-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JOf5H8c0QeeMwzACYuhVP1BMoxdtEjBRKZYAP1wFjm+R73yeAWMk5Y6oe2QU45QT 0iH89aPXLT39R6U7bLt9Ig== 0000916641-98-001291.txt : 19981201 0000916641-98-001291.hdr.sgml : 19981201 ACCESSION NUMBER: 0000916641-98-001291 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 39 FILED AS OF DATE: 19981130 EFFECTIVENESS DATE: 19981130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR FUNDS CENTRAL INDEX KEY: 0000883428 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 251679376 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-45315 FILM NUMBER: 98761527 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-06550 FILM NUMBER: 98761528 BUSINESS ADDRESS: STREET 1: RIVERFRONT PLAZA STREET 2: WEST TOWER 901 E BYRD STREET CITY: RICHMOND STATE: VA ZIP: 23219 BUSINESS PHONE: 8047823648 MAIL ADDRESS: STREET 1: RIVERFRONT PLAZA STREET 2: WEST TOWER 901 E BYRD STREET CITY: RICHMOND STATE: VA ZIP: 23219 FORMER COMPANY: FORMER CONFORMED NAME: CAMBRIDGE SERIES TRUST DATE OF NAME CHANGE: 19920717 485BPOS 1 MENTOR FUNDS 485BPOS As filed with the Securities and Exchange Commission on November 30, 1998 Registration No. 33-45315 File No. 811-6550 - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] ------------------------------------------------------- Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 21 [X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [X] ACT OF 1940 Amendment No. 23 [X] (Check appropriate box or boxes) MENTOR FUNDS (Exact name of registrant as specified in charter) 901 East Byrd Street Richmond, Virginia 23219 (Address of principal executive offices) Registrant's Telephone Number, including Area Code (804) 782-3648 --------------- PAUL F. COSTELLO, President 901 East Byrd Street Richmond, Virginia 23219 (Name and address of agent for service) ----------------- Copy to: TIMOTHY W. DIGGINS, Esquire ROPES & GRAY One International Place Boston, Massachusetts 02110 -------------- It is proposed that this filing will become effective (check appropriate box): [ ] immediately upon filing pursuant to paragraph (b) [x] on December 15, 1998 pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of Rule 485 If appropriate, check the following box: [ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment. THIS AMENDMENT RELATES TO EACH OF THE PORTFOLIOS OF THE REGISTRANT OTHER THAN MENTOR GROWTH OPPORTUNITIES AND MENTOR ASSET ALLOCATION PORTFOLIOS. NO INFORMATION RELATING TO MENTOR GROWTH OPPORTUNITIES OR MENTOR ASSET ALLOCATION PORTFOLIOS IS AMENDED, DELETED, OR SUPERSEDED HEREBY. MENTOR FUNDS CROSS REFERENCE SHEET (as required by Rule 404(a)) Part A - Mentor Funds - Class A and B Shares: Mentor Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Capital Growth Portfolio, Mentor Balanced Portfolio, Mentor Income and Growth Portfolio, Mentor Municipal Income Portfolio, Mentor Quality Income Portfolio, Mentor Short-Duration Income Portfolio and Mentor High Income Portfolio
N-1A Item No. Location 1. Cover Page . . . . . . . . . . . . Cover Page 2. Synopsis . . . . . . . . . . . . . Cover Page; Expenses Summary; Financial Highlights 3. Condensed Financial Information . . Expenses Summary; Financial Highlights 4. General Description of Registrant . Cover Page; Investment Objectives and Policies; General 5. Management of the Fund . . . . . . Investment Objectives and Policies; Other Investment Practices; Valuing Shares; Distribution Plans; General; Management; The Sub-Advisers; Other Services; Performance Information 5A. Management's Discussion of Fund Performance . . . . . . . (Contained in the Annual Report of the Registrant) 6. Capital Stock and Other Securities . . . . . . . . . . . How to Buy Shares; How to Exchange Shares; Distributions and Taxes; Management; General 7. Purchase of Securities Being Offered . . . . . . . . . . . . . Sales Arrangements; How to Buy Shares; Management 8. Redemption or Repurchase . . . . . How to Buy Shares; How to Sell Shares; How to Exchange Shares 9. Pending Legal Proceedings . . . . . Not Applicable
Part A - Mentor Funds - Class Y Shares: Mentor Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Capital Growth Portfolio, Mentor Balanced Portfolio, Mentor Income and Growth Portfolio, Mentor Municipal Income Portfolio, Mentor Quality Income Portfolio, Mentor Short-Duration Income Portfolio and Mentor High Income Portfolio. N-1A Item No. Location 1. Cover Page . . . . . . . . . . . . Cover Page 2. Synopsis . . . . . . . . . . . . . Cover Page; Expenses Summary; 3. Condensed Financial Information . . Expenses Summary 4. General Description of Registrant . Cover Page; Investment Objectives and Policies; General 5. Management of the Fund . . . . . . Investment Objectives and Policies; Other Investment Practices; Valuing the Portfolios' Shares; General; Management; The Sub-Advisers; Other Services; Performance Information 5A. Management's Discussion of Fund Performance . . . . . . . Not Applicable 6. Capital Stock and Other Securities . . . . . . . . . . . How to Buy Shares; How to Exchange Shares; Distributions and Taxes; Management; General 7. Purchase of Securities Being Offered . . . . . . . . . . . . . How to Buy Shares; Management 8. Redemption or Repurchase . . . . . How to Buy Shares; How to Sell Shares; How to Exchange Shares 9. Pending Legal Proceedings . . . . . Not Applicable Part A - Mentor Funds - Money Market, U.S. Governmental Money Market, and Tax-Exempt Money Market Retail Shares N-1A Item No. Location 1. Cover Page....................... Cover Page 2. Synopsis......................... Cover Page; Expense summary 3. Condensed Financial Information.. Expense summary 4. General Description of Registrant.................. Cover Page; Investment objective and policies; General 5. Management of the Fund........... Investment objective and policies; Management; General; How the Portfolio values its shares; Custodian and transfer and dividend agent; Performance information 5A. Management's Discussion of Fund Performance............ Not applicable 6. Capital Stock and Other Securities...................... Management; General; Purchase of shares; How distributions are made; tax information; Performance information 7. Purchase of Securities Being Offered......................... Management; Purchase of shares 8. Redemption or Repurchase.......... Purchase of shares; Redemption of shares 9. Pending Legal Proceedings......... Not Applicable Part A - Mentor Funds - Money Market, U.S. Government Money Market, and Tax-Exempt Money Market Institutional Shares
N-1A Item No. Location 1. Cover Page......................... Cover Page 2. Synopsis........................... Cover Page; Expense summary 3. Condensed Financial Information.... Expense summary 4. General Description of Registrant.. Cover Page; Investment objective and policies; General 5. Management of the Fund............. Investment objective and policies; Management; General; How the Portfolio values its shares; Custodian and transfer and dividend agent; Performance information 5A. Management's Discussion of Fund Performance.............. Not applicable 6. Capital Stock and Other Securities........................ Management; General; Purchase of shares; How distributions are made; tax information; Performance information 7. Purchase of Securities Being Offered........................... Management; Purchase of shares 8. Redemption or Repurchase............ Purchase of shares; Redemption of shares 9. Pending Legal Proceedings........... Not Applicable
Part B - Class A, B and Y Shares: Mentor Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Capital Growth Portfolio, Mentor Balanced Portfolio, Mentor Income and Growth Portfolio, Mentor Municipal Income Portfolio, Mentor Quality Income Portfolio, Mentor Short-Duration Income Portfolio and Mentor High Income Portfolio N-1A Item No. Location 10. Cover Page ........................ Cover Page 11. Table of Contents ................. Table of Contents 12. General Information and History ... Cover Page; Introduction 13. Investment Objectives and Policies ........................ Investment Restrictions (Part I and Part II); Certain Investment Techniques (Part III) 14. Management of the Fund ............ Management of the Trust; Principal Holders of Securities; Investment Advisory Services; Administrative Services; Shareholder Servicing Plan; Brokerage Transactions; Distribution (Part III); Members of Investment Management Teams 15. Control Persons and Principal Holders of Securities .......... Principal Holders of Securities (Part III) 16. Investment Advisory and Other Services ........................ Management of the Trust; Principal Holders of Securities; Investment Advisory Services; Administrative Services; Shareholder Servicing Plan; Brokerage Transactions; Distribution (Part III); Custodian 17. Brokerage Allocation ............... Brokerage Transactions (Part III) 18. Capital Stock and Other Securities ....................... How to Buy Shares; Distribution; Determining Net Asset Value; Taxes; Shareholder Liability (Part III) 19. Purchase; Redemption and Pricing of Securities Being Offered ...... Brokerage Transactions; Distribution; Determining Net Asset Value; Redemptions in Kind (Part III) 20. Tax Status ......................... Investment Restrictions; Taxes (Part III) 21. Underwriters ....................... Distribution 22. Calculations of Performance Data.... Performance Information; Performance Comparisons (Part III) 23. Financial Statements ............... Independent Accountants; Financial Statements (Part III) Part B - Money Market, U.S. Government Money Market and Tax-Exempt Money Market Institutional and Retail Shares N-1A Item No. Location 10. Cover Page ........................ Cover Page 11. Table of Contents ................. Table of Contents 12. General Information and History ... Cover Page; Introduction 13. Investment Objectives and Policies ........................ Investment Restrictions (Part I and Part II); Certain Investment Techniques (Part III) 14. Management of the Fund ............ Management of the Trust; Principal Holders of Securities; Investment Advisory Services; Administrative Services; Shareholder Servicing Plan; Brokerage Transactions; Distribution (Part III); Members of Investment Management Teams 15. Control Persons and Principal Holders of Securities .......... Principal Holders of Securities (Part III) 16. Investment Advisory and Other Services ........................ Management of the Trust; Principal Holders of Securities; Investment Advisory Services; Administrative Services; Shareholder Servicing Plan; Brokerage Transactions; Distribution (Part III); Custodian 17. Brokerage Allocation ............... Brokerage Transactions (Part III) 18. Capital Stock and Other Securities ....................... How to Buy Shares; Distribution; Determining Net Asset Value; Taxes; Shareholder Liability (Part III) 19. Purchase; Redemption and Pricing of Securities Being Offered ...... Brokerage Transactions; Distribution; Determining Net Asset Value; Redemptions in Kind (Part III) 20. Tax Status ......................... Investment Restrictions; Taxes (Part III) 21. Underwriters ....................... Distribution 22. Calculations of Performance Data.... Performance Information; Performance Comparisons (Part III) 23. Financial Statements ............... Independent Accountants; Financial Statements (Part III) Part C Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C of the Registration Statement. P R O S P E C T U S December 15, 1998 (Class A and B Shares) Mentor Funds Mentor Funds, an open-end management investment company, is offering shares of nine different investment portfolios by this Prospectus: Mentor Growth Portfolio, Mentor Capital Growth Portfolio, Mentor Balanced Portfolio, Mentor Income and Growth Portfolio, Mentor Perpetual Global Portfolio (a global growth fund), Mentor Quality Income Portfolio, Mentor Municipal Income Portfolio, Mentor Short-Duration Income Portfolio, and Mentor High Income Portfolio. CERTAIN OF THE PORTFOLIOS MAY USE "LEVERAGE" -- THAT IS, THEY MAY BORROW MONEY TO PURCHASE ADDITIONAL PORTFOLIO SECURITIES, WHICH INVOLVES SPECIAL RISKS. See "Other Investment Practices and Risk Factors." Mentor Funds provides investors an opportunity to design their own investment programs by investing in a variety of Portfolios offering a wide array of investment strategies. Each Portfolio pursues its investment objectives through the investment policies described in this Prospectus. This Prospectus sets forth concisely the information about Mentor Funds that a prospective investor should know before investing. Please read this Prospectus carefully and retain it for future reference. YOU CAN FIND MORE DETAILED INFORMATION IN THE DECEMBER 15, 1998 STATEMENT OF ADDITIONAL INFORMATION, AS AMENDED FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT OR FOR OTHER INFORMATION, PLEASE CALL MENTOR SERVICES COMPANY, INC. AT 1-800-869-6042. The Statement has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference. The address of Mentor Funds is P.O. Box 1357, Richmond, Virginia 23218-1357. ---------------- Mentor Distributors, LLC Distributor THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS
PAGE ----- Expense Summary ...................................... 3 Financial Highlights ................................. 6 Investment Objectives and Policies ................... 15 Other Investment Practices and Risk Factors .......... 24 Valuing the Portfolios' Shares ....................... 33 Sales Arrangements ................................... 33 How To Buy Shares .................................... 34 Distribution Plans (Class B Shares) .................. 38 How To Sell Shares ................................... 39 How To Exchange Shares ............................... 40 How Distributions Are Made ........................... 41 Taxes ................................................ 41 Management ........................................... 42 Other Services ....................................... 44 General Information .................................. 45 Performance Information .............................. 46 APPENDIX ............................................. 47
2 EXPENSE SUMMARY Expenses are one of several factors to consider when investing in a Portfolio. The tables on this page and the next are provided to help you understand the expenses of investing in each of the Portfolios and your share of the operating expenses of each of the Portfolios. Expenses shown are based on those incurred for the last fiscal year (except that in respect of Class A shares of the Balanced Portfolio and Class A and B shares of the High Income Portfolio, expenses shown are estimated based on the expenses the Portfolios expect to incur in respect of those classes during the current fiscal year). The Examples show the cumulative expenses attributable to a hypothetical $1,000 investment in each of the Portfolios over specified periods.
CLASS A CLASS B SHARES SHARES(1) --------- ---------- SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) Mentor Growth Portfolio ..................................................... 5.75% None Mentor Capital Growth Portfolio ............................................. 5.75% None Mentor Balanced Portfolio ................................................... 5.75% None Mentor Income and Growth Portfolio .......................................... 5.75% None Mentor Perpetual Global Portfolio ........................................... 5.75% None Mentor Quality Income Portfolio ............................................. 4.75% None Mentor Municipal Income Portfolio ........................................... 4.75% None Mentor Short-Duration Income Portfolio ...................................... 1.00% None Mentor High Income Portfolio ................................................ 4.75% None Maximum Sales Charge Imposed on Reinvested Dividends ......................... None None Exchange Fee ................................................................. None None Contingent Deferred Sales Charge (as a percentage of the lower of the original purchase price or redemption proceeds of shares redeemed) Class A Shares (all Portfolios): ........................................... None(2) Class B Shares(3)(4):
Growth, Capital Growth, Income and 4.0% in the first year, declining to 1.0% in the fifth Growth, Global, and Balanced Portfolios year, and eliminated thereafter Quality Income, Municipal Income, 4.0% in the first year, declining to 1.0% in the sixth Short-Duration Income, and High Income year, and eliminated thereafter Portfolio
- ---------- (1) Long-term Class B shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted by the rules of the National Association of Securities Dealers, Inc. (2) A contingent deferred sales charge ("CDSC") of 1.00% is assessed on Class A shares that are purchased without an initial sales charge as part of an investment of over $1 million that are redeemed within one year of purchase. (3) The amount redeemed is computed as the lesser of the current net asset value of the shares redeemed, and the original purchase price of the shares. See "How to Buy Shares." (4) Shares purchased as part of asset-allocation plans pursuant to the BL Purchase Program are subject to a CDSC of 1.00% if the shares are redeemed within one year of purchase. See "How to Buy Shares -- the BL Purchase Program." 3 ANNUAL PORTFOLIO OPERATING EXPENSES (as a percentage of average net assets)
INCOME CAPITAL AND GROWTH GROWTH BALANCED GROWTH ---------- --------- ---------- ---------- CLASS A SHARES Investment Advisory Fee ..... 0.70% 0.80% 0.75% 0.75% 12b-1 Fees .................. None None None None Other Expenses Shareholder Service Plan Fees ................ 0.25% 0.25% 0.25% 0.25% Other Expenses ............. 0.31% 0.29% 0.35% 0.32% ----- ----- ----- ----- Total Other Expenses ........ 0.56% 0.54% 0.60% 0.57% ----- ----- ----- ----- Total Portfolio Operating Expenses ................... 1.26% 1.34% 1.35% 1.32% CLASS B SHARES Investment Advisory Fee ..... 0.70% 0.80% 0.75% 0.75% 12b-1 Fees .................. 0.75% 0.75% 0.75% 0.75% Other Expenses Shareholder Service Plan Fees ................ 0.25% 0.25% 0.25% 0.25% Other Expenses ............. 0.31% 0.29% 0.35% 0.32% ----- ----- ----- ----- Total Other Expenses ........ 0.56% 0.54% 0.60% 0.57% ----- ----- ----- ----- Total Portfolio Operating Expenses ................... 2.01% 2.09% 2.10% 2.07% PERPETUAL QUALITY MUNICIPAL SHORT- HIGH GLOBAL INCOME INCOME DURATION INCOME ----------- ----------- ----------- ------------ ------------ CLASS A SHARES Investment Advisory Fee ..... 1.05% 0.48%* 0.60% 0.32%* 0.35%* 12b-1 Fees .................. None None None None None Other Expenses Shareholder Service Plan Fees ................ 0.25% 0.25% 0.25% 0.25% 0.25% Other Expenses ............. 0.45% 0.32% 0.32% 0.29%* 0.35%** ----- ----- ----- ------ ----- Total Other Expenses ........ 0.70% 0.57%* 0.57% 0.54%* 0.60% ----- ----- ----- ------ ----- Total Portfolio Operating Expenses ................... 1.75% 1.05%* 1.17% 0.86%* 0.95%* CLASS B SHARES Investment Advisory Fee ..... 1.05% 0.48%* 0.60% 0.32%* 0.35%* 12b-1 Fees .................. 0.75% 0.50% 0.50% 0.30% 0.50% Other Expenses Shareholder Service Plan Fees ................ 0.25% 0.25% 0.25% 0.25% 0.25% Other Expenses ............. 0.45% 0.32% 0.32% 0.29%* 0.35%** ----- ----- ----- ------ ----- Total Other Expenses ........ 0.70% 0.57% 0.57% 0.54%* 0.60% ----- ----- ----- ------ ----- Total Portfolio Operating Expenses ................... 2.50% 1.55%* 1.67% 1.16%* 1.45%*
- ---------- * After expense limitation. ** Other Expenses are estimated based on the expenses the Portfolio expects to incur during its first full year of operations. Mentor Investment Advisors, LLC has agreed to limit its Management Fees from each of the Quality Income, Short-Duration Income and High Income Portfolios, and Mentor Investment Group has agreed to limit certain administrative services fees from the Short-Duration Income Portfolio to the extent necessary to limit the Total Portfolio Operating Expenses of those Portfolios to the levels shown. In the absence of these expense limitations, Management Fees for the Quality Income, the Short-Duration Income, and the High Income Portfolios would be 0.60%, 0.50% and 0.70% respectively; Other Expenses for the Short-Duration Income Portfolio would have been 0.39%; and Total Portfolio Operating Expenses would have been as follows: Balanced Portfolio, Class B--2.12%, Quality Income Portfolio, Class A -- 1.18%, Class B -- 1.67%; Short-Duration Income Portfolio, Class A -- 1.14%, Class B -- 1.44%; and High Income Portfolio Class A -- 1.30%, Class B -- 1.80%. 4 EXAMPLES You would pay the following expenses on a $1,000 investment, assuming 5% annual return and no redemption at the end of each period:
1 YEAR 3 YEAR 5 YEAR 10 YEAR ------------------- ------------------- ------------------- ------------------ CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B --------- --------- --------- --------- --------- --------- --------- -------- Growth Portfolio ........................ 70 $20 95 63 123 108 201 234 Capital Growth Portfolio ................ 70 21 98 65 127 112 209 242 Balanced Portfolio ...................... 70 22 98 66 127 114 211 245 Income and Growth Portfolio ............. 70 21 97 65 126 111 207 240 Global Portfolio ........................ 74 25 109 78 147 133 252 284 Quality Income Portfolio ................ 58 16 79 49 103 84 170 185 Municipal Income Portfolio .............. 59 17 83 53 109 91 183 198 Short-Duration Income Portfolio ......... 19 12 37 37 57 64 115 141 High Income Portfolio ................... 57 15 76 46 -- -- -- --
You would pay the following expenses on a $1,000 investment, assuming 5% annual return and redemption at the end of each period:
1 YEAR 3 YEAR 5 YEAR 10 YEAR ------------------- ------------------- ------------------- ------------------ CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B --------- --------- --------- --------- --------- --------- --------- -------- Growth Portfolio ........................ 70 60 95 93 123 118 201 234 Capital Growth Portfolio ................ 70 61 98 95 127 122 209 242 Balanced Portfolio ...................... 70 62 98 96 127 124 211 245 Income and Growth Portfolio ............. 70 61 97 95 126 121 207 240 Global Portfolio ........................ 74 65 109 108 147 143 252 284 Quality Income Portfolio ................ 58 56 79 79 103 94 170 185 Municipal Income Portfolio .............. 59 57 83 83 109 101 183 198 Short-Duration Income Portfolio ......... 19 52 37 67 57 74 115 141 High Income Portfolio ................... 57 55 76 76 -- -- -- --
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE PERFORMANCE; ACTUAL EXPENSES MAY VARY. 5 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) The following tables have been derived from the Financial Highlights included in Mentor Funds' financial statements, which have been audited by KPMG Peat Marwick LLP, Mentor Funds' independent auditors. The report of KPMG Peat Marwick LLP, along with the Portfolios' financial statements and notes thereto, is included in the Statement of Additional Information, which may be obtained in the manner described on the cover page of this Prospectus. See "Financial Statements" in the Statement of Additional Information. CLASS A SHARES
MENTOR GROWTH PORTFOLIO ----------------------------------------------------------- YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95* ------------- ------------ ------------- ------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 19.94 $ 18.47 $ 16.08 $ 13.37 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) .............. (0.12) (0.17) (0.10) (0.01) Net realized and unrealized gain (loss) on investments .................... (4.03) 4.19 4.23 2.72 -------- --------- -------- ---------- Total from investment operations .......... (4.15) 4.02 4.13 2.71 LESS DISTRIBUTIONS Distributions from net investment income .................................... -- -- -- -- Distributions from capital gains ........... (1.19) (2.55) (1.74) -- -------- --------- -------- ---------- Total Distributions ...................... (1.19) (2.55) (1.74) -- -------- --------- -------- ---------- NET ASSET VALUE, END OF PERIOD .............. $ 14.60 $ 19.94 $ 18.47 $ 16.08 ======== ========= ======== ========== Total Return ................................ (22.08%) 25.81% 29.15% 20.27% ======== ========= ======== ========== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 77,720 $ 105,033 $ 40,272 $ 20,368 Ratio of expenses to average net assets ..... 1.26% 1.28% 1.28% 1.36%(a) Ratio of expenses to average net assets excluding waiver ........................... 1.26% 1.28% 1.28% 1.36%(a) Ratio of net investment income (loss) to average net assets ......................... (0.56%) (0.67%) (0.39%) (0.65%)(a) Portfolio turnover rate ..................... 88% 77% 105% 70% Average commission rate on portfolio transactions ............................... $ 0.0658 $ 0.0651 $ 0.0602 -- ========== ========== ========== ========== MENTOR CAPITAL GROWTH PORTFOLIO ------------------------------------------------------------------------ YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 ------------ ----------- ----------- ----------- ----------- ----------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26 $ 14.21 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) .............. (0.10) (0.02) 0.11 0.02 0.09 0.14 Net realized and unrealized gain (loss) on investments .................... 2.34 5.87 3.73 2.91 (0.30) 1.02 --------- --------- -------- ------- ------- ------- Total from investment operations .......... 2.24 5.85 3.84 2.93 (0.21) 1.16 LESS DISTRIBUTIONS Distributions from net investment income .................................... (0.01) -- -- -- (0.04) (0.11) Distributions from capital gains ........... (1.94) (2.79) (0.50) (1.79) (0.13) -- --------- --------- --------- ------- ------- ------- Total Distributions ...................... (1.95) (2.79) (0.50) (1.79) (0.17) (0.11) --------- --------- --------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD .............. $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26 ========= ========= ========= ======= ======= ======= Total Return ................................ 10.72% 34.78% 24.63% 20.18% (1.37%) 8.21% ========= ========= ========= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $145,117 $ 65,703 $ 31,889 $29,582 $21,181 $31,360 Ratio of expenses to average net assets ..... 1.34% 1.41% 1.43% 1.87% 1.70% 1.49% Ratio of expenses to average net assets excluding waiver ........................... 1.34% 1.41% 1.43% 1.87% 1.70% 1.59% Ratio of net investment income (loss) to average net assets ......................... 0.06% 0.53% 0.51% 0.27% 0.53% 0.96% Portfolio turnover rate ..................... 104% 64% 98% 157% 149% 192% Average commission rate on portfolio transactions ............................... $0.0692 $ 0.0697 $ 0.0688 -- -- -- ========= ========= ========= ======= ======= ======= MENTOR CAPITAL GROWTH PORTFOLIO ---------------- YEAR ENDED 9/30/92** ---------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) .............. 0.08 Net realized and unrealized gain (loss) on investments .................... 0.03 --------- Total from investment operations .......... 0.11 LESS DISTRIBUTIONS Distributions from net investment income .................................... (0.08) Distributions from capital gains ........... -- --------- Total Distributions ...................... (0.08) --------- NET ASSET VALUE, END OF PERIOD .............. $ 14.21 ========= Total Return ................................ 0.78% ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 20,864 Ratio of expenses to average net assets ..... 1.14%(a) Ratio of expenses to average net assets excluding waiver ........................... 1.43%(a) Ratio of net investment income (loss) to average net assets ......................... 1.54%(a) Portfolio turnover rate ..................... 61% Average commission rate on portfolio transactions ............................... -- =========
- --------- * For the period from June 5, 1995 (initial offering of Class A shares) to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations) to September 30, 1992. (a) Annualized. 6 CLASS A SHARES (CONTINUED)
MENTOR BALANCED PORTFOLIO MENTOR INCOME AND GROWTH PORTFOLIO ------------------ ------------------------------------------------------------------------------ PERIOD YEAR YEAR YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED ENDED ENDED ENDED 9/30/98*** 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93* ------------------ ----------- ----------- ----------- ----------- ----------- ------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 13.69 $ 20.60 $ 19.16 $ 17.13 $ 15.27 $ 14.88 $ 14.14 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ............. 0.00(b) 0.51 0.44 0.37 0.40 0.31 0.09 Net realized and unrealized gain (loss) on investments ............... 0.00(b) 0.60 3.39 2.75 2.14 0.64 0.73 -------- -------- -------- -------- ------- ------- ---------- Total from investment operations ................ 0.00(b) 1.11 3.83 3.12 2.54 0.95 0.82 LESS DISTRIBUTIONS Distributions from net investment income .................... -- (0.51) (0.47) (0.35) (0.43) (0.30) (0.08) Distributions from capital gains ............. -- (1.66) (1.92) (0.74) (0.25) (0.26) -- ---------- --------- --------- --------- -------- ------- ---------- Total distributions ........ -- (2.17) (2.39) (1.09) (0.68) (0.56) (0.08) ---------- --------- --------- --------- -------- ------- ---------- NET ASSET VALUE, END OF PERIOD ..................... $ 13.69 $ 19.54 $ 20.60 $ 19.16 $ 17.13 $ 15.27 $ 14.88 ========== ========= ========= ========= ======== ======= ========== Total Return ................ (0%)(c) 5.81% 22.11% 19.13% 17.24% 6.54% 5.54% ========== ========= ========= ========= ======== ======= ========== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ............. $ 3,534 $ 98,794 $ 63,509 $ 24,210 $19,888 $17,773 $ 9,849 Ratio of expenses to average net assets ......... 1.35%(a) 1.32% 1.35% 1.36% 1.69% 1.75% 1.56%(a) Ratio of expenses to average net assets excluding waiver ........... 1.35% 1.32% 1.35% 1.36% 1.69% 1.75% 1.94%(a) Ratio of net investment income (loss) to average net assets ......... 1.52%(a) 2.70% 2.63% 2.08% 2.53% 2.20% 2.35%(a) Portfolio turnover rate ..... 89% 40% 75% 72% 62% 78% 13% Average commission rate on portfolio transactions ............... $ 0.0687 $ 0.0540 $ 0.0515 $ 0.0492 -- -- -- =========== ========= ========= ========= ======= ======= ========== MENTOR PERPETUAL GLOBAL PORTFOLIO --------------------------------------------------------------------- YEAR YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94** ------------ ----------- ------------- ----------- ------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 20.94 $ 17.86 $ 15.88 $ 14.23 $ 14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ............. (0.03) 0.04 (0.04) 0.05 (0.01) Net realized and unrealized gain (loss) on investments ............... (0.97) 3.67 2.82 1.60 0.06 -------- -------- -------- ------- ---------- Total from investment operations ................ (1.00) 3.71 2.78 1.65 0.05 LESS DISTRIBUTIONS Distributions from net investment income .................... -- -- -- -- -- Distributions from capital gains ............. (1.02) (0.63) (0.80) -- -- -------- --------- -------- -------- ---------- Total distributions ........ (1.02) (0.63) (0.80) -- -- -------- --------- -------- -------- ---------- NET ASSET VALUE, END OF PERIOD ..................... $ 18.92 $ 20.94 $ 17.86 $ 15.88 $ 14.23 ======== ========= ======== ======== ========== Total Return ................ (4.97%) 21.59% 18.40% 11.60% 0.35% ======== ========= ======== ======== ========== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ............. $ 59,012 $ 46,556 $ 13,098 $ 6,854 $ 8,882 Ratio of expenses to average net assets ......... 1.75% 1.89% 1.95% 2.06% 2.09%(a) Ratio of expenses to average net assets excluding waiver ........... 1.75% 1.89% 1.95% 2.11% 3.18%(a) Ratio of net investment income (loss) to average net assets ......... (0.01%) 0.07% (0.21%) 0.26% (0.10%)(a) Portfolio turnover rate ..... 162% 128% 130% 155% 2% Average commission rate on portfolio transactions ............... $ 0.0188 $ 0.0319 $ 0.0320 -- -- ========= ========= ========== ======== ==========
- --------- * Reflects operations for the period from May 24, 1993 (commencement of operations) to September 30, 1993. ** Reflects operations for the period from March 29, 1994 (commencement of operations) to September 30, 1994. *** For the period from September 16, 1998 (initial offering of Class A) to September 30, 1998. (a) Annualized. (b) Income for period was less than $0.01 per share. (c) Total return does not reflect sales commissions and is not annualized. 7 CLASS A SHARES (CONTINUED)
MENTOR QUALITY INCOME PORTFOLIO ----------------------------------- YEAR YEAR YEAR ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 ----------- ----------- ----------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 13.18 $ 12.91 $ 13.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ................................... 0.79 0.97 0.89 Net realized and unrealized gain (loss) on investments ......... 0.47 0.26 (0.37) ------- ------- ------- Total from investment operations ............................... 1.26 1.23 0.52 LESS DISTRIBUTIONS Distributions from net investment income ....................... (0.83) (0.96) (0.90) Distributions from capital gains ............................... -- -- ------- ------- ------- Total Distributions ............................................ (0.83) (0.96) (0.90) ------- ------- ------- NET ASSET VALUE, END OF PERIOD .................................. $ 13.61 $ 13.18 $ 12.91 ======= ======= ======= Total Return .................................................... 9.95% 9.86% 4.09% ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ........................ $94,279 $53,176 $21,092 Ratio of expenses to average net assets ......................... 1.05% 1.05% 1.05% Ratio of expenses to average net assets excluding waiver ........ 1.18% 1.18% 1.31% Ratio of net investment income (loss) to average net assets ..... 5.73% 7.01% 6.84% Portfolio turnover rate ......................................... 114% 100% 254% Average commission rate on portfolio transactions ............... -- -- -- ======= ======= ======= MENTOR QUALITY INCOME PORTFOLIO ---------------------------------------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 9/30/95 9/30/94 9/30/93 9/30/92** ----------- ----------- ----------- ---------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 12.75 $ 14.04 $ 14.39 $ 14.30 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ................................... 0.84 0.84 1.06 0.44 Net realized and unrealized gain (loss) on investments ......... 0.61 (1.30) (0.31) 0.09 ------- ------- ------- --------- Total from investment operations ............................... 1.45 (0.46) 0.75 0.53 LESS DISTRIBUTIONS Distributions from net investment income ....................... (0.91) (0.83) (1.10) (0.44) Distributions from capital gains ............................... -- -- -- -- ------- ------- ------- --------- Total Distributions ............................................ (0.91) (0.83) (1.10) (0.44) ------- ------- ------- --------- NET ASSET VALUE, END OF PERIOD .................................. $ 13.29 $ 12.75 $ 14.04 $ 14.39 ======= ======= ======= ========= Total Return .................................................... 11.82% (3.39%) 5.41% 3.37% ======= ======= ======= ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ........................ $24,472 $30,142 $47,780 $ 36,740 Ratio of expenses to average net assets ......................... 1.32% 1.38% 1.04% 0.36%(a) Ratio of expenses to average net assets excluding waiver ........ 1.36% 1.39% 1.22% 1.21%(a) Ratio of net investment income (loss) to average net assets ..... 6.73% 6.33% 7.31% 8.00%(a) Portfolio turnover rate ......................................... 368% 455% 102% 9% Average commission rate on portfolio transactions ............... -- -- -- -- ======= ======= ======= =========
- --------- * For the period from June 16, 1995 (initial offering of Class A shares) to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations) to September 30, 1992. (a) Annualized. 8 CLASS A SHARES (CONTINUED)
MENTOR MUNICIPAL INCOME PORTFOLIO ---------------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92** ----------- ----------- ----------- ----------- ----------- ----------- ---------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD......... $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76 $ 14.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ............. 0.66 0.81 0.82 0.81 0.82 0.92 0.32 Net realized and unrealized gain (loss) on investments ............... 0.59 0.49 0.12 0.51 (1.54) 1.32 0.47 ------- ------- ------- ------- ------- ------- --------- Total from investment operations ................ 1.25 1.30 0.94 1.32 (0.72) 2.24 0.79 LESS DISTRIBUTIONS Distributions from net investment income.......... (0.76) (0.81) (0.82) (0.82) (0.81) (0.95) (0.32) Distributions from capital gains ............. -- (0.03) -- -- (0.10) -- -- ------- ------- ------- ------- ------- ------- --------- Total Distributions ........ (0.76) (0.84) (0.82) (0.82) (0.91) (0.95) (0.32) ------- ------- ------- ------- ------- ------- --------- NET ASSET VALUE, END OF PERIOD ..................... $ 15.99 $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76 ------- ======= ======= ======= ======= ======= ========= Total Return ................ 8.24% 8.89% 6.46% 9.46% (4.83%) 16.00% 5.34% ======= ======= ======= ======= ======= ======= ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ............. $51,757 $29,394 $17,558 $20,460 $25,056 $29,245 $ 18,801 Ratio of expenses to average net assets ......... 1.17% 1.22% 1.24% 1.43% 1.24% 0.71% 0.00%(a) Ratio of expenses to average net assets excluding waiver ........... 1.17% 1.22% 1.24% 1.43% 1.33% 1.39% 1.26%(a) Ratio of net investment income (loss) to average net assets ......... 4.63% 5.09% 5.47% 5.56% 5.43% 5.92% 6.21%(a) Portfolio turnover rate ..... 62% 59% 46% 43% 87% 88% 0% ======= ======= ======= ======= ======= ======= ========= MENTOR MENTOR SHORT DURATION HIGH INCOME INCOME PORTFOLIO PORTFOLIO ----------------------------------------------------- ---------------- YEAR YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95* 9/30/98*** ----------- ----------- ----------- ----------------- ---------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD......... $ 12.62 $ 12.50 $ 12.68 $ 12.74 $ 12.00 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ............. 0.70 0.77 0.82 0.22 0.24 Net realized and unrealized gain (loss) on investments ............... 0.15 0.12 (0.23) (0.03) (1.04) ------- ------- -------- ---------- --------- Total from investment operations ................ 0.85 0.89 0.59 0.19 (0.80) LESS DISTRIBUTIONS Distributions from net investment income.......... (0.73) (0.77) (0.77) (0.25) (0.28) Distributions from capital gains ............. -- -- -- -- -- ------- ------- -------- ---------- --------- Total Distributions ........ (0.69) (0.77) (0.77) (0.25) (0.28) ------- ------- -------- ---------- --------- NET ASSET VALUE, END OF PERIOD ..................... $ 12.74 $ 12.62 $ 12.50 $ 12.68 $ 10.92 ======= ======= ======== ========== ========= Total Return ................ 6.98% 7.33% 4.80% 1.51% (6.75%) ======= ======= ======== ========== ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ............. $93,135 $27,619 $ 7,450 $ 1,002 $ 50,887 Ratio of expenses to average net assets ......... 0.86% 0.86% 0.86% 0.71%(a) 0.60%(a) Ratio of expenses to average net assets excluding waiver ........... 1.14% 1.12% 1.26% 1.00%(a) 1.30%(a) Ratio of net investment income (loss) to average net assets ......... 5.24% 6.00% 5.90% 4.10%(a) 7.36%(a) Portfolio turnover rate ..... 171% 75% 411% 126% 27% ======= ======= ======== ========== =========
- --------- * For the period from June 16, 1995 (initial offering of Class A shares) to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations) to September 30, 1992. *** For the period from June 23, 1998 (commencement of operations) to September 30, 1998. (a) Annualized. 9 CLASS B SHARES
MENTOR GROWTH PORTFOLIO ---------------------------------------------------------- YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95* ------------- ------------ ------------ ------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD .............................. $ 19.53 $ 18.29 $ 16.05 $ 12.15 INCOME FROM INVESTMENT OPERATIONS ......................... Net investment income (loss) ........ (0.23) (0.22) (0.17) (0.13) Net realized and unrealized gain (loss) on investments .............. (3.93) 4.01 4.15 4.03 -------- --------- --------- ---------- Total from investment operations ......................... (4.16) 3.79 3.98 3.90 LESS DISTRIBUTIONS ................... Distributions from net investment income .................. -- -- -- -- Distributions from capital gains..... (1.19) (2.55) (1.74) -- -------- --------- --------- ---------- Total Distributions ................. (1.19) (2.55) (1.74) -- -------- --------- --------- ---------- NET ASSET VALUE, END OF PERIOD ....... $ 14.18 $ 19.53 $ 18.29 $ 16.05 ======== ========= ========= ========== Total Return ......................... (22.62%) 24.66% 28.18% 32.10% ======== ========= ========= ========== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) .......................... $ 383,188 $ 506,230 $ 371,578 $ 246,326 Ratio of expenses to average net assets .............................. 2.01% 2.03% 2.03% 2.08%(a) Ratio of expenses to average net assets excluding waiver ............. 2.01% 2.03% 2.03% 2.08%(a) Ratio of net investment income (loss) to average net assets ........ (1.30%) (1.42%) (1.13%) (1.20%)(a) Portfolio turnover rate .............. 88% 77% 105% 70% Average commission rate on portfolio transactions .............. $ 0.0658 $ 0.0651 $ 0.0602 -- ========== ========== ========== ========== MENTOR GROWTH PORTFOLIO ------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 ------------- ------------ ------------ ------------ ------------- ------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD .............................. $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 $ 8.54 INCOME FROM INVESTMENT OPERATIONS ......................... Net investment income (loss) ........ (0.15) (0.08) (0.06) (0.09) 0.02 0.13 Net realized and unrealized gain (loss) on investments .............. (0.47) 2.07 1.94 4.30 (1.10) 1.35 ------- ------- ------- ------- --------- ------- Total from investment operations ......................... (0.62) 1.99 1.88 4.21 (1.08) 1.48 LESS DISTRIBUTIONS ................... Distributions from net investment income .................. -- -- -- -- (0.05) (0.12) Distributions from capital gains..... (1.01) (1.02) (1.23) (0.42) (0.13) (0.27) ------- ------- ------- ------- --------- -------- Total Distributions ................. (1.01) (1.02) (1.23) (0.42) (0.18) (0.39) ------- ------- ------- ------- --------- -------- NET ASSET VALUE, END OF PERIOD ....... $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 $ 9.63 ======= ======= ======= ======= ========= ======== Total Return ......................... (4.48%) 15.60% 15.46% 50.30% (11.21%) 17.33% ======= ======= ======= ======= ========= ======== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) .......................... $190,126 $186,978 $136,053 $108,719 $ 83,540 $107,315 Ratio of expenses to average net assets .............................. 2.01% 2.02% 2.05% 2.17% 2.25% 2.24% Ratio of expenses to average net assets excluding waiver ............. 2.01% 2.02% 2.05% 2.17% 2.25% -- Ratio of net investment income (loss) to average net assets ........ (1.20%) (1.12%) (0.76%) (0.80%) 0.26% 1.36% Portfolio turnover rate .............. 77% 64% 50% 40% 50% 26% Average commission rate on portfolio transactions .............. -- -- -- -- -- -- ======== ======== ======== ======== ========= ========
- --------- * For the period from January 1, 1995 to September 30, 1995. (a) Annualized. 10 CLASS B SHARES (CONTINUED)
MENTOR CAPITAL GROWTH PORTFOLIO ----------------------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92* ------------ ------------ ------------- ----------- ------------ ----------- ------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ..................... $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ............. (0.08) -- (0.04) 0.25 (0.04) 0.05 0.46 Net realized and unrealized gain (loss) on investments ............... 2.07 5.55 3.67 2.53 (0.26) 1.02 0.04 --------- --------- -------- ------- ------- ------- ---------- Total from investment operations ................ 1.99 5.55 3.63 2.78 (0.30) 1.07 0.50 LESS DISTRIBUTIONS Distributions from net investment income.......... (0.01) -- -- -- -- (0.06) (0.46) Distributions from capital gains ............. (1.94) (2.79) (0.50) (1.79) (0.13) -- -- --------- --------- -------- ------- ------- ------- ---------- Total Distributions ........ (1.95) (2.79) (0.50) (1.79) (0.13) (0.06) (0.46) --------- --------- -------- ------- ------- ------- ---------- NET ASSET VALUE, END OF PERIOD ..................... $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22 ========= ========= ======== ======= ======= ======= ========== Total Return ................ 9.86% 33.88% 23.64% 19.26% (2.00%) 7.52% 0.61% ========= ========= ======== ======= ======= ======= ========== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ............. $196,751 $ 113,587 $ 68,213 $57,648 $41,106 $57,030 $ 25,468 Ratio of expenses to average net assets ......... 2.09% 2.16% 2.18% 2.56% 2.46% 2.24% 1.86%(a) Ratio of expenses to average net assets excluding waiver ........... 2.09% 2.16% 2.18% 2.56% 2.46% 2.34% 2.16%(a) Ratio of net investment income to average net assets (loss) .............. (0.70%) (0.22%) (0.24%) (0.41%) (0.22%) 0.21% 0.83%(a) Portfolio turnover rate ..... 104% 64% 98% 157% 149% 192% 61% Average commission rate on portfolio transactions ............... $ 0.0692 $ 0.0697 $ 0.0688 -- -- -- -- ========== ========== ========== ======= ======= ======= ========== MENTOR BALANCED PORTFOLIO --------------------------------------------------------------------- YEAR YEAR YEAR PERIOD PERIOD ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95** 12/31/94*** ----------- ----------- ----------- ---------------- ---------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ..................... $ 17.61 $ 16.28 $ 14.85 $ 12.44 $ 12.50 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ............. 0.45 0.43 0.42 0.36 0.22 Net realized and unrealized gain (loss) on investments ............... 1.43 3.35 2.09 2.08 (0.09) -------- -------- -------- --------- --------- Total from investment operations ................ 1.88 3.78 2.51 2.44 0.13 LESS DISTRIBUTIONS Distributions from net investment income.......... (0.71) (0.43) (0.48) (0.03) (0.19) Distributions from capital gains ............. (5.09) (2.02) (0.60) -- -- --------- --------- --------- --------- --------- Total Distributions ........ (5.80) (2.45) (1.08) (0.03) (0.19) --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD ..................... $ 13.69 $ 17.61 $ 16.28 $ 14.85 $ 12.44 ========= ========= ========= ========= ========= Total Return ................ 11.86% 26.09% 18.00% 19.28% 1.00% ========= ========= ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ............. $ 5,645 $ 4,102 $ 3,825 $ 3,210 $ 2,911 Ratio of expenses to average net assets ......... 0.52% 0.50% 0.50% 0.50%(a) 0.50%(a) Ratio of expenses to average net assets excluding waiver ........... 2.12% 2.13% 2.06% 2.12%(a) 2.72%(a) Ratio of net investment income to average net assets (loss) .............. 2.63% 2.78% 2.83% 3.26%(a) 3.32%(a) Portfolio turnover rate ..... 89% 80% 103% 65% 71% Average commission rate on portfolio transactions ............... $0.0687 $ 0.0696 $ 0.0694 ========= ========= =========
