AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1998
REGISTRATION NO. 33-45315
FILE NO. 811-6550
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
PRE-EFFECTIVE AMENDMENT NO. _ ( )
POST-EFFECTIVE AMENDMENT NO. 16 (X)
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
AMENDMENT NO. 18 (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)
(804) 782-3648
(REGISTRANT'S TELEPHONE NUMBER)
PAUL F. COSTELLO
PRESIDENT
901 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
TIMOTHY W. DIGGINS, ESQ.
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MA 02110
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX)
( ) IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
<PAGE>
( ) ON (date) PURSUANT TO PARAGRAPH (B)
( ) 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)
( ) ON (DATE) PURSUANT TO PARAGRAPH (A)(1)
(X) 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)
( ) ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485
<PAGE>
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
( ) THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR
A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT
THIS POST-EFFECTIVE AMENDMENT RELATES ONLY TO THE MENTOR INCOME PORTFOLIO AND
THE MENTOR ASSET ALLOCATION PORTFOLIO. NO INFORMATION RELATING TO ANY OTHER
SERIES OF THE REGISTRANT IS AMENDED, DELETED, OR SUPERSEDED HEREBY.
MENTOR FUNDS
CROSS REFERENCE SHEET
(as required by Rule 404(a))
Part A - Mentor Funds - Mentor Income Portfolio -- Class A and Class B
<TABLE>
<CAPTION>
N-1A Item No. Location
<S> <C>
1. Cover Page......................................... Cover Page
2. Synopsis........................................... Cover Page; Expense Summary
3. Condensed Financial Information.................... Not Applicable
4. General Description of Registrant.................. Cover Page; Investment Objective
and Policies; General Information
5. Management of the Fund............................. Investment Objective and Policies;
Other Investment Practices and
Risks; How the Portfolio Values its
Shares; General Information;
Management; Performance
Information
5A. Management's Discussion of
Fund Performance................................ Not Applicable
6. Capital Stock and Other Securities................. Sales Arrangements; How to Buy
Shares; How to Sell Shares; How to
Exchange Shares; How
Distributions are Made; Taxes;
Management; General Information
7. Purchase of Securities Being Offered............... How to Buy Shares; How to
Exchange Shares; Management;
Distribution Plan
8. Redemption or Repurchase........................... How to Buy Shares; How to Sell
Shares; How to Exchange Shares
9. Pending Legal Proceedings.......................... Not Applicable
-1-
<PAGE>
<CAPTION>
Part A - Mentor Funds - Mentor Income Portfolio -- Institutional Class
N-1A Item No. Location
<S> <C>
1. Cover Page......................................... Cover Page
2. Synopsis........................................... Cover Page; Expense Summary
3. Condensed Financial Information.................... Not Applicable
4. General Description of Registrant.................. Cover Page; Investment Objective
and Policies; General Information
5. Management of the Fund............................. Investment Objective and Policies;
Other Investment Practices and
Risks; How the Portfolio Values its
Shares; General Information;
Management; Performance
Information
5A. Management's Discussion of
Fund Performance................................ Not Applicable
6. Capital Stock and Other Securities................. Purchase of Shares; Redemption of
Shares; How Distributions are
Made; Taxes; Management; General
Information
7. Purchase of Securities Being Offered............... Purchase of Shares; Redemption of
Shares; Management
8. Redemption or Repurchase........................... Purchase of Shares; Redemption of
Shares
9. Pending Legal Proceedings.......................... Not Applicable
-2-
<PAGE>
<CAPTION>
Part A - Mentor Funds - Mentor Income Portfolio -- Class E
N-1A Item No. Location
<S> <C>
1. Cover Page......................................... Cover Page
2. Synopsis........................................... Cover Page; Expense Summary
3. Condensed Financial Information.................... Not Applicable
4. General Description of Registrant.................. Cover Page; Investment Objective
and Policies; General Information
5. Management of the Fund............................. Investment Objective and Policies;
Other Investment Practices and
Risks; How the Portfolio Values its
Shares; General Information;
Management; Performance
Information
5A. Management's Discussion of
Fund Performance................................ Not Applicable
6. Capital Stock and Other Securities................. Purchase of Shares; Redemption of
Shares; How Distributions are
Made; Taxes; Management; General
Information
7. Purchase of Securities Being Offered............... Purchase of Shares; Redemption of
Shares; Management
8. Redemption or Repurchase........................... Purchase of Shares; Redemption of
Shares
9. Pending Legal Proceedings.......................... Not Applicable
-3-
<PAGE>
<CAPTION>
Part A - Mentor Funds - Mentor Asset Allocation Portfolio -- Class A and Class B
N-1A Item No. Location
<S> <C>
1. Cover Page......................................... Cover Page
2. Synopsis........................................... Cover Page; Expense Summary
3. Condensed Financial Information.................... Not Applicable
4. General Description of Registrant.................. Cover Page; Investment Objective
and Policies; General
5. Management of the Fund............................. Investment Objective and Policies;
Other Investment Practices and
Risks; How the Portfolio Values its
Shares; General Information;
Management; 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; How
Distributions are Made; Taxes;
Management; General Information
7. Purchase of Securities Being Offered............... How to Buy Shares; How to
Exchange Shares; Management;
Distribution Plan
8. Redemption or Repurchase........................... How to Buy Shares; How to Sell
Shares; How to Exchange Shares
9. Pending Legal Proceedings.......................... Not Applicable
-4-
<PAGE>
<CAPTION>
Part A - Mentor Funds - Mentor Asset Allocation Portfolio -- Institutional Class
N-1A Item No. Location
<S> <C>
1. Cover Page......................................... Cover Page
2. Synopsis........................................... Cover Page; Expense Summary
3. Condensed Financial Information.................... Not Applicable
4. General Description of Registrant.................. Cover Page; Investment Objective
and Policies; General
5. Management of the Fund............................. Investment Objective and Policies;
Other Investment Practices and
Risks; How the Portfolio Values its
Shares; General Information;
Management; Performance
Information
5A. Management's Discussion of
Fund Performance................................ Not Applicable
6. Capital Stock and Other Securities................. Purchase of Shares; Redemption of
Shares; How Distributions are
Made; Taxes; Management; General
Information
7. Purchase of Securities Being Offered............... Purchase of Shares; Redemption of
Shares; Management
8. Redemption or Repurchase........................... Purchase of Shares; Redemption of
Shares
9. Pending Legal Proceedings.......................... Not Applicable
-5-
<PAGE>
<CAPTION>
Part A - Mentor Funds - Mentor Asset Allocation Portfolio -- Class E
N-1A Item No. Location
<S> <C>
1. Cover Page......................................... Cover Page
2. Synopsis........................................... Cover Page; Expense Summary
3. Condensed Financial Information.................... Not Applicable
4. General Description of Registrant.................. Cover Page; Investment Objective
and Policies; General
5. Management of the Fund............................. Investment Objective and Policies;
Other Investment Practices and
Risks; How the Portfolio Values its
Shares; General Information;
Management; Performance
Information
5A. Management's Discussion of
Fund Performance................................ Not Applicable
6. Capital Stock and Other Securities................. Purchase of Shares; Redemption of
Shares; How Distributions are
Made; Taxes; Management; General
Information
7. Purchase of Securities Being Offered............... Purchase of Shares; Redemption of
Shares; Management
8. Redemption or Repurchase........................... Purchase of Shares; Redemption of
Shares
9. Pending Legal Proceedings.......................... Not Applicable
-6-
<PAGE>
<CAPTION>
Part B
N-1A Item No. Location
<S> <C>
1. Cover Page......................................... Cover Page
2. Table of Contents.................................. Table of Contents
3. General Information and History.................... Cover Page; Introduction
4. Investment Objectives and Policies................. Investment Restrictions; Certain
Investment Techniques
5. Management of the Fund............................. Management of the Trust; Principal
Holders of Securities; Investment
Advisory Services; Administrative
Services; Shareholder Servicing
Plan; Brokerage Transactions;
Distribution; Members of
Investment Management Teams
6. Control Persons and Principal
Holders of Securities........................... Principal Holders of Securities
7. Investment Advisory and
Other Services.................................. Management of the Trust; Principal
Holders of Securities; Investment
Advisory Services; Administrative
Services; Shareholder Servicing
Plan; Brokerage Transactions;
Distribution; Custodian
8. Brokerage Allocation............................... Brokerage Transactions
9. Capital Stock and Other Securities................. How to Buy Shares; Distribution;
Determining Net Asset Value;
Taxes; Shareholder Liability
10. Purchase; Redemption and Pricing
of Securities Being Offered..................... Brokerage Transactions;
Distribution; Determining Net Asset
Value; Redemptions in Kind
-7-
<PAGE>
11. Tax Status......................................... Investment Restrictions; Taxes
12. Underwriters....................................... Distribution
13. Calculations of Performance Data................... Performance Information;
Performance Comparisons
14. Financial Statements............................... Not Applicable
</TABLE>
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.
-8-
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 30, 1998
PROSPECTUS April ___, 1998
Class A and B shares
MENTOR INCOME PORTFOLIO
Mentor Income Portfolio seeks high current income. As a secondary
objective, the Portfolio seeks preservation of capital, to the extent consistent
with its objective of seeking high current income. Mentor Investment Advisors,
LLC is the Portfolio's investment adviser. The Portfolio is a series of shares
of Mentor Funds.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. Investors can find more detailed
information in the April ___, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement, call Mentor
Investment Group, LLC at 1-800-869-6042. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
-------------------------
MENTOR DISTRIBUTORS, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
-1-
<PAGE>
Expense summary
Expenses are one of several factors to consider when investing in
the Portfolio. Expenses shown reflect the expenses the Portfolio expects to
incur in its first fiscal year with respect to its Class A and Class B shares.
The Examples show the cumulative expenses attributable to a hypothetical $1,000
investment in the Class A and Class B shares of the Portfolio over specified
periods.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses: Class A Class B
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)/1 4.75% None
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None2 4.0% in the first year,
(as a percentage of the lower of the original declining to 1.0% in the
purchase price or redemption proceeds (3) sixth year, and
eliminated thereafter/4
Redemption Fees None None
Exchange Fee None None
</TABLE>
1 Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
2 A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1,000,000 that are redeemed within one year of purchase.
3 The amount redeemed is computed as the lesser of the current net asset value
of the shares redeemed, and the original purchase price of the shares. See "How
to buy shares - Class B shares."
4 Shares purchased as part of asset-allocation plans pursuant to the BL Purchase
Program are subject to a CDSC of 1.00%, if the shares are redeemed within one
year of purchase. See "How to Buy Shares -- the BL Purchase Program."
Annual Portfolio Operating Expenses:
(as a percentage of average net assets) Class A Class B
------- -------
Management Fees 0.60% 0.60%
12b-1 Fees 0.00% 0.50%
Shareholder Service Fee 0.25% 0.25%
Other Expenses (after expense limitation)* 0.33% 0.33%
---- ----
Total Portfolio Operating Expenses (after 1.18% 1.68%
expense limitation)*
- -----------------
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation currently in effect. In the absence of the expense
limitation, Other Expenses are expected to be ___% for Class A and Class B
shares, and Total Portfolio Operating Expenses are expected to be ____% for
Class A shares and ____% for Class B shares.
-2-
<PAGE>
Examples
An investment of $1,000 in the Portfolio would incur the following
expenses assuming 5% annual return and no redemption at the end of each period:
Class A Class B
1 year $58 $16
3 years $79 $49
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
Class A Class B
1 year $58 $56
3 years $79 $79
This information is provided to help investors understand the expenses
of investing in the Portfolio and an investor's share of the estimated operating
expenses for the Portfolio. The Examples should not be considered a
representation of future performance; actual expenses may be more or less than
those shown.
Investment objective and policies
The Portfolio's investment objective is to seek high current income. As
a secondary objective, the Portfolio seeks preservation of capital, to the
extent consistent with its objective of seeking high current income.
The Portfolio may invest in debt securities, including both government
and corporate obligations, preferred stocks, and dividend-paying common stocks.
The Portfolio will also likely at times hold a substantial portion of its assets
in mortgage-backed and other asset-backed securities. The Portfolio may also
hold a portion of its assets in cash or money-market instruments.
The Portfolio may invest in securities of any maturity. Mentor Advisors
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.
The Portfolio may invest in both higher-rated and lower-rated
fixed-income securities (including preferred stocks). The Portfolio may invest
up to 35% of its assets in securities rated below Baa by Moody's Investor's
Service, Inc. or BBB by Standard & Poor's Corporation or determined by Mentor
Advisors to be of comparable quality. 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 Mentor Advisors to be of comparable quality, if Mentor
Advisors 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 Mentor Advisors 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
-3-
<PAGE>
rated below Baa by Moody's or BBB by Standard & Poor's are considered to be of
poor standing and predominantly speculative. 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 hereto. See "Lower-rated securities," below.
At times, Mentor Advisors 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 Mentor Advisors 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 increase the portion of its assets
invested in money market instruments and in U.S. Governments or agency
obligations, or invest in any other fixed-income security Mentor Advisors
considers consistent with such defensive strategies. It is impossible to predict
when, or for how long, the Portfolio will use such alternative strategies.
Mortgage-backed securities; other asset-backed securities. The
Portfolio may invest a substantial portion of its assets in mortgage-backed
certificates and may invest in other securities representing ownership interests
in mortgage pools, including CMOs and "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.
The Portfolio 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. The Portfolio may invest in both the interest-only -- or
"IO" -- class and the principal- only -- or "PO" -- class. The yield to maturity
and price of an IO class 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, the Portfolio may under some
circumstances fail to fully recoup its initial investment in these securities.
Conversely, POs tend to increase in value if prepayments are greater than
anticipated and decline if prepayments are slower than anticipated. The
secondary market for stripped mortgage-backed securities may be more volatile
and less liquid than that for other mortgage-backed securities, potentially
limiting the Portfolio's ability to buy or sell those securities at any
particular time.
-4-
<PAGE>
Certain mortgage-backed securities held by the Portfolio may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may also invest in securities representing interests in
other types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security interest
in the underlying assets may be limited. For example, the laws of certain states
may prevent or restrict repossession of collateral from a debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
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
Portfolio may invest in new types of mortgage-related securities that may be
developed and marketed from time to time. If the Portfolio 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 Portfolio 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.
The Portfolio's investment 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, the Portfolio's investment adviser
may be required to estimate the value of such a security using quotations
provided by pricing services or securities dealers making a market in such
securities, or based on other comparable securities or other bench-mark
securities or interest rates. Mortgage-backed and other asset-backed securities
in which the Portfolio may invest may be highly illiquid, and the Portfolio may
not be able to sell such a security at a particular time or at the value it has
placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, the Portfolio's investment 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 the
Portfolio's investment 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 the Portfolio will recover the entire amount of the principal
paid by it to purchase any such securities.
-5-
<PAGE>
Investments in 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 Portfolio. The lower ratings of certain
securities held by the 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 the Portfolio more
volatile and could limit the Portfolio's ability to sell its securities at
prices approximating the values the Portfolio had placed on such securities. 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, the 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.
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. The Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although Mentor Advisors will monitor the
investment to determine whether continued investment in the security will assist
in meeting the 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 the Portfolio invests 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.
The Portfolio may invest in securities which trade infrequently or in
more limited volume than higher- rated securities (including illiquid
securities), or in securities which are restricted as to resale. In addition, a
substantial portion of the 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, holds a major portion or all of
such securities, which may limit the liquidity of such securities. The Portfolio
could find it difficult or impossible to sell illiquid securities when Mentor
Advisors 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 the
Portfolio's net asset value. In order to enforce its rights in the event of a
default under securities in cases where the Portfolio holds a major portion or
all of the outstanding issue, the 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
-6-
<PAGE>
Portfolio's net asset value. The 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. The Portfolio
will not invest more than 15% of its assets (determined at the time of
investment) in securities determined to be illiquid.
The Portfolio may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" 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. 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. 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. Both zero-coupon and
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 such bonds do not pay
current interest in cash, the Portfolio is nonetheless required for Federal
income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates, the
Portfolio may not be able to reinvest the proceeds in securities providing the
same investment return as the securities redeemed.
The Portfolio may at times invest in securities bearing coupon rates
higher than prevailing market rates. Such "premium" securities are typically
purchased at prices greater than the principal amounts payable on maturity. The
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, the Portfolio may recognize a capital loss to the
extent the call or sale price is less than the purchase price. Additionally, the
Portfolio will recognize a capital loss if its holds such securities to
maturity.
Mentor Advisors seeks to minimize the risks involved in investing in
lower-rated securities through diversification and careful investment analysis.
When the Portfolio invests in high yield securities in the lower rating
categories, achievement of the Portfolio's goals depends more on Mentor
Advisors's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories.
Other investment practices and risks
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of certain of these practices and risks they may involve.
Leverage. The Portfolio may borrow money to invest in additional
securities to seek current income. This technique, known as "leverage,"
increases the Portfolio's market exposure and risk and may result in losses.
When the Portfolio has borrowed money for leverage and its investments increase
or decrease in value, its net asset value will normally increase or decrease
more than if it had not borrowed money for this purpose. The interest that the
Portfolio must pay on borrowed money will reduce its net investment income, and
may also either offset any potential capital gains or increase any losses. The
Portfolio currently intends to use leverage in order to adjust the
dollar-weighted average duration of its portfolio. The Portfolio will not always
borrow money for investment and the extent to which the Portfolio will borrow
money, and the amount it may borrow, depends on market conditions and interest
rates. Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse" repurchase agreements,
"dollar-roll" transactions, and forward commitments, described above) that can
exist at any one time will not exceed one-third of the value of the Portfolio's
total assets.
-7-
<PAGE>
Reverse repurchase agreements; forward commitments. The Portfolio may
enter into "reverse" repurchase agreements with respect to up to one-third of
its assets. "Reverse" repurchase agreement generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the securities
at an agreed-upon price, date, and interest payment. The Portfolio may also
enter into forward commitments, in which the Portfolio buys securities for
future delivery. Reverse repurchase agreements and forward commitments involve
leverage, and may increase the Portfolio's overall investment exposure. Their
use by the Portfolio may result in losses.
Dollar roll transactions. In order to enhance portfolio returns and
manage prepayment risks, the Portfolio may engage in dollar roll transactions
with respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In
a dollar roll transaction, the Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (i.e., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon price.
The mortgage-related securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories. Dollar-roll transactions may
increase overall investment exposure and may result in losses.
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, the Portfolio may enter into interest rate swaps
and other interest rate transactions, such as interest rate caps, floors, and
collars. Interest rate swaps involve the exchange by the Portfolio with another
party of different types of interest-rate streams (e.g. an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. The Portfolio intends to use
these interest rate transactions as a hedge and not as a speculative investment.
The Portfolio's ability to engage in certain interest rate transactions may be
limited by tax considerations. The use of interest rate swaps and other interest
rate transactions is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Portfolio's investment adviser is incorrect in
its forecasts of market values, interest rates, or other applicable factors, the
investment performance of the Portfolio would be less favorable than it would
have been if this investment technique were not used.
Premium securities. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although the Portfolio generally amortizes the amount of
any such premium into income, the Portfolio may recognize a capital loss if such
premium securities are called or sold prior to maturity and the call or sale
price is less than the purchase price. Additionally, the Portfolio may recognize
a capital loss if it holds such securities to maturity.
Options and futures. The Portfolio may buy and sell call and put
options to hedge against changes in net asset value or to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return.
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize
-8-
<PAGE>
these instruments effectively for the purposes stated above. Transactions in
options and futures involve certain risks which are described below and in the
Statement of Additional Information.
Index futures and options. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index future"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of the
index between the time when the Portfolio enters into and terminates an index
futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return.
Risks related to options and futures strategies. Options and futures
transactions involve costs and may result in losses. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or the securities held by the Portfolio that are the subject of a hedge.
The successful use by the Portfolio of the strategies described above further
depends on the ability of Mentor Advisors to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out futures and options positions. Although the Portfolio will enter into
options and futures transactions only if Mentor Advisors believes that a liquid
secondary market exists for such options or futures contract, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. Certain provisions of the Internal
Revenue Code may limit the Portfolio's ability to engage in options and futures
transactions.
The Portfolio generally expects that its options transactions will be
conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of Mentor Advisors, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually not
more than one week), which the seller agrees to repurchase at a fixed time and
price, representing the Portfolio's cost plus interest. Under a securities loan,
the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party should become involved in bankruptcy or
insolvency proceedings, it is possible that the Portfolio may be treated as an
unsecured creditor and be required to return the underlying collateral to the
other party's estate.
-9-
<PAGE>
Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective and
policies described herein are not fundamental and may be changed by the Trustees
without shareholder approval. All percentage limitations on investments will
apply at the time of investment and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of the
investment.
Management
The Trustees of Mentor Funds (the "Trust") are responsible for
generally overseeing the conduct of the Portfolio's business. Mentor Investment
Advisors, LLC located at 901 East Byrd Street, Richmond, Virginia 23219, acts as
investment adviser to the Portfolio. Mentor Investment Group, LLC ("Mentor
Investment Group") serves as administrator to the Portfolio. As compensation for
its services as administrator, the Fund pays Mentor Investment Group a fee,
accrued daily and paid monthly, at an annual rate of 0.10% of the average value
of the Portfolio's daily assets.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group
which is in turn a subsidiary of Wheat First Butcher Singer, Inc. ("Wheat First
Butcher Singer"), a diversified financial services holding company. Wheat First
Butcher Singer, through other subsidiaries, also engages in securities
brokerage, investment banking, and related businesses. EVEREN Capital
Corporation has a 20% ownership in Mentor Investment Group and may acquire
additional ownership based principally on the amount of Mentor Investment
Group's revenues derived from assets attributable to clients of EVEREN
Securities, Inc. and its affiliates. Mentor Advisors and its affiliates serve as
investment adviser to over twenty separate investment portfolios in the Mentor
Family of Funds with total assets under management of more than $11 billion. All
investment decisions for the Portfolio are made by investment teams at Mentor
Advisors.
Mentor Investment Group has informed the Portfolio that Wheat First
Butcher Singer will be acquired by First Union Corp. ("First Union"), in a
transaction expected to occur as early as January 31, 1998. First Union is a
global financial services company with approximately $140 billion in assets and
$10 billion in total stockholders' equity. The proposed arrangement does not
contemplate any changes in the management or operations of Mentor Investment
Group or any of its subsidiaries, including Mentor Advisors.
Subject to the general oversight of the Trustees, Mentor Advisors
manages the Portfolio in accordance with the stated policies of the Portfolio.
Mentor Advisors makes investment decisions for the Portfolio and places the
purchase and sale orders for the Portfolio's portfolio transactions. In
selecting broker-dealers, Mentor Advisors may consider research and brokerage
services furnished to it and its affiliates. Subject to seeking the best overall
terms available, Mentor Advisors may consider sales of shares of the Portfolio
(and, if permitted by law, of other funds in the Mentor family) as a factor in
the selection of broker-dealers to execute portfolio transactions for the
Portfolio. Mentor Advisors may at times cause the Portfolio to pay commissions
to broker-dealers affiliated with Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise
allocated to the Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and its
subsidiaries, Securities and Exchange Commission fees and related expenses,
state Blue Sky qualification fees, charges of the custodian and transfer and
dividend disbursing agents, outside auditing, accounting, and legal services,
certain investor servicing fees and expenses, charges for the printing of
prospectuses and statements of additional information for regulatory purposes or
for distribution to shareholders, certain shareholder report charges, and
charges relating to corporate matters, are borne by the Portfolio.
Portfolio turnover. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Portfolio may lead to frequent changes in
-10-
<PAGE>
the Portfolio's investments, particularly in periods of volatile market
movements. A change in the securities held by the Portfolio is known as
"portfolio turnover." Portfolio turnover generally involves some expense to the
Portfolio, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and reinvestment in other
securities. Such sales may result in realization of taxable capital gains. The
Portfolio's annual portfolio turnover rate is expected to be not more than 200%
for the current fiscal year.
How the Portfolio values its shares
The Portfolio calculates the net asset value of its shares of each
class by dividing the total value of its assets attributable to that class, less
liabilities attributable to that class, by the number of shares of the class
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which has been determined to approximate the fair market value
of such investments. All other securities and assets are valued at their fair
values. The net asset value for Class A shares will generally differ from that
of Class B shares due to the variance in daily net income realized by and
dividends paid on each class of shares, and any differences in the expenses of
the different classes.
Sales arrangements
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
Class A shares. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to buy shares --- Class A
shares."
Class B shares. Class B shares are sold without an initial sales
charge, but are subject to a CDSC of up to 4% if redeemed within five years.
Class B shares also bear 12b-1 fees. Class B shares provide an investor the
benefit of putting all of the investor's money to work from the time the
investment is made, but have a higher expense ratio and pay lower dividends than
Class A shares due to the 12b-1 fees. If you purchase shares through an
asset-allocation program, you may also be eligible to purchase Class B shares
through the "BL Purchase Program." See "How to buy shares --- Class B shares."
Which arrangement is for you? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. Investors purchasing shares through an asset-allocation program
may wish to purchase shares through the BL Purchase Program. For more
information about these sales arrangements, consult your investment dealer or
Mentor Distributors, LLC (the "Distributor"). Sales personnel may receive
different compensation depending on which class of shares they sell. Shares may
only be exchanged for shares of the same class of certain other funds in the
Mentor family and for shares of Cash Resource U.S. Government Money Market Fund.
See "How to exchange shares."
How to buy shares
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little as $100. Investments under
IRAs and qualified retirement plans are subject to a minimum initial investment
of $250. The minimum initial investment may be waived for current and retired
Trustees, and current and retired employees of the Trust, Mentor Investment
Group or its affiliates. You can buy Portfolio shares by
-11-
<PAGE>
completing the enclosed New Account Form and sending it to Boston Financial
Data Services ("BFDS) at 2 Heritage Drive, North Quincy, Massachusetts 02171,
along with a check or money order made payable to Mentor 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
Investment Group can refer you to one.
Automatic investment plan. Once you have made the initial minimum
investment in the Portfolio, you can make regular investments of $50 or more on
a monthly or quarterly basis through automatic deductions from your bank
checking account. Application forms are available from your investment dealer or
through the Distributor.
Shares are sold at a price based on the Portfolio's net asset value
next determined after the Distributor receives your purchase order. In most
cases, in order to receive that day's public offering price, the Distributor
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 the Distributor 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 the Distributor. The current sales charges
for Class A shares of the Portfolio are as follows:
<TABLE>
<CAPTION>
Sales Charge as Sales Charge as
a Percentage of a Percentage of
Public Offering Net Amount Dealer
Price Invested Commission*
--------------- --------------- -----------
<S> <C>
Less than $50,000.............................. 5.75% 5.82% 5.00%
$50,000 but less than $100,000................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000................ 3.75% 3.90% 3.00%
$250,000 but less than $500,000................ 3.00% 3.09% 2.50%
$500,000 but less than $1 million.............. 2.00% 2.04% 1.75%
$1 million or more............................. 0% 0% (see below)
</TABLE>
- ----------------------
* At the discretion of the Distributor, the entire sales charge may at times be
reallowed to dealers. The Staff of the Securities and Exchange Commission has
indicated that dealers who receive more than 90% of the sales charge may be
considered underwriters.
There is no initial sales charge on purchases of Class A shares of $1
million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. A CDSC is also imposed on any shares purchased
without a sales charge as part of a purchase of shares of $1 million or more
under a purchase accumulation plan. Contact the Distributor for more
information.
You may be eligible to buy Class A shares at reduced sales charges.
Consult your investment dealer or the Distributor for details about Quantity
Discounts and Accumulated Purchases, Letters of Intent, the Reinvestment
Privilege, Concurrent Purchases, and the Automatic Investment Plan. Descriptions
are also included in the New Account Form. Shares may be sold at net asset value
to certain categories of investors, including to shareholders of other mutual
funds who invest in the Portfolio in response to certain promotional activities,
and the CDSC may be waived under certain circumstances. The sales charges shown
above will not apply to shares purchased by you if you purchase shares through
EVEREN Securities, Inc. with the redemption proceeds received by you within the
preceding 90 days from the sale of shares of any non- Mentor open-end mutual
fund. No CDSC will apply to these purchases. EVEREN Securities, Inc. may
-12-
<PAGE>
compensate your investment dealer in connection with any such purchase. Sales
charges may similarly not apply to shares purchased through other financial
institutions that have made arrangements with Mentor Distributors. Contact your
financial institution or Mentor Distributors for more information. See "How to
buy shares --- General" below.
Class B Shares. Class B shares are sold without an initial sales
charge, although a CDSC will be imposed if you redeem shares within five years
of purchase. The following types of shares may be redeemed without charge: (i)
shares acquired by reinvestment of distributions and (ii) shares otherwise
exempt from the CDSC, as described in the Example below. The amount of CDSC is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. The amount of the CDSC will depend on the number
of years since you invested in the shares being redeemed and the dollar amount
being redeemed, according to the following table:
Years Since Purchase Payment Made CDSC
--------------------------------- -----
1 4.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6 1.0%
7+ None
The BL Purchase Program. If you purchase Class B shares through an
asset-allocation program sponsored by your broker-dealer or other financial
institution, you may elect to participate in the BL Purchase Program. Shares
purchased through this program are not subject to the CDSC shown above. Rather,
a CDSC of 1.00% will be imposed on redemptions of such shares within the first
year after purchase, based on the lower of the shares' cost and current net
asset value. Your broker-dealer or other financial institution is responsible
for making the election on your behalf to invest through the Program.
