Filed Pursuant to Rule 497(e)
33-45315
P R O S P E C T U S January 17, 1998,
as revised June 16, 1998
Y (Institutional) Shares
Mentor Funds
Mentor Funds, an open-end management investment company, is offering Y
Shares of eight different investment portfolios to institutional and high
net-worth individual investors: Mentor Growth Portfolio, Mentor Capital Growth
Portfolio, Mentor Strategy Portfolio, Mentor Income and Growth Portfolio,
Mentor Perpetual Global Portfolio, Mentor Quality Income Portfolio, Mentor
Municipal Income Portfolio, and Mentor Short-Duration Income Portfolio. Certain
of the Portfolios may use "leverage" -- that is, they may borrow money to
purchase additional portfolio securities, which involves special risks. See
"Other Investment Practices."
Mentor Funds provides investors an opportunity to invest in a variety of
Portfolios offering a wide array of investment strategies. Each Portfolio
pursues its investment objectives through the investment policies described in
this Prospectus. This Prospectus sets forth concisely the information about
Mentor Funds that a prospective investor should know before investing.
Investors should read this Prospectus carefully and retain it for future
reference. More detailed information can be found in the January 17, 1998
Statement of Additional Information, as amended from time to time. For a free
copy of the Statement or for other information, please call Mentor Services
Company, Inc. at 1-800-382-0016. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The address of Mentor Funds is P.O. Box 1357, Richmond, Virginia
23218-1357.
----------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THEACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, FIRST UNION CORP. OR ANY OF ITS AFFILIATES AND ARE NOT FEDERALLY
INSURED BY, GUARANTEED BY OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE FUNDS INVOLVES
INVESTMENT RISK, INCLUDING THE POSSIBLE RISK OF PRINCIPAL.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Expense Summary ............................. 3
Investment Objectives and Policies .......... 4
Other Investment Practices .................. 13
Valuing the Portfolios' Shares .............. 21
How to Buy Shares ........................... 21
How To Sell Shares .......................... 22
How To Exchange Shares ...................... 23
Distributions and Taxes ..................... 24
Management .................................. 25
General ..................................... 27
Performance Information ..................... 28
APPENDIX .................................... 29
</TABLE>
2
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EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a
Portfolio. Expenses shown reflect the estimated expenses each of the Portfolios
expects to occur during the current fiscal year with respect to its Y Shares.
The Examples show the cumulative expenses attributable to a hypothetical $1,000
investment in Y Shares of each Portfolio over specified periods.
Shareholder Transaction Expenses
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases .................... None
Maximum Sales Charge Imposed on Reinvested Dividends ......... None
Exchange Fee ................................................. None
Contingent Deferred Sales Charge ............................. None
</TABLE>
Annual Portfolio Operating Expenses
(As a percentage of average net assets)
<TABLE>
<CAPTION>
Income Short-
Capital and Perpetual Quality Municipal Duration
Growth Growth Strategy Growth Global Income Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees .............. 0.70% 0.80% 0.85% 0.75% 1.10% 0.47%* 0.60% 0.34%*
12b-1 Fees ................... None None None None None None None None
Shareholder Services Fee ..... None None None None None None None None
Other Expenses ............... 0.33% 0.36% 0.35% 0.35% 0.54% 0.33 % 0.37% 0.27%*
Total Portfolio Operating
Expenses .................. 1.03% 1.16% 1.20% 1.10% 1.64% 0.80%* 0.97% 0.61%*
</TABLE>
- ----------
* After expense limitation.
Mentor Investment Advisors, LLC has agreed to limit its Management Fees
from each of the Quality Income and Short-Duration Income Portfolios and Mentor
Investment Group has agreed to limit its administrative services fees from the
Short-Duration Income Portfolio until September 30, 1998. In the absence of
these expense limitations, Management Fees for the Quality Income Portfolio and
the Short-Duration Income Portfolio would be 0.60% and 0.50%, respectively,
Other Expenses for the Short-Duration Income Portfolio are expected to be
0.37%, and Total Portfolio Operating Expenses for the Quality Income Portfolio
and the Short-Duration Income Portfolio are expected to be 0.93% and 0.87%,
respectively.
3
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Examples
You would pay the following expenses on a $1,000 investment in Y Shares,
assuming 5% annual return and with or without redemption at the end of each
period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Growth Portfolio ......................... $11 $33 $57 $126
Capital Growth Portfolio ................. 12 37 64 141
Strategy Portfolio ....................... 12 38 66 145
Income and Growth Portfolio .............. 11 35 61 134
Perpetual Global Portfolio ............... 17 52 89 194
Quality Income Portfolio ................. 8 26 44 99
Municipal Income Portfolio ............... 10 31 54 119
Short-Duration Income Portfolio .......... 6 20 34 76
</TABLE>
The Examples should not be considered a representation of future
performance; actual expenses may vary.
INVESTMENT OBJECTIVES AND POLICIES
Mentor Funds is offering Y Shares of eight different diversified
Portfolios by this Prospectus with varying investment objectives and policies.
There can, of course, be no assurance that any Portfolio will achieve its
investment objective. The differences in objectives and policies among the
Portfolios can be expected to affect the investment return of each Portfolio
and the degree of market and financial risk of an investment in each Portfolio.
For a discussion of certain investment practices in which the Portfolios may
engage, and the risks they may entail, see "Other Investment Practices" below.
The investment objectives of the Portfolios, other than those of the Strategy
Portfolio and the Short-Duration Income Portfolio, are fundamental policies and
may not be changed without shareholder approval. Except for the investment
policies designated in this Prospectus or the Statement of Additional
Information as fundamental, the investment policies described herein are not
fundamental and may be changed by the Trustees without shareholder approval.
Any percentage limitation on a Portfolio's investments will apply only at
the time of investment; a Portfolio would not be considered to have violated
any such limitation, unless an excess or deficiency occurs or exists
immediately after and as a result of an investment. In addition, a Portfolio
will not necessarily dispose of a security when its rating is reduced below any
applicable minimum rating, although the investment adviser or sub-adviser of
the Portfolio will monitor the investment to determine whether continued
investment in the security will assist in meeting the Portfolio's investment
objective.
Mentor Investment Advisors, LLC ("Mentor Advisors") is the investment
adviser to each of the Portfolios other than the Mentor Perpetual Global
Portfolio. Mentor Perpetual Advisors, LLC ("Mentor Perpetual") is the
investment adviser to the Global Portfolio.
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Mentor Growth Portfolio
The Growth Portfolio's investment objective is long-term capital growth.
Although the Portfolio may receive current income from dividends, interest, and
other sources, income is only an incidental consideration.
The Portfolio attempts to achieve long-term capital growth by investing in
a diversified portfolio of securities. Under normal circumstances at least 75%
of the Portfolio's assets will be invested in common stocks of companies
domiciled or located in the United States. Although the Portfolio may invest in
companies of any size, the Portfolio invests principally in common stocks of
small to mid-sized companies. The Portfolio invests in companies that, in the
opinion of Mentor Advisors, have demonstrated earnings, asset values, or growth
potential not yet reflected in their market price. A key indication of such
undervaluation considered by Mentor Advisors is earnings growth which is above
average compared to the S&P 500 Index. Other important factors in selecting
investments include a strong balance sheet and product leadership in niche
markets. Mentor Advisors believes that such investments may offer better than
average potential for long-term capital growth.
Small and mid-size companies may present greater opportunities for capital
growth than do larger companies because of high potential earnings growth, but
may also involve greater risk. They may have limited product lines, markets, or
financial resources, or may depend on a limited management group. Their
securities may trade less frequently and in limited volume, and only in the
over-the-counter market or on a regional securities exchange. As a result,
these securities may change in value more than those of larger, more
established companies.
Mentor Capital Growth Portfolio
The investment objective of the Capital Growth Portfolio is to provide
long-term appreciation of capital. The Portfolio may invest in a wide variety
of securities which Mentor Advisors believes offers the potential for capital
appreciation over both the intermediate and long term. The Portfolio does not
invest for current income.
The Portfolio invests primarily in common stocks of companies believed by
Mentor Advisors to have the potential for capital appreciation. The Portfolio
may invest without limit in preferred stocks, investment-grade bonds,
convertible preferred stocks, convertible debentures, and any other class or
type of security Mentor Advisors believes offers the potential for capital
appreciation. In selecting investments, Mentor Advisors will attempt to
identify securities it believes will provide capital appreciation over the
intermediate or long term due to changes in the financial condition of issuers,
changes in financial conditions generally, or other factors. The Portfolio also
may invest in fixed-income securities, and cash or money market investments,
for temporary defensive purposes.
Mentor Strategy Portfolio
The Strategy Portfolio's investment objective is to seek high total return
on its investments. In seeking to achieve this objective, Mentor Advisors
actively allocates the Portfolio's assets among the major asset categories of
equity securities, fixed-income securities, and money market instruments. The
Portfolio will normally invest some portion of its assets in each asset
category, but may invest without limit in any asset category. Total return
consists of current income (including dividends, interest, and, in the case of
discounted instruments, discount accruals) and capital appreciation (including
realized and unrealized capital gains and losses).