- --------- * Reflects operations for the period from April 29, 1992 (commencement of operations) to September 30, 1992. ** For the period from January 1, 1995 to September 30, 1995. *** For the period from June 21, 1994 (commencement of operations) to December 31, 1994. (a) Annualized. 11 CLASS B SHARES (CONTINUED)
MENTOR INCOME AND GROWTH PORTFOLIO ------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 ------------ ------------ ----------- ----------- ----------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91 Income from investment operations .................. Net investment income (loss) ....................... 0.37 0.34 0.23 0.28 0.21 Net realized and unrealized gain (loss) on investments ....................................... 0.59 3.35 2.76 2.14 0.61 -------- -------- -------- ------- ------- Total from investment operations ................... 0.96 3.69 2.99 2.42 0.82 LESS DISTRIBUTIONS Distributions from net investment income ........... (0.36) (0.36) (0.21) (0.31) (0.19) Distributions from capital gains ................... (1.66) (1.92) (0.74) (0.25) (0.26) --------- --------- --------- ------- ------- Total Distributions ................................ (2.02) (2.28) (0.95) (0.56) (0.45) --------- --------- --------- ------- ------- NET ASSET VALUE, END OF PERIOD ...................... $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28 ========= ========= ========= ======= ======= Total Return ........................................ 5.01% 21.24% 18.26% 16.32% 5.66% ========= ========= ========= ======= ======= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ............ $143,846 $ 107,816 $ 66,548 $46,678 $43,219 Ratio of expenses to average net assets ............. 2.07% 2.10% 2.13% 2.43% 2.44% Ratio of expenses to average net assets excluding waiver ............................................. 2.07% 2.10% 2.13% 2.43% 2.44% Ratio of net investment income (loss) to average net assets ......................................... 1.95% 1.87% 1.32% 1.78% 1.51% Portfolio turnover rate ............................. 40% 75% 72% 62% 78% Average commission rate on portfolio transactions ....................................... $0.0540 $ 0.0515 $ 0.0492 -- -- ========= ========= ========= ======= ======= MENTOR INCOME AND GROWTH PORTFOLIO ---------------- YEAR ENDED 9/30/93* ---------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 14.14 Income from investment operations .................. Net investment income (loss) ....................... 0.05 Net realized and unrealized gain (loss) on investments ....................................... 0.77 --------- Total from investment operations ................... 0.82 LESS DISTRIBUTIONS Distributions from net investment income ........... (0.05) Distributions from capital gains ................... -- --------- Total Distributions ................................ (0.05) --------- NET ASSET VALUE, END OF PERIOD ...................... $ 14.91 ========= Total Return ........................................ 5.54% ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ............ $ 18,127 Ratio of expenses to average net assets ............. 2.31%(a) Ratio of expenses to average net assets excluding waiver ............................................. 2.69%(a) Ratio of net investment income (loss) to average net assets ......................................... 1.60%(a) Portfolio turnover rate ............................. 13% Average commission rate on portfolio transactions ....................................... -- ========= MENTOR PERPETUAL GLOBAL PORTFOLIO ----------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94** ------------ ------------- ------------- ----------- ------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 20.32 $ 17.46 $ 15.67 $ 14.15 $ 14.18 Income from investment operations .................. Net investment income (loss) ....................... (0.12) (0.02) (0.05) (0.05) (0.04) Net realized and unrealized gain (loss) on investments ....................................... (0.97) 3.51 2.64 1.57 0.01 -------- -------- -------- ------- ---------- Total from investment operations ................... (1.09) 3.49 2.59 1.52 (0.03) LESS DISTRIBUTIONS Distributions from net investment income ........... -- -- -- -- -- Distributions from capital gains ................... (1.02) (0.63) (0.80) -- -- -------- -------- -------- ------- ---------- Total Distributions ................................ (1.02) (0.63) (0.80) -- -- -------- -------- -------- ------- ---------- NET ASSET VALUE, END OF PERIOD ...................... $ 18.21 $ 20.32 $ 17.46 $ 15.67 $ 14.15 ======== ======== ======== ======= ========== Total Return ........................................ (5.65%) 20.74% 17.39% 10.74% (0.21%) ======== ======== ======== ======= ========== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ............ $ 99,277 $ 89,030 $ 42,131 $12,667 $ 7,987 Ratio of expenses to average net assets ............. 2.51% 2.64% 2.70% 2.72% 2.79%(a) Ratio of expenses to average net assets excluding waiver ............................................. 2.50% 2.64% 2.70% 2.79% 3.93%(a) Ratio of net investment income (loss) to average net assets ......................................... (0.77%) (0.68%) (0.91%) (0.40%) (0.82%)(a) Portfolio turnover rate ............................. 162% 128% 130% 155% 2% Average commission rate on portfolio transactions ....................................... $ 0.0188 $ 0.0319 $ 0.0320 -- -- ========= ========== ========== ======= ==========
- --------- * Reflects operations for the period from May 24, 1993 (commencement of operations) to September 30, 1993. ** Reflects operations for the period from March 29, 1994 (commencement of operations) to September 30, 1994. (a) Annualized. 12 CLASS B SHARES (CONTINUED)
MENTOR QUALITY INCOME PORTFOLIO ------------------------------------ YEAR YEAR YEAR ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 ------------ ----------- ----------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ........................... $ 13.18 $ 12.93 $ 13.31 Income from investment operations ............................. Net investment income (loss) .................................. 0.72 0.86 0.84 Net realized and unrealized gain (loss) on investments ........ 0.48 0.30 (0.38) ------- ------- ------- Total from investment operations .............................. 1.20 1.16 0.46 LESS DISTRIBUTIONS Distributions from net investment income ...................... (0.77) (0.91) (0.84) Distributions from capital gains .............................. -- -- -- -------- ------- ------- Total Distributions ........................................... (0.77) (0.91) (0.84) -------- ------- ------- NET ASSET VALUE, END OF PERIOD ................................. $ 13.61 $ 13.18 $ 12.93 ======== ======= ======= Total Return ................................................... 9.46% 9.29% 3.57% ======== ======= ======= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ....................... $112,901 $75,046 $58,239 Ratio of expenses to average net assets ........................ 1.55% 1.55% 1.55% Ratio of expenses to average net assets excluding waiver ....... 1.67% 1.68% 1.81% Ratio of net investment income (loss) to average net assets .... 5.22% 6.51% 6.36% Portfolio turnover rate ........................................ 114% 100% 254% Average commission rate on portfolio transactions .............. -- -- -- ======== ======= ======= MENTOR QUALITY INCOME PORTFOLIO ----------------------------------------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 9/30/95 9/30/94 9/30/93 9/30/92* ----------- ----------- ------------ ---------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ........................... $ 12.76 $ 14.06 $ 14.40 $ 14.30 Income from investment operations ............................. Net investment income (loss) .................................. 0.79 0.82 0.99 0.41 Net realized and unrealized gain (loss) on investments ........ 0.61 (1.37) (0.31) 0.10 ------- ------- -------- --------- Total from investment operations .............................. 1.40 (0.55) 0.68 0.51 LESS DISTRIBUTIONS Distributions from net investment income ...................... (0.85) (0.75) (1.02) (0.41) Distributions from capital gains .............................. -- -- -- -- ------- ------- -------- --------- Total Distributions ........................................... (0.85) (0.75) (1.02) (0.41) ------- ------- -------- --------- NET ASSET VALUE, END OF PERIOD ................................. $ 13.31 $ 12.76 $ 14.06 $ 14.40 ======= ======= ======== ========= Total Return ................................................... 11.33% (3.97%) 4.86% 3.24% ======= ======= ======== ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ....................... $62,155 $77,888 $127,346 $ 65,661 Ratio of expenses to average net assets ........................ 1.74% 1.88% 1.54% 0.83%(a) Ratio of expenses to average net assets excluding waiver ....... 1.79% 1.90% 1.72% 1.67%(a) Ratio of net investment income (loss) to average net assets .... 6.24% 6.21% 6.81% 7.53%(a) Portfolio turnover rate ........................................ 368% 455% 102% 9% Average commission rate on portfolio transactions .............. -- -- -- -- ======= ======= ======== =========
- --------- * Reflects operations for the period from April 29, 1992 (commencement of operations) to September 30, 1992. (a) Annualized. 13 CLASS B SHARES (CONTINUED)
MENTOR MUNICIPAL INCOME PORTFOLIO ---------------------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92* ----------- ------------ ------------ ------------ ------------ ------------ ----------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNNING OF PERIOD ................... $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78 $ 14.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ........... 1.30 0.71 0.75 0.74 0.74 0.82 0.29 Net realized and unrealized gain (loss) on investments ............. (0.14) 0.52 0.11 0.52 (1.54) 1.32 0.49 ------- -------- -------- -------- -------- -------- ---------- Total from investment operations .............. 1.16 1.23 0.86 1.26 (0.80) 2.14 0.78 LESS DISTRIBUTIONS Distributions from net investment income........ (0.71) (0.71) (0.76) (0.74) (0.73) (0.86) (0.29) Distributions from capital gains ........... -- (0.08) -- -- (0.10) -- -- ------- --------- -------- -------- -------- --------- ---------- Total Distributions ...... (0.71) (0.79) (0.76) (0.74) (0.83) (0.86) (0.29) ------- --------- -------- -------- -------- --------- ---------- NET ASSET VALUE, END OF PERIOD ................... $ 15.94 $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78 ======= ========= ======== ======== ======== ========= ========== Total Return .............. 7.70% 8.33% 5.87% 9.01% (5.34%) 15.27% 5.28% ======= ========= ======== ======== ======== ========= ========== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ........... $59,351 $ 44,272 $ 37,191 $ 39,493 $ 46,157 $ 50,976 $ 24,265 Ratio of expenses to average net assets ....... 1.67% 1.72% 1.74% 1.92% 1.74% 1.21 0.50%(a) Ratio of expenses to average net assets excluding waiver ......... 1.67% 1.72% 1.74% 1.92% 1.86% 1.89% 1.76%(a) Ratio of net investment income (loss) to average net assets ....... 4.13% 4.60% 4.95% 5.07% 4.93% 5.42% 5.80%(a) Portfolio turnover rate ... 62% 59% 46% 43% 87% 88% 0% ======= ========= ======== ======== ======== ========= ========== MENTOR MENTOR SHORT-DURATION HIGH INCOME INCOME PORTFOLIO PORTFOLIO --------------------------------------------------------------------- ---------------- YEAR YEAR YEAR PERIOD PERIOD PERIOD ENDED ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95** 12/31/94*** 9/30/98**** ----------- ----------- ----------- ---------------- ---------------- ---------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNNING OF PERIOD ................... $ 12.62 $ 12.50 $ 12.67 $ 12.18 $ 12.50 $ 12.00 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) ........... 0.66 0.73 0.73 0.59 0.41 0.22 Net realized and unrealized gain (loss) on investments ............. 0.16 0.12 (0.17) 0.52 (0.29) (1.05) ------- ------- ------- --------- --------- --------- Total from investment operations .............. 0.82 0.85 0.56 1.11 0.12 (0.83) LESS DISTRIBUTIONS Distributions from net investment income........ (0.69) (0.73) (0.73) (0.62) (0.44) (0.26) Distributions from capital gains ........... -- -- -- -- -- ------- ------- ------- --------- --------- Total Distributions ...... (0.73) (0.73) (0.62) (0.44) ------- ------- --------- --------- NET ASSET VALUE, END OF PERIOD ................... $ 12.75 $ 12.62 $ 12.50 $ 12.67 $ 12.18 $ 10.91 ======= ======= ======= ========= ========= ========= Total Return .............. 6.68% 6.96% 4.53% 9.22% 0.95% (6.95%) ======= ======= ======= ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ........... $53,908 $27,089 $24,517 $ 19,871 $ 17,144 $ 62,869 Ratio of expenses to average net assets ....... 1.16% 1.16% 1.16% 1.20% 1.29%(a) 1.10%(a) Ratio of expenses to average net assets excluding waiver ......... 1.44% 1.42% 1.56% 1.70%(a) 1.29%(a) 1.80%(a) Ratio of net investment income (loss) to average net assets ....... 4.94% 5.70% 5.60% 5.04%(a) 4.90%(a) 6.87%(a) Portfolio turnover rate ... 171% 75% 411% 126% 166% 27% ======= ======= ======= ========= ========= =========
- --------- * Reflects operations for the period from April 29, 1992 (commencement of operations) to September 30, 1992. ** For the period from January 1, 1995 to September 30, 1995. *** Reflects operations for the period from April 29, 1994 (commencement of operations) to December 31, 1994. **** For the period from June 23, 1995 (commencement of operations) to September 30, 1998. (a) Annualized. 14 INVESTMENT OBJECTIVES AND POLICIES Mentor Funds is offering shares of nine different diversified Portfolios by this Prospectus with varying investment objectives and policies. There can, of course, be no assurance that any Portfolio will achieve its investment objective. The differences in objectives and policies among the Portfolios can be expected to affect the investment return of each Portfolio and the degree of market and financial risk of an investment in each Portfolio. For a discussion of certain investment practices in which the Portfolios may engage, and the risks they may entail, see "Other Investment Practices and Risk Factors" below. The investment objectives of the Portfolios, other than those of the Short-Duration Income Portfolio, are fundamental policies and may not be changed without shareholder approval. Except for the investment policies designated in this Prospectus or the Statement of Additional Information as fundamental, the investment policies described herein are not fundamental and may be changed by the Trustees without shareholder approval. Any percentage limitation on a Portfolio's investments will apply only at the time of investment; a Portfolio would not be considered to have violated any such limitation, unless an excess or deficiency occurs or exists immediately after and as a result of an investment. In addition, a Portfolio will not necessarily dispose of a security when its rating is reduced below any applicable minimum rating, although the investment adviser or sub-adviser of the Portfolio will monitor the investment to determine whether continued investment in the security will assist in meeting the Portfolio's investment objective. Mentor Investment Advisors, LLC ("Mentor Advisors") is the investment adviser to each of the Portfolios other than the Mentor Perpetual Global Portfolio. Mentor Perpetual Advisors, LLC ("Mentor Perpetual") is the investment adviser to the Global Portfolio. MENTOR GROWTH PORTFOLIO The Growth Portfolio's investment objective is long-term capital growth. Although the Portfolio may receive current income from dividends, interest, and other sources, income is only an incidental consideration. The Portfolio attempts to achieve long-term capital growth by investing in a diversified portfolio of securities. Under normal circumstances at least 75% of the Portfolio's assets will be invested in common stocks of companies domiciled or located in the United States. Although the Portfolio may invest in companies of any size, the Portfolio invests principally in common stocks of small to mid-sized companies. The Portfolio invests in companies that, in the opinion of Mentor Advisors, have demonstrated earnings, asset values, or growth potential not yet reflected in their market price. A key indication of such undervaluation considered by Mentor Advisors is earnings growth which is above average compared to the S&P 500 Index. Other important factors in selecting investments include a strong balance sheet and product leadership in niche markets. Mentor Advisors believes that such investments may offer better than average potential for long-term capital growth. Small and mid-size companies may present greater opportunities for capital growth than do larger companies because of high potential earnings growth, but may also involve greater risk. They may have limited product lines, markets, or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the-counter market or on a regional securities exchange. As a result, these securities may change in value more than those of larger, more established companies. 15 MENTOR CAPITAL GROWTH PORTFOLIO The investment objective of the Capital Growth Portfolio is to provide long-term appreciation of capital. The Portfolio may invest in a wide variety of securities which Mentor Advisors believes offers the potential for capital appreciation over both the intermediate and long term. The Portfolio does not invest for current income. The Portfolio invests primarily in common stocks of companies believed by Mentor Advisors to have the potential for capital appreciation. The Portfolio may invest without limit in preferred stocks, investment-grade bonds, convertible preferred stocks, convertible debentures, and any other class or type of security Mentor Advisors believes offers the potential for capital appreciation. In selecting investments, Mentor Advisors will attempt to identify securities it believes will provide capital appreciation over the intermediate or long term due to changes in the financial condition of issuers, changes in financial conditions generally, or other factors. The Portfolio also may invest in fixed-income securities, and cash or money market investments, for temporary defensive purposes. MENTOR BALANCED PORTFOLIO Mentor Balanced Portfolio's investment objective is to seek capital growth and current income. The Portfolio invests in a diversified portfolio of equity and fixed-income securities which Mentor Advisors believes will produce both capital growth and current income. There can, of course, be no assurance that the Portfolio will achieve its investment objective. The Portfolio may invest in almost any type of security. The Portfolio's securities will include some securities selected primarily to provide for growth in value, others selected for current income, and other for stability of principal. Mentor Advisors will adjust the proportions of the Portfolio's assets invested in the different types of securities in response to changing market conditions. For example, under certain market conditions, Mentor Advisors may judge that most of the Portfolio's assets should be invested in equity securities, and that only a relatively small portion of the Portfolio's assets should be invested in fixed-income securities. At other times, Mentor Advisors may invest most of the Portfolio's assets in fixed-income securities, with a corresponding reduction in the portion of the Portfolio's assets invested in equity securities. Under normal circumstances, the Portfolio will invest at least 25% of its assets in fixed-income securities and 25% of its assets in equity securities. The Portfolio will invest in debt securities and preferred stocks of investment grade, and the Portfolio will seek under normal market conditions to maintain a portfolio of such securities with a dollar-weighted average rating of A or better. A security will be considered to be of "investment grade" if, at the time of investment by the Portfolio, it is rated at least Baa3 by Moody's Investors Service, Inc. or BBB- by Standard & Poor's Ratings Service, Inc. or the equivalent by another nationally recognized rating organization or, if unrated, determined by Mentor Advisors to be of comparable quality. Securities rated Baa or BBB lack outstanding investment characteristics and have speculative characteristics and are subject to greater credit and market risks than higher-rated securities. See the Appendix for descriptions of securities ratings assigned by Moody's and Standard & Poor's. At times Mentor Advisors may decide that conditions in the securities markets make pursuing the Portfolio's basic investment strategy inconsistent with the best interests of its shareholders. At such times, Mentor Advisors may temporarily use alternative investment strategies primarily designed to reduce fluctuations in the value of the Portfolio's assets. In implementing these "defensive" strategies, the Portfolio would be permitted to 16 hold all or any portion of its assets in high quality fixed-income securities, cash, or money market instruments. It is impossible to predict when, or for how long, the Portfolio will use these alternative strategies. MENTOR INCOME AND GROWTH PORTFOLIO SUB-ADVISER: WELLINGTON MANAGEMENT COMPANY, LLP The investment objective of the Income and Growth Portfolio is to provide a conservative combination of income and growth of capital consistent with capital protection. The Portfolio invests in a diversified portfolio of equity securities of companies Wellington Management Company, LLP ("Wellington Management") believes exhibit sound fundamental characteristics and in investment-grade fixed-income securities and U.S. Government securities, as described below. Wellington Management will manage the allocation of assets among asset classes based upon its analysis of economic conditions, relative fundamental values and the attractiveness of each asset class, and expected future returns of each asset class. The Portfolio will normally have some portion of its assets invested in each asset class at all times but may invest without limit in any asset class. The Portfolio may invest in a wide variety of equity securities, such as common stocks and preferred stocks, as well as debt securities convertible into equity securities or that are accompanied by warrants or other equity securities. In selecting equity investments, Wellington Management will attempt to identify securities it believes are conservatively valued. Within the equity asset class, the Portfolio seeks to achieve long-term appreciation of capital and a moderate income level by selecting investments in out-of-favor companies with sound fundamentals. These decisions are based primarily on Wellington Management's fundamental research and security valuations. Within the fixed-income asset class, Wellington Management seeks to invest in a portfolio that provides as high a level of current income as is consistent with prudent investment risk. The Portfolio may invest in debt securities of any maturity, preferred stocks, and other fixed-income instruments, including, for example, U.S. Government securities, corporate debt securities (including zero-coupon securities) and debt securities issued by foreign governments and by companies located outside the United States. The Portfolio will only invest in debt securities which are rated at the time of purchase Baa or better by Moody's or BBB or better by S&P or which, if unrated, are deemed by Wellington Management to be of comparable quality. While fixed-income securities rated Baa or BBB are considered to be of investment grade, they have speculative characteristics as well. A description of securities ratings is contained in the Appendix to this Prospectus. The Portfolio may invest up to 10% of its assets in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests in real estate. The Portfolio will limit its investment in real estate investment trusts to 10% of its total assets. Such investments may involve many of the risks of direct investment in real estate, such as declines in the value of real estate, risks related to general and local economic conditions, and adverse changes in interest rates. Other risks associated with real estate investment trusts include lack of diversification, borrower default, and voluntary liquidation. MENTOR PERPETUAL GLOBAL PORTFOLIO The investment objective of the Global Portfolio is to seek long-term growth of capital through a diversified portfolio of marketable securities made up primarily of equity securities, including common stocks, preferred stocks, securities convertible into common stocks, and warrants. The Portfolio may also invest in debt 17 securities and other fixed-income securities of private or governmental issuers (including zero-coupon securities) which Mentor Perpetual believes to be consistent with the Portfolio's objective. It is expected that the Portfolio's investments will normally be spread broadly around the world, although (except as described in the next sentence) there is no limit on the amount of the Portfolio's assets that may be invested in any single country. Under normal circumstances, the Portfolio will invest at least 65% of the value of its total assets in securities of at least three countries, one of which may be the United States. The Portfolio may invest all of its assets in securities of issuers outside the United States, and for temporary defensive purposes may at times invest all of its assets in securities of U.S. issuers. To the extent that the Portfolio invests a substantial portion of its assets in securities of issuers located in a single country, it will be more susceptible to adverse economic, business, political, or regulatory conditions in or affecting that country than if it were to invest in a geographically more diverse portfolio. The Portfolio may invest in closed-end investment companies holding foreign securities. The Portfolio also may hold a portion of its assets in cash or cash equivalents, including foreign and domestic money market instruments. It is likely that, at times, a substantial portion of the Portfolio's assets will be invested in securities of issuers in emerging markets, including under-developed and developing nations. Investments in emerging markets are subject to the same risks applicable to foreign investments generally although those risks may be increased due to conditions in such markets. For example, the securities markets and legal systems in emerging markets may only be in a developmental stage and may provide few, or none, of the advantages or protections of markets or legal systems available in more developed countries. Although many of the securities in which the Portfolio may invest are traded on securities exchanges, they may trade in limited volume, and the exchanges may not provide all of the conveniences or protections provided by securities exchanges in more developed markets. The Portfolio may also invest a substantial portion of its assets in securities traded in the over-the-counter markets and not on any exchange, which may affect the liquidity of the investment and expose the Portfolio to the credit risk of its counterparties in trading those investments. See "Other Investment Practices and Risk Factors -- Foreign securities." Mentor Perpetual may seek investment opportunities in securities of large, widely traded companies as well as securities of small, less well known companies. Small companies may present greater opportunities for investment return, but may also involve greater risk. They may have limited product lines, markets, or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume. As a result the prices of these securities may fluctuate more than prices of securities of larger, more established companies. Except as described below, debt and fixed-income securities in which the Portfolio may invest will be investment grade securities or those of equivalent quality as determined by Mentor Perpetual. The Portfolio may invest up to 5% of its total assets in debt securities rated Baa or below by Moody's, or BBB or below by S&P, or deemed by Mentor Perpetual to be of comparable quality, and may invest in securities rated as low as C by Moody's or D by S&P. Securities rated Baa or BBB lack outstanding investment characteristics and have speculative characteristics and are subject to greater credit and market risks than higher-rated securities. Securities rated below investment grade are commonly referred to as "junk bonds" and are predominately speculative. Securities rated D may be in default with respect to payment of principal or interest. A description of securities ratings is contained in the Appendix to this Prospectus. 18 MENTOR QUALITY INCOME PORTFOLIO The Quality Income Portfolio's investment objective is to seek high current income consistent with what Mentor Advisors believes to be prudent risk. The Portfolio may invest in debt securities, including both U.S. Government and corporate obligations, and in other income-producing securities, including preferred stocks and dividend-paying common stocks. The Portfolio may also hold a portion of its assets in cash or money market instruments. The Portfolio will normally invest at least 80% of its assets in U.S. Government securities and in other securities rated at least A by Moody's or S&P, or at a comparable rating by another nationally recognized rating organization, or, if unrated, determined by Mentor Advisors to be of comparable quality. The Portfolio may invest the remaining 20% of its assets in lower-rated securities, including securities rated below investment grade (or, if unrated, determined by Mentor Advisors to be of comparable quality). Securities rated below investment grade are considered to be of poor standing and predominantly speculative. Assurance of interest and principal payments or of maintenance of other terms of the securities' contract over any long period of time may be small. The Portfolio will not invest more than 10% of its assets in securities rated Ca or below by Moody's or CC or below by Standard & Poor's. See "Other Investment Practices and Risk Factors -- Lower-rated securities." A description of securities ratings is contained in the Appendix to this Prospectus. Mentor Advisors may take full advantage of the entire range of maturities of the securities in which the Portfolio may invest and may adjust the average maturity of the Portfolio's securities from time to time, depending on its assessment of relative yields on securities of different maturities and expectations of future changes in interest rates. The Portfolio may invest any portion of its assets in mortgage-backed certificates and other securities representing ownership interests in mortgage pools, including CMOs and certain stripped mortgage-backed securities (including certain "residual" interests), and in other asset-backed securities which involve certain risks. The Portfolio may also invest any portion of its assets in securities representing secured or unsecured interests in other types of assets, such as automobile finance or credit card receivables. See "Other Investment Practices and Risk Factors -- Mortgage-backed securities; other asset-backed securities" and " -- Other mortgage-related securities" below. The Portfolio may borrow money to invest in additional securities; this practice involves risks. See "Other Investment Practices and Risk Factors -- Leverage," below. The Portfolio may also engage in a variety of interest rate transactions, including swaps, caps, floors, and collars. See "Other Investment Practices and Risk Factors -- Interest rate transactions" below for a description of risks associated with these transactions. MENTOR MUNICIPAL INCOME PORTFOLIO SUB-ADVISER: VAN KAMPEN MANAGEMENT, INC. The investment objective of the Municipal Income Portfolio is to provide investors with a high level of current income exempt from federal regular income tax, consistent with preservation of capital. Under normal market conditions, the Portfolio will invest at least 80% of its total assets in tax-exempt municipal securities rated investment grade, or deemed by Van Kampen Management, Inc. ("Van Kampen") to be of comparable quality. The Portfolio may invest a substantial portion of its assets in municipal securities that pay interest that is a tax preference item under the federal alternative minimum tax. The Portfolio may not be a suitable investment for investors who are already subject to federal alternative minimum tax or who would become subject to federal alternative minimum tax as a result of an investment in the Portfolio. 19 Tax-exempt municipal securities are debt obligations issued by or on behalf of the governments of states (including the District of Columbia) and United States territories or possessions, and their political subdivisions, agencies, and instrumentalities, and certain interstate agencies, the interest on which, in the opinion of bond counsel, is exempt from federal income tax. The Portfolio may also invest up to 10% of its assets in tax-exempt money market funds, which will be considered tax-exempt municipal securities for this purpose. Up to 20% of the Portfolio's total assets may be invested in tax-exempt municipal securities rated between BB and B- by S&P or between Ba and B3 by Moody's (or equivalently rated short-term obligations) and unrated tax-exempt securities that Van Kampen considers to be of comparable quality. These securities are below investment grade and are considered to be of poor standing and predominantly speculative. Assurance of interest and principal payments or of maintenance of other terms of the securities' contract over any long period of time may be small. The Portfolio will not invest in securities rated below B- by S&P or below B3 by Moody's at the time of purchase. See "Other Investment Practices and Risk Factors -- Lower-rated securities." A description of securities ratings is contained in the Appendix to this Prospectus. The Portfolio may hold a portion of its assets in cash or money market instruments. The two principal classifications of municipal securities are "general obligation" and "special revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of principal and interest. Special revenue bonds are usually payable only from the revenues derived from a particular facility or class of facilities or from the proceeds of a special excise tax or other specific revenue source and generally are not payable from the unrestricted revenues of an issuer. Industrial development bonds and private activity bonds are usually special revenue bonds, the credit quality of which is normally directly related to the credit standing of the private user involved. There are, in addition, a variety of hybrid and special types of municipal securities, including variable rate securities, municipal notes, and municipal leases. Variable rate securities bear rates of interest that are adjusted periodically according to formulae intended to minimize fluctuation in values of the instruments. Municipal notes include tax, revenue, and bond anticipation notes of short maturities, generally less than three years, which are issued to obtain temporary funds for various public purposes. Municipal leases are obligations issued by state and local governments or authorities to finance the acquisition of equipment and facilities and may be considered illiquid. They may take the form of a lease, an installment purchase contract, a conditional sales contract, or a participation certificate on any of the above. No more than 5% of the net assets of the Portfolio will be invested in municipal leases. A more detailed description of the types of municipal securities in which the Portfolio may invest is included in the Statement of Additional Information. CONCENTRATION. The Portfolio generally will not invest more than 25% of its total assets in any one industry. Governmental issuers of municipal securities are not considered part of any "industry." However, municipal securities backed only by the assets and revenues of nongovernmental users may for this purpose be deemed to be issued by such nongovernmental users, and the 25% limitation would apply to such obligations. The Portfolio may invest more than 25% of its assets in a broader segment of the municipal securities market, such as revenue obligations of hospitals and other health care facilities, housing agency revenue obligations, or airport revenue obligations, if Van Kampen determines that the yields available from obligations in a particular segment of the market justify the additional risks associated with such concentration. Although such obligations could be supported by the credit of governmental users, or by the credit of nongovernmental users engaged in a number of industries, economic, business, political, and other developments generally affecting the revenues of such 20 users (for example, proposed legislation or pending court decisions affecting the financing of such projects and market factors affecting the demand for their services or products) may have a general adverse effect on all municipal securities in such a market segment. The Portfolio reserves the right to invest more than 25% of its assets in industrial development or private activity bonds or in issuers located in any individual state, although Van Kampen has no present intention to invest more than 25% of the Portfolio's assets in issuers located in the same state. If the Portfolio were to invest more than 25% of its assets in issuers located in one state, it would be more susceptible to adverse economic, business, or regulatory conditions in or affecting that state than if it were to invest in a geographically more diverse portfolio. MENTOR SHORT-DURATION INCOME PORTFOLIO The Short-Duration Income Portfolio's investment objective is to seek current income. As a secondary objective, the Portfolio seeks preservation of capital, to the extent consistent with its objective of current income. The Portfolio will normally invest at least 65% of its assets in debt securities with a "duration" of three years or less. The Portfolio may invest in U.S. Government securities and debt obligations of private issuers and in preferred stocks and dividend-paying common stocks, and may hold a portion of its assets in cash or money market instruments. The Portfolio may invest any portion of its assets in mortgage-backed certificates and other securities representing ownership interests in mortgage pools, including CMOs and certain other stripped mortgage-backed securities (including certain "residual" interests). The Portfolio may also invest any portion of its assets in securities representing secured or unsecured interests in other types of assets, such as automobile finance or credit card receivables. See "Other Investment Practices and Risk Factors -- Mortgage-backed securities; other asset-backed securities" and " -- Other mortgage-related securities" below for a description of these securities and risks they may entail. Traditionally, a debt security's "term to maturity" has been used to evaluate the sensitivity of the security's price to changes in interest rates (the security's interest-rate "volatility"). However, a security's term to maturity measures only the period of time until the last payment of principal or interest on the security, and does not take into account the timing of the various payments of principal or interest to be made prior to the instrument's maturity. By contrast, "duration" is a measure of the full stream of payments to be received on a debt instrument, including both interest and principal payments, based on their present values. Duration measures the periods of time between the present time and the time when the various interest and principal payments are scheduled or, in the case of a callable bond, expected to be received, and weights them by their present values. There are some situations where even the standard duration calculation does not properly reflect the interest-rate volatility of a security. For example, floating and variable rate securities often have final maturities of ten years or more; however, their interest-rate volatility is determined based principally on the period of time until their interest rates are reset and on the terms on which they may be reset. Another example where a security's interest-rate volatility is not properly measured by its duration is the case of mortgage-related securities. The stated final maturity of such securities may be up to 30 years, but the actual cash flow on the securities will be determined by the anticipated prepayment rates on the underlying mortgage loans. Therefore, the duration of such a security can change if anticipated prepayment rates change. In these and other similar situations, Mentor Advisors will estimate a security's duration using sophisticated analytical techniques that take into account such 21 factors as the expected prepayment rate on the security and how the prepayment rate might change under various market conditions, although there can be no assurance that any such estimation will accurately predict actual prepayment rates or their effect on the volatility or value of a security. The Portfolio will invest primarily in debt securities and preferred stocks of investment grade and, under normal market conditions, the Portfolio will seek to maintain a portfolio of securities with a dollar-weighted average rating of Baa/BBB or better. A security will be considered to be of "investment grade" if, at the time of investment by the Portfolio, it is rated at least Baa3 by Moody's or BBB- by S&P or the equivalent by another nationally recognized rating organization or, if unrated, determined by Mentor Advisors to be of comparable quality. Securities rated Baa or BBB lack outstanding investment characteristics and have speculative characteristics and are subject to greater credit and market risks than higher-rated securities. The Portfolio may invest up to 20% of its assets in securities rated below investment grade (or, if unrated, determined by Mentor Advisors to be of comparable quality). Securities rated below investment grade are considered to be of poor standing and predominantly speculative. Assurance of interest and principal payments or of maintenance of other terms of the securities' contract over any long period of time may be small. The Portfolio will not invest more than 10% of its assets in securities rated below Ca by Moody's or CC by Standard & Poor's. See "Other Investment Practices and Risk Factors -- Lower-rated securities." A description of securities ratings is contained in the Appendix to this Prospectus. The Portfolio may borrow money to invest in additional securities; this practice involves risks. See "Other Investment Practices and Risk Factors -- Leverage," below. The Portfolio may also engage in a variety of interest rate transactions, including swaps, caps, floors, and collars. See "Other Investment Practices and Risk Factors -- Interest rate transactions" below for a description of risks associated with these transactions. MENTOR HIGH INCOME PORTFOLIO SUB-ADVISER: VAN KAMPEN MANAGEMENT, INC. The Portfolio's investment objective is to seek high current income. Capital growth is a secondary objective when consistent with the objective of seeking high current income. Mentor Advisors is the Portfolio's investment adviser. Van Kampen serves as the sub-adviser to the Portfolio. Van Kampen purchases and sells securities for the Portfolio, and otherwise manages the investments of the Portfolio, subject to the overall supervision of Mentor Advisors. The Portfolio may invest in both lower-rated and higher-rated fixed-income securities, including debt securities, convertible securities, and preferred stocks that are consistent with its primary investment objective of high current income. The Portfolio's remaining assets may be held in cash or money market instruments, or invested in common stocks and other equity securities. The Portfolio may at times hold a substantial portion of its assets in mortgage-backed and other asset-backed securities. The Portfolio may invest in securities of any maturity. Van Kampen will adjust the expected average life of the investments held in the Portfolio from time to time, depending on its assessment of relative yields and risks of securities of different maturities and its expectations of future changes in interest rates. At times when the expected average life of the investments held by the Portfolio is longer, the values of the securities held by the Portfolio will generally change more in response to changes in interest rates than at times when the expected average life is shorter. 