Accordingly, if you wish to purchase shares through this Program, you should
instruct your broker-dealer or financial institution to do so.
General. Mentor Distributors, LLC, located at 901 East Byrd
Street, Richmond, Virginia 23219, serves as distributor of the Portfolio's
shares. The Distributor is not obligated to sell any specific amount of shares
of the Portfolio. The Distributor's telephone number is 1-800-869-6042.
A Portfolio may sell its Class A shares without a sales charge and
may waive the CDSC on shares redeemed by the Trust's current and retired
Trustees (and their families), current and retired employees (and their
families) of Mentor Investment Group, Mentor Advisors, and their affiliates,
registered representatives and other employees (and their families) of
broker-dealers having sales agreements with the Distributor, employees (and
their families) of financial institutions having sales agreements with the
Distributor (or otherwise having an arrangement with a broker-dealer or
financial institution with respect to sales of Portfolio shares), financial
institution trust departments investing an aggregate of $1 million or more in
one or more funds in the Mentor family, clients of certain administrators of
tax-qualified plans, employer-sponsored retirement plans, tax-qualified plans
when proceeds from repayments of loans to participants are invested (or
reinvested) in funds in the Mentor family, shares redeemed under the Portfolio's
Systematic Withdrawal Plan (limited to 10% of a shareholder's account in any
calendar year), and "wrap accounts" for the benefit of clients of financial
planners adhering to certain standards established by Mentor Investment Group or
its affiliates. The Portfolio may sell shares without a sales charge or a CDSC
in connection with the acquisition by the Portfolio of assets of an investment
company or personal holding company. In addition, the CDSC may be waived in the
case of (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, including the shares of a shareholder who owns the shares with his or
her spouse as joint tenants with right of survivorship, provided that the
redemption is requested within one year of the death or initial determination of
disability; (ii) redemptions in connection with the following retirement plan
distributions: (a) lump-sum or other distributions from a qualified retirement
plan following retirement, (b) distributions from an IRA, Keogh Plan, or
Custodial Account under Section 403(b)(7) of the Internal Revenue Code following
attainment of age 59 1/2, and (c) a tax-free return on an excess contribution to
an IRA; (iii)
-13-
<PAGE>
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. The Portfolio may sell its
Class A shares without a sales charge to shareholders of other mutual funds who
invest in other funds in the Mentor family in response to certain promotional
activities (in which case a CDSC of 1% may apply for a period of years after
purchase). Contact the Distributor for more information. If you invest through a
broker-dealer or other financial institution, your broker-dealer or other
financial institution will be responsible for electing on your behalf to take
advantage of any of these reduced sales charges or waivers described above.
Please instruct your broker-dealer or other financial institution accordingly.
Shareholders of other funds in the Mentor family may be entitled
to exchange their shares for, or reinvest distributions from their funds in,
shares of the Portfolio at net asset value.
In determining whether a CDSC is payable in respect of the shares
redeemed, the Portfolio will first redeem the shares held longest (together with
any shares received upon reinvestment of distributions with respect to those
shares). Any of the shares being redeemed which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing capital
appreciation will not be subject to a CDSC. See the Example below.
Example:
You have purchased 100 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
The Distributor receives the entire amount of any CDSC you pay.
Consult the Distributor for more information.
If you are considering redeeming or exchanging shares of the
Portfolio or transferring shares to another person shortly after purchase, you
should pay for those shares with a certified check to avoid any delay in
redemption, exchange, or transfer. Otherwise the Portfolio may delay payment
until the purchase price of those shares has been collected or, if you redeem by
telephone, until 15 calendar days after the purchase date.
Because of the relatively high cost of maintaining accounts, the
Portfolio reserves the right to redeem, upon not less than 60 days' notice, any
Portfolio account below $500 as a result of redemptions. A shareholder may,
however, avoid such a redemption by the Portfolio by increasing his investment
in shares of the Portfolio to a value of $500 or more during such 60-day period.
The Distributor, Mentor Advisors, and affiliates thereof, at their
own expense and out of their own assets, may also provide other compensation to
dealers in connection with sales of the Portfolio. Compensation may also
include, but is not limited to, financial assistance to dealers in connection
with
-14-
<PAGE>
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of the Portfolio's
shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. Certain dealers may not sell all classes
of shares.
In all cases Mentor Advisors and the Distributor reserve the
right to reject any particular investment.
Reinvestment Privilege. If you redeem Class A or B shares of the
Portfolio, you have a one-time right, within 60 days, to reinvest the redemption
proceeds plus the amount of CDSC you paid, if any, at the next-determined net
asset value. Front-end sales charges will not apply to such reinvestment. The
Distributor must be notified in writing by you or by your financial institution
of the reinvestment for you to recover the CDSC, or to eliminate the front-end
sales charge. If you redeem shares in the Portfolio, there may be tax
consequences.
Distribution Plan (Class B Shares)
The Distributor is not obligated to sell any specific amount of
shares of the Portfolio.
The Portfolio has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 with respect to its Class B shares (the "Plan") providing for
payments by the Portfolio to the 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 Plan for such periods as they may determine. The
Distributor also receives the proceeds of any CDSC imposed on redemptions of
shares.
Payments under the Plan are intended to compensate the Distributor
for services provided and expenses incurred by it as principal underwriter of
the Portfolio's Class B shares. The 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 Portfolio. Financial institutions will receive fees from the 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 the Distributor. The Distributor may suspend or modify such
payments to dealers. Such payments are also subject to the continuation of the
Plan, the terms of any agreements between dealers and the Distributor, and any
applicable limits imposed by the National Association of Securities Dealers,
Inc.
How to sell shares
You can sell your shares to the Portfolio any day the New York
Stock Exchange is open, either directly to the Portfolio or through your
investment dealer. The Portfolio will only redeem shares for which it has
received payment.
Selling shares directly to the Portfolio. Send a signed letter of
instruction and stock power form, along with any certificates that represent
shares you want to sell, to Mentor Funds, c/o BFDS, 2 Heritage Drive, North
Quincy, Massachusetts 02171. The price you will receive is the net asset value
next calculated after your request is received in proper form less any
applicable CDSC. In order to receive that day's net asset value, your request
must be received before the close of regular trading on the New York Stock
Exchange. If you sell shares having a net asset value of $50,000 or more or if
you want your redemption proceeds payable to you at a different address or to
someone else, the signatures of registered owners or their legal representatives
must be guaranteed by a bank, broker-dealer, or certain other financial
institutions. Contact Mentor Distributors for more information about where to
obtain a signature guarantee.
-15-
<PAGE>
Stock power forms are available from your investment dealer, the Distributor,
and many commercial banks. The Distributor usually requires additional
documentation for the sale of shares by a corporation, partnership, agent,
fiduciary, or surviving joint owner. Contact the Distributor for details.
Selling shares by telephone. You may use the Telephone Redemption
Privilege to redeem shares from your account unless you have notified the
Distributor of an address change within the preceding 15 days. Unless an
investor indicates otherwise on the New Account Form, the Distributor will be
authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide the Distributor with his or her account
registration and address as it appears on the Distributor's records. The
Distributor will employ these and other reasonable procedures to confirm that
instructions communicated by telephone are genuine; if it fails to employ
reasonable procedures, the Distributor may be liable for any losses due to
unauthorized or fraudulent instructions. For more information, consult the
Distributor. During periods of unusual market changes and shareholder activity,
you may experience delays in contacting the Distributor by telephone in which
case you may wish to submit a written redemption request, as described above, or
contact your investment dealer, as described below. The Telephone Redemption
Privilege may be modified or terminated without notice.
Selling shares through your investment dealer. Your dealer and the
Distributor 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 the Distributor,
and may charge you for its services.
Systematic Withdrawal Program. You may redeem Class A or B shares
of the Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program are
not subject to a CDSC, but the aggregate withdrawals of Class B shares in any
year are limited to 10% of the value of the account at the time of enrollment.
Contact the Distributor for more information.
General. The Portfolio generally sends you payment for your shares
the business day after your request is received. Under unusual circumstances,
the Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption by making payment
in whole or in part in securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
How to exchange shares
Except as otherwise described below, you can exchange your shares
in the Portfolio worth at least $1,000 for shares of the same class of certain
other Portfolios of Mentor Funds, with different investment objectives and
policies, at net asset value beginning 15 days after purchase. You may also
exchange shares of the Portfolio for shares of Cash Resource U.S. Government
Money Market Fund (the "Cash Fund"). If you exchange shares subject to a CDSC,
the transaction will not be subject to a CDSC. However, when you redeem the
shares acquired through the exchange, the redemption may be subject to the CDSC,
depending upon when you originally purchased the shares, using the schedule of
the Portfolio from which your first exchange was effected. For purposes of
computing the CDSC, the length of time you have owned your shares will be
measured from the date of original purchase and will not be affected by any
exchange. (If you exchange your shares for shares of the Cash Fund, the period
when you hold shares of the Cash Fund will not be included in calculating the
length of time you have owned the shares subject to the CDSC, and any CDSC
payable on redemption of your shares
-16-
<PAGE>
will be reduced by the amount of any payment collected by the Cash Fund under
its distribution plan in respect of those shares. Contact the Distributor for
information.)
To exchange your shares, simply complete an Exchange Authorization
Form and send it to Mentor Funds, c/o BFDS, 2 Heritage Drive, North Quincy,
Massachusetts 02171. Exchange Authorization Forms are available by calling or
writing the Distributor. 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 Distributor's procedures for
telephonic transactions are described above under "How to sell shares." The
Telephone Exchange Privilege is not available if you were issued certificates
for shares which remain outstanding. Ask you investment dealer or the
Distributor for a prospectus relating to other Portfolios of Mentor Funds or the
Cash Fund. Shares of certain of the Portfolios may not be available to residents
of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management and
have an adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where the Distributor or the Trustees
believe doing so would be in the best interests of the Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. Consult the
Distributor before requesting an exchange by calling 1-800-869-6042. Contact the
Distributor to find out more about the exchange privilege.
How distributions are made
The Portfolio distributes net investment income and any net
realized capital gains at least annually. Distributions from capital gains are
made after applying any available capital loss carryovers. All Portfolio
distributions will be invested in additional Portfolio shares, unless the
shareholder instructs the Portfolio otherwise.
Taxes
The Portfolio intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as
ordinary income, except that any distributions of net capital gain will be taxed
as long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Pursuant to the Taxpayer
Relief Act of 1997, long-term capital gains generally will be subject
to a maximum tax rate of 28% or 20% depending upon the holding period
of the Portfolio investment generating the gains. Distributions will be taxable
as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year the Trust will notify
shareholders of the amount and tax status of distributions paid by the Portfolio
for the preceding year. In buying or selling securities for the Portfolio,
Mentor Advisors will not normally take into account the effect any purchase or
sale of securities will have on the tax positions of the Portfolio's
shareholders.
Shareholders of the Portfolio who are U.S. citizens or residents
may be able to claim a foreign tax credit or deduction on their U.S. income tax
returns with respect to foreign taxes paid by the Portfolio. If, at the end of
the fiscal year of the Portfolio, more than 50% of the Portfolio's total assets
are represented by securities of foreign corporations, the Portfolio intends to
make an election permitted by the Internal Revenue Code to treat any foreign
taxes it paid as paid by its shareholders. In that case, shareholders who are
U.S. citizens, U.S. corporations, and, in some cases, U.S. residents will be
required to include in U.S. taxable income their pro rata share of such taxes,
but may then be entitled to claim a foreign tax credit or deduction (but not
both) for their share of such taxes.
The foregoing is a summary of certain federal income tax
consequences of investing in the Portfolio. Dividends and distributions also may
be subject to state and local taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state, or local taxes.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
-17-
<PAGE>
Other services
Shareholder Servicing Plan. The Trust has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to the Class A and Class B
shares of the Portfolio. Under the Service Plan, financial institutions will
enter into shareholder service agreements with the Trust to provide
administrative support services to their customers who are Portfolio
shareholders. In return for providing these support services, a financial
institution may receive payments at a rate not exceeding 0.25% of the average
daily net assets of the Class A or Class B shares of the Portfolio. These
administrative services may include, but are not limited to, the following
functions: providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer personnel, as necessary
or beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Portfolio; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Portfolio reasonably
requests.
In addition to receiving payments under the Service Plan,
financial institutions may be compensated by Mentor Advisors and/or Mentor
Investment Group, or affiliates thereof, for providing administrative support
services to holders of Class A or Class B shares of the Portfolio. These
payments will be made directly by Mentor Advisors and/or Mentor Investment Group
and will not be made from the assets of the Portfolio.
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 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 more
than ten series, one representing the Portfolio, the others representing other
Portfolios with varying investment objectives and policies. Only Class A and
Class B shares of the Portfolio are being offered by this Prospectus. The
Portfolio also offers other classes of shares with different sales charges and
expenses. Because of these different sales charges and expenses, the investment
performance of the classes will vary. For more information, including your
eligibility to purchase any other class of shares, contact the Distributor.
Each share has one vote, with fractional shares voting
proportionally. Shares of each series will vote together as a single series
except when required by law or determined by the Trustees. Shares of the
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets of
the Portfolio. The Trust may suspend the sale of shares at any time and may
refuse any order to purchase shares. Although neither the Portfolio nor the
Trust is required to hold annual meetings of shareholders, shareholders have the
right to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Agreement and Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not
issue certificates for its shares except at the shareholder's request.
-18-
<PAGE>
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 BFDS, 2 Heritage Drive, North Quincy, Massachusetts 02171,
serves as the Portfolio's transfer and dividend agent.
Performance Information
Yield and total return data may from time to time be included in
advertisements about Class A and Class B shares of the Portfolio. The
Portfolio's "yield" for each class of shares is calculated by dividing the
Portfolio's annualized net investment income per share during a recent 30-day
period by the maximum public offering price per share on the last day of that
period. "Total return" for the one-, five- and ten-year periods (or for the life
of 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 at the maximum public offering price (in the case of Class A shares)
and reflecting (in the case of Class B shares) the deduction of any applicable
CDSC. Total return may also be presented for other periods or based on
investment at reduced sales charge levels or at net asset value. Investment
performance of different classes of shares of the Portfolio will differ. Any
quotation of investment performance not reflecting the maximum initial sales
charge or CDSC would be reduced if such sales charges were reflected. Quotations
of yield and total return for a period when an expense limitation was in effect
will be greater than if the limitation had not been in effect. The Portfolio's
performance may be compared to various indices. See the Statement of Additional
Information. Information may be presented in advertisements about the Portfolio
describing the background and professional experience of the Portfolio's
investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and
does not predict future performance. Investment performance, which will vary, is
based on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These factors
should be considered when comparing the Portfolio's investment results to those
of other mutual funds and other investment vehicles.
-19-
<PAGE>
APPENDIX
SECURITIES RATINGS
The following rating services describe rated securities as follows:
MOODY'S INVESTORS SERVICE, INC.
BONDS
AAA -- Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated BAA are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
A-1
<PAGE>
CA -- Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S
BONDS
AAA -- Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree. A 4 Debt
rated 'A' has a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for bonds in higher-rated categories.
BB-B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB -- Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B -- Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC -- Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
A-2
<PAGE>
CC -- The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C -- The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
D -- Bonds rated 'D' are in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be used
on the filing of a bankruptcy petition if debt service payments are jeopardized.
A-3
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the
office of the Commission.
Table of Contents
Expense summary...........................................................2
Investment objective and policies.........................................3
Other investment practices and risks......................................5
Management................................................................6
How the Portfolio values its shares.......................................7
Sales arrangements........................................................8
How to buy shares.........................................................8
Distribution Plan (Class B Shares).......................................12
How to sell shares.......................................................12
How to exchange shares...................................................13
How distributions are made...............................................14
Taxes....................................................................14
Other services...........................................................14
General information......................................................15
Performance information..................................................15
MENTOR
INCOME
PORTFOLIO
Class A and Class B Shares
----------
PROSPECTUS
----------
April ___, 1998
Mentor Distributors, LLC
Distributor
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 30, 1998
PROSPECTUS April ___, 1998
Institutional Class
MENTOR INCOME PORTFOLIO
Mentor Income Portfolio seeks high current income. As a secondary
objective, the Portfolio seeks preservation of capital, to the extent consistent
with its objective of seeking high current income. Mentor Investment Advisors,
LLC in the Portfolio's investment advisor. The Portfolio is a series of shares
of Mentor Funds.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. Investors can find more detailed
information in the April ___, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement, call Mentor
Investment Group, LLC at 1-800-869-6042. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
-------------------------
MENTOR DISTRIBUTORS, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
-1-
<PAGE>
Expense summary
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur in
its first full fiscal year. The Example shows the cumulative expenses
attributable to a hypothetical $1,000 investment in the Portfolio over specified
periods.
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
(as a percentage of average net assets)
Management Fees 0.60%
12b-1 Fees 0.00%
Other Expenses (after expense limitation)* 0.33%
----
Total Portfolio Operating Expenses (after 1.33%
expense limitation)*
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation. In the absence of the expense limitation, Other Expenses are
expected to be ____% and Total Portfolio Operating Expenses are expected to be
____%.
Example
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
1 year $
3 years $
This information is provided to help investors understand the expenses of
investing in the Portfolio and an investor's share of the estimated operating
expenses of the Portfolio. The Example should not be considered a representation
of future performance; actual expenses may be more or less than those shown.
Investment objective and policies
The Portfolio's investment objective is to seek high current income. As
a secondary objective, the Portfolio seeks preservation of capital, to the
extent consistent with its objective of seeking high current income.
The Portfolio may invest in debt securities, including both government
and corporate obligations, preferred stocks, and dividend-paying common stocks.
The Portfolio will also likely at times hold a substantial portion of its assets
in mortgage-backed and other asset-backed securities. The Portfolio may also
hold a portion of its assets in cash or money-market instruments.
-2-
<PAGE>
The Portfolio may invest in securities of any maturity. Mentor Advisors
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.
The Portfolio may invest in both higher-rated and lower-rated
fixed-income securities (including preferred stocks). The Portfolio may invest
up to 35% of its assets in securities rated below Baa by Moody's Investor's
Service, Inc. or BBB by Standard & Poor's Corporation or determined by Mentor
Advisors to be of comparable quality. 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 Mentor Advisors to be of comparable quality, if Mentor
Advisors 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 Mentor Advisors 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 rated below Baa by Moody's or BBB by Standard &
Poor's are considered to be of poor standing and predominantly speculative.
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 hereto. See
"Lower-rated securities," below.
At times, Mentor Advisors 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 Mentor Advisors 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 increase the portion of its assets
invested in money market instruments and in U.S. Governments or agency
obligations, or invest in any other fixed-income security Mentor Advisors
considers consistent with such defensive strategies. It is impossible to predict
when, or for how long, the Portfolio will use such alternative strategies.
Mortgage-backed securities; other asset-backed securities. The
Portfolio may invest a substantial portion of its assets in mortgage-backed
certificates and may invest in other securities representing ownership interests
in mortgage pools, including CMOs and "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
-3-
<PAGE>
significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
The Portfolio 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. The Portfolio may invest in both the interest-only -- or
"IO" -- class and the principal- only -- or "PO" -- class. The yield to maturity
and price of an IO class 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, the Portfolio may under some
circumstances fail to fully recoup its initial investment in these securities.
Conversely, POs tend to increase in value if prepayments are greater than
anticipated and decline if prepayments are slower than anticipated. The
secondary market for stripped mortgage-backed securities may be more volatile
and less liquid than that for other mortgage-backed securities, potentially
limiting the Portfolio's ability to buy or sell those securities at any
particular time.
Certain mortgage-backed securities held by the Portfolio may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may also invest in securities representing interests in
other types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security interest
in the underlying assets may be limited. For example, the laws of certain states
may prevent or restrict repossession of collateral from a debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
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
Portfolio may invest in new types of mortgage-related securities that may be
developed and marketed from time to time. If the Portfolio 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 Portfolio 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.
The Portfolio's investment 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
-4-
<PAGE>
the values of such securities accurately. In such cases, the Portfolio's
investment adviser may be required to estimate the value of such a security
using quotations provided by pricing services or securities dealers making a
market in such securities, or based on other comparable securities or other
bench-mark securities or interest rates. Mortgage-backed and other asset-backed
securities in which the Portfolio may invest may be highly illiquid, and the
Portfolio may not be able to sell such a security at a particular time or at the
value it has placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, the Portfolio's investment 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 the
Portfolio's investment 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 the Portfolio will recover the entire amount of the principal
paid by it to purchase any such securities.
Investments in 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 Portfolio. The lower ratings of certain
securities held by the 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 the Portfolio more
volatile and could limit the Portfolio's ability to sell its securities at
prices approximating the values the Portfolio had placed on such securities. 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, the 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.
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. The Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although Mentor Advisors will monitor the
investment to determine whether continued investment in the security will assist
in meeting the 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 the Portfolio invests are issued to raise funds
in connection with the acquisition of a company, in so-called "leveraged
buy-out" transactions. The
-5-
<PAGE>
highly leveraged capital structure of such issuers may make them especially
vulnerable to adverse changes in economic conditions.
The Portfolio may invest in securities which trade infrequently or in
more limited volume than higher- rated securities (including illiquid
securities), or in securities which are restricted as to resale. In addition, a
substantial portion of the 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, holds a major portion or all of
such securities, which may limit the liquidity of such securities. The Portfolio
could find it difficult or impossible to sell illiquid securities when Mentor
Advisors 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 the
Portfolio's net asset value. In order to enforce its rights in the event of a
default under securities in cases where the Portfolio holds a major portion or
all of the outstanding issue, the 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. The 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. The Portfolio
will not invest more than 15% of its assets (determined at the time of
investment) in securities determined to be illiquid.
The Portfolio may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" 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. 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. 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. Both zero-coupon and
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 such bonds do not pay
current interest in cash, the Portfolio is nonetheless required for Federal
income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates, the
Portfolio may not be able to reinvest the proceeds in securities providing the
same investment return as the securities redeemed.
The Portfolio may at times invest in securities bearing coupon rates
higher than prevailing market rates. Such "premium" securities are typically
purchased at prices greater than the principal amounts payable on maturity. The
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, the Portfolio may recognize a capital loss to the
extent the call or sale price is less than the purchase price. Additionally, the
Portfolio will recognize a capital loss if its holds such securities to
maturity.
Mentor Advisors seeks to minimize the risks involved in investing in
lower-rated securities through diversification and careful investment analysis.
When the Portfolio invests in high yield securities in the lower rating
categories, achievement of the Portfolio's goals depends more on Mentor
Advisors's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories.
Other investment practices and risks
-6-
<PAGE>
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of certain of these practices and risks they may involve.
Leverage. The Portfolio may borrow money to invest in additional
securities to seek current income. This technique, known as "leverage,"
increases the Portfolio's market exposure and risk and may result in losses.
When the Portfolio has borrowed money for leverage and its investments increase
or decrease in value, its net asset value will normally increase or decrease
more than if it had not borrowed money for this purpose. The interest that the
Portfolio must pay on borrowed money will reduce its net investment income, and
may also either offset any potential capital gains or increase any losses. The
Portfolio currently intends to use leverage in order to adjust the
dollar-weighted average duration of its portfolio. The Portfolio will not always
borrow money for investment and the extent to which the Portfolio will borrow
money, and the amount it may borrow, depends on market conditions and interest
rates. Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse" repurchase agreements,
"dollar-roll" transactions, and forward commitments, described above) that can
exist at any one time will not exceed one-third of the value of the Portfolio's
total assets.
Reverse repurchase agreements; forward commitments. The Portfolio may
enter into "reverse" repurchase agreements with respect to up to one-third of
its assets. "Reverse" repurchase agreement generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the securities
at an agreed-upon price, date, and interest payment. The Portfolio may also
enter into forward commitments, in which the Portfolio buys securities for
future delivery. Reverse repurchase agreements and forward commitments involve
leverage, and may increase the Portfolio's overall investment exposure. Their
use by the Portfolio may result in losses.
Dollar roll transactions. In order to enhance portfolio returns and
manage prepayment risks, the Portfolio may engage in dollar roll transactions
with respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In
a dollar roll transaction, the Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (i.e., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon price.
The mortgage-related securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories. Dollar-roll transactions may
increase overall investment exposure and may result in losses.
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, the Portfolio may enter into interest rate swaps
and other interest rate transactions, such as interest rate caps, floors, and
collars. Interest rate swaps involve the exchange by the Portfolio with another
party of different types of interest-rate streams (e.g. an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. The Portfolio intends to use
these interest rate transactions as a hedge and not as a speculative investment.
The Portfolio's ability to engage in certain interest rate transactions may be
limited by tax considerations. The use of interest rate swaps and other interest
rate transactions is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Portfolio's investment adviser is incorrect in
its forecasts of market values, interest rates, or other applicable factors, the
investment performance of the Portfolio would be less favorable than it would
have been if this investment technique were not used.
-7-
<PAGE>
Premium securities. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although the Portfolio generally amortizes the amount of
any such premium into income, the Portfolio may recognize a capital loss if such
premium securities are called or sold prior to maturity and the call or sale
price is less than the purchase price. Additionally, the Portfolio may recognize
a capital loss if it holds such securities to maturity.
Options and futures. The Portfolio may buy and sell call and put
options to hedge against changes in net asset value or to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return.
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
Index futures and options. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index future"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of the
index between the time when the Portfolio enters into and terminates an index
futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return.
Risks related to options and futures strategies. Options and futures
transactions involve costs and may result in losses. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or the securities held by the Portfolio that are the subject of a hedge.
The successful use by the Portfolio of the strategies described above further
depends on the ability of Mentor Advisors to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out futures and options positions. Although the Portfolio will enter into
options and futures transactions only if Mentor Advisors believes that a liquid
secondary market exists for such options or futures contract, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. Certain provisions of the Internal
Revenue Code may limit the Portfolio's ability to engage in options and futures
transactions.
The Portfolio generally expects that its options transactions will be
conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of Mentor Advisors, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
-8-
<PAGE>
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually not
more than one week), which the seller agrees to repurchase at a fixed time and
price, representing the Portfolio's cost plus interest. Under a securities loan,
the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party should become involved in bankruptcy or
insolvency proceedings, it is possible that the Portfolio may be treated as an
unsecured creditor and be required to return the underlying collateral to the
other party's estate.
Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective and
policies described herein are not fundamental and may be changed by the Trustees
without shareholder approval. All percentage limitations on investments will
apply at the time of investment and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of the
investment.
Management
The Trustees of Mentor Funds (the "Trust") are responsible for
generally overseeing the conduct of the Portfolio's business. Mentor Investment
Advisors, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, acts
as investment adviser to the Portfolio. Mentor Investment Group, LLC ("Mentor
Investment Group") serves as administrator to the Portfolio. As compensation for
its services as administrator, the Fund pays Mentor Investment Group a fee,
accrued daily and paid monthly, at an annual rate of 0.10% of the average value
of the Portfolio's daily assets.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment
Group, LLC ("Mentor Investment Group") which is in turn a subsidiary of Wheat
First Butcher Singer, Inc. ("Wheat First Butcher Singer"), a diversified
financial services holding company. Wheat First Butcher Singer, through other
subsidiaries, also engages in securities brokerage, investment banking, and
related businesses. EVEREN Capital Corporation has a 20% ownership in Mentor
Investment Group and may acquire additional ownership based principally on the
amount of Mentor Investment Group's revenues derived from assets attributable to
clients of EVEREN Securities, Inc. and its affiliates. Mentor Advisors and its
affiliates serve as investment adviser to over twenty separate investment
portfolios in the Mentor Family of Funds with total assets under management of
more than $11 billion. All investment decisions for the Portfolio are made by
investment teams at Mentor Advisors.
Mentor Investment Group is a subsidiary of Wheat First Butcher Singer,
Inc. ("Wheat First Butcher Singer"), a diversified financial services holding
company. Wheat First Butcher Singer, through other subsidiaries, also engages in
securities brokerage, investment banking, and related businesses. EVEREN Capital
Corporation has a 20% ownership in Mentor Investment Group and may acquire
additional ownership based principally on the amount of Mentor Investment
Group's revenues derived from assets attributable to clients of EVEREN
Securities, Inc. and its affiliates.
Mentor Investment Group has informed the Portfolio that Wheat First
Butcher Singer will be acquired by First Union Corp. ("First Union"), in a
transaction expected to occur as early as January 31, 1998. First Union is a
global financial services company with approximately $140 billion in assets and
$10 billion in total
-9-
<PAGE>
stockholders' equity. The proposed arrangement does not contemplate any changes
in the management or operations of Mentor Investment Group or any of its
subsidiaries, including Mentor Advisors.
Subject to the general oversight of the Trustees, Mentor Advisors
manages the Portfolio in accordance with the stated policies of the Portfolio.
