FILED PURSUANT TO RULE 497
FILE NUMBER 33-45315
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 7, 1998
P R O S P E C T U S June , 1998
Class A and B shares
Mentor High Income Portfolio
Mentor High Income Portfolio seeks high current income. Capital growth is
a secondary objective when consistent with the objective of seeking high
current income. Mentor Investment Advisors, LLC is the Portfolio's investment
adviser. Van Kampen American Capital Management, Inc. serves as the sub-adviser
to the Portfolio. The Portfolio is a series of shares of Mentor Funds.
The Portfolio invests primarily in lower-rated bonds, commonly known as
"junk bonds." Investments of this type are subject to a greater risk of loss of
principal and non-payment of interest. Investors should carefully assess the
risks associated with an investment in the Portfolio. The Portfolio may also
trade securities for short-term profits. For a description of these strategies
and the related risks, see "Investment objectives and policies" in this
Prospectus.
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. Please read this
Prospectus and retain it for future reference. Investors can find more detailed
information in the June ___, 1998 Statement of Additional Information, as
amended from time to time. For a free copy of the Statement, call Mentor
Investment Group, LLC at 1-800-382-0016. The Statement has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. The Portfolio's address is P.O. Box 1357, Richmond, Virginia
23218-1357.
---------------
Mentor Distributors, LLC
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Expense summary ............................... 3
Investment objective and policies ............. 4
Other investment practices and risks .......... 6
Management .................................... 10
How the Portfolio values its shares ........... 11
Sales arrangements ............................ 11
How to buy shares ............................. 11
Distribution Plan (Class B Shares) ............ 14
How to sell shares ............................ 14
How to exchange shares ........................ 15
How distributions are made .................... 16
Taxes ......................................... 16
Other services ................................ 16
General information ........................... 16
Performance information ....................... 17
</TABLE>
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EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Portfolio. Expenses shown reflect the expenses the Portfolio expects to incur
in its first fiscal year with respect to its Class A and Class B shares. The
Examples show the cumulative expenses attributable to a hypothetical $1,000
investment in the Class A and Class B shares of the Portfolio over specified
periods.
<TABLE>
<CAPTION>
Class A Class B
--------- ---------------------------
<S> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)1 ......................................................... 4.75% None
Maximum Sales Load Imposed on Reinvested Dividends ....................... None None
Deferred Sales Load ...................................................... None2 4.0% in the first year,
(as a percentage of the lower of the original purchase price or ......... declining to 1.0% in the
redemption proceeds)3 ................................................... sixth year, and eliminated
thereafter4
Redemption Fees .......................................................... None None
Exchange Fee ............................................................. None None
</TABLE>
- ---------
1 Long-term Class B shareholders may pay more than the economic equivalent of
the maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc.
2 A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A
shares that were purchased without an initial sales charge as part of an
investment of over $1,000,000 that are redeemed within one year of purchase.
3 The amount redeemed is computed as the lesser of the current net asset value
of the shares redeemed, and the original purchase price of the shares. See
"How to buy shares -- Class B shares."
4 Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1.00%, if the shares are redeemed
within one year of purchase. See "How to Buy Shares -- the BL Purchase
Program."
Annual Portfolio Operating Expenses:
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Class A Class B
--------- ----------
<S> <C> <C>
Management Fees .................... .......... 0.70% 0.70%
12b-1 Fees ......................... .......... 0.00% 0.50%
Other Expenses* .................... ..........
Shareholder Service Fee .......... .......... 0.25% 0.25%
Other ............................ .......... 0.35% 0.35%
---- ----
Total Other Expenses ............... .......... 0.60% 0.60%
---- ----
Total Portfolio Operating Expenses* .......... 1.30% 1.80%
</TABLE>
- ---------
* Other Expenses are estimated based on the expenses the Portfolio expects to
incur during its first full year of operations.
Examples
An investment of $1,000 in the Portfolio would incur the following
expenses assuming 5% annual return and no redemption at the end of each period:
<TABLE>
<CAPTION>
Class A Class B
--------- --------
<S> <C> <C>
1 year .................... $60 $18
3 years ................... $87 $58
</TABLE>
An investment of $1,000 in the Portfolio would incur the following
expenses, assuming 5% annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
Class A Class B
--------- --------
<S> <C> <C>
1 year .................... $ 60 $ 58
3 years ................... $ 87 $ 88
</TABLE>
3
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This information is provided to help investors understand the expenses of
investing in the Portfolio and an investor's share of the estimated operating
expenses of the Portfolio. The Examples should not be considered a
representation of future performance; actual expenses may be more or less than
those shown.
INVESTMENT OBJECTIVES AND POLICIES
The Portfolio's investment objective is to seek high current income.
Capital growth is a secondary objective when consistent with the objective of
seeking high current income. The Portfolio is not intended to be a complete
investment program, and there is no assurance it will achieve its objectives.
The Portfolio is a diversified investment company.
Mentor Investment Advisors, LLC is the Portfolio's investment adviser. Van
Kampen American Capital Management, Inc. serves as the sub-adviser to the
Portfolio. Van Kampen purchases and sells securities for the Portfolio, and
otherwise manages the investments of the Portfolio, subject to the overall
supervision of Mentor Advisors.
The Portfolio may invest in both lower-rated and higher-rated fixed-income
securities, including debt securities, convertible securities, and preferred
stocks that are consistent with its primary investment objective of high
current income. The Portfolio's remaining assets may be held in cash or money
market instruments, or invested in common stocks and other equity securities.
The Portfolio may at times hold a substantial portion of its assets in
mortgage-backed and other asset-backed securities.
The Portfolio may invest in securities of any maturity. Van Kampen will
adjust the expected average life of the investments held in the Portfolio from
time to time, depending on its assessment of relative yields and risks of
securities of different maturities and its expectations of future changes in
interest rates. At times when the expected average life of the investments held
by the Portfolio is longer, the values of the securities held by the Portfolio
will generally change more in response to changes in interest rates than at
times when the expected average life is shorter.
Differing yields on fixed-income securities of the same maturity are a
function of several factors, including the relative financial strength of their
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies: Baa or lower by Moody's Investors
Service, Inc. or BBB or lower by Standard & Poor's. The Portfolio may invest
any portion of its assets (and normally will invest at least 65% of its assets)
in such securities and in unrated securities determined by Van Kampen to be of
comparable quality. Securities rated below Baa by Moody's or BBB by Standard &
Poor's are considered to be predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligations. Securities in the lowest rating categories may have extremely poor
prospects of attaining any real investment standing and may be in default. The
rating services' descriptions of securities in the lower rating categories,
including their speculative characteristics, are set forth in the Appendix to
this Prospectus. See "Investments in lower-rated securities," below.
The Portfolio may at times invest up to 10% of its assets in securities
rated in the lowest grades (Ca or C in the case of Moody's and CC, C, or D in
the case of Standard & Poor's) or in unrated securities determined by Van
Kampen to be of comparable quality, if Van Kampen believes that there are
prospects for an upgrade in a security's rating or a favorable conversion of a
security into other securities. The Portfolio might also invest in such
securities if Van Kampen were to believe that, upon completion of any
contemplated exchange offer or reorganization involving a security or its
issuer, the Portfolio would receive securities or other assets offering
significant opportunities for capital appreciation or future high rates of
current income.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate.