22 Differing yields on fixed-income securities of the same maturity are a function of several factors, including the relative financial strength of their issuers. Higher yields are generally available from securities in the lower categories of recognized rating agencies: Baa or lower by Moody's or BBB or lower by Standard & Poor's. The Portfolio may invest any portion of its assets (and normally will invest at least 65% of its assets) in such securities and in unrated securities determined by Van Kampen to be of comparable quality. The Portfolio will normally invest a substantial portion of its assets in securities rated below Baa by Moody's or BBB by Standard & Poor's and in unrated securities determined by Van Kampen to be of comparable quality. Securities rated below Baa by Moody's or BBB by Standard & Poor's are considered to be predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligations. Securities in the lowest rating categories may have extremely poor prospects of attaining any real investment standing and may be in default. The rating services' descriptions of securities in the lower rating categories, including their speculative characteristics, are set forth in the Appendix to this Prospectus. See "Other Investments Practices and Risk Factors -- lower-rated securities," below. The Portfolio may at times invest up to 10% of its assets in securities rated in the lowest grades (Ca or C in the case of Moody's and CC, C, or D in the case of Standard & Poor's) or in unrated securities determined by Van Kampen to be of comparable quality, if Van Kampen believes that there are prospects for an upgrade in a security's rating or a favorable conversion of a security into other securities. The Portfolio might also invest in such securities if Van Kampen were to believe that, upon completion of any contemplated exchange offer or reorganization involving a security or its issuer, the Portfolio would receive securities or other assets offering significant opportunities for capital appreciation or future high rates of current income. Securities ratings are based largely on the issuer's historical financial condition and the rating agencies' investment analysis at the time of rating. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition, which may be better or worse than the rating would indicate. The Portfolio seeks its secondary objective of capital growth, when consistent with its primary objective of seeking high current income, by investing in securities which may be expected to appreciate in value as a result of declines in long-term interest rates or of favorable developments affecting the business or prospects of the issuer which may improve the issuer's financial condition and credit rating. At times, Van Kampen may judge that conditions in the securities markets make pursuing the Portfolio's basic investment strategy inconsistent with the best interests of its shareholders. At such times Van Kampen may temporarily use alternative strategies, primarily designed to reduce fluctuations in the value of the Portfolio's assets. In implementing these "defensive" strategies, the Portfolio may invest without limitation in money market instruments and in U.S. Government or agency obligations, or invest in any other fixed-income security Van Kampen considers consistent with such defensive strategies. It is impossible to predict when, or for how long, the Portfolio will use such alternative strategies. The Portfolio will not invest more than 15% of its net assets (determined at the time of investment) in securities determined to be illiquid. Certain securities that are restricted as to resale may nonetheless be resold by the Portfolio in accordance with Rule 144A under the Securities Act of 1933, as amended. Such securities may be determined by Van Kampen to be liquid for purposes of compliance with the limitation on the Portfolio's investment in illiquid securities. There can, however, be no assurance that the Portfolio will be able to sell 23 such securities at any time when Van Kampen deems it advisable to do so or at prices prevailing for comparable securities that are more widely held. OTHER INVESTMENT PRACTICES AND RISK FACTORS Each of the Portfolios (except as noted below) may engage in the other investment practices described below. See the Statement of Additional Information for a more detailed description of these practices and certain risks they may involve. MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. Each of the Balanced, Short-Duration Income, High Income, Quality Income, and Income and Growth Portfolios may invest in mortgage-backed certificates and other securities representing ownership interests in mortgage pools, including CMOs and, in the case of the Quality Income and Short-Duration Income Portfolios, "residual" interests therein (described more fully below). Interest and principal payments on the mortgages underlying mortgage-backed securities are passed through to the holders of the mortgage-backed securities. Mortgage-backed securities currently offer yields higher than those available from many other types of fixed-income securities but because of their prepayment aspects, their price volatility and yield characteristics will change based on changes in prepayment rates. As a result, mortgage-backed securities are less effective than other securities as a means of "locking in" long-term interest rates. Generally, prepayment rates increase if interest rates fall and decrease if interest rates rise. For many types of mortgage-backed securities, this can result in unfavorable changes in price and yield characteristics in response to changes in interest rates and other market conditions. For example, as a result of their prepayment aspects, mortgage-backed securities have less potential for capital appreciation during periods of declining interest rates than other fixed-income securities of comparable maturities, although such obligations may have a comparable risk of decline in market value during periods of rising interest rates. Mortgage-backed securities have yield and maturity characteristics that are dependent upon the mortgages underlying them. Thus, unlike traditional debt securities, which may pay a fixed rate of interest until maturity when the entire principal amount comes due, payments on these securities may include both interest and a partial payment of principal. In addition to scheduled loan amortization, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans. Such prepayments may significantly shorten the effective durations of mortgage-backed securities, especially during periods of declining interest rates. Similarly, during periods of rising interest rates, a reduction in the rate of prepayments may significantly lengthen the effective durations of such securities. Each of the Balanced, High Income, Short-Duration Income, and Quality Income Portfolios may invest in stripped mortgage-backed securities. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage assets. A Portfolio may invest in both the interest-only -- or "IO" - -- class and the principal-only -- or "PO" -- class. The yield to maturity and price of an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the Portfolio's net asset value. This would typically be the case in an environment of falling interest rates. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Portfolio may under some circumstances fail to fully recoup its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for stripped mortgage-backed securities may be more volatile and less 24 liquid than that for other mortgage-backed securities, potentially limiting a Portfolio's ability to buy or sell those securities at any particular time. Certain mortgage-backed securities held by the Portfolios may permit the issuer at its option to "call," or redeem, its securities. If an issuer were to redeem securities held by a Portfolio during a time of declining interest rates, the Portfolio may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. Each of the Quality Income, Short-Duration Income, Balanced, Income and Growth, and High Income Portfolios may invest in securities representing interests in other types of financial assets, such as automobile-finance receivables or credit-card receivables. Such securities may or may not be secured by the receivables themselves or may be unsecured obligations of their issuers. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. For example, the laws of certain states may prevent or restrict repossession of collateral from a debtor. The Balanced, Quality Income, Short-Duration Income and High Income Portfolios may also invest in other types of mortgage-related securities, including any securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans or real property, including collateralized mortgage obligation "residual" interests. "Residual" interests represent the right to any excess cash flow remaining after all other payments are made among the various tranches of interests issued by structured mortgage-backed vehicles. The values of such interests are extremely sensitive to changes in interest rates and in prepayment rates on the underlying mortgages. In the event of a significant change in interest rates or other market conditions, the value of an investment by the Portfolio in such interests could be substantially reduced and the Portfolio may be unable to dispose of the interests at prices approximating the values the Portfolio had previously assigned to them or to recoup its initial investment in the interests. The Portfolios may invest in new types of mortgage-related securities that may be developed and marketed from time to time. If any of the Portfolios were to invest in such newly developed securities, shareholders would, where appropriate, be notified and this Prospectus would be revised accordingly. Mortgage-backed securities and other asset-backed securities are "derivative" securities and present certain special risks. The Portfolios may invest in a wide variety of such securities, including mortgage-backed and other asset-backed securities that will pay principal or interest only under certain circumstances, or in amounts that may increase or decrease substantially depending on changes in interest rates or other market factors. Such securities may experience extreme price volatility in response to changes in interest rates or other market factors; this may be especially true in the case of securities where the amounts of principal or interest paid, or the timing of such payments, varies widely depending on prevailing interest rates. A Portfolio's investment adviser or sub-adviser may not be able to obtain current market quotations for certain mortgage-backed or asset-backed securities at all times, or to obtain market quotations believed by it to reflect the values of such securities accurately. In such cases, a Portfolio's investment adviser or sub-adviser may be required to estimate the value of such a security using quotations provided by pricing services or securities dealers making a market in such securities, or based on other comparable securities or other bench-mark securities or interest rates. Mortgage-backed and other asset-backed securities in which a Portfolio may invest may be highly illiquid, and a Portfolio may not be able to sell such a security at a particular time or at the value it has placed on that security. 25 In calculating the value and duration of mortgage-backed or other asset-backed securities, a Portfolio's investment adviser or sub-adviser will be required to estimate the extent to which the values of the securities are likely to change in response to changes in interest rates or other market conditions, and the rate at which prepayments on the underlying mortgages or other assets are likely to occur under different scenarios. There can be no assurance that a Portfolio's investment adviser or sub-adviser will be able to predict the amount of principal or interest to be paid on any security under different interest rate or market conditions or that its predictions will be accurate, nor can there be any assurance that a Portfolio will recover the entire amount of the principal paid by it to purchase any such securities. ZERO-COUPON BONDS. Each of the Global, Income and Growth, Municipal Income, Balanced, High Income, Quality Income, and Short-Duration Income Portfolios may at times invest in so-called "zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount from face value and pay interest only at maturity rather than at intervals during the life of the security. Because zero-coupon bonds do not pay current interest, their value is subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest currently. Zero-coupon bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds that pay interest currently. Even though such bonds do not pay current interest in cash, a Portfolio is nonetheless required for federal income tax purposes to accrue interest income on such investments and to distribute such amounts at least annually to shareholders. Thus, a Portfolio could be required at times to liquidate other investments in order to satisfy this distribution requirement. PREMIUM SECURITIES. The Portfolios may at times invest in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amount payable on maturity. Although a Portfolio generally amortizes the amount of any such premium into income, the Portfolio may recognize a capital loss if such premium securities are called or sold prior to maturity and the call or sale price is less than the purchase price. Additionally, a Portfolio may recognize a capital loss if it holds such securities to maturity. LOWER-RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THE RISKS OF OWNING SHARES OF A MUTUAL FUND THAT INVESTS IN LOWER-RATED SECURITIES (SOMETIMES REFERRED TO AS "JUNK BONDS") BEFORE MAKING AN INVESTMENT IN THE QUALITY INCOME, HIGH INCOME, MUNICIPAL INCOME, OR SHORT DURATION INCOME PORTFOLIOS. The lower ratings of lower-rated securities held by a Portfolio reflect a greater possibility that adverse changes in the financial condition of the issuer, or in general economic conditions, or both, or an unanticipated rise in interest rates, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payment of interest and principal would likely make the values of securities held by a Portfolio more volatile and could limit a Portfolio's ability to sell its securities at prices approximating the values the Portfolio had placed on such securities. It is possible that legislation may be adopted in the future limiting the ability of certain financial institutions to purchase lower-rated securities; such legislation may adversely affect the liquidity of such securities. In the absence of a liquid trading market for securities held by it, a Portfolio may be unable at times to establish the fair market value of such securities. The rating assigned to a security by Moody's or Standard & Poor's does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. For more information about the rating services' descriptions of lower-rated securities, see the Appendix to this Prospectus. 26 Like those of other fixed-income securities, the values of lower-rated securities fluctuate in response to changes in interest rates. Thus, a decrease in interest rates will generally result in an increase in the value of a Portfolio's assets. Conversely, during periods of rising interest rates, the value of a Portfolio's assets will generally decline. In addition, the values of such securities are also affected by changes in general economic conditions and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of any fixed-income security and in the ability of an issuer to make payments of interest and principal may also affect the values of these investments. Changes in the values of portfolio securities generally will not affect cash income derived from such securities, but will affect a Portfolio's net asset value. A Portfolio will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase, although Mentor Advisors or Van Kampen, as the case may be, will monitor the investment to determine whether continued investment in the security will assist in meeting a Portfolio's investment objectives. Issuers of lower-rated securities are often highly leveraged, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. In addition, such issuers may not have more traditional methods of financing available to them, and may be unable to repay debt at maturity by refinancing. The risk of loss due to default in payment of interest or principal by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. Certain of the lower-rated securities in which a Portfolio may invest are issued to raise funds in connection with the acquisition of a company, in so-called "leveraged buy-out" transactions. The highly leveraged capital structure of such issuers may make them especially vulnerable to adverse changes in economic conditions. A Portfolio may invest in lower-rated securities which trade infrequently or in more limited volume than higher-rated securities (including illiquid securities), or which are restricted as to resale. In addition, a substantial portion of a Portfolio's assets may at times be invested in securities as to which the Portfolio, by itself or together with other accounts managed by Mentor Advisors and its affiliates (or by Van Kampen and its affiliates, as the case may be), holds a major portion or all of such securities, which may limit the liquidity of such securities. A Portfolio could find it difficult or impossible to sell illiquid securities when Mentor Advisors or Van Kampen, as the case may be, believes it advisable to do so or may be able to sell such securities only at prices lower than if such securities were more widely held. In many cases, such securities may be purchased in private placements and, accordingly, will be subject to restrictions on resale as a matter of contract or under securities laws. Under such circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing a Portfolio's net asset value. In order to enforce its rights in the event of a default under securities in cases where a Portfolio holds a major portion or all of the outstanding issue, a Portfolio may be required to take possession of and manage assets securing the issuer's obligations on such securities, which may increase the Portfolio's operating expenses and adversely affect the Portfolio's net asset value. A Portfolio may also be limited in its ability to enforce its rights and may incur greater costs in enforcing its rights in the event an issuer becomes the subject of bankruptcy proceedings. A Portfolio may at times invest in so-called "payment-in-kind" bonds. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds that pay interest currently. Even though 27 such bonds do not pay current interest in cash, a Portfolio is nonetheless required for Federal income tax purposes to accrue interest income on such investments and to distribute such amounts at least annually to shareholders. Thus, a Portfolio could be required at times to liquidate other investments in order to satisfy this distribution requirement. Certain securities held by a Portfolio may permit the issuer at its option to "call," or redeem, its securities. If an issuer were to redeem securities held by a Portfolio during a time of declining interest rates, the Portfolio may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. A Portfolio may at times invest in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amounts payable on maturity. A Portfolio does not amortize the premium paid for such securities in calculating its net investment income. Consequently, if such premium securities are called or sold prior to maturity, a Portfolio may recognize a capital loss to the extent the call or sale price is less than the purchase price. Additionally, a Portfolio will recognize a capital loss if its holds such securities to maturity. Mentor Advisors and Van Kampen seek to minimize the risks involved in investing in lower-rated securities through diversification and careful investment analysis. When a Portfolio invests in high yield securities in the lower rating categories, achievement of the Portfolio's goals depends more on its adviser's investment analysis than would be the case if the Portfolio were investing in securities in the higher rating categories. OPTIONS AND FUTURES. Each of the Portfolios may buy and sell call and put options on securities it owns to hedge against changes in net asset value or to realize a greater current return. In addition, through the purchase and sale of futures contracts and related options, the Portfolios may at times seek to hedge against fluctuations in net asset value and, to the extent consistent with applicable law, to increase its investment return. In addition, the Portfolios may buy and sell options and futures contracts (including index futures contracts, described below) to implement changes in its asset allocations among various market sectors, pending the sale of its existing investments and reinvestment in new securities. The Portfolios' ability to engage in options and futures strategies will depend on the availability of liquid markets in such instruments. It is impossible to predict the amount of trading interest that may exist in various types of options or futures contracts. Therefore, there is no assurance that the Portfolios will be able to utilize these instruments effectively for the purposes stated above. Although the Portfolios will only engage in options and futures transactions for limited purposes, those transactions involve certain risks which are described below and in the Statement of Additional Information. Transactions in options and futures contracts involve brokerage costs and may require the Portfolios to segregate assets to cover its outstanding positions. For more information, see the Statement of Additional Information. INDEX FUTURES AND OPTIONS. Each of the Portfolios may buy and sell index futures contracts ("index futures") and options on index futures and indices for hedging purposes (or may purchase warrants whose value is based on the value from time to time of one or more foreign securities indices). An "index futures" contract is a contract to buy or sell units of a particular bond or stock index at an agreed price on a specified future date. Depending on the change in value of the index between the time when a Portfolio enters into and terminates an index 28 futures or option transaction, the Portfolio realizes a gain or loss. The Portfolios may also, to the extent consistent with applicable law, buy and sell index futures and options to increase investment return. RISKS RELATED TO OPTIONS AND FUTURE STRATEGIES. Options and futures transactions involve costs and may result in losses. Certain risks arise because of the possibility of imperfect correlations between movements in the prices of futures and options and movements in the prices of the underlying security or index or of the securities held by a Portfolio that are the subject of a hedge. The successful use by a Portfolio of the strategies described above further depends on the ability of its investment adviser or sub-adviser to forecast market movements correctly. Other risks arise from a Portfolio's potential inability to close out futures or options positions. Although a Portfolio will enter into options or futures transactions only if its investment adviser or sub-adviser believes that a liquid secondary market exists for such option or futures contract, there can be no assurance that a Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. Transactions in options and futures contracts involve brokerage costs and may require a Portfolio to segregate assets to cover its outstanding positions. For more information, see the Statement of Additional Information. Federal tax considerations may also limit a Portfolio's ability to engage in options and futures transactions. Each Portfolio's options and futures contract transactions will generally be conducted on recognized exchanges. However, a Portfolio may purchase and sell options in transactions in the over-the-counter markets. A Portfolio's ability to terminate options in the over-the-counter markets may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions would be unable to meet their obligations to the Portfolio. A Portfolio will, however, engage in over-the-counter transactions only when appropriate exchange-traded transactions are not appropriate and when, in the opinion of its investment adviser or sub-adviser, the pricing mechanism and liquidity of the over-the-counter markets are satisfactory and the participants are responsible parties likely to meet their contractual obligations. The Portfolios will not purchase futures or options on futures or sell futures if as a result the sum of the initial margin deposits on the Portfolios' existing futures positions and premiums paid for outstanding options on futures contracts would exceed 5% of the Portfolios' assets. (For options that are "in-the-money" at the time of purchase, the amount by which the option is "in-the-money" is excluded from this calculation.) SECURITIES LOANS AND REPURCHASE AGREEMENTS. Each Portfolio, other than the Municipal Income Portfolio, may lend portfolio securities and may enter into repurchase agreements with banks, broker/dealers, and other recognized financial institutions. The Short-Duration Income Portfolio may enter into each type of transaction on up to 25% of its assets, and each of the Growth, Capital Growth, Global, Income and Growth, and Quality Income Portfolios may enter into each type of transaction on up to one-third of its assets. These transactions must be fully collateralized at all times, but involve some risk to a Portfolio if the other party should default on its obligations and the Portfolio is delayed or prevented from recovering the collateral. LEVERAGE. The Short-Duration Income Portfolio, the Quality Income Portfolio, the High Income, and the Balanced Portfolio may borrow money to invest in additional securities. Certain other Portfolios may engage in reverse repurchase agreements, forward commitments, and dollar-roll transactions described below and in the Statement of Additional Information, which may have the same economic effect as if the Portfolios had borrowed money. The use of borrowed money, known as "leverage," increases a Portfolio's market exposure and risk and may result in losses. When a Portfolio has borrowed money for leverage and its investments increase or decrease 29 in value, its net asset value will normally increase or decrease more than if it had not borrowed money for this purpose. The interest that the Portfolio must pay on borrowed money will reduce its net investment income, and may also either offset any potential capital gains or increase any losses. The Portfolios currently intend to use leverage in order to adjust the dollar-weighted average duration of their portfolios. A Portfolio will not always borrow money for investment and the extent to which a Portfolio will borrow money, and the amount it may borrow, depends on market conditions and interest rates. Successful use of leverage depends on an investment adviser's ability to predict market movements correctly. The amount of leverage (including leverage to the extent employed by a Portfolio through "reverse repurchase agreements," "dollar-roll" transactions, and "forward commitments," described below) that can exist at any one time will not exceed one-third of the value of a Portfolio's total assets (less all liabilities of the Portfolio other than the leverage). REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. Each Portfolio, other than the Growth Portfolio, may enter into "reverse" repurchase agreements. Each of the Capital Growth, Quality Income, Short-Duration Income, Balanced, High Income, Income and Growth, and Global Portfolios may do so with respect to up to one-third of its assets, and the Municipal Income Portfolio may do so with respect to up to 5% of its assets. "Reverse" repurchase agreements generally involve the sale by a Portfolio of securities held by it and an agreement to repurchase the securities at an agreed-upon price, date, and interest payment. Each Portfolio also may enter into forward commitments, in which a Portfolio buys securities for future delivery. Reverse repurchase agreements and forward commitments involve leverage, and may increase a Portfolio's overall investment exposure. Their use by a Portfolio may result in losses. The Short-Duration Income Portfolio and the Quality Income Portfolio may enter into reverse repurchase agreements to create investment leverage. DOLLAR-ROLL TRANSACTIONS. In order to enhance portfolio returns and manage prepayment risks, each Portfolio, other than the Growth and Municipal Income Portfolios may engage in dollar-roll transactions with respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a dollar-roll transaction, a Portfolio sells a mortgage-related security to a financial institution, such as a bank or broker/dealer, and simultaneously agrees to repurchase a substantially similar (I.E., same type, coupon, and maturity) security from the institution at a later date at an agreed upon price. The mortgage-related securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. Dollar-roll transactions involve leverage, and may increase a Portfolio's overall investment exposure. Their use by a Portfolio may result in losses. FOREIGN SECURITIES. Each Portfolio other than the Growth and Municipal Income Portfolios may invest in securities principally traded in foreign markets. The Capital Growth and Income and Growth Portfolios will limit such investments to 15% of their total assets. (Those percentage limitations do not apply to American Depository Receipts, Global Depository Receipts, and other U.S. dollar-denominated securities of issuers located outside the United States.) Since foreign securities are normally denominated and traded in foreign currencies, the values of a Portfolio's assets may be affected favorably or unfavorably by changes in currency exchange rates and by exchange control regulations. There may be less information publicly available about a foreign company than about a U.S. company, and foreign companies are not generally subject to accounting, auditing, and financial reporting standards and practices comparable to those in the United States. The securities of some foreign 30 companies are less liquid and at times more volatile than securities of comparable U.S. companies. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of a Portfolio's assets held abroad) and expenses not present in the settlement of domestic investments. In addition, there may be a possibility of nationalization or expropriation of assets, imposition of currency exchange controls, confiscatory taxation, political or financial instability, and diplomatic developments which could affect the value of a Portfolio's investments in certain foreign countries. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit a Portfolio's ability to invest in securities of certain issuers located in those foreign countries. Special tax considerations apply to foreign securities. A Portfolio may buy or sell foreign currencies and options and futures contracts on foreign currencies for hedging purposes in connection with its foreign investments as described more fully below. A Portfolio may invest in American Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs"), which represent interests in foreign securities held by a bank, trust company, or other organization. Investments in ADRs and GDRs are subject to many of the same risks of investing in foreign securities generally. The risks described above are typically increased to the extent that a Portfolio invests in securities traded in underdeveloped and developing nations, which are sometimes referred to as "emerging markets." FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Each Portfolio that may invest in foreign securities may engage in foreign currency exchange transactions to protect against uncertainty in the level of future currency exchange rates. A Portfolio may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging"). A Portfolio also may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which a Portfolio contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. A Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with transaction hedging. A Portfolio may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and may purchase and sell foreign currency futures contracts, for hedging and not for speculation. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange- traded contracts and have margin requirements. For transaction hedging purposes, a Portfolio may also purchase and sell call and put options on foreign currency futures contracts and on foreign currencies. A Portfolio may engage in position hedging to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in value of a currency in which securities the Portfolio intends to buy are denominated). For position hedging purposes, a Portfolio may purchase or sell foreign currency futures contracts and foreign currency forward contracts, and may purchase and sell put and call options on foreign currency futures contracts and on foreign currencies. In connection with position hedging, a Portfolio may also purchase or sell foreign currencies on a spot basis. 31 Although there is no limit to the amount of a Portfolio's assets that may be invested in foreign currency exchange and foreign currency forward contacts, a Portfolio will only enter into such transactions to the extent necessary to effect the hedging transactions described above. INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of its portfolio from interest rate fluctuations and to adjust the interest-rate sensitivity of its portfolio, each of the Global, Balanced, High Income, Quality Income, and Short-Duration Income Portfolios may enter into interest rate swaps and other interest rate transactions, such as interest rate caps, floors, and collars. Interest rate swaps involve the exchange by a Portfolio with another party of different types of interest-rate streams (E.G. an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal). The purchase of an interest rate cap entitles the purchaser to receive payments on a notional principal amount from the party selling the cap to the extent that a specified index exceeds a predetermined interest rate or amount. The purchase of a floor entitles the purchaser to receive payments on a notional principal amount from the party selling the floor to the extent that a specified index falls below a predetermined interest rate or amount. A collar is a combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates or values. Each Portfolio intends to use these interest rate transactions as a hedge and not as a speculative investment. A Portfolio's ability to engage in certain interest rate transactions may be limited by tax considerations. The use of interest rate swaps and other interest rate transactions is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If a Portfolio's investment adviser or sub-adviser is incorrect in its forecasts of market values, interest rates, or other applicable factors, the investment performance of a Portfolio would be less favorable than it would have been if this investment technique were not used. INDEXED SECURITIES. The Global Portfolio may invest in indexed securities, the values of which are linked to currencies, interest rates, commodities, indices, or other financial indicators. Investment in indexed securities involves certain risks. In addition to the credit risk of the securities issuer and normal risks of price changes in response to changes in interest rates, the principal amount of indexed securities may decrease as a result of changes in the value of the reference instruments. Also, in the case of certain indexed securities where the interest rate is linked to a reference instrument, the interest rate may be reduced to zero and any further declines in the value of the security may then reduce the principal amount payable on maturity. Further, indexed securities may be more volatile than the reference instruments underlying indexed securities. PORTFOLIO TURNOVER. The length of time a Portfolio has held a particular security is not generally a consideration in investment decisions. A change in the securities held by a Portfolio is known as "portfolio turnover." As a result of each Portfolio's investment policies, under certain market conditions its portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense to a Portfolio, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. Such transactions may result in realization of taxable gains. The portfolio turnover rate for the High Income Portfolio is not expected to exceed 200% for the current fiscal year. Portfolio turnover rates for the ten most recent fiscal years (or for the life of a Portfolio if shorter) for the other Funds are contained in the section "Financial Highlights." 32 VALUING THE PORTFOLIOS' SHARES Each Portfolio calculates the net asset value of a share of each class by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Portfolio securities for which market quotations are readily available are stated at market value. Short-term investments that will mature in 60 days or less are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair values. The net asset value for Class A shares will generally differ from that of Class B shares due to the variance in daily net income realized by and dividends paid on each class of shares, and any differences in the expenses of the different classes. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rates or at such other rates as may be used in accordance with procedures approved by the Trustees. As a result, fluctuations in the values of such currencies in relation to the U.S. dollar will affect the net asset value of a Portfolio's shares even though there has not been any change in the values of such securities as quoted in such foreign currencies. SALES ARRANGEMENTS This Prospectus offers investors two classes of shares which bear sales charges in different forms and amounts and which bear different levels of expenses: CLASS A SHARES. An investor who purchases Class A shares pays a sales charge at the time of purchase. As a result, Class A shares are not subject to any charges when they are redeemed, except that sales at net asset value in excess of $1 million are subject to a contingent deferred sales charge (a "CDSC"). Certain purchases of Class A shares qualify for reduced sales charges. Class A shares currently bear no 12b-1 fees. See "How to Buy Shares -- Class A shares." CLASS B SHARES. Class B shares are sold without an initial sales charge, but are subject to a CDSC of up to 4% if redeemed within five or six years, depending on the Portfolio. Class B shares also bear 12b-1 fees. Class B shares provide an investor the benefit of putting all of the investor's money to work from the time the investment is made, but will have a higher expense ratio and pay lower dividends than Class A shares due to the 12b-1 fees. If you purchase shares through an asset-allocation program, you may also be eligible to purchase Class B shares through the "BL Purchase Program." See "How to Buy Shares -- Class B shares." WHICH ARRANGEMENT IS FOR YOU? The decision as to which class of shares provides a suitable investment for an investor depends on a number of factors, including the amount and intended length of the investment. Investors making investments that qualify for reduced sales charges might consider Class A shares. Investors who prefer not to pay an initial sales charge might consider Class B shares. Investors purchasing shares through an asset-allocation program may wish to purchase shares through the BL Purchase Program. For more information about these sales arrangements, consult your investment dealer or Mentor Services Company, Inc. ("Mentor Services Company"). Sales personnel may receive different compensation depending on which class of shares they sell. Investors may be charged a fee if they effect transactions through a broker or agent. Shares may only be exchanged for shares of the same class of another Mentor fund and for shares of Cash Resource U.S. Government Money Market Fund. See "How to Exchange Shares." 33 HOW TO BUY SHARES You can open a Portfolio account with as little as $1,000 and make additional investments at any time with as little at $50. Investments under IRAs and investments under qualified retirement plans are subject to a minimum initial investment of $250. The minimum initial investment may be waived for current and retired Trustees, and current and retired employees of Mentor Funds or Mentor Services Company or its affiliates. You can buy Portfolio shares BY COMPLETING THE ENCLOSED NEW ACCOUNT FORM and sending it to c/o Mentor Funds Boston Financial Data Services at 2 Heritage Drive, North Quincy MA 02171, along with a check or money order made payable to Mentor Funds; THROUGH YOUR FINANCIAL INSTITUTION, which may be an investment dealer, a bank, or another institution; OR THROUGH AUTOMATIC INVESTING. If you do not have a dealer, Mentor Services Company can refer you to one. AUTOMATIC INVESTMENT PLAN. Once you have made the initial minimum investment in a Portfolio, you can make regular investments of $50 or more on a monthly or quarterly basis through automatic deductions from your bank checking account. Application forms are available from your investment dealer or through Mentor Services Company. Shares are sold at a price based on a Portfolio's net asset value next determined after Mentor Distributors, LLC ("Mentor Distributors") receives your purchase order. In most cases, in order to receive that day's public offering price, Mentor Distributors or your investment dealer must receive your order before the close of regular trading on the New York Stock Exchange. If you buy shares through your investment dealer, the dealer must ensure that Mentor Distributors receives your order before the close of regular trading on the New York Stock Exchange for you to receive that day's public offering price. CLASS A SHARES. The public offering price of Class A shares is the net asset value plus a sales charge. The Portfolio receives the net asset value. The sales charge varies depending on the size of your purchase and is allocated between your investment dealer and Mentor Distributors. The current sales charges for the GROWTH, CAPITAL GROWTH, BALANCED, INCOME AND GROWTH, and GLOBAL PORTFOLIOS are:
SALES CHARGE AS A SALES CHARGE PERCENTAGE OF AS A PUBLIC PERCENTAGE OF OFFERING NET AMOUNT DEALER PRICE INVESTED COMMISSION* --------------- -------------- ------------ Less than $50,000......................... 5.75% 6.10% 5.00% $50,000 but less than $100,000............ 4.75% 4.99% 4.00% $100,000 but less than $250,000........... 3.75% 3.90% 3.00% $250,000 but less than $500,000 .......... 3.00% 3.09% 2.50% $500,000 but less than $1 million......... 2.00% 2.04% 1.75% $1 million or more........................ 0% 0% (see below)
34 The current sales charges for the MUNICIPAL INCOME, HIGH INCOME, and QUALITY INCOME PORTFOLIOS are:
SALES CHARGE AS A SALES CHARGE PERCENTAGE OF AS A PUBLIC PERCENTAGE OF OFFERING NET AMOUNT DEALER PRICE INVESTED COMMISSION* --------------- -------------- ------------ 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)
- ---------- * At the discretion of Mentor Distributors, the entire sales charge may at times be reallowed to dealers. The Staff of the Securities and Exchange Commission has indicated that dealers who receive more than 90% of the sales charge may be considered underwriters. Shares of the SHORT-DURATION INCOME PORTFOLIO are sold subject to a sales charge of 1%. There is no initial sales charge on purchases of Class A shares of $1 million or more. However, a CDSC of 1.00% is imposed on redemptions of such shares within the first year after purchase, based on the lower of the shares' cost and current net asset value. A CDSC is also imposed on any shares purchased without a sales charge as part of a purchase of shares of $1 million or more under a purchase accumulation plan. Contact Mentor Services Company for more information. You may be eligible to buy Class A shares at reduced sales charges. Consult your investment dealer or Mentor Services Company for details about Quantity Discounts and Accumulated Purchases, Letters of Intent, the Reinvestment Privilege, Concurrent Purchases, and the Automatic Investment Plan. Descriptions are also included in the New Account Form or are available from Mentor Services Company. Shares may be sold at net asset value to certain categories of investors, including to shareholders of other mutual funds who invest in Mentor Funds in response to certain promotional activities, and the CDSC may be waived under certain circumstances. The sales charges shown above will not apply to shares purchased by you if you purchase shares through EVEREN Securities, Inc. with the redemption proceeds received by you within the preceding 90 days from the sale of shares of most non-Mentor investment companies. No CDSC will apply to these purchases. EVEREN Securities, Inc. may compensate your investment dealer in connection with any such purchase. Sales charges may similarly not apply to shares purchased through other financial institutions that have made arrangements with Mentor Distributors. Contact your financial institution or Mentor Services Company for more information. See "How to Buy Shares -- General" below. CLASS B SHARES. Class B shares are sold without an initial sales charge, although a CDSC will be imposed if you redeem shares within five or six years of purchase, depending on the Portfolio. The following types of shares may be redeemed without charge: (i) shares acquired by reinvestment of distributions and (ii) shares otherwise exempt from the CDSC, as described in the Example below. The amount of CDSC is determined as a percentage of the lesser of the current market value or the cost of the shares being redeemed. The amount of the 35 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:
CONTINGENT DEFERRED SALES CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF CHARGE AS A PERCENTAGE OF APPLICABLE AMOUNT APPLICABLE AMOUNT REDEEMED (GROWTH, CAPITAL REDEEMED (QUALITY INCOME, GROWTH, BALANCED, INCOME HIGH INCOME, MUNICIPAL INCOME, YEARS SINCE PURCHASE PAYMENT AND GROWTH, AND GLOBAL AND SHORT-DURATION INCOME MADE PORTFOLIOS) PORTFOLIOS) - ------------------------------ --------------------------- ------------------------------- 1 4.0% 4.0% 2 4.0% 4.0% 3 3.0% 3.0% 4 2.0% 2.0% 5 1.0% 1.0% 6 None 1.0% 7+ None None