Mentor Advisors makes investment decisions for the Portfolio and places the
purchase and sale orders for the Portfolio's portfolio transactions. In
selecting broker-dealers, Mentor Advisors may consider research and brokerage
services furnished to it and its affiliates. Subject to seeking the best overall
terms available, Mentor Advisors may consider sales of shares of the Portfolio
(and, if permitted by law, of other funds in the Mentor family) as a factor in
the selection of broker-dealers to execute portfolio transactions for the
Portfolio. Mentor Advisors may at times cause the Portfolio to pay commissions
to broker-dealers affiliated with Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise
allocated to the Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, certain investor servicing fees and
expenses, charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges, and charges relating to corporate matters, are borne
by the Portfolio.
Portfolio turnover. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's annual portfolio turnover
rate is expected to be less than 200% for the current fiscal year.
How the Portfolio values its shares
The Portfolio calculates the net asset value of its shares of each
class by dividing the total value of its assets attributable to that class, less
liabilities attributable to that class, by the number of shares of the class
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which has been determined to approximate the fair market value
of such investments. All other securities and assets are valued at their fair
values. The net asset value for Class A shares will generally differ from that
of Class B shares due to the variance in daily net income realized by and
dividends paid on each class of shares, and any differences in the expenses of
the different classes.
Purchase of shares
Shares are sold at a price based on the Portfolio's net asset value
next determined after a purchase order is received by the Portfolio. In most
cases, in order to receive that day's public offering price, your order must be
received by the Trust or Mentor Distributors, LLC, 901 East Byrd Street,
Richmond, Virgina 23219 (the "Distributor"), before the close of regular trading
on the New York Stock Exchange. The Distributor is not obligated to sell any
specific amount of shares of the Portfolio.
An investor may make an initial purchase of shares in the Portfolio by
submitting completed application materials along with a purchase order, and by
making payment to the Trust. 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
-10-
<PAGE>
Advisers Act of 1940, as amended (including "wrap" accounts), are not subject to
these minimum investment requirements. The Portfolio reserves the right at any
time to change the initial and subsequent investment minimums required of
investors. If an investor purchases shares of the Portfolio through EVEREN
Securities, Inc. or certain other financial institutions that have made
arrangements with Mentor Distributors with the redemption proceeds received by
the investor within the preceding 90 days from the sale of shares of any
non-Mentor open-end mutual fund, EVEREN Securities, Inc. or such other financial
institutions may compensate the investor's investment consultant in connection
with that purchase.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to Mentor Advisors, or (iii) a combination of
such securities and cash. Purchase of shares of the Portfolio in exchange for
securities is subject in each case to the determination by Mentor Advisors that
the securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by Mentor Advisors in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the
Portfolio's next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in the market
price of accepted securities at the time of valuation become the property of the
Portfolio and must be delivered to the Portfolio upon receipt by the investor
from the issuer. A gain or loss for federal income tax purposes would be
realized upon the exchange by an investor that is subject to federal income
taxation, depending upon the investor's basis in the securities tendered. A
shareholder who wishes to purchase shares by exchanging securities should obtain
instructions by calling the Distributor at 1-800-869-6042.
The Distributor, Mentor Advisors, and affiliates thereof, at their own
expense and out of their own assets, may provide compensation to dealers in
connection with sales of shares of the Portfolio. Such compensation may include,
but is not limited to, financial assistance to dealers in connection with
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of Portfolio shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc.
In all cases Mentor Advisors and the Distributor reserve the right to
reject any particular investment.
Redemption of shares
A shareholder may redeem all or any portion of its shares in the
Portfolio any day the New York Stock Exchange is open by sending a signed letter
of instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to the Portfolio c/o Mentor Funds, P.O.
Box 1357, Richmond, Virginia 23286-0109 or to the Distributor. Redemptions will
be effected at the net asset value per share of the Portfolio next determined
after the receipt by the Portfolio of redemption instructions in "good order" as
described below. In order to receive that day's net asset value, your request
must be received before the close of regular trading on the New York Stock
Exchange. The Portfolio will only redeem shares for which it has received
payment. A check for the proceeds will normally be mailed on the next business
day after a request in good order is received.
A redemption request will be considered to have been made in "good
order" if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be
redeemed, and identifies the shareholder's Portfolio account
number;
(2) the request is signed by each registered owner exactly as the
shares are registered; and
-11-
<PAGE>
(3) if the shares to be redeemed were issued in certificate
form, the certificates are endorsed for transfer (or are
accompanied by an endorsed stock power) and accompany the
redemption request.
If shares to be redeemed represent an investment made by check, the Trust
reserves the right not to transmit the redemption proceeds to the shareholder
until the check has been collected, which may take up to 15 days after the
purchase date.
The Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. The Distributor usually
requires additional documentation for the sale of shares by a corporation,
partnership, agent, fiduciary, or surviving joint owner. Contact the Distributor
for details.
The Distributor may facilitate any redemption request. There is no extra
charge for this service.
Other information concerning redemption. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven days,
as permitted by federal securities law. In addition, the Portfolio reserves the
right, if conditions exist which make cash payments undesirable, to honor any
request for redemption by making payment in whole or in part in securities
valued in the same way as they would be valued for purposes of computing the
Portfolio's per share net asset value. If payment is made in securities, a
shareholder may incur brokerage expenses in converting those securities into
cash.
How distributions are made
The Portfolio distributes net investment income and any net
realized capital gains at least annually. Distributions from capital gains are
made after applying any available capital loss carryovers. All Portfolio
distributions will be invested in additional Portfolio shares, unless the
shareholder instructs the Portfolio otherwise.
Taxes
The Portfolio intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as
ordinary income, except that any distributions of net capital gain will be taxed
as long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Pursuant to the Taxpayer
Relief Act of 1997, long-term capital gains generally will be subject to a
maximum tax rate of 28% or 20% depending upon the holding period of the
Portfolio investment generating the gains. Distributions will be taxable as
described above whether received in cash or in shares through the reinvestment
of distributions. Early in each year the Trust will notify shareholders of the
amount and tax status of distributions paid by the Portfolio for the preceding
year. In buying or selling securities for the Portfolio, Mentor Advisors will
not normally take into account the effect any purchase or sale of securities
will have on the tax positions of the Portfolio's shareholders.
Shareholders of the Portfolio who are U.S. citizens or residents
may be able to claim a foreign tax credit or deduction on their U.S. income tax
returns with respect to foreign taxes paid by the Portfolio. If, at the end of
the fiscal year of the Portfolio, more than 50% of the Portfolio's total assets
are represented by securities of foreign corporations, the Portfolio intends to
make an election permitted by the Internal Revenue Code to treat
-12-
<PAGE>
any foreign taxes it paid as paid by its shareholders. In that case,
shareholders who are U.S. citizens, U.S. corporations, and, in some cases, U.S.
residents will be required to include in U.S. taxable income their pro rata
share of such taxes, but may then be entitled to claim a foreign tax credit or
deduction (but not both) for their share of such taxes.
The foregoing is a summary of certain federal income tax
consequences of investing in the Portfolio. Dividends and distributions also may
be subject to state and local taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state, or local taxes.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
General 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 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 more than
ten series, one representing the Portfolio, the others representing other
Portfolios with varying investment objectives and policies. The Portfolio's
shares are currently divided into four classes. Only shares of the Portfolio's
Institutional Class (Class D) are being offered by this Prospectus. The
Portfolio also offers other classes of shares with different sales charges and
expenses. Because of these different sales charges and expenses, the investment
performance of the classes will vary. For more information, including your
eligibility to purchase any other class of shares, contact the Distributor.
Each share has one vote, with fractional shares voting
proportionally. Shares of each series will vote together as a single series
except when required by law or determined by the Trustees. Shares of the
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets of
the Portfolio. The Trust may suspend the sale of shares at any time and may
refuse any order to purchase shares. Although neither the Portfolio nor the
Trust is required to hold annual meetings of shareholders, shareholders have the
right to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Agreement and Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not
issue certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas
City, Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
-13-
<PAGE>
Performance Information
Yield and total return data may from time to time be included in
advertisements about the Class E shares of the Portfolio. The Portfolio's
"yield" for each class of shares is calculated by dividing the Portfolio's
annualized net investment income per share during a recent 30-day period by its
net asset value on the last day of that period. "Total return" for the life of
the Class E shares of the Portfolio through the most recent calendar quarter
represents the average annual compounded rate of return on an investment of
$1,000 in the shares over the period. Total return may also be presented for
other periods or based on investment at reduced sales charge levels or at net
asset value. Investment performance for different classes of shares of the
Portfolio will differ. Quotations of yield and total return for a period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. The Portfolio's performance may be compared to various indices.
See the Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of the Portfolio's investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and
does not predict future performance. Investment performance, which will vary, is
based on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These factors
should be considered when comparing the Portfolio's investment results to those
of other mutual funds and other investment vehicles.
-14-
<PAGE>
APPENDIX
SECURITIES RATINGS
The following rating services describe rated securities as follows:
MOODY'S INVESTORS SERVICE, INC.
BONDS
AAA -- Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated BAA are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
A-1
<PAGE>
CA -- Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S
BONDS
AAA -- Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree. A 4 Debt
rated 'A' has a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for bonds in higher-rated categories.
BB-B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB -- Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B -- Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC -- Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
A-2
<PAGE>
CC -- The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C -- The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
D -- Bonds rated 'D' are in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be used
on the filing of a bankruptcy petition if debt service payments are jeopardized.
A-3
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the
office of the Commission.
Table of Contents
Expense summary..............................................................2
Investment objective and policies............................................3
Other investment practices and risks.........................................5
Management...................................................................6
How the Portfolio values its shares..........................................7
Sales arrangements...........................................................8
How to buy shares............................................................8
How to sell shares..........................................................12
How to exchange shares......................................................13
How distributions are made..................................................14
Taxes.......................................................................14
Other services..............................................................14
General information.........................................................15
Performance information.....................................................15
MENTOR
INCOME PORTFOLIO
Institutional Class
----------
PROSPECTUS
----------
April ___, 1998
Mentor Distributors, LLC
Distributor
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 30, 1998
PROSPECTUS April ___, 1998
Class E shares
MENTOR INCOME PORTFOLIO
Mentor Income Portfolio seeks high current income. As a secondary
objective, the Portfolio seeks preservation of capital, to the extent consistent
with its objective of seeking high current income. Mentor Investment Advisors,
LLC is the Portfolio's investment adviser. The Portfolio is a series of shares
of Mentor Funds.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. Investors can find more detailed
information in the April ___, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement, call Mentor
Investment Group, LLC at 1-800-869-6042. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
-------------------------
MENTOR DISTRIBUTORS, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
-1-
<PAGE>
Expense summary
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur in
its first full fiscal year. The Example shows the cumulative expenses
attributable to a hypothetical $1,000 investment in the Portfolio over specified
periods.
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
(as a percentage of average net assets)
Management Fees 0.60%
12b-1 Fees 0.00%
Shareholder Service Fee 0.25%
Other Expenses (after expense limitation)* 0.33%
----
Total Portfolio Operating Expenses (after 1.18%
expense limitation)*
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation. In the absence of the expense limitation, Other Expenses are
expected to be ____% and Total Portfolio Operating Expenses are expected to be
____%.
Example
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
1 year $
3 years $
This information is provided to help investors understand the expenses of
investing in the Portfolio and an investor's share of the estimated operating
expenses of the Portfolio. The Example should not be considered a representation
of future performance; actual expenses may be more or less than those shown.
Investment objective and policies
The Portfolio's investment objective is to seek high current income. As
a secondary objective, the Portfolio seeks preservation of capital, to the
extent consistent with its objective of seeking high current income.
The Portfolio may invest in debt securities, including both government
and corporate obligations, preferred stocks, and dividend-paying common stocks.
The Portfolio will also likely at times hold a substantial portion of its assets
in mortgage-backed and other asset-backed securities. The Portfolio may also
hold a portion of its assets in cash or money-market instruments.
-2-
<PAGE>
The Portfolio may invest in securities of any maturity. Mentor Advisors
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.
The Portfolio may invest in both higher-rated and lower-rated
fixed-income securities (including preferred stocks). The Portfolio may invest
up to 35% of its assets in securities rated below Baa by Moody's Invester's
Service, Inc. or BBB by Standard & Poor's Corporation or determined by Mentor
Advisors to be of comparable quality. 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 Mentor Advisors to be of comparable quality, if Mentor
Advisors 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 Mentor Advisors 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 rated below Baa by Moody's or BBB by Standard &
Poor's are considered to be of poor standing and predominantly speculative.
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 hereto. See
"Lower-rated securities," below.
At times, Mentor Advisors 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 Mentor Advisors 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 increase the portion of its assets
invested in money market instruments and in U.S. Governments or agency
obligations, or invest in any other fixed-income security Mentor Advisors
considers consistent with such defensive strategies. It is impossible to predict
when, or for how long, the Portfolio will use such alternative strategies.
Mortgage-backed securities; other asset-backed securities. The
Portfolio may invest a substantial portion of its assets in mortgage-backed
certificates and may invest in other securities representing ownership interests
in mortgage pools, including CMOs and "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
-3-
<PAGE>
significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
The Portfolio 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. The Portfolio may invest in both the interest-only -- or
"IO" -- class and the principal- only -- or "PO" -- class. The yield to maturity
and price of an IO class 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, the Portfolio may under some
circumstances fail to fully recoup its initial investment in these securities.
Conversely, POs tend to increase in value if prepayments are greater than
anticipated and decline if prepayments are slower than anticipated. The
secondary market for stripped mortgage-backed securities may be more volatile
and less liquid than that for other mortgage-backed securities, potentially
limiting the Portfolio's ability to buy or sell those securities at any
particular time.
Certain mortgage-backed securities held by the Portfolio may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may also invest in securities representing interests in
other types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security interest
in the underlying assets may be limited. For example, the laws of certain states
may prevent or restrict repossession of collateral from a debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
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
Portfolio may invest in new types of mortgage-related securities that may be
developed and marketed from time to time. If the Portfolio 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 Portfolio 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.
The Portfolio's investment 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
-4-
<PAGE>
the values of such securities accurately. In such cases, the Portfolio's
investment adviser may be required to estimate the value of such a security
using quotations provided by pricing services or securities dealers making a
market in such securities, or based on other comparable securities or other
bench-mark securities or interest rates. Mortgage-backed and other asset-backed
securities in which the Portfolio may invest may be highly illiquid, and the
Portfolio may not be able to sell such a security at a particular time or at the
value it has placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, the Portfolio's investment 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 the
Portfolio's investment 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 the Portfolio will recover the entire amount of the principal
paid by it to purchase any such securities.
Investments in 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 Portfolio. The lower ratings of certain
securities held by the 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 the Portfolio more
volatile and could limit the Portfolio's ability to sell its securities at
prices approximating the values the Portfolio had placed on such securities. 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, the 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.
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. The Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although Mentor Advisors will monitor the
investment to determine whether continued investment in the security will assist
in meeting the 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 the Portfolio invests are issued to raise funds
in connection with the acquisition of a company, in so-called "leveraged
buy-out" transactions. The
-5-
<PAGE>
highly leveraged capital structure of such issuers may make them especially
vulnerable to adverse changes in economic conditions.
The Portfolio may invest in securities which trade infrequently or in
more limited volume than higher- rated securities (including illiquid
securities), or in securities which are restricted as to resale. In addition, a
substantial portion of the 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, holds a major portion or all of
such securities, which may limit the liquidity of such securities. The Portfolio
could find it difficult or impossible to sell illiquid securities when Mentor
Advisors 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 the
Portfolio's net asset value. In order to enforce its rights in the event of a
default under securities in cases where the Portfolio holds a major portion or
all of the outstanding issue, the 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. The 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. The Portfolio
will not invest more than 15% of its assets (determined at the time of
investment) in securities determined to be illiquid.
The Portfolio may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" 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. 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. 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. Both zero-coupon and
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 such bonds do not pay
current interest in cash, the Portfolio is nonetheless required for Federal
income tax purposes to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates, the
Portfolio may not be able to reinvest the proceeds in securities providing the
same investment return as the securities redeemed.
The Portfolio may at times invest in securities bearing coupon rates
higher than prevailing market rates. Such "premium" securities are typically
purchased at prices greater than the principal amounts payable on maturity. The
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, the Portfolio may recognize a capital loss to the
extent the call or sale price is less than the purchase price. Additionally, the
Portfolio will recognize a capital loss if its holds such securities to
maturity.
Mentor Advisors seeks to minimize the risks involved in investing in
lower-rated securities through diversification and careful investment analysis.
When the Portfolio invests in high yield securities in the lower rating
categories, achievement of the Portfolio's goals depends more on Mentor
Advisors's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories.
Other investment practices and risks
-6-
<PAGE>
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of certain of these practices and risks they may involve.
Leverage. The Portfolio may borrow money to invest in additional
securities to seek current income. This technique, known as "leverage,"
increases the Portfolio's market exposure and risk and may result in losses.
When the Portfolio has borrowed money for leverage and its investments increase
or decrease in value, its net asset value will normally increase or decrease
more than if it had not borrowed money for this purpose. The interest that the
Portfolio must pay on borrowed money will reduce its net investment income, and
may also either offset any potential capital gains or increase any losses. The
Portfolio currently intends to use leverage in order to adjust the
dollar-weighted average duration of its portfolio. The Portfolio will not always
borrow money for investment and the extent to which the Portfolio will borrow
money, and the amount it may borrow, depends on market conditions and interest
rates. Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage (including leverage
to the extent employed by the Portfolio through "reverse" repurchase agreements,
"dollar-roll" transactions, and forward commitments, described above) that can
exist at any one time will not exceed one-third of the value of the Portfolio's
total assets.
Reverse repurchase agreements; forward commitments. The Portfolio may
enter into "reverse" repurchase agreements with respect to up to one-third of
its assets. "Reverse" repurchase agreement generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the securities
at an agreed-upon price, date, and interest payment. The Portfolio may also
enter into forward commitments, in which the Portfolio buys securities for
future delivery. Reverse repurchase agreements and forward commitments involve
leverage, and may increase the Portfolio's overall investment exposure. Their
use by the Portfolio may result in losses.
Dollar roll transactions. In order to enhance portfolio returns and
manage prepayment risks, the Portfolio may engage in dollar roll transactions
with respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In
a dollar roll transaction, the Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (i.e., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon price.
The mortgage-related securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories. Dollar-roll transactions may
increase overall investment exposure and may result in losses.
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, the Portfolio may enter into interest rate swaps
and other interest rate transactions, such as interest rate caps, floors, and
collars. Interest rate swaps involve the exchange by the Portfolio with another
party of different types of interest-rate streams (e.g. an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. The Portfolio intends to use
these interest rate transactions as a hedge and not as a speculative investment.
The Portfolio's ability to engage in certain interest rate transactions may be
limited by tax considerations. The use of interest rate swaps and other interest
rate transactions is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Portfolio's investment adviser is incorrect in
its forecasts of market values, interest rates, or other applicable factors, the
investment performance of the Portfolio would be less favorable than it would
have been if this investment technique were not used.
-7-
<PAGE>
Premium securities. The Portfolio may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although the Portfolio generally amortizes the amount of
any such premium into income, the Portfolio may recognize a capital loss if such
premium securities are called or sold prior to maturity and the call or sale
price is less than the purchase price. Additionally, the Portfolio may recognize
a capital loss if it holds such securities to maturity.
Options and futures. The Portfolio may buy and sell call and put
options to hedge against changes in net asset value or to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and, to the extent consistent with applicable
law, to increase its investment return.
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
Index futures and options. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index future"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of the
index between the time when the Portfolio enters into and terminates an index
futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return.
Risks related to options and futures strategies. Options and futures
transactions involve costs and may result in losses. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or the securities held by the Portfolio that are the subject of a hedge.
The successful use by the Portfolio of the strategies described above further
depends on the ability of Mentor Advisors to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out futures and options positions. Although the Portfolio will enter into
options and futures transactions only if Mentor Advisors believes that a liquid
secondary market exists for such options or futures contract, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. Certain provisions of the Internal
Revenue Code may limit the Portfolio's ability to engage in options and futures
transactions.
The Portfolio generally expects that its options transactions will be
conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would be unable to meet their
obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of Mentor Advisors, the pricing
mechanism and liquidity of the over-the-counter markets are satisfactory and the
participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
-8-
<PAGE>
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually not
more than one week), which the seller agrees to repurchase at a fixed time and
price, representing the Portfolio's cost plus interest. Under a securities loan,
the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party should become involved in bankruptcy or
insolvency proceedings, it is possible that the Portfolio may be treated as an
unsecured creditor and be required to return the underlying collateral to the
other party's estate.
Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective and
policies described herein are not fundamental and may be changed by the Trustees
without shareholder approval. All percentage limitations on investments will
apply at the time of investment and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of the
investment.
Management
The Trustees of Mentor Funds (the "Trust") are responsible for
generally overseeing the conduct of the Portfolio's business. Mentor Investment
Advisors, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, acts
as investment adviser to the Portfolio. Mentor Investment Group, LLC ("Mentor
Investment Group") serves as administrator to the Portfolio. As compensation for
its services as administrator, the Fund pays Mentor Investment Group a fee,
accrued daily and paid monthly, at an annual rate of 0.10% of the average value
of the Portfolio's daily assets.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment
Group, LLC ("Mentor Investment Group") which is in turn a subsidiary of Wheat
First Butcher Singer, Inc. ("Wheat First Butcher Singer"), a diversified
financial services holding company. Wheat First Butcher Singer, through other
subsidiaries, also engages in securities brokerage, investment banking, and
related businesses. EVEREN Capital Corporation has a 20% ownership in Mentor
Investment Group and may acquire additional ownership based principally on the
amount of Mentor Investment Group's revenues derived from assets attributable to
clients of EVEREN Securities, Inc. and its affiliates. Mentor Advisors and its
affiliates serve as investment adviser to over twenty separate investment
portfolios in the Mentor Family of Funds with total assets under management of
more than $11 billion. All investment decisions for the Portfolio are made by
investment teams at Mentor Advisors.
Mentor Investment Group is a subsidiary of Wheat First Butcher Singer,
Inc. ("Wheat First Butcher Singer"), a diversified financial services holding
company. Wheat First Butcher Singer, through other subsidiaries, also engages in
securities brokerage, investment banking, and related businesses. EVEREN Capital
Corporation has a 20% ownership in Mentor Investment Group and may acquire
additional ownership based principally on the amount of Mentor Investment
Group's revenues derived from assets attributable to clients of EVEREN
Securities, Inc. and its affiliates.
Mentor Investment Group has informed the Portfolio that Wheat First
Butcher Singer will be acquired by First Union Corp. ("First Union"), in a
transaction expected to occur as early as January 31, 1998. First Union is a
global financial services company with approximately $140 billion in assets and
$10 billion in total
-9-
<PAGE>
stockholders' equity. The proposed arrangement does not contemplate any changes
in the management or operations of Mentor Investment Group or any of its
subsidiaries, including Mentor Advisors.
Subject to the general oversight of the Trustees, Mentor Advisors
manages the Portfolio in accordance with the stated policies of the Portfolio.
Mentor Advisors makes investment decisions for the Portfolio and places the
purchase and sale orders for the Portfolio's portfolio transactions. In
selecting broker-dealers, Mentor Advisors may consider research and brokerage
services furnished to it and its affiliates. Subject to seeking the best overall
terms available, Mentor Advisors may consider sales of shares of the Portfolio
(and, if permitted by law, of other funds in the Mentor family) as a factor in
the selection of broker-dealers to execute portfolio transactions for the
Portfolio. Mentor Advisors may at times cause the Portfolio to pay commissions
to broker-dealers affiliated with Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise
allocated to the Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, certain investor servicing fees and
expenses, charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges, and charges relating to corporate matters, are borne
by the Portfolio.
Portfolio turnover. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's annual portfolio turnover
rate is expected to be less than 200% for the current fiscal year.
How the Portfolio values its shares
The Portfolio calculates the net asset value of its shares of each class by
dividing the total value of its assets attributable to that class, less
liabilities attributable to that class, by the number of shares of the class
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which has been determined to approximate the fair market value
of such investments. All other securities and assets are valued at their fair
values. The net asset value for Class A shares will generally differ from that
of Class B shares due to the variance in daily net income realized by and
dividends paid on each class of shares, and any differences in the expenses of
the different classes.
Purchase of shares
Class E shares of the Portfolio are available to shareholders who
invest or maintain a Portfolio account with the assistance of a broker-dealer,
financial consultant, or similar service provider (a "financial intermediary").
Shares are sold at a price based on the Portfolio's net asset value
next determined after a purchase order is received by the Portfolio. In most
cases, in order to receive that day's public offering price, your order must be
received by the Trust or Mentor Distrbutors, LLC, 901 East Byrd Street,
Richmond, Virginia 23219 (the "Distributor"), before the close of regular
trading on the New York Stock Exchange. The Distributor is not obligated to sell
any specific amount of shares of the Portfolio.
-10-
<PAGE>
An investor may make an initial purchase of shares in the Portfolio by
submitting completed application materials along with a purchase order, and by
making payment to the Trust, or through a financial intermediary. If you
purchase shares through your financial intermediary, your financial intermediary
will be responsible for forwarding any necessary documentation and payments to
the Distributor.
Investors will be required to make minimum initial investments of
$500,000 and minimum subsequent investments of $25,000. Investments made through
advisory accounts maintained with investment advisers registered under the
Investment Advisers Act of 1940, as amended (including "wrap" accounts), are not
subject to these minimum investment requirements. The Portfolio reserves the
right at any time to change the initial and subsequent investment minimums
required of investors. If an investor purchases shares of the Portfolio through
EVEREN Securities, Inc. or certain other financial institutions that have made
arrangements with Mentor Distributors with the redemption proceeds received by
the investor within the preceding 90 days from the sale of shares of any
non-Mentor open-end mutual fund, EVEREN Securities, Inc. or such other financial
institutions may compensate the investor's investment consultant in connection
with that purchase.
If you buy shares through a financial intermediary, the financial
intermediary must ensure that the Distributor receives your order before the
close of regular trading on the New York Stock Exchange for you to receive that
day's public offering price.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to Mentor Advisors, or (iii) a combination of
such securities and cash. Purchase of shares of the Portfolio in exchange for
securities is subject in each case to the determination by Mentor Advisors that
the securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by Mentor Advisors in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the
Portfolio's next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in the market
price of accepted securities at the time of valuation become the property of the
Portfolio and must be delivered to the Portfolio upon receipt by the investor
from the issuer. A gain or loss for federal income tax purposes would be
realized upon the exchange by an investor that is subject to federal income
taxation, depending upon the investor's basis in the securities tendered. A
shareholder who wishes to purchase shares by exchanging securities should obtain
instructions by calling the Distributor at 1-800-869-6042.
The Distributor, Mentor Advisors, and affiliates thereof, at their own
expense and out of their own assets, may provide compensation to dealers in
connection with sales of shares of the Portfolio. Such compensation may include,
but is not limited to, financial assistance to dealers in connection with
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of Portfolio shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc.
In all cases Mentor Advisors or the Distributor reserves the right to
reject any particular investment.
Shareholder Servicing Plan; financial intermediaries. The Portfolio has
adopted a Shareholder Servicing Plan (the "Plan") with respect to its Class E
shares. Under the Plan, financial intermediaries may enter into shareholder
service agreements with the Portfolio to provide administrative support to their
customers who hold Class E shares of the Portfolio. In return for providing
these support services, a financial intermediary may receive payments at a rate
not exceeding 0.25% of the average daily net assets of the Portfolio
attributable to the Class E shares held by its customers. These support services
may include, but are not limited to, the following: providing office space,
equipment, telephone facilities, and various personnel, including clerical,
supervisory, and computer personnel, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Portfolio; assisting clients in
changing dividend options, account
-11-
<PAGE>
designations, and addresses; and providing such other services as the Portfolio
reasonably requests.
In addition to receiving payments under the Plan, financial
intermediaries may be compensated by Mentor Advisors and/or Mentor Investment
Group, or affiliates thereof, for providing administrative support services to
holders of Class E shares of the Portfolio. These payments will be made directly
by Mentor Advisors and/or Mentor Investment Group and will not be made from the
assets of the Portfolio.
When you effect transactions with the Portfolio (including, for
example, purchases, sales, or redemptions of shares) through a financial
intermediary, your financial intermediary, and not the Portfolio, will be
responsible for taking all steps, and furnishing all necessary documentation, to
effect the transactions. Your financial intermediary may charge for these
services. Certain financial intermediaries may not effect transactions with the
Portfolio for their clients.
Redemption of shares
You can sell your shares to the Portfolio any day the New York Stock
Exchange is open, either directly to the Portfolio or through your financial
intermediary.
Selling shares directly to the Portfolio. A shareholder may redeem all
or any portion of its shares in the Portfolio any day the New York Stock
Exchange is open by sending a signed letter of instruction and stock power form,
along with any certificates that represent shares the shareholder wants to sell,
to the Portfolio c/o Mentor Funds, P.O. Box 1357, Richmond, Virginia 23286-0109
or to the Distributor. Redemptions will be effected at the net asset value per
share of the Portfolio next determined after the receipt by the Portfolio of
redemption instructions in "good order" as described below. In order to receive
that day's net asset value, your request must be received before the close of
regular trading on the New York Stock Exchange. The Portfolio will only redeem
shares for which it has received payment. A check for the proceeds will normally
be mailed on the next business day after a request in good order is received.