The Portfolio seeks its secondary objective of capital growth, when
consistent with its primary objective of seeking high current income, by
investing in securities which may be expected to appreciate in value as a
result of declines in long-term interest rates or of favorable developments
affecting the business or prospects of the issuer which may improve the
issuer's financial condition and credit rating.
At times, Van Kampen may judge that conditions in the securities markets
make pursuing the Portfolio's basic investment strategy inconsistent with the
best interests of its shareholders. At such times Van Kampen may temporarily
use alternative strategies, primarily designed to reduce fluctuations in the
value of the Portfolio's assets. In implementing these "defensive" strategies,
the Portfolio may invest without limitation in money market instruments and in
U.S. Government or
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agency obligations, or invest in any other fixed-income security Van Kampen
considers consistent with such defensive strategies. It is impossible to
predict when, or for how long, the Portfolio will use such alternative
strategies.
Investments in lower-rated securities. Investors should carefully consider
their ability to assume the risks of owning shares of a mutual fund that
invests in lower-rated securities (sometimes referred to as "junk bonds")
before making an investment in the Portfolio. The lower ratings of certain
securities held by the Portfolio reflect a greater possibility that adverse
changes in the financial condition of the issuer, or in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. The inability
(or perceived inability) of issuers to make timely payment of interest and
principal would likely make the values of securities held by the Portfolio more
volatile and could limit the Portfolio's ability to sell its securities at
prices approximating the values the Portfolio had placed on such securities. In
the absence of a liquid trading market for securities held by it, the Portfolio
may be unable at times to establish the fair market value of such securities.
The rating assigned to a security by Moody's or Standard & Poor's does not
reflect an assessment of the volatility of the security's market value or of
the liquidity of an investment in the security. For more information about the
rating services' descriptions of lower-rated securities, see the Appendix to
this Prospectus.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. Changes in the value
of portfolio securities generally will not affect cash income derived from such
securities, but will affect the Portfolio's net asset value. The Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although Van Kampen will monitor the investment
to determine whether continued investment in the security will assist in
meeting the Portfolio's investment objectives.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may not have more traditional methods of financing available to
them, and may be unable to repay debt at maturity by refinancing. The risk of
loss due to default in payment of interest or principal by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness. Certain of the
lower-rated securities in which the Portfolio invests are issued to raise funds
in connection with the acquisition of a company, in so-called "leveraged
buy-out" transactions. The highly leveraged capital structure of such issuers
may make them especially vulnerable to adverse changes in economic conditions.
The Portfolio may invest in securities which trade infrequently or in more
limited volume than higher-rated securities (including illiquid securities), or
in securities which are restricted as to resale. In addition, a substantial
portion of the Portfolio's assets may at times be invested in securities as to
which the Portfolio, by itself or together with other accounts managed by Van
Kampen and its affiliates, holds a major portion or all of such securities,
which may limit the liquidity of such securities. The Portfolio could find it
difficult or impossible to sell illiquid securities when Van Kampen believes it
advisable to do so or may be able to sell such securities only at prices lower
than if such securities were more widely held. In many cases, such securities
may be purchased in private placements and, accordingly, will be subject to
restrictions on resale as a matter of contract or under securities laws. Under
such circumstances, it may also be more difficult to determine the fair value
of such securities for purposes of computing the Portfolio's net asset value.
In order to enforce its rights in the event of a default under securities in
cases where the Portfolio holds a major portion or all of the outstanding
issue, the Portfolio may be required to take possession of and manage assets
securing the issuer's obligations on such securities, which may increase the
Portfolio's operating expenses and adversely affect the Portfolio's net asset
value. The Portfolio may also be limited in its ability to enforce its rights
and may incur greater costs in enforcing its rights in the event an issuer
becomes the subject of bankruptcy proceedings.
The Portfolio will not invest more than 15% of its net assets (determined
at the time of investment) in securities determined to be illiquid. Certain
securities that are restricted as to resale may nonetheless be resold by the
Portfolio in accordance with Rule 144A under the Securities Act of 1933, as
amended. Such securities may be determined by Van Kampen to be liquid for
purposes of compliance with the limitation on the Portfolio's investment in
illiquid securities. There can, however, be no assurance that the Portfolio
will be able to sell such securities at any time when Van Kampen deems it
advisable to do so or at prices prevailing for comparable securities that are
more widely held.
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The Portfolio may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero- coupon bonds are issued at a significant
discount from face value and pay interest only at maturity rather than at
intervals during the life of the security. Payment-in-kind bonds allow the
issuer, at its option, to make current interest payments on the bonds either in
cash or in additional bonds. Because zero-coupon bonds do not pay current
interest, their value is subject to greater fluctuation in response to changes
in market interest rates than bonds that pay interest currently. Both
zero-coupon and payment-in-kind bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly, such bonds may
involve greater credit risks than bonds that pay interest currently. Even
though such bonds do not pay current interest in cash, the Portfolio is
nonetheless required for Federal income tax purposes to accrue interest income
on such investments and to distribute such amounts at least annually to
shareholders. Thus, the Portfolio could be required at times to liquidate other
investments in order to satisfy this distribution requirement. Certain
securities held by the Portfolio may permit the issuer at its option to "call,"
or redeem, its securities. If an issuer were to redeem securities held by the
Portfolio during a time of declining interest rates, the Portfolio may not be
able to reinvest the proceeds in securities providing the same investment
return as the securities redeemed.
The Portfolio may at times invest in securities bearing coupon rates
higher than prevailing market rates. Such "premium" securities are typically
purchased at prices greater than the principal amounts payable on maturity. The
Portfolio does not amortize the premium paid for such securities in calculating
its net investment income. Consequently, if such premium securities are called
or sold prior to maturity, the Portfolio may recognize a capital loss to the
extent the call or sale price is less than the purchase price. Additionally,
the Portfolio will recognize a capital loss if its holds such securities to
maturity.
Van Kampen seeks to minimize the risks involved in investing in
lower-rated securities through diversification and careful investment analysis.
When the Portfolio invests in high yield securities in the lower rating
categories, achievement of the Portfolio's goals depends more on Van Kampen's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
OTHER INVESTMENT PRACTICES AND RISKS
The Portfolio may engage in the other investment practices described
below. See the Statement of Additional Information for a more detailed
description of certain of these practices and risks they may involve.
Mortgage-backed securities; other asset-backed securities. The Portfolio
may invest a substantial portion of its assets in mortgage-backed certificates
and may invest in other securities representing ownership interests in mortgage
pools, including CMOs and "residual" interests therein (described more fully
below). Interest and principal payments on the mortgages underlying
mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Mortgage-backed securities currently offer yields
higher than those available from many other types of fixed-income securities
but because of their prepayment aspects, their price volatility and yield
characteristics will change based on changes in prepayment rates. As a result,
mortgage-backed securities are less effective than other securities as a means
of "locking in" long-term interest rates. Generally, prepayment rates increase
if interest rates fall and decrease if interest rates rise. For many types of
mortgage-backed securities, this can result in unfavorable changes in price and
yield characteristics in response to changes in interest rates and other market
conditions. For example, as a result of their prepayment aspects,
mortgage-backed securities have less potential for capital appreciation during
periods of declining interest rates than other fixed-income securities of
comparable maturities, although such obligations may have a comparable risk of
decline in market value during periods of rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that
are dependent upon the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities may include
both interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed
securities, especially during periods of declining interest rates. Similarly,
during periods of rising interest rates, a reduction in the rate of prepayments
may significantly lengthen the effective durations of such securities.
