As filed with the Securities and Exchange Commission on November 30, 1998
Registration No. 33-45315
File No. 811-6550
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
-------------------------------------------------------
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 21 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [X]
ACT OF 1940
Amendment No. 23 [X]
(Check appropriate box or boxes)
MENTOR FUNDS
(Exact name of registrant as specified in charter)
901 East Byrd Street
Richmond, Virginia 23219
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code (804) 782-3648
---------------
PAUL F. COSTELLO, President
901 East Byrd Street
Richmond, Virginia 23219
(Name and address of agent for service)
-----------------
Copy to:
TIMOTHY W. DIGGINS, Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
--------------
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on December 15, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
THIS AMENDMENT RELATES TO EACH OF THE PORTFOLIOS OF THE REGISTRANT OTHER
THAN MENTOR GROWTH OPPORTUNITIES AND MENTOR ASSET ALLOCATION PORTFOLIOS. NO
INFORMATION RELATING TO MENTOR GROWTH OPPORTUNITIES OR MENTOR ASSET ALLOCATION
PORTFOLIOS IS AMENDED, DELETED, OR SUPERSEDED HEREBY.
<PAGE>
MENTOR FUNDS
CROSS REFERENCE SHEET
(as required by Rule 404(a))
Part A - Mentor Funds - Class A and B Shares: Mentor Growth Portfolio, Mentor
Perpetual Global Portfolio, Mentor Capital Growth Portfolio, Mentor Balanced
Portfolio, Mentor Income and Growth Portfolio, Mentor Municipal Income
Portfolio, Mentor Quality Income Portfolio, Mentor Short-Duration Income
Portfolio and Mentor High Income Portfolio
<TABLE>
<CAPTION>
N-1A Item No. Location
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . Cover Page; Expenses Summary;
Financial Highlights
3. Condensed Financial Information . . Expenses Summary; Financial
Highlights
4. General Description of Registrant . Cover Page; Investment
Objectives and Policies;
General
5. Management of the Fund . . . . . . Investment Objectives
and Policies; Other
Investment Practices;
Valuing Shares;
Distribution Plans; General;
Management; The Sub-Advisers;
Other Services; Performance
Information
5A. Management's Discussion
of Fund Performance . . . . . . . (Contained in the Annual
Report of the Registrant)
6. Capital Stock and Other
Securities . . . . . . . . . . . How to Buy Shares; How
to Exchange Shares;
Distributions and Taxes;
Management; General
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . Sales Arrangements; How
to Buy Shares; Management
8. Redemption or Repurchase . . . . . How to Buy Shares; How
to Sell Shares; How to
Exchange Shares
9. Pending Legal Proceedings . . . . . Not Applicable
</TABLE>
<PAGE>
Part A - Mentor Funds - Class Y Shares: Mentor Growth Portfolio, Mentor
Perpetual Global Portfolio, Mentor Capital Growth Portfolio, Mentor Balanced
Portfolio, Mentor Income and Growth Portfolio, Mentor Municipal Income
Portfolio, Mentor Quality Income Portfolio, Mentor Short-Duration Income
Portfolio and Mentor High Income Portfolio.
N-1A Item No. Location
1. Cover Page . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . Cover Page; Expenses Summary;
3. Condensed Financial Information . . Expenses Summary
4. General Description of Registrant . Cover Page; Investment
Objectives and Policies;
General
5. Management of the Fund . . . . . . Investment Objectives
and Policies; Other
Investment Practices;
Valuing the Portfolios'
Shares; General; Management;
The Sub-Advisers; Other
Services; Performance
Information
5A. Management's Discussion
of Fund Performance . . . . . . . Not Applicable
6. Capital Stock and Other
Securities . . . . . . . . . . . How to Buy Shares; How
to Exchange Shares;
Distributions and Taxes;
Management; General
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . How to Buy Shares; Management
8. Redemption or Repurchase . . . . . How to Buy Shares; How
to Sell Shares; How to
Exchange Shares
9. Pending Legal Proceedings . . . . . Not Applicable
<PAGE>
Part A - Mentor Funds - Money Market, U.S. Governmental Money Market, and
Tax-Exempt Money Market Retail Shares
N-1A Item No. Location
1. Cover Page....................... Cover Page
2. Synopsis......................... Cover Page; Expense summary
3. Condensed Financial Information.. Expense summary
4. General Description
of Registrant.................. Cover Page; Investment objective
and policies; General
5. Management of the Fund........... Investment objective and policies;
Management; General; How the
Portfolio values its shares;
Custodian and transfer and dividend
agent; Performance information
5A. Management's Discussion
of Fund Performance............ Not applicable
6. Capital Stock and Other
Securities...................... Management; General; Purchase
of shares; How distributions
are made; tax information;
Performance information
7. Purchase of Securities Being
Offered......................... Management; Purchase
of shares
8. Redemption or Repurchase.......... Purchase of shares; Redemption of
shares
9. Pending Legal Proceedings......... Not Applicable
<PAGE>
Part A - Mentor Funds - Money Market, U.S. Government Money Market, and
Tax-Exempt Money Market Institutional Shares
<TABLE>
<CAPTION>
N-1A Item No. Location
<S> <C> <C>
1. Cover Page......................... Cover Page
2. Synopsis........................... Cover Page; Expense summary
3. Condensed Financial Information.... Expense summary
4. General Description of Registrant.. Cover Page; Investment objective
and policies; General
5. Management of the Fund............. Investment objective and policies;
Management; General; How the Portfolio
values its shares; Custodian and transfer
and dividend agent; Performance information
5A. Management's Discussion
of Fund Performance.............. Not applicable
6. Capital Stock and Other
Securities........................ Management; General; Purchase of
shares; How distributions are made;
tax information; Performance
information
7. Purchase of Securities Being
Offered........................... Management; Purchase
of shares
8. Redemption or Repurchase............ Purchase of shares; Redemption of
shares
9. Pending Legal Proceedings........... Not Applicable
</TABLE>
<PAGE>
Part B - Class A, B and Y Shares: Mentor Growth Portfolio, Mentor
Perpetual Global Portfolio, Mentor Capital Growth Portfolio, Mentor
Balanced Portfolio, Mentor Income and Growth Portfolio, Mentor Municipal
Income Portfolio, Mentor Quality Income Portfolio, Mentor Short-Duration
Income Portfolio and Mentor High Income Portfolio
N-1A Item No. Location
10. Cover Page ........................ Cover Page
11. Table of Contents ................. Table of Contents
12. General Information and History ... Cover Page; Introduction
13. Investment Objectives and
Policies ........................ Investment Restrictions
(Part I and Part II);
Certain Investment
Techniques (Part III)
14. Management of the Fund ............ Management of the Trust;
Principal Holders of
Securities; Investment
Advisory Services;
Administrative Services;
Shareholder Servicing
Plan; Brokerage
Transactions;
Distribution (Part III);
Members of Investment
Management Teams
15. Control Persons and Principal
Holders of Securities .......... Principal Holders of
Securities (Part III)
16. Investment Advisory and Other
Services ........................ Management of the Trust;
Principal Holders of
Securities; Investment
Advisory Services;
Administrative Services;
Shareholder Servicing
Plan; Brokerage
Transactions;
Distribution (Part III);
Custodian
17. Brokerage Allocation ............... Brokerage Transactions
(Part III)
18. Capital Stock and Other
Securities ....................... How to Buy Shares;
Distribution; Determining
Net Asset Value; Taxes;
Shareholder Liability
(Part III)
19. Purchase; Redemption and Pricing
of Securities Being Offered ...... Brokerage Transactions;
Distribution;
Determining Net Asset
Value; Redemptions in
Kind (Part III)
20. Tax Status ......................... Investment Restrictions;
Taxes (Part III)
21. Underwriters ....................... Distribution
22. Calculations of Performance Data.... Performance Information;
Performance Comparisons
(Part III)
23. Financial Statements ............... Independent Accountants;
Financial Statements
(Part III)
<PAGE>
Part B - Money Market, U.S. Government Money Market and Tax-Exempt Money Market
Institutional and Retail Shares
N-1A Item No. Location
10. Cover Page ........................ Cover Page
11. Table of Contents ................. Table of Contents
12. General Information and History ... Cover Page; Introduction
13. Investment Objectives and
Policies ........................ Investment Restrictions
(Part I and Part II);
Certain Investment
Techniques (Part III)
14. Management of the Fund ............ Management of the Trust;
Principal Holders of
Securities; Investment
Advisory Services;
Administrative Services;
Shareholder Servicing
Plan; Brokerage
Transactions;
Distribution (Part III);
Members of Investment
Management Teams
15. Control Persons and Principal
Holders of Securities .......... Principal Holders of
Securities (Part III)
16. Investment Advisory and Other
Services ........................ Management of the Trust;
Principal Holders of
Securities; Investment
Advisory Services;
Administrative Services;
Shareholder Servicing
Plan; Brokerage
Transactions;
Distribution (Part III);
Custodian
17. Brokerage Allocation ............... Brokerage Transactions
(Part III)
18. Capital Stock and Other
Securities ....................... How to Buy Shares;
Distribution; Determining
Net Asset Value; Taxes;
Shareholder Liability
(Part III)
19. Purchase; Redemption and Pricing
of Securities Being Offered ...... Brokerage Transactions;
Distribution;
Determining Net Asset
Value; Redemptions in
Kind (Part III)
20. Tax Status ......................... Investment Restrictions;
Taxes (Part III)
21. Underwriters ....................... Distribution
22. Calculations of Performance Data.... Performance Information;
Performance Comparisons
(Part III)
23. Financial Statements ............... Independent Accountants;
Financial Statements
(Part III)
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
<PAGE>
P R O S P E C T U S December 15, 1998
(Class A and B Shares)
Mentor Funds
Mentor Funds, an open-end management investment company, is offering
shares of nine different investment portfolios by this Prospectus: Mentor
Growth Portfolio, Mentor Capital Growth Portfolio, Mentor Balanced Portfolio,
Mentor Income and Growth Portfolio, Mentor Perpetual Global Portfolio (a global
growth fund), Mentor Quality Income Portfolio, Mentor Municipal Income
Portfolio, Mentor Short-Duration Income Portfolio, and Mentor High 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 and Risk Factors."
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 DECEMBER 15, 1998 STATEMENT OF ADDITIONAL INFORMATION, AS
AMENDED FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT OR FOR OTHER
INFORMATION, PLEASE CALL MENTOR SERVICES COMPANY, INC. AT 1-800-869-6042. The
Statement has been filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference. The 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 ................... 15
Other Investment Practices and Risk Factors .......... 24
Valuing the Portfolios' Shares ....................... 33
Sales Arrangements ................................... 33
How To Buy Shares .................................... 34
Distribution Plans (Class B Shares) .................. 38
How To Sell Shares ................................... 39
How To Exchange Shares ............................... 40
How Distributions Are Made ........................... 41
Taxes ................................................ 41
Management ........................................... 42
Other Services ....................................... 44
General Information .................................. 45
Performance Information .............................. 46
APPENDIX ............................................. 47
</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 (except that in respect of Class A
shares of the Balanced Portfolio and Class A and B shares of the High Income
Portfolio, expenses shown are estimated based on the expenses the Portfolios
expect to incur in respect of those classes during the current fiscal year). The
Examples show the cumulative expenses attributable to a hypothetical $1,000
investment in each of the Portfolios over specified periods.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES(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 Balanced 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
Mentor High Income Portfolio ................................................ 4.75% 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, Income and 4.0% in the first year, declining to 1.0% in the fifth
Growth, Global, and Balanced Portfolios year, and eliminated thereafter
Quality Income, Municipal Income, 4.0% in the first year, declining to 1.0% in the sixth
Short-Duration Income, and High Income year, and eliminated thereafter
Portfolio
</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
CAPITAL AND
GROWTH GROWTH BALANCED GROWTH
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
CLASS A SHARES
Investment Advisory Fee ..... 0.70% 0.80% 0.75% 0.75%
12b-1 Fees .................. None None None None
Other Expenses
Shareholder Service
Plan Fees ................ 0.25% 0.25% 0.25% 0.25%
Other Expenses ............. 0.31% 0.29% 0.35% 0.32%
----- ----- ----- -----
Total Other Expenses ........ 0.56% 0.54% 0.60% 0.57%
----- ----- ----- -----
Total Portfolio Operating
Expenses ................... 1.26% 1.34% 1.35% 1.32%
CLASS B SHARES
Investment Advisory Fee ..... 0.70% 0.80% 0.75% 0.75%
12b-1 Fees .................. 0.75% 0.75% 0.75% 0.75%
Other Expenses
Shareholder Service
Plan Fees ................ 0.25% 0.25% 0.25% 0.25%
Other Expenses ............. 0.31% 0.29% 0.35% 0.32%
----- ----- ----- -----
Total Other Expenses ........ 0.56% 0.54% 0.60% 0.57%
----- ----- ----- -----
Total Portfolio Operating
Expenses ................... 2.01% 2.09% 2.10% 2.07%
<CAPTION>
PERPETUAL QUALITY MUNICIPAL SHORT- HIGH
GLOBAL INCOME INCOME DURATION INCOME
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
Investment Advisory Fee ..... 1.05% 0.48%* 0.60% 0.32%* 0.35%*
12b-1 Fees .................. None None None None None
Other Expenses
Shareholder Service
Plan Fees ................ 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses ............. 0.45% 0.32% 0.32% 0.29%* 0.35%**
----- ----- ----- ------ -----
Total Other Expenses ........ 0.70% 0.57%* 0.57% 0.54%* 0.60%
----- ----- ----- ------ -----
Total Portfolio Operating
Expenses ................... 1.75% 1.05%* 1.17% 0.86%* 0.95%*
CLASS B SHARES
Investment Advisory Fee ..... 1.05% 0.48%* 0.60% 0.32%* 0.35%*
12b-1 Fees .................. 0.75% 0.50% 0.50% 0.30% 0.50%
Other Expenses
Shareholder Service
Plan Fees ................ 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses ............. 0.45% 0.32% 0.32% 0.29%* 0.35%**
----- ----- ----- ------ -----
Total Other Expenses ........ 0.70% 0.57% 0.57% 0.54%* 0.60%
----- ----- ----- ------ -----
Total Portfolio Operating
Expenses ................... 2.50% 1.55%* 1.67% 1.16%* 1.45%*
</TABLE>
- ----------
* After expense limitation.
** Other Expenses are estimated based on the expenses the Portfolio expects to
incur during its first full year of operations.
Mentor Investment Advisors, LLC has agreed to limit its Management Fees
from each of the Quality Income, Short-Duration Income and High Income
Portfolios, and Mentor Investment Group has agreed to limit certain
administrative services fees from the Short-Duration Income Portfolio 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, the Short-Duration Income, and the High
Income Portfolios would be 0.60%, 0.50% and 0.70% respectively; Other Expenses
for the Short-Duration Income Portfolio would have been 0.39%; and Total
Portfolio Operating Expenses would have been as follows: Balanced Portfolio,
Class B--2.12%, Quality Income Portfolio, Class A -- 1.18%, Class B -- 1.67%;
Short-Duration Income Portfolio, Class A -- 1.14%, Class B -- 1.44%; and High
Income Portfolio Class A -- 1.30%, Class B -- 1.80%.
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 YEAR 5 YEAR 10 YEAR
------------------- ------------------- ------------------- ------------------
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 $20 95 63 123 108 201 234
Capital Growth Portfolio ................ 70 21 98 65 127 112 209 242
Balanced Portfolio ...................... 70 22 98 66 127 114 211 245
Income and Growth Portfolio ............. 70 21 97 65 126 111 207 240
Global Portfolio ........................ 74 25 109 78 147 133 252 284
Quality Income Portfolio ................ 58 16 79 49 103 84 170 185
Municipal Income Portfolio .............. 59 17 83 53 109 91 183 198
Short-Duration Income Portfolio ......... 19 12 37 37 57 64 115 141
High Income Portfolio ................... 57 15 76 46 -- -- -- --
</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 YEAR 5 YEAR 10 YEAR
------------------- ------------------- ------------------- ------------------
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 60 95 93 123 118 201 234
Capital Growth Portfolio ................ 70 61 98 95 127 122 209 242
Balanced Portfolio ...................... 70 62 98 96 127 124 211 245
Income and Growth Portfolio ............. 70 61 97 95 126 121 207 240
Global Portfolio ........................ 74 65 109 108 147 143 252 284
Quality Income Portfolio ................ 58 56 79 79 103 94 170 185
Municipal Income Portfolio .............. 59 57 83 83 109 101 183 198
Short-Duration Income Portfolio ......... 19 52 37 67 57 74 115 141
High Income Portfolio ................... 57 55 76 76 -- -- -- --
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
PERFORMANCE; ACTUAL EXPENSES MAY VARY.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following tables have been 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 included 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.
CLASS A SHARES
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
-----------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95*
------------- ------------ ------------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 19.94 $ 18.47 $ 16.08 $ 13.37
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) .............. (0.12) (0.17) (0.10) (0.01)
Net realized and unrealized gain
(loss) on investments .................... (4.03) 4.19 4.23 2.72
-------- --------- -------- ----------
Total from investment operations .......... (4.15) 4.02 4.13 2.71
LESS DISTRIBUTIONS
Distributions from net investment
income .................................... -- -- -- --
Distributions from capital gains ........... (1.19) (2.55) (1.74) --
-------- --------- -------- ----------
Total Distributions ...................... (1.19) (2.55) (1.74) --
-------- --------- -------- ----------
NET ASSET VALUE, END OF PERIOD .............. $ 14.60 $ 19.94 $ 18.47 $ 16.08
======== ========= ======== ==========
Total Return ................................ (22.08%) 25.81% 29.15% 20.27%
======== ========= ======== ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 77,720 $ 105,033 $ 40,272 $ 20,368
Ratio of expenses to average net assets ..... 1.26% 1.28% 1.28% 1.36%(a)
Ratio of expenses to average net assets
excluding waiver ........................... 1.26% 1.28% 1.28% 1.36%(a)
Ratio of net investment income (loss) to
average net assets ......................... (0.56%) (0.67%) (0.39%) (0.65%)(a)
Portfolio turnover rate ..................... 88% 77% 105% 70%
Average commission rate on portfolio
transactions ............................... $ 0.0658 $ 0.0651 $ 0.0602 --
========== ========== ========== ==========
<CAPTION>
MENTOR CAPITAL GROWTH PORTFOLIO
------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26 $ 14.21
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) .............. (0.10) (0.02) 0.11 0.02 0.09 0.14
Net realized and unrealized gain
(loss) on investments .................... 2.34 5.87 3.73 2.91 (0.30) 1.02
--------- --------- -------- ------- ------- -------
Total from investment operations .......... 2.24 5.85 3.84 2.93 (0.21) 1.16
LESS DISTRIBUTIONS
Distributions from net investment
income .................................... (0.01) -- -- -- (0.04) (0.11)
Distributions from capital gains ........... (1.94) (2.79) (0.50) (1.79) (0.13) --
--------- --------- --------- ------- ------- -------
Total Distributions ...................... (1.95) (2.79) (0.50) (1.79) (0.17) (0.11)
--------- --------- --------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD .............. $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26
========= ========= ========= ======= ======= =======
Total Return ................................ 10.72% 34.78% 24.63% 20.18% (1.37%) 8.21%
========= ========= ========= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $145,117 $ 65,703 $ 31,889 $29,582 $21,181 $31,360
Ratio of expenses to average net assets ..... 1.34% 1.41% 1.43% 1.87% 1.70% 1.49%
Ratio of expenses to average net assets
excluding waiver ........................... 1.34% 1.41% 1.43% 1.87% 1.70% 1.59%
Ratio of net investment income (loss) to
average net assets ......................... 0.06% 0.53% 0.51% 0.27% 0.53% 0.96%
Portfolio turnover rate ..................... 104% 64% 98% 157% 149% 192%
Average commission rate on portfolio
transactions ............................... $0.0692 $ 0.0697 $ 0.0688 -- -- --
========= ========= ========= ======= ======= =======
<CAPTION>
MENTOR CAPITAL
GROWTH
PORTFOLIO
----------------
YEAR
ENDED
9/30/92**
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) .............. 0.08
Net realized and unrealized gain
(loss) on investments .................... 0.03
---------
Total from investment operations .......... 0.11
LESS DISTRIBUTIONS
Distributions from net investment
income .................................... (0.08)
Distributions from capital gains ........... --
---------
Total Distributions ...................... (0.08)
---------
NET ASSET VALUE, END OF PERIOD .............. $ 14.21
=========
Total Return ................................ 0.78%
=========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 20,864
Ratio of expenses to average net assets ..... 1.14%(a)
Ratio of expenses to average net assets
excluding waiver ........................... 1.43%(a)
Ratio of net investment income (loss) to
average net assets ......................... 1.54%(a)
Portfolio turnover rate ..................... 61%
Average commission rate on portfolio
transactions ............................... --
=========
</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
BALANCED
PORTFOLIO MENTOR INCOME AND GROWTH PORTFOLIO
------------------ ------------------------------------------------------------------------------
PERIOD YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/98*** 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93*
------------------ ----------- ----------- ----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $ 13.69 $ 20.60 $ 19.16 $ 17.13 $ 15.27 $ 14.88 $ 14.14
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income (loss) ............. 0.00(b) 0.51 0.44 0.37 0.40 0.31 0.09
Net realized and
unrealized gain
(loss) on
investments ............... 0.00(b) 0.60 3.39 2.75 2.14 0.64 0.73
-------- -------- -------- -------- ------- ------- ----------
Total from investment
operations ................ 0.00(b) 1.11 3.83 3.12 2.54 0.95 0.82
LESS DISTRIBUTIONS
Distributions from
net investment
income .................... -- (0.51) (0.47) (0.35) (0.43) (0.30) (0.08)
Distributions from
capital gains ............. -- (1.66) (1.92) (0.74) (0.25) (0.26) --
---------- --------- --------- --------- -------- ------- ----------
Total distributions ........ -- (2.17) (2.39) (1.09) (0.68) (0.56) (0.08)
---------- --------- --------- --------- -------- ------- ----------
NET ASSET VALUE, END OF
PERIOD ..................... $ 13.69 $ 19.54 $ 20.60 $ 19.16 $ 17.13 $ 15.27 $ 14.88
========== ========= ========= ========= ======== ======= ==========
Total Return ................ (0%)(c) 5.81% 22.11% 19.13% 17.24% 6.54% 5.54%
========== ========= ========= ========= ======== ======= ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) ............. $ 3,534 $ 98,794 $ 63,509 $ 24,210 $19,888 $17,773 $ 9,849
Ratio of expenses to
average net assets ......... 1.35%(a) 1.32% 1.35% 1.36% 1.69% 1.75% 1.56%(a)
Ratio of expenses to
average net assets
excluding waiver ........... 1.35% 1.32% 1.35% 1.36% 1.69% 1.75% 1.94%(a)
Ratio of net investment
income (loss) to
average net assets ......... 1.52%(a) 2.70% 2.63% 2.08% 2.53% 2.20% 2.35%(a)
Portfolio turnover rate ..... 89% 40% 75% 72% 62% 78% 13%
Average commission
rate on portfolio
transactions ............... $ 0.0687 $ 0.0540 $ 0.0515 $ 0.0492 -- -- --
=========== ========= ========= ========= ======= ======= ==========
<CAPTION>
MENTOR PERPETUAL GLOBAL PORTFOLIO
---------------------------------------------------------------------
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94**
------------ ----------- ------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $ 20.94 $ 17.86 $ 15.88 $ 14.23 $ 14.18
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income (loss) ............. (0.03) 0.04 (0.04) 0.05 (0.01)
Net realized and
unrealized gain
(loss) on
investments ............... (0.97) 3.67 2.82 1.60 0.06
-------- -------- -------- ------- ----------
Total from investment
operations ................ (1.00) 3.71 2.78 1.65 0.05
LESS DISTRIBUTIONS
Distributions from
net investment
income .................... -- -- -- -- --
Distributions from
capital gains ............. (1.02) (0.63) (0.80) -- --
-------- --------- -------- -------- ----------
Total distributions ........ (1.02) (0.63) (0.80) -- --
-------- --------- -------- -------- ----------
NET ASSET VALUE, END OF
PERIOD ..................... $ 18.92 $ 20.94 $ 17.86 $ 15.88 $ 14.23
======== ========= ======== ======== ==========
Total Return ................ (4.97%) 21.59% 18.40% 11.60% 0.35%
======== ========= ======== ======== ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) ............. $ 59,012 $ 46,556 $ 13,098 $ 6,854 $ 8,882
Ratio of expenses to
average net assets ......... 1.75% 1.89% 1.95% 2.06% 2.09%(a)
Ratio of expenses to
average net assets
excluding waiver ........... 1.75% 1.89% 1.95% 2.11% 3.18%(a)
Ratio of net investment
income (loss) to
average net assets ......... (0.01%) 0.07% (0.21%) 0.26% (0.10%)(a)
Portfolio turnover rate ..... 162% 128% 130% 155% 2%
Average commission
rate on portfolio
transactions ............... $ 0.0188 $ 0.0319 $ 0.0320 -- --
========= ========= ========== ======== ==========
</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.
*** For the period from September 16, 1998 (initial offering of Class A) to
September 30, 1998.
(a) Annualized.
(b) Income for period was less than $0.01 per share.
(c) Total return does not reflect sales commissions and is not annualized.
7
<PAGE>
CLASS A SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR QUALITY INCOME PORTFOLIO
-----------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96
----------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 13.18 $ 12.91 $ 13.29
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) ................................... 0.79 0.97 0.89
Net realized and unrealized gain (loss) on investments ......... 0.47 0.26 (0.37)
------- ------- -------
Total from investment operations ............................... 1.26 1.23 0.52
LESS DISTRIBUTIONS
Distributions from net investment income ....................... (0.83) (0.96) (0.90)
Distributions from capital gains ............................... -- --
------- ------- -------
Total Distributions ............................................ (0.83) (0.96) (0.90)
------- ------- -------
NET ASSET VALUE, END OF PERIOD .................................. $ 13.61 $ 13.18 $ 12.91
======= ======= =======
Total Return .................................................... 9.95% 9.86% 4.09%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ........................ $94,279 $53,176 $21,092
Ratio of expenses to average net assets ......................... 1.05% 1.05% 1.05%
Ratio of expenses to average net assets excluding waiver ........ 1.18% 1.18% 1.31%
Ratio of net investment income (loss) to average net assets ..... 5.73% 7.01% 6.84%
Portfolio turnover rate ......................................... 114% 100% 254%
Average commission rate on portfolio transactions ............... -- -- --
======= ======= =======
<CAPTION>
MENTOR QUALITY INCOME PORTFOLIO
----------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/95 9/30/94 9/30/93 9/30/92**
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 12.75 $ 14.04 $ 14.39 $ 14.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) ................................... 0.84 0.84 1.06 0.44
Net realized and unrealized gain (loss) on investments ......... 0.61 (1.30) (0.31) 0.09
------- ------- ------- ---------
Total from investment operations ............................... 1.45 (0.46) 0.75 0.53
LESS DISTRIBUTIONS
Distributions from net investment income ....................... (0.91) (0.83) (1.10) (0.44)
Distributions from capital gains ............................... -- -- -- --
------- ------- ------- ---------
Total Distributions ............................................ (0.91) (0.83) (1.10) (0.44)
------- ------- ------- ---------
NET ASSET VALUE, END OF PERIOD .................................. $ 13.29 $ 12.75 $ 14.04 $ 14.39
======= ======= ======= =========
Total Return .................................................... 11.82% (3.39%) 5.41% 3.37%
======= ======= ======= =========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ........................ $24,472 $30,142 $47,780 $ 36,740
Ratio of expenses to average net assets ......................... 1.32% 1.38% 1.04% 0.36%(a)
Ratio of expenses to average net assets excluding waiver ........ 1.36% 1.39% 1.22% 1.21%(a)
Ratio of net investment income (loss) to average net assets ..... 6.73% 6.33% 7.31% 8.00%(a)
Portfolio turnover rate ......................................... 368% 455% 102% 9%
Average commission rate on portfolio transactions ............... -- -- -- --
======= ======= ======= =========
</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 A SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR MUNICIPAL INCOME PORTFOLIO
----------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/98 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> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD......... $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76 $ 14.29
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income (loss) ............. 0.66 0.81 0.82 0.81 0.82 0.92 0.32
Net realized and
unrealized gain
(loss) on
investments ............... 0.59 0.49 0.12 0.51 (1.54) 1.32 0.47
------- ------- ------- ------- ------- ------- ---------
Total from investment
operations ................ 1.25 1.30 0.94 1.32 (0.72) 2.24 0.79
LESS DISTRIBUTIONS
Distributions from net
investment income.......... (0.76) (0.81) (0.82) (0.82) (0.81) (0.95) (0.32)
Distributions from
capital gains ............. -- (0.03) -- -- (0.10) -- --
------- ------- ------- ------- ------- ------- ---------
Total Distributions ........ (0.76) (0.84) (0.82) (0.82) (0.91) (0.95) (0.32)
------- ------- ------- ------- ------- ------- ---------
NET ASSET VALUE, END OF
PERIOD ..................... $ 15.99 $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76
------- ======= ======= ======= ======= ======= =========
Total Return ................ 8.24% 8.89% 6.46% 9.46% (4.83%) 16.00% 5.34%
======= ======= ======= ======= ======= ======= =========
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of period
(in thousands) ............. $51,757 $29,394 $17,558 $20,460 $25,056 $29,245 $ 18,801
Ratio of expenses to
average net assets ......... 1.17% 1.22% 1.24% 1.43% 1.24% 0.71% 0.00%(a)
Ratio of expenses to
average net assets
excluding waiver ........... 1.17% 1.22% 1.24% 1.43% 1.33% 1.39% 1.26%(a)
Ratio of net investment
income (loss) to
average net assets ......... 4.63% 5.09% 5.47% 5.56% 5.43% 5.92% 6.21%(a)
Portfolio turnover rate ..... 62% 59% 46% 43% 87% 88% 0%
======= ======= ======= ======= ======= ======= =========
<CAPTION>
MENTOR
MENTOR SHORT DURATION HIGH INCOME
INCOME PORTFOLIO PORTFOLIO
----------------------------------------------------- ----------------
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95* 9/30/98***
----------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF PERIOD......... $ 12.62 $ 12.50 $ 12.68 $ 12.74 $ 12.00
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income (loss) ............. 0.70 0.77 0.82 0.22 0.24
Net realized and
unrealized gain
(loss) on
investments ............... 0.15 0.12 (0.23) (0.03) (1.04)
------- ------- -------- ---------- ---------
Total from investment
operations ................ 0.85 0.89 0.59 0.19 (0.80)
LESS DISTRIBUTIONS
Distributions from net
investment income.......... (0.73) (0.77) (0.77) (0.25) (0.28)
Distributions from
capital gains ............. -- -- -- -- --
------- ------- -------- ---------- ---------
Total Distributions ........ (0.69) (0.77) (0.77) (0.25) (0.28)
------- ------- -------- ---------- ---------
NET ASSET VALUE, END OF
PERIOD ..................... $ 12.74 $ 12.62 $ 12.50 $ 12.68 $ 10.92
======= ======= ======== ========== =========
Total Return ................ 6.98% 7.33% 4.80% 1.51% (6.75%)
======= ======= ======== ========== =========
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of period
(in thousands) ............. $93,135 $27,619 $ 7,450 $ 1,002 $ 50,887
Ratio of expenses to
average net assets ......... 0.86% 0.86% 0.86% 0.71%(a) 0.60%(a)
Ratio of expenses to
average net assets
excluding waiver ........... 1.14% 1.12% 1.26% 1.00%(a) 1.30%(a)
Ratio of net investment
income (loss) to
average net assets ......... 5.24% 6.00% 5.90% 4.10%(a) 7.36%(a)
Portfolio turnover rate ..... 171% 75% 411% 126% 27%
======= ======= ======== ========== =========
</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.
*** For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
(a) Annualized.
9
<PAGE>
CLASS B SHARES
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
----------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95*
------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING OF
PERIOD .............................. $ 19.53 $ 18.29 $ 16.05 $ 12.15
INCOME FROM INVESTMENT
OPERATIONS .........................
Net investment income (loss) ........ (0.23) (0.22) (0.17) (0.13)
Net realized and unrealized gain
(loss) on investments .............. (3.93) 4.01 4.15 4.03
-------- --------- --------- ----------
Total from investment
operations ......................... (4.16) 3.79 3.98 3.90
LESS DISTRIBUTIONS ...................
Distributions from net
investment income .................. -- -- -- --
Distributions from capital gains..... (1.19) (2.55) (1.74) --
-------- --------- --------- ----------
Total Distributions ................. (1.19) (2.55) (1.74) --
-------- --------- --------- ----------
NET ASSET VALUE, END OF PERIOD ....... $ 14.18 $ 19.53 $ 18.29 $ 16.05
======== ========= ========= ==========
Total Return ......................... (22.62%) 24.66% 28.18% 32.10%
======== ========= ========= ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
thousands) .......................... $ 383,188 $ 506,230 $ 371,578 $ 246,326
Ratio of expenses to average net
assets .............................. 2.01% 2.03% 2.03% 2.08%(a)
Ratio of expenses to average net
assets excluding waiver ............. 2.01% 2.03% 2.03% 2.08%(a)
Ratio of net investment income
(loss) to average net assets ........ (1.30%) (1.42%) (1.13%) (1.20%)(a)
Portfolio turnover rate .............. 88% 77% 105% 70%
Average commission rate on
portfolio transactions .............. $ 0.0658 $ 0.0651 $ 0.0602 --
========== ========== ========== ==========
<CAPTION>
MENTOR GROWTH PORTFOLIO
-------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
------------- ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING OF
PERIOD .............................. $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54
INCOME FROM INVESTMENT
OPERATIONS .........................
Net investment income (loss) ........ (0.15) (0.08) (0.06) (0.09) 0.02 0.13
Net realized and unrealized gain
(loss) on investments .............. (0.47) 2.07 1.94 4.30 (1.10) 1.35
------- ------- ------- ------- --------- -------
Total from investment
operations ......................... (0.62) 1.99 1.88 4.21 (1.08) 1.48
LESS DISTRIBUTIONS ...................
Distributions from net
investment income .................. -- -- -- -- (0.05) (0.12)
Distributions from capital gains..... (1.01) (1.02) (1.23) (0.42) (0.13) (0.27)
------- ------- ------- ------- --------- --------
Total Distributions ................. (1.01) (1.02) (1.23) (0.42) (0.18) (0.39)
------- ------- ------- ------- --------- --------
NET ASSET VALUE, END OF PERIOD ....... $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63
======= ======= ======= ======= ========= ========
Total Return ......................... (4.48%) 15.60% 15.46% 50.30% (11.21%) 17.33%
======= ======= ======= ======= ========= ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
thousands) .......................... $190,126 $186,978 $136,053 $108,719 $ 83,540 $107,315
Ratio of expenses to average net
assets .............................. 2.01% 2.02% 2.05% 2.17% 2.25% 2.24%
Ratio of expenses to average net
assets excluding waiver ............. 2.01% 2.02% 2.05% 2.17% 2.25% --
Ratio of net investment income
(loss) to average net assets ........ (1.20%) (1.12%) (0.76%) (0.80%) 0.26% 1.36%
Portfolio turnover rate .............. 77% 64% 50% 40% 50% 26%
Average commission rate on
portfolio transactions .............. -- -- -- -- -- --
======== ======== ======== ======== ========= ========
</TABLE>
- ---------
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
10
<PAGE>
CLASS B SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR CAPITAL GROWTH PORTFOLIO
-----------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/98 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> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNING OF
PERIOD ..................... $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 14.18
INCOME FROM
INVESTMENT OPERATIONS
Net investment
income (loss) ............. (0.08) -- (0.04) 0.25 (0.04) 0.05 0.46
Net realized and
unrealized gain
(loss) on
investments ............... 2.07 5.55 3.67 2.53 (0.26) 1.02 0.04
--------- --------- -------- ------- ------- ------- ----------
Total from investment
operations ................ 1.99 5.55 3.63 2.78 (0.30) 1.07 0.50
LESS DISTRIBUTIONS
Distributions from net
investment income.......... (0.01) -- -- -- -- (0.06) (0.46)
Distributions from
capital gains ............. (1.94) (2.79) (0.50) (1.79) (0.13) -- --
--------- --------- -------- ------- ------- ------- ----------
Total Distributions ........ (1.95) (2.79) (0.50) (1.79) (0.13) (0.06) (0.46)
--------- --------- -------- ------- ------- ------- ----------
NET ASSET VALUE, END OF
PERIOD ..................... $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22
========= ========= ======== ======= ======= ======= ==========
Total Return ................ 9.86% 33.88% 23.64% 19.26% (2.00%) 7.52% 0.61%
========= ========= ======== ======= ======= ======= ==========
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of period
(in thousands) ............. $196,751 $ 113,587 $ 68,213 $57,648 $41,106 $57,030 $ 25,468
Ratio of expenses to
average net assets ......... 2.09% 2.16% 2.18% 2.56% 2.46% 2.24% 1.86%(a)
Ratio of expenses to
average net assets
excluding waiver ........... 2.09% 2.16% 2.18% 2.56% 2.46% 2.34% 2.16%(a)
Ratio of net investment
income to average net
assets (loss) .............. (0.70%) (0.22%) (0.24%) (0.41%) (0.22%) 0.21% 0.83%(a)
Portfolio turnover rate ..... 104% 64% 98% 157% 149% 192% 61%
Average commission
rate on portfolio
transactions ............... $ 0.0692 $ 0.0697 $ 0.0688 -- -- -- --
========== ========== ========== ======= ======= ======= ==========
<CAPTION>
MENTOR BALANCED PORTFOLIO
---------------------------------------------------------------------
YEAR YEAR YEAR PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED
9/30/98 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,
BEGINNING OF
PERIOD ..................... $ 17.61 $ 16.28 $ 14.85 $ 12.44 $ 12.50
INCOME FROM
INVESTMENT OPERATIONS
Net investment
income (loss) ............. 0.45 0.43 0.42 0.36 0.22
Net realized and
unrealized gain
(loss) on
investments ............... 1.43 3.35 2.09 2.08 (0.09)
-------- -------- -------- --------- ---------
Total from investment
operations ................ 1.88 3.78 2.51 2.44 0.13
LESS DISTRIBUTIONS
Distributions from net
investment income.......... (0.71) (0.43) (0.48) (0.03) (0.19)
Distributions from
capital gains ............. (5.09) (2.02) (0.60) -- --
--------- --------- --------- --------- ---------
Total Distributions ........ (5.80) (2.45) (1.08) (0.03) (0.19)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF
PERIOD ..................... $ 13.69 $ 17.61 $ 16.28 $ 14.85 $ 12.44
========= ========= ========= ========= =========
Total Return ................ 11.86% 26.09% 18.00% 19.28% 1.00%
========= ========= ========= ========= =========
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of period
(in thousands) ............. $ 5,645 $ 4,102 $ 3,825 $ 3,210 $ 2,911
Ratio of expenses to
average net assets ......... 0.52% 0.50% 0.50% 0.50%(a) 0.50%(a)
Ratio of expenses to
average net assets
excluding waiver ........... 2.12% 2.13% 2.06% 2.12%(a) 2.72%(a)
Ratio of net investment
income to average net
assets (loss) .............. 2.63% 2.78% 2.83% 3.26%(a) 3.32%(a)
Portfolio turnover rate ..... 89% 80% 103% 65% 71%
Average commission
rate on portfolio
transactions ............... $0.0687 $ 0.0696 $ 0.0694
========= ========= =========
</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.
*** For the period from June 21, 1994 (commencement of operations) to December
31, 1994.
(a) Annualized.
11
<PAGE>
CLASS B SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR INCOME AND GROWTH PORTFOLIO
-------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91
Income from investment operations ..................
Net investment income (loss) ....................... 0.37 0.34 0.23 0.28 0.21
Net realized and unrealized gain (loss) on
investments ....................................... 0.59 3.35 2.76 2.14 0.61
-------- -------- -------- ------- -------
Total from investment operations ................... 0.96 3.69 2.99 2.42 0.82
LESS DISTRIBUTIONS
Distributions from net investment income ........... (0.36) (0.36) (0.21) (0.31) (0.19)
Distributions from capital gains ................... (1.66) (1.92) (0.74) (0.25) (0.26)
--------- --------- --------- ------- -------
Total Distributions ................................ (2.02) (2.28) (0.95) (0.56) (0.45)
--------- --------- --------- ------- -------
NET ASSET VALUE, END OF PERIOD ...................... $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28
========= ========= ========= ======= =======
Total Return ........................................ 5.01% 21.24% 18.26% 16.32% 5.66%
========= ========= ========= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ............ $143,846 $ 107,816 $ 66,548 $46,678 $43,219
Ratio of expenses to average net assets ............. 2.07% 2.10% 2.13% 2.43% 2.44%
Ratio of expenses to average net assets excluding
waiver ............................................. 2.07% 2.10% 2.13% 2.43% 2.44%
Ratio of net investment income (loss) to average
net assets ......................................... 1.95% 1.87% 1.32% 1.78% 1.51%
Portfolio turnover rate ............................. 40% 75% 72% 62% 78%
Average commission rate on portfolio
transactions ....................................... $0.0540 $ 0.0515 $ 0.0492 -- --
========= ========= ========= ======= =======
<CAPTION>
MENTOR INCOME AND
GROWTH
PORTFOLIO
----------------
YEAR
ENDED
9/30/93*
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 14.14
Income from investment operations ..................
Net investment income (loss) ....................... 0.05
Net realized and unrealized gain (loss) on
investments ....................................... 0.77
---------
Total from investment operations ................... 0.82
LESS DISTRIBUTIONS
Distributions from net investment income ........... (0.05)
Distributions from capital gains ................... --
---------
Total Distributions ................................ (0.05)
---------
NET ASSET VALUE, END OF PERIOD ...................... $ 14.91
=========
Total Return ........................................ 5.54%
=========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ............ $ 18,127
Ratio of expenses to average net assets ............. 2.31%(a)
Ratio of expenses to average net assets excluding
waiver ............................................. 2.69%(a)
Ratio of net investment income (loss) to average
net assets ......................................... 1.60%(a)
Portfolio turnover rate ............................. 13%
Average commission rate on portfolio
transactions ....................................... --
=========
<CAPTION>
MENTOR PERPETUAL GLOBAL PORTFOLIO
-----------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94**
------------ ------------- ------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 20.32 $ 17.46 $ 15.67 $ 14.15 $ 14.18
Income from investment operations ..................
Net investment income (loss) ....................... (0.12) (0.02) (0.05) (0.05) (0.04)
Net realized and unrealized gain (loss) on
investments ....................................... (0.97) 3.51 2.64 1.57 0.01
-------- -------- -------- ------- ----------
Total from investment operations ................... (1.09) 3.49 2.59 1.52 (0.03)
LESS DISTRIBUTIONS
Distributions from net investment income ........... -- -- -- -- --
Distributions from capital gains ................... (1.02) (0.63) (0.80) -- --
-------- -------- -------- ------- ----------
Total Distributions ................................ (1.02) (0.63) (0.80) -- --
-------- -------- -------- ------- ----------
NET ASSET VALUE, END OF PERIOD ...................... $ 18.21 $ 20.32 $ 17.46 $ 15.67 $ 14.15
======== ======== ======== ======= ==========
Total Return ........................................ (5.65%) 20.74% 17.39% 10.74% (0.21%)
======== ======== ======== ======= ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ............ $ 99,277 $ 89,030 $ 42,131 $12,667 $ 7,987
Ratio of expenses to average net assets ............. 2.51% 2.64% 2.70% 2.72% 2.79%(a)
Ratio of expenses to average net assets excluding
waiver ............................................. 2.50% 2.64% 2.70% 2.79% 3.93%(a)
Ratio of net investment income (loss) to average
net assets ......................................... (0.77%) (0.68%) (0.91%) (0.40%) (0.82%)(a)
Portfolio turnover rate ............................. 162% 128% 130% 155% 2%
Average commission rate on portfolio
transactions ....................................... $ 0.0188 $ 0.0319 $ 0.0320 -- --
========= ========== ========== ======= ==========
</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.
12
<PAGE>
CLASS B SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR QUALITY INCOME PORTFOLIO
------------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96
------------ ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ........................... $ 13.18 $ 12.93 $ 13.31
Income from investment operations .............................
Net investment income (loss) .................................. 0.72 0.86 0.84
Net realized and unrealized gain (loss) on investments ........ 0.48 0.30 (0.38)
------- ------- -------
Total from investment operations .............................. 1.20 1.16 0.46
LESS DISTRIBUTIONS
Distributions from net investment income ...................... (0.77) (0.91) (0.84)
Distributions from capital gains .............................. -- -- --
-------- ------- -------
Total Distributions ........................................... (0.77) (0.91) (0.84)
-------- ------- -------
NET ASSET VALUE, END OF PERIOD ................................. $ 13.61 $ 13.18 $ 12.93
======== ======= =======
Total Return ................................................... 9.46% 9.29% 3.57%
======== ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ....................... $112,901 $75,046 $58,239
Ratio of expenses to average net assets ........................ 1.55% 1.55% 1.55%
Ratio of expenses to average net assets excluding waiver ....... 1.67% 1.68% 1.81%
Ratio of net investment income (loss) to average net assets .... 5.22% 6.51% 6.36%
Portfolio turnover rate ........................................ 114% 100% 254%
Average commission rate on portfolio transactions .............. -- -- --
======== ======= =======
<CAPTION>
MENTOR QUALITY INCOME PORTFOLIO
-----------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/95 9/30/94 9/30/93 9/30/92*
----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD ........................... $ 12.76 $ 14.06 $ 14.40 $ 14.30
Income from investment operations .............................
Net investment income (loss) .................................. 0.79 0.82 0.99 0.41
Net realized and unrealized gain (loss) on investments ........ 0.61 (1.37) (0.31) 0.10
------- ------- -------- ---------
Total from investment operations .............................. 1.40 (0.55) 0.68 0.51
LESS DISTRIBUTIONS
Distributions from net investment income ...................... (0.85) (0.75) (1.02) (0.41)
Distributions from capital gains .............................. -- -- -- --
------- ------- -------- ---------
Total Distributions ........................................... (0.85) (0.75) (1.02) (0.41)
------- ------- -------- ---------
NET ASSET VALUE, END OF PERIOD ................................. $ 13.31 $ 12.76 $ 14.06 $ 14.40
======= ======= ======== =========
Total Return ................................................... 11.33% (3.97%) 4.86% 3.24%
======= ======= ======== =========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ....................... $62,155 $77,888 $127,346 $ 65,661
Ratio of expenses to average net assets ........................ 1.74% 1.88% 1.54% 0.83%(a)
Ratio of expenses to average net assets excluding waiver ....... 1.79% 1.90% 1.72% 1.67%(a)
Ratio of net investment income (loss) to average net assets .... 6.24% 6.21% 6.81% 7.53%(a)
Portfolio turnover rate ........................................ 368% 455% 102% 9%
Average commission rate on portfolio transactions .............. -- -- -- --
======= ======= ======== =========
</TABLE>
- ---------
* Reflects operations for the period from April 29, 1992 (commencement of
operations) to September 30, 1992.
(a) Annualized.
13
<PAGE>
CLASS B SHARES (CONTINUED)
<TABLE>
<CAPTION>
MENTOR MUNICIPAL INCOME PORTFOLIO
----------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/98 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> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNNING OF
PERIOD ................... $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78 $ 14.29
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income (loss) ........... 1.30 0.71 0.75 0.74 0.74 0.82 0.29
Net realized and
unrealized gain
(loss) on
investments ............. (0.14) 0.52 0.11 0.52 (1.54) 1.32 0.49
------- -------- -------- -------- -------- -------- ----------
Total from investment
operations .............. 1.16 1.23 0.86 1.26 (0.80) 2.14 0.78
LESS DISTRIBUTIONS
Distributions from net
investment income........ (0.71) (0.71) (0.76) (0.74) (0.73) (0.86) (0.29)
Distributions from
capital gains ........... -- (0.08) -- -- (0.10) -- --
------- --------- -------- -------- -------- --------- ----------
Total Distributions ...... (0.71) (0.79) (0.76) (0.74) (0.83) (0.86) (0.29)
------- --------- -------- -------- -------- --------- ----------
NET ASSET VALUE, END OF
PERIOD ................... $ 15.94 $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78
======= ========= ======== ======== ======== ========= ==========
Total Return .............. 7.70% 8.33% 5.87% 9.01% (5.34%) 15.27% 5.28%
======= ========= ======== ======== ======== ========= ==========
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of period
(in thousands) ........... $59,351 $ 44,272 $ 37,191 $ 39,493 $ 46,157 $ 50,976 $ 24,265
Ratio of expenses to
average net assets ....... 1.67% 1.72% 1.74% 1.92% 1.74% 1.21 0.50%(a)
Ratio of expenses to
average net assets
excluding waiver ......... 1.67% 1.72% 1.74% 1.92% 1.86% 1.89% 1.76%(a)
Ratio of net investment
income (loss) to
average net assets ....... 4.13% 4.60% 4.95% 5.07% 4.93% 5.42% 5.80%(a)
Portfolio turnover rate ... 62% 59% 46% 43% 87% 88% 0%
======= ========= ======== ======== ======== ========= ==========
<CAPTION>
MENTOR
MENTOR SHORT-DURATION HIGH INCOME
INCOME PORTFOLIO PORTFOLIO
--------------------------------------------------------------------- ----------------
YEAR YEAR YEAR PERIOD PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95** 12/31/94*** 9/30/98****
----------- ----------- ----------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE,
BEGINNNING OF
PERIOD ................... $ 12.62 $ 12.50 $ 12.67 $ 12.18 $ 12.50 $ 12.00
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income (loss) ........... 0.66 0.73 0.73 0.59 0.41 0.22
Net realized and
unrealized gain
(loss) on
investments ............. 0.16 0.12 (0.17) 0.52 (0.29) (1.05)
------- ------- ------- --------- --------- ---------
Total from investment
operations .............. 0.82 0.85 0.56 1.11 0.12 (0.83)
LESS DISTRIBUTIONS
Distributions from net
investment income........ (0.69) (0.73) (0.73) (0.62) (0.44) (0.26)
Distributions from
capital gains ........... -- -- -- -- --
------- ------- ------- --------- ---------
Total Distributions ...... (0.73) (0.73) (0.62) (0.44)
------- ------- --------- ---------
NET ASSET VALUE, END OF
PERIOD ................... $ 12.75 $ 12.62 $ 12.50 $ 12.67 $ 12.18 $ 10.91
======= ======= ======= ========= ========= =========
Total Return .............. 6.68% 6.96% 4.53% 9.22% 0.95% (6.95%)
======= ======= ======= ========= ========= =========
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of period
(in thousands) ........... $53,908 $27,089 $24,517 $ 19,871 $ 17,144 $ 62,869
Ratio of expenses to
average net assets ....... 1.16% 1.16% 1.16% 1.20% 1.29%(a) 1.10%(a)
Ratio of expenses to
average net assets
excluding waiver ......... 1.44% 1.42% 1.56% 1.70%(a) 1.29%(a) 1.80%(a)
Ratio of net investment
income (loss) to
average net assets ....... 4.94% 5.70% 5.60% 5.04%(a) 4.90%(a) 6.87%(a)
Portfolio turnover rate ... 171% 75% 411% 126% 166% 27%
======= ======= ======= ========= ========= =========
</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 April 29, 1994 (commencement of
operations) to December 31, 1994.
**** For the period from June 23, 1995 (commencement of operations) to
September 30, 1998.
(a) Annualized.
14
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Mentor Funds is offering shares of nine 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 and Risk Factors" below.
The investment objectives of the Portfolios, other than those of 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.
15
<PAGE>
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 BALANCED PORTFOLIO
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 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 response 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 such 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 Ratings Service, Inc. 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 Appendix 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
16
<PAGE>
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.
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
17
<PAGE>
securities and other fixed-income securities of private or governmental issuers
(including zero-coupon securities) which Mentor Perpetual believes to be
consistent with the Portfolio's objective.
It is expected that the Portfolio's investments will normally be spread
broadly around the world, although (except as described in the next sentence)
there is no limit on the amount of the Portfolio's assets that may be invested
in any single country. Under normal circumstances, the Portfolio will invest at
least 65% of the value of its total assets in securities of at least three
countries, one of which may be the United States. The Portfolio may invest all
of its assets in securities of issuers outside the United States, and for
temporary defensive purposes may at times invest all of its assets in
securities of U.S. issuers. To the extent that the Portfolio invests a
substantial portion of its assets in securities of issuers located in a single
country, it will be more susceptible to adverse economic, business, political,
or regulatory conditions in or affecting that country than if it were to invest
in a geographically more diverse portfolio. The Portfolio may invest in
closed-end investment companies holding foreign securities. The Portfolio also
may hold a portion of its assets in cash or cash equivalents, including foreign
and domestic money market instruments.
It is likely that, at times, a substantial portion of the Portfolio's
assets will be invested in securities of issuers in emerging markets, including
under-developed and developing nations. Investments in emerging markets are
subject to the same risks applicable to foreign investments generally although
those risks may be increased due to conditions in such markets. For example,
the securities markets and legal systems in emerging markets may only be in a
developmental stage and may provide few, or none, of the advantages or
protections of markets or legal systems available in more developed countries.
Although many of the securities in which the Portfolio may invest are traded on
securities exchanges, they may trade in limited volume, and the exchanges may
not provide all of the conveniences or protections provided by securities
exchanges in more developed markets. The Portfolio may also invest a
substantial portion of its assets in securities traded in the over-the-counter
markets and not on any exchange, which may affect the liquidity of the
investment and expose the Portfolio to the credit risk of its counterparties in
trading those investments. See "Other Investment Practices and Risk Factors --
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.
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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.
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. The Portfolio may invest the remaining 20% of its assets in
lower-rated securities, including securities rated below investment grade (or,
if unrated, determined by Mentor Advisors to be of comparable quality).
Securities rated below investment grade 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 more than 10% of its assets
in securities rated Ca or below by Moody's or CC or below by Standard & Poor's.
See "Other Investment Practices and Risk Factors -- Lower-rated securities." 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 and Risk Factors --
Mortgage-backed securities; other asset-backed securities" and " -- Other
mortgage-related securities" below.
The Portfolio may borrow money to invest in additional securities; this
practice involves risks. See "Other Investment Practices and Risk Factors --
Leverage," below. The Portfolio may also engage in a variety of interest rate
transactions, including swaps, caps, floors, and collars. See "Other Investment
Practices and Risk Factors -- Interest rate transactions" below for a
description of risks associated with these transactions.
MENTOR MUNICIPAL INCOME PORTFOLIO
SUB-ADVISER: VAN KAMPEN 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
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.
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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. See "Other Investment
Practices and Risk Factors -- Lower-rated securities." A description of
securities ratings is contained in the Appendix to this Prospectus. 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.
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
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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 Practices and Risk Factors --
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
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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 primarily 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 Baa/BBB 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.
The Portfolio may invest up to 20% of its assets in securities rated below
investment grade (or, if unrated, determined by Mentor Advisors to be of
comparable quality). Securities rated below investment grade 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 more
than 10% of its assets in securities rated below Ca by Moody's or CC by
Standard & Poor's. See "Other Investment Practices and Risk Factors --
Lower-rated securities." A description of securities ratings is contained in
the Appendix to this Prospectus.
The Portfolio may borrow money to invest in additional securities; this
practice involves risks. See "Other Investment Practices and Risk Factors --
Leverage," below. The Portfolio may also engage in a variety of interest rate
transactions, including swaps, caps, floors, and collars. See "Other Investment
Practices and Risk Factors -- Interest rate transactions" below for a
description of risks associated with these transactions.
MENTOR HIGH INCOME PORTFOLIO
SUB-ADVISER: VAN KAMPEN MANAGEMENT, INC.
The Portfolio's investment objective is to seek high current income.
Capital growth is a secondary objective when consistent with the objective of
seeking high current income.
Mentor Advisors is the Portfolio's investment adviser. Van Kampen serves
as the sub-adviser to the Portfolio. Van Kampen purchases and sells securities
for the Portfolio, and otherwise manages the investments of the Portfolio,
subject to the overall supervision of Mentor Advisors.
The Portfolio may invest in both lower-rated and higher-rated fixed-income
securities, including debt securities, convertible securities, and preferred
stocks that are consistent with its primary investment objective of high
current income. The Portfolio's remaining assets may be held in cash or money
market instruments, or invested in common stocks and other equity securities.
The Portfolio may at times hold a substantial portion of its assets in
mortgage-backed and other asset-backed securities.
The Portfolio may invest in securities of any maturity. Van Kampen will
adjust the expected average life of the investments held in the Portfolio from
time to time, depending on its assessment of relative yields and risks of
securities of different maturities and its expectations of future changes in
interest rates. At times when the expected average life of the investments held
by the Portfolio is longer, the values of the securities held by the Portfolio
will generally change more in response to changes in interest rates than at
times when the expected average life is shorter.
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Differing yields on fixed-income securities of the same maturity are a
function of several factors, including the relative financial strength of their
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies: Baa or lower by Moody's or BBB or
lower by Standard & Poor's. The Portfolio may invest any portion of its assets
(and normally will invest at least 65% of its assets) in such securities and in
unrated securities determined by Van Kampen to be of comparable quality. The
Portfolio will normally invest a substantial portion of its assets in
securities rated below Baa by Moody's or BBB by Standard & Poor's and in
unrated securities determined by Van Kampen to be of comparable quality.
Securities rated below Baa by Moody's or BBB by Standard & Poor's are
considered to be predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligations.
Securities in the lowest rating categories may have extremely poor prospects of
attaining any real investment standing and may be in default. The rating
services' descriptions of securities in the lower rating categories, including
their speculative characteristics, are set forth in the Appendix to this
Prospectus. See "Other Investments Practices and Risk Factors -- lower-rated
securities," below.
The Portfolio may at times invest up to 10% of its assets in securities
rated in the lowest grades (Ca or C in the case of Moody's and CC, C, or D in
the case of Standard & Poor's) or in unrated securities determined by Van
Kampen to be of comparable quality, if Van Kampen believes that there are
prospects for an upgrade in a security's rating or a favorable conversion of a
security into other securities. The Portfolio might also invest in such
securities if Van Kampen were to believe that, upon completion of any
contemplated exchange offer or reorganization involving a security or its
issuer, the Portfolio would receive securities or other assets offering
significant opportunities for capital appreciation or future high rates of
current income.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate.
The Portfolio seeks its secondary objective of capital growth, when
consistent with its primary objective of seeking high current income, by
investing in securities which may be expected to appreciate in value as a
result of declines in long-term interest rates or of favorable developments
affecting the business or prospects of the issuer which may improve the
issuer's financial condition and credit rating.
At times, Van Kampen may judge 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 Van Kampen may temporarily
use alternative strategies, primarily designed to reduce fluctuations in the
value of the Portfolio's assets. In implementing these "defensive" strategies,
the Portfolio may invest without limitation in money market instruments and in
U.S. Government or agency obligations, or invest in any other fixed-income
security Van Kampen considers consistent with such defensive strategies. It is
impossible to predict when, or for how long, the Portfolio will use such
alternative strategies.
The Portfolio will not invest more than 15% of its net assets (determined
at the time of investment) in securities determined to be illiquid. Certain
securities that are restricted as to resale may nonetheless be resold by the
Portfolio in accordance with Rule 144A under the Securities Act of 1933, as
amended. Such securities may be determined by Van Kampen to be liquid for
purposes of compliance with the limitation on the Portfolio's investment in
illiquid securities. There can, however, be no assurance that the Portfolio
will be able to sell
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such securities at any time when Van Kampen deems it advisable to do so or at
prices prevailing for comparable securities that are more widely held.
OTHER INVESTMENT PRACTICES AND RISK FACTORS
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
Balanced, Short-Duration Income, High 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 Balanced, High Income, 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
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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, Balanced, Income and
Growth, and High Income Portfolios may invest in securities representing
interests in other types of financial assets, such as automobile-finance
receivables or credit-card receivables. Such securities 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 Balanced, Quality Income, Short-Duration Income and High 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.
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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, Balanced, High Income, Quality Income, and Short-Duration Income
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.
LOWER-RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THEIR
ABILITY TO ASSUME THE RISKS OF OWNING SHARES OF A MUTUAL FUND THAT INVESTS IN
LOWER-RATED SECURITIES (SOMETIMES REFERRED TO AS "JUNK BONDS") BEFORE MAKING AN
INVESTMENT IN THE QUALITY INCOME, HIGH INCOME, MUNICIPAL INCOME, OR SHORT
DURATION INCOME PORTFOLIOS. The lower ratings of lower-rated 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 a
Portfolio's ability to sell its securities at prices approximating the values
the Portfolio had placed on such securities. It is possible that legislation
may be adopted in the future limiting the ability of certain financial
institutions to purchase lower-rated securities; such legislation may adversely
affect the liquidity of 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 market value of such securities. The rating assigned to a
security by Moody's or Standard & Poor's 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 securities, see the Appendix to this Prospectus.
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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 a
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of a 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 values of these investments. Changes in the
values of portfolio securities generally will not affect cash income derived
from such securities, but will affect a 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 Mentor Advisors or Van
Kampen, as the case may be, will monitor the investment to determine whether
continued investment in the security will assist in meeting a Portfolio's
investment objectives.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may not have more traditional methods of financing available to
them, and may be unable to repay debt at maturity by refinancing. The risk of
loss due to default in payment of interest or principal by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness. Certain of the
lower-rated securities in which a Portfolio may invest are issued to raise
funds in connection with the acquisition of a company, in so-called "leveraged
buy-out" transactions. The highly leveraged capital structure of such issuers
may make them especially vulnerable to adverse changes in economic conditions.
A Portfolio may invest in lower-rated securities which trade infrequently
or in more limited volume than higher-rated securities (including illiquid
securities), or which are restricted as to resale. In addition, a substantial
portion of a Portfolio's assets may at times be invested in securities as to
which the Portfolio, by itself or together with other accounts managed by
Mentor Advisors and its affiliates (or by Van Kampen and its affiliates, as the
case may be), holds a major portion or all of such securities, which may limit
the liquidity of such securities. A Portfolio could find it difficult or
impossible to sell illiquid securities when Mentor Advisors or Van Kampen, as
the case may be, believes it advisable to do so or may be able to sell such
securities only at prices lower than if such securities were more widely held.
In many cases, such securities may be purchased in private placements and,
accordingly, will be subject to restrictions on resale as a matter of contract
or under securities laws. Under such circumstances, it may also be more
difficult to determine the fair value of such securities for purposes of
computing a Portfolio's net asset value. In order to enforce its rights in the
event of a default under securities in cases where a Portfolio holds a major
portion or all of the outstanding issue, a Portfolio may be required to take
possession of and manage assets securing the issuer's obligations on such
securities, which may increase the Portfolio's operating expenses and adversely
affect the Portfolio's net asset value. A Portfolio may also be limited in its
ability to enforce its rights and may incur greater costs in enforcing its
rights in the event an issuer becomes the subject of bankruptcy proceedings.
A Portfolio may at times invest in so-called "payment-in-kind" bonds.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Payment-in-kind
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
27
<PAGE>
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.
Certain securities held by a Portfolio 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.
A 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 amounts payable on maturity. A Portfolio
does not amortize the premium paid for such securities in calculating its net
investment income. Consequently, if such premium securities are called or sold
prior to maturity, a Portfolio may recognize a capital loss to the extent the
call or sale price is less than the purchase price. Additionally, a Portfolio
will recognize a capital loss if its holds such securities to maturity.
Mentor Advisors and Van Kampen seek to minimize the risks involved in
investing in lower-rated securities through diversification and careful
investment analysis. When a Portfolio invests in high yield securities in the
lower rating categories, achievement of the Portfolio's goals depends more on
its adviser's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories.
OPTIONS AND FUTURES. Each of the Portfolios 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 Portfolios 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
Portfolios 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 Portfolios' 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 Portfolios will be able to utilize these instruments effectively for the
purposes stated above. Although the Portfolios 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 Portfolios to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
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
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<PAGE>
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.
The Portfolios will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolios' existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolios' 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 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. The Short-Duration Income Portfolio 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, the Quality Income
Portfolio, the High Income, and the Balanced Portfolio may borrow money to
invest in additional securities. 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
29
<PAGE>
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
(including leverage to the extent employed by a Portfolio through "reverse
repurchase agreements," "dollar-roll" transactions, and "forward commitments,"
described below) that can exist at any one time will not exceed one-third of
the value of a Portfolio's total assets (less all liabilities of the Portfolio
other than the leverage).
REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. Each Portfolio, other
than the Growth Portfolio, may enter into "reverse" repurchase agreements. Each
of the Capital Growth, Quality Income, Short-Duration Income, Balanced, High
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 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
30
<PAGE>
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 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.
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<PAGE>
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, Balanced, High Income,
Quality Income, and Short-Duration Income Portfolios may enter into interest
rate swaps and other interest rate transactions, such as interest rate caps,
floors, and collars. Interest rate swaps involve the exchange by a Portfolio
with another party of different types of interest-rate streams (E.G. an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). The purchase of an interest rate cap entitles
the purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling the
floor to the extent that a specified index falls below a predetermined interest
rate or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values. Each
Portfolio intends to use these interest rate transactions as a hedge and not as
a speculative investment. A Portfolio's ability to engage in certain interest
rate transactions may be limited by tax considerations.
The use of interest rate swaps and other interest rate transactions is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. If a Portfolio's investment adviser or sub-adviser is incorrect
in its forecasts of market values, interest rates, or other applicable factors,
the investment performance of a Portfolio would be less favorable than it would
have been if this investment technique were not used.
INDEXED SECURITIES. The Global Portfolio may invest in indexed securities,
the values of which are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Investment in indexed securities
involves certain risks. In addition to the credit risk of the securities issuer
and normal risks of price changes in response to changes in interest rates, the
principal amount of indexed securities may decrease as a result of changes in
the value of the reference instruments. Also, in the case of certain indexed
securities where the interest rate is linked to a reference instrument, the
interest rate may be reduced to zero and any further declines in the value of
the security may then reduce the principal amount payable on maturity. Further,
indexed securities may be more volatile than the reference instruments
underlying indexed securities.
PORTFOLIO TURNOVER. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by a Portfolio is known as "portfolio turnover." As a
result of each Portfolio's investment policies, under certain market conditions
its portfolio turnover rate may be higher than that of other mutual funds.
Portfolio turnover generally involves some expense to a Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestment in other securities. Such transactions may
result in realization of taxable gains. The portfolio turnover rate for the
High Income Portfolio is not expected to exceed 200% for the current fiscal
year. Portfolio turnover rates for the ten most recent fiscal years (or for
the life of a Portfolio if shorter) for the other Funds are contained in the
section "Financial Highlights."
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<PAGE>
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 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 Services Company, Inc. ("Mentor Services Company"). Sales personnel may
receive different compensation depending on which class of shares they sell.
Investors may be charged a fee if they effect transactions through a broker or
agent. 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."
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<PAGE>
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 $50. 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 Services Company or its affiliates. You can buy Portfolio shares BY
COMPLETING THE ENCLOSED NEW ACCOUNT FORM and sending it to c/o Mentor Funds
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 Services Company 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 Services Company.