Selling shares through your financial intermediary. Your financial
intermediary must receive your request before the close of regular trading on
the New York Stock Exchange to receive that day's net asset value. If you redeem
your shares through a financial intermediary, your financial intermediary will
be responsible for delivering your redemption request and all necessary
documentation to the Portfolio and may charge you for its services.
General. A redemption request will be considered to have been made in
"good order" if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be
redeemed, and identifies the shareholder's Portfolio account
number;
(2) the request is signed by each registered owner exactly as the
shares are registered; and
(3) if the shares to be redeemed were issued in certificate form,
the certificates are endorsed for transfer (or are accompanied
by an endorsed stock power) and accompany the redemption
request.
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.
-12-
<PAGE>
The Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. The Distributor usually
requires additional documentation for the sale of shares by a corporation,
partnership, agent, fiduciary, or surviving joint owner. Contact the Distributor
for details.
The Distributor may facilitate any redemption request. There is no
extra charge for this service.
Other information concerning redemption. Under unusual circumstances,
the Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law. In addition, the Portfolio
reserves the right, if conditions exist which make cash payments undesirable, to
honor any request for redemption by making payment in whole or in part in
securities valued in the same way as they would be valued for purposes of
computing the Portfolio's per share net asset value. If payment is made in
securities, a shareholder may incur brokerage expenses in converting those
securities into cash.
How distributions are made
The Portfolio distributes net investment income and any net
realized capital gains at least annually. Distributions from capital gains are
made after applying any available capital loss carryovers. All Portfolio
distributions will be invested in additional Portfolio shares, unless the
shareholder instructs the Portfolio otherwise.
Taxes
The Portfolio intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as
ordinary income, except that any distributions of net capital gain will be taxed
as long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Pursuant to the Taxpayer
Relief Act of 1997, long-term capital gains generally will be subject to a
maximum tax rate of 28% or 20% depending upon the holding period of the
Portfolio investment generating the gains. Pursuant to the Taxpayer Relief Act
of 1997, long-term capital gains generally will be subject to a maximum tax rate
of 28% or 20% depending upon the holding period of the Portfolio investment
generating the gains. Distributions will be taxable as described above whether
received in cash or in shares through the reinvestment of distributions. Early
in each year the Trust will notify shareholders of the amount and tax status of
distributions paid by the Portfolio for the preceding year. In buying or selling
securities for the Portfolio, Mentor Advisors will not normally take into
account the effect any purchase or sale of securities will have on the tax
positions of the Portfolio's shareholders.
Shareholders of the Portfolio who are U.S. citizens or residents
may be able to claim a foreign tax credit or deduction on their U.S. income tax
returns with respect to foreign taxes paid by the Portfolio. If, at the end of
the fiscal year of the Portfolio, more than 50% of the Portfolio's total assets
are represented by securities of foreign corporations, the Portfolio intends to
make an election permitted by the Internal Revenue Code to treat any foreign
taxes it paid as paid by its shareholders. In that case, shareholders who are
U.S. citizens, U.S. corporations, and, in some cases, U.S. residents will be
required to include in U.S. taxable income their pro rata share of such taxes,
but may then be entitled to claim a foreign tax credit or deduction (but not
both) for their share of such taxes.
The foregoing is a summary of certain federal income tax consequences
of investing in the Portfolio. Dividends and distributions also may be subject
to state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult
-13-
<PAGE>
their tax advisers concerning the tax consequences of ownership of shares of the
Portfolio, including the possibility that distributions may be subject to a 30%
United States withholding tax (or a reduced rate of withholding provided by
treaty).
General 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 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 more than
ten series, one representing the Portfolio, the others representing other
Portfolios with varying investment objectives and policies. The Portfolio's
shares are currently divided into four classes. Only shares of the Portfolio's
Class E shares are being offered by this Prospectus. The Portfolio also offers
other classes of shares with different sales charges and expenses. Because of
these different sales charges and expenses, the investment performance of the
classes will vary. For more information, including your eligibility to purchase
any other class of shares, contact the Distributor.
Each share has one vote, with fractional shares voting
proportionally. Shares of each series will vote together as a single series
except when required by law or determined by the Trustees. Shares of the
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets of
the Portfolio. The Trust may suspend the sale of shares at any time and may
refuse any order to purchase shares. Although neither the Portfolio nor the
Trust is required to hold annual meetings of shareholders, shareholders have the
right to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Agreement and Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not
issue certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas
City, Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
-14-
<PAGE>
Performance Information
Yield and total return data may from time to time be included in
advertisements about the Class E shares of the Portfolio. The Portfolio's
"yield" for each class of shares is calculated by dividing the Portfolio's
annualized net investment income per share during a recent 30-day period by its
net asset value on the last day of that period. "Total return" for the life of
the Class E shares of the Portfolio through the most recent calendar quarter
represents the average annual compounded rate of return on an investment of
$1,000 in the shares over the period. Total return may also be presented for
other periods or based on investment at reduced sales charge levels or at net
asset value. Investment performance for different classes of shares of the
Portfolio will differ. Quotations of yield and total return for a period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. The Portfolio's performance may be compared to various indices.
See the Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of the Portfolio's investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and
does not predict future performance. Investment performance, which will vary, is
based on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These factors
should be considered when comparing the Portfolio's investment results to those
of other mutual funds and other investment vehicles.
-15-
<PAGE>
APPENDIX
SECURITIES RATINGS
The following rating services describe rated securities as follows:
MOODY'S INVESTORS SERVICE, INC.
BONDS
AAA -- Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated BAA are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
A-1
<PAGE>
CA -- Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S
BONDS
AAA -- Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree. A 4 Debt
rated 'A' has a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for bonds in higher-rated categories.
BB-B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB -- Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B -- Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC -- Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
A-2
<PAGE>
CC -- The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C -- The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
D -- Bonds rated 'D' are in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be used
on the filing of a bankruptcy petition if debt service payments are jeopardized.
A-3
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the
office of the Commission.
Table of Contents
Expense summary............................................................2
Investment objective and policies..........................................3
Other investment practices and risks.......................................5
Management.................................................................6
How the Portfolio values its shares........................................7
Sales arrangements.........................................................8
How to buy shares..........................................................8
How to sell shares........................................................12
How to exchange shares....................................................13
How distributions are made................................................14
Taxes.....................................................................14
Other services............................................................14
General information.......................................................15
Performance information...................................................15
MENTOR
INCOME
PORTFOLIO
Class E Shares
----------
PROSPECTUS
----------
April ___, 1998
Mentor Distributors, LLC
Distributor
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 30, 1998
PROSPECTUS April ___, 1998
Class A and B shares
MENTOR ASSET ALLOCATION PORTFOLIO
Mentor Asset Allocation Portfolio seeks high total return. The Portfolio
allocates its assets among the major asset categories of equity securities,
fixed-income securities, and money-market instruments. Mentor Investment
Advisors, LLC is the Portfolio's investment adviser. The Portfolio is a series
of shares of Mentor Funds.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. Investors can find more detailed
information in the April ___, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement, call Mentor
Investment Group, LLC at 1-800-869-6042. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
-------------------------
MENTOR DISTRIBUTORS, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
-1-
<PAGE>
Expense summary
Expenses are one of several factors to consider when investing in
the Portfolio. Expenses shown reflect the expenses the Portfolio expects to
incur in its first fiscal year with respect to its Class A and Class B shares.
The Examples show the cumulative expenses attributable to a hypothetical $1,000
investment in the Class A and Class B shares of the Portfolio over specified
periods.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses: Class A Class B
<S><C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)(1) 5.75% None
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None(2) 4.0% in the first year,
(as a percentage of the lower of the original declining to 1.0% in the
purchase price or redemption proceeds)3 fifth year, and eliminated
thereafter(4)
Redemption Fees None None
Exchange Fee None None
</TABLE>
- -------------
(1) Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
(2) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1,000,000 that are redeemed within one year of purchase.
(3) The amount redeemed is computed as the lesser of the current net asset value
of the shares redeemed, and the original purchase price of the shares. See "How
to buy shares - Class B shares."
(4) Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1.00%, if the shares are redeemed
within one year of purchase. See "How to Buy Shares -- the BL Purchase Program."
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses:
(as a percentage of average net assets) Class A Class B
------- -------
<S> <C>
Management Fees 0.85% 0.85%
12b-1 Fees 0.00% 0.75%
Shareholder Service Fee 0.25% 0.25%
Other Expenses (after expense limitation)* 0.35% 0.35%
---- ----
Total Portfolio Operating Expenses (after 1.45% 2.20%
expense limitation)*
</TABLE>
- -----------------
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation currently in effect. In the absence of the expense
limitation, Other Expenses are expected to be ___% for Class A and Class B
shares, and Total Portfolio Operating Expenses are expected to be ____% for
Class A shares and ____% for Class B shares.
-2-
<PAGE>
Examples
An investment of $1,000 in the Portfolio would incur the following
expenses assuming 5% annual return and no redemption:
Class A Class B
------- -------
1 year $71 $22
3 years $101 $69
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
Class A Class B
------- -------
1 year $71 $62
3 years $101 $99
This information is provided to help investors understand the expenses
of investing in the Portfolio and an investor's share of the estimated operating
expenses for the Portfolio. The Examples should not be considered a
representation of future performance; actual expenses may be more or less than
those shown.
Investment objective and policies
The Portfolio's investment objective is to seek high total return. In
seeking this objective, Mentor Investment Advisors, LLC, the Portfolio's
investment adviser ("Mentor Advisors"), allocates the Portfolio's assets among
the major asset categories of equity securities, fixed-income securities, and
money-market instruments. The Portfolio will normally invest some portion of its
assets in each asset category, but may invest without limit in any asset
category. Total return consist of current income (including dividends, interest,
and, in the case of discounted instruments, discount accruals) and capital
appreciation (including realized and unrealized capital gains and losses).
Mentor Advisors believes that the Portfolio has the potential to
achieve above-average investment returns at comparatively lower risk by
allocating its resources among the equity, debt, and money-market sectors of the
market as opposed to relying solely on just one market sector. For example,
Mentor Advisors may at times believe that the equity market holds a higher
potential for total return than the debt market and that a relatively large
portion of the Portfolio's assets should be allocated to the equity market
sector. The reverse would be true at times when Mentor Advisors believes that
the potential for total return in the bond market is greater than that in the
equity market. Mentor Advisors might also allocate the Portfolio's investments
to money market instruments in order to earn current return and to reduce the
potential adverse effect of declines in the bond and equity markets.
Mentor Advisors implements its asset allocation decisions by allocating
the Portfolio's assets among the three investment sectors within the Portfolio
- -- the Equity Sector, the Bond Sector, and the Cash Sector. After determining
the portions of the Portfolio's assets to be invested in the various sectors,
Mentor Advisors employs a "passively" managed investment - or index - approach
to managing the Equity and Bond Sectors. In each case, Mentor Advisors creates a
mix of securities that will match as closely as possible the performance of a
benchmark index; it does not buy and sell securities based on research and
analysis. However, to the extent Mentor Advisors actively allocates the
Portfolio's assets across the various market sectors, the achievement of the
Portfolio's
-3-
<PAGE>
investment objective depends on, among other things, the ability of Mentor
Advisors to assess correctly the effects of economic and markets trends on
different sectors of the market.
In the case of the Equity Sector, Mentor Advisors seeks to track the
performance of the Standard & Poor's 500 Composite Stock Price Index, which
emphasizes stocks of large U.S. companies. The Portfolio typically holds each
stock found in the S&P 500 Index in roughly the same proportions as represented
in the index itself. For example, if 5% of the S&P 500 Index were made up of the
assets of a specific company, the Portfolio would invest the same percentage of
its assets in that company.
In the case of the Bond Sector, Mentor Advisors seeks to track the
performance of the Lehman Brothers Mutual Fund Long (10+) Government/Corporate
Index, a market weighted index which encompasses U.S. Treasury and agency
securities and investment grade corporate and international (dollar denominated)
bonds, with maturities greater than ten years. Because of the large number of
securities involved, the Portfolio will be unable to hold all of the individual
issues which comprise the Index. Instead, the Portfolio will attempt to
duplicate the performance of the Index through statistical sampling procedures;
it will hold a representative sample of the securities in the Index, selecting a
few issues to represent entire "classes" or types of securities in the Index.
The Portfolio will be constructed so as to match approximately the composition
of the Index after adjusting for the corporate substitution policy (see "Special
considerations regarding the Bond Sector" below).
The Cash Sector will contain short-term, fixed-income securities issued
by private and governmental institutions. Such securities may include, for
example, U.S. Government securities; bank obligations; Eurodollar certificates
of deposit issued by foreign branches of domestic banks; obligations of savings
institutions; fully- insured certificates of deposit; and commercial paper rated
within the two highest grades by S&P or the highest grade by Moody's, or, if not
rated, issued by a company having an outstanding debt issue rated at least Aa by
Moody's or AA by S&P.
An index portfolio has operating expenses; a market index does not. As
a result, the Equity and Bond Sectors -- while expected to track their target
indices as closely as possible -- will not be able to match the performance of
the indices exactly.
Special considerations regarding the Bond Sector. Fixed-income
securities will be primarily of investment grade quality -- i.e., those rated at
least Baa3 by Moody's or BBB- by S&P or at a comparable rating by another
nationally recognized rating organization, or, if unrated, determined by Mentor
Advisors to be of comparable quality. Securities rated Baa or BBB are considered
as medium grade obligations. Interest payments and principal are regarded as
adequate for the present but certain protective elements found in higher rated
bonds may be lacking. Such bonds lack outstanding investment characteristics
and, in fact, have speculative characteristics as well. A description of
securities ratings is contained in the Appendix to this Prospectus.
In its effort to duplicate the investment performance of its Index, the
Bond Sector will invest in fixed-income securities approximating its relative
proportion of the Index's total market value. These investments include U.S.
Treasury and agency securities, corporate debt, and international (dollar
denominated) debt. The Portfolio may invest in U.S. Treasury bills, notes, and
bonds and other "full faith and credit" obligations of the U.S. Government. The
Portfolio may also invest in U.S. Government agency securities, which are debt
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government. Such "agency" securities may not be backed by the "full faith and
credit" of the U.S. Government. Such U.S. Government agencies may include the
Federal Farm Credit Banks and the Resolution Trust Corporation. Even though they
all carry top (AAA) credit ratings, "agency" obligations are not explicitly
guaranteed by the U.S. Government and so are perceived as somewhat riskier than
comparable Treasury bonds.
The Portfolio may, from time to time, substitute one type of investment
grade bond for another. For instance, a Portfolio may hold more short-term
corporate bonds (fewer short-term U.S. Treasury bonds) than
-4-
<PAGE>
represented in the Index so as to increase income. This corporate substitution
strategy will entail the assumption of additional credit risk; however,
substantial diversification within the corporate sector should moderate issue-
specific credit risk. In addition, the Portfolio currently restricts corporate
substitutions to issues with less than four years remaining to maturity and in
aggregate no more than 15% of net assets within the Bond Sector.
Overall credit risk is expected to be low.
Mortgage-backed securities; other asset-backed securities. The
Portfolio may invest in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including CMOs and
"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.
The Portfolio 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. The Portfolio may invest in both the interest-only -- or
"IO" -- class and the principal- only -- or "PO" -- class. The yield to maturity
and price of an IO class 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, the Portfolio may under some
circumstances fail to fully recoup its initial investment in these securities.
Conversely, POs tend to increase in value if prepayments are greater than
anticipated and decline if prepayments are slower than anticipated. The
secondary market for stripped mortgage-backed securities may be more volatile
and less liquid than that for other mortgage-backed securities, potentially
limiting the Portfolio's ability to buy or sell those securities at any
particular time.
Certain mortgage-backed securities held by the Portfolio may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may also 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
-5-
<PAGE>
securities to enforce its security interest in the underlying assets may be
limited. For example, the laws of certain states may prevent or restrict
repossession of collateral from a debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
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.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio may
invest in a wide variety of such securities, including mortgage-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.
The Portfolio's investment 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, the Portfolio's investment adviser
may be required to estimate the value of such a security using quotations
provided by pricing services or securities dealers making a market in such
securities, or based on other comparable securities or other bench-mark
securities or interest rates. Mortgage-backed and other asset-backed securities
in which the Portfolio may invest may be highly illiquid, and the Portfolio may
not be able to sell such a security at a particular time or at the value it has
placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, the Portfolio's investment 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 the
Portfolio's investment 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 the Portfolio will recover the entire amount of the principal
paid by it to purchase any such securities.
Use of derivatives. The Portfolio may invest in futures contracts and
options, but only to a limited extent. Specifically, the Portfolio may enter
into futures contracts provided that not more than 5% of its assets are required
as a futures contract deposit.
Futures contracts and options may be used for several common fund
management strategies: to maintain cash reserves while simulating full
investment, to reduce transaction costs, or to implement changes among the
various Sectors of the Portfolio pending the sale of some portfolio securities
and the purchase of others.
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize
-6-
<PAGE>
these instruments effectively for the purposes stated above. Transactions in
options and futures involve certain risks which are described below and in the
Statement of Additional Information.
Options and futures transactions involve costs and may result in
losses. For example, certain risks arise from the Portfolio's potential
inability to close out futures and options positions. Although the Portfolio
will enter into options and futures transactions only if Mentor Advisors
believes that a liquid secondary market exists for such options or futures
contract, there can be no assurance that the Portfolio will be able to effect
closing transactions at any particular time or at an acceptable price. Certain
provisions of the Internal Revenue Code may limit the Portfolio's ability to
engage in options and futures transactions.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually not
more than one week), which the seller agrees to repurchase at a fixed time and
price, representing the Portfolio's cost plus interest. Under a securities loan,
the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party should become involved in bankruptcy or
insolvency proceedings, it is possible that the Portfolio may be treated as an
unsecured creditor and be required to return the underlying collateral to the
other party's estate.
Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective and
policies described herein are not fundamental and may be changed by the Trustees
without shareholder approval. All percentage limitations on investments will
apply at the time of investment and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of the
investment.
Management
The Trustees of Mentor Funds (the "Trust") are responsible for
generally overseeing the conduct of the Portfolio's business. Mentor Investment
Advisors, LLC located at 901 East Byrd Street, Richmond, Virginia 23219, acts as
investment adviser to the Portfolio. Mentor Investment Group, LLC ("Mentor
Investment Group") serves as administrator to the Portfolio. As compensation for
its services as administrator, the Fund pays Mentor Investment Group a fee,
accrued daily and paid monthly, at an annual rate of 0.10% of the average value
of the Portfolio's daily assets.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group
which is in turn a subsidiary of Wheat First Butcher Singer, Inc. ("Wheat First
Butcher Singer"), a diversified financial services holding company. Wheat First
Butcher Singer, through other subsidiaries, also engages in securities
brokerage, investment banking, and related businesses. EVEREN Capital
Corporation has a 20% ownership in Mentor Investment Group and may acquire
additional ownership based principally on the amount of Mentor Investment
Group's revenues derived from assets attributable to clients of EVEREN
Securities, Inc. and its affiliates. Mentor
-7-
<PAGE>
Advisors and its affiliates serve as investment adviser to over twenty separate
investment portfolios in the Mentor Family of Funds with total assets under
management of more than $11 billion. All investment decisions for the Portfolio
are made by investment teams at Mentor Advisors.
Mentor Investment Group has informed the Portfolio that Wheat First
Butcher Singer will be acquired by First Union Corp. ("First Union"), in a
transaction expected to occur as early as January 31, 1998. First Union is a
global financial services company with approximately $140 billion in assets and
$10 billion in total stockholders' equity. The proposed arrangement does not
contemplate any changes in the management or operations of Mentor Investment
Group or any of its subsidiaries, including Mentor Advisors.
Subject to the general oversight of the Trustees, Mentor Advisors
manages the Portfolio in accordance with the stated policies of the Portfolio.
Mentor Advisors makes investment decisions for the Portfolio and places the
purchase and sale orders for the Portfolio's portfolio transactions. In
selecting broker-dealers, Mentor Advisors may consider research and brokerage
services furnished to it and its affiliates. Subject to seeking the best overall
terms available, Mentor Advisors may consider sales of shares of the Portfolio
(and, if permitted by law, of other funds in the Mentor family) as a factor in
the selection of broker-dealers to execute portfolio transactions for the
Portfolio. Mentor Advisors may at times cause the Portfolio to pay commissions
to broker-dealers affiliated with Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise
allocated to the Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, certain investor servicing fees and
expenses, charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges, and charges relating to corporate matters, are borne
by the Portfolio.
Portfolio turnover. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's annual portfolio turnover
rate is expected not to exceed 200% for the current fiscal year.
How the Portfolio values its shares
The Portfolio calculates the net asset value of its shares of each
class by dividing the total value of its assets attributable to that class, less
liabilities attributable to that class, by the number of shares of the class
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which has been determined to approximate the fair market value
of such investments. All other securities and assets are valued at their fair
values. The net asset value for Class A shares will generally differ from that
of Class B shares due to the variance in daily net income realized by and
dividends paid on each class of shares, and any differences in the expenses of
the different classes.
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:
-8-
<PAGE>
Class A shares. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to buy shares --- Class A
shares."
Class B shares. Class B shares are sold without an initial sales
charge, but are subject to a CDSC of up to 4% if redeemed within five years.
Class B shares also bear 12b-1 fees. Class B shares provide an investor the
benefit of putting all of the investor's money to work from the time the
investment is made, but have a higher expense ratio and pay lower dividends than
Class A shares due to the 12b-1 fees. If you purchase shares through an
asset-allocation program, you may also be eligible to purchase Class B shares
through the "BL Purchase Program." See "How to buy shares --- Class B shares."
Which arrangement is for you? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. Investors purchasing shares through an asset-allocation program
may wish to purchase shares through the BL Purchase Program. For more
information about these sales arrangements, consult your investment dealer or
Mentor Distributors, LLC (the "Distributor"). Sales personnel may receive
different compensation depending on which class of shares they sell. Shares may
only be exchanged for shares of the same class of certain other funds in the
Mentor family and for shares of Cash Resource U.S. Government Money Market Fund.
See "How to exchange shares."
How to buy shares
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little as $100. Investments under
IRAs and qualified retirement plans are subject to a minimum initial investment
of $250. The minimum initial investment may be waived for current and retired
Trustees, and current and retired employees of the Trust, Mentor Investment
Group or its affiliates. You can buy Portfolio shares by completing the enclosed
New Account Form and sending it to Boston Financial Data Services ("BFDS") at 2
Heritage Drive, North Quincy, Massachusetts 02171, along with a check or money
order made payable to Mentor 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 Investment Group can
refer you to one.
Automatic investment plan. Once you have made the initial minimum
investment in the Portfolio, you can make regular investments of $50 or more on
a monthly or quarterly basis through automatic deductions from your bank
checking account. Application forms are available from your investment dealer or
through the Distributor.
Shares are sold at a price based on the Portfolio's net asset value
next determined after the Distributor receives your purchase order. In most
cases, in order to receive that day's public offering price, the Distributor
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 the Distributor 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 the Distributor. The current sales charges
for Class A shares of the Portfolio are as follows:
-9-
<PAGE>
<TABLE>
<CAPTION>
Sales Charge as Sales Charge as
a Percentage of a Percentage of
Public Offering Net Amount Dealer
Price Invested Commission*
--------------- --------------- -----------
<S> <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>
- ----------------------
* At the discretion of the Distributor, the entire sales charge may at times be
reallowed to dealers. The Staff of the Securities and Exchange Commission has
indicated that dealers who receive more than 90% of the sales charge may be
considered underwriters.
There is no initial sales charge on purchases of Class A shares of
$1 million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. A CDSC is also imposed on any shares purchased
without a sales charge as part of a purchase of shares of $1 million or more
under a purchase accumulation plan. Contact the Distributor for more
information.
You may be eligible to buy Class A shares at reduced sales
charges. Consult your investment dealer or the Distributor for details about
Quantity Discounts and Accumulated Purchases, Letters of Intent, the
Reinvestment Privilege, Concurrent Purchases, and the Automatic Investment Plan.
Descriptions are also included in the New Account Form. Shares may be sold at
net asset value to certain categories of investors, including to shareholders of
other mutual funds who invest in the Portfolio in response to certain
promotional activities, and the CDSC may be waived under certain circumstances.
The sales charges shown above will not apply to shares purchased by you if you
purchase shares through EVEREN Securities, Inc. with the redemption proceeds
received by you within the preceding 90 days from the sale of shares of any
non-Mentor open-end mutual fund. No CDSC will apply to these purchases. EVEREN
Securities, Inc. may compensate your investment dealer in connection with any
such purchase. Sales charges may similarly not apply to shares purchase through
other financial institutions that have made arrangements with Mentor
Distributors. Contact your financial institution or Mentor Distributors for more
information. See "How to buy shares --- General" below.
Class B Shares. Class B shares are sold without an initial sales
charge, although a CDSC will be imposed if you redeem shares within five years
of purchase. The following types of shares may be redeemed without charge: (i)
shares acquired by reinvestment of distributions and (ii) shares otherwise
exempt from the CDSC, as described in the Example below. The amount of CDSC is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. The amount of the CDSC will depend on the number
of years since you invested in the shares being redeemed and the dollar amount
being redeemed, according to the following table:
<TABLE>
<CAPTION>
Years Since Purchase Payment Made CDSC
--------------------------------- -----------
<S> <C>
1 4.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6+ None
</TABLE>
The BL Purchase Program. If you purchase Class B shares through an
asset-allocation program sponsored by your broker-dealer or other financial
institution, you may elect to participate in the BL Purchase
-10-
<PAGE>
Program. Shares purchased through this program are not subject to the CDSC shown
above. Rather, a CDSC of 1.00% will be imposed on redemptions of such shares
within the first year after purchase, based on the lower of the shares' cost and
current net asset value. Your broker-dealer or other financial institution is
responsible for making the election on your behalf to invest through the
Program. Accordingly, if you wish to purchase shares through this Program, you
should instruct your broker-dealer or financial institution to do so.
General. Mentor Distributors, LLC, located at 901 East Byrd
Street, Richmond, Virginia 23219, serves as distributor of the Portfolio's
shares. The Distributor is not obligated to sell any specific amount of shares
of the Portfolio. The Distributor's telephone number is 1-800-869-6042.
A Portfolio may sell its Class A shares without a sales charge and
may waive the CDSC on shares redeemed by the Trust's current and retired
Trustees (and their families), current and retired employees (and their
families) of Mentor Investment Group, Mentor Advisors, and their affiliates,
registered representatives and other employees (and their families) of
broker-dealers having sales agreements with the Distributor, employees (and
their families) of financial institutions having sales agreements with the
Distributor (or otherwise having an arrangement with a broker-dealer or
financial institution with respect to sales of Portfolio shares), financial
institution trust departments investing an aggregate of $1 million or more in
one or more funds in the Mentor family, clients of certain administrators of
tax-qualified plans, employer-sponsored retirement plans, tax-qualified plans
when proceeds from repayments of loans to participants are invested (or
reinvested) in funds in the Mentor family, shares redeemed under the Portfolio's
Systematic Withdrawal Plan (limited to 10% of a shareholder's account in any
calendar year), and "wrap accounts" for the benefit of clients of financial
planners adhering to certain standards established by Mentor Investment Group or
its affiliates. The Portfolio may sell shares without a sales charge or a CDSC
in connection with the acquisition by the Portfolio of assets of an investment
company or personal holding company. In addition, the CDSC may be waived in the
case of (i) redemptions of shares held at the time a shareholder dies or becomes
disabled, including the shares of a shareholder who owns the shares with his or
her spouse as joint tenants with right of survivorship, provided that the
redemption is requested within one year of the death or initial determination of
disability; (ii) redemptions in connection with the following retirement plan
distributions: (a) lump-sum or other distributions from a qualified retirement
plan following retirement, (b) distributions from an IRA, Keogh Plan, or
Custodial Account under Section 403(b)(7) of the Internal Revenue Code following
attainment of age 59 1/2, and (c) a tax-free return on an excess contribution to
an IRA; (iii) redemptions by pension or profit sharing plans sponsored by Mentor
Investment Group or an affiliate; and (iv) redemptions by pension or profit
sharing plans of which Mentor Investment Group or any affiliate serves as a plan
fiduciary. In addition, certain retirement plans with over 200 employees may
purchase Class A shares at net asset value without a sales charge. The Portfolio
may sell its Class A shares without a sales charge to shareholders of other
mutual funds who invest in other funds in the Mentor family in response to
certain promotional activities (in which case a CDSC of 1% may apply for a
period of years after purchase). Contact the Distributor for more information.
If you invest through a broker-dealer or other financial institution, your
broker-dealer or other financial institution will be responsible for electing on
your behalf to take advantage of any of these reduced sales charges or waivers
described above. Please instruct your broker-dealer or other financial
institution accordingly.
Shareholders of other funds in the Mentor family may be entitled
to exchange their shares for, or reinvest distributions from their funds in,
shares of the Portfolio at net asset value.
In determining whether a CDSC is payable in respect of the shares
redeemed, the Portfolio will first redeem the shares held longest (together with
any shares received upon reinvestment of distributions with respect to those
shares). Any of the shares being redeemed which were acquired by reinvestment of
distributions will be redeemed without a CDSC, and amounts representing capital
appreciation will not be subject to a CDSC. See the Example below.