For information on how sales charges are calculated if you exchange your shares, see "How To Exchange Shares." THE BL PURCHASE PROGRAM. If you purchase Class B shares through an asset-allocation program sponsored by your broker-dealer or other financial institution, you may elect to participate in the BL Purchase Program. Shares purchased through this Program are not subject to the CDSC shown above. Rather, a CDSC of 1.00% will be imposed on redemptions of such shares within the first year after purchase, based on the lower of the shares' cost and current net asset value. Your broker-dealer or other financial institution is responsible for making the election on your behalf to invest through the Program. Accordingly, if you wish to purchase shares through this Program, you should instruct your broker-dealer or financial institution to do so. GENERAL A Portfolio may sell its Class A shares without a sales charge and may waive the CDSC on shares redeemed by Mentor Funds' current and retired Trustees (and their families), current and retired employees (and their families) of Mentor Services Company, each investment adviser or sub-adviser, and each of their affiliates, registered representatives and other employees (and their families) of broker-dealers having sales agreements with Mentor Distributors, employees (and their families) of financial institutions having sales agreements with Mentor Distributors (or otherwise having an arrangement with a broker-dealer or financial institution with respect to sales of Portfolio shares), financial institution trust departments investing an aggregate of $1 million or more in one or more funds in the Mentor family, clients of certain administrators of tax-qualified plans, employer-sponsored retirement plans, tax-qualified plans when proceeds from repayments of loans to participants are invested (or reinvested) in funds in the Mentor family, shares redeemed under a Portfolio's Systematic Withdrawal Plan (limited to 10% of a shareholder's account in any calendar year), and "wrap accounts" for the benefit of clients of financial planners adhering to certain standards established by Mentor Services Company or its affiliates. A Portfolio may sell shares without a sales charge or a CDSC in connection with the acquisition by the Portfolio of assets of an investment company or personal holding company. In addition, the CDSC may be 36 waived in the case of (i) redemptions of shares held at the time a shareholder dies or becomes disabled, including the shares of a shareholder who owns the shares with his or her spouse as joint tenants with right of survivorship, provided that the redemption is requested within one year of the death or initial determination of disability; (ii) redemptions in connection with the following retirement plan distributions: (a) lump-sum or other distributions from a qualified retirement plan following retirement; (b) distributions from an IRA, Keogh Plan, or Custodial Account under Section 403(b)(7) of the Internal Revenue Code following attainment of age 59 1/2; and (c) a tax-free return of an excess contribution to an IRA; (iii) redemptions by pension or profit sharing plans sponsored by Mentor Investment Group or an affiliate; and (iv) redemptions by pension or profit sharing plans of which Mentor Investment Group or any affiliate serves as a plan fiduciary. In addition, certain retirement plans with over 200 employees may purchase Class A shares at net asset value without a sales charge. In addition, a Portfolio may sell its Class A shares without a sales charge and may waive the CDSC on shares redeemed by shareholders investing through brokerage or similar accounts sponsored by financial institutions having agreements with Mentor Distributors or Mentor Services Company, Inc., where the shareholder pays account fees to its financial institution based on the asset value of the shareholder's account with the financial institution from time to time. A Portfolio may sell its Class A shares without a sales charge to shareholders of other mutual funds who invest in Mentor Funds in response to certain promotional activities (in which case a CDSC of 1% may apply for a period of years after the purchase). Contact Mentor Services Company. If you invest through a broker-dealer or other financial institution, your broker-dealer or other financial institution will be responsible for electing on your behalf to take advantage of any of these reduced sales charges or waivers described above. Please instruct your broker-dealer or other financial institution accordingly. Shareholders of other funds in the Mentor family may be entitled to exchange their shares for, or reinvest distributions from their funds in, shares of a Portfolio at net asset value. In determining whether a CDSC is payable in respect of the shares redeemed, a Portfolio will first redeem the shares held longest (together with any shares received upon reinvestment of distributions with respect to those shares). Any of the shares being redeemed which were acquired by reinvestment of distributions will be redeemed without a CDSC, and amounts representing capital appreciation will not be subject to a CDSC. See the Example below. EXAMPLE: You have purchased 100 shares at $10 per share. The second year after your purchase, your investment's net asset value per share has increased by $2 to $12, and you have gained 10 additional shares through dividend reinvestment. If you redeem 50 of those shares (including shares purchased through reinvestment of distributions on those 100 shares) at this time, your CDSC will be calculated as follows: o Proceeds of 50 shares redeemed at $12 per share $600 o Minus proceeds of 10 shares not subject to a CDSC because they were acquired through dividend reinvestment (10 x $12) -120 o Minus appreciation on remaining shares, also not subject to CDSC (40 x $2) -80 ---- o Amount subject to a CDSC $400 37 Mentor Distributors receives the entire amount of any CDSC you pay. Consult Mentor Services Company for more information. If you are considering redeeming or exchanging shares of a Portfolio or transferring shares to another person shortly after purchase, you should pay for those shares with a certified check to avoid any delay in redemption, exchange, or transfer. Otherwise the Portfolio may delay payment until the purchase price of those shares has been collected or, if you redeem by telephone, until 15 calendar days after the purchase date. To eliminate the need for safekeeping, certificates will not be issued for your shares unless you request them. Because of the relatively high cost of maintaining accounts, each Portfolio reserves the right to redeem, upon not less than 60 days' notice, any Portfolio account below $500 as a result of redemptions. A shareholder may, however, avoid such a redemption by a Portfolio by increasing investment in shares of that Portfolio to a value of $500 or more during such 60-day period. Mentor Distributors, Mentor Advisors, the sub-advisers, or affiliates thereof, at their own expense and out of their own assets (or in conjunction with other entities), may also periodically sponsor programs that offer additional compensation in connection with sales of shares of the Portfolios. Compensation may include, but is not limited to, financial assistance to dealers in connection with conferences, sales, or training programs for their employees, seminars for the public, advertising or sales campaigns, or other dealer-sponsored special events. In some instances, this compensation may be made available only to certain dealers whose representatives have sold or are expected to sell significant amounts of shares. Dealers may not use sales of Mentor Funds' shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc. Certain dealers may not sell all classes of shares. In all cases Mentor Advisors or the Distributors reserve the right to reject any particular investment. REINVESTMENT PRIVILEGE. If you redeem Class A or B shares of any Portfolio, you have a one-time right, within 60 days, to reinvest the redemption proceeds plus the amount of CDSC you paid, if any, at the next- determined net asset value. Front-end sales charges will not apply to such reinvestment. Mentor Distributors must be notified in writing by you or by your financial institution of the reinvestment for you to recover the CDSC, or to eliminate the front-end sales charge. If you redeem shares in any of the Portfolios, there may be tax consequences. DISTRIBUTION PLANS (CLASS B SHARES) Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus, Ohio 43219, is the principal distributor for the Portfolios' shares. Mentor Distributors is not obligated to sell any specific amount of shares of any Portfolio. Mentor Distributors is a wholly owned subsidiary of BISYS Fund Services, Inc. Each of the Portfolios has adopted a Distribution Plan under Rule 12b-1 with respect to its Class B shares (each, a "Class B Plan") providing for payments by the Portfolio to its distributor from the assets attributable to the Portfolio's Class B shares at the annual rate set out under "Expense Summary -- Annual Portfolio Operating Expenses" above. (The Trustees may reduce the amount of payments or suspend the Class B Plan for such 38 periods as they may determine. A Portfolio's distributor also receives the proceeds of any CDSC imposed on redemptions of shares). Payments under the Plans are intended to compensate a Portfolio's distributor for services provided and expenses incurred by it as principal underwriter of a Portfolio's Class B shares. A Portfolio's distributor may select financial institutions (such as a broker/dealer or bank) to provide sales support services as agents for their clients or customers who beneficially own Class B shares of the Portfolios. Financial institutions will receive fees from a Portfolio's distributor based upon Class B shares owned by their clients or customers. The schedules of such fees and the basis upon which such fees will be paid will be determined from time to time by a Portfolio's distributor. A Portfolio's distributor may suspend or modify such payments to dealers. Such payments are also subject to the continuation of the relevant Class B Plan, the terms of any agreements between dealers and a Portfolio's distributor, and any applicable limits imposed by the National Association of Securities Dealers, Inc. Mentor Services Company, a wholly owned subsidiary of Mentor Investment Group, provides marketing-related services in respect of the Portfolios. Mentor Services Company and its affiliates will receive from Mentor Distributors substantially all amounts received or retained by Mentor Distributors in respect of the distribution of the Portfolios' shares, including any amounts paid to Mentor Distributors under the Portfolios' Class B Plans. In addition, Mentor Services Company receives from Mentor Distributors an amount equal to all CDSC's received by Mentor Distributors. HOW TO SELL SHARES You can sell your shares in any Portfolio to that Portfolio any day the New York Stock Exchange is open, either directly to the Portfolio or through your investment dealer. A Portfolio will only redeem shares for which it has received payment. SELLING SHARES DIRECTLY TO A PORTFOLIO. Send a signed letter of instruction and stock power form, along with any certificates that represent shares you want to sell, to Mentor Funds, c/o Boston Financial Data Services, Inc. ("BFDS"), 2 Heritage Drive, North Quincy, Massachusetts 02171. The price you will receive is the net asset value next calculated after your request is received in proper form less any applicable CDSC. In order to receive that day's net asset value, your request must be received before the close of regular trading on the New York Stock Exchange. If you sell shares having a net asset value of $50,000 or more or if you want your redemption proceeds payable to you at a different address or to someone else, the signatures of registered owners or their legal representatives must be guaranteed by a bank, broker-dealer, or certain other financial institutions. Contact Mentor Services Company for more information about where to obtain a signature guarantee. Stock power forms are available from your investment dealer, Mentor Services Company, and many commercial banks. Mentor Distributor usually requires additional documentation for the sale of shares by a corporation, partnership, agent, or fiduciary, or surviving joint owner. Contact Mentor Services Company for details. SELLING SHARES BY TELEPHONE. You may use the Telephone Redemption Privilege to redeem shares from your account unless you have notified Mentor Services Company of an address change within the preceding 15 days. Unless an investor indicates otherwise on the New Account Form, Mentor Services Company will be authorized 39 to act upon redemption and transfer instructions received by telephone from a shareholder, or any person claiming to act as his or her representative, who can provide Mentor Services Company with his or her account registration and address as it appears on Mentor Services Company's records. Mentor Services Company will employ these and other reasonable procedures to confirm that instructions communicated by telephone are genuine; if it fails to employ reasonable procedures, Mentor Services Company may be liable for any losses due to unauthorized or fraudulent instructions. For more information, consult Mentor Services Company. During periods of unusual market changes and shareholder activity, you may experience delays in contacting Mentor Services Company by telephone in which case you may wish to submit a written redemption request, as described above, or contact your investment dealer, as described below. The Telephone Redemption Privilege may be modified or terminated without notice. SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must receive your request before the close of regular trading on the New York Stock Exchange to receive that day's net asset value. Your dealer will be responsible for furnishing all necessary documentation to Mentor Services Company, and may charge you for its services. SYSTEMATIC WITHDRAWAL PROGRAM. You may redeem Class A or B shares of a Portfolio through periodic withdrawals for a predetermined amount. Only shareholders with accounts valued at $10,000 or more are eligible to participate. Class B shares redeemed under the Systematic Withdrawal Program are not subject to a CDSC, but the aggregate withdrawals of Class B shares in any year are limited to 10% of the value of the account at the time of enrollment. Contact Mentor Services Company for more information. GENERAL. The Portfolios generally send you payment for your shares the business day after your request is received. Under unusual circumstances, the Portfolios may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. The Portfolios reserve the right, if conditions exist which make cash payments undesirable, to honor any request for redemption by making payment in whole or in part in securities valued in the same way as they would be valued for purposes of computing the Portfolios' per share net asset value. If payment is made in securities, a shareholder may incur brokerage expenses in converting those securities into cash. HOW TO EXCHANGE SHARES Except as otherwise described below, you can exchange your shares in a Portfolio worth at least $1,000 for shares of the same class of any other Portfolio offered by this Prospectus and certain other portfolios in the Mentor family at net asset value beginning 15 days after purchase. You may also exchange shares of any Portfolio for shares of Cash Resource U.S. Government Money Market Fund (the "Cash Fund"). If you exchange shares subject to a CDSC, the transaction will not be subject to a CDSC. However, when you redeem the shares acquired through the exchange, the redemption may be subject to the CDSC, depending upon when you originally purchased the shares, using the schedule of the Portfolio from which your first exchange was effected. For purposes of computing the CDSC, the length of time you have owned your shares will be measured from the date of original purchase and will not be affected by any exchange. For information on how to exchange your shares, contact Mentor Service Company at 1-800-869-6042. For federal income tax purposes, an exchange is treated as a sale of shares and generally results in a capital gain or loss. A Telephone Exchange Privilege is currently available. Mentor Services Company's procedures for telephonic 40 transactions are described above under "How to Sell Shares." The Telephone Exchange Privilege is not available if you were issued certificates for shares which remain outstanding. Ask your investment dealer or Mentor Services Company for a prospectus relating to the Cash Fund or the other portfolios into which you may exchange your shares. Shares of certain of the Portfolios may not available to residents of all states. The exchange privilege is not intended as a vehicle for short-term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where Mentor Advisors or the Trustees believe doing so would be in the best interests of a Portfolio, the Trust reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges, or reject any exchange. Shareholders would be notified of any such action to the extent required by law. See the Statement of Additional Information to find out more about the exchange privilege. HOW DISTRIBUTIONS ARE MADE Dividends, if any, are declared daily and paid monthly for the Quality Income, High Income, Short-Duration Income, and Municipal Income Portfolios, quarterly for the Income and Growth and Balanced Portfolios, and annually for the Growth, Capital Growth, and Global Portfolios. Each Portfolio will distribute its net capital gain, if any, at least annually. All dividends and distributions of net capital gain will be invested in additional shares of the same class of a Portfolio unless a shareholder requests in writing to receive the dividend or distribution in cash. TAXES Each Portfolio intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements that are necessary for it to be relieved of federal taxes on income and gains it distributes to shareholders. Each Portfolio will distribute substantially all of its net investment income and capital gain net income on a current basis. All Portfolio distributions, other than exempt-interest dividends, will be taxable to you as ordinary income, except that any distributions of net capital gain will be taxed as long-term capital gain, regardless of how long you have held the shares (although the loss on a sale of shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain distribution received with respect to those shares). Portfolio distributions will be taxable to you even if they are paid from income or gains earned by the Portfolio prior to your investment (and thus were included in the price paid for your shares). Distributions will be taxable as described above whether received in cash or in shares through the reinvestment of distributions. Early in each year Mentor Funds will notify you of the amount and tax status of distributions paid to you by your Portfolio for the preceding year. In buying or selling securities for each of the Portfolios, Mentor Advisors and Mentor Perpetual, as applicable, will not normally take into account the effect any purchase or sale of securities will have on the tax positions of the Portfolios' shareholders. To permit the Quality Income, Municipal Income, and Short-Duration Income Portfolios to maintain more stable monthly distributions, each of those Portfolios may from time to time pay out less than the entire amount of net investment income earned in any particular period. Any such amount retained by a Portfolio would be available to stabilize future distributions. As a result, the distributions paid by any of these Portfolios for any 41 particular period may be more or less than the amount of net investment income actually earned by the Portfolio during that period. MUNICIPAL INCOME PORTFOLIO. Distributions designated by the Portfolio as "exempt-interest dividends" are not generally subject to federal income tax. The Portfolio may engage in investment activities that produce taxable income, the distribution of which will be taxable to shareholders as described above. If you receive Social Security or railroad retirement benefits, you should consult your tax adviser to determine what effect, if any, an investment in the Portfolio may have on the taxation of your benefits. In addition, an investment in the Portfolio may result in liability for federal alternative maximum tax and for state and local taxes, both for individual and corporate shareholders. GLOBAL PORTFOLIO ONLY. Shareholders of the Portfolio who are U.S. citizens or residents may be able to claim a foreign tax credit or deduction on their U.S. income tax returns with respect to foreign taxes paid by the Portfolio. If, at the end of the fiscal year of the Portfolio, more than 50% of the Portfolio's total assets are represented by stock or securities of foreign corporations, the Portfolio intends to make an election permitted by the Internal Revenue Code to treat any eligible foreign taxes it paid as paid by its shareholders. In that case, shareholders who are U.S. citizens, U.S. corporations, and, in some cases, U.S. residents, will be required to include in U.S. taxable income their pro rata share of such taxes, but may then be entitled to claim a foreign tax credit or deduction (but not both) for their share of such taxes. The foregoing is a summary of certain federal income tax consequences of investing in a Portfolio. Dividends, distributions, and redemption proceeds also may be subject to foreign, state, and local taxes. Shareholders are urged to consult their tax advisers regarding specific questions as to federal, foreign, state, or local taxes. Non-U.S. investors should consult their tax advisers concerning the tax consequences of ownership of shares of a Portfolio, including the possibility that distributions may be subject to a 30% United States withholding tax (or a reduced rate of withholding provided by treaty). MANAGEMENT The Trustees of Mentor Funds are responsible for generally overseeing the conduct of its business. MENTOR INVESTMENT ADVISORS, LLC is the investment adviser to each of the Portfolios other than the Global Portfolio. MENTOR PERPETUAL ADVISORS, LLC is the investment adviser to the Global Portfolio. Each of the investment advisers is located at 901 East Byrd Street, Richmond, Virginia. All investment decisions made for the Portfolios by Mentor Advisors and Mentor Perpetual are made by investment management teams. Mentor Advisors has over $13 billion in assets under management and is a wholly owned subsidiary of Mentor Investment Group, LLC ("Mentor Investment Group") and its affiliates. Mentor Investment Group is a subsidiary of Wheat First Butcher Singer, Inc., which is in turn a wholly owned subsidiary of First Union Corp. ("First Union"). First Union is a leading financial services company with approximately $234 billion in assets and $17 billion in total stockholders' equity as of September 30, 1998. EVEREN Capital Corporation has a 20% ownership in Mentor Investment Group and may acquire additional ownership based principally on the amount of Mentor's revenues derived from assets attributable to clients of EVEREN Securities, Inc. and its affiliates. 42 Mentor Perpetual, an investment advisory firm organized in 1995, is owned equally by Perpetual plc, a diversified financial services holding company, and Mentor Advisors. The Perpetual organization currently serves as investment adviser for assets of more than $14 billion. Its clients include 28 unit and investment trusts and other public investment pools including private individuals, charities, pension plans, and life assurance companies. Mentor Advisors and Mentor Perpetual together serve as investment adviser to 27 separate investment portfolios in the Mentor Family of Funds, including those offered by this Prospectus. For a prospectus relating to certain of these other investment portfolios, and for information concerning your eligibility to purchase shares of those portfolios, contact Mentor Services Company. Each of the Portfolios (other than the Global Portfolio) pays management fees to Mentor Advisors at the annual rates described above under "Expense Summary -- Annual Portfolio Operating Expenses"; and the Global Portfolio pays fees to Mentor Perpetual at an annual rate of 1.10% of its average daily net assets up to and including $75 million and 1.00% of its average daily net assets in excess of $75 million. The advisory fees paid by the Growth, Capital Growth, Income and Growth, and Global Portfolios are higher than those paid by many other mutual funds. An investment adviser may from time to time voluntarily waive some or all of its investment advisory fees and may terminate any such voluntary waiver at any time in its sole discretion. THE SUB-ADVISERS VAN KAMPEN MANAGEMENT, INC. serves as sub-adviser to the High Income Portfolio and the Municipal Income Portfolio. Van Kampen, located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, was incorporated in 1990 and commenced operations in 1992. Van Kampen currently provides investment advice to a wide variety of individual, institutional, and investment company clients. Van Kampen is a wholly owned subsidiary of Van Kampen American Capital, Inc., which, in turn, is wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is an indirect wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. Morgan Stanley, Dean Witter, Discover & Co. and various of its subsidiaries, including Morgan Stanley & Co. Incorporated, a registered broker-dealer, are engaged in a wide range of financial services. As of September 30, 1998, Van Kampen, together with its affiliates, advised or supervised approximately $70 billion of assets. For its services as sub-adviser of the Municipal Income Portfolio, Van Kampen receives a fee from Mentor Advisors at the following annual rate: 0.25% of the first $60 million of the Portfolio's average net assets and 0.20% of the Portfolio's average net assets over $60 million. For its services as sub-adviser of the High Income Portfolio, Van Kampen receives a monthly fee from Mentor Advisers at the annual rate of .20% of the Portfolio's average daily net assets. David C. Johnson, Senior Vice President and Co-Director of Municipal Investments, is a manager of the Municipal Income Portfolio. Mr. Johnson joined Van Kampen in 1989 and has served as portfolio manager of the Municipal Income Portfolio since its inception. Mr. Johnson has eighteen years of management experience in the tax-free fixed-income sector. Currently, he is responsible for the management and supervision of 52 Van Kampen municipal funds, including both open and closed-end fund, with total assets exceeding $13 billion. Timothy D. Haney, Vice President, is a co-manager of the Municipal Income Portfolio since 1997. He is responsible for the management of ten open and closed-end municipal funds with total assets of approximately $2 billion. Mr. Haney joined Van Kampen in 1988 and has ten years of experience in the tax-free fixed income market. 43 Ellis S. Bigelow, Senior Vice President, is the manager of the Mentor High Income Portfolio since its inception. Ms. Bigelow joined Van Kampen in 1980 and has over 18 years of experience in the corporate, government and equity sectors. Currently, she is responsible for the management or supervision of approximately $2 billion in corporate assets. WELLINGTON MANAGEMENT COMPANY, LLP serves as sub-adviser to the Income and Growth Portfolio. Wellington Management, located at 75 State Street, Boston, Massachusetts 02109, is a professional investment counseling firm which provides investment services to investment companies, employee benefit plans, endowments, foundations, and other institutions and individuals. As of September 30, 1998, Wellington Management had discretionary investment management authority with respect to approximately $187 billion in assets. Wellington Management and its predecessor organizations have provided investment advisory services to investment companies since 1933 and to investment counseling clients since 1960. For its services as sub-adviser, Wellington Management receives a fee from Mentor Advisors at the following annual rate: 0.325% of the first $50 million of the Portfolio's average net assets, 0.275% of the next $150 million of the Portfolio's average net assets, 0.225% of the next $300 million of the Portfolio's average net assets, and 0.200% of the Portfolio's net assets over $500 million. Paul D. Kaplan, Senior Vice President of Wellington Management, has served as portfolio manager of the fixed-income and U.S. Government securities portion of the Portfolio since its inception in May 1993. Mr. Kaplan has been a portfolio manager with Wellington Management since 1982. As of November 30, 1996, Wellington Management's Equity Income Team, a group of equity portfolio managers and senior investment professionals, assumed responsibility for managing the equity securities portion of the Portfolio. GENERAL. Subject to the general oversight of the Trustees, each Portfolio's investment adviser or sub-adviser manages the relevant Portfolio's investments in accordance with the stated policies of the Portfolio. Each makes investment decisions for the Portfolio and places purchase and sale orders for the Portfolio's transactions. In addition, each pays the salaries of all officers and employees who are employed by both it and Mentor Funds. Mentor Funds pays all expenses not assumed by the investment advisers, sub-advisers, or Mentor Investment Group, including, among other things, Trustees' fees, auditing, accounting, legal, custodial, investor servicing, and shareholder reporting expenses, and payments under the Portfolios' Class B Plans. In selecting broker-dealers, an investment adviser or sub-adviser may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the best overall terms available, a Portfolio's investment adviser or sub-adviser may consider sales of shares of Mentor Funds (and, if permitted by law, of the other funds in the Mentor family) as a factor in the selection of broker-dealers. OTHER SERVICES ADMINISTRATIVE SERVICES. Mentor Investment Group, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain administrative personnel and services necessary to operate each Portfolio, such as bookkeeping and accounting services. Mentor Investment Group provides these services to each of the Portfolios at an annual rate of 0.10% of the Portfolio's average daily net assets. SHAREHOLDER SERVICING PLAN. Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with respect to Class A and Class B shares of each Portfolio. Under the Service Plan, financial institutions will enter into shareholder service agreements with Mentor Distributors to provide administrative support services to 44 their customers who are Portfolio shareholders. In return for providing these support services, a financial institution may receive payments at a rate not exceeding 0.25% of the average daily net assets of the Class A or Class B shares of a Portfolio. These administrative services may include, but are not limited to, the following functions: providing office space, equipment, telephone facilities, and various personnel, including clerical, supervisory, and computer personnel, as necessary or beneficial to establish and maintain shareholder accounts and records; processing purchase and redemption transactions and automatic investments of client account cash balances; answering routine client inquiries regarding the Portfolios; assisting clients in changing dividend options, account designations, and addresses; and providing such other services as the Portfolios reasonably request. In addition to receiving payments under the Service Plan, financial institutions may be compensated by a Portfolio's investment adviser, by a Portfolio's sub-adviser, or by Mentor Investment Group, or affiliates thereof, for providing administrative support services to holders of Class A or Class B shares of the Portfolios. These payments will be made directly by an investment adviser, sub-adviser, and/or Mentor Investment Group, or their affiliates, and will not be made from the assets of any of the Portfolios. GENERAL INFORMATION Mentor Funds is a Massachusetts business trust organized on January 20, 1992. A copy of the Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The Trust is an open-end series management investment company with an unlimited number of authorized shares of beneficial interest. Shares of the Trust may, without shareholder approval, be divided into two or more series of shares representing separate investment portfolios. Any such series of shares may be further divided without shareholder approval into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees determine. The Trust's shares are currently divided into twelve series with varying investment objectives and policies. Certain of the Trust's Portfolios offer more than one class of shares with different sales charges and expenses. Each of the Growth, Perpetual Global, Capital Growth, Balanced, Income and Growth, Municipal Income, Quality Income, Short-Duration Income, and High Income Portfolios currently offers three classes of shares: Class A and Class B shares, which are offered by this Prospectus; and Class Y (Institutional) shares, which are not subject to any sales loads or shareholder servicing fees. Contact Mentor Services Company for information concerning Class Y shares and your eligibility to purchase shares of that class. Each share has one vote, with fractional shares voting proportionally. Shares of each class will vote together as a single class except when required by law or determined by the Trustees. Shares of the Portfolios are freely transferable, are entitled to dividends as declared by the Trustees, and, if the Portfolios were liquidated, would receive the net assets of the Portfolios. The Trust may suspend the sale of shares at any time and may refuse any order to purchase shares. Although neither the Portfolios nor the Trust is required to hold annual meetings of shareholders, shareholders have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Declaration of Trust. The Portfolios receive services from a number of providers which rely on the smooth functioning of their respective systems and the systems of others to perform those services. It is generally recognized that certain systems in use today may not perform their intended functions adequately after the Year 1999 because of the 45 inability of the software to distinguish the Year 2000 from the Year 1900. Mentor Advisors is taking steps that it believes are reasonably designed to address this potential "Year 2000" problem and to obtain satisfactory assurances that comparable steps are being taken by the Portfolios' other major service providers. There can be no assurance, however, that these steps will be sufficient to avoid any adverse impact on the Portfolios from this problem. In the interest of economy and convenience, the Portfolio will not issue certificates for its shares except at the shareholder's request. Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri 64105, serves as the Portfolio's custodian. State Street Bank and Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend agent. PERFORMANCE INFORMATION Yield and total return data may from time to time be included in advertisements about the Portfolios. A Portfolio's "yield" is calculated by dividing the Portfolio's annualized net investment income per share of the class in question during a recent 30-day period by the maximum public offering price per share of that class on the last day of that period. "Total return" for the one-, five-, and ten-year periods (or for the life of a Portfolio, if shorter) through the most recent calendar quarter represents the average annual compounded rate of return on an investment of $1,000 in the Portfolio at the maximum public offering price (in the case of Class A shares) and reflecting (in the case of Class B shares) the deduction of any applicable CDSC. Total return may also be presented for other periods or based on investment at reduced sales charge levels or at net asset value. Investment performance of different classes of shares of a Portfolio will differ. Any quotation of investment performance not reflecting a CDSC or maximum front-end sales charge would be reduced if the CDSC or front-end sales charges were reflected. Quotations of yield or total return for a period when an expense limitation was in effect will be greater than if the limitation had not been in effect. A Portfolio's performance may be compared to various indices. See the Statement of Additional Information for more information. Information may be presented in advertisements about a Portfolio describing the background and professional experience of the Portfolio's investment adviser, sub-adviser, or any of their personnel. ALL DATA ARE BASED ON A PORTFOLIO'S PAST INVESTMENT RESULTS AND DO NOT PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based on many factors, including market conditions, the composition of a Portfolio's investments, a Portfolio's operating expenses, and which class of shares you purchase. Investment performance also often reflects the risks associated with a Portfolio's investment objective and policies. These factors should be considered when comparing a Portfolio's investment results to those of other mutual funds and other investment vehicles. As permitted by applicable law, performance information for a Portfolio whose investment adviser or sub-adviser has changed may be presented only for periods after the change was effected. 46 APPENDIX MOODY'S INVESTORS SERVICE, INC., BOND RATINGS AAA -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. BAA -- Bonds which are rated Baa are considered as medium-grade obligations, (I.E., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA -- Bonds which are Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principle or interest. CA -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS AAA -- An obligation rated AAA has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. AA -- An obligation rated AA differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. 47 A -- An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB -- An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Obligations rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the lowest degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B -- An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligations. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. CC -- An obligation rated CC is currently highly vulnerable to nonpayment. C -- The C rating may be used to cover a situation where a bankruptcy petition has been filed, or similar action has been taken, but payments on this obligation are being continued. D -- An obligation rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition, or the taking of a similar action if payments on an obligation are jeopardized. MOODY'S NOTE RATINGS MIG1/VMIG1 -- This designation denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broadbased access to the market for refinancing. MIG2/VMIG2 -- This designation denotes high quality. Margins of protection are ample although not so large as in the preceding group. 48 STANDARD AND POOR'S NOTE RATINGS SP-1 -- Strong capacity to pay principal and interest. Issues determined to possess overwhelming safety characteristics are given a plus sign (+) designation. SP-2 -- Satisfactory capacity to pay principal and interest. SP-3 -- Speculative capacity to pay principal and interest. MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by the following characteristics: -- Leading market positions in well established industries. -- High rates of return on funds employed. -- Conservative capitalization structure with moderate reliance on debt and ample asset protection. -- Broad margins in earnings coverage of fixed financial charges and high internal cash generation. -- Well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. STANDARD AND POOR'S COMMERCIAL PAPER RATINGS A-1 -- This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 -- Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of saety is not as high as for issues designated "A-1". A-3 -- Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. 49 (This Page Intentionally Left Blank) (This Page Intentionally Left Blank) NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES. ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE PORTFOLIO IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION. MENTOR INVESTMENT GROUP 901 East Byrd Street Richmond, VA 23219 (800) 869-6042 1998 MENTOR DISTRIBUTORS, LLC SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE MK 609 MENTOR FUNDS MENTOR GROWTH PORTFOLIO MENTOR PERPETUAL GLOBAL PORTFOLIO MENTOR CAPITAL GROWTH PORTFOLIO MENTOR BALANCED PORTFOLIO MENTOR INCOME AND GROWTH PORTFOLIO MENTOR MUNICIPAL INCOME PORTFOLIO MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MENTOR HIGH INCOME PORTFOLIO ------------------------- PROSPECTUS ------------------------- December 15, 1998 [MENTOR LOGO] NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES. ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE PORTFOLIO IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION. MENTOR INVESTMENT GROUP 901 East Byrd Street Richmond, VA 23219 (800) 869-6042 1998 MENTOR DISTRIBUTORS, LLC SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE MK 609 [MENTOR LOGO] MENTOR FUNDS MENTOR GROWTH PORTFOLIO MENTOR PERPETUAL GLOBAL PORTFOLIO MENTOR CAPITAL GROWTH PORTFOLIO MENTOR BALANCED PORTFOLIO MENTOR INCOME AND GROWTH PORTFOLIO MENTOR MUNICIPAL INCOME PORTFOLIO MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MENTOR HIGH INCOME PORTFOLIO ------------------------- PROSPECTUS ------------------------- December 15, 1998 [EVEREN SECURITIES LOGO] MENTOR FUNDS NEW ACCOUNT FORM AND SHAREOWNER OPTIONS FORM [MENTOR INVESTMENT GROUP LOGO] USE THE ATTACHED FORM TO ESTABLISH YOUR ACCOUNT IN MENTOR FUNDS NEW ACCOUNT FORM AND [MENTOR INVESTMENT GROUP LOGO] SHAREOWNER OPTIONS FORM - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TYPE OF ACCOUNT - -------------------------------------------------------------------------------- Use this one form to open any ONE of the following types of accounts. Please check the appropriate one below. [ ] Individual Account, Complete 1. [ ] Joint Account, Complete 1 and 2. [ ] Custodial Account, (Gift to a Minor), Complete 3. [ ] Trust Account, Complete 4. [ ] Corporate (or Organization) Account, Complete 5. [ ] Revise Existing Account Number ------------------------------ 1. - - ----------------------------------------- ---------- ------ --------- Name Social Security Number 2. - - ---------------------------------------- ---------- ------ --------- Name Social Security Number SHAREOWNER EMPLOYMENT INFORMATION This information is required in accordance with the Rules of Fair Practice of the National Association of Securities Dealers. - ---------------------------------------------------------------------------- Occupation of Shareowner or Custodian - ---------------------------------------------------------------------------- Employer's Name - ---------------------------------------------------------------------------- Employer's Address - ---------------------------------------------------------------------------- City State ZIP Code - ---------------------------------------------------------------------------- Occupation of Co-Shareowner - ---------------------------------------------------------------------------- Employer's Name - ---------------------------------------------------------------------------- Employer's Address - ---------------------------------------------------------------------------- City State ZIP Code 3. as custodian for ---------------------------------------------- Custodian's Name (only one custodian permitted) - ---------------------------------------------------------------------------- Minor's Name (only one minor permitted) - - - --------- ----- ----------- Minor's Social Security Number Under the Uniform Gifts or Uniform Transfers to Minors ----- ----- State State Act / / ------------------------------ Minor's Birthdate 4. ----------------------- ---------------------------------- Name of Trustee Name of Trust / / - ------------------------------------------------ --- ----- Name of Second Trustee (if any) Date of Trust - ---------------------------------------------------------------------------- Trust's Taxpayer Identification Number 5. - ---------------------------------------------------------------------------- Name of Corporation (or other entity) - ---------------------------------------------------------------------------- Taxpayer Identification Number Business Type: Corporation Partnership Organization ---- --- --- Fiduciary Other ---- --- -------------------------- Specify other type (Please attach a certified copy of your corporate resolution) - -------------------------------------------------------------------------------- MAILING ADDRESS OF ACCOUNT - -------------------------------------------------------------------------------- All the information requested is needed to open your account. - ---------------------------------- -------------------------------------- Street Address or Box Number Apartment Number - ---------------------------------- -------------------------------------- City State ZIP Code ( ) ( ) - ------------------------ -------------------------------- Area Code Daytime Phone Area Code Evening Phone - -------------------------------------------------------------------------------- FUND SELECTION AND INITIAL INVESTMENT - -------------------------------------------------------------------------------- [ ] Next to the Portfolio name(s), indicate the amount you're investing in the Portfolio. MINIMUM PER PORTFOLIO: $1,000 [ ] Be sure to check how you want your Dividend and Capital Gains distributions handled: automatically reinvested to buy more shares or sent to you by check. [ ] Indicate the TOTAL amount you're investing at this time.