Shares are sold at a price based on a Portfolio's net asset value next
determined after Mentor Distributors, LLC ("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, BALANCED, INCOME AND GROWTH, and GLOBAL
PORTFOLIOS are:
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE OF AS A
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT DEALER
PRICE INVESTED COMMISSION*
--------------- -------------- ------------
<S> <C> <C> <C>
Less than $50,000......................... 5.75% 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>
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<PAGE>
The current sales charges for the MUNICIPAL INCOME, HIGH 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 Services Company for
more information.
You may be eligible to buy Class A shares at reduced sales charges.
Consult your investment dealer or Mentor Services Company 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 Services Company. 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 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 most non-Mentor investment
companies. 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 Services Company 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
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<PAGE>
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, BALANCED, INCOME HIGH INCOME, MUNICIPAL INCOME,
YEARS SINCE PURCHASE PAYMENT AND GROWTH, AND GLOBAL AND 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 families) of
Mentor Services Company, 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
Services Company 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
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waived in the case of (i) redemptions of shares held at the time a shareholder
dies or becomes disabled, including the shares of a shareholder who owns the
shares with his or her spouse as joint tenants with right of survivorship,
provided that the redemption is requested within one year of the death or
initial determination of disability; (ii) redemptions in connection with the
following retirement plan distributions: (a) lump-sum or other distributions
from a qualified retirement plan following retirement; (b) distributions from
an IRA, Keogh Plan, or Custodial Account under Section 403(b)(7) of the
Internal Revenue Code following attainment of age 59 1/2; and (c) a tax-free
return 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. In addition, a Portfolio may sell its Class
A shares without a sales charge and may waive the CDSC on shares redeemed by
shareholders investing through brokerage or similar accounts sponsored by
financial institutions having agreements with Mentor Distributors or Mentor
Services Company, Inc., where the shareholder pays account fees to its
financial institution based on the asset value of the shareholder's account
with the financial institution from time to time. 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 Services Company. 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:
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
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Mentor Distributors receives the entire amount of any CDSC you pay.
Consult Mentor Services Company
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 (or in conjunction
with other entities), may also periodically sponsor programs that offer
additional compensation 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. Certain dealers may not sell
all classes of shares.
In all cases Mentor Advisors or the Distributors reserve the right to
reject any particular investment.
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 3435 Stelzer Road, Columbus, Ohio
43219, is the principal distributor for the Portfolios' shares. Mentor
Distributors is not obligated to sell any specific amount of shares of any
Portfolio. Mentor Distributors is a wholly owned subsidiary of BISYS Fund
Services, Inc.
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 "Expense
Summary -- Annual Portfolio Operating Expenses" above. (The Trustees may reduce
the amount of payments or suspend the Class B Plan for such
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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.
Mentor Services Company, a wholly owned subsidiary of Mentor Investment
Group, provides marketing-related services in respect of the Portfolios. Mentor
Services Company and its affiliates will receive from Mentor Distributors
substantially all amounts received or retained by Mentor Distributors in
respect of the distribution of the Portfolios' shares, including any amounts
paid to Mentor Distributors under the Portfolios' Class B Plans. In addition,
Mentor Services Company receives from Mentor Distributors an amount equal to
all CDSC's received by Mentor Distributors.
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 Services
Company for more information about where to obtain a signature guarantee. Stock
power forms are available from your investment dealer, Mentor Services Company,
and many commercial banks. Mentor Distributor usually requires additional
documentation for the sale of shares by a corporation, partnership, agent, or
fiduciary, or surviving joint owner. Contact Mentor Services Company for
details.
SELLING SHARES BY TELEPHONE. You may use the Telephone Redemption
Privilege to redeem shares from your account unless you have notified Mentor
Services Company of an address change within the preceding 15 days. Unless an
investor indicates otherwise on the New Account Form, Mentor Services Company
will be authorized
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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 Services Company with his or her account registration and
address as it appears on Mentor Services Company's records. Mentor Services
Company will employ these and other reasonable procedures to confirm that
instructions communicated by telephone are genuine; if it fails to employ
reasonable procedures, Mentor Services Company may be liable for any losses due
to unauthorized or fraudulent instructions. For more information, consult
Mentor Services Company. During periods of unusual market changes and
shareholder activity, you may experience delays in contacting Mentor Services
Company 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 Services Company, and may
charge you for its services.
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 Services Company for more information.
GENERAL. The Portfolios generally send you payment for your shares the
business day after your request is received. Under unusual circumstances, the
Portfolios may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolios reserve 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 Portfolios' per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in 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.
For information on how to exchange your shares, contact Mentor Service
Company at 1-800-869-6042. 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 Services Company's
procedures for telephonic
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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 Services Company
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 Advisors 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. See the Statement
of Additional Information to find out more about the exchange privilege.
HOW DISTRIBUTIONS ARE MADE
Dividends, if any, are declared daily and paid monthly for the Quality
Income, High Income, Short-Duration Income, and Municipal Income Portfolios,
quarterly for the Income and Growth and Balanced Portfolios, and annually for
the Growth, Capital Growth, and Global 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.
TAXES
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). Portfolio
distributions will be taxable to you even if they are paid from income or gains
earned by the Portfolio prior to your investment (and thus were included in the
price paid for your shares). 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
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particular period may be more or less than the amount of net investment income
actually earned by the Portfolio during that period.
MUNICIPAL INCOME PORTFOLIO. Distributions designated by the Portfolio as
"exempt-interest dividends" are not generally subject to federal income tax.
The Portfolio may engage in investment activities that produce taxable income,
the distribution of which will be taxable to shareholders as described above.
If you receive Social Security 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, distributions, and redemption proceeds
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 $13 billion in assets under management and 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., which is in turn a wholly owned subsidiary of First
Union Corp. ("First Union"). First Union is a leading financial services
company with approximately $234 billion in assets and $17 billion in total
stockholders' equity as of September 30, 1998. EVEREN Capital Corporation has a
20% ownership in Mentor Investment Group and may acquire additional ownership
based principally on the amount of Mentor's revenues derived from assets
attributable to clients of EVEREN Securities, Inc. and its affiliates.
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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 $14 billion. Its clients include 28 unit and
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 27 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 Services Company.
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 MANAGEMENT, INC. serves as sub-adviser to the High Income
Portfolio and 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, 1998, Van Kampen, together with its affiliates, advised or
supervised approximately $70 billion of assets. For its services as sub-adviser
of the Municipal Income Portfolio, 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. For its services as sub-adviser of the High Income Portfolio,
Van Kampen receives a monthly fee from Mentor Advisers at the annual rate of
.20% of the Portfolio's average daily net assets.
David C. Johnson, Senior Vice President and Co-Director of Municipal
Investments, is a 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 eighteen 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 fund, with total assets exceeding $13 billion.
Timothy D. Haney, Vice President, is a co-manager of the Municipal Income
Portfolio since 1997. He is responsible for the management of ten open and
closed-end municipal funds with total assets of approximately $2 billion. Mr.
Haney joined Van Kampen in 1988 and has ten years of experience in the tax-free
fixed income market.
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Ellis S. Bigelow, Senior Vice President, is the manager of the Mentor High
Income Portfolio since its inception. Ms. Bigelow joined Van Kampen in 1980 and
has over 18 years of experience in the corporate, government and equity
sectors. Currently, she is responsible for the management or supervision of
approximately $2 billion in corporate assets.
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, 1998, Wellington Management had discretionary investment
management authority with respect to approximately $187 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
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their customers who are Portfolio shareholders. In return for providing these
support services, a financial institution may receive payments at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B
shares of a Portfolio. These administrative services may include, but are not
limited to, the following functions: providing office space, equipment,
telephone facilities, and various personnel, including clerical, supervisory,
and computer personnel, as necessary or beneficial to establish and maintain
shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Portfolios; assisting clients
in changing dividend options, account designations, and addresses; and
providing such other services as the Portfolios reasonably request.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by a Portfolio's investment adviser, 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, or their affiliates, and
will not be made from the assets of any of the Portfolios.
GENERAL INFORMATION
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.
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 twelve
series 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.
Each of the Growth, Perpetual Global, Capital Growth, Balanced, Income and
Growth, Municipal Income, Quality Income, Short-Duration Income, and High
Income Portfolios currently offers three classes of shares: Class A and Class B
shares, which are offered by this Prospectus; and Class Y (Institutional)
shares, which are not subject to any sales loads or shareholder servicing fees.
Contact Mentor Services Company for information concerning Class Y shares and
your eligibility to purchase shares of that class.
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 Portfolios are freely
transferable, are entitled to dividends as declared by the Trustees, and, if
the Portfolios were liquidated, would receive the net assets of the Portfolios.
The Trust may suspend the sale of shares at any time and may refuse any order
to purchase shares. Although neither the Portfolios 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 Declaration of Trust.
The Portfolios receive services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the
45
<PAGE>
inability of the software to distinguish the Year 2000 from the Year 1900.
Mentor Advisors is taking steps that it believes are reasonably designed to
address this potential "Year 2000" problem and to obtain satisfactory
assurances that comparable steps are being taken by the Portfolios' other major
service providers. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the Portfolios from this problem.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and
dividend agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about the 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.
46
<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 edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term 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.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principle
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS
AAA -- An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
47
<PAGE>
A -- An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligations. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition, or the taking of a
similar action if payments on an obligation are jeopardized.
MOODY'S 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.
48
<PAGE>
STANDARD AND POOR'S NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess overwhelming safety characteristics are given a plus sign (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of saety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
49
<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
(This Page Intentionally Left Blank)
<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
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
MENTOR FUNDS
MENTOR GROWTH PORTFOLIO
MENTOR PERPETUAL GLOBAL PORTFOLIO
MENTOR CAPITAL GROWTH PORTFOLIO
MENTOR BALANCED PORTFOLIO
MENTOR INCOME AND GROWTH PORTFOLIO
MENTOR MUNICIPAL INCOME PORTFOLIO
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MENTOR HIGH INCOME PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
December 15, 1998
[MENTOR LOGO]
<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
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MK 609
[MENTOR LOGO]
MENTOR FUNDS
MENTOR GROWTH PORTFOLIO
MENTOR PERPETUAL GLOBAL PORTFOLIO
MENTOR CAPITAL GROWTH PORTFOLIO
MENTOR BALANCED PORTFOLIO
MENTOR INCOME AND GROWTH PORTFOLIO
MENTOR MUNICIPAL INCOME PORTFOLIO
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MENTOR HIGH INCOME PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
December 15, 1998
[EVEREN SECURITIES 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>
NEW ACCOUNT FORM AND [MENTOR INVESTMENT GROUP LOGO]
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 [ ] [ ]
[ ] Balanced Portfolio [ ] [ ] [ ] $-------- Capital Gains [ ] [ ]
Dividends [ ] [ ]
[ ] Income and [ ] [ ] [ ] $-------- Capital Gains [ ] [ ]
Growth Portfolio
Dividends [ ] [ ]
[ ] Perpetual Global [ ] [ ] [ ] $-------- Capital Gains [ ] [ ]
Portfolio
Dividends [ ] [ ]
[ ] Quality Income [ ] [ ] [ ] $-------- Capital Gains [ ] [ ]
Portfolio
Dividends [ ] [ ]
[ ] Municipal [ ] [ ] [ ] $-------- Capital Gains [ ] [ ]
Income Portfolio
Dividends [ ] [ ]
[ ] Short-Duration [ ] [ ] [ ] $-------- Capital Gains [ ] [ ]
Income Portfolio
Dividends [ ] [ ]
[ ] High Income [ ] [ ] [ ] $-------- Capital Gains [ ] [ ]
Portfolio
</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 ($50 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 ($50 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:
o 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.
o 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.
o I am of legal age in my state and have the authority and legal capacity to
purchase mutual fund shares.
o 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.
o 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.
o 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
MENTOR DISTRIBUTORS, LLC, Distributor
- --------------------------------------------------------------------------------
<PAGE>
P R O S P E C T U S December 15, 1998
Y (INSTITUTIONAL) SHARES
Mentor Funds
Mentor Funds, an open-end management investment company, is offering Y
Shares of nine different investment portfolios to institutional and high
net-worth individual investors: Mentor Growth Portfolio, Mentor Capital Growth
Portfolio, Mentor Balanced Portfolio, Mentor High Income Portfolio, Mentor
Income and Growth Portfolio, Mentor Perpetual Global Portfolio, 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 And Risk Factors."
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 DECEMBER 15, 1998
STATEMENT OF ADDITIONAL INFORMATION, AS AMENDED FROM TIME TO TIME. FOR A FREE
COPY OF THE STATEMENT OR FOR OTHER INFORMATION, PLEASE CALL MENTOR SERVICES
COMPANY, INC. AT 1-800-869-6042. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The 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
THEACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, FIRST UNION CORP. OR ANY OF ITS AFFILIATES AND ARE NOT FEDERALLY
INSURED BY, GUARANTEED BY OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE FUNDS INVOLVES
INVESTMENT RISK, INCLUDING THE POSSIBLE RISK OF PRINCIPAL.
<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 .......... 15
How the Portfolios Value Their Shares ................ 23
Purchase of Shares ................................... 24
Redemption of Shares ................................. 25
How To Exchange Shares ............................... 26
How Distributions Are Made ........................... 26
Taxes ................................................ 26
Management ........................................... 28
General Information .................................. 30
Performance Information .............................. 31
APPENDIX ............................................. 32
</TABLE>
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. Expenses shown are based on those incurred for the last fiscal year
(except that, in the case of the Balanced and High Income Portfolios, expenses
shown reflect the expenses the Portfolios expect to incur in respect of their Y
shares in the current fiscal year). 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
CAPITAL AND
GROWTH GROWTH BALANCED GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INSTITUTIONAL
- ---------------------------------
Investment Advisory Fee ......... 0.70% 0.80% 0.75% 0.75%
Other Expenses
Shareholder Services
Plan Fees .................... None None None None
Other Expenses ................. 0.31% 0.29% 0.35% 0.32%
---- ---- ---- ----
Total Other Expenses ............ 0.31% 0.29% 0.35% 0.32%
---- ---- ---- ----
Total Portfolio Operating
Expenses ....................... 1.01% 1.09% 1.10% 1.07%
<CAPTION>
SHORT-
PERPETUAL QUALITY MUNICIPAL DURATION HIGH
GLOBAL INCOME INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INSTITUTIONAL
- -------------
Investment Advisory Fee ......... 1.05% 0.48%* 0.60% 0.32%* 0.35%*
Other Expenses
Shareholder Services
Plan Fees .................... None None None None None
Other Expenses ................. 0.45% 0.32% 0.32% 0.29%* 0.35%**
---- ------ ---- ---- -------
Total Other Expenses ............ 0.45% 0.32% 0.32% 0.29%* 0.35%
---- ------ ---- ---- -------
Total Portfolio Operating
Expenses ....................... 1.50% 0.80%* 0.92% 0.61%* 0.70%*
</TABLE>
- ----------
* After expense limitation.
** Other Expenses are estimated based on the expenses the Portfolio expects to
incur during its first full year of operation.
Mentor Investment Advisors, LLC has agreed to limit its Management Fees
from each of the Quality Income, Short-Duration Income, and High Income
Portfolios and Mentor Investment Group has agreed to limit certain
administrative Services fees from the Short-Duration Income Portfolio 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, the Short-Duration Income and the High
Income Portfolio would be 0.60%, 0.50%, and 70% respectively. Other Expenses for
the Short-Duration Income Portfolio would be 0.37%, and Total Portfolio
Operating Expenses for the Quality Income, the Short-Duration Income, and the
High Income Portfolios, would have been 0.93%, 0.87%, and 1.05% respectively.
3
<PAGE>
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 YEAR 5 YEAR 10 YEAR
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Growth Portfolio ......................... 10 32 56 124
Capital Growth Portfolio ................. 11 35 60 133
Balanced Portfolio ....................... 11 35 61 134
Income and Growth Portfolio .............. 11 34 59 131
Perpetual Global Portfolio ............... 15 47 82 179
Quality Income Portfolio ................. 8 26 44 99
Municipal Income Portfolio ............... 9 29 51 113
Short-Duration Income Portfolio .......... 6 20 34 76
High Income Portfolio .................... 7 22 -- --
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
PERFORMANCE; ACTUAL EXPENSES MAY VARY.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE 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 included 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.
<TABLE>
<CAPTION>
PERPETUAL CAPITAL
GROWTH GLOBAL GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------- --------------------- ----------------
PERIOD PERIOD PERIOD
ENDED ENDED ENDED
<S> <C> <C> <C>
PER SHARE OPERATING
9/30/98(B) 9/30/98(B) 9/30/98(B)
------- ------- -------
PERFORMANCE
NET ASSET VALUE, BEGINNING OF
PERIOD ............................ $ 18.12 $ 18.81 $ 20.81
------------ ----------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) .......................... (0.02) 0.00 (c) 0.02
Net realized and unrealized
gain (loss) on
investments ..................... (3.28) 0.30 2.16
------------ ----------- ----------
Total from investment
operations ...................... (3.30) 0.30 2.18
------------ ----------- ----------
LESS DISTRIBUTIONS
From net investment income ........ -- -- --
From capital gains ................ (0.19) (0.15) (0.25)
------------ ----------- ----------
Total distributions ............... (0.19) (0.15) (0.25)
------------ ----------- ----------
NET ASSET VALUE, END OF PERIOD ..... $ 14.63 $ 18.96 $ 22.74
============ =========== ==========
Total Return* ...................... (18.36%) 1.60% 10.56%
============ =========== ==========
Ratios/Supplemental Data
Net assets, end of period
(in thousands) .................... $ 25,353 $ 1 $ 1
Ratio of expenses to average net
assets ............................ 1.01% (a) 1.50% (a) 1.09% (a)
Ratio of expenses to average net
assets excluding waiver ........... 1.01% (a) 1.50% (a) 1.09% (a)
Ratio of net investment income
(loss) to average net assets ...... (0.04%)(a) (0.02%) (a) 0.38% (a)
Portfolio turnover rate ............ 88% 162% 104%
Average commission rate on
portfolio transactions ............ $ 0.0658 $ 0.0188 $ 0.0692
========== =========== ===========
<CAPTION>
INCOME AND MUNICIPAL QUALITY SHORT-DURATION
GROWTH BALANCED INCOME INCOME INCOME
PORTFOLIO PORTFOLIO(E) PORTFOLIO PORTFOLIO PORTFOLIO
---------------- ---------------- ---------------- ---------------- -----------------
PERIOD PERIOD PERIOD PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
9/30/98(B) 9/30/98(D) 9/30/98(B) 9/30/98(B) 9/30/98(B)
------- ------- ------- ------- -------
PERFORMANCE
NET ASSET VALUE, BEGINNING OF
PERIOD ............................ $ 18.75 $ 13.69 $ 15.51 $ 13.20 $ 12.57
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) .......................... 0.54 0.01 1.39 0.78 0.67
Net realized and unrealized
gain (loss) on
investments ..................... 0.82 (0.01) ( 0.23) 0.39 0.16
---------- ---------- ---------- ---------- ----------
Total from investment
operations ...................... 1.36 0.00 1.16 1.17 0.83
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
From net investment income ........ (0.54) -- (0.67) ( 0.68) ( 0.61)
From capital gains ................ (0.03) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions ............... (0.57) -- (0.67) ( 0.68) ( 0.61)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD ..... $ 19.54 $ 13.69 $ 16.00 $ 13.69 $ 12.79
========== ========== ========== ========== ==========
Total Return* ...................... 7.29% 0.00 % 7.51% 8.94% 6.64%
========== ========== ========== ========== ==========
Ratios/Supplemental Data
Net assets, end of period
(in thousands) .................... $ 1 $ 3,642 $ 1 $ 1 $ 1
Ratio of expenses to average net
assets ............................ 1.07%(a) 1.10%(a) 0.92%(a) 0.80%(a) 0.61%(a)
Ratio of expenses to average net
assets excluding waiver ........... 1.07%(a) 1.10%(a) .92%(a) 0.93%(a) 0.87%(a)
Ratio of net investment income
(loss) to average net assets ...... 3.15%(a) 2.31%(a) 5.66%(a) 7.09%(a) 6.10%(a)
Portfolio turnover rate ............ 40% 89% 62% 114% 171%
Average commission rate on
portfolio transactions ............ $ 0.0540 $ 0.0687
=========== ===========
</TABLE>
- ---------
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
(c) Income is less than $0.005 per share.
(d) For the period from September 16, 1998 (initial offering of Class Y) to
September 30, 1998.
(e) Prior to September 16, 1998, all shareholders of the Balanced Portfolio
were Class B shareholders. On September 16, 1998, shares of Class B were
converted to Class Y shares.
* Total return does not reflect sales commissions and is not annualized.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Mentor Funds is offering Y Shares of nine 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 and Risk Factors" below.
The investment objectives of the Portfolios, other than those of 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.
6
<PAGE>
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 BALANCED PORTFOLIO
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 belives 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 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 repsonse 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 reductioin 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 such 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 Ratings Service, Inc. 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 Appendix 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 inconsistant
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
7
<PAGE>
hold all or any portion of its assets in high quality fixed-income securities,
chas or money market instruments. it is impossible to predict when, or for how
long, the Portfolio will use these alternative strategies.
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
8
<PAGE>
securities and other fixed-income securities of private or governmental issuers
(including zero-coupon securities) which Mentor Perpetual believes to be
consistent with the Portfolio's objective.
It is expected that the Portfolio's investments will normally be spread
broadly around the world, although (except as described in the next sentence)
there is no limit on the amount of the Portfolio's assets that may be invested
in any single country. Under normal circumstances, the Portfolio will invest at
least 65% of the value of its total assets in securities of at least three
countries, one of which may be the United States. The Portfolio may invest all
of its assets in securities of issuers outside the United States, and for
temporary defensive purposes may at times invest all of its assets in
securities of U.S. issuers. To the extent that the Portfolio invests a
substantial portion of its assets in securities of issuers located in a single
country, it will be more susceptible to adverse economic, business, political,
or regulatory conditions in or affecting that country than if it were to invest
in a geographically more diverse portfolio. The Portfolio may invest in
closed-end investment companies holding foreign securities. The Portfolio also
may hold a portion of its assets in cash or cash equivalents, including foreign
and domestic money market instruments.
It is likely that, at times, a substantial portion of the Portfolio's
assets will be invested in securities of issuers in emerging markets, including
under-developed and developing nations. Investments in emerging markets are
subject to the same risks applicable to foreign investments generally although
those risks may be increased due to conditions in such markets. For example,
the securities markets and legal systems in emerging markets may only be in a
developmental stage and may provide few, or none, of the advantages or
protections of markets or legal systems available in more developed countries.
Although many of the securities in which the Portfolio may invest are traded on
securities exchanges, they may trade in limited volume, and the exchanges may
not provide all of the conveniences or protections provided by securities
exchanges in more developed markets. The Portfolio may also invest a
substantial portion of its assets in securities traded in the over-the-counter
markets and not on any exchange, which may affect the liquidity of the
investment and expose the Portfolio to the credit risk of its counterparties in
trading those investments. See "Other Investment Practices and Risk Factors --
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.
9
<PAGE>
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.
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. The Portfolio may invest the remaining 20% of its assets in
lower-rated securities, including securities rated below investment grade (or,
if unrated, determined by Mentor Advisors to be of comparable quality).
Securities rated below investment grade 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 more than 10% of its assets
in securities rated Ca or below by Moody's or CC or below by Standard & Poor's.
See "Other Investment Practices and Risk Factors -- Lower-rated securities." 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 and Risk
Factors -- Mortgage-backed securities; other asset-backed securities" and " --
Other mortgage-related securities" below. The Portfolio may borrow money to
invest in additional securities; this practice involves risks. See "Other
Investment Practices and Risk Factors -- Leverage," below. The Portfolio may
also engage in a variety of interest rate transactions, including swaps, caps,
floors, and collars. See "Other Investment Practices and Risk Factors --
Interest rate transactions" below for a description of risks associated with
these transactions.
MENTOR MUNICIPAL INCOME PORTFOLIO
SUB-ADVISER: VAN KAMPEN 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
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.
10
<PAGE>
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. See "Other Investment
Practices and Risk Factors -- Lower rated securities." A description of
Securities ratings is contained in the Appendix to this Prospectus. 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.
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
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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 Practices and Risk Factors --
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
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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 primarily 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 Baa/BBB 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 Standard & Poor's 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.
The Portfolio may invest up to 20% of its assets in securities rated below
investment grade (or, if unrated, determined by Mentor Advisors to be of
comparable quality). Securities rated below investment grade 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 more
than 10% of its assets in securities rated below Ca by Moody's or CC by
Standard & Poor's. See "Other Investment Practices and Risk Factors --
Lower-rated securities." A description of securities ratings is contained in
the Appendix to this Prospectus.
The Portfolio may borrow money to invest in additional securities; this
practice involves risk. See "Other Investment Practices and Risk Factors --
Leverage," below. The Portfolio may also engage in a variety of interest rate
transactions, including swaps, caps, floors, and collars. See "Other Investment
Practices and Risk Factors -- Interest rate transactions" below for a
description of risks associated with these transactions.
MENTOR HIGH INCOME PORTFOLIO
SUB-ADVISOR: VAN KAMPEN MANAGEMENT, INC.
The Portfolio's investment objective is to seek high current income.
Capital growth is a secondary objective when consistent with the objective of
seeking high current income.
Mentor Advisors is the Portfolio's investment adviser. Van Kampen serves
as the sub-adviser to the Portfolio. Van Kampen purchases and sells securities
for the Portfolio, and otherwise manages the investments of the Portfolio,
subject to the overall supervision of Mentor Advisors.
The Portfolio may invest in both lower-rated and higher-rated fixed-income
securities, including debt securities, convertible securities, and preferred
stocks that are consistent with its primary investment objective of high
current income. The Portfolio's remaining assets may be held in cash or money
market instruments, or invested in common stocks and other equity securities.
The Portfolio may at times hold a substantial portion of its assets in
mortgage-backed and other asset-backed securities.
The Portfolio may invest in securities of any maturity. Van Kampen will
adjust the expected average life of the investments held in the Portfolio from
time to time, depending on its assessment of relative yields and risks of
securities of different maturities and expectations of future changes in
interest rates. At times when the expected average life of the investments held
by the Portfolio is longer, the values of the securities held by the Portfolio
will generally change more in response to changes in interest rates than at
times when the expected average life is shorter.
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Differing yields on fixed-income securities of the same maturity are a
function of several factors, including the relative financial strength of their
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies: Baa or lower by Moody's, Inc. or BBB
or lower by Standard & Poor's. The Portfolio may invest any portion of its
assets (and normally will invest at least 65% of its assets) in such securities
and in unrated securities determined by Van Kampen to be of comparable quality.
The Portfolio will normally invest a substantial portion of its assets in
securities rated below Baa by Moody's or BBB by Standard & Poor's and in
unrated securities determined by Van Kampen to be of comparable quality.
Securities rated below Baa by Moody's or BBB by Standard & Poor's are
considered to be predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligations.
Securities in the lowest rating categories may have extremely poor prospects of
attaining any real investment standing and may be in default. The rating
services' descriptions of securities in the lower rating categories, including
their speculative characteristics, are set forth in the Appendix to this
Prospectus. See "Other Investment Practices and Risk Factors -- Lower-rated
securities," below.
The Portfolio may at times invest up to 10% of its assets in securities
rated in the lowest grades (Ca or C in the case of Moody's and CC, C, or D in
the case of Standard & Poor's) or in unrated securities determined by Van
Kampen to be of comparable quality, if Van Kampen believes that there are
prospects for an upgrade in a security's rating or a favorable conversion of a
security into other securities. The Portfolio might also invest in such
securities if Van Kampen were to believe that, upon completion of any
contemplated exchange offer or reorganization involving a security or its
issuer, the Portfolio would receive securities or other assets offering
significant opportunities for capital appreciation or future high rates of
current income.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate.
The Portfolio seeks its secondary objective of capital growth, when
consistent with its primary objective of seeking high current income, by
investing in securities which may be expected to appreciate in value as a
result of declines in long-term interest rates or of favorable developments
affecting the business or prospects of the issuer which may improve the
issuer's financial condition and credit rating.
At times, Van Kampen may judge 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 Van Kampen may temporarily
use alternative strategies, primarily designed to reduce fluctuations in the
value of the Portfolio's assets. In implementing these "defensive" strategies,
the Portfolio may invest without limitation in money market instruments and in
U.S. Government or agency obligations, or invest in any other fixed-income
security Van Kampen considers consistent with such defensive strategies. It is
impossible to predict when, or for how long, the Portfolio will use such
alternative strategies.
The Portfolio will not invest more than 15% of its net assets (determined
at the time of investment) in securities determined to be illiquid. Certain
securities that are restricted as to resale may nonetheless be resold by the
Portfolio in accordance with Rule 144A under the Securities Act of 1933, as
amended. Such securities may be determined by Van Kampen to be liquid for
purposes of compliance with the limitation on the Portfolio's investment in
illiquid securities. There can, however, be no assurance that the Portfolio
will be able to sell
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such securities at any time when Van Kampen deems it advisable to do so or at
prices prevailing for comparable securities that are more widely held.
OTHER INVESTMENT PRACTICES AND RISK FACTORS
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
Balanced, Short-Duration Income, High 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 Balanced, High Income, 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
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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 Balanced, Quality Income, Short-Duration Income, Income and
Growth, and High Income Portfolios may invest in securities representing
interests in other types of financial assets, such as automobile-finance
receivables or credit-card receivables. Such securities 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 Balanced, Quality Income, Short-Duration Income and High 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.
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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, High Income, and Balanced
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.
LOWER-RATED SECURITIES (QUALITY INCOME, HIGH INCOME, MUNICIPAL INCOME, AND
SHORT-DURATION INCOME PORTFOLIOS). INVESTORS SHOULD CAREFULLY CONSIDER THEIR
ABILITY TO ASSUME THE RISKS OF OWNING SHARES OF A MUTUAL FUND THAT INVESTS IN
LOWER-RATED SECURITIES (SOMETIMES REFERRED TO AS "JUNK BONDS") BEFORE MAKING AN
INVESTMENT IN THE QUALITY INCOME, HIGH INCOME, MUNICIPAL INCOME, OR SHORT
DURATION INCOME PORTFOLIOS. The lower ratings of lower-rated 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 a
Portfolio's ability to sell its securities at prices approximating the values
the Portfolio had placed on such securities. It is possible that legislation
may be adopted in the future limiting the ability of certain financial
institutions to purchase lower-rated securities; such legislation may adversely
affect the liquidity of 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 market value of such securities. The rating assigned to a
security by Moody's or Standard & Poor's 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 securities, see the Appendix to this Prospectus.
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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 a
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of a 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 values of these investments. Changes in the
values of portfolio securities generally will not affect cash income derived
from such securities, but will affect a 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 Mentor Advisors or Van
Kampen, as the case may be, will monitor the investment to determine whether
continued investment in the security will assist in meeting a Portfolio's
investment objectives.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may not have more traditional methods of financing available to
them, and may be unable to repay debt at maturity by refinancing. The risk of
loss due to default in payment of interest or principal by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness. Certain of the
lower-rated securities in which a Portfolio may invest are issued to raise
funds in connection with the acquisition of a company, in so-called "leveraged
buy-out" transactions. The highly leveraged capital structure of such issuers
may make them especially vulnerable to adverse changes in economic conditions.
A Portfolio may invest in lower-rated securities which trade infrequently
or in more limited volume than higher-rated securities (including illiquid
securities), or which are restricted as to resale. In addition, a substantial
portion of a Portfolio's assets may at times be invested in securities as to
which the Portfolio, by itself or together with other accounts managed by
Mentor Advisors and its affiliates (or by Van Kampen and its affiliates, as the
case may be), holds a major portion or all of such securities, which may limit
the liquidity of such securities. A Portfolio could find it difficult or
impossible to sell illiquid securities when Mentor Advisors or Van Kampen, as
the case may be, believes it advisable to do so or may be able to sell such
securities only at prices lower than if such securities were more widely held.
In many cases, such securities may be purchased in private placements and,
accordingly, will be subject to restrictions on resale as a matter of contract
or under securities laws. Under such circumstances, it may also be more
difficult to determine the fair value of such securities for purposes of
computing a Portfolio's net asset value. In order to enforce its rights in the
event of a default under securities in cases where a Portfolio holds a major
portion or all of the outstanding issue, a Portfolio may be required to take
possession of and manage assets securing the issuer's obligations on such
securities, which may increase the Portfolio's operating expenses and adversely
affect the Portfolio's net asset value. A Portfolio may also be limited in its
ability to enforce its rights and may incur greater costs in enforcing its
rights in the event an issuer becomes the subject of bankruptcy proceedings.
A Portfolio may at times invest in so-called "payment-in-kind" bonds.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Payment-in-kind
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
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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.
Certain securities held by a Portfolio 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.
Mentor Advisors and Van Kampen seek to minimize the risks involved in
investing in lower-rated securities through diversification and careful
investment analysis. When a Portfolio invests in high yield securities in the
lower rating categories, achievement of the Portfolio's goals depends more on
its adviser's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories.
OPTIONS AND FUTURES. Each of the Portfolios 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 Portfolios 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
Portfolios 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 Portfolios' 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 Portfolios will be able to utilize these instruments effectively for the
purposes stated above. Although the Portfolios 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 Portfolios to segregate assets to cover its outstanding
positions. For more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. Each of the Portfolios may buy and sell index
futures contracts ("index futures") and options on index futures and indices
for hedging purposes (or may purchase warrants whose value is based on the
value from time to time of one or more foreign securities indices). An "index
futures" contract is a contract to buy or sell units of a particular bond or
stock index at an agreed price on a specified future date. Depending on the
change in value of the index between the time when a Portfolio enters into and
terminates an index futures or option transaction, the Portfolio realizes a
gain or loss. The Portfolios may also, to the extent consistent with applicable
law, buy and sell index futures and options to increase investment return.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. Options and futures
transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
security or index or of the securities held by a Portfolio that are the subject
of a hedge. The successful use by a Portfolio of the strategies described above
further depends on the ability of its investment adviser or sub-adviser to
forecast market movements correctly.
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Other risks arise from a Portfolio's potential inability to close out futures
or options positions. Although a Portfolio will enter into options or futures
transactions only if its investment adviser or sub-adviser believes that a
liquid secondary market exists for such option or futures contract, there can
be no assurance that a Portfolio will be able to effect closing transactions at
any particular time or at an acceptable price. Transactions in options and
futures contracts involve brokerage costs and may require a Portfolio to
segregate assets to cover its outstanding positions. For more information, see
the Statement of Additional Information. Federal tax considerations may also
limit a Portfolio's ability to engage in options and futures transactions.
Each Portfolio's options and futures contract transactions will generally
be conducted on recognized exchanges. However, a Portfolio may purchase and
sell options in transactions in the over-the-counter markets. A Portfolio's
ability to terminate options in the over-the-counter markets may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would be unable to meet
their obligations to the Portfolio. A Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are 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.
The Portfolios will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolios' existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolios' 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 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. The 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, the Quality Income
Portfolio, the High Income Portfolio, and the Balanced Portfolio may borrow
money to invest in additional securities. 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 (including leverage
to the extent
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employed by a Portfolio through "reverse" repurchase agreements, "dollar roll"
transactions, and "forward commitments", described below) that can exist at any
one time will not exceed one-third of the value of a Portfolio's total assets
(less all liabilities of the Portfolio other than the leverage).
REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. Each Portfolio, other
than the Growth and Portfolio, may enter into "reverse" repurchase agreements.
Each of the Capital Growth, Quality Income, Short-Duration Income, Balanced,
High 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 agreement to create investment leverage.
DOLLAR-ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, each Portfolio, other than the Growth, Balanced, High Income,
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
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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 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, Balanced, High Income,
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
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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 know 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. Portfolio turnover rates for the most recent
fiscal year (for each of the Portfolios except the High Income Portfolio) are
contained in the section "Financial Highlights". The portfolio turnover note for
the High Income Portfolio is not expected to exceed 200% for the current fiscal
year.
HOW THE PORTFOLIOS VALUE THEIR 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.
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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.
PURCHASE OF SHARES
Mentor Distributors, LLC ("Mentor Distributors"), located at 3435 Stelzer
Road, Columbus, Ohio 43219, serves as distributor of the Portfolios' shares.
Mentor Distributors is not obligated to sell any specific amount of shares of
any of the Portfolios. Mentor Distributors is a wholly owned subsidiary of
BISYS Fund Services, Inc.
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 c/o Mentor Funds to Boston Financial Data Services, Inc. at 2
Heritage Drive, North Quincy, MA 02171. 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. Contact Mentor Services Company, Inc. ("Mentor Services Company")
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 Services Company 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
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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.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of its shares in a Portfolio
any day the New York Stock Exchange is open by sending a signed letter of
instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to Mentor Funds, c/o Boston Financial
Data Services, Inc., 2 Heritage Drive, North Quincy, MA 02171. 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.
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 Services Company
usually requires additional documentation for the sale of shares by a
corporation, partnership, agent, fiduciary, or surviving joint owner. Contact
Mentor Services Company at 1-800-869-6042 for details.
Mentor Services Company may facilitate any redemption request. There
is no extra charge for this service.
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GENERAL. The Portfolios generally send you payment for your shares the
business day after your request is received. Under unusual circumstances, the
Portfolios may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolios reserve 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 Portfolios' 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 $1,000,000 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 provide a letter of intent and send it to
the Trust, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171. 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 Services Company 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 Advisors 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
Services Company before requesting an exchange by calling 1-800-869-6042. See
the Statement of Additional Information to find out more about the exchange
privilege.
HOW DISTIBUTIONS ARE MADE
Dividends, if any, are declared daily and paid monthly for the Quality
Income, High Income, Short-Duration Income, and Municipal Income Portfolios,
quarterly for the Income and Growth and Balanced Portfolios and annually for
the Growth, Capital Growth, and Global 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.
TAXES
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
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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).
Distributions will be taxable to a shareholder of a Portfolio even if they are
paid from income or gains earned by the Portfolio prior to the shareholder's
investment (and thus were included in the price paid by the shareholder).
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.
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 distributions and redemption proceeds 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).
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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 $13 billion in assets under management and 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., which is in turn a wholly owned subsidiary of First
Union Corp. ("First Union"). First Union is a leading financial services
company with approximately $234 billion in assets and $17 billion in total
stockholders' equity as of September 30, 1998. 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 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 $15 billion. Its clients include 28 unit and
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 27 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 Services.
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 Management, Inc. serves as sub-adviser to the High Income
Portfolio and 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.
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Incorporated, a registered broker-dealer, are engaged in a wide range of
financial services. As of September 30, 1998, Van Kampen, together with its
affiliates, advised or supervised approximately $70 billion of assets. For its
services as sub-adviser of the Municipal Income Portfolio, 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. For its services as a sub-adviser of the
High Income Portfolio, Van Kampen receives a monthly fee from Mentor Advisors
at the annual rate of .20% of the Portfolio's average daily net assets.
David C. Johnson, Senior Vice President and Co-Director of Municipal
Investments, is a 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 eighteen 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 fund, with total assets exceeding $13 billion.
Timothy D. Haney, Vice President, is a co-manager of the Municipal Income
Portfolio since 1997. He is responsible for the management of ten open and
closed-end municipal funds with total assets of approximately $2 billion. Mr.
Haney joined Van Kampen in 1988 and has ten years of experience in the tax-free
fixed income market.
Ellis S. Bigelow, Senior Vice President, has been the manager of the Mentor
High Income Portfolio since its inception. Ms. Bigelow joined Van Kampen in 1980
and has over 18 years of experience in the corporate, government and equity
sectors. Currently, she is responsible for the management or supervision of
approximately $2 billion in corporate assets.
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, 1998, Wellington Management had discretionary investment
management authority with respect to approximately $187 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 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,
29
<PAGE>
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.
GENERAL INFORMATION
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.
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 twelve
series, 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.
Each of the Growth, Perpetual Global, Capital Growth, Balanced, Income and
Growth, Municipal Income, Quality Income, Short-Duration Income, and High
Income Portfolios currently offer three classes of shares: Class Y
(Institutional) shares of the Portfolios, which are offered by this Prospectus,
and Class A and Class B shares which are subject to sales loads and (in the
case of Class B shares, distribution fees) and shareholder servicing fees.
Contact Mentor Services Company for information concerning Class A and B
shares.
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.
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.
The Portfolios receive services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of the software to distinguish the Year 2000 from the
Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory
30
<PAGE>
assurances that comparable steps are being taken by the Portfolios' other major
service providers. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the Portfolios from this problem.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and
dividend agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about 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.
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 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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<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 edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term 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.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principle
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS
AAA -- An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet it financial commitment on the
bligation is extremely strong.
AA -- An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
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<PAGE>
A -- An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligations. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition, or the taking of a
similar action if payments on an obligtion are jeopardized.
MOODY'S 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.
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<PAGE>
STANDARD AND POOR'S NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess overwhelming safety characteristics are given a plus sign (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) ahve a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above to a lesser degree.
Earnings trends and coverage ratios,, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicateds that the degree of safety regrding
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 designationis
satisfactory. However, the relative degree of saety is not as high as for
issues designated A-1.
A-3 -- Issues carrying this designation have adequate capacity fo rtimely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
34
<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 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
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
MENTOR FUNDS
MENTOR GROWTH PORTFOLIO
MENTOR PERPETUAL GLOBAL PORTFOLIO
MENTOR CAPITAL GROWTH PORTFOLIO
MENTOR BALANCED PORTFOLIO
MENTOR INCOME AND GROWTH PORTFOLIO
MENTOR MUNICIPAL INCOME PORTFOLIO
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MENTOR HIGH INCOME PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
December 15, 1998
[MENTOR INVESTMENT GROUP LOGO]
<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 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
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED
MAY LOSE VALUE
[MENTOR INVESTMENT GROUP LOGO]
MENTOR FUNDS
MENTOR GROWTH PORTFOLIO
MENTOR PERPETUAL GLOBAL PORTFOLIO
MENTOR CAPITAL GROWTH PORTFOLIO
MENTOR BALANCED PORTFOLIO
MENTOR INCOME AND GROWTH PORTFOLIO
MENTOR MUNICIPAL INCOME PORTFOLIO
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MENTOR HIGH INCOME PORTFOLIO
-------------------------
PROSPECTUS
-------------------------
December 15, 1998
[EVEREN SECURITIES LOGO]
<PAGE>
P R O S P E C T U S December 15, 1998
Retail Shares
MENTOR FUNDS
MENTOR MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO
The Mentor Money Market Portfolios are designed for investors who seek
current income consistent with preservation of capital and maintenance of
liquidity. The Portfolios are diversified investment portfolios of Mentor Funds
(the "Trust").
An investment in a Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that a Portfolio will be able to maintain
a stable net asset value of $1.00 per share.
This Prospectus explains concisely what you should know before investing
in a Portfolio. Please read it carefully and keep it for future reference. You
can find more detailed information about the Portfolios in a December 15, 1998
Statement of Additional Information, as amended from time to time. For a free
copy of the Statement, call Mentor Services Company, Inc. at 1-800-869-6042.
The Statement has been filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference.
----------------
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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
Investment Objectives and Policies .......... 4
Management .................................. 12
General Information ......................... 15
</TABLE>
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. The following table summarizes your maximum transaction costs from an
investment in Retail Shares of each of the Portfolios. Expenses shown are based
on those incurred for the last fiscal year (except that, in the case of the
Tax-Exempt Money Market Portfolio, expenses shown reflect the expenses the
Portfolio expects to incur in its first fiscal year). The Examples show the
cumulative expenses attributable to a hypothetical $1,000 investment in each
Portfolio over specified periods. The information presented below does not
reflect any fees or charges imposed by Financial Institutions through which you
may invest in the Portfolios.
<TABLE>
<CAPTION>
MENTOR MENTOR
MENTOR U.S. GOVERNMENT TAX-EXEMPT
MONEY MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ----------------- -------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* ...................... .18% .18% .21%
12b-1 Fees ............................ .38% .38% .33%
Other Expenses ........................ .28% .25% .17%
---- ----- -----
Total Fund Operating Expenses ......... .84% .81% .71%
</TABLE>
* For purposes of determining the annual rate at which Management Fees are
payable by the Portfolios, a Portfolio's assets will be considered to
include the assets of certain Funds offered by Cash Resource Trust and
managed by Mentor Investment Advisors, LLC. See "Management," below.
EXAMPLES
Your investment of $1,000 in a Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Mentor Money Market Portfolio .......... $9 $27 $47 $104
Mentor U.S. Government
Money Market Portfolio ................ $8 $26 $45 $100
Mentor Tax-Exempt
Money Market Portfolio ................ $7 $23 -- --
</TABLE>
The table is provided to help you understand the expenses of investing in
each of the Portfolios and your share of the operating expenses which each of
the Portfolios expects to incur. The Examples do not represent past or future
expense levels. Actual returns and expenses may be greater or less than those
shown. Federal regulations require the Examples to assume a 5% annual return,
but actual annual return will vary. Because of the 12b-1 fees payable by the
Portfolios, long-term shareholders may pay more in aggregate sales charges than
the maximum initial sales charge permitted by the National Association of
Securities Dealers, Inc.
3
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of Mentor Money Market Portfolio (the "Money
Market Portfolio") and Mentor U.S. Government Money Market Portfolio (the "U.S.
Government Money Market Portfolio") are to seek as high a rate of current income
as Mentor Investment Advisors, LLC, the Portfolios' investment advisor ("Mentor
Advisors"), believes is consistent with preservation of capital and maintenance
of liquidity. The investment objective of Mentor Tax-Exempt Money Market
Portfolio (the "Tax-Exempt Money Market Portfolio") is to seek as high a rate
of current income exempt from federal income tax as Mentor Advisors believes is
consistent with preservation of capital and maintenance of liquidity. The
Portfolios seek their objectives through the investment policies described
below. Because each of the Portfolios is a money market fund, it will only
invest in the types of investments described below under "Selection of
Investments."
The investment objective and policies of each Portfolio may, unless
otherwise specifically stated, be changed by the Trustees without shareholder
approval. None of the Portfolios is intended to be a complete investment
program, and there is no assurance a Portfolio will achieve its objective.
MENTOR MONEY MARKET PORTFOLIO
The Money Market 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.
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.
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The U.S. Government Money Market 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. Certain of these 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.
4
<PAGE>
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.
MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO
The Tax-Exempt Portfolio invests, as a fundamental policy, at least 80% of
its net assets in Tax-Exempt Securitites (as described below). The Portfolio
may invest the remainder of its assets in investments of any kind in which any
of the other Portfolios may invest.
The Portfolio will invest in the following types of Tax-Exempt Securities:
(i) municipal notes; (ii) municipal bonds; (iii) municipal securities backed by
the U.S. government or any of its agencies or instrumentalities; (iv)
tax-exempt commercial paper; (v) participation interests in any of the
foregoing; and (vi) unrated securities or new types of tax-exempt instruments
which become available in the future if Mentor Advisors determines they meet
the quality standards discussed below (collectively, "Tax-Exempt Securities").
(In the case of any such new types of tax-exempt instruments, this Prospectus
would be revised as may be appropriate to describe such instruments.) In
connection with the purchase of Tax-Exempt Securities, the Portfolio may
acquire stand-by commitments, which give the Portfolio the right to resell the
security to the dealer at a specified price. Stand-by commitments may provide
additional liquidity for the fund but are subject to the risk that the dealer
may fail to meet its obligations. The Portfolio does not generally expect to
pay additional consideration for stand-by commitments or to assign any value to
them.
Tax-Exempt Securities are debt obligations issued by a state (including
the District of Columbia), a U.S. territory or possession, or any of their
political subdivisions, the interest from which is, in the opinion of bond
counsel, exempt from federal income tax. These securities are issued to obtain
funds for various public purposes, such as the construction of public
facilities, the payment of general operating expenses, or the refunding of
outstanding debts. They may also be issued to finance various private
activities, including the lending of funds to public or private institutions
for the construction of housing, educational, or medical facilitites and may
also include certain types of private activity and industrial development bonds
issued by public authorities to finance privately owned or operated facilities.
Short-term Tax-Exempt Securities are generally issued as interim financing in
anticipation of tax collections, revenue receipts, or bond sales to finance
various public puposes.
The two principal classifications of Tax-Exempt Securities are general
obligation and special obligation (or revenue) securities. General obligation
securitites involve the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The
characteristics and methods of enforcement of general obligation securities
vary according to the law applicable to the particular issuer. Special
obligation securities are payable only from the revenues derived from a
particular facility or class of facilities, or a specific revenue source and
generally are not payable from the unrestricted revenues of the issuer.
Industrial development and private activity bonds are in most cases special
obligation securities, the credit quality of which is directly related to the
private user of a facility.
For purposes of the Portfolio's policy to invest at least 80% of its net
assets in Tax-Exempt Securities, the Portfolio will not treat obligations as
Tax-Exempt Securitites for purposes of measuring compliance with such policy if
they would give rise to interest income subject to federal alternative minimum
tax for individuals. To
5
<PAGE>
the extent that the Portfolio invests in these securities, individual
shareholders of the Portfolio, depending on their own tax status, may be
subject to federal alternative minimum tax on the part of the Portfolio's
distributions derived from these securities. In addition an investment in the
Portfolio may cause corporate shareholders to be subject to (or result in an
increased liability under) the alternative minimum tax because tax-exempt
income is generally included in the alternative minimum taxable income of
corporations.
The ability of governmental issuers to meet their obligations will depend
primarily on the availability of tax and other revenues to those governments
and on thier fiscal conditions generally. The amounts of tax and other revenues
available to governmental issuers may be affected from time to time by
economic, political, and demographic conditions affecting a particular state.
In addition, constitutional or statutory restrictions may limit a government's
power to raise revenues or increase taxes. The avalability of federal, state,
and local aid to issuers of such securities may also affect their ability to
meet their obligations. Payments of principal and interest on special
obligation securities will depend on the economic condition of the facility or
specific revenue source from whose revenues the payments will be made, which in
turn could be affected by economic, political, and demographic conditions
affecting a particular state. Any reduction in the actual or perceived ability
of an issuer of Tax-Exempt Securities in a particular state to meet its
obligations (including a reduction in the rating of its outstanding securities)
would likely affect adversely the market value and marketability of its
obligations and could adversely affect the values of Tax-Exempt Securities
issued by others in that state as well.
The Portfolio may invest without limit in high quality taxable money
market instruments of any type at any time when Mentor Advisors believes that
market conditions make pursuing the Portfolio's basic investment strategy
inconsistent with the best interests of shareholders. It is impossible to
predict when, or for how long, the Portfolio will use these alternative
defensive strategies.
SELECTION OF INVESTMENTS
Each 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 believe present minimal credit risk.
"High-quality securities," in the case of the Money Market Portfolio, are (i)
commercial paper or other short-term obligations rated A-1 by Standard & Poor's
Ratings Service, Inc. 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). Each 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. Each of the Portfolios 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.
A Portfolio may invest in variable or floating-rate securities which bear
interest at rates subject to periodic adjustment or which provide for periodic
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. Some of these securities may be supported by the right of the
holders under certain circumstances to demand that a specified bank,
broker-dealer, or other financial institution purchase the securities from the
holders at par, or otherwise to demand on short notice, payment of unpaid
principal and interest on the securities. Such securities are subject to the
risk that the financial
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institution in question may for any reason be unwilling or unable to meet its
obligation in respect of the securities, which would likely have an adverse
effect on the value of the securities.
Considerations of liquidity and preservation of capital mean that a
Portfolio may not necessarily invest in money market instruments paying the
highest available yield at a particular time. Consistent with its investment
objective, a 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. Each Portfolio may
also invest to take advantage of what Mentor Advisors believes to be temporary
disparities in the 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 Portfolios, may result in frequent changes in the investments
held by the Portfolios. The Portfolios will not usually pay brokerage
commissions in connection with the purchase or sale of portfolio securities.
The Portfolios' investments will be affected by general changes in
interest rates resulting in increases or decreases in the values of the
obligations held by the Portfolios. The values of a 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.
DIVERSIFICATION AND CONCENTRATION POLICIES
Each Portfolio is a "diversified" investment company under the Investment
Company Act of 1940. This means that each Portfolio may invest up to 25% of its
total assets in the securities of one or more issuers, and is limited with
respect to the remaining portion of its assets to investing 5% or less of its
total assets in the securities of any one issuer (other than the U.S.
Government). However, under the current rules governing money market funds, the
Portfolios generally may not invest more than 5% of their assets in any one
issuer (other than the U.S. Government).
The Money Market 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 values of its portfolio securities may be especially affected
by factors pertaining to the issuers of such obligations.
The Tax-Exempt Money Market Portfolio will not invest more than 25% of its
total assets in any one industry. Governmental issuers of Tax-Exempt Securities
are not considered part of any "industry." However, Securities backed only by
the assets and revenues of nongovernmental users may for this purpose be deemed
to be issued by such nongovernmental users, and the 25% limitation would apply
to such obligations.
It is nonetheless possible that the Portfolio may invest more than 25% of
its assets in a broader segment of the Tax-Exempt Securities market, such as
revenue obligations of hospitals and other health care facilities, housing
agency revenue obligations, or airport revenue obligations. This would be the
case only if Mentor Advisors determined that the yields available from
obligations in a particular segment of the market justified 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 Tax-Exempt
Securities in such
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a market segment. The Portfolio reserves the right to invest more than 25% of
its assets in industrial development bonds and private activity bonds or notes.
The Portfolio also reserves the right to invest more than 25% of its
assets in securities relating to any one or more states (including the District
of Columbia), U.S. territories or possessions, or any of their political
subdivisions. As a result of such an investment, the performance of the
Portfolio may be especially affected by factors pertaining to the economy of
the relevant state and other factors specifically affecting the ability of
issuers of such securities to meet their obligations. As a result, the value of
the Portfolio's shares may fluctuate more widely than the value of shares of a
fund investing in securities relating to a greater number of different states.
OTHER INVESTMENT PRACTICES
A Portfolio may also engage to a limited extent in the following
investment practices, each of which involves certain special risks. The
Statement of Additional Information contains more detailed information about
these practices.
FOREIGN INVESTMENTS. The Money Market Portfolio may invest in obligations
of foreign issuers and in bank certificates of deposit and bankers' acceptances
payable in U.S. dollars and issued by foreign banks (including U.S. branches of
foreign banks) or by foreign branches of U.S. banks. These investments subject
the Portfolio to investment risks different from those associated with domestic
investments. Such risks include adverse political and economic developments in
foreign countries, the imposition of withholding taxes on interest income,
seizure or nationalization of foreign deposits, or the adoption of other
governmental restrictions which may adversely affect the payment of principal
and interest on such obligations. Legal remedies available to investors in
certain foreign countries may be more limited than those available with respect
to investments in the U.S. or in other foreign countries. 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, foreign securities may be less liquid than U.S.
securities, and foreign accounting and disclosure standards may differ from
U.S. standards. Special tax considerations apply to foreign investments.
REPURCHASE AGREEMENTS. Under a repurchase agreement, a Portfolio purchases
a debt instrument for a relatively short period (usually not more than one
week), which the seller agrees to repurchase at a fixed time and price,
representing the Portfolio's cost plus interest. A Portfolio will enter into
repurchase agreements only with commercial banks and with registered
broker-dealers who are members of a national securities exchange or market
makers in government securities, and only if the debt instrument subject to the
repurchase agreement is a U.S. Government security. Although Mentor Advisors
will monitor repurchase agreement transactions to ensure that they will be
fully collateralized at all times, a Portfolio bears a risk of loss if the
other party defaults on its obligation and the Portfolio is delayed or
prevented from exercising its rights to dispose of the collateral. If the other
party should become involved in bankruptcy or insolvency proceedings, it is
possible that a Portfolio may be treated as an unsecured creditor and required
to return the collateral to the other party's estate.
SECURITIES LENDING. A Portfolio may lend portfolio securities to
broker-dealers. These transactions must be fully collateralized at all times
with cash or short-term debt obligations, but involve some risk to a Portfolio
if the other party should default on its obligation and the Portfolio is
delayed or prevented from exercising its rights in respect of the collateral.
Any investment of collateral by a Portfolio would be made in accordance with
the Portfolio's investment objective and policies described above.
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DIVIDENDS
The Trust determines the net income of each Portfolio as of the close of
regular trading on the New York Stock Exchange (the "Exchange") each day the
Exchange is open. Each determination of a 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. Each Portfolio's investments are
valued at amortized cost according to Securities and Exchange Commission Rule
2a-7. A Portfolio will not normally have unrealized gains or losses so long as
it values its investments by the amortized cost method.
DAILY DIVIDENDS. Each Portfolio declares all of its net income as a
distribution on each day it is open for business, as a dividend to shareholders
of record immediately prior to the close of regular trading on the Exchange.
Shareholders whose purchase of shares of a Portfolio is accepted at or before
12:00 noon on any day will receive the dividend declared by the Portfolio for
that day; shareholders who purchase shares after 12:00 noon will begin earning
dividends on the next business day after the Portfolio accepts their order. A
Portfolio's net income for Saturdays, Sundays, and holidays is declared as a
dividend on the preceding business day. Dividends for any calendar month will
be paid on the last day of that month (or, if that day is not a
business day, on the next preceding business day), except that a 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 who
withdraws the entire balance of an account at any time during a month will be
paid all dividends declared through the time of the withdrawal. Since the net
income of each Portfolio is declared as a dividend each time it is determined,
the net asset value per share of each Portfolio normally remains at $1 per
share immediately after each determination and dividend declaration.
You can choose from two distribution options: (1) automatically reinvest
all distributions from a Portfolio in additional shares of that Portfolio; or
(2) receive all distributions in cash. If you wish to change your distribution
option, you should contact your Financial Institution (as defined below), who
will be responsible for forwarding the necessary instructions to the Trust's
transfer agent, Boston Financial Data Services ("BFDS"). If you do not select
an option when you open your account, all distributions will be reinvested. You
will receive a statement confirming reinvestment of distributions in additional
shares of a Portfolio promptly following the month in which the reinvestment
occurs.
TAX INFORMATION
FEDERAL TAXES. 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 income taxes
on income (and gains, if any) it distributes to shareholders. Each Portfolio
will distribute substantially all of its net ordinary income (and net capital
gains, if any) on a current basis. Distributions (other than exempt-interest
dividends) will be taxable to you regardless of whether you elect to receive
them as cash or to reinvest them in additional shares.
Dividends paid by the Tax-Exempt Money Market Portfolio that are derived
from exempt-interest income (known as "exempt-interest dividends") and that are
designated as such may be treated by the Portfolio's shareholders as items of
interest excludable from their federal gross income. (Shareholders should
consult their own tax adviser with respect to whether exempt-interest dividends
would be excludable from gross income if the shareholder were treated as a
"substantial user" of facilities financed by an obligation held by the
Portfolio or a
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"related person" to such a user under the Internal Revenue Code.) If a
shareholder receives an exempt-interest dividend with respect to any share held
for six months or less, any loss on the sale or exchange of that share will be
disallowed to the extent of the amount of the exempt-interest dividend. To the
extent dividends paid to shareholders are derived from taxable income (for
example, from interest on certificates of deposit) or from gains, such
dividends will be subject to federal income tax, whether they are paid in the
form of cash or additional shares.
If the Tax-Exempt Money Market Portfolio holds certain "private activity
bonds" ("industrial development bonds" under prior law), dividends derived from
interest on such obligations will be classified as an item of tax preference
which could subject certain shareholders to alternative minimum tax liability.
Corporate shareholders must also take all exempt-interest dividends into
account in determining "adjusted current earnings" for purposes of calculating
their alternative minimum tax liability.
Shareholders receiving Social Security benefits or Railroad Retirement Act
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits. Early in each year the
Tax-Exempt Money Market Portfolio will notify you of the amount and tax status
of distributions paid to you by the Portfolio for the preceding year.
GENERAL. The foregoing is a summary of certain federal income tax
consequences of investing in the Portfolios. You should consult your tax
adviser to determine the precise effect of an investment in each Portfolio on
your particular tax situation.
BUYING AND SELLING SHARES OF THE PORTFOLIOS
HOW TO BUY SHARES. The Trust offers Retail Shares of the Portfolios
continuously at a price of $1.00 per share. The Trust determines the net asset
value of each Portfolio twice each day, as of 12:00 noon and as of the close of
regular trading on the Exchange. Retail Shares of each Portfolio are sold at
net asset value through a number of selected financial institutions, such as
investment dealers and banks (each, a "Financial Institution"). Your Financial
Institution is responsible for forwarding any necessary information and
documentation to BFDS. There is no sales charge on sales of shares, nor is any
minimum investment required for any of the Portfolios.
Because each Portfolio seeks to be fully invested at all times,
investments must be in Same Day Funds to be accepted. Investments which are
accepted at or before 12:00 noon will be invested at the net asset value
determined at that time; investments accepted after 12:00 noon will receive the
net asset value determined at the close of regular trading on the Exchange.
"Same Day Funds" are funds credited by the applicable regional Federal Reserve
Bank to the account of the Trust at its designated bank. When payment in Same
Day Funds is available to the Trust, the Trust will accept the order to
purchase shares at the net asset value next determined.
If you are considering redeeming shares or transferring shares to another
person shortly after purchase, you should pay for those shares with wired Same
Day Funds or a certified check to avoid any delay in redemption or transfer.
Otherwise, the Trust may delay payment for shares until the purchase price of
those shares has been collected which may be up to 15 calendar days after the
purchase date.
The Mentor Distributors or Mentor Advisors may refuse any order to buy
shares.
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For more information on how to purchase shares of the Portfolios, contact
your Financial Institution or Mentor Services Company, Inc. ("Mentor Services
Company"), 901 East Byrd Street, Richmond, Virginia 23219. Mentor Services
Company's telephone number is 1-800-869-6042.
HOW TO SELL SHARES. You can redeem your Portfolio shares through your
Financial Institution any day the Exchange is open, or you may redeem your
shares by check. If you redeem shares through your Financial Institution, your
Financial Institution is responsible for communicating your redemption request
to BFDS and for forwarding any necessary information and documentation to BFDS.
Redemptions will be effected at the net asset value per share of the Portfolio
next determined after receipt of the redemption request in good order. The Fund
must receive your properly completed purchase documentation before you may sell
shares.
SELLING SHARES THROUGH YOUR FINANCIAL INSTITUTION. You may redeem your
shares through your Financial Institution. Your Financial Institution is
responsible for delivering your redemption request and all necessary
documentation to the Trust, and may charge you for its services (including, for
example, charges relating to the wiring of funds). Your Financial Institution
may accept your redemption instructions by telephone. Consult your Financial
Institution.
SELLING SHARES BY CHECK. If you would like the ability to write checks
against your investment in a Portfolio, you should provide the necessary
documentation to your Financial Institution and complete the signature card
which you may obtain by calling your Financial Institution. When a Portfolio
receives your properly completed documentation and card, you will receive
checks drawn on your Portfolio account and payable through the Portfolio's
designated bank. These checks may be made payable to the order of any person.
You will continue to earn dividends until the check clears. When a check is
presented for payment, a sufficient number of full and fractional shares of the
Portfolio in your account will be redeemed to cover the amount of the check.
Your Financial Institution may limit the availability of the check-writing
privilege or assess certain fees in connection with the checkwriting privilege.
Shareholders using Trust checks are subject to the Trust's designated
bank's rules governing checking accounts. There is currently no charge to the
shareholder for the use of checks, although one may be imposed in the future.
Shareholders would be notified in advance of the imposition of any such charge.
(In addition, if you deplete your original check supply, there may be a charge
to order additional checks.) You should make sure that there are sufficient
shares in your account to cover the amount of the check drawn. If there is an
insufficient number of shares in the account, the check will be dishonored and
returned, and no shares will be redeemed. Because dividends declared on shares
held in your account and prior withdrawals may cause the value of your account
to change, it is impossible to determine in advance your account's total value.
Accordingly, you should not write a check for the entire value of your account
or close your account by writing a check. You may revoke check-writing
authorization by written notice to your Financial Institution, which will be
responsible for forwarding the notice to the Portfolio.
SELLING SHARES BY MAIL. You may also sell shares of a Portfolio by sending
a written withdrawal request to your Financial Institution. You must sign the
withdrawal request and include a stock power with signature(s) guaranteed by a
bank, broker/dealer, or certain other financial institutions.
A Portfolio generally sends you payment for your shares the business day
after your request is received in good order. Under unusual circumstances, a
Portfolio may suspend repurchases, or postpone payment for more than seven
days, as permitted by federal securities law.
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HOW TO EXCHANGE SHARES
You can exchange your shares in any Portfolio for Retail Shares of any
other Mentor Money Market Portfolio in the Trust at net asset value, except as
described below. If you request an exchange through your Financial Institution,
your Financial Institution will be responsible for forwarding the necessary
documentation to BFDS. Exchange Authorization Forms are available from your
Financial Institution. For federal income tax purposes, an exchange is treated
as a sale of shares and may result in a capital gain or loss. The Trust
reserves the right to change or suspend the exchange privilege at any time.
Shareholders would be notified of any change or suspension. Consult your
Financial Institution or Mentor Services Company before requesting an exchange.
FINANCIAL INSTITUTIONS
Financial Institutions provide varying arrangements for their clients with
respect to the purchase and redemption of Portfolio shares and the confirmation
thereof and may arrange with their clients for other investment or
administrative services. When you effect transactions with a Portfolio
(including among other things the purchase, redemption, or exchange of
Portfolio shares) through a Financial Institution, the Financial Institution,
and not the Portfolio, will be responsible for taking all steps, and furnishing
all necessary documentation, to effect such transactions. Financial
Institutions have the responsibility to deliver purchase and redemption
requests to a Portfolio promptly. Some Financial Institutions may establish
minimum investment requirements with respect to a Portfolio. They may also
establish and charge fees and other amounts to their clients for their
services. Certain privileges, such as the check writing privilege or
reinvestment options, may not be available through certain Financial
Institutions or they may be available only under certain conditions. If your
Financial Institution holds your investment in a Portfolio in its own name,
then your Financial Institution will be the shareholder of record in respect of
that investment; your ability to take advantage of any investment options or
services of the Portfolio will depend on whether, and to what extent, your
Financial Institution is willing to take advantage of them on your behalf.
FINANCIAL INSTITUTIONS, INCLUDING FIRST UNION CORP. ("FIRST UNION"), AN
AFFILIATE OF MENTOR ADVISORS, MAY CHARGE FEES TO OR IMPOSE RESTRICTIONS ON YOUR
SHAREHOLDER ACCOUNT. CONSULT YOUR FINANCIAL INSTITUTION FOR INFORMATION ABOUT
ANY FEES OR RESTRICTIONS OR FOR FURTHER INFORMATION CONCERNING ITS SERVICES.
MANAGEMENT
The Trustees are responsible for generally overseeing the conduct of the
Trust's business. Mentor Investment Advisors, LLC, located at 901 East Byrd
Street, Richmond, Virginia 23219, serves as investment adviser to each of the
Portfolios, providing investment advisory services and advising and assisting
the officers of the Trust in taking such steps as are necessary or appropriate
to carry out the decisions of the Trustees. Subject to such policies as the
Trustees may determine, Mentor Advisors furnishes a continuing investment
program for the Portfolios and makes investment decisions on their behalf.