Example:
-11-
<PAGE>
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 of those shares (including shares purchased through reinvestment
of distributions on those 100 shares) at this time, your CDSC will be calculated
as follows:
<TABLE>
<CAPTION>
<S> <C>
o Proceeds of 50 shares redeemed at $12 per share $600
o Minus proceeds of 10 shares not subject to a CDSC
because they were acquired through dividend reinvestment
(10 x $12) -120
o Minus appreciation on remaining shares, also not subject
to CDSC (40 x $2) -80
----
o Amount subject to a CDSC $400
</TABLE>
The Distributor receives the entire amount of any CDSC you pay.
Consult the Distributor for more information.
If you are considering redeeming or exchanging shares of the
Portfolio or transferring shares to another person shortly after purchase, you
should pay for those shares with a certified check to avoid any delay in
redemption, exchange, or transfer. Otherwise the Portfolio may delay payment
until the purchase price of those shares has been collected or, if you redeem by
telephone, until 15 calendar days after the purchase date.
Because of the relatively high cost of maintaining accounts, the
Portfolio reserves the right to redeem, upon not less than 60 days' notice, any
Portfolio account below $500 as a result of redemptions. A shareholder may,
however, avoid such a redemption by the Portfolio by increasing his investment
in shares of the Portfolio to a value of $500 or more during such 60-day period.
The Distributor, Mentor Advisors, and affiliates thereof, at their
own expense and out of their own assets, may also provide other compensation to
dealers in connection with sales of the Portfolio. Such compensation may also
include, but is not limited to, financial assistance to dealers in connection
with conferences, sales, or training programs for their employees, seminars for
the public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of the Portfolio's
shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. Certain dealers may not sell all classes
of shares.
In all cases Mentor Advisors and the Distributor reserves the
right to reject any particular investment.
Reinvestment Privilege. If you redeem Class A or B shares of the
Portfolio, you have a one-time right, within 60 days, to reinvest the redemption
proceeds plus the amount of CDSC you paid, if any, at the next-determined net
asset value. Front-end sales charges will not apply to such reinvestment. The
Distributor must be notified in writing by you or by your financial institution
of the reinvestment for you to recover the CDSC, or to eliminate the front-end
sales charge. If you redeem shares in the Portfolio, there may be tax
consequences.
Distribution Plan (Class B Shares)
The Distributor is not obligated to sell any specific amount of
shares of the Portfolio.
The Portfolio has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 with respect to its Class B shares (the "Plan") providing for
payments by the Portfolio to the Distributor from the assets attributable to the
-12-
<PAGE>
Portfolio's Class B shares at the annual rate set out under "Expense Summary -
Annual Portfolio Operating Expenses" above. The Trustees may reduce the amount
of payments or suspend the Plan for such periods as they may determine. The
Distributor also receives the proceeds of any CDSC imposed on redemptions of
shares.
Payments under the Plan are intended to compensate the Distributor
for services provided and expenses incurred by it as principal underwriter of
the Portfolio's Class B shares. The 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 Portfolio. Financial institutions will receive fees from the 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 the Distributor. The Distributor may suspend or modify such
payments to dealers. Such payments are also subject to the continuation of the
Plan, the terms of any agreements between dealers and the Distributor, and any
applicable limits imposed by the National Association of Securities Dealers,
Inc.
How to sell shares
You can sell your shares to the Portfolio any day the New York
Stock Exchange is open, either directly to the Portfolio or through your
investment dealer. The Portfolio will only redeem shares for which it has
received payment.
Selling shares directly to the Portfolio. Send a signed letter of
instruction and stock power form, along with any certificates that represent
shares you want to sell, to Mentor Funds, c/o 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 Distribtors for more information about where to
obtain a signature guarantee. Stock power forms are available from your
investment dealer, the Distributor, and many commercial banks. The Distributor
usually requires additional documentation for the sale of shares by a
corporation, partnership, agent, fiduciary, or surviving joint owner. Contact
the Distributor for details.
Selling shares by telephone. You may use the Telephone Redemption
Privilege to redeem shares from your account unless you have notified the
Distributor of an address change within the preceding 15 days. Unless an
investor indicates otherwise on the New Account Form, the Distributor will be
authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide the Distributor with his or her account
registration and address as it appears on the Distributor's records. The
Distributor will employ these and other reasonable procedures to confirm that
instructions communicated by telephone are genuine; if it fails to employ
reasonable procedures, the Distributor may be liable for any losses due to
unauthorized or fraudulent instructions. For more information, consult the
Distributor. During periods of unusual market changes and shareholder activity,
you may experience delays in contacting the Distributor by telephone in which
case you may wish to submit a written redemption request, as described above, or
contact your investment dealer, as described below. The Telephone Redemption
Privilege may be modified or terminated without notice.
Selling shares through your investment dealer. Your dealer and the
Distributor 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 the Distributor,
and may charge you for its services.
-13-
<PAGE>
Systematic Withdrawal Program. You may redeem Class A or B shares
of the Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program are
not subject to a CDSC, but the aggregate withdrawals of Class B shares in any
year are limited to 10% of the value of the account at the time of enrollment.
Contact the Distributor for more information.
General. The Portfolio generally sends you payment for your shares
the business day after your request is received. Under unusual circumstances,
the Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption by making payment
in whole or in part in securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
How to exchange shares
Except as otherwise described below, you can exchange your shares
in the Portfolio worth at least $1,000 for shares of the same class of certain
other Portfolios of Mentor Funds, with different investment objectives and
policies, at net asset value beginning 15 days after purchase. You may also
exchange shares of the Portfolio for shares of Cash Resource U.S. Government
Money Market Fund (the "Cash Fund"). If you exchange shares subject to a CDSC,
the transaction will not be subject to a CDSC. However, when you redeem the
shares acquired through the exchange, the redemption may be subject to the CDSC,
depending upon when you originally purchased the shares, using the schedule of
the Portfolio from which your first exchange was effected. For purposes of
computing the CDSC, the length of time you have owned your shares will be
measured from the date of original purchase and will not be affected by any
exchange. (If you exchange your shares for shares of the Cash Fund, the period
when you hold shares of the Cash Fund will not be included in calculating the
length of time you have owned the shares subject to the CDSC, and any CDSC
payable on redemption of your shares will be reduced by the amount of any
payment collected by the Cash Fund under its distribution plan in respect of
those shares. Contact the Distributor for information.)
To exchange your shares, simply complete an Exchange Authorization
Form and send it to Mentor Funds, c/o BFDS, 2 Heritage Drive, North Quincy,
Massachusetts 02171. Exchange Authorization Forms are available by calling or
writing the Distributor. 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 Distributor's procedures for
telephonic transactions are described above under "How to sell shares." The
Telephone Exchange Privilege is not available if you were issued certificates
for shares which remain outstanding. Ask you investment dealer or the
Distributor for a prospectus relating to other Portfolios of Mentor Funds or the
Cash Fund. Shares of certain of the Portfolios may not be available to residents
of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management and
have an adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where the Distributor or the Trustees
believe doing so would be in the best interests of the Portfolio, the Portfolio
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges, or reject any exchange. Shareholders would be
notified of
-14-
<PAGE>
any such action to the extent required by law. Consult the Distributor before
requesting an exchange by calling 1-800-869-6042. Contact the Distributor to
find out more about the exchange privilege.
How distributions are made
The Portfolio distributes net investment income and any net
realized capital gains at least annually. Distributions from capital gains are
made after applying any available capital loss carryovers. All Portfolio
distributions will be invested in additional Portfolio shares, unless the
shareholder instructs the Portfolio otherwise.
Taxes
The Portfolio intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as
ordinary income, except that any distributions of net capital gain will be taxed
as long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Pursuant to the Taxpayer
Relief Act of 1997, long-term capital gains generally will be subject
to a maximum tax rate of 28% or 20% depending upon the holding period
of the Portfolio investment generating the gains. Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year the Trust will notify
shareholders of the amount and tax status of distributions paid by the Portfolio
for the preceding year. In buying or selling securities for the Portfolio,
Mentor Advisors will not normally take into account the effect any purchase or
sale of securities will have on the tax positions of the Portfolio's
shareholders.
Shareholders of the Portfolio who are U.S. citizens or residents
may be able to claim a foreign tax credit or deduction on their U.S. income tax
returns with respect to foreign taxes paid by the Portfolio. If, at the end of
the fiscal year of the Portfolio, more than 50% of the Portfolio's total assets
are represented by securities of foreign corporations, the Portfolio intends to
make an election permitted by the Internal Revenue Code to treat any foreign
taxes it paid as paid by its shareholders. In that case, shareholders who are
U.S. citizens, U.S. corporations, and, in some cases, U.S. residents will be
required to include in U.S. taxable income their pro rata share of such taxes,
but may then be entitled to claim a foreign tax credit or deduction (but not
both) for their share of such taxes.
The foregoing is a summary of certain federal income tax
consequences of investing in the Portfolio. Dividends and distributions also may
be subject to state and local taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state, or local taxes.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
Other services
Shareholder Servicing Plan. The Trust has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to the Class A and Class B
shares of the Portfolio. Under the Service Plan, financial institutions will
enter into shareholder service agreements with the Trust to provide
administrative support services to their customers who are Portfolio
shareholders. In return for providing these support services, a financial
institution may receive payments at a rate not exceeding 0.25% of the average
daily net assets of the Class A or Class B shares of the Portfolio. These
administrative services may include, but are not limited to, the following
-15-
<PAGE>
functions: providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer personnel, as necessary
or beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Portfolio; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Portfolio reasonably
requests.
In addition to receiving payments under the Service Plan,
financial institutions may be compensated by Mentor Advisors and/or Mentor
Investment Group, or affiliates thereof, for providing administrative support
services to holders of Class A or Class B shares of the Portfolio. These
payments will be made directly by Mentor Advisors and/or Mentor Investment Group
and will not be made from the assets of the Portfolio.
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 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 more than
ten series, one representing the Portfolio, the others representing other
Portfolios with varying investment objectives and policies. Only Class A and
Class B shares of the Portfolio are being offered by this Prospectus. The
Portfolio also offers other classes of shares with different sales charges and
expenses. Because of these different sales charges and expenses, the investment
performance of the classes will vary. For more information, including your
eligibility to purchase any other class of shares, contact the Distributor.
Each share has one vote, with fractional shares voting
proportionally. Shares of each series will vote together as a single series
except when required by law or determined by the Trustees. Shares of the
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets of
the Portfolio. The Trust may suspend the sale of shares at any time and may
refuse any order to purchase shares. Although neither the Portfolio nor the
Trust is required to hold annual meetings of shareholders, shareholders have the
right to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Agreement and Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not
issue certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas
City, Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o BFDS, 2 Heritage Drive, North Quincy, Massachusetts 02171,
serves as the Portfolio's transfer and dividend agent.
Performance Information
Yield and total return data may from time to time be included in
advertisements about Class A and Class B shares of the Portfolio. The
Portfolio's "yield" for each class of shares is calculated by dividing the
Portfolio's annualized net investment income per share during a recent 30-day
period by the maximum public offering price per share on the last day of that
period. "Total return" for the one-, five- and ten-year periods (or for the life
of 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 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
-16-
<PAGE>
net asset value. Investment performance of different classes of shares of the
Portfolio will differ. Any quotation of investment performance not reflecting
the maximum initial sales charge or CDSC would be reduced if such sales charges
were reflected. Quotations of yield and total return for a period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. The Portfolio's performance may be compared to various indices.
See the Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of the Portfolio's investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and
does not predict future performance. Investment performance, which will vary, is
based on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These factors
should be considered when comparing the Portfolio's investment results to those
of other mutual funds and other investment vehicles.
-17-
<PAGE>
APPENDIX
SECURITIES RATINGS
The following rating services describe rated securities as follows:
MOODY'S INVESTORS SERVICE, INC.
BONDS
AAA -- Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated BAA are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
A-1
<PAGE>
CA -- Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S
BONDS
AAA -- Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree. A 4 Debt
rated 'A' has a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for bonds in higher-rated categories.
BB-B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB -- Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B -- Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC -- Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
A-2
<PAGE>
CC -- The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C -- The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
D -- Bonds rated 'D' are in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be used
on the filing of a bankruptcy petition if debt service payments are jeopardized.
A-3
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the
office of the Commission.
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Expense summary........................................................................................................2
Investment objective and policies......................................................................................3
Other investment practices and risks...................................................................................5
Management.............................................................................................................6
How the Portfolio values its shares....................................................................................7
Sales arrangements.....................................................................................................8
How to buy shares......................................................................................................8
Distribution Plan (Class B Shares)....................................................................................12
How to sell shares....................................................................................................12
How to exchange shares................................................................................................13
How distributions are made............................................................................................14
Taxes.................................................................................................................14
Other services........................................................................................................14
General information...................................................................................................15
Performance information...............................................................................................15
</TABLE>
MENTOR
ASSET ALLOCATION
PORTFOLIO
Class A and Class B Shares
----------
PROSPECTUS
----------
April ___, 1998
Mentor Distributors, LLC
Distributor
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 30, 1998
PROSPECTUS April ___, 1998
Institutional Class
MENTOR ASSET ALLOCATION PORTFOLIO
Mentor Asset Allocation Portfolio seeks high total return. The
Portfolio allocates its assets among the major asset categories of equity
securities, fixed-income securities, and money-market instruments. Mentor
Investment Advisors, LLC is the Portfolio's investment adviser. The Portfolio is
a series of shares of Mentor Funds.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. Investors can find more detailed
information in the April ___, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement, call Mentor
Investment Group, LLC at 1-800-869-6042. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
-------------------------
MENTOR DISTRBUTORS, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
-1-
<PAGE>
Expense summary
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur in
its first full fiscal year. The Example shows the cumulative expenses
attributable to a hypothetical $1,000 investment in the Portfolio over specified
periods.
<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
(as a percentage of average net assets)
Management Fees 0.85%
12b-1 Fees 0.00%
Other Expenses (after expense limitation)* 0.33%
----
Total Portfolio Operating Expenses (after 1.18%
expense limitation)*
</TABLE>
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation. In the absence of the expense limitation, Other Expenses are
expected to be ____% and Total Portfolio Operating Expenses are expected to be
____%.
Example
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
1 year $
3 years $
This information is provided to help investors understand the expenses of
investing in the Portfolio and an investor's share of the estimated operating
expenses of the Portfolio. The Example should not be considered a representation
of future performance; actual expenses may be more or less than those shown.
Investment objective and policies
The Portfolio's investment objective is to seek high total return. In
seeking this objective, Mentor Investment Advisors, LLC, the Portfolio's
investment adviser ("Mentor Advisors"), allocates the Portfolio's assets among
the major asset categories of equity securities, fixed-income securities, and
money-market instruments. The Portfolio will normally invest some portion of its
assets in each asset category, but may invest without limit in any asset
category. Total return consist of current income (including dividends, interest,
and, in the case of discounted instruments, discount accruals) and capital
appreciation (including realized and unrealized capital gains and losses).
-2-
<PAGE>
Mentor Advisors believes that the Portfolio has the potential to
achieve above-average investment returns at comparatively lower risk by
allocating its resources among the equity, debt, and money-market sectors of the
market as opposed to relying solely on just one market sector. For example,
Mentor Advisors may at times believe that the equity market holds a higher
potential for total return than the debt market and that a relatively large
portion of the Portfolio's assets should be allocated to the equity market
sector. The reverse would be true at times when Mentor Advisors believes that
the potential for total return in the bond market is greater than that in the
equity market. Mentor Advisors might also allocate the Portfolio's investments
to money market instruments in order to earn current return and to reduce the
potential adverse effect of declines in the bond and equity markets.
Mentor Advisors implements its asset allocation decisions by allocating
the Portfolio's assets among the three investment sectors within the Portfolio
- -- the Equity Sector, the Bond Sector, and the Cash Sector. After determining
the portions of the Portfolio's assets to be invested in the various sectors,
Mentor Advisors employs a "passively" managed investment - or index - approach
to managing the Equity and Bond Sectors. In each case, Mentor Advisors creates a
mix of securities that will match as closely as possible the performance of a
benchmark index; it does not buy and sell securities based on research and
analysis. However, to the extent Mentor Advisors actively allocates the
Portfolio's assets across the various market sectors, the achievement of the
Portfolio's investment objective depends on, among other things, the ability of
Mentor Advisors to assess correctly the effects of economic and markets trends
on different sectors of the market.
In the case of the Equity Sector, Mentor Advisors seeks to track the
performance of the Standard & Poor's 500 Composite Stock Price Index, which
emphasizes stocks of large U.S. companies. The Portfolio typically holds each
stock found in the S&P 500 Index in roughly the same proportions as represented
in the index itself. For example, if 5% of the S&P 500 Index were made up of the
assets of a specific company, the Portfolio would invest the same percentage of
its assets in that company.
In the case of the Bond Sector, Mentor Advisors seeks to track the
performance of the Lehman Brothers Mutual Fund Long (10+) Government/Corporate
Index, a market weighted index which encompasses U.S. Treasury and agency
securities and investment grade corporate and international (dollar denominated)
bonds, with maturities greater than ten years. Because of the large number of
securities involved, the Portfolio will be unable to hold all of the individual
issues which comprise the Index. Instead, the Portfolio will attempt to
duplicate the performance of the Index through statistical sampling procedures;
it will hold a representative sample of the securities in the Index, selecting a
few issues to represent entire "classes" or types of securities in the Index.
The Portfolio will be constructed so as to match approximately the composition
of the Index after adjusting for the corporate substitution policy (see "Special
considerations regarding the Bond Sector" below).
The Cash Sector will contain short-term, fixed-income securities issued
by private and governmental institutions. Such securities may include, for
example, U.S. Government securities; bank obligations; Eurodollar certificates
of deposit issued by foreign branches of domestic banks; obligations of savings
institutions; fully- insured certificates of deposit; and commercial paper rated
within the two highest grades by S&P or the highest grade by Moody's, or, if not
rated, issued by a company having an outstanding debt issue rated at least Aa by
Moody's or AA by S&P.
An index portfolio has operating expenses; a market index does not. As
a result, the Equity and Bond Sectors -- while expected to track their target
indices as closely as possible -- will not be able to match the performance of
the indices exactly.
Special considerations regarding the Bond Sector. Fixed-income
securities will be primarily of investment grade quality -- i.e., those rated at
least Baa3 by Moody's or BBB- by S&P or at a comparable rating by another
nationally recognized rating organization, or, if unrated, determined by Mentor
Advisors to be of comparable quality. Securities rated Baa or BBB are considered
as medium grade obligations. Interest payments
-3-
<PAGE>
and principal are regarded as adequate for the present but certain protective
elements found in higher rated bonds may be lacking. Such bonds lack outstanding
investment characteristics and, in fact, have speculative characteristics as
well. A description of securities ratings is contained in the Appendix to this
Prospectus.
In its effort to duplicate the investment performance of its Index, the
Bond Sector will invest in fixed-income securities approximating its relative
proportion of the Index's total market value. These investments include U.S.
Treasury and agency securities, corporate debt, and international (dollar
denominated) debt. The Portfolio may invest in U.S. Treasury bills, notes, and
bonds and other "full faith and credit" obligations of the U.S. Government. The
Portfolio may also invest in U.S. Government agency securities, which are debt
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government. Such "agency" securities may not be backed by the "full faith and
credit" of the U.S. Government. Such U.S. Government agencies may include the
Federal Farm Credit Banks and the Resolution Trust Corporation. Even though they
all carry top (AAA) credit ratings, "agency" obligations are not explicitly
guaranteed by the U.S. Government and so are perceived as somewhat riskier than
comparable Treasury bonds.
The Portfolio may, from time to time, substitute one type of investment
grade bond for another. For instance, a Portfolio may hold more short-term
corporate bonds (fewer short-term U.S. Treasury bonds) than represented in the
Index so as to increase income. This corporate substitution strategy will entail
the assumption of additional credit risk; however, substantial diversification
within the corporate sector should moderate issue-specific credit risk. In
addition, the Portfolio currently restricts corporate substitutions to issues
with less than four years remaining to maturity and in aggregate no more than
15% of net assets within the Bond Sector. Overall credit risk is expected to be
low.
Mortgage-backed securities; other asset-backed securities. The
Portfolio may invest in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including CMOs and
"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.
The Portfolio 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. The Portfolio may invest in both the interest-only -- or
"IO" -- class and the principal- only -- or "PO" -- class. The yield to maturity
and price of an IO class is extremely sensitive to the rate of
-4-
<PAGE>
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, the Portfolio may
under some circumstances fail to fully recoup its initial investment in these
securities. Conversely, POs tend to increase in value if prepayments are greater
than anticipated and decline if prepayments are slower than anticipated. The
secondary market for stripped mortgage-backed securities may be more volatile
and less liquid than that for other mortgage-backed securities, potentially
limiting the Portfolio's ability to buy or sell those securities at any
particular time.
Certain mortgage-backed securities held by the Portfolio may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may also invest in securities representing interests in
other types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security interest
in the underlying assets may be limited. For example, the laws of certain states
may prevent or restrict repossession of collateral from a debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
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.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio may
invest in a wide variety of such securities, including mortgage-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.
The Portfolio's investment 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, the Portfolio's investment adviser
may be required to estimate the value of such a security using quotations
provided by pricing services or securities dealers making a market in such
securities, or based on other comparable securities or other bench-mark
securities or interest rates. Mortgage-backed and other asset-backed securities
in which the Portfolio may invest may be highly illiquid, and the Portfolio may
not be able to sell such a security at a particular time or at the value it has
placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, the Portfolio's investment 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
-5-
<PAGE>
the Portfolio's investment 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 the Portfolio will recover the entire amount of the principal
paid by it to purchase any such securities.
Use of derivatives. The Portfolio may invest in futures contracts and
options, but only to a limited extent. Specifically, the Portfolio may enter
into futures contracts provided that not more than 5% of its assets are required
as a futures contract deposit.
Futures contracts and options may be used for several common fund
management strategies: to maintain cash reserves while simulating full
investment, to reduce transaction costs, or to implement changes among the
various Sectors of the Portfolio pending the sale of some portfolio securities
and the purchase of others.
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
Options and futures transactions involve costs and may result in
losses. For example, certain risks arise from the Portfolio's potential
inability to close out futures and options positions. Although the Portfolio
will enter into options and futures transactions only if Mentor Advisors
believes that a liquid secondary market exists for such options or futures
contract, there can be no assurance that the Portfolio will be able to effect
closing transactions at any particular time or at an acceptable price. Certain
provisions of the Internal Revenue Code may limit the Portfolio's ability to
engage in options and futures transactions.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually not
more than one week), which the seller agrees to repurchase at a fixed time and
price, representing the Portfolio's cost plus interest. Under a securities loan,
the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party should become involved in bankruptcy or
insolvency proceedings, it is possible that the Portfolio may be treated as an
unsecured creditor and be required to return the underlying collateral to the
other party's estate.
Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective and
policies described herein are not fundamental and may be changed by the Trustees
without shareholder approval. All percentage limitations on investments will
apply at the time of investment and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of the
investment.
-6-
<PAGE>
Management
The Trustees of Mentor Funds (the "Trust") are responsible for
generally overseeing the conduct of the Portfolio's business. Mentor Investment
Advisors, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, acts
as investment adviser to the Portfolio. Mentor Investment Group, LLC ("Mentor
Investment Group") serves as administrator to the Portfolio. As compensation for
its services as administrator, the Fund pays Mentor Investment Group a fee,
accrued daily and paid monthly, at an annual rate of 0.10% of the average value
of the Portfolio's daily assets.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment
Group, LLC ("Mentor Investment Group") which is in turn a subsidiary of Wheat
First Butcher Singer, Inc. ("Wheat First Butcher Singer"), a diversified
financial services holding company. Wheat First Butcher Singer, through other
subsidiaries, also engages in securities brokerage, investment banking, and
related businesses. EVEREN Capital Corporation has a 20% ownership in Mentor
Investment Group and may acquire additional ownership based principally on the
amount of Mentor Investment Group's revenues derived from assets attributable to
clients of EVEREN Securities, Inc. and its affiliates. Mentor Advisors and its
affiliates serve as investment adviser to over twenty separate investment
portfolios in the Mentor Family of Funds with total assets under management of
more than $11 billion. All investment decisions for the Portfolio are made by
investment teams at Mentor Advisors.
Mentor Investment Group is a subsidiary of Wheat First Butcher Singer,
Inc. ("Wheat First Butcher Singer"), a diversified financial services holding
company. Wheat First Butcher Singer, through other subsidiaries, also engages in
securities brokerage, investment banking, and related businesses. EVEREN Capital
Corporation has a 20% ownership in Mentor Investment Group and may acquire
additional ownership based principally on the amount of Mentor Investment
Group's revenues derived from assets attributable to clients of EVEREN
Securities, Inc. and its affiliates.
Mentor Investment Group has informed the Portfolio that Wheat First
Butcher Singer will be acquired by First Union Corp. ("First Union"), in a
transaction expected to occur as early as January 31, 1998. First Union is a
global financial services company with approximately $140 billion in assets and
$10 billion in total stockholders' equity. The proposed arrangement does not
contemplate any changes in the management or operations of Mentor Investment
Group or any of its subsidiaries, including Mentor Advisors.
Subject to the general oversight of the Trustees, Mentor Advisors
manages the Portfolio in accordance with the stated policies of the Portfolio.
Mentor Advisors makes investment decisions for the Portfolio and places the
purchase and sale orders for the Portfolio's portfolio transactions. In
selecting broker-dealers, Mentor Advisors may consider research and brokerage
services furnished to it and its affiliates. Subject to seeking the best overall
terms available, Mentor Advisors may consider sales of shares of the Portfolio
(and, if permitted by law, of other funds in the Mentor family) as a factor in
the selection of broker-dealers to execute portfolio transactions for the
Portfolio. Mentor Advisors may at times cause the Portfolio to pay commissions
to broker-dealers affiliated with Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise
allocated to the Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, certain investor servicing fees and
expenses, charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges, and charges relating to corporate matters, are borne
by the Portfolio.
-7-
<PAGE>
Portfolio turnover. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's annual portfolio turnover
rate is expected to be less than 200% for the current fiscal year.
How the Portfolio values its shares
The Portfolio calculates the net asset value of its shares of each
class by dividing the total value of its assets attributable to that class, less
liabilities attributable to that class, by the number of shares of the class
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which has been determined to approximate the fair market value
of such investments. All other securities and assets are valued at their fair
values. The net asset value for Class A shares will generally differ from that
of Class B shares due to the variance in daily net income realized by and
dividends paid on each class of shares, and any differences in the expenses of
the different classes.
Purchase of shares
Shares are sold at a price based on the Portfolio's net asset value
next determined after a purchase order is received by the Portfolio. In most
cases, in order to receive that day's public offering price, your order must be
received by the Trust or Mentor Distributors, LLC, 901 East Byrd Street,
Richmond, Virginia 23219 (the "Distributor"), before the close of regular
trading on the New York Stock Exchange. The Distributor is not obligated to sell
any specific amount of shares of the Portfolio.
An investor may make an initial purchase of shares in the Portfolio by
submitting completed application materials along with a purchase order, and by
making payment to the Trust. Investors will be required to make minimum
initial investments of $500,000 and minimum subsequent investments of $25,000.
Investments made through advisory accounts maintained with investment advisers
registered under the Investment Advisers Act of 1940, as amended (including
"wrap" accounts) are not subject to these minimum investment requirements. The
Portfolio reserves the right at any time to change the initial and subsequent
investment minimums required of investors. If an investor purchases shares of
the Portfolio through EVEREN Securities, Inc. or certain other financial
institutions that have made arrangements with Mentor Distributors with the
redemption proceeds received by the investor within the preceding 90 days from
the sale of shares of any non-Mentor open-end mutual fund, EVEREN Securities,
Inc. or such other financial institutions may compensate the investor's
investment consultant in connection with that purchase.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to Mentor Advisors, or (iii) a combination of
such securities and cash. Purchase of shares of the Portfolio in exchange for
securities is subject in each case to the determination by Mentor Advisors that
the securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by Mentor Advisors in exchange for Portfolio shares will be
valued in the same manner as the Portfolio's assets as of the time of the
Portfolio's next determination of net asset value after such acceptance. All
dividends and subscription or other rights which are reflected in the market
price of accepted securities at the time of valuation become the property of the
Portfolio and must be delivered to the Portfolio upon receipt by the investor
from the issuer. A gain or loss for federal income tax purposes would be
realized upon the exchange by an investor that is subject to federal income
taxation, depending upon the investor's basis in the securities tendered. A
shareholder who wishes to purchase shares by exchanging securities should obtain
instructions by calling the Distributor at 1-800-869-6042.
-8-
<PAGE>
The Distributor, Mentor Advisors, and affiliates thereof, at their own
expense and out of their own assets, may provide compensation to dealers in
connection with sales of shares of the Portfolio. Such compensation may include,
but is not limited to, financial assistance to dealers in connection with
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of Portfolio shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc.
In all cases Mentor Advisors and the Distributor reserve the right to
reject any particular investment.
Redemption of shares
A shareholder may redeem all or any portion of its shares in the
Portfolio any day the New York Stock Exchange is open by sending a signed letter
of instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to the Portfolio c/o Mentor Funds, P.O.
