounts for the periods indicated below:
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Global Portfolio............................ -- -- $ 10,545
Quality Income Portfolio.................... $ 123,214 $ 217,329 --
Short-Duration Income Portfolio 55,521 83,567 65,901
Balanced Portfolio ........................ 20,072 18,976 14,563
</TABLE>
The investment advisers of the following Portfolios paid sub-advisory
fees to the Portfolios' sub-advisers in the following amounts for the periods
indicated below:
<TABLE>
<CAPTION>
Fiscal year Fiscal year Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Capital Growth Portfolio (1) -- -- $ 126,880
Income and Growth Portfolio $ 373,115 $236,071 193,845
Global Portfolio (2) -- -- 49,880
Quality Income Portfolio (3) -- -- 157,161
Municipal Income Portfolio 153,577 172,392 190,141
</TABLE>
- --------------------
(1) Prior to April 13, 1995, Phoenix Investment Counsel, Inc. ("Phoenix")
served as sub-adviser to the Capital Growth Portfolio. Commonwealth
Advisors paid subadvisory fees of $126,880 to Phoenix for fiscal year
1995.
-38-
<PAGE>
(2) Prior to April 13, 1995, Scudder, Stevens & Clark ("Scudder") served as
sub-adviser to the Global Portfolio. Commonwealth Advisors paid
subadvisory fees of $49,880 to Scudder for fiscal year 1995.
(3) Prior to April 13, 1995, Pacific Investment Management Company
("Pacific") served as sub-adviser to the Quality Income Portfolio
(formerly the Cambridge Government Income Portfolio). Commonwealth
Advisors paid $157,161 in subadvisory fees to Pacific for fiscal year
1995.
ADMINISTRATIVE SERVICES
Mentor Investment Group, LLC serves as administrator to each of the
Portfolios pursuant to an Administration Agreement. Prior to June 1, 1994,
Cambridge Administrative Services ("CAS") provided administrative services to
the Capital Growth, Quality Income, Municipal Income, Income and Growth, and
Global Portfolios.
Pursuant to the Administration Agreement, Mentor Investment Group
provides continuous business management services to the Portfolios and, subject
to the general oversight of the Trustees, manages all of the business and
affairs of the Portfolios subject to the provisions of the Trust's Declaration
of Trust, By-laws and the 1940 Act, and other policies and instructions the
Trustees may from time to time establish. Mentor Investment Group pays the
compensation of all officers and executive employees of the Trust (except those
employed by or serving at the request of an investment adviser or sub-adviser)
and makes available to the Trust the services of its directors, officers, and
employees as elected by the Trustees or officers of the Trust. In addition,
Mentor Investment Group provides all clerical services relating to the
Portfolios' business. As compensation for its services, Mentor Investment Group
receives a fee from each Portfolio calculated daily at the annual rate of .10%
of a Portfolio's average daily net assets.
The Administration Agreement must be approved at least annually with
respect to each Portfolio by a vote of a majority of the Trustees who are not
interested persons of Mentor Investment Group or the Trust. The Agreement may be
terminated at any time without penalty on 30 days notice by Mentor Investment
Group, or immediately in respect of any Portfolio upon notice by the Trustees or
by vote of a majority of the outstanding voting securities of that Portfolio.
The Agreement terminates automatically in the event of any assignment (as
defined in the 1940 Act).
-39-
<PAGE>
The Portfolios paid administrative service fees in the following
amounts for the periods indicated below (amounts shown reflect fee waivers where
applicable):
<TABLE>
<CAPTION>
Fiscal year Fiscal year Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $462,643 $ 330,496 $108,285
Capital Growth Portfolio.................... 132,988 91,067 66,032
Strategy Portfolio.......................... 330,300 269,102 146,572
Income and Growth Portfolio................. 126,302 76,753 69,316
Global Portfolio............................ 92,753 33,508 19,082
Quality Income Portfolio.................... 95,423 82,591 65,234
Municipal Income Portfolio.................. 61,705 57,464 72,055
</TABLE>
The administrators waived administrative fees in the amounts and for the
periods indicated below:
<TABLE>
<CAPTION>
Fiscal year Fiscal year Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Quality Income Portfolio.................... -- -- 41,651
Short-Duration Income Portfolio 37,151 $ 27,680 --
</TABLE>
The portfolios also provided direct reimbursement to Mentor for certain legal
and compliance administration, investor relation and operation costs not covered
under the Investment Management Agreement. These direct reimbursements were as
follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio 17,457 23,289 6,579
Capital Growth Portfolio 5,036 5,901 --
Strategy Portfolio 11,846 17,744 6,117
Income and Growth Portfolio 4,851 5,210 --
Global Portfolio 3,672 2,752 --
Quality Income Portfolio 3,617 5,005 --
Municipal Income Portfolio 2,293 3,465 --
Short-Duration Income Portfolio 1,443 1,842 --
Balanced Portfolio -- -- --
Government Money Market -- -- --
</TABLE>
SHAREHOLDER SERVICING PLAN
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors, LLC with respect to the Class A and Class B shares
each Portfolio. Pursuant to the Service Plan, financial institutions will enter
into shareholder service agreements with the Portfolios to provide
administrative support services to their customers who from time to time may be
record or beneficial owners of shares of one or more Portfolios. In return for
providing these support services, a financial institution may receive payments
from one or
-40-
<PAGE>
more Portfolios at a rate not exceeding .25% of the average daily net assets of
the Class A or Class B shares of the particular Portfolio or Portfolios owned by
the financial institution's customers for whom it is the holder of record or
with whom it has a servicing relationship. The Service Plan is designed to
stimulate financial institutions to render administrative support services to
the Portfolios and their shareholders. These administrative support services
include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding the 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 the investment adviser, a sub-adviser, and/or
Mentor Investment Group, 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 the investment adviser, a sub-adviser,
and/or Mentor Investment Group, as applicable, and will not be made from the
assets of any of the Portfolios.
Shareholder Services Fees
During fiscal year 1997, the Portfolios incurred shareholder service
fees in respect of Class A and Class B shares under the Service Plan as follows
(amounts shown reflect fee waivers where applicable):
Class A Class B
Growth Portfolio.................... $200,471 $956,135
Capital Growth Portfolio............ 121,929 210,541
Strategy Portfolio.................. 97,981 727,769
Income and Growth Portfolio......... 117,034 198,722
Global Portfolio.................... 79,427 152,456
Quality Income Portfolio............ 96,471 142,087
Municipal Income Portfolio.......... 60,943 93,320
Short-Duration Income Portfolio..... 44,783 47,894
Balanced Portfolio.................. -- --
Government Money Market Portfolio... -- --
During fiscal year 1997, shareholder services fees of $9,642 were
waived in respect of the Balanced Portfolio.
-41-
<PAGE>
BROKERAGE TRANSACTIONS
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different brokers.
A particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price paid by the Trust usually includes an undisclosed dealer commission or
mark-up. In underwritten offerings, the price paid by the Trust includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
It is anticipated that most purchases and sales of securities by funds investing
primarily in certain fixed-income securities will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, those funds would not ordinarily pay significant brokerage
commissions with respect to securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, each investment adviser or sub-adviser may receive brokerage and
research services and other similar services from many broker-dealers with which
such investment adviser or sub-adviser places a Portfolio's portfolio
transactions and from third parties with which these broker-dealers have
arrangements. These services include such matters as general economic and market
reviews, industry and company reviews, evaluations of investments,
recommendations as to the purchase and sale of investments, newspapers,
magazines, pricing services, quotation services, news services and personal
computers utilized by the investment adviser's or sub-adviser's managers and
analysts. Where the services referred to above are not used exclusively by the
investment adviser or sub-adviser for research purposes, the investment adviser
or sub-adviser, based upon its own allocations of expected use, bears that
portion of the cost of these services which directly relates to its non-research
use. Some of these services are of value to the investment adviser or
sub-adviser and its affiliates in advising various of its clients (including the
Portfolios), although not all of these services are necessarily useful and of
value in managing all or any of the Portfolios. The management fee paid by a
Portfolio is not reduced because its investment adviser or sub-adviser or any of
their affiliates receive these services even though the investment adviser or
sub-adviser might otherwise be required to purchase some of these services for
cash.