CLASS FUND CHOICE A B BL AMOUNT REINVEST CASH Dividends [ ] [ ] [ ] Growth Portfolio [ ] [ ] [ ] $-------- Capital Gains [ ] [ ] Dividends [ ] [ ] [ ] Capital Growth [ ] [ ] [ ] $-------- Capital Gains [ ] [ ] Portfolio Dividends [ ] [ ] [ ] Balanced Portfolio [ ] [ ] [ ] $-------- Capital Gains [ ] [ ] Dividends [ ] [ ] [ ] Income and [ ] [ ] [ ] $-------- Capital Gains [ ] [ ] Growth Portfolio Dividends [ ] [ ] [ ] Perpetual Global [ ] [ ] [ ] $-------- Capital Gains [ ] [ ] Portfolio Dividends [ ] [ ] [ ] Quality Income [ ] [ ] [ ] $-------- Capital Gains [ ] [ ] Portfolio Dividends [ ] [ ] [ ] Municipal [ ] [ ] [ ] $-------- Capital Gains [ ] [ ] Income Portfolio Dividends [ ] [ ] [ ] Short-Duration [ ] [ ] [ ] $-------- Capital Gains [ ] [ ] Income Portfolio Dividends [ ] [ ] [ ] High Income [ ] [ ] [ ] $-------- Capital Gains [ ] [ ] Portfolio
TOTAL $----------------- [ ] Check enclosed for total purchase above made payable to Mentor Funds. [ ] Other payment method - -------------------------------------------------------------------------------- TELEPHONE EXCHANGE/ TELEPHONE REDEMPTION - -------------------------------------------------------------------------------- I elect the following privileges as described in the prospectus: Telephone Exchange: [ ] Yes Telephone Redemptions: [ ] Yes [ ] No [ ] No These privileges will automatically apply if neither box is checked. By establishing these services and signing this form, I acknowledge that: I authorize Boston Financial Data Services, Inc. to accept and act upon telephoned instructions to (1) exchange shares I own in any Portfolio(s) for shares of any other Portfolio(s) or (2) redeem shares I own in any Portfolio(s). I understand that exchanges can be made only between accounts having identical registrations. - -------------------------------------------------------------------------------- [ ] LETTER OF INTENT - -------------------------------------------------------------------------------- I understand that through accumulated investments I can reduce my sales charges on Class A shares. I plan to invest over a 13-month period in Class A shares of one or more of the Portfolios in Mentor Funds in an aggregate amount of at least: [ ] $50,000 (applies only to equity funds) [ ] $250,000 [ ] $500,000 [ ] $1,000,000 (and above) If the amount indicated is not invested within 13 months, reduced sales charge do not apply. [ ] I am already investing under an existing statement of intention. - -------------------------------------------------------------------------------- [ ] RIGHTS OF ACCUMULATION - -------------------------------------------------------------------------------- [ ] I own Class A shares of more than one Portfolio in Mentor Funds, which may entitle me to a reduced sales charge. My shareholder account numbers are: - -------------------------- -------------------------- -------------------------- [ ] The registration of some of my shares differs. Their account numbers are: - -------------------------- -------------------------- ------------------------ BE SURE TO COMPLETE THE REVERSE SIDE - --------------------------------------- [ ] SYSTEMATIC INVESTMENT PLAN VIA ACH - --------------------------------------- Check the box above and complete this section; then check the box next to Bank Account Information and complete that section too. I authorize State Street Bank & Trust Co. (service agent for Mentor Funds), to withdraw money from my bank account to buy more shares for my account(s) in the Portfolio(s) listed below. PORTFOLIO AMOUNT ($50 minimum) [ ] $ ---------------------------- -------------------------------- [ ] $ ---------------------------- --------------------------------
Please note: This service takes approximately 15 days to establish and will be done on or about the 15th of each month. - --------------------------------------- [ ] SYSTEMATIC WITHDRAWAL PLAN VIA CHECK - --------------------------------------- You must have a minimum of $10,000 in your mutual fund account to qualify for this optional service. (Class B shares withdrawals will not be subject to the applicable CDSC up to 10% of account value at the time of plan inception.) Check the box above and complete this section. I authorize State Street Bank & Trust Co. (service agent for Mentor Funds), to redeem shares from my account(s) in the Portfolio(s) listed below and mail a check for the amount specified to the name and address on the account. State Street Bank & Trust Co., is to do this on the 15th of each month. If the 15th falls on a weekend or holiday, the transaction will take place the next business day. FUND AMOUNT ($50 minimum) [ ] $ ---------------------------- ---------------------------- [ ] $ ---------------------------- ----------------------------
Please send my Systematic Withdrawal Check to [ ] Mailing Address of Account [ ] Other* ---------------------------------- Please note: This service takes approximately two (2) weeks to establish. *Signature guarantee required - -------------------------------------------------------------------------------- [ ] BANK ACCOUNT INFORMATION - -------------------------------------------------------------------------------- Complete this section only if you are signing-up for [ ] Telephone Redemption, [ ] Systematic Investment Plan, or [ ] Systematic Withdrawal Plan. - -------------------------------------------------------------------------------- Bank Name ABA Number - -------------------------------------------------------------------------------- Bank Address - -------------------------------------------------------------------------------- City State ZIP Code - -------------------------------------------------------------------------------- Name(s) on Bank Account - -------------------------------------------------------------------------------- Bank Account Number Checking Savings - -------- ------- Please attach a check (marked "VOID") or a deposit ticket from this bank account. - ------------------------------------------------------------------------------- SIGNATURES - ------------------------------------------------------------------------------- This New Account Form must be signed for an account to be opened. The signatures required for the various types of accounts are: [ ] Individual Account, the individual's [ ] Joint Account, both shareowners' [ ] Custodial Account (Gift to a Minor), the custodian's [ ] Corporate (or Organization) Account, an officer's (and the officer's title must be included) By signing this New Account Form below, I assure that: o I have received and read the prospectus for each of the Portfolios in which I am investing, and I understand that the prospectus terms are incorporated into this form by reference. o I authorize Mentor Funds, its affiliates and agents, to act on any instructions believed to be genuine for any service authorized on this form. I agree they will not be liable for any resulting loss or expense. o I am of legal age in my state and have the authority and legal capacity to purchase mutual fund shares. o I understand that I may terminate the Telephone Redemption, Systematic Investment Plan, and/or Systematic Withdrawal Plan at any time by writing to Boston Financial Data Services. o I understand that I will receive 30 days' written notice from Boston Financial Data Services, Transfer Agent, before any service on this form is terminated. o I certify, under penalties of perjury, that: 1. The Social Security or Taxpayer Identification Number shown on this form is correct. (If I fail to give the correct number or to sign this form, Mentor Funds may reject, restrict, or redeem my investment. I may also be subject to IRS Backup Withholding of a percentage of all distributions and redemptions.) 2. I am NOT currently subject to IRS Backup Withholding because (a) I have not been notified of it or (b) notification has been revoked. (Cross out "NOT" if you are currently subject to Backup Withholding.) - ------------------------------------------------------------------------------- I agree that none of Mentor Investment Group, LLC, Mentor Distributors, LLC, Boston Financial Data Services, Mentor Funds, or any of their affiliates will be responsible for the authenticity of any instructions given and shall be fully indemnified and held harmless from any and all direct liabilities, losses, or cost resulting from acting upon such transactions. - ----------------------------------------------------------------------- Shareowner (or Custodian) Date - ----------------------------------------------------------------------- Co-Shareowner Date - ----------------------------------------------------------------------- Corporate Officer or Trustee Date - ----------------------------------------------------------------------- Title of Corporate Officer or Trustee Date - ------------------------------------------------------------------------------- DEALER INFORMATION - ------------------------------------------------------------------------------- To be completed by Customer Account Representative: - ----------------------------------------------------------------------- Financial Institution Name - ----------------------------------------------------------------------- Address - ----------------------------------------------------------------------- City State ZIP Code - ----------------------------------------------------------------------- Dealer Number (If applicable) - ----------------------------------------------------------------------- Representative's Code Number - ----------------------------------------------------------------------- Representative's Full Name - ----------------------------------------------------------------------- Representative's Branch Office - ----------------------------------------------------------------------- Representative's Phone Number - ---------------------------------------------------------------------------- MAILING INFORMATION - ---------------------------------------------------------------------------- Send this completed form to: Mentor Funds c/o Boston Financial Data Services P.O. Box 8507 Boston, MA 02266 If you have any questions please call 1-800-382-0016 MENTOR DISTRIBUTORS, LLC, Distributor - -------------------------------------------------------------------------------- P R O S P E C T U S December 15, 1998 Y (INSTITUTIONAL) SHARES Mentor Funds Mentor Funds, an open-end management investment company, is offering Y Shares of nine different investment portfolios to institutional and high net-worth individual investors: Mentor Growth Portfolio, Mentor Capital Growth Portfolio, Mentor Balanced Portfolio, Mentor High Income Portfolio, Mentor Income and Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Quality Income Portfolio, Mentor Municipal Income Portfolio, and Mentor Short-Duration Income Portfolio. CERTAIN OF THE PORTFOLIOS MAY USE "LEVERAGE" -- THAT IS, THEY MAY BORROW MONEY TO PURCHASE ADDITIONAL PORTFOLIO SECURITIES, WHICH INVOLVES SPECIAL RISKS. See "Other Investment Practices And Risk Factors." Mentor Funds provides investors an opportunity to invest in a variety of Portfolios offering a wide array of investment strategies. Each Portfolio pursues its investment objectives through the investment policies described in this Prospectus. This Prospectus sets forth concisely the information about Mentor Funds that a prospective investor should know before investing. Investors should read this Prospectus carefully and retain it for future reference. MORE DETAILED INFORMATION CAN BE FOUND IN THE DECEMBER 15, 1998 STATEMENT OF ADDITIONAL INFORMATION, AS AMENDED FROM TIME TO TIME. FOR A FREE COPY OF THE STATEMENT OR FOR OTHER INFORMATION, PLEASE CALL MENTOR SERVICES COMPANY, INC. AT 1-800-869-6042. The Statement has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference. The address of Mentor Funds is P.O. Box 1357, Richmond, Virginia 23218-1357. ---------------- Mentor Distributors, LLC Distributor THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THEACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, FIRST UNION CORP. OR ANY OF ITS AFFILIATES AND ARE NOT FEDERALLY INSURED BY, GUARANTEED BY OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE RISK OF PRINCIPAL. TABLE OF CONTENTS
PAGE ----- Expense Summary ...................................... 3 Financial Highlights ................................. 5 Investment Objectives and Policies ................... 6 Other Investment Practices and Risk Factors .......... 15 How the Portfolios Value Their Shares ................ 23 Purchase of Shares ................................... 24 Redemption of Shares ................................. 25 How To Exchange Shares ............................... 26 How Distributions Are Made ........................... 26 Taxes ................................................ 26 Management ........................................... 28 General Information .................................. 30 Performance Information .............................. 31 APPENDIX ............................................. 32
2 EXPENSE SUMMARY Expenses are one of several factors to consider when investing in a Portfolio. Expenses shown are based on those incurred for the last fiscal year (except that, in the case of the Balanced and High Income Portfolios, expenses shown reflect the expenses the Portfolios expect to incur in respect of their Y shares in the current fiscal year). The Examples show the cumulative expenses attributable to a hypothetical $1,000 investment in Y Shares of each Portfolio over specified periods. SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Charge Imposed on Purchases .................... None Maximum Sales Charge Imposed on Reinvested Dividends ......... None Exchange Fee ................................................. None Contingent Deferred Sales Charge ............................. None
ANNUAL PORTFOLIO OPERATING EXPENSES (As a percentage of average net assets)
INCOME CAPITAL AND GROWTH GROWTH BALANCED GROWTH PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ----------- ----------- ----------- ----------- INSTITUTIONAL - --------------------------------- Investment Advisory Fee ......... 0.70% 0.80% 0.75% 0.75% Other Expenses Shareholder Services Plan Fees .................... None None None None Other Expenses ................. 0.31% 0.29% 0.35% 0.32% ---- ---- ---- ---- Total Other Expenses ............ 0.31% 0.29% 0.35% 0.32% ---- ---- ---- ---- Total Portfolio Operating Expenses ....................... 1.01% 1.09% 1.10% 1.07% SHORT- PERPETUAL QUALITY MUNICIPAL DURATION HIGH GLOBAL INCOME INCOME INCOME INCOME PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ----------- ----------- ----------- ----------- ------------ INSTITUTIONAL - ------------- Investment Advisory Fee ......... 1.05% 0.48%* 0.60% 0.32%* 0.35%* Other Expenses Shareholder Services Plan Fees .................... None None None None None Other Expenses ................. 0.45% 0.32% 0.32% 0.29%* 0.35%** ---- ------ ---- ---- ------- Total Other Expenses ............ 0.45% 0.32% 0.32% 0.29%* 0.35% ---- ------ ---- ---- ------- Total Portfolio Operating Expenses ....................... 1.50% 0.80%* 0.92% 0.61%* 0.70%*
- ---------- * After expense limitation. ** Other Expenses are estimated based on the expenses the Portfolio expects to incur during its first full year of operation. Mentor Investment Advisors, LLC has agreed to limit its Management Fees from each of the Quality Income, Short-Duration Income, and High Income Portfolios and Mentor Investment Group has agreed to limit certain administrative Services fees from the Short-Duration Income Portfolio to the extent necessary to limit the Total Portfolio Operating Expenses of those Portfolios to the levels shown. In the absence of these expense limitations, Management Fees for the Quality Income, the Short-Duration Income and the High Income Portfolio would be 0.60%, 0.50%, and 70% respectively. Other Expenses for the Short-Duration Income Portfolio would be 0.37%, and Total Portfolio Operating Expenses for the Quality Income, the Short-Duration Income, and the High Income Portfolios, would have been 0.93%, 0.87%, and 1.05% respectively. 3 EXAMPLES You would pay the following expenses on a $1,000 investment in Y Shares, assuming 5% annual return and with or without redemption at the end of each period:
1 YEAR 3 YEAR 5 YEAR 10 YEAR -------- -------- -------- -------- Growth Portfolio ......................... 10 32 56 124 Capital Growth Portfolio ................. 11 35 60 133 Balanced Portfolio ....................... 11 35 61 134 Income and Growth Portfolio .............. 11 34 59 131 Perpetual Global Portfolio ............... 15 47 82 179 Quality Income Portfolio ................. 8 26 44 99 Municipal Income Portfolio ............... 9 29 51 113 Short-Duration Income Portfolio .......... 6 20 34 76 High Income Portfolio .................... 7 22 -- --
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE PERFORMANCE; ACTUAL EXPENSES MAY VARY. 4 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) The following tables have been derived from the Financial Highlights included in Mentor Funds' financial statements, which have been audited by KPMG Peat Marwick LLP, Mentor Funds' independent auditors. The report of KPMG Peat Marwick LLP, along with the Portfolios' financial statements and notes thereto, is included in the Statement of Additional Information, which may be obtained in the manner described on the cover page of this Prospectus. See "Financial Statements" in the Statement of Additional Information.
PERPETUAL CAPITAL GROWTH GLOBAL GROWTH PORTFOLIO PORTFOLIO PORTFOLIO ---------------------- --------------------- ---------------- PERIOD PERIOD PERIOD ENDED ENDED ENDED PER SHARE OPERATING 9/30/98(B) 9/30/98(B) 9/30/98(B) ------- ------- ------- PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 18.12 $ 18.81 $ 20.81 ------------ ----------- ---------- INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) .......................... (0.02) 0.00 (c) 0.02 Net realized and unrealized gain (loss) on investments ..................... (3.28) 0.30 2.16 ------------ ----------- ---------- Total from investment operations ...................... (3.30) 0.30 2.18 ------------ ----------- ---------- LESS DISTRIBUTIONS From net investment income ........ -- -- -- From capital gains ................ (0.19) (0.15) (0.25) ------------ ----------- ---------- Total distributions ............... (0.19) (0.15) (0.25) ------------ ----------- ---------- NET ASSET VALUE, END OF PERIOD ..... $ 14.63 $ 18.96 $ 22.74 ============ =========== ========== Total Return* ...................... (18.36%) 1.60% 10.56% ============ =========== ========== Ratios/Supplemental Data Net assets, end of period (in thousands) .................... $ 25,353 $ 1 $ 1 Ratio of expenses to average net assets ............................ 1.01% (a) 1.50% (a) 1.09% (a) Ratio of expenses to average net assets excluding waiver ........... 1.01% (a) 1.50% (a) 1.09% (a) Ratio of net investment income (loss) to average net assets ...... (0.04%)(a) (0.02%) (a) 0.38% (a) Portfolio turnover rate ............ 88% 162% 104% Average commission rate on portfolio transactions ............ $ 0.0658 $ 0.0188 $ 0.0692 ========== =========== =========== INCOME AND MUNICIPAL QUALITY SHORT-DURATION GROWTH BALANCED INCOME INCOME INCOME PORTFOLIO PORTFOLIO(E) PORTFOLIO PORTFOLIO PORTFOLIO ---------------- ---------------- ---------------- ---------------- ----------------- PERIOD PERIOD PERIOD PERIOD PERIOD ENDED ENDED ENDED ENDED ENDED PER SHARE OPERATING 9/30/98(B) 9/30/98(D) 9/30/98(B) 9/30/98(B) 9/30/98(B) ------- ------- ------- ------- ------- PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 18.75 $ 13.69 $ 15.51 $ 13.20 $ 12.57 ---------- ---------- ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) .......................... 0.54 0.01 1.39 0.78 0.67 Net realized and unrealized gain (loss) on investments ..................... 0.82 (0.01) ( 0.23) 0.39 0.16 ---------- ---------- ---------- ---------- ---------- Total from investment operations ...................... 1.36 0.00 1.16 1.17 0.83 ---------- ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS From net investment income ........ (0.54) -- (0.67) ( 0.68) ( 0.61) From capital gains ................ (0.03) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total distributions ............... (0.57) -- (0.67) ( 0.68) ( 0.61) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD ..... $ 19.54 $ 13.69 $ 16.00 $ 13.69 $ 12.79 ========== ========== ========== ========== ========== Total Return* ...................... 7.29% 0.00 % 7.51% 8.94% 6.64% ========== ========== ========== ========== ========== Ratios/Supplemental Data Net assets, end of period (in thousands) .................... $ 1 $ 3,642 $ 1 $ 1 $ 1 Ratio of expenses to average net assets ............................ 1.07%(a) 1.10%(a) 0.92%(a) 0.80%(a) 0.61%(a) Ratio of expenses to average net assets excluding waiver ........... 1.07%(a) 1.10%(a) .92%(a) 0.93%(a) 0.87%(a) Ratio of net investment income (loss) to average net assets ...... 3.15%(a) 2.31%(a) 5.66%(a) 7.09%(a) 6.10%(a) Portfolio turnover rate ............ 40% 89% 62% 114% 171% Average commission rate on portfolio transactions ............ $ 0.0540 $ 0.0687 =========== ===========
- --------- (a) Annualized. (b) For the period from November 19, 1997 (initial offering of Class Y shares) to September 30, 1998. (c) Income is less than $0.005 per share. (d) For the period from September 16, 1998 (initial offering of Class Y) to September 30, 1998. (e) Prior to September 16, 1998, all shareholders of the Balanced Portfolio were Class B shareholders. On September 16, 1998, shares of Class B were converted to Class Y shares. * Total return does not reflect sales commissions and is not annualized. 5 INVESTMENT OBJECTIVES AND POLICIES Mentor Funds is offering Y Shares of nine different diversified Portfolios by this Prospectus with varying investment objectives and policies. There can, of course, be no assurance that any Portfolio will achieve its investment objective. The differences in objectives and policies among the Portfolios can be expected to affect the investment return of each Portfolio and the degree of market and financial risk of an investment in each Portfolio. For a discussion of certain investment practices in which the Portfolios may engage, and the risks they may entail, see "Other Investment Practices and Risk Factors" below. The investment objectives of the Portfolios, other than those of the Short-Duration Income Portfolio, are fundamental policies and may not be changed without shareholder approval. Except for the investment policies designated in this Prospectus or the Statement of Additional Information as fundamental, the investment policies described herein are not fundamental and may be changed by the Trustees without shareholder approval. Any percentage limitation on a Portfolio's investments will apply only at the time of investment; a Portfolio would not be considered to have violated any such limitation, unless an excess or deficiency occurs or exists immediately after and as a result of an investment. In addition, a Portfolio will not necessarily dispose of a security when its rating is reduced below any applicable minimum rating, although the investment adviser or sub-adviser of the Portfolio will monitor the investment to determine whether continued investment in the security will assist in meeting the Portfolio's investment objective. Mentor Investment Advisors, LLC ("Mentor Advisors") is the investment adviser to each of the Portfolios other than the Mentor Perpetual Global Portfolio. Mentor Perpetual Advisors, LLC ("Mentor Perpetual") is the investment adviser to the Global Portfolio. MENTOR GROWTH PORTFOLIO The Growth Portfolio's investment objective is long-term capital growth. Although the Portfolio may receive current income from dividends, interest, and other sources, income is only an incidental consideration. The Portfolio attempts to achieve long-term capital growth by investing in a diversified portfolio of securities. Under normal circumstances at least 75% of the Portfolio's assets will be invested in common stocks of companies domiciled or located in the United States. Although the Portfolio may invest in companies of any size, the Portfolio invests principally in common stocks of small to mid-sized companies. The Portfolio invests in companies that, in the opinion of Mentor Advisors, have demonstrated earnings, asset values, or growth potential not yet reflected in their market price. A key indication of such undervaluation considered by Mentor Advisors is earnings growth which is above average compared to the S&P 500 Index. Other important factors in selecting investments include a strong balance sheet and product leadership in niche markets. Mentor Advisors believes that such investments may offer better than average potential for long-term capital growth. Small and mid-size companies may present greater opportunities for capital growth than do larger companies because of high potential earnings growth, but may also involve greater risk. They may have limited product lines, markets, or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the-counter market or on a regional securities exchange. As a result, these securities may change in value more than those of larger, more established companies. 6 MENTOR CAPITAL GROWTH PORTFOLIO The investment objective of the Capital Growth Portfolio is to provide long-term appreciation of capital. The Portfolio may invest in a wide variety of securities which Mentor Advisors believes offers the potential for capital appreciation over both the intermediate and long term. The Portfolio does not invest for current income. The Portfolio invests primarily in common stocks of companies believed by Mentor Advisors to have the potential for capital appreciation. The Portfolio may invest without limit in preferred stocks, investment-grade bonds, convertible preferred stocks, convertible debentures, and any other class or type of security Mentor Advisors believes offers the potential for capital appreciation. In selecting investments, Mentor Advisors will attempt to identify securities it believes will provide capital appreciation over the intermediate or long term due to changes in the financial condition of issuers, changes in financial conditions generally, or other factors. The Portfolio also may invest in fixed-income securities, and cash or money market investments, for temporary defensive purposes. MENTOR BALANCED PORTFOLIO Mentor Balanced Portfolio's investment objective is to seek capital growth and current income. The Portfolio invests in a diversified portfolio of equity and fixed-income securities which Mentor Advisors belives will produce both capital growth and current income. There can, of course, be no assurance that the Portfolio will achieve its investment objective. The Portfolio may invest in almost any type of security. The Portfolio's securities will include some securities selected primarily to provide for growth in value, others selected for current income, and other for stability of principal. Mentor Advisors will adjust the proportions of the Portfolio's assets invested in the different types of securities in repsonse to changing market conditions. For example, under certain market conditions, Mentor Advisors may judge that most of the Portfolio's assets should be invested in equity securities, and that only a relatively small portion of the Portfolio's assets should be invested in fixed-income securities. At other times, Mentor Advisors may invest most of the Portfolio's assets in fixed-income securities, with a corresponding reductioin in the portion of the Portfolio's assets invested in equity securities. Under normal circumstances, the Portfolio will invest at least 25% of its assets in fixed-income securities and 25% of its assets in equity securities. The Portfolio will invest in debt securities and preferred stocks of investment grade, and the Portfolio will seek under normal market conditions to maintain a portfolio of such securities with a dollar-weighted average rating of A or better. A security will be considered to be of "investment grade" if, at the time of investment by the Portfolio, it is rated at least Baa3 by Moody's Investors Service, Inc. or BBB- by Standard & Poor's Ratings Service, Inc. or the equivalent by another nationally recognized rating organization or, if unrated, determined by Mentor Advisors to be of comparable quality. Securities rated Baa or BBB lack outstanding investment characteristics and have speculative characteristics and are subject to greater credit and market risks than higher-rated securities. See the Appendix for descriptions of securities ratings assigned by Moody's and Standard & Poor's. At times Mentor Advisors may decide that conditions in the securities markets make pursuing the Portfolio's basic investment strategy inconsistant with the best interests of its shareholders. At such times, Mentor Advisors may temporarily use alternative investment strategies primarily designed to reduce fluctuations in the value of the Portfolio's assets. In implementing these "defensive" strategies, the Portfolio would be permitted to 7 hold all or any portion of its assets in high quality fixed-income securities, chas or money market instruments. it is impossible to predict when, or for how long, the Portfolio will use these alternative strategies. MENTOR INCOME AND GROWTH PORTFOLIO SUB-ADVISER: WELLINGTON MANAGEMENT COMPANY, LLP The investment objective of the Income and Growth Portfolio is to provide a conservative combination of income and growth of capital consistent with capital protection. The Portfolio invests in a diversified portfolio of equity securities of companies Wellington Management Company, LLP ("Wellington Management") believes exhibit sound fundamental characteristics and in investment-grade fixed-income securities and U.S. Government securities, as described below. Wellington Management will manage the allocation of assets among asset classes based upon its analysis of economic conditions, relative fundamental values and the attractiveness of each asset class, and expected future returns of each asset class. The Portfolio will normally have some portion of its assets invested in each asset class at all times but may invest without limit in any asset class. The Portfolio may invest in a wide variety of equity securities, such as common stocks and preferred stocks, as well as debt securities convertible into equity securities or that are accompanied by warrants or other equity securities. In selecting equity investments, Wellington Management will attempt to identify securities it believes are conservatively valued. Within the equity asset class, the Portfolio seeks to achieve long-term appreciation of capital and a moderate income level by selecting investments in out-of-favor companies with sound fundamentals. These decisions are based primarily on Wellington Management's fundamental research and security valuations. Within the fixed-income asset class, Wellington Management seeks to invest in a portfolio that provides as high a level of current income as is consistent with prudent investment risk. The Portfolio may invest in debt securities of any maturity, preferred stocks, and other fixed-income instruments, including, for example, U.S. Government securities, corporate debt securities (including zero-coupon securities) and debt securities issued by foreign governments and by companies located outside the United States. The Portfolio will only invest in debt securities which are rated at the time of purchase Baa or better by Moody's or BBB or better by S&P or which, if unrated, are deemed by Wellington Management to be of comparable quality. While fixed-income securities rated Baa or BBB are considered to be of investment grade, they have speculative characteristics as well. A description of securities ratings is contained in the Appendix to this Prospectus. The Portfolio may invest up to 10% of its assets in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests in real estate. The Portfolio will limit its investment in real estate investment trusts to 10% of its total assets. Such investments may involve many of the risks of direct investment in real estate, such as declines in the value of real estate, risks related to general and local economic conditions, and adverse changes in interest rates. Other risks associated with real estate investment trusts include lack of diversification, borrower default, and voluntary liquidation. MENTOR PERPETUAL GLOBAL PORTFOLIO The investment objective of the Global Portfolio is to seek long-term growth of capital through a diversified portfolio of marketable securities made up primarily of equity securities, including common stocks, preferred stocks, securities convertible into common stocks, and warrants. The Portfolio may also invest in debt 8 securities and other fixed-income securities of private or governmental issuers (including zero-coupon securities) which Mentor Perpetual believes to be consistent with the Portfolio's objective. It is expected that the Portfolio's investments will normally be spread broadly around the world, although (except as described in the next sentence) there is no limit on the amount of the Portfolio's assets that may be invested in any single country. Under normal circumstances, the Portfolio will invest at least 65% of the value of its total assets in securities of at least three countries, one of which may be the United States. The Portfolio may invest all of its assets in securities of issuers outside the United States, and for temporary defensive purposes may at times invest all of its assets in securities of U.S. issuers. To the extent that the Portfolio invests a substantial portion of its assets in securities of issuers located in a single country, it will be more susceptible to adverse economic, business, political, or regulatory conditions in or affecting that country than if it were to invest in a geographically more diverse portfolio. The Portfolio may invest in closed-end investment companies holding foreign securities. The Portfolio also may hold a portion of its assets in cash or cash equivalents, including foreign and domestic money market instruments. It is likely that, at times, a substantial portion of the Portfolio's assets will be invested in securities of issuers in emerging markets, including under-developed and developing nations. Investments in emerging markets are subject to the same risks applicable to foreign investments generally although those risks may be increased due to conditions in such markets. For example, the securities markets and legal systems in emerging markets may only be in a developmental stage and may provide few, or none, of the advantages or protections of markets or legal systems available in more developed countries. Although many of the securities in which the Portfolio may invest are traded on securities exchanges, they may trade in limited volume, and the exchanges may not provide all of the conveniences or protections provided by securities exchanges in more developed markets. The Portfolio may also invest a substantial portion of its assets in securities traded in the over-the-counter markets and not on any exchange, which may affect the liquidity of the investment and expose the Portfolio to the credit risk of its counterparties in trading those investments. See "Other Investment Practices and Risk Factors -- Foreign securities." Mentor Perpetual may seek investment opportunities in securities of large, widely traded companies as well as securities of small, less well known companies. Small companies may present greater opportunities for investment return, but may also involve greater risk. They may have limited product lines, markets, or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume. As a result the prices of these securities may fluctuate more than prices of securities of larger, more established companies. Except as described below, debt and fixed-income securities in which the Portfolio may invest will be investment grade securities or those of equivalent quality as determined by Mentor Perpetual. The Portfolio may invest up to 5% of its total assets in debt securities rated Baa or below by Moody's, or BBB or below by S&P, or deemed by Mentor Perpetual to be of comparable quality, and may invest in securities rated as low as C by Moody's or D by S&P. Securities rated Baa or BBB lack outstanding investment characteristics and have speculative characteristics and are subject to greater credit and market risks than higher-rated securities. Securities rated below investment grade are commonly referred to as "junk bonds" and are predominately speculative. Securities rated D may be in default with respect to payment of principal or interest. A description of securities ratings is contained in the Appendix to this Prospectus. 9 MENTOR QUALITY INCOME PORTFOLIO The Quality Income Portfolio's investment objective is to seek high current income consistent with what Mentor Advisors believes to be prudent risk. The Portfolio may invest in debt securities, including both U.S. Government and corporate obligations, and in other income-producing securities, including preferred stocks and dividend-paying common stocks. The Portfolio may also hold a portion of its assets in cash or money market instruments. The Portfolio will normally invest at least 80% of its assets in U.S. Government securities and in other securities rated at least A by Moody's or S&P, or at a comparable rating by another nationally recognized rating organization, or, if unrated, determined by Mentor Advisors to be of comparable quality. The Portfolio may invest the remaining 20% of its assets in lower-rated securities, including securities rated below investment grade (or, if unrated, determined by Mentor Advisors to be of comparable quality). Securities rated below investment grade are considered to be of poor standing and predominantly speculative. Assurance of interest and principal payments or of maintenance of other terms of the securities' contract over any long period of time may be small. The Portfolio will not invest more than 10% of its assets in securities rated Ca or below by Moody's or CC or below by Standard & Poor's. See "Other Investment Practices and Risk Factors -- Lower-rated securities." A description of securities ratings is contained in the Appendix to this Prospectus. Mentor Advisors may take full advantage of the entire range of maturities of the securities in which the Portfolio may invest and may adjust the average maturity of the Portfolio's securities from time to time, depending on its assessment of relative yields on securities of different maturities and expectations of future changes in interest rates. The Portfolio may invest any portion of its assets in mortgage-backed certificates and other securities representing ownership interests in mortgage pools, including CMOs and certain stripped mortgage-backed securities (including certain "residual" interests), and in other asset-backed securities, which involve certain risks. The Portfolio may also invest any portion of its assets in securities representing secured or unsecured interests in other types of assets such as automobile finance or credit card receivables. See "Other Investment Practices and Risk Factors -- Mortgage-backed securities; other asset-backed securities" and " -- Other mortgage-related securities" below. The Portfolio may borrow money to invest in additional securities; this practice involves risks. See "Other Investment Practices and Risk Factors -- Leverage," below. The Portfolio may also engage in a variety of interest rate transactions, including swaps, caps, floors, and collars. See "Other Investment Practices and Risk Factors -- Interest rate transactions" below for a description of risks associated with these transactions. MENTOR MUNICIPAL INCOME PORTFOLIO SUB-ADVISER: VAN KAMPEN MANAGEMENT, INC. The investment objective of the Municipal Income Portfolio is to provide investors with a high level of current income exempt from federal regular income tax, consistent with preservation of capital. Under normal market conditions, the Portfolio will invest at least 80% of its total assets in tax-exempt municipal securities rated investment grade, or deemed by Van Kampen Management, Inc. ("Van Kampen") to be of comparable quality. The Portfolio may invest a substantial portion of its assets in municipal securities that pay interest that is a tax preference item under the federal alternative minimum tax. The Portfolio may not be a suitable investment for investors who are already subject to federal alternative minimum tax or who would become subject to federal alternative minimum tax as a result of an investment in the Portfolio. 10 Tax-exempt municipal securities are debt obligations issued by or on behalf of the governments of states (including the District of Columbia) and United States territories or possessions, and their political subdivisions, agencies, and instrumentalities, and certain interstate agencies, the interest on which, in the opinion of bond counsel, is exempt from federal income tax. The Portfolio may also invest up to 10% of its assets in tax-exempt money market funds, which will be considered tax-exempt municipal securities for this purpose. Up to 20% of the Portfolio's total assets may be invested in tax-exempt municipal securities rated between BB and B- by S&P or between Ba and B3 by Moody's (or equivalently rated short-term obligations) and unrated tax-exempt securities that Van Kampen considers to be of comparable quality. These securities are below investment grade and are considered to be of poor standing and predominantly speculative. Assurance of interest and principal payments or of maintenance of other terms of the securities' contract over any long period of time may be small. The Portfolio will not invest in securities rated below B- by S&P or below B3 by Moody's at the time of purchase. See "Other Investment Practices and Risk Factors -- Lower rated securities." A description of Securities ratings is contained in the Appendix to this Prospectus. The Portfolio may hold a portion of its assets in cash or money market instruments. The two principal classifications of municipal securities are "general obligation" and "special revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of principal and interest. Special revenue bonds are usually payable only from the revenues derived from a particular facility or class of facilities or from the proceeds of a special excise tax or other specific revenue source and generally are not payable from the unrestricted revenues of an issuer. Industrial development bonds and private activity bonds are usually special revenue bonds, the credit quality of which is normally directly related to the credit standing of the private user involved. There are, in addition, a variety of hybrid and special types of municipal securities, including variable rate securities, municipal notes, and municipal leases. Variable rate securities bear rates of interest that are adjusted periodically according to formulae intended to minimize fluctuation in values of the instruments. Municipal notes include tax, revenue, and bond anticipation notes of short maturities, generally less than three years, which are issued to obtain temporary funds for various public purposes. Municipal leases are obligations issued by state and local governments or authorities to finance the acquisition of equipment and facilities and may be considered illiquid. They may take the form of a lease, an installment purchase contract, a conditional sales contract, or a participation certificate on any of the above. No more than 5% of the net assets of the Portfolio will be invested in municipal leases. A more detailed description of the types of municipal securities in which the Portfolio may invest is included in the Statement of Additional Information. CONCENTRATION. The Portfolio generally will not invest more than 25% of its total assets in any one industry. Governmental issuers of municipal securities are not considered part of any "industry." However, municipal securities backed only by the assets and revenues of nongovernmental users may for this purpose be deemed to be issued by such nongovernmental users, and the 25% limitation would apply to such obligations. The Portfolio may invest more than 25% of its assets in a broader segment of the municipal securities market, such as revenue obligations of hospitals and other health care facilities, housing agency revenue obligations, or airport revenue obligations, if Van Kampen determines that the yields available from obligations in a particular segment of the market justify the additional risks associated with such concentration. Although such obligations could be supported by the credit of governmental users, or by the credit of nongovernmental users engaged in a number of industries, economic, business, political, and other developments generally affecting the revenues of such 11 users (for example, proposed legislation or pending court decisions affecting the financing of such projects and market factors affecting the demand for their services or products) may have a general adverse effect on all municipal securities in such a market segment. The Portfolio reserves the right to invest more than 25% of its assets in industrial development or private activity bonds or in issuers located in any individual state, although Van Kampen has no present intention to invest more than 25% of the Portfolio's assets in issuers located in the same state. If the Portfolio were to invest more than 25% of its assets in issuers located in one state, it would be more susceptible to adverse economic, business, or regulatory conditions in or affecting that state than if it were to invest in a geographically more diverse portfolio. MENTOR SHORT-DURATION INCOME PORTFOLIO The Short-Duration Income Portfolio's investment objective is to seek current income. As a secondary objective, the Portfolio seeks preservation of capital, to the extent consistent with its objective of current income. The Portfolio will normally invest at least 65% of its assets in debt securities with a "duration" of three years or less. The Portfolio may invest in U.S. Government securities and debt obligations of private issuers and in preferred stocks and dividend-paying common stocks, and may hold a portion of its assets in cash or money market instruments. The Portfolio may invest any portion of its assets in mortgage-backed certificates and other securities representing ownership interests in mortgage pools, including CMOs and certain other stripped mortgage-backed securities (including certain "residual" interests). The Portfolio may also invest any portion of its assets in securities representing secured or unsecured interests in other types of assets, such as automobile finance or credit card receivables. See "Other Investment Practices and Risk Factors -- Mortgage-backed securities; other asset-backed securities" and " -- Other mortgage-related securities" below for a description of these securities and risks they may entail. Traditionally, a debt security's "term to maturity" has been used to evaluate the sensitivity of the security's price to changes in interest rates (the security's interest-rate "volatility"). However, a security's term to maturity measures only the period of time until the last payment of principal or interest on the security, and does not take into account the timing of the various payments of principal or interest to be made prior to the instrument's maturity. By contrast, "duration" is a measure of the full stream of payments to be received on a debt instrument, including both interest and principal payments, based on their present values. Duration measures the periods of time between the present time and the time when the various interest and principal payments are scheduled or, in the case of a callable bond, expected to be received, and weights them by their present values. There are some situations where even the standard duration calculation does not properly reflect the interest-rate volatility of a security. For example, floating and variable rate securities often have final maturities of ten years or more; however, their interest-rate volatility is determined based principally on the period of time until their interest rates are reset and on the terms on which they may be reset. Another example where a security's interest-rate volatility is not properly measured by its duration is the case of mortgage-related securities. The stated final maturity of such securities may be up to 30 years, but the actual cash flow on the securities will be determined by the anticipated prepayment rates on the underlying mortgage loans. Therefore, the duration of such a security can change if anticipated prepayment rates change. In these and other similar situations, Mentor Advisors will estimate a security's duration using sophisticated analytical techniques that take into account such 12 factors as the expected prepayment rate on the security and how the prepayment rate might change under various market conditions, although there can be no assurance that any such estimation will accurately predict actual prepayment rates or their effect on the volatility or value of a security. The Portfolio will invest primarily in debt securities and preferred stocks of investment grade and, under normal market conditions, the Portfolio will seek to maintain a portfolio of securities with a dollar-weighted average rating of Baa/BBB or better. A security will be considered to be of "investment grade" if, at the time of investment by the Portfolio, it is rated at least Baa3 by Moody's or BBB- by Standard & Poor's or the equivalent by another nationally recognized rating organization or, if unrated, determined by Mentor Advisors to be of comparable quality. Securities rated Baa or BBB lack outstanding investment characteristics and have speculative characteristics and are subject to greater credit and market risks than higher-rated securities. The Portfolio may invest up to 20% of its assets in securities rated below investment grade (or, if unrated, determined by Mentor Advisors to be of comparable quality). Securities rated below investment grade are considered to be of poor standing and predominantly speculative. Assurance of interest and principal payments or of maintenance of other terms of the securities' contract over any long period of time may be small. The Portfolio will not invest more than 10% of its assets in securities rated below Ca by Moody's or CC by Standard & Poor's. See "Other Investment Practices and Risk Factors -- Lower-rated securities." A description of securities ratings is contained in the Appendix to this Prospectus. The Portfolio may borrow money to invest in additional securities; this practice involves risk. See "Other Investment Practices and Risk Factors -- Leverage," below. The Portfolio may also engage in a variety of interest rate transactions, including swaps, caps, floors, and collars. See "Other Investment Practices and Risk Factors -- Interest rate transactions" below for a description of risks associated with these transactions. MENTOR HIGH INCOME PORTFOLIO SUB-ADVISOR: VAN KAMPEN MANAGEMENT, INC. The Portfolio's investment objective is to seek high current income. Capital growth is a secondary objective when consistent with the objective of seeking high current income. Mentor Advisors is the Portfolio's investment adviser. Van Kampen serves as the sub-adviser to the Portfolio. Van Kampen purchases and sells securities for the Portfolio, and otherwise manages the investments of the Portfolio, subject to the overall supervision of Mentor Advisors. The Portfolio may invest in both lower-rated and higher-rated fixed-income securities, including debt securities, convertible securities, and preferred stocks that are consistent with its primary investment objective of high current income. The Portfolio's remaining assets may be held in cash or money market instruments, or invested in common stocks and other equity securities. The Portfolio may at times hold a substantial portion of its assets in mortgage-backed and other asset-backed securities. The Portfolio may invest in securities of any maturity. Van Kampen will adjust the expected average life of the investments held in the Portfolio from time to time, depending on its assessment of relative yields and risks of securities of different maturities and expectations of future changes in interest rates. At times when the expected average life of the investments held by the Portfolio is longer, the values of the securities held by the Portfolio will generally change more in response to changes in interest rates than at times when the expected average life is shorter. 