Box 1357, Richmond, Virginia 23286-0109 or to the Distributor. Redemptions will
be effected at the net asset value per share of the Portfolio next determined
after the receipt by the Portfolio of redemption instructions in "good order" as
described below. In order to receive that day's net asset value, your request
must be received before the close of regular trading on the New York Stock
Exchange. The Portfolio will only redeem shares for which it has received
payment. A check for the proceeds will normally be mailed on the next business
day after a request in good order is received.
A redemption request will be considered to have been made in "good
order" if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be
redeemed, and identifies the shareholder's Portfolio account
number;
(2) the request is signed by each registered owner exactly as
the shares are registered; and
(3) if the shares to be redeemed were issued in certificate
form, the certificates are endorsed for transfer (or are
accompanied by an endorsed stock power) and accompany the
redemption request.
If shares to be redeemed represent an investment made by check, the Trust
reserves the right not to transmit the redemption proceeds to the shareholder
until the check has been collected, which may take up to 15 days after the
purchase date.
The Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. The Distributor usually
requires additional documentation for the sale of shares by a corporation,
partnership, agent, fiduciary, or surviving joint owner. Contact the Distributor
for details.
The Distributor may facilitate any redemption request. There is no extra
charge for this service.
Other information concerning redemption. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven days,
as permitted by federal securities law. In addition, the Portfolio reserves the
right, if conditions exist which make cash payments undesirable, to honor any
request for redemption by making payment in whole or in part in securities
valued in the same way as they would be
-9-
<PAGE>
valued for purposes of computing the Portfolio's per share net asset value. If
payment is made in securities, a shareholder may incur brokerage expenses in
converting those securities into cash.
How distributions are made
The Portfolio distributes net investment income and any net
realized capital gains at least annually. Distributions from capital gains are
made after applying any available capital loss carryovers. All Portfolio
distributions will be invested in additional Portfolio shares, unless the
shareholder instructs the Portfolio otherwise.
Taxes
The Portfolio intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as
ordinary income, except that any distributions of net capital gain will be taxed
as long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Pursuant to the Taxpayer
Relief Act of 1997, long-term capital gains generally will be subject to a
maximum tax rate of 28% or 20% depending upon the holding period of the
Portfolio investment generally the gains. Distributions will be taxable as
described above whether received in cash or in shares through the reinvestment
of distributions. Early in each year the Trust will notify shareholders of the
amount and tax status of distributions paid by the Portfolio for the preceding
year. In buying or selling securities for the Portfolio, Mentor Advisors will
not normally take into account the effect any purchase or sale of securities
will have on the tax positions of the Portfolio's shareholders.
Shareholders of the Portfolio who are U.S. citizens or residents
may be able to claim a foreign tax credit or deduction on their U.S. income tax
returns with respect to foreign taxes paid by the Portfolio. If, at the end of
the fiscal year of the Portfolio, more than 50% of the Portfolio's total assets
are represented by securities of foreign corporations, the Portfolio intends to
make an election permitted by the Internal Revenue Code to treat any foreign
taxes it paid as paid by its shareholders. In that case, shareholders who are
U.S. citizens, U.S. corporations, and, in some cases, U.S. residents will be
required to include in U.S. taxable income their pro rata share of such taxes,
but may then be entitled to claim a foreign tax credit or deduction (but not
both) for their share of such taxes.
The foregoing is a summary of certain federal income tax
consequences of investing in the Portfolio. Dividends and distributions also may
be subject to state and local taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state, or local taxes.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
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 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
-10-
<PAGE>
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 more than ten series, one representing the Portfolio,
the others representing other Portfolios with varying investment objectives and
policies. The Portfolio's shares are currently divided into four classes. Only
shares of the Portfolio's Institutional Class (Class D) are being offered by
this Prospectus. The Portfolio also offers other classes of shares with
different sales charges and expenses. Because of these different sales charges
and expenses, the investment performance of the classes will vary. For more
information, including your eligibility to purchase any other class of shares,
contact the Distributor.
Each share has one vote, with fractional shares voting
proportionally. Shares of each series will vote together as a single series
except when required by law or determined by the Trustees. Shares of the
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets of
the Portfolio. The Trust may suspend the sale of shares at any time and may
refuse any order to purchase shares. Although neither the Portfolio nor the
Trust is required to hold annual meetings of shareholders, shareholders have the
right to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Agreement and Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not
issue certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas
City, Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
Performance Information
Yield and total return data may from time to time be included in
advertisements about the Class E shares of the Portfolio. The Portfolio's
"yield" for each class of shares is calculated by dividing the Portfolio's
annualized net investment income per share during a recent 30-day period by its
net asset value on the last day of that period. "Total return" for the life of
the Class E shares of the Portfolio through the most recent calendar quarter
represents the average annual compounded rate of return on an investment of
$1,000 in the shares over the period. Total return may also be presented for
other periods or based on investment at reduced sales charge levels or at net
asset value. Investment performance for different classes of shares of the
Portfolio will differ. Quotations of yield and total return for a period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. The Portfolio's performance may be compared to various indices.
See the Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of the Portfolio's investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and
does not predict future performance. Investment performance, which will vary, is
based on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These factors
should be considered when comparing the Portfolio's investment results to those
of other mutual funds and other investment vehicles.
-11-
<PAGE>
APPENDIX
SECURITIES RATINGS
The following rating services describe rated securities as follows:
MOODY'S INVESTORS SERVICE, INC.
BONDS
AAA -- Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated BAA are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
A-1
<PAGE>
CA -- Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S
BONDS
AAA -- Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree. A 4 Debt
rated 'A' has a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for bonds in higher-rated categories.
BB-B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB -- Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B -- Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC -- Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
A-2
<PAGE>
CC -- The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C -- The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
D -- Bonds rated 'D' are in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be used
on the filing of a bankruptcy petition if debt service payments are jeopardized.
A-3
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the
office of the Commission.
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Expense summary........................................................................................................2
Investment objective and policies......................................................................................3
Other investment practices and risks...................................................................................5
Management.............................................................................................................6
How the Portfolio values its shares....................................................................................7
Sales arrangements.....................................................................................................8
How to buy shares......................................................................................................8
How to sell shares....................................................................................................12
How to exchange shares................................................................................................13
How distributions are made............................................................................................14
Taxes.................................................................................................................14
Other services........................................................................................................14
General information...................................................................................................15
Performance information...............................................................................................15
</TABLE>
MENTOR
ASSET ALLOCATION
PORTFOLIO
Institutional Class
----------
PROSPECTUS
----------
April ___, 1998
Mentor Distributors, LLC
Distributor
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 30, 1998
PROSPECTUS April ___, 1998
Class E shares
MENTOR ASSET ALLOCATION PORTFOLIO
Mentor Asset Allocation Portfolio seeks high total return. The
Portfolio allocates its assets among the major asset categories of equity
securities, fixed-income securities, and money-market instruments. Mentor
Investment Advisors, LLC is the Portfolio's investment adviser. The Portfolio is
a series of shares of Mentor Funds.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. Investors can find more detailed
information in the April ___, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement, call Mentor
Investment Group, LLC at 1-800-869-6042. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
-------------------------
MENTOR DISTRIBUTORS, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
-1-
<PAGE>
Expense summary
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur in
its first full fiscal year. The Example shows the cumulative expenses
attributable to a hypothetical $1,000 investment in the Portfolio over specified
periods.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses:
<S> <C>
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
<S> <C>
(as a percentage of average net assets)
Management Fees 0.85%
12b-1 Fees 0.00%
Shareholder Service Fee 0.25%
Other Expenses (after expense limitation)* 0.35%
----
Total Portfolio Operating Expenses (after 1.45%
expense limitation)*
</TABLE>
- ----------------
* Other Expenses and Total Portfolio Operating Expenses reflect a voluntary
expense limitation. In the absence of the expense limitation, Other Expenses are
expected to be ____% and Total Portfolio Operating Expenses are expected to be
____%.
Example
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
1 year $
3 years $
This information is provided to help investors understand the expenses of
investing in the Portfolio and an investor's share of the estimated operating
expenses of the Portfolio. The Example should not be considered a representation
of future performance; actual expenses may be more or less than those shown.
Investment objective and policies
The Portfolio's investment objective is to seek high total return. In
seeking this objective, Mentor Investment Advisors, LLC, the Portfolio's
investment adviser ("Mentor Advisors"), allocates the Portfolio's assets among
the major asset categories of equity securities, fixed-income securities, and
money-market instruments. The Portfolio will normally invest some portion of its
assets in each asset category, but may invest without limit in any asset
category. Total return consist of current income (including dividends, interest,
and, in the case of discounted instruments, discount accruals) and capital
appreciation (including realized and unrealized capital gains and losses).
-2-
<PAGE>
Mentor Advisors believes that the Portfolio has the potential to achieve
above-average investment returns at comparatively lower risk by allocating its
resources among the equity, debt, and money-market sectors of the market as
opposed to relying solely on just one market sector. For example, Mentor
Advisors may at times believe that the equity market holds a higher potential
for total return than the debt market and that a relatively large portion of the
Portfolio's assets should be allocated to the equity market sector. The reverse
would be true at times when Mentor Advisors believes that the potential for
total return in the bond market is greater than that in the equity market.
Mentor Advisors might also allocate the Portfolio's investments to money market
instruments in order to earn current return and to reduce the potential adverse
effect of declines in the bond and equity markets.
Mentor Advisors implements its asset allocation decisions by allocating the
Portfolio's assets among the three investment sectors within the Portfolio --
the Equity Sector, the Bond Sector, and the Cash Sector. After determining the
portions of the Portfolio's assets to be invested in the various sectors, Mentor
Advisors employs a "passively" managed investment - or index - approach to
managing the Equity and Bond Sectors. In each case, Mentor Advisors creates a
mix of securities that will match as closely as possible the performance of a
benchmark index; it does not buy and sell securities based on research and
analysis. However, to the extent Mentor Advisors actively allocates the
Portfolio's assets across the various market sectors, the achievement of the
Portfolio's investment objective depends on, among other things, the ability of
Mentor Advisors to assess correctly the effects of economic and markets trends
on different sectors of the market.
In the case of the Equity Sector, Mentor Advisors seeks to track the
performance of the Standard & Poor's 500 Composite Stock Price Index, which
emphasizes stocks of large U.S. companies. The Portfolio typically holds each
stock found in the S&P 500 Index in roughly the same proportions as represented
in the index itself. For example, if 5% of the S&P 500 Index were made up of the
assets of a specific company, the Portfolio would invest the same percentage of
its assets in that company.
In the case of the Bond Sector, Mentor Advisors seeks to track the
performance of the Lehman Brothers Mutual Fund Long (10+) Government/Corporate
Index, a market weighted index which encompasses U.S. Treasury and agency
securities and investment grade corporate and international (dollar denominated)
bonds, with maturities greater than ten years. Because of the large number of
securities involved, the Portfolio will be unable to hold all of the individual
issues which comprise the Index. Instead, the Portfolio will attempt to
duplicate the performance of the Index through statistical sampling procedures;
it will hold a representative sample of the securities in the Index, selecting a
few issues to represent entire "classes" or types of securities in the Index.
The Portfolio will be constructed so as to match approximately the composition
of the Index after adjusting for the corporate substitution policy (see "Special
considerations regarding the Bond Sector" below).
The Cash Sector will contain short-term, fixed-income securities issued by
private and governmental institutions. Such securities may include, for example,
U.S. Government securities; bank obligations; Eurodollar certificates of deposit
issued by foreign branches of domestic banks; obligations of savings
institutions; fully- insured certificates of deposit; and commercial paper rated
within the two highest grades by S&P or the highest grade by Moody's, or, if not
rated, issued by a company having an outstanding debt issue rated at least Aa by
Moody's or AA by S&P.
An index portfolio has operating expenses; a market index does not. As a
result, the Equity and Bond Sectors -- while expected to track their target
indices as closely as possible -- will not be able to match the performance of
the indices exactly.
Special considerations regarding the Bond Sector. Fixed-income securities
will be primarily of investment grade quality -- i.e., those rated at least Baa3
by Moody's or BBB- by S&P or at a comparable rating by another nationally
recognized rating organization, or, if unrated, determined by Mentor Advisors to
be of comparable quality. Securities rated Baa or BBB are considered as medium
grade obligations. Interest payments and principal
-3-
<PAGE>
are regarded as adequate for the present but certain protective elements found
in higher rated bonds may be lacking. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well. A
description of securities ratings is contained in the Appendix to this
Prospectus.
In its effort to duplicate the investment performance of its Index, the
Bond Sector will invest in fixed-income securities approximating its relative
proportion of the Index's total market value. These investments include U.S.
Treasury and agency securities, corporate debt, and international (dollar
denominated) debt. The Portfolio may invest in U.S. Treasury bills, notes, and
bonds and other "full faith and credit" obligations of the U.S. Government. The
Portfolio may also invest in U.S. Government agency securities, which are debt
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government. Such "agency" securities may not be backed by the "full faith and
credit" of the U.S. Government. Such U.S. Government agencies may include the
Federal Farm Credit Banks and the Resolution Trust Corporation. Even though they
all carry top (AAA) credit ratings, "agency" obligations are not explicitly
guaranteed by the U.S. Government and so are perceived as somewhat riskier than
comparable Treasury bonds.
The Portfolio may, from time to time, substitute one type of investment
grade bond for another. For instance, a Portfolio may hold more short-term
corporate bonds (fewer short-term U.S. Treasury bonds) than represented in the
Index so as to increase income. This corporate substitution strategy will entail
the assumption of additional credit risk; however, substantial diversification
within the corporate sector should moderate issue-specific credit risk. In
addition, the Portfolio currently restricts corporate substitutions to issues
with less than four years remaining to maturity and in aggregate no more than
15% of net assets within the Bond Sector. Overall credit risk is expected to be
low.
Mortgage-backed securities; other asset-backed securities. The Portfolio
may invest in mortgage-backed certificates and other securities representing
ownership interests in mortgage pools, including CMOs and "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.
The Portfolio 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. The Portfolio may invest in both the interest-only -- or "IO"
- -- class and the principal- only -- or "PO" -- class. The yield to maturity and
price of an IO class is extremely sensitive to the rate of
-4-
<PAGE>
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, the Portfolio may
under some circumstances fail to fully recoup its initial investment in these
securities. Conversely, POs tend to increase in value if prepayments are greater
than anticipated and decline if prepayments are slower than anticipated. The
secondary market for stripped mortgage-backed securities may be more volatile
and less liquid than that for other mortgage-backed securities, potentially
limiting the Portfolio's ability to buy or sell those securities at any
particular time.
Certain mortgage-backed securities held by the Portfolio may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may also invest in securities representing interests in other
types of financial assets, such as automobile-finance receivables or credit-card
receivables. Such securities may or may not be secured by the receivables
themselves or may be unsecured obligations of their issuers. The ability of an
issuer of asset-backed securities to enforce its security interest in the
underlying assets may be limited. For example, the laws of certain states may
prevent or restrict repossession of collateral from a debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
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.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio may
invest in a wide variety of such securities, including mortgage-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.
The Portfolio's investment 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, the Portfolio's investment adviser may be
required to estimate the value of such a security using quotations provided by
pricing services or securities dealers making a market in such securities, or
based on other comparable securities or other bench-mark securities or interest
rates. Mortgage-backed and other asset-backed securities in which the Portfolio
may invest may be highly illiquid, and the Portfolio may not be able to sell
such a security at a particular time or at the value it has placed on that
security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, the Portfolio's investment 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
-5-
<PAGE>
the Portfolio's investment 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 the Portfolio will recover the entire amount of the principal
paid by it to purchase any such securities.
Use of derivatives. The Portfolio may invest in futures contracts and
options, but only to a limited extent. Specifically, the Portfolio may enter
into futures contracts provided that not more than 5% of its assets are required
as a futures contract deposit.
Futures contracts and options may be used for several common fund
management strategies: to maintain cash reserves while simulating full
investment, to reduce transaction costs, or to implement changes among the
various Sectors of the Portfolio pending the sale of some portfolio securities
and the purchase of others.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above. Transactions in options and futures involve certain risks which
are described below and in the Statement of Additional Information.
Options and futures transactions involve costs and may result in losses.
For example, certain risks arise from the Portfolio's potential inability to
close out futures and options positions. Although the Portfolio will enter into
options and futures transactions only if Mentor Advisors believes that a liquid
secondary market exists for such options or futures contract, there can be no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. Certain provisions of the Internal
Revenue Code may limit the Portfolio's ability to engage in options and futures
transactions.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on futures
contracts would exceed 5% of the Portfolio's assets. (For options that are
"in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually not
more than one week), which the seller agrees to repurchase at a fixed time and
price, representing the Portfolio's cost plus interest. Under a securities loan,
the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is a
U.S. Government security. These transactions must be fully collateralized at all
times, but involve some risk to the Portfolio if the other party should default
on its obligations and the Portfolio is delayed or prevented from recovering the
collateral. If the other party should become involved in bankruptcy or
insolvency proceedings, it is possible that the Portfolio may be treated as an
unsecured creditor and be required to return the underlying collateral to the
other party's estate.
Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective and
policies described herein are not fundamental and may be changed by the Trustees
without shareholder approval. All percentage limitations on investments will
apply at the time of investment and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of the
investment.
-6-
<PAGE>
Management
The Trustees of Mentor Funds (the "Trust") are responsible for
generally overseeing the conduct of the Portfolio's business. Mentor Investment
Advisors, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, acts
as investment adviser to the Portfolio. Mentor Investment Group, LLC ("Mentor
Investment Group") serves as administrator to the Portfolio. As compensation for
its services as administrator, the Fund pays Mentor Investment Group a fee,
accrued daily and paid monthly, at an annual rate of 0.10% of the average value
of the Portfolio's daily assets.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment
Group, LLC ("Mentor Investment Group") which is in turn a subsidiary of Wheat
First Butcher Singer, Inc. ("Wheat First Butcher Singer"), a diversified
financial services holding company. Wheat First Butcher Singer, through other
subsidiaries, also engages in securities brokerage, investment banking, and
related businesses. EVEREN Capital Corporation has a 20% ownership in Mentor
Investment Group and may acquire additional ownership based principally on the
amount of Mentor Investment Group's revenues derived from assets attributable to
clients of EVEREN Securities, Inc. and its affiliates. Mentor Advisors and its
affiliates serve as investment adviser to over twenty separate investment
portfolios in the Mentor Family of Funds with total assets under management of
more than $11 billion. All investment decisions for the Portfolio are made by
investment teams at Mentor Advisors.
Mentor Investment Group is a subsidiary of Wheat First Butcher Singer,
Inc. ("Wheat First Butcher Singer"), a diversified financial services holding
company. Wheat First Butcher Singer, through other subsidiaries, also engages in
securities brokerage, investment banking, and related businesses. EVEREN Capital
Corporation has a 20% ownership in Mentor Investment Group and may acquire
additional ownership based principally on the amount of Mentor Investment
Group's revenues derived from assets attributable to clients of EVEREN
Securities, Inc. and its affiliates.
Mentor Investment Group has informed the Portfolio that Wheat First
Butcher Singer will be acquired by First Union Corp. ("First Union"), in a
transaction expected to occur as early as January 31, 1998. First Union is a
global financial services company with approximately $140 billion in assets and
$10 billion in total stockholders' equity. The proposed arrangement does not
contemplate any changes in the management or operations of Mentor Investment
Group or any of its subsidiaries, including Mentor Advisors.
Subject to the general oversight of the Trustees, Mentor Advisors
manages the Portfolio in accordance with the stated policies of the Portfolio.
Mentor Advisors makes investment decisions for the Portfolio and places the
purchase and sale orders for the Portfolio's portfolio transactions. In
selecting broker-dealers, Mentor Advisors may consider research and brokerage
services furnished to it and its affiliates. Subject to seeking the best overall
terms available, Mentor Advisors may consider sales of shares of the Portfolio
(and, if permitted by law, of other funds in the Mentor family) as a factor in
the selection of broker-dealers to execute portfolio transactions for the
Portfolio. Mentor Advisors may at times cause the Portfolio to pay commissions
to broker-dealers affiliated with Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise
allocated to the Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, certain investor servicing fees and
expenses, charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges, and charges relating to corporate matters, are borne
by the Portfolio.
-7-
<PAGE>
Portfolio turnover. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions.
The investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. The Portfolio's annual portfolio turnover
rate is expected to be less than 200% for the current fiscal year.
How the Portfolio values its shares
The Portfolio calculates the net asset value of its shares of each
class by dividing the total value of its assets attributable to that class, less
liabilities attributable to that class, by the number of shares of the class
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which has been determined to approximate the fair market value
of such investments. All other securities and assets are valued at their fair
values. The net asset value for Class A shares will generally differ from that
of Class B shares due to the variance in daily net income realized by and
dividends paid on each class of shares, and any differences in the expenses of
the different classes.
Purchase of shares
Class E shares of the Portfolio are available to shareholders who
invest or maintain a Portfolio account with the assistance of a broker-dealer,
financial consultant, or similar service provider (a "financial intermediary").
Shares are sold at a price based on the Portfolio's net asset value
next determined after a purchase order is received by the Portfolio. In most
cases, in order to receive that day's public offering price, your order must be
received by the Trust or Mentor Distributors, LLC, 901 East Byrd Street,
Richmond, Virginia 23219 (the "Distributor"), before the close of regular
trading on the New York Stock Exchange. The Distributor is not obligated to sell
any specific amount of shares of the Portfolio.
An investor may make an initial purchase of shares in the Portfolio by
submitting completed application materials along with a purchase order, and by
making payment to the Trust, or through a financial intermediary. If you
purchase shares through your financial intermediary, your financial intermediary
will be responsible for forwarding any necessary documentation and payments to
the Distributor.
Investors will be required to make minimum initial investments of
$500,000 and minimum subsequent investments of $25,000. Investments made through
advisory accounts maintained with investment advisers registered under the
Investment Advisers Act of 1940, as amended (including "wrap" accounts), are not
subject to these minimum investment requirements. The Portfolio reserves the
right at any time to change the initial and subsequent investment minimums
required of investors. If an investor purchases shares of the Portfolio through
EVEREN Securities, Inc. or certain other financial institutions that have made
arragements with Mentor Distributors with the redemption proceeds received by
the investor within the preceding 90 days from the sale of shares of any
non-Mentor open-end mutual fund, EVEREN Securities, Inc. or such other financial
institutuons may compensate the investor's investment consultant in connection
with that purchase.
If you buy shares through a financial intermediary, the financial
intermediary must ensure that the Distributor receives your order before the
close of regular trading on the New York Stock Exchange for you to receive that
day's public offering price.
Shares of the Portfolio may be purchased by (i) paying cash, (ii)
exchanging securities acceptable to Mentor Advisors, or (iii) a combination of
such securities and cash. Purchase of shares of the Portfolio in
-8-
<PAGE>
exchange for securities is subject in each case to the determination by Mentor
Advisors that the securities to be exchanged are acceptable for purchase by the
Portfolio. Securities accepted by Mentor Advisors in exchange for Portfolio
shares will be valued in the same manner as the Portfolio's assets as of the
time of the Portfolio's next determination of net asset value after such
acceptance. All dividends and subscription or other rights which are reflected
in the market price of accepted securities at the time of valuation become the
property of the Portfolio and must be delivered to the Portfolio upon receipt by
the investor from the issuer. A gain or loss for federal income tax purposes
would be realized upon the exchange by an investor that is subject to federal
income taxation, depending upon the investor's basis in the securities tendered.
A shareholder who wishes to purchase shares by exchanging securities should
obtain instructions by calling the Distributor at 1-800-869-6042.
The Distributor, Mentor Advisors, and affiliates thereof, at their own
expense and out of their own assets, may provide compensation to dealers in
connection with sales of shares of the Portfolio. Such compensation may include,
but is not limited to, financial assistance to dealers in connection with
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of Portfolio shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc.
In all cases Mentor Advisors or the Distributor reserves the right to
reject any particular investment.
Shareholder Servicing Plan; financial intermediaries. The Portfolio has
adopted a Shareholder Servicing Plan (the "Plan") with respect to its Class E
shares. Under the Plan, financial intermediaries may enter into shareholder
service agreements with the Portfolio to provide administrative support to their
customers who hold Class E shares of the Portfolio. In return for providing
these support services, a financial intermediary may receive payments at a rate
not exceeding 0.25% of the average daily net assets of the Portfolio
attributable to the Class E shares held by its customers. These support services
may include, but are not limited to, the following: providing office space,
equipment, telephone facilities, and various personnel, including clerical,
supervisory, and computer personnel, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Portfolio; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Portfolio reasonably requests.
In addition to receiving payments under the Plan, financial
intermediaries may be compensated by Mentor Advisors and/or Mentor Investment
Group, or affiliates thereof, for providing administrative support services to
holders of Class E shares of the Portfolio. These payments will be made directly
by Mentor Advisors and/or Mentor Investment Group and will not be made from the
assets of the Portfolio.
When you effect transactions with the Portfolio (including, for
example, purchases, sales, or redemptions of shares) through a financial
intermediary, your financial intermediary, and not the Portfolio, will be
responsible for taking all steps, and furnishing all necessary documentation, to
effect the transactions. Your financial intermediary may charge for these
services. Certain financial intermediaries may not effect transactions with the
Portfolio for their clients.
Redemption of shares
You can sell your shares to the Portfolio any day the New York Stock
Exchange is open, either directly to the Portfolio or through your financial
intermediary.
Selling shares directly to the Portfolio. A shareholder may redeem all
or any portion of its shares in the Portfolio any day the New York Stock
Exchange is open by sending a signed letter of instruction and stock power
-9-
<PAGE>
form, along with any certificates that represent shares the shareholder
wants to sell, to the Portfolio c/o Mentor Funds, P.O. Box 1357, Richmond,
Virginia 23286-0109 or to the Distributor. Redemptions will be effected at
-10-
<PAGE>
the net asset value per share of the Portfolio next determined after the receipt
by the Portfolio of redemption instructions in "good order" as described below.
In order to receive that day's net asset value, your request must be received
before the close of regular trading on the New York Stock Exchange. The
Portfolio will only redeem shares for which it has received payment. A check for
the proceeds will normally be mailed on the next business day after a request in
good order is received.
Selling shares through your financial intermediary. Your financial
intermediary must receive your request before the close of regular trading on
the New York Stock Exchange to receive that day's net asset value. If you redeem
your shares through a financial intermediary, your financial intermediary will
be responsible for delivering your redemption request and all necessary
documentation to the Portfolio and may charge you for its services.
General. A redemption request will be considered to have been made in
"good order" if the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be
redeemed, and identifies the shareholder's Portfolio account
number;
(2) the request is signed by each registered owner exactly as the
shares are registered; and
(3) if the shares to be redeemed were issued in certificate form,
the certificates are endorsed for transfer (or are accompanied
by an endorsed stock power) and accompany the redemption
request.
If shares to be redeemed represent an investment made by check, the
Trust reserves the right not to transmit the redemption proceeds to the
shareholder until the check has been collected, which may take up to 15 days
after the purchase date.
The Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. The Distributor usually
requires additional documentation for the sale of shares by a corporation,
partnership, agent, fiduciary, or surviving joint owner. Contact the Distributor
for details.
The Distributor may facilitate any redemption request. There is no
extra charge for this service.
Other information concerning redemption. Under unusual circumstances,
the Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law. In addition, the Portfolio
reserves the right, if conditions exist which make cash payments undesirable, to
honor any request for redemption by making payment in whole or in part in
securities valued in the same way as they would be valued for purposes of
computing the Portfolio's per share net asset value. If payment is made in
securities, a shareholder may incur brokerage expenses in converting those
securities into cash.
How distributions are made
The Portfolio distributes net investment income and any net
realized capital gains at least annually. Distributions from capital gains are
made after applying any available capital loss carryovers. All Portfolio
distributions will be invested in additional Portfolio shares, unless the
shareholder instructs the Portfolio otherwise.
-11-
<PAGE>
Taxes
The Portfolio intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as
ordinary income, except that any distributions of net capital gain will be taxed
as long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Pursuant to the Taxpayer
Relief Act of 1997, long-term capital gains generally will be subject to a
maximum tax rate of 28% or 20% depending upon the holding period of the
Portfolio investment generating the gains. Distributions will be taxable as
described above whether received in cash or in shares through the reinvestment
of distributions. Early in each year the Trust will notify shareholders of the
amount and tax status of distributions paid by the Portfolio for the preceding
year. In buying or selling securities for the Portfolio, Mentor Advisors will
not normally take into account the effect any purchase or sale of securities
will have on the tax positions of the Portfolio's shareholders.
Shareholders of the Portfolio who are U.S. citizens or residents
may be able to claim a foreign tax credit or deduction on their U.S. income tax
returns with respect to foreign taxes paid by the Portfolio. If, at the end of
the fiscal year of the Portfolio, more than 50% of the Portfolio's total assets
are represented by securities of foreign corporations, the Portfolio intends to
make an election permitted by the Internal Revenue Code to treat any foreign
taxes it paid as paid by its shareholders. In that case, shareholders who are
U.S. citizens, U.S. corporations, and, in some cases, U.S. residents will be
required to include in U.S. taxable income their pro rata share of such taxes,
but may then be entitled to claim a foreign tax credit or deduction (but not
both) for their share of such taxes.