A Portfolio's investment adviser or sub-adviser, as the case may be,
places all orders for the purchase and sale of portfolio investments for the
Portfolio and buys and sells investments for the Portfolio through a substantial
number of brokers and dealers. The investment adviser or sub-adviser seeks the
best overall terms available for the Portfolio,
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except to the extent the investment adviser or sub-adviser may be permitted to
pay higher brokerage commissions as described below. In doing so, the investment
adviser or subadviser, having in mind the Portfolio's best interests, considers
all factors it deems relevant, including, by way of illustration, price, the
size of the transaction, the nature of the market for the security or other
investment, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the advisory and
sub-advisory agreements, a Portfolio's investment adviser or sub-adviser may
cause the Portfolio to pay a broker-dealer which provides "brokerage and
research services" (as defined in the 1934 Act) to that adviser an amount of
disclosed commission for effecting securities transactions on stock exchanges
and other transactions for the Portfolio on an agency basis in excess of the
commission which another broker-dealer would have charged for effecting that
transaction. The investment adviser's or sub-adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Trustees may adopt from time to time. It is the position of the staff of
the Securities and Exchange Commission that Section 28(e) does not apply to the
payment of such greater commissions in "principal" transactions. Accordingly,
each investment adviser and sub-adviser will use its best efforts to obtain the
best overall terms available with respect to such transactions, as described
above.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to such other policies as the Trustees
may determine, an investment adviser or sub-adviser may consider sales of shares
of a Portfolio (and, if permitted by law, of the other funds in the Mentor
family) as a factor in the selection of broker-dealers to execute portfolio
transactions for a Portfolio.
The Trustees have determined that portfolio transactions for the Trust
may be effected through Wheat, First Securities, Inc. ("Wheat"), and EVEREN
Securities, Inc. ("EVEREN"), broker-dealers affiliated with Mentor Advisors and
Mentor Perpetual. The Trustees have adopted certain policies incorporating the
standards of Rule 17e-l issued by the SEC under the 1940 Act which requires,
among other things, that the commissions paid to Wheat and EVEREN must be
reasonable and fair compared to the commissions, fees, or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. Wheat and EVEREN will not
participate in brokerage commissions given by a Portfolio to other brokers or
dealers. Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. A Portfolio will in no event effect
principal transactions with Wheat and EVEREN in over-the-counter securities in
which Wheat or EVEREN makes a market.
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Under rules adopted by the SEC, Wheat and EVEREN may not execute
transactions for a Portfolio on the floor of any national securities exchange,
but may effect transactions for a Portfolio by transmitting orders for execution
and arranging for the performance of this function by members of the exchange
not associated with them. Wheat and EVEREN will be required to pay fees charged
to those persons performing the floor brokerage elements out of the brokerage
compensation they receive from a Portfolio. The Trust has been advised by Wheat
that on most transactions, the floor brokerage generally constitutes from 5% and
10% of the total commissions paid.
Brokerage Commissions
The Portfolios paid brokerage commissions on brokerage transactions in
the following aggregate amounts for the periods indicated:
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $1,482,817 $1,864,300 $1,354,359
Capital Growth Portfolio.................... 275,151 299,554 416,744
Strategy Portfolio.......................... 1,349,443 1,144,804 1,297,178
Income and Growth Portfolio................. 302,628 146,323 125,986
Global Portfolio............................ 838,045 359,217 148,625
Quality Income Portfolio.................... 900 24,990 20,250
Municipal Income Portfolio.................. 5,044 2,422 4,037
Short-Duration Income Portfolio -- 1,560 2,717
Balanced Portfolio.......................... 4,752 7,385 3,436
Government Money Market Portfolio -- -- --
</TABLE>
The following table shows brokerage commissions paid by each of the
Portfolios to Wheat for the periods indicated:
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $101,434 $72,923 $53,120
Capital Growth Portfolio.................... 29,226 54,642 22,411
Strategy Portfolio.......................... 287,495 87,458 1,138
Income and Growth Portfolio 101,434 52,534 47,723
Global Portfolio............................ -- -- --
Quality Income Portfolio.................... -- -- --
Municipal Income Portfolio -- -- --
Short-Duration Income Portfolio -- -- --
Balanced Portfolio.......................... 50 -- --
Government Money Market Portfolio -- -- --
</TABLE>
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<PAGE>
The following table shows brokerage commissions paid by each of the
Portfolios to EVEREN for the period indicated.
Fiscal year
1997
----
Growth Portfolio............................ $2,331
Capital Growth Portfolio.................... 9,793
Strategy Portfolio.......................... --
Income and Growth Portfolio --
Global Portfolio............................ --
Quality Income Portfolio.................... --
Municipal Income Portfolio --
Short-Duration Income Portfolio --
Balanced Portfolio.......................... --
Government Money Market Portfolio --
The brokerage commissions paid to Wheat for fiscal year 1997 amounted
to the following percentages of the aggregate brokerage commissions and
brokerage transactions paid by each Portfolio:
<TABLE>
<CAPTION>
Percent of aggregate
Percent of aggregate dollar amount of
commissions brokerage transactions
------------------ ----------------------
<S> <C>
Growth Portfolio............................ 6.84% 4.78%
Capital Growth Portfolio.................... 10.62% 11.21%
Strategy Portfolio.......................... 21.30% 4.68%
Income and Growth Portfolio 33.52% 29.21%
Global Portfolio............................ -- --
Quality Income Portfolio.................... -- --
Municipal Income Portfolio -- --
Short-Duration Income Portfolio -- --
Balanced Portfolio.......................... 1.05% 0.03%
Government Money Market Portfolio -- --
</TABLE>
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<PAGE>
The brokerage commissions paid to EVEREN for fiscal year 1997 amounted
to the following percentages of the aggregate brokerage commissions and
brokerage transactions paid by each Portfolio:
<TABLE>
<CAPTION>
Percent of aggregate
Percent of aggregate dollar amount of
commissions brokerage transactions
------------------ ----------------------
<S> <C>
Growth Portfolio............................ 0.16% 0.09%
Capital Growth Portfolio.................... 3.56% 3.48%
Strategy Portfolio.......................... --
Income and Growth Portfolio -- --
Global Portfolio............................ -- --
Quality Income Portfolio.................... -- --
Municipal Income Portfolio -- --
Short-Duration Income Portfolio -- --
Balanced Portfolio.......................... 1.05% --
Government Money Market Portfolio -- --
</TABLE>
HOW TO BUY SHARES
Except under certain circumstances described in the Trust's or an individual
Portfolio's prospectus, Class A shares of the Portfolios are sold at their net
asset value plus an applicable sales charge on days the New York Stock Exchange
is open for business. Class B shares of the Portfolios (where applicable) and
Institutional Shares of the Portfolios are sold at their net asset value with no
sales charge on days the New York Stock Exchange is open for business. The
procedure for purchasing Class A, Class B and Institutional Shares of the
Portfolios is explained in the relevant Prospectus under the section entitled
"How to Buy Shares."
DISTRIBUTION
Each of the Portfolios makes payments to Mentor Distributors, LLC in
accordance with its respective Distribution Plan adopted in respect of Class A
and Class B shares pursuant to Rule 12b-1 under the Investment Company Act of
1940.
During fiscal year 1997, the Portfolios paid the following 12b-1 fees
in respect of Class B shares to Mentor Distributors as shown below:
Growth Portfolio............................ $2,989,388
Capital Growth Portfolio.................... 656,243
Strategy Portfolio.......................... 2,224,816
Income and Growth Portfolio................. 645,243
Global Portfolio............................ 481,581
Quality Income Portfolio.................... 317,465
Municipal Income Portfolio.................. 197,295
Short-Duration Income Portfolio 73,558
Balanced Portfolio.......................... --
Government Money Market Portfolio --
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<PAGE>
During fiscal year 1997, 12b-1 fees of $28,926 were waived in respect
of Class B shares of the Balanced Portfolio.