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Mentor Advisors believes that the Portfolio has the potential to achieve
above-average investment returns at comparatively lower risk by actively
allocating its resources among the equity, debt, and money market sectors of
the market as opposed to relying solely on just one market sector. For example,
Mentor Advisors may at times believe that the equity market holds a higher
potential for total return than the debt market and that a relatively large
portion of the Portfolio's assets should be allocated to the equity market
sector. The reverse would be true at times when Mentor Advisors believes that
the potential for total return in the bond market is greater than that in the
equity market. Mentor Advisors might also allocate the Portfolio's investments
to short-term bonds and money market instruments in order to earn current
return and to reduce the potential adverse effect of declines in the bond and
equity markets. After determining the portions of the Portfolio's assets to be
invested in the various market sectors, Mentor Advisors attempts to select the
securities of companies within those sectors offering potential for
above-average total return. The achievement of the Portfolio's investment
objective depends upon, among other things, the ability of Mentor Advisors to
assess correctly the effects of economic and market trends on different sectors
of the market. The Portfolio's investments may include both securities of U.S.
issuers and securities traded principally in foreign markets. The Portfolio may
invest without limit in foreign securities. See "Other Investment Practices --
Foreign Securities" for a description of risks associated with investments in
such securities.
Within the equity sector, Mentor Advisors actively allocates the
Portfolio's assets to those industries and issuers it expects to benefit from
major market trends or which it otherwise believes offer the potential for
above-average total return. The Portfolio may purchase equity securities
(including convertible debt obligations and convertible preferred stock) sold
on the New York, American, and other U.S. or foreign stock exchanges and in the
over-the-counter market.
Within the fixed-income sector, Mentor Advisors seeks to maximize the
return on its investments by adjusting maturities and coupon rates as well as
by exploiting yield differentials among different types of investment- grade
securities. The Portfolio may invest in debt securities of any maturity,
preferred stocks, and other fixed-income instruments, including, for example,
U.S. Government securities and corporate debt securities (including zero coupon
securities). A substantial portion of the Portfolio's investments in the
fixed-income sector may be in mortgage-backed securities, including
collateralized mortgage obligations ("CMOs") and certain other stripped
mortgage-backed securities, which have certain special risks. See "Other
Investment Practices -- Mortgage-backed securities; other asset-backed
securities" and " -- Other mortgage-related securities" for a description of
these risks. The Portfolio will only invest in debt securities which are rated
at the time of purchase Baa or better by Moody's Investors Service, Inc.
("Moody's") or BBB or better by Standard & Poor's ("S&P") or, if unrated, are
deemed by Mentor Advisors to be of comparable quality. While bonds rated Baa or
BBB are considered to be of investment grade, they have speculative
characteristics as well. A description of securities ratings is contained in
the Appendix to this Prospectus.
The money market portion of the Portfolio will contain short-term
fixed-income securities issued by private and governmental institutions. Such
securities may include, for example, U.S. Government securities; bank
obligations; Eurodollar certificates of deposit issued by foreign branches of
domestic banks; obligations of savings institutions; fully insured certificates
of deposit; and commercial paper rated within the two highest grades by S&P or
the highest grade by Moody's or, if not rated, issued by a company having an
outstanding debt issue rated at least Aa by Moody's or AA by S&P.
6
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Mentor Income and Growth Portfolio
Sub-adviser: Wellington Management Company, LLP
The investment objective of the Income and Growth Portfolio is to provide
a conservative combination of income and growth of capital consistent with
capital protection. The Portfolio invests in a diversified portfolio of equity
securities of companies Wellington Management Company, LLP ("Wellington
Management") believes exhibit sound fundamental characteristics and in
investment-grade fixed-income securities and U.S. Government securities, as
described below.
Wellington Management will manage the allocation of assets among asset
classes based upon its analysis of economic conditions, relative fundamental
values and the attractiveness of each asset class, and expected future returns
of each asset class. The Portfolio will normally have some portion of its
assets invested in each asset class at all times but may invest without limit
in any asset class.
The Portfolio may invest in a wide variety of equity securities, such as
common stocks and preferred stocks, as well as debt securities convertible into
equity securities or that are accompanied by warrants or other equity
securities. In selecting equity investments, Wellington Management will attempt
to identify securities it believes are conservatively valued. Within the equity
asset class, the Portfolio seeks to achieve long-term appreciation of capital
and a moderate income level by selecting investments in out-of-favor companies
with sound fundamentals. These decisions are based primarily on Wellington
Management's fundamental research and security valuations.
Within the fixed-income asset class, Wellington Management seeks to invest
in a portfolio that provides as high a level of current income as is consistent
with prudent investment risk. The Portfolio may invest in debt securities of
any maturity, preferred stocks, and other fixed-income instruments, including,
for example, U.S. Government securities, corporate debt securities (including
zero-coupon securities) and debt securities issued by foreign governments and
by companies located outside the United States. The Portfolio will only invest
in debt securities which are rated at the time of purchase Baa or better by
Moody's or BBB or better by S&P or which, if unrated, are deemed by Wellington
Management to be of comparable quality. While fixed-income securities rated Baa
or BBB are considered to be of investment grade, they have speculative
characteristics as well. A description of securities ratings is contained in
the Appendix to this Prospectus.
The Portfolio may invest up to 10% of its assets in securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests in real estate. The Portfolio will limit its investment in
real estate investment trusts to 10% of its total assets. Such investments may
involve many of the risks of direct investment in real estate, such as declines
in the value of real estate, risks related to general and local economic
conditions, and adverse changes in interest rates. Other risks associated with
real estate investment trusts include lack of diversification, borrower
default, and voluntary liquidation.
Mentor Perpetual Global Portfolio
The investment objective of the Global Portfolio is to seek long-term
growth of capital through a diversified portfolio of marketable securities made
up primarily of equity securities, including common stocks, preferred stocks,
securities convertible into common stocks, and warrants. The Portfolio may also
invest in debt securities and other fixed-income securities of private or
governmental issuers (including zero-coupon securities) which Mentor Perpetual
believes to be consistent with the Portfolio's objective.
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It is expected that the Portfolio's investments will normally be spread
broadly around the world, although (except as described in the next sentence)
there is no limit on the amount of the Portfolio's assets that may be invested
in any single country. Under normal circumstances, the Portfolio will invest at
least 65% of the value of its total assets in securities of at least three
countries, one of which may be the United States. The Portfolio may invest all
of its assets in securities of issuers outside the United States, and for
temporary defensive purposes may at times invest all of its assets in
securities of U.S. issuers. To the extent that the Portfolio invests a
substantial portion of its assets in securities of issuers located in a single
country, it will be more susceptible to adverse economic, business, political,
or regulatory conditions in or affecting that country than if it were to invest
in a geographically more diverse portfolio. The Portfolio may invest in
closed-end investment companies holding foreign securities. The Portfolio also
may hold a portion of its assets in cash or cash equivalents, including foreign
and domestic money market instruments.
It is likely that, at times, a substantial portion of the Portfolio's
assets will be invested in securities of issuers in emerging markets, including
under-developed and developing nations. Investments in emerging markets are
subject to the same risks applicable to foreign investments generally although
those risks may be increased due to conditions in such markets. For example,
the securities markets and legal systems in emerging markets may only be in a
developmental stage and may provide few, or none, of the advantages or
protections of markets or legal systems available in more developed countries.
Although many of the securities in which the Portfolio may invest are traded on
securities exchanges, they may trade in limited volume, and the exchanges may
not provide all of the conveniences or protections provided by securities
exchanges in more developed markets. The Portfolio may also invest a
substantial portion of its assets in securities traded in the over-the-counter
markets and not on any exchange, which may affect the liquidity of the
investment and expose the Portfolio to the credit risk of its counterparties in
trading those investments. See "Other Investment Practices -- Foreign
securities."
Mentor Perpetual may seek investment opportunities in securities of large,
widely traded companies as well as securities of small, less well known
companies. Small companies may present greater opportunities for investment
return, but may also involve greater risk. They may have limited product lines,
markets, or financial resources, or may depend on a limited management group.
Their securities may trade less frequently and in limited volume. As a result
the prices of these securities may fluctuate more than prices of securities of
larger, more established companies.
Except as described below, debt and fixed-income securities in which the
Portfolio may invest will be investment grade securities or those of equivalent
quality as determined by Mentor Perpetual. The Portfolio may invest up to 5% of
its total assets in debt securities rated Baa or below by Moody's, or BBB or
below by S&P, or deemed by Mentor Perpetual to be of comparable quality, and
may invest in securities rated as low as C by Moody's or D by S&P. Securities
rated Baa or BBB lack outstanding investment characteristics and have
speculative characteristics and are subject to greater credit and market risks
than higher-rated securities. Securities rated below investment grade are
commonly referred to as "junk bonds" and are predominately speculative.
Securities rated D may be in default with respect to payment of principal or
interest. A description of securities ratings is contained in the Appendix to
this Prospectus.
Mentor Quality Income Portfolio
The Quality Income Portfolio's investment objective is to seek high
current income consistent with what Mentor Advisors believes to be prudent
risk. The Portfolio may invest in debt securities, including both U.S.
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Government and corporate obligations, and in other income-producing securities,
including preferred stocks and dividend-paying common stocks. The Portfolio may
also hold a portion of its assets in cash or money market instruments.
The Portfolio will normally invest at least 80% of its assets in U.S.