The Portfolio may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are usually structured with two classes that receive
different portions of the interest and principal distributions on a pool of
mortgage assets. The Portfolio may invest in both the interest-only -- or "IO"
- -- class and the principal-only -- or "PO" -- class. The yield to maturity and
price of an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the
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related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Portfolio's net asset value. This would
typically be the case in an environment of falling interest rates. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may under some circumstances fail to fully recoup its
initial investment in these securities. Conversely, POs tend to increase in
value if prepayments are greater than anticipated and decline if prepayments
are slower than anticipated. The secondary market for stripped mortgage-backed
securities may be more volatile and less liquid than that for other
mortgage-backed securities, potentially limiting the Portfolio's ability to buy
or sell those securities at any particular time.
Certain mortgage-backed securities held by the Portfolio may permit the
issuer at its option to "call," or redeem, its securities. If an issuer were to
redeem securities held by the Portfolio during a time of declining interest
rates, the Portfolio may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The Portfolio may also invest in securities representing interests in
other types of financial assets, such as automobile-finance receivables or
credit-card receivables. Such securities may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers. The
ability of an issuer of asset-backed securities to enforce its security
interest in the underlying assets may be limited. For example, the laws of
certain states may prevent or restrict repossession of collateral from a
debtor.
The Portfolio may also invest in other types of mortgage-related
securities, including any securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans or real
property, including collateralized mortgage obligation "residual" interests.
"Residual" interests represent the right to any excess cash flow remaining
after all other payments are made among the various tranches of interests
issued by structured mortgage-backed vehicles. The values of such interests are
extremely sensitive to changes in interest rates and in prepayment rates on the
underlying mortgages. In the event of a significant change in interest rates or
other market conditions, the value of an investment by the Portfolio in such
interests could be substantially reduced and the Portfolio may be unable to
dispose of the interests at prices approximating the values the Portfolio had
previously assigned to them or to recoup its initial investment in the
interests. The Portfolio may invest in new types of mortgage-related securities
that may be developed and marketed from time to time. If the Portfolio were to
invest in such newly developed securities, shareholders would, where
appropriate, be notified and this Prospectus would be revised accordingly.
Mortgage-backed securities and other asset-backed securities are
"derivative" securities and present certain special risks. The Portfolio may
invest in a wide variety of such securities, including mortgage-backed and
other asset-backed securities that will pay principal or interest only under
certain circumstances, or in amounts that may increase or decrease
substantially depending on changes in interest rates or other market factors.
Such securities may experience extreme price volatility in response to changes
in interest rates or other market factors; this may be especially true in the
case of securities where the amounts of principal or interest paid, or the
timing of such payments, varies widely depending on prevailing interest rates.
Van Kampen 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, Van Kampen may be required to estimate the value of such a
security using quotations provided by pricing services or securities dealers
making a market in such securities, or based on other comparable securities or
other bench-mark securities or interest rates. Mortgage-backed and other
asset-backed securities in which the Portfolio may invest may be highly
illiquid, and the Portfolio may not be able to sell such a security at a
particular time or at the value it has placed on that security.
In calculating the value and duration of mortgage-backed or other
asset-backed securities, Van Kampen will be required to estimate the extent to
which the values of the securities are likely to change in response to changes
in interest rates or other market conditions, and the rate at which prepayments
on the underlying mortgages or other assets are likely to occur under different
scenarios. There can be no assurance that the Portfolio's investment adviser
will be able to predict the amount of principal or interest to be paid on any
security under different interest rate or market conditions or that its
predictions will be accurate, nor can there be any assurance that the Portfolio
will recover the entire amount of the principal paid by it to purchase any such
securities.
Foreign securities. The Portfolio may invest in securities issued by
foreign governments and other foreign issuers. Investments in foreign
securities involve a number of special risks. Since foreign securities are
often denominated and traded in foreign currencies, the values of the
Portfolio's assets may be affected favorably or unfavorably by currency
exchange rates and exchange control regulations. There 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
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at times more volatile than securities of comparable U.S. companies. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. Foreign settlement procedures and trade regulations may involve
certain risks (such as delay in payment or delivery of securities or in the
recovery of the Portfolio's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls, confiscatory
taxation, political or financial instability, and diplomatic developments which
could affect the value of the Portfolio's investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. In the case of securities issued
by a foreign governmental entity, the issuer may in certain circumstances be
unable or unwilling to meet its obligations on the securities in accordance
with their terms, and the Portfolio may have limited recourse available to it
in the event of default. The laws of some foreign countries may limit the
Portfolio's ability to invest in securities of certain issuers located in those
foreign countries. Special tax considerations apply to foreign securities. The
Portfolio may buy or sell foreign currencies and options and futures contracts
on foreign currencies for hedging purposes in connection with its foreign
investments.
The Portfolio may invest in American Depository Receipts ("ADRs") and
Global Depository Receipts ("GDRs"), which represent interests in foreign
securities held by a bank, trust company, or other organization. Investments in
ADRs and GDRs are subject to many of the same risks of investing in foreign
securities generally.
Leverage. The Portfolio may borrow money to invest in additional
securities to seek current income. This technique, known as "leverage,"
increases the Portfolio's market exposure and risk. When the Portfolio has
borrowed money for leverage and its investments increase or decrease in value,
its net asset value will normally increase or decrease more than if it had not
borrowed money for this purpose. The interest that the Portfolio must pay on
borrowed money will reduce its net investment income, and may also either
offset any potential capital gains or increase any losses. The Portfolio will
not always borrow money for investment and the extent to which the Portfolio
will borrow money, and the amount it may borrow, depends on market conditions
and interest rates. Successful use of leverage depends on Van Kampen's ability
to predict market movements correctly. The amount of leverage (including
leverage to the extent employed by the Portfolio through "reverse" repurchase
agreements, "dollar-roll" transactions, and forward commitments, described
below) that can exist at any one time will not exceed one-third of the value of
the Portfolio's total assets.
Reverse repurchase agreements; forward commitments. The Portfolio may
enter into "reverse" repurchase agreements with respect to up to one-third of
its assets. "Reverse" repurchase agreements generally involve the sale by the
Portfolio of securities held by it and an agreement to repurchase the
securities at an agreed-upon price, date, and interest payment. The Portfolio
may also enter into forward commitments, in which the Portfolio buys securities
for future delivery. Reverse repurchase agreements and forward commitments
involve leverage, and may increase the Portfolio's overall investment exposure.
Their use by the Portfolio may result in losses.