Contingent Deferred Sales Charges
During fiscal year 1997, Mentor Distributors received the following
contingent deferred sales charges with respect to Class B shares:
Growth Portfolio............................ $362,277
Capital Growth Portfolio.................... 40,502
Strategy Portfolio.......................... 727,513
Income and Growth Portfolio................. 57,856
Global Portfolio............................ 83,936
Quality Income Portfolio.................... 30,436
Municipal Income Portfolio.................. 26,274
Short-Duration Income Portfolio 33,870
Balanced Portfolio.......................... --
Government Money Market Portfolio --
Underwriting Commissions
The following table shows the approximate amount of underwriting
commissions retained by Mentor Distributors (and any predecessor) in respect of
Class A and Class B shares for each Portfolio for the periods indicated:
<TABLE>
<CAPTION>
Fiscal year Fiscal Fiscal year
1997 1996 1995
---- ---- ----
<S> <C>
Growth Portfolio............................ $116,796 38,398 --
Capital Growth Portfolio.................... 63,786 $ 10,477 $ 1,314
Strategy Portfolio.......................... 62,145 31,801 --
Income and Growth Portfolio................. 59,230 15,762 2,708
Global Portfolio............................ 66,416 23,038 1,829
Quality Income Portfolio.................... 37,516 9,062 559
Municipal Income Portfolio.................. 21,433 4,110 247
Short-Duration Income Portfolio............. 867 186 --
Balanced Portfolio.......................... -- -- --
Government Money Market Portfolio........... -- -- --
</TABLE>
DETERMINING NET ASSET VALUE
A Portfolio determines the net asset value per share of each class once
each day the New York Exchange (the "Exchange") is open as of the close of
regular trading on the Exchange. Currently, the Exchange is closed Saturdays,
Sundays and the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, the Fourth of July, Labor Day, Thanksgiving and Christmas.
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<PAGE>
Securities for which market quotations are readily available are valued
at prices which, in the opinion of a Portfolio's investment adviser or
sub-adviser, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sale price or, if
no sales are reported (as in the case of some securities traded
over-the-counter), the last reported bid price, except that certain U.S.
Government securities are stated at the mean between the last reported bid and
asked prices. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost, which approximates market value. All other
securities and assets are valued at their fair value following procedures
approved by the Trustees. Liabilities are deducted from the total, and the
resulting amount is divided by the number of shares of the class outstanding.
Reliable market quotations are not considered to be readily available
for long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. These investments are stated at fair
value on the basis of valuations furnished by pricing services approved by the
Trustees, which determine valuations for normal, institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders.
If any securities held by a Portfolio are restricted as to resale, the
Portfolio's investment adviser or sub-adviser determines their fair values. The
fair value of such securities is generally determined as the amount which a
Portfolio could reasonably expect to realize from an orderly disposition of such
securities over a reasonable period of time. The valuation procedures applied in
any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any registration
expenses that might be borne by the Portfolio in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
In the case of certain fixed-income securities, including certain less
common mortgage-backed securities, market quotations are not readily available
to the Portfolios on a daily basis, and pricing services may not provide price
quotations. In such cases, the Portfolio's investment adviser or sub-adviser is
typically able to obtain dealer quotations for each of the securities on at
least a weekly basis. On any day when it is not practicable for the investment
adviser or sub-adviser to obtain an actual dealer quotation for a security, the
investment adviser or sub-adviser may reprice the securities based on changes in
the value of a U.S. Treasury security of comparable duration. When the next
dealer quotation is obtained, the investment adviser or sub-adviser compares the
dealer quote against the price obtained by it using its U.S. Treasury-spread
calculation, and makes any necessary adjustments to its calculation methodology.
The investment adviser or sub-adviser attempts to obtain dealer quotes for each
security at least weekly, and on any day when there has been an unusual
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<PAGE>
occurrence affecting the securities which, in the investment adviser or
sub-adviser's view, makes pricing the securities on the basis of U.S. Treasuries
unlikely to provide a fair value of the securities.
Generally, trading in certain securities (such as foreign securities)
is substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of a class of shares are computed as of such times. Also, because of the amount
of time required to collect and process trading information as to large numbers
of securities issues, the values of certain securities (such as convertible
bonds, U.S. Government securities, and tax-exempt securities) are determined
based on market quotations collected earlier in the day at the latest
practicable time prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value
following procedures approved by the Trustees.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which net asset value is not calculated. A Portfolio calculates net asset
value per share of each class, and therefore effects sales, redemptions and
repurchases of its shares, as of the close of the Exchange once on each day on
which the Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when a classes' net asset value is calculated, such
securities will be valued at fair value as determined in good faith by
procedures approved as required by the Trustees.
REDEMPTIONS IN KIND
Although each Portfolio intends to redeem Class A, Class B and
Institutional Shares in cash, it reserves the right under certain circumstances
to pay the redemption price in whole or in part by a distribution of securities
from its investment portfolio. Redemptions in kind will be made in conformity
with applicable SEC rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner that the
Trustees determine to be fair and equitable. The Trust has elected to be
governed by Rule 18f- 1 of the Investment Company Act of 1940, under which a
Portfolio is obligated to redeem shares for any one shareholder in cash only up
to the lesser of $250,000 or 1% of the respective classes' net asset value
during any 90-day period.
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<PAGE>
TAXES
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to shareholders. A Portfolio will not under present law be subject
to any excise or income taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other dispositions of stock, securities, or foreign currencies, and
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities, or currencies; and (b) diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the market value
of its total assets consists of cash and cash items, U.S. Government Securities,
securities of other regulated investment companies, and other securities limited
generally with respect to any one issuer to not more than 5% of the value of its
total assets and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities (other than those of the U.S. Government or other regulated
investment companies) of any issuer or of two or more issuers which the
Portfolio controls and which are engaged in the same, similar, or related trades
or businesses. In order to receive the favorable tax treatment accorded
regulated investment companies and their shareholders, moreover, a Portfolio
must in general distribute at least 90% of the sum of its taxable net investment
income, its net tax-exempt income, and the excess, if any, of net short-term
capital gains over net long-term capital losses for such year.
If a Portfolio failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Portfolio would be
subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax-exempt income
and net long-term capital gains, would be taxable to shareholders as ordinary
income. In addition, a Portfolio could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial distributions
before requalifying as a regulated investment company that is accorded special
tax treatment.
If a Portfolio fails to distribute in a calendar year substantially all
of its ordinary income for such year and substantially all of its capital gain
net income for the one-year period ending October 31, plus any retained amount
from the prior year, the Portfolio will be subject to a 4% excise tax on the
undistributed amounts. A dividend paid to shareholders by a Portfolio in January
of a year generally is deemed to have been paid by the Portfolio on December 31
of the preceding year, if the dividend was declared and payable to shareholders
of record on a date in October, November or December of that preceding year. A
Portfolio intends generally to make distributions sufficient to avoid imposition
of the 4% excise tax.
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Distributions from a Portfolio (other than exempt-interest dividends,
as discussed below) will be taxable to shareholders as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), two different tax
rates apply to net capital gains (that is, the excess of net gains from capital
assets held for more than one year over net losses from capital assets held for
not more than one year). One rate (generally 28%) applies to net gains on
capital assets held for more than one year but not more than 18 months (28% rate
gains) and a second, preferred rate (generally 20%) applies to the balance of
such net capital gains ("adjusted net capital gains"). Distributions of net
capital gains will be treated in the hands of shareholders as 28% rate gains to
the extent designated by the Portfolio as deriving from net gains from assets
held for more than one year but not more than 18 months, and the balance will be
treated as adjusted net capital gains. Distributions of 28% rate gains and
adjusted net capital gains will be taxable to shareholders as such, regardless
of how long a shareholder has held the shares in the Portfolio.
Exempt-interest dividends. A Portfolio will be qualified to pay
exempt-interest dividends to its shareholders only if, at the close of each
quarter of the Portfolio's taxable year, at least 50% of the total value of the
Portfolio's assets consists of obligations the interest on which is exempt from
federal income tax. Distributions that the Portfolio properly designates as
exempt-interest dividends are treated by shareholders as interest excludable
from their gross income for federal income tax purposes but may be taxable for
federal alternative minimum tax purposes and for state and local purposes. If
the Portfolio intends to be qualified to pay exempt-interest dividends, the
Portfolio may be limited in its ability to enter into taxable transactions
involving forward commitments, or repurchase agreements, financial futures, and
options contracts on financial futures, tax-exempt bond indices, and other
assets.