Mentor Advisors has over $13 billion in assets under management and 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., which is in turn a wholly owned subsidiary of First
Union Corp. First Union is a leading financial services company with
approximately $234 billion in assets and $17 billion in total stockholders'
equity as of September 30, 1998. EVEREN Capital Corporation has 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.
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Each 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. For purposes of
determining the annual rate at which management fees are payable by the
Portfolios, a Portfolio's assets will be considered to include the assets of,
in the case of the Money Market Portfolio, Cash Resource Money Market Fund; in
the case of the U.S. Government Money Market Portfolio, Cash Resource U.S.
Government Money Market Fund; and in the case of the Tax-Exempt Money Market
Portfolio, Cash Resource Tax-Exempt Money Market Fund. Each of those Funds is
managed by Mentor Advisors and is a series of shares of Cash Resource Trust.
The Portfolios pay all expenses not assumed by Mentor Advisors, including
Trustees' fees, auditing, legal, custodial, investor servicing, and shareholder
reporting expenses, and payments under their Distribution Plans. General
expenses of the Trust will be charged to the assets of each Portfolio on a
basis that the Trustees deem fair and equitable, which may be based on the
relative assets of each Portfolio (and other series of shares of the Trust) or
the nature of the services performed and relative applicability to each
Portfolio. Expenses directly charged or attributable to a Portfolio will be
paid from the assets of that Portfolio.
Mentor Advisors places all orders for purchases and sales of the
investments of each Portfolio. In selecting broker-dealers, Mentor Advisors may
consider research and brokerage services furnished to it and its affiliates.
Subject to seeking the most favorable price and execution available, Mentor
Advisors may consider sales of shares of the Portfolios (and, if permitted by
law, of the other funds in the Mentor family) as a factor in the selection of
broker-dealers.
The Portfolios receive services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of the software to distinguish the Year 2000 from the
Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolios from this problem.
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 .02% of the Portfolio's
average daily net assets.
DISTRIBUTION SERVICES
Mentor Distributors, LLC ("Mentor Distributors"), 3435 Stelzer Road,
Columbus, Ohio 43219, is the distributor of the Portfolios' shares. Mentor
Distributors is a wholly owned subsidiary of BISYS Fund Services, Inc. Each
Portfolio has adopted a Distribution Plan (each, a "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 with respect to its Retail
Shares. The purpose of the Plans is to permit each of the Portfolios to
compensate Mentor Distributors for services provided and expenses incurred by
it in promoting the sale of Retail Shares of the Portfolio, reducing
redemptions, or maintaining or improving services provided to
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shareholders. The Plans provide for monthly payments by the Portfolios to
Mentor Distributors out of the Portfolios' assets attributable to the Retail
Shares, subject to the authority of the Trustees to reduce the amount of
payments or to suspend the Plans for such periods as they may determine. Any
material increase in amounts payable under a Plan would require shareholder
approval.
In order to compensate Financial Institutions for services provided in
connection with sales of Portfolio shares and the maintenance of shareholder
accounts (or, in the case of certain Financial Institutions which are banking
institutions, for certain administrative and shareholder services), Mentor
Distributors, Mentor Advisors, or their affiliates may make periodic payments
(from any amounts received under the Plans or from their other resources) to
any qualifying Financial Institution based on the average net asset value of
Retail Shares for which the Financial Institution is designated as the
financial institution of record. Such payments may be made at the annual rate
of between 0.15% and 0.40% in the case of the Money Market Portfolio and the
U.S. Government Money Market Portfolio, and between 0.15% and 0.33% in the case
of the Tax-Exempt Money Market Portfolio. These payments may be suspended or
modified at any time, and payments are subject to the continuation of each
Portfolio's Plan and of applicable agreements between Mentor Distributors and
the applicable Financial Institution. Financial Institutions receiving such
payments include First Union, an affiliate of Mentor Advisors.
HOW A PORTFOLIO'S PERFORMANCE IS CALCULATED
Yield and effective yield data of a Portfolio's Retail Shares may from
time to time be included in advertisements about the Portfolios. "Yield" is
calculated by dividing a Portfolio's annualized net investment income per
Retail Share during a recent seven-day period by the net asset value per share
on the last day of that period. "Effective yield" compounds that yield for a
year and is, for that reason, greater than a Portfolio's yield. "Tax-equivalent"
yield shows the affect on performance of the tax-exempt status of distributions
received from the Tax-Exempt Money Market Portfolio. It reflects the
approximate yield that a taxable investment must earn for shareholders at
stated income levels to produce an after-tax yield equivalent to the
Portfolio's tax-exempt yield. Quotations of yield for any 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.
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. All data is based on a
Portfolio's past investment results and does not predict future performance.
Investment performance, which will vary, is based on many factors, including
market conditions, the composition of a Portfolio's investments, a 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.
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GENERAL INFORMATION
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.
The Trust is an open-end, 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, and are currently divided into
twelve series of shares. Under the Agreement and Declaration of Trust, a
Portfolio's shares may be further divided, without shareholder approval, into
two or more classes of shares having such preferences or special or relative
rights and privileges as the Trustees may determine. Each Portfolio's shares
are currently divided into two classes, Retail Shares, which are offered by
this Prospectus, and Institutional Shares. Institutional Shares are not subject
to any 12b-1 fees, and may be subject to different expenses of other types.
Differences in expenses between the classes will affect performance. Contact
Mentor Services Company at 1-800-869-6042 for information concerning
Institutional Shares of a Portfolio and your eligibility to purchase those
shares. Each share has one vote, with fractional shares voting proportionally.
Shares of each Portfolio are freely transferable, are entitled to dividends as
declared by the Trustees, and, if a Portfolio were liquidated, would receive
the net assets of the Portfolio. The Trust may suspend the sale of shares of
any Portfolio at any time and may refuse any order to purchase shares. Although
the Trust is not required to hold annual meetings of its shareholders,
shareholders have the right to call a meeting to elect or remove Trustees, or
to take other actions as provided in the Agreement and Declaration of Trust.
Boston Financial Data Services, located at 2 Heritage Drive, North Quincy,
MA 02171, is the transfer agent and dividend-paying agent for the Trust. BFDS
engages at its own expense certain Financial Institutions, including affiliates
of First Union, to perform bookkeeping, data processing, and administrative
services pertaining to the maintenance of shareholder accounts. Investors
Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri, 64105
serves as the Portfolios' custodian.
If you own fewer shares of a Portfolio than a minimum amount set by the
Trustees, the Trust may choose to redeem your shares and pay you for them. You
will receive at least 30 days written notice before the Trust redeems your
shares, and you may purchase additional shares at any time to avoid a
redemption. The Trust may also redeem shares if you own shares of any Portfolio
or of the Trust above any maximum amount set by the Trustees. There is
presently no such minimum or maximum, but the Trustees may establish one at any
time, which could apply to both present and future shareholders.
The Trust may send a single copy of shareholder reports and communications
to an address where there is more than one registered shareholder with the same
last name, unless a shareholder at that address requests, by calling or writing
his Financial Institution or Mentor Services Company, that the Trust do
otherwise.
15
<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 FUNDS
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE
MK 1341
MENTOR FUNDS
MENTOR
MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
MENTOR TAX-EXEMPT
MONEY MARKET PORTFOLIO
-----------------------
PROSPECTUS
RETAIL SHARES
-----------------------
December 15, 1998
[MENTOR LOGO]
<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 FUNDS
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE
MK 1341
[MENTOR LOGO]
MENTOR FUNDS
MENTOR
MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
MENTOR TAX-EXEMPT
MONEY MARKET PORTFOLIO
-----------------------
PROSPECTUS
RETAIL SHARES
-----------------------
December 15, 1998
[EVEREN SECURITIES LOGO]
<PAGE>
P R O S P E C T U S December 15, 1998
Institutional Shares
MENTOR FUNDS
MENTOR MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO
The Mentor Money Market Portfolios are designed for investors who seek
current income consistent with preservation of capital and maintenance of
liquidity. The Portfolios are diversified investment portfolios of Mentor Funds
(the "Trust").
An investment in a Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that a Portfolio will be able to maintain
a stable net asset value of $1.00 per share.
This Prospectus explains concisely what you should know before investing
in a Portfolio. Please read it carefully and keep it for future reference. You
can find more detailed information about the Portfolios in a December 15, 1998
Statement of Additional Information, as amended from time to time. For a free
copy of the Statement, call Mentor Services Company, Inc. at 1-800-869-6042.
The Statement has been filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference.
----------------
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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
Finanical Highlights ........................... 4
Investment Objectives and Policies ............. 5
How The Portfolios Value Their Shares .......... 10
Purchase Of Shares ............................. 11
Redemption Of Shares ........................... 11
How Distributions Are Made ..................... 12
Management ..................................... 13
General Information ............................ 15
</TABLE>
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. The following table summarizes your maximum transaction costs from
an investment in Institutional Shares of each of the Portfolios and expenses
each Portfolio expects to incur in respect of its Institutional Shares during
the current fiscal year (expenses shown for the Tax-Exempt Money Market
Portfolio reflect the expenses the Portfolio expects to incur in its first
fiscal year). The Examples show the cumulative expenses attributable to a
hypothetical $1,000 investment in each Portfolio over specified periods. The
information presented below does not reflect any fees or charges imposed by
Financial Institutions through which you may invest in the Portfolios.
<TABLE>
<CAPTION>
MENTOR MENTOR
MENTOR U.S. GOVERNMENT TAX-EXEMPT
MONEY MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ----------------- -------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None None
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* ...................... .18% .18% .21%
12b-1 Fees ............................ None None None
Other Expenses ........................ .15% .15% .15%
---- ----- -----
Total Fund Operating Expenses ......... .33% .33% .36%
---- ----- -----
</TABLE>
* For purposes of determining the annual rate at which Management Fees are
payable by the Portfolios, a Portfolio's assets will be considered to
include the assets of certain Funds offered by Cash Resource Trust and
managed by Mentor Investment Advisors, LLC. See "Management," below.
** Expenses are estimated based on the expenses the Portfolios expects to incur.
EXAMPLES
Your investment of $1,000 in a Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Mentor Money Market Portfolio .......... $3 $11 18 41
Mentor U.S. Government
Money Market Portfolio ................ $3 $11 18 41
Mentor Tax-Exempt
Money Market Portfolio ................ 4 12 -- --
</TABLE>
The table is provided to help you understand the expenses of investing in
each of the Portfolios and your share of the operating expenses which each of
the Portfolios expects to incur. The Examples do not represent past or future
expense levels. Actual returns and expenses may be greater or less than those
shown. Federal regulations require the Examples to assume a 5% annual return,
but actual annual return will vary.
3
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE 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 included 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.
<TABLE>
<CAPTION>
MENTOR MONEY MENTOR U.S. GOVERNMENT
MARKET PORTFOLIO MONEY MARKET PORTFOLIO
------------------ ----------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED
9/30/98 (B) 9/30/98 9/30/97 (C)
------------------ ------------- ------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ......................... $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations ............................
Net investment income ....................................... 0.05 0.05 0.01
-------- -------- --------
Total from investment operations ............................ 0.05 0.05 0.01
-------- -------- --------
Less distributions ...........................................
From net investment income .................................. (0.05) (0.05) (0.01)
--------- --------- ---------
Total distributions ......................................... (0.05) (0.05) (0.01)
--------- --------- ---------
Net asset value, end of period ............................... $ 1.00 $ 1.00 $ 1.00
========= ========= =========
TOTAL RETURN (D) 4.74% 5.42% 1.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ..................... $ 40,970 $ 106,273 $ 61,805
Ratio of expenses to average net assets ...................... 0.33%(a) 0.33% 0.33%(a)
Ratio of net investment income to average net assets ......... 5.35%(a) 5.27% 5.26%(a)
</TABLE>
- ----------
(a) Annualized.
(b) For the period from November 19, 1997 (commencement of operations) to
September 30, 1998.
(c) For the period from June 27, 1997 (commencement of operations) to September
30, 1997.
(d) Not annualized.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of Mentor Money Market Portfolio (the "Money
Market Portfolio") and Mentor U.S. Government Money Market Portfolio (the "U.S.
Government Money Market Portfolio") are to seek as high a rate of current income
as Mentor Investment Advisors, LLC, the Portfolios' investment advisor ("Mentor
Advisors"), believes is consistent with preservation of capital and maintenance
of liquidity. The investment objective of Mentor Tax-Exempt Money Market
Portfolio (the "Tax-Exempt Money Market Portfolio") is to seek as high a rate
of current income exempt from federal income tax as Mentor Advisors believes is
consistent with preservation of capital and maintenance of liquidity. The
Portfolios seek their objectives through the investment policies described
below. Because each of the Portfolios is a money market fund, it will only
invest in the types of investments described below under "Selection of
Investments."
The investment objective and policies of each Portfolio may, unless
otherwise specifically stated, be changed by the Trustees without shareholder
approval. None of the Portfolios is intended to be a complete investment
program, and there is no assurance a Portfolio will achieve its objective.
MENTOR MONEY MARKET PORTFOLIO
The Money Market 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.
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.
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The U.S. Government Money Market 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. Certain of these 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.
5
<PAGE>
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.
MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO
The Tax-Exempt Portfolio invests, as a fundamental policy, at least 80% of
its net assets in Tax-Exempt Securitites (as described below). The Portfolio
may invest the remainder of its assets in investments of any kind in which any
of the other Portfolios may invest.
The Portfolio will invest in the following types of Tax-Exempt Securities:
(i) municipal notes; (ii) municipal bonds; (iii) municipal securities backed by
the U.S. government or any of its agencies or instrumentalities; (iv)
tax-exempt commercial paper; (v) participation interests in any of the
foregoing; and (vi) unrated securities or new types of tax-exempt instruments
which become available in the future if Mentor Advisors determines they meet
the quality standards discussed below (collectively, "Tax-Exempt Securities").
(In the case of any such new types of tax-exempt instruments, this Prospectus
would be revised as may be appropriate to describe such instruments.) In
connection with the purchase of Tax-Exempt Securities, the Portfolio may
acquire stand-by commitments, which give the Portfolio the right to resell the
security to the dealer at a specified price. Stand-by commitments may provide
additional liquidity for the fund but are subject to the risk that the dealer
may fail to meet its obligations. The Portfolio does not generally expect to
pay additional consideration for stand-by commitments or to assign any value to
them.
Tax-Exempt Securities are debt obligations issued by a state (including
the District of Columbia), a U.S. territory or possession, or any of their
political subdivisions, the interest from which is, in the opinion of bond
counsel, exempt from federal income tax. These securities are issued to obtain
funds for various public purposes, such as the construction of public
facilities, the payment of general operating expenses, or the refunding of
outstanding debts. They may also be issued to finance various private
activities, including the lending of funds to public or private institutions
for the construction of housing, educational, or medical facilitites and may
also include certain types of private activity and industrial development bonds
issued by public authorities to finance privately owned or operated facilities.
Short-term Tax-Exempt Securities are generally issued as interim financing in
anticipation of tax collections, revenue receipts, or bond sales to finance
various public puposes.
The two principal classifications of Tax-Exempt Securities are general
obligation and special obligation (or revenue) securities. General obligation
securitites involve the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The
characteristics and methods of enforcement of general obligation securities
vary according to the law applicable to the particular issuer. Special
obligation securities are payable only from the revenues derived from a
particular facility or class of facilities, or a specific revenue source and
generally are not payable from the unrestricted revenues of the issuer.
Industrial development and private activity bonds are in most cases special
obligation securities, the credit quality of which is directly related to the
private user of a facility.
For purposes of the Portfolio's policy to invest at least 80% of its net
assets in Tax-Exempt Securities, the Portfolio will not treat obligations as
Tax-Exempt Securitites for purposes of measuring compliance with such
6
<PAGE>
policy if they would give rise to interest income subject to federal
alternative minimum tax for individuals. To the extent that the Portfolio
invests in these securities, individual shareholders of the Portfolio,
depending on their own tax status, may be subject to federal alternative
minimum tax on the part of the Portfolio's distributions derived from these
securities. In addition an investment in the Portfolio may cause corporate
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax because tax-exempt income is generally included in the
alternative minimum taxable income of corporations.
The ability of governmental issuers to meet their obligations will depend
primarily on the availability of tax and other revenues to those governments
and on thier fiscal conditions generally. The amounts of tax and other revenues
available to governmental issuers may be affected from time to time by
economic, political, and demographic conditions affecting a particular state.
In addition, constitutional or statutory restrictions may limit a government's
power to raise revenues or increase taxes. The avalability of federal, state,
and local aid to issuers of such securities may also affect their ability to
meet their obligations. Payments of principal and interest on special
obligation securities will depend on the economic condition of the facility or
specific revenue source from whose revenues the payments will be made, which in
turn could be affected by economic, political, and demographic conditions
affecting a particular state. Any reduction in the actual or perceived ability
of an issuer of Tax-Exempt Securities in a particular state to meet its
obligations (including a reduction in the rating of its outstanding securities)
would likely affect adversely the market value and marketability of its
obligations and could adversely affect the values of Tax-Exempt Securities
issued by others in that state as well.
The Portfolio may invest without limit in high quality taxable money
market instruments of any type at any time when Mentor Advisors believes that
market conditions make pursuing the Portfolio's basic investment strategy
inconsistent with the best interests of shareholders. It is impossible to
predict when, or for how long, the Portfolio will use these alternative
defensive strategies.
SELECTION OF INVESTMENTS
Each 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 believe present minimal credit risk.
"High-quality securities," in the case of the Money Market Portfolio, 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). Each
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. Each of the Portfolios 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.
A Portfolio may invest in variable or floating-rate securities which bear
interest at rates subject to periodic adjustment or which provide for periodic
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. Some of these securities may be supported by the right of the
holders under certain circumstances to demand that a specified bank,
broker-dealer, or other
7
<PAGE>
financial institution purchase the securities from the holders at par, or
otherwise to demand on short notice, payment of unpaid principal and interest
on the securities. Such securities are subject to the risk that the financial
institution in question may for any reason be unwilling or unable to meet its
obligation in respect of the securities, which would likely have an adverse
effect on the value of the securities.
Considerations of liquidity and preservation of capital mean that a
Portfolio may not necessarily invest in money market instruments paying the
highest available yield at a particular time. Consistent with its investment
objective, a 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. Each Portfolio may
also invest to take advantage of what Mentor Advisors believes to be temporary
disparities in the 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 Portfolios, may result in frequent changes in the investments
held by the Portfolios. The Portfolios will not usually pay brokerage
commissions in connection with the purchase or sale of portfolio securities.
The Portfolios' investments will be affected by general changes in
interest rates resulting in increases or decreases in the values of the
obligations held by the Portfolios. The values of a 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.
DIVERSIFICATION AND CONCENTRATION POLICIES
Each Portfolio is a "diversified" investment company under the Investment
Company Act of 1940. This means that each Portfolio may invest up to 25% of its
total assets in the securities of one or more issuers, and is limited with
respect to the remaining portion of its assets to investing 5% or less of its
total assets in the securities of any one issuer (other than the U.S.
Government). However, under the current rules governing money market funds, the
Portfolios generally may not invest more than 5% of their assets in any one
issuer (other than the U.S. Government).
The Money Market 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 values of its portfolio securities may be especially affected
by factors pertaining to the issuers of such obligations.
The Tax-Exempt Money Market Portfolio will not invest more than 25% of its
total assets in any one industry. Governmental issuers of Tax-Exempt Securities
are not considered part of any "industry." However, Securities backed only by
the assets and revenues of nongovernmental users may for this purpose be deemed
to be issued by such nongovernmental users, and the 25% limitation would apply
to such obligations.
It is nonetheless possible that the Portfolio may invest more than 25% of
its assets in a broader segment of the Tax-Exempt Securities market, such as
revenue obligations of hospitals and other health care facilities, housing
agency revenue obligations, or airport revenue obligations. This would be the
case only if Mentor Advisors determined that the yields available from
obligations in a particular segment of the market justified 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
8
<PAGE>
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 Tax-Exempt Securities in such a market
segment. The Portfolio reserves the right to invest more than 25% of its assets
in industrial development bonds and private activity bonds or notes.
The Portfolio also reserves the right to invest more than 25% of its
assets in securities relating to any one or more states (including the District
of Columbia), U.S. territories or possessions, or any of their political
subdivisions. As a result of such an investment, the performance of the
Portfolio may be especially affected by factors pertaining to the economy of
the relevant state and other factors specifically affecting the ability of
issuers of such securities to meet their obligations. As a result, the value of
the Portfolio's shares may fluctuate more widely than the value of shares of a
fund investing in securities relating to a greater number of different states.
OTHER INVESTMENT PRACTICES
A Portfolio may also engage to a limited extent in the following
investment practices, each of which involves certain special risks. The
Statement of Additional Information contains more detailed information about
these practices.
FOREIGN INVESTMENTS. The Money Market Portfolio may invest in obligations
of foreign issuers and in bank certificates of deposit and bankers' acceptances
payable in U.S. dollars and issued by foreign banks (including U.S. branches of
foreign banks) or by foreign branches of U.S. banks. These investments subject
the Portfolio to investment risks different from those associated with domestic
investments. Such risks include adverse political and economic developments in
foreign countries, the imposition of withholding taxes on interest income,
seizure or nationalization of foreign deposits, or the adoption of other
governmental restrictions which may adversely affect the payment of principal
and interest on such obligations. Legal remedies available to investors in
certain foreign countries may be more limited than those available with respect
to investments in the U.S. or in other foreign countries. 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, foreign securities may be less liquid than U.S.
securities, and foreign accounting and disclosure standards may differ from
U.S. standards. Special tax considerations apply to foreign investments.
REPURCHASE AGREEMENTS. Under a repurchase agreement, a Portfolio purchases
a debt instrument for a relatively short period (usually not more than one
week), which the seller agrees to repurchase at a fixed time and price,
representing the Portfolio's cost plus interest. A Portfolio will enter into
repurchase agreements only with commercial banks and with registered
broker-dealers who are members of a national securities exchange or market
makers in government securities, and only if the debt instrument subject to the
repurchase agreement is a U.S. Government security. Although Mentor Advisors
will monitor repurchase agreement transactions to ensure that they will be
fully collateralized at all times, a Portfolio bears a risk of loss if the
other party defaults on its obligation and the Portfolio is delayed or
prevented from exercising its rights to dispose of the collateral. If the other
party should become involved in bankruptcy or insolvency proceedings, it is
possible that a Portfolio may be treated as an unsecured creditor and required
to return the collateral to the other party's estate.
SECURITIES LENDING. A Portfolio may lend portfolio securities to
broker-dealers. These transactions must be fully collateralized at all times
with cash or short-term debt obligations, but involve some risk to a Portfolio
if the other party should default on its obligation and the Portfolio is
delayed or prevented from exercising its
9
<PAGE>
rights in respect of the collateral. Any investment of collateral by a
Portfolio would be made in accordance with the Portfolio's investment objective
and policies described above.
TAX INFORMATION
FEDERAL TAXES. 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 income taxes
on income (and gains, if any) it distributes to shareholders. Each Portfolio
will distribute substantially all of its net ordinary income (and net capital
gains, if any) on a current basis. Distributions (other than exempt interest
dividends) will be taxable to you regardless of whether you elect to receive
them in cash or to reinvest them in additional shares.
Dividends paid by the Tax-Exempt Money Market Portfolio that are derived
from exempt-interest income (known as "exempt-interest dividends") and that are
designated as such may be treated by the Portfolio's shareholders as items of
interest excludable from their federal gross income. (Shareholders should
consult their own tax adviser with respect to whether exempt-interest dividends
would be excludable from gross income if the shareholder were treated as a
"substantial user" of facilities financed by an obligation held by the
Portfolio or a "related person" to such a user under the Internal Revenue
Code.) If a shareholder receives an exempt-interest dividend with respect to
any share held for six months or less, any loss on the sale or exchange of that
share will be disallowed to the extent of the amount of the exempt-interest
dividend. To the extent dividends paid to shareholders are derived from taxable
income (for example, from interest on certificates of deposit) or from gains,
such dividends will be subject to federal income tax, whether they are paid in
the form of cash or additional shares.
If the Tax-Exempt Money Market Portfolio holds certain "private activity
bonds" ("industrial development bonds" under prior law), dividends derived from
interest on such obligations will be classified as an item of tax preference
which could subject certain shareholders to alternative minimum tax liability.
Corporate shareholders must also take all exempt-interest dividends into
account in determining "adjusted current earnings" for purposes of calculating
their alternative minimum tax liability.
Shareholders receiving Social Security benefits or Railroad Retirement Act
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits. Early in each year the
Tax-Exempt Money Market Portfolio will notify you of the amount and tax status
of distributions paid to you by the Portfolio for the preceding year.
GENERAL. The foregoing is a summary of certain federal income tax
consequences of investing in the Portfolios. You should consult your tax
adviser to determine the precise effect of an investment in each Portfolio on
your particular tax situation.
HOW THE PORTFOLIOS VALUE THEIR SHARES
Each 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. A
Portfolio's investments are valued at amortized cost in accordance with
Securities and Exchange Commission Rule 2a-7. A Portfolio will not normally
have unrealized gains or losses so long as it values its investments by the
amortized cost method.
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<PAGE>
PURCHASE OF SHARES
The Portfolios offer their shares continuously at a price of $1.00 per
share. Because the Portfolios seek 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, 3435 Stelzer Road, Columbus, Ohio 43219, serves
as distributor of the Portfolios' shares.
An investor may make an initial purchase of shares in the Portfolios by
submitting completed application materials along with a purchase order, and by
making payment to Mentor Services Company 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 Portfolios reserve the right at any time
to change the initial and subsequent investment minimums required of investors.
Shares of the Portfolios 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 Portfolios 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 Portfolios.
Securities accepted by Mentor Advisors in exchange for Portfolios shares will
be valued in the same manner as the Portfolios' assets as of the time of the
Portfolios' 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 Portfolios and must be delivered to the Portfolios 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 Services Company 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 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. Dealers may not use sales of Portfolios 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 and Mentor Distributors reserve the right to
reject any particular investment.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of its shares in a Portfolio
any day the New York Stock Exchange is open by sending a signed letter of
instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to the Portfolio c/o Mentor Funds, P.O.
Box 1357, Richmond,
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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. 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.
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 Portfolios reserve 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
Portfolios may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law. In addition, the Portfolios
reserve 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 Portfolios' 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
A 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 a 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.
A 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 a Portfolio are accepted at or before
12:00 noon on any day will receive the dividend declared by a Portfolio for
that day; shareholders who purchase shares after 12:00 noon will
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<PAGE>
begin earning dividends on the next business day after the Portfolio accepts
their order. A Portfolio's net income for Saturdays, Sundays, and holidays is
declared as a dividend on the preceding business day. Dividends for any
calendar month will be paid on the last day of that month (or, if that day is
not a business day, on the next preceding business day), except that a
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 a Portfolio is declared as a dividend each time it is
determined, the net asset value per share of a 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.
MANAGEMENT
The Trustees are responsible for generally overseeing the conduct of the
Trust's business. Mentor Investment Advisors, LLC, located at 901 East Byrd
Street, Richmond, Virginia 23219, serves as investment adviser to each of the
Portfolios, providing investment advisory services and advising and assisting
the officers of the Trust in taking such steps as are necessary or appropriate
to carry out the decisions of the Trustees. Subject to such policies as the
Trustees may determine, Mentor Advisors furnishes a continuing investment
program for the Portfolios and makes investment decisions on their behalf.
Mentor Advisors has over $13 billion in assets under management and 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., which is in turn a wholly owned subsidiary of First
Union Corp. First Union is a leading financial services company with
approximately $234 billion in assets and $17 billion in total stockholders'
equity as of September 30, 1998. 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.
Each 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. For purposes of
determining the annual rate at which management fees are payable by the
Portfolios, a Portfolio's assets will be considered to include the assets of,
in the case of the Money Market Portfolio, Cash Resource Money Market Fund; in
the case of the U.S. Government Money Market Portfolio, Cash Resource U.S.
Government Money Market Fund; and in the case of the Tax-Exempt Money Market
Portfolio, Cash Resource Tax-Exempt Money Market Fund. Each of those Funds is
managed by Mentor Advisors and is a series of shares of Cash Resource Trust.
The Portfolios pay all expenses not assumed by Mentor Advisors, including
Trustees' fees, auditing, legal, custodial, investor servicing, and shareholder
reporting expenses, and payments under their Distribution Plans. General
expenses of the Trust will be charged to the assets of each Portfolio on a
basis that the Trustees deem fair and equitable, which may be based on the
relative assets of each Portfolio (and other series of shares of the
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Trust) or the nature of the services performed and relative applicability to
each Portfolio. Expenses directly charged or attributable to a Portfolio will
be paid from the assets of that Portfolio.
Mentor Advisors places all orders for purchases and sales of the
investments of each Portfolio. In selecting broker-dealers, Mentor Advisors may
consider research and brokerage services furnished to it and its affiliates.
Subject to seeking the most favorable price and execution available, Mentor
Advisors may consider sales of shares of the Portfolios (and, if permitted by
law, of the other funds in the Mentor family) as a factor in the selection of
broker-dealers.
The Portfolios receive services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of the software to distinguish the Year 2000 from the
Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolios from this problem.
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 .02% of the Portfolio's
average daily net assets.
HOW A PORTFOLIO'S PERFORMANCE IS CALCULATED
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.
Yield and effective yield data of a Portfolio's Retail Shares may from
time to time be included in advertisements about the Portfolios. "Yield" is
calculated by dividing a Portfolio's annualized net investment income per
Retail Share during a recent seven-day period by the net asset value per share
on the last day of that period. "Effective yield" compounds that yield for a
year and is, for that reason, greater than a Portfolio's yield. "Tax-equivalent"
yield shows the affect on performance of the tax-exempt status of distributions
received from the Tax-Exempt Money Market Portfolio. It reflects the
approximate yield that a taxable investment must earn for shareholders at
stated income levels to produce an after-tax yield equivalent to the
Portfolio's tax-exempt yield. Quotations of yield for any 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.
All data is based on a Portfolio's past investment results and does not
predict future performance. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of a Portfolio's
investments, a 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.
14
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GENERAL INFORMATION
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, 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, and are currently divided into
twelve series of shares. Under the Declaration of Trust, a Portfolio's shares
may be further divided, without shareholder approval, into two or more classes
of shares having such preferences or special or relative rights and privileges
as the Trustees may determine. Each Portfolio's shares are currently divided
into two classes, Institutional Shares, which are offered by this Prospectus,
and Retail Shares. Retail Shares are subject to Rule 12b-1 fees and to certain
expenses of other types. Differences in expenses between the classes will
affect performance. Contact Mentor Services Company at 1-800-869-6042 for
information concerning Retail Shares of a Portfolio and your eligibility to
purchase those shares. Each share has one vote, with fractional shares voting
proportionally. Shares of each Portfolio are freely transferable, are entitled
to dividends as declared by the Trustees, and, if a Portfolio were liquidated,
would receive the net assets of the Portfolio. The Trust may suspend the sale
of shares of any Portfolio at any time and may refuse any order to purchase
shares. Although the Trust is not required to hold annual meetings of its
shareholders, shareholders have the right to call a meeting to elect or remove
Trustees, or to take other actions as provided in the Declaration of Trust.
Boston Financial Data Services, located at 2 Heritage Drive, North Quincy,
MA 02171, is the transfer agent and dividend-paying agent for the Trust. BFDS
engages at its own expense certain Financial Institutions, including affiliates
of First Union, to perform bookkeeping, data processing, and administrative
services pertaining to the maintenance of shareholder accounts. Investors
Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri 64105,
serves as the Portfolios' custodian.
If you own fewer shares of a Portfolio than a minimum amount set by the
Trustees, the Trust may choose to redeem your shares and pay you for them. You
will receive at least 30 days written notice before the Trust redeems your
shares, and you may purchase additional shares at any time to avoid a
redemption. The Trust may also redeem shares if you own shares of any Portfolio
or of the Trust above any maximum amount set by the Trustees. There is
presently no such minimum or maximum, but the Trustees may establish one at any
time, which could apply to both present and future shareholders.
The Trust may send a single copy of shareholder reports and communications
to an address where there is more than one registered shareholder with the same
last name, unless a shareholder at that address requests, by calling or writing
his Financial Institution or Mentor Services Company, that the Trust do
otherwise.
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<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 FUNDS
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE
MK 1341
MENTOR FUNDS
MENTOR
MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
MENTOR TAX-EXEMPT
MONEY MARKET PORTFOLIO
---------------------------------
PROSPECTUS
INSTITUTIONAL SHARES
---------------------------------
December 15, 1998
[MENTOR LOGO]
<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 FUNDS
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 MENTOR DISTRIBUTORS, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE
MK 1341
[MENTOR LOGO]
MENTOR FUNDS
MENTOR
MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
MENTOR TAX-EXEMPT
MONEY MARKET PORTFOLIO
---------------------------------
PROSPECTUS
INSTITUTIONAL SHARES
---------------------------------
December 15, 1998
[EVEREN SECURITIES LOGO]
<PAGE>
MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
(MENTOR GROWTH PORTFOLIO, MENTOR PERPETUAL GLOBAL PORTFOLIO,
MENTOR CAPITAL GROWTH PORTFOLIO, MENTOR BALANCED PORTFOLIO,
MENTOR INCOME AND GROWTH PORTFOLIO, MENTOR MUNICIPAL INCOME PORTFOLIO,
MENTOR QUALITY INCOME PORTFOLIO, MENTOR SHORT-DURATION INCOME PORTFOLIO,
MENTOR HIGH INCOME PORTFOLIO)
December 15, 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
Services Company, Inc., at 901 East Byrd Street, Richmond, Virginia 23219, or
by calling Mentor Services Company at 1-800-869-6042.
This Statement is in 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 Short-Duration Income Portfolio, and Mentor Balanced
Portfolio. Part III contains information with respect to Mentor High Income
Portfolio. Part IV provides general information with respect to the Trust and
all of the Portfolios.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction ............................................................................. ii
PART I ................................................................................... 1
Investment Restrictions ................................................................ 1
PART II .................................................................................. 4
Investment Restrictions ................................................................ 4
PART III ................................................................................. 7
Investment Restrictions ................................................................ 7
PART IV .................................................................................. 8
Certain Investment Techniques .......................................................... 8
Management of the Trust ................................................................ 27
Principal Holders of Securities ........................................................ 30
Investment Advisory Services ........................................................... 31
Administrative Services ................................................................ 33
Shareholder Servicing Plan ............................................................. 35
Brokerage Transactions ................................................................. 36
How to Buy Shares ...................................................................... 39
Distribution ........................................................................... 39
Determining Net Asset Value ............................................................ 40
Redemptions in Kind .................................................................... 42
Taxes .................................................................................. 42
Independent Accountants ................................................................ 46
Custodian .............................................................................. 46
Performance Information ................................................................ 47
Equivalent Yields: Tax-exempt Versus Taxable Securities for the Municipal Income 49
Portfolio
Mentor Municipal Income Portfolio -- Federal Taxable Equivalent Yield Table-1998 Rates . 50
Members of Investment Management Teams ................................................. 51
Performance Comparisons ................................................................ 54
Shareholder Liability .................................................................. 59
Financial Statements ................................................................... 59
</TABLE>
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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 nine
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"); and Mentor High Income Portfolio ("the High Income Portfolio").
Each Portfolio has three classes of shares of beneficial interest, Class A
shares, Class B shares, and Class Y (Institutional) shares.
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. (not applicable to the Quality Income Portfolio) 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.
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. (not applicable to the Quality Income Portfolio) 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 assets. Margin deposits for the purchase and sale of futures
contracts and related options are not deemed to be a pledge.
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
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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 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.
11. 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.
12. 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).
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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 Portfolio's net assets (taken at
current value) would be invested in securities described in (a), (b) and (c)
above.
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PART II
The following information relates to each of the Balanced, Growth, and
Short-Duration Income 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 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) 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 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).
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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 Portfolio's net assets (taken at current value)
would be invested in securities described in (a), (b) and (c) above.
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PART III
The following information relates to the High Income Portfolio.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to the Portfolio without approval by the holders of a majority of the
outstanding shares of the Portfolio, the 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.
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, except as contemplated by restriction 6
below.
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 more than 33 1/3% of the value of its total assets less all
liabilities and indebtedness (other than such borrowings)
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 policies, by entering
into repurchase agreements, or by lending its portfolio securities.
In addition, it is contrary to the current policy of the 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) securities
restricted as to resale (excluding securities determined by the 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 15% of the Portfolio's net assets (taken
at current value) would then be invested in securities described in (a), (b),
and (c).
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PART IV
All percentage limitations on investments (including those described in
Parts I, II, and III, above) will apply at the time of investment and shall not
be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment. Except for the investment
restrictions listed above as fundamental or to the extent designated as such in
a Prospectus with respect to a Portfolio, the other investment policies
described in this Statement or in a Prospectus are not fundamental and may be
changed by approval of the Trustees. As a matter of policy, the Trustees would
not materially change a Portfolio's investment 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 the
Portfolio means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, and (2) 67% or more of the shares present
at a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
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. Certain information with
respect to certain Portfolios is given for partial fiscal years. See "Financial
Highlights" in the Trust's prospectuses for information concerning the
commencement of operations of each of the Portfolios.
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
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difference between the Portfolio's cost for the underlying security and the
proceeds of sale (exercise price minus commissions) plus the amount of the
premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
COVERED PUT OPTIONS. A Portfolio may write covered put options in order to
enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a
potential capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may
be partially or entirely offset by the premium received on the terminated
option.
PURCHASING PUT AND CALL OPTIONS. A Portfolio may also purchase put options
to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs that the Portfolio must pay. These costs will reduce any profit the
Portfolio might have realized had it sold the underlying security instead of
buying the put option.
A Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. These costs will reduce any profit the
Portfolio might have realized had it bought the underlying security at the time
it purchased the call option.
A Portfolio may also purchase put and sell options to enhance its current
return.
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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 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 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").
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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 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.
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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 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.
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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".
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
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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 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
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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 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
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in bankruptcy or insolvency proceedings, a Portfolio may incur delay and costs
in selling the underlying security or may suffer a loss of principal and
interest if a Portfolio is treated as an unsecured creditor and required to
return the underlying collateral to the seller's estate.
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.
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
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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 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.
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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 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
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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.
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,
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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 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 feefor 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 discount from their
face or par value and are subject to
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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 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
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<PAGE>
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.
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.
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<PAGE>
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.
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
23
<PAGE>
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 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.
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<PAGE>
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.
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 "D-mark"), 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.
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"),
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<PAGE>
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.
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<PAGE>
MANAGEMENT OF THE TRUST
The following table provides biographical information with respect to each
Trustee and officer of the Trust. Each Trustee who is an "interested person" of
the Trust, as defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- -------------- ---------------------------------------------------------------
<S> <C> <C>
Daniel J. Ludeman* Chairman Chairman and Chief Executive Officer Mentor Investment
c/o Mentor Funds and Trustee Group, Inc.; Managing Director of Wheat First Butcher
901 E. Byrd Street Singer, Inc. Director, Wheat, First Securities, Inc.; Chairman
Richmond, VA 23219 and Director Mentor Income Fund, Inc., and America's
Utility Fund, Inc.; Chairman and Trustee, Cash Resource
Trust, Mentor Variable Investment Portfolios and Mentor
Institutional Trust.
Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corporation; Trustee, Cash Resource
P.O. Box 18156 Trust, Mentor Variable Investment Portfolios and Mentor
Richmond, Virginia 23226 Institutional Trust; Director, Mentor Income Fund, Inc. and
America's Utility Fund, Inc.; formerly, Chairman and Chief
Executive Officer, Hamilton Beach/Proctor-Silex, Inc.
Thomas F. Keller Trustee R.J. Reynolds Industries Professor of Business Adminis-
Fuqua School of Business tration and Former Dean of Fuqua School of Business, Duke
Duke University University; Director of LADD Furniture, Inc., Wendy's
Durham, NC 27706 International, Inc., American Business Products, Inc., Dimon,
Inc., and Biogen, Inc.; Director of Nations Balanced Target
Maturity Fund, Inc., Nations Government Income Term Trust
2003, Inc., Nations Government Income Term Trust 2004,
Inc., Hatteras Income Securities, Inc., Nations Institutional
Reserves, Nations Fund Trust, Nations Fund, Inc., Nations
Fund Portfolios, Inc., and Nations LifeGoal Funds, Inc.
Trustee, Cash Resource Trust, Mentor Variable Investment
Portfolios and Mentor Institutional Trust; Director, Mentor
Income Fund, Inc. and America's Utility Fund, Inc.
Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of Richmond;
University of Richmond Trustee, Cash Resource Trust, Mentor Variable Investment
Richmond, VA 23173 Portfolios and Mentor Institutional Trust; Director, Mentor
Income Fund, Inc. and America's Utility Fund, Inc.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company; Trustee, Cash Resource
Heilig-Meyers Company Trust, Mentor Variable Investment Portfolios and Mentor
2235 Staples Mill Road Institutional Trust; Director, Mentor Income Fund, Inc. and
Richmond, Virginia 23230 America's Utility Fund, Inc.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ---------------------- -------------- -------------------------------------------------------------
<S> <C> <C>
Peter J. Quinn, Jr.* Trustee Formerly, President, Mentor Distributors, Inc.; Managing
c/o Mentor Funds Director, Mentor Investment Group, LLC, and Wheat First
901 E. Byrd Street Butcher Singer, Inc.; formerly, Senior Vice President/
Richmond, VA 23219 Director of Mutual Funds, Wheat First Butcher Singer, Inc.;
Trustee, Cash Resource Trust, Mentor Variable Investment
Portfolios and Mentor Institutional Trust; Director, Mentor
Income Fund, Inc. and America's Utility Fund, Inc.
Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; formerly, Vice
Chancellor for Development and University Relations,
University of North Carolina at Chapel Hill.
Weston E. Edwards Trustee President, Weston Edwards & Associates; Trustee Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; Founder and
Chairman, The Housing Roundtable; formerly, President,
Smart Mortgage Access, Inc.
Jerry R. Barrentine Trustee President, J.R. Barretine & Associates; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; formerly, Executive
Vice President and Chief Financial Officer, Barclays/
American Mortgage Director Corporation; Managing Partner,
Barrentine Lott & Associates.
J. Garnett Nelson Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 Inc., America's Utility Fund, Inc., GE Investment Funds,
Inc., and Lawyers Title Corporation; Member, Investment
Advisory Committee, Virginia Retirement System; formerly,
Senior Vice President, The Life Insurance Company of
Virginia.
Paul F. Costello President Managing Director, Wheat First Butcher Singer, Inc. and
c/o Mentor Funds Mentor Investment Group, LLC; President, Cash Resource
901 E. Byrd Street Trust, Mentor Income Fund, Inc., Mentor Institutional Trust,
Richmond, VA 23219 Mentor Variable Investment Portfolios and America's Utility
Fund, Inc.; Director, Mentor Perpetual Advisors, LLC.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------- -------------- ------------------------------------------------------------
<S> <C> <C>
Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group, LLC;
c/o Mentor Funds Treasurer, Mentor Institutional Trust, Cash Resource Trust,
901 E. Byrd Street Mentor Variable Investment Portfolios, Mentor Income
Richmond, VA 23219 Fund, Inc.; America's Utility Fund, Inc.; formerly,
Treasurer and Comptroller, Ryland Capital Management, Inc.
Michael Wade Assistant Vice President, Mentor Investment Group, LLC Assistant
c/o Mentor Funds Treasurer Treasurer, Mentor Income Fund, Inc., Cash Resource Trust,
901 E. Byrd Street Mentor Institutional Trust, Mentor Variable Investment
Richmond, VA 23219 Portfolios and America's Utility Fund; formerly, Senior
Accountant, Wheat First Butcher Singer, Inc., Audit Senior,
BDO Seidman.
Geoffrey B. Sale Secretary Associate Vice President Mentor Investment Group, LLC;
c/o Mentor Funds Secretary, Cash Resource Trust, Mentor Institutional Trust,
901 E. Byrd Street Mentor Variable Investment Portfolios; Clerk, America's
Richmond, VA 23219 Utility Fund, Inc., Mentor Income Fund, Inc.
</TABLE>
The table below shows the fees paid to each Trustee by the Trust for the
1998 fiscal year and the fees paid to each Trustee by all funds in the Mentor
family (including the Trust) during the 1997 calendar year.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM ALL
FROM THE TRUST COMPLEX FUNDS (27 FUNDS)
(FISCAL YEAR END 1998) (CALENDAR YEAR 1998)
------------------------ ----------------------------
<S> <C> <C>
Daniel J. Ludeman ............... $ 0 $ 0
Arnold H. Dreyfuss .............. $5,808 $32,000
Thomas F. Keller ................ $4,859 $32,000
Louis W. Moelchert, Jr. ......... $5,606 $32,000
J. Garnett Nelson ............... $5,393 $40,000
Troy A. Peery, Jr. .............. $5,405 $32,000
Peter J. Quinn, Jr. ............. $ 0 $ 0
Jerry R. Barrentine ............. $5,660 $40,000
Weston E. Edwards ............... $5,479 $42,000
Arch T. Allen III ............... $5,399 $35,000
</TABLE>
- ----------
The Trustees do not receive pension or retirement benefits from the Trust.
The Declaration of Trust of the Trust provides that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its
29
<PAGE>
Shareholders by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of his or her duties. The Trust, at its expense, provides
liability insurance for the benefit of its Trustees and officers.
PRINCIPAL HOLDERS OF SECURITIES
As of November 2, 1998, the officers and Trustees of the Trust owned as a
group less than 1% of the outstanding shares of any class of the Balanced
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 the
Portfolios as of that date, except as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO HOLDER PERCENTAGE OWNERSHIP
- --------------------------------- ------------------------------- ---------------------
<S> <C> <C>
Short Duration-Income Portfolio Partnership Healthplan of Cal 7.60%
Class A Attn: Marion R. Schales CFO
421 Executive Ct North Ste #A
Suisun City, CA 94585-4019
Short Duration-Income Portfolio EVEREN Clearing Corp. 5.91%
Class A A/C 1902-3741
Calaveras County Water Dist
111 East Kilbourn Avenue
Milwaukee, WI 53202-6611
</TABLE>
30
<PAGE>
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as investment
adviser to each Portfolio other than the Global Portfolio. Van Kampen
Management, Inc. ("Van Kampen") serves as sub-adviser to the Municipal Income
Portfolio and the High 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.
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 which became a subsidiary
of Morgan Stanley Group, Inc.
Subject to the general oversight of the Trustees, each investment adviser
and/or sub-adviser 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
31
<PAGE>
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.
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. 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 (beginning
in 2000) 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).
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.
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<PAGE>
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 YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio ........................ $4,204,377 $3,238,498 $2,313,470
Capital Growth Portfolio ................ 2,153,467 1,063,903 728,536
Income and Growth Portfolio ............. 1,638,729 947,267 575,647
Global Portfolio ........................ 1,612,495 998,592 368,592
Quality Income Portfolio ................ 821,411 449,325 278,216
Municipal Income Portfolio .............. 557,332 370,232 344,784
Short-Duration Income Portfolio ......... 323,574 129,833 54,833
Balanced Portfolio ...................... 31,721 8,854 6,790
</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 YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Quality Income Portfolio ................ $204,530 $123,214 $217,329
Short-Duration Income Portfolio ......... 180,523 55,521 83,567
Balanced Portfolio ...................... -- 20,072 18,976
High Income Portfolio ................... 175,891 -- --
</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
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Income and Growth Portfolio ......... $ 575,028 $373,115 $236,071
Municipal Income Portfolio .......... 216,114 153,577 172,392
</TABLE>
ADMINISTRATIVE SERVICES
Mentor Investment Group, LLC serves as administrator to each of the
Portfolios pursuant to an Administration Agreement.
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
33
<PAGE>
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).
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
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio .................... $600,625 $462,643 $330,496
Capital Growth Portfolio ............ 269,183 132,988 91,067
Income and Growth Portfolio ......... 218,497 126,302 76,753
Global Portfolio .................... 153,750 92,753 33,508
Quality Income Portfolio ............ 174,343 95,423 82,591
Municipal Income Portfolio .......... 92,888 61,705 57,464
High Income Portfolio ............... 24,979 -- --
</TABLE>
The administrators waived administrative fees in the amounts and for the
periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Short-Duration Income Portfolio ......... $101,237 37,151 $27,680
Balanced Portfolio ...................... 8,127 -- --
</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
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio ........................ $26,735 17,457 23,289
Capital Growth Portfolio ................ 12,494 5,036 5,901
Income and Growth Portfolio ............. 10,079 4,851 5,210
Global Portfolio ........................ 6,902 3,672 2,752
Quality Income Portfolio ................ 7,964 3,617 5,005
Municipal Income Portfolio .............. 4,318 2,293 3,465
Short-Duration Income Portfolio ......... 5,085 1,443 1,842
</TABLE>
34
<PAGE>
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 of
each Portfolio. Pursuant to the Service Plan, financial institutions will enter
into shareholder service agreements 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 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 or affiliates, as applicable, and
will not be made from the assets of any of the Portfolios.
SHAREHOLDER SERVICES FEES
During fiscal year 1998, 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):
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- -------------
<S> <C> <C>
Growth Portfolio ......................... $255,596 $1,233,864
Capital Growth Portfolio ................. 283,728 389,229
Income and Growth Portfolio .............. 222,501 323,741
Global Portfolio ......................... 146,546 237,827
Quality Income Portfolio ................. 195,196 232,278
Municipal Income Portfolio ............... 108,151 124,069
Short-Duration Income Portfolio .......... 160,078 91,969
Balanced Portfolio ....................... 3,517 6,695
High Income Portfolio .................... 28,187 34,631
</TABLE>
35
<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, 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 sub-adviser, 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.
36
<PAGE>
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"), First Union
Brokerage Services ("FUBS"), 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, FUBS, 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, FUBS, 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, FUBS, and EVEREN in over-the-counter
securities in which Wheat, FUBS, or EVEREN makes a market.
Under rules adopted by the SEC, Wheat, FUBS, 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, FUBS, 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.
37
<PAGE>
BROKERAGE COMMISSIONS
The Portfolios paid brokerage commissions on brokerage transactions in the
following aggregate amounts for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio ........................ $2,620,649 $1,482,817 $1,864,300
Capital Growth Portfolio ................ 920,105 275,151 299,554
Income and Growth Portfolio ............. 183,991 302,628 146,323
Global Portfolio ........................ 1,272,077 838,045 359,217
Quality Income Portfolio ................ -- 900 24,990
Municipal Income Portfolio .............. 18,968 5,044 2,422
Short-Duration Income Portfolio ......... -- -- 1,560
Balanced Portfolio ...................... 12,356 4,752 7,385
</TABLE>
The following table shows brokerage commissions paid by each of the
Portfolios to Wheat for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio .................... $148,289 $101,434 $72,923
Capital Growth Portfolio ............ 104,188 29,226 54,642
Income and Growth Portfolio ......... 73,192 101,434 52,534
Balanced Portfolio .................. 193 50 --
</TABLE>
The following table shows brokerage commissions paid by each of the
Portfolios to EVEREN for the period indicated.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1998 1997
------------- ------------
<S> <C> <C>
Growth Portfolio ................. $20,738 $2,331
Capital Growth Portfolio ......... 63,266 9,793
Balanced Portfolio ............... 2,023 --
</TABLE>
The brokerage commissions paid to Wheat for fiscal year 1998 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> <C>
Growth Portfolio .................... 5.66% 5.19%
Capital Growth Portfolio ............ 11.32% 14.26%
Income and Growth Portfolio ......... 39.78% 29.39%
Balanced Portfolio .................. 1.56% 0.32%
</TABLE>
38
<PAGE>
The brokerage commissions paid to EVEREN for fiscal year 1998 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> <C>
Growth Portfolio ................. 0.79% 0.71%
Capital Growth Portfolio ......... 6.88% 6.29%
Balanced Portfolio ............... 16.37% 3.89%
</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 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 B
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
During fiscal year 1998, the Portfolios paid the following 12b-1 fees in
respect of Class B shares to Mentor Distributors as shown below:
<TABLE>
<S> <C>
Growth Portfolio ........................ $3,638,580
Capital Growth Portfolio ................ 1,227,717
Balanced Portfolio ...................... 30,319
Income and Growth Portfolio ............. 986,604
Global Portfolio ........................ 734,020
Quality Income Portfolio ................ 467,042
Municipal Income Portfolio .............. 257,381
Short-Duration Income Portfolio ......... 133,476
High Income Portfolio ................... 68,461
</TABLE>
During fiscal year 1998, 12b-1 fees of $29,451 of the number above were
waived in respect of Class B shares of the Balanced Portfolio.
39
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
During fiscal year 1998, Mentor Distributors received the following
contingent deferred sales charges with respect to Class B shares:
<TABLE>
<S> <C>
Growth Portfolio ........................ $500,690
Capital Growth Portfolio ................ 132,159
Income and Growth Portfolio ............. 163,091
Global Portfolio ........................ 179,805
Quality Income Portfolio ................ 137,341
Municipal Income Portfolio .............. 26,436
Short-Duration Income Portfolio ......... 90,668
High Income Portfolio ................... 17,592
</TABLE>
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 YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio ........................ $231,016 $116,796 38,398
Capital Growth Portfolio ................ 320,353 63,786 $10,477
Income and Growth Portfolio ............. 169,108 59,230 15,762
Global Portfolio ........................ 113,331 66,416 23,038
Quality Income Portfolio ................ 104,891 37,516 9,062
Municipal Income Portfolio .............. 80,007 21,433 4,110
Short-Duration Income Portfolio ......... 4,833 867 186
High Income Portfolio ................... 56,138 -- --
</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, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Thanksgiving and Christmas.
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
40
<PAGE>
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 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.
41
<PAGE>
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 1940 Act, 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.
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
42
<PAGE>
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 taxable 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. Each Portfolio intends generally to make distributions
sufficient to avoid imposition of the 4% excise tax.
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.
Distributions of net capital gain (that is, the excess of net gains from
capital assets held by the Portfolio for more than one year over net losses
from capital assets held for not more than one year) that are designed as
capital gain dividends will be taxable to shareholders as long-term capital
gain, which is generally taxable to individuals at a 20% rate.
Dividends and distributions on a Portfolio's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Portfolio's realized income and gains, even though such dividends and
distributions may economically represent a return of a particular shareholder's
investment. Such distributions are likely to occur in respect of shares
purchased at a time when a Portfolio's net asset value reflects gains that are
either unrealized, or realized but not distributed. Such realized gains may be
required to be distributed even when a Portfolio's net asset value also
reflects unrealized losses.
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 a 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 a
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
43
<PAGE>
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 capital gain) 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 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 hedging 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. Each 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.
RETURN OF CAPITAL DISTRIBUTIONS. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" allocable
to such distribution, 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 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.
Certain of a Portfolio's 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
44
<PAGE>
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.
FOREIGN TAX CREDIT. 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, if any, 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.
PASSIVE FOREIGN INVESTMENT COMPANIES. 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 in certain circumstances, 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 in income 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, as are gains on disposition of the
stock and losses on disposition of the stock is to the extent of previous
inclusions in income. 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 increasing 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 held for more than one year will be taxed
as long-term capital gain. Such gain is, in the case of an individual,
generally taxed at a 20% rate. 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, capital
loss 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
45
<PAGE>
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 dividend 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, distributions, and redemption proceeds
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).
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.
46
<PAGE>
PERFORMANCE INFORMATION
(SHOWN THROUGH SEPTEMBER 30, 1998)
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>
SINCE INCEPTION
CLASS A SHARES 1 YEAR 5 YEARS OR 10 YEARS
- ------------------------------------------ ------------ ----------- ----------------
<S> <C> <C> <C>
Growth Portfolio* ........................ -26.57% N/A 11.47%
Capital Growth Portfolio ................. 4.34% 15.75% 13.57%
Balanced Portfolio ....................... N/A N/A -5.78%
Income and Growth Portfolio .............. -0.29% 12.62% 12.84%
Global Portfolio ......................... -10.44% N/A 8.50%
Quality Income Portfolio ................. 4.71% 5.31% 5.51%
Municipal Income Portfolio ............... 3.12% 4.53% 6.79%
Short-Duration Income Portfolio* ......... 5.89% N/A 5.94%
High Income Portfolio .................... N/A N/A -11.19%
</TABLE>
<TABLE>
<CAPTION>
SINCE INCEPTION
CLASS B SHARES 1 YEAR 5 YEARS OR 10 YEARS
- ------------------------------------------ ------------ --------- ----------------
<S> <C> <C> <C>
Growth Portfolio* ........................ -25.53% 9.87% 8.19%
Capital Growth Portfolio ................. 5.86% 16.17% 13.84%
Balanced Portfolio ....................... 8.75% N/A 17.69%
Income and Growth Portfolio .............. 1.22% 12.67% 14.70%
Global Portfolio ......................... -9.23% N/A 8.89%
Quality Income Portfolio ................. 5.46% 5.65% 7.14%
Municipal Income Portfolio ............... 3.70% 4.85% 6.90%
Short-Duration Income Portfolio* ......... 2.68% N/A 5.52%
High Income Portfolio .................... N/A N/A -7.86%
</TABLE>
<TABLE>
<CAPTION>
SINCE INCEPTION
CLASS Y SHARES 1 YEAR 5 YEARS OR 10 YEARS
- ------------------------------------------ -------- --------- ----------------
<S> <C> <C> <C>
Growth Portfolio* ........................ N/A N/A -18.36%
Capital Growth Portfolio ................. N/A N/A 10.56%
Balanced Portfolio* ...................... N/A N/A 0.00%
Income and Growth Portfolio .............. N/A N/A 7.29%
Global Portfolio ......................... N/A N/A 1.60%
Quality Income Portfolio ................. N/A N/A 8.94%
Municipal Income Portfolio ............... N/A N/A 7.51%
Short-Duration Income Portfolio* ......... N/A N/A 6.64%
High Income Portfolio .................... N/A N/A N/A
</TABLE>
- ----------
* Prior to May 30, 1995, the Balanced, Growth, and Short-Duration Income
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, and
47
<PAGE>
Short-Duration Income Portfolios reflects various sales charges currently
not applicable to the Portfolios. The Balanced, Growth, and Short-Duration
Portfolios are the successors to Mentor Balanced Fund, Mentor Growth Fund,
and Mentor Short-Duration Income 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%.
** 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, 1998, was as follows*:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- ----------
<S> <C> <C>
Quality Income Portfolio ................. 4.59% 4.32%
Municipal Income Portfolio ............... 3.99% 3.69%
Short-Duration Income Portfolio .......... 4.81% 4.57%
High Income Portfolio .................... 10.37% 10.36%
</TABLE>
The tax-equivalent yield for the Municipal Income Portfolio for the
thirty-day period ended September 30.
<TABLE>
<S> <C>
Class A ............... 6.61%
Class B ............... 6.11%
</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 accrued for that period, and
(ii) dividing that amount by the product of (A) the average daily number of
shares of the 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.
48
<PAGE>
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, 1998, was 6.61%. The
tax-equivalent yield for that Portfolio's Class B shares was 6.11% 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.
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 1998. 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%.
49
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO --
FEDERAL TAXABLE EQUIVALENT YIELD TABLE-1998 RATES
<TABLE>
<CAPTION>
EFFECTIVE
FEDERAL FEDERAL FEDERAL
TAXPAYER TAXABLE TAX TAX
YEAR STATUS INCOME BRACKET RATE
- -------- ---------- ------------------ ----------- ----------
<S> <C> <C> <C> <C>
1998 MARRIED $ 0-42,350 15.00% 15.00%
$ 42,351-102,300 28.00% 28.00%
$102,301-124,500 31.00% 31.00%
$124,501-155,950 31.00% 31.93%
$155,951-278,450 36.00% 37.08%
OVER $278,450 39.60% 40.79%
1998 SINGLE $ 0-25,350 15.00% 15.00%
$ 25,351-61,400 28.00% 28.00%
$ 61,401-124,500 31.00% 31.00%
$124,501-128,500 31.00% 31.93%
128,101-278,450 36.00% 37.08%
OVER $278,450 39.60% 40.79%
<CAPTION>
TAX-FREE YIELD
----------------------------------------------------------------------------------------------------
2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
YEAR
- -------- TAXABLE EQUIVALENT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 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% 10.14% 11.59% 13.04% 14.49%
2.94% 4.41% 5.88% 7.35% 8.81% 10.28% 11.75% 13.22% 14.69%
3.18% 4.77% 6.36% 7.95% 9.54% 11.13% 12.71% 14.30% 15.89%
3.38% 5.07% 6.76% 8.44% 10.13% 11.82% 13.51% 15.20% 16.89%
1998 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% 10.14% 11.59% 13.04% 14.49%
2.94% 4.41% 5.88% 7.35% 8.81% 10.28% 11.75% 13.22% 14.69%
3.18% 4.77% 6.36% 7.95% 9.54% 11.13% 12.71% 14.30% 15.89%
3.38% 5.07% 6.76% 8.44% 10.13% 11.82% 13.51% 15.20% 16.89%
</TABLE>
- ---------
Note: This tables reflects the following:
1 Taxable Income, as reflected in the above table, equals Federal adjusted
gross income (AGI), less personal exemptions and itemized deductions.
However, certain itemized deductions are reduced by the lesser of (i) three
percent of the amount of the taxpayer's AGI over $124,500, or (ii) 80
percent of the amount of such itemized deductions otherwise allowable. The
effect of the three percent phase out on all itemized deductions and not
just those deductions subject to the phase out is reflected above in the
combined Federal and state tax rates through the use of higher effective
Federal tax rates. In addition, the effect of the 80 percent cap on overall
percent cap on overall itemized deductions is not reflected on this tables.
Federal income tax rules also provide that personal exemptions are phased
out at a rate of two percent for each $2,500 (or fraction thereof) of AGI in
excess of $186,800 for married taxpayers filing a joint tax return and
$124,500 for single taxpayers. The effect of the phase out of personal
exemmptions is not reflected in the above table.
2 The effect of state income taxes are not considered in the above table. Such
consideration would increase the taxable equivalent yield to the extent that
the municipal obligations are issued by the taxpayer's state o f residence.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the table.
4 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determinig yields. Instead, the tax rates used
are the highest marginal tax rates applicable to the income levcels
indicated within each bracket.
5 Interest earned on all municipal obligations may cause certain investors to
be subject to tax on a portion of their Social Security an/dor railroad
retirement benefits. The effect of this provision is not included in the
above table.
50
<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 INVESTMENT OFFICER
Mr. Davenport has 12 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 -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Skeppstrom has 7 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 7 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 22 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 -- VICE PRESIDENT, 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.
ACTIVE FIXED-INCOME
P. MICHAEL JONES, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Jones has 12 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
an MBA from the Wharton School of the University of Pennsylvania.
DENNIS F. CLARY, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Clary joined Mentor in 1998 and has over 20 years of investment management
experience. Prior to joining
51
<PAGE>
Mentor's Fixed Income Team, he worked for three years as a Vice President and
Senior Portfolio Manager for First America Investment Corporation. He
previously was employed for four years as a Vice President and Portfolio
Manager at CSI Asset Management, Inc. and prior to that for four years in a
similar role by Investment & Capital Management Corporation. Mr. Clary received
his BA and MBA degrees from Ohio State University.
TIMOTHY ANDERSON, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Anderson has 8 years of investment management experience. He joined Mentor
in June, 1998. Prior to joining Mentor's Fixed-Income Team, he worked for two
years as a Senior Fixed Income Analyst at Investment Advisors, Inc. Previous to
that he was employed for five years as a Senior Investment Analyst at St. Paul
Fire & Marine Insurance Company and for two years as an Analyst for Duff &
Phelps Credit Rating Company. He received a BS degree from DePaul University
and an MBA degree from the University of Chicago.
TODD C. KUIMJIAN -- PORTFOLIO MANAGER
Mr. Kuimjian has 4 years of investment management experience. He joined the
Fixed-Income Team in January, 1997, initially as a Research Analyst and later
as a Portfolio Manager. Prior to joining the Fixed-Income Team, Mr. Kuimjian
served Mentor as an investment accountant/systems analyst and later as a senior
investment administrator within Mentor's investment services group. Mr.
Kuimjian is a Certified Public Accountant and received his BS degree from
Virginia Polytechnic Institute.
SMALL CAPITALIZATION EQUITY GROWTH
THEODORE W. PRICE, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Price has 30 years of investment management experience. 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 has 19 years investment management experience. 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 for 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 -- SENIOR 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.
CASH MANAGEMENT
R. PRESTON NUTTALL, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Nuttall has more than 30 years of investment management experience. Prior
to Mentor Advisors, he led
52
<PAGE>
short-term fixed-income management for fifteen years at Capitoline Investment
Services, Inc. He has his undergraduate degree in economics from the University
of Richmond and his graduate degree in finance from the Wharton School at the
University of Pennsylvania.
HUBERT R. WHITE III -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. White has 12 years of investment management experience. Prior to joining
Mentor Advisors, he served for five years as portfolio manager with Capitoline
Investment Services. He has his undergraduate degree in business from the
University of Richmond.
GREGORY S. KAPLAN -- ASSOCIATE VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Kaplan brings over 6 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
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 chartered Accountant, he has 22 years' investment management
experience.
BOB YERBURY -- CHIEF INVESTMENT OFFICER
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.
SCOTT MCGLASHAN -- FAR EAST TEAM LEADER
Mr. McGlashan 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.
53
<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.
IAN BRADY -- AMERICAN TEAM LEADER
Mr. Brady is head of the North American team at Perpetual. He has 12 years'
investment management experience. Before joining Perpetual in 1997, he worked
for Britannia Investment Management, Legal & General and Standard Life. He is a
graduate of Aberdeen and Strathclyde Universities.
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 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.
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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.
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 quasi-federal 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).
55
<PAGE>
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 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
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.
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<PAGE>
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 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
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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 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."
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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.