Dollar roll transactions. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar roll transactions with
respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a
dollar roll transaction, the Portfolio sells a mortgage-related security to a
financial institution, such as a bank or broker/dealer, and simultaneously
agrees to repurchase a substantially similar (i.e., same type, coupon, and
maturity) security from the institution at a later date at an agreed upon
price. The mortgage-related securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories. Dollar-roll
transactions may increase overall investment exposure and may result in losses.
Interest rate transactions. In order to attempt to protect the value of
its portfolio from interest rate fluctuations and to adjust the interest-rate
sensitivity of its portfolio, the Portfolio may enter into interest rate swaps
and other interest rate transactions, such as interest rate caps, floors, and
collars. Interest rate swaps involve the exchange by the Portfolio with another
party of different types of interest-rate streams (e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal). The purchase of an interest rate cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling the
floor to the extent that a specified index falls below a predetermined interest
rate or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values. The
Portfolio intends to use these interest rate transactions as a hedge and not as
a speculative investment. The Portfolio's ability to engage in certain interest
rate transactions may be limited by tax considerations. The use of interest
rate swaps and other interest rate transactions is a highly specialized
activity which involves investment techniques
8
<PAGE>
and risks different from those associated with ordinary portfolio securities
transactions. If Van Kampen is incorrect in its forecasts of market values,
interest rates, or other applicable factors, the investment performance of the
Portfolio would be less favorable than it would have been if this investment
technique were not used.
Options and futures. The Portfolio may buy and sell call and put options
to hedge against changes in net asset value or to realize a greater current
return. In addition, through the purchase and sale of futures contracts and
related options, the Portfolio may at times seek to hedge against fluctuations
in net asset value and, to the extent consistent with applicable law, to
increase its investment return.
The Portfolio's ability to engage in options and futures strategies will
depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that
the Portfolio will be able to utilize these instruments effectively for the
purposes stated above. Transactions in options and futures involve certain
risks which are described below and in the Statement of Additional Information.
Index futures and options. The Portfolio may buy and sell index futures
contracts ("index futures") and options on index futures and on indices for
hedging purposes (or may purchase warrants whose value is based on the value
from time to time of one or more foreign securities indices). An "index future"
is a contract to buy or sell units of a particular bond or stock index at an
agreed price on a specified future date. Depending on the change in value of
the index between the time when the Portfolio enters into and terminates an
index futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also, to the extent consistent with applicable law, buy and sell
index futures and options to increase its investment return.
Risks related to options and futures strategies. Options and futures
transactions involve costs and may result in losses (which are, potentially,
unlimited). Certain risks arise because of the possibility of imperfect
correlations between movements in the prices of futures and options and
movements in the prices of the underlying security or index or the securities
held by the Portfolio that are the subject of a hedge. The successful use by
the Portfolio of the strategies described above further depends on the ability
of Van Kampen to forecast market movements correctly. Other risks arise from
the Portfolio's potential inability to close out futures and options positions.
Although the Portfolio will enter into options and futures transactions only if
Van Kampen believes that a liquid secondary market exists for such options or
futures contract, there can be no assurance that the Portfolio will be able to
effect closing transactions at any particular time or at an acceptable price.
Certain provisions of the Internal Revenue Code may limit the Portfolio's
ability to engage in options and futures transactions.
The Portfolio generally expects that its options transactions will be
conducted on recognized exchanges. The Portfolio may in certain instances
purchase and sell options in the over-the-counter markets. The Portfolio's
ability to terminate options in the over-the-counter markets may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would be unable to meet
their obligations to the Portfolio. The Portfolio will, however, engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of Van Kampen, the
pricing mechanism and liquidity of the over-the-counter markets are
satisfactory and the participants are responsible parties likely to meet their
obligations. The Portfolio will consider over-the-counter options written by
it, and any of the Portfolio's assets serving as "cover" for such options, to
be illiquid, to the extent required by applicable law.
The Portfolio will not purchase futures or options on futures or sell
futures if as a result the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding
options on futures contracts would exceed 5% of the Portfolio's assets. (For
options that are "in-the-money" at the time of purchase, the amount by which
the option is "in-the-money" is excluded from this calculation.)
Repurchase agreements; securities loans. The Portfolio may enter into
repurchase agreements and securities loans. Under a repurchase agreement, the
Portfolio purchases a debt instrument for a relatively short period (usually
not more than one week), which the seller agrees to repurchase at a fixed time
and price, representing the Portfolio's cost plus interest. Under a securities
loan, the Portfolio lends portfolio securities. The Portfolio will enter into
repurchase agreements and securities loans only with commercial banks and with
registered broker-dealers who are members of a national securities exchange or
market makers in government securities, and in the case of repurchase
agreements, only if the debt instrument subject to the repurchase agreement is
a U.S. Government security. These transactions must be fully collateralized at
all times, but involve some risk to the Portfolio if the other party should
default on its obligations and the Portfolio is delayed
9
<PAGE>
or prevented from recovering the collateral. If the other party should become
involved in bankruptcy or insolvency proceedings, it is possible that the
Portfolio may be treated as an unsecured creditor and be required to return the
underlying collateral to the other party's estate.
Except for investment policies designated in this Prospectus or the
Statement of Additional Information as fundamental, the investment objective
and policies described herein are not fundamental and may be changed by the
Trustees without shareholder approval. All percentage limitations on
investments will apply at the time of investment and will not be considered
violated unless an excess or deficiency occurs or exists immediately after and
as a result of the investment.
MANAGEMENT
The Trustees of Mentor Funds (the "Trust") are responsible for generally
overseeing the conduct of the Portfolio's business. Mentor Investment Advisors,
LLC located at 901 East Byrd Street, Richmond, Virginia 23219, acts as
investment adviser to the Portfolio. Mentor Investment Group, LLC ("Mentor
Investment Group") serves as administrator to the Portfolio. As compensation
for its services as administrator, the Portfolio pays Mentor Investment Group a
fee, accrued daily and paid monthly, at an annual rate of 0.10% of the average
value of the Portfolio's daily assets.
Van Kampen American Capital Management Inc. serves as sub-adviser to the
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 Group Inc. Morgan Stanley
Group Inc. 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 April 30, 1998, Van Kampen, together with its
affiliates, advised or supervised approximately $64 billion of assets. For its
services as sub-adviser, Van Kampen receives a monthly fee from Mentor Advisors
at the annual rate of .20% of the Portfolio's average daily net assets.
Mentor Advisors has over $13 billion in assets under management and is a
wholly owned subsidiary of 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 $172 billion
in assets and $12 billion in total stockholders' equity as of March 31, 1998.
EVEREN Capital Corporation has a 20% ownership in Mentor Investment Group and
may acquire additional ownership based principally on the amount of Mentor
Investment Group's revenues derived from assets attributable to clients of
EVEREN Securities, Inc. and its affiliates. All investment decisions made for
the Portfolio by Van Kampen are made by an investment team at Van Kampen.
Subject to the general oversight of the Trustees, Van Kampen manages the
Portfolio in accordance with the stated policies of the Portfolio. Van Kampen
makes investment decisions for the Portfolio and places the purchase and sale
orders for the Portfolio's portfolio transactions. In selecting broker-dealers,
Van Kampen may consider research and brokerage services furnished to it and its
affiliates. Subject to seeking the best overall terms available, Van Kampen may
consider sales of shares of the Portfolio (and, if permitted by law, of other
funds in the Mentor family or advised by Van Kampen or its affiliates) as a
factor in the selection of broker-dealers to execute portfolio transactions for
the Portfolio. Van Kampen may at times cause the Portfolio to pay commissions
to broker-dealers affiliated with Van Kampen or Mentor Advisors.