Part or all of the interest on indebtedness, if any, incurred or
continued by a shareholder to purchase or carry shares of a Portfolio paying
exempt-interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the indebtedness,
multiplied by the percentage of a Portfolio's total distributions (not including
distributions from net long-term capital gains) paid to the shareholder that are
exempt-interest dividends. Under rules used by the Internal Revenue Service for
determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
A Portfolio which is qualified to pay exempt-interest dividends will
inform investors within 60 days of the Portfolio's fiscal year-end of the
percentage of its income distributions designated as tax-exempt. The percentage
is applied uniformly to all distributions made during the year. The percentage
of income designated as tax-exempt for any particular distribution
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<PAGE>
may be substantially different from the percentage of the Portfolio's income
that was tax-exempt during the period covered by the distribution.
Hedging transactions. If a Portfolio engages in transactions, including
hedging transactions in options, futures contracts, and straddles, or other
similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to the Portfolio, defer losses
to the Portfolio, cause adjustments in the holding periods of the Portfolio's
securities, or convert short-term capital losses into long-term capital losses.
These rules could therefore affect the amount, timing and character of
distributions to shareholders. A Portfolio will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the best
interests of the Portfolio.
Certain of a Portfolio's hedging activities (including its
transactions, if any, in foreign currencies or foreign currency-denominated
instruments) are likely to produce a difference between its book income and its
taxable income. If a Portfolio's book income exceeds its taxable income, the
distribution (if any) of such excess will be treated as a dividend to the extent
of the Portfolio's remaining earnings and profits (including earnings and
profits arising from tax-exempt income), and thereafter as a return of capital
or as gain from the sale or exchange of a capital asset, as the case may be. If
a Portfolio's book income is less than its taxable income, the Portfolio could
be required to make distributions exceeding book income to qualify as a
regulated investment company that is accorded special tax treatment.
Pursuant to the 1997 Act, new "constructive sale" provisions apply to
activities by a Portfolio which lock-in gain on an "appreciated financial
position." Generally, a "position" is defined to include stock, a debt
instrument, or partnership interest, or an interest in any of the foregoing,
including through a short sale, a swap contract, or a future or forward
contract. Under the 1997 Act, the entry into a short sale, a swap contract or a
future or forward contract relating to an appreciated direct position in any
stock or debt instrument, or the acquisition of stock or debt instrument at a
time when the Portfolio occupies an offsetting (short) appreciated position in
the stock or debt instrument, is treated as a "constructive sale" that gives
rise to the immediate recognition of gain (but not loss). The application of
these new provisions may cause a Portfolio to recognize taxable income from
these offsetting transactions in excess of the available cash generated by such
activities.
Return of capital distributions. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" in any
taxable year, the excess distribution will be treated as a return of capital to
the extent of your tax basis in your shares, and thereafter as capital gain. A
return of capital is not taxable, but it reduces your tax basis in your shares,
thus reducing any loss or increasing any gain on a subsequent taxable
disposition by you or your shares.
Securities issued or purchased at a discount. A Portfolio's investment
in securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio to
accrue and distribute income not yet received. In
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order to generate sufficient cash to make the requisite distributions, a
Portfolio may be required to sell securities in its portfolio that it otherwise
would have continued to hold.
Foreign currency-denominated securities and related hedging
transactions. A Portfolio's transactions in foreign currencies, foreign
currency-denominated debt securities and certain foreign currency options,
futures contracts, and forward contacts (and similar instruments) may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of a Portfolio's assets at year end consists of the
stock or securities of foreign corporations, the Portfolio may elect to permit
shareholders to claim a credit or deduction on their income tax returns for
their pro rata portion of qualified taxes paid by the Portfolio to foreign
countries in respect of foreign securities the Portfolio has held for at least
the minimum period specified in the Code. In such a case, shareholders will
include in gross income from foreign sources their pro rata shares of such
taxes. A shareholder's ability to claim a foreign tax credit or deduction in
respect of foreign taxes paid by the Portfolio may be subject to certain
limitations imposed by the Code, as a result of which a shareholder may not get
a full credit or deduction for the amount of such taxes. Shareholders who do not
itemize on their federal income tax returns may claim a credit (but no
deduction) for such foreign taxes.
Investment by a Portfolio in certain "passive foreign investment
companies" ("PFICs") could subject the Portfolio to a U.S. federal income tax
(including interest charges) on distributions received from the company or on
proceeds received from the disposition of shares in the company, which tax
cannot be eliminated by making distributions to Portfolio shareholders. However,
the Portfolio may elect to treat a passive foreign investment company as a
"qualified electing fund," in which case the Portfolio will be required to
include its share of the company's income and net capital gain annually,
regardless of whether it receives any distribution from the company. The
Portfolio also may make an election to mark the gains (and to a limited extent
losses) in such holdings "to the market" as though it had sold and repurchased
its holdings in those PFICs on the last day of the Portfolio's taxable year.
Such gains and losses are treated as ordinary income and loss. The qualified
electing fund and mark-to-market elections may have the effect of accelerating
the recognition of income (without the receipt of cash) and increase the amount
required to be distributed for the Portfolio to avoid taxation. Making either of
these elections therefore may require a Portfolio to liquidate other investments
(including when it is not advantageous to do so) to meet its distribution
requirement, which also may accelerate the recognition of gain and affect a
Portfolio's total return.
Sale or redemption of shares. The sale, exchange or redemption of
Portfolio shares may give rise to a gain or loss. In general, any gain realized
upon a taxable disposition of shares will be treated as 28% rate gains if the
shares have been held for more than 12 months but not more than 18 months, and
as adjusted net capital gains if the shares been held for more than 18 months.
Otherwise the gain on the sale, exchange or redemption of Portfolio shares will
be treated as short-term capital gain. In general, any loss realized upon a
taxable
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<PAGE>
disposition of shares will be treated as long-term loss if the shares have been
held for more than 12 months, and otherwise as short-term capital loss. However,
if a shareholder sells shares at a loss within six months of purchase, any loss
will be disallowed for federal income tax purposes to the extent of any
exempt-interest dividends received on such shares. In addition, any loss (not
already disallowed as provided in the preceding sentence) realized upon a
taxable disposition of shares held for six months or less will be treated as
long-term, rather than short-term, to the extent of any long-term capital gain
distributions received by the shareholder with respect to the shares. All or a
portion of any loss realized upon a taxable disposition of Portfolio shares will
be disallowed if other Portfolio shares are purchased within 30 days before or
after the disposition. In such a case, the basis of the newly purchased shares
will be adjusted to reflect the disallowed loss.
Shares purchased through tax-qualified plans. Special tax rules apply
to investments through defined contribution plans and other tax-qualified plans.
Shareholders should consult their tax adviser to determine the suitability of
shares of a Portfolio as an investment through such plans and the precise effect
of an investment on their particular tax situation.
Backup withholding. A Portfolio generally is required to withhold and
remit to the U.S. Treasury 31% of the taxable dividends and other distributions
(including in redemption of portfolio shares) paid to any individual shareholder
who fails to furnish the Portfolio with a correct taxpayer identification number
(TIN), who has under reported dividends or interest income, or who fails to
certify to the Portfolio that he or she is not subject to such withholding.
Shareholders who fail to furnish their current TIN are subject to a penalty of
$50 for each such failure unless the failure is due to reasonable cause and not
wilful neglect. An individual's taxpayer identification number is his or her
social security number.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to
state, local, foreign and other taxes. Shareholders are urged to consult their
tax advisers regarding specific questions as to federal, state, local or foreign
taxes. The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
For a more complete discussion of shareholders' tax status, including a
discussion of the individual alternative minimum tax and the corporate
alternative minimum tax, see the section of the relevant prospectus in respect
of taxes.
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<PAGE>
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, are the Trust's independent accountants, providing audit services, tax
return review and other tax consulting services.
CUSTODIAN
Investors Fiduciary Trust Company, located at 127 West 10th Street,
Kansas City, Missouri, is the custodian of each Portfolio, except that State
Street Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts serves as
custodian to the Global Portfolio and as the foreign custodian to each of the
other Portfolios in respect of foreign assets. A custodian's responsibilities
include generally safeguarding and controlling a Portfolio's cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on a Portfolio's investments.