FINANCIAL STATEMENTS
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FINANCIAL STATEMENTS
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 84.17%
CAPITAL GOODS & CONSTRUCTION - 3.67%
Conrad Industries, Inc. * 225,700 $ 1,495,262
Denali, Inc. * 180,950 2,442,825
Motivepower Industries, Inc. * 282,500 6,603,437
Pentacon, Inc. * 159,500 1,016,813
Rental Service Corporation * 237,900 4,282,200
Waste Industries, Inc. * 95,750 1,986,812
-----------
17,827,349
-----------
CONSUMER CYCLICAL - 14.81%
Cadmus Communications
Corporation 192,900 3,761,550
Central Garden & Pet
Company * 237,200 4,388,200
Chancellor Media
Corporation * 110,950 3,702,956
Chattem, Inc. 121,100 3,307,544
Clear Channel
Communications 113,712 5,401,320
Dollar General Corporation 105,116 2,798,720
Dollar Tree Stores, Inc. * 136,575 4,276,505
Fairfield Communities, Inc. * 239,450 2,394,500
Family Dollar Stores 348,900 5,495,175
Galey & Lord, Inc. * 171,700 2,049,669
Keystone Automotive
Industries, Inc. * 303,300 5,990,175
Lamar Advertising Company * 111,300 3,116,400
Mail Well Holdings, Inc. * 76,300 653,319
Media Arts Group, Inc. * 190,300 1,736,487
Metro Networks, Inc. * 75,600 2,768,850
Outdoor Systems, Inc. * 469,589 9,156,986
Papa John's
International, Inc. * 112,500 3,712,500
SCP Pool Corporation * 253,075 3,289,975
Suburban Lodges of America * 195,150 1,305,066
Travel Services
International, Inc. * 198,250 2,688,766
-----------
71,994,663
-----------
CONSUMER STAPLES - 5.70%
Celestial Seasonings, Inc. * 154,800 2,341,350
Natrol, Inc. * 171,900 1,525,612
Omega Protein Corporation * 158,000 878,875
Rexall Sundown, Inc. * 196,700 3,036,556
Richfood Holdings, Inc. 274,725 4,223,897
Twinlab Corporation * 117,000 2,998,125
US Foodservice * 151,100 6,289,537
Wild Oats Markets, Inc. * 112,300 3,046,137
Whole Foods Market, Inc. * 80,050 3,372,106
-----------
27,712,195
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ENERGY - 2.14%
Core Laboratories N.V. * 340,500 $ 5,873,625
Global Industries, Limited * 265,850 3,073,891
Unifab International, Inc. * 140,000 1,470,000
-----------
10,417,516
-----------
FINANCIAL - 7.28%
Concord EFS, Inc. * 351,316 9,068,344
Hibernia Corporation -
Class A 196,000 2,829,750
Markel Corporation * 66,360 10,119,900
National Commerce
Bancorporation 424,834 7,009,761
NOVA Corporation * 208,423 6,395,965
-----------
35,423,720
-----------
HEALTH - 19.18%
American Dental
Partners, Inc. * 68,600 591,675
Assisted Living
Concepts, Inc. * 132,600 1,881,262
Brookdale Living
Communities * 213,800 4,489,800
Curative Health
Services, Inc. * 185,450 5,679,406
Express Scripts, Inc. -
Class A * 77,300 6,357,925
Health Management
Associates, Inc. * 310,061 5,658,613
Henry Schein, Inc. * 120,250 4,178,687
Mecon, Inc. * 184,600 1,384,500
Medquist, Inc. * 217,050 6,864,206
Molecular Devices
Corporation * 232,000 3,973,000
Monarch Dental
Corporation * 113,000 1,490,187
NCS Healthcare, Inc. -
Class A * 131,350 2,315,044
Omnicare, Inc. 140,660 4,958,265
Osteotech, Inc. * 190,450 5,046,925
Pharmaceutical Product
Development * 117,450 3,288,600
Priority Healthcare
Corporation - Class B * 120,700 2,761,013
Province Healthcare
Company * 222,700 7,585,719
QuadraMed Corporation * 201,400 4,053,175
Serologicals Corporation * 376,050 9,448,256
Sunrise Assisted Living, Inc. * 175,200 6,011,550
United Payors &
Providers, Inc. * 171,450 3,343,275
Wesley Jessen Visioncare, Inc. * 90,000 1,912,500
-----------
93,273,583
-----------
</TABLE>
8
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY - 18.23%
ADE Corporation * 246,400 $2,402,400
Applied Micro Circuits * 135,100 2,009,612
Aspect Development, Inc. * 54,050 2,128,219
ATMI, Inc. * 147,950 2,052,806
Benchmark Electronics, Inc. * 289,440 6,602,850
Billing Concepts
Corporation * 214,350 3,000,900
Black Box Corporation * 111,350 2,700,237
C&D Technologies, Inc. 150,600 3,595,575
Carrier Access Corporation * 30,100 538,037
Cerprobe Corporation 278,800 3,066,800
CSG Systems
International, Inc. * 119,600 5,292,300
Cumulus Media - Class A * 220,550 1,791,969
E.spire Communications, Inc. * 196,600 1,769,400
FORE Systems, Inc. * 196,400 3,265,150
Genesis Microchip, Inc. * 25,000 235,937
ICG Communications * 167,500 2,826,562
ITC DeltaCom * 209,100 4,338,825
Medialink Worldwide, Inc. * 180,000 3,015,000
Network Appliance, Inc. * 37,100 1,878,187
Optek Technology, Inc. * 222,900 3,956,475
Parlex Corporation * 219,950 2,020,791
PCD, Inc. * 216,200 2,702,500
Powerwave Technologies,
Inc. * 158,300 1,345,550
PRI Automation, Inc. * 238,800 2,985,000
RF Micro Devices, Inc. * 163,400 2,961,625
SCB Computer
Technology, Inc. * 498,150 3,860,663
Segue Software, Inc. * 223,000 3,679,500
Sipex Corporation * 239,500 6,077,313
Speedfam International, Inc. * 236,700 2,544,525
World Access, Inc. 197,750 4,004,438
----------
88,649,146
----------
TRANSPORTATION - 6.05%
Atlantic Coast Airlines, Inc. * 222,750 5,206,781
Carey International, Inc. * 107,850 1,617,750
Coach USA, Inc. * 180,350 4,452,391
Comair Holdings, Inc. 190,225 5,468,969
Covenant Transport, Inc. -
Class A * 217,700 2,476,338
Hunt (JB) Transportation
Services, Inc. 86,850 1,259,325
Mesaba Holdings, Inc. 379,775 5,506,738
M.S. Carriers, Inc. * 89,850 1,785,769
US Xpress Enterprises -
Class A * 135,650 1,661,713
----------
29,435,774
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MISCELLANEOUS - 7.11%
ABR Information
Services, Inc. * 130,500 $ 1,786,219
AccuStaff, Inc. * 145,635 2,120,810
AHL Services, Inc. * 261,050 8,549,388
Butler International, Inc. * 150,600 3,002,588
Gulf Island Fabrication, Inc. * 184,350 3,133,950
Kulicke & Soffa Industries,
Inc. 186,400 2,493,100
Meta Group, Inc. * 76,750 2,508,766
NFO Worldwide, Inc. * 188,750 1,875,703
Rock of Ages Corporation * 129,800 1,444,025
Romac International, Inc. * 186,667 3,360,006
Select Appointments
Holding ~ 133,850 2,325,644
StaffMark, Inc. * 106,850 1,950,013
------------
34,550,212
------------
TOTAL COMMON STOCKS
(COST $392,590,559) 409,284,158
------------
SHORT-TERM INVESTMENT - 14.75%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$72,638,658 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$ 73,365,044 (cost
$ 71,719,983) $71,719,983 71,719,983
------------
TOTAL INVESTMENTS
(COST $464,310,542)-98.92% 481,004,141
OTHER ASSETS LESS LIABILITIES - 1.08% 5,256,518
------------
NET ASSETS - 100.00% $486,260,659
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
9
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $476,835,969 and $493,255,955, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $465,111,603. Net unrealized appreciation aggregated
$15,892,538, of which $88,762,155, related to appreciated investment securities
and $72,869,617, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $409,284,158
Repurchase agreements 71,719,983
------------
Total investments
(cost $464,310,542) 481,004,141
Collateral for securities
loaned (Note 2) 115,219,699
Receivables
Investments sold 9,099,966
Fund shares sold 958,924
Dividends and interest 60,844
Other 74,079
------------
TOTAL ASSETS 606,417,653
------------
LIABILITIES
Payables
Investments purchased $ 1,944,829
Securities loaned (Note 2) 115,219,699
Fund shares redeemed 2,791,991
Accrued expenses and other
liabilities 200,475
-----------
TOTAL LIABILITIES 120,156,994
------------
NET ASSETS $486,260,659
============
Net Assets represented by: (Note 2)
Additional paid-in capital $451,922,136
Accumulated undistributed
net investment income -
Accumulated net realized
gain on investment
transactions 17,644,924
Net unrealized appreciation
of investments 16,693,599
------------
NET ASSETS $486,260,659
============
NET ASSET VALUE PER SHARE
Class A Shares $ 14.60
Class B Shares $ 14.18
Class Y Shares $ 14.63
OFFERING PRICE PER SHARE
Class A Shares $ 15.49 (a)
Class B Shares $ 14.18
Class Y Shares $ 14.63
SHARES OUTSTANDING
Class A Shares 5,323,225
Class B Shares 27,027,617
Class Y Shares 1,732,865
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 524,466
Interest 3,725,963
-------------
TOTAL INVESTMENT
INCOME (NOTE 2) 4,250,429
EXPENSES
Management fee (Note 4) $ 4,204,377
Distribution fee (Note 5) 3,638,580
Shareholder service fee
(Note 5) 1,489,460
Transfer agent fee 800,563
Administration fee (Note 4) 600,625
Shareholder reports and
postage expenses 142,288
Registration expenses 130,378
Custodian and accounting fees 84,516
Legal fees 22,254
Directors' fees and expenses 17,864
Audit fees 12,320
Organizational expenses 8,526
Miscellaneous 61,523
------------
Total expenses 11,213,274
-------------
NET INVESTMENT LOSS (6,962,845)
-------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on
investments (Note 2) 37,565,972
Change in unrealized
appreciation on investments (173,567,460)
------------
NET LOSS ON INVESTMENTS (136,001,488)
-------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(142,964,333)
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment loss $ (6,962,845) $ (6,118,383)
Net realized gain on investments 37,565,972 35,210,825
Change in unrealized appreciation on investments (173,567,460) 90,598,141
-------------- -------------
Increase (decrease) in net assets resulting from operations (142,964,333) 119,690,583
-------------- -------------
Distributions to Shareholders
From net realized gain on investments
Class A (6,599,466) (5,768,516)
Class B (31,307,757) (52,589,913)
Class Y (10) -
-------------- -------------
Total distributions to shareholders (37,907,233) (58,358,429)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 313,753,597 168,560,541
Reinvested distributions 36,935,409 57,233,448
Cost of shares redeemed (294,819,420) (87,713,664)
-------------- -------------
Change in net assets resulting from capital share transactions 55,869,586 138,080,325
-------------- -------------
Increase (decrease) in net assets (125,001,980) 199,412,479
Net Assets
Beginning of year 611,262,639 411,850,160
-------------- -------------
End of year $ 486,260,659 $ 611,262,639
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (B)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.94 $ 18.47 $ 16.08 $ 13.37
------- --------- -------- ---------
Income from investment operations
Net investment loss (0.12) (0.17) (0.10) (0.01)
Net realized and unrealized gain (loss) on investments (4.03) 4.19 4.23 2.72
-------- --------- -------- ----------
Total from investment operations (4.15) 4.02 4.13 2.71
-------- --------- -------- ----------
Less distributions
From capital gains (1.19) (2.55) (1.74) -
-------- --------- -------- ----------
Net asset value, end of period $ 14.60 $ 19.94 $ 18.47 $ 16.08
======== ========= ======== ==========
TOTAL RETURN* (22.08%) 25.81% 29.15% 20.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $77,720 $105,033 $ 40,272 $ 20,368
Ratio of expenses to average net assets 1.26% 1.28% 1.28% 1.36%(a)
Ratio of net investment loss to average net assets (0.56%) (0.67%) (0.39%) (0.65%)(a)
Portfolio turnover rate 88% 77% 105% 70%
Average commission rate on portfolio transactions $0.0658 $ 0.0651 $ 0.0602
</TABLE>
(a) Annualized.
(b) For the period from June 5, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (B) 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.53 $ 18.29 $ 16.05 $ 12.15 $ 13.78 $ 12.81
-------- --------- --------- -------- ------- -------
Income from investment operations
Net investment loss (0.23) (0.22) (0.17) (0.13) (0.15) (0.08)
Net realized and unrealized gain (loss) on
investments (3.93) 4.01 4.15 4.03 (0.47) 2.07
-------- --------- --------- --------- ------- -------
Total from investment operations (4.16) 3.79 3.98 3.90 (0.62) 1.99
-------- --------- --------- --------- ------- -------
Less distributions
From capital gains (1.19) (2.55) (1.74) -- (1.01) (1.02)
-------- --------- --------- --------- ------- -------
Net asset value, end of period $ 14.18 $ 19.53 $ 18.29 $ 16.05 $ 12.15 $ 13.78
======== ========= ========= ========= ======= =======
TOTAL RETURN* (22.62%) 24.66% 28.18% 32.10% (4.48%) 15.60%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 383,188 $506,230 $371,578 $ 246,326 $190,126 $186,978
Ratio of expenses to average net assets 2.01% 2.03% 2.03% 2.08% (a) 2.01% 2.02%
Ratio of net investment loss to average net assets (1.30%) (1.42%) (1.13%) (1.20%)(a) (1.20%) (1.12%)
Portfolio turnover rate 88% 77% 105% 70% 77% 64%
Average commission rate on portfolio transactions $ 0.0658 $ 0.0651 $ 0.0602
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (C)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.12
---------
Income from investment operations
Net investment loss (0.02)
Net realized and unrealized loss on investments (3.28)
-----------
Total from investment operations (3.30)
-----------
Less distributions
From capital gains (0.19)
-----------
Net asset value, end of period $ 14.63
===========
TOTAL RETURN* (18.36%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 25,353
Ratio of expenses to average net assets 1.01%(a)
Ratio of net investment loss to average net assets (0.04%)(a)
Portfolio turnover rate 88%
Average commission rate on portfolio transactions $ 0.0658
</TABLE>
(a) Annualized.
(b) For the period from January 1, 1995 to September 30, 1995.
(c) For the period from November 19, 1997 (initial offering of Class Y
shares) to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 88.49%
ARGENTINA - 0.10%
Perez Company SA~ 4,437 $ 36,609
Telecom Argentina SA~ 2,100 62,344
Telefonica de Argentina SA~ 2,020 59,464
----------
158,417
----------
AUSTRIA - 0.34%
Bank Austria AG 14,000 535,988
----------
BELGIUM - 1.18%
Cofinimmo 7,576 920,068
Fortis AG 1,550 382,327
G.I.B. Group SA 11,200 557,400
----------
1,859,795
----------
BRAZIL - 0.33%
Cemig CIA Energetic~ (a) 1,700 37,593
CIA Brasil Petro Ipiranga 4,900,000 31,374
Companhia Cervejaria
Brahma~ 3,500 27,344
Companhia Vale do Rio Doce~ 2,450 35,140
Compania Paulista de Forca e
Luz 370,000 30,589
Electrobras - Centrais Eletricas
Brasileiras SA 2,930 32,507
Electropaulo Metropolitana -
Electricidade de Sao Paulo SA 690,000 35,443
Pao de Acucar# 2,630,000 34,611
Petroleo Brasileiro SA~ 2,520 25,833
Telecomonicacoes
Brasileiras SA~ 2,030 142,988
Telecomunicacoes de Sao
Paulo SA 240,000 34,824
Telecomunicacoes de
Minas Gerais 1,130,000 40,037
Telerj Celular SA* 240,000 10,326
----------
518,609
----------
CHILE - 0.09%
Chilectra SA~ 3,450 56,411
Embotelladora Andina SA~* 1,200 16,500
Enersis SA~ 1,500 30,563
Telecomunicaciones de Chile~ 1,700 32,513
----------
135,987
----------
CHINA - 0.25%
Heilongjiang Electric Power
Company 180,000 66,600
Huaneng Power International,
Inc. - Class A~* 15,000 153,750
Yanzhou Coal Mining
Company 1,000,000 174,216
----------
394,566
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINLAND - 1.49%
Huhtamaki 7,472 $ 230,812
Metra Oyj - Class B 38,220 744,472
Nokia Oyj - Class A 17,410 1,383,894
----------
2,359,178
----------
FRANCE - 7.04%
Accor SA 5,000 1,049,463
Atos SA 5,230 931,443
Axa 10,940 1,002,522
Casino Guichard Perrachn 7,350 741,814
Compagnie de Saint - Gobain 3,250 431,352
Colas 1,730 329,121
Comptoirs Modernes 1,320 825,280
Elf Aquitaine SA 10,400 1,283,721
Entrelec 12,000 531,609
Genset SA~* 30,000 772,500
ISIS 5,460 370,626
SEB SA 1,270 98,821
Serp Recyclage 3,039 295,317
Societe Generale D'Enterprises 12,610 471,909
Total SA - Class B 8,450 1,065,664
Vivendi 4,760 948,922
----------
11,150,084
----------
GERMANY - 5.41%
Allianz AG 3,785 1,172,150
Ava Allg Handels Der Verbrau 3,400 1,384,887
Porsche AG 805 1,408,009
Prosieben Media AG 12,650 697,116
Sauer, Inc. 34,050 270,272
Siemens AG 13,850 757,438
Veba AG 35,920 1,864,742
Viag AG 1,550 1,014,331
----------
8,568,945
----------
GREAT BRITAIN - 10.50%
Abbey National PLC 31,250 538,886
Allied Zurich PLC* 28,500 291,247
Arcadia Group 55,700 228,062
Arriva PLC 35,000 223,582
Asda Group 108,000 313,762
BAA PLC 32,250 327,925
Barclays PLC 26,000 422,733
Bass PLC 23,571 285,127
BAT Industries PLC 32,500 244,054
Britannic Assurance PLC 15,000 322,885
British Aerospace PLC 81,000 488,189
British Airways PLC 34,500 213,208
British Biotech PLC* 150,000 89,832
</TABLE>
20
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GREAT BRITAIN (CONTINUED)
British Petroleum
Company PLC 24,000 $ 366,565
Burmah Castrol PLC 25,000 353,806
Celltech PLC* 25,000 112,555
Centrica PLC* 149,500 288,282
Debenhams PLC 40,000 226,640
Dixons Group 16,000 163,507
Emap PLC 25,000 397,554
Enterprise Oil PLC 75,000 506,499
Glaxo Wellcome PLC 31,000 912,727
Granada Group PLC 36,000 470,032
Great Universal Stores PLC 22,000 245,379
Greenalls Group PLC 40,000 197,078
House of Fraser 50,000 70,506
Iceland Group PLC 31,250 101,169
III Group PLC 30,000 257,136
Imperial Chemical
Industries PLC 30,000 236,239
Inchcape PLC 90,000 177,370
Lloyds TSB Group PLC 54,000 603,212
Medeva PLC 80,000 125,043
Meggitt PLC 50,000 113,830
National Westminster Bank 28,250 377,963
Northern Foods PLC 73,400 223,218
PowerGen PLC 44,000 653,348
Prudential Corporation PLC 33,000 479,639
Rank Group PLC 61,750 251,784
Reckitt & Colman PLC 13,300 198,506
Reuters Group PLC 32,000 268,298
Rolls-Royce PLC 138,000 478,875
Sainsbury (J.) PLC 51,000 489,119
Scotia Holdings * 30,000 50,968
Signet Group 312,500 136,712
Smith (H.W.) Group PLC 33,750 280,104
SmithKline Beecham PLC 47,000 518,630
Spirax-Sarco Engineering PLC 30,000 221,203
Stakis PLC 260,000 375,468
Standard Chartered 51,500 366,389
Tate & Lyle PLC 35,282 195,412
Tesco PLC 112,400 332,274
Trinity PLC 35,000 241,421
United Assurance Group PLC 23,000 229,180
United News & Media PLC 35,000 331,210
----------
16,614,342
----------
GREECE - 0.00%
Heilenic Telecommunication
organization SA 122 2,926
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HONG KONG - 1.84%
Cheung Kong 20,000 $ 92,657
China Foods Holdings,
Limited * 575,000 143,954
China Telecom * 40,000 62,976
Citic Pacific, Limited 70,000 122,855
Elec & Eltek International
Company, Limited 735,000 132,791
First Tractor Company 305,000 78,720
GZI Transport, Limited -
Warrants 60,000 77
GZI Transport, Limited 484,000 101,185
HKR International, Limited 840,000 260,163
Hong Kong Electric 35,000 120,370
Hong Kong & China Gas 100,000 122,596
HSBC Holdings PLC 33,454 613,683
Hung Hing Printing Group 238,000 79,088
Hutchison Whampoa, Limited 48,000 252,729
National Mutual Asia, Limited 280,000 136,405
New World Development 130,951 175,750
Road King Infrastructure,
Limited 464,544 254,783
Swire Pacific,
Limited - Class A 50,000 157,440
----------
2,908,222
----------
INDIA - 0.34%
BSES, Limited #* 8,000 103,000
Hindalco Industries, Limited # 5,000 54,500
Indian Opportunity Fund,
Limited* 11,000 93,390
Mahanagar Telephone Nigam,
Limited #* 2,000 22,700
Tata Electric # 1,500 262,500
----------
536,090
----------
INDONESIA - 0.06%
Bat Indonesia 36,000 50,131
Gudang Garam 80,000 42,804
----------
92,935
----------
IRELAND - 2.05%
Bank of Ireland 72,465 1,289,008
CRH PLC 80,000 1,007,138
Elan Corporation PLC~ * 13,250 954,828
----------
3,250,974
----------
ITALY - 4.77%
Assicurazioni Generali 15,020 488,729
ENI SPA 192,000 1,177,350
Finmeccanica SPA 192,030 159,526
Grupo Editoriale L'Espresso 174,000 1,370,618
Ina SPA 185,000 470,809
</TABLE>
21
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ITALY (CONTINUED)
Istituto Mobiliare Italiano 76,000 $1,003,908
Rinascente SPA 90,850 797,108
Telecom Italia Mobile 105,500 614,966
Telecom Italia SPA 185,000 1,275,108
Telecom Moblit 61,000 196,267
----------
7,554,389
----------
JAPAN - 8.87%
Asahi Glass Company, Limited 275,000 1,327,239
Daiwa House Industry
Company, Limited 170,000 1,541,499
Kirin Brewery Company,
Limited 160,000 1,277,660
Kokusai Securities Company,
Limited 200,000 1,396,709
Mitsui Chemicals, Inc. 500,000 1,429,616
Nippon Steel Corporation 880,000 1,261,280
Sony Music Entertainment,
Inc. 40,000 1,310,420
Sumitomo Warehouse 360,000 1,376,819
Tokyo Electric Power
Company 75,000 1,431,444
Tokio Marine & Fire
Insurance 190,000 1,695,064
----------
14,047,750
----------
KOREA - 0.08%
Atlantis Korean Smaller
Companies * 20,000 100,200
CITC Seoul Excel * 2 3,700
LG Electronics # 6,400 8,000
Samsung Electronics # (a) 475 7,030
----------
118,930
----------
MALAYSIA - 0.08%
Boustead Holdings Berhad (c) 84,000 46,802
IOI Corporation (c) 100,000 37,319
Nanyang Press Berhad (c) 60,000 48,568
----------
132,689
----------
MEXICO - 0.31%
Cemex SA~* 5,600 27,368
Cifra SA 34,500 41,982
Coca-Cola Femsa SA~ 2,900 35,344
Corporacion Geo SA* 9,600 17,881
DESC SA~ 2,002 27,528
Empresas La Moderna SA~ 1,800 43,030
Grupo Carso SA~ 7,800 46,539
Grupo Televisa #* 1,400 26,928
Kimberly-Clark de Mexico SA~ 2,680 35,845
Panamerican
Beverages - Class A * 2,000 35,625
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEXICO (CONTINUED)
Telefonos de Mexico SA 3,500 $ 154,875
----------
492,945
----------
NETHERLANDS - 1.14%
Baan Company NV * 23,000 595,117
Royal Dutch Petroleum 12,748 633,285
Vendex International NV 15,325 569,960
Vendex International NV -
Coupon 15,325 2,036
----------
1,800,398
----------
PERU - 0.01%
Telefonica del Peru SA~ 2,500 30,625
----------
PHILIPPINES - 0.13%
Benpres Holdings #* 68,000 187,000
Benpres Holdings - Rights 27,200 27,336
----------
214,336
----------
PORTUGAL - 1.38%
BPI SGPS SA 28,060 773,990
Cimpor Cimentos de Portugal 15,000 418,391
Elec de Portugal 29,600 681,196
Jeronimo Martins 9,050 306,623
----------
2,180,200
----------
SINGAPORE - 0.72%
City Developments, Limited 30,000 65,700
GP Batteries International,
Limited 190,000 245,161
Marco Polo Developments,
Limited 120,000 62,504
Overseas Chinese Bank * 80,287 201,490
Overseas Union Bank, Limited 80,000 114,117
Singapore Airlines, Limited 20,000 109,500
Singapore Press Holdings 10,000 82,865
United Overseas Bank 87,000 253,353
----------
1,134,690
----------
SPAIN - 6.22%
Acciona SA 5,000 1,252,952
Argentaria Corp Bancaria de
Espana SA 45,143 898,946
Baron de Ley* 30,000 1,015,050
Centros Comerciales
Continente, SA 50,560 1,286,587
Gas Natural SDG SA 11,600 821,767
Prosegur CIA de Seguridad SA 116,895 1,450,218
Tabacalera SA 64,000 1,405,280
Telefonica SA 24,745 903,529
Viscofan Envolturas
Celulosicas SA 29,960 779,279
</TABLE>
22
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SPAIN (CONTINUED)
Viscofan Envolturas
Celulosicas SA - Warrants 29,960 $ 38,647
---------
9,852,255
---------
SWEDEN - 1.88%
BPA AB 265,000 673,829
Celsius AB - Class B 56,360 1,060,489
ForeningsSparbanken AB 54,040 1,236,692
---------
2,971,010
---------
SWITZERLAND - 4.19%
Jelmoli Holding AG 880 1,026,295
Nestle SA 790 1,575,994
Novartis AG 1,056 1,697,402
Roche Holding
AG - Genussshein 152 1,640,565
UBS AG* 3,525 689,424
---------
6,629,680
---------
TAIWAN - 0.20%
Formosa Growth Fund * 5,000 88,125
Taipei Fund * 20 161,000
Taiwan Semiconductor~ 5,900 75,228
---------
324,353
---------
THAILAND - 0.08%
Cogenaration PLC 67,000 30,493
Electricity Generating Public
Company 40,000 95,575
---------
126,068
---------
UNITED STATES - 27.41%
AccuStaff, Inc. * 25,000 364,063
American Home Products
Company 14,000 733,250
American Tower
Corporation * 10,000 255,000
Anadarko Petroleum
Corporation 12,000 471,750
Anheuser-Busch Companies,
Inc. 11,000 594,000
Associates First Capital 19,100 1,246,275
Aurora Foods, Inc.* 9,800 134,750
BankBoston Corporation* 10,800 356,400
Baxter International, Inc. 14,500 862,750
Bell Atlantic Corporation 18,900 915,469
Borders Group, Inc. * 18,000 400,500
Bristol-Myers Squibb
Company* 9,700 1,007,588
Burlington Northern 16,500 528,000
Cardinal Health, Inc. 5,800 598,850
Chase Manhattan Corporation 11,700 506,025
Chevron Corporation 10,000 840,625
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
Columbia/HCA Healthcare
Corporation 27,900 $ 559,744
Comcast Corporation - Class A 15,000 704,063
Compaq Computer
Corporation 24,500 774,813
CompUSA, Inc. 7,600 131,576
Conseco, Inc. 20,600 629,588
Consolidated Stores
Corporation* 15,000 294,375
Duke Energy Corporation 7,700 509,644
El Paso Energy Corporation 20,000 648,750
EMC Corporation* 15,000 857,813
Federal National Mortgage
Association 6,300 404,775
HealthSouth Corporation * 50,000 528,125
Intel Corporation 19,600 1,680,700
International Business
Machines, Inc. 11,000 1,408,000
Lilly (Eli) & Company 9,000 704,813
Lockheed Martin Corporation 6,100 614,956
Mail-Well Holdings* 19,600 167,825
MBNA Corporation 29,200 835,850
McDonald's Corporation 9,000 537,188
MCI WorldCom, Inc. 29,000 1,417,375
Medicis Pharmaceutical* 22,000 871,750
Meditrust Corporation 27,654 471,846
Microsoft Corporation * 5,000 550,313
NationsBank Corporation 15,500 829,250
Newbridge Networks
Corporation 24,500 439,469
Newcourt Credit Group, Inc. 11,000 287,375
Nextel Communications, Inc. 11,000 222,063
Ocular Sciences * 5,000 105,000
Omnicare, Inc. 15,000 528,750
Pfizer, Inc. 8,200 868,688
Philip Morris Companies, Inc. 15,000 690,938
Phillips Petroleum Company 7,100 320,388
Provident Companies, Inc. 20,000 675,000
Ralston-Purina Group 12,400 362,700
Republic Services, Inc.* 9,000 175,500
SBC Communications, Inc. 28,800 1,279,800
Staples, Inc.* 53,150 1,561,281
Stewart Enterprises 22,000 368,500
Sun Microsystems, Inc.* 9,000 448,313
Sybron International
Corporation * 25,000 478,125
Tele-Communications
International * 16,000 626,000
Texaco, Inc. 15,000 940,313
Texas Instruments, Inc. 7,500 395,625
</TABLE>
23
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
3Com Corporation* 10,000 $ 300,625
Time Warner, Inc. 17,500 1,532,340
Travelers Group, Inc. 12,500 468,750
Travelers Property and
Casualty Corporation 18,000 574,875
Tyco International, Ltd. 10,000 552,500
U.S. Foodservice* 29,600 1,232,100
Viacom Industries,
Inc. - Class A 20,000 1,150,000
Westpoint Stevens,
Inc. - Class A * 16,000 488,000
Williams Companies, Inc. 12,500 359,375
-----------
43,380,820
-----------
TOTAL COMMON STOCKS
(COST $148,319,820) 140,078,196
-----------
CORPORATE BONDS - 0.29%
GREAT BRITIAN
Scotia Holdings, 8.50%,
3/26/02 $ 19,000 23,403
-----------
KOREA
Republic of Korea, 8.88%,
4/15/08 208,000 177,450
-----------
MALAYSIA
Telekom Malaysia Berhad,
4.00%, 10/03/04 - (9/22/94,
$70,000) (a) (b) 70,000 37,800
-----------
THAILAND
PTTEP International, Limited,
7.63%, 10/01/06 300,000 223,500
-----------
TOTAL CORPORATE BONDS
(COST $461,458) 462,153
-----------
140,540,349
-----------
SHORT-TERM
INVESTMENT - 10.07%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
Federal National Mortgage
Association, $16,141,372
6.00%, 8/01/13, market
value $16,302,785
(cost $15,936,519) 15,936,519 15,936,519
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
<S> <C>
TOTAL INVESTMENTS
(COST $164,717,797)-98.85% $156,476,868
OTHER ASSETS LESS
LIABILITIES - 1.15% 1,812,839
------------
NET ASSETS - 100.00% $158,289,707
============
</TABLE>
* Non-income producing.
# Global Depository Receipts.
- American Depository Receipts.
@ International Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4 (2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) All or a portion of these securities are restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses
after the title of the restricted securities.
(c) These securities are considered illiquid due to a one year moratorium on
the repatriation of assets from Malaysia.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $248,291,695 and $235,288,192, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $165,477,184. Net unrealized depreciation aggregated
$9,000,316, of which $11,442,631, related to appreciated investment securities
and $20,442,947, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $ 140,540,349
Repurchase agreements 15,936,519
-------------
Total investments
(cost $164,717,797) 156,476,868
Receivables
Collateral for securities
loaned (Note 2) 12,707,641
Investments sold 6,315,010
Fund shares sold 354,472
Dividends and interest 443,615
Unrealized appreciation on
forward foreign currency
exchange contracts (Note 6) 617
Deferred expenses (Note 2) 5,424
-------------
TOTAL ASSETS 176,303,647
-------------
LIABILITIES
Payables
Investments purchased $ 2,697,553
Securities loaned (Note 2) 12,707,641
Fund shares redeemed 2,446,454
Unrealized depreciation on
forward foreign currency
exchange contracts
(Note 6) 35,060
Accrued expenses and other
liabilities 127,232
-----------
TOTAL LIABILITIES 18,013,940
-------------
NET ASSETS $ 158,289,707
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 153,975,854
Accumulated undistributed
net investment income 3,616
Accumulated net realized
gain on investment
transactions 12,574,725
Net unrealized depreciation
of investments and foreign
currency related
transactions (8,264,488)
-------------
NET ASSETS $ 158,289,707
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 18.92
Class B Shares $ 18.21
Class Y Shares $ 18.96
OFFERING PRICE PER SHARE
Class A Shares $ 20.07(a)
Class B Shares $ 18.21
Class Y Shares $ 18.96
SHARES OUTSTANDING
Class A Shares 3,118,915
Class B Shares 5,452,526
Class Y Shares 53
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 2,176,556
Interest 499,605
------------
TOTAL INVESTMENT
INCOME (NOTE 2) 2,676,161
EXPENSES
Management fee (Note 4) $ 1,612,495
Distribution fee (Note 5) 734,020
Shareholder service fee (Note 5) 384,373
Transfer agent fee 220,815
Custodian and accounting fees 188,561
Administration fee (Note 4) 153,750
Registration expenses 67,081
Shareholder reports and postage
expenses 36,249
Miscellaneous 14,317
Organizational expenses 11,067
Legal fees 4,542
Directors' fees and expenses 3,591
Audit fees 3,143
-----------
Total expenses 3,434,004
------------
NET INVESTMENT LOSS (757,843)
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS
Net realized gain on investments
and foreign currency related
transactions (Note 2) 14,799,387
Change in unrealized
appreciation (depreciation) on
investments and foreign
currency related transactions (25,459,714)
-----------
NET LOSS ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS (10,660,327)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(11,418,170)
============
</TABLE>
(b) Net of withholding taxes of $206,565.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment loss $ (757,843) $ (416,666)
Net realized gain on investments and foreign currency related transactions 14,799,387 6,084,166
Change in unrealized appreciation (depreciation) on investments (25,459,714) 13,678,454
------------- -------------
Increase (decrease) in net assets resulting from operations (11,418,170) 19,345,954
------------- -------------
Distributions to Shareholders
From net realized gain on investments
Class A (2,382,830) (476,590)
Class B (4,553,653) (1,576,577)
Class Y (8) --
--------------- -------------
Total distributions to shareholders (6,936,491) (2,053,167)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 78,893,773 74,523,622
Reinvested distributions 6,732,722 2,007,927
Shares redeemed (44,567,723) (13,467,704)
-------------- -------------
Change in net assets resulting from capital share transactions 41,058,772 63,063,845
-------------- -------------
Increase in net assets 22,704,111 80,356,632
Net Assets
Beginning of year 135,585,596 55,228,964
-------------- -------------
End of year (including accumulated undistributed net investment
income (loss) of $3,616 and ($97,957), respectively) $ 158,289,707 $ 135,585,596
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
9/30/98 9/30/97
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 20.94 $ 17.86
--------- ---------
Income from investment operations
Net investment income (loss) (0.03) 0.04
Net realized and unrealized gain (loss) on investments (0.97) 3.67
--------- ---------
Total from investment operations (1.00) 3.71
--------- ---------
Less distributions
From capital gains (1.02) (0.63)
--------- ----------
Net asset value, end of period $ 18.92 $ 20.94
========= ==========
TOTAL RETURN* (4.97%) 21.59%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 59,012 $ 46,556
Ratio of expenses to average net assets 1.75% 1.89%
Ratio of expenses to average net assets excluding waiver 1.75% 1.89%
Ratio of net investment income (loss) to average net assets (0.01%) 0.07%
Portfolio turnover rate 162% 128%
Average commission rate on portfolio transactions $ 0.0188 $ 0.0319
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 (C)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.88 $ 14.23 $ 14.18
-------- -------- -----------
Income from investment operations
Net investment income (loss) (0.04) 0.05 (0.01)
Net realized and unrealized gain (loss) on investments 2.82 1.60 0.06
--------- -------- ------------
Total from investment operations 2.78 1.65 0.05
--------- -------- ------------
Less distributions
From capital gains (0.80) -- --
--------- --------- ------------
Net asset value, end of period $ 17.86 $ 15.88 $ 14.23
========= ========= ============
TOTAL RETURN* 18.40% 11.60% 0.35%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 13,098 $ 6,854 $ 8,882
Ratio of expenses to average net assets 1.95% 2.06% 2.09% (a)
Ratio of expenses to average net assets excluding waiver 1.95% 2.11% 3.18% (a)
Ratio of net investment income (loss) to average net assets (0.21%) 0.26% (0.10%)(a)
Portfolio turnover rate 130% 155% 2%
Average commission rate on portfolio transactions $ 0.0320
</TABLE>
(a) Annualized.
(c) For the period from March 29, 1994 (commencement of operations), to
September 30, 1994.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
9/30/98 9/30/97
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 20.32 $ 17.46
--------- --------
Income from investment operations
Net investment loss (0.12) (0.02)
Net realized and unrealized gain (loss) on investments (0.97) 3.51
--------- ---------
Total from investment operations (1.09) 3.49
--------- ---------
Less distributions
From capital gains (1.02) (0.63)
--------- ---------
Net asset value, end of period $ 18.21 $ 20.32
========= =========
TOTAL RETURN* (5.65%) 20.74%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 99,277 $ 89,030
Ratio of expenses to average net assets 2.50% 2.64%
Ratio of expenses to average net assets excluding waiver 2.50% 2.64%
Ratio of net investment loss to average net assets (0.77%) (0.68%)
Portfolio turnover rate 162% 128%
Average commission rate on portfolio transactions $ 0.0188 $ 0.0319
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 (D)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.67 $ 14.15 $ 14.18
-------- -------- -----------
Income from investment operations
Net investment loss (0.05) (0.05) (0.04)
Net realized and unrealized gain (loss) on investments 2.64 1.57 0.01
--------- -------- ------------
Total from investment operations 2.59 1.52 (0.03)
--------- -------- ------------
Less distributions
From capital gains (0.80) -- --
--------- -------- ------------
Net asset value, end of period $ 17.46 $ 15.67 $ 14.15
========= ======== ============
TOTAL RETURN* 17.39% 10.74% (0.21%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 42,131 $ 12,667 $ 7,987
Ratio of expenses to average net assets 2.70% 2.72% 2.79% (a)
Ratio of expenses to average net assets excluding waiver 2.70% 2.79% 3.93% (a)
Ratio of net investment loss to average net assets (0.91%) (0.40%) (0.82%)(a)
Portfolio turnover rate 130% 155% 2%
Average commission rate on portfolio transactions $ 0.0320
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED
9/30/98 (E)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.81
---------
Income from investment operations
Net investment income 0.00 (f)
Net realized and unrealized gain on investments 0.30
---------
Total from investment operations 0.30
---------
Less distributions
From capital gains (0.15)
-----------
Net asset value, end of period $ 18.96
===========
TOTAL RETURN* 1.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.50% (a)
Ratio of net investment loss to average net assets (0.02%)(a)
Portfolio turnover rate 162%
Average commission rate on portfolio transactions $ 0.0188
</TABLE>
(a) Annualized.
(d) For the period from March 29, 1994 (commencement of operations) to
September 30, 1994.
(e) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
(f) Income is less than $0.005 per share.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 97.19%
BASIC MATERIALS - 2.72%
Bemis Company, Inc. 265,400 $9,305,587
----------
CAPITAL GOODS &
CONSTRUCTION - 9.68%
Emerson Electric Company 191,000 11,889,750
Illinois Tool Works 223,700 12,191,650
W.W. Grainger, Inc. 214,300 9,027,387
----------
33,108,787
----------
CONSUMER CYCLICAL - 14.08%
Chancellor Media Corporation * 213,000 7,108,875
Clear Channel Communications 157,750 7,493,125
Gannett, Inc. 194,000 10,391,125
Interpublic Group Companies 210,800 11,370,025
Newell Company 255,650 11,775,878
----------
48,139,028
----------
CONSUMER STAPLES - 10.75%
Philip Morris Companies, Inc. 260,000 11,976,250
Sherwin-Williams Company 546,600 11,820,225
Sysco Corporation 549,500 12,947,594
----------
36,744,069
----------
FINANCIAL - 20.44%
Ahmanson HF & Company 210,500 11,682,750
American Express Company 139,500 10,828,687
Federal National Mortgage
Association 171,600 11,025,300
NationsBank Corporation 199,150 10,654,525
Norwest Corporation 346,200 12,398,288
SouthTrust Corporation 32,700 1,142,456
UNUM Corporation 244,100 12,128,719
----------
69,860,725
----------
HEALTH - 14.79%
Bristol-Myers Squibb Company 128,250 13,321,969
HealthSouth Corporation 1,281,000 13,530,563
Johnson & Johnson 153,600 12,019,200
Tenet Healthcare Corporation 407,000 11,701,250
----------
50,572,982
----------
TECHNOLOGY - 18.41%
Automatic Data Processing 162,750 12,165,563
Computer Associates
International, Inc. 362,300 13,405,100
Computer Sciences Corporation 226,900 12,366,050
MCI WorldCom, Inc. 254,750 12,450,906
Sun Microsystems, Inc. * 251,850 12,545,278
----------
62,932,897
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION & SERVICES - 2.04%
Werner Enterprises, Inc. 443,312 $ 6,982,164
-------------
MISCELLANEOUS - 4.28%
Tyco International Limited 264,600 14,619,150
-------------
TOTAL COMMON STOCKS
(COST $325,801,368) 332,265,389
-------------
SHORT-TERM INVESTMENT - 5.06%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$17,523,355 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$ 17,698,589
(cost $17,301,645) $ 17,301,645 17,301,645
-------------
TOTAL INVESTMENTS
(COST $343,103,013)-102.25% 349,567,034
OTHER ASSETS LESS
LIABILITIES - (2.25%) (7,698,090)
-------------
NET ASSETS - 100.00% $ 341,868,944
=============
</TABLE>
* Non-income producing.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $411,684,003 and $263,413,957, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $343,119,643. Net unrealized appreciation aggregated
$6,447,391, of which $28,966,561, related to appreciated investment securities
and $22,519,170, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $332,265,389
Repurchase agreements 17,301,645
------------
Total investments
(cost $343,103,013) 349,567,034
Collateral for securities loaned
(Note 2) 15,562,984
Receivables
Fund shares sold 3,633,968
Dividends and interest 315,098
------------
TOTAL ASSETS 369,079,084
------------
LIABILITIES
Payables
Investments purchased $10,840,843
Securities loaned (Note 2) 15,562,984
Fund shares redeemed 755,755
Accrued expenses and other
liabilities 50,558
-----------
TOTAL LIABILITIES 27,210,140
------------
NET ASSETS $341,868,944
============
Net Assets represented by: (Note 2)
Additional paid-in capital $298,264,898
Accumulated undistributed
net investment income -
Accumulated net realized
gain on investment
transactions 37,140,025
Net unrealized appreciation
of investments 6,464,021
------------
NET ASSETS $341,868,944
============
NET ASSET VALUE PER SHARE
Class A Shares $ 22.71
Class B Shares $ 21.72
Class Y Shares $ 22.74
OFFERING PRICE PER SHARE
Class A Shares $ 24.09(a)
Class B Shares $ 21.72
Class Y Shares $ 22.74
SHARES OUTSTANDING
Class A Shares 6,391,508
Class B Shares 9,059,483
Class Y Shares 49
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 2,936,795
Interest 804,494
------------
TOTAL INVESTMENT INCOME
(NOTE 2) 3,741,289
EXPENSES
Management fee (Note 4) $ 2,153,467
Distribution fee (Note 5) 1,227,717
Shareholder service fee (Note 5) 672,957
Transfer agent fee 324,574
Administration fee (Note 4) 269,183
Shareholder reports and postage
expenses 57,979
Registration expenses 52,663
Custodian and accounting fees 37,488
Legal fees 8,462
Directors' fees and expenses 6,830
Audit fees 4,556
Miscellaneous 25,373
-----------
Total expenses 4,841,249
------------
NET INVESTMENT LOSS (1,099,960)
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on investments
(Note 2) 45,438,253
Change in unrealized
appreciation on investments (32,273,002)
-----------
NET GAIN ON INVESTMENTS 13,165,251
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 12,065,291
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income (loss) $ (1,099,960) $ 55,807
Net realized gain on investments 45,438,253 14,469,617
Change in unrealized appreciation on investments (32,273,002) 24,877,344
------------- -------------
Increase in net assets resulting from operations 12,065,291 39,402,768
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A (29,728) -
Class B (52,910) -
From net realized gain on investments
Class A (5,934,313) (4,657,749)
Class B (10,484,517) (10,198,967)
Class Y (12) -
------------- -------------
Total distributions to shareholders (16,501,480) (14,856,716)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 220,347,637 61,493,267
Reinvested distributions 16,089,732 14,535,885
Shares redeemed (69,421,744) (21,387,389)
------------- -------------
Change in net assets resulting from capital share transactions 167,015,625 54,641,763
------------- -------------
Increase in net assets 162,579,436 79,187,815
Net Assets
Beginning of year 179,289,508 100,101,693
------------- -------------
End of year (including accumulated undistributed net investment
income of $0 and $59,668, respectively) $ 341,868,944 $ 179,289,508
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26
--------- --------- --------- -------- --------
Income from investment operations
Net investment income (loss) (0.10) (0.02) 0.11 0.02 0.09
Net realized and unrealized gain (loss) on
investments 2.34 5.87 3.73 2.91 (0.30)
---------- ---------- --------- -------- --------
Total from investment operations 2.24 5.85 3.84 2.93 (0.21)
---------- ---------- --------- -------- --------
Less distributions
From net investment income (0.01) - - - (0.04)
From capital gains (1.94) (2.79) (0.50) (1.79) (0.13)
---------- ---------- ---------- -------- --------
Total distributions (1.95) (2.79) (0.50) (1.79) (0.17)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88
========== ========== ========== ======== ========
TOTAL RETURN* 10.72% 34.78% 24.63% 20.18% (1.37%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $145,117 $ 65,703 $ 31,889 $ 29,582 $ 21,181
Ratio of expenses to average net assets 1.34% 1.41% 1.43% 1.87% 1.70%
Ratio of net investment income to average net assets 0.06% 0.53% 0.51% 0.27% 0.53%
Portfolio turnover rate 104% 64% 98% 157% 149%
Average commission rate on portfolio transactions $ 0.0692 $ 0.0697 $ 0.0688
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23
---------- ---------- -------- -------- --------
Income from investment operations
Net investment income (loss) (0.08) - (0.04) 0.25 (0.04)
Net realized and unrealized gain (loss) on investments 2.07 5.55 3.67 2.53 (0.26)
---------- ---------- --------- -------- --------
Total from investment operations 1.99 5.55 3.63 2.78 (0.30)
---------- ---------- --------- -------- --------
Less distributions
From net investment income (0.01) - - - -
From capital gains (1.94) (2.79) (0.50) (1.79) (0.13)
---------- ---------- --------- -------- --------
Total distributions (1.95) (2.79) (0.50) (1.79) (0.13)
---------- ---------- --------- -------- --------
Net asset value, end of year $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80
========== ========== ========= ======== ========
TOTAL RETURN* 9.86% 33.88% 23.64% 19.26% (2.00%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $196,751 $113,587 $ 68,213 $ 57,648 $ 41,106
Ratio of expenses to average net assets 2.09% 2.16% 2.18% 2.56% 2.46%
Ratio of net investment loss to average net assets (0.70%) (0.22%) (0.24%) (0.41%) (0.22%)
Portfolio turnover rate 104% 64% 98% 157% 149%
Average commission rate on portfolio transactions $ 0.0692 $ 0.0697 $ 0.0688
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED
9/30/98 (B)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 20.81
--------
Income from investment operations
Net investment income 0.02
Net realized and unrealized gain on investments 2.16
--------
Total from investment operations 2.18
--------
Less distributions
From capital gains (0.25)
----------
Net asset value, end of period $ 22.74
==========
TOTAL RETURN* 10.56%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.09% (a)
Ratio of net investment income to average net assets 0.38% (a)
Portfolio turnover rate 104%
Average commission rate on portfolio transactions $ 0.0692
</TABLE>
(a) Annualized.
(b) Reflects operations for the period from November 19, 1997 (initial offering
of Class Y shares) to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 52.08%
CAPITAL GOODS &
CONSTRUCTION - 5.59%
Emerson Electric Company 75,100 $ 4,674,975
Illinois Tool Works 78,000 4,251,000
W.W. Grainger, Inc. 86,900 3,660,662
------------
12,586,637
------------
COMMERCIAL SERVICES - 0.88%
Omnicom Group 43,800 1,971,000
------------
CONSUMER CYCLICAL - 8.43%
Chancellor Media
Corporation * 47,000 1,568,625
Clear Channel
Communications 41,600 1,976,000
Gannett, Inc. 42,600 2,281,763
General Motors Corporation 19,100 1,044,531
Interpublic Group Company 54,600 2,944,987
Newell Company 90,200 4,154,837
Time Warner 25,800 2,259,113
Tribune Company 35,300 1,776,031
Walt Disney Company 39,000 987,188
------------
18,993,075
------------
CONSUMER STAPLES - 4.38%
Philip Morris Companies, Inc. 61,400 2,828,238
Sherwin-Williams Company 133,200 2,880,450
Sysco Corporation 176,000 4,147,000
------------
9,855,688
------------
ENERGY - 0.43%
Williams Companies 33,500 963,125
------------
FINANCIAL - 11.48%
Ahmanson HF & Company 25,500 1,415,250
Charter One Financial, Inc. 97,873 2,410,113
Dime Bancorp, Inc. 61,700 1,561,781
M & T Bank Corporation 2,901 1,337,361
Marsh & McLennan
Companies, Inc. 14,700 731,325
North Fork Bancorp 111,750 2,235,000
Northern Trust Corporation 35,200 2,402,400
Old Republic International
Corporation 92,550 2,082,375
Price (T. Rowe) & Associates,
Inc. 70,000 2,056,250
Torchmark Corporation 52,000 1,868,750
Travelers Group, Inc. 45,300 1,698,750
UNUM Corporation 77,000 3,825,937
U S Bancorp 62,700 2,229,769
------------
25,855,061
------------
HEALTH - 6.81%
Bristol-Myers Squibb Company 37,600 3,905,700
HealthSouth Corporation * 188,700 1,993,144
Johnson & Johnson 62,600 4,898,450
Tenet Healthcare Corporation 158,000 4,542,500
------------
15,339,794
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL - 1.27%
Safeway, Inc. * 61,600 $ 2,856,700
------------
TECHNOLOGY - 10.42%
Automatic Data Processing 60,100 4,492,475
Computer Associates
International, Inc. 22,600 836,200
Computer Sciences
Corporation 69,500 3,787,750
GTE Corporation 31,400 1,727,000
MCI WorldCom, Inc. 90,000 4,398,750
Sprint Corporation 23,900 1,720,800
Sun Microsystems, Inc. * 103,500 5,155,594
U S West, Inc. 25,905 1,358,393
------------
23,476,962
------------
TRANSPORTATION - 0.70%
Werner Enterprises, Inc. 100,000 1,575,000
------------
MISCELLANEOUS - 1.69%
Tyco International Limited 69,100 3,817,775
------------
TOTAL COMMON STOCKS
(COST $119,416,670) 117,290,817
------------
U.S. GOVERNMENT SECURITIES - 41.72%
U.S. Treasury Bond, 5.50%,
1/31/03 (a) $12,000,000 12,531,120
U.S. Treasury Bond, 6.50%,
11/15/26 68,323,000 81,437,600
------------
TOTAL U.S. GOVERNMENT
SECURITIES
(COST $78,253,007) 93,968,720
------------
211,259,537
------------
SHORT-TERM INVESTMENT - 6.03%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$13,769,132 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$ 13,906,823,
(cost $13,594,355) 13,594,355 13,594,355
------------
TOTAL INVESTMENTS
(COST $211,264,032)-99.83% 224,853,892
OTHER ASSETS LESS
LIABILITIES - 0.17% 379,555
------------
NET ASSETS - 100.00% $225,233,447
============
</TABLE>
* Non-income producing.
(a) A portion of this security is pledged as collateral for open futures
contracts.
39
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $196,774,571 and $286,670,918, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $211,280,993. Net unrealized appreciation aggregated
$13,572,899, of which $25,354,232, related to appreciated investment securities
and $11,781,333, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $ 211,259,537
Repurchase agreements 13,594,355
-------------
Total investments
(cost $211,264,032) 224,853,892
Collateral for securities
loaned (Note 2) 60,165,776
Receivables
Fund shares sold 61,401
Dividends and interest 1,908,750
Deferred expenses (Note 2) 5,034
-------------
TOTAL ASSETS 286,994,853
-------------
LIABILITIES
Payables
Securities loaned (Note 2) $ 60,165,776
Fund shares redeemed 502,685
Variation margin 1,032,188
Accrued expenses and other
liabilities 60,757
------------
TOTAL LIABILITIES 61,761,406
-------------
NET ASSETS $ 225,233,447
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 192,886,301
Accumulated undistributed
net investment income 2,163,583
Accumulated net realized
gain on investment
transactions 20,465,541
Net unrealized appreciation
of investments and open
futures contracts 9,718,022
-------------
NET ASSETS $ 225,233,447
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.41
Class B Shares $ 14.97
Class Y Shares $ 15.43
OFFERING PRICE PER SHARE
Class A Shares $ 16.35(a)
Class B Shares $ 14.97
Class Y Shares $ 15.43
SHARES OUTSTANDING
Class A Shares 1,602,162
Class B Shares 13,393,973
Class Y Shares 67
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 1,264,309
Interest 7,295,963
-----------
TOTAL INVESTMENT INCOME
(NOTE 2) 8,560,272
EXPENSES
Management fee (Note 4) $ 2,420,122
Distribution fee (Note 5) 1,875,172
Shareholder service fee (Note 5) 711,799
Transfer agent fee 375,675
Administration fee (Note 4) 284,720
Shareholder reports and postage
expenses 67,926
Custodian and accounting fees 64,615
Registration expenses 47,295
Organizational expenses 20,152
Legal fees 10,523
Directors' fees and expenses 8,296
Audit fees 5,661
Miscellaneous 29,147
-----------
Total expenses 5,921,103
-----------
NET INVESTMENT INCOME 2,639,169
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on
investments (Note 2) 24,557,938
Change in unrealized appreciation
on investments and futures
contracts (26,287,481)
-----------
NET LOSS ON INVESTMENTS (1,729,543)
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 909,626
===========
</TABLE>
(b) Net of foreign withholding taxes of $8,800.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 2,639,169 $ 5,345,384
Net realized gain (loss) on investments 24,557,938 54,534,179
Change in unrealized appreciation on investments and futures contracts (26,287,481) (24,297,952)
-------------- -------------
Increase in net assets resulting from operations 909,626 35,581,611
-------------- -------------
Distributions to Shareholders
From net investment income
Class A (617,602) -
Class B (4,725,533) -
From net realized gain on investments
Class A (6,308,309) (1,531,137)
Class B (48,272,257) (21,767,428)
-------------- -------------
Total distributions to shareholders (59,923,701) (23,298,565)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 16,612,646 71,646,650
Reinvested distributions 58,353,501 22,750,654
Shares redeemed (133,155,402) (73,109,779)
-------------- -------------
Change in net assets resulting from capital share transactions (58,189,255) 21,287,525
-------------- -------------
Increase (decrease) in net assets (117,203,330) 33,570,571
Net Assets
Beginning of year 342,436,777 308,866,206
-------------- -------------
End of year (including accumulated undistributed net investment
income of $2,163,583 and $5,365,536, respectively) $ 225,233,447 $ 342,436,777
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (B)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.61 $ 17.96 $ 15.24 $ 13.45
--------- --------- --------- ----------
Income from investment operations
Net investment income 0.40 0.31 0.08 -
Net realized and unrealized gain (loss) on investments (0.35) 1.68 2.86 1.79
---------- --------- --------- -----------
Total from investment operations 0.05 1.99 2.94 1.79
---------- --------- --------- -----------
Less distributions
From net investment income (0.29) - - -
From capital gains (2.96) (1.34) (0.22) -
---------- ---------- ---------- -----------
Total distributions (3.25) (1.34) (0.22) -
---------- ---------- ---------- -----------
Net asset value, end of period $ 15.41 $ 18.61 $ 17.96 $ 15.24
========== ========== ========== ===========
TOTAL RETURN* 0.32% 11.97% 19.36% 13.31%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 24,685 $ 40,552 $ 20,372 $ 10,503
Ratio of expenses to average net assets 1.42% 1.45% 1.42% 1.65% (a)
Ratio of net investment income (loss) to average net assets 1.59% 2.29% 0.62% (0.06%)(a)
Portfolio turnover rate 77% 192% 125% 122%
Average commission rate on portfolio transactions $ 0.0708 $ 0.0644 $ 0.0669
</TABLE>
(a) Annualized.
(b) For the period from June 5, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.29 $ 17.79 $ 15.21
-------- --------- ----------
Income from investment operations
Net investment income (loss) 0.16 0.26 (0.03)
Net realized and unrealized gain (loss) on
investments (0.23) 1.58 2.83
--------- --------- ----------
Total from investment operations (0.07) 1.84 2.80
--------- --------- ----------
Less distributions
From net investment income (0.29) - -
From capital gains (2.96) (1.34) (0.22)
--------- ---------- ----------
Total distributions (3.25) (1.34) (0.22)
--------- ---------- ----------
Net asset value, end of period $ 14.97 $ 18.29 $ 17.79
========= ========== ==========
TOTAL RETURN* (0.46%) 11.19% 18.48%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $200,547 $301,885 $288,494
Ratio of expenses to average net assets 2.17% 2.20% 2.19%
Ratio of net investment income (loss) to average
net assets 0.84% 1.54% (0.19%)
Portfolio turnover rate 77% 192% 125%
Average commission rate on portfolio transactions $ 0.0708 $ 0.0644 $ 0.0669
<CAPTION>
PERIOD
PERIOD ENDED YEAR ENDED ENDED
9/30/95 (C) 12/31/94 12/31/93 (D)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.24 $ 12.70 $ 12.50
---------- -------- ---------
Income from investment operations
Net investment income (loss) - (0.06) -
Net realized and unrealized gain (loss) on
investments 2.97 (0.40) 0.20
---------- -------- ---------
Total from investment operations 2.97 (0.46) 0.20
---------- -------- ---------
Less distributions
From net investment income - - -
From capital gains - - -
---------- -------- ---------
Total distributions - - -
---------- -------- ---------
Net asset value, end of period $ 15.21 $ 12.24 $ 12.70
========== ======== =========
TOTAL RETURN* 24.26% (3.61%) 1.60%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 224,643 $179,274 $ 122,177
Ratio of expenses to average net assets 2.31%(a) 2.19% 2.06%(a)
Ratio of net investment income (loss) to average
net assets 0.02%(a) (0.54%) 0.08%(a)
Portfolio turnover rate 122% 143% 0%
Average commission rate on portfolio transactions
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED 9/30/98 (E)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.01
--------
Income from investment operations
Net investment income 0.25
Net realized and unrealized gain on investments 0.18
--------
Total from investment operations 0.43
--------
Less distributions
From capital gains (0.01)
----------
Net asset value, end of period $ 15.43
==========
TOTAL RETURN* 2.87%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.17% (a)
Ratio of net investment income to average net assets 2.18% (a)
Portfolio turnover rate 77%
Average commission rate on portfolio transactions $ 0.0708
</TABLE>
(a) Annualized.
(c) For the period from January 1, 1995 to September 30, 1995.
(d) For the period from October 29, 1993 (commencement of operations) to
December 31, 1993.
(e) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 58.78%
BASIC MATERIALS - 4.46%
AlliedSignal, Inc. 92,300 $ 3,265,113
Aluminum Company of America 24,000 1,704,000
British Steel PLC~ 137,000 2,491,687
Westvaco Corporation 68,300 1,639,200
Willamette Industries, Inc. 60,000 1,721,250
-----------
10,821,250
-----------
CAPITAL GOODS & CONSTRUCTION - 4.46%
Caterpillar, Inc. 50,000 2,228,125
Cooper Industries, Inc. 47,500 1,935,625
Cooper Tire & Rubber 125,000 2,250,000
Hubbell, Inc. 65,000 2,307,500
Thomas & Betts Corporation 55,000 2,093,438
-----------
10,814,688
-----------
COMMERCIAL SERVICES - 3.17%
Foster Wheeler Corporation 111,200 1,529,000
Supervalu, Inc. 91,300 2,128,431
Wallace Computer Services, Inc. 225,300 4,041,319
-----------
7,698,750
-----------
CONSUMER CYCLICAL - 3.99%
American Stores Company 58,900 1,895,844
Ford Motor Company 75,500 3,543,781
Maytag Corporation 28,900 1,379,975
Sears Roebuck & Company 65,000 2,872,188
-----------
9,691,788
-----------
CONSUMER STAPLES - 7.94%
American Home Products
Corporation 53,200 2,786,350
Baxter International, Inc. 62,000 3,689,000
Dimon Incorporated 280,000 2,957,500
Hormel Foods Corporation 136,400 3,691,325
Kimberly-Clark Corporation 72,000 2,916,000
Philip Morris Companies, Inc. 70,000 3,224,375
-----------
19,264,550
-----------
ENERGY - 6.52%
Amoco Corporation 23,200 1,249,900
Baker Hughes, Inc. 89,800 1,880,187
Chevron Corporation 26,400 2,219,250
Phillips Petroleum Company 22,000 992,750
Repsol SA~ 50,000 2,109,375
Total SA~ 37,700 2,368,031
Unocal Corporation 65,800 2,385,250
USX-Marathon Group, Inc. 74,000 2,622,375
-----------
15,827,118
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL - 10.96%
Ace Limited 73,700 $ 2,211,000
Citicorp 36,600 3,401,513
Federal National Mortgage
Association 78,600 5,050,050
First Union Corporation (b) 43,200 2,211,300
Jefferson-Pilot Corporation 33,750 2,041,875
Spieker Properties, Inc. 65,000 2,388,750
US Bancorp 99,000 3,520,687
Wachovia Corporation 39,000 3,324,750
Wilmington Trust Corporation 46,900 2,438,800
-----------
26,588,725
-----------
HEALTH - 4.61%
Abbott Laboratories 43,900 1,906,906
Columbia HCA Healthcare
Corporation 150,000 3,009,375
Johnson & Johnson 41,000 3,208,250
Pharmacia & UpJohn 61,000 3,061,438
-----------
11,185,969
-----------
TECHNOLOGY - 4.63%
Amp, Inc. 45,700 1,633,775
International Business Machines
Corporation 32,700 4,185,600
Lockheed Martin Corporation 21,700 2,187,631
Xerox Corporation 38,000 3,220,500
-----------
11,227,506
-----------
TRANSPORTATION &
SERVICES - 1.58%
KLM Royal Dutch Air * 43,428 1,074,826
Union Pacific Corporation 65,000 2,770,625
-----------
3,845,451
-----------
UTILITIES - 6.46%
Bell Atlantic Corporation 78,900 3,821,719
BellSouth Corporation 33,000 2,483,250
DPL, Inc. 95,000 1,864,375
DQE, Inc. 43,000 1,660,875
Pinnacle West Capital 41,700 1,868,681
SBC Communications, Inc. 89,200 3,963,825
-----------
15,662,725
-----------
TOTAL COMMON STOCKS
(COST $137,623,841) 142,628,520
-----------
</TABLE>
48
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 13.43%
INDUSTRIAL - 6.03%
Aluminum Company of
America, 5.75%, 2/01/01 $ 250,000 $ 254,350
Archer-Daniels-Midland, 6.75%,
12/15/27 2,000,000 2,078,040
Computer Associates
International, 6.50%,
4/15/08 (a) 1,000,000 997,900
Gap, Inc., 6.90%, 9/15/07 1,000,000 1,114,180
Gillette Company, 5.75%,
10/15/05 250,000 260,167
Hershey Foods Corporation,
7.20%, 8/15/27 1,000,000 1,119,310
ICI Wilmington, Inc., 6.95%,
9/15/04 1,000,000 1,065,060
Mead Corporation, 7.35%,
3/01/17 750,000 814,223
Praxair, Inc., 6.15%, 4/15/03 1,000,000 1,027,020
Rockwell International
Corporation, 6.70%, 1/15/28 1,500,000 1,589,775
Scripps (E.W.) Company,
6.38%, 10/15/02 1,000,000 1,037,830
Tenneco, Inc., 7.50%, 4/15/07 500,000 548,365
Williams Company, Inc., 6.50%,
11/15/02 1,000,000 1,032,510
Zeneca Wilmington, 7.00%,
11/15/23 1,500,000 1,688,745
-----------
14,627,475
-----------
FINANCIAL - 5.08%
Allmerica Financial Corporation,
7.63%, 10/15/25 1,130,000 1,252,729
Allstate Corporation, 6.75%,
5/15/18 1,000,000 1,028,290
American General Finance.,
5.88%, 7/01/00 250,000 252,987
Associates Corporation of North
America, 5.25%, 3/30/00 250,000 250,645
BankAmerica Corporation,
7.88%, 12/01/02 1,000,000 1,092,980
Bank One Texas, 6.25%,
2/15/08 1,000,000 1,043,010
Chase Manhattan Corporation,
7.75%, 11/01/99 250,000 255,697
Comerica Bank, 7.13%,
12/01/13 250,000 267,703
Finova Capital Corporation,
6.39%, 10/08/02 1,000,000 1,036,390
First National Bank of Boston,
8.00%, 9/15/04 250,000 277,367
Fleet Financial Group, 6.88%,
1/15/28 1,000,000 1,029,320
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
FINANCIAL (CONTINUED)
Great Western Financial,
6.38%, 7/01/00 $ 250,000 $ 254,623
Heller Financial, 6.38%,
11/10/00 1,000,000 1,026,960
Home Savings of Americas,
6.00%, 11/01/00 250,000 253,330
MBIA, Inc., 7.00%, 12/15/25 1,000,000 1,063,240
NationsBank Corporation,
7.80%, 9/15/16 1,000,000 1,134,400
Security Benefits Life Company,
8.75%, 5/15/16 (a) 500,000 549,375
Toronto Dominion Bank,
6.13%, 11/01/08 250,000 260,930
-----------
12,329,976
-----------
UTILITIES - 2.32%
Florida Power & Light
Company, 5.38%, 4/01/00 250,000 251,090
New York Telephone, 6.00%,
4/15/08 1,000,000 1,052,340
Northern Natural Gas, 6.75%,
9/15/08 2,000,000 2,096,000
Pacific Gas & Electric Company,
5.93%, 10/08/03 250,000 262,700
Philadelphia Electric Company,
7.50%, 1/15/99 100,000 100,835
Southwestern Public Service
Company, 6.88%, 12/01/99 250,000 255,188
System Energy Resources,
7.71%, 8/01/01 500,000 525,535
Union Electric Company,
6.75%, 10/15/99 250,000 254,688
US West Capital Funding Inc.,
6.88%, 7/15/28 785,000 833,489
-----------
5,631,865
-----------
TOTAL CORPORATE BONDS
(COST $31,414,967) 32,589,316
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 27.27%
Government National Mortgage
Association 6.50% - 7.00%,
1/15/24 - 6/15/28 8,509,957 8,721,623
U.S. Treasury Bonds, 7.25%,
5/15/16 4,110,000 5,103,469
U.S. Treasury Notes, 5.63% -
7.50%, 11/15/99 - 10/15/06 48,550,000 52,331,514
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $61,636,227) 66,156,606
-----------
241,374,442
-----------
</TABLE>
49
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT - 0.18%
REPURCHASE AGREEMENT
Paribas Corporation
Dated 9/30/98, 5.54%, due
10/01/98, collateralized by
$368,000 U.S. Treasury Note,
7.88%, 11/13/04, market
value $435,735
(cost $435,000) $435,000 $ 435,000
------------
TOTAL INVESTMENTS
(COST $231,110,035)-99.66% 241,809,442
OTHER ASSETS LESS
LIABILITIES - 0.34% 831,534
------------
NET ASSETS - 100.00% $242,640,976
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under rule 144A or securities offered pursuant to section 4(2) of the
Securities Act of 1933, as amended. These securites have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) At September 30, 1998, the Portfolio owned 43,200 shares of common stock of
First Union Corporation at a cost of $1,599,696 and market value of
$2,211,300. These shares were purchased by the Portfolio prior to the
acquisition of Wheat First Union by First Union.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $159,489,535 and $86,643,249, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $231,143,009. Net unrealized appreciation aggregated
$10,666,433, of which $24,490,485, related to appreciated investment securities
and $13,824,052, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $ 241,374,442
Repurchase agreements 435,000
-------------
Total investments
(cost $231,110,035) 241,809,442
Collateral for securities
loaned (Note 2) 40,344,784
Receivables
Fund shares sold 290,524
Dividends and interest 1,702,285
Other 500
-------------
TOTAL ASSETS 284,147,535
-------------
LIABILITIES
Payables
Investments purchased $ 662,932
Securities loaned (Note 2) 40,344,784
Fund shares redeemed 426,881
Accrued expenses and other
liabilities 71,962
----------
TOTAL LIABILITIES 41,506,559
-------------
NET ASSETS $ 242,640,976
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 221,635,180
Accumulated undistributed
net investment income 91,952
Accumulated net realized
gain on investment
transactions 10,214,437
Net unrealized appreciation
of investments 10,699,407
-------------
NET ASSETS $ 242,640,976
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 19.54
Class B Shares $ 19.53
Class Y Shares $ 19.54
OFFERING PRICE PER SHARE
Class A Shares $ 20.73(a)
Class B Shares $ 19.53
Class Y Shares $ 19.54
SHARES OUTSTANDING
Class A Shares 5,055,017
Class B Shares 7,364,927
Class Y Shares 55
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 2,856,521
Interest 5,943,480
------------
TOTAL INVESTMENT INCOME
(NOTE 2) 8,800,001
EXPENSES
Management fee (Note 4) $ 1,638,729
Distribution fee (Note 5) 986,604
Shareholder service fee
(Note 5) 546,242
Transfer agent fee 292,933
Administration fee (Note 4) 218,497
Registration expenses 50,615
Custodian and accounting
fees 48,726
Shareholder reports and
postage expenses 43,522
Legal fees 7,495
Directors' fees and expenses 5,917
Audit fees 4,195
Miscellaneous 26,008
-----------
Total expenses 3,869,483
------------
NET INVESTMENT INCOME 4,930,518
------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on
investments (Note 2) 10,845,766
Change in unrealized
appreciation on
investments (5,423,416)
-----------
NET GAIN ON INVESTMENTS 5,422,350
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 10,352,868
============
</TABLE>
(b) Net of foreign withholding taxes of $50,731.