Expenses incurred in the operation of the Portfolio or otherwise allocated
to the Portfolio, including but not limited to taxes, interest, brokerage fees
and commissions, fees to Trustees who are not officers, directors,
stockholders, or employees of Wheat First Butcher Singer and its subsidiaries,
Securities and Exchange Commission fees and related expenses, state Blue Sky
qualification fees, charges of the custodian and transfer and dividend
disbursing agents, outside auditing, accounting, and legal services, certain
investor servicing fees and expenses, charges for the printing of prospectuses
and statements of additional information for regulatory purposes or for
distribution to shareholders, certain shareholder report charges, and charges
relating to corporate matters, are borne by the Portfolio.
Portfolio turnover. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. The
investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements.
A change in the securities held by the Portfolio is known as "portfolio
turnover." Portfolio turnover generally involves some expense to the Portfolio,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. Such sales may
result in realization of taxable capital gains. The Portfolio's annual
portfolio turnover rate is not expected to exceed 200% for its first fiscal
year.
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<PAGE>
How the Portfolio values its shares
The Portfolio calculates the net asset value of its shares by dividing the
total value of its assets, less liabilities, by the number of its shares
outstanding. Shares are valued as of the close of regular trading on the New
York Stock Exchange each day the Exchange is open. Portfolio securities for
which market quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are stated at
amortized cost, which has been determined to approximate the fair market value
of such investments. All other securities and assets are valued at their fair
values. The net asset value for Class A shares will generally differ from that
of Class B shares due to the variance in daily net income realized by and
dividends paid on each class of shares, and any differences in the expenses of
the different classes.
Sales arrangements
This Prospectus offers investors two classes of shares which bear sales
charges in different forms and amounts and which bear different levels of
expenses:
Class A shares. An investor who purchases Class A shares pays a sales
charge at the time of purchase. As a result, Class A shares are not subject to
any charges when they are redeemed, except that sales at net asset value in
excess of $1 million are subject to a contingent deferred sales charge (a
"CDSC"). Certain purchases of Class A shares qualify for reduced sales charges.
Class A shares currently bear no 12b-1 fees. See "How to buy shares -- Class A
shares."
Class B shares. Class B shares are sold without an initial sales charge,
but are subject to a CDSC of up to 4% if redeemed within six years. Class B
shares also bear 12b-1 fees. Class B shares provide an investor the benefit of
putting all of the investor's money to work from the time the investment is
made, but have a higher expense ratio and pay lower dividends than Class A
shares due to the 12b-1 fees. If you purchase shares through an
asset-allocation program, you may also be eligible to purchase Class B shares
through the "BL Purchase Program." See "How to buy shares -- Class B shares."
Which arrangement is for you? The decision as to which class of shares
provides a suitable investment for an investor depends on a number of factors,
including the amount and intended length of the investment. Investors making
investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge might consider
Class B shares. Investors purchasing shares through an asset-allocation program
may wish to purchase shares through the BL Purchase Program. For more
information about these sales arrangements, consult your investment dealer or
Mentor Services Company, Inc. Sales personnel may receive different
compensation depending on which class of shares they sell. Investors may be
charged a fee if they effect transactions through a broker or agent. Shares may
only be exchanged for shares of the same class of certain other funds in the
Mentor family and for shares of Cash Resource U.S. Government Money Market
Fund. See "How to exchange shares."
HOW TO BUY SHARES
You can open a Portfolio account with as little as $1,000 and make
additional investments at any time with as little as $100. Investments under
IRAs and qualified retirement plans are subject to a minimum initial investment
of $250. The minimum initial investment may be waived for current and retired
Trustees, and current and retired employees of the Trust, Mentor Investment
Group or its affiliates. You can buy Portfolio shares by completing the
enclosed New Account Form and sending it to Boston Financial Data Services at 2
Heritage Drive, North Quincy, MA 02171, along with a check or money order made
payable to Mentor Funds, through your financial institution, which may be an
investment dealer, a bank, or another institution, or through automatic
investing. If you do not have a dealer, Mentor Services Company can refer you
to one.
Automatic investment plan. Once you have made the initial minimum
investment in the Portfolio, you can make regular investments of $50 or more on
a monthly or quarterly basis through automatic deductions from your bank
checking account. Application forms are available from your investment dealer
or through Mentor Services Company.
Shares are sold at a price based on the Portfolio's net asset value next
determined after the Distributor receives your purchase order. In most cases,
in order to receive that day's public offering price, the Distributor must
receive your order before the close of regular trading on the New York Stock
Exchange. If you buy shares through your investment dealer, the dealer must
ensure that Mentor Distributors, LLC, the Portfolio's distributor (the
"Distributor"), receives your order before the close of regular trading on the
New York Stock Exchange for you to receive that day's public offering price.
Class A Shares. The public offering price of Class A shares is the net
asset value plus a sales charge. The Portfolio receives the net asset value.
The sales charge varies depending on the size of your purchase and is allocated
between your investment dealer and the Distributor. The current sales charges
for Class A shares of the Portfolio are as follows:
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<PAGE>
<TABLE>
<CAPTION>
Sales Charge as Sales Charge as
a Percentage of a Percentage of
Pubic Offering Net Amount Dealer
Price Invested Commission*
----------------- ----------------- ------------
<S> <C> <C> <C>
Less than $100,000....................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000.......................... 4.00% 4.17% 3.25%
$250,000 but less than $500,000.......................... 3.00% 3.09% 2.50%
$500,000 but less than $1 million ........................ 2.00% 2.04% 1.75%
$1 million or more....................................... 0% 0% (see below)
</TABLE>
- ---------
* At the discretion of the Distributor, the entire sales charge may at times
be reallowed to dealers. The Staff of the Securities and Exchange Commission
has indicated that dealers who receive more than 90% of the sales charge may
be considered underwriters.
There is no initial sales charge on purchases of Class A shares of $1
million or more. However, a CDSC of 1.00% is imposed on redemptions of such
shares within the first year after purchase, based on the lower of the shares'
cost and current net asset value. A CDSC is also imposed on any shares
purchased without a sales charge as part of a purchase of shares of $1 million
or more under a purchase accumulation plan. Contact Mentor Services Company for
more information.
You may be eligible to buy Class A shares at reduced sales charges.
Consult your investment dealer or Mentor Services Company for details about
Quantity Discounts and Accumulated Purchases, Letters of Intent, the
Reinvestment Privilege, Concurrent Purchases, and the Automatic Investment
Plan. Descriptions are also included in the New Account Form or are available
from Mentor Services Company. Shares may be sold at net asset value to certain
categories of investors, including to shareholders of other mutual funds who
invest in the Portfolio in response to certain promotional activities, and the
CDSC may be waived under certain circumstances. The sales charges shown above
will not apply to shares purchased by you if you purchase shares through EVEREN
Securities, Inc. with the redemption proceeds received by you within the
preceding 90 days from the sale of shares of any non-Mentor open-end mutual
fund. No CDSC will apply to these purchases. EVEREN Securities, Inc. may
compensate your investment dealer in connection with any such purchase. Sales
charges may similarly not apply to shares purchased through other financial
institutions that have made arrangements with Mentor Distributors. Contact your
financial institution or Mentor Services Company for more information. See "How
to buy shares --- General" below.