PERFORMANCE INFORMATION (shown through September 30, 1997)
The table below shows the average annual total return of Class A shares
and Class B shares for the one-, five- and ten-year periods (or for the life of
a class if shorter)**:
<TABLE>
<CAPTION>
Class A Shares 1 Year 5 Years Since Inception
-------------- ------ ------- or 10 Years
-----------
<S> <C>
Growth Portfolio*............................ 18.56% -- 30.05%
Capital Growth Portfolio..................... 27.04% -- 14.11%
Strategy Portfolio*.......................... 5.51% -- 16.55%
Income and Growth Portfolio.................. 15.09% -- 14.59%
Global Portfolio............................. 14.60% -- 12.76%
Quality Income Portfolio..................... 4.67% -- 4.71%
Municipal Income Portfolio................... 3.71% -- 6.52%
Short-Duration Income Portfolio* 6.23% -- 5.49%
<CAPTION>
Class B Shares 1 Year 5 Years Since Inception
-------------- ------ ------- or 10 Years
<S> <C> -----------
Growth Portfolio*............................ 20.66% 21.29% 13.92%
Capital Growth Portfolio..................... 29.88% -- 14.48%
Strategy Portfolio*.......................... 7.19% -- 12.42%
Income and Growth Portfolio.................. 17.24% -- 15.13%
Global Portfolio............................. 16.74% -- 13.23%
Quality Income Portfolio..................... 5.29% -- 4.99%
Municipal Income Portfolio................... 4.33% -- 6.80%
Short-Duration Income Portfolio* 2.96% -- 5.78%
Balanced Portfolio*.......................... 21.09% -- 19.18%
Government Money Market Portfolio -- -- --
- -----------------
</TABLE>
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<PAGE>
* Prior to May 30, 1995, the Balanced, Growth, Short-Duration Income,
and Strategy Portfolios only offered one class of shares. Total return
information prior to this date is shown under the Class B share table. As a
result, the annual total return information beyond the one-year period shown
above for the Balanced, Growth, Short-Duration Income, and Strategy Portfolios
reflects various sales charges currently not applicable to the Portfolios. The
Balanced, Growth, Short-Duration, and Strategy Portfolios are the successors to
Mentor Balanced Fund, Mentor Growth Fund, Mentor Short-Duration Income Fund, and
Mentor Strategy Fund, respectively, each of which was previously a series of
shares of beneficial interest of Mentor Series Trust. For fiscal 1994, none of
these Funds bore a front-end sales charge, but each of them was subject to a
maximum contingent deferred sales charge of 5%. The Balanced Portfolio currently
offers only one class of shares. Total return information for this Portfolio is
shown under the Class B share table.
**No Institutional Shares were outstanding for these periods.
- - - - - -
Total return for the one-, five-, and ten-year periods for each class
of shares of a Portfolio (or for the life of a class, if shorter) is determined
by calculating the actual dollar amount of investment return on a $1,000
investment in shares of that class at the beginning of the period, and then
calculating the annual compounded rate of return which would produce that
amount. Total return for a period of one year is equal to the actual return of
the particular class of a Portfolio during that period. Total return
calculations assume deduction of a classes' maximum front-end or contingent
deferred sales charge, if any, and reinvestment of all distributions at net
asset value on their respective reinvestment dates.
All data are based on past performance and do not predict future
results.
Yield and Tax-Equivalent Yield
The thirty-day yield for Class A shares and Class B shares of certain
of the Portfolios for the period ending September 30, 1997, was as follows*:
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C>
Quality Income Portfolio 7.07% 6.91%
Municipal Income Portfolio 3.66% 3.35%
Short-Duration Income Portfolio 5.35% 5.11%
</TABLE>
*No Institutional Shares were outstanding for these periods.
Yield for each class is presented for a specified thirty-day period
(the "base period"). Yield is based on the amount determined by (i) calculating
the aggregate amount of dividends and interest earned by a class of shares of a
Portfolio during the base period less expenses
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<PAGE>
accrued for that period, and (ii) dividing that amount by the product of (A) the
average daily number of shares of class outstanding during the base period and
entitled to receive dividends and (B) the net asset value per share of the class
on the last day of the base period. The result is annualized on a compounding
basis to determine the yield. For this calculation, interest earned on debt
obligations held by a Portfolio is generally calculated using the yield to
maturity (or first expected call date) of such obligations based on their market
values (or, in the case of receivables-backed securities such as GNMA's, based
on costs). Dividends on equity securities are accrued daily at their stated
dividend rates.
To the extent that financial institutions and broker/dealers charge
fees in connection with services provided in conjunction with an investment in a
Portfolio, the performance will be reduced for those shareholders paying those
fees.
The tax-equivalent yield for Class A shares of the Municipal Income
Portfolio for the thirty-day period ending September 30, 1997, was 6.06%. The
tax-equivalent yield for that Portfolio's Class B shares was 5.55% for the same
period. The tax-equivalent yield for all classes of shares of the Municipal
Income Portfolio is calculated similarly to the yield, but is adjusted to
reflect the taxable yield that the Portfolio would have had to earn to equal its
actual yield, assuming a 39.6% tax rate (the maximum effective federal rate for
individuals) and assuming that income is 100% tax-exempt.
The Municipal Income Portfolio may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal bonds in
the Portfolio's investment portfolio generally remains free from federal regular
income tax but may be subject to state and local taxes. (Some portion of the
Portfolio's income may be subject to federal alternative minimum tax and state
and local taxes.) Capital gains, if any, are subject to federal, state and local
tax.
At times, a Portfolio's investment adviser or sub-adviser may reduce
its compensation or assume expenses of the Portfolio in order to reduce the
Portfolio's expenses. Any such fee reduction or assumption of expenses would
increase a classes' yield and total return during the period of the fee
reduction or assumption of expenses.
Total return may be presented for other periods or without giving
effect to any contingent deferred sales charge. Any quotation of total return or
yield not reflecting the front-end or contingent deferred sales charge would be
reduced if such sales charges were reflected.
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<PAGE>
EQUIVALENT YIELDS: TAX-EXEMPT VERSUS TAXABLE SECURITIES FOR THE MUNICIPAL
INCOME PORTFOLIO
The table below shows the effect of the tax status of tax-exempt securities on
the effective yield received by their individual holders under the federal
income tax laws currently in effect for 1997. It gives the approximate yield a
taxable security must earn at various income levels to produce after-tax yields
equivalent to those of tax-exempt securities yielding from 2.0% to 10.0%.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1997
Marginal
Taxable Income* federal
______________ income
tax**
Joint Single Rate
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
<S> <C>
$0 - 41,200 $0 - 24,650 15.00%
41,201 - 99,600 24,651 - 59,750 28.00%
99,601 - 151,750 59,751 - 124,650 31.00%
151,751 - 271,050 124,651 - 271,050 36.00%
over 271,051 over 271,051 39.60%
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------
Tax-exempt yield
_______________________________________________________________________
2% 3% 4% 5% 6% 7% 8% 9% 10%
- --------------------------------------------------------------------------------------------------------
Equivalent taxable yield
- ------------------------------------------------------------------------------------------------------
<S> <C>
2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
2.90% 4.35% 5.80% 7.25% 8.70% 10.15% 11.59% 13.04% 14.49%
3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
3.31% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
- ------------------
* This amount represents taxable income as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), after any deduction for
personal exemptions and the greater of the standard deduction or
itemized deductions. Income in the higher brackets may be affected by
the phase-out of personal exemptions and the limitation of itemized
deductions, based on Adjusted Gross Income, under the Code.
** These rates are the marginal federal income tax rate s on taxable
income currently in effect for 1997 under the Code.
Of course, there is no assurance that the Municipal Income Portfolio
will achieve any specific tax-exempt yield. While it is expected that the
Portfolio will invest principally in obligations which pay interest exempt from
federal income tax, other income received by the Portfolio may be taxable. The
table does not take into account any state or local taxes payable on Portfolio
distributions.
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<PAGE>
MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of the Portfolio's
investment advisers, as indicated.
Mentor Investment Advisors, LLC
Large Capitalization Quality Equity Growth
John G. Davenport, CFA -- Managing Director, Chief Equity Officer
Mr. Davenport has 11 years of investment management experience. He joined the
firm after leading equity research at the investment management firm of Lowe,
Brockenbrough, & Tattersall, Inc. Mr. Davenport graduated from the University of
Richmond and has an MBA from the University of Virginia.
Richard H. Skeppstrom II -- Vice President, Portfolio Manager
Mr. Skeppstrom has six years of investment management experience. Before joining
the firm he was a global portfolio analyst for Saudi International Bank
Portfolio Advisors. Mr. Skeppstrom began his career as a pension and benefit
analyst at Johnson & Higgins of Virginia. He has earned both an undergraduate
degree and an MBA from the University of Virginia.