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 4,930,518 $ 2,672,361
Net realized gain on investments 10,845,766 15,016,540
Change in unrealized appreciation on investments (5,423,416) 6,704,657
------------ -------------
Increase in net assets resulting from operations 10,352,868 24,393,558
------------ -------------
Distributions to Shareholders
From net investment income
Class A (2,350,498) (,097,197)
Class B (2,488,039) (1,691,306)
Class Y (29) -
From net realized gain on investments
Class A (5,325,307) (2,474,556)
Class B (8,807,307) (6,846,186)
Class Y (1) -
--------------- -------------
Total distributions to shareholders (18,971,181) (12,109,245)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 101,090,596 74,239,398
Reinvested distributions 17,902,342 11,495,496
Shares redeemed (39,059,107) (17,451,330)
-------------- -------------
Change in net assets resulting from capital share transactions 79,933,831 68,283,564
-------------- -------------
Increase in net assets 71,315,518 80,567,877
Net Assets
Beginning of year 171,325,458 90,757,581
-------------- -------------
End of year (including accumulated undistributed net investment
income of $91,952 and $0, respectively) $ 242,640,976 $ 171,325,458
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 20.60 $ 19.16 $ 17.13 $ 15.27 $ 14.88
--------- --------- --------- -------- --------
Income from investment operations
Net investment income 0.51 0.44 0.37 0.40 0.31
Net realized and unrealized gain on investments 0.60 3.39 2.75 2.14 0.64
--------- --------- --------- -------- --------
Total from investment operations 1.11 3.83 3.12 2.54 0.95
--------- --------- --------- -------- --------
Less distributions
From net investment income (0.51) (0.47) (0.35) (0.43) (0.30)
From capital gains (1.66) (1.92) (0.74) (0.25) (0.26)
---------- ---------- ---------- -------- --------
Total distributions (2.17) (2.39) (1.09) (0.68) (0.56)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 19.54 $ 20.60 $ 19.16 $ 17.13 $ 15.27
========== ========== ========== ======== ========
TOTAL RETURN* 5.81% 22.11% 19.13% 17.24% 6.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 98,794 $ 63,509 $ 24,210 $ 19,888 $ 17,773
Ratio of expenses to average net assets 1.32% 1.35% 1.36% 1.69% 1.75%
Ratio of net investment income to average net assets 2.70% 2.63% 2.08% 2.53% 2.20%
Portfolio turnover rate 40% 75% 72% 62% 78%
Average commission rate on portfolio transactions $ 0.0540 $ 0.0515 $ 0.0492
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91
--------- --------- --------- -------- --------
Income from investment operations
Net investment income 0.37 0.34 0.23 0.28 0.21
Net realized and unrealized gain on investments 0.59 3.35 2.76 2.14 0.61
--------- --------- --------- -------- --------
Total from investment operations 0.96 3.69 2.99 2.42 0.82
--------- --------- --------- -------- --------
Less distributions
From net investment income (0.36) (0.36) (0.21) (0.31) (0.19)
From capital gains (1.66) (1.92) (0.74) (0.25) (0.26)
---------- ---------- ---------- -------- --------
Total distributions (2.02) (2.28) (0.95) (0.56) (0.45)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28
========== ========== ========== ======== ========
TOTAL RETURN* 5.01% 21.24% 18.26% 16.32% 5.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $143,846 $107,816 $ 66,548 $ 46,678 $ 43,219
Ratio of expenses to average net assets 2.07% 2.10% 2.13% 2.43% 2.44%
Ratio of net investment income to average net assets 1.95% 1.87% 1.32% 1.78% 1.51%
Portfolio turnover rate 40% 75% 72% 62% 78%
Average commission rate on portfolio transactions $ 0.0540 $ 0.0515 $ 0.0492
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (C)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.75
--------
Income from investment operations
Net investment income 0.54
Net realized and unrealized gain on investments 0.82
--------
Total from investment operations 1.36
--------
Less distributions
From net investment income (0.54)
From capital gains (0.03)
----------
Total distributions (0.57)
----------
Net asset value, end of period $ 19.54
==========
TOTAL RETURN* 7.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.07% (a)
Ratio of net investment income to average net assets 3.15% (a)
Portfolio turnover rate 40%
Average commission rate on portfolio transactions $ 0.0540
</TABLE>
(a) Annualized.
(c) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
53
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 51.46%
BASIC MATERIALS - 1.89%
Emerson Electric Company 3,890 $ 242,152
---------
CAPITAL GOODS & CONSTRUCTION - 5.56%
Bemis Company 6,245 218,966
Illinois Tool Works 4,635 252,607
W. W. Grainger, Inc. 5,730 241,377
---------
712,950
---------
CONSUMER CYCLICAL - 8.42%
Chancellor Media Corporation -
Class A * 5,245 175,052
Clear Channel Communications * 4,445 211,137
Gannett Company 4,105 219,874
Interpublic Group Companies, Inc. 4,335 233,819
Newell Company 5,220 240,446
---------
1,080,328
---------
CONSUMER STAPLES - 5.52%
Philip Morris Companies, Inc. 4,840 222,942
Sherwin-Williams Company 11,285 244,038
Sysco Corporation 10,235 241,162
---------
708,142
---------
FINANCIAL - 10.84%
Ahmanson (HF) & Company 3,950 219,225
American Express Company 2,860 222,007
Federal National Mortgage Association 3,510 225,517
NationsBank Corporation 2,990 159,965
Norwest Corporation 4,495 160,977
UNUM Corporation 4,720 234,525
SouthTrust Corporation 4,800 167,700
---------
1,389,916
---------
HEALTH - 6.95%
Bristol-Myers Squibb Company 2,345 243,587
HealthSouth Corporation * 18,340 193,716
Johnson & Johnson 2,805 219,492
Tenet Healthcare Corporation * 8,170 234,888
---------
891,683
---------
TECHNOLOGY - 9.20%
Automatic Data Processing 3,190 238,452
Computer Associates International, Inc. 6,770 250,490
Computer Sciences Corporation 4,145 225,903
MCI WorldCom, Inc. * 4,685 228,980
Sun Microsystems, Inc. * 4,725 235,364
---------
1,179,189
---------
TRANSPORTATION & SERVICES - 1.16%
Werner Enterprises, Inc. 9,472 149,184
---------
MISCELLANEOUS - 1.92%
Tyco International, Inc. 4,445 245,586
---------
TOTAL COMMON STOCKS
(COST $6,531,760) 6,599,130
---------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
FIXED INCOME SECURITIES - 36.99%
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 34.26%
Federal National Mortgage
Association, MTN, 6.64%,
7/02/07 $ 130,000 $ 145,240
Government National
Mortgage Association, MBS,
6.50%, 5/15/09 102,065 104,453
7.00%, 8/15/28 ARM 84,047 86,674
Government National
Mortgage Association II,
ARM,
6.88%, 4/20/22 71,868 73,307
7.00%, 11/20/22 - 8/15/28 78,240 79,458
U.S. Treasury Bonds, 6.00% -
7.50%, 2/15/23 - 2/15/26 725,000 910,182
U.S. Treasury Notes, 5.63% -
6.75%, 4/30/00 - 5/15/08 2,790,000 2,995,171
---------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $4,274,484) 4,394,485
---------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 1.22%
AFG Receivables Trust, 6.65%,
10/15/02 32,527 32,782
CS First Boston, 7.18%,
2/25/18 25,000 26,800
Key Auto Finance Trust Series
1997-2 Class A3, 6.10%,
11/15/00 50,000 50,172
Union Acceptance Corporation,
6.48%, 5/10/04 45,000 46,240
---------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $152,201) 155,994
---------
CORPORATE BONDS - 1.51%
Ford Motor Credit Company,
7.20%, 6/15/07 45,000 50,256
Norwest Corporation, 6.80%,
5/15/02 60,000 63,625
PNC Student Loan Trust I,
6.73%, 1/25/07, ARM 75,000 79,726
---------
TOTAL CORPORATE BONDS
(COST $181,746) 193,607
---------
TOTAL FIXED INCOME SECURITIES
(COST $4,608,431) 4,744,086
---------
</TABLE>
58
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT
REPURCHASE AGREEMENT - 0.98%
Goldman Sachs & Company
Dated 09/30/98, 5.60%, due
10/01/98, collateralized by
$127,262 Federal National
Mortgage Association,
6.00%, 08/01/13, market
value $128,534
(cost $125,344) $125,344 $ 125,344
-----------
TOTAL INVESTMENTS
(COST $11,265,535)-89.43% 11,468,560
OTHER ASSETS LESS
LIABILITIES - 10.57% 1,352,413
-----------
NET ASSETS - 100.00% $12,820,973
===========
</TABLE>
* Non-income producing.
ARM - Adjustable Rate Mortgage
MBS - Mortgage Backed Securities
MTN - Medium Term Note
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $11,028,839 and $3,760,750, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $11,265,535. Net unrealized appreciation aggregated
$203,025, of which $449,651, related to appreciated investment securities and
$246,626, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value
(Note 2)
Investment securities $ 11,343,216
Repurchase agreements 125,344
------------
Total investments
(cost $11,265,535) 11,468,560
Collateral for securities loaned
(Note 2) 2,639,420
Cash 477,253
Receivables
Investments sold 90,763
Fund shares sold 3,356,473
Dividends and interest 68,997
------------
TOTAL ASSETS 18,101,466
------------
LIABILITIES
Investments purchased $ 2,537,038
Securities loaned (Note 2) 2,639,420
Fund shares redeemed 100,000
Accrued expenses and other
liabilities 4,035
-----------
TOTAL LIABILITIES 5,280,493
------------
NET ASSETS $ 12,820,973
============
Net Assets represented by:
(Note 2)
Additional paid-in capital $ 12,530,663
Accumulated undistributed net
investment income 18,259
Accumulated net realized gain
on investment transactions 69,026
Net unrealized appreciation of
investments 203,025
------------
NET ASSETS $ 12,820,973
============
NET ASSET VALUE PER SHARE
Class A Shares $ 13.69
Class B Shares $ 13.69
Class Y Shares $ 13.69
OFFERING PRICE PER SHARE
Class A Shares $ 14.53(a)
Class B Shares $ 13.69
Class Y Shares $ 13.69
SHARES OUTSTANDING
Class A Shares 258,246
Class B Shares 412,394
Class Y Shares 266,111
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 29,221
Interest 104,135
--------
Total investment income
(Note 2) 133,356
EXPENSES
Management fee (Note 4) $ 31,721
Distribution fee (Note 5) 30,319
Shareholder service fee (Note 5) 10,212
Administration fee (Note 4) 4,219
Custodian and accounting fees 5,842
Registration expenses 2,363
Shareholder reports and postage
expenses 2,043
Legal fees 115
Directors' fees and expenses 60
Audit fees 59
Miscellaneous 465
--------
Total expenses 87,418
--------
Deduct
Waiver of distribution fee (Note 5) (29,451)
Waiver of management fee
(Note 4) (20,856)
Waiver of shareholder servicing
fee (Note 5) (9,738)
Waiver of administration fee
(Note 4) (4,219)
--------
NET EXPENSES 23,154
--------
NET INVESTMENT INCOME 110,202
--------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on investments
(Note 2) 822,291
Change in unrealized appreciation
on investments (583,942)
--------
NET GAIN ON INVESTMENTS 238,349
--------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $348,551
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 110,202 $ 107,324
Net realized gain on investments 822,291 408,111
Change in unrealized appreciation on investments (583,942) 397,175
------------ -----------
Increase in net assets resulting from operations 348,551 912,610
------------ -----------
Distributions to Shareholders
From net investment income (159,807) (108,705)
From net realized gain on investments (1,140,442) (449,369)
------------ -----------
Total distributions to shareholders (1,300,249) (558,074)
------------ -----------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 9,280,672 108,705
Reinvested distributions 1,300,249 449,370
Shares redeemed (910,125) (636,137)
------------ -----------
Change in net assets resulting from capital share transactions 9,670,796 (78,062)
------------ -----------
Increase in net assets 8,719,098 276,474
Net Assets
Beginning of period 4,101,875 3,825,401
------------ -----------
End of period (including accumulated undistributed net investement
income of $18,259 and $67,864, respectively) $ 12,820,973 $ 4,101,875
============ ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (B)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69
--------
Income from investment operations
Net investment income 0.00**
Net realized and unrealized gain (loss) on
investments 0.00**
----------
Total from investment operations 0.00**
----------
Net asset value, end of period $ 13.69
==========
TOTAL RETURN* 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,534
Ratio of expenses to average net assets 1.35%(a)
Ratio of net investment income to average net
assets 1.52%(a)
Portfolio turnover rate 89%
Average commission rate on portfolio
transactions $ 0.0687
</TABLE>
(a) Annualized.
(b) For the period from September 16, 1998 (initial offering of Class A) to
September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
** Income for the period was less than $0.005 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES (F)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 17.61 $ 16.28 $ 14.85
--------- --------- ---------
Income from investment operations
Net investment income 0.45 0.43 0.42
Net realized and unrealized gain (loss) on
investments 1.43 3.35 2.09
--------- --------- ---------
Total from investment operations 1.88 3.78 2.51
--------- --------- ---------
Less distributions
From net investment income (0.71) (0.43) (0.48)
From net realized capital gain (5.09) (2.02) (0.60)
---------- ---------- ----------
Total distributions (5.80) (2.45) (1.08)
---------- ---------- ----------
Net asset value, end of period $ 13.69 $ 17.61 $ 16.28
========== ========== ==========
TOTAL RETURN* 11.86% 26.09% 18.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 5,645 $ 4,102 $ 3,825
Ratio of expenses to average net assets 0.52% 0.50% 0.50%
Ratio of expenses to average net assets excluding
waiver 2.12% 2.13% 2.06%
Ratio of net investment income to average net assets 2.63% 2.78% 2.83%
Portfolio turnover rate 89% 80% 103%
Average commission rate on portfolio transactions $ 0.0687 $ 0.0696 $ 0.0694
<CAPTION>
PERIOD ENDED PERIOD ENDED
9/30/95 (C) 12/31/94 (D)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.44 $ 12.50
----------- ----------
Income from investment operations
Net investment income 0.36 0.22
Net realized and unrealized gain (loss) on
investments 2.08 (0.09)
----------- -----------
Total from investment operations 2.44 0.13
----------- -----------
Less distributions
From net investment income (0.03) (0.19)
From net realized capital gain -- --
----------- -----------
Total distributions (0.03) (0.19)
----------- -----------
Net asset value, end of period $ 14.85 $ 12.44
=========== ===========
TOTAL RETURN* 19.28% 1.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,210 $ 2,911
Ratio of expenses to average net assets 0.50% (a) 0.50% (a)
Ratio of expenses to average net assets excluding
waiver 2.12% (a) 2.72% (a)
Ratio of net investment income to average net assets 3.26% (a) 3.32% (a)
Portfolio turnover rate 65% 71%
Average commission rate on portfolio transactions
</TABLE>
CLASS Y SHARES (F)
<TABLE>
<CAPTION>
PERIOD
ENDED 9/30/98 (E)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69
--------
Income from investment operations
Net investment income 0.01
Net realized and unrealized loss on investments (0.01)
---------
Total from investment operations 0.00
---------
Net asset value, end of period $ 13.69
=========
TOTAL RETURN* 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,642
Ratio of expenses to average net assets 1.10%(a)
Ratio of net investment income to average net assets 2.31%(a)
Portfolio turnover rate 89%
Average commission rate on portfolio transactions $0.0687
</TABLE>
(a) Annualized.
(c) For the period from January 1, 1995 to September 30, 1995.
(d) For the period from June 21, 1994 (commencement of operations) to December
31, 1994.
(e) For the period from September 16, 1998 (initial offering of Class Y) to
September 30, 1998.
(f) Prior to September 16, 1998, all shareholders of the Balanced Portfolio
were Class B shareholders. On September 16, 1998, shares of Class B were
converted to Class Y shares.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES - 99.42%
ARIZONA - 1.56%
Pima County Arizona IDA,
7.25%, 7/15/10 (c) $1,550,000 $ 1,733,830
-------------
ARKANSAS - 1.12%
Pulaski County Health
Facilities, 5.00%, 12/01/28 1,250,000 1,248,950
-------------
CALIFORNIA - 10.51%
California State Water Reserve
Center, 4.75%, 12/01/29 3,500,000 3,427,270
California Statewide
Community Development
Authority, 5.63%, 10/01/34 2,070,000 2,132,514
Carson Improvement Board Act
1915, Special Assessment
District 92, 7.38%, 9/02/22 700,000 770,392
East Bay Municipal Utility
District, 4.75%, 6/01/21 1,915,000 1,887,424
Orange County Community
Facilities District, Series A,
7.35%, 8/15/18 (c) 300,000 346,779
San Francisco City & County
Airport, 6.30%, 5/01/25 1,000,000 1,101,250
University of California
Revenues, 4.75%, 9/01/16 2,000,000 2,012,240
-------------
11,677,869
-------------
COLORADO - 3.36%
Colorado Housing Authority,
7.00%, 11/01/24 525,000 560,873
Denver City & County Airport
Revenue, 7.75% - 8.50%,
11/15/13 - 11/15/23 2,700,000 3,167,089
-------------
3,727,962
-------------
CONNECTICUT - 0.99%
Connecticut State Development
Authority, 6.15%, 4/01/35 1,000,000 1,104,860
-------------
DISTRICT OF COLUMBIA - 0.80%
Metropolitan Washington,
General Airport Revenue,
Series A, 6.63%, 10/01/19 (c) 800,000 884,496
-------------
FLORIDA - 2.54%
Hillsborough County, 6.25%,
12/01/34 1,250,000 1,396,750
Sarasota County Health
Facilities Authority Revenue,
10.00%, 7/01/22 1,160,000 1,418,831
-------------
2,815,581
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
GEORGIA - 2.92%
Fulton County Georgia
Housing Authority
Multifamily, Housing
Revenue, 6.38%, 2/01/08 $ 520,000 $ 528,346
George Smith World Congress
Center, 5.50%, 7/01/20 1,500,000 1,509,345
Monroe County Development
Authority PCRB, 6.75%,
1/01/10 1,000,000 1,205,240
-------------
3,242,931
-------------
ILLINOIS - 9.53%
Broadview Tax Increment
Revenue, 8.25%, 7/01/13 1,000,000 1,145,030
Chicago Capital Appreciation,
(effective yield-1.99%) (a),
7/01/16 2,000,000 718,080
Chicago Heights Residential
Mortgage, (effective
yield-3.29%) (a), 6/01/09 3,465,000 1,655,300
Illinois Health Facilities
Authority Revenue, 5.50% -
9.50%, 11/15/19 - 10/01/22 2,250,000 2,527,477
Illinois Educational Facilities
Authority Revenue, 6.00%,
10/01/24 1,000,000 1,042,200
Kane County School District
No. 129, 5.50%, 2/01/11 2,000,000 2,167,620
Metropolitan Pier &
Exposition, (effective
yield-1.39%) (a), 6/15/21 1,950,000 644,962
Saint Clair County Public
Building, (effective
yield-1.99%) (a), 12/01/16 1,650,000 690,789
-------------
10,591,458
-------------
INDIANA - 0.36%
Indiana Transportation Finance
Authority, Series A, (effective
yield-1.92%) (a), 6/01/17 1,000,000 403,560
-------------
IOWA - 0.61%
Student Loan Liquidity
Corporation, Student Loan
Revenue, Series C, 6.95%,
3/01/06 (c) 625,000 674,525
-------------
</TABLE>
66
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
KENTUCKY - 4.58%
Jefferson County Hospital
Revenue, 8.70%,
10/01/08 (b) $ 500,000 $ 599,375
Kenton County Airport Board
Revenue, OID, 7.50%,
2/01/20 1,400,000 1,546,342
Warren County Hospital
Facility Revenue Bowling
4.88%, 4/01/27 3,000,000 2,945,580
----------
5,091,297
----------
LOUISIANA - 3.38%
Louisiana Public Facilities
Authority Revenue, Dillard
University-Louisiana, 5.00%,
2/01/28 2,750,000 2,755,720
Louisiana State University &
Agriculture and Mechanical
College, University Revenues,
5.00%, 10/01/30 1,000,000 1,001,340
----------
3,757,060
----------
MAINE - 0.86%
Maine State Housing Authority,
Series C, 6.88%, 11/15/23 885,000 956,030
----------
MASSACHUSETTS - 1.92%
Massachusetts State Health and
Education, 6.00%, 10/01/23 1,000,000 1,018,850
Massachusetts State Health and
Educational Facilities
Authority, OID Revenue
Bonds, Series A, 6.88%,
4/01/22 1,000,000 1,119,950
----------
2,138,800
----------
MICHIGAN - 4.93%
Detroit Michigan Water Supply
Systems, 5.00%, 7/01/27 1,000,000 1,000,310
Grand Traverse County
Hospital, 5.00%, 7/01/28 2,500,000 2,486,375
Michigan State Hospital
Financial Authority Revenue,
5.00%, 5/15/28 2,000,000 1,995,280
----------
5,481,965
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
NEBRASKA - 1.22%
Nebraska Investment Finance
Authority, SFM, 9.42%,
9/15/24 (b) $ 300,000 $ 339,375
Nebraska Public Gas Agency
Gas supply System, 5.00%,
4/01/00 1,000,000 1,017,810
----------
1,357,185
----------
NEVADA - 2.26%
Clark County, 5.90%, 10/01/30 2,000,000 2,050,800
Henderson Local Improvement
District, Special Assessment,
Series A, 8.50%, 11/01/12 440,000 458,876
----------
2,509,676
----------
NEW JERSEY - 2.10%
East Orange County Board of
Education, Participation
Notes, (effective
yield-1.67%) (a), 2/01/20 1,000,000 365,000
New Jersey State Housing &
Mortgage Finance, 5.40%,
11/01/28 1,170,000 1,209,406
Union Utilities Authority,
5.00%, 6/15/28 750,000 757,568
----------
2,331,974
----------
NEW MEXICO - 0.92%
Santa Fe Educational Facilities
Revenue Bonds, 5.50%
3/01/24 1,000,000 1,020,210
----------
NEW YORK - 4.93%
Clifton Springs Hospital
Refunding & Improvement,
8.00%, 1/01/20 700,000 786,947
Metropolitan Transportation
Authority, 4.75%, 7/01/19 1,000,000 962,240
New York City Municipal
Water Facility, 5.13%,
6/15/21 1,000,000 1,008,300
New York, Series H, 7.20%,
2/01/13 1,500,000 1,680,946
New York State Dormitory
Authority Revenue Hospital,
5.20%, 2/15/14 1,000,000 1,034,250
----------
5,472,683
----------
</TABLE>
67
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
NORTH CAROLINA - 2.12%
Cumberland County, 5.00%,
12/01/24 $1,250,000 $1,253,875
North Carolina Eastern
Municipal Power Agency
Systems Revenue, 5.70%,
1/01/13 1,000,000 1,097,700
----------
2,351,575
----------
NORTH DAKOTA - 0.91%
Devils Lake Health Care,
6.10%, 10/01/23 1,000,000 1,012,690
----------
OHIO - 1.91%
Batavia Local School District
Reference, 5.63%,12/01/22 1,000,000 1,121,040
Cuyahoga County Health Care
Facilities, 5.50%, 12/01/28 1,000,000 1,001,990
----------
2,123,030
----------
OKLAHOMA - 0.50%
Oklahoma City, Industrial and
Cultural Facilities Trust,
6.75%, 9/15/17 540,000 551,993
----------
PENNSYLVANIA - 6.39%
Beaver County Hospital
Authority Revenue, 5.00%,
5/15/28 1,000,000 997,640
Delaware IDA, 6.20%, 7/01/19 2,000,000 2,191,040
Pennsylvania Economic
Development, 6.40%,
1/01/09 500,000 534,620
Philadelphia Gas Works
Revenue, 5.00%, 7/01/28 2,250,000 2,250,698
Philadelphia Hospital and
Higher Education Facilities,
6.50%, 11/15/08 1,000,000 1,121,430
----------
7,095,428
----------
RHODE ISLAND - 0.31%
West Warwick, Series A, GO
Bonds, 7.30%, 7/15/08 310,000 348,372
----------
SOUTH CAROLINA - 1.81%
Cayce South Carolina
Waterworks & Sewage
Revenue, 5.00%, 7/01/20 2,000,000 2,006,740
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
TENNESSEE - 3.73%
Memphis Shelby County
Airport Authority Special
Facilities Revenue Refunding,
7.88%, 9/01/09 $1,500,000 $1,675,485
Metropolitan Government
Nashville & Davidson
County, 4.75% - 5.00%,
1/01/22 - 10/01/28 2,500,000 2,472,795
----------
4,148,280
----------
TEXAS - 9.94%
Abilene Health Facilities
Development Corporation,
5.90%, 11/15/25 1,000,000 1,002,500
Alliance Airport Authority,
6.38%, 4/01/21 2,000,000 2,192,620
Brazos Higher Education
Authority Student Loan
Revenue, 7.10%, 11/01/04 416,000 472,410
Brazos River Authority
Revenue, 4.90%, 10/01/15 2,000,000 2,054,760
Dallas Fort Worth International
Airport Facility Revenue
Bonds, 7.25%, 11/01/30 1,000,000 1,112,260
Edinburg Consolidated School
District Public Facilities,
5.00%, 8/15/19 1,500,000 1,516,815
Lufkin Health Memorial East
Texas, 5.70%, 2/15/28 1,000,000 1,025,010
Rockwall Independent School
District, OID, 5.55%,
8/15/22 2,450,000 689,822
Texas State Department of
Housing and Community
Affairs Refunding, Series C,
9.74%, 7/02/24 (b) 750,000 973,125
----------
11,039,322
----------
UTAH - 3.40%
Bountiful Hospital Revenue,
9.50%, 12/15/18 230,000 281,237
Intermountain Power Agency
Power Supply, 5.00%,
7/01/19 2,500,000 2,472,225
Utah State Housing Finance
Agency, SFM, 7.20%,
1/01/27 945,000 1,025,108
----------
3,778,570
----------
</TABLE>
68
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
WEST VIRGINIA - 3.61%
Harrison County, 6.75%,
8/01/24 $2,000,000 $ 2,271,020
West Virginia State Hospital
Finance Authority Revenue,
8.80%, 1/01/18 (b) 1,500,000 1,742,445
------------
4,013,465
------------
WISCONSIN - 3.39%
Southeast Wisconsin
Professional Baseball, 5.50%,
12/15/26 2,000,000 2,229,960
Wisconsin State Health &
Educational Facility
Authority Revenues, 5.50%,
2/15/28 1,500,000 1,537,530
------------
3,767,490
------------
TOTAL LONG-TERM MUNICIPAL
SECURITIES
(COST $102,611,970) 110,459,857
------------
SHORT-TERM MUNICIPAL
SECURITIES - 2.16%
CALIFORNIA - 0.45%
California PCRB Series A,
VRDN, 3.65%, 2/28/08 500,000 500,000
------------
NEVADA - 0.54%
Reno Nevada Hospital
Revenue, VRDN, 4.10%,
5/15/23 600,000 600,000
------------
NEW YORK - 0.54%
City of New York VRDN,
4.25%, 8/01/16 200,000 200,000
New York City GO Bonds,
VRDN, 3.95%, 8/15/19 200,000 200,000
New York State Energy
Residential Housing &
Development, VRDN,
4.10%, 7/01/15 200,000 200,000
------------
600,000
------------
TEXAS - 0.45%
North Central Texas Health
Facility, Presbyterian Medical
Center, VRDN, 4.10%,
12/01/15 500,000 500,000
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM MUNICIPAL
SECURITIES (CONTINUED)
WASHINGTON - 0.18%
Washington Health Care,
Sisters of Providence, Series I,
VRDN, 4.05%, 10/01/05 $ 200,000 $ 200,000
------------
TOTAL SHORT-TERM MUNICIPAL
SECURITIES (COST $2,400,000) 2,400,000
------------
TOTAL INVESTMENTS
(COST $105,011,970)-101.58% 112,859,857
OTHER ASSETS LESS
LIABILITIES - (1.58%) (1,750,720)
------------
NET ASSETS - 100.00% $111,109,137
============
</TABLE>
INVESTMENT ABBREVIATIONS
GO - General Obligation
IDA - Industrial Development Authority
OID - Original Issue Discount
PCRB - Pollution Control Revenue Bond
SFM - Single Family Mortgage
VRDN - Variable Rate Demand Note
(a) Effective yield is the yield as calculated at time of purchase at which the
bond accretes on an annual basis until its maturity date.
(b) Represents inverse floating rate securities.
(c) A portion of this security is held as collateral for open futures
contracts.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $91,099,135 and $56,728,625, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $105,011,970. Net unrealized appreciation aggregated
$7,847,887, of which $7,847,887, related to appreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
69
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value
(cost $105,011,970) (Note 2) $112,859,857
Cash 84,254
Receivables
Investments sold 985,674
Fund shares sold 870,855
Interest 1,685,891
-------------
TOTAL ASSETS 116,486,531
-------------
LIABILITIES
Payables
Investments purchased $4,840,799
Fund shares redeemed 60,067
Dividends 349,921
Variation margin (Note 2) 90,000
Accrued expenses and other
liabilities 36,607
----------
TOTAL LIABILITIES 5,377,394
-------------
NET ASSETS $111,109,137
=============
Net Assets represented by:
(Note 2)
Additional paid-in capital $105,840,947
Accumulated distributions in
excess of net investment
income (349,922)
Accumulated net realized loss
on investment transactions (2,004,046)
Net unrealized appreciation of
investments 7,622,158
-------------
NET ASSETS $111,109,137
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.99
Class B Shares $ 15.94
Class Y Shares $ 16.00
OFFERING PRICE PER SHARE
Class A Shares $ 16.79(a)
Class B Shares $ 15.94
Class Y Shares $ 16.00
SHARES OUTSTANDING
Class A Shares 3,237,676
Class B Shares 3,722,547
Class Y Shares 67
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $ 5,400,238
EXPENSES
Management fee (Note 4) $ 557,332
Distribution fee (Note 5) 257,381
Shareholder service fee (Note 5) 232,220
Transfer agent fee 102,171
Administration fee (Note 4) 92,888
Registration expenses 53,355
Custodian and accounting fees 26,161
Shareholder reports and postage
expenses 8,237
Legal fees 2,878
Directors' fees and expenses 2,275
Audit fees 1,991
Miscellaneous 9,070
---------
Total expenses 1,345,959
-----------
NET INVESTMENT INCOME 4,054,279
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, FUTURES AND
OPTIONS CONTRACTS
Net realized loss on investments,
futures and options contracts
(Note 2) (41,138)
Change in unrealized appreciation
on investments 3,077,428
---------
NET GAIN ON INVESTMENTS, FUTURES
AND OPTIONS CONTRACTS 3,036,290
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 7,090,569
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
70
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 4,054,279 $ 2,950,727
Net realized gain (loss) on investments, futures and options contracts (41,138) 548,498
Change in unrealized appreciation on investments 3,077,428 1,603,630
------------- -------------
Increase in net assets resulting from operations 7,090,569 5,102,855
------------- -------------
Distributions to Shareholders
From net investment income
Class A (1,979,908) (1,179,998)
Class B (2,308,071) (1,981,316)
Class Y (43) --
From net realized gain on investments
Class A -- (39,820)
Class B -- (66,849)
------------- -------------
Total distributions to shareholders (4,288,022) (3,267,983)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 45,477,369 25,738,018
Reinvested distributions 2,625,084 1,904,347
Shares redeemed (13,461,719) (10,560,419)
------------- -------------
Change in net assets resulting from capital share transactions 34,640,734 17,081,946
------------- -------------
Increase in net assets 37,443,281 18,916,818
Net Assets
Beginning of year 73,665,856 54,749,038
------------- -------------
End of year (including accumulated distributions in excess of net
investment income of ($349,922) and ($300,191), respectively) $ 111,109,137 $ 73,665,856
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05
------- ------- ------- ------- -------
Income from investment operations
Net investment income 0.66 0.81 0.82 0.81 0.82
Net realized and unrealized gain
(loss) on investments 0.59 0.49 0.12 0.51 (1.54)
------- ------- ------- ------- -------
Total from investment operations 1.25 1.30 0.94 1.32 (0.72)
------- ------- ------- ------- -------
Less distributions
From net investment income (0.76) (0.81) (0.82) (0.82) (0.81)
From capital gains -- (0.03) -- - (0.10)
------- ------- ------- ------- -------
Total distributions (0.76) (0.84) (0.82) (0.82) (0.91)
------- ------- ------- ------- -------
Net asset value, end of year $ 15.99 $ 15.50 $ 15.04 $ 14.92 $ 14.42
======= ======= ======= ======= =======
TOTAL RETURN* 8.24% 8.89% 6.46% 9.46% (4.83%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $51,757 $29,394 $17,558 $20,460 $25,056
Ratio of expenses to average net assets 1.17% 1.22% 1.24% 1.43% 1.24%
Ratio of expenses to average net assets excluding waiver 1.17% 1.22% 1.24% 1.43% 1.33%
Ratio of net investment income to average net assets 4.63% 5.09% 5.47% 5.56% 5.43%
Portfolio turnover rate 62% 59% 46% 43% 87%
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
71
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06
------- ------- ------- ------- -------
Income from investment operations
Net investment income 1.30 0.71 0.75 0.74 0.74
Net realized and unrealized gain
(loss) on investments (0.14) 0.52 0.11 0.52 (1.54)
------- ------- ------- ------- -------
Total from investment operations 1.16 1.23 0.86 1.26 (0.80)
------- ------- ------- ------- -------
Less distributions
From net investment income (0.71) (0.71) (0.76) (0.74) (0.73)
From capital gains -- (0.08) -- -- (0.10)
------- ------- ------- ------- -------
Total distributions (0.71) (0.79) (0.76) (0.74) (0.83)
------- ------- ------- ------- -------
Net asset value, end of year $ 15.94 $ 15.49 $ 15.05 $ 14.95 $ 14.43
======= ======= ======= ======= =======
TOTAL RETURN* 7.70% 8.33% 5.87% 9.01% (5.34%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $59,351 $44,272 $37,191 $39,493 $46,157
Ratio of expenses to average net assets 1.67% 1.72% 1.74% 1.92% 1.74%
Ratio of expenses to average net assets excluding waiver 1.67% 1.72% 1.74% 1.92% 1.86%
Ratio of net investment income to average net assets 4.13% 4.60% 4.95% 5.07% 4.93%
Portfolio turnover rate 62% 59% 46% 43% 87%
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (B)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.51
--------
Income from investment operations
Net investment income 1.39
Net realized and unrealized loss on investments (0.23)
--------
Total from investment operations 1.16
--------
Less distributions
From net investment income (0.67)
--------
Net asset value, end of period $ 16.00
========
TOTAL RETURN* 7.51%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 0.92%(a)
Ratio of net investment income to average net assets 5.66%(a)
Portfolio turnover rate 62%
</TABLE>
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
72
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM INVESTMENTS - 143.47%
PREFERRED STOCK - 2.11%
Home Ownership Funding
Corporation (cost
$3,939,796) $4,350,000 $ 4,373,725
-----------
ASSET-BACKED SECURITIES - 7.61%
Advanta Mortgage Loan
Trust, Series 1993-4,
5.55%, 3/25/10 - 1/25/25 1,960,695 1,985,118
AFG Receivables Trust,
7.00%, 2/15/03 (a) 1,250,918 1,260,091
CS First Boston, Series
1996-2 A6, 7.18%, 2/25/18 6,500,000 6,968,124
Equifax Credit Corporation,
Series 1994-1 B, 5.75%,
3/15/09 1,504,448 1,509,739
Fifth Third Bank Auto
Grantor Trust, 6.20%,
9/15/01 702,998 706,572
NASCOR, Series 1997-18,
6.75%, 12/25/27 2,587,927 2,697,132
Old Stone Credit Corporation
Home Equity Trust, Series
1993-1 B1, 6.00%, 3/15/08 624,707 630,054
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $14,997,748) 15,756,830
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 102.27%
Federal Home Loan
Mortgage Corporation
6.50%, Series 1647B,
11/15/08, REMIC 3,263,696 3,263,696
6.00%, Series 1693Z,
3/15/09, REMIC 6,116,037 6,218,120
6.50%, Series 26C, 7/25/18 7,000,000 7,241,864
Federal National Mortgage
Association 6.50%,
5/18/28 2,992,041 2,977,081
6.00% - 6.50%, 9/25/08 -
8/01/28 68,855,587 69,140,559
Government National
Mortgage Association
7.00%, 12/15/08 2,974,460 3,094,571
6.00% - 7.00%, 3/15/28 -
8/15/28 44,411,497 45,459,522
Government National
Mortgage Association II
4.50% - 7.00%, 4/20/22 -
1/20/28 7,152,832 7,209,007
U.S. Treasury Bonds, 6.13%,
11/15/27 8,600,000 9,909,178
U.S. Treasury Notes, 5.38% -
5.63% 7/31/00 - 5/15/08 53,650,000 57,369,396
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $205,742,125) 211,882,994
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 11.63%
Capital One Bank, 7.15% -
7.20%, 7/19/99 - 9/15/06 $4,750,000 $ 4,948,018
Ford Capital, 9.88%, 5/15/02 2,525,000 2,929,000
Lehman Brothers Holdings,
8.50%, 5/01/07 3,000,000 3,345,159
Lehman Brothers, Inc.,
7.50%, 8/01/26 3,500,000 3,635,943
ReliaStar Financial
Corporation, 6.63%,
9/15/03 5,000,000 5,259,300
Salomon, Inc., 7.30%,
5/15/02 2,000,000 2,140,834
United Dominion Realty,
7.07%, 11/15/06 1,700,000 1,827,512
-----------
TOTAL CORPORATE BONDS
(COST $23,143,699) 24,085,766
-----------
MISCELLANEOUS - 0.97%
CSC Holdings, Inc., 7.25%,
7/15/08 1,000,000 1,007,239
Playtex Family Production
Corporation, 9.00%,
12/15/03 1,000,000 1,007,685
-----------
TOTAL MISCELLANEOUS
(COST $2,024,403) 2,014,924
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 14.75%
Chase Mortgage Finance
Corporation, Series
1993-L2 M, 7.00%,
10/25/24 2,958,977 3,113,602
Equifax Credit Corporation,
Series 1998-2, 6.16%,
4/15/08 2,370,000 2,407,761
General Electric Capital
Mortgage Services, Inc.,
Series 1993-18 B1, 6.00%,
2/25/09 1,924,384 1,946,511
General Electric Capital
Mortgage Services, Inc.,
Series 1998-11, 6.50% -
7.00%, 1/25/13 - 1/25/28 4,607,307 4,786,961
Key Auto Finance Trust,
6.15%, 10/15/01 1,500,000 1,513,112
NASCOR, Series 1996-2
Class M, 7.00%, 9/25/11 1,751,689 1,855,812
Prudential Home, Series
1995-5 B1, 7.25%,
9/25/25 (a) 1,453,140 1,515,504
Prudential Home, Series
1995-5 M, 7.25%, 9/25/25 2,562,369 2,667,547
Prudential Home, Series
1995-7 M, 7.00%,
11/25/25 2,813,484 2,959,016
</TABLE>
78
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Prudential Home, Series
1996-4 M, 6.50%, 4/25/26 $5,172,223 $ 5,342,964
Prudential Home, Series
1996-8 M, 6.75%, 6/25/26 2,340,523 2,448,236
------------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(COST $28,983,412) 30,557,026
------------
RESIDUAL INTERESTS (A) - 4.13%
Capital Mortgage Funding I,
Inc., 1998-1, 1/22/27 43,831 689,073
General Mortgage Securities
II, Inc., 1995-1, 1998,
6/25/20 14,918 419,119
General Mortgage Securities
II, Inc., 1995-4, 1998,
6/25/23 8,768 397,338
General Mortgage Securities
II, Inc., 1997-4, 1998,
5/20/22 11,724 506,284
General Mortgage Securities
II, Inc., 1997-5, 1998,
7/20/23 23,164 735,034
National Mortgage Funding I,
Inc., 1995-4, 1998, 3/20/21 7,182 127,547
National Mortgage Funding I,
Inc., 1997-6, 9/20/21 32,943 640,712
National Mortgage Funding I,
Inc., 1997-7, 7/20/22 35,133 648,314
National Mortgage Funding I,
Inc., 1997-9, 10/20/24 25,739 632,940
National Mortgage Funding I,
Inc., 1997-10, 10/20/24 34,246 475,067
National Mortgage Funding I,
Inc., 1998-1, 10/20/22 17,335 440,254
National Mortgage Funding I,
Inc., 1998-2, 10/20/23 19,397 462,999
National Mortgage Funding I,
Inc., 1998-3, 11/20/23 19,847 469,598
National Mortgage Funding I,
Inc., 1998-5, 11/25/22 7,274 381,156
National Mortgage Funding I,
Inc., 1998-8, 5/20/24 34,593 498,670
National Mortgage Funding I,
Inc., 1998-9, 11/20/22 28,893 502,352
National Mortgage Funding I,
Inc., 1998-10, 1/20/23 17,413 540,932
------------
TOTAL RESIDUAL INTERESTS
(COST $9,933,404) 8,567,389
------------
297,238,654
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT - 0.67%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$1,417,776 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$1,431,511
(cost $1,399,604) $1,399,604 $ 1,399,604
---------- ------------
TOTAL INVESTMENTS
(COST $290,164,191) -144.14%
$298,638,258
OTHER ASSETS LESS
LIABILITIES - (44.14%) (91,456,993)
------------
NET ASSETS - 100.00% $207,181,265
============
</TABLE>
INVESTMENT ABBREVIATIONS
ARM - Adjustable Rate Mortgage
MBS - Mortgage-Backed Security
REMIC - Real Estate Mortgage Investment Conduit
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4 (2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $426,685,104 and $225,275,749, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $290,164,191. Net unrealized appreciation aggregated
$8,474,067, of which $9,931,057, related to appreciated investment securities
and $1,456,990, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
79
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $297,238,654
Repurchase agreements 1,399,604
------------
Total investments
(cost $290,164,191) 298,638,258
Collateral for securities
loaned (Note 2) 1,605,500
Cash 118,918
Receivables
Fund shares sold 1,324,653
Dividends and interest 2,790,157
Other assets 35,189
------------
TOTAL ASSETS 304,512,675
------------
LIABILITIES
Payables
Securities loaned (Note 2) $ 1,605,500
Reverse repurchase
agreement 94,533,000
Fund shares redeemed 101,673
Dividends 923,573
Accrued expenses and other
liabilities 167,664
-----------
TOTAL LIABILITIES 97,331,410
------------
NET ASSETS $207,181,265
============
Net Assets represented by: (Note 2)
Additional paid-in capital $213,925,048
Accumulated distributions
in excess of net
investment income (923,573)
Accumulated net realized
loss on investment
transactions (14,294,277)
Net unrealized appreciation
of investments 8,474,067
------------
NET ASSETS $207,181,265
============
NET ASSET VALUE PER SHARE
Class A Shares $ 13.61
Class B Shares $ 13.61
Class Y Shares $ 13.69
OFFERING PRICE PER SHARE
Class A Shares $ 14.29(a)
Class B Shares $ 13.61
Class Y Shares $ 13.69
SHARES OUTSTANDING
Class A Shares 6,927,132
Class B Shares 8,297,359
Class Y Shares 80
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (b) (Note 2) $ 11,610,166
EXPENSES
Management fee (Note 4) $ 1,025,941
Distribution fee (Note 5) 467,042
Shareholder service fee
(Note 5) 427,474
Transfer agent fee 212,090
Administration fee (Note 4) 174,343
Registration expenses 84,362
Custodian and accounting fees 34,008
Shareholder reports and
postage expenses 24,577
Legal fees 5,369
Directors' fees and expenses 4,244
Audit fees 3,715
Miscellaneous 16,925
-----------
Total expenses 2,480,090
Deduct
Waiver of management fee
(Note 4) (204,530)
------------
NET INVESTMENT INCOME 9,334,606
------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND
INTEREST-RATE SWAP CONTRACTS
Net realized gain on
investments and
interest-rate swap contracts
(Note 2) 713,191
Change in unrealized
appreciation on investments 6,558,180
-----------
NET GAIN ON INVESTMENTS AND
INTEREST-RATE SWAP CONTRACTS 7,271,371
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 16,605,977
============
</TABLE>
(b) Net of interest expense of $1,961,350 ($921,496 related to interest-
rate swaps and $1,039,854 related to borrowings).
SEE NOTES TO FINANCIAL STATEMENTS.
80
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 9,334,606 $ 6,390,445
Net realized gain on investments and interest-rate swap contracts 713,191 222,072
Change in unrealized appreciation on investments 6,558,180 2,224,113
------------- -------------
Increase in net assets resulting from operations 16,605,977 8,836,630
------------- -------------
Distributions to Shareholders
From net investment income
Class A (4,831,082) (2,180,277)
Class B (5,431,749) (4,210,168)
Class Y (51) -
In excess of net investment income
Class A - (150,441)
Class B - (212,242)
------------- -------------
Total distributions to shareholders (10,262,882) (6,753,128)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 106,644,051 63,942,122
Reinvested distributions 6,677,759 4,044,282
Shares redeemed (40,705,601) (21,179,174)
------------- -------------
Change in net assets resulting from capital share transactions 72,616,209 46,807,230
------------- -------------
Increase in net assets 78,959,304 48,890,732
Net Assets
Beginning of year 128,221,961 79,331,229
------------- -------------
End of year (including accumulated distributions in excess of net
investment income of ($923,573) and ($390,590), respectively) $ 207,181,265 $ 128,221,961
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.18 $ 12.91 $ 13.29 $ 12.75 $ 14.04
-------- -------- -------- -------- --------
Income from investment operations
Net investment income 0.79 0.97 0.89 0.84 0.84
Net realized and unrealized gain (loss) on
investments 0.47 0.26 (0.37) 0.61 (1.30)
-------- -------- -------- -------- --------
Total from investment operations 1.26 1.23 0.52 1.45 (0.46)
-------- -------- -------- -------- --------
Less distributions
From net investment income (0.83) (0.96) (0.90) (0.91) (0.83)
-------- -------- -------- -------- --------
Net asset value, end of year $ 13.61 $ 13.18 $ 12.91 $ 13.29 $ 12.75
======== ======== ======== ======== ========
TOTAL RETURN* 9.95% 9.86% 4.09% 11.82% (3.39%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 94,279 $ 53,176 $ 21,092 $ 24,472 $ 30,142
Ratio of expenses to average net assets 1.05% 1.05% 1.05% 1.32% 1.38%
Ratio of expenses to average net assets excluding
waiver 1.18% 1.18% 1.31% 1.36% 1.39%
Ratio of net investment income to average net assets 5.73% 7.01% 6.84% 6.73% 6.33%
Portfolio turnover rate 114% 100% 254% 368% 455%
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
81
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.18 $ 12.93 $ 13.31 $ 12.76 $ 14.06
-------- -------- -------- -------- --------
Income from investment operations
Net investment income 0.72 0.86 0.84 0.79 0.82
Net realized and unrealized gain (loss) on
investments 0.48 0.30 (0.38) 0.61 (1.37)
-------- -------- -------- -------- --------
Total from investment operations 1.20 1.16 0.46 1.40 (0.55)
-------- -------- -------- -------- --------
Less distributions
From net investment income (0.77) (0.91) (0.84) (0.85) (0.75)
--------- -------- -------- -------- --------
Net asset value, end of year $ 13.61 $ 13.18 $ 12.93 $ 13.31 $ 12.76
========= ======== ======== ======== ========
TOTAL RETURN* 9.46% 9.29% 3.57% 11.33% (3.97%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $112,901 $ 75,046 $ 58,239 $ 62,155 $ 77,888
Ratio of expenses to average net assets 1.55% 1.55% 1.55% 1.74% 1.88%
Ratio of expenses to average net assets excluding
waiver 1.67% 1.68% 1.81% 1.79% 1.90%
Ratio of net investment income to average net assets 5.22% 6.51% 6.36% 6.24% 6.21%
Portfolio turnover rate 114% 100% 254% 368% 455%
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (B)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.20
----------
Income from investment operations
Net investment income 0.78
Net realized and unrealized gain on investments 0.39
----------
Total from investment operations 1.17
----------
Less distributions
From net investment income (0.68)
----------
Net asset value, end of period $ 13.69
==========
TOTAL RETURN* 8.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 0.80% (a)
Ratio of expenses to average net assets exluding waiver 0.93% (a)
Ratio of net investment income to average net assets 7.09% (a)
Portfolio turnover rate 114%
</TABLE>
(a) Annualized.
(b) for the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
82
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
ASSET-BACKED SECURITIES - 12.18%
Advanta Home Equity Loan,
6.15%, 10/25/09 $ 766,206 $ 780,265
Advanta Mortgage Loan
Trust 1993-3 A3, 4.75% -
5.55%, 2/25/10 - 3/25/10 948,868 947,007
AFC Home Equity Loan
Trust, 6.60%, 2/25/27 1,499,955 1,514,193
AFG Receivables Trust,
6.20% - 7.05%, 9/15/00 -
2/15/03 (a) 3,098,596 3,116,978
CS First Boston 1996-2,
6.32% - 7.18%, 2/25/18 5,428,834 5,722,852
Equifax Credit Corporation
1994-1B, 5.75%, 3/15/09 478,313 479,995
Fifth Third Auto Grantor
Trust, 6.20%, 9/15/01 351,859 353,648
Old Stone Credit
Corporation, 6.20%,
6/15/08 274,327 277,455
Olympic Automobiles
Receivables Trust, 6.85% -
7.35%, 6/15/01 - 10/15/01 1,431,929 1,440,041
Union Acceptance
Corporation, 6.45% -
6.70%, 6/08/03 - 5/10/04 3,211,430 3,274,164
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $17,569,230) 17,906,598
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 74.00%
Federal National Mortgage
Association
6.00%, 5/01/13, ARM 13,278,924 13,415,870
10.00%, 6/01/05, MBS 188,066 197,098
Government National
Mortgage Association
7.00%, 12/15/08 1,123,686 1,169,061
6.50%, 3/15/28 2,940,243 3,003,643
7.00%, 8/15/28 9,991,943 10,304,191
Government National
Mortgage Association II
4.50%, 10/20/27 - 1/20/28 6,599,445 6,581,813
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
U.S. GOVERNMENT SECURITIES
AND AGENCIES (CONTINUED)
Government National
Mortgage Association II
7.00%, 7/20/22 - 9/20/23 $9,244,030 $ 9,411,333
U.S. Treasury Notes,
5.38% - 6.63%, 7/31/00 -
5/15/08 61,950,000 64,731,078
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $107,576,668) 108,814,087
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 3.68%
Equifax Credit Corporation,
6.16%, 4/15/08 1,362,750 1,384,463
Key Auto Finance Trust,
6.15%, 10/15/01 4,000,000 4,034,964
-----------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(COST $5,359,496) 5,419,427
-----------
CORPORATE BONDS - 16.63%
Association Corporation NA,
7.88%, 9/30/01 1,000,000 1,077,892
Capital One Bank, 7.15% -
7.20%, 7/19/99 - 9/15/06 2,500,000 2,577,034
Dayton Hudson Company,
6.63%, 3/01/03 2,000,000 2,121,698
Ford Capital, 9.88%,
5/15/02 2,525,000 2,929,000
General Motors Acceptance
Corporation, 5.63% -
6.88%, 2/01/99 - 7/15/01 2,750,000 2,854,932
Lehman Brothers, 6.20% -
6.63%, 11/15/00 - 1/15/02 3,750,000 3,799,689
Playtex Family Production
Corporation, 9.00%,
12/15/03 1,000,000 1,007,685
Salomon Incorporated,
5.50% - 7.30%, 1/15/99 -
5/15/02 3,750,000 3,935,117
The Money Store, 6.28%,
12/15/22 4,000,000 4,143,804
-----------
TOTAL CORPORATE BONDS
(COST $23,808,616) 24,446,851
-----------
</TABLE>
83
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
RESIDUAL INTERESTS (A) - 1.57%
General Mortgage Securities
II, Inc., 1997-4, 1998,
5/20/22 $ 3,908 $ 167,785
National Mortgage Funding,
Inc., 1998-7, 7/20/23 49,685 674,478
National Mortgage Funding,
Inc., 1998-6, 1/20/23 53,627 706,457
National Mortgage Funding,
Inc., 1998-8, 5/20/24 23,062 332,447
National Mortgage Funding,
Inc., 1997-9, 11/20/24 17,159 421,960
------------
TOTAL RESIDUAL INTERESTS
(COST $2,666,160) 2,303,127
------------
SHORT-TERM INVESTMENTS - 2.88%
VARIABLE RATE DEMAND NOTE
Hilander Finance, LLC,
5.70%, 12/01/25 1,850,000 1,850,000
------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%,
due 10/01/98,
collateralized by
$2,422,945 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$2,446,418 2,391,457 2,391,457
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $4,241,457) 4,241,457
------------
TOTAL INVESTMENTS (COST
$161,221,627)-110.94% 163,131,547
OTHER ASSETS LESS LIABILITIES - (10.94%) (16,087,108)
------------
NET ASSETS - 100.00% $147,044,439
============
</TABLE>
INVESTMENT ABBREVIATIONS
ARM - Adjustable Rate Mortgage
MBS - Mortgage Backed Securities
(a) These are securities that may be resold to "qualified institutional
buyers" under rule 144A or securities offered pursuant to section 4(2) of
the Securities Act of 1933, as amended. These securites have been
determined to be liquid under guidelines established by the Board of
Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $296,888,520 and $175,441,302, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $161,223,032. Net unrealized appreciation aggregated
$1,908,515 of which $2,467,650, related to appreciated investment securities
and $559,135, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
84
<PAGE>
SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $160,740,090
Repurchase agreements 2,391,457
------------
Total investments (cost
$161,221,627) 163,131,547
Receivables
Fund shares sold 4,126,138
Dividends and interest 1,260,809
Deferred expenses (Note 2) 25,241
------------
TOTAL ASSETS 168,543,735
------------
LIABILITIES
Payables
Reverse repurchase
agreement $ 18,555,000
Fund shares redeemed 2,139,010
Dividends 544,779
Accrued expenses and other
liabilities 260,507
------------
TOTAL LIABILITIES 21,499,296
------------
NET ASSETS $147,044,439
============
Net Assets represented by:
(Note 2)
Additional paid-in capital $145,502,924
Accumulated distributions in
excess of net investment
income (512,293)
Accumulated net realized
gain on investment
transactions 143,888
Net unrealized appreciation
of investments and
interest-rate swap contracts 1,909,920
------------
NET ASSETS $147,044,439
============
NET ASSET VALUE PER SHARE
Class A Shares $ 12.74
Class B Shares $ 12.75
Class Y Shares $ 12.79
OFFERING PRICE PER SHARE
Class A Shares $ 12.87(a)
Class B Shares $ 12.75
Class Y Shares $ 12.79
SHARES OUTSTANDING
Class A Shares 7,313,315
Class B Shares 4,228,466
Class Y Shares 83
</TABLE>
(a) Computation of offering price: 100/99 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (b) (Note 2) $ 6,170,420
EXPENSES
Management fee (Note 4) $ 504,097
Shareholder service fee (Note 5) 252,047
Transfer agent fee 148,709
Distribution fee (Note 5) 133,476
Administration fee (Note 4) 101,237
Registration expenses 74,882
Custodian and accounting fees 26,595
Shareholder reports and postage
expenses 14,335
Miscellaneous 12,548
Organizational expenses 7,337
Legal fees 3,980
Directors' fees and expenses 3,147
Audit fees 2,754
---------
Total expenses 1,285,144
Deduct
Waiver of administration fee
(Note 4) (101,237)
Waiver of management fee
(Note 4) (180,523)
-----------
NET INVESTMENT INCOME 5,167,036
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND INTEREST-RATE
SWAP CONTRACTS
Net realized gain on investments
and interest-rate swap contracts
(Note 2) 325,954
Change in unrealized appreciation
on investments 1,608,387
---------
NET GAIN ON INVESTMENTS 1,934,341
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 7,101,377
===========
</TABLE>
(b) Net of interest expenses of $588,099 ($283,529 related to interest-rate
swaps and $304,570 related to borrowings).
SEE NOTES TO FINANCIAL STATEMENTS.
85
<PAGE>
SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 5,167,036 $ 2,155,953
Net realized gain on investments 325,954 7,748
Change in unrealized appreciation on investments 1,608,387 386,023
------------- -------------
Increase in net assets resulting from operations 7,101,377 2,549,724
------------- -------------
Distributions to Shareholders
From net investment income
Class A (3,203,099) (763,890)
Class B (2,394,223) (1,415,914)
Class Y (49) --
------------- -------------
Total distributions to shareholders (5,597,371) (2,179,804)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 169,053,248 39,889,219
Reinvested distributions 4,352,285 1,755,339
Shares redeemed (82,572,822) (19,273,346)
------------- -------------
Change in net assets resulting from capital share transactions 90,832,711 22,371,212
------------- -------------
Increase in net assets 92,336,717 22,741,132
Net Assets
Beginning of year 54,707,722 31,966,590
------------- -------------
End of year (including accumulated distributions in excess of
net investment income of ($512,293) and ($95,798), respectively) $ 147,044,439 $ 54,707,722
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (C)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.62 $ 12.50 $ 12.68 $ 12.74
-------- -------- -------- ----------
Income from investment operations
Net investment income 0.70 0.77 0.82 0.22
Net realized and unrealized gain (loss) on investments 0.15 0.12 (0.23) (0.03)
-------- -------- --------- ----------
Total from investment operations 0.85 0.89 0.59 0.19
-------- -------- --------- ----------
Less distributions
From net investment income (0.73) (0.77) (0.77) (0.25)
-------- -------- --------- ----------
Net asset value, end of period $ 12.74 $ 12.62 $ 12.50 $ 12.68
======== ======== ========= ==========
TOTAL RETURN* 6.98% 7.33% 4.80% 1.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 93,135 $ 27,619 $ 7,450 $ 1,002
Ratio of expenses to average net assets 0.86% 0.86% 0.86% 0.71% (a)
Ratio of expenses to average net assets excluding waiver 1.14% 1.12% 1.26% 1.00% (a)
Ratio of net investment income to average net assets 5.24% 6.00% 5.90% 4.10% (a)
Portfolio turnover rate 171% 75% 411% 126%
</TABLE>
(a) Annualized.
(c) For the period from June 16, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
86
<PAGE>
SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.62 $ 12.50 $ 12.67
-------- -------- --------
Income from investment operations
Net investment income 0.66 0.73 0.73
Net realized and unrealized gain (loss) on
investments 0.16 0.12 (0.17)
-------- -------- ---------
Total from investment operations 0.82 0.85 0.56
-------- -------- ---------
Less distributions
From net investment income (0.69) (0.73) (0.73)
--------- --------- ---------
Net asset value, end of period $ 12.75 $ 12.62 $ 12.50
========= ========= =========
TOTAL RETURN* 6.68% 6.96% 4.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 53,908 $ 27,089 $ 24,517
Ratio of expenses to average net assets 1.16% 1.16% 1.16%
Ratio of expenses to average net assets excluding
waiver 1.44% 1.42% 1.56%
Ratio of net investment income to average net assets 4.94% 5.70% 5.60%
Portfolio turnover rate 171% 75% 411%
<CAPTION>
PERIOD PERIOD
ENDED ENDED
9/30/95 (D) 12/31/94 (E)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.18 $ 12.50
----------- -----------
Income from investment operations
Net investment income 0.59 0.41
Net realized and unrealized gain (loss) on
investments 0.52 (0.29)
----------- -----------
Total from investment operations 1.11 0.12
----------- -----------
Less distributions
From net investment income (0.62) (0.44)
----------- -----------
Net asset value, end of period $ 12.67 $ 12.18
=========== ===========
TOTAL RETURN* 9.22% 0.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 19,871 $ 17,144
Ratio of expenses to average net assets 1.20%(a) 1.29% (a)
Ratio of expenses to average net assets excluding
waiver 1.70%(a) 1.29% (a)
Ratio of net investment income to average net assets 5.04%(a) 4.90% (a)
Portfolio turnover rate 126% 166%
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED
9/30/98 (F)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.57
----------
Income from investment operations
Net investment income 0.67
Net realized and unrealized gain on investments 0.16
----------
Total from investment operations 0.83
----------
Less distributions
From net investment income (0.61)
----------
Net asset value, end of period $ 12.79
==========
TOTAL RETURN* 6.64%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 0.61% (a)
Ratio of expenses to average net assets excluding waiver 0.87% (a)
Ratio of net investment income to average net assets 6.10% (a)
Portfolio turnover rate 171%
</TABLE>
(a) Annualized.
(d) For the period from January 1, 1995 to September 30, 1995.
(e) For the period from April 29, 1994 (commencement of operations) to December
31, 1994.
(f) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
87
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 79.65%
CONSUMER DISTRIBUTION - 7.13%
Aurora Foods, Inc. Senior
Subordinated Notes,
Series D, 9.88%, 2/15/07 $ 1,000,000 $ 1,075,000
Big 5 Corporation Senior
Notes, Series B, 10.88%,
11/15/07 1,000,000 955,000
CHS Electronics, Inc. Senior
Notes, 9.88%, 4/15/05 1,000,000 925,000
Del Monte Foods Company
Senior Discount Notes,
12.50%, 12/15/07 (a) 1,500,000 870,000
Disco S.A. Notes, 9.88%,
5/15/08 (a) 1,000,000 675,000
Musicland Group, Inc. Senior
Subordinated Notes-B,
9.88%, 3/15/08 1,500,000 1,432,500
Pantry, Inc. Senior Notes,
12.50%, 11/15/00 1,148,000 1,202,530
Pantry, Inc. Senior
Subordinated Notes,
10.25%, 10/15/07 1,000,000 980,000
------------
8,115,030
------------
CONSUMER DURABLES - 9.48%
Aetna Industries, Inc. Senior
Notes, 11.88%, 10/01/06 1,500,000 1,530,000
Cluett American Corporation
Senior Subordinated Notes,
10.13%, 5/15/08 (a) 1,000,000 920,000
Consoltex Group Senior
Notes, 11.00%, 10/01/03 200,000 208,000
Decora Industries, Inc.
Secured Notes, 11.00%,
5/01/05 (a) 1,000,000 907,500
Derby Cycle Corporation
Senior Notes, 10.00%,
5/15/08 (a) 1,000,000 930,000
Galey & Lord, Inc. Senior
Subordinated Notes,
9.13%, 3/01/08 1,500,000 1,316,250
MCII Holdings Senior
Secured Discount Notes,
15.00%, 11/15/02 1,000,000 825,000
Outsourcing Services Group
Senior Subordinated Notes,
10.88%, 3/01/06 (a) 1,150,000 1,092,500
Oxford Automotive, Inc.,
10.13%, 6/15/07 1,000,000 965,000
Talon Automotive Group
Senior Subordinated Notes,
9.63%, 5/01/08 (a) 1,000,000 935,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES (CONTINUED)
Venture Holdings Trust
Senior Notes-B, 9.50%,
7/01/05 $ 1,175,000 $ 1,151,500
------------
10,780,750
------------
CONSUMER SERVICES - 14.23%
Americredit Corporation,
9.25%, 2/01/04 (a) 1,000,000 965,000
Argosy Gaming Company,
13.25%, 6/01/04 (a) 1,500,000 1,597,500
Booth Creek Ski Holdings
Senior Notes-B, 12.50%,
3/15/07 1,000,000 985,000
Capstar Broadcasting Senior
Discount Notes, 12.75%,
2/01/09 (a) 1,000,000 755,000
Carrols Corporation Senior
Notes, 11.50%, 8/15/03 1,000,000 1,045,000
Diamond Cable
Communications Senior
Discount Notes, 11.75%,
12/15/05 1,500,000 1,207,500
Globo Communicacoes
Senior Notes, 10.63%,
12/05/08 (a) 1,000,000 520,000
Grupo Televisa S.A. Senior
Discount Notes-Euro,
13.25%, 5/15/08 1,000,000 695,000
Hollywood Casino
Corporation Senior Notes,
12.75%, 11/01/03 1,000,000 1,045,000
Interep National Radio Sales,
10.00%, 7/01/08 (a) 1,000,000 980,000
Isles of Capri Casinos,
12.50%, 8/01/03 1,000,000 1,085,000
La Petite Academy LPA
Holdings-B, 10.00%,
5/15/08 1,250,000 1,212,500
Majestic Star Casino, LLC,
12.75%, 5/15/03 1,500,000 1,556,250
Northland Cable Television
Senior Subordinated Notes,
10.25%, 11/15/07 1,000,000 1,060,000
Silver Cinemas, Inc. Senior
Subordinated Notes,
10.50%, 4/15/05 (a) 1,000,000 955,000
Young American Corporation
Senior Subordinated Notes,
11.63%, 2/15/06 (a) 1,000,000 530,000
------------
16,193,750
------------
</TABLE>
90
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
ENERGY - 8.14%
Abraxas Petroleum Senior
Notes, Series D, 11.50%,
11/01/04 $ 1,000,000 $ 780,000
Dawson Production Services,
Inc. Senior Notes, 9.38%,
2/01/07 1,000,000 1,002,500
Gothic Production
Corporation, 11.13%,
5/01/05 1,000,000 760,000
Houston Exploration
Company Senior
Subordinated Notes-B,
8.63%, 1/01/08 1,000,000 960,000
Hurricane Hydrocarbons
Senior Notes, 11.75%,
11/01/04 (a) 1,000,000 560,000
Moll Industries Senior
Subordinated Notes,
10.50%, 7/01/08 (a) 1,100,000 1,023,000
Ocean Energy, Inc. Senior
Subordinated Notes-B,
8.88%, 7/15/07 1,000,000 1,010,000
Tesoro Petroleum
Corporation Senior
Subordinated Notes,
9.00%, 7/01/08 (a) 1,000,000 967,500
Universal Compression, Inc.