Class B Shares. Class B shares are sold without an initial sales charge,
although a CDSC will be imposed if you redeem shares within six years of
purchase. The following types of shares may be redeemed without charge: (i)
shares acquired by reinvestment of distributions and (ii) shares otherwise
exempt from the CDSC, as described in the Example below. The amount of CDSC is
determined as a percentage of the lesser of the current market value or the
cost of the shares being redeemed. The amount of the CDSC will depend on the
number of years since you invested in the shares being redeemed and the dollar
amount being redeemed, according to the following table:
<TABLE>
<CAPTION>
Years Since Purchase Payment Made CDSC
- ----------------------------------- ---------
<S> <C>
1 4.0%
2 4.0%
3 3.0%
4 2.0%
5 1.0%
6 1.0%
7+ None
</TABLE>
The BL Purchase Program. If you purchase Class B shares through an
asset-allocation program sponsored by your broker-dealer or other financial
institution, you may elect to participate in the BL Purchase Program. Shares
purchased through this program are not subject to the CDSC shown above. Rather,
a CDSC of 1.00% will be imposed on redemptions of such shares within the first
year after purchase, based on the lower of the shares' cost and current net
asset value. Your broker-dealer or other financial institution is responsible
for making the election on your behalf to invest through the Program.
Accordingly, if you wish to purchase shares through this Program, you should
instruct your broker-dealer or financial institution to do so.
General. Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus,
Ohio 43219 serves as distributor of the Portfolio's shares. The Distributor is
not obligated to sell any specific amount of shares of the Portfolio.
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<PAGE>
A Portfolio may sell its Class A shares without a sales charge and may
waive the CDSC on shares redeemed by the Trust's current and retired Trustees
(and their families), current and retired employees (and their families) of
Mentor Investment Group, Mentor Advisors, and their affiliates, registered
representatives and other employees (and their families) of broker-dealers
having sales agreements with the Distributor, employees (and their families) of
financial institutions having sales agreements with the Distributor (or
otherwise having an arrangement with a broker-dealer or financial institution
with respect to sales of Portfolio shares), financial institution trust
departments investing an aggregate of $1 million or more in one or more funds
in the Mentor family, clients of certain administrators of tax-qualified plans,
employer-sponsored retirement plans, tax-qualified plans when proceeds from
repayments of loans to participants are invested (or reinvested) in funds in
the Mentor family, shares redeemed under the Portfolio's Systematic Withdrawal
Plan (limited to 10% of a shareholder's account in any calendar year), and
"wrap accounts" for the benefit of clients of financial planners adhering to
certain standards established by Mentor Services Company or its affiliates. The
Portfolio may sell shares without a sales charge or a CDSC in connection with
the acquisition by the Portfolio of assets of an investment company or personal
holding company. In addition, the CDSC may be waived in the case of (i)
redemptions of shares held at the time a shareholder dies or becomes disabled,
including the shares of a shareholder who owns the shares with his or her
spouse as joint tenants with right of survivorship, provided that the
redemption is requested within one year of the death or initial determination
of disability; (ii) redemptions in connection with the following retirement
plan distributions: (a) lump-sum or other distributions from a qualified
retirement plan following retirement, (b) distributions from an IRA, Keogh
Plan, or Custodial Account under Section 403(b)(7) of the Internal Revenue Code
following attainment of age 59 1/2, and (c) a tax-free return on an excess
contribution to an IRA; (iii) redemptions by pension or profit sharing plans
sponsored by Mentor Investment Group or an affiliate; and (iv) redemptions by
pension or profit sharing plans of which Mentor Investment Group or any
affiliate serves as a plan fiduciary. In addition, certain retirement plans
with over 200 employees may purchase Class A shares at net asset value without
a sales charge. The Portfolio may sell its Class A shares without a sales
charge to shareholders of other mutual funds who invest in other funds in the
Mentor family in response to certain promotional activities (in which case a
CDSC of 1% may apply for a period of years after purchase). Contact Mentor
Services Company. If you invest through a broker-dealer or other financial
institution, your broker-dealer or other financial institution will be
responsible for electing on your behalf to take advantage of any of these
reduced sales charges or waivers described above. Please instruct your
broker-dealer or other financial institution accordingly.
Shareholders of other funds in the Mentor family may be entitled to
exchange their shares for, or reinvest distributions from their funds in,
shares of the Portfolio at net asset value.
In determining whether a CDSC is payable in respect of the shares
redeemed, the Portfolio will first redeem the shares held longest (together
with any shares received upon reinvestment of distributions with respect to
those shares). Any of the shares being redeemed which were acquired by
reinvestment of distributions will be redeemed without a CDSC, and amounts
representing capital appreciation will not be subject to a CDSC. See the
Example below.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 of those shares (including shares purchased through reinvestment
of distributions on those 100 shares) at this time, your CDSC will be
calculated as follows:
o Proceeds of 50 shares redeemed at $12 per share $600
o Minus proceeds of 10 shares not subject to a CDSC because they were
acquired through dividend reinvestment (10 x $12) -120
o Minus appreciation on remaining shares, also not subject to CDSC
(40 x $2) -80
o Amount subject to a CDSC $400
The Distributor receives the entire amount of any CDSC you pay. Consult
the Distributor for more information.
If you are considering redeeming or exchanging shares of the Portfolio or
transferring shares to another person shortly after purchase, you should pay
for those shares with a certified check to avoid any delay in redemption,
exchange, or transfer. Otherwise the Portfolio may delay payment until the
purchase price of those shares has been collected or, if you redeem by
telephone, until 15 calendar days after the purchase date.
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<PAGE>
Because of the relatively high cost of maintaining accounts, the Portfolio
reserves the right to redeem, upon not less than 60 days' notice, any Portfolio
account below $500 as a result of redemptions. A shareholder may, however,
avoid such a redemption by the Portfolio by increasing his investment in shares
of the Portfolio to a value of $500 or more during such 60-day period.
The Distributor, Mentor Advisors, and affiliates thereof, at their own
expense and out of their own assets (or in conjunction with other entities),
may also periodically sponsor programs that offer additional compensation in
connection with sales of the Portfolio. Such compensation may also include, but
is not limited to, financial assistance to dealers in connection with
conferences, sales, or training programs for their employees, seminars for the
public, advertising or sales campaigns, or other dealer-sponsored special
events. In some instances, this compensation may be made available only to
certain dealers whose representatives have sold or are expected to sell
significant amounts of shares. Dealers may not use sales of the Portfolio's
shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. Certain dealers may not sell all
classes of shares.
In all cases Mentor Advisors or the Distributor reserves the right to
reject any particular investment.