Christopher W. Rusbuldt, CFA -- Vice President, Portfolio Manager
Mr. Rusbuldt joined the firm in 1995 and has five years' investment experience.
Previously, he was an equity research analyst for Wheat First Butcher Singer. He
began his career as a banker in the corporate group at NationsBank. Mr. Rusbuldt
is a graduate of the University of Virginia.
Richard L. Rice -- Vice President, Portfolio Manager
Mr. Rice has twenty-five years' experience in the securities industry. Before
joining Mentor, he was a partner in Parata Analytics Research. Prior
responsibilities include research for Signet Asset Management, senior research
analyst for Capitoline Investment Services, and positions in research at Atlanta
Corporation and Southwest Banking, Inc. Mr. Rice is a graduate of the University
of Florida and has completed graduate work at Georgia State University.
Steven A. Certo -- Portfolio Manager
Mr. Certo joined the firm in 1997, from the equity research department of Wheat
First Butcher Singer where he was a research analyst following the software
industry. Mr. Certo served five years as an intelligence officer in the US Navy.
His professional background also includes a year as an investment representative
for Edward Jones and Co. He is a graduate of Iona College and is a level III
candidate in the CFA program.
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<PAGE>
Active Fixed-Income
P. Michael Jones, CFA -- Managing Director, Chief Fixed-Income Officer Mr. Jones
has 10 years of investment management experience. He is the manager of Mentor
Short-Duration Income Portfolio and Mentor Quality Income Portfolio, as well as
Mentor Income Fund, a $120 million closed-end bond fund. Mr. Jones is
responsible for the design and implementation of the fixed-income group's
proprietary analytical system. He has worked as an investment manager at Ryland
Capital Management, Alliance Capital Management, and Central Fidelity Bank. Mr.
Jones earned an undergraduate degree from the College of William and Mary, and
is enrolled in the Wharton School of the University of Pennsylvania.
Steven C. Henderson -- Vice President, Portfolio Manager
Mr. Henderson has seven years of investment management experience. He is a
portfolio manager for Mentor Short-Duration Income Portfolio, Mentor Quality
Income Portfolio, and Mentor Income Fund. Prior to joining the firm, Mr.
Henderson was senior portfolio analyst at Ryland Capital Management, Inc. Before
Ryland Capital Management, Mr. Henderson was a financial analyst at Ryland
Mortgage Company. Mr. Henderson is a graduate of the University of Richmond and
received an MBA from George Washington University.
Stephen R. McClelland, CFA -- Vice President, Portfolio Manager
Mr. McClelland has six years of investment management experience. He is
responsible for managing institutional total-return portfolios and corporate
bond portfolios. Prior to joining Mentor, Mr. McClelland was a budget analyst
for three years at Wheat First Butcher Singer. He is a certified public
accountant. Mr. McClelland graduated from Iowa State University and earned an
MBA from Virginia Commonwealth University.
B. Keith Wantling -- Associate Vice President, Sector Specialist
Mr. Wantling has four years of investment experience. He is responsible for
monitoring and evaluating opportunities in the mortgage-backed securities
market. He designs and maintains spread tracking systems, prepayment data bases
and other tools necessary to determine relative value in the mortgage sector.
Prior to assuming his current duties, Mr. Wantling was instrumental in the
construction of the fixed-income department's proprietary analytical system.
E. Marc Cheatham III -- Systems/Research Analyst
Mr. Cheatham has primary responsibility for the fixed-income team's decision
support system. He builds proprietary analytical software based on
specifications provided by portfolio managers and analysts. In addition, he
builds and maintains the extensive historical databases used to monitor economic
and market conditions. Mr. Cheatham holds an undergraduate degree in computer
science from the University of Richmond.
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<PAGE>
Todd C. Kuimjian -- Credit/Research Analyst
Mr. Kuimjian has three years of investment experience. He is responsible for
maintaining credit information on corporate issuers and assisting Mr. McClelland
in evaluating the risk/return characteristics of corporate securities. Prior to
assuming his current duties, Mr. Kuimjian served as an investment
accountant/systems analyst and later as a senior investment administrator within
Mentor's investment services group. He holds an undergraduate degree from
Virginia Polytechnic Institute and is also a CPA.
Small-to-Medium Capitalization Equity Growth
Theodore W. Price, CFA -- Managing Director, Chief Investment Officer
Prior to establishing the small/mid cap. management style, Mr. Price served for
10 years as vice chairman and portfolio manager of the investment management
subsidiary of Wheat First Butcher Singer. In 1985, he established the equity
retail mutual fund, Mentor Growth Portfolio, which today represents nearly $600
million in assets. He is a member of the Richmond Society of Financial Analysts.
Mr. Price earned both BA and MBA degrees from the University of Virginia.
Linda A. Ziglar, CFA -- Managing Director, Portfolio Manager
Ms. Ziglar joined the firm in 1991 after serving seven years as vice president
of Federal Investment Counseling and Federated Research Corporation in
Pittsburgh. While at Federated, Ms. Ziglar shared responsibility fro the
management of more than $300 million in mutual fund and separate account assets.
She is a member of the Richmond Society of Financial Analysts, the Financial
Analysts Federation, and a former officer of the Pittsburgh Society of Financial
Analysts. Ms. Ziglar is a summa cum laude, Phi Beta Kappa graduate of
Randolph-Macon Woman's College. She earned an MBA from the University of
Pittsburgh.
Jeffrey S. Drummond, CFA -- Vice President, Portfolio Manager
Mr. Drummond joined the firm in 1993 after five years in investment strategy at
Wheat First Butcher Singer. While working with Wheat's chief investment
strategist, he shared responsibility for the management of the Strategic Sectors
Portfolio. He is a member of the Richmond Society of Financial Analysts. Mr.
Drummond graduated cum laude from the University of Richmond.
Edward Rick IV -- Research Analyst
Mr. Rick joined the firm in 1994 after his experience with Davenport & Co. of
Virginia, where he focused on research of insider ownership and past earnings
performance of their universe of companies. He also organized research data for
the firm's leading retail analysts. Mr. Rick is a magna cum laude graduate of
the University of Richmond where he served as a business analyst for the
University's investment club, and later as leading manager. He is a candidate in
the Chartered Financial Analyst program.
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<PAGE>
Tactical Asset Allocation
Don R. Hays -- President, Portfolio Manager
Mr. Hays has more than 27 years' experience in securities selection and analysis
of the markets. In addition to managing Mentor Strategy Portfolio, he is
director of investment strategy for Wheat First Butcher Singer, a position he
has held since 1984. He has also been a partner at J.C. Bradford, where he
served as investment strategist for the firm and chairman of the investment
policy committee. He began his investment career as a financial consultant at
J.C. Bradford. Mr. Hays holds an undergraduate degree from Tennessee Polytechnic
University.
Katherine A. Duggan -- Portfolio Analyst
Ms. Duggan joined Wheat First Butcher Singer in 1996 as part of the investment
strategy department. Her responsibilities within the Mentor Strategy Portfolio
team have focused primarily on the trading of the Portfolio and updating
information used in the tactical asset allocation model employed in its
management. Ms. Duggan received her BSBA from the University of Richmond in
1996.
William P. Ryder -- Research Analyst
Mr. Ryder joined Wheat First Butcher Singer in 1991 as a member of its
investment strategy group, working as a research analyst on its growth and
growth and income model portfolios. In 1995 he became part of the team
responsible for managing the Mentor Strategy Portfolio. In that capacity he
focuses primarily on conducting economic analysis, industry group studies, and
asset allocation modeling. Mr. Ryder attended Virginia Commonwealth University
and has five years' investment experience.
Cash Management
R. Preston Nuttall, CFA -- Managing Director, Director of Cash Management Mr.
Nuttall oversees the investment of all short-term fixed-income assets including
five money-market funds and approximately 50 separately-invested portfolios. Mr.
Nuttall has over 30 years' of investment experience. Before joining the firm, he
directed short-term fixed-income management for 15 years at Capitoline
Investment Services, Inc. He is a graduate of the University of Richmond and
received an MBA from the University of Pennsylvania.