Government securities and in other securities rated at least A by Moody's or
S&P, or at a comparable rating by another nationally recognized rating
organization, or, if unrated, determined by Mentor Advisors to be of comparable
quality. The Portfolio may invest the remaining 20% of its assets in
lower-rated securities, including securities rated below investment grade (or,
if unrated, determined by Mentor Advisors to be of comparable quality).
Securities rated below investment grade are considered to be of poor standing
and predominantly speculative. Assurance of interest and principal payments or
of maintenance of other terms of the securities' contract over any long period
of time may be small. The Portfolio will not invest more than 10% of its assets
in securities rated Ca or below by Moody's or CC or below by Standard & Poor's.
See "Other Investment Practices -- Lower-rated securities." A description of
securities ratings is contained in the Appendix to this Prospectus.
Mentor Advisors may take full advantage of the entire range of maturities
of the securities in which the Portfolio may invest and may adjust the average
maturity of the Portfolio's securities from time to time, depending on its
assessment of relative yields on securities of different maturities and
expectations of future changes in interest rates. The Portfolio may invest any
portion of its assets in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including CMOs and certain
stripped mortgage-backed securities (including certain "residual" interests),
and in other asset-backed securities, which involve certain risks. The
Portfolio may also invest any portion of its assets in securities representing
secured or unsecured interests in other types of assets such as automobile
finance or credit card receivables. See "Other Investment Practices --
Mortgage-backed securities; other asset-backed securities" and " -- Other
mortgage-related securities" below. The Portfolio may borrow money to invest in
additional securities; this practice involves risks. See "Other Investment
Practices -- Leverage," below. The Portfolio may also engage in a variety of
interest rate transactions, including swaps, caps, floors, and collars. See
"Other Investment Practices -- Interest rate transactions" below for a
description of risks associated with these transactions.
Mentor Municipal Income Portfolio
Sub-adviser: Van Kampen American Capital Management, Inc.
The investment objective of the Municipal Income Portfolio is to provide
investors with a high level of current income exempt from federal regular
income tax, consistent with preservation of capital. Under normal market
conditions, the Portfolio will invest at least 80% of its total assets in
tax-exempt municipal securities rated investment grade, or deemed by Van Kampen
American Capital Management, Inc. ("Van Kampen") to be of comparable quality.
The Portfolio may invest a substantial portion of its assets in municipal
securities that pay interest that is a tax preference item under the federal
alternative minimum tax. The Portfolio may not be a suitable investment for
investors who are already subject to federal alternative minimum tax or who
would become subject to federal alternative minimum tax as a result of an
investment in the Portfolio.
Tax-exempt municipal securities are debt obligations issued by or on
behalf of the governments of states (including the District of Columbia) and
United States territories or possessions, and their political subdivisions,
agencies, and instrumentalities, and certain interstate agencies, the interest
on which, in the opinion of bond
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counsel, is exempt from federal income tax. The Portfolio may also invest up to
10% of its assets in tax-exempt money market funds, which will be considered
tax-exempt municipal securities for this purpose.
Up to 20% of the Portfolio's total assets may be invested in tax-exempt
municipal securities rated between BB and B- by S&P or between Ba and B3 by
Moody's (or equivalently rated short-term obligations) and unrated tax-exempt
securities that Van Kampen considers to be of comparable quality. These
securities are below investment grade and are considered to be of poor standing
and predominantly speculative. Assurance of interest and principal payments or
of maintenance of other terms of the securities' contract over any long period
of time may be small. The Portfolio will not invest in securities rated below
B- by S&P or below B3 by Moody's at the time of purchase. The Portfolio may
hold a portion of its assets in cash or money market instruments.
The two principal classifications of municipal securities are "general
obligation" and "special revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit, and taxing power for the
payment of principal and interest. Special revenue bonds are usually payable
only from the revenues derived from a particular facility or class of
facilities or from the proceeds of a special excise tax or other specific
revenue source and generally are not payable from the unrestricted revenues of
an issuer. Industrial development bonds and private activity bonds are usually
special revenue bonds, the credit quality of which is normally directly related
to the credit standing of the private user involved.
There are, in addition, a variety of hybrid and special types of municipal
securities, including variable rate securities, municipal notes, and municipal
leases. Variable rate securities bear rates of interest that are adjusted
periodically according to formulae intended to minimize fluctuation in values
of the instruments. Municipal notes include tax, revenue, and bond anticipation
notes of short maturities, generally less than three years, which are issued to
obtain temporary funds for various public purposes. Municipal leases are
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered illiquid. They
may take the form of a lease, an installment purchase contract, a conditional
sales contract, or a participation certificate on any of the above. No more
than 5% of the net assets of the Portfolio will be invested in municipal
leases. A more detailed description of the types of municipal securities in
which the Portfolio may invest is included in the Statement of Additional
Information.
Risks of lower-grade securities. Investors should carefully consider the
risks of owning shares of a mutual fund which invests in lower-grade
securities, commonly known as "junk bonds", before making an investment in the
Portfolio. The lower ratings of certain securities held by the Portfolio
reflect a greater possibility that the financial condition of the issuer, or
adverse changes in general economic conditions, or both, may impair the ability
of the issuer to make payments of interest and principal. Lower-grade
securities generally involve greater credit risk than higher-grade municipal
securities and are more sensitive to adverse economic changes, significant
increases in interest rates, and individual issuer developments. The inability
(or perceived inability) of issuers to make timely payments of interest and
principal would likely make the values of securities held by the Portfolio more
volatile and could limit the Portfolio's ability to sell its securities at
prices approximating the values the Portfolio had placed on such securities. In
the absence of a liquid trading market for securities held by it, the Portfolio
may be unable at times to establish the fair value of such securities and may
not be able to dispose of such securities in a timely manner at a price which
reflects the value of such securities. The rating assigned to a Security by
Moody's or S&P does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an investment in the security.
For more information about the rating services' descriptions of lower-rated
municipal securities, see the Appendix to this Prospectus.
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Van Kampen seeks to minimize the risks involved in investing in
lower-grade securities through diversification and careful investment analysis.
However, the amount of information about the financial condition of an issuer
of lower-grade municipal securities may not be as extensive as that which is
made available by corporations whose securities are publicly traded. When the
Portfolio invests in tax exempt securities in the lower rating categories, the
achievement of the Portfolio's goals is more dependent on Van Kampen's ability
than would be the case if the Portfolio were investing in securities in the
higher rating categories. To the extent that there is no established retail
market for some of the lower-grade securities in which the Portfolio may
invest, trading in such securities may be relatively inactive. During periods
of reduced market liquidity and in the absence of readily available market
quotations for lower-grade municipal securities held by the Portfolio, the
valuation of the Portfolio's securities becomes more difficult and the use of
judgment may play a greater role in the valuation of the Portfolio's securities
due to the reduced availability of reliable objective data. The effects of
adverse publicity and investor perceptions may be more pronounced for
securities for which no established market exists as compared with the effects
on securities for which such a market does exist. Further, the Portfolio may
have more difficulty selling such securities in a timely manner and at their
stated value than would be the case for securities for which an established
market does exist.
Concentration. The Portfolio generally will not invest more than 25% of
its total assets in any one industry. Governmental issuers of municipal
securities are not considered part of any "industry." However, municipal
securities backed only by the assets and revenues of nongovernmental users may
for this purpose be deemed to be issued by such nongovernmental users, and the
25% limitation would apply to such obligations. The Portfolio may invest more
than 25% of its assets in a broader segment of the municipal securities market,
such as revenue obligations of hospitals and other health care facilities,
housing agency revenue obligations, or airport revenue obligations, if Van
Kampen determines that the yields available from obligations in a particular
segment of the market justify the additional risks associated with such
concentration. Although such obligations could be supported by the credit of
governmental users, or by the credit of nongovernmental users engaged in a
number of industries, economic, business, political, and other developments
generally affecting the revenues of such users (for example, proposed
legislation or pending court decisions affecting the financing of such projects
and market factors affecting the demand for their services or products) may
have a general adverse effect on all municipal securities in such a market
segment. The Portfolio reserves the right to invest more than 25% of its assets
in industrial development or private activity bonds or in issuers located in
any individual state, although Van Kampen has no present intention to invest
more than 25% of the Portfolio's assets in issuers located in the same state.
If the Portfolio were to invest more than 25% of its assets in issuers located
in one state, it would be more susceptible to adverse economic, business, or
regulatory conditions in or affecting that state than if it were to invest in a
geographically more diverse portfolio.
Mentor Short-Duration Income Portfolio
The Short-Duration Income Portfolio's investment objective is to seek
current income. As a secondary objective, the Portfolio seeks preservation of
capital, to the extent consistent with its objective of current income. The
Portfolio will normally invest at least 65% of its assets in debt securities
with a "duration" of three years or less. The Portfolio may invest in U.S.
Government securities and debt obligations of private issuers and in preferred
stocks and dividend-paying common stocks, and may hold a portion of its assets
in cash or money market instruments.