Reinvestment Privilege. If you redeem Class A or B shares of the
Portfolio, you have a one-time right, within 60 days, to reinvest the
redemption proceeds plus the amount of CDSC you paid, if any, at the
next-determined net asset value. Front-end sales charges will not apply to such
reinvestment. The Distributor must be notified in writing by you or by your
financial institution of the reinvestment for you to recover the CDSC, or to
eliminate the front-end sales charge. If you redeem shares in the Portfolio,
there may be tax consequences.
DISTRIBUTION PLAN (CLASS B SHARES)
Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus, Ohio
43219, is the principal distributor for the Portfolios' shares. The Distributor
is not obligated to sell any specific amount of shares of the Portfolio. The
Distributor is a wholly owned subsidiary of BISYS Fund Services, Inc.
The Portfolio has adopted a Distribution Plan (the "Plan") under Rule
12b-1 with respect to its Class B shares (the "Plan") providing for payments by
the Portfolio to the Distributor from the assets attributable to the
Portfolio's Class B shares at the annual rate set out under "Expense Summary --
Annual Portfolio Operating Expenses" above. The Trustees may reduce the amount
of payments or suspend the Plan for such periods as they may determine. The
Distributor also receives the proceeds of any CDSC imposed on redemptions of
shares.
Payments under the Plan are intended to compensate the Distributor for
services provided and expenses incurred by it as principal underwriter of the
Portfolio's Class B shares. The Distributor may select financial institutions
(such as a broker/ dealer or bank) to provide sales support services as agents
for their clients or customers who beneficially own Class B shares of the
Portfolio. Financial institutions will receive fees from the Distributor based
upon Class B shares owned by their clients or customers. The schedules of such
fees and the basis upon which such fees will be paid will be determined from
time to time by the Distributor. The Distributor may suspend or modify such
payments to dealers. Such payments are also subject to the continuation of the
Plan, the terms of any agreements between dealers and the Distributor, and any
applicable limits imposed by the National Association of Securities Dealers,
Inc.
Mentor Services Company, a wholly owned subsidiary of Mentor Investment
Group, provides marketing-related services in respect of the Portfolio. Mentor
Services Company and its affiliates will receive from the Distributor
substantially all amounts received or retained by the Distributor under the
Portfolio's Distribution Plans. Mentor Services Company receives from the
Distributor an amount equal to all CDSCs received by the Distributor.
HOW TO SELL SHARES
You can sell your shares to the Portfolio any day the New York Stock
Exchange is open, either directly to the Portfolio or through your investment
dealer. The Portfolio will only redeem shares for which it has received
payment.
Selling shares directly to the Portfolio. Send a signed letter of
instruction and stock power form, along with any certificates that represent
shares you want to sell, to Mentor Funds, c/o Boston Financial Data Services,
Inc. ("BFDS"), 2 Heritage Drive, North Quincy, Massachusetts 02171. The price
you will receive is the net asset value next calculated after your request is
received in proper form less any applicable CDSC. In order to receive that
day's net asset value, your request must be received before the close of
regular trading on the New York Stock Exchange. If you sell shares having a net
asset value of $50,000 or more or if you want your redemption proceeds payable
to you at a different address or to someone else,
14
<PAGE>
the signatures of registered owners or their legal representatives must be
guaranteed by a bank, broker-dealer, or certain other financial institutions.
Contact Mentor Services Company for more information about where to obtain a
signature guarantee. Stock power forms are available from your investment
dealer, Mentor Services Company, and many commercial banks. The Distributor
usually requires additional documentation for the sale of shares by a
corporation, partnership, agent, fiduciary, or surviving joint owner. Contact
Mentor Services Company for details.
Selling shares by telephone. You may use the Telephone Redemption
Privilege to redeem shares from your account unless you have notified Mentor
Services Company of an address change within the preceding 15 days. Unless an
investor indicates otherwise on the New Account Form, Mentor Services Company
will be authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide Mentor Services Company with his or her account
registration and address as it appears on Mentor Services Company's records.
Mentor Services Company will employ these and other reasonable procedures to
confirm that instructions communicated by telephone are genuine; if it fails to
employ reasonable procedures, Mentor Services Company may be liable for any
losses due to unauthorized or fraudulent instructions. For more information,
consult Mentor Services Company. During periods of unusual market changes and
shareholder activity, you may experience delays in contacting Mentor Services
Company by telephone in which case you may wish to submit a written redemption
request, as described above, or contact your investment dealer, as described
below. The Telephone Redemption Privilege may be modified or terminated without
notice.
Selling shares through your investment dealer. Your dealer must receive
your request before the close of regular trading on the New York Stock Exchange
to receive that day's net asset value. Your dealer will be responsible for
furnishing all necessary documentation to Mentor Services Company, and may
charge you for its services.
Systematic Withdrawal Program. You may redeem Class A or B shares of the
Portfolio through periodic withdrawals for a predetermined amount. Only
shareholders with accounts valued at $10,000 or more are eligible to
participate. Class B shares redeemed under the Systematic Withdrawal Program
are not subject to a CDSC, but the aggregate withdrawals of Class B shares in
any year are limited to 10% of the value of the account at the time of
enrollment. Contact the Distributor for more information.
General. The Portfolio generally sends you payment for your shares the
business day after your request is received. Under unusual circumstances, the
Portfolio may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part in securities valued in the same way as they would be valued
for purposes of computing the Portfolio's per share net asset value. If payment
is made in securities, a shareholder may incur brokerage expenses in converting
those securities into cash.
HOW TO EXCHANGE SHARES
Except as otherwise described below, you can exchange your shares in the
Portfolio worth at least $1,000 for shares of the same class of certain other
Portfolios of Mentor Funds, with different investment objectives and policies,
at net asset value beginning 15 days after purchase. You may also exchange
shares of the Portfolio for shares of Cash Resource U.S. Government Money
Market Fund (the "Cash Fund"). If you exchange shares subject to a CDSC, the
transaction will not be subject to a CDSC. However, when you redeem the shares
acquired through the exchange, the redemption may be subject to the CDSC,
depending upon when you originally purchased the shares, using the schedule of
the Portfolio from which your first exchange was effected. For purposes of
computing the CDSC, the length of time you have owned your shares will be
measured from the date of original purchase and will not be affected by any
exchange.
For information on how to exchange your shares, contact Mentor Services
Company at 1-800-382-0016. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss. A
Telephone Exchange Privilege is currently available. The Distributor's
procedures for telephonic transactions are described above under "How to sell
shares." The Telephone Exchange Privilege is not available if you were issued
certificates for shares which remain outstanding. Ask you investment dealer or
the Distributor for a prospectus relating to other Portfolios of Mentor Funds
or the Cash Fund. Shares of certain of the Portfolios may not be available to
residents of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio management
and have an adverse effect on all shareholders. In order to limit excessive
exchange activity and
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in other circumstances where the Distributor or the Trustees believe doing so
would be in the best interests of the Portfolio, the Portfolio reserves the
right to revise or terminate the exchange privilege, limit the amount or number
of exchanges, or reject any exchange. Shareholders would be notified of any
such action to the extent required by law. Consult the Distributor before
requesting an exchange by calling 1-800-382-0016. See the Statement of
Additional Information to find out more about the exchange privilege.