The foregoing is a summary of certain federal income tax
consequences of investing in the Portfolio. Dividends and distributions also may
be subject to state and local taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state, or local taxes.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
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 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 more than
ten series, one representing the Portfolio, the others representing other
Portfolios with varying investment objectives and policies. The Portfolio's
shares are currently divided into four classes. Only shares of the Portfolio's
Class E shares are being offered by this Prospectus. The Portfolio also offers
other classes of shares with different sales charges and expenses. Because of
these different sales charges and expenses, the investment performance of the
classes will vary. For more information, including your eligibility to purchase
any other class of shares, contact the Distributor.
-12-
<PAGE>
Each share has one vote, with fractional shares voting
proportionally. Shares of each series will vote together as a single series
except when required by law or determined by the Trustees. Shares of the
Portfolio are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Portfolio were liquidated, would receive the net assets of
the Portfolio. The Trust may suspend the sale of shares at any time and may
refuse any order to purchase shares. Although neither the Portfolio nor the
Trust is required to hold annual meetings of shareholders, shareholders have the
right to call a meeting to elect or remove Trustees, or to take other actions as
provided in the Agreement and Declaration of Trust.
In the interest of economy and convenience, the Portfolio will not
issue certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas
City, Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend
agent.
Performance Information
Yield and total return data may from time to time be included in
advertisements about the Class E shares of the Portfolio. The Portfolio's
"yield" for each class of shares is calculated by dividing the Portfolio's
annualized net investment income per share during a recent 30-day period by its
net asset value on the last day of that period. "Total return" for the life of
the Class E shares of the Portfolio through the most recent calendar quarter
represents the average annual compounded rate of return on an investment of
$1,000 in the shares over the period. Total return may also be presented for
other periods or based on investment at reduced sales charge levels or at net
asset value. Investment performance for different classes of shares of the
Portfolio will differ. Quotations of yield and total return for a period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect. The Portfolio's performance may be compared to various indices.
See the Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of the Portfolio's investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and
does not predict future performance. Investment performance, which will vary, is
based on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These factors
should be considered when comparing the Portfolio's investment results to those
of other mutual funds and other investment vehicles.
-13-
<PAGE>
APPENDIX
SECURITIES RATINGS
The following rating services describe rated securities as follows:
MOODY'S INVESTORS SERVICE, INC.
BONDS
AAA -- Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated BAA are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
A-1
<PAGE>
CA -- Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S
BONDS
AAA -- Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree. A 4 Debt
rated 'A' has a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for bonds in higher-rated categories.
BB-B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB -- Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B -- Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC -- Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
A-2
<PAGE>
CC -- The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C -- The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
D -- Bonds rated 'D' are in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be used
on the filing of a bankruptcy petition if debt service payments are jeopardized.
A-3
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the
office of the Commission.
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Expense summary........................................................................................................2
Investment objective and policies......................................................................................3
Other investment practices and risks...................................................................................5
Management.............................................................................................................6
How the Portfolio values its shares....................................................................................7
Sales arrangements.....................................................................................................8
How to buy shares......................................................................................................8
How to sell shares....................................................................................................12
How to exchange shares................................................................................................13
How distributions are made............................................................................................14
Taxes.................................................................................................................14
Other services........................................................................................................14
General information...................................................................................................15
Performance information...............................................................................................15
</TABLE>
MENTOR
ASSET ALLOCATION
PORTFOLIO
Class E Shares
----------
PROSPECTUS
----------
April ___, 1998
Mentor Distributors, LLC
Distributor
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 30, 1998
MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
(Mentor Income Portfolio and Mentor Asset Allocation Portfolio)
April ___, 1998
This Statement of Additional Information relates to the Mentor Income
Portfolio and the Mentor Asset Allocation Portfolio (each a "Portfolio" and,
collectively, the "Portfolios"). Each Portfolio is a series of shares of
beneficial interest of Mentor Funds (the "Trust"). Each Portfolio currently
offers four classes of shares (Class A, Class B, Class D, and Class E shares).
This Statement is not a prospectus and should be read in conjunction with the
relevant prospectus of the Trust. A copy of any prospectus can be obtained upon
request made to Mentor Investment Group, LLC, at P.O. Box 1357, Richmond,
Virginia 23286-0109, or calling Mentor Investment Group, LLC at (800) 869-6042.
TABLE OF CONTENTS
CAPTION PAGE
GENERAL .........................................................
INVESTMENT RESTRICTIONS...........................................
CERTAIN INVESTMENT TECHNIQUES.....................................
MANAGEMENT OF THE TRUST...........................................
PRINCIPAL HOLDERS OF SECURITIES...................................
INVESTMENT ADVISORY AND OTHER SERVICES............................
BROKERAGE.........................................................
DETERMINATION OF NET ASSET VALUE..................................
TAX STATUS........................................................
THE DISTRIBUTOR...................................................
INDEPENDENT ACCOUNTANTS...........................................
CUSTODIAN.........................................................
PERFORMANCE INFORMATION...........................................
SHAREHOLDER LIABILITY.............................................
MEMBERS OF INVESTMENT MANAGEMENT TEAMS............................
RATINGS .........................................................
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<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.
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)
<PAGE>
7. Purchase or sell commodities or commodity
contracts, except that a Portfolio may purchase or sell
financial futures contracts, options on futures contracts, and
futures contracts, forward contracts, and options with respect
to foreign currencies, and may enter into swap transactions.
8. Make loans, except by purchase of debt obligations
in which the Portfolio may invest consistent with its
investment the Portfolio may invest consistent with its
investment policies, by entering into repurchase agreements,
or by lending its portfolio securities.
In addition, it is contrary to the current policy of each Portfolio,
which policy may be changed without shareholder approval, to invest in (a)
securities which at the time of such investment are not readily marketable, (b)
securities restricted as to resale (excluding securities determined by Trustees
of the Trust (or the person designated by the Trustees to make such
determinations) to be readily marketable), and (c) repurchase agreements
maturing in more then seven days, if, as a result, more than 10% of the
Portfolio's net assets (taken at current value) would then be invested in
securities described in (a), (b), and (c).
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above as fundamental or to the extent
designated as such in a Prospectus with respect to a Portfolio, the other
investment policies described in this Statement or in a Prospectus are not
fundamental and may be changed by approval of the Trustees. As a matter of
policy, the Trustees would not materially change the Portfolio's investment
objectives 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.
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques
in which the Portfolios may engage, and certain of the risks they may entail.
<PAGE>
Repurchase Agreements
Each of the Portfolios 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
Each of the Portfolios 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)
the 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
<PAGE>
or consent to matters materially affecting the investment. A Portfolio will not
lend portfolio securities to borrowers affiliated with the Portfolio.
When-Issued Securities
A Portfolio may from time to time purchase securities on a
"when-issued" basis. Debt securities are often issued on this basis. The price
of such securities, which may be expressed in yield terms, is fixed at the time
a commitment to purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase. During the period between purchase and
settlement, no payment is made by the Portfolio and no interest accrues to the
Portfolio. To the extent that assets of the Portfolio are held in cash pending
the settlement of a purchase of securities, that Portfolio would earn no income.
While the Portfolio may sell its right to acquire when-issued securities prior
to the settlement date, the Portfolio intends actually to acquire such
securities unless a sale prior to settlement appears desirable for investment
reasons. At the time the Portfolio makes the commitment to purchase a security
on a when-issued basis, it will record the transaction and reflect the amount
due and the value of the security in determining the Portfolio's net asset
value. The market value of the when-issued securities may be more or less than
the purchase price payable at the settlement date. The Portfolio will establish
a segregated account in which it will maintain cash and U.S. Government
Securities or other high-grade debt obligations at least equal in value to
commitments for when-issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date.
Options
Each of the Portfolios may purchase and sell put and call options on
its portfolio securities to enhance investment performance and to protect
against changes in market prices.
Covered call options. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may also
be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
<PAGE>
In return for the premium received when it writes a covered call
option, a Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying security. If the option is exercised, the Portfolio realizes a
gain or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus commissions)
plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. The 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
<PAGE>
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 call options to enhance its
current return.
Risks involved in the sale of options. Options transactions involve
certain risks, including the risks that a Portfolio's investment adviser will
not forecast interest rate or market movements correctly, that the 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 the Portfolio's
investment adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, a Portfolio may be forced to continue to hold,
or to purchase at a fixed price, a security on which it has sold an option at a
time when its investment adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other
unforeseen events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Trust's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible that the Trust
and other clients of the Portfolios' investment advisers may be considered such
a group. These position limits may restrict the Trust's ability to purchase or
sell options on particular securities.
<PAGE>
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 Trust's use of options.
Futures Contracts
In order to hedge against the effects of adverse market changes, each
of the Portfolios may buy and sell futures contracts. A Portfolio may also, to
the extent permitted by applicable law, buy and sell futures contracts and
options on futures contracts to increase the Portfolio's current return. All
such futures and related options will, as may be required by applicable law, be
traded on exchanges that are licensed and regulated by the Commodity Futures
Trading Commission (the "CFTC").
Index Futures Contracts and Options. A Portfolio may invest in debt
index futures contracts and stock index futures contracts, and in related
options. A debt index futures contract is a contract to buy or sell units of a
specified debt index at a specified future date at a price agreed upon when the
contract is made. A unit is the current value of the index. Debt index futures
in which the Portfolios are presently expected to invest are not now available,
although such futures contracts are expected to become available in the future.
A stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index is composed of
100 selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 100 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 100 Index, contracts are
to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180, one
contract would be worth $18,000 (100 units x $180). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if a Portfolio enters into a futures contract to buy 100 units of
the S&P 100 Index at a specified future date at a contract price of $180 and the
S&P 100 Index is at $184 on that future date, the Portfolio
<PAGE>
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, the Portfolio must invest in futures contracts
with respect to indexes or sub-indexes the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.
Options on index futures contracts are similar to options on securities
except that options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the holder would assume the underlying futures
position and would receive a variation margin payment of cash or securities
approximating the increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to purchasing and selling call and put options on
index futures contracts, a Portfolio 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".
<PAGE>
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. The 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 the Portfolio upon termination of the
contract, assuming the Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when a Portfolio sells a futures contract and the value of the
underlying index rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the value of the index underlying the futures contract. Conversely, if the price
of the underlying index falls below the delivery price of the contract, the
Portfolio's futures position increases in value. The broker then must make a
variation margin payment equal to the difference between the delivery price of
the futures contract and the value of the index underlying the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
Special Risks of Transactions in Futures Contracts and Related Options
Liquidity risks. Positions in futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market for such
futures. Although the Trust intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract
<PAGE>
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 the Portfolio would have to exercise the
options in order to realize any profit.
Hedging risks. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying index or
movements in the prices of the Portfolio's securities which are the subject of a
hedge. The Portfolio's investment adviser will, however, attempt to reduce this
risk by purchasing and selling, to the extent possible, futures contracts and
related options on securities and indexes the movements of which will, in its
judgment, correlate closely with movements in the value of the underlying index
and the Portfolio's portfolio securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to its investment adviser's ability to predict
correctly movements in the direction of the market. It is possible that, where
the Portfolio has purchased puts on futures contracts to hedge its portfolio
against a decline in the market, the index on which the puts are purchased may
increase in value and the value of securities held in the portfolio may decline.
If this occurred, the Portfolio would lose money on the puts and also experience
a decline in value in its portfolio securities. In addition, the prices of
futures, for a number of reasons, may not correlate perfectly with movements in
the underlying index due to certain market distortions. First, all participants
in the futures market are subject to margin deposit requirements. Such
requirements may cause investors to close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
index and futures markets. Second, the margin requirements in the futures
markets are less onerous than margin requirements in the
<PAGE>
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 the Portfolio's investment adviser may still not result in a
successful hedging transaction over a very short time period.
Other Risks. A Portfolio will incur brokerage fees in connection with
its futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while the Portfolio
may benefit from the use of futures and related options, unanticipated changes
in interest rates or stock price movements may result in a poorer overall
performance for the Portfolio than if it had not entered into any futures
contracts or options transactions. Moreover, in the event of an imperfect
correlation between the futures position and the portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss, which may be unlimited.
Dollar Rolls and Reverse Repurchase Agreements
The Income 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
<PAGE>
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.
Forward Commitments
The Income 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
The Income 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
<PAGE>
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.
Collateralized mortgage obligations; other mortgage-related securities
Each of the Portfolios may invest in collateralized mortgage
obligations ("CMOs"). 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 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
<PAGE>
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.
Zero-Coupon Securities
Zero-coupon securities in which the Income Portfolio may invest are
debt obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest. As a result, the net asset value of
shares of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other mutual funds investing in securities making
current distributions of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly
by the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
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
<PAGE>
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.
Lower-rated Securities
The Income 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
<PAGE>
cash income derived from such securities, but will affect the Portfolio's net
asset value. A Portfolio will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase, although its Adviser
will monitor the investment to determine whether its retention will assist in
meeting the Portfolio's investment objective.
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent a
Portfolio invests in tax exempt securities in the lower rating categories, the
achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
MANAGEMENT OF THE TRUST
The following table provides biographical information with respect to
each Trustee and officer of the Trust. Each Trustee who is an "interested
person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name and Address with Portfolio During Past 5 Years
- ---------------- -------------- -------------------
<S> <C>
*Daniel J. Ludeman Chairman; Trustee Chairman and Chief Executive
Officer, Mentor Investment
Group, LLC; Managing Director,
Wheat, First Securities, Inc.;
Director, Wheat First Butcher
Singer, Inc.; Chairman and
Director, Mentor Income Fund,
Inc. and America's Utility Fund,
Inc.; Chairman and Trustee,
Mentor Institutional Trust and
Cash Resource Trust.
Louis W. Moelchert, Jr. Trustee Vice President for Investments,
University of Richmond; Trustee,
Mentor Institutional Trust and Cash
Resource Trust; Director, America's
Utility Fund, Inc. and Mentor Income
Fund, Inc.
<PAGE>
Thomas F. Keller Trustee Professor of Business Administration
and former Dean, Fuqua School of
Business, Duke University; Trustee,
Mentor Institutional Trust and Cash
Resource Trust; Director, America's
Utility Fund, Inc. and Mentor Income
Fund, Inc.
Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corp.; formerly,
Chairman and Chief Executive Officer,
Hamilton Beach/Proctor-Silex, Inc.;
Trustee, Mentor Institutional Trust and
Cash Resource Trust; Director,
America's Utility Fund, Inc. and Mentor
Income Fund, Inc.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company;
Trustee, Mentor Institutional Trust and
Cash Resource Trust; Director,
America's Utility Fund, Inc. and Mentor
Income Fund, Inc.
*Peter J. Quinn, Jr. Trustee President, Mentor Distributors, LLC; Managing Director, Mentor Investment
Group, LLC and Wheat First Butcher Singer, Inc.; formerly, Senior Vice
President/Director of Mutual Funds, Wheat First Butcher Singer, Inc.;
Trustee, Mentor Institutional Trust and Cash Resource Trust; Director,
America's Utility Fund, Inc. and Mentor Income Fund, Inc.
Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee, Mentor
Institutional Trust and Case Resource Trust; Director, Mentor Income Fund,
Inc. and America's Utility Fund, Inc.; formerly, Vice Chancellor for
Development and University Relations, University of North Carolina at
Chapel Hill.
<PAGE>
Weston E. Edwards Trustee President, Weston Edwards &
Associates; Trustee, Mentor
Institutional Trust and Cash Resource
Trust; Director, Mentor Income Fund,
Inc. and America's Utility Fund, Inc.;
Founder and Chairman, The Housing
Roundtable; formerly, President, Smart
Mortgage Access, Inc.
Jerry R. Barrentine Trustee President, J.R. Barrentine &
Associates; Trustee, Mentor
Institutional Trust and Cash Resource
Trust; Director, 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, Mentor Institutional Trust
and Cash Resource Trust; Director, Mentor Income Fund, Inc., America's
Utility Fund, Inc., GE Investment Funds, Inc., and Lawyers Title Corporation;
Member, Investment Advisory Committee, Virginia Retirement System; formerly,
Senior Vice President, The Life Insurance Company of Virginia.
Paul F. Costello President Managing Director, Mentor Investment Group, LLC, Wheat First Butcher Singer,
Inc., and Mentor Investment Advisors, LLC; President, Mentor Income Fund, Inc.,
America's Utility Fund, Inc., Mentor Institutional Trust, and Cash Resource
Trust; Director, Mentor Perpetual Advisors, LLC and Mentor Trust Company.
<PAGE>
Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group, LLC; Treasurer, Cash Resource
Trust, Mentor Income Fund, Inc., and Mentor Institutional Trust; Treasurer and
Senior Vice President, America's Utility Fund, Inc.; formerly, Treasurer and
Comptroller, Ryland Capital Management, Inc.
Michael Wade Assistant Vice President, Mentor Investment Group, LLC; Assistant Treasurer, Cash
Treasurer Resource Trust, Mentor Income Fund, Inc., Mentor Institutional Trust, and
America's Utility Fund, Inc.; formerly, Senior Accountant, Wheat First Butcher
Singer, Inc.; Audit Senior, BDO Seidman.
John M. Ivan Secretary Managing Director, Director of Compliance, and Assistant General Counsel,
Wheat, First Securities, Inc.; Managing Director and Assistant Secretary,
Wheat First Butcher Singer, Inc.; Clerk, Cash Resource Trust and Mentor
Institutional Trust.
</TABLE>
The table below shows the fees paid to each Trustee by the Trust
for the 1997 fiscal year and the fees paid to each Trustee by all funds in the
Mentor family (including the Trust) during the 1997 calendar year.
<PAGE>
Total compensation
Aggregate compensation from all
Trustees from the Trust complex funds (23 Funds)
- -------- ---------------------- -------------------------
Daniel J. Ludeman 0 0
Arnold H. Dreyfuss $6,000 $12,200
Thomas F. Keller $6,000 $12,200
Louis W. Moelchert, Jr. $6,000 $12,200
Stanley F. Pauley* $6,000 $12,200
Troy A. Peery, Jr. $5,500 $11,175
Peter J. Quinn, Jr. $ 0 $ 0
Arch T. Allen, III+ $ 0 $ 0
Weston E. Edwards+ $ 0 $ 0
Jerry R. Barrentine+ $ 0 $ 0
J. Barnett Nelson+ $ 0 $ 0
- -------------
* Resigned as Trustee effective December 22, 1997
+ Elected Trustee December 22, 1997
The Trustees do not receive pension or retirement benefits from the
Trust.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Trust,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.
PRINCIPAL HOLDERS OF SECURITIES
As of April ___, 1998, the Portfolios had no shares outstanding.
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Mentor Advisors acts as investment adviser to the Portfolios pursuant
to Investment Advisory and Management Agreements with the Trust. Mentor
Investment Group, LLC ("Mentor") acts as administrator to the Portfolios
pursuant to Administration Agreements with the Trust. Subject to the supervision
and direction of the Trustees, Mentor Advisors manages the Portfolios'
portfolios in accordance with the stated policies of the Portfolios and of the
Trust. Mentor Advisors makes investment decisions for the Portfolios and places
the purchase and sale orders for portfolio transactions. Mentor furnishes the
Portfolios with certain statistical and research data, clerical help, and
certain accounting, data processing, and other services required by the
Portfolios, assists in preparation of certain reports to shareholders of the
Portfolios, tax returns, and filings with the SEC and state Blue Sky
authorities, and generally assists in all aspects of the Portfolios' operations.
Mentor Advisors and Mentor bear all their expenses in connection with the
performance of their services. In addition, Mentor Advisors and Mentor pay the
salaries of all officers and employees who are employed by them 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
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
Mentor Advisors' opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or
sales of portfolio securities for one or more clients will have an adverse
effect on other clients. In the case of short-term investments, the Treasury
area of Wheat First Butcher Singer handles purchases and sales under guidelines
approved by investment officers of the Trust. Mentor Advisors employs
professional staffs of portfolio managers who draw upon a variety of resources,
including Wheat First Butcher Singer for research information 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, are specifically allocated to that Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books
<PAGE>
of account, and will be charged with the liabilities in respect of that
Portfolio and with a share of the general liabilities of the Trust. Expenses
with respect to any two or more Portfolios of the Trust may be allocated in
proportion to the net asset values of the respective Portfolios except where
allocations of direct expenses can otherwise be fairly made.
Expenses incurred in the operation of a Portfolio or otherwise
allocated to a Portfolio, including but not limited to taxes, interest,
brokerage fees and commissions, fees to Trustees who are not officers,
directors, stockholders, or employees of Wheat First Butcher Singer and
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, investor servicing fees and expenses,
charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges, and charges relating to corporate matters, are borne
by the Portfolio.
The Investment Advisory and Management Agreements and the
Administration Agreements are subject to annual approval (commencing in 2000) by
(i) the Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of each 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, Mentor Advisors,
or Mentor, by vote cast in person at a meeting called for the purpose of voting
on such approval. The Management Agreements 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 each Portfolio's shares, or by
Mentor Advisors. The Administration Agreements are terminable without penalty,
immediately upon notice, by the Trustees or by vote of the holders of a majority
of each Portfolio's shares, and on not less than thirty days' notice by Mentor.
Each of the agreements will terminate automatically in the event of its
assignment.
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with respect to the Portfolios' Class A, Class B shares, and Class E shares.
Pursuant to the Service Plan, financial institutions will enter into shareholder
service agreements with the Portfolios to provide administrative support
services to their customers who from time to time may be record or beneficial
owners of shares of the Portfolios. In return for providing these support
services, a financial institution may receive payments from the Portfolios at a
rate not exceeding 0.25% of the average daily net assets of the relevant class
of shares of the 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,
<PAGE>
equipment, telephone facilities, and various personnel including clerical,
supervisory, and computer personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding the Portfolio; assisting clients in
changing dividend options, account designations and addresses; and providing
such other services as the Portfolios reasonably request. A Service Plan may be
terminated with respect to a particular class at any time by (i) a vote of the
majority of the Trustees who are not "interested persons" of the Trust (as
defined in the 1940 Act) or (ii) a vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of a particular class.
In addition to receiving payments under the Service Plans, financial
institutions may be compensated by Mentor Advisors and/or Mentor, or affiliates
thereof, for providing administrative support services to holders of Class A,
Class B, or Class E shares of the Portfolio. These payments will be made
directly by Mentor Advisors and/or Mentor, as applicable, and will not be made
from the assets of the Portfolios.
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 a Portfolio usually includes an undisclosed dealer commission
or mark-up. In underwritten offerings, the price paid by a 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 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 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 the Portfolios' best interests,
considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security or
other investment, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience, and
financial stability of the broker-dealer involved, and the quality of service
rendered by the broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the Investment
Advisory and Management Agreements, Mentor Advisors may cause the Portfolios to
pay a broker-dealer which provides "brokerage and research services" (as defined
in the 1934 Act) to them an amount of disclosed commission for effecting
securities transactions on stock exchanges and other transactions for the
Portfolios 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 the Portfolios 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 the Portfolios to make such
payments. It is the position of the staff of the Securities and Exchange
Commission ("SEC") 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 the Portfolios
(and, if permitted by law,
<PAGE>
of the other Mentor funds) as a factor in the selection of broker-dealers to
execute portfolio transactions for the Portfolios.
The Trustees have determined that portfolio transactions for the Trust
may be effected through Wheat, First Securities, Inc. ("Wheat") or EVEREN
Securities, Inc. ("EVEREN"), broker-dealers affiliated with Mentor Advisors. The
Trustees have adopted certain policies incorporating the standards of Rule 17e-l
issued by the SEC under the 1940 Act which requires, among other things, that
the commissions paid to Wheat and EVEREN must be reasonable and fair compared to
the commissions, fees, or other remuneration received by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time. Wheat and EVEREN will not participate in brokerage
commissions paid by the Portfolios 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.
The Portfolios will in no event effect principal transactions with Wheat or
EVEREN in over-the-counter securities in which Wheat or EVEREN makes a market,
as the case may be.
Under rules adopted by the SEC, neither Wheat nor EVEREN may execute
transactions for the Portfolios on the floor of any national securities
exchange, but either may effect transactions for the Portfolios by transmitting
orders for execution and arranging for the performance of this function by
members of the exchange not associated with them. Wheat and EVEREN will be
required to pay fees charged to those persons performing the floor brokerage
elements out of the brokerage compensation it receives from the Portfolios. 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.
DETERMINATION OF NET ASSET VALUE
A Portfolio determines net asset value per share of each class of
shares each day the New York Stock Exchange (the "Exchange") is open. Currently,
the Exchange is closed Saturdays, Sundays, and the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, the Fourth of July, Labor Day, Thanksgiving, and Christmas.
<PAGE>
Securities for which market quotations are readily available are valued
at prices which, in the opinion of the Trustees or Mentor Advisors, most nearly
represent the market values of such securities. Currently, such prices are
determined using the last reported sale price or, if no sales are reported (as
in the case of some securities traded over-the-counter), the last reported bid
price, except that certain U.S. Government securities are stated at the mean
between the last reported bid and asked prices. Short- term investments having
remaining maturities of 60 days or less are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value following procedures approved by the Trustees. Liabilities are
deducted from the total, and the resulting amount is divided by the number of
shares of the particular 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,
Mentor Advisors 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 a
Portfolio in connection with such disposition). In addition, specific factors
are also generally considered, such as the cost of the investment, the market
value of any unrestricted securities of the same class (both at the time of
purchase and at the time of valuation), the size of the holding, the prices of
any recent transactions or offers with respect to such securities, and any
available analysts' reports regarding the issuer.
Generally, trading in certain securities (such as foreign securities)
is substantially completed each day at various times prior to the close of the
New York Stock Exchange. The values of these securities used in determining the
net asset value of the Portfolios' 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
<PAGE>
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 the
Portfolios' 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.
TAX STATUS
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to shareholders. 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 gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies; (b) derive less than 30% of its gross income from the sale or other
disposition of certain assets (including stock and securities) held less than
three months; (c) 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, and other securities limited
generally with respect to any one issuer to not more than 5% 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 assets is invested in the securities
of any issuer (other than U.S. Government Securities). 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
its interest, dividends, net short-term capital gain, and certain other income
each 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.
An excise tax at the rate of 4% will be imposed on the excess, if any,
of a Portfolio's "required distribution" over its actual distributions in any
calendar year. Generally, the "required distribution" is 98% of a Portfolio's
ordinary income for the calendar year plus 98% of its capital gain net income
recognized during the one-year period ending on October 31 (or December 31, if
the Portfolio so elects) plus undistributed amounts from prior years. The
Portfolio intends to make distributions sufficient to avoid imposition of the
excise tax. Distributions declared by the Portfolio
<PAGE>
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.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), two different tax
rates apply to net capital gains (that is, the excess of net gains from capital
assets held for more than one year over net losses from capital assets held for
not more than one year). One rate (generally 28%) applies to net gains on
capital assets held for more than one year but not more than 18 months (28% rate
gains) ("adjusted net capital gains"). Distributions of net capital gains will
be treated in the hands of shareholders as 28% rate gains to the extent
designated by the Portfolio as deriving from net assets held for more than one
year but not more than 18 months, and the balance will be treated as adjusted
net capital gains. Distributions of 28% rate gains and adjusted net capital
gains will be taxable to shareholders as such, regardless of how long a
shareholder has held the shares in the Portfolio.
Under federal income tax law, a portion of the difference between the
purchase price of zero-coupon securities in which a Portfolio has invested and
their face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the net investment income of the Portfolio which must be
distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.
A Portfolio is required to withhold 31% of all 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 the Portfolio is notified that the
shareholder has under reported income in the past, or who fails to certify to
the Portfolio that the shareholder is not subject to such withholding.
Tax-exempt shareholders are not subject to these back-up withholding rules so
long as they furnish the Portfolio with a proper certification.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to state
and federal taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local 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 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).
THE DISTRIBUTOR
Mentor Distributors, LLC (the "Distributor") is the Trust's
distributor. The Portfolios make payments to the Distributor in accordance with
their Distribution Plans in respect of their Class B shares adopted pursuant to
Rule 12b-1 under the 1940 Act (each, a "Plan").
Continuance of a Plan is subject to annual approval by a vote of the
Trustees, including a majority of the Trustees who are not interested persons of
the relevant
<PAGE>
Portfolio and who have no direct or indirect interest in the Plan or related
arrangements (the "Qualified Trustees"), cast in person at a meeting called for
that purpose. All material amendments to a Plan must be likewise approved by the
Trustees and the Qualified Trustees. A Plan may not be amended in order to
increase materially the costs which a Portfolio may bear for distribution
pursuant to such Plan without also being approved by a majority of the
outstanding Class B shares of the Portfolio. Each Plan terminates automatically
in the event of its assignment and may be terminated without penalty, at any
time, by a vote of a majority of the Qualified Trustees or by a vote of a
majority of the outstanding Class B shares of the relevant Portfolio.
Financial institutions receiving payments from the Distributor may be
required to comply with various state and federal regulatory requirements,
including among others those regulating the activities of securities brokers or
dealers.