13 Differing yields on fixed-income securities of the same maturity are a function of several factors, including the relative financial strength of their issuers. Higher yields are generally available from securities in the lower categories of recognized rating agencies: Baa or lower by Moody's, Inc. or BBB or lower by Standard & Poor's. The Portfolio may invest any portion of its assets (and normally will invest at least 65% of its assets) in such securities and in unrated securities determined by Van Kampen to be of comparable quality. The Portfolio will normally invest a substantial portion of its assets in securities rated below Baa by Moody's or BBB by Standard & Poor's and in unrated securities determined by Van Kampen to be of comparable quality. Securities rated below Baa by Moody's or BBB by Standard & Poor's are considered to be predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligations. Securities in the lowest rating categories may have extremely poor prospects of attaining any real investment standing and may be in default. The rating services' descriptions of securities in the lower rating categories, including their speculative characteristics, are set forth in the Appendix to this Prospectus. See "Other Investment Practices and Risk Factors -- Lower-rated securities," below. The Portfolio may at times invest up to 10% of its assets in securities rated in the lowest grades (Ca or C in the case of Moody's and CC, C, or D in the case of Standard & Poor's) or in unrated securities determined by Van Kampen to be of comparable quality, if Van Kampen believes that there are prospects for an upgrade in a security's rating or a favorable conversion of a security into other securities. The Portfolio might also invest in such securities if Van Kampen were to believe that, upon completion of any contemplated exchange offer or reorganization involving a security or its issuer, the Portfolio would receive securities or other assets offering significant opportunities for capital appreciation or future high rates of current income. Securities ratings are based largely on the issuer's historical financial condition and the rating agencies' investment analysis at the time of rating. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition, which may be better or worse than the rating would indicate. The Portfolio seeks its secondary objective of capital growth, when consistent with its primary objective of seeking high current income, by investing in securities which may be expected to appreciate in value as a result of declines in long-term interest rates or of favorable developments affecting the business or prospects of the issuer which may improve the issuer's financial condition and credit rating. At times, Van Kampen may judge that conditions in the securities markets make pursuing the Portfolio's basic investment strategy inconsistent with the best interests of its shareholders. At such times Van Kampen may temporarily use alternative strategies, primarily designed to reduce fluctuations in the value of the Portfolio's assets. In implementing these "defensive" strategies, the Portfolio may invest without limitation in money market instruments and in U.S. Government or agency obligations, or invest in any other fixed-income security Van Kampen considers consistent with such defensive strategies. It is impossible to predict when, or for how long, the Portfolio will use such alternative strategies. The Portfolio will not invest more than 15% of its net assets (determined at the time of investment) in securities determined to be illiquid. Certain securities that are restricted as to resale may nonetheless be resold by the Portfolio in accordance with Rule 144A under the Securities Act of 1933, as amended. Such securities may be determined by Van Kampen to be liquid for purposes of compliance with the limitation on the Portfolio's investment in illiquid securities. There can, however, be no assurance that the Portfolio will be able to sell 14 such securities at any time when Van Kampen deems it advisable to do so or at prices prevailing for comparable securities that are more widely held. OTHER INVESTMENT PRACTICES AND RISK FACTORS Each of the Portfolios (except as noted below) may engage in the other investment practices described below. See the Statement of Additional Information for a more detailed description of these practices and certain risks they may involve. MORTGAGE-BACKED SECURITIES; OTHER ASSET-BACKED SECURITIES. Each of the Balanced, Short-Duration Income, High Income, Quality Income, and Income and Growth Portfolios may invest in mortgage-backed certificates and other securities representing ownership interests in mortgage pools, including CMOs and, in the case of the Quality Income and Short-Duration Income Portfolios, "residual" interests therein (described more fully below). Interest and principal payments on the mortgages underlying mortgage-backed securities are passed through to the holders of the mortgage-backed securities. Mortgage-backed securities currently offer yields higher than those available from many other types of fixed-income securities but because of their prepayment aspects, their price volatility and yield characteristics will change based on changes in prepayment rates. As a result, mortgage-backed securities are less effective than other securities as a means of "locking in" long-term interest rates. Generally, prepayment rates increase if interest rates fall and decrease if interest rates rise. For many types of mortgage-backed securities, this can result in unfavorable changes in price and yield characteristics in response to changes in interest rates and other market conditions. For example, as a result of their prepayment aspects, mortgage-backed securities have less potential for capital appreciation during periods of declining interest rates than other fixed-income securities of comparable maturities, although such obligations may have a comparable risk of decline in market value during periods of rising interest rates. Mortgage-backed securities have yield and maturity characteristics that are dependent upon the mortgages underlying them. Thus, unlike traditional debt securities, which may pay a fixed rate of interest until maturity when the entire principal amount comes due, payments on these securities may include both interest and a partial payment of principal. In addition to scheduled loan amortization, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans. Such prepayments may significantly shorten the effective durations of mortgage-backed securities, especially during periods of declining interest rates. Similarly, during periods of rising interest rates, a reduction in the rate of prepayments may significantly lengthen the effective durations of such securities. Each of the Balanced, High Income, Short-Duration Income, and Quality Income Portfolios may invest in stripped mortgage-backed securities. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage assets. A Portfolio may invest in both the interest-only -- or "IO" - -- class and the principal-only -- or "PO" -- class. The yield to maturity and price of an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the Portfolio's net asset value. This would typically be the case in an environment of falling interest rates. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Portfolio may under some circumstances fail to fully recoup its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for stripped mortgage-backed securities may be more volatile and less 15 liquid than that for other mortgage-backed securities, potentially limiting a Portfolio's ability to buy or sell those securities at any particular time. Certain mortgage-backed securities held by the Portfolios may permit the issuer at its option to "call," or redeem, its securities. If an issuer were to redeem securities held by a Portfolio during a time of declining interest rates, the Portfolio may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. Each of the Balanced, Quality Income, Short-Duration Income, Income and Growth, and High Income Portfolios may invest in securities representing interests in other types of financial assets, such as automobile-finance receivables or credit-card receivables. Such securities may or may not be secured by the receivables themselves or may be unsecured obligations of their issuers. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. For example, the laws of certain states may prevent or restrict repossession of collateral from a debtor. The Balanced, Quality Income, Short-Duration Income and High Income Portfolios may also invest in other types of mortgage-related securities, including any securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans or real property, including collateralized mortgage obligation "residual" interests. "Residual" interests represent the right to any excess cash flow remaining after all other payments are made among the various tranches of interests issued by structured mortgage-backed vehicles. The values of such interests are extremely sensitive to changes in interest rates and in prepayment rates on the underlying mortgages. In the event of a significant change in interest rates or other market conditions, the value of an investment by the Portfolio in such interests could be substantially reduced and the Portfolio may be unable to dispose of the interests at prices approximating the values the Portfolio had previously assigned to them or to recoup its initial investment in the interests. The Portfolios may invest in new types of mortgage-related securities that may be developed and marketed from time to time. If any of the Portfolios were to invest in such newly developed securities, shareholders would, where appropriate, be notified and this Prospectus would be revised accordingly. Mortgage-backed securities and other asset-backed securities are "derivative" securities and present certain special risks. The Portfolios may invest in a wide variety of such securities, including mortgage-backed and other asset-backed securities that will pay principal or interest only under certain circumstances, or in amounts that may increase or decrease substantially depending on changes in interest rates or other market factors. Such securities may experience extreme price volatility in response to changes in interest rates or other market factors; this may be especially true in the case of securities where the amounts of principal or interest paid, or the timing of such payments, varies widely depending on prevailing interest rates. A Portfolio's investment adviser or sub-adviser may not be able to obtain current market quotations for certain mortgage-backed or asset-backed securities at all times, or to obtain market quotations believed by it to reflect the values of such securities accurately. In such cases, a Portfolio's investment adviser or sub-adviser may be required to estimate the value of such a security using quotations provided by pricing services or securities dealers making a market in such securities, or based on other comparable securities or other bench-mark securities or interest rates. Mortgage-backed and other asset-backed securities in which a Portfolio may invest may be highly illiquid, and a Portfolio may not be able to sell such a security at a particular time or at the value it has placed on that security. 16 In calculating the value and duration of mortgage-backed or other asset-backed securities, a Portfolio's investment adviser or sub-adviser will be required to estimate the extent to which the values of the securities are likely to change in response to changes in interest rates or other market conditions, and the rate at which prepayments on the underlying mortgages or other assets are likely to occur under different scenarios. There can be no assurance that a Portfolio's investment adviser or sub-adviser will be able to predict the amount of principal or interest to be paid on any security under different interest rate or market conditions or that its predictions will be accurate, nor can there be any assurance that a Portfolio will recover the entire amount of the principal paid by it to purchase any such securities. ZERO-COUPON BONDS. Each of the Global, Income and Growth, Municipal Income, Quality Income, Short-Duration Income, High Income, and Balanced Portfolios may at times invest in so-called "zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount from face value and pay interest only at maturity rather than at intervals during the life of the security. Because zero-coupon bonds do not pay current interest, their value is subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest currently. Zero-coupon bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds that pay interest currently. Even though such bonds do not pay current interest in cash, a Portfolio is nonetheless required for federal income tax purposes to accrue interest income on such investments and to distribute such amounts at least annually to shareholders. Thus, a Portfolio could be required at times to liquidate other investments in order to satisfy this distribution requirement. PREMIUM SECURITIES. The Portfolios may at times invest in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amount payable on maturity. Although a Portfolio generally amortizes the amount of any such premium into income, the Portfolio may recognize a capital loss if such premium securities are called or sold prior to maturity and the call or sale price is less than the purchase price. Additionally, a Portfolio may recognize a capital loss if it holds such securities to maturity. LOWER-RATED SECURITIES (QUALITY INCOME, HIGH INCOME, MUNICIPAL INCOME, AND SHORT-DURATION INCOME PORTFOLIOS). INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THE RISKS OF OWNING SHARES OF A MUTUAL FUND THAT INVESTS IN LOWER-RATED SECURITIES (SOMETIMES REFERRED TO AS "JUNK BONDS") BEFORE MAKING AN INVESTMENT IN THE QUALITY INCOME, HIGH INCOME, MUNICIPAL INCOME, OR SHORT DURATION INCOME PORTFOLIOS. The lower ratings of lower-rated securities held by a Portfolio reflect a greater possibility that adverse changes in the financial condition of the issuer, or in general economic conditions, or both, or an unanticipated rise in interest rates, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payment of interest and principal would likely make the values of securities held by a Portfolio more volatile and could limit a Portfolio's ability to sell its securities at prices approximating the values the Portfolio had placed on such securities. It is possible that legislation may be adopted in the future limiting the ability of certain financial institutions to purchase lower-rated securities; such legislation may adversely affect the liquidity of such securities. In the absence of a liquid trading market for securities held by it, a Portfolio may be unable at times to establish the fair market value of such securities. The rating assigned to a security by Moody's or Standard & Poor's does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. For more information about the rating services' descriptions of lower-rated securities, see the Appendix to this Prospectus. 17 Like those of other fixed-income securities, the values of lower-rated securities fluctuate in response to changes in interest rates. Thus, a decrease in interest rates will generally result in an increase in the value of a Portfolio's assets. Conversely, during periods of rising interest rates, the value of a Portfolio's assets will generally decline. In addition, the values of such securities are also affected by changes in general economic conditions and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of any fixed-income security and in the ability of an issuer to make payments of interest and principal may also affect the values of these investments. Changes in the values of portfolio securities generally will not affect cash income derived from such securities, but will affect a Portfolio's net asset value. A Portfolio will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase, although Mentor Advisors or Van Kampen, as the case may be, will monitor the investment to determine whether continued investment in the security will assist in meeting a Portfolio's investment objectives. Issuers of lower-rated securities are often highly leveraged, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. In addition, such issuers may not have more traditional methods of financing available to them, and may be unable to repay debt at maturity by refinancing. The risk of loss due to default in payment of interest or principal by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. Certain of the lower-rated securities in which a Portfolio may invest are issued to raise funds in connection with the acquisition of a company, in so-called "leveraged buy-out" transactions. The highly leveraged capital structure of such issuers may make them especially vulnerable to adverse changes in economic conditions. A Portfolio may invest in lower-rated securities which trade infrequently or in more limited volume than higher-rated securities (including illiquid securities), or which are restricted as to resale. In addition, a substantial portion of a Portfolio's assets may at times be invested in securities as to which the Portfolio, by itself or together with other accounts managed by Mentor Advisors and its affiliates (or by Van Kampen and its affiliates, as the case may be), holds a major portion or all of such securities, which may limit the liquidity of such securities. A Portfolio could find it difficult or impossible to sell illiquid securities when Mentor Advisors or Van Kampen, as the case may be, believes it advisable to do so or may be able to sell such securities only at prices lower than if such securities were more widely held. In many cases, such securities may be purchased in private placements and, accordingly, will be subject to restrictions on resale as a matter of contract or under securities laws. Under such circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing a Portfolio's net asset value. In order to enforce its rights in the event of a default under securities in cases where a Portfolio holds a major portion or all of the outstanding issue, a Portfolio may be required to take possession of and manage assets securing the issuer's obligations on such securities, which may increase the Portfolio's operating expenses and adversely affect the Portfolio's net asset value. A Portfolio may also be limited in its ability to enforce its rights and may incur greater costs in enforcing its rights in the event an issuer becomes the subject of bankruptcy proceedings. A Portfolio may at times invest in so-called "payment-in-kind" bonds. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds that pay interest currently. Even though 18 such bonds do not pay current interest in cash, a Portfolio is nonetheless required for Federal income tax purposes to accrue interest income on such investments and to distribute such amounts at least annually to shareholders. Thus, a Portfolio could be required at times to liquidate other investments in order to satisfy this distribution requirement. Certain securities held by a Portfolio may permit the issuer at its option to "call," or redeem, its securities. If an issuer were to redeem securities held by a Portfolio during a time of declining interest rates, the Portfolio may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. Mentor Advisors and Van Kampen seek to minimize the risks involved in investing in lower-rated securities through diversification and careful investment analysis. When a Portfolio invests in high yield securities in the lower rating categories, achievement of the Portfolio's goals depends more on its adviser's investment analysis than would be the case if the Portfolio were investing in securities in the higher rating categories. OPTIONS AND FUTURES. Each of the Portfolios may buy and sell call and put options on securities it owns to hedge against changes in net asset value or to realize a greater current return. In addition, through the purchase and sale of futures contracts and related options, the Portfolios may at times seek to hedge against fluctuations in net asset value and, to the extent consistent with applicable law, to increase its investment return. In addition, the Portfolios may buy and sell options and futures contracts (including index futures contracts, described below) to implement changes in its asset allocations among various market sectors, pending the sale of its existing investments and reinvestment in new securities. The Portfolios' ability to engage in options and futures strategies will depend on the availability of liquid markets in such instruments. It is impossible to predict the amount of trading interest that may exist in various types of options or futures contracts. Therefore, there is no assurance that the Portfolios will be able to utilize these instruments effectively for the purposes stated above. Although the Portfolios will only engage in options and futures transactions for limited purposes, those transactions involve certain risks which are described below and in the Statement of Additional Information. Transactions in options and futures contracts involve brokerage costs and may require the Portfolios to segregate assets to cover its outstanding positions. For more information, see the Statement of Additional Information. INDEX FUTURES AND OPTIONS. Each of the Portfolios may buy and sell index futures contracts ("index futures") and options on index futures and indices for hedging purposes (or may purchase warrants whose value is based on the value from time to time of one or more foreign securities indices). An "index futures" contract is a contract to buy or sell units of a particular bond or stock index at an agreed price on a specified future date. Depending on the change in value of the index between the time when a Portfolio enters into and terminates an index futures or option transaction, the Portfolio realizes a gain or loss. The Portfolios may also, to the extent consistent with applicable law, buy and sell index futures and options to increase investment return. RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. Options and futures transactions involve costs and may result in losses. Certain risks arise because of the possibility of imperfect correlations between movements in the prices of futures and options and movements in the prices of the underlying security or index or of the securities held by a Portfolio that are the subject of a hedge. The successful use by a Portfolio of the strategies described above further depends on the ability of its investment adviser or sub-adviser to forecast market movements correctly. 19 Other risks arise from a Portfolio's potential inability to close out futures or options positions. Although a Portfolio will enter into options or futures transactions only if its investment adviser or sub-adviser believes that a liquid secondary market exists for such option or futures contract, there can be no assurance that a Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. Transactions in options and futures contracts involve brokerage costs and may require a Portfolio to segregate assets to cover its outstanding positions. For more information, see the Statement of Additional Information. Federal tax considerations may also limit a Portfolio's ability to engage in options and futures transactions. Each Portfolio's options and futures contract transactions will generally be conducted on recognized exchanges. However, a Portfolio may purchase and sell options in transactions in the over-the-counter markets. A Portfolio's ability to terminate options in the over-the-counter markets may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions would be unable to meet their obligations to the Portfolio. A Portfolio will, however, engage in over-the-counter transactions only when appropriate exchange-traded transactions are not appropriate and when, in the opinion of its investment adviser or sub-adviser, the pricing mechanism and liquidity of the over-the-counter markets are satisfactory and the participants are responsible parties likely to meet their contractual obligations. The Portfolios will not purchase futures or options on futures or sell futures if as a result the sum of the initial margin deposits on the Portfolios' existing futures positions and premiums paid for outstanding options on futures contracts would exceed 5% of the Portfolios' assets. (For options that are "in-the-money" at the time of purchase, the amount by which the option is "in-the-money" is excluded from this calculation.) SECURITIES LOANS AND REPURCHASE AGREEMENTS. Each Portfolio, other than the Municipal Income Portfolio, may lend portfolio securities and may enter into repurchase agreements with banks, broker/dealers, and other recognized financial institutions. The Short-Duration Income Portfolios may enter into each type of transaction on up to 25% of its assets, and each of the Growth, Capital Growth, Global, Income and Growth, and Quality Income Portfolios may enter into each type of transaction on up to one-third of its assets. These transactions must be fully collateralized at all times, but involve some risk to a Portfolio if the other party should default on its obligations and the Portfolio is delayed or prevented from recovering the collateral. LEVERAGE. The Short-Duration Income Portfolio, the Quality Income Portfolio, the High Income Portfolio, and the Balanced Portfolio may borrow money to invest in additional securities. Certain other Portfolios may engage in reverse repurchase agreements, forward commitments, and dollar-roll transactions described below and in the Statement of Additional Information, which may have the same economic effect as if the Portfolios had borrowed money. The use of borrowed money, known as "leverage," increases a Portfolio's market exposure and risk and may result in losses. When a Portfolio has borrowed money for leverage and its investments increase or decrease in value, its net asset value will normally increase or decrease more than if it had not borrowed money for this purpose. The interest that the Portfolio must pay on borrowed money will reduce its net investment income, and may also either offset any potential capital gains or increase any losses. The Portfolios currently intend to use leverage in order to adjust the dollar-weighted average duration of their portfolios. A Portfolio will not always borrow money for investment and the extent to which a Portfolio will borrow money, and the amount it may borrow, depends on market conditions and interest rates. Successful use of leverage depends on an investment adviser's ability to predict market movements correctly. The amount of leverage (including leverage to the extent 20 employed by a Portfolio through "reverse" repurchase agreements, "dollar roll" transactions, and "forward commitments", described below) that can exist at any one time will not exceed one-third of the value of a Portfolio's total assets (less all liabilities of the Portfolio other than the leverage). REVERSE REPURCHASE AGREEMENTS; FORWARD COMMITMENTS. Each Portfolio, other than the Growth and Portfolio, may enter into "reverse" repurchase agreements. Each of the Capital Growth, Quality Income, Short-Duration Income, Balanced, High Income, Income and Growth, and Global Portfolios may do so with respect to up to one-third of its assets, and the Municipal Income Portfolio may do so with respect to up to 5% of its assets. "Reverse" repurchase agreements generally involve the sale by a Portfolio of securities held by it and an agreement to repurchase the securities at an agreed-upon price, date, and interest payment. Each Portfolio also may enter into forward commitments, in which a Portfolio buys securities for future delivery. Reverse repurchase agreements and forward commitments involve leverage, and may increase a Portfolio's overall investment exposure. Their use by a Portfolio may result in losses. The Short-Duration Income Portfolio and the Quality Income Portfolio may enter into reverse repurchase agreement to create investment leverage. DOLLAR-ROLL TRANSACTIONS. In order to enhance portfolio returns and manage prepayment risks, each Portfolio, other than the Growth, Balanced, High Income, and Municipal Income Portfolios may engage in dollar-roll transactions with respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a dollar-roll transaction, a Portfolio sells a mortgage-related security to a financial institution, such as a bank or broker/dealer, and simultaneously agrees to repurchase a substantially similar (I.E., same type, coupon, and maturity) security from the institution at a later date at an agreed upon price. The mortgage-related securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. Dollar-roll transactions involve leverage and may increase a Portfolio's overall investment exposure. Their use by a Portfolio may result in losses. FOREIGN SECURITIES. Each Portfolio other than the Growth and Municipal Income Portfolios may invest in securities principally traded in foreign markets. The Capital Growth and Income and Growth Portfolios will limit such investments to 15% of their total assets. (Those percentage limitations do not apply to American Depository Receipts, Global Depository Receipts, and other U.S. dollar-denominated securities of issuers located outside the United States.) Since foreign securities are normally denominated and traded in foreign currencies, the values of a Portfolio's assets may be affected favorably or unfavorably by changes in currency exchange rates and by exchange control regulations. There may be less information publicly available about a foreign company than about a U.S. company, and foreign companies are not generally subject to accounting, auditing, and financial reporting standards and practices comparable to those in the United States. The securities of some foreign companies are less liquid and at times more volatile than securities of comparable U.S. companies. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of a Portfolio's assets held abroad) and expenses not present in the settlement of domestic investments. In addition, there may be a possibility of nationalization or expropriation of assets, imposition of currency exchange controls, confiscatory taxation, political or financial instability, and diplomatic developments which could affect the value of a Portfolio's investments in certain foreign countries. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit a Portfolio's ability to 21 invest in securities of certain issuers located in those foreign countries. Special tax considerations apply to foreign securities. A Portfolio may buy or sell foreign currencies and options and futures contracts on foreign currencies for hedging purposes in connection with its foreign investments as described more fully below. A Portfolio may invest in American Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs"), which represent interests in foreign securities held by a bank, trust company, or other organization. Investments in ADRs and GDRs are subject to many of the same risks of investing in foreign securities generally. The risks described above are typically increased to the extent that a Portfolio invests in securities traded in underdeveloped and developing nations, which are sometimes referred to as "emerging markets." FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Each Portfolio that may invest in foreign securities may engage in foreign currency exchange transactions to protect against uncertainty in the level of future currency exchange rates. A Portfolio may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging"). A Portfolio also may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which a Portfolio contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. A Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with transaction hedging. A Portfolio may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and may purchase and sell foreign currency futures contracts, for hedging and not for speculation. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange- traded contracts and have margin requirements. For transaction hedging purposes, a Portfolio may also purchase and sell call and put options on foreign currency futures contracts and on foreign currencies. A Portfolio may engage in position hedging to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in value of a currency in which securities the Portfolio intends to buy are denominated). For position hedging purposes, a Portfolio may purchase or sell foreign currency futures contracts and foreign currency forward contracts, and may purchase and sell put and call options on foreign currency futures contracts and on foreign currencies. In connection with position hedging, a Portfolio may also purchase or sell foreign currencies on a spot basis. Although there is no limit to the amount of a Portfolio's assets that may be invested in foreign currency exchange and foreign currency forward contacts, a Portfolio will only enter into such transactions to the extent necessary to effect the hedging transactions described above. INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of its portfolio from interest rate fluctuations and to adjust the interest-rate sensitivity of its portfolio, each of the Global, Balanced, High Income, Quality Income, and Short-Duration Income Portfolios may enter into interest rate swaps and other interest rate transactions, such as interest rate caps, floors, and collars. Interest rate swaps involve the exchange by a Portfolio with another party of different types of interest-rate streams (E.G. an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal). The purchase of an interest rate cap entitles the 22 purchaser to receive payments on a notional principal amount from the party selling the cap to the extent that a specified index exceeds a predetermined interest rate or amount. The purchase of a floor entitles the purchaser to receive payments on a notional principal amount from the party selling the floor to the extent that a specified index falls below a predetermined interest rate or amount. A collar is a combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates or values. Each Portfolio intends to use these interest rate transactions as a hedge and not as a speculative investment. A Portfolio's ability to engage in certain interest rate transactions may be limited by tax considerations. The use of interest rate swaps and other interest rate transactions is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If a Portfolio's investment adviser or sub-adviser is incorrect in its forecasts of market values, interest rates, or other applicable factors, the investment performance of a Portfolio would be less favorable than it would have been if this investment technique were not used. INDEXED SECURITIES. The Global Portfolio may invest in indexed securities, the values of which are linked to currencies, interest rates, commodities, indices, or other financial indicators. Investment in indexed securities involves certain risks. In addition to the credit risk of the securities issuer and normal risks of price changes in response to changes in interest rates, the principal amount of indexed securities may decrease as a result of changes in the value of the reference instruments. Also, in the case of certain indexed securities where the interest rate is linked to a reference instrument, the interest rate may be reduced to zero and any further declines in the value of the security may then reduce the principal amount payable on maturity. Further, indexed securities may be more volatile than the reference instruments underlying indexed securities. PORTFOLIO TURNOVER. The length of time a Portfolio has held a particular security is not generally a consideration in investment decisions. A change in the securities held by a Portfolio is know as "portfolio turnover." As a result of each Portfolio's investment policies, under certain market conditions its portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense to a Portfolio, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. Such transactions may result in realization of taxable gains. Portfolio turnover rates for the most recent fiscal year (for each of the Portfolios except the High Income Portfolio) are contained in the section "Financial Highlights". The portfolio turnover note for the High Income Portfolio is not expected to exceed 200% for the current fiscal year. HOW THE PORTFOLIOS VALUE THEIR SHARES Each Portfolio calculates the net asset value of a share of each class by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Portfolio securities for which market quotations are readily available are stated at market value. Short-term investments that will mature in 60 days or less are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair values. 23 Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rates or at such other rates as may be used in accordance with procedures approved by the Trustees. As a result, fluctuations in the values of such currencies in relation to the U.S. dollar will affect the net asset value of a Portfolio's shares even though there has not been any change in the values of such securities as quoted in such foreign currencies. PURCHASE OF SHARES Mentor Distributors, LLC ("Mentor Distributors"), located at 3435 Stelzer Road, Columbus, Ohio 43219, serves as distributor of the Portfolios' shares. Mentor Distributors is not obligated to sell any specific amount of shares of any of the Portfolios. Mentor Distributors is a wholly owned subsidiary of BISYS Fund Services, Inc. Y Shares of each Portfolio are sold at a price based on their net asset value next determined after a purchase order is received by the Portfolio. In most cases, in order to receive that day's public offering price, your order must be received by the Trust or Mentor Distributors before the close of regular trading on the New York Stock Exchange. An investor may make an initial purchase of shares in a Portfolio by submitting completed application materials along with a purchase order, and by making payment c/o Mentor Funds to Boston Financial Data Services, Inc. at 2 Heritage Drive, North Quincy, MA 02171. Investors will be required to make minimum initial investments of $500,000 and minimum subsequent investments of $25,000. Investments made through advisory accounts maintained with investment advisers registered under the Investment Advisers Act of 1940, as amended (including "wrap" accounts), are not subject to these minimum investment requirements. Contact Mentor Services Company, Inc. ("Mentor Services Company") for information. The Portfolios reserve the right at any time to change the initial and subsequent investment minimums required of investors. Shares of a Portfolio may be purchased by (i) paying cash, (ii) exchanging securities acceptable to a Portfolio's investment adviser or sub-adviser, or (iii) a combination of such securities and cash. Purchase of shares of a Portfolio in exchange for securities is subject in each case to the determination by a Portfolio's investment adviser or sub-adviser that the securities to be exchanged are acceptable for purchase by the Portfolio. Securities accepted by a Portfolio's investment adviser or sub-adviser in exchange for Portfolio shares will be valued in the same manner as the Portfolio's assets as of the time of the next determination of net asset value after such acceptance. All dividends and subscription or other rights which are reflected in the market price of accepted securities at the time of valuation become the property of the Portfolio and must be delivered to the Portfolio upon receipt by the investor from the issuer. A gain or loss for federal income tax purposes would be realized upon the exchange by an investor that is subject to federal income taxation, depending upon the investor's basis in the securities tendered. A shareholder who wishes to purchase shares by exchanging securities should obtain instruction by calling Mentor Services Company at 1-800-869-6042. Mentor Distributors, Mentor Advisors, Mentor Perpetual, the sub-advisers or affiliates thereof, at their own expense and out of their own assets, may provide compensation to dealers in connection with sales of shares of the Portfolios. Such compensation may include, but is not limited to, financial assistance to dealers in connection with conferences, sales, or training programs for their employees, seminars for the public, advertising or sales campaigns, or other dealer-sponsored special events. In some instances, this compensation may be made available only to certain dealers whose representatives have sold or are expected to sell significant amounts of 24 shares. In addition, if an investor purchases shares of a Portfolio through EVEREN Securities, Inc. with the redemption proceeds received by the investor within the preceding 90 days from the sale of shares of any non-Mentor open-end mutual fund, EVEREN Securities, Inc. may compensate the investor's investment consultant in connection with that purchase. Dealers may not use sales of Portfolio shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc. In all cases a Portfolio's investment adviser, sub-adviser, and Mentor Distributors reserve the right to reject any particular investment. REDEMPTION OF SHARES A shareholder may redeem all or any portion of its shares in a Portfolio any day the New York Stock Exchange is open by sending a signed letter of instruction and stock power form, along with any certificates that represent shares the shareholder wants to sell, to Mentor Funds, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North Quincy, MA 02171. Redemptions will be effected at the net asset value per share next determined after the receipt by the Portfolio of redemption instructions in "good order" as described below. In order to receive that day's net asset value, your request must be received before the close of regular trading on the New York Stock Exchange. A Portfolio will only redeem shares for which it has received payment. A check for the proceeds will normally be mailed on the next business day after a request in good order is received. A redemption request will be considered to have been made in "good order" if the following conditions are satisfied: (1) the request is in writing, states the number of shares to be redeemed, and identifies the shareholder's Portfolio account number; (2) the request is signed by each registered owner exactly as the shares are registered; and (3) if the shares to be redeemed were issued in certificate form, the certificates are endorsed for transfer (or are accompanied by an endorsed stock power) and accompany the redemption request. If shares to be redeemed represent an investment made by check, the Trust reserves the right not to transmit the redemption proceeds to the shareholder until the check has been collected, which may take up to 15 days after the purchase date. Each Portfolio reserves the right to require signature guarantees. A guarantor of a signature must be an eligible guarantor institution, which term includes most banks and trust companies, savings associations, credit unions, and securities brokers or dealers. The purpose of a signature guarantee is to protect shareholders against the possibility of fraud. Mentor Services Company usually requires additional documentation for the sale of shares by a corporation, partnership, agent, fiduciary, or surviving joint owner. Contact Mentor Services Company at 1-800-869-6042 for details. Mentor Services Company may facilitate any redemption request. There is no extra charge for this service. 25 GENERAL. The Portfolios generally send you payment for your shares the business day after your request is received. Under unusual circumstances, the Portfolios may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. The Portfolios reserve the right, if conditions exist which make cash payments undesirable, to honor any request for redemption by making payment in whole or in part in securities valued in the same way as they would be valued for purposes of computing the Portfolios' per share net asset value. If payment is made in securities, a shareholder may incur brokerage expenses in converting those securities into cash. HOW TO EXCHANGE SHARES Except as otherwise described below, you can exchange your Y Shares in a Portfolio worth at least $1,000,000 for shares of the same class of any other Portfolio of the Trust, at net asset value beginning 15 days after purchase. You may also exchange Y Shares of a Portfolio for shares of Cash Resource U.S. Government Money Market Fund (the "Cash Fund"). To exchange your shares, simply provide a letter of intent and send it to the Trust, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North Quincy, Massachusetts 02171. For federal income tax purposes, an exchange is treated as a sale of shares and generally results in a capital gain or loss. A Telephone Exchange Privilege is currently available. The Telephone Exchange Privilege is not available if you were issued certificates for shares which remain outstanding. Ask you investment dealer or Mentor Services Company for a prospectus relating to the Cash Fund. Shares of certain of the Portfolios may not be available to residents of all states. The exchange privilege is not intended as a vehicle for short-term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where Mentor Advisors or the Trustees believe doing so would be in the best interests of a Portfolio, the Trust reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges, or reject any exchange. Shareholders would be notified of any such action to the extent required by law. Consult Mentor Services Company before requesting an exchange by calling 1-800-869-6042. See the Statement of Additional Information to find out more about the exchange privilege. HOW DISTIBUTIONS ARE MADE Dividends, if any, are declared daily and paid monthly for the Quality Income, High Income, Short-Duration Income, and Municipal Income Portfolios, quarterly for the Income and Growth and Balanced Portfolios and annually for the Growth, Capital Growth, and Global Portfolios. Each Portfolio will distribute its net capital gain, if any, at least annually. All dividends and distributions of net capital gain will be invested in additional Y Shares of a Portfolio unless a shareholder requests in writing to receive the dividend or distribution in cash. TAXES Each Portfolio intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements that are necessary for it to be relieved of federal taxes on income and gains it 26 distributes to shareholders. Each Portfolio will distribute substantially all of its net investment income and capital gain net income on a current basis. All Portfolio distributions, other than exempt-interest dividends, will be taxable to shareholders as ordinary income, except that any distributions of net capital gain will be taxed as long-term capital gain, regardless of how long a shareholder has held the shares (although the loss on a sale of shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain distribution received with respect to those shares). Distributions will be taxable to a shareholder of a Portfolio even if they are paid from income or gains earned by the Portfolio prior to the shareholder's investment (and thus were included in the price paid by the shareholder). Distributions will be taxable as described above whether received in cash or in shares through the reinvestment of distributions. Early in each year Mentor Funds will notify shareholders of the amount and tax status of distributions paid by their Portfolios for the preceding year. In buying or selling securities for each of the Portfolios, Mentor Advisors and Mentor Perpetual, as applicable, will not normally take into account the effect any purchase or sale of securities will have on the tax positions of the Portfolios' shareholders. To permit the Quality Income, Municipal Income, and Short-Duration Income Portfolios to maintain more stable monthly distributions, each of these Portfolios may from time to time pay out less than the entire amount of net investment income earned in any particular period. Any such amount retained by a Portfolio would be available to stabilize future distributions. As a result, the distributions paid by any of these Portfolios for any particular period may be more or less than the amount of net investment income actually earned by the Portfolio during that period. MUNICIPAL INCOME PORTFOLIO. Distributions designated by the Municipal Income Portfolio as "exempt-interest dividends" are not generally subject to federal income tax. The Municipal Income Portfolio may engage in investment activities that produce taxable income, the distribution of which will be taxable to shareholders as described above. Individual investors who receive Social Security or railroad retirement benefits should consult their tax advisers to determine what effect, if any, an investment in the Municipal Income Portfolio may have on the taxation of their benefits. In addition, an investment in the Portfolio may result in liability for federal alternative maximum tax and for state and local taxes, both for individual and corporate shareholders. GLOBAL PORTFOLIO ONLY. Shareholders of the Global Portfolio who are U.S. citizens or residents may be able to claim a foreign tax credit or deduction on their U.S. income tax returns with respect to foreign taxes paid by the Portfolio. If, at the end of the fiscal year of the Portfolio, more than 50% of the Portfolio's total assets are represented by stock or securities of foreign corporations, the Portfolio intends to make an election permitted by the Internal Revenue Code to treat any eligible foreign taxes it paid as paid by its shareholders. In that case, shareholders who are U.S. citizens, U.S. corporations, and, in some cases, U.S. residents, will be required to include in U.S. taxable income their pro rata share of such taxes, but may then be entitled to claim a foreign tax credit or deduction (but not both) for their share of such taxes. The foregoing is a summary of certain federal income tax consequences of investing in a Portfolio. Dividends distributions and redemption proceeds also may be subject to foreign, state, and local taxes. Shareholders are urged to consult their tax advisers regarding specific questions as to federal, foreign, state, or local taxes. Non-U.S. investors should consult their tax advisers concerning the tax consequences of ownership of shares of a Portfolio, including the possibility that distributions may be subject to a 30% United States withholding tax (or a reduced rate of withholding provided by treaty). 