Hubert R. White III -- Vice President, Portfolio Manager
Mr. White currently manages four taxable money-market funds, cash positions for
11 other mutual funds. He has eleven years of investment management experience
and specializes in taxable fixed-income. Prior to joining the firm, Mr. White
served for five years as portfolio manager with Capitoline Investment Services.
Formerly, he was at Crestar Bank, where he began his career in 1982. Mr. White
is a graduate of University of Richmond.
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<PAGE>
Kathryn T. Allen -- Vice President, Portfolio Manager
Ms. Allen has 14 years of tax-free management investment experience. At Mentor
she manages the tax-exempt money-market fund, as well as intermediate-maturity
tax-exempt portfolios. Prior to joining the firm, Ms. Allen was portfolio
manager at PNC Institutional Management Corporation. She began her career at
Bradford Securities Operations, Inc. and later joined AIM Management in Houston,
Texas. Ms. Allen is a graduate of the University of Alabama.
Thomas G. Morgan -- Vice President, Senior Credit Analyst
Mr. Morgan joined Mentor after two years with Capitoline Investment Services,
where he served as chief credit officer for five money-market funds, and shared
responsibility for the management of a money-market fund. Prior to his
experience with Capitoline, Mr. Morgan spent 12 years with Crestar Bank as a
financial analyst and senior credit analyst. A graduate of Westminster College,
Mr. Morgan brings 17 years of analytical and investment experience to the firm.
Gregory S. Kaplan -- Associate Vice President, Credit Analyst
Mr, Kaplan brings over six years of analytical and investment experience to
mentor. Prior to joining the firm, Mr. Kaplan served for four years as a credit
specialist analyzing commercial credit for NationsBank. He began his career in
the Investment Services division of Prudential Insurance. Mr. Kaplan is a
graduate of Rutgers University and earned his MBS from the Pamplin College of
Business at Virginia Polytechnic Institute and State University.
Mentor Perpetual Advisors, LLC
Rod Smyth -- Managing Director, Mentor Perpetual Advisors
Mr. Smyth is headquartered in Richmond, Virginia and has 13 years of investment
experience. His previous employers include Baring Securities, Ulster Bank
Investment Managers, Citicorp Scrimgeour Vickers, and Nomura International. He
is a graduate of Dundee University.
Martin Arbib -- Chairman, Perpetual Portfolio Management
Mr. Arbib is chairman and founder of Perpetual, a partner in the Mentor
Perpetual Advisors joint venture, where he currently leads investment
management. A Charter Accountant, he has 22 years' investment management
experience.
Scott McGlashan -- Far East Team Leader
Mr. McGlashan is lead manager of Mentor Perpetual Global Portfolio. He has 19
years' management experience, 13 years specializing in the Far East, and 11
years' tenure at Perpetual. He is a graduate of Yale and Cambridge University.
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<PAGE>
Kathryn Langridge -- Southeast Asia Team Leader
Ms. Langridge shares responsibility with Mr. McGlashan for Far East equity
investments. Before joining Perpetual in 1990, she spent eight years in Hong
Kong with the investment firm of Jardine Fleming. She specializes in equity
investments in the non-Japanese stock markets of the Far East. Ms. Langridge is
a graduate of Cambridge University.
Bob Yerbury -- American Team Leader
Mr. Yerbury has 24 years' investment management experience, with over 21 years'
experience in North American stock markets, and has been part of the Perpetual
team for 13 years. Before joining Perpetual, he was a portfolio manager with
Equity & Law Assurance Company. Mr. Yerbury is a graduate of Cambridge
University.
Stephen Whittaker -- UK Team Leader
Mr. Whittaker joined Perpetual eight years ago and has 16 years' investment
management experience. Prior to joining Perpetual, he was responsible for UK
equity funds for the Save & Prosper Group. He began his fund management career
with Rowe & Pitman after graduation from Manchester University.
Margaret Roddan -- Europe Team Leader
Ms. Roddan has 11 years of investment management experience, three years with
Perpetual. She joined Perpetual from Mercury Asset Management, where she shared
responsibility for management of continental European equity holdings. She began
her career with the National Provident Institution. Ms. Roddan is a graduate of
the Investment Management Program at the London Business School. She studied
finance at City University and is a graduate of Bristol University.
PERFORMANCE COMPARISONS
The performance of a Portfolio depends upon such variables as:
portfolio quality; average portfolio maturity; type of instruments in which the
particular Portfolio is invested; changes in the expenses of a particular
Portfolio and class of shares; and various other factors.
The performance of each Portfolio fluctuates on a daily basis largely
because net earnings and net asset value per share of each class fluctuate
daily. Both net earnings and net asset value per share are factors in the
computation of yield and total return for each class of the Portfolios.
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how a Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time to
time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below
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<PAGE>
measure performance based on their own criteria rather than on the standardized
performance measures described in the preceding section.
Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified period of
time. From time to time, a Portfolio will quote its Lipper ranking in
advertising and sales literature.
Morningstar, Inc. distributes mutual fund ratings twice a month. The
ratings are divided into five groups: highest, above average, neutral, below
average, and lowest. They represent a Portfolio's historical risk/reward ratio
relative to other funds with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3- year, 5-year, and 10-year
total return performance (if available) reflecting deduction of expenses and
sales charges. Performance is adjusted using quantitative techniques to reflect
the risk profile of the Portfolio. The ratings are derived from a purely
quantitative system that does not utilize the subjective criteria customarily
employed by rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return calculated
by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and
10-year performance. Mutual funds are ranked in general categories (e.g.,
international bond, international equity, municipal bond, and maximum capital
gain). Weisenberger rankings do not reflect deduction of sales charges or fees.
A Portfolio's shares also may be compared to the following indices:
Dow Jones Industrial Average ("DJIA") is an unmanaged index
representing share prices of major industrial corporations, public utilities,
and transportation companies. Produced by Dow Jones & Company, it is cited as a
principal indicator of market conditions.
Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of funds
whose portfolios are invested primarily in common stocks. In addition, the
Standard & Poor's listed on its index. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated, in the Standard &
Poor's figures.
Consumer Price Index is generally considered to be a measure of
inflation.
CDA Mutual Fund Growth Index is a weighted performance average of other
mutual funds with growth of capital objectives.
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<PAGE>
Lipper Growth Fund Index is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services, Inc.,
an independent mutual fund rating service.
Lehman Brothers Government/Corporate (total) Index is comprised of
approximately 5,000 issues, which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasifederal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine years. Tracked by
Shearson Lehman Brothers Inc., the index calculates total returns for one month,
three month, twelve month and ten year periods and year-to-date.
Lehman Brothers Government Index is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or any
agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.
Russell Growth 1000 (Russell 1000 Index) is a broadly diversified index
consisting of approximately 1,000 common stocks of companies with market values
between $20 million and $300 million that can be used to compare the total
returns of funds whose portfolios are invested primarily in growth common
stocks.
Lehman Brothers Aggregate Bond Index is a total return index measuring
both the capital price changes and income provided by the underlying universe of
securities, weighted by market value outstanding. The Aggregate Bond Index is
comprised of the Shearson Lehman Government Bond Index, Corporate Bond Index,
Mortgage-Backed Securities Index, and Yankee Bond Index. These indices include:
U.S. Treasury obligations, including bonds and notes; U.S. agency obligations,
including those of the Federal Farm Credit Bank, Federal Land Bank, and the Bank
for Cooperatives; foreign obligations; and U.S. investment-grade corporate debt
and mortgage-backed obligations. All corporate debt included in the Aggregate
Bond Index has a minimum S&P rating of BBB, a minimum Moody's rating of Baa, or
a minimum Fitch rating of BBB.
Salomon Brothers Mortgage-Backed Securities Index-15 Years includes the
average of all 15-year mortgage securities, which include Federal Home Loan
Mortgage Corporation (Freddie Mac), Federal National Mortgage Association
(Fannie Mae), and Government National Mortgage Association (Ginnie Mae).
Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market. Returns
and attributes for the
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Index are calculated semi-monthly using approximately 29,000 municipal bonds,
which are priced by Muller Data Corporation.