INDEPENDENT ACCOUNTANTS
_______________ are the Portfolios' independent auditors, 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 a Portfolios. 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
Total return is determined by calculating the actual investment return
on a $1,000 (or a larger amount depending on the minimum investment for a
particular class) investment in a Portfolio at the beginning of the applicable
period, and at the maximum public offering price for Class A shares, and net
asset value for all other classes of shares. Total return may also be presented
for other periods. Total return calculations assume deduction of a Portfolio's
maximum front-end or contingent deferred sales charge, if applicable, and
reinvestment of all Portfolio distributions at net asset value on their
respective investment dates.
Total return may be presented for other periods or without giving
effect to any front-end or contingent deferred sales charge. Any quotation of
total return not reflecting such sales charges would be reduced if such sales
charges were reflected.
<PAGE>
All data for the Portfolio are based on past performance and do not
predict future results.
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how the Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time to
time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below measure performance based on the
basis of their own criteria rather than on the basis of the standardized
performance measures described above.
Lipper Analytical Services, Inc. distributes mutual fund rankings
monthly. The rankings are based on total return performance calculated
by Lipper, reflecting generally changes in net asset value adjusted for
reinvestment of capital gains and income dividends. They do not reflect
deduction of any sales charges. Lipper rankings cover a variety of
performance periods, for example year-to-date, 1-year, 5-year, and
10-year performance. Lipper classifies mutual funds by investment
objective and asset category.
Morningstar, Inc. distributes mutual fund ratings twice a month. the
ratings are divided into five groups: highest, above average, neutral,
below average and lowest. They represent a fund's historical
risk/reward ratio relative to other funds with similar objectives. The
performance factor is a weighted-average assessment of the Portfolio's
3-year, 5-year, and 10-year total return performance (if available)
reflecting deduction of expenses and sales charges. Performance is
adjusted using quantitative techniques to reflect the risk profile of
the fund. The ratings are derived from a purely quantitative system
that does not utilize the subjective criteria customarily employed by
rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return
calculated by Weisenberger for periods such as year-to-date, 1-year,
3-year, 5-year and 10-year performance. Mutual funds are ranked in
general categories (e.g., international bond, international equity,
municipal bond, and maximum capital gain). Weisenberger rankings do not
reflect deduction of sales charges or fees.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, LLC, an affiliate of Mentor Advisors, which bears full
responsibility for their use and the descriptions appearing below. From time to
time the Portfolios may distribute evaluations by or excerpts from these
publications to its shareholders or to potential
<PAGE>
investors. The following illustrates the types of information provided by these
publications.
Business Week publishes mutual fund rankings in its Investment Figures
of the Week column. The rankings are based on 4-week and 52-week total
return reflecting changes in net asset value and the reinvestment of
all distributions. They do not reflect deduction of any sales charges.
Portfolios are not categorized; they compete in a large universe of
over 2,000 funds. The source for rankings is data generated by
Morningstar, Inc.
Investor's Business Daily publishes mutual fund rankings on a daily
basis. The rankings are depicted as the top 25 funds in a given
category. The categories are based loosely on the type of fund, e.g.,
growth funds, balanced funds, U.S. Government funds, GNMA funds, growth
and income funds, corporate bond funds, etc. Performance periods for
sector equity funds can vary from 4 weeks to 39 weeks; performance
periods for other fund groups vary from 1 year to 3 years. Total return
performance reflects changes in net asset value and reinvestment of
dividends and capital gains. The rankings are based strictly on total
return. They do not reflect deduction of any sales charges. Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds;
an A rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical
Services. The Lipper total return data reflects changes in net asset
value and reinvestment of distributions, but does not reflect deduction
of any sales charges. The performance periods vary from short-term
intervals (current quarter or year-to-date, for example) to long-term
periods (five-year or ten-year performance, for example). Barron's
classifies the funds using the Lipper mutual fund categories, such as
Capital Appreciation Portfolios, Growth Portfolios, U.S. Government
Portfolios, Equity Income Portfolios, Global Portfolios, etc.
Occasionally, Barron's modifies the Lipper information by ranking the
funds in asset classes. "Large funds" may be those with assets in
excess of $25 million; "small funds" may be those with less than $25
million in assets.
The Wall Street Journal publishes its Mutual Portfolio Scorecard on a
daily basis. Each Scorecard is a ranking of the top-15 funds in a given
Lipper Analytical Services category. Lipper provides the rankings based
on its total return data reflecting changes in net asset value and
reinvestment of distributions and not reflecting any sales charges. The
Scorecard portrays 4-week, year-to-date, one-year and 5-year
performance; however, the ranking is based on the one-year
<PAGE>
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 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
<PAGE>
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) is 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
<PAGE>
system: zero designates "poor"; one point means "fair"; two points
denote "good"; three points qualify as a "very good"; four points rank
as "superior"; and five points mean "excellent."
From time to time, the "Efficient Frontier" chart may be presented in
promotional materials for the Portfolios.
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 that Portfolio.
Thus the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which a 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 thirty 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 -- Vice President, Portfolio Manager
Mr. White has eleven 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.
<PAGE>
Kathryn T. Allen -- Vice President, Portfolio Manager
Ms. Allen has fourteen years of investment management experience and specializes
in tax-free trades. Prior to joining Mentor Advisors, Ms. Allen was portfolio
group manager at PNC Institutional Management Corporation. She has her
undergraduate degree in commerce and business administration from the University
of Alabama.
RATINGS
The rating services' descriptions of corporate bonds are:
Moody's Investors Service, Inc.:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Standard & Poor's:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
<PAGE>
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
A-1 and Prime-1 Commercial Paper Ratings
The rating A-1 (including A-1+) is the highest commercial paper rating assigned
by S&P. Commercial paper rated A-1 by S&P has the following characteristics:
o liquidity ratios are adequate to meet cash requirements;
o long-term senior debt is rated "A" or better;
o the issuer has access to at least two additional channels of
borrowing;
o basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances;
o typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and
o the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. Issues rated A-1 that are
determined by S&P to have overwhelming safety characteristics are designated
A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
o evaluation of the management of the issuer;
<PAGE>
o economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent
in certain areas;
o evaluation of the issuer's products in relation to competition
and customer acceptance;
o liquidity;
o amount and quality of long-term debt;
o trend of earnings over a period of ten years;
o financial strength of parent company and the relationships
which exist with the issuer; and
o recognition by the management of obligations which may be
present or may arise as a result of public interest questions
and preparations to meet such obligations.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
(a) Financial Statements and Supporting Schedules (For all Portfolios
other than Mentor Institutional Money Market, Institutional Shares,
and Mentor Growth Opportunities)
(1) Financial Statements:
Portfolios of Investments -- September 30, 1997*
Statements of Assets and Liabilities -- September 30, 1997*
Statements of Operations -- year ended September 30, 1997*
Statements of Changes in Net Assets -- years/periods ended
September 30, 1997 and September 30, 1996*
Financial Highlights *(+)
Notes to Financial Statements*
Independent Auditors Report
_____________
* Incorporated by reference to Part B to this Registration Statement.
(+) Incorporated by reference to 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)
(2) Copy of By-Laws of the Registrant (1);
(3) Not applicable;
(4)(i) Copy of Specimen Certificates for both Class A and
Class B Shares of Beneficial Interest for each New
Portfolio (6);
(ii) Copy of Specimen Certificate for Institutional Shares of
Beneficial Interest for each Portfolio (10);
(5)(i) (a)Conformed copy of Management Agreement of the Registrant
(Capital Growth, Income and Growth, Quality Income, and
Municipal Income Portfolios) (2);
(b)Conformed copy of New Exhibit A to Management
Agreement(4);
(c)Form of Instrument of Transfer of Management Agreement
(8);
(ii) Form of Investment Advisory Agreement
(Municipal Income Portfolio) (8);
(iii) (a)Conformed copy of Investment Advisory Agreement
(Income and Growth Portfolio) (3);
(b)Form of Instrument of Transfer of Investment Advisory
Agreement (Income and Growth Portfolio) (8);
(iv) Form of Investment Advisory and Management Agreement
(Global Portfolio) (8);
(v) (a)Form of Investment Advisory and Management
Agreement (Growth Portfolio) (6);
(b)Form of Instrument of Transfer of Investment Advisory
and Management Agreement (Growth Portfolio) (8);
(vi) (a)Form of Investment Advisory and Management
Agreement (Strategy Portfolio) (6);
(b)Form of Instrument of Transfer of Investment Advisory
and Management Agreement (Strategy Portfolio) (8);
(vii) (a)Form of Investment Advisory and Management Agreement
(Short-Duration Income Portfolio) (6);
(b)Form of Instrument of Transfer of Investment Advisory
and Management Agreement (Short-Duration Income
Portfolio) (8);
(viii) (a)Form of Investment Advisory and Management
Agreement (Balanced Portfolio) (6);
(b)Form of Instrument of Transfer of Investment Advisory
and Management Agreement (Balanced Portfolio) (8);
(ix) Form of Investment Advisory and Management Agreement
(Institutional U.S. Government Money Market Portfolio) (9);
(x) Form of Investment Advisory and Management Agreement
(Institutional U.S. Government Money Market Portfolio) (9);
(xi) Form of Investment Advisory and Management Agreement
(Growth Opportunities Portfolio) (11);
(xii) Form of Investment Advisory and Management Agreement
(Mentor Income Portfolio) (13)
(xiii) Form of Investment Advisory and Management Agreement
(Mentor Asset Allocation Portfolio) (13)
(6)(i) (a)Conformed copy of Distributor's Contract of the
Registrant, through and including
Exhibit I (3);
(b) Form of Instrument of Transfer of Distributor's
Contract (8);
(ii) Form of New Exhibit J to the Distributor's Contract in
respect of the Class A and B shares of the Growth,
Strategy, Short-Duration Income Portfolios and the
Balanced Portfolio (6);
(iii) Form of New Exhibit K to the Distributor's Contract in
respect of Institutional Shares of each of the Portfolios
(10);
(iv) Form of New Exhibit L to the Distributor's Contract in
respect of Mentor Income and Asset Allocation Portfolios
(13)
(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) (a)Form of Administration Agreement of the
Registrant in respect of each Portfolio (6);
(b) Form of Instrument of Transfer of Administration
Agreement (8);
(iv) Form of Custodian Contract with State Street Bank
and Trust Company in respect of foreign securities(7);
(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 Income and Asset
Allocation Portfolios (13);
(10) Not applicable;
(11)(i) Conformed copy of Consent of Independent Auditors (12);
(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 (Class B Shares) (12)
(ii) Revised Exhibit A to Plan of Distribution (13)
(16)(i) Schedules for Computation of Performance
(all Portfolios)(8)
(18) Amended and Restated Rule 18f-3(d) Plan (10)
(27)(i) Financial Data Schedules of Class A Shares (12)
(ii) Financial Data Schedules of Class B Shares (12)
(iii) Financial Data Schedule in respect of the Balanced
Portfolio. (12)
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 N1-A filed December 22, 1997.
13. 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 December 8, 1997
Multiclass Portfolios Class A Class B
Capital Growth Portfolio 4,363 8,442
Global Portfolio 3,014 7,597
Growth Portfolio 4,936 28,469
Income and Growth Portfolio 3,174 6,694
Municipal Income Portfolio 707 4,256
Quality Income Portfolio 2,156 4,048
Short-Duration Income Portfolio 784 1,681
Strategy Portfolio 1,850 16,644
Single Class Portfolios
Balanced Portfolio 4
Mentor Institutional U.S. Government Money Market Portfolio 87
Mentor Institutional Money Market Portfolio 0
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.
Thomas L. Souders Treasurer Managing Director and
Chief Financial
Officer, Wheat, First
Securities, Inc.;
Treasurer, Mentor
Distributors, LLC.
Robert P. Wilson Assistant Treasurer Managing Director and
Treasurer, Wheat,
First Securities,
Inc.; Assistant
Treasurer, Mentor
Distributors, Inc.
John M. Ivan Secretary Managing Director,
Assistant General
Counsel, and Director
of Compliance, Wheat,
First Securities, Inc.;
Clerk, Cash Resource
Trust; Secretary,
Mentor Institutional
Trust and Mentor
Distributors, LLC.
Howard T. Macrae, Jr. Assistant Secretary Assistant Secretary,
Mentor Investment
Advisors, LLC and
Mentor Distributors,
LLC.
(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) The following is a list of the general partners and Senior Vice Presidents
of Wellington Management Company, LLP, located at 75 State Street, Boston
Massachusetts 02109:
Kenneth L. Abrams Paul D. Kaplan Richard S. Press
Nicholas C. Adams John C. Keogh Robert D. Rands
Rand L. Alexander Mark T. Lynch Eugene E. Record, Jr.
Deborah L. Allinson Nanch T. Lukitsh John R. Ryan
Nancy T. August Christine S. Manfredi Joseph H. Schwartz
James H. Averill Patrick J. McCloskey David W. Scudder
Marie-Claude Bernal Earl E. McEvoy Binkley C. Shorts
William N. Booth Duncan M. McFarland Trond Skramstad
Paul Braverman Paul M. Mecray, III Catherine A. Smith
William D. Dilanni Matthew E. Megargel Stephen A. Soderberg
Pamela Dippel James N. Mordy Harriett Tee Taggart
Robert W. Doran Diane C. Nordin Perry M. Traquina
Charles T. Freeman Edward P. Owens Gene R. Tremblay
Laurie A. Gabriel Saul J. Pannell Mary Ann Tynan
Frank J. Gilday, III Thomas L. Pappas Ernst H. von Metzsch
John H. Gooch David M. Parker Clare Villari
Nicholas P. Greville Robert D. Payne James L. Walters
William C.S. Hicks Jonathan M. Payson Kim Williams
Stephen M. Pazuk Frank V. Wisneski
(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 is the principal distributor for the
Registrant's shares and acts as the principal underwriter for the
Registrant.
-10-
Mentor Distributors, LLC is a Virginia corporation and is an
affiliate of Mentor Investment Advisors, LLC.
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITERS WITH REGISTRANT
Peter J. Quinn, Jr. President and Director Trustee
901 East Byrd Street
Richmond, VA 23219
Paul F. Costello Senior Vice President President
901 East Byrd Street
Richmond, VA 23219
Thomas L. Souders Treasurer None
901 East Byrd Street
Richmond, VA 23219
John M. Ivan Secretary Secretary
901 East Byrd Street
Richmond, VA 23219
Howard T. MaCrae, Jr. Assistant Secretary None
901 East Byrd Street
Richmond, VA 23219
Thomas L. Souders Treasurer None
901 East Byrd Street
Richmond, VA 23219
Robert P. Wilson Assistant Treasurer None
901 East Byrd Street
Richmond, VA 23219
Item 30. Location of Accounts and Records:
Response is incorporated by reference to Registrant's Initial
Registration on Form N-1A filed January 31, 1992 (File Nos. 33-45315
and 811-6550).
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.
(c) The Registrant undertakes to file a post-effective amendment to this
Registration Statement containing financial statements for the Income
and Asset Allocation Portfolios, which financial statements need not
be certified, within four to six months from the effective date of
this amendment.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
be signed on behalf of the undersigned, thereunto duly authorized, in the City
of Richmond and the Commonwealth of Virginia, on the 28th day of January, 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 date
indicated:
<TABLE>
<CAPTION>
Name Title Date
<S> <C>
* January 28, 1998
- -----------------------
Daniel J. Ludeman Chairman and Trustee
(Chief Executive
Officer)
/s/ Peter J. Quinn, Jr. Trustee January 28, 1998
- -----------------------
Peter J. Quinn, Jr.
* January 28, 1998
- -----------------------
Arnold H. Dreyfuss Trustee
* January 28, 1998
- -----------------------
Thomas F. Keller Trustee
* January 28, 1998
- -----------------------
Louis W. Moelchert, Jr. Trustee
* January 28, 1998
- -----------------------
Troy A. Peery, Jr. Trustee
- -----------------------
Arch T. Allen, III Trustee
- -----------------------
Weston E. Edwards Trustee
- -----------------------
Jerry R. Barrentine Trustee
- -----------------------
J. Garnett Nelson Trustee
/s/ Paul F. Costello January 28, 1998
- ------------------------
Paul F. Costello President
/s/ Terry L. Perkins January 28, 1998
- ------------------------
Terry L. Perkins Treasurer (Principal Financial
and Accounting Officer)
*/s/ Peter J. Quinn, Jr. Attorney-in-fact January 28, 1998
- ------------------------
Peter J. Quinn, Jr.
</TABLE>
EXHIBIT INDEX
Exhibit Page
(1)(iii) Form of Amendment to Declaration of Trust of Registrant.
(5)(xii) Form of Investment Advisory and Management Agreement (Mentor
Income Portfolio)
(xiii) Form of Investment Advisory and Management Agreement (Mentor
Asset Allocation Portfolio)
(6)(iv) Form of New Exhibit L to the Distributor's Contract
9(ii)(e) Form of New Exhibit E to Shareholders Service Plan for each
Portfolio
15(ii) Revised Exhibit A to Plan of Distribution
THE 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:
(a) 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) 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 [date].
IN WITNESS WHEREOF, the undersigned, being at least a majority of the
Trustees in office, have executed this instrument.
3
<PAGE>
Exhibit 5 (xii)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of , 1998
between MENTOR FUNDS, a Massachusetts business trust (the "Trust"), and MENTOR
INVESTMENT ADVISORS, LLC, a Virginia limited liability company (the "Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor Income Portfolio, a series of the Trust (the
"Portfolio"), will determine what investments shall be purchased, held, sold, or
exchanged by the Portfolio and what portion, if any, of the assets of the
Portfolio shall be held uninvested and shall make changes in the Portfolio's
investments. In the performance of its duties, the Manager will comply with the
provisions of the Agreement and Declaration of Trust and Bylaws of the Trust and
the Portfolio's stated investment objectives, policies, and restrictions, and
will use its best efforts to safeguard and promote the welfare of the Portfolio
and to comply with other policies which the Trustees may from time to time
determine and shall exercise the same care and diligence expected of the
Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience, and financial
stability
-1-
<PAGE>
of the broker or dealer involved, and the quality of service rendered by the
broker or dealer in other transactions. Subject to such policies as the Trustees
of the Trust may determine, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Portfolio to pay a broker or dealer
that provides brokerage and research services to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission that another broker or dealer would have charged for
effecting that transaction, if the Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Portfolio and to other clients of the Manager as to which
the Manager exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934, as amended and Rule 11a2-2(T) thereunder, and the Portfolio hereby
consents to the retention of compensation for such transactions in accordance
with Rule 11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rates of 0.60% of the Portfolio's average daily net assets. The first
payment of the fee shall be made as promptly as possible at the end of the month
next succeeding the effective date of this Agreement, and shall constitute a
full payment of the fee due the Manager for all services prior to that date. If
this Agreement is terminated as of any date that is not the last day of a month,
such fee shall be paid as promptly as possible after
-2-
<PAGE>
such date of termination, shall be based on the average daily net assets of the
Portfolio in that period from the beginning of such month to such date of
termination, and shall be that proportion of such average daily net assets as
the number of business days in such period bears to the number of business days
in such month. The average daily net assets of the Portfolio shall in all cases
be based only on business days and be computed as of the time of the regular
close of business of the New York Stock Exchange, or such other time as may be
determined by the Trustees. Each such payment shall be accompanied by a report
of the Trust prepared either by the Trust or by a reputable firm of independent
accountants which shall show the amount properly payable to the Manager under
this Agreement and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS
AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Agreement shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on , 2000 (unless terminated automatically as set forth in Section 4),
and shall continue for successive one-year periods thereafter, if approved in
accordance with Section 6, until terminated by either party hereto at any time
by not more than sixty days nor less than thirty days written notice delivered
or mailed by registered mail, postage prepaid, to the other party. Such action
by the Trust with respect to termination may be taken either (i) by vote of a
majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Portfolio.
Termination of this Agreement pursuant to this Section 5 will be
without the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Agreement, this
Agreement shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
-3-
<PAGE>
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of Mentor
Institutional Trust (the "Trust") is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the Trustees of the Trust for the Portfolio as Trustees
and not individually and that the obligations of this instrument are not binding
upon any of the Trustees, officers, or shareholders of the Fund but are binding
only upon the assets and property of the Portfolio.
-4-
<PAGE>
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT
ADVISORS, LLC, have each caused this instrument to be signed in duplicate in its
behalf by its President or Vice President thereunto duly authorized, all as of
the day and year first above written.
MENTOR FUNDS
on behalf of Mentor Income Portfolio
By:_____________________________________
MENTOR INVESTMENT ADVISORS, LLC
By:______________________________________
-5-
Exhibit 5 (xiii)
MENTOR FUNDS
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement dated as of , 1998
between MENTOR FUNDS, a Massachusetts business trust (the "Trust"), and MENTOR
INVESTMENT ADVISORS, LLC, a Virginia limited liability company (the "Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE MANAGER TO TRUST.
(a) The Manager, at its expense, will furnish continuously an
investment program for the Mentor Asset Allocation Portfolio, a series of the
Trust (the "Portfolio"), will determine what investments shall be purchased,
held, sold, or exchanged by the Portfolio and what portion, if any, of the
assets of the Portfolio shall be held uninvested and shall make changes in the
Portfolio's investments. In the performance of its duties, the Manager will
comply with the provisions of the Agreement and Declaration of Trust and Bylaws
of the Trust and the Portfolio's stated investment objectives, policies, and
restrictions, and will use its best efforts to safeguard and promote the welfare
of the Portfolio and to comply with other policies which the Trustees may from
time to time determine and shall exercise the same care and diligence expected
of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the
Portfolio as provided in Section 1(e), will furnish all necessary investment and
related management facilities, including salaries of personnel, required for it
to execute its duties faithfully. The Manager will pay the compensation, if any,
of certain officers of the Trust carrying out the investment management and
related duties provided for by this Agreement.
(c) The Manager, at its expense, shall place all orders for the
purchase and sale of portfolio investments for the Portfolio's account with
brokers or dealers selected by the Manager. In the selection of such brokers or
dealers and the placing of such orders, the Manager shall give primary
consideration to securing for the Portfolio the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
doing so, the Manager, bearing in mind the Portfolio's best interests at all
times, shall consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience, and financial
stability
-1-
<PAGE>
of the broker or dealer involved, and the quality of service rendered by the
broker or dealer in other transactions. Subject to such policies as the Trustees
of the Trust may determine, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Portfolio to pay a broker or dealer
that provides brokerage and research services to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission that another broker or dealer would have charged for
effecting that transaction, if the Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Portfolio and to other clients of the Manager as to which
the Manager exercises investment discretion.
(d) The Trust, on behalf of the Portfolio, hereby authorizes any entity
or person associated with the Manager which is a member of a national securities
exchange to effect any transaction on the exchange for the account of the
Portfolio which is permitted by Section 11(a) of the Securities Exchange Act of
1934, as amended and Rule 11a2-2(T) thereunder, and the Portfolio hereby
consents to the retention of compensation for such transactions in accordance
with Rule 11a2-2(T)(2)(iv).
(e) The Manager shall not be obligated to pay any expenses of or for
the Portfolio not expressly assumed by the Manager pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers, and
employees of the Trust may be a shareholder, director, officer, or employee of,
or be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Portfolio. It is also understood that the Manager and any person controlled
by or under common control with the Manager have and may have advisory,
management, service, or other agreements with other organizations and persons,
and may have other interests and business.
3. COMPENSATION TO BE PAID BY THE PORTFOLIO TO THE MANAGER.
As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Portfolio shall pay the Manager, as promptly as
possible after the last day of each month, a fee, calculated daily, at the
annual rates of 0.85% of the Portfolio's average daily net assets. The first
payment of the fee shall be made as promptly as possible at the end of the month
next succeeding the effective date of this Agreement, and shall constitute a
full payment of the fee due the Manager for all services prior to that date. If
this Agreement is terminated as of any date that is not the last day of a month,
such fee shall be paid as promptly as possible after
-2-
<PAGE>
such date of termination, shall be based on the average daily net assets of the
Portfolio in that period from the beginning of such month to such date of
termination, and shall be that proportion of such average daily net assets as
the number of business days in such period bears to the number of business days
in such month. The average daily net assets of the Portfolio shall in all cases
be based only on business days and be computed as of the time of the regular
close of business of the New York Stock Exchange, or such other time as may be
determined by the Trustees. Each such payment shall be accompanied by a report
of the Trust prepared either by the Trust or by a reputable firm of independent
accountants which shall show the amount properly payable to the Manager under
this Agreement and the detailed computation thereof.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS
AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment; and this Agreement shall not be
amended unless such amendment be approved at a meeting by the affirmative vote
of a majority of the outstanding shares of the Portfolio, and by the vote, cast
in person at a meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Agreement shall become effective upon its execution and shall
remain in full force and effect continuously thereafter until the close of
business on , 2000 (unless terminated automatically as set forth in Section 4),
and shall continue for successive one-year periods thereafter, if approved in
accordance with Section 6, until terminated by either party hereto at any time
by not more than sixty days nor less than thirty days written notice delivered
or mailed by registered mail, postage prepaid, to the other party. Such action
by the Trust with respect to termination may be taken either (i) by vote of a
majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Portfolio.
Termination of this Agreement pursuant to this Section 5 will be
without the payment of any penalty.
6. ANNUAL APPROVAL.
For additional terms after the initial term of this Agreement, this
Agreement shall be submitted for approval to the Trustees annually and shall
continue in effect only so long as specifically approved annually by vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval.
-3-
<PAGE>
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" of the Portfolio means the affirmative vote, at a
duly called and held meeting of such shareholders, (a) of the holders of 67% or
more of the shares of the Portfolio present (in person or by proxy) and entitled
to vote at such meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio entitled to vote at such meeting are present in person
or by proxy, or (b) of the holders of more than 50% of the outstanding shares of
the Portfolio entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person," and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940, as amended, and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under said Act; the term
"specifically approve at least annually" shall be construed in a manner
consistent with the Investment Company Act of 1940, as amended, and the Rules
and Regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934, as amended, and
the Rules and Regulations thereunder.
8. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith, or gross negligence
on the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of Mentor
Institutional Trust (the "Trust") is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the Trustees of the Trust for the Portfolio as Trustees
and not individually and that the obligations of this instrument are not binding
upon any of the Trustees, officers, or shareholders of the Fund but are binding
only upon the assets and property of the Portfolio.
-4-
<PAGE>
IN WITNESS WHEREOF, MENTOR FUNDS and MENTOR INVESTMENT
ADVISORS, LLC, have each caused this instrument to be signed in duplicate in its
behalf by its President or Vice President thereunto duly authorized, all as of
the day and year first above written.
MENTOR FUNDS
on behalf of Mentor Asset Allocation Portfolio
By:_____________________________________
MENTOR INVESTMENT ADVISORS, LLC
By:______________________________________
-5-
EXHIBIT (6) (iv)
EXHIBIT L
TO THE
DISTRIBUTOR'S CONTRACT
MENTOR FUNDS
Mentor Income Portfolio - Class A, B, E Shares and Y (or
Institutional) Shares
Mentor Asset Allocation Portfolio - Class A, B, E Shares and Y (or
Institutional) Shares
In consideration of the mutual convenants set forth in the Distributor's
Contract dated May 19, 1992 between Mentor Funds (formerly Cambridge Series
Trust) and Mentor Distributors, LLC. (formerly Cambridge Distributors, Inc.),
Mentor Funds executes and delivers this Exhibit on behalf of the Portfolios, and
with respect to the separate classes of shares, if any, thereof first set forth
in this Exhibit.
WITNESS the due execution hereof this __ day of ________________, 1998.
MENTOR FUNDS
By:_________________________
President
MENTOR DISTRIBUTORS, LLC
By:__________________________
President
Exhibit 9(ii)(e)
EXHIBIT E
TO THE
SHAREHOLDER SERVICE PLAN
MENTOR FUNDS
Mentor Income Portfolio - Class A
Mentor Income Portfolio - Class B
Mentor Income Portfolio - Class E
Mentor Asset Association Portfolio - Class A
Mentor Asset Association Portfolio - Class B
Mentor Asset Allocation Portfolio - Class E
This Plan is adopted by Mentor Funds (the "Trust") (formerly Cambridge Series
Trust) with respect to the Portfolios of the Trust, and with respect to the
classes of shares of such Portfolios, if any, set forth above.
In compensation for services provided pursuant to this Plan, Administrators will
be paid a monthly fee computed at the annual rate not to exceed 0.25 of 1% of
the average aggregate net asset value of the shares of all participating classes
or Portfolios, as the case may be, held during each month.
WITNESS the due execution hereof this day of April, 1998.
MENTOR FUNDS
By:__________________
President
Exhibit 15(ii)
EXHIBIT A
Class of Shares 12b-1 Fee
--------------- ---------
Mentor Growth Portfolio B 0.75%
Mentor Capital Growth Portfolio B 0.75%
Mentor Strategy Portfolio B 0.75%
Mentor Income and Growth Portfolio B 0.75%
Mentor Perpetual Global Portfolio B 0.75%
Mentor Quality Income Portfolio B 0.50%
Mentor Municipal Income Portfolio B 0.50%
Mentor Short-Duration Income Portfolio B 0.30%
Mentor Balanced Portfolio B 0.75%
Mentor Growth Opportunities Portfolio B 0.75%
Mentor Income Portfolio B 0.50%
Mentor Asset Allocation Portfolio B 0.75%