27 MANAGEMENT The Trustees of Mentor Funds are responsible for generally overseeing the conduct of its business. MENTOR INVESTMENT ADVISORS, LLC is the investment adviser to each of the Portfolios other than the Global Portfolio. MENTOR PERPETUAL ADVISORS, LLC is the investment adviser to the Global Portfolio. Each of the investment advisers is located at 901 East Byrd Street, Richmond, Virginia. All investment decisions made for the Portfolios by Mentor Advisors and Mentor Perpetual are made by investment management teams. Mentor Advisors has over $13 billion in assets under management and is a wholly owned subsidiary of Mentor Investment Group, LLC ("Mentor Investment Group") and its affiliates. Mentor Investment Group is a subsidiary of Wheat First Butcher Singer, Inc., which is in turn a wholly owned subsidiary of First Union Corp. ("First Union"). First Union is a leading financial services company with approximately $234 billion in assets and $17 billion in total stockholders' equity as of September 30, 1998. EVEREN Capital Corporation has a 20% ownership in Mentor Investment Group and may acquire additional ownership based principally on the amount of Mentor Investment Group's revenues derived from assets attributable to clients of EVEREN Securities, Inc. and its affiliates. Mentor Perpetual, an investment advisory firm organized in 1995, is owned equally by Perpetual plc, a diversified financial services holding company, and Mentor Advisors. The Perpetual organization currently serves as investment adviser for assets of more than $15 billion. Its clients include 28 unit and investment trusts and other public investment pools including private individuals, charities, pension plans, and life assurance companies. Mentor Advisors and Mentor Perpetual together serve as investment adviser to 27 separate investment portfolios in the Mentor Family of Funds, including those offered by this Prospectus. For a prospectus relating to certain of these other investment portfolios, and for information concerning your eligibility to purchase shares of those portfolios, contact Mentor Services. Each of the Portfolios (other than the Global Portfolio) pays management fees to Mentor Advisors at the annual rates described above under "Expense Summary -- Annual Portfolio Operating Expenses", and the Global Portfolio pays fees to Mentor Perpetual at an annual rate to 1.10% of its average daily net assets up to and including $75 million and 1.00% of its average daily net assets in excess of $75 million. The advisory fees paid by the Growth, Capital Growth, Income and Growth, and Global Portfolios are higher than those paid by many other mutual funds. An investment adviser may from time to time voluntarily waive some or all of its investment advisory fees and may terminate any such voluntary waiver at any time in its sole discretion. THE SUB-ADVISERS Van Kampen Management, Inc. serves as sub-adviser to the High Income Portfolio and the Municipal Income Portfolio. Van Kampen, located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, was incorporated in 1990 and commenced operations in 1992. Van Kampen currently provides investment advice to a wide variety of individual, institutional, and investment company clients. Van Kampen is a wholly owned subsidiary of Van Kampen American Capital, Inc., which, in turn, is a wholly owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is an indirect wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. Morgan Stanley, Dean Witter, Discover & Co. and various of its subsidiaries, including Morgan Stanley & Co. 28 Incorporated, a registered broker-dealer, are engaged in a wide range of financial services. As of September 30, 1998, Van Kampen, together with its affiliates, advised or supervised approximately $70 billion of assets. For its services as sub-adviser of the Municipal Income Portfolio, Van Kampen receives a fee from Mentor Advisors at the following annual rate: 0.25% of the first $60 million of the Portfolio's average net assets and 0.20% of the Portfolio's average net assets over $60 million. For its services as a sub-adviser of the High Income Portfolio, Van Kampen receives a monthly fee from Mentor Advisors at the annual rate of .20% of the Portfolio's average daily net assets. David C. Johnson, Senior Vice President and Co-Director of Municipal Investments, is a manager of the Municipal Income Portfolio. Mr. Johnson joined Van Kampen in 1989 and has served as portfolio manager of the Municipal Income Portfolio since its inception. Mr. Johnson has eighteen years of management experience in the tax-free fixed-income sector. Currently, he is responsible for the management and supervision of 52 Van Kampen municipal funds, including both open and closed-end fund, with total assets exceeding $13 billion. Timothy D. Haney, Vice President, is a co-manager of the Municipal Income Portfolio since 1997. He is responsible for the management of ten open and closed-end municipal funds with total assets of approximately $2 billion. Mr. Haney joined Van Kampen in 1988 and has ten years of experience in the tax-free fixed income market. Ellis S. Bigelow, Senior Vice President, has been the manager of the Mentor High Income Portfolio since its inception. Ms. Bigelow joined Van Kampen in 1980 and has over 18 years of experience in the corporate, government and equity sectors. Currently, she is responsible for the management or supervision of approximately $2 billion in corporate assets. Wellington Management Company, LLP serves as sub-adviser to the Income and Growth Portfolio. Wellington Management, located at 75 State Street, Boston, Massachusetts 02109, is a professional investment counseling firm which provides investment services to investment companies, employee benefit plans, endowments, foundations, and other institutions and individuals. As of September 30, 1998, Wellington Management had discretionary investment management authority with respect to approximately $187 billion in assets. Wellington Management and its predecessor organizations have provided investment advisory services to investment companies since 1933 and to investment counseling clients since 1960. For its services as sub-adviser, Wellington Management receives a fee from Mentor Advisors at the following annual rate: 0.325% of the first $50 million of the Portfolio's average net assets, 0.275% of the next $150 million of the Portfolio's average net assets, 0.225% of the next $300 million of the Portfolio's average net assets, and 0.200% of the Portfolio's net assets over $500 million. Paul D. Kaplan, Senior Vice President of Wellington Management, has served as portfolio manager of the fixed-income and U.S. Government securities portion of the Portfolio since its inception in May 1993. Mr. Kaplan has been a portfolio manager with Wellington Management since 1982. As of November 30, 1996, Wellington Management's Equity Income Team, a group of equity portfolio managers and senior investment professionals, assumed responsibility for managing the equity securities portion of the Portfolio. GENERAL. Subject to the general oversight of the Trustees, each Portfolio's investment adviser or sub-adviser manages the relevant Portfolio's investments in accordance with the stated policies of the Portfolio. Each makes investment decisions for a Portfolio and places purchase and sale orders for the Portfolio's transactions. In addition, each pays the salaries of all officers and employees who are employed by both it and Mentor Funds. Mentor Funds pays all expenses not assumed by the investment advisers, sub-advisers, or Mentor Investment Group, 29 including, among other things, Trustees' fees, auditing, accounting, legal, custodial, investor servicing, and shareholder reporting expenses. In selecting broker-dealers, an investment adviser or sub-adviser may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the best overall terms available, a Portfolio's investment adviser or sub-adviser may consider sales of shares of Mentor Funds (and, if permitted by law, of the other funds in the Mentor family) as a factor in the selection of broker-dealers. ADMINISTRATIVE SERVICES. Mentor Investment Group, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain administrative personnel and services necessary to operate each Portfolio, such as bookkeeping and accounting services. Mentor Investment Group provides these services to each of the Portfolios at an annual rate of 0.10% of the Portfolio's average daily net assets attributable to each class. GENERAL INFORMATION Mentor Funds is a Massachusetts business trust organized on January 20, 1992. A copy of the Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The Trust is an open-end series management investment company with an unlimited number of authorized shares of beneficial interest. Shares of the Trust may, without shareholder approval, be divided into two or more series of shares representing separate investment portfolios. Any such series of shares may be further divided without shareholder approval into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees determine. The Trust's shares are currently divided into twelve series, with varying investment objectives and policies. Certain of the Trust's Portfolios offer more than one class of shares with different sales charges and expenses. Each of the Growth, Perpetual Global, Capital Growth, Balanced, Income and Growth, Municipal Income, Quality Income, Short-Duration Income, and High Income Portfolios currently offer three classes of shares: Class Y (Institutional) shares of the Portfolios, which are offered by this Prospectus, and Class A and Class B shares which are subject to sales loads and (in the case of Class B shares, distribution fees) and shareholder servicing fees. Contact Mentor Services Company for information concerning Class A and B shares. Each share has one vote, with fractional shares voting proportionally. Shares of each class will vote together as a single class except when required by law or determined by the Trustees. shares of the Portfolio are freely transferable, are entitled to dividends as declared by the Trustees, and, if the Portfolio were liquidated, would receive the net assets of the Portfolio. The Trust may suspend the sale of shares at any time and may refuse any order to purchase shares. Although neither the Portfolio nor the Trust is required to hold annual meetings of shareholders, shareholders have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust. The Portfolios receive services from a number of providers which rely on the smooth functioning of their respective systems and the systems of others to perform those services. It is generally recognized that certain systems in use today may not perform their intended functions adequately after the Year 1999 because of the inability of the software to distinguish the Year 2000 from the Year 1900. Mentor Advisors is taking steps that it believes are reasonably designed to address this potential "Year 2000" problem and to obtain satisfactory 30 assurances that comparable steps are being taken by the Portfolios' other major service providers. There can be no assurance, however, that these steps will be sufficient to avoid any adverse impact on the Portfolios from this problem. In the interest of economy and convenience, the Portfolio will not issue certificates for its shares except at the shareholder's request. Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri 64105, serves as the Portfolio's custodian. State Street Bank and Trust Company, c/o Boston Financial Data Services, Inc., 2 Heritage Drive, North Quincy, Massachusetts 02171, serves as the Portfolio's transfer and dividend agent. PERFORMANCE INFORMATION Yield and total return data may from time to time be included in advertisements about Y Shares of the Portfolios. A Portfolio's "Yield" is calculated by dividing the Portfolio's annualized net investment income per Y Share during a recent 30-day period by the net asset value per Y Share on the last day of that period. "Total return" of a Portfolio's Y Shares for the one-five- and ten-year period (or for a life of a class, if shorter) through the most recent calendar quarter represents the average annual compounded rate of return on an investment of $1,000 in the Portfolio's Y Shares that class of shares over the period. Total return may also be presented for other periods. Investment performance for different classes of shares of the Portfolios will differ. Quotations of yield and total return for a period when an expense limitation was in effect will be greater than if the limitation had not been in effect. A Portfolio's performance may be compared to various indices. See the Statement of Additional Information. Information may be presented in advertisements about the Portfolios describing the background and professional experience of the Portfolios' investment adviser or its investment personnel. ALL DATA IS BASED ON THE PORTFOLIO'S PAST INVESTMENT RESULTS AND DOES NOT PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based on many factors, including market conditions, the composition of a Portfolio's investments, the Portfolio's operating expenses, and the class of shares purchased. Investment performance also often reflects the risks associated with a Portfolio's investment objective and policies. These factors should be considered when comparing a Portfolio's investment results to those of other mutual funds and other investment vehicles. As permitted by applicable law, performance information for a Portfolio whose investment adviser or sub-adviser has changed may be presented only for periods after the change was effected. 31 APPENDIX MOODY'S INVESTORS SERVICE, INC., BOND RATINGS AAA -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. BAA -- Bonds which are rated Baa are considered as medium-grade obligations, (I.E., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA -- Bonds which are Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principle or interest. CA -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS AAA -- An obligation rated AAA has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet it financial commitment on the bligation is extremely strong. AA -- An obligation rated AA differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. 32 A -- An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB -- An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Obligations rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the lowest degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B -- An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligations. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. CC -- An obligation rated CC is currently highly vulnerable to nonpayment. C -- The C rating may be used to cover a situation where a bankruptcy petition has been filed, or similar action has been taken, but payments on this obligation are being continued. D -- An obligation rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition, or the taking of a similar action if payments on an obligtion are jeopardized. MOODY'S NOTE RATINGS MIG1/VMIG1 -- This designation denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broadbased access to the market for refinancing. MIG2/VMIG2 -- This designation denotes high quality. Margins of protection are ample although not so large as in the preceding group. 33 STANDARD AND POOR'S NOTE RATINGS SP-1 -- Strong capacity to pay principal and interest. Issues determined to possess overwhelming safety characteristics are given a plus sign (+) designation. SP-2 -- Satisfactory capacity to pay principal and interest. SP-3 -- Speculative capacity to pay principal and interest. MOODY'S COMMERCIAL PAPER RATINGS Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by the following characteristics: -- Leading market positions in well established industries. -- High rates of return on funds employed. -- Conservative capitalization structure with moderate reliance on debt and ample asset protection. -- Broad margins in earnings coverage of fixed financial charges and high internal cash generation. -- Well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) ahve a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above to a lesser degree. Earnings trends and coverage ratios,, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. STANDARD AND POOR'S COMMERCIAL PAPER RATINGS A-1 -- This highest category indicateds that the degree of safety regrding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 -- Capacity for timely payment on issues with this designationis satisfactory. However, the relative degree of saety is not as high as for issues designated A-1. A-3 -- Issues carrying this designation have adequate capacity fo rtimely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. 34 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MENTOR FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES. ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND MENTOR FUNDS IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION. MENTOR INVESTMENT GROUP 901 East Byrd Street Richmond, VA 23219 (800) 869-6042 1998 MENTOR DISTRIBUTORS, LLC SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE MENTOR FUNDS MENTOR GROWTH PORTFOLIO MENTOR PERPETUAL GLOBAL PORTFOLIO MENTOR CAPITAL GROWTH PORTFOLIO MENTOR BALANCED PORTFOLIO MENTOR INCOME AND GROWTH PORTFOLIO MENTOR MUNICIPAL INCOME PORTFOLIO MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MENTOR HIGH INCOME PORTFOLIO ------------------------- PROSPECTUS ------------------------- December 15, 1998 [MENTOR INVESTMENT GROUP LOGO] NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MENTOR FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES. ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND MENTOR FUNDS IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION. MENTOR INVESTMENT GROUP 901 East Byrd Street Richmond, VA 23219 (800) 869-6042 1998 MENTOR DISTRIBUTORS, LLC SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE [MENTOR INVESTMENT GROUP LOGO] MENTOR FUNDS MENTOR GROWTH PORTFOLIO MENTOR PERPETUAL GLOBAL PORTFOLIO MENTOR CAPITAL GROWTH PORTFOLIO MENTOR BALANCED PORTFOLIO MENTOR INCOME AND GROWTH PORTFOLIO MENTOR MUNICIPAL INCOME PORTFOLIO MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MENTOR HIGH INCOME PORTFOLIO ------------------------- PROSPECTUS ------------------------- December 15, 1998 [EVEREN SECURITIES LOGO] P R O S P E C T U S December 15, 1998 Retail Shares MENTOR FUNDS MENTOR MONEY MARKET PORTFOLIO MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO The Mentor Money Market Portfolios are designed for investors who seek current income consistent with preservation of capital and maintenance of liquidity. The Portfolios are diversified investment portfolios of Mentor Funds (the "Trust"). An investment in a Portfolio is neither insured nor guaranteed by the U.S. Government. There can be no assurance that a Portfolio will be able to maintain a stable net asset value of $1.00 per share. This Prospectus explains concisely what you should know before investing in a Portfolio. Please read it carefully and keep it for future reference. You can find more detailed information about the Portfolios in a December 15, 1998 Statement of Additional Information, as amended from time to time. For a free copy of the Statement, call Mentor Services Company, Inc. at 1-800-869-6042. The Statement has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference. ---------------- SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS
PAGE ----- Expense Summary ............................. 3 Investment Objectives and Policies .......... 4 Management .................................. 12 General Information ......................... 15
2 EXPENSE SUMMARY Expenses are one of several factors to consider when investing in a Portfolio. The following table summarizes your maximum transaction costs from an investment in Retail Shares of each of the Portfolios. Expenses shown are based on those incurred for the last fiscal year (except that, in the case of the Tax-Exempt Money Market Portfolio, expenses shown reflect the expenses the Portfolio expects to incur in its first fiscal year). The Examples show the cumulative expenses attributable to a hypothetical $1,000 investment in each Portfolio over specified periods. The information presented below does not reflect any fees or charges imposed by Financial Institutions through which you may invest in the Portfolios.
MENTOR MENTOR MENTOR U.S. GOVERNMENT TAX-EXEMPT MONEY MARKET MONEY MARKET MONEY MARKET PORTFOLIO PORTFOLIO PORTFOLIO -------------- ----------------- ------------- SHAREHOLDER TRANSACTION EXPENSES None None None ANNUAL PORTFOLIO OPERATING EXPENSES: (as a percentage of average net assets) Management Fees* ...................... .18% .18% .21% 12b-1 Fees ............................ .38% .38% .33% Other Expenses ........................ .28% .25% .17% ---- ----- ----- Total Fund Operating Expenses ......... .84% .81% .71%
* For purposes of determining the annual rate at which Management Fees are payable by the Portfolios, a Portfolio's assets will be considered to include the assets of certain Funds offered by Cash Resource Trust and managed by Mentor Investment Advisors, LLC. See "Management," below. EXAMPLES Your investment of $1,000 in a Portfolio would incur the following expenses, assuming 5% annual return and redemption at the end of each period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------- --------- --------- --------- Mentor Money Market Portfolio .......... $9 $27 $47 $104 Mentor U.S. Government Money Market Portfolio ................ $8 $26 $45 $100 Mentor Tax-Exempt Money Market Portfolio ................ $7 $23 -- --
The table is provided to help you understand the expenses of investing in each of the Portfolios and your share of the operating expenses which each of the Portfolios expects to incur. The Examples do not represent past or future expense levels. Actual returns and expenses may be greater or less than those shown. Federal regulations require the Examples to assume a 5% annual return, but actual annual return will vary. Because of the 12b-1 fees payable by the Portfolios, long-term shareholders may pay more in aggregate sales charges than the maximum initial sales charge permitted by the National Association of Securities Dealers, Inc. 3 INVESTMENT OBJECTIVES AND POLICIES The investment objectives of Mentor Money Market Portfolio (the "Money Market Portfolio") and Mentor U.S. Government Money Market Portfolio (the "U.S. Government Money Market Portfolio") are to seek as high a rate of current income as Mentor Investment Advisors, LLC, the Portfolios' investment advisor ("Mentor Advisors"), believes is consistent with preservation of capital and maintenance of liquidity. The investment objective of Mentor Tax-Exempt Money Market Portfolio (the "Tax-Exempt Money Market Portfolio") is to seek as high a rate of current income exempt from federal income tax as Mentor Advisors believes is consistent with preservation of capital and maintenance of liquidity. The Portfolios seek their objectives through the investment policies described below. Because each of the Portfolios is a money market fund, it will only invest in the types of investments described below under "Selection of Investments." The investment objective and policies of each Portfolio may, unless otherwise specifically stated, be changed by the Trustees without shareholder approval. None of the Portfolios is intended to be a complete investment program, and there is no assurance a Portfolio will achieve its objective. MENTOR MONEY MARKET PORTFOLIO The Money Market Portfolio will invest in a portfolio of high-quality, short-term instruments consisting of any or all of the following: o U.S. Government securities: securities issued or guaranteed as to principal or interest by the U.S. Government or by any of its agencies or instrumentalities. o Banker's acceptances: negotiable drafts or bills of exchange, which have been "accepted" by a domestic bank (or a foreign bank with an agency domiciled in the United States), meaning, in effect, that the bank has unconditionally agreed to pay the face value of the instrument on maturity. o Prime commercial paper: high-quality, short-term obligations issued by banks, corporations, and other issuers organized under the laws of a jurisdiction within the United States. o Other short-term obligations: high-quality, short-term obligations of corporate issuers. o Repurchase agreements: with respect to U.S. Government or agency securities. MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO The U.S. Government Money Market Portfolio invests exclusively in U.S. Treasury bills, notes, and bonds, and other obligations issued or guaranteed as to principal or interest by the U.S. Government, its agencies, or instrumentalities, and in repurchase agreements with respect to such obligations. Certain of these obligations, including U.S. Treasury bills, notes, and bonds, mortgage participation certificates issued or guaranteed by the Government National Mortgage Association, and Federal Housing Administration debentures, are supported by the full faith and credit of the United States. Other U.S. Government securities issued by federal agencies or government-sponsored enterprises are not supported by the full faith and credit of the United States. These securities include obligations supported by the right of the issuer to borrow from the U.S. Treasury, such as obligations of Federal Home Loan Banks, and obligations supported only by the credit of an instrumentality, such as Federal National Mortgage Association bonds. 4 Short-term U.S. Government obligations generally are considered among the safest short-term investments. Because of their added safety, the yields available from U.S. Government obligations are generally lower than the yields available from comparable corporate debt securities. The U.S. Government guarantee of securities owned by the Portfolio does not guarantee the net asset value of the Portfolio's shares, which the Portfolio seeks to maintain at $1.00 per share. MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO The Tax-Exempt Portfolio invests, as a fundamental policy, at least 80% of its net assets in Tax-Exempt Securitites (as described below). The Portfolio may invest the remainder of its assets in investments of any kind in which any of the other Portfolios may invest. The Portfolio will invest in the following types of Tax-Exempt Securities: (i) municipal notes; (ii) municipal bonds; (iii) municipal securities backed by the U.S. government or any of its agencies or instrumentalities; (iv) tax-exempt commercial paper; (v) participation interests in any of the foregoing; and (vi) unrated securities or new types of tax-exempt instruments which become available in the future if Mentor Advisors determines they meet the quality standards discussed below (collectively, "Tax-Exempt Securities"). (In the case of any such new types of tax-exempt instruments, this Prospectus would be revised as may be appropriate to describe such instruments.) In connection with the purchase of Tax-Exempt Securities, the Portfolio may acquire stand-by commitments, which give the Portfolio the right to resell the security to the dealer at a specified price. Stand-by commitments may provide additional liquidity for the fund but are subject to the risk that the dealer may fail to meet its obligations. The Portfolio does not generally expect to pay additional consideration for stand-by commitments or to assign any value to them. Tax-Exempt Securities are debt obligations issued by a state (including the District of Columbia), a U.S. territory or possession, or any of their political subdivisions, the interest from which is, in the opinion of bond counsel, exempt from federal income tax. These securities are issued to obtain funds for various public purposes, such as the construction of public facilities, the payment of general operating expenses, or the refunding of outstanding debts. They may also be issued to finance various private activities, including the lending of funds to public or private institutions for the construction of housing, educational, or medical facilitites and may also include certain types of private activity and industrial development bonds issued by public authorities to finance privately owned or operated facilities. Short-term Tax-Exempt Securities are generally issued as interim financing in anticipation of tax collections, revenue receipts, or bond sales to finance various public puposes. The two principal classifications of Tax-Exempt Securities are general obligation and special obligation (or revenue) securities. General obligation securitites involve the credit of an issuer possessing taxing power and are payable from the issuer's general unrestricted revenues. Their payment may depend on an appropriation by the issuer's legislative body. The characteristics and methods of enforcement of general obligation securities vary according to the law applicable to the particular issuer. Special obligation securities are payable only from the revenues derived from a particular facility or class of facilities, or a specific revenue source and generally are not payable from the unrestricted revenues of the issuer. Industrial development and private activity bonds are in most cases special obligation securities, the credit quality of which is directly related to the private user of a facility. For purposes of the Portfolio's policy to invest at least 80% of its net assets in Tax-Exempt Securities, the Portfolio will not treat obligations as Tax-Exempt Securitites for purposes of measuring compliance with such policy if they would give rise to interest income subject to federal alternative minimum tax for individuals. To 5 the extent that the Portfolio invests in these securities, individual shareholders of the Portfolio, depending on their own tax status, may be subject to federal alternative minimum tax on the part of the Portfolio's distributions derived from these securities. In addition an investment in the Portfolio may cause corporate shareholders to be subject to (or result in an increased liability under) the alternative minimum tax because tax-exempt income is generally included in the alternative minimum taxable income of corporations. The ability of governmental issuers to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on thier fiscal conditions generally. The amounts of tax and other revenues available to governmental issuers may be affected from time to time by economic, political, and demographic conditions affecting a particular state. In addition, constitutional or statutory restrictions may limit a government's power to raise revenues or increase taxes. The avalability of federal, state, and local aid to issuers of such securities may also affect their ability to meet their obligations. Payments of principal and interest on special obligation securities will depend on the economic condition of the facility or specific revenue source from whose revenues the payments will be made, which in turn could be affected by economic, political, and demographic conditions affecting a particular state. Any reduction in the actual or perceived ability of an issuer of Tax-Exempt Securities in a particular state to meet its obligations (including a reduction in the rating of its outstanding securities) would likely affect adversely the market value and marketability of its obligations and could adversely affect the values of Tax-Exempt Securities issued by others in that state as well. The Portfolio may invest without limit in high quality taxable money market instruments of any type at any time when Mentor Advisors believes that market conditions make pursuing the Portfolio's basic investment strategy inconsistent with the best interests of shareholders. It is impossible to predict when, or for how long, the Portfolio will use these alternative defensive strategies. SELECTION OF INVESTMENTS Each Portfolio will invest only in U.S. dollar-denominated high-quality securities and other U.S. dollar-denominated money market instruments meeting credit criteria which the Trustees believe present minimal credit risk. "High-quality securities," in the case of the Money Market Portfolio, are (i) commercial paper or other short-term obligations rated A-1 by Standard & Poor's Ratings Service, Inc. and P-1 by Moody's Investors Service, Inc., and (ii) obligations rated AAA or AA by Standard & Poor's and Aaa or Aa by Moody's at the time of investment. The Portfolio will not invest in securities rated below A-1 or P-1 (or securities not so rated whose issuer does not have outstanding short-term debt obligations, of comparable priority and security, rated A-1 or P-1). Each Portfolio will maintain a dollar-weighted average maturity of 90 days or less and will not invest in securities with remaining maturities of more than 397 days. Each of the Portfolios follows investment and valuation policies designed to maintain a stable net asset value of $1.00 per share, although there is no assurance that these policies will be successful. A Portfolio may invest in variable or floating-rate securities which bear interest at rates subject to periodic adjustment or which provide for periodic recovery of principal on demand. Under certain conditions, these securities may be deemed to have remaining maturities equal to the time remaining until the next interest adjustment date or the date on which principal can be recovered on demand. Some of these securities may be supported by the right of the holders under certain circumstances to demand that a specified bank, broker-dealer, or other financial institution purchase the securities from the holders at par, or otherwise to demand on short notice, payment of unpaid principal and interest on the securities. Such securities are subject to the risk that the financial 6 institution in question may for any reason be unwilling or unable to meet its obligation in respect of the securities, which would likely have an adverse effect on the value of the securities. Considerations of liquidity and preservation of capital mean that a Portfolio may not necessarily invest in money market instruments paying the highest available yield at a particular time. Consistent with its investment objective, a Portfolio will attempt to maximize yields by portfolio trading and by buying and selling portfolio investments in anticipation of or in response to changing economic and money market conditions and trends. Each Portfolio may also invest to take advantage of what Mentor Advisors believes to be temporary disparities in the yields of different segments of the high-quality money market or among particular instruments within the same segment of the market. These policies, as well as the relatively short maturity of obligations purchased by the Portfolios, may result in frequent changes in the investments held by the Portfolios. The Portfolios will not usually pay brokerage commissions in connection with the purchase or sale of portfolio securities. The Portfolios' investments will be affected by general changes in interest rates resulting in increases or decreases in the values of the obligations held by the Portfolios. The values of a Portfolio's securities can be expected to vary inversely to changes in prevailing interest rates. Withdrawals by shareholders could require the sale of portfolio investments at a time when such a sale might not otherwise be desirable. DIVERSIFICATION AND CONCENTRATION POLICIES Each Portfolio is a "diversified" investment company under the Investment Company Act of 1940. This means that each Portfolio may invest up to 25% of its total assets in the securities of one or more issuers, and is limited with respect to the remaining portion of its assets to investing 5% or less of its total assets in the securities of any one issuer (other than the U.S. Government). However, under the current rules governing money market funds, the Portfolios generally may not invest more than 5% of their assets in any one issuer (other than the U.S. Government). The Money Market Portfolio may invest without limit in obligations of domestic branches of U.S. banks and U.S. branches of foreign banks (if it can be demonstrated that they are subject to the same regulations as U.S. banks). At times when the Portfolio has concentrated its investments in bank obligations, the values of its portfolio securities may be especially affected by factors pertaining to the issuers of such obligations. The Tax-Exempt Money Market Portfolio will not invest more than 25% of its total assets in any one industry. Governmental issuers of Tax-Exempt Securities are not considered part of any "industry." However, Securities backed only by the assets and revenues of nongovernmental users may for this purpose be deemed to be issued by such nongovernmental users, and the 25% limitation would apply to such obligations. It is nonetheless possible that the Portfolio may invest more than 25% of its assets in a broader segment of the Tax-Exempt Securities market, such as revenue obligations of hospitals and other health care facilities, housing agency revenue obligations, or airport revenue obligations. This would be the case only if Mentor Advisors determined that the yields available from obligations in a particular segment of the market justified the additional risks associated with such concentration. Although such obligations could be supported by the credit of governmental users or by the credit of nongovernmental users engaged in a number of industries, economic, business, political, and other developments generally affecting the revenues of such users (for example, proposed legislation or pending court decisions affecting the financing of such projects and market factors affecting the demand for their services or products) may have a general adverse effect on all Tax-Exempt Securities in such 7 a market segment. The Portfolio reserves the right to invest more than 25% of its assets in industrial development bonds and private activity bonds or notes. The Portfolio also reserves the right to invest more than 25% of its assets in securities relating to any one or more states (including the District of Columbia), U.S. territories or possessions, or any of their political subdivisions. As a result of such an investment, the performance of the Portfolio may be especially affected by factors pertaining to the economy of the relevant state and other factors specifically affecting the ability of issuers of such securities to meet their obligations. As a result, the value of the Portfolio's shares may fluctuate more widely than the value of shares of a fund investing in securities relating to a greater number of different states. OTHER INVESTMENT PRACTICES A Portfolio may also engage to a limited extent in the following investment practices, each of which involves certain special risks. The Statement of Additional Information contains more detailed information about these practices. FOREIGN INVESTMENTS. The Money Market Portfolio may invest in obligations of foreign issuers and in bank certificates of deposit and bankers' acceptances payable in U.S. dollars and issued by foreign banks (including U.S. branches of foreign banks) or by foreign branches of U.S. banks. These investments subject the Portfolio to investment risks different from those associated with domestic investments. Such risks include adverse political and economic developments in foreign countries, the imposition of withholding taxes on interest income, seizure or nationalization of foreign deposits, or the adoption of other governmental restrictions which may adversely affect the payment of principal and interest on such obligations. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the U.S. or in other foreign countries. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of the Portfolio's assets held abroad) and expenses not present in the settlement of domestic investments. In addition, foreign securities may be less liquid than U.S. securities, and foreign accounting and disclosure standards may differ from U.S. standards. Special tax considerations apply to foreign investments. REPURCHASE AGREEMENTS. Under a repurchase agreement, a Portfolio purchases a debt instrument for a relatively short period (usually not more than one week), which the seller agrees to repurchase at a fixed time and price, representing the Portfolio's cost plus interest. A Portfolio will enter into repurchase agreements only with commercial banks and with registered broker-dealers who are members of a national securities exchange or market makers in government securities, and only if the debt instrument subject to the repurchase agreement is a U.S. Government security. Although Mentor Advisors will monitor repurchase agreement transactions to ensure that they will be fully collateralized at all times, a Portfolio bears a risk of loss if the other party defaults on its obligation and the Portfolio is delayed or prevented from exercising its rights to dispose of the collateral. If the other party should become involved in bankruptcy or insolvency proceedings, it is possible that a Portfolio may be treated as an unsecured creditor and required to return the collateral to the other party's estate. SECURITIES LENDING. A Portfolio may lend portfolio securities to broker-dealers. These transactions must be fully collateralized at all times with cash or short-term debt obligations, but involve some risk to a Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from exercising its rights in respect of the collateral. Any investment of collateral by a Portfolio would be made in accordance with the Portfolio's investment objective and policies described above. 8 DIVIDENDS The Trust determines the net income of each Portfolio as of the close of regular trading on the New York Stock Exchange (the "Exchange") each day the Exchange is open. Each determination of a Portfolio's net income includes (i) all accrued interest on the Portfolio's investments, (ii) plus or minus all realized and unrealized gains and losses on the Portfolio's investments, (iii) less all accrued expenses of the Portfolio. Each Portfolio's investments are valued at amortized cost according to Securities and Exchange Commission Rule 2a-7. A Portfolio will not normally have unrealized gains or losses so long as it values its investments by the amortized cost method. DAILY DIVIDENDS. Each Portfolio declares all of its net income as a distribution on each day it is open for business, as a dividend to shareholders of record immediately prior to the close of regular trading on the Exchange. Shareholders whose purchase of shares of a Portfolio is accepted at or before 12:00 noon on any day will receive the dividend declared by the Portfolio for that day; shareholders who purchase shares after 12:00 noon will begin earning dividends on the next business day after the Portfolio accepts their order. A Portfolio's net income for Saturdays, Sundays, and holidays is declared as a dividend on the preceding business day. Dividends for any calendar month will be paid on the last day of that month (or, if that day is not a business day, on the next preceding business day), except that a Portfolio's schedule for payment of dividends during the month of December may be adjusted to assist in tax reporting and distribution requirements. A shareholder who withdraws the entire balance of an account at any time during a month will be paid all dividends declared through the time of the withdrawal. Since the net income of each Portfolio is declared as a dividend each time it is determined, the net asset value per share of each Portfolio normally remains at $1 per share immediately after each determination and dividend declaration. You can choose from two distribution options: (1) automatically reinvest all distributions from a Portfolio in additional shares of that Portfolio; or (2) receive all distributions in cash. If you wish to change your distribution option, you should contact your Financial Institution (as defined below), who will be responsible for forwarding the necessary instructions to the Trust's transfer agent, Boston Financial Data Services ("BFDS"). If you do not select an option when you open your account, all distributions will be reinvested. You will receive a statement confirming reinvestment of distributions in additional shares of a Portfolio promptly following the month in which the reinvestment occurs. TAX INFORMATION FEDERAL TAXES. Each Portfolio intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements that are necessary for it to be relieved of federal income taxes on income (and gains, if any) it distributes to shareholders. Each Portfolio will distribute substantially all of its net ordinary income (and net capital gains, if any) on a current basis. Distributions (other than exempt-interest dividends) will be taxable to you regardless of whether you elect to receive them as cash or to reinvest them in additional shares. Dividends paid by the Tax-Exempt Money Market Portfolio that are derived from exempt-interest income (known as "exempt-interest dividends") and that are designated as such may be treated by the Portfolio's shareholders as items of interest excludable from their federal gross income. (Shareholders should consult their own tax adviser with respect to whether exempt-interest dividends would be excludable from gross income if the shareholder were treated as a "substantial user" of facilities financed by an obligation held by the Portfolio or a 9 "related person" to such a user under the Internal Revenue Code.) If a shareholder receives an exempt-interest dividend with respect to any share held for six months or less, any loss on the sale or exchange of that share will be disallowed to the extent of the amount of the exempt-interest dividend. To the extent dividends paid to shareholders are derived from taxable income (for example, from interest on certificates of deposit) or from gains, such dividends will be subject to federal income tax, whether they are paid in the form of cash or additional shares. If the Tax-Exempt Money Market Portfolio holds certain "private activity bonds" ("industrial development bonds" under prior law), dividends derived from interest on such obligations will be classified as an item of tax preference which could subject certain shareholders to alternative minimum tax liability. Corporate shareholders must also take all exempt-interest dividends into account in determining "adjusted current earnings" for purposes of calculating their alternative minimum tax liability. Shareholders receiving Social Security benefits or Railroad Retirement Act benefits should note that all exempt-interest dividends will be taken into account in determining the taxability of such benefits. Early in each year the Tax-Exempt Money Market Portfolio will notify you of the amount and tax status of distributions paid to you by the Portfolio for the preceding year. GENERAL. The foregoing is a summary of certain federal income tax consequences of investing in the Portfolios. You should consult your tax adviser to determine the precise effect of an investment in each Portfolio on your particular tax situation. BUYING AND SELLING SHARES OF THE PORTFOLIOS HOW TO BUY SHARES. The Trust offers Retail Shares of the Portfolios continuously at a price of $1.00 per share. The Trust determines the net asset value of each Portfolio twice each day, as of 12:00 noon and as of the close of regular trading on the Exchange. Retail Shares of each Portfolio are sold at net asset value through a number of selected financial institutions, such as investment dealers and banks (each, a "Financial Institution"). Your Financial Institution is responsible for forwarding any necessary information and documentation to BFDS. There is no sales charge on sales of shares, nor is any minimum investment required for any of the Portfolios. Because each Portfolio seeks to be fully invested at all times, investments must be in Same Day Funds to be accepted. Investments which are accepted at or before 12:00 noon will be invested at the net asset value determined at that time; investments accepted after 12:00 noon will receive the net asset value determined at the close of regular trading on the Exchange. "Same Day Funds" are funds credited by the applicable regional Federal Reserve Bank to the account of the Trust at its designated bank. When payment in Same Day Funds is available to the Trust, the Trust will accept the order to purchase shares at the net asset value next determined. If you are considering redeeming shares or transferring shares to another person shortly after purchase, you should pay for those shares with wired Same Day Funds or a certified check to avoid any delay in redemption or transfer. Otherwise, the Trust may delay payment for shares until the purchase price of those shares has been collected which may be up to 15 calendar days after the purchase date. The Mentor Distributors or Mentor Advisors may refuse any order to buy shares. 