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The Portfolio may invest any portion of its assets in mortgage-backed
certificates and other securities representing ownership interests in mortgage
pools, including CMOs and certain other stripped mortgage-backed securities
(including certain "residual" interests). The Portfolio may also invest any
portion of its assets in securities representing secured or unsecured interests
in other types of assets, such as automobile finance or credit card
receivables. See "Other Investment Practices -- Mortgage-backed securities;
other asset-backed securities" and " -- Other mortgage-related securities"
below for a description of these securities and risks they may entail
Traditionally, a debt security's "term to maturity" has been used to
evaluate the sensitivity of the security's price to changes in interest rates
(the security's interest-rate "volatility"). However, a security's term to
maturity measures only the period of time until the last payment of principal
or interest on the security, and does not take into account the timing of the
various payments of principal or interest to be made prior to the instrument's
maturity. By contrast, "duration" is a measure of the full stream of payments
to be received on a debt instrument, including both interest and principal
payments, based on their present values. Duration measures the periods of time
between the present time and the time when the various interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by their present values.
There are some situations where even the standard duration calculation
does not properly reflect the interest-rate volatility of a security. For
example, floating and variable rate securities often have final maturities of
ten years or more; however, their interest-rate volatility is determined based
principally on the period of time until their interest rates are reset and on
the terms on which they may be reset. Another example where a security's
interest-rate volatility is not properly measured by its duration is the case
of mortgage-related securities. The stated final maturity of such securities
may be up to 30 years, but the actual cash flow on the securities will be
determined by the anticipated prepayment rates on the underlying mortgage
loans. Therefore, the duration of such a security can change if anticipated
prepayment rates change. In these and other similar situations, Mentor Advisors
will estimate a security's duration using sophisticated analytical techniques
that take into account such factors as the expected prepayment rate on the
security and how the prepayment rate might change under various market
conditions, although there can be no assurance that any such estimation will
accurately predict actual prepayment rates or their effect on the volatility or
value of a security.
The Portfolio will invest primarily in debt securities and preferred
stocks of investment grade and, under normal market conditions, the Portfolio
will seek to maintain a portfolio of securities with a dollar-weighted average
rating of Baa/BBB or better. A security will be considered to be of "investment
grade" if, at the time of investment by the Portfolio, it is rated at least
Baa3 by Moody's or BBB- by Standard & Poor's or the equivalent by another
nationally recognized rating organization or, if unrated, determined by Mentor
Advisors to be of comparable quality. Securities rated Baa or BBB lack
outstanding investment characteristics and have speculative characteristics and
are subject to greater credit and market risks than higher-rated securities.
The Portfolio may invest up to 20% of its assets in securities rated below
investment grade (or, if unrated, determined by Mentor Advisors to be of
comparable quality). Securities rated below investment grade are considered to
be of poor standing and predominantly speculative. Assurance of interest and
principal payments or of maintenance of other terms of the securities' contract
over any long period of time may be small. The Portfolio will not invest more
than 10% of its assets in securities rated below Ca by Moody's or CC by
Standard & Poor's. See "Other Investment Practices -- Lower-rated securities."
A description of securities ratings is contained in the Appendix to this
Prospectus.
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The Portfolio may borrow money to invest in additional securities; this
practice involves risk. See "Other Investment Practices -- Leverage," below.
The Portfolio may also engage in a variety of interest rate transactions,
including swaps, caps, floors, and collars. See "Other Investment Practices --
Interest rate transactions" below for a description of risks associated with
these transactions.
OTHER INVESTMENT PRACTICES
Each of the Portfolios (except as noted below) may engage in the other
investment practices described below. See the Statement of Additional
Information for a more detailed description of these practices and certain
risks they may involve.
Mortgage-backed securities; other asset-backed securities. Each of the
Strategy, Short-Duration Income, Quality Income, and Income and Growth
Portfolios may invest in mortgage-backed certificates and other securities
representing ownership interests in mortgage pools, including CMOs and, in the
case of the Quality Income and Short-Duration Income Portfolios, "residual"
interests therein (described more fully below). Interest and principal payments
on the mortgages underlying mortgage-backed securities are passed through to
the holders of the mortgage-backed securities. Mortgage-backed securities
currently offer yields higher than those available from many other types of
fixed-income securities but because of their prepayment aspects, their price
volatility and yield characteristics will change based on changes in prepayment
rates. As a result, mortgage-backed securities are less effective than other
securities as a means of "locking in" long-term interest rates. Generally,
prepayment rates increase if interest rates fall and decrease if interest rates
rise. For many types of mortgage-backed securities, this can result in
unfavorable changes in price and yield characteristics in response to changes
in interest rates and other market conditions. For example, as a result of
their prepayment aspects, mortgage-backed securities have less potential for
capital appreciation during periods of declining interest rates than other
fixed-income securities of comparable maturities, although such obligations may
have a comparable risk of decline in market value during periods of rising
interest rates.
Mortgage-backed securities have yield and maturity characteristics that
are dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include
both interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed
securities, especially during periods of declining interest rates. Similarly,
during periods of rising interest rates, a reduction in the rate of prepayments
may significantly lengthen the effective durations of such securities.
Each of the Strategy, Short-Duration Income, and Quality Income Portfolios
may invest in stripped mortgage-backed securities. Stripped mortgage-backed
securities are usually structured with two classes that receive different
portions of the interest and principal distributions on a pool of mortgage
assets. A Portfolio may invest in both the interest-only -- or "IO" -- class
and the principal-only -- or "PO" -- class. The yield to maturity and price of
an IO class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's net
asset value. This would typically be the case in an environment of falling
interest rates. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may under some circumstances
fail to fully recoup its initial investment in these securities. Conversely,
POs tend to increase
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in value if prepayments are greater than anticipated and decline if prepayments
are slower than anticipated. The secondary market for stripped mortgage-backed
securities may be more volatile and less liquid than that for other
mortgage-backed securities, potentially limiting a Portfolio's ability to buy
or sell those securities at any particular time.
Certain mortgage-backed securities held by the Portfolios may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by a Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
Each of the Quality Income, Short-Duration Income, Income and Growth, and
Strategy Portfolios may invest in securities representing interests in other
types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security
interest in the underlying assets may be limited. For example, the laws of
certain states may prevent or restrict repossession of collateral from a
debtor.
The Quality Income and Short-Duration Income Portfolios may also invest in
other types of mortgage-related securities, including any securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans or real property, including collateralized
mortgage obligation "residual" interests. "Residual" interests represent the
right to any excess cash flow remaining after all other payments are made among
the various tranches of interests issued by structured mortgage-backed
vehicles. The values of such interests are extremely sensitive to changes in
interest rates and in prepayment rates on the underlying mortgages. In the
event of a significant change in interest rates or other market conditions, the
value of an investment by the Portfolio in such interests could be
substantially reduced and the Portfolio may be unable to dispose of the
interests at prices approximating the values the Portfolio had previously
assigned to them or to recoup its initial investment in the interests. The
Portfolios may invest in new types of mortgage-related securities that may be
developed and marketed from time to time. If any of the Portfolios were to
invest in such newly developed securities, shareholders would, where
appropriate, be notified and this Prospectus would be revised accordingly.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolios may
invest in a wide variety of such securities, including mortgage-backed and
other asset-backed securities that will pay principal or interest only under
certain circumstances, or in amounts that may increase or decrease
substantially depending on changes in interest rates or other market factors.
Such securities may experience extreme price volatility in response to changes
in interest rates or other market factors; this may be especially true in the
case of securities where the amounts of principal or interest paid, or the
timing of such payments, varies widely depending on prevailing interest rates.
A Portfolio's investment adviser or sub-adviser may not be able to obtain
current market quotations for certain mortgage-backed or asset-backed
securities at all times, or to obtain market quotations believed by it to
reflect the values of such securities accurately. In such cases, a Portfolio's
investment adviser or sub-adviser may be required to estimate the value of such
a security using quotations provided by pricing services or securities dealers
making a market in such securities, or based on other comparable securities or
other bench-mark securities or interest rates. Mortgage-backed and other
asset-backed securities in which a Portfolio may invest may
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be highly illiquid, and a Portfolio may not be able to sell such a security at
a particular time or at the value it has placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, a Portfolio's investment adviser or sub-adviser will
be required to estimate the extent to which the values of the securities are
likely to change in response to changes in interest rates or other market
conditions, and the rate at which prepayments on the underlying mortgages or
other assets are likely to occur under different scenarios. There can be no
assurance that a Portfolio's investment adviser or sub-adviser will be able to
predict the amount of principal or interest to be paid on any security under
different interest rate or market conditions or that its predictions will be
accurate, nor can there be any assurance that a Portfolio will recover the
entire amount of the principal paid by it to purchase any such securities.
Zero-coupon bonds. Each of the Global, Income and Growth, Municipal
Income, Quality Income, Short-Duration Income, and Strategy Portfolios may at
times invest in so-called "zero-coupon" bonds. Zero-coupon bonds are issued at
a significant discount from face value and pay interest only at maturity rather
than at intervals during the life of the security. Because zero-coupon bonds do
not pay current interest, their value is subject to greater fluctuation in
response to changes in market interest rates than bonds that pay interest
currently. Zero-coupon bonds allow an issuer to avoid the need to generate cash
to meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds that pay interest currently. Even though such bonds do
not pay current interest in cash, a Portfolio is nonetheless required for
federal income tax purposes to accrue interest income on such investments and
to distribute such amounts at least annually to shareholders. Thus, a Portfolio
could be required at times to liquidate other investments in order to satisfy
this distribution requirement.