How distributions are made
Dividends, if any, are declared daily and paid monthly. The Portfolio
distributes any net realized capital gains at least annually. Distributions
from capital gains are made after applying any available capital loss
carryovers. All Portfolio distributions will be invested in additional
Portfolio shares, unless the shareholder instructs the Portfolio otherwise.
Taxes
The Portfolio intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that are
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. The Portfolio will distribute substantially all of
its net investment income and capital gain net income on a current basis.
All Portfolio distributions will be taxable to shareholders as ordinary
income, except that any distributions of net capital gain will be taxed as
long-term capital gain, regardless of how long a shareholder has held the
shares (although the loss on a sale of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain
distribution received with respect to those shares). Distributions will be
taxable as described above whether received in cash or in shares through the
reinvestment of distributions. Early in each year the Trust will notify
shareholders of the amount and tax status of distributions paid by the
Portfolio for the preceding year. In buying or selling securities for the
Portfolio, Mentor Advisors will not normally take into account the effect any
purchase or sale of securities will have on the tax positions of the
Portfolio's shareholders.
The foregoing is a summary of certain federal income tax consequences of
investing in the Portfolio. Dividends and distributions also may be subject to
state and local taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, or local taxes. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of the Portfolio, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
OTHER SERVICES
Shareholder Servicing Plan. The Trust has adopted a Shareholder Servicing
Plan (the "Service Plan") with respect to the Class A and Class B shares of the
Portfolio. Under the Service Plan, financial institutions will enter into
shareholder service agreements with the Distributor to provide administrative
support services to their customers who are Portfolio shareholders. In return
for providing these support services, a financial institution may receive
payments at a rate not exceeding 0.25% of the average daily net assets of the
Class A or Class B shares of the Portfolio. These administrative services may
include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer personnel, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding the Portfolio; assisting
clients in changing dividend options, account designations, and addresses; and
providing such other services as the Portfolio reasonably requests.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by Mentor Advisors and/or Mentor Investment
Group, or affiliates thereof, for providing administrative support services to
holders of Class A or Class B shares of the Portfolio. These payments will be
made directly by Mentor Advisors and/or Mentor Investment Group and will not be
made from the assets of the Portfolio.
GENERAL INFORMATION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992. A copy of the Agreement and Declaration of Trust, which is governed by
Massachusetts law, is on file with the Secretary of State of The Commonwealth
of Massachusetts.
The Trust is an open-end series management investment company with an
unlimited number of authorized shares of beneficial interest. Shares of the
Trust may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios. Any such series of shares
may be further divided without shareholder approval into
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two or more classes of shares having such preferences and special or relative
rights and privileges as the Trustees determine. The Trust's shares are
currently divided into eleven series, one representing the Portfolio, the
others representing other Portfolios with varying investment objectives and
policies. Certain of the Trust's Portfolios offer more than one class of shares
with different sales charges and expenses. The Portfolio currently offers
shares in three classes: Class A and Class B shares of the Portfolio, which are
offered by this Prospectus and Class Y (Institutional) shares, which are not
subject to any sales loads or shareholder servicing fees. Contact Mentor
Services Company for information concerning Class Y shares and your eligibility
to purchase shares of those classes.
Each share has one vote, with fractional shares voting proportionally.
Shares of each class will vote together as a single class except when required
by law or determined by the Trustees. Shares of the Portfolio are freely
transferable, are entitled to dividends as declared by the Trustees, and, if
the Portfolio were liquidated, would receive the net assets of the Portfolio.
The Trust may suspend the sale of shares at any time and may refuse any order
to purchase shares. Although neither the Portfolio nor the Trust is required to
hold annual meetings of shareholders, shareholders have the right to call a
meeting to elect or remove Trustees, or to take other actions as provided in
the Agreement and Declaration of Trust.
The Portfolio receives services from a number of providers which rely on
the smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of software to distinguish the Year 2000 from the Year
1900. Mentor Advisors is taking steps that it believes are reasonably designed
to address this potential "Year 2000" problem and to obtain satisfactory
assurances that comparable steps are being taken by the Portfolio's other major
service providers. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the Portfolio from this problem.
In the interest of economy and convenience, the Portfolio will not issue
certificates for its shares except at the shareholder's request.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as the Portfolio's custodian. State Street Bank and
Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive,
North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and
dividend agent.
PERFORMANCE INFORMATION
Yield and total return data may from time to time be included in
advertisements about Class A and Class B shares of the Portfolio. The
Portfolio's "yield" for each class of shares is calculated by dividing the
Portfolio's annualized net investment income per share during a recent 30-day
period by the maximum public offering price per share on the last day of that
period. "Total return" for the one-, five- and ten-year periods (or for the
life of a class, if shorter) through the most recent calendar quarter
represents the average annual compounded rate of return on an investment of
$1,000 in the Portfolio at the maximum public offering price (in the case of
Class A shares) and reflecting (in the case of Class B shares) the deduction of
any applicable CDSC. Total return may also be presented for other periods or
based on investment at reduced sales charge levels or at net asset value.
Investment performance of different classes of shares of the Portfolio will
differ. Any quotation of investment performance not reflecting the maximum
initial sales charge or CDSC would be reduced if such sales charges were
reflected. Quotations of yield and total return for a period when an expense
limitation was in effect will be greater than if the limitation had not been in
effect. The Portfolio's performance may be compared to various indices. See the
Statement of Additional Information. Information may be presented in
advertisements about the Portfolio describing the background and professional
experience of the Portfolio's investment adviser or its investment personnel.
All data is based on the Portfolio's past investment results and does not
predict future performance. Investment performance, which will vary, is based
on many factors, including market conditions, the composition of the
Portfolio's investments, the Portfolio's operating expenses and the class of
shares purchased. Investment performance also often reflects the risks
associated with the Portfolio's investment objective and policies. These
factors should be considered when comparing the Portfolio's investment results
to those of other mutual funds and other investment vehicles.
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APPENDIX A
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.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principle
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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.
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 -- Debt rated \`BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments. The
\`BB' rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied \`BBB - ' rating.
B -- Debt rated \`B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay
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interest and repay principal. The \`B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied \`BB' or BB -'
rating.
CCC -- Debt rated \`CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The \`CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied \`B' or \`B - ' rating.
CC -- The rating \`CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied \`CCC' rating.
C -- The rating \`C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied \`CCC - ' debt rating. The \`C'
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
D -- Bonds rated \`D' are in payment default. The \`D' rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The \`D' rating also will
be used on the filing of a bankruptcy petition if debt service payments are
jeopardized.
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.
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 the Portfolio. This Prospectus does not constitute an
offer in any State in which, or to any person to whom, such offering may not
lawfully be made. This Prospectus omits certain information contained in the
Registration Statement, to which reference is made, filed with the Securities
and Exchange Commission. Items which are thus omitted, including contracts and
other documents referred to or summarized herein, may be obtained from the
Commission upon payment of the prescribed fees.
Additional information concerning the securities offered hereby and the
Portfolio is to be found in the Registration Statement, including various
exhibits thereto and financial statements included or incorporated therein,
which may be inspected at the office of the Commission.
Mentor Distributors, LLC Distributor
Mentor
High Income Portfolio
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PROSPECTUS
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June , 1998