Senior Discount Notes,
9.88%, 2/15/08 (a) 2,000,000 1,190,000
Vintage Petroleum Senior
Subordinated Notes,
8.63%, 2/01/09 1,000,000 1,010,000
------------
9,263,000
------------
HEALTH CARE - 0.97%
Mariner Post-Acute Network
Senior Subordinated Notes,
10.50%, 11/01/07 1,500,000 832,500
Vencor, Inc. Senior
Subordinated Notes,
9.88%, 5/01/05 (a) 350,000 276,500
------------
1,109,000
------------
PRODUCER MANUFACTURING - 8.22%
Anthony Crane Rentals,
10.38%, 8/01/08 (a) 1,000,000 940,000
Compass Aerospace
Corporation, 10.13%,
4/15/05 (a) 1,000,000 985,000
Del Webb Corporation Senior
Subordinated Debentures,
9.38%, 5/01/09 750,000 720,000
Dine S.A. de C.V., 8.75%,
10/15/07 (a) 1,000,000 720,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
PRODUCER MANUFACTURING (CONTINUED)
Hydrochemical Industrial
Service Senior Subordinated
Notes-B, 10.38%, 8/01/07 $ 1,000,000 $ 940,000
Kevco, Inc. Senior
Subordinated Notes,
10.38%, 12/01/07 1,000,000 955,000
Outboard Marine
Corporation, 10.75%,
6/01/08 (a) 1,000,000 945,000
Schuler Homes Senior Notes,
9.00%, 4/15/08 (a) 750,000 701,250
Tekni-Plex, Inc. Senior
Subordinated Notes-B,
11.25%, 4/01/07 500,000 522,500
Terex Corporation Senior
Subordinated Notes,
8.88%, 4/01/08 (a) 1,000,000 932,500
W. R. Carpenter North
America Senior
Subordinated Notes,
10.63%, 6/15/07 1,000,000 985,000
------------
9,346,250
------------
RAW MATERIALS/PRODUCTS INDUSTRIES - 4.28%
Acetex Corporation Senior
Notes, 9.75%, 10/01/03 900,000 859,500
Anchor Lamina, Inc. Senior
Subordinated Notes,
9.88%, 2/01/08 800,000 656,000
GS Technologies Operation,
Inc. Senior Notes, 12.25%,
10/01/05 875,000 748,125
Hylsa S.A. de C.V. Bonds,
9.25%, 9/15/07 (a) 1,000,000 685,000
Pioneer Americas Acquisition
Senior Notes, 9.25%,
6/15/07 1,500,000 1,230,000
Vicap S.A.Guaranteed Notes,
11.38%, 5/15/07 (a) 1,000,000 685,000
------------
4,863,625
------------
TECHNOLOGY - 3.10%
Advanced Micro Devices
Senior Notes, 11.00%,
8/01/03 2,000,000 2,030,000
DecisionOne Holdings
Discount Notes, 11.50%,
8/01/08 1,500,000 562,500
Dictaphone Corporation
Senior Subordinated Notes,
11.75%, 8/01/05 1,000,000 930,000
------------
3,522,500
------------
</TABLE>
91
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TRANSPORTATION - 4.02%
Atlas Air, Inc. Senior Notes,
10.75%, 8/01/05 $ 1,000,000 $ 985,000
American Communication
Lines, LLC Bonds, 10.25%,
6/30/08 (a) 1,000,000 990,000
Cenargo International
PLC-1st Mortgage, 9.75%,
6/15/08 (a) 1,000,000 820,000
Greyhound Lines Senior
Notes, 11.50%, 4/15/07 1,250,000 1,337,500
Pegasus Shipping Hellas
Notes-A, 11.88%, 11/15/04 500,000 435,000
-----------
4,567,500
-----------
UTILITIES - 20.08%
American Cellular
Corporation Senior Notes,
10.50%, 5/15/08 (a) 500,000 487,500
Cathay International Limited
Senior Notes, 13.00%,
4/15/08 (a) 1,000,000 600,000
CIA Transporte Energia
Notes, 9.25%, 4/01/08 (a) 1,000,000 760,000
Clearnet Communications
Senior Discount Notes,
14.75%, 12/15/05 1,500,000 1,248,750
Comcast Cellular Holdings
Senior Notes, 9.50%,
5/01/07 1,000,000 1,030,000
Crown Castle International
Corporation Senior
Discount Notes, 10.63%,
11/15/07 750,000 453,750
e.spire Communications, Inc.
Senior Discount Notes,
12.75% - 13.75%,
4/01/06 - 7/15/07 1,050,000 985,000
Esprit Telecommunications
Group PLC Senior Notes,
11.50%, 10.88% - 11.50%,
12/15/07 - 6/15/08 (a) 1,000,000 922,500
ICG Holdings, Inc. Discount
Notes, 11.63% - 13.50%,
9/15/05 - 3/15/07 1,500,000 1,103,750
Intermedia Communications
Senior Discount Notes,
8.60%, 6/01/08 525,000 527,625
Intermedia Communications
of Florida, 12.50%,
5/15/06 600,000 492,000
McLeodusa, Inc. Senior
Discount Notes, 10.50%,
3/01/07 1,250,000 912,500
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
MetroNet Communications
Senior Discount Notes,
9.95%, 6/15/08 (a) $ 1,500,000 $ 832,500
Microcell Telecommuni-
cations Senior Discount
Notes-B, 14.00%, 6/01/06 1,000,000 715,000
Millicom International
Cellular Senior Discount
Notes, 13.50%, 6/01/06 1,250,000 793,750
MJD Communications, Inc.,
9.50%, 5/01/08 (a) 750,000 753,750
Netia Holdings Senior
Discount Notes-B, 11.25%,
11/01/07 1,500,000 660,000
Optel Inc. Senior Notes,
11.50%, 7/01/08 (a) 500,000 470,000
Pinnacle Holdings, Inc. Senior
Discount Notes, 10.00%,
3/15/08 (a) 750,000 401,250
Price Communications
Wireless, Inc. Senior
Subordinated Notes,
11.75%, 7/15/07 1,000,000 1,035,000
Primus Telecommunications
Group Strips, 11.75%,
8/01/04 1,000,000 945,000
PSINet, Inc. Senior Notes,
Series B, 10.00%, 2/15/05 1,000,000 1,005,000
Rogers Cantel,
Inc.Debentures, 9.38%,
6/01/08 1,000,000 1,020,000
Satelites Mexicanos Senior
Notes, 10.13%,
11/01/04 (a) 1,000,000 685,000
SBA Communications
Corporation Senior
Discount Notes, 12.00%,
3/01/08 (a) 1,000,000 520,000
</TABLE>
92
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
Spectrasite Holdings, Inc.
Senior Discount Notes,
12.00%, 7/15/08 (a) $1,000,000 $ 480,000
Sprint Spectrum Senior Notes,
11.00%, 8/15/06 1,000,000 1,140,000
Startec Global
Communications Units,
12.00%, 5/15/08 (a) 1,000,000 870,000
Verio, Inc. Senior Notes,
10.38%, 4/01/05 (a) 1,000,000 995,000
------------
22,844,625
------------
TOTAL CORPORATE BONDS
(COST $99,855,713) 90,606,030
------------
FOREIGN GOVERNMENT - 0.75%
Republic of Korea Bond,
8.88%, 4/15/08 (cost
$938,803) 1,000,000 855,000
------------
PREFERRED STOCK - 0.80%
Rural Cellular Corporation
(cost $900,000) 10,000 910,000
------------
92,371,030
------------
SHORT TERM
INVESTMENT - 14.24%
U.S. Government Agency
Federal Home Loan Bank
5.00%, 10/01/98
(cost $16,195,000) 16,195,000 16,195,000
------------
TOTAL INVESTMENTS
(COST $117,889,516)-95.44% 108,566,030
OTHER ASSETS LESS
LIABILITIES - 4.56% 5,190,110
------------
NET ASSETS - 100.00% $113,756,140
============
</TABLE>
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $107,457,273 and $5,763,938, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $117,889,516. Net unrealized depreciation aggregated
$9,323,486, of which $286,135, related to appreciated investment securities and
$9,609,621, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
93
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (cost
$117,889,516)(Note 2)
Investment securities $108,566,030
Cash 2,492,668
Receivables
Investments sold 485,622
Fund shares sold 3,115,774
Dividends and interest 2,576,302
Deferred expenses (Note 2) 17,486
------------
TOTAL ASSETS 117,253,882
------------
LIABILITIES
Payables
Investments purchased $ 2,981,590
Fund shares redeemed 110,985
Dividends 371,873
Accrued expenses and other
liabilities 33,294
-----------
TOTAL LIABILITIES 3,497,742
------------
NET ASSETS $113,756,140
============
Net Assets represented by: (Note 2)
Additional paid-in capital $123,540,215
Accumulated distributions
in excess of net
investment income (371,874)
Accumulated net realized
loss on investment
transactions (88,715)
Net unrealized depreciation
of investments (9,323,486)
------------
NET ASSETS $113,756,140
============
NET ASSET VALUE PER SHARE
Class A Shares $ 10.92
Class B Shares $ 10.91
OFFERING PRICE PER SHARE
Class A Shares $ 11.46(a)
Class B Shares $ 10.91
SHARES OUTSTANDING
Class A Shares 4,658,188
Class B Shares 5,762,202
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
(b) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 1998 (B)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $ 2,037,403
------------
EXPENSES
Management fee (Note 4) $ 175,891
Distribution fee (Note 5) 68,461
Shareholder service fee
(Note 5) 62,818
Administration fee (Note 4) 24,979
Transfer agent fee 23,292
Custodian and accounting fees 16,350
Registration expenses 11,840
Shareholder reports and
postage expenses 3,449
Legal fees 753
Directors' fees and expenses 596
Audit fees 521
Miscellaneous 6,164
----------
Total expenses 395,114
------------
Deduct
Waiver of management fee
(Note 4) (175,891)
------------
NET INVESTMENT INCOME 1,818,180
------------
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized loss on
investments (88,715)
Change in unrealized
depreciation on investments (9,323,486)
----------
NET LOSS ON INVESTMENTS (9,412,201)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (7,594,021)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (B)
<S> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 1,818,180
Net realized loss on investments (88,715)
Change in unrealized depreciation on investments (9,323,486)
-------------
Decrease in net assets resulting from operations (7,594,021)
-------------
Distributions to Shareholders
From net investment income
Class A (1,040,534)
Class B (1,178,956)
In excess of net investment income
Class A -
Class B -
-------------
Total distributions to shareholders (2,219,490)
-------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 126,286,107
Reinvested distributions 1,281,553
Shares redeemed (3,998,009)
-------------
Change in net assets resulting from capital share transactions 123,569,651
-------------
Increase in net assets 113,756,140
Net Assets
Beginning of period -
-------------
End of period (including accumulated distributions in excess
of net investment income of ($371,874) ) $ 113,756,140
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (B)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.00
----------
Income from investment operations
Net investment income 0.24
Net realized and unrealized loss on investments (1.04)
----------
Total from investment operations (0.80)
----------
Less distributions
From net investment income (0.28)
----------
Net asset value, end of period $ 10.92
==========
TOTAL RETURN* (6.75%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 50,887
Ratio of expenses to average net assets 0.60% (a)
Ratio of expenses to average net asset excluding waiver 1.30% (a)
Ratio of net investment income to average net assets 7.36% (a)
Portfolio turnover rate 27%
</TABLE>
(a) Annualized.
(b) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (C)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.00
----------
Income from investment operations
Net investment income 0.22
Net realized and unrealized loss on investments (1.05)
----------
Total from investment operations (0.83)
----------
Less distributions
From net investment income (0.26)
----------
Net asset value, end of period $ 10.91
==========
TOTAL RETURN* (6.95%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 62,869
Ratio of expenses to average net assets 1.10% (a)
Ratio of expenses to average net asset excluding waiver 1.80% (a)
Ratio of net investment income to average net assets 6.87% (a)
Portfolio turnover rate 27%
</TABLE>
(a) Annualized.
(c) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
NOTE 1: ORGANIZATION
Mentor Funds is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. Mentor Funds consists of
twelve separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1998, as
follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Balanced Portfolio
("Balanced Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor High Income Portfolio
("High Income Portfolio")
Mentor U.S. Government Money Market Portfolio ("Government Portfolio")
Mentor Money Market Portfolio
("Money Market Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
These financial statements do not include Money Market Portfolio and the U.S.
Government Money Market Portfolio.
Mentor Funds currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% (4.75% for the Quality Income
Portfolio, Municipal Income Portfolio and High Income Portfolio and 1% for
Short-Duration Income Portfolio) payable at the time of purchase. Class B
shares are sold subject to a contingent deferred sales charge payable upon
redemption which decreases depending on when shares were purchased and how long
they have been held. Class Y shares are sold to institutions and high net-worth
individual investors and are not subject to any sales or contingent deferred
sales charges.
During the year, the Balanced Portfolio added two classes of shares designated
as Class A and Class Y and designated its existing class of shares as Class B.
Shareholders of the Balanced Portfolio who on September 16, 1998, held Class B
shares had such shares converted to Class Y shares having an aggregate value
equal to that of the shareholder's Class B shares prior to the conversion.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios in the preparation of their financial statements.
The policies are in conformity with generally accepted accounting principles
which require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates,
any such differences are expected to be immaterial to the net assets of the
Portfolios.
(a) Valuation of Securities - Listed securities held by the Growth Portfolio,
Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and
Growth Portfolio, and Balanced Portfolio traded on national stock exchanges and
over-the-counter securities quoted on the NASDAQ National Market
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
System are valued at the last reported sales price or, lacking any sales, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange determined by the
advisor of the Portfolios as the primary market. Securities traded in the
over-the-counter market, other than those quoted on the NASDAQ National Market
System, are valued at the last available bid price. Short-term investments with
remaining maturities of 60 days or less are carried at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith under
procedures established by the Board of Trustees.
U.S. Government obligations held by the Income and Growth Portfolio, Balanced
Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio, and High
Income Portfolio are valued at the mean between the over-the-counter bid and
asked prices as furnished by an independent pricing service. Listed corporate
bonds, other fixed income securities, mortgage backed securities, mortgage
related, asset-backed and other related securities are valued at the prices
provided by an independent pricing service. Security valuations not available
from an independent pricing service are provided by dealers approved by the
Portfolios' Board of Trustees. In determining value, the pricing services use
information with respect to transactions in such securities, market
transactions in comparable securities, various relationships between
securities, and yield to maturity.
Municipal bonds, held by the Municipal Income Portfolio, are valued at fair
value. An independent pricing service values the Portfolio's municipal bonds
taking into consideration yield, stability, risk, quality, coupon, maturity,
type of issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities. The pricing service does not rely exclusively on quoted prices.
Short-term investments with remaining maturities of 60 days or less shall be
their amortized cost value unless the particular circumstances of the security
indicate otherwise.
Foreign currency amounts are translated into United States dollars as follows:
market value of investments, other assets and liabilities at the daily rate of
exchange, purchases and sales of investments, income and expenses at the rate
of exchange prevailing on the respective dates of such transactions. Net
unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
Net realized foreign currency gains and losses include foreign currency gains
and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of the Portfolio and
the amount actually received. The portion of investment gains and losses
related to foreign currency fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date is included in realized
gains and losses on security transactions.
(b) Repurchase Agreements -- It is the policy of Mentor Funds to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by Mentor Funds to monitor, on a daily basis, the market value of
each repurchase agreement's
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
underlying securities to ensure the existence of a proper level of collateral.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Funds' adviser to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Borrowings -- Each of the Portfolios (except for the Growth Portfolio,
Strategy Portfolio and Municipal Income Portfolio) may, under certain
circumstances, borrow money directly or through dollar-roll and reverse
repurchase agreements (arrangements in which the Portfolio sells a security for
a percentage of its market value with an agreement to buy it back on a set
date). Each Portfolio may borrow up to one-third of the value of its net
assets.
The average daily balance of reverse repurchase agreements outstanding for
Quality Income Portfolio during the year ended September 30, 1998, was
approximately $16,388,088 or $1.24 per share based on average shares
outstanding during the period at a weighted average interest rate of 5.16%. The
maximum amount of borrowings outstanding for any day during the period was
$71,061,218 (including accrued interest), as of September 17, 1998, at an
interest rate of 5.52% and was 26.09% of total assets at that date.
The average daily balance of reverse repurchase agreements outstanding for
Short-Duration Income Portfolio during the year ended September 30, 1998, was
approximately $6,026,021 or $0.72 per share based on average shares outstanding
during the period at a weighted average interest rate of 5.55%. The maximum
amount of borrowings outstanding for any day during the period was $35,037,791
(including accrued interest), as of September 3, 1998, at an interest rate of
5.55% and was 18.35% of total assets at that date.
(d) Portfolio Securities Loaned -- Each of the Portfolios (except for Municipal
Income Portfolio) is authorized by the Board of Trustees to participate in
securities lending transactions.
The Portfolios may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolios
continue to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolios record an asset and obligation for the market value
of that collateral. Cash received as collateral may be reinvested, in which
case that security is recorded as an asset of the Portfolio. Variations in the
market value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At September 30, 1998, certain Portfolios had loaned securities to brokers
which were collateralized by cash, U.S. Treasury securities and letters of
credit. Cash collateral at September 30, 1998 was reinvested in U.S. Treasury
and high quality money market instruments. Income from securities lending
activities amounted to $283,424, $50,923, $25,753, $88,906, $47,564, $702, and
$46,419, for the Growth Portfolio, Global Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio and Quality
Income Portfolio, respectively for the year ended September 30, 1998.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Among the risks to a Portfolio from securities lending are that the borrower
may not provide additional collateral when required or return the securities
when due. At September 30, 1998, the value of the securities on loan and the
value of the related collateral were as follows:
<TABLE>
<CAPTION>
SECURITIES CASH SECURITIES TRI-PARTY
PORTFOLIO ON LOAN COLLATERAL COLLATERAL COLLATERAL
- ------------------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Growth $106,657,061 $115,219,699 $771,567 $ -
Global 11,714,972 12,707,641 - -
Capital Growth 14,483,537 15,562,984 - -
Strategy 58,005,353 60,165,776 215,110 -
Income and Growth 47,343,071 40,344,784 6,360 7,911,321
Balanced 2,544,039 2,639,420 - 39,456
Quality Income 3,244,448 1,605,500 - 1,687,662
- ------------------- ------------ ------------ -------- ---------
</TABLE>
(e) Dollar Roll Transactions -- Each of the Portfolios (except for the Growth,
Strategy and Municipal Income Portfolios) may engage in dollar roll
transactions with respect to mortgage-backed securities issued by GNMA, FNMA,
and FHLMC. In a dollar-roll transaction, a Portfolio sells a mortgage-backed
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-backed 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.
(f) Security Transactions and Investment Income -- Security transactions for
the Portfolios are accounted for on trade date. Dividend income is recorded on
the ex-dividend date. Interest income is recorded on the accrual basis.
Interest income (except for Municipal Income Portfolio) includes interest and
discount earned (net of premium) on short-term obligations, and interest earned
on all other debt securities including original issue discount as required by
the Internal Revenue Code. Dividends to shareholders and capital gain
distributions, if any, are recorded on the ex-dividend date.
Interest income for the Municipal Income Portfolio includes interest earned net
of premium, and original issue discount as required by the Internal Revenue
Code.
(g) Federal Income Taxes -- No provision for federal income taxes has been made
since it is each Portfolio's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to
distribute to its shareholders within the allowable time limit substantially
all taxable income and realized capital gains.
Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends
to meet certain requirements of the Internal Revenue Code applicable to
regulated investment companies which will enable the Portfolio to pay
tax-exempt interest dividends. The portion of such interest, if any, earned on
private purpose municipal bonds issued after August 7, 1986, may by considered
a tax preference item to shareholders.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
At September 30, 1998, capital loss carryforwards for federal tax purposes were
as follows:
<TABLE>
<CAPTION>
MUNICIPAL QUALITY
EXPIRES INCOME PORTFOLIO INCOME PORTFOLIO
- ----------- ------------------ -----------------
<S> <C> <C>
9/30/2001 $ - $ 244,512
9/30/2002 - 3,678,547
9/30/2003 317,478 7,326,035
9/30/2004 1,616,817 1,708,773
9/30/2005 - 1,325,149
9/30/2006 295,480 -
---------- -----------
$2,229,775 $14,283,016
========== ===========
</TABLE>
Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise relieve the Portfolios of
any liability for federal tax.
(h) When-Issued and Delayed Delivery Transactions -- The Portfolios may engage
in when-issued or delayed delivery transactions. To the extent the Portfolios
engage in such transactions, they will do so for the purpose of acquiring
portfolio securities consistent with their investment objectives and policies
and not for the purpose of investment leverage. The Portfolios will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Portfolios will maintain security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily, and begin earning interest on the
settlement date.
(i) Futures Contracts -- In order to gain exposure to or protect against
declines in security values, the Portfolios may buy and sell futures contracts.
The Portfolios may also buy or write put or call options on futures contracts.
The Portfolios may sell futures contracts to hedge against declines in the
value of portfolios securities. The Portfolios may also purchase futures
contracts to gain exposure to market changes as it may be more efficient or
cost effective than actually buying securities. The Portfolios will segregate
assets to cover its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolios are required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolios each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolios recognize a realized gain or loss when the
contract is closed. For the year ended September 30, 1998, Strategy Portfolio,
Municipal Income Portfolio and Short-Duration Income Portfolio had realized
losses of $1,950,741, $923,251, and $88,910, respectively, on closed futures
contracts.
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities. At September 30, 1998, Strategy Portfolio and Municipal
Income Portfolio had open positions in the following futures contracts:
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
NUMBER OF NOTIONAL UNREALIZED
PORTFOLIO CONTRACTS POSITION CONTRACTS EXPIRATION VALUE DEPRECIATION
- ------------------ ----------- ---------- ------------------ ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Strategy 734 Short U.S. Long Bond Dec-98 $73,400,000 ($3,871,838)
Municipal Income 90 Short Muni Bond Future Dec-98 $ 9,000,000 ($ 225,729)
- ------------------ --- ---------- ------------------ ------ ----------- ----------
</TABLE>
(j) Options - In order to produce incremental earnings or protect against
changes in the value of portfolio securities, the Portfolios may buy and sell
put and call options, write covered call options on portfolio securities and
write cash-secured put options.
The Portfolios generally purchase put options or write covered call options to
hedge against adverse movements in the value of portfolio holdings. The
Portfolios may also use options for speculative purposes, although they do not
employ options for this at the present time. The Portfolios will segregate
assets to cover their obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Portfolios will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a
written put option, or the cost of the security for a purchased put or call
option is adjusted by the amount of premium received or paid. For the year
ended September 30, 1998, Municipal Income Portfolio had a net realized gain of
$10,940 on closed option contracts.
The risk in writing a call option is that the Portfolios give up the
opportunity for profit if the market price of the security increases and the
option is exercised. The risk in writing a put option is that the Portfolio may
incur a loss if the market price of the security decreases and the option is
exercised. The risk in buying an option is that the Portfolio pays a premium
whether or not the option is exercised or the counterparty is unwilling or
unable to perform. The Portfolio also has the additional risk of not being able
to enter into a closing transaction if a liquid secondary market does not
exist. The Portfolio may also write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of the
counterparty. Activity in written options for the Municipal Income Portfolio
for the year ended September 30, 1998, was as follows:
<TABLE>
<CAPTION>
PREMIUM
RECEIVED FACE VALUE
------------ ---------------
<S> <C> <C>
Options outstanding at
September 30, 1997 $ 36,693 $ 10,000,000
Options written 53,274 21,000,000
Options closed (49,292) (20,000,000)
Options expired (40,675) (11,000,000)
- ----------------------- -------- ------------
Options outstanding at
September 30, 1998 $ - $ -
- ----------------------- -------- ------------
</TABLE>
(k) Residual Interests - A derivative security is any investment that derives
its value from an underlying security, asset, or market index. Quality Income
Portfolio and Short-Duration Income Portfolio invest in mortgage security
residual interests ("residuals") which are considered derivative securities.
The Portfolios' investments in residuals have been primarily in securities
issued by proprietary mortgage trusts. While these entities have been highly
leveraged, often having indebtedness of up to 95% of their total value, the
Portfolios have not incurred any indebtedness in the course of making these
residual investments; nor have the Portfolios' assets been
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
pledged to secure the indebtedness of the issuing structure or the Portfolios'
investment in the residuals. In consideration of the risk associated with
investment in residual securities, it is the Portfolios' policy to limit their
exposure at the time of purchase to no more than 20% of their total assets.
(l) Interest-Rate Swap - An interest-rate swap is a contract between two
parties on a specified principal amount (referred to as the notional principal)
for a specified period. In the most common instance, a swap involves the
exchange of streams of variable and fixed-rate interest payments. During the
term of the swap, changes in the value of the swap are recognized as unrealized
gains or losses by marking-to-market the value of the swap. When the swap is
terminated, the Fund will record a realized gain or loss. At September 30,
1998, there were no open interest rate swap agreements.
(m) Deferred Expenses - Costs incurred by the Portfolios in connection with
their initial share registration and organization costs were deferred by the
Portfolios and are being amortized on a straight-line basis over a five-year
period.
(n) Distributions - Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for net operating losses, certain futures and deferral
of wash sales and equalization deficits.
The Growth Portfolio, Capital Growth Portfolio and Strategy Portfolio also
utilized earnings and profits distributed to shareholders on redemption of
shares as a part of the distributions for income tax purposes.
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly to all shareholders invested
in Municipal Income Portfolio, Quality Income Portfolio, Short-Duration Income
Portfolio and High Income Portfolio. Dividends are declared and paid annually
to all shareholders invested in the Growth Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Global Portfolio and Balanced Portfolio. Dividends are
declared and paid quarterly to all shareholders invested in Income and Growth
Portfolio. Dividends will be reinvested in additional shares of the same class
and Portfolio on payment dates at the ex-dividend date net asset value without
a sales charge unless cash payments are requested by shareholders in writing to
Mentor Investment Group, LLC. Dividends of all Portfolios are paid to
shareholders of record on the record date. Capital gains realized by each
Portfolio, if any, are paid annually.
NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment
advisor, receives for its services an annual investment advisory fee not to
exceed the following percentages of the average daily net assets of the
particular Portfolio: Growth Portfolio, 0.70%; Capital Growth Portfolio, 0.80%;
Strategy Portfolio, 0.85%; Income and Growth Portfolio, 0.75%; Balanced
Portfolio, 0.75%; Municipal Income Portfolio, 0.60%; Quality Income Portfolio,
0.60%; Short-Duration Income Portfolio, 0.50%; and High Income Portfolio,
0.70%.
Mentor Advisors pays Van Kampen American Capital Management, Inc., the
sub-advisor to Municipal Income Portfolio, an annual fee expressed as a
percentage of the Portfolio's average net assets as
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
follows: 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.
For the period from October 1, 1997 to June 30, 1998, Wellington Management
Company, LLC, the sub-advisor to the Income and Growth Portfolio, received from
the Investment Adviser an annual fee expressed as a percentage of that
Portfolio's assets as follows: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.275% on 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. Effective July 1, 1998, the sub-advisor to the Income and Growth
Portfolio received the following fees: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.250% on the next $150 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's average net
assets over $150 million.
Van Kampen American Capital Management, Inc., the sub-advisor to the High
Income Portfolio receives from the Investment Advisor an annual fee of 0.20% of
the Portfolio's average daily net assets.
No performance or incentive fees are paid to the sub-advisors. Under certain
Sub-Advisory Agreements, the particular sub-advisor may, from time to time,
voluntarily waive some or all of its sub-advisory fee charged to the Investment
Advisor and may terminate any such voluntary waiver at any time in its sole
discretion.
The Global Portfolio has entered into an Investment Advisory Agreement with
Mentor Perpetual Advisors, LLC ("Mentor Perpetual"). Mentor Perpetual is owned
equally by Mentor and Perpetual PLC, a diversified financial services holding
company. Under this agreement, Mentor Perpetual's management fee is accrued
daily and paid monthly at an annual rate of 1.10% applied to the average daily
net assets of the Portfolio up to and including $75 million and 1.00% of its
average daily net assets in excess of $75 million.
For the year ended September 30, 1998, Mentor Advisors and sub-advisors, earned
and voluntarily waived the following management fees:
<TABLE>
<CAPTION>
MANAGEMENT
MANAGEMENT FEE SUB ADVISOR
FEE VOLUNTARILY FEE
PORTFOLIO EARNED WAIVED EARNED/(WAIVED)
- ----------------------- ------------ ------------- ----------------
<S> <C> <C> <C>
Growth $4,204,377 $ - $ -
Global 1,612,495 - -
Capital Growth 2,153,467 - -
Strategy 2,420,122 - -
Income and Growth 1,638,729 - 575,028
Balanced 31,721 - 20,856
Municipal Income 557,332 - 216,114
Quality Income 1,025,941 204,530 -
Short-Duration Income 504,097 180,523 -
High Income 175,891 175,891 (51,279)
- ----------------------- ---------- ------- -------
</TABLE>
Administrative personnel and services are provided by Mentor, under an
Administration Agreement, at an annual rate of 0.10% of the average daily net
assets of each Portfolio. For the year ended September 30, 1998, Mentor earned
the following administration fees:
<TABLE>
<CAPTION>
ADMINISTRATION
ADMINISTRATION FEE VOLUNTARILY
PORTFOLIO FEE EARNED WAIVED
- ----------------------- ---------------- ----------------
<S> <C> <C>
Growth $600,625 $ -
Global 153,750 -
Capital Growth 269,183 -
Strategy 284,720 -
Income and Growth 218,497 -
Balanced 4,219 4,219
Municipal Income 92,888 -
Quality Income 174,343 -
Short-Duration Income 101,237 101,237
High Income 24,979 -
- ----------------------- -------- -------
</TABLE>
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
The Portfolios also provide direct reimbursement to Mentor for certain legal
and compliance administration, investor relation and operation related costs
not covered under the Investment Management Agreement. For the year ended
September 30, 1998, these direct reimbursements were as follows:
<TABLE>
<CAPTION>
DIRECT
PORTFOLIO REIMBURSEMENTS
- ----------------------- ---------------
<S> <C>
Growth $26,735
Global 6,902
Capital Growth 12,494
Strategy 12,317
Income and Growth 10,079
Municipal Income 4,318
Quality Income 7,964
Short-Duration Income 5,085
- ----------------------- -------
</TABLE>
NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The Class B shares of the Portfolios have adopted a Distribution Plan (the
Plan) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a
Distribution Agreement between the Portfolios and Mentor Distributors, LLC
("Mentor Distributors") a wholly-owned subsidiary of BYSIS Fund Services, Inc.,
Mentor Distributors was appointed distributor of the Portfolios. To compensate
Mentor Distributors for the services it provides and for the expenses it incurs
under the Distribution Agreement, the Portfolios pay a distribution fee, which
is accrued daily and paid monthly at the annual rate of 0.75% of the
Portfolios' average daily net assets for the Growth Portfolio, Capital Growth
Portfolio, Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio
and Global Portfolio, 0.50% of the average daily net assets of the Quality
Income Portfolio, High Income Portfolio and Municipal Income Portfolio, and
0.30% of the average daily net assets for the Short-Duration Income Portfolio.
Mentor Distributors may select financial institutions, such as investment
dealers and banks to provide sales support services as agents for their clients
or customers who beneficially own Class B shares of the Portfolios. Financial
institutions will receive fees from Mentor Distributors based upon Class B
shares owned by their clients or customers.
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
Mentor Distributors with respect to Class A and Class B shares of each
Portfolio. Under the Service Plan, financial institutions will enter into
shareholder service agreements with the Portfolios to provide administrative
support services to their customers who from time to time may be owners of
record or beneficial owners of Class A or Class B shares of one or more
Portfolios. In return for providing these support services, a financial
institution may receive payments from one or more Portfolios at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B
shares of the particular Portfolio or Portfolios beneficially owned by the
financial institution's customers for whom it is holder of record or with whom
it has a servicing relationship.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Presently, the Portfolios' class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.
Under the Distribution Plan, shareholder service fees are charged in Class A
and B and distribution fees are charged to Class B. For the year ended
September 30, 1998, distribution fees and shareholder servicing fees were as
follows:
<TABLE>
<CAPTION>
CLASS B CLASS B SHAREHOLDER SERVICE FEE
DISTRIBUTION DISTRIBUTION --------------------------- SHAREHOLDER SERVICE
PORTFOLIO FEE FEE WAVIED CLASS A CLASS B FEE WAIVED
- ----------------------- -------------- -------------- ----------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
Growth $3,638,580 $ -- $255,596 $1,233,864 $ --
Global 734,020 -- 146,546 237,827 --
Capital Growth 1,227,717 -- 283,728 389,229 --
Strategy 1,875,172 -- 77,994 633,805 --
Income and Growth 986,604 -- 222,501 323,741 --
Balanced 30,319 29,451 3,517 6,695 9,738
Municipal Income 257,381 -- 108,151 124,069 --
Quality Income 467,042 -- 195,196 232,278 --
Short-Duration Income 133,476 -- 160,078 91,969 --
High Income 68,461 -- 28,187 34,631 --
- ----------------------- ---------- ------- -------- ---------- ------
</TABLE>
NOTE 6: FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
In connection with portfolio purchases and sales of securities denominated in a
foreign currency, Global Portfolio may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time Global
Portfolio may enter into contracts to hedge certain foreign currency assets.
Contracts are recorded at market value. Realized gains and losses arising from
such transactions are included in net gain (loss) on investments and forward
foreign currency exchange contracts. The Portfolio is subject to the credit
risk that the other party will not complete the obligations of the contract. At
September 30, 1998, Global Portfolio had outstanding forward contracts as set
forth below.
<TABLE>
<CAPTION>
CONTRACTS NET UNREALIZED
TO DELIVER/ IN EXCHANGE APPRECIATION/
SETTLEMENT DATE RECEIVE VALUE FOR (DEPRECIATION)
- ----------------------------- ------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
PURCHASES
10/01/98 British Pound 34,560 $ 58,716 $ 58,925 $ (209)
10/01/98 British Pound 19,415 32,985 33,102 (117)
SALES
10/01/98 British Pound 32,471 55,166 55,362 196
10/02/98 British Pound 33,054 56,156 56,356 200
10/02/98 British Pound 36,586 62,159 62,380 221
10/30/98 French Franc 3,859,918 689,505 685,598 (3,907)
3/18/99 Hong Kong Dollar 7,928,000 1,006,040 1,000,000 (6,040)
11/30/98 Singapore Dollar 885,000 524,787 500,000 (24,787)
- -------- ------------------ --------- --------- ---------- ---------
</TABLE>
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 12,016,618 $ 210,103,016 5,018,131 $ 82,270,375
Shares issued upon reinvestment of distributions 346,751 6,474,795 369,088 5,744,163
Shares redeemed (12,306,743) (213,035,017) (2,301,180) (37,823,031)
----------- -------------- ---------- -------------
Change in net assets from capital share transactions 56,626 $ 3,542,794 3,086,039 $ 50,191,507
=========== ============== ========== =============
CLASS B:
Shares sold 4,138,131 $ 73,047,883 5,392,199 $ 86,290,167
Shares issued upon reinvestment of distributions 1,667,456 30,460,604 3,348,283 51,489,284
Shares redeemed (4,698,527) (80,890,251) (3,140,076) (49,890,633)
----------- -------------- ---------- -------------
Change in net assets from capital share transactions 1,107,060 $ 22,618,236 5,600,406 $ 87,888,818
=========== ============== ========== =============
CLASS Y: (A)
Shares sold 1,786,672 $ 30,602,698 - -
Shares issued upon reinvestment of distributions 1 10 - -
Shares redeemed (53,808) (894,152) - -
----------- -------------- ---------- -------------
Change in net assets from capital share transactions 1,732,865 $ 29,708,556 - -
=========== ============== ========== =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR PERPETUAL GLOBAL PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- ------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,057,945 $ 42,154,809 1,732,413 $ 32,107,036
Shares issued upon reinvestment of distributions 113,726 2,255,270 26,897 463,738
Shares redeemed (1,275,534) (25,637,616) (270,161) (5,115,471)
---------- ------------- --------- ------------
Change in net assets from capital share transactions 896,137 $ 18,772,463 1,489,149 $ 27,455,303
========== ============= ========= ============
CLASS B:
Shares sold 1,821,588 $ 36,737,964 2,325,365 $ 42,416,589
Shares issued upon reinvestment of distributions 232,932 4,477,444 91,695 1,544,189
Shares redeemed (983,971) (18,930,107) (447,724) (8,352,236)
---------- ------------- --------- ------------
Change in net assets from capital share transactions 1,070,549 $ 22,285,301 1,969,336 $ 35,608,542
========== ============= ========= ============
CLASS Y: (A)
Shares sold 53 $ 1,000 - -
Shares issued upon reinvestment of distributions - 8 - -
Shares redeemed - - - -
---------- ------------- --------- ------------
Change in net assets from capital share transactions 53 $ 1,008 - -
========== ============= ========= ============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR CAPITAL GROWTH PORTFOLIO
--------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
--------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 5,110,051 $ 121,415,173 1,422,449 $ 28,161,248
Shares issued upon reinvestment of distributions 278,288 5,833,664 264,769 4,552,490
Shares redeemed (1,926,775) (45,709,577) (404,403) (7,959,184)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 3,461,564 $ 81,539,260 1,282,815 $ 24,754,554
========== ============= ========= =============
CLASS B:
Shares sold 4,375,173 $ 98,931,464 1,749,992 $ 33,332,019
Shares issued upon reinvestment of distributions 507,715 10,256,056 596,606 9,983,395
Shares redeemed (1,063,324) (23,712,167) (711,342) (13,428,205)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 3,819,564 $ 85,475,353 1,635,256 $ 29,887,209
========== ============= ========= =============
CLASS Y: (A)
Shares sold 48 $ 1,000 - -
Shares issued upon reinvestment of distributions 1 12 - -
Shares redeemed - - -
---------- ------------- --------- -------------
Change in net assets from capital share transactions 49 $ 1,012 - -
========== ============= ========= =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR STRATEGY PORTFOLIO
------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
--------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 508,748 $ 7,933,524 1,695,322 $ 28,517,096
Shares issued upon reinvestment of distributions 444,548 6,836,196 91,017 1,513,610
Shares redeemed (1,529,689) (24,220,890) (742,169) (12,677,413)
---------- ------------- --------- -------------
Change in net assets from capital share transactions (576,393) ($ 9,451,170) 1,044,170 $ 17,353,293
========== ============= ========= =============
CLASS B:
Shares sold 564,916 $ 8,678,121 2,587,894 $ 43,129,553
Shares issued upon reinvestment of distributions 3,423,558 51,517,305 1,291,000 21,237,045
Shares redeemed (7,097,154) (108,934,512) (3,591,125) (60,432,366)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions (3,108,680) ($ 48,739,086) 287,769 $ 3,934,232
========== ============= ========== =============
CLASS Y: (A)
Shares sold 67 $ 1,001 - -
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 67 $ 1,001 - -
========== ============= ========== =============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR INCOME AND GROWTH PORTFOLIO
---------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,515,923 $ 49,323,113 1,945,245 $ 37,552,063
Shares issued upon reinvestment of distributions 371,373 7,153,831 179,904 3,303,336
Shares redeemed (915,370) (18,005,450) (305,497) (5,925,176)
--------- ------------- --------- -------------
Change in net assets from capital share transactions 1,971,926 $ 38,471,494 1,819,652 $ 34,930,223
========= ============= ========= =============
CLASS B:
Shares sold 2,642,784 $ 51,766,483 1,913,241 $ 36,687,335
Shares issued upon reinvestment of distributions 559,471 10,748,481 450,665 8,192,160
Shares redeemed (1,074,795) (21,053,657) (596,371) (11,526,154)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 2,127,460 $ 41,461,307 1,767,535 $ 33,353,341
========== ============= ========= =============
CLASS Y: (A)
Shares sold 53 $ 1,000 - -
Shares issued upon reinvestment of distributions 2 30 - -
Shares redeemed - - - -
---------- ------------- --------- -------------
Change in net assets from capital share transactions 55 $ 1,030 - -
========== ============= ========= =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR BALANCED PORTFOLIO
-------------------------------------------------------------
PERIOD ENDED YEAR ENDED
9/30/98 9/30/97
------------------------------ ----------------------------
SHARES DOLLARS SHARES DOLLARS
------------ --------------- ------------ -------------
<S> <C> <C> <C> <C>
CLASS A: (B)
Shares sold 258,246 $ 3,577,935 - $ -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
------- ------------ ------- ----------
Change in net assets from capital share transactions 258,246 $ 3,577,935 - $ -
======= ============ ======= ==========
CLASS B:
Shares sold 412,403 $ 5,702,737 - $ -
Shares issued upon reinvestment of distributions 88,886 1,300,249 37,773 558,075
Shares redeemed (48,378) (810,125) (39,915) (636,137)
Conversion of Class B Shares to Class Y Shares (273,416) (3,350,117) - -
-------- ------------ ------- ----------
Change in net assets from capital share transactions 179,495 $ 2,842,744 (2,142) $ (78,062)
======== ============ ======= ==========
CLASS Y: (B)
Shares sold - $ - - $ -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed (7,305) (100,000) - -
Conversion of Class B Shares to Class Y Shares 273,416 3,350,117 - -
-------- ------------ ------- ----------
Change in net assets from capital share transactions 266,111 $ 3,250,117 - $ -
======== ============ ======= ==========
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
(b) For the period from September 16, 1998 (initial offering of Class A and
Class Y Shares) to September 30, 1998.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR MUNICIPAL INCOME PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
-------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 1,688,990 $ 26,509,509 901,683 $ 13,789,961
Shares issued upon reinvestment of distributions 75,715 1,188,701 41,778 635,539
Shares redeemed (423,337) (6,641,364) (214,874) (3,272,170)
--------- ------------ -------- ------------
Change in net assets from capital share transactions 1,341,368 $ 21,056,846 728,587 $ 11,153,330
========= ============ ======== ============
CLASS B:
Shares sold 1,208,341 $ 18,966,860 782,655 $ 11,948,057
Shares issued upon reinvestment of distributions 91,662 1,436,340 83,433 1,268,808
Shares redeemed (436,001) (6,820,355) (478,013) (7,288,249)
--------- ------------ -------- ------------
Change in net assets from capital share transactions 864,002 $ 13,582,845 388,075 $ 5,928,616
========= ============ ======== ============
CLASS Y: (A)
Shares sold 64 $ 1,000 - -
Shares issued upon reinvestment of distributions 3 43 - -
Shares redeemed - - - -
--------- ------------ -------- ------------
Change in net assets from capital share transactions 67 $ 1,043 - -
========= ============ ======== ============
</TABLE>
<TABLE>
<CAPTION>
MENTOR QUALITY INCOME PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- ---------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 4,256,782 $ 56,191,423 2,838,801 $ 37,052,906
Shares issued upon reinvestment of distributions 233,015 3,077,659 91,837 1,196,422
Shares redeemed (1,597,720) (21,178,895) (529,521) (6,928,329)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 2,892,077 $ 38,090,187 2,401,117 $ 31,320,999
========== ============= ========= =============
CLASS B:
Shares sold 3,811,046 $ 50,451,628 2,058,671 $ 26,889,217
Shares issued upon reinvestment of distributions 272,551 3,600,049 218,332 2,847,859
Shares redeemed (1,478,885) (19,526,706) (1,089,318) (14,250,845)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 2,604,712 $ 34,524,971 1,187,685 $ 15,486,231
========== ============= ========== =============
CLASS Y: (A)
Shares sold 76 $ 1,000 - -
Shares issued upon reinvestment of distributions 4 51 - -
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 80 $ 1,051 - -
========== ============= ========== =============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR SHORT-DURATION INCOME PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
--------------------------------- ----------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 9,921,692 $ 124,978,729 2,047,670 $ 25,768,187
Shares issued upon reinvestment of distributions 200,895 2,525,409 49,602 623,647
Shares redeemed (4,997,458) (62,897,886) (505,078) (6,351,983)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 5,125,129 $ 64,606,252 1,592,194 $ 20,039,851
========== ============= ========= =============
CLASS B:
Shares sold 3,500,465 $ 44,073,519 1,121,483 $ 14,121,033
Shares issued upon reinvestment of distributions 145,226 1,826,827 89,996 1,131,691
Shares redeemed (1,563,684) (19,674,936) (1,027,042) (12,921,363)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 2,082,007 $ 26,225,410 184,437 $ 2,331,361
========== ============= ========== =============
CLASS Y: (A)
Shares sold 79 $ 1,000 - -
Shares issued upon reinvestment of distributions 4 49 - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 83 $ 1,049 - -
========== ============= ========== =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR HIGH INCOME PORTFOLIO
------------------------------
PERIOD ENDED
9/30/98 (C)
------------------------------
SHARES DOLLARS
------------- --------------
<S> <C> <C>
CLASS A:
Shares sold 4,775,208 $ 56,602,255
Shares issued upon reinvestment of distributions 51,541 580,207
Shares redeemed (168,561) (1,889,222)
--------- ------------
Change in net assets from capital share transactions 4,658,188 $ 55,293,240
========= ============
CLASS B:
Shares sold 5,890,307 $ 69,683,852
Shares issued upon reinvestment of distributions 62,441 701,346
Shares redeemed (190,546) (2,108,787)
--------- ------------
Change in net assets from capital share transactions 5,762,202 $ 68,276,411
========= ============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
(c) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
NOTE 8: SUBSEQUENT EVENT
Effective November 16, 1998, the Balanced Portfolio acquired substantially all
the assets and assumed the liabilities of the Strategy Portfolio in exchange
for Class A, Class B and Class Y shares of the Balanced Portfolio. The
acquisition was accomplished by a tax-free exchange of the respective shares of
the Balanced Portfolio for the net assets of the Strategy Portfolio. The net
assets acquired amounted to $222,601,303. The aggregate net assets of the
Balanced Portfolio immediately after the acquisition were $255,551,169.
<PAGE>
MENTOR FUNDS
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE TRUSTEES AND SHAREHOLDERS
MENTOR FUNDS
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments of Growth Portfolio, Global Portfolio,
Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio,
Balanced Portfolio, Municipal Income Portfolio, Quality Income Portfolio,
Short-Duration Income Portfolio and High Income Portfolio, portfolios of Mentor
Funds as of September 30, 1998 and the related statements of operations for the
year or period then ended, the statements of changes in net assets for each of
the years or periods in the two-year period then ended and the financial
highlights for each of the years or periods in the five-year period ended
September 30, 1998 as described more fully in each of the financial highlights
of each of the funds. These financial statements and financial highlights are
the responsibility of the Funds' management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy
Portfolio, Income and Growth Portfolio, Balanced Portfolio, Municipal Income
Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio and High
Income Portfolio, portfolios of Mentor Funds as of September 30, 1998, the
results of their operations for the year or period then ended, the changes in
their net assets for each of the years or periods in the two-year period then
ended, and the financial highlights for each of the years or periods in the
five-year period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick
Boston, Massachusetts
November 20, 1998
<PAGE>
MENTOR FUNDS
ADDITIONAL INFORMATION
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
YEAR 2000 (UNAUDITED)
The Portfolio receives services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer software to distinguish the year 2000 from
the year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolio's other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolio from this problem.
FEDERAL TAX STATUS OF DIVIDENDS DECLARED (UNAUDITED)
Long-term capital gain dividends paid during the period are presented below.
For federal income tax purposes, dividends from short-term capital gains are
classified as ordinary income. All net investment income dividends were
ordinary income, except for Municipal Income Portfolio that paid exempt income
dividends. The percentage of qualifying dividends eligible for the corporate
dividends received deduction are also listed below for the applicable
Portfolios.
<TABLE>
<CAPTION>
LONG-TERM TAX-EXEMPT
CAPITAL GAIN INCOME QUALIFYING
PORTFOLIO DIVIDENDS DIVIDENDS DIVIDENDS
- ----------------------- -------------- ------------ -----------
<S> <C> <C> <C>
Growth $37,907,233 $ - -
Global 3,028,816 - -
Capital Growth 9,208,016 - 21.04%
Strategy 41,130,602 - 9.69%
Income and Growth 8,656,201 - 37.12%
Municipal Income - 3,949,481 -
Balanced 893,299 - 11.33%
High Income - - -
Quality Income - - -
Short-Duration Income - - -
- ----------------------- ----------- ---------- -----
</TABLE>
Shareholders of Mentor Strategy Portfolio (the "Strategy Portfolio") considered
and acted upon the proposal listed below at a special meeting of shareholders
held on Thursday November 12, 1998. In addition, below the proposal are the
results of that vote.
1. To approve or disapprove an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of Strategy Portfolio to Mentor
Balanced Portfolio (the "Balanced Portfolio") in exchange for shares of
the Balanced Portfolio and the assumption by the Balanced Portfolio of all
of the liabilities of the Strategy Portfolio, and the distribution of such
shares to the shareholders of the Strategy Portfolio in complete
liquidation of the Strategy Portfolio:
<TABLE>
<S> <C>
Affirmative 7,281,296
Against 313,087
Abstain 331,983
</TABLE>
<PAGE>
MENTOR FUNDS
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
TRUSTEES
DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
ARCH T. ALLEN III, TRUSTEE
Attorney at Law
Allen & Moore, LLP
JERRY R. BARRENTINE, TRUSTEE
President
J.R. Barrentine & Associates
ARNOLD H. DREYFUSS, TRUSTEE
Chairman
Eskimo Pie Corporation
WESTON E. EDWARDS, TRUSTEE
President
Weston Edwards & Associates
THOMAS F. KELLER, TRUSTEE
Former Dean, Fuqua School of Business
Duke University
LOUIS W. MOELCHERT, JR., TRUSTEE
Vice President for Business & Finance
University of Richmond
J. GARNETT NELSON, TRUSTEE
Consultant
Mid-Atlantic Holdings, LLC
TROY A. PEERY, JR., TRUSTEE
President
Heilig-Meyers Company
PETER J. QUINN, JR., TRUSTEE
Managing Director
Mentor Investment Group, LLC
OFFICERS
PAUL F. COSTELLO, PRESIDENT
Managing Director
Mentor Investment Group, LLC
TERRY L. PERKINS, TREASURER
Senior Vice President
Mentor Investment Group, LLC
GEOFFREY B. SALE, SECRETARY
Associate Vice President
Mentor Investment Group, LLC
MICHAEL A. WADE, ASSISTANT TREASURER
Vice President
Mentor Investment Group, LLC
This report is authorized for distribution to prospective investors only when
preceded or accompanied by a Mentor Funds prospectus, which contains complete
information about fees, sales charges and expenses. Please read it carefully
before you invest or send money.
<PAGE>
MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
(Mentor U.S. Government Money Market Portfolio,
Mentor Money Market Portfolio, and Mentor Tax-Exempt Money Market Portfolio)
December 15, 1998
This Statement of Additional Information relates to Retail and
Institutional Shares of the Mentor U.S. Government Money Market Portfolio,
Mentor Money Market Portfolio, and Mentor Tax-Exempt Money Market Portfolio
(each a "Portfolio" and collectively the "Portfolios"). Each of the Portfolios
is a series of shares of beneficial interest of Mentor Funds (the "Trust"). The
Mentor U.S. Government Money Market and Mentor Money Market Portfolios were
previously known as the "Mentor Institutional U.S. Government Money Market
Portfolio" and "Mentor Institutional Money Market Portfolio," respectively.
This Statement is not a prospectus and should be read in conjunction with the
relevant prospectus. Separate statements of additional information relate to
the other Portfolios comprising the Trust. A copy of any prospectus or
statement of additional information can be obtained upon request made to Mentor
Services Company, Inc., at P.O. Box 1357, Richmond, Virginia 23218-1357, or
calling Mentor Services Company, Inc. at 1-800-869-6042.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- -----
<S> <C>
General .................................................................................. 1
Investment Restrictions .................................................................. 1
Certain Investment Techniques ............................................................ 3
Management of the Trust .................................................................. 6
Principal Holders of Securities .......................................................... 10
Investment Advisory and Other Services ................................................... 10
Brokerage ................................................................................ 12
Determination of Net Asset Value ......................................................... 14
Tax Status ............................................................................... 15
The Distributor .......................................................................... 18
Independent Accountants .................................................................. 18
Custodian ................................................................................ 18
Performance Information .................................................................. 18
Mentor Tax Exempt Money Market Portfolio -- Federal Taxable Equivalent Yield Table-1998 19
Rates Shareholder Liability ........................................................... 23
Members of Investment Management Teams ................................................... 23
APPENDIX ................................................................................. 24
</TABLE>
i
<PAGE>
GENERAL
Mentor Funds (the "Trust") is a Massachusetts business trust organized on
January 20, 1992 as Cambridge Series Trust.
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.
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 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) securities
restricted as to resale (excluding securities determined by the 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 than
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).
1
<PAGE>
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.
The Investment Company Act of 1940, as amended (the "1940 Act"), provides
that a "vote of a majority of the outstanding voting securities" of a Portfolio
means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, and (2) 67% or more of the shares present
at a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
2
<PAGE>
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques in
which each Portfolio may engage, and certain of the risks they may entail.
REPURCHASE AGREEMENTS
A Portfolio may enter into repurchase agreements. A repurchase agreement
is a contract under which the Portfolio acquires a security for a relatively
short period (usually not more than one week) subject to the obligation of the
seller to repurchase and the Portfolio to resell such security at a fixed time
and price (representing the Portfolio's cost plus interest). It is the Trust's
present intention to enter into repurchase agreements only with member banks of
the Federal Reserve System and securities dealers meeting certain criteria as
to creditworthiness and financial condition established by the Trustees of the
Trust and only with respect to obligations of the U.S. government or its
agencies or instrumentalities or other high quality short term debt
obligations. Repurchase agreements may also be viewed as loans made by a
Portfolio which are collateralized by the securities subject to repurchase. The
investment adviser will monitor such transactions to ensure that the value of
the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, a Portfolio could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, a Portfolio may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if a Portfolio is
treated as an unsecured creditor and required to return the underlying
collateral to the seller's estate.
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 of any Portfolio loaned will not at any
time exceed one-third (or such other limit as the Trustee may establish) of the
total assets of the Portfolio. Cash collateral received by a Portfolio may be
invested in any securities in which the Portfolio may invest consistent with
its investment policies. In addition, it is anticipated that a Portfolio may
share with the borrower some of the income received on the collateral for the
loan or that it will be paid a premium for the loan. Before a Portfolio enters
into a loan, its investment adviser considers all relevant facts and
circumstances including the creditworthiness of the borrower. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower, a
Portfolio retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by a Portfolio if
the holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. A Portfolio will not lend portfolio
securities to borrowers affiliated with the Portfolio.
3
<PAGE>
TAX-EXEMPT SECURITIES
GENERAL DESCRIPTION. As used in the prospectus and in this Statement the
term "Tax-Exempt Securities" includes debt obligations issued by a state, its
political subdivisions (for example, counties, cities, towns, villages,
districts and authorities) and their agencies, instrumentalities or other
governmental units, the interest from which is, in the opinion of bond counsel,
exempt from federal income tax. Such obligations are issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Tax-Exempt Securities may be issued include the refunding of
outstanding obligations or the payment of general operating expenses.
Short-term Tax-Exempt Securities are generally issued by state and local
governments and public authorities as interim financing in anticipation of tax
collections, revenue receipts, or bond sales to finance such public purposes.
In addition, certain types of "private activity" bonds may be issued by public
authorities to finance such projects as privately operated housing facilities
and certain local facilities for water supply, gas, electricity or sewage or
solid waste disposal, student loans, or the obtaining of funds to lend to
public or private institutions for the construction of facilities such as
educational, hospital and housing facilities. Other types of private activity
bonds, the proceeds of which are used for the construction, repair or
improvement of, or to obtain equipment for, privately operated industrial or
commercial facilities, may constitute Tax-Exempt Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. Tax-Exempt Securities also include tax-exempt commercial paper, which
are promissory notes issued by municipalities to enhance their cash flows.
PARTICIPATION INTERESTS. The Tax-Exempt Money Market Portfolio may invest
in Tax-Exempt Securities either by purchasing them directly or by purchasing
certificates of accrual or similar instruments evidencing direct ownership of
interest payments or principal payments, or both, on Tax-Exempt Securities,
provided that, in the opinion of counsel to the initial seller of each such
certificate or instrument, any discount accruing on the certificate or
instrument that is purchased at a yield not greater than the coupon rate of
interest on the related Tax-Exempt Securities will be exempt from federal
income tax to the same extent as interest on the Tax-Exempt Securities. The
Tax-Exempt Money Market Portfolio may also invest in Tax-Exempt Securities by
purchasing from banks participation interests in all or part of specific
holdings of Tax-Exempt Securities. These participations may be backed in whole
or in part by an irrevocable letter of credit or guarantee of the selling bank.
The selling bank may receive a fee from a Fund in connection with the
arrangement.
STAND-BY COMMITMENTS. When the Tax-Exempt Money Market Portfolio purchases
Tax-Exempt Securities, it has the authority to acquire stand-by commitments
from banks and broker-dealers with respect to those Tax-Exempt Securities. A
stand-by commitment may be considered a security independent of the state
tax-exempt security to which it relates. The amount payable by a bank or dealer
during the time a stand-by commitment is exercisable, absent unusual
circumstances, would be substantially the same as the market value of the
underlying Tax-Exempt Security to a third party at any time. The Tax-Exempt
Money Market Portfolio expects that stand-by commitments generally will be
available without the payment of direct or indirect consideration. No Fund
expects to assign any value to stand-by commitments.
YIELDS. The yields on Tax-Exempt Securities depend on a variety of
factors, including general money market conditions, effective marginal tax
rates, the financial condition of the issuer, general conditions of the tax-
exempt security market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Moody's Investors
Service, Inc. and Standard & Poor's represent their opinions as to the quality
4
<PAGE>
of the Tax-Exempt Securities which they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, Tax-Exempt Securities with the same maturity and
interest rate but with different ratings may have the same yield. Yield
disparities may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest rates, due to
such factors as changes in the overall demand or supply of various types of
Tax-Exempt Securities or changes in the investment objectives of investors.
Subsequent to purchase by the Tax-Exempt Money Market Portfolio, an issue of
Tax-Exempt Securities or other investments may cease to be rated or its rating
may be reduced below the minimum rating required for purchase by the Portfolio.
Neither event will require the elimination of an investment from the Tax-Exempt
Money Market Portfolio's portfolio, but Mentor Advisors will consider such an
event in its determination of whether the Tax-Exempt Money Market Portfolio
should continue to hold an investment in its portfolio.
"MORAL OBLIGATION" BONDS. The Tax-Exempt Money Market Portfolio does not
currently intend to invest in so-called "moral obligation" bonds, where
repayment is backed by a moral commitment of an entity other than the issuer,
unless the credit of the issuer itself, without regard to the "moral
obligation," meets the investment criteria established for investments by the
Tax-Exempt Money Market Portfolio.
ADDITIONAL RISKS. Securities in which the Tax-Exempt Money Market
Portfolio may invest, including Tax-Exempt Securities, are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal Bankruptcy Code (including special
provisions related to municipalities and other public entities), and laws, if
any, which may be enacted by Congress or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations. There is also the possibility that as a
result of litigation or other conditions the power, ability or willingness of
issuers to meet their obligations for the payment of interest and principal on
their Tax-Exempt Securities may be materially affected. There is no assurance
that any issuer of a Tax-Exempt Security will make full or timely payments of
principal or interest or remain solvent.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax-exemption for
interest on debt obligations issued by states and their political subdivisions.
Federal tax laws limit the types and amounts of tax-exempt bonds issuable for
certain purposes, especially industrial development bonds and private activity
bonds. Such limits may affect the future supply and yields of these types of
Tax-Exempt Securities. Further proposals limiting the issuance of tax-exempt
bonds may well be introduced in the future. If it appeared that the
availability of Tax-Exempt Securities for investment by the Portfolio and the
value of the Tax-Exempt Money Market Portfolio's portfolio could be materially
affected by such changes in law, the Trustees of the Trust would reevaluate the
Tax-Exempt Money Market Portfolio's investment objectives and policies and
consider changes in the structure of the Tax-Exempt Money Market Portfolio or
its dissolution.
5
<PAGE>
MANAGEMENT OF THE TRUST
The following table provides biographical information with respect to each
Trustee and officer of the Trust. Each Trustee who is an "interested person" of
the Trust, as defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- ---------------------- -----------------------------------------------------
<S> <C> <C>
Daniel J. Ludeman* Chairman and Trustee Chairman and Chief Executive Officer Mentor
c/o Mentor Funds Investment Group, Inc.; Managing Director of
901 E. Byrd Street Wheat First Butcher Singer, Inc. Director, Wheat,
Richmond, VA 23219 First Securities, Inc.; Chairman and Director Mentor
Income Fund, Inc., and America's Utility Fund,
Inc.; Chairman and Trustee, Cash Resource Trust,
Mentor Variable Investment Portfolios and Mentor
Institutional Trust.
Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corporation; Trustee, Cash
P.O. Box 18156 Resource Trust, Mentor Variable Investment
Richmond, Virginia 23226 Portfolios and Mentor Institutional Trust; Director,
Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; formerly, Chairman and Chief Executive
Officer, Hamilton Beach/Proctor-Silex, Inc.
Thomas F. Keller Trustee R.J. Reynolds Industries Professor of Business
Fuqua School of Business Administration and Former Dean of Fuqua School
Duke University of Business, Duke University; Director of LADD
Durham, NC 27706 Furniture, Inc., Wendy's International, Inc.,
American Business Products, Inc., Dimon, Inc., and
Biogen, Inc.; Director of Nations Balanced Target
Maturity Fund, Inc., Nations Government Income
Term Trust 2003, Inc., Nations Government Income
Term Trust 2004, Inc., Hatteras Income Securities,
Inc., Nations Institutional Reserves, Nations Fund
Trust, Nations Fund, Inc., Nations Fund Portfolios,
Inc., and Nations LifeGoal Funds, Inc. Trustee,
Cash Resource Trust, Mentor Variable Investment
Portfolios and Mentor Institutional Trust; Director,
Mentor Income Fund, Inc. and America's Utility
Fund, Inc.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- -------------- -----------------------------------------------------
<S> <C> <C>
Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of
University of Richmond Richmond; Trustee, Cash Resource Trust, Mentor
Richmond, VA 23173 Variable Investment Portfolios and Mentor
Institutional Trust; Director, Mentor Income Fund,
Inc. and America's Utility Fund, Inc.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company; Trustee, Cash
Heilig-Meyers Company Resource Trust, Mentor Variable Investment
2235 Staples Mill Road Portfolios and Mentor Institutional Trust; Director,
Richmond, Virginia 23230 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.
Peter J. Quinn, Jr.* Trustee Formerly, President, Mentor Distributors, Inc.;
c/o Mentor Funds Managing Director, Mentor Investment Group, LLC,
901 E. Byrd Street and Wheat First Butcher Singer, Inc.; formerly,
Richmond, VA 23219 Senior Vice President/Director of Mutual Funds,
Wheat First Butcher Singer, Inc.; Trustee, Cash
Resource Trust, Mentor Variable Investment
Portfolios and Mentor Institutional Trust; Director,
Mentor Income Fund, Inc. and America's Utility
Fund, Inc.
Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee,
c/o Mentor Funds Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; formerly, Vice Chancellor for
Development and University Relations, University
of North Carolina at Chapel Hill.
Weston E. Edwards Trustee President, Weston Edwards & Associates; Trustee
c/o Mentor Funds Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; Founder and Chairman, The Housing
Roundtable; formerly, President, Smart Mortgage
Access, Inc.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------- --------------------- -----------------------------------------------------
<S> <C> <C>
Jerry R. Barrentine Trustee President, J.R. Barretine & Associates; Trustee,
c/o Mentor Funds Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility
Fund, Inc.; formerly, Executive Vice President and
Chief Financial Officer, Barclays/American
Mortgage Director Corporation; Managing Partner,
Barrentine Lott & Associates.
J. Garnett Nelson Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee,
c/o Mentor Funds Cash Resource Trust, Mentor Variable Investment
901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director,
Richmond, VA 23219 Mentor Income Fund, Inc., America's Utility Fund,
Inc., GE Investment Funds, Inc., and Lawyers Title
Corporation; Member, Investment Advisory
Committee, Virginia Retirement System; formerly,
Senior Vice President, The Life Insurance Company
of Virginia.
Paul F. Costello President Managing Director, Wheat First Butcher Singer, Inc.
c/o Mentor Funds and Mentor Investment Group, LLC; President,
901 E. Byrd Street Cash Resource Trust, Mentor Income Fund, Inc.,
Richmond, VA 23219 Mentor Institutional Trust, Mentor Variable
Investment Portfolios and America's Utility Fund,
Inc.; Director, Mentor Perpetual Advisors, LLC
Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group,
c/o Mentor Funds LLC; Treasurer, Mentor Institutional Trust, Cash
901 E. Byrd Street Resource Trust, Mentor Variable Investment
Richmond, VA 23219 Portfolios, Mentor Income Fund, Inc.;
America's Utility Fund, Inc.; formerly,
Treasurer and Comptroller, Ryland
Capital Management, Inc.
Michael Wade Assistant Treasurer Vice President, Mentor Investment Group, LLC
c/o Mentor Funds Assistant Treasurer, Mentor Income Fund, Inc.,
901 E. Byrd Street Cash Resource Trust, Mentor Institutional Trust,
Richmond, VA 23219 Mentor Variable Investment Portfolios and
America's Utility Fund; formerly, Senior
Accountant, Wheat First Butcher Singer, Inc., Audit
Senior, BDO Seidman.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------- -------------- --------------------------------------------------
<S> <C> <C>
Geoffrey B. Sale Secretary Associate Vice President Mentor Investment Group,
c/o Mentor Funds LLC; Secretary, Cash Resource Trust, Mentor
901 E. Byrd Street Institutional Trust, Mentor Variable Investment
Richmond, VA 23219 Portfolios; Clerk, America's Utility Fund, Inc.,
Mentor Income Fund, Inc.