Premium securities. The Portfolios may at times invest in securities
bearing coupon rates higher than prevailing market rates. Such "premium"
securities are typically purchased at prices greater than the principal amount
payable on maturity. Although a Portfolio generally amortizes the amount of any
such premium into income, the Portfolio may recognize a capital loss if such
premium securities are called or sold prior to maturity and the call or sale
price is less than the purchase price. Additionally, a Portfolio may recognize
a capital loss if it holds such securities to maturity.
Lower-rated securities (Quality Income, Municipal Income, and
Short-Duration Income Portfolios). Investors should carefully consider their
ability to assume the risks of owning shares of a mutual fund that invests in
lower-rated securities (sometimes referred to as "junk bonds") before making an
investment in the Quality Income, Municipal Income, or Short Duration Income
Portfolio. The lower ratings of lower-rated securities held by a Portfolio
reflect a greater possibility that adverse changes in the financial condition
of the issuer, or in general economic conditions, or both, or an unanticipated
rise in interest rates, may impair the ability of the issuer to make payments
of interest and principal. The inability (or perceived inability) of issuers to
make timely payment of interest and principal would likely make the values of
securities held by a Portfolio more volatile and could limit a Portfolio's
ability to sell its securities at prices approximating the values the Portfolio
had placed on such securities. It is possible that legislation may be adopted
in the future limiting the ability of certain financial institutions to
purchase lower-rated securities; such legislation may adversely affect the
liquidity of such securities. In the absence of a liquid trading market for
securities held by it, a Portfolio may be unable at times to establish the fair
market value of such securities. The rating assigned to a security by Moody's
or Standard & Poor's does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an
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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 a
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of a Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the values of these investments. Changes in the
values of portfolio securities generally will not affect cash income derived
from such securities, but will affect a Portfolio's net asset value. A
Portfolio will not necessarily dispose of a security when its rating is reduced
below its rating at the time of purchase, although Mentor Advisors or Van
Kampen, as the case may be, will monitor the investment to determine whether
continued investment in the security will assist in meeting a Portfolio's
investment objectives.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may not have more traditional methods of financing available to
them, and may be unable to repay debt at maturity by refinancing. The risk of
loss due to default in payment of interest or principal by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness. Certain of the
lower-rated securities in which a Portfolio may invest are issued to raise
funds in connection with the acquisition of a company, in so-called "leveraged
buy-out" transactions. The highly leveraged capital structure of such issuers
may make them especially vulnerable to adverse changes in economic conditions.
A Portfolio may invest in lower-rated securities which trade infrequently
or in more limited volume than higher-rated securities (including illiquid
securities), or which are restricted as to resale. In addition, a substantial
portion of a Portfolio's assets may at times be invested in securities as to
which the Portfolio, by itself or together with other accounts managed by
Mentor Advisors and its affiliates (or by Van Kampen and its affiliates, as the
case may be), holds a major portion or all of such securities, which may limit
the liquidity of such securities. A Portfolio could find it difficult or
impossible to sell illiquid securities when Mentor Advisors or Van Kampen, as
the case may be, believes it advisable to do so or may be able to sell such
securities only at prices lower than if such securities were more widely held.
In many cases, such securities may be purchased in private placements and,
accordingly, will be subject to restrictions on resale as a matter of contract
or under securities laws. Under such circumstances, it may also be more
difficult to determine the fair value of such securities for purposes of
computing a Portfolio's net asset value. In order to enforce its rights in the
event of a default under securities in cases where a Portfolio holds a major
portion or all of the outstanding issue, a Portfolio may be required to take
possession of and manage assets securing the issuer's obligations on such
securities, which may increase the Portfolio's operating expenses and adversely
affect the Portfolio's net asset value. A Portfolio may also be limited in its
ability to enforce its rights and may incur greater costs in enforcing its
rights in the event an issuer becomes the subject of bankruptcy proceedings.
A Portfolio may at times invest in so-called "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
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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,
a Portfolio is nonetheless required for Federal income tax purposes to accrue
interest income on such investments and to distribute such amounts at least
annually to shareholders. Thus, a Portfolio could be required at times to
liquidate other investments in order to satisfy this distribution requirement.
Certain securities held by a Portfolio may permit the issuer at its option
to "call," or redeem, its securities. If an issuer were to redeem securities
held by a Portfolio during a time of declining interest rates, the Portfolio
may not be able to reinvest the proceeds in securities providing the same
investment return as the securities redeemed.
Mentor Advisors and Van Kampen seek to minimize the risks involved in
investing in lower-rated securities through diversification and careful
investment analysis. When a Portfolio invests in high yield securities in the
lower rating categories, achievement of the Portfolio's goals depends more on
its adviser's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories.
Options and futures. Each of the Portfolios may buy and sell put and call
options on securities it owns or plans to purchase to hedge against changes in
net asset value or to realize a greater current return. In addition, through
the purchase and sale of futures contracts and related options, each of the
Portfolios may at times seek to hedge against fluctuations in net asset value.
In addition, to the extent consistent with applicable law, the Portfolios may
buy and sell futures contracts and related options to increase investment
return. The Strategy Portfolio may also buy and sell options and futures
contracts (including index options and futures contracts) to implement changes
in its asset allocations among various market sectors, pending the sale of its
existing investments and reinvestments in new securities.
Index futures and options. Each of the Portfolios may buy and sell index
futures contracts ("index futures") and options on index futures and indices
for hedging purposes (or may purchase warrants whose value is based on the
value from time to time of one or more foreign securities indices). An "index
futures" contract is a contract to buy or sell units of a particular bond or
stock index at an agreed price on a specified future date. Depending on the
change in value of the index between the time when a Portfolio enters into and
terminates an index futures or option transaction, the Portfolio realizes a
gain or loss. The Portfolios may also, to the extent consistent with applicable
law, buy and sell index futures and options to increase investment return.
Risks related to options and futures strategies. Options and futures
transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
security or index or of the securities held by a Portfolio that are the subject
of a hedge. The successful use by a Portfolio of the strategies described above
further depends on the ability of its investment adviser or sub-adviser to
forecast market movements correctly. Other risks arise from a Portfolio's
potential inability to close out futures or options positions. Although a
Portfolio will enter into options or futures transactions only if its
investment adviser or sub-adviser believes that a liquid secondary market
exists for such option or futures contract, there can be no assurance that a
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price. Transactions in options and
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futures contracts involve brokerage costs and may require a Portfolio to
segregate assets to cover its outstanding positions. For more information, see
the Statement of Additional Information. Federal tax considerations may also
limit a Portfolio's ability to engage in options and futures transactions.
Each Portfolio's options and futures contract transactions will generally
be conducted on recognized exchanges. However, a Portfolio may purchase and
sell options in transactions in the over-the-counter markets. A Portfolio's
ability to terminate options in the over-the-counter markets may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would be unable to meet
their obligations to the Portfolio. A Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are not appropriate and when, in the opinion of its investment
adviser or sub-adviser, the pricing mechanism and liquidity of the
over-the-counter markets are satisfactory and the participants are responsible
parties likely to meet their contractual obligations.
Securities loans and repurchase agreements. Each Portfolio, other than the
Municipal Income Portfolio, may lend portfolio securities and may enter into
repurchase agreements with banks, broker/dealers, and other recognized
financial institutions. Each of the Strategy and Short-Duration Income
Portfolios may enter into each type of transaction on up to 25% of its assets,
and each of the Growth, Capital Growth, Global, Income and Growth, and Quality
Income Portfolios may enter into each type of transaction on up to one-third of
its assets. These transactions must be fully collateralized at all times, but
involve some risk to a Portfolio if the other party should default on its
obligations and the Portfolio is delayed or prevented from recovering the
collateral.
Leverage. The Short-Duration Income Portfolio and the Quality Income
Portfolio may borrow money to invest in additional securities. Certain other
Portfolios may engage in reverse repurchase agreements, forward commitments,
and dollar-roll transactions described below and in the Statement of Additional
Information, which may have the same economic effect as if the Portfolios had
borrowed money.
The use of borrowed money, known as "leverage," increases a Portfolio's
market exposure and risk and may result in losses. When a Portfolio has
borrowed money for leverage and its investments increase or decrease in value,
its net asset value will normally increase or decrease more than if it had not
borrowed money for this purpose. The interest that the Portfolio must pay on
borrowed money will reduce its net investment income, and may also either
offset any potential capital gains or increase any losses. The Portfolios
currently intend to use leverage in order to adjust the dollar-weighted average
duration of their portfolios. A Portfolio will not always borrow money for
investment and the extent to which a Portfolio will borrow money, and the
amount it may borrow, depends on market conditions and interest rates.
Successful use of leverage depends on an investment adviser's ability to
predict market movements correctly. The amount of leverage that can exist at
any one time will not exceed one-third of the value of a Portfolio's total
assets.
Reverse repurchase agreements; forward committments. Each Portfolio, other
than the Growth and Strategy Portfolios, may enter into "reverse" repurchase
agreements. Each of the Capital Growth, Quality Income, Short-Duration Income,
Income and Growth, and Global Portfolios may do so with respect to up to
one-third of its assets, and the Municipal Income Portfolio may do so with
respect to up to 5% of its assets. "Reverse" repurchase agreements generally
involve the sale by a Portfolio of securities held by it and an agreement to
repurchase the securities at an agreed-upon price, date, and interest payment.