From time to time, certain of the Portfolios that invest in foreign
securities may advertise the performance of their classes of shares compared to
similar funds or portfolios using certain indices, reporting services, and
financial publications. These may include the following: Morgan Stanley Capital
International World Index, The Morgan Stanley Capital International EAFE
(Europe, Australia, Far East) index, J.P. Morgan Global Traded Bond Index,
Salomon Brothers World Government Bond Index, and the Standard & Poor's 500
Composite Stock Price Index (S&P 500). A Portfolio also may compare its
performance to the performance of unmanaged stock and bond indices, including
the total returns of foreign government bond markets in various countries. All
index returns are translated into U.S. dollars. The total return calculation for
these unmanaged indices may assume the reinvestment of dividends and any
distributions, if applicable, may include withholding taxes, and generally do
not reflect deductions for administrative and management costs.
Investors may use such indices or reporting services in addition to the
Trust or an individual Portfolio's prospectus to obtain a more complete view of
a particular Portfolio's performance before investing. Of course, when comparing
a Portfolio's performance to any index, conditions such as composition of the
index and prevailing market conditions should be considered in assessing the
significance of such comparisons. When comparing portfolios using reporting
services, or total return and yield, investors should take into consideration
any relevant differences in portfolios, such as permitted portfolio compositions
and methods used to value portfolio securities and compute net asset value.
Advertisements and other sales literature for a Portfolio may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in a
Portfolio based on monthly reinvestment of dividends over a specified period of
time.
From time to time the Portfolios may advertise their performance, using
charts, graphs, and descriptions, compared to federally insured bank products,
including certificates of deposit and time deposits, and to monthly market funds
using the Lipper Analytical Service money market instruments average.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the descriptions
appearing below. From time to time any or all of the Portfolios may distribute
evaluations by or excerpts from these publications to its
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shareholders or to potential investors. The following illustrates the types of
information provided by these publications.
Business Week publishes mutual fund rankings in its Investment Figures
of the Week column. The rankings are based on 4-week and 52-week total return
reflecting changes in net asset value and the reinvestment of all distributions.
They do not reflect deduction of any sales charges. Funds are not categorized;
they compete in a large universe of over 2,000 funds. The source for rankings is
data generated by Morningstar, Inc.
Investor's Business Daily publishes mutual fund rankings on a daily
basis. The rankings are depicted as the top 25 funds in a given category. The
categories are based loosely on the type of fund, e.g., growth funds, balanced
funds, U.S. government funds, GNMA funds, growth and income funds, corporate
bond funds, etc. Performance periods for sector equity funds can vary from 4
weeks to 39 weeks; performance periods for other fund groups vary from 1 year to
3 years. Total return performance reflects changes in net asset value and
reinvestment of dividends and capital gains. The rankings are based strictly on
total return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds; an A
rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical Services. The
Lipper total return data reflects changes in net asset value and reinvestment of
distributions, but does not reflect deduction of any sales charges. The
performance periods vary from short-term intervals (current quarter or
year-to-date, for example) to long-term periods (five-year or ten-year
performance, for example). Barron's classifies the funds using the Lipper mutual
fund categories, such as Capital Appreciation Funds, Growth Funds, U.S.
Government Funds, Equity Income Funds, Global Funds, etc. Occasionally, Barron's
modifies the Lipper information by ranking the funds in asset classes. "Large
funds" may be those with assets in excess of $25 million; "small funds" may be
those with less than $25 million in assets.
The Wall Street Journal publishes its Mutual Fund Scorecard on a daily
basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper
Analytical Services category. Lipper provides the rankings based on its total
return data reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The Scorecard portrays
4-week, year-to-date, one-year and 5-year performance; however, the ranking is
based on the one-year results. The rankings for any given category appear
approximately once per month.
Fortune magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Funds are placed in stock or
bond fund categories (for example, aggressive growth stock funds, growth stock
funds, small company
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stock funds, junk bond funds, Treasury bond funds etc.), with the top-10 stock
funds and the top-5 bond funds appearing in the rankings. The rankings are based
on 3-year annualized total return reflecting changes in net asset value and
reinvestment of distributions and not reflecting sales charges. Performance is
adjusted using quantitative techniques to reflect the risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a
database of funds tracked for performance by Lipper Analytical Services. The
funds are placed in 23 stock or bond fund categories and analyzed for five-year
risk adjusted return. Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions and does not
reflect deduction of any sales charges. Grades are conferred (from A to E): the
top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a
fund must be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
Financial World publishes its monthly Independent Appraisals of Mutual
Funds, a survey of approximately 1000 mutual funds. Funds are categorized as to
type, e.g., balanced funds, corporate bond funds, global bond funds, growth and
income funds, U.S. government bond funds, etc. To compete, funds must be over
one year old, have over $1 million in assets, require a maximum of $10,000
initial investment, and should be available in at least 10 states in the United
States. The funds receive a composite past performance rating, which weighs the
intermediate - and long-term past performance of each fund versus its category,
as well as taking into account its risk, reward to risk, and fees. An A+ rated
fund is one of the best, while a D- rated fund is one of the worst. The source
for Financial World rating is Schabacker investment management in Rockville,
Maryland.
Forbes magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond funds,
municipal bond funds, etc. Data sources include Lipper Analytical Services and
CDA Investment Technologies. The ratings are based strictly on performance at
net asset value over the given cycles. Funds performing in the top 5% receive an
A+ rating; the top 15% receive an A rating; and so on until the bottom 5%
receive an F rating. Each fund exhibits two ratings, one for performance in "up"
markets and another for performance in "down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value and
reinvestment of dividends and capital gains and not reflecting deduction of any
sales charges. Funds are ranked by tenths: a rank of 1 means that a fund was
among the highest 10% in total return for the period; a rank of 10 denotes the
bottom 10%. Funds compete in categories of similar funds -- aggressive growth
funds, growth and income funds, sector funds, corporate bond funds, global
governmental bond funds, mortgage-backed securities funds, etc. Kiplinger's also
provides a risk-adjusted
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grade in both rising and falling markets. Funds are graded against others with
the same objective. The average weekly total return over two years is
calculated. Performance is adjusted using quantitative techniques to reflect the
risk profile of the fund.
U.S. News and World Report periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co.,
a Boston research firm. Over 2000 funds are tracked and divided into 10 equity,
taxable bond and tax-free bond categories. Funds compete within the 10 groups
and three broad categories. The OPI is a number from 0-100 that measures the
relative performance of funds at least three years old over the last 1, 3, 5 and
10 years and the last six bear markets. Total return reflects changes in net
asset value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges. Results for
the longer periods receive the most weight.
The 100 Best Mutual Funds You Can Buy authored by Gordon K. Williamson.
The author's list of funds is divided into 12 equity and bond fund categories,
and the 100 funds are determined by applying four criteria. First, equity funds
whose current management teams have been in place for less than five years are
eliminated. (The standard for bond funds is three years.) Second, the author
excludes any fund that ranks in the bottom 20 percent of its category's risk
level. Risk is determined by analyzing how many months over the past three years
the fund has underperformed a bank CD or a U.S. Treasury bill. Third, a fund
must have demonstrated strong results for current three-year and five-year
performance. Fourth, the fund must either possess, in Mr. Williamson's judgment,
"excellent" risk-adjusted return or "superior" return with low levels of risk.
Each of the 100 funds is ranked in five categories: total return,
risk/volatility, management, current income and expenses. The rankings follow a
five-point system: zero designates "poor"; one point means "fair"; two points
denote "good"; three points qualify as a "very good"; four points rank as
"superior"; and five points mean "excellent."
From time to time, the "Efficient Frontier" chart may be presented in
promotional materials regarding the Funds.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation, or instrument entered into or executed
by the Trust or the Trustees. The Agreement and Declaration of Trust provides
for indemnification out of a Portfolio's property for all loss and expense of
any shareholder held personally liable for the obligations of a Portfolio. Thus
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
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FINANCIAL STATEMENTS
The Independent Auditors' Report, financial highlights, and financial
statements in respect of the Class A and Class B shares of each Portfolio other
than the Balanced Portfolio, included in the Mentor Funds' Annual Report for the
fiscal year ended September 30, 1997, and the Independent Auditors' Report,
financial highlights, and financial statements included in the Government Money
Market's Annual Report for the fiscal year ended September 30, 1997, each filed
electronically on December 4, 1997 (File No. 811-6550), and, the Independent
Auditors' Report, financial highlights, and financial statements included in the
Balanced Portfolio's Annual Report for the fiscal year ended September 30, 1997,
filed electronically on December 19, 1997 (File No. 811-6550), are incorporated
by reference into this Statement of Additional Information.
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