</TABLE>
- ----------
* This Trustee is deemed to be an "interested person" of a Fund as defined in
the 1940 Act.
The table below shows the fees paid to each Trustee by the Trust for the
1998 fiscal year and the fees paid to each Trustee by all funds in the Mentor
family (including the Trust) during the 1997 calendar year.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM THE TRUST ALL COMPLEX FUNDS (27 FUNDS)
TRUSTEES (FISCAL YEAR END 1998) (CALENDAR YEAR 1998)
- --------------------------------- ------------------------ -----------------------------
<S> <C> <C>
Daniel J. Ludeman ............... $ 0 $ 0
Arnold H. Dreyfuss .............. $5,808 $32,000
Thomas F. Keller ................ $4,859 $32,000
Louis W. Moelchert, Jr. ......... $5,606 $32,000
J. Garnett Nelson ............... $5,393 $40,000
Troy A. Peery, Jr. .............. $5,405 $32,000
Peter J. Quinn, Jr. ............. $ 0 $ 0
Jerry R. Barrentine ............. $5,660 $40,000
Weston E. Edwards ............... $5,479 $42,000
Arch T. Allen III ............... $5,399 $35,000
</TABLE>
The Trustees do not receive pension or retirement benefits from the Trust.
The Declaration of Trust of the Trust provides that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its Shareholders by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of his or her duties. The
Trust, at its expense, provides liability insurance for the benefit of its
Trustees and officers.
9
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of November 2, 1998, the officers and Trustees of the Trust owned as a
group less than one percent of the outstanding shares of each Portfolio. To the
knowledge of the Trust, no person owned of record or beneficially more than 5%
of the outstanding shares of any Portfolio as of that date except that the
following persons owned of record Institutional Shares of the Money Market
Portfolio:
<TABLE>
<CAPTION>
PORTFOLIO HOLDER PERCENTAGE OWNERSHIP
- ------------------------- --------------------------- ---------------------
<S> <C> <C>
Money Market Portfolio- EVEREN Clearing Corp Cust 5.81%
Institutional Class FBO Alif A Kuri IRA
112 Francis St
Kent, OH 44240
Money Market Portfolio- Dinwiddie County 5.89%
Institutional Class PO Box 178
Dinwiddie, VA 23841-0178
Money Market Portfolio- Greensville County 5.94%
Institutional Class 1750 E. Atlantic St Rm 213
Emporia, VA 23847-6584
Money Market Portfolio- Sussex County 6.75%
Institutional Class PO Box 13999
Sussex, VA 23884-0399
Money Market Portfolio- City of Hopewell 9.08%
Institutional Class 300 N. Main St
Hopewell, VA 23860-2740
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as investment
adviser to each Portfolio pursuant to a Management Contract with the Trust.
Subject to the supervision and direction of the Trustees, Mentor Advisors
manages a Portfolio's portfolio in accordance with the stated policies of that
Portfolio and of the Trust. Mentor Advisors makes investment decisions for the
Portfolios and places the purchase and sale orders for portfolio transactions.
Mentor Advisors bears all of its expenses in connection with the performance of
its services. In addition, Mentor Advisors pays the salaries of all officers
and employees who are employed by it and the Trust.
Mentor Advisors provides the Portfolios with investment officers who are
authorized to execute purchases and sales of securities. Investment decisions
for the Portfolios and for the other investment advisory clients of
10
<PAGE>
Mentor Advisors and its affiliates are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In some instances, one client
may sell a particular security to another client. It also sometimes happens
that two or more clients simultaneously purchase or sell the same security, in
which event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in an
investment adviser's opinion is equitable to each and in accordance with the
amount being purchased or sold by each. In some cases, this procedure could
have an adverse effect on the price or amount of the securities purchased or
sold by a Portfolio. Purchase and sale orders for a Portfolio may be combined
with those of other clients of Mentor Advisors in the interest achieving the
most favorable net results for the Portfolio.
The proceeds received by each Portfolio for each issue or sale of its
shares, and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, will be specifically allocated to such Portfolio,
and constitute the underlying assets of that Portfolio. The underlying assets
of each Portfolio will be segregated on the Trust's books of account, and will
be charged with the liabilities in respect of such Portfolio and with a share
of the general liabilities of the Trust. Expenses with respect to a Portfolio
may be allocated in proportion to the net asset values of that Portfolio except
where allocations of direct expenses can otherwise be fairly made.
Expenses incurred in the operation of a Portfolio or otherwise allocated
to a Portfolio, including but not limited to taxes, interest, brokerage fees
and commissions, fees to Trustees who are not officers, directors,
stockholders, or employees of Wheat First Butcher Singer and subsidiaries, SEC
fees and related expenses, state Blue Sky qualification fees, charges of the
custodian and transfer and dividend disbursing agents, outside auditing,
accounting, and legal services, investor servicing fees and expenses, charges
for the printing of prospectuses and statements of additional information for
regulatory purposes or for distribution to shareholders, certain shareholder
report charges and charges relating to corporate matters are borne by the
Portfolio.
Each Management Contract is subject to annual approval (beginning in 2000)
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
Mentor Advisors, by vote cast in person at a meeting called for the purpose of
voting on such approval. Each Management Contract is 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 Mentor Advisors. Each Management Contract terminates
automatically in the event of its assignment (as defined in the 1940 Act).
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.
11
<PAGE>
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 YEAR
1998 1997
------------- ------------
<S> <C> <C>
Money Market Portfolio ............ $ 52,000 N/A
U.S. Government Portfolio ......... $202,000 29,982
Tax-Exempt Portfolio .............. N/A N/A
</TABLE>
BROKERAGE
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different
brokers. A particular broker may charge different commissions according to such
factors as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets,
but the price paid by the Portfolio usually includes an undisclosed dealer
commission or mark-up. In underwritten offerings, the price paid by the
Portfolio includes a disclosed, fixed commission or discount retained by the
underwriter or dealer. It is anticipated that most purchases and sales of
portfolio securities by a Portfolio will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, the Portfolios would not ordinarily pay significant brokerage
commissions with respect to securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, Mentor Advisors receives brokerage and research services and other
similar services from many broker-dealers with which it places the Portfolios'
portfolio transactions and from third parties with which these broker-dealers
have arrangements. These services include such matters as general economic and
market reviews, industry and company reviews, evaluations of investments,
recommendations as to the purchase and sale of investments, newspapers,
magazines, pricing services, quotation services, news services and personal
computers utilized by the investment advisers' managers and analysts. Where the
services referred to above are not used exclusively by Mentor Advisors for
research purposes, Mentor Advisors, 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 Mentor Advisors
and its affiliates in advising various of its clients (including the
Portfolios), although not all of these services are necessarily useful and of
value in managing the Portfolios.
Mentor Advisors places all orders for the purchase and sale of portfolio
investments for the Portfolios and buys and sells investments for the
Portfolios through a substantial number of brokers and dealers. Mentor Advisors
seeks the best overall terms available for the Portfolios, except to the extent
it may be permitted to pay higher brokerage commissions as described below. In
doing so, Mentor Advisors, having in mind a Portfolio's best interests,
considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security
or other investment, the amount of the commission, the
12
<PAGE>
timing of the transaction taking into account market prices and trends, the
reputation, experience and financial stability of the broker-dealer involved
and the quality of service rendered by the broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the Management
Contract, Mentor Advisors may cause a Portfolio to pay a broker-dealer which
provides "brokerage and research services" (as defined in the 1934 Act) to it
an amount of disclosed commission for effecting securities transactions on
stock exchanges and other transactions for a Portfolio on an agency basis in
excess of the commission which another broker-dealer would have charged for
effecting that transaction. Mentor Advisors' 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. Mentor Advisors does not currently intend
to cause a Portfolio to make such payments. It is the position of the staff of
the Securities and Exchange Commission that Section 28(e) does not apply to the
payment of such greater commissions in "principal" transactions. Accordingly,
Mentor Advisors 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, Mentor Advisors may consider sales of shares of a Portfolio (and, if
permitted by law, of the other Mentor funds) as a factor in the selection of
broker-dealers to execute portfolio transactions for a Portfolio.
The Trustees have determined that portfolio transactions for the Trust may
be effected through Wheat, First Securities, Inc. ("Wheat"), First Union
Brokerage Services ("FUBS") or EVEREN Securities, Inc. ("EVEREN"),
broker-dealers affiliated with Mentor Advisors. 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, FUBS, 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 paid 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, FUBS, or
EVEREN in over-the-counter securities in which Wheat, FUBS, or EVEREN makes a
market, as the case may be.
Under rules adopted by the SEC, neither Wheat, FUBS, nor EVEREN may
execute transactions for a Portfolio on the floor of any national securities
exchange, but either may effect transactions for a Portfolio by transmitting
orders for execution and arranging for the performance of this function by
members of the exchange not associated with them. Wheat, FUBS, and EVEREN will
be required to pay fees charged to those persons performing the floor brokerage
elements out of the brokerage compensation it receives from a Portfolio. The
Trust has been advised by Wheat that, on most transactions, the floor brokerage
generally constitutes from 5% and 10% of the total commissions paid.
The Portfolios paid no brokerage fees for the fiscal periods ended
September 30, 1997 and 1998.
13
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of a Portfolio is determined
twice each day as of 12:00 noon and as of the close of regular trading
(generally 4:00 p.m. New York time) on each day the New York Stock Exchange is
open for trading. The New York Stock Exchange is normally closed on the
following national holidays: New Year's Day, Dr. Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
The valuation of each Portfolio's portfolio securities is based upon its
amortized cost, which does not take into account unrealized securities gains or
losses. This method involves initially valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. By using amortized cost valuation, each Portfolio
seeks to maintain a constant net asset value of $1.00 per share, despite minor
shifts in the market value of its portfolio securities. While this method
provides certainty in valuation, it may result in periods during which value,
as determined by amortized cost, is higher or lower than the price a Portfolio
would receive if it sold the instrument. During periods of declining interest
rates, the quoted yield on shares of a Portfolio may tend to be higher than a
like computation made by a fund with identical investments utilizing a method
of valuation based on market prices and estimates of market prices for all of
its portfolio instruments. Thus, if the use of amortized cost by a Portfolio
resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Portfolio would be able to obtain a somewhat higher
yield if he purchased shares of the Portfolio on that day, than would result
from investment in a fund utilizing solely market values, and existing
investors in the Portfolio would receive less investment income. The converse
would apply on a day when the use of amortized cost by a Portfolio resulted in
a higher aggregate portfolio value. However, as a result of certain procedures
adopted by the Trust, the Trust believes any difference will normally be
minimal.
The valuation of a Portfolio's portfolio instruments at amortized cost is
permitted in accordance with Securities and Exchange Commission Rule 2a-7 and
certain procedures adopted by the Trustees. Under these procedures, a Portfolio
must maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 397 days or less, and
invest in securities determined by the Trustees to be of high quality with
minimal credit risks. The Trustees have also established procedures designed to
stabilize, to the extent reasonably possible, a Portfolio's price per share as
computed for the purpose of distribution, redemption and repurchase at $1.00.
These procedures include review of a Portfolio's portfolio holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
a Portfolio's net asset value calculated by using readily available market
quotations deviates from $1.00 per share, and, if so, whether such deviation
may result in material dilution or is otherwise unfair to existing
shareholders. In the event the Trustees determine that such a deviation may
result in material dilution or is otherwise unfair to existing shareholders,
they will take such corrective action as they regard as necessary and
appropriate, including the sale of portfolio instruments prior to maturity to
realize capital gains or losses or to shorten the average portfolio maturity;
withholding dividends; redemption of shares in kind; or establishing a net
asset value per share by using readily available market quotations.
Since the net income of a Portfolio is declared as a dividend each time it
is determined, the net asset value per share of a Portfolio remains at $1.00
per share immediately after such determination and dividend declaration. Any
increase in the value of a shareholder's investment in a Portfolio representing
the reinvestment of dividend income is reflected by an increase in the number
of shares of a Portfolio in the shareholder's account on
14
<PAGE>
the last day of each month (or, if that day is not a business day, on the next
business day). It is expected that a Portfolio's net income will be positive
each time it is determined. However, if because of realized losses on sales of
portfolio investments, a sudden rise in interest rates, or for any other reason
the net income of a Portfolio determined at any time is a negative amount, that
Portfolio will offset such amount allocable to each then shareholder's account
from dividends accrued during the month with respect to such account. If at the
time of payment of a dividend by a Portfolio (either at the regular monthly
dividend payment date, or, in the case of a shareholder who is withdrawing all
or substantially all of the shares in an account, at the time of withdrawal),
such negative amount exceeds a shareholder's accrued dividends, that Portfolio
will reduce the number of outstanding shares by treating the shareholder as
having contributed to the capital of the Portfolio that number of full and
fractional shares which represent the amount of the excess. Each shareholder is
deemed to have agreed to such contribution in these circumstances by its
investment in a Portfolio.
Should a Portfolio incur or anticipate any unusual or unexpected
significant expense or loss which would affect disproportionately the
Portfolio's income for a particular period, the Trustees would at that time
consider whether to adhere to the dividend policy described above or to revise
it in light of the then prevailing circumstances in order to ameliorate to the
extent possible the disproportionate effect of such expense or loss on then
existing shareholders. Such expenses or losses may nevertheless result in a
shareholder's receiving no dividends for the period during which the shares are
held and receiving upon redemption a price per share lower than that which was
paid.
TAX STATUS
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal
income tax on any of its net investment income or net realized capital gains
that are distributed to its shareholders. As series of a Massachusetts business
trust, the Portfolios under present law will not be subject to any excise or
income taxes in Massachusetts.
Distributions from a Portfolio will be taxable to a shareholder whether
received in cash or additional shares. Such distributions that are designated
as capital gains dividends will be taxable as such, regardless of how long
Portfolio shares have been held, while other taxable distributions will be
taxed as ordinary income.
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 disposition 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 value of its total
assets consists of cash, cash items, U.S. Government Securities, securities of
other regulated investment companies, and other securities limited generally
with respect to any one issuer to not more than 5% of the total assets of a
Fund 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 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
15
<PAGE>
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. To satisfy these requirements,
a Portfolio may engage in investment techniques that affect the amount, timing
and character of its income and distributions.
If a Portfolio failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Portfolio would be
subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax-exempt income
and net long-term capital gains, would be taxable to shareholders as ordinary
income. In addition, a Portfolio could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial distributions
before requalifying as a regulated investment company that is accorded special
tax treatment.
An excise tax at the rate of 4% will be imposed on the excess, if any, of
each Portfolio's "required distribution" over its distributions in any calendar
year. Generally, the "required distribution" is 98% of the Portfolio's ordinary
income for the calendar year plus 98% of its capital gain net income realized
during the one-year period ending on October 31, plus undistributed amounts
from prior years. Each Portfolio intends to make distributions sufficient to
avoid imposition of the excise tax. Distributions declared by a Portfolio
during October, November or December to shareholders of record on a date in any
such month and paid by the Portfolio during the following January will be
treated for federal tax purposes as paid by the Portfolio and received by
shareholders on December 31 of the year in which declared.
Distributions from a Portfolio (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.
Net capital gain (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) of a Portfolio that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, generally
taxable to individuals at a 20% rate, regardless of how long a shareholder has
held the shares in the Portfolio.
Each Portfolio is required to withhold 31% of all ordinary income
dividends and capital gain distributions, and 31% of the gross proceeds of all
redemptions of Portfolio shares, in the case of any shareholder who does not
provide a correct taxpayer identification number, about whom a Portfolio is
notified that the shareholder has underreported income in the past, or who
fails to certify to a Portfolio that the shareholder is not subject to such
withholding. Shareholders who fail to furnish their current tax identification
numbers are subject to a penalty of $50 for each such failure unless the
failure is due to reasonable cause and not willfull neglect. An individual's
taxpayer identification number is his or her Social Security number. Tax-exempt
shareholders are not subject to these back-up withholding rules so long as they
furnish the Portfolio with a proper certification.
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 a Portfolio properly designates as
exempt-interest dividends are treated as interest excludable from shareholders'
gross income for federal income tax purposes but may be taxable for federal
alternative minimum tax purposes
16
<PAGE>
and for state and local purposes. If a 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, 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 capital gain dividends) 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 may be
substantially different from the percentage of a Portfolio's income that was
tax-exempt during the period covered by the distribution.
REDEMPTIONS. Each Portfolio seeks to maintain a stable net asset value of
$1.00 per share; however, there can be no assurance that a Portfolio will be
able to do so. A shareholder may therefore recognize gain or loss on the sale
or redemption of shares of a Portfolio in an amount equal to the difference
between the proceeds of the sale or redemption and the shareholder's adjusted
tax basis in the shares. All or a portion of any loss so recognized may be
disallowed if the shareholder purchases other shares of that Portfolio within
30 days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares of a
Portfolio will be considered capital gain or loss and will be long-term capital
gain or loss if the shares were held for longer than one year. Long-term
capital gain is generally taxable to individuals at a 20% rate. However, any
capital loss arising from the sale or redemption of shares held for six months
or less will be disallowed to the extent of the amount of exempt-interest
dividends received on such shares and (to the extent not disallowed) will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such 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 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.
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.
17
<PAGE>
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 Fund, including the possibility that distributions may be
subject to a 30% United States withholding tax (or a reduced rate of
withholding provided by treaty).
THE DISTRIBUTOR
Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus, Ohio
43219, is the principal distributor of the Portfolios' shares. Mentor
Distributors, LLC is a wholly owned subsidiary of BISYS Fund Services, Inc.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, are the Portfolios' independent auditors, providing audit services, tax
return review, and other tax consulting services.
CUSTODIAN
The custodian of the Portfolios, Investors Fiduciary Trust Company, is
located at 127 West 10th Street, Kansas City, Missouri 64105. A custodian's
responsibilities include generally safeguarding and controlling a Portfolio's
cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on a Portfolio's investments.
PERFORMANCE INFORMATION
The yield of each Portfolio is computed by determining the percentage net
change, excluding capital changes, in the value of an investment in one share
of the Portfolio over the base period, and multiplying the net change by 365/7
(or approximately 52 weeks). A Portfolio's effective yield represents a
compounding of the yield by adding 1 to the number representing the percentage
change in value of the investment during the base period, raising that sum to a
power equal to 365/7, and subtracting 1 from the result.
The U.S. Government Money Market Portfolio's yield and effective yield for
the seven-day period ended September 30, 1998 were 5.13% and 5.26%,
respectively.
The Money Market Portfolio's yield and effective yield for the seven-day
period ended September 30, 1998 were 5.28% and 5.42%, respectively.
All data for each of the Portfolios are based on past performance and do
not predict future results.
18
<PAGE>
MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO --
FEDERAL TAXABLE EQUIVALENT YIELD TABLE-1998 RATES
<TABLE>
<CAPTION>
FEDERAL FEDERAL EFFECTIVE
TAXPAYER TAXABLE TAX FEDERAL
YEAR STATUS INCOME BRACKET RATE
- -------- ---------- ------------------ ----------- ----------
<S> <C> <C> <C> <C>
1998 MARRIED $ 0-42,350 15.00% 15.00%
$ 42,351-102,300 28.00% 28.00%
$102,301-124,500 31.00% 31.00%
$124,501-155,950 31.00% 31.93%
$155,951-278,450 36.00% 37.08%
OVER $278,450 39.60% 40.79%
1998 SINGLE $ 0-25,350 15.00% 15.00%
$ 25,351-61,400 28.00% 28.00%
$ 61,401-124,500 31.00% 31.00%
$124,501-128,500 31.00% 31.93%
128,101-278,450 36.00% 37.08%
OVER $278,450 39.60% 40.79%
<CAPTION>
TAX-FREE YIELD
--------------------------------------------------------------------------------------------------
4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
YEAR
- -------- TAXABLE EQUIVALENT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41%
5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11%
5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59%
5.88% 6.61% 7.35% 8.08% 8.81% 9.55% 10.28% 11.02% 11.75%
6.36% 7.15% 7.95% 8.74% 9.54% 10.33% 11.13% 11.92% 12.71%
6.76% 7.60% 8.44% 9.29% 10.13% 10.98% 11.82% 12.67% 13.51%
1998 4.71% 5.29% 5.88% 6.47% 7.06% 7.69% 8.24% 8.82% 9.41%
5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11%
5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59%
5.88% 6.61% 7.35% 8.08% 8.81% 9.55% 10.28% 11.02% 11.75%
6.36% 7.15% 7.95% 8.74% 9.54% 10.33% 11.13% 11.92% 12.71%
6.76% 7.60% 8.44% 9.29% 10.13% 10.98% 11.82% 12.67% 13.51%
</TABLE>
- ---------
Note: This tables reflects the following:
1 Taxable Income, as reflected in the above table, equals Federal adjusted
gross income (AGI), less personal exemptions and itemized deductions.
However, certain itemized deductions are reduced by the lesser of (i) three
percent of the amount of the taxpayer's AGI over $124,500, or (ii) 80
percent of the amount of such itemized deductions otherwise allowable. The
effect of the three percent phase out on all itemized deductions and not
just those deductions subject to the phase out is reflected above in the
combined Federal and state tax rates through the use of higher effective
Federal tax rates. In addition, the effect of the 80 percent cap on overall
percent cap on overall itemized deductions is not reflected on this table.
Federal income tax rules also provide that personal exemptions are phased
out at a rate of two percent for each $2,500 (or fraction thereof) of AGI in
excess of $186,800 for married taxpayers filing a joint tax return and
$124,500 for single taxpayers. The effect of the phase out of personal
exemptions is not reflected in the above table.
2 The effect of state income taxes are not considered in the above table. Such
consideration would increase the taxable equivalent yield to the extent that
the municipal obligations are issued by the taxpayer's state of residence.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the table.
4 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determinig yields. Instead, the tax rates used
are the highest marginal tax rates applicable to the income levels indicated
within each bracket.
5 Interest earned on all municipal obligations may cause certain investors to
be subject to tax on a portion of their Social Security and/or railroad
retirement benefits. The effect of this provision is not included in the
above table.
19
<PAGE>
Of course, there is no assurance that the Tax-Exempt Money Market
Portfolio will achieve any specific tax-exempt yield. While it is expected that
the Tax-Exempt Money Market Portfolio will invest principally in obligations
which pay interest exempt from federal income tax, other income received by the
Tax-Exempt Money Market Portfolio may be taxable. The table does not take into
account any state or local taxes payable on Tax-Exempt Money Market Portfolio
distributions.
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how the Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time
to time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below measure performance based on the
basis of their own criteria rather than on the basis of the standardized
performance measures described above.
Lipper Analytical Services, Inc. distributes mutual fund rankings monthly.
The rankings are based on total return performance calculated by Lipper,
reflecting generally changes in net asset value adjusted for reinvestment of
capital gains and income dividends. They do not reflect deduction of any sales
charges. Lipper rankings cover a variety of performance periods, for example
year-to-date, 1-year, 5-year, and 10-year performance. Lipper classifies mutual
funds by investment objective and asset category.
Morningstar, Inc. distributes mutual fund ratings twice a month. the
ratings are divided into five groups: highest, above average, neutral, below
average and lowest. They represent a fund's historical risk/reward ratio
relative to other funds with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3-year, 5-year, and 10-year
total return performance (if available) reflecting deduction of expenses and
sales charges. Performance is adjusted using quantitative techniques to reflect
the risk profile of the fund. The ratings are derived from a purely
quantitative system that does not utilize the subjective criteria customarily
employed by rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return calculated
by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and
10-year performance. Mutual funds are ranked in general categories (e.g.,
international bond, international equity, municipal bond, and maximum capital
gain). Weisenberger rankings do not reflect deduction of sales charges or fees.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the
descriptions appearing below. From time to time any or all of the Portfolios
may distribute evaluations by or excerpts from these publications to its
shareholders or to potential investors. The following illustrates the types of
information provided by these publications.
Business Week publishes mutual fund rankings in its Investment Figures of
the Week column. The rankings are based on 4-week and 52-week total return
reflecting changes in net asset value and the reinvestment of all
distributions. They do not reflect deduction of any sales charges. Portfolios
are not categorized; they compete in a large universe of over 2,000 funds. The
source for rankings is data generated by Morningstar, Inc.
20
<PAGE>
Investor's Business Daily publishes mutual fund rankings on a daily basis.
The rankings are depicted as the top 25 funds in a given category. The
categories are based loosely on the type of fund, e.g., growth funds, balanced
funds, U.S. government funds, GNMA funds, growth and income funds, corporate
bond funds, etc. Performance periods for sector equity funds can vary from 4
weeks to 39 weeks; performance periods for other fund groups vary from 1 year
to 3 years. Total return performance reflects changes in net asset value and
reinvestment of dividends and capital gains. The rankings are based strictly on
total return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds; an A
rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical Services. The
Lipper total return data reflects changes in net asset value and reinvestment
of distributions, but does not reflect deduction of any sales charges. The
performance periods vary from short-term intervals (current quarter or
year-to-date, for example) to long-term periods (five-year or ten-year
performance, for example). Barron's classifies the funds using the Lipper
mutual fund categories, such as Capital Appreciation Portfolios, Growth
Portfolios, U.S. Government Portfolios, Equity Income Portfolios, Global
Portfolios, etc. Occasionally, Barron's modifies the Lipper information by
ranking the funds in asset classes. "Large funds" may be those with assets in
excess of $25 million; "small funds" may be those with less than $25 million in
assets.
The Wall Street Journal publishes its Mutual Portfolio Scorecard on a
daily basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper
Analytical Services category. Lipper provides the rankings based on its total
return data reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The Scorecard portrays
4-week, year-to-date, one-year and 5-year performance; however, the ranking is
based on the one-year results. The rankings for any given category appear
approximately once per month.
Fortune magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Portfolios are placed in
stock or bond fund categories (for example, aggressive growth stock funds,
growth stock funds, small company stock funds, junk bond funds, Treasury bond
funds etc.), with the top-10 stock funds and the top-5 bond funds appearing in
the rankings. The rankings are based on 3-year annualized total return
reflecting changes in net asset value and reinvestment of distributions and not
reflecting sales charges. Performance is adjusted using quantitative techniques
to reflect the risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a database
of funds tracked for performance by Lipper Analytical Services. The funds are
placed in 23 stock or bond fund categories and analyzed for five-year risk
adjusted return. Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions and does not
reflect deduction of any sales charges. Grades are conferred (from A to E): the
top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a
fund must be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
Financial World publishes its monthly Independent Appraisals of Mutual
Portfolios, a survey of approximately 1000 mutual funds. Portfolios are
categorized as to type, e.g., balanced funds, corporate bond funds, global bond
funds, growth and income funds, U.S. government bond funds, etc. To compete,
funds must be over one year old, have over $1 million in assets, require a
maximum of $10,000 initial investment, and should be
21
<PAGE>
available in at least 10 states in the United States. The funds receive a
composite past performance rating, which weighs the intermediate- and long-term
past performance of each fund versus its category, as well as taking into
account its risk, reward to risk, and fees. An A+ rated fund is one of the
best, while a D- rated fund is one of the worst. The source for Financial World
rating is Schabacker investment management in Rockville, Maryland.
Forbes magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond funds,
municipal bond funds, etc. Data sources include Lipper Analytical Services and
CDA Investment Technologies. The ratings are based strictly on performance at
net asset value over the given cycles. Portfolios performing in the top 5%
receive an A+ rating; the top 15% receive an A rating; and so on until the
bottom 5% receive an F rating. Each fund exhibits two ratings, one for
performance in "up" markets and another for performance in "down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value and
reinvestment of dividends and capital gains and not reflecting deduction of any
sales charges. Portfolios are ranked by tenths: a rank of 1 means that a fund
was among the highest 10% in total return for the period; a rank of 10 denotes
the bottom 10%. Portfolios compete in categories of similar funds -- aggressive
growth funds, growth and income funds, sector funds, corporate bond funds,
global governmental bond funds, mortgage-backed securities funds, etc.
Kiplinger's also provides a risk-adjusted grade in both rising and falling
markets. Portfolios are graded against others with the same objective. The
average weekly total return over two years is calculated. Performance is
adjusted using quantitative techniques to reflect the risk profile of the fund.
U.S. News and World Report periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co.,
a Boston research firm. Over 2000 funds are tracked and divided into 10 equity,
taxable bond and tax-free bond categories. Portfolios compete within the 10
groups and three broad categories. The OPI is a number from 0-100 that measures
the relative performance of funds at least three years old over the last 1, 3,
5 and 10 years and the last six bear markets. Total return reflects changes in
net asset value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges. Results for
the longer periods receive the most weight.
The 100 Best Mutual Portfolios You Can Buy (1992), authored by Gordon K.
Williamson. The author's list of funds is divided into 12 equity and bond fund
categories, and the 100 funds are determined by applying four criteria. First,
equity funds whose current management teams have been in place for less than
five years are eliminated. (The standard for bond funds is three years.)
Second, the author excludes any fund that ranks in the bottom 20 percent of its
category's risk level. Risk is determined by analyzing how many months over the
past three years the fund has underperformed a bank CD or a U.S. Treasury bill.
Third, a fund must have demonstrated strong results for current three-year and
five-year performance. Fourth, the fund must either possess, in Mr.
Williamson's judgment, "excellent" risk-adjusted return or "superior" return
with low levels of risk. Each of the 100 funds is ranked in five categories:
total return, risk/volatility, management, current income and expenses. The
rankings follow a fivepoint 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."
22
<PAGE>
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of a Portfolio's property for all loss and expense of any
shareholder held personally liable for the obligations of a Portfolio. Thus the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of Mentor Advisors:
MENTOR INVESTMENT ADVISORS, LLC
CASH MANAGEMENT
R. PRESTON NUTTALL, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Nuttall has more than 30 years of investment management experience. Prior
to Mentor Advisors, he led short-term fixed-income management for fifteen years
at Capitoline Investment Services, Inc. He has his undergraduate degree in
economics from the University of Richmond and his graduate degree in finance
from the Wharton School at the University of Pennsylvania.
HUBERT R. WHITE III -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. White has 12 years of investment management experience. Prior to joining
Mentor Advisors, he served for five years as portfolio manager with Capitoline
Investment Services. He has his undergraduate degree in business from the
University of Richmond.
GREGORY S. KAPLAN -- ASSOCIATE VICE PRESIDENT, PORTFOLIO MANAGER
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.
23
<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 edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term 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.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principle
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS
AAA -- An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated AA differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
24
<PAGE>
A -- An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligations. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition, or the taking of a
similar action if payments on an obligtion are jeopardized.
MOODY'S 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.
25
<PAGE>
STANDARD AND POOR'S NOTE RATINGS
SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess overwhelming safety characteristics are given a plus sign (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of saety is not as high as for
issues designated A-1.
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
26
FINANCIAL STATEMENTS
<PAGE>
MENTOR MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
BANKERS ACCEPTANCES - 5.56%
Bank of Montreal, 5.51%,
12/08/98 $1,335,740 $ 1,321,838
NationsBank Corporation,
5.45%, 7/19/99 1,000,000 955,946
-----------
TOTAL BANKERS ACCEPTANCES 2,277,784
-----------
BANK NOTES - 21.97%
Abbey National North
America, 5.88%, 12/22/98 1,000,000 1,000,663
Banc One Milwaukee
National Association,
5.55%, 1/29/99 1,000,000 999,842
Bank of NewYork, 5.66%,
6/17/99 1,000,000 999,503
FCC National Bank, 5.74%,
5/07/99 1,000,000 999,657
First Tennessee Bank National
Association, 5.65% -
5.70%, 4/15/99 - 7/09/99 2,000,000 1,999,373
Harris Trust, 5.55%,
10/13/98 2,000,000 2,000,000
Key Bank National
Association, 5.51%,
1/14/99 (b) 1,000,000 999,881
-----------
TOTAL BANK NOTES 8,998,919
-----------
CERTIFICATES OF DEPOSIT - 9.76%
Bankers Trust Delaware,
5.69%, 7/27/99 1,000,000 999,529
Canadian Imperial Bank,
5.55%, 11/02/98 2,000,000 2,000,071
Rabobank Nederland NV,
5.70%, 4/20/99 1,000,000 1,000,688
-----------
TOTAL CERTIFICATES OF DEPOSIT 4,000,288
-----------
COMMERCIAL PAPER - 36.45%
General Electric Company,
5.51%, 10/22/98 2,000,000 1,993,572
Greenwich Funding
Corporation, 5.48%,
11/09/98 (a)(c) 2,000,000 1,988,127
Mont Blanc Capital
Corporation, 5.54%,
10/22/98 (a) 2,000,000 1,993,537
Monte Rosa Capital
Corporation, 5.53%,
10/23/98 (a) 2,000,000 1,993,241
Rincon Securities Inc., 5.52%,
11/23/98 (a) 1,000,000 991,873
Special Purpose Accounts
Receivable Cooperative
Corporation, 5.56%,
10/23/98 2,000,000 1,993,204
Vehicle Services of America,
Limited, 5.52%, 11/04/98 2,000,000 1,989,573
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMERCIAL PAPER (CONTINUED)%
Windmill Funding
Corporation, 5.55%,
10/29/98 (a) $2,000,000 $ 1,991,367
-----------
TOTAL COMMERCIAL PAPER 14,934,494
-----------
FOOD & KINDRED PRODUCTS - 2.44%
Mississippi Business Financial
Corporation (Taxable
Variable Rate Demand
Note), 5.55%, 1/01/23 (b) 1,000,000 1,000,000
-----------
HEALTH CARE - 2.44%
Catholic Health Initiatives
(Taxable Variable Rate
Demand Note), 5.30%,
12/01/27 (b) 1,000,000 1,000,000
-----------
REAL ESTATE - 2.93%
C.C.M. Properties, 5.70%,
2/01/11 (b) 1,200,000 1,200,000
-----------
U.S. GOVERNMENT AGENCIES - 4.64%
Federal National Mortgage
Association, 4.93%,
1/21/99 (b) 1,000,000 999,877
Student Loan Marketing
Association, 4.73%,
11/10/98 (b) 900,000 899,666
-----------
TOTAL U.S. GOVERNMENT
AGENCIES 1,899,543
-----------
REPURCHASE AGREEMENTS - 13.23%
Goldman Sachs & Company
Dated 9/30/98, 5.61%, due
10/01/98, collateralized by
$5,437,311 (original
face value) Federal Home Loan
Mortgage Corporation,
6.50% - 7.75%, 10/01/01 -
05/01/13, market value
$5,528,343
(cost $5,419,944) 5,419,944 5,419,944
-----------
TOTAL INVESTMENTS
(COST $40,730,972)-99.42%
40,730,972
-----------
OTHER ASSETS LESS LIABILITIES - 0.58%
239,317
-----------
NET ASSETS - 100.00% $40,970,289
===========
</TABLE>
Interest rates disclosed represent annualized yield to date of maturity, except
for floating rate securities described in (b).
(a) These are securities that may be resold to qualified institutional buyers
under Rule 144A or securities offered pursuant to section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines that have been established by the Board of
Trustees unless otherwise noted.
(b) Floating Rate Securities -- The rates shown are the effective rates at
September 30, 1998.
(c) The security is deemed illiquid because it can not be resold within seven
business days from September 30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
<S> <C> <C>
U.S. GOVERNMENT AGENCIES - 52.13%
Federal Farm Credit Bank,
5.70%, 11/03/98 $ 1,000,000 $ 1,000,172
Federal Home Loan Bank,
5.01%, 10/20/98 (a) 3,000,000 2,999,955
Federal Home Loan Bank,
5.40% - 5.63%, 1/15/99 -
7/15/99 9,560,000 9,557,718
Federal Home Loan Mortgage
Corporation, 5.30% -
5.45%, 10/06/98 - 12/21/98 15,000,000 14,875,620
Federal Home Loan Mortgage
Corporation, 5.33% -
5.47%, 1/26/99 - 8/17/99
(a) 6,000,000 5,997,524
Federal National Mortgage
Association, 5.20% -
5.63%, 2/12/99 - 5/6/99 10,000,000 9,969,153
Federal National Mortgage
Association, 4.93% -
5.38%, 11/09/98 - 5/28/99
(a) 11,000,000 10,997,535
------------
TOTAL U.S. GOVERNMENT
AGENCIES 55,397,677
------------
REPURCHASE AGREEMENTS - 47.70%
Dean Witter Dated 9/30/98,
5.62%, due 10/1/98,
collateralized by various
U.S. Government securities
with total original face value
of $25,889,000, 5.49% -
7.55%, 10/06/98 - 4/15/27,
market value $25,500,152 25,000,000 25,000,000
Goldman Sachs & Company
Dated 9/30/98, 5.61%, due
10/01/98, collateralized by
$16,131,941 (original
face value) Federal Home Loan
Mortgage Corporation,
7.50%, 10/01/27, market
value $12,946,065 12,692,220 12,692,220
J.P. Morgan Securities, Inc. (b)
Dated 7/16/98, 5.56%, due
10/19/98, collateralized by
$25,970,039 (original face
value) Government
National Mortgage
Association, 8.50% -
9.00%., 6/15/16 - 10/15/27,
market value $8,217,789 8,000,000 8,000,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
<S> <C> <C>
REPURCHASE AGREEMENTS (CONTINUED)
Merrill Lynch Dated 7/13/98,
5.54%, due 10/13/98,
collateralized by
$20,347,264 (original face
value) Federal National
Mortgage Association,
10/01/24 - 12/01/25, market
value $5,100,858 $ 5,000,000 $ 5,000,000
------------
TOTAL REPURCHASE AGREEMENTS 50,692,220
------------
TOTAL INVESTMENTS
(COST $106,089,897)-99.83% $106,089,897
------------
OTHER ASSETS LESS LIABILITIES - 0.17%
183,141
------------
NET ASSETS - 100.00% $106,273,038
============
</TABLE>
(a) Floating Rate Securities -- The rates shown are the effective rates at
September 30, 1998.
(b) The security is deemed illiquid because it can not be resold within seven
business days from September 30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
MENTOR FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MONEY MARKET U.S. GOVERNMENT
PORTFOLIO MONEY MARKET PORTFOLIO
<S> <C> <C>
ASSETS
Investments, at amortized cost (Note 2)
Investment securities $ 35,311,028 $ 55,397,677
Repurchase agreements 5,419,944 50,692,220
------------- --------------
Total investments 40,730,972 106,089,897
Receivables
Dividends and interest 270,031 585,632
Fund shares sold 167,750 54,000
Deferred expenses (Note 2) 16,210 15,375
------------- --------------
TOTAL ASSETS 41,184,963 106,744,904
------------- --------------
LIABILITIES
Dividends payable 194,865 465,840
Accrued expenses and other liabilities 19,809 6,026
------------- --------------
TOTAL LIABILITIES 214,674 471,866
------------- --------------
NET ASSETS $ 40,970,289 $ 106,273,038
============= ==============
SHARES OUTSTANDING 40,970,289 106,273,038
NET ASSET VALUE PER SHARE $ 1.00 $ 1.00
</TABLE>
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET MONEY MARKET
PORTFOLIO (A) PORTFOLIO
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $ 1,816,540 $ 5,164,328
----------- -----------
EXPENSES
Management fee (Note 4) 51,691 202,179
Transfer agent fee 22,291 34,490
Custodian and accounting fees 16,449 35,521
Registration expenses 8,933 18,100
Legal fees 727 1,659
Shareholder reports and postage expenses 652 1,444
Directors' fees and expenses 575 1,327
Audit fees 489 1,008
Organizational expenses - 4,100
Miscellaneous 3,480 3,440
----------- -----------
Total expenses 105,287 303,268
----------- -----------
NET INVESTMENT INCOME $ 1,711,253 $ 4,861,060
=========== ===========
</TABLE>
(a) For the period from November 19, 1997 (commencement of operations) to
September 30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
MENTOR FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY MARKET U.S. GOVERNMENT
PORTFOLIO MONEY MARKET PORTFOLIO
PERIOD ENDED YEAR ENDED PERIOD
9/30/98 (B) 9/30/98 ENDED 9/30/97 (C)
<S> <C> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 1,711,253 $ 4,861,060 $ 741,466
------------- -------------- ------------
Increase in net assets resulting from operations 1,711,253 4,861,060 741,466
------------- -------------- ------------
Distributions to Shareholders
From net investment income (1,711,253) (4,861,060) (741,466)
------------- -------------- ------------
Total distributions to shareholders (1,711,253) (4,861,060) (741,466)
------------- -------------- ------------
Capital Share Transactions (Note 5)
Proceeds from sale of shares 69,738,706 170,787,913 70,658,240
Reinvested distributions 1,450,841 4,466,073 612,639
Shares redeemed (30,219,258) (130,785,595) (9,466,232)
------------- -------------- ------------
Change in net assets resulting from capital share transactions 40,970,289 44,468,391 61,804,647
------------- -------------- ------------
Increase in net assets 40,970,289 44,468,391 61,804,647
Net Assets
Beginning of period - 61,804,647 -
------------- -------------- ------------
End of period $ 40,970,289 $ 106,273,038 $ 61,804,647
============= ============== ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY MARKET U.S. GOVERNMENT MONEY MARKET
PORTFOLIO PORTFOLIO
PERIOD ENDED YEAR ENDED PERIOD ENDED
9/30/98 (B) 9/30/98 9/30/97 (C)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.05 0.05 0.01
-------- -------- --------
Total from investment operations 0.05 0.05 0.01
-------- -------- --------
Less distributions
From net investment income (0.05) (0.05) (0.01)
--------- --------- ---------
Total distributions (0.05) (0.05) (0.01)
--------- --------- ---------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
========= ========= =========
TOTAL RETURN (D) 4.74% 5.42% 1.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 40,970 $ 106,273 $ 61,805
Ratio of expenses to average net assets 0.33% (a) 0.33% 0.33% (a)
Ratio of net investment income to average net assets 5.35% (a) 5.27% 5.26% (a)
</TABLE>
(a) Annualized.
(b) For the period from November 19, 1997 (commencement of operations) to
September 30, 1998.
(c) For the period from June 27, 1997 (commencement of operations) to
September 30, 1997.
(d) Not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
NOTE 1: ORGANIZATION
Mentor Funds is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. Mentor Funds consists of twelve
separate Portfolios (hereinafter each individually referred to as a "Portfolio"
or collectively as the "Portfolios") at September 30, 1998, as follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Balanced Portfolio ("Balanced Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor High Income Portfolio
("High Income Portfolio")
Mentor U.S. Government Money Market
Portfolio ("Government Portfolio")
Mentor Money Market Portfolio
("Money Market Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
These financial statements include only Money Market Portfolio and Government
Portfolio.
The investment objective of the Money Market Portfolio is to seek a high rate of
current income 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.
The Government Portfolio's investment objective is to seek a high rate of
current income 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.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the
Portfolio.
(a) Valuation of Securities -- Securities held by the Portfolios are stated at
amortized cost, which approximates market value as permitted by Rule 2a-7 of the
Investment Company Act of 1940. In the event that a deviation of 1/2 of 1% or
more exists between the Portfolios' $1.00 per share net asset value calculated
at amortized cost, and the net asset value calculated by reference to
market-based values, or if there is any other deviation that the Board of
Trustees believes would result in a material dilution to
7
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
shareholders or purchasers, the Board of Trustees will promptly consider what
action should be initiated. Net asset value per share is determined each
business day for the Fund and is calculated by dividing net asset value by the
number of shares outstanding at the end of each business day.
(b) Repurchase Agreements -- It is the policy of the Trust to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system, or to have segregated within the custodian bank's
possession all securities held as collateral in support of repurchase agreement
investments.
Additionally, procedures have been established by the Trust to monitor, on a
daily basis, the market value of each repurchase agreement's underlying
securities to ensure the existence of a proper level of collateral.
The Trust will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Trust's adviser to be creditworthy pursuant to guidelines established by the
Trustees. Risks may arise from the potential inability of counterparties to
honor the terms of the repurchase agreement. Accordingly, the Trust could
receive less than the repurchase price on the sale of collateral securities.
(c) Security Transactions and Interest Income -- Security transactions for the
Portfolios are accounted for on a trade date basis. Interest income is recorded
on the accrual basis and includes amortization of premium and discount on
investments.
(d) Federal Taxes -- No provision for federal income taxes has been made since
it is each Portfolios' intent to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains.
(e) Deferred Expenses -- Costs incurred by the Portfolios in connection with
their initial share registration and organization costs were deferred by the
Portfolios and are being amortized on a straight-line basis over a five-year
period.
(f) Distributions -- Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
NOTE 3: DIVIDENDS
Each Portfolio declares a daily dividend, equal to its net investment income for
that day. Dividends for the immediately preceding month will be paid on the
fifteenth day of each calendar month. Distributions from net realized capital
gains, if any, will be distributed annually.
NOTE 4: INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENTS
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment
adviser, receives for its services an annual investment advisory fee not to
exceed the following percentages of the average daily net assets of the
Portfolios: 0.22% of the first $500 million of the Portfolios' 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. For the period
ended September 30, 1998, Mentor Advisors earned advisory fees of $51,691 and
$202,179 from Money Market Portfolio and Government Portfolio, respectively.
8
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC
("Mentor") which is in turn a subsidiary of Wheat First Union ("Wheat"). EVEREN
Capital Corporation owns 20% of the outstanding interest in Mentor.
NOTE 5: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in capital
shares were as follows:
<TABLE>
<CAPTION>
MENTOR MONEY
MARKET PORTFOLIO
PERIOD ENDED
9/30/98 (A)
<S> <C>
Shares sold 69,738,706
Shares issued upon reinvestment of distributions 1,450,841
Shares redeemed (30,219,258)
-----------
Change in net assets from capital share
transactions 40,970,289
===========
</TABLE>
<TABLE>
<CAPTION>
MENTOR U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
YEAR ENDED PERIOD ENDED
9/30/98 9/30/97 (B)
<S> <C> <C>
Shares sold 170,787,913 70,658,240
Shares issued upon reinvestment
of distributions 4,466,073 612,639
Shares redeemed (130,785,595) (9,466,232)
------------ ----------
Change in net assets from capital
share transactions 44,468,391 61,804,647
============ ==========
</TABLE>
(a) For the period from November 19, 1997 (commencement of operations) to
September 30, 1998.
(b) For the period from June 27, 1997 (commencement of operations) to September
30, 1997.
YEAR 2000 (UNAUDITED)
The Portfolios receive services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer software to distinguish the year 2000 from
the year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the Portfolio
from this problem.
9
<PAGE>
MENTOR FUNDS
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE TRUSTEES AND SHAREHOLDERS
MENTOR MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, as of September 30, 1998 of Money Market
Portfolio and U.S. Government Money Market Portfolio, portfolios of Mentor
Funds, and the related statement of operations, statement of changes in net
assets and financial highlights for Money Market Portfolio for the period from
November 19, 1997 (commencement of operations) to September 30, 1998 and for
U.S. Government Money Market Portfolio, the related statement of operations for
the year then ended, the statements of changes in net assets and financial
highlights for the year then ended and for the period from June 27, 1997
(commencement of operations) to September 30, 1998. These financial statements
and financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1998 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Money
Market Portfolio and U.S. Government Money Market Portfolio, portfolios of
Mentor Funds, as of September 30, 1998, the results of their operations, the
changes in their net assets and financial highlights for each of the years or
periods indicated in the first paragraph above, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick
Boston, Massachusetts
November 20, 1998
10
<PAGE>
MENTOR FUNDS
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
TRUSTEES
DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
ARCH T. ALLEN III, TRUSTEE
Attorney at Law
Allen & Moore, LLP
JERRY R. BARRENTINE, TRUSTEE
President
J.R. Barrentine & Associates
ARNOLD H. DREYFUSS, TRUSTEE
Chairman
Eskimo Pie Corporation
WESTON E. EDWARDS, TRUSTEE
President
Weston Edwards & Associates
THOMAS F. KELLER, TRUSTEE
Former Dean, Fuqua School of Business
Duke University
LOUIS W. MOELCHERT, JR., TRUSTEE
Vice President for Business & Finance
University of Richmond
J. GARNETT NELSON, TRUSTEE
Consultant
Mid-Atlantic Holdings, LLC
TROY A. PEERY, JR., TRUSTEE
President
Heilig-Meyers Company
PETER J. QUINN, JR., TRUSTEE
Managing Director
Mentor Investment Group, LLC
OFFICERS
PAUL F. COSTELLO, PRESIDENT
Managing Director
Mentor Investment Group, LLC
TERRY L. PERKINS, TREASURER
Senior Vice President
Mentor Investment Group, LLC
GEOFFREY B. SALE, SECRETARY
Associate Vice President
Mentor Investment Group, LLC
MICHAEL A. WADE, ASSISTANT TREASURER
Vice President
Mentor Investment Group, LLC
This report is authorized for distribution to prospective investors only when
preceded or accompanied by a Mentor Funds prospectus, which contains complete
information about fees, sales charges and expenses. Please read it carefully
before you invest or send money.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) Financial Statements
(1) Audited Financial Statements and Financial Highlights (For all
Portfolios other than Mentor Asset Allocation Portfolio, Mentor Growth
Opportunities Portfolio, and Mentor Tax-Exempt Money Market Portfolio)
Financial Statements:
Portfolios of Investments -- September 30, 1998*
Statements of Assets and Liabilities -- September 30, 1998*
Statements of Operations -- year ended September 30, 1998*
Statements of Changes in Net Assets -- years/periods ended
September 30, 1998 and September 30, 1997*
Financial Highlights (+)*
Notes to Financial Statements*
Independent Auditors' Report*
_____________
* Included in Part B to this Registration Statement.
(+) Included in Part A to this Registration Statement.
(b) Exhibits:
(1)(i) Conformed copy of Declaration of Trust of the
Registrant, with Amendments No. 1 and 2 (2);
(ii) Amendment No. 5 to the Declaration of Trust of the
Registrant (12);
(iii) Form of Amendment to the Declaration of Trust of the
Registrant (13)
(iv) Form of Proposed Amendment to the Declaration of Trust
of the Registrant to be dated as of May 12, 1998 (14)
(v) Amendment No. 6 to the Declaration of Trust of the
Registrant (18)
(vi) Amendment No. 7 to the Declaration of Trust of the
Registrant (18)
(vii) Amendment No. 8 to the Declaration of Trust of the
Registrant (18)
(2) (i) Copy of By-Laws of the Registrant (1);
(ii) Amendment to By-Laws (18)
(3) Not applicable;
(4) Portions of Registrant's Declaration of Trust and By-Laws
relating to shareholder rights (1)(2)(12)(13);
(5)(i) Form Management Agreement of the Registrant
(Capital Growth, Income and Growth, Quality Income, and
Municipal Income Portfolios) (14);
(ii) Form of Investment Advisory Agreement
(Municipal Income Portfolio) (14);
(iii) Form of Investment Advisory Agreement
(Income and Growth Portfolio) (14);
(iv) Form of Investment Advisory and Management Agreement
(Perpetual Global Portfolio) (8);
(v) Form of Investment Advisory and Management
Agreement (Growth Portfolio) (14);
(vi) Not Applicable
(vii) Form of Investment Advisory and Management Agreement
(Short-Duration Income Portfolio) (14);
(viii) Form of Investment Advisory and Management
Agreement (Balanced Portfolio) (14);
(ix) Form of Investment Advisory and Management Agreement
(Institutional Money Market Portfolio) (14);
(x) Form of Investment Advisory and Management Agreement
(Institutional U.S. Government Money Market Portfolio)
(14);
(xi) Form of Investment Advisory and Management Agreement
(Growth Opportunities Portfolio) (11);
(xii) Form of Investment Advisory and Management Agreement
(Mentor High Income Portfolio) (14)
(xiii) Sub-Advisory Agreement (Mentor High Income Portfolio)(14)
(xiv) Form of Investment Advisory and Management Agreement
(Mentor Asset Allocation Portfolio) (13)
(xv) Form of Investment Advisory and Management Agreement
(Mentor Institutional Tax-Exempt Money Market Portfolio)
(17)
(6) Form of Distribution Agreement of the Registrant (14)
(7) Not applicable;
(8)(i) Conformed copy of Custodian Contract of the Registrant
with Investors Fiduciary Trust Company (2);
(ii) Conformed copy of Custodian Contract of the Registrant
with State Street Bank and Trust Company (2);
(iii) Form of Administration Agreement of the
Registrant in respect of certain Portfolios (14);
(iv) Form of Custodian Contract with State Street Bank
and Trust Company in respect of foreign securities(7);
(v) Form of Administration Agreement of the Registrant in
respect of the Money Market Portfolios (17)
(9)(i) Conformed copy of Transfer Agency and Registrar
Agreement of the Registrant (2);
(ii) (a) Conformed copy of Shareholder Services Plan of the
Registrant through and including Exhibit B in respect of
the Capital Growth, Quality Income, Municipal Income,
Income and Growth, and Global Portfolios (3);
(b) Form of Instrument of Transfer of Shareholder Services
Plan (8);
(c) Form of New Exhibit C to the Shareholder Services Plan
in respect of the Class A and B shares of the Growth,
Strategy, Short-Duration Income Portfolios and the
Balanced Portfolio (6);
(d) Form of New Exhibit D to Shareholder Services Plan in
respect of Class A and B shares of the Growth Opportunities
Portfolio (11);
(e) Form of New Exhibit E to Shareholder Services Plan in
respect of Class A and B shares of the High Yield and Asset
Allocation Portfolios (13);
(9)(iii) Form of Agency Agreement with Investors Fiduciary Trust
Company (Money Market Portfolios) (17);
(9)(iv) Form of Draft Processing Agreement with Investors Fiduciary
Trust Company (Money Market Portfolios) (17)
(10) Not applicable;
(11)(i) Conformed copy of Consent of Independent Auditors (18);
(ii) Conformed copy of KPMG Peat Marwick LLP opinion on
Methodology and Procedures for Accounting for Multiple
Classes of Shares (5);
(12) Not applicable;
(13) Conformed copy of Initial Capital Understanding (1);
(14) Not applicable;
(15)(i) Plan of Distribution (12)
(ii) Revised Exhibit A to Plan of Distribution (17)
(16)(i) Schedules for Computation of Performance
(all Portfolios)(8)
(18) Amended and Restated Rule 18f-3(d) Plan (18)
(24) Powers of Attorney (18)
(27)(i) Financial Data Schedules (18)
1. Incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed April 14, 1992.
2. Incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on Form N-1A filed May 14, 1993.
3. Incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed November 26, 1993.
4. Incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed August 3, 1994.
5. Incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed January 27, 1995.
6. Incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed March 15, 1995.
7. Incorporated by reference to Registrant's Post-Effective
Amendment No. 10 on Form N-1A filed January 15, 1996.
8. Incorporated by reference to Registrant's Post-Effective Amendment No. 11
on Form N-1A filed November 29, 1996.
9. Incorporated by reference to Registrant's Post-Effective Amendment No. 12
on Form N-1A filed January 22, 1997.
10. Incorporated by reference to Registrant's Post-Effective Amendment No. 13
on Form N-1A filed March 4, 1997.
11. Incorporated by reference to Registrant's Post-Effective Amendment
No. 14 on Form N-1A filed November 7, 1997.
12. Incorporated by reference to Registrant's Post-Effective Amendment No. 15
on Form N-1A filed December 22, 1997.
13. Incorporated by reference to Registrant's Post-Effective Amendment No. 16
on Form N-1A filed on January 30, 1998.
14. Incorporated by reference to Registrant's Post-Effective Amendment No. 17
on Form N-1A filed on May 7, 1998.
15. Incorporated by reference to Registrant's Post-Effective Amendment No. 18
on Form N-1A filed on May 12, 1998.
16. Incorporated by reference to Registrant's Post-Effective Amendment No. 19
on form N-1A filed on July 10, 1998.
17. Incorporated by reference to Registrant's Post-Effective Amendment No. 20
on form N-1A filed on July 31, 1998.
18. Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant:
Reference is made to "Principal Holders of Securities" in Part
B of this Registration Statement
Item 26. Number of Holders of Securities as of November 2, 1998
Multiclass Portfolios Class A Class B Class Y
Non-Money Market Portfolios
Capital Growth Portfolio 8,171 14,513 --
Global Portfolio 3,528 8,647 --
Growth Portfolio 6,391 30,247 8
Income and Growth Portfolio 4,074 8,644 --
Municipal Income Portfolio 826 1,350 --
Quality Income Portfolio 2,645 4,796 --
Short-Duration Income Portfolio 1,067 872 --
Balanced Portfolio 377 526 7
High Income Portfolio 1,953 2,951 --
Retail Institutional
Money Market Portfolio 4 4
U.S. Government Money Market Portfolio 4 74
Tax Exempt Money Market Portfolio 4 3
Item 27. Indemnification:
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed January 31, 1992 (File Nos.
33-45315 and 811-6550).
Item 28. Business and Other Connections of Investment Advisers
The business and other connections of each director, officer, or partner
of the entities below in which such director, officer, or partner is or has
been, at any time during the past two fiscal years, engaged for his own account
or in the capacity of director, officer, employee, partner, or trustee are set
forth in the following tables.
(a) The following is additional information with respect to the
directors and officers of Mentor Investment Advisors, LLC:
Business, Profession,
Vocation or Employment
Position with during the past
Name Investment Adviser two fiscal years
John G. Davenport Managing Director Managing Director,
Mentor Investment
Group, LLC.
R. Preston Nuttall Managing Director Managing Director,
Mentor Investment
Group, LLC.
Paul F. Costello Managing Director Managing Director,
Mentor Investment Group,
LLC; President, Mentor
Funds, Mentor
Institutional Trust, Cash
Resource Trust, Mentor
Income Fund, Inc.; and
America's Utility Fund,
Inc.; Senior Vice
President, Mentor
Distributors, LLC;
Managing Director, Mentor
Perpetual Advisors, LLC.
Theodore W. Price Managing Director Managing Director,
Mentor Investment
Group, LLC.
P. Michael Jones Managing Director Managing Director,
Mentor Investment
Group, LLC.
Peter J. Quinn, Jr. Managing Director Managing Director,
Mentor Investment
Group, LLC.
-3-
<PAGE>
Daniel J. Ludeman Chairman Chairman and Chief
Executive Officer,
Mentor Investment
Group, LLC.
Karen H. Wimbish Managing Director Managing Director,
Mentor Investment
Group, LLC.
Terry L. Perkins Treasurer Senior Vice President,
Mentor Investment Group,
L.L.C.
Michael A. Wade Controller Vice President, Mentor
Investment Group, L.L.C.
Geoffrey B. Sale Secretary Associate Vice President
Mentor Investment Group,
LLC; Clerk Mentor
Institutional Trust;
Secretary Cash Resource
Trust, Mentor Income Fund,
Inc., Mentor Funds and
Mentor Variable Investment
Portfolios.
(b) The following is additional information with respect to the directors and
officers of Mentor Perpetual Advisors, LLC ("Mentor Perpetual"):
<TABLE>
Other Substantial
Position with the Business, Profession,
Name Investment Advisor Vocation or Employment
<S> <C> <C>
Scott A. McGlashan President Director, Perpetual
Portfolio Management
Limited.
Martyn Arbib Managing Director Chairman, Perpetual
Portfolio Management
Limited.
Roger C. Cormick Managing Director Deputy Chairman -
Marketing, Perpetual
Portfolio Management
Limited.
Paul F. Costello Managing Director Managing Director, Mentor
Investment Group, LLC
and Mentor Investment
Advisors, LLC; President,
Mentor Funds, Mentor
Institutional
Trust, Cash Resource
Trust, Mentor Income
Fund, Inc., and America's
Utility Fund, Inc.;
Senior Vice President,
Mentor Distributors, LLC.
Daniel J. Ludeman Managing Director Chairman and Chief
Executive Officer,
Mentor Investment
Group, LLC; Director,
Wheat First Securities,
Inc.; Managing Director,
Wheat First Butcher
Singer, Inc.
David S. Mossop Managing Director Director, Perpetual
Portfolio Management
Limited
Peter J. Quinn, Jr. Managing Director Managing Director,
Mentor Investment
Group, LLC.
Roderick A. Smyth Managing Director Managing Director,
Mentor Investment
Group, LLC.
* The address of Mentor Investment Group, LLC, Wheat, First Securities,
Inc., Wheat First Butcher Singer, Inc., Mentor Funds, Mentor Income
Fund, Inc., Mentor Investment Advisors, LLC, and Mentor Perpetual
Advisors, LLC is 901 East Byrd Street, Richmond, VA 23219. The address
of Ryland Capital Management, Inc. and RAC Income Fund, Inc. is 11000
Broken Land Parkway, Columbia, MD 21044. The address of Perpetual
Portfolio Management Limited is 48 Hart Street, Henley-on-Thames, Oxon,
England, RG92AZ.
</TABLE>
(c) Wellington Management Company, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 28 of officers
and partners of Wellington Management, together with any information as to
any business profession, vocation or employment of a substantial nature
engaged in by such officers and partners during the past two years, is
incorporated herein by reference from Schedules B and D of Form ADV filed
by Wellington Management pursuant to the Advisers Act (SEC File No.
801-15908).
(d) The following is additional information with respect to the directors
and officers of Van Kampen American Capital Management Inc., located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181-4486:
Other Substantial
Position with Business, Profession,
Name Investment Advisor Vocation or Employment
---- ------------------ ----------------------
Don G. Powell Chairman and Director Chairman and Director,
VK/AC Holding, Inc.,
Van Kampen American
Capital, Inc., Van
Kampen American Capital
Distributors, Inc.,
Van Kampen American
Capital Asset
Management, Inc., Van
Kampen American Capital
Investment Advisory
Corp., and Van
Kampen American Capital
Advisors, Inc.
Philip N. Duff Chief Executive Officer President and Chief
Executive Officer,
VK/AC Holding, Inc.
and Van Kampen American
Capital, Inc.
Dennis J. McDonnell President and Chief Executive Vice
Operating Officer President, VK/AC
Holding, Inc. and Van
Kampen American
Capital, Inc.;
President and Chief
Operating Officer, Van
Kampen American
Capital Advisors, Inc.,
Van Kampen American
Capital Asset
Management, Inc.,
and Van Kampen
American Capital
Investment Advisory
Corp.
Ronald A. Nyberg Executive Vice President Executive Vice
and General Counsel President and General
Counsel, VK/AC Holding,
Inc., Van Kampen
American Capital, Inc.,
Van Kampen American
Capital Distributors,
Inc., Van Kampen
American Asset
Management, Inc., Van
Kampen American
Investment Advisory
Corp., and Van Kampen
American Capital
Advisors, Inc.
William R. Rybak Executive Vice President Executive Vice
and Chief Financial President and Chief
Officer Financial Officer,
VK/AC Holding, Inc.,
Van Kampen American
Capital, Inc., Van
Kampen American Capital
Distributors, Inc.,
Van Kampen American
Capital Asset
Management Inc., Van
Kampen American
Capital Investment
Advisory Corp., and
Van Kampen American
Capital Advisors, Inc.
Peter W. Hegel Executive Vice President Executive Vice
President, Van Kampen
American Capital Asset
Management, Inc.,
Van Kampen American
Capital Investment
Advisory Corp., and
Van Kampen American
Capital Advisors, Inc.
Alan T. Sachtleben Executive Vice President Executive Vice
President, Van Kampen
American Capital
Asset Management, Inc.,
Van Kampen American
Capital Investment
Advisory Corp., and
Van Kampen American
Capital Advisors, Inc.
Item 29. Principal Underwriters:
(a) Mentor Distributors, LLC, the Fund's principal underwriter, acts as
principal underwriter for the following investment companies:
The Mentor Funds
o Mentor Growth Portfolio
o Mentor Short-Duration Income Portfolio
o Mentor Balanced Portfolio
o Mentor Capital Growth Portfolio
o Mentor Perpetual Global Portfolio
o Mentor High Income Portfolio
o Mentor Income and Growth Portfolio
o Mentor Quality Income Portfolio
o Mentor Municipal Income Portfolio
o Mentor U.S. Government Money Market Portfolio
o Mentor Money Market Portfolio
o Mentor Tax-Exempt Money Market Portfolio
Cash Resource Trust
o Cash Resource Money Market Fund
o Cash Resource U.S. Government Money Market Fund
o Cash Resource Tax-Exempt Money Market Fund
o Cash Resource California Tax-Exempt Money Market Fund
o Cash Resource New York Tax-Exempt Money Market Fund
Mentor Institutional Trust
o Mentor U.S. Government Cash Management Portfolio
o Mentor Fixed-Income Portfolio
o Mentor Perpetual International Portfolio
Mentor Investment Group
o Mentor Income Fund
o America's Utility Fund
Mentor Variable Investment Portfolios
o Mentor VIP Growth Portfolio
o Mentor VIP Strategy Portfolio
o Mentor VIP Balanced Portfolio
o Mentor VIP Capital Growth Portfolio
o Mentor VIP Perpetual International Portfolio
(b) Information concerning officers of Mentor Distributors, LLC:
-10-
Name And Principal Positions And Offices Positions And Offices
Business Address* With Underwriter With Registrant
- ----------------- -------------------- ---------------------
Lynn Mangum Chairman Inapplicable
D'Ray Moore President Inapplicable
Dennis Sheehan Executive Vice President Inapplicable
William J. Tomko Senior Vice President Inapplicable
Mark J. Rybarczyk Senior Vice President Inapplicable
Kevin J. Dell Vice President and Inapplicable
Secretary
Michael D. Burns Vice President Inapplicable
David Blackmore Vice President Inapplicable
Robert L. Tuch Assistant Secretary Inapplicable
Steven Ludwig Compliance Officer Inapplicable
*Principal Address for all Officers:
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-8000
(c) Inapplicable.
Item 30. Location of Accounts and Records
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules promulgated thereunder
are maintained by the Fund at 901 East Byrd Street, Richmond, Virginia
23219 or by Boston Financial Data Services, Inc., the Registrant's
transfer agent, at 2 Heritage Drive, North Quincy, Massachusetts
02171. Records relating to the duties of the Registrant's custodian
are maintained by the Registrant's Custodian, Investors Fiduciary
Trust Company, 127 West 10th Street, Kansas City, Missouri 64105.
Records relating to the duties of the Registrant's distributor are
maintained by the Registrant's Distributor, Mentor Distributors, LLC,
3435 Stelzer Road, Columbus, Ohio 43219-8000.
Item 31. Management Services
None.
Item 32. Undertakings:
(a) Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933, and
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Richmond, and the Commonwealth of
Virginia on this 30th day of November, 1998.
MENTOR FUNDS
By: /s/ Paul F. Costello
----------------------------
Paul F. Costello
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacity and on the 30th
day of November, 1998:
<TABLE>
<CAPTION>
Name Title
<S> <C>
*
- ----------------------- Chairman and Trustee
Daniel J. Ludeman (Chief Executive
Officer)
*
Trustee
- -----------------------
Peter J. Quinn, Jr.
*
- ---------------------- Trustee
Arnold H. Dreyfuss
* Trustee
- -----------------------
Thomas F. Keller
* Trustee
- -----------------------
Louis W. Moelchert, Jr.
* Trustee
- -----------------------
Troy A. Peery, Jr.
* Trustee
- -----------------------
Arch T. Allen, III
* Trustee
- -----------------------
Weston E. Edwards
* Trustee
- -----------------------
Jerry R. Barrentine
* Trustee
- -----------------------
J. Garnett Nelson
/s/ Paul F. Costello President
- ------------------------
Paul F. Costello
/s/ Terry L. Perkins Treasurer (Principal Financial
- ------------------------ and Accounting Officer)
Terry L. Perkins
/s/ Paul F. Costello Attorney-in-fact
- ------------------------
Paul F. Costello
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit 1(v) Amendment No. 6 to the Declaration of Trust of the Registrant.
Exhibit 1(vi) Amendment No. 7 to the Declaration of Trust of the Registrant.
Exhibit 1(vii) Amendment No. 8 to the Declaration of Trust of the Registrant.
Exhibit 2(ii) Amendment to By-Laws
Exhibit 11(i) Conformed copy of Consent of Independent Auditors.
Exhibit 18 Amended and Restated Rule 18f-3(d) Plan.
Exhibit 24 Powers of Attorney.
Exhibit 27 Financial Data Schedules.
Exhibit 1 (v)
MENTOR FUNDS
Amendment No. 6
to
DECLARATION OF TRUST
dated January 20, 1992
This Declaration of Trust is amended as follows:
1. Section 5 of Article III is replaced in its entirety by the following:
Section 5. Establishment and Designation of Series or Class. The
following Portfolios shall be designated as separate series of shares of
beneficial interest of the Trust, with the relative rights and preferences set
forth in this Declaration of Trust as it may be amended from time to time:
Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio, Mentor
Municipal Income Portfolio, Mentor Income and Growth Portfolio, Mentor Perpetual
Global Portfolio, Mentor Growth Portfolio, Mentor Strategy Portfolio, Mentor
Short-Duration Income Portfolio, Mentor Balanced Portfolio, Mentor Institutional
U.S. Government Money Market Portfolio, Mentor Institutional Money Market
Portfolio, Mentor Asset Allocation Portfolio, and Mentor Income Portfolio.
There hereby are established and created four classes of shares of each
such Portfolio, the classes so established to be designated Class A shares,
Class B shares, Institutional or Y shares, and Class E shares, with the relative
rights and preferences set forth in this Declaration of Trust as it may be
amended from time to time.
Shares of any Series or Class established in this Section 5 shall have
the following relative rights and preferences:
(1) Assets belonging to Series or Class. All consideration received by
the Trust for the issue or sale of Shares of a particular Series or Class,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series or Class for all purposes, subject only to the
rights of creditors, and shall be so recorded upon the books of account of the
Trust. Such consideration, assets, income, earnings, profits and proceeds
thereof, from whatever source derived, including, without
1
<PAGE>
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
belonging to" that Series or Class. In the event that there are any assets,
income, earnings, profits and proceeds thereof, funds or payments which are not
readily identifiable as belonging to any particular Series or Class
(collectively "General Assets"), the Trustees shall allocate such General Assets
to, between or among any one or more of the Series or Classes established and
designated from time to time in such manner and on such basis as they, in their
sole discretion, deem fair and equitable, and any General Assets so allocated to
a particular Series or Class shall belong to that Series or Class. Each such
allocation by the Trustees shall be conclusive and binding upon the Shareholders
of all Series or Classes for all purposes.
(2) Liabilities Belonging to Series or Class. The assets belonging to
each particular Series of Class shall be charged with the liabilities of the
Trust in respect to that Series or Class and all expenses, costs, charges and
reserves attributable to that Series or Class, and any general liabilities of
the Trust which are not readily identifiable as belonging to any particular
Series or Class shall be allocated and charged by the Trustees to and among any
one or more of the Series or Classes established and designated from time to
time in such manner and on such basis as the Trustees in their sole discretion
deem fair and equitable. The liabilities, expenses, costs, charges and reserves
so charged to a Series or Class are herein referred to as "liabilities belonging
to" that Series or Class. Each allocation of liabilities belonging to a Series
or Class by the Trustees shall be conclusive and binding upon the Shareholders
of all Series or Classes for all purposes.
(3) Dividends, Distributions, Redemptions, Repurchases and
Indemnification. Notwithstanding any other provisions of this Declaration,
including, without limitation, Article X, no dividend or distribution
(including, without limitation, any distribution paid upon termination of the
Trust or of any Series or Class) with respect to, nor any redemption or
repurchase of the Shares of any Series or Class shall be effected by the Trust
other than from the assets belonging to such Series or Class, nor except as
specifically provided in Section 1 of Article XI hereof, shall any Shareholder
of any particular Series or Class otherwise have any right or claim against the
assets belonging to any other Series or Class except to the extent that such
Shareholder has such a right or claim hereunder as a Shareholder of such other
Series or Class.
(4) Voting. Notwithstanding any of the other provisions of this
Declaration, including, without limitation, Section 1 of Article VIII, only
Shareholders of a particular Series or Class shall be entitled to vote on any
matters affecting such Series or Class. Except with respect to matters as to
which any particular Series or Class is affected, all of the Shares of each
Series or Class shall, on matters as to which such Series or Class is entitled
to vote, vote with other Series or Classes so entitled as a single class.
Notwithstanding the foregoing, with respect to matters which would otherwise be
voted on by two or more Series or Classes as a single class, the Trustees may,
in their sole discretion, submit such matters to the Shareholders of any or all
2
<PAGE>
such Series or Classes, separately.
(5) Fraction. Any fractional Share of a Series or Class shall carry
proportionately all the rights and obligations of a whole Share of that Series
or Class, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust or of any
Series or Class.
(6) Exchange Privilege. The Trustees shall have the authority to
provide that the holders of Shares of any Series or Class shall have the right
to exchange said Shares for Shares of one or more other Series or Classes in
accordance with such requirements and procedures as may be established by the
Trustees.
(7) Combination of Series and Classes. The Trustees shall have the
authority, without the approval of the Shareholders of any Series or Class,
unless otherwise required by applicable law, to combine the assets and
liabilities belonging to a single Series or Class with the assets and
liabilities of one of the other Series or Classes.
(8) Elimination of Series or Classes. At any time that there are no
Shares outstanding of any particular Series or Class previously established and
designated, the Trustees may amend this Declaration of Trust to abolish that
Series or Class and to rescind the establishment and designation thereof.
------------------
This Amendment is executed as of the 13th day of October, 1998, to be
effective as of June 1, 1998, to give effect to the previous intention and
action of the Trustees that all shares of Mentor Asset Allocation Portfolio and
Mentor Income Portfolio issued from and after that date be and for all purposes
be considered to have been duly authorized in accordance with this Declaration
of Trust.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned, being at least a majority of the
Trustees in office, have executed this instrument.
/s/ Arch T. Allen, III /s/ Jerry R. Barrentine
- ------------------------ ------------------------
Arch T. Allen, III Jerry R. Barrentine
/s/ Arnold H. Dreyfuss /s/ Weston E. Edwards
- ------------------------ ------------------------
Arnold H. Dreyfuss Weston E. Edwards
/s/ Thomas F. Keller /s/ Daniel J. Ludeman
- ------------------------ ------------------------
Thomas F. Keller Daniel J. Ludeman
/s/ Louis W. Moelchert, Jr. /s/ J. Garnett Nelson
- --------------------------- ------------------------
Louis W. Moelchert, Jr. J. Garnett Nelson
/s/ Troy A. Peery, Jr. /s/ Peter J. Quinn, Jr.
- ------------------------ ------------------------
Troy A. Peery, Jr. Peter J. Quinn, Jr.
4
Exhibit 1 (vi)
MENTOR FUNDS
Amendment No. 7
to
DECLARATION OF TRUST
dated January 20, 1992
This Declaration of Trust is amended as follows:
1. Section 5 of Article III is hereby amended by replacing the reference
therein to "Mentor Income Portfolio" with a reference to "Mentor High
Income Portfolio".
------------------
This Amendment is executed as of the 13th day of October 1998, to be
effective as of June 1, 1998.
IN WITNESS WHEREOF, the undersigned, being at least a majority of the
Trustees in office, have executed this instrument.
/s/ Arch T. Allen, III /s/ Jerry R. Barrentine
- ------------------------ ------------------------
Arch T. Allen, III Jerry R. Barrentine
/s/ Arnold H. Dreyfuss /s/ Weston E. Edwards
- ------------------------ ------------------------
Arnold H. Dreyfuss Weston E. Edwards
/s/ Thomas F. Keller /s/ Daniel J. Ludeman
- ------------------------ ------------------------
Thomas F. Keller Daniel J. Ludeman
/s/ Louis W. Moelchert, Jr. /s/ J. Garnett Nelson
- --------------------------- ------------------------
Louis W. Moelchert, Jr. J. Garnett Nelson
/s/ Troy A. Peery, Jr. /s/ Peter J. Quinn, Jr.
- ------------------------ ------------------------
Troy A. Peery, Jr. Peter J. Quinn, Jr.
1
Exhibit 1 (vii)
MENTOR FUNDS
Amendment No. 8
to
DECLARATION OF TRUST
dated January 20, 1992
This Declaration of Trust is amended as follows:
1. Section 5 of Article III is hereby amended by replacing the first and
second paragraphs thereto with the following:
Section 5. Establishment and Designation of Series or Class. The
following Portfolios shall be designated as separate series of shares of
beneficial interest of the Trust, with the relative rights and preferences set
forth in this Declaration of Trust as it may be amended from time to time:
Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio, Mentor
Municipal Income Portfolio, Mentor Income and Growth Portfolio, Mentor Perpetual
Global Portfolio, Mentor Growth Portfolio, Mentor Strategy Portfolio, Mentor
Short-Duration Income Portfolio, Mentor Balanced Portfolio, Mentor U.S.
Government Money Market Portfolio (formerly, Mentor Institutional U.S.
Government Money Market Portfolio), Mentor Money Market Portfolio (formerly,
Mentor Institutional Money Market Portfolio), Mentor Tax-Exempt Money Market
Portfolio (formerly, Mentor Institutional Tax-Exempt Money Market Portfolio),
Mentor Asset Allocation Portfolio, and Mentor High Income Portfolio.
There hereby are established and created (i) four classes of shares of
each such Portfolio other than Mentor U.S. Government Money Market Portfolio,
Mentor Money Market Portfolio, and Mentor Tax-Exempt Money Market Portfolio, the
classes so established to be designated Class A shares, Class B shares, Class Y
shares, and Class E shares, respectively, and (ii) two classes of shares of each
of Mentor U.S. Government Money Market Portfolio, Mentor Money Market Portfolio,
and Mentor Tax-Exempt Money Market Portfolio to be designated Institutional
Shares and Retail Shares, respectively, in each case with the relative rights
and preferences set forth in this Declaration of Trust as it may be amended from
time to time.
Shares of any Series or Class established in this Section 5 shall have
the following relative rights and preferences:
(1) Assets belonging to Series or Class. All consideration received by the
Trust for the
1
<PAGE>
issue or sale of Shares of a particular Series or Class, together with all
assets in which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof from whatever source derived, including,
without limitation, any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall irrevocably belong to that
Series or Class for all purposes, subject only to the rights of creditors, and
shall be so recorded upon the books of account of the Trust. Such consideration,
assets, income, earnings, profits and proceeds thereof, from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds, in whatever form the same may be, are herein
referred to as "assets belonging to" that Series or Class. In the event that
there are any assets, income, earnings, profits and proceeds thereof, funds or
payments which are not readily identifiable as belonging to any particular
Series or Class (collectively "General Assets"), the Trustees shall allocate
such General Assets to, between or among any one or more of the Series or
Classes established and designated from time to time in such manner and on such
basis as they, in their sole discretion, deem fair and equitable, and any
General Assets so allocated to a particular Series or Class shall belong to that
Series or Class. Each such allocation by the Trustees shall be conclusive and
binding upon the Shareholders of all Series or Classes for all purposes.
(2) Liabilities Belonging to Series or Class. The assets belonging to
each particular Series or Class shall be charged with the liabilities of the
Trust in respect to that Series or Class and all expenses, costs, charges and
reserves attributable to that Series or Class, and any general liabilities of
the Trust which are not readily identifiable as belonging to any particular
Series or Class shall be allocated and charged by the Trustees to and among any
one or more of the Series or Classes established and designated from time to
time in such manner and on such basis as the Trustees in their sole discretion
deem fair and equitable. The liabilities, expenses, costs, charges and reserves
so charged to a Series or Class are herein referred to as "liabilities belonging
to" that Series or Class. Each allocation of liabilities belonging to a Series
or Class by the Trustees shall be conclusive and binding upon the Shareholders
of all Series or Classes for all purposes.
(3) Dividends, Distributions, Redemptions, Repurchases and
Indemnification. Notwithstanding any other provisions of this Declaration,
including, without limitation, Article X, no dividend or distribution
(including, without limitation, any distribution paid upon termination of the
Trust or of any Series or Class) with respect to, nor any redemption or
repurchase of the Shares of any Series or Class shall be effected by the Trust
other than from the assets belonging to such Series or Class, nor except as
specifically provided in Section 1 of Article XI hereof, shall any Shareholder
of any particular Series or Class otherwise have any right or claim against the
assets belonging to any other Series or Class except to the extent that such
Shareholder has such a right or claim hereunder as a Shareholder of such other
Series or Class.
2
<PAGE>
(4) Voting. Notwithstanding any of the other provisions of this
Declaration, including, without limitation, Section 1 of Article VIII, only
Shareholders of a particular Series or Class shall be entitled to vote on any
matters affecting such Series or Class. Except with respect to matters as to
which any particular Series or Class is affected, all of the Shares of each
Series or Class shall, on matters as to which such Series or Class is entitled
to vote, vote with other Series or Classes so entitled as a single class.
Notwithstanding the foregoing, with respect to matters which would otherwise be
voted on by two or more Series or Classes as a single class, the Trustees may,
in their sole discretion, submit such matters to the Shareholders of any or all
such Series or Classes, separately.
(5) Fraction. Any fractional Share of a Series or Class shall carry
proportionately all the rights and obligations of a whole Share of that Series
or Class, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust or of any
Series or Class.
(6) Exchange Privilege. The Trustees shall have the authority to
provide that the holders of Shares of any Series or Class shall have the right
to exchange said Shares for Shares of one or more other Series or Classes in
accordance with such requirements and procedures as may be established by the
Trustees.
(7) Combination of Series and Classes. The Trustees shall have the
authority, without the approval of the Shareholders of any Series or Class,
unless otherwise required by applicable law, to combine the assets and
liabilities belonging to a single Series or Class with the assets and
liabilities of one of the other Series or Classes.
(8) Elimination of Series or Classes. At any time that there are no
Shares outstanding of any particular Series or Class previously established and
designated, the Trustees may amend this Declaration of Trust to abolish that
Series or Class and to rescind the establishment and designation thereof.
------------------
This Amendment is to be effective as of October 13, 1998.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned, being at least a majority of the
Trustees in office, have executed this instrument.
/s/ Arch T. Allen, III /s/ Jerry R. Barrentine
- ------------------------ ------------------------
Arch T. Allen, III Jerry R. Barrentine
/s/ Arnold H. Dreyfuss /s/ Weston E. Edwards
- ------------------------ ------------------------
Arnold H. Dreyfuss Weston E. Edwards
/s/ Thomas F. Keller /s/ Daniel J. Ludeman
- ------------------------ ------------------------
Thomas F. Keller Daniel J. Ludeman
/s/ Louis W. Moelchert, Jr. /s/ J. Garnett Nelson
- --------------------------- ------------------------
Louis W. Moelchert, Jr. J. Garnett Nelson
/s/ Troy A. Peery, Jr. /s/ Peter J. Quinn, Jr.
- ------------------------ ------------------------
Troy A. Peery, Jr. Peter J. Quinn, Jr.
4
Exhibit 2 (ii)
VOTED: That a new Section 6 of Article IV be added to the Bylaws to read in its
entirety as follows:
"Section 6. The placing of a shareholder's name on a proxy pursuant to
telephone or electronically transmitted instructions obtained pursuant
to procedures reasonably designed to verify that such instructions have
been authorized by such shareholder shall constitute execution of such
proxy by or on behalf of such shareholder."
Exhibit 11 (i)
Consent of Independent Auditors
The Board of Trustees
Mentor Funds:
We consent to the use of our reports dated November 20, 1998, included herein
and to the references to our firm under the headings "FINANCIAL HIGHLIGHTS" in
the prospectuses and "INDEPENDENT ACCOUNTANTS" in the statements of additional
information.
KPMG Peat Marwick LLP
Boston, Massachusetts
November 30, 1998
Exhibit 18
MENTOR FUNDS
Amended and Restated Plan
pursuant to Rule 18f-3(d) under the Investment Company Act of 1940
Effective October 13, 1998
Each series of shares of beneficial interest in Mentor Funds (the
"Trust") (each a "Portfolio" and, together, the "Portfolios") may from time to
time issue one or more of the following classes of shares: Class A shares, Class
B shares, and Class Y shares, or in the case of the Money Market Portfolios,
Retail shares and Institutional shares. Each class is subject to such investment
minimums and other conditions of eligibility as are set forth in the prospectus
in respect of any such Portfolio as from time to time in effect (each, the
"Prospectus"). The differences in expenses among these classes of shares, and
the conversion and exchange features of each class of shares, are set forth
below in this Amended and Restated Plan. Except as noted below, expenses are
allocated among the classes of shares of each Portfolio based upon the expenses
incurred by each class or as otherwise determined to be fair and equitable by
the Trustees. This Amended and Restated Plan is subject to change, to the extent
permitted by law and by the Declaration of Trust and By-laws of the Trust, by
action of the Trustees of the Trust.
CLASS A SHARES
Distribution and Service Fees
Class A shares pay no Rule 12b-1 distribution fees, but pay shareholder
service fees of .25% of the relevant Portfolio's average net assets attributable
to Class A shares.
Exchange Features
Class A shares of any Portfolio may be exchanged, at the holder's
option, for Class A shares of any other Portfolio that offers Class A shares
without the payment of a sales charge beginning 15 days after purchase, provided
that Class A shares of such other Portfolio are available to residents of the
relevant state. The holding period for determining any CDSC will include the
holding period of the shares exchanged, and will be calculated using the
schedule of any Portfolio into or from which shares have been exchanged that
would result in the highest CDSC applicable to such shares. (If a shareholder
exchanges his shares for shares of the Cash Resource U.S. Government Money
Market Fund, the period during which he holds
-1-
<PAGE>
shares of that Fund will not be included in calculating the length of time he
has owned the shares subject to the CDSC, and any CDSC payable on redemption of
his shares will be reduced by the amount of any payment collected by that Fund
under its distribution plan in respect of those shares.)
Conversion Features
Class A shares do not convert into any other class of shares.
Initial Sales Charge
Class A shares are offered at a public offering price that is equal to
their net asset value ("NAV") plus a sales charge of up to 5.75% of the public
offering price (which maximum may be less for certain Portfolios, as described
in the Prospectus). The sales charges on Class A shares are subject to reduction
or waiver as permitted by Rule 22d-1 under the Investment Company Act of 1940,
as amended (the "1940 Act") and as described in the Prospectus.
Contingent Deferred Sales Charge
Purchases of Class A shares of $1 million or more that are redeemed
within one year of purchase are subject to a CDSC of 1.00% of either the
purchase price or the NAV of the shares redeemed, whichever is less. Class A
shares are not otherwise subject to a CDSC.
The CDSC on Class A shares is subject to reduction or waiver in certain
circumstances, as permitted by Rule 6c-10 under the 1940 Act and as described in
the Prospectus.
CLASS B SHARES
Distribution and Service Fees
Class B shares pay distribution fees pursuant to plans adopted pursuant
to Rule 12b-1 under the 1940 Act (the "Class B Plans"). Class B shares also bear
any costs associated with obtaining shareholder approval of the Class B Plans
(or an amendment to a Class B Plan). Pursuant to the Class B Plans, Class B
shares may pay up to .75% of the relevant Portfolio's average net assets
attributable to Class B shares (which percentage may be less for certain
Portfolios, as described in the Prospectus). Amounts payable under the Class B
Plans are subject to such further limitations as the Trustees may from time to
time determine and as set forth in the Prospectus.
-2-
<PAGE>
Exchange Features
Class B shares of any Portfolio may be exchanged, at the holder's
option, for Class B shares of any other Portfolio that offers Class B shares
without the payment of a sales charge beginning 15 days after purchase, provided
that Class B shares of such other Portfolio are available to residents of the
relevant state. The holding period for determining any CDSC will include the
holding period of the shares exchanged, and will be calculated using the
schedule of any Portfolio into or from which shares have been exchanged that
would result in the highest CDSC applicable to such Class B shares. (If a
shareholder exchanges his shares for shares of the Cash Resource U.S. Government
Money Market Fund, the period which he holds shares of that Fund will not be
included in calculating the length of time he has owned the shares subject to
the CDSC, and any CDSC payable on redemption of his shares will be reduced by
the amount of any payment collected by that Fund under its distribution plan in
respect of those shares.)
Conversion Features
Class B shares do not convert into any other class of shares.
Initial Sales Charge
Class B shares are offered at their NAV, without an initial sales
charge.
Contingent Deferred Sales Charge
Class B shares that are redeemed within 6 years of purchase are subject
to a CDSC of up to 4.00% of either the purchase price or the NAV of the shares
redeemed, whichever is less (which period may be shorter and which percentage
may be less for certain Portfolios, as described in the Prospectus); such
percentage declines the longer the shares are held, as described in the
Prospectus. Class B shares purchased with reinvested dividends or capital gains
are not subject to a CDSC.
The CDSC on Class B shares is subject to reduction or waiver in certain
circumstances, as permitted by Rule 6c-10 under the 1940 Act and as described in
the Prospectus.
Y SHARES
Distribution and Service Fees
Y Shares pay no Rule 12b-1 distribution fees.
-3-
<PAGE>
Exchange Features
Y Shares of any Portfolio may be exchanged, at the holder's option, (i)
for Y Shares of any other Portfolio and (ii) for shares of the Cash Resource
U.S. Government Money Market Fund, without the payment of a sales charge
beginning 15 days after purchase, provided that such other shares are available
to residents of the relevant state.
Conversion Features
Y Shares do not convert into any other class of shares.
Initial Sales Charge
Y Shares are offered at their NAV, without an initial sales charge.
Contingent Deferred Sales Charge
Y Shares are not subject to any CDSC.
RETAIL SHARES (Money Market Portfolios)
Distribution and Service Fees
Retail Shares pay distribution fees pursuant to plans adopted pursuant
to Rule 12b-1 under the 1940 Act (the "Retail Share Plans"). Retail Shares also
bear any costs associated with obtaining shareholder approval of the Retail
Share Plans (or an amendment to a Retail Share Plan). Pursuant to the Retail
Share Plans, Retail Shares may pay up to .38% of the relevant Portfolio's
average net assets attributable to Retail Shares (which percentage may be less
for certain Portfolios, as described in the Prospectus). Amounts payable under
the Retail Share Plans are subject to such further limitations as the Trustees
may from time to time determine and as set forth in the Prospectus.
Exchange Features
Retail Shares of any Portfolio may be exchanged, at the holder's
option, for Retail Shares of any other Portfolio that offers Retail Shares
without the payment of a sales charge beginning 15 days after purchase, provided
that Retail Shares of such other Portfolio are available to residents of the
relevant state.
Conversion Features
Retail Shares do not convert into any other class of shares.
-4-
<PAGE>
Initial Sales Charge
Retail Shares are offered at their NAV, without an initial sales
charge.
Contingent Deferred Sales Charge
Retail Shares are not subject to any CDSC.
INSTITUTIONAL SHARES (Money Market Portfolios)
Distribution and Service Fees
Institutional Shares pay no Rule 12b-1 distribution fees.
Exchange Features
Institutional Shares of any Portfolio may be exchanged, at the holder's
option, for Institutional Shares of any other Fund, without the payment of a
sales charge beginning 15 days after purchase, provided that such other shares
are available to residents of the relevant state.
Conversion Features
Institutional Shares do not convert into any other class of shares.
Initial Sales Charge
Institutional Shares are offered at their NAV, without an initial sales
charge.
Contingent Deferred Sales Charge
Institutional Shares are not subject to any CDSC.
-5-
Exhibit 24
POWER OF ATTORNEY
We, the undersigned Officers and Trustees of Mentor Funds (the
"Trust"), hereby severally constitute and appoint Daniel J. Ludeman, Paul F.
Costello and Terry L. Perkins, and each of them singly, our true and lawful
attorneys, with full power to them and each of them, to sign for us, and in our
names and in the capacities indicated below, the Registration Statement on Form
N-1A of the Trust and any and all amendments (including post-effective
amendments) to said Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto our said attorneys, and each
of them acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratify and
confirm all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
WITNESS our hands and common seal on the date set forth below.
Signature Title Date
/s/ Arch T. Allen, III Trustee November 10, 1998
- ---------------------------
Arch T. Allen, III
/s/ Jerry R. Barrentine Trustee November 10, 1998
- ---------------------------
Jerry R. Barrentine
/s/ Arnold H. Dreyfuss Trustee November 10, 1998
- ---------------------------
Arnold H. Dreyfuss
/s/ Weston E. Edwards Trustee November 10, 1998
- ---------------------------
Weston E. Edwards
/s/ Thomas F. Keller Trustee November 10, 1998
- ---------------------------
Thomas F. Keller
-1-
<PAGE>
/s/ Daniel J. Ludeman Chairman;Trustee November 10, 1998
- ---------------------------
Daniel J. Ludeman
/s/ Louis W. Moelchert, Jr. Trustee November 10, 1998
- ---------------------------
Louis W. Moelchert, Jr.
/s/ J. Garnett Nelson Trustee November 10, 1998
- ---------------------------
J. Garnett Nelson
/s/ Troy A. Peery, Jr. Trustee November 10, 1998
- ---------------------------
Troy A. Peery, Jr.
/s/ Peter J. Quinn, Jr. Trustee November 10, 1998
- ---------------------------
Peter J. Quinn, Jr.
/s/ Paul F. Costello President November 10, 1998
- --------------------------- (Principal
Paul F. Costello Executive
Officer)
/s/ Terry L. Perkins Treasurer November 10, 1998
- --------------------------- (Principal
Terry L. Perkins Financial and
Accounting
Officer)
-2-
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MENTOR GROWTH PORTFOLIO-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 464,311
<INVESTMENTS-AT-VALUE> 481,004
<RECEIVABLES> 10,120
<ASSETS-OTHER> 74
<OTHER-ITEMS-ASSETS> 115,220
<TOTAL-ASSETS> 606,418
<PAYABLE-FOR-SECURITIES> 1,945
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 118,212
<TOTAL-LIABILITIES> 120,157
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 451,922
<SHARES-COMMON-STOCK> 5,323
<SHARES-COMMON-PRIOR> 5,267
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 17,645
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,694
<NET-ASSETS> 486,261
<DIVIDEND-INCOME> 524
<INTEREST-INCOME> 3,726
<OTHER-INCOME> 0
<EXPENSES-NET> 11,213
<NET-INVESTMENT-INCOME> (6,963)
<REALIZED-GAINS-CURRENT> 37,566
<APPREC-INCREASE-CURRENT> (173,567)
<NET-CHANGE-FROM-OPS> (142,964)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 6,599
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,017
<NUMBER-OF-SHARES-REDEEMED> 12,307
<SHARES-REINVESTED> 347
<NET-CHANGE-IN-ASSETS> (125,002)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 30,589
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,204
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,213
<AVERAGE-NET-ASSETS> 110,307
<PER-SHARE-NAV-BEGIN> 19.94
<PER-SHARE-NII> (0.12)
<PER-SHARE-GAIN-APPREC> (4.03)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.19
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.60
<EXPENSE-RATIO> 1.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MENTOR GROWTH PORTFOLIO-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 464,311
<INVESTMENTS-AT-VALUE> 481,004
<RECEIVABLES> 10,120
<ASSETS-OTHER> 74
<OTHER-ITEMS-ASSETS> 115,220
<TOTAL-ASSETS> 606,418
<PAYABLE-FOR-SECURITIES> 1,945
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 118,212
<TOTAL-LIABILITIES> 120,157
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 451,922
<SHARES-COMMON-STOCK> 27,028
<SHARES-COMMON-PRIOR> 25,921
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 17,645
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,694
<NET-ASSETS> 486,261
<DIVIDEND-INCOME> 524
<INTEREST-INCOME> 3,726
<OTHER-INCOME> 0
<EXPENSES-NET> 11,213
<NET-INVESTMENT-INCOME> (6,963)
<REALIZED-GAINS-CURRENT> 37,566
<APPREC-INCREASE-CURRENT> (173,567)
<NET-CHANGE-FROM-OPS> (142,964)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 31,308
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,138
<NUMBER-OF-SHARES-REDEEMED> 4,699
<SHARES-REINVESTED> 1,667
<NET-CHANGE-IN-ASSETS> (125,002)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 30,589
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,204
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,213
<AVERAGE-NET-ASSETS> 484,933
<PER-SHARE-NAV-BEGIN> 19.53
<PER-SHARE-NII> (0.23)
<PER-SHARE-GAIN-APPREC> (3.93)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.19
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.18
<EXPENSE-RATIO> 2.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MENTOR GROWTH PORTFOLIO-CLASS Y
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 464,311
<INVESTMENTS-AT-VALUE> 481,004
<RECEIVABLES> 10,120
<ASSETS-OTHER> 74
<OTHER-ITEMS-ASSETS> 115,220
<TOTAL-ASSETS> 606,418
<PAYABLE-FOR-SECURITIES> 1,945
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 118,212
<TOTAL-LIABILITIES> 120,157
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 451,922
<SHARES-COMMON-STOCK> 1,733
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 17,645
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,694
<NET-ASSETS> 486,261
<DIVIDEND-INCOME> 524
<INTEREST-INCOME> 3,726
<OTHER-INCOME> 0
<EXPENSES-NET> 11,213
<NET-INVESTMENT-INCOME> (6,963)
<REALIZED-GAINS-CURRENT> 37,566
<APPREC-INCREASE-CURRENT> (173,567)
<NET-CHANGE-FROM-OPS> (142,964)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,787
<NUMBER-OF-SHARES-REDEEMED> 54
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (125,002)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 30,589
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,204
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,213
<AVERAGE-NET-ASSETS> 5,803
<PER-SHARE-NAV-BEGIN> 18.12
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> (3.28)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.19
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.63
<EXPENSE-RATIO> 1.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MENTOR GLOBAL PORTFOLIO-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 164,718
<INVESTMENTS-AT-VALUE> 156,477
<RECEIVABLES> 19,821
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5
<TOTAL-ASSETS> 176,303
<PAYABLE-FOR-SECURITIES> 2,698
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,315
<TOTAL-LIABILITIES> 18,013
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 153,976
<SHARES-COMMON-STOCK> 3,119
<SHARES-COMMON-PRIOR> 2,223
<ACCUMULATED-NII-CURRENT> 3,616
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,575
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,264)
<NET-ASSETS> 158,290
<DIVIDEND-INCOME> 2,177
<INTEREST-INCOME> 500
<OTHER-INCOME> 0
<EXPENSES-NET> 3,434
<NET-INVESTMENT-INCOME> (757)
<REALIZED-GAINS-CURRENT> 14,799
<APPREC-INCREASE-CURRENT> (25,460)
<NET-CHANGE-FROM-OPS> (11,418)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 2,383
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,058
<NUMBER-OF-SHARES-REDEEMED> 1,276
<SHARES-REINVESTED> 114
<NET-CHANGE-IN-ASSETS> 22,704
<ACCUMULATED-NII-PRIOR> (98)
<ACCUMULATED-GAINS-PRIOR> 5,560
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,612
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,434
<AVERAGE-NET-ASSETS> 56,009
<PER-SHARE-NAV-BEGIN> 20.94
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> (0.97)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.02
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.92
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> MENTOR PERPETUAL GLOBAL PORTFOLIO-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 164,718
<INVESTMENTS-AT-VALUE> 156,477
<RECEIVABLES> 19,821
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5
<TOTAL-ASSETS> 176,303
<PAYABLE-FOR-SECURITIES> 2,698
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,315
<TOTAL-LIABILITIES> 18,013
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 153,976
<SHARES-COMMON-STOCK> 5,453
<SHARES-COMMON-PRIOR> 4,382
<ACCUMULATED-NII-CURRENT> 3,616
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,575
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,264)
<NET-ASSETS> 158,290
<DIVIDEND-INCOME> 2,177
<INTEREST-INCOME> 500
<OTHER-INCOME> 0
<EXPENSES-NET> 3,434
<NET-INVESTMENT-INCOME> (757)
<REALIZED-GAINS-CURRENT> 14,799
<APPREC-INCREASE-CURRENT> (25,460)
<NET-CHANGE-FROM-OPS> (11,418)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 4,554
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,822
<NUMBER-OF-SHARES-REDEEMED> 984
<SHARES-REINVESTED> 233
<NET-CHANGE-IN-ASSETS> 22,704
<ACCUMULATED-NII-PRIOR> (98)
<ACCUMULATED-GAINS-PRIOR> 5,560
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,612
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,434
<AVERAGE-NET-ASSETS> 97,925
<PER-SHARE-NAV-BEGIN> 20.32
<PER-SHARE-NII> (0.12)
<PER-SHARE-GAIN-APPREC> (0.97)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.02
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.21
<EXPENSE-RATIO> 2.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> MENTOR PERPETUAL GLOBAL PORTFOLIO-CLASS Y
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 164,718
<INVESTMENTS-AT-VALUE> 156,477
<RECEIVABLES> 19,821
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5
<TOTAL-ASSETS> 176,303
<PAYABLE-FOR-SECURITIES> 2,698
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,315
<TOTAL-LIABILITIES> 18,013
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 153,976
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,616
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,575
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,264)
<NET-ASSETS> 158,290
<DIVIDEND-INCOME> 2,177
<INTEREST-INCOME> 500
<OTHER-INCOME> 0
<EXPENSES-NET> 3,434
<NET-INVESTMENT-INCOME> (757)
<REALIZED-GAINS-CURRENT> 14,799
<APPREC-INCREASE-CURRENT> (25,460)
<NET-CHANGE-FROM-OPS> (11,418)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 22,704
<ACCUMULATED-NII-PRIOR> (98)
<ACCUMULATED-GAINS-PRIOR> 5,560
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,612
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,434
<AVERAGE-NET-ASSETS> 1
<PER-SHARE-NAV-BEGIN> 18.81
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.30
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.15
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.96
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> MENTOR CAPITAL GROWTH PORTFOLIO-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 343,103
<INVESTMENTS-AT-VALUE> 349,567
<RECEIVABLES> 3,949
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 15,563
<TOTAL-ASSETS> 369,079
<PAYABLE-FOR-SECURITIES> 10,841
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,369
<TOTAL-LIABILITIES> 27,210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 298,265
<SHARES-COMMON-STOCK> 6,392
<SHARES-COMMON-PRIOR> 2,930
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 37,140
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,464
<NET-ASSETS> 341,869
<DIVIDEND-INCOME> 2,937
<INTEREST-INCOME> 804
<OTHER-INCOME> 0
<EXPENSES-NET> 4,841
<NET-INVESTMENT-INCOME> (1,100)
<REALIZED-GAINS-CURRENT> 45,438
<APPREC-INCREASE-CURRENT> (32,273)
<NET-CHANGE-FROM-OPS> 12,065
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 30
<DISTRIBUTIONS-OF-GAINS> 5,934
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,130
<NUMBER-OF-SHARES-REDEEMED> 1,927
<SHARES-REINVESTED> 278
<NET-CHANGE-IN-ASSETS> 162,579
<ACCUMULATED-NII-PRIOR> 60
<ACCUMULATED-GAINS-PRIOR> 13,768
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,153
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,841
<AVERAGE-NET-ASSETS> 105,795
<PER-SHARE-NAV-BEGIN> 22.42
<PER-SHARE-NII> (0.10)
<PER-SHARE-GAIN-APPREC> 2.34
<PER-SHARE-DIVIDEND> 0.01
<PER-SHARE-DISTRIBUTIONS> 1.94
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 22.71
<EXPENSE-RATIO> 1.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> MENTOR CAPITAL GROWTH PORTFOLIO-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 343,103
<INVESTMENTS-AT-VALUE> 349,567
<RECEIVABLES> 3,949
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 15,563
<TOTAL-ASSETS> 369,079
<PAYABLE-FOR-SECURITIES> 10,841
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,369
<TOTAL-LIABILITIES> 27,210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 298,265
<SHARES-COMMON-STOCK> 9,059
<SHARES-COMMON-PRIOR> 5,240
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 37,140
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,464
<NET-ASSETS> 341,869
<DIVIDEND-INCOME> 2,937
<INTEREST-INCOME> 804
<OTHER-INCOME> 0
<EXPENSES-NET> 4,841
<NET-INVESTMENT-INCOME> (1,100)
<REALIZED-GAINS-CURRENT> 45,438
<APPREC-INCREASE-CURRENT> (32,273)
<NET-CHANGE-FROM-OPS> 12,065
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 53
<DISTRIBUTIONS-OF-GAINS> 10,485
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,375
<NUMBER-OF-SHARES-REDEEMED> 1,063
<SHARES-REINVESTED> 508
<NET-CHANGE-IN-ASSETS> 162,579
<ACCUMULATED-NII-PRIOR> 60
<ACCUMULATED-GAINS-PRIOR> 13,768
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,153
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,841
<AVERAGE-NET-ASSETS> 164,065
<PER-SHARE-NAV-BEGIN> 21.68
<PER-SHARE-NII> (0.08)
<PER-SHARE-GAIN-APPREC> 2.07
<PER-SHARE-DIVIDEND> 0.01
<PER-SHARE-DISTRIBUTIONS> 1.94
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 21.72
<EXPENSE-RATIO> 2.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> MENTOR CAPITAL GROWTH PORTFOLIO-CLASS Y
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 343,103
<INVESTMENTS-AT-VALUE> 349,567
<RECEIVABLES> 3,949
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 15,563
<TOTAL-ASSETS> 369,079
<PAYABLE-FOR-SECURITIES> 10,841
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,369
<TOTAL-LIABILITIES> 27,210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 298,265
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 37,140
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,464
<NET-ASSETS> 341,869
<DIVIDEND-INCOME> 2,937
<INTEREST-INCOME> 804
<OTHER-INCOME> 0
<EXPENSES-NET> 4,841
<NET-INVESTMENT-INCOME> (1,100)
<REALIZED-GAINS-CURRENT> 45,438
<APPREC-INCREASE-CURRENT> (32,273)
<NET-CHANGE-FROM-OPS> 12,065
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 162,579
<ACCUMULATED-NII-PRIOR> 60
<ACCUMULATED-GAINS-PRIOR> 13,768
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,153
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,841
<AVERAGE-NET-ASSETS> 1
<PER-SHARE-NAV-BEGIN> 20.81
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 2.16
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.25
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 22.74
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> MENTOR INCOME AND GROWTH PORTFOLIO-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 231,110
<INVESTMENTS-AT-VALUE> 241,809
<RECEIVABLES> 1,993
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 40,345
<TOTAL-ASSETS> 284,148
<PAYABLE-FOR-SECURITIES> 663
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40,844
<TOTAL-LIABILITIES> 41,507
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 221,635
<SHARES-COMMON-STOCK> 5,055
<SHARES-COMMON-PRIOR> 3,083
<ACCUMULATED-NII-CURRENT> 92
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,214
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,699
<NET-ASSETS> 242,641
<DIVIDEND-INCOME> 2,856
<INTEREST-INCOME> 5,943
<OTHER-INCOME> 0
<EXPENSES-NET> 3,869
<NET-INVESTMENT-INCOME> 4,930
<REALIZED-GAINS-CURRENT> 10,846
<APPREC-INCREASE-CURRENT> (5,423)
<NET-CHANGE-FROM-OPS> 10,353
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,350
<DISTRIBUTIONS-OF-GAINS> 5,325
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,516
<NUMBER-OF-SHARES-REDEEMED> 915
<SHARES-REINVESTED> 371
<NET-CHANGE-IN-ASSETS> 71,316
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 13,501
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,639
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,869
<AVERAGE-NET-ASSETS> 87,119
<PER-SHARE-NAV-BEGIN> 20.60
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> 0.60
<PER-SHARE-DIVIDEND> 0.51
<PER-SHARE-DISTRIBUTIONS> 1.66
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.54
<EXPENSE-RATIO> 1.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> MENTOR INCOME AND GROWTH PORTFOLIO-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 231,110
<INVESTMENTS-AT-VALUE> 241,809
<RECEIVABLES> 1,993
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 40,345
<TOTAL-ASSETS> 284,148
<PAYABLE-FOR-SECURITIES> 663
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40,844
<TOTAL-LIABILITIES> 41,507
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 221,635
<SHARES-COMMON-STOCK> 7,365
<SHARES-COMMON-PRIOR> 5,237
<ACCUMULATED-NII-CURRENT> 92
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,214
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,699
<NET-ASSETS> 242,641
<DIVIDEND-INCOME> 2,856
<INTEREST-INCOME> 5,943
<OTHER-INCOME> 0
<EXPENSES-NET> 3,869
<NET-INVESTMENT-INCOME> 4,930
<REALIZED-GAINS-CURRENT> 10,846
<APPREC-INCREASE-CURRENT> (5,423)
<NET-CHANGE-FROM-OPS> 10,353
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,488
<DISTRIBUTIONS-OF-GAINS> 8,807
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,643
<NUMBER-OF-SHARES-REDEEMED> 1,075
<SHARES-REINVESTED> 559
<NET-CHANGE-IN-ASSETS> 71,316
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 13,501
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,639
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,869
<AVERAGE-NET-ASSETS> 131,644
<PER-SHARE-NAV-BEGIN> 20.59
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> 0.59
<PER-SHARE-DIVIDEND> 0.36
<PER-SHARE-DISTRIBUTIONS> 1.66
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.53
<EXPENSE-RATIO> 2.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> MENTOR INCOME AND GROWTH PORTFOLIO-CLASS Y
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 231,110
<INVESTMENTS-AT-VALUE> 241,809
<RECEIVABLES> 1,993
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 40,345
<TOTAL-ASSETS> 284,148
<PAYABLE-FOR-SECURITIES> 663
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40,844
<TOTAL-LIABILITIES> 41,507
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 221,635
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 92
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,214
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,699
<NET-ASSETS> 242,641
<DIVIDEND-INCOME> 2,856
<INTEREST-INCOME> 5,943
<OTHER-INCOME> 0
<EXPENSES-NET> 3,869
<NET-INVESTMENT-INCOME> 4,930
<REALIZED-GAINS-CURRENT> 10,846
<APPREC-INCREASE-CURRENT> (5,423)
<NET-CHANGE-FROM-OPS> 10,353
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 71,316
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 13,501
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,639
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,869
<AVERAGE-NET-ASSETS> 1
<PER-SHARE-NAV-BEGIN> 18.75
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 0.82
<PER-SHARE-DIVIDEND> 0.54
<PER-SHARE-DISTRIBUTIONS> 0.03
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.54
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> MENTOR BALANCED PORTFOLIO-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 11,266
<INVESTMENTS-AT-VALUE> 11,469
<RECEIVABLES> 3,516
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3,116
<TOTAL-ASSETS> 18,101
<PAYABLE-FOR-SECURITIES> 2,537
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,743
<TOTAL-LIABILITIES> 5,280
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,531
<SHARES-COMMON-STOCK> 258
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 18
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 69
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 203
<NET-ASSETS> 12,821
<DIVIDEND-INCOME> 29
<INTEREST-INCOME> 104
<OTHER-INCOME> 0
<EXPENSES-NET> 23
<NET-INVESTMENT-INCOME> 110
<REALIZED-GAINS-CURRENT> 822
<APPREC-INCREASE-CURRENT> (584)
<NET-CHANGE-FROM-OPS> 348
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 258
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,719
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 87
<AVERAGE-NET-ASSETS> 1,261
<PER-SHARE-NAV-BEGIN> 13.69
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.69
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 14
<NAME> MENTOR BALANCED PORTFOLIO-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 11,266
<INVESTMENTS-AT-VALUE> 11,469
<RECEIVABLES> 3,516
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3,116
<TOTAL-ASSETS> 18,101
<PAYABLE-FOR-SECURITIES> 2,537
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,743
<TOTAL-LIABILITIES> 5,280
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,531
<SHARES-COMMON-STOCK> 412
<SHARES-COMMON-PRIOR> 233
<ACCUMULATED-NII-CURRENT> 18
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 69
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 203
<NET-ASSETS> 12,821
<DIVIDEND-INCOME> 29
<INTEREST-INCOME> 104
<OTHER-INCOME> 0
<EXPENSES-NET> 23
<NET-INVESTMENT-INCOME> 110
<REALIZED-GAINS-CURRENT> 822
<APPREC-INCREASE-CURRENT> (584)
<NET-CHANGE-FROM-OPS> 348
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 139
<NUMBER-OF-SHARES-REDEEMED> 48
<SHARES-REINVESTED> 89
<NET-CHANGE-IN-ASSETS> 8,719
<ACCUMULATED-NII-PRIOR> 68
<ACCUMULATED-GAINS-PRIOR> 387
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 87
<AVERAGE-NET-ASSETS> 4,012
<PER-SHARE-NAV-BEGIN> 17.61
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> 1.43
<PER-SHARE-DIVIDEND> 0.71
<PER-SHARE-DISTRIBUTIONS> 5.09
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.69
<EXPENSE-RATIO> 2.12
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 15
<NAME> MENTOR BALANCED PORTFOLIO-CLASS Y
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 11,266
<INVESTMENTS-AT-VALUE> 11,469
<RECEIVABLES> 3,516
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3,116
<TOTAL-ASSETS> 18,101
<PAYABLE-FOR-SECURITIES> 2,537
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,743
<TOTAL-LIABILITIES> 5,280
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,531
<SHARES-COMMON-STOCK> 266
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 18
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 69
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 203
<NET-ASSETS> 12,821
<DIVIDEND-INCOME> 29
<INTEREST-INCOME> 104
<OTHER-INCOME> 0
<EXPENSES-NET> 23
<NET-INVESTMENT-INCOME> 110
<REALIZED-GAINS-CURRENT> 822
<APPREC-INCREASE-CURRENT> (584)
<NET-CHANGE-FROM-OPS> 348
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 160
<DISTRIBUTIONS-OF-GAINS> 1,140
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 273
<NUMBER-OF-SHARES-REDEEMED> 7
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,719
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 87
<AVERAGE-NET-ASSETS> 3,773
<PER-SHARE-NAV-BEGIN> 13.69
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.69
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 16
<NAME> MENTOR MUNI INCOME PORTFOLIO-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 105,012
<INVESTMENTS-AT-VALUE> 112,860
<RECEIVABLES> 3,543
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 84
<TOTAL-ASSETS> 116,487
<PAYABLE-FOR-SECURITIES> 4,841
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 536
<TOTAL-LIABILITIES> 5,377
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 105,841
<SHARES-COMMON-STOCK> 3,237
<SHARES-COMMON-PRIOR> 1,896
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (350)
<ACCUMULATED-NET-GAINS> (2,004)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,622
<NET-ASSETS> 111,109
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,400
<OTHER-INCOME> 0
<EXPENSES-NET> 1,346
<NET-INVESTMENT-INCOME> 4,054
<REALIZED-GAINS-CURRENT> (41)
<APPREC-INCREASE-CURRENT> 3,077
<NET-CHANGE-FROM-OPS> 7,090
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,980
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,689
<NUMBER-OF-SHARES-REDEEMED> 423
<SHARES-REINVESTED> 76
<NET-CHANGE-IN-ASSETS> 37,443
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 300
<OVERDIST-NET-GAINS-PRIOR> 1,963
<GROSS-ADVISORY-FEES> 557
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,346
<AVERAGE-NET-ASSETS> 41,490
<PER-SHARE-NAV-BEGIN> 15.50
<PER-SHARE-NII> 0.66
<PER-SHARE-GAIN-APPREC> 0.59
<PER-SHARE-DIVIDEND> 0.76
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.99
<EXPENSE-RATIO> 1.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 17
<NAME> MENTOR MUNI INCOME PORTFOLIO-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 105,102
<INVESTMENTS-AT-VALUE> 112,860
<RECEIVABLES> 3,543
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 84
<TOTAL-ASSETS> 116,487
<PAYABLE-FOR-SECURITIES> 4,841
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 536
<TOTAL-LIABILITIES> 5,377
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 105,841
<SHARES-COMMON-STOCK> 3,723
<SHARES-COMMON-PRIOR> 2,859
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (350)
<ACCUMULATED-NET-GAINS> (2,004)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,622
<NET-ASSETS> 111,109
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,400
<OTHER-INCOME> 0
<EXPENSES-NET> 1,346
<NET-INVESTMENT-INCOME> 4,054
<REALIZED-GAINS-CURRENT> (41)
<APPREC-INCREASE-CURRENT> 3,077
<NET-CHANGE-FROM-OPS> 7,090
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,308
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,208
<NUMBER-OF-SHARES-REDEEMED> 436
<SHARES-REINVESTED> 92
<NET-CHANGE-IN-ASSETS> 37,443
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 300
<OVERDIST-NET-GAINS-PRIOR> 1,963
<GROSS-ADVISORY-FEES> 557
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,346
<AVERAGE-NET-ASSETS> 51,566
<PER-SHARE-NAV-BEGIN> 15.49
<PER-SHARE-NII> 1.30
<PER-SHARE-GAIN-APPREC> (0.14)
<PER-SHARE-DIVIDEND> 0.71
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.94
<EXPENSE-RATIO> 1.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 18
<NAME> MENTOR MUNI INCOME PORTFOLIO-CLASS Y
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 105,012
<INVESTMENTS-AT-VALUE> 112,860
<RECEIVABLES> 3,543
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 84
<TOTAL-ASSETS> 116,487
<PAYABLE-FOR-SECURITIES> 4,841
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 536
<TOTAL-LIABILITIES> 5,377
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 105,841
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (350)
<ACCUMULATED-NET-GAINS> (2,004)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,622
<NET-ASSETS> 111,109
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,400
<OTHER-INCOME> 0
<EXPENSES-NET> 1,346
<NET-INVESTMENT-INCOME> 4,054
<REALIZED-GAINS-CURRENT> (41)
<APPREC-INCREASE-CURRENT> 3,077
<NET-CHANGE-FROM-OPS> 7,090
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 37,443
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 300
<OVERDIST-NET-GAINS-PRIOR> 1,963
<GROSS-ADVISORY-FEES> 557
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,346
<AVERAGE-NET-ASSETS> 1
<PER-SHARE-NAV-BEGIN> 15.51
<PER-SHARE-NII> 1.39
<PER-SHARE-GAIN-APPREC> (0.23)
<PER-SHARE-DIVIDEND> 0.67
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.00
<EXPENSE-RATIO> 0.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 19
<NAME> MENTOR QUALITY INCOME PORTFOLIO-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 290,164
<INVESTMENTS-AT-VALUE> 298,638
<RECEIVABLES> 4,115
<ASSETS-OTHER> 35
<OTHER-ITEMS-ASSETS> 1,725
<TOTAL-ASSETS> 304,513
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,331
<TOTAL-LIABILITIES> 97,331
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 213,925
<SHARES-COMMON-STOCK> 6,927
<SHARES-COMMON-PRIOR> 4,035
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (924)
<ACCUMULATED-NET-GAINS> (14,294)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,474
<NET-ASSETS> 207,181
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,610
<OTHER-INCOME> 0
<EXPENSES-NET> 2,275
<NET-INVESTMENT-INCOME> 9,335
<REALIZED-GAINS-CURRENT> 713
<APPREC-INCREASE-CURRENT> 6,558
<NET-CHANGE-FROM-OPS> 16,606
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,831
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,257
<NUMBER-OF-SHARES-REDEEMED> 1,598
<SHARES-REINVESTED> 233
<NET-CHANGE-IN-ASSETS> 78,959
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 391
<OVERDIST-NET-GAINS-PRIOR> 15,099
<GROSS-ADVISORY-FEES> 1,026
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,480
<AVERAGE-NET-ASSETS> 77,738
<PER-SHARE-NAV-BEGIN> 13.18
<PER-SHARE-NII> 0.79
<PER-SHARE-GAIN-APPREC> 0.47
<PER-SHARE-DIVIDEND> 0.83
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.61
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 20
<NAME> MENTOR QUALITY INCOME PORTFOLIO-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 290,165
<INVESTMENTS-AT-VALUE> 298,638
<RECEIVABLES> 4,115
<ASSETS-OTHER> 35
<OTHER-ITEMS-ASSETS> 1,725
<TOTAL-ASSETS> 304,513
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,331
<TOTAL-LIABILITIES> 97,331
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 213,925
<SHARES-COMMON-STOCK> 8,297
<SHARES-COMMON-PRIOR> 5,693
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (924)
<ACCUMULATED-NET-GAINS> (14,294)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,474
<NET-ASSETS> 207,181
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,610
<OTHER-INCOME> 0
<EXPENSES-NET> 2,275
<NET-INVESTMENT-INCOME> 9,335
<REALIZED-GAINS-CURRENT> 713
<APPREC-INCREASE-CURRENT> 6,558
<NET-CHANGE-FROM-OPS> 16,606
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,432
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,811
<NUMBER-OF-SHARES-REDEEMED> 1,479
<SHARES-REINVESTED> 272
<NET-CHANGE-IN-ASSETS> 78,959
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 391
<OVERDIST-NET-GAINS-PRIOR> 15,099
<GROSS-ADVISORY-FEES> 1,026
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,480
<AVERAGE-NET-ASSETS> 93,548
<PER-SHARE-NAV-BEGIN> 13.18
<PER-SHARE-NII> 0.72
<PER-SHARE-GAIN-APPREC> 0.48
<PER-SHARE-DIVIDEND> 0.77
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.61
<EXPENSE-RATIO> 1.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 21
<NAME> MENTOR QUALITY INCOME PORTFOLIO-CLASS Y
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 290,165
<INVESTMENTS-AT-VALUE> 298,638
<RECEIVABLES> 4,115
<ASSETS-OTHER> 35
<OTHER-ITEMS-ASSETS> 1,725
<TOTAL-ASSETS> 304,513
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,331
<TOTAL-LIABILITIES> 97,331
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 213,925
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (924)
<ACCUMULATED-NET-GAINS> (14,294)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,474
<NET-ASSETS> 207,181
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,610
<OTHER-INCOME> 0
<EXPENSES-NET> 2,275
<NET-INVESTMENT-INCOME> 9,335
<REALIZED-GAINS-CURRENT> 713
<APPREC-INCREASE-CURRENT> 6,558
<NET-CHANGE-FROM-OPS> 16,606
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 78,959
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 391
<OVERDIST-NET-GAINS-PRIOR> 15,099
<GROSS-ADVISORY-FEES> 1,026
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,480
<AVERAGE-NET-ASSETS> 1
<PER-SHARE-NAV-BEGIN> 13.20
<PER-SHARE-NII> 0.78
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> 0.68
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.69
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 22
<NAME> MENTOR SHORT DURATION INCOME-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 161,222
<INVESTMENTS-AT-VALUE> 163,132
<RECEIVABLES> 5,387
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 25
<TOTAL-ASSETS> 168,544
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,499
<TOTAL-LIABILITIES> 21,499
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 145,503
<SHARES-COMMON-STOCK> 7,313
<SHARES-COMMON-PRIOR> 2,188
<ACCUMULATED-NII-CURRENT> (512)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 144
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,910
<NET-ASSETS> 147,044
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,170
<OTHER-INCOME> 0
<EXPENSES-NET> 1,003
<NET-INVESTMENT-INCOME> 5,167
<REALIZED-GAINS-CURRENT> 326
<APPREC-INCREASE-CURRENT> 1,608
<NET-CHANGE-FROM-OPS> 7,101
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,203
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,922
<NUMBER-OF-SHARES-REDEEMED> 4,997
<SHARES-REINVESTED> 201
<NET-CHANGE-IN-ASSETS> 92,337
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 96
<OVERDIST-NET-GAINS-PRIOR> 176
<GROSS-ADVISORY-FEES> 504
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,285
<AVERAGE-NET-ASSETS> 56,628
<PER-SHARE-NAV-BEGIN> 12.62
<PER-SHARE-NII> 0.70
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> 0.73
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.74
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 23
<NAME> MENTOR SHORT DURATION INCOME-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 161,222
<INVESTMENTS-AT-VALUE> 163,132
<RECEIVABLES> 5,387
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 25
<TOTAL-ASSETS> 168,544
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,499
<TOTAL-LIABILITIES> 21,499
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 145,503
<SHARES-COMMON-STOCK> 4,228
<SHARES-COMMON-PRIOR> 2,146
<ACCUMULATED-NII-CURRENT> (512)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 144
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,910
<NET-ASSETS> 147,044
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,170
<OTHER-INCOME> 0
<EXPENSES-NET> 1,003
<NET-INVESTMENT-INCOME> 5,167
<REALIZED-GAINS-CURRENT> 326
<APPREC-INCREASE-CURRENT> 1,608
<NET-CHANGE-FROM-OPS> 7,101
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,394
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,500
<NUMBER-OF-SHARES-REDEEMED> 1,564
<SHARES-REINVESTED> 145
<NET-CHANGE-IN-ASSETS> 92,337
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 96
<OVERDIST-NET-GAINS-PRIOR> 176
<GROSS-ADVISORY-FEES> 504
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,285
<AVERAGE-NET-ASSETS> 44,607
<PER-SHARE-NAV-BEGIN> 12.62
<PER-SHARE-NII> 0.66
<PER-SHARE-GAIN-APPREC> 0.16
<PER-SHARE-DIVIDEND> 0.69
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.75
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 24
<NAME> MENTOR SHORT DURATION INCOME-CLASS Y
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 161,222
<INVESTMENTS-AT-VALUE> 163,132
<RECEIVABLES> 5,387
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 25
<TOTAL-ASSETS> 168,544
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,499
<TOTAL-LIABILITIES> 21,499
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 145,503
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (512)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 144
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,910
<NET-ASSETS> 147,044
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,170
<OTHER-INCOME> 0
<EXPENSES-NET> 1,003
<NET-INVESTMENT-INCOME> 5,167
<REALIZED-GAINS-CURRENT> 326
<APPREC-INCREASE-CURRENT> 1,608
<NET-CHANGE-FROM-OPS> 7,101
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 92,337
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 96
<OVERDIST-NET-GAINS-PRIOR> 176
<GROSS-ADVISORY-FEES> 504
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,285
<AVERAGE-NET-ASSETS> 1
<PER-SHARE-NAV-BEGIN> 12.57
<PER-SHARE-NII> 0.67
<PER-SHARE-GAIN-APPREC> 0.16
<PER-SHARE-DIVIDEND> 0.61
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.79
<EXPENSE-RATIO> 0.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 25
<NAME> MENTOR U.S. GOVT MONEY MARKET PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 106,090
<INVESTMENTS-AT-VALUE> 106,090
<RECEIVABLES> 640
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 15
<TOTAL-ASSETS> 106,745
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 472
<TOTAL-LIABILITIES> 472
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,273
<SHARES-COMMON-STOCK> 106,273
<SHARES-COMMON-PRIOR> 61,805
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 106,273
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,164
<OTHER-INCOME> 0
<EXPENSES-NET> 303
<NET-INVESTMENT-INCOME> 4,861
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,861
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,861
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 170,788
<NUMBER-OF-SHARES-REDEEMED> 130,786
<SHARES-REINVESTED> 4,466
<NET-CHANGE-IN-ASSETS> 44,468
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 202
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 303
<AVERAGE-NET-ASSETS> 92,242
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 26
<NAME> MENTOR MONEY MARKET PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 40,731
<INVESTMENTS-AT-VALUE> 40,731
<RECEIVABLES> 438
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 16
<TOTAL-ASSETS> 41,185
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 215
<TOTAL-LIABILITIES> 215
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 40,970
<SHARES-COMMON-STOCK> 40,970
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 40,970
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,816
<OTHER-INCOME> 0
<EXPENSES-NET> 105
<NET-INVESTMENT-INCOME> 1,711
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,711
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,711
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 69,738
<NUMBER-OF-SHARES-REDEEMED> 30,219
<SHARES-REINVESTED> 1,451
<NET-CHANGE-IN-ASSETS> 40,970
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 52
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 105
<AVERAGE-NET-ASSETS> 36,943
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 27
<NAME> MENTOR HIGH INCOME-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 117,889
<INVESTMENTS-AT-VALUE> 108,566
<RECEIVABLES> 6,178
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,510
<TOTAL-ASSETS> 117,254
<PAYABLE-FOR-SECURITIES> 2,982
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 516
<TOTAL-LIABILITIES> 3,498
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 123,540
<SHARES-COMMON-STOCK> 4,658
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (372)
<ACCUMULATED-NET-GAINS> (89)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (9,323)
<NET-ASSETS> 113,756
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,037
<OTHER-INCOME> 0
<EXPENSES-NET> 219
<NET-INVESTMENT-INCOME> 1,818
<REALIZED-GAINS-CURRENT> (89)
<APPREC-INCREASE-CURRENT> (9,323)
<NET-CHANGE-FROM-OPS> (7,594)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,041
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,775
<NUMBER-OF-SHARES-REDEEMED> 169
<SHARES-REINVESTED> 52
<NET-CHANGE-IN-ASSETS> 113,756
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 176
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 395
<AVERAGE-NET-ASSETS> 42,576
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> (1.04)
<PER-SHARE-DIVIDEND> 0.28
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.92
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 28
<NAME> MENTOR HIGH INCOME-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 117,889
<INVESTMENTS-AT-VALUE> 108,566
<RECEIVABLES> 6,178
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,510
<TOTAL-ASSETS> 117,254
<PAYABLE-FOR-SECURITIES> 2,982
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 516
<TOTAL-LIABILITIES> 3,498
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 123,540
<SHARES-COMMON-STOCK> 5,762
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (372)
<ACCUMULATED-NET-GAINS> (89)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (9,323)
<NET-ASSETS> 113,756
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,037
<OTHER-INCOME> 0
<EXPENSES-NET> 219
<NET-INVESTMENT-INCOME> 1,818
<REALIZED-GAINS-CURRENT> (89)
<APPREC-INCREASE-CURRENT> (9,323)
<NET-CHANGE-FROM-OPS> (7,594)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,179
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,890
<NUMBER-OF-SHARES-REDEEMED> 191
<SHARES-REINVESTED> 62
<NET-CHANGE-IN-ASSETS> 113,756
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 176
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 395
<AVERAGE-NET-ASSETS> 51,007
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> 0.22
<PER-SHARE-GAIN-APPREC> (1.05)
<PER-SHARE-DIVIDEND> 0.26
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.91
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 29
<NAME> MENTOR STRATEGY PORTFOLIO-CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 211,264
<INVESTMENTS-AT-VALUE> 224,854
<RECEIVABLES> 1,970
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 60,171
<TOTAL-ASSETS> 286,995
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61,761
<TOTAL-LIABILITIES> 61,761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 192,886
<SHARES-COMMON-STOCK> 1,602
<SHARES-COMMON-PRIOR> 2,179
<ACCUMULATED-NII-CURRENT> 2,164
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20,466
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,718
<NET-ASSETS> 225,233
<DIVIDEND-INCOME> 1,264
<INTEREST-INCOME> 7,296
<OTHER-INCOME> 0
<EXPENSES-NET> 5,921
<NET-INVESTMENT-INCOME> 2,639
<REALIZED-GAINS-CURRENT> 24,558
<APPREC-INCREASE-CURRENT> (26,287)
<NET-CHANGE-FROM-OPS> 910
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 618
<DISTRIBUTIONS-OF-GAINS> 6,308
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 509
<NUMBER-OF-SHARES-REDEEMED> 1,530
<SHARES-REINVESTED> 445
<NET-CHANGE-IN-ASSETS> (117,203)
<ACCUMULATED-NII-PRIOR> 5,366
<ACCUMULATED-GAINS-PRIOR> 54,474
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,420
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,921
<AVERAGE-NET-ASSETS> 34,676
<PER-SHARE-NAV-BEGIN> 18.61
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> (0.35)
<PER-SHARE-DIVIDEND> 0.29
<PER-SHARE-DISTRIBUTIONS> 2.96
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.41
<EXPENSE-RATIO> 1.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 30
<NAME> MENTOR STRATEGY PORTFOLIO-CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 211,264
<INVESTMENTS-AT-VALUE> 224,854
<RECEIVABLES> 1,970
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 60,171
<TOTAL-ASSETS> 286,995
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61,761
<TOTAL-LIABILITIES> 61,761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 192,886
<SHARES-COMMON-STOCK> 13,394
<SHARES-COMMON-PRIOR> 16,503
<ACCUMULATED-NII-CURRENT> 2,164
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20,466
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,718
<NET-ASSETS> 225,233
<DIVIDEND-INCOME> 1,264
<INTEREST-INCOME> 7,296
<OTHER-INCOME> 0
<EXPENSES-NET> 5,921
<NET-INVESTMENT-INCOME> 2,639
<REALIZED-GAINS-CURRENT> 24,558
<APPREC-INCREASE-CURRENT> (26,287)
<NET-CHANGE-FROM-OPS> 910
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,726
<DISTRIBUTIONS-OF-GAINS> 48,272
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 564
<NUMBER-OF-SHARES-REDEEMED> 7,097
<SHARES-REINVESTED> 3,424
<NET-CHANGE-IN-ASSETS> (117,203)
<ACCUMULATED-NII-PRIOR> 5,366
<ACCUMULATED-GAINS-PRIOR> 54,474
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,420
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,921
<AVERAGE-NET-ASSETS> 249,870
<PER-SHARE-NAV-BEGIN> 18.29
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> (0.23)
<PER-SHARE-DIVIDEND> 0.29
<PER-SHARE-DISTRIBUTIONS> 2.96
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.97
<EXPENSE-RATIO> 2.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 31
<NAME> MENTOR STRATEGY PORTFOLIO-CLASS Y
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 211,264
<INVESTMENTS-AT-VALUE> 224,854
<RECEIVABLES> 1,970
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 60,171
<TOTAL-ASSETS> 286,995
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61,761
<TOTAL-LIABILITIES> 61,761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 192,886
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2,164
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20,466
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,718
<NET-ASSETS> 225,233
<DIVIDEND-INCOME> 1,264
<INTEREST-INCOME> 7,296
<OTHER-INCOME> 0
<EXPENSES-NET> 5,921
<NET-INVESTMENT-INCOME> 2,639
<REALIZED-GAINS-CURRENT> 24,558
<APPREC-INCREASE-CURRENT> (26,287)
<NET-CHANGE-FROM-OPS> 910
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (117,203)
<ACCUMULATED-NII-PRIOR> 5,366
<ACCUMULATED-GAINS-PRIOR> 54,474
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,420
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,921
<AVERAGE-NET-ASSETS> 1
<PER-SHARE-NAV-BEGIN> 15.01
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 0.18
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.01
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.43
<EXPENSE-RATIO> 2.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