Each Portfolio also may enter into forward commitments, in which a Portfolio
buys securities for future delivery. Reverse repurchase agreements and forward
commitments involve leverage, and may increase a Portfolio's overall investment
exposure. Their use
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by a Portfolio may result in losses. The Short-Duration Income Portfolio and
the Quality Income Portfolio may enter into reverse repurchase agreement to
create investment leverage.
Dollar-roll transactions. In order to enhance portfolio returns and manage
prepayment risks, each Portfolio, other than the Growth, Strategy, and
Municipal Income Portfolios may engage in dollar-roll transactions with respect
to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar-roll transaction, a Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (i.e., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon
price. The mortgage-related securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories. Dollar-roll
transactions involve leverage and may increase a Portfolio's overall investment
exposure. Their use by a Portfolio may result in losses.
Foreign securities. Each Portfolio other than the Growth and Municipal
Income Portfolios may invest in securities principally traded in foreign
markets. The Capital Growth and Income and Growth Portfolios will limit such
investments to 15% of their total assets. (Those percentage limitations do not
apply to American Depository Receipts, Global Depository Receipts, and other
U.S. dollar-denominated securities of issuers located outside the United
States.) Since foreign securities are normally denominated and traded in
foreign currencies, the values of a Portfolio's assets may be affected
favorably or unfavorably by changes in currency exchange rates and by exchange
control regulations. There may be less information publicly available about a
foreign company than about a U.S. company, and foreign companies are not
generally subject to accounting, auditing, and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign companies are less liquid and at times more volatile than securities of
comparable U.S. companies. Foreign brokerage commissions and other fees are
also generally higher than in the United States. Foreign settlement procedures
and trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of a Portfolio's assets held abroad)
and expenses not present in the settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of a Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. The laws of some foreign countries
may limit a Portfolio's ability to invest in securities of certain issuers
located in those foreign countries. Special tax considerations apply to foreign
securities. A Portfolio may buy or sell foreign currencies and options and
futures contracts on foreign currencies for hedging purposes in connection with
its foreign investments as described more fully below.
A Portfolio may invest in American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs"), which represent interests in foreign securities
held by a bank, trust company, or other organization. Investments in ADRs and
GDRs are subject to many of the same risks of investing in foreign securities
generally.
The risks described above are typically increased to the extent that a
Portfolio invests in securities traded in underdeveloped and developing
nations, which are sometimes referred to as "emerging markets."
Foreign currency exchange transactions. Each Portfolio that may invest in
foreign securities may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future currency exchange rates. A
Portfolio may engage in foreign currency exchange transactions in connection
with the purchase and sale
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of portfolio securities ("transaction hedging") and to protect against changes
in the value of specific portfolio positions ("position hedging").
A Portfolio also may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which a Portfolio
contracts to purchase or sell a security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. A Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with transaction hedging.
A Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may purchase and sell
foreign currency futures contracts, for hedging and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange
currency at a future time at a rate or rates that may be higher or lower than
the spot rate. Foreign currency futures contracts are standardized exchange-
traded contracts and have margin requirements. For transaction hedging
purposes, a Portfolio may also purchase and sell call and put options on
foreign currency futures contracts and on foreign currencies.
A Portfolio may engage in position hedging to protect against a decline in
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in value of a currency in
which securities the Portfolio intends to buy are denominated). For position
hedging purposes, a Portfolio may purchase or sell foreign currency futures
contracts and foreign currency forward contracts, and may purchase and sell put
and call options on foreign currency futures contracts and on foreign
currencies. In connection with position hedging, a Portfolio may also purchase
or sell foreign currencies on a spot basis.
Although there is no limit to the amount of a Portfolio's assets that may
be invested in foreign currency exchange and foreign currency forward contacts,
a Portfolio will only enter into such transactions to the extent necessary to
effect the hedging transactions described above.
Interest rate transactions. In order to attempt to protect the value of
its portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of its portfolio, each of the Global, Quality Income, and Short-
Duration Income Portfolios may enter into interest rate swaps and other
interest rate transactions, such as interest rate caps, floors, and collars.
Interest rate swaps involve the exchange by a Portfolio with another party of
different types of interest-rate streams (e.g. an exchange of floating rate
payments for fixed rate payments with respect to a notional amount of
principal). The purchase of an interest rate cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values. Each Portfolio intends to use
these interest rate transactions as a hedge and not as a speculative
investment. A Portfolio's ability to engage in certain interest rate
transactions may be limited by tax considerations.
The use of interest rate swaps and other interest rate transactions is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. If a Portfolio's investment adviser or sub-adviser is incorrect
in its forecasts of market values, interest rates, or other applicable factors,
the investment performance of a Portfolio would be less favorable than it would
have been if this investment technique were not used.
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Indexed securities. The Global Portfolio may invest in indexed securities,
the values of which are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Investment in indexed securities
involves certain risks. In addition to the credit risk of the securities issuer
and normal risks of price changes in response to changes in interest rates, the
principal amount of indexed securities may decrease as a result of changes in
the value of the reference instruments. Also, in the case of certain indexed
securities where the interest rate is linked to a reference instrument, the
interest rate may be reduced to zero and any further declines in the value of
the security may then reduce the principal amount payable on maturity. Further,
indexed securities may be more volatile than the reference instruments
underlying indexed securities.
VALUING THE PORTFOLIOS' SHARES
Each Portfolio calculates the net asset value of a share of each class by
dividing the total value of its assets, less liabilities, by the number of its
shares outstanding. Shares are valued as of the close of regular trading on the
New York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which approximates market value. All other securities and
assets are valued at their fair values.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rates or at such other rates as may be used in
accordance with procedures approved by the Trustees. As a result, fluctuations
in the values of such currencies in relation to the U.S. dollar will affect the
net asset value of a Portfolio's shares even though there has not been any
change in the values of such securities as quoted in such foreign currencies.
HOW TO BUY SHARES
Mentor Distributors, LLC ("Mentor Distributors"), located at 3435 Stelzer
Road, Columbus, Ohio 43219, serves as distributor of the Portfolios' shares.
Mentor Distributors is not obligated to sell any specific amount of shares of
any of the Portfolios. Mentor Distributors is a wholly owned subsidiary of
BISYS Fund Services, Inc.
Y Shares of each Portfolio are sold at a price based on their net asset
value next determined after a purchase order is received by the Portfolio. In
most cases, in order to receive that day's public offering price, your order
must be received by the Trust or Mentor Distributors before the close of
regular trading on the New York Stock Exchange.
An investor may make an initial purchase of shares in a Portfolio by
submitting completed application materials along with a purchase order, and by
making payment to Boston Financial Data Services, Inc. at 2 Heritage Drive,
North Quincy, MA 02171. Investors will be required to make minimum initial
investments of $1 million and minimum subsequent investments of $25,000.
Investments made through advisory accounts maintained with investment advisers
registered under the Investment Advisers Act of 1940, as amended (including
"wrap" accounts), are not subject to these minimum investment requirements.
Contact Mentor Services Company, Inc. ("Mentor Services") for information. The
Portfolios reserve the right at any time to change the initial and subsequent
investment minimums required of investors.
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Shares of a Portfolio may be purchased by (i) paying cash, (ii) exchanging
securities acceptable to a Portfolio's investment adviser or sub-adviser, or
(iii) a combination of such securities and cash. Purchase of shares of a
Portfolio in exchange for securities is subject in each case to the
determination by a Portfolio's investment adviser or sub-adviser that the
securities to be exchanged are acceptable for purchase by the Portfolio.
Securities accepted by a Portfolio's investment adviser or sub-adviser in
exchange for Portfolio shares will be valued in the same manner as the
Portfolio's assets as of the time of the next determination of net asset value
after such acceptance. All dividends and subscription or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Portfolio and must be delivered to the Portfolio
upon receipt by the investor from the issuer. A gain or loss for federal income
tax purposes would be realized upon the exchange by an investor that is subject
to federal income taxation, depending upon the investor's basis in the
securities tendered. A shareholder who wishes to purchase shares by exchanging
securities should obtain instruction by calling Mentor Services at
1-800-869-6042.
Mentor Distributors, Mentor Advisors, Mentor Perpetual, the sub-advisers
or affiliates thereof, at their own expense and out of their own assets, may
provide compensation to dealers in connection with sales of shares of the
Portfolios. Such compensation may include, but is not limited to, financial
assistance to dealers in connection with conferences, sales, or training
programs for their employees, seminars for the public, advertising or sales
campaigns, or other dealer-sponsored special events. In some instances, this
compensation may be made available only to certain dealers whose
representatives have sold or are expected to sell significant amounts of
shares. In addition, if an investor purchases shares of a Portfolio through
EVEREN Securities, Inc. with the redemption proceeds received by the investor
within the preceding 90 days from the sale of shares of any non-Mentor open-end
mutual fund, EVEREN Securities, Inc. may compensate the investor's investment
consultant in connection with that purchase. Dealers may not use sales of
Portfolio shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc.
In all cases a Portfolio's investment adviser, sub-adviser, and Mentor
Distributors reserve the right to reject any particular investment.