10 For more information on how to purchase shares of the Portfolios, contact your Financial Institution or Mentor Services Company, Inc. ("Mentor Services Company"), 901 East Byrd Street, Richmond, Virginia 23219. Mentor Services Company's telephone number is 1-800-869-6042. HOW TO SELL SHARES. You can redeem your Portfolio shares through your Financial Institution any day the Exchange is open, or you may redeem your shares by check. If you redeem shares through your Financial Institution, your Financial Institution is responsible for communicating your redemption request to BFDS and for forwarding any necessary information and documentation to BFDS. Redemptions will be effected at the net asset value per share of the Portfolio next determined after receipt of the redemption request in good order. The Fund must receive your properly completed purchase documentation before you may sell shares. SELLING SHARES THROUGH YOUR FINANCIAL INSTITUTION. You may redeem your shares through your Financial Institution. Your Financial Institution is responsible for delivering your redemption request and all necessary documentation to the Trust, and may charge you for its services (including, for example, charges relating to the wiring of funds). Your Financial Institution may accept your redemption instructions by telephone. Consult your Financial Institution. SELLING SHARES BY CHECK. If you would like the ability to write checks against your investment in a Portfolio, you should provide the necessary documentation to your Financial Institution and complete the signature card which you may obtain by calling your Financial Institution. When a Portfolio receives your properly completed documentation and card, you will receive checks drawn on your Portfolio account and payable through the Portfolio's designated bank. These checks may be made payable to the order of any person. You will continue to earn dividends until the check clears. When a check is presented for payment, a sufficient number of full and fractional shares of the Portfolio in your account will be redeemed to cover the amount of the check. Your Financial Institution may limit the availability of the check-writing privilege or assess certain fees in connection with the checkwriting privilege. Shareholders using Trust checks are subject to the Trust's designated bank's rules governing checking accounts. There is currently no charge to the shareholder for the use of checks, although one may be imposed in the future. Shareholders would be notified in advance of the imposition of any such charge. (In addition, if you deplete your original check supply, there may be a charge to order additional checks.) You should make sure that there are sufficient shares in your account to cover the amount of the check drawn. If there is an insufficient number of shares in the account, the check will be dishonored and returned, and no shares will be redeemed. Because dividends declared on shares held in your account and prior withdrawals may cause the value of your account to change, it is impossible to determine in advance your account's total value. Accordingly, you should not write a check for the entire value of your account or close your account by writing a check. You may revoke check-writing authorization by written notice to your Financial Institution, which will be responsible for forwarding the notice to the Portfolio. SELLING SHARES BY MAIL. You may also sell shares of a Portfolio by sending a written withdrawal request to your Financial Institution. You must sign the withdrawal request and include a stock power with signature(s) guaranteed by a bank, broker/dealer, or certain other financial institutions. A Portfolio generally sends you payment for your shares the business day after your request is received in good order. Under unusual circumstances, a Portfolio may suspend repurchases, or postpone payment for more than seven days, as permitted by federal securities law. 11 HOW TO EXCHANGE SHARES You can exchange your shares in any Portfolio for Retail Shares of any other Mentor Money Market Portfolio in the Trust at net asset value, except as described below. If you request an exchange through your Financial Institution, your Financial Institution will be responsible for forwarding the necessary documentation to BFDS. Exchange Authorization Forms are available from your Financial Institution. For federal income tax purposes, an exchange is treated as a sale of shares and may result in a capital gain or loss. The Trust reserves the right to change or suspend the exchange privilege at any time. Shareholders would be notified of any change or suspension. Consult your Financial Institution or Mentor Services Company before requesting an exchange. FINANCIAL INSTITUTIONS Financial Institutions provide varying arrangements for their clients with respect to the purchase and redemption of Portfolio shares and the confirmation thereof and may arrange with their clients for other investment or administrative services. When you effect transactions with a Portfolio (including among other things the purchase, redemption, or exchange of Portfolio shares) through a Financial Institution, the Financial Institution, and not the Portfolio, will be responsible for taking all steps, and furnishing all necessary documentation, to effect such transactions. Financial Institutions have the responsibility to deliver purchase and redemption requests to a Portfolio promptly. Some Financial Institutions may establish minimum investment requirements with respect to a Portfolio. They may also establish and charge fees and other amounts to their clients for their services. Certain privileges, such as the check writing privilege or reinvestment options, may not be available through certain Financial Institutions or they may be available only under certain conditions. If your Financial Institution holds your investment in a Portfolio in its own name, then your Financial Institution will be the shareholder of record in respect of that investment; your ability to take advantage of any investment options or services of the Portfolio will depend on whether, and to what extent, your Financial Institution is willing to take advantage of them on your behalf. FINANCIAL INSTITUTIONS, INCLUDING FIRST UNION CORP. ("FIRST UNION"), AN AFFILIATE OF MENTOR ADVISORS, MAY CHARGE FEES TO OR IMPOSE RESTRICTIONS ON YOUR SHAREHOLDER ACCOUNT. CONSULT YOUR FINANCIAL INSTITUTION FOR INFORMATION ABOUT ANY FEES OR RESTRICTIONS OR FOR FURTHER INFORMATION CONCERNING ITS SERVICES. MANAGEMENT The Trustees are responsible for generally overseeing the conduct of the Trust's business. Mentor Investment Advisors, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, serves as investment adviser to each of the Portfolios, providing investment advisory services and advising and assisting the officers of the Trust in taking such steps as are necessary or appropriate to carry out the decisions of the Trustees. Subject to such policies as the Trustees may determine, Mentor Advisors furnishes a continuing investment program for the Portfolios and makes investment decisions on their behalf. Mentor Advisors has over $13 billion in assets under management and is a wholly owned subsidiary of Mentor Investment Group, LLC ("Mentor Investment Group") and its affiliates. Mentor Investment Group is a subsidiary of Wheat First Butcher Singer, Inc., which is in turn a wholly owned subsidiary of First Union Corp. First Union is a leading financial services company with approximately $234 billion in assets and $17 billion in total stockholders' equity as of September 30, 1998. EVEREN Capital Corporation has 20% ownership in Mentor Investment Group and may acquire additional ownership based principally on the amount of Mentor Investment Group's revenues derived from assets attributable to clients of EVEREN Securities, Inc. and its affiliates. 12 Each Portfolio pays management fees to Mentor Advisors monthly at the following annual rates (based on the average daily net assets of the Portfolio): 0.22% of the first $500 million of the Portfolio's average net assets; 0.20% of the next $500 million; 0.175% of the next $1 billion; 0.16% of the next $1 billion; and 0.15% of any amounts over $3 billion. For purposes of determining the annual rate at which management fees are payable by the Portfolios, a Portfolio's assets will be considered to include the assets of, in the case of the Money Market Portfolio, Cash Resource Money Market Fund; in the case of the U.S. Government Money Market Portfolio, Cash Resource U.S. Government Money Market Fund; and in the case of the Tax-Exempt Money Market Portfolio, Cash Resource Tax-Exempt Money Market Fund. Each of those Funds is managed by Mentor Advisors and is a series of shares of Cash Resource Trust. The Portfolios pay all expenses not assumed by Mentor Advisors, including Trustees' fees, auditing, legal, custodial, investor servicing, and shareholder reporting expenses, and payments under their Distribution Plans. General expenses of the Trust will be charged to the assets of each Portfolio on a basis that the Trustees deem fair and equitable, which may be based on the relative assets of each Portfolio (and other series of shares of the Trust) or the nature of the services performed and relative applicability to each Portfolio. Expenses directly charged or attributable to a Portfolio will be paid from the assets of that Portfolio. Mentor Advisors places all orders for purchases and sales of the investments of each Portfolio. In selecting broker-dealers, Mentor Advisors may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the most favorable price and execution available, Mentor Advisors may consider sales of shares of the Portfolios (and, if permitted by law, of the other funds in the Mentor family) as a factor in the selection of broker-dealers. The Portfolios receive services from a number of providers which rely on the smooth functioning of their respective systems and the systems of others to perform those services. It is generally recognized that certain systems in use today may not perform their intended functions adequately after the Year 1999 because of the inability of the software to distinguish the Year 2000 from the Year 1900. Mentor Advisors is taking steps that it believes are reasonably designed to address this potential "Year 2000" problem and to obtain satisfactory assurances that comparable steps are being taken by the Portfolios' other major service providers. There can be no assurance, however, that these steps will be sufficient to avoid any adverse impact on the Portfolios from this problem. ADMINISTRATIVE SERVICES. Mentor Investment Group, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain administrative personnel and services necessary to operate each Portfolio, such as bookkeeping and accounting services. Mentor Investment Group provides these services to each of the Portfolios at an annual rate of .02% of the Portfolio's average daily net assets. DISTRIBUTION SERVICES Mentor Distributors, LLC ("Mentor Distributors"), 3435 Stelzer Road, Columbus, Ohio 43219, is the distributor of the Portfolios' shares. Mentor Distributors is a wholly owned subsidiary of BISYS Fund Services, Inc. Each Portfolio has adopted a Distribution Plan (each, a "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 with respect to its Retail Shares. The purpose of the Plans is to permit each of the Portfolios to compensate Mentor Distributors for services provided and expenses incurred by it in promoting the sale of Retail Shares of the Portfolio, reducing redemptions, or maintaining or improving services provided to 13 shareholders. The Plans provide for monthly payments by the Portfolios to Mentor Distributors out of the Portfolios' assets attributable to the Retail Shares, subject to the authority of the Trustees to reduce the amount of payments or to suspend the Plans for such periods as they may determine. Any material increase in amounts payable under a Plan would require shareholder approval. In order to compensate Financial Institutions for services provided in connection with sales of Portfolio shares and the maintenance of shareholder accounts (or, in the case of certain Financial Institutions which are banking institutions, for certain administrative and shareholder services), Mentor Distributors, Mentor Advisors, or their affiliates may make periodic payments (from any amounts received under the Plans or from their other resources) to any qualifying Financial Institution based on the average net asset value of Retail Shares for which the Financial Institution is designated as the financial institution of record. Such payments may be made at the annual rate of between 0.15% and 0.40% in the case of the Money Market Portfolio and the U.S. Government Money Market Portfolio, and between 0.15% and 0.33% in the case of the Tax-Exempt Money Market Portfolio. These payments may be suspended or modified at any time, and payments are subject to the continuation of each Portfolio's Plan and of applicable agreements between Mentor Distributors and the applicable Financial Institution. Financial Institutions receiving such payments include First Union, an affiliate of Mentor Advisors. HOW A PORTFOLIO'S PERFORMANCE IS CALCULATED Yield and effective yield data of a Portfolio's Retail Shares may from time to time be included in advertisements about the Portfolios. "Yield" is calculated by dividing a Portfolio's annualized net investment income per Retail Share during a recent seven-day period by the net asset value per share on the last day of that period. "Effective yield" compounds that yield for a year and is, for that reason, greater than a Portfolio's yield. "Tax-equivalent" yield shows the affect on performance of the tax-exempt status of distributions received from the Tax-Exempt Money Market Portfolio. It reflects the approximate yield that a taxable investment must earn for shareholders at stated income levels to produce an after-tax yield equivalent to the Portfolio's tax-exempt yield. Quotations of yield for any period when an expense limitation was in effect will be greater than if the limitation had not been in effect. A Portfolio's performance may be compared to various indices. See the Statement of Additional Information. Quotations of yield for a period when an expense limitation was in effect will be greater than if the limitation had not been in effect. The Portfolio's performance may be compared to various indices. See the Statement of Additional Information. Information may be presented in advertisements about the Portfolio describing the background and professional experience of the Portfolio's investment adviser or its investment personnel. All data is based on a Portfolio's past investment results and does not predict future performance. Investment performance, which will vary, is based on many factors, including market conditions, the composition of a Portfolio's investments, a Portfolio's operating expenses, and the class of shares purchased. Investment performance also often reflects the risks associated with a Portfolio's investment objective and policies. These factors should be considered when comparing a Portfolio's investment results to those of other mutual funds and other investment vehicles. 14 GENERAL INFORMATION Mentor Funds is a Massachusetts business trust organized on January 20, 1992. A copy of the Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The Trust is an open-end, management investment company with an unlimited number of authorized shares of beneficial interest. Shares of the Trust may, without shareholder approval, be divided into two or more series of shares representing separate investment portfolios, and are currently divided into twelve series of shares. Under the Agreement and Declaration of Trust, a Portfolio's shares may be further divided, without shareholder approval, into two or more classes of shares having such preferences or special or relative rights and privileges as the Trustees may determine. Each Portfolio's shares are currently divided into two classes, Retail Shares, which are offered by this Prospectus, and Institutional Shares. Institutional Shares are not subject to any 12b-1 fees, and may be subject to different expenses of other types. Differences in expenses between the classes will affect performance. Contact Mentor Services Company at 1-800-869-6042 for information concerning Institutional Shares of a Portfolio and your eligibility to purchase those shares. Each share has one vote, with fractional shares voting proportionally. Shares of each Portfolio are freely transferable, are entitled to dividends as declared by the Trustees, and, if a Portfolio were liquidated, would receive the net assets of the Portfolio. The Trust may suspend the sale of shares of any Portfolio at any time and may refuse any order to purchase shares. Although the Trust is not required to hold annual meetings of its shareholders, shareholders have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust. Boston Financial Data Services, located at 2 Heritage Drive, North Quincy, MA 02171, is the transfer agent and dividend-paying agent for the Trust. BFDS engages at its own expense certain Financial Institutions, including affiliates of First Union, to perform bookkeeping, data processing, and administrative services pertaining to the maintenance of shareholder accounts. Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri, 64105 serves as the Portfolios' custodian. If you own fewer shares of a Portfolio than a minimum amount set by the Trustees, the Trust may choose to redeem your shares and pay you for them. You will receive at least 30 days written notice before the Trust redeems your shares, and you may purchase additional shares at any time to avoid a redemption. The Trust may also redeem shares if you own shares of any Portfolio or of the Trust above any maximum amount set by the Trustees. There is presently no such minimum or maximum, but the Trustees may establish one at any time, which could apply to both present and future shareholders. The Trust may send a single copy of shareholder reports and communications to an address where there is more than one registered shareholder with the same last name, unless a shareholder at that address requests, by calling or writing his Financial Institution or Mentor Services Company, that the Trust do otherwise. 15 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES. ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE PORTFOLIO IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION. MENTOR FUNDS 901 East Byrd Street Richmond, VA 23219 (800) 869-6042 1998 MENTOR DISTRIBUTORS, LLC SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE MK 1341 MENTOR FUNDS MENTOR MONEY MARKET PORTFOLIO MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO ----------------------- PROSPECTUS RETAIL SHARES ----------------------- December 15, 1998 [MENTOR LOGO] NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES. ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE PORTFOLIO IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION. MENTOR FUNDS 901 East Byrd Street Richmond, VA 23219 (800) 869-6042 1998 MENTOR DISTRIBUTORS, LLC SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE MK 1341 [MENTOR LOGO] MENTOR FUNDS MENTOR MONEY MARKET PORTFOLIO MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO ----------------------- PROSPECTUS RETAIL SHARES ----------------------- December 15, 1998 [EVEREN SECURITIES LOGO] P R O S P E C T U S December 15, 1998 Institutional Shares MENTOR FUNDS MENTOR MONEY MARKET PORTFOLIO MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO The Mentor Money Market Portfolios are designed for investors who seek current income consistent with preservation of capital and maintenance of liquidity. The Portfolios are diversified investment portfolios of Mentor Funds (the "Trust"). An investment in a Portfolio is neither insured nor guaranteed by the U.S. Government. There can be no assurance that a Portfolio will be able to maintain a stable net asset value of $1.00 per share. This Prospectus explains concisely what you should know before investing in a Portfolio. Please read it carefully and keep it for future reference. You can find more detailed information about the Portfolios in a December 15, 1998 Statement of Additional Information, as amended from time to time. For a free copy of the Statement, call Mentor Services Company, Inc. at 1-800-869-6042. The Statement has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference. ---------------- SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS
PAGE ----- Expense Summary ................................ 3 Finanical Highlights ........................... 4 Investment Objectives and Policies ............. 5 How The Portfolios Value Their Shares .......... 10 Purchase Of Shares ............................. 11 Redemption Of Shares ........................... 11 How Distributions Are Made ..................... 12 Management ..................................... 13 General Information ............................ 15
2 EXPENSE SUMMARY Expenses are one of several factors to consider when investing in a Portfolio. The following table summarizes your maximum transaction costs from an investment in Institutional Shares of each of the Portfolios and expenses each Portfolio expects to incur in respect of its Institutional Shares during the current fiscal year (expenses shown for the Tax-Exempt Money Market Portfolio reflect the expenses the Portfolio expects to incur in its first fiscal year). The Examples show the cumulative expenses attributable to a hypothetical $1,000 investment in each Portfolio over specified periods. The information presented below does not reflect any fees or charges imposed by Financial Institutions through which you may invest in the Portfolios.
MENTOR MENTOR MENTOR U.S. GOVERNMENT TAX-EXEMPT MONEY MARKET MONEY MARKET MONEY MARKET PORTFOLIO PORTFOLIO PORTFOLIO -------------- ----------------- ------------- SHAREHOLDER TRANSACTION EXPENSES None None None ANNUAL PORTFOLIO OPERATING EXPENSES: (as a percentage of average net assets) Management Fees* ...................... .18% .18% .21% 12b-1 Fees ............................ None None None Other Expenses ........................ .15% .15% .15% ---- ----- ----- Total Fund Operating Expenses ......... .33% .33% .36% ---- ----- -----
* For purposes of determining the annual rate at which Management Fees are payable by the Portfolios, a Portfolio's assets will be considered to include the assets of certain Funds offered by Cash Resource Trust and managed by Mentor Investment Advisors, LLC. See "Management," below. ** Expenses are estimated based on the expenses the Portfolios expects to incur. EXAMPLES Your investment of $1,000 in a Portfolio would incur the following expenses, assuming 5% annual return and redemption at the end of each period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------- --------- --------- --------- Mentor Money Market Portfolio .......... $3 $11 18 41 Mentor U.S. Government Money Market Portfolio ................ $3 $11 18 41 Mentor Tax-Exempt Money Market Portfolio ................ 4 12 -- --
The table is provided to help you understand the expenses of investing in each of the Portfolios and your share of the operating expenses which each of the Portfolios expects to incur. The Examples do not represent past or future expense levels. Actual returns and expenses may be greater or less than those shown. Federal regulations require the Examples to assume a 5% annual return, but actual annual return will vary. 3 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) The following tables have been derived from the Financial Highlights included in Mentor Funds' financial statements, which have been audited by KPMG Peat Marwick LLP, Mentor Funds' independent auditors. The report of KPMG Peat Marwick LLP, along with the Portfolios' financial statements and notes thereto, is included in the Statement of Additional Information, which may be obtained in the manner described on the cover page of this Prospectus. See "Financial Statements" in the Statement of Additional Information.
MENTOR MONEY MENTOR U.S. GOVERNMENT MARKET PORTFOLIO MONEY MARKET PORTFOLIO ------------------ ---------------------------------- PERIOD ENDED YEAR ENDED PERIOD ENDED 9/30/98 (B) 9/30/98 9/30/97 (C) ------------------ ------------- ------------------ PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period ......................... $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- Income from investment operations ............................ Net investment income ....................................... 0.05 0.05 0.01 -------- -------- -------- Total from investment operations ............................ 0.05 0.05 0.01 -------- -------- -------- Less distributions ........................................... From net investment income .................................. (0.05) (0.05) (0.01) --------- --------- --------- Total distributions ......................................... (0.05) (0.05) (0.01) --------- --------- --------- Net asset value, end of period ............................... $ 1.00 $ 1.00 $ 1.00 ========= ========= ========= TOTAL RETURN (D) 4.74% 5.42% 1.39% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) ..................... $ 40,970 $ 106,273 $ 61,805 Ratio of expenses to average net assets ...................... 0.33%(a) 0.33% 0.33%(a) Ratio of net investment income to average net assets ......... 5.35%(a) 5.27% 5.26%(a)
- ---------- (a) Annualized. (b) For the period from November 19, 1997 (commencement of operations) to September 30, 1998. (c) For the period from June 27, 1997 (commencement of operations) to September 30, 1997. (d) Not annualized. 4 INVESTMENT OBJECTIVES AND POLICIES The investment objectives of Mentor Money Market Portfolio (the "Money Market Portfolio") and Mentor U.S. Government Money Market Portfolio (the "U.S. Government Money Market Portfolio") are to seek as high a rate of current income as Mentor Investment Advisors, LLC, the Portfolios' investment advisor ("Mentor Advisors"), believes is consistent with preservation of capital and maintenance of liquidity. The investment objective of Mentor Tax-Exempt Money Market Portfolio (the "Tax-Exempt Money Market Portfolio") is to seek as high a rate of current income exempt from federal income tax as Mentor Advisors believes is consistent with preservation of capital and maintenance of liquidity. The Portfolios seek their objectives through the investment policies described below. Because each of the Portfolios is a money market fund, it will only invest in the types of investments described below under "Selection of Investments." The investment objective and policies of each Portfolio may, unless otherwise specifically stated, be changed by the Trustees without shareholder approval. None of the Portfolios is intended to be a complete investment program, and there is no assurance a Portfolio will achieve its objective. MENTOR MONEY MARKET PORTFOLIO The Money Market Portfolio will invest in a portfolio of high-quality, short-term instruments consisting of any or all of the following: o U.S. Government securities: securities issued or guaranteed as to principal or interest by the U.S. Government or by any of its agencies or instrumentalities. o Banker's acceptances: negotiable drafts or bills of exchange, which have been "accepted" by a domestic bank (or a foreign bank with an agency domiciled in the United States), meaning, in effect, that the bank has unconditionally agreed to pay the face value of the instrument on maturity. o Prime commercial paper: high-quality, short-term obligations issued by banks, corporations, and other issuers organized under the laws of a jurisdiction within the United States. o Other short-term obligations: high-quality, short-term obligations of corporate issuers. o Repurchase agreements: with respect to U.S. Government or agency securities. MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO The U.S. Government Money Market Portfolio invests exclusively in U.S. Treasury bills, notes, and bonds, and other obligations issued or guaranteed as to principal or interest by the U.S. Government, its agencies, or instrumentalities, and in repurchase agreements with respect to such obligations. Certain of these obligations, including U.S. Treasury bills, notes, and bonds, mortgage participation certificates issued or guaranteed by the Government National Mortgage Association, and Federal Housing Administration debentures, are supported by the full faith and credit of the United States. Other U.S. Government securities issued by federal agencies or government-sponsored enterprises are not supported by the full faith and credit of the United States. These securities include obligations supported by the right of the issuer to borrow from the U.S. Treasury, such as obligations of Federal Home Loan Banks, and obligations supported only by the credit of an instrumentality, such as Federal National Mortgage Association bonds. 5 Short-term U.S. Government obligations generally are considered among the safest short-term investments. Because of their added safety, the yields available from U.S. Government obligations are generally lower than the yields available from comparable corporate debt securities. The U.S. Government guarantee of securities owned by the Portfolio does not guarantee the net asset value of the Portfolio's shares, which the Portfolio seeks to maintain at $1.00 per share. MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO The Tax-Exempt Portfolio invests, as a fundamental policy, at least 80% of its net assets in Tax-Exempt Securitites (as described below). The Portfolio may invest the remainder of its assets in investments of any kind in which any of the other Portfolios may invest. The Portfolio will invest in the following types of Tax-Exempt Securities: (i) municipal notes; (ii) municipal bonds; (iii) municipal securities backed by the U.S. government or any of its agencies or instrumentalities; (iv) tax-exempt commercial paper; (v) participation interests in any of the foregoing; and (vi) unrated securities or new types of tax-exempt instruments which become available in the future if Mentor Advisors determines they meet the quality standards discussed below (collectively, "Tax-Exempt Securities"). (In the case of any such new types of tax-exempt instruments, this Prospectus would be revised as may be appropriate to describe such instruments.) In connection with the purchase of Tax-Exempt Securities, the Portfolio may acquire stand-by commitments, which give the Portfolio the right to resell the security to the dealer at a specified price. Stand-by commitments may provide additional liquidity for the fund but are subject to the risk that the dealer may fail to meet its obligations. The Portfolio does not generally expect to pay additional consideration for stand-by commitments or to assign any value to them. Tax-Exempt Securities are debt obligations issued by a state (including the District of Columbia), a U.S. territory or possession, or any of their political subdivisions, the interest from which is, in the opinion of bond counsel, exempt from federal income tax. These securities are issued to obtain funds for various public purposes, such as the construction of public facilities, the payment of general operating expenses, or the refunding of outstanding debts. They may also be issued to finance various private activities, including the lending of funds to public or private institutions for the construction of housing, educational, or medical facilitites and may also include certain types of private activity and industrial development bonds issued by public authorities to finance privately owned or operated facilities. Short-term Tax-Exempt Securities are generally issued as interim financing in anticipation of tax collections, revenue receipts, or bond sales to finance various public puposes. The two principal classifications of Tax-Exempt Securities are general obligation and special obligation (or revenue) securities. General obligation securitites involve the credit of an issuer possessing taxing power and are payable from the issuer's general unrestricted revenues. Their payment may depend on an appropriation by the issuer's legislative body. The characteristics and methods of enforcement of general obligation securities vary according to the law applicable to the particular issuer. Special obligation securities are payable only from the revenues derived from a particular facility or class of facilities, or a specific revenue source and generally are not payable from the unrestricted revenues of the issuer. Industrial development and private activity bonds are in most cases special obligation securities, the credit quality of which is directly related to the private user of a facility. For purposes of the Portfolio's policy to invest at least 80% of its net assets in Tax-Exempt Securities, the Portfolio will not treat obligations as Tax-Exempt Securitites for purposes of measuring compliance with such 6 policy if they would give rise to interest income subject to federal alternative minimum tax for individuals. To the extent that the Portfolio invests in these securities, individual shareholders of the Portfolio, depending on their own tax status, may be subject to federal alternative minimum tax on the part of the Portfolio's distributions derived from these securities. In addition an investment in the Portfolio may cause corporate shareholders to be subject to (or result in an increased liability under) the alternative minimum tax because tax-exempt income is generally included in the alternative minimum taxable income of corporations. The ability of governmental issuers to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on thier fiscal conditions generally. The amounts of tax and other revenues available to governmental issuers may be affected from time to time by economic, political, and demographic conditions affecting a particular state. In addition, constitutional or statutory restrictions may limit a government's power to raise revenues or increase taxes. The avalability of federal, state, and local aid to issuers of such securities may also affect their ability to meet their obligations. Payments of principal and interest on special obligation securities will depend on the economic condition of the facility or specific revenue source from whose revenues the payments will be made, which in turn could be affected by economic, political, and demographic conditions affecting a particular state. Any reduction in the actual or perceived ability of an issuer of Tax-Exempt Securities in a particular state to meet its obligations (including a reduction in the rating of its outstanding securities) would likely affect adversely the market value and marketability of its obligations and could adversely affect the values of Tax-Exempt Securities issued by others in that state as well. The Portfolio may invest without limit in high quality taxable money market instruments of any type at any time when Mentor Advisors believes that market conditions make pursuing the Portfolio's basic investment strategy inconsistent with the best interests of shareholders. It is impossible to predict when, or for how long, the Portfolio will use these alternative defensive strategies. SELECTION OF INVESTMENTS Each Portfolio will invest only in U.S. dollar-denominated high-quality securities and other U.S. dollar-denominated money market instruments meeting credit criteria which the Trustees believe present minimal credit risk. "High-quality securities," in the case of the Money Market Portfolio, are (i) commercial paper or other short-term obligations rated A-1 by Standard & Poor's and P-1 by Moody's Investors Service, Inc., and (ii) obligations rated AAA or AA by Standard & Poor's and Aaa or Aa by Moody's at the time of investment. The Portfolio will not invest in securities rated below A-1 or P-1 (or securities not so rated whose issuer does not have outstanding short-term debt obligations, of comparable priority and security, rated A-1 or P-1). Each Portfolio will maintain a dollar-weighted average maturity of 90 days or less and will not invest in securities with remaining maturities of more than 397 days. Each of the Portfolios follows investment and valuation policies designed to maintain a stable net asset value of $1.00 per share, although there is no assurance that these policies will be successful. A Portfolio may invest in variable or floating-rate securities which bear interest at rates subject to periodic adjustment or which provide for periodic recovery of principal on demand. Under certain conditions, these securities may be deemed to have remaining maturities equal to the time remaining until the next interest adjustment date or the date on which principal can be recovered on demand. Some of these securities may be supported by the right of the holders under certain circumstances to demand that a specified bank, broker-dealer, or other 7 financial institution purchase the securities from the holders at par, or otherwise to demand on short notice, payment of unpaid principal and interest on the securities. Such securities are subject to the risk that the financial institution in question may for any reason be unwilling or unable to meet its obligation in respect of the securities, which would likely have an adverse effect on the value of the securities. Considerations of liquidity and preservation of capital mean that a Portfolio may not necessarily invest in money market instruments paying the highest available yield at a particular time. Consistent with its investment objective, a Portfolio will attempt to maximize yields by portfolio trading and by buying and selling portfolio investments in anticipation of or in response to changing economic and money market conditions and trends. Each Portfolio may also invest to take advantage of what Mentor Advisors believes to be temporary disparities in the yields of different segments of the high-quality money market or among particular instruments within the same segment of the market. These policies, as well as the relatively short maturity of obligations purchased by the Portfolios, may result in frequent changes in the investments held by the Portfolios. The Portfolios will not usually pay brokerage commissions in connection with the purchase or sale of portfolio securities. The Portfolios' investments will be affected by general changes in interest rates resulting in increases or decreases in the values of the obligations held by the Portfolios. The values of a Portfolio's securities can be expected to vary inversely to changes in prevailing interest rates. Withdrawals by shareholders could require the sale of portfolio investments at a time when such a sale might not otherwise be desirable. DIVERSIFICATION AND CONCENTRATION POLICIES Each Portfolio is a "diversified" investment company under the Investment Company Act of 1940. This means that each Portfolio may invest up to 25% of its total assets in the securities of one or more issuers, and is limited with respect to the remaining portion of its assets to investing 5% or less of its total assets in the securities of any one issuer (other than the U.S. Government). However, under the current rules governing money market funds, the Portfolios generally may not invest more than 5% of their assets in any one issuer (other than the U.S. Government). The Money Market Portfolio may invest without limit in obligations of domestic branches of U.S. banks and U.S. branches of foreign banks (if it can be demonstrated that they are subject to the same regulations as U.S. banks). At times when the Portfolio has concentrated its investments in bank obligations, the values of its portfolio securities may be especially affected by factors pertaining to the issuers of such obligations. The Tax-Exempt Money Market Portfolio will not invest more than 25% of its total assets in any one industry. Governmental issuers of Tax-Exempt Securities are not considered part of any "industry." However, Securities backed only by the assets and revenues of nongovernmental users may for this purpose be deemed to be issued by such nongovernmental users, and the 25% limitation would apply to such obligations. It is nonetheless possible that the Portfolio may invest more than 25% of its assets in a broader segment of the Tax-Exempt Securities market, such as revenue obligations of hospitals and other health care facilities, housing agency revenue obligations, or airport revenue obligations. This would be the case only if Mentor Advisors determined that the yields available from obligations in a particular segment of the market justified the additional risks associated with such concentration. Although such obligations could be supported by the credit of governmental users or by the credit of nongovernmental users engaged in a number of industries, economic, business, political, and other developments generally affecting the revenues of such users (for example, proposed 8 legislation or pending court decisions affecting the financing of such projects and market factors affecting the demand for their services or products) may have a general adverse effect on all Tax-Exempt Securities in such a market segment. The Portfolio reserves the right to invest more than 25% of its assets in industrial development bonds and private activity bonds or notes. The Portfolio also reserves the right to invest more than 25% of its assets in securities relating to any one or more states (including the District of Columbia), U.S. territories or possessions, or any of their political subdivisions. As a result of such an investment, the performance of the Portfolio may be especially affected by factors pertaining to the economy of the relevant state and other factors specifically affecting the ability of issuers of such securities to meet their obligations. As a result, the value of the Portfolio's shares may fluctuate more widely than the value of shares of a fund investing in securities relating to a greater number of different states. OTHER INVESTMENT PRACTICES A Portfolio may also engage to a limited extent in the following investment practices, each of which involves certain special risks. The Statement of Additional Information contains more detailed information about these practices. FOREIGN INVESTMENTS. The Money Market Portfolio may invest in obligations of foreign issuers and in bank certificates of deposit and bankers' acceptances payable in U.S. dollars and issued by foreign banks (including U.S. branches of foreign banks) or by foreign branches of U.S. banks. These investments subject the Portfolio to investment risks different from those associated with domestic investments. Such risks include adverse political and economic developments in foreign countries, the imposition of withholding taxes on interest income, seizure or nationalization of foreign deposits, or the adoption of other governmental restrictions which may adversely affect the payment of principal and interest on such obligations. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the U.S. or in other foreign countries. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of the Portfolio's assets held abroad) and expenses not present in the settlement of domestic investments. In addition, foreign securities may be less liquid than U.S. securities, and foreign accounting and disclosure standards may differ from U.S. standards. Special tax considerations apply to foreign investments. REPURCHASE AGREEMENTS. Under a repurchase agreement, a Portfolio purchases a debt instrument for a relatively short period (usually not more than one week), which the seller agrees to repurchase at a fixed time and price, representing the Portfolio's cost plus interest. A Portfolio will enter into repurchase agreements only with commercial banks and with registered broker-dealers who are members of a national securities exchange or market makers in government securities, and only if the debt instrument subject to the repurchase agreement is a U.S. Government security. Although Mentor Advisors will monitor repurchase agreement transactions to ensure that they will be fully collateralized at all times, a Portfolio bears a risk of loss if the other party defaults on its obligation and the Portfolio is delayed or prevented from exercising its rights to dispose of the collateral. If the other party should become involved in bankruptcy or insolvency proceedings, it is possible that a Portfolio may be treated as an unsecured creditor and required to return the collateral to the other party's estate. SECURITIES LENDING. A Portfolio may lend portfolio securities to broker-dealers. These transactions must be fully collateralized at all times with cash or short-term debt obligations, but involve some risk to a Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from exercising its 9 rights in respect of the collateral. Any investment of collateral by a Portfolio would be made in accordance with the Portfolio's investment objective and policies described above. TAX INFORMATION FEDERAL TAXES. Each Portfolio intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements that are necessary for it to be relieved of federal income taxes on income (and gains, if any) it distributes to shareholders. Each Portfolio will distribute substantially all of its net ordinary income (and net capital gains, if any) on a current basis. Distributions (other than exempt interest dividends) will be taxable to you regardless of whether you elect to receive them in cash or to reinvest them in additional shares. Dividends paid by the Tax-Exempt Money Market Portfolio that are derived from exempt-interest income (known as "exempt-interest dividends") and that are designated as such may be treated by the Portfolio's shareholders as items of interest excludable from their federal gross income. (Shareholders should consult their own tax adviser with respect to whether exempt-interest dividends would be excludable from gross income if the shareholder were treated as a "substantial user" of facilities financed by an obligation held by the Portfolio or a "related person" to such a user under the Internal Revenue Code.) If a shareholder receives an exempt-interest dividend with respect to any share held for six months or less, any loss on the sale or exchange of that share will be disallowed to the extent of the amount of the exempt-interest dividend. To the extent dividends paid to shareholders are derived from taxable income (for example, from interest on certificates of deposit) or from gains, such dividends will be subject to federal income tax, whether they are paid in the form of cash or additional shares. If the Tax-Exempt Money Market Portfolio holds certain "private activity bonds" ("industrial development bonds" under prior law), dividends derived from interest on such obligations will be classified as an item of tax preference which could subject certain shareholders to alternative minimum tax liability. Corporate shareholders must also take all exempt-interest dividends into account in determining "adjusted current earnings" for purposes of calculating their alternative minimum tax liability. Shareholders receiving Social Security benefits or Railroad Retirement Act benefits should note that all exempt-interest dividends will be taken into account in determining the taxability of such benefits. Early in each year the Tax-Exempt Money Market Portfolio will notify you of the amount and tax status of distributions paid to you by the Portfolio for the preceding year. GENERAL. The foregoing is a summary of certain federal income tax consequences of investing in the Portfolios. You should consult your tax adviser to determine the precise effect of an investment in each Portfolio on your particular tax situation. HOW THE PORTFOLIOS VALUE THEIR SHARES Each Portfolio values its shares twice each day, once at 12:00 noon and again at the close of regular trading on the New York Stock Exchange. A Portfolio's investments are valued at amortized cost in accordance with Securities and Exchange Commission Rule 2a-7. A Portfolio will not normally have unrealized gains or losses so long as it values its investments by the amortized cost method. 10 PURCHASE OF SHARES The Portfolios offer their shares continuously at a price of $1.00 per share. Because the Portfolios seek to be fully invested at all times, investments must be in Same Day Funds to be accepted. "Same Day Funds" are funds credited by the applicable regional Federal Reserve Bank to the account of the Portfolio at its designated bank. Mentor Distributors, LLC, 3435 Stelzer Road, Columbus, Ohio 43219, serves as distributor of the Portfolios' shares. An investor may make an initial purchase of shares in the Portfolios by submitting completed application materials along with a purchase order, and by making payment to Mentor Services Company or the Trust. Investors will be required to make minimum initial investments of $500,000 and minimum subsequent investments of $25,000. Investments made through advisory accounts maintained with investment advisers registered under the Investment Advisers Act of 1940, as amended (including "wrap" accounts), are not subject to these minimum investment requirements. The Portfolios reserve the right at any time to change the initial and subsequent investment minimums required of investors. Shares of the Portfolios may be purchased by (i) paying cash, (ii) exchanging securities acceptable to Mentor Advisors, or (iii) a combination of such securities and cash. Purchase of shares of the Portfolios in exchange for securities is subject in each case to the determination by Mentor Advisors that the securities to be exchanged are acceptable for purchase by the Portfolios. Securities accepted by Mentor Advisors in exchange for Portfolios shares will be valued in the same manner as the Portfolios' assets as of the time of the Portfolios' next determination of net asset value after such acceptance. All dividends and subscription or other rights which are reflected in the market price of accepted securities at the time of valuation become the property of the Portfolios and must be delivered to the Portfolios upon receipt by the investor from the issuer. A gain or loss for federal income tax purposes would be realized upon the exchange by an investor that is subject to federal income taxation, depending upon the investor's basis in the securities tendered. A shareholder who wishes to purchase shares by exchanging securities should obtain instructions by calling Mentor Services Company at 1-800-869-6042. Mentor Distributors, Mentor Advisors, and their affiliates, at their own expense and out of their own assets, may provide compensation to dealers in connection with sales of shares of the Portfolios. Such compensation may include, but is not limited to, financial assistance to dealers in connection with conferences, sales, or training programs for their employees, seminars for the public, advertising or sales campaigns, or other dealer-sponsored special events. In some instances, this compensation may be made available only to certain dealers whose representatives have sold or are expected to sell significant amounts of shares. Dealers may not use sales of Portfolios shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc. In all cases Mentor Advisors and Mentor Distributors reserve the right to reject any particular investment. REDEMPTION OF SHARES A shareholder may redeem all or any portion of its shares in a Portfolio any day the New York Stock Exchange is open by sending a signed letter of instruction and stock power form, along with any certificates that represent shares the shareholder wants to sell, to the Portfolio c/o Mentor Funds, P.O. Box 1357, Richmond, 11 Virginia 23218-1357 or to Mentor Distributors. Redemptions will be effected at the net asset value per share of the Portfolio next determined after the receipt by the Portfolio of redemption instructions in "good order" as described below. In order to receive that day's net asset value, your request must be received before the close of regular trading on the New York Stock Exchange. A Portfolio will only redeem shares for which it has received payment. A check for the proceeds will normally be mailed on the next business day after a request in good order is received. A redemption request will be considered to have been made in "good order" if the following conditions are satisfied: (1) the request is in writing, states the number of