HOW TO SELL SHARES
A shareholder may redeem all or any portion of its shares in a Portfolio
any day the New York Stock Exchange is open by sending a signed letter of
instruction and stock power form, along with any certificates that represent
shares the shareholder wants to sell, to the Portfolio c/o Mentor Funds, P. O.
Box 1357, Richmond, Virginia 23218-1357 or to Mentor Distributors. Redemptions
will be effected at the net asset value per share next determined after the
receipt by the Portfolio of redemption instructions in "good order" as
described below. In order to receive that day's net asset value, your request
must be received before the close of regular trading on the New York Stock
Exchange. A Portfolio will only redeem shares for which it has received
payment. A check for the proceeds will normally be mailed on the next business
day after a request in good order is received.
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;
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(2) the request is signed by each registered owner exactly as the shares
are registered; and
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed for transfer (or are accompanied by an
endorsed stock power) and accompany the redemption request.
If shares to be redeemed represent an investment made by check, the Trust
reserves the right not to transmit the redemption proceeds to the shareholder
until the check has been collected, which may take up to 15 days after the
purchase date.
Each Portfolio reserves the right to require signature guarantees. A
guarantor of a signature must be an eligible guarantor institution, which term
includes most banks and trust companies, savings associations, credit unions,
and securities brokers or dealers. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Mentor Services usually
requires additional documentation for the sale of shares by a corporation,
partnership, agent, fiduciary, or surviving joint owner. Contact Mentor
Services for details.
Mentor Distributors may facilitate any redemption request. There is no
extra charge for this service.
Other information concerning redemption. Under unusual circumstances, each
of the Portfolios may suspend redemptions, or postpone payment for more than
seven days, as permitted by federal securities law. In addition, each Portfolio
reserves the right, if conditions exist which make cash payments undesirable,
to honor any request for redemption by making payment in whole or in part in
securities value in the same way as they would be valued for purposes of
computing the Portfolio's per share net asset value. If payment is made in
securities, a shareholder may incur brokerage expenses in converting those
securities into cash.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your Y Shares in a
Portfolio worth at least $1,000,000 for shares of the same class of any other
Portfolio of the Trust, at net asset value beginning 15 days after purchase.
You may also exchange Y Shares of a Portfolio for shares of Cash Resource U.S.
Government Money Market Fund (the "Cash Fund").
To exchange your shares, simply complete an Exchange Authorization Form
and send it to the Trust, c/o Boston Financial Data Services, Inc., 2 Heritage
Drive, North Quincy, Massachusetts 02171. Exchange Authorization Forms are
available by calling or writing Mentor Services. For federal income tax
purposes, an exchange is treated as a sale of shares and generally results in a
capital gain or loss. A Telephone Exchange Privilege is currently available.
The Telephone Exchange Privilege is not available if you were issued
certificates for shares which remain outstanding. Ask you investment dealer or
Mentor Services for a prospectus relating to the Cash Fund. Shares of certain
of the Portfolios may not be available to residents of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management
and have an adverse effect on all shareholders. In order to limit excessive
exchange activity and in other circumstances where Mentor Advisors or the
Trustees believe doing so would be in the best interests of a Portfolio, the
Trust reserves the right to revise or terminate the exchange privilege, limit
the amount or number of exchanges, or reject any exchange. Shareholders would
be notified of any such action to the extent required by law. Consult Mentor
Services before requesting an exchange by calling 1-800-869-6042. See the
Statement of Additional Information to find out more about the exchange
privilege.
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DISTRIBUTIONS AND TAXES
Dividends, if any, are declared daily and paid monthly for the Quality
Income, Short-Duration Income, and Municipal Income Portfolios, quarterly for
the Income and Growth Portfolio, and annually for the Growth, Capital Growth,
Global, and Strategy Portfolios. Each Portfolio will distribute its net capital
gain, if any, at least annually. All dividends and distributions of net capital
gain will be invested in additional Y Shares of a Portfolio unless a
shareholder requests in writing to receive the dividend or distribution in
cash.
Each Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. Each Portfolio will distribute substantially all
of its net investment income and capital gain net income on a current basis.
All Portfolio distributions, other than exempt-interest dividends, will be
taxable to shareholders as ordinary income, except that any distributions of
net capital gain will be taxed as long-term capital gain, regardless of how
long a shareholder has held the shares (although the loss on a sale of shares
held for six months or less will be treated as long-term capital loss to the
extent of any capital gain distribution received with respect to those shares).
Pursuant to the Taxpayer Relief Act of 1997, long-term capital gains generally
will be subject to a maximum tax rate of 28% or 20% depending upon the holding
period of the portfolio investment generating the gains. Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year Mentor Funds will notify
shareholders of the amount and tax status of distributions paid by their
Portfolios for the preceding year. In buying or selling securities for each of
the Portfolios, Mentor Advisors and Mentor Perpetual, as applicable, will not
normally take into account the effect any purchase or sale of securities will
have on the tax positions of the Portfolios' shareholders.
To permit the Quality Income, Municipal Income, and Short-Duration Income
Portfolios to maintain more stable monthly distributions, each of these
Portfolios may from time to time pay out less than the entire amount of net
investment income earned in any particular period. Any such amount retained by
a Portfolio would be available to stabilize future distributions. As a result,
the distributions paid by any of these Portfolios for any particular period may
be more or less than the amount of net investment income actually earned by the
Portfolio during that period.
Municipal Income Portfolio. Distributions designated by the Municipal
Income Portfolio as "exempt-interest dividends" are not generally subject to
federal income tax. The Municipal Income Portfolio may engage in investment
activities that produce taxable income, the distribution of which will be
taxable to shareholders as described above. Individual investors who receive
Social Security or railroad retirement benefits should consult their tax
advisers to determine what effect, if any, an investment in the Municipal
Income Portfolio may have on the taxation of their benefits. In addition, an
investment in the Portfolio may result in liability for federal alternative
maximum tax and for state and local taxes, both for individual and corporate
shareholders.
Global Portfolio only. Shareholders of the Global Portfolio who are U.S.
citizens or residents may be able to claim a foreign tax credit or deduction on
their U.S. income tax returns with respect to foreign taxes paid by the
Portfolio. If, at the end of the fiscal year of the Portfolio, more than 50% of
the Portfolio's total assets are represented by stock or securities of foreign
corporations, the Portfolio intends to make an election permitted by the
Internal Revenue Code to treat any eligible foreign taxes it paid as paid by
its shareholders. In that case, shareholders who are U.S. citizens, U.S.
corporations, and, in some cases, U.S. residents, will be required to
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include in U.S. taxable income their pro rata share of such taxes, but may then
be entitled to claim a foreign tax credit or deduction (but not both) for their
share of such taxes.
The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. Dividends and distributions also may be subject to
foreign, state, and local taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, foreign, state, or local
taxes. Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of a Portfolio, including the possibility
that distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
MANAGEMENT
The Trustees of Mentor Funds are responsible for generally overseeing the
conduct of its business. Mentor Investment Advisors, LLC is the investment
adviser to each of the Portfolios other than the Global Portfolio. Mentor
Perpetual Advisors, LLC is the investment adviser to the Global Portfolio. Each
of the investment advisers is located at 901 East Byrd Street, Richmond,
Virginia.
All investment decisions made for the Portfolios by Mentor Advisors and
Mentor Perpetual are made by investment management teams.
Mentor Advisors has over $12 billion in assets under management and is a
wholly owned subsidiary of Mentor Investment Group, LLC ("Mentor Investment
Group") and its affiliates. Mentor Investment Group is a subsidiary of Wheat
First Butcher Singer, Inc., which is in turn a wholly owned subsidiary of First
Union Corp. ("First Union"). First Union is a leading financial services
company with approximately $157 billion in assets and $12 billion in total
stockholders' equity as of December 31, 1997. EVEREN Capital Corporation has a
20% ownership in Mentor Investment Group and may acquire additional ownership
based principally on the amount of Mentor Investment Group's revenues derived
from assets attributable to clients of EVEREN Securities, Inc. and its
affiliates.
Mentor Perpetual, an investment advisory firm organized in 1995, is owned
equally by Perpetual plc, a diversified financial services holding company, and
Mentor Advisors. The Perpetual organization currently serves as investment
adviser for assets of more than $10 billion. Its clients include 28 unit
investment trusts and other public investment pools including private
individuals, charities, pension plans, and life assurance companies.
Mentor Advisors and Mentor Perpetual together serve as investment adviser
to twenty-two separate investment portfolios in the Mentor Family of Funds,
including those offered by this Prospectus. For a prospectus relating to
certain of these other investment portfolios, and for information concerning
your eligibility to purchase shares of those portfolios, contact Mentor
Services.
Each of the Portfolios (other than the Global Portfolio) pays management
fees to Mentor Advisors at the annual rates described above under "Expense
Summary -- Annual Portfolio Operating Expenses", and the Global Portfolio pays
fees to Mentor Perpetual at an annual rate to 1.10% of its average daily net
assets up to and including $75 million and 1.00% of its average daily net
assets in excess of $75 million. The advisory fees paid by the Growth, Capital
Growth, Income and Growth, and Global Portfolios are higher than those paid by
many other mutual funds. An investment adviser may from time to time
voluntarily waive some or all of its investment advisory fees and may terminate
any such voluntary waiver at any time in its sole discretion.
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The Sub-Advisers
Van Kampen American Capital Management Inc. serves as sub-adviser to the
Municipal Income Portfolio. Van Kampen, located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, was incorporated in 1990 and commenced operations in
1992. Van Kampen currently provides investment advice to a wide variety of
individual, institutional, and investment company clients. Van Kampen is a
wholly owned subsidiary of Van Kampen American Capital, Inc., which, in turn,
is a wholly owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is an
indirect wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
Morgan Stanley, Dean Witter, Discover & Co. and various of its subsidiaries,
including Morgan Stanley & Co. Incorporated, a registered broker-dealer, are
engaged in a wide range of financial services. As of September 30, 1997, Van
Kampen, together with its affiliates, advised or supervised approximately $67.5
billion of assets. For its services as sub-adviser, Van Kampen receives a fee
from Mentor Advisors at the following annual rate: 0.25% of the first $60
million of the Portfolio's average net assets and 0.20% of the Portfolio's
average net assets over $60 million.
David C. Johnson, Senior Vice President of Van Kampen, is manager of the
Municipal Income Portfolio. Mr. Johnson joined Van Kampen in 1989 and has
served as portfolio manager of the Municipal Income Portfolio since its
inception. Mr. Johnson has fourteen years of management experience in the
tax-free fixed-income sector. Currently, he is responsible for the management
and supervision of 52 Van Kampen municipal funds, including both open and
closed-end funds, with total assets exceeding $13 billion.
Wellington Management Company, LLP serves as sub-adviser to the Income and
Growth Portfolio. Wellington Management, located at 75 State Street, Boston,
Massachusetts 02109, is a professional investment counseling firm which
provides investment services to investment companies, employee benefit plans,
endowments, foundations, and other institutions and individuals. As of
September 30, 1997, Wellington Management had discretionary investment
management authority with respect to approximately $168.7 billion in assets.
Wellington Management and its predecessor organizations have provided
investment advisory services to investment companies since 1933 and to
investment counseling clients since 1960. For its services as sub-adviser,
Wellington Management receives a fee from Mentor Advisors at the following
annual rate: 0.325% of the first $50 million of the Portfolio's average net
assets, 0.275% of the next $150 million of the Portfolio's average net assets,
0.225% of the next $300 million of the Portfolio's average net assets, and
0.200% of the Portfolio's net assets over $500 million.
Paul D. Kaplan, Senior Vice President of Wellington Management, has served
as portfolio manager of the fixed-income and U.S. Government securities portion
of the Portfolio since its inception in May 1993. Mr. Kaplan has been a
portfolio manager with Wellington Management since 1982. As of November 30,
1996, Wellington Management's Equity Income Team, a group of equity portfolio
managers and senior investment professionals, assumed responsibility for
managing the equity securities portion of the Portfolio.
General. Subject to the general oversight of the Trustees, each
Portfolio's investment adviser or sub-adviser manages the relevant Portfolio's
investments in accordance with the stated policies of the Portfolio. Each makes
investment decisions for a Portfolio and places purchase and sale orders for
the Portfolio's transactions. In addition, each pays the salaries of all
officers and employees who are employed by both it and Mentor Funds. Mentor
Funds pays all expenses not assumed by the investment advisers, sub-advisers,
or Mentor Investment Group, including, among other things, Trustees' fees,
auditing, accounting, legal, custodial, investor servicing, and shareholder
reporting expenses.
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In selecting broker-dealers, an investment adviser or sub-adviser may
consider research and brokerage services furnished to it and its affiliates.
Subject to seeking the best overall terms available, a Portfolio's investment
adviser or sub-adviser may consider sales of shares of Mentor Funds (and, if
permitted by law, of the other funds in the Mentor family) as a factor in the
selection of broker-dealers.
Administrative Services. Mentor Investment Group, LLC, located at 901 East
Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain
administrative personnel and services necessary to operate each Portfolio, such
as bookkeeping and accounting services. Mentor Investment Group provides these
services to each of the Portfolios at an annual rate of 0.10% of the
Portfolio's average daily net assets attributable to each class.
Portfolio Turnover
The length of time a Portfolio has held a particular security is not
generally a consideration in investment decisions. A change in the securities
held by a Portfolio is known as "portfolio turnover." As a result of each
Portfolio's investment policies, under certain market conditions its portfolio
turnover rate may be higher than that of other mutual funds. Portfolio turnover
generally involves some expense to a Portfolio, including brokerage commissions
or dealer mark-ups and other transaction costs on the sale of securities and
reinvestment in other securities. Such transactions may result in realization
of taxable gains. The portfolio turnover rates for each Portfolio during the
periods ending September 30, 1997 and September 30, 1996, respectively, were:
Mentor Growth Portfolio -- 77% and 105%; Mentor Capital Growth Portfolio -- 64%
and 98%; Mentor Strategy Portfolio -- 192% and 125%; Mentor Income and Growth
Portfolio 75% and 72%; Mentor Perpetual Global Portfolio -- 128% and 130%;
Mentor Quality Income Portfolio -- 100% and 254%; Mentor Municipal Income
Portfolio 59% and 46%; and Mentor Short-Duration Income Portfolio 75% and 41%.
GENERAL
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of its Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
Mentor Funds is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of Mentor
Funds may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and privileges as
the Trustees determine. Mentor Funds' shares are currently divided into eleven
series, eight of which are being offered by this Prospectus. Each series
offered by this Prospectus issues shares of three classes, Class A shares,
Class B shares, and Y Shares. The sales charges and other expenses of a
Portfolio's Class A and Class B shares differ from those of its Y Shares, which
will affect performance. Contact Mentor Services for information concerning the
Class A or Class B shares of any Portfolio at 1-800-869-6042. Each share has
one vote, with fractional shares voting proportionally. Shares of each series
will vote together as a single series, except when required by law or
determined by the Trustees. Shares of each Portfolio are freely transferable,
are entitled to dividends as declared by the Trustees, and, if the Portfolio
were liquidated, would receive the net assets of that Portfolio. Mentor Funds
may suspend the sale of shares at any time and may refuse any order to purchase
shares. Although neither Mentor Funds nor any Portfolio is required to
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hold annual meetings of shareholders, shareholders have the right to call a
meeting to elect or remove Trustees, or to take other actions as provided in
the Declaration of Trust.
In the interest of economy and convenience, the Portfolios will not issue
certificates for their shares except at the shareholder's request. Investors
Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri 64105,
serves as custodian for each Portfolio, except that State Street Bank & Trust
Company, P.O. Box 8602, Boston, Massachusetts 02266 serves as custodian for the
Global Portfolio. State Street Bank and Trust Company, through its subsidiary
Boston Financial Data Services, Inc., serves as transfer agent and dividend
disbursing agent for the Portfolios. Mentor Funds' independent auditors are
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about Y Shares of the Portfolios. A Portfolio's "Yield" is
calculated by dividing the Portfolio's annualized net investment income per Y
Share during a recent 30-day period by the net asset value per Y Share on the
last day of that period. "Total return" of a Portfolio's Y Shares for the
one-five- and ten-year period (or for a life of a class, if shorter) through
the most recent calendar quarter represents the average annual compounded rate
of return on an investment of $1,000 in the Portfolio's Y Shares that class of
shares over the period. Total return may also be presented for other periods.
Investment performance for different classes of shares of the Portfolios will
differ. Quotations of yield and total return for a period when an expense
limitation was in effect will be greater than if the limitation had not been in
effect. A Portfolio's performance may be compared to various indices. See the
Statement of Additional Information. Information may be presented in
advertisements about the Portfolios describing the background and professional
experience of the Portfolios' investment adviser or its investment personnel.
All data is based on the Portfolios' past investment results and does not
predict future performance. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of a Portfolio's
investments, the Portfolio's operating expenses, and the class of shares
purchased. Investment performance also often reflects the risks associated with
a Portfolio's investment objective and policies. These factors should be
considered when comparing a Portfolio's investment results to those of other
mutual funds and other investment vehicles.
As permitted by applicable law, performance information for a Portfolio
whose investment adviser or sub-adviser has changed may be presented only for
periods after the change was effected.
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APPENDIX
Moody's Investors Service, Inc., Bond Ratings
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
Standard and Poor's Bond Ratings
AAA -- Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposure to adverse
conditions.
Plus (+) or Minus (-): The ratings from "A" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Service, Inc., Note Ratings
MIG1/VMIG1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
Standard and Poor's Note Ratings
SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus sign (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
Moody's Investors Service, Inc., Commercial Paper Ratings
P-1 -- Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
P-2 -- Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
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Standard and Poor's Commercial Paper Ratings
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such other information or representations must not be relied upon as
having been authorized by Mentor Funds. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and
Mentor Funds is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
Mentor Investment Group
901 East Byrd Street
Richmond, VA 23219
(800) 869-6042
1998 Mentor Distributors, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE
Mentor Funds
Mentor Growth Portfolio
Mentor Perpetual Global Portfolio
Mentor Capital Growth Portfolio
Mentor Strategy Portfolio
Mentor Income and Growth Portfolio
Mentor Municipal Income Portfolio
Mentor Quality Income Portfolio
Mentor Short-Duration Income Portfolio
-------------------------
PROSPECTUS
-------------------------
January 17, 1998,
as revised June 16, 1998
[MENTOR FUNDS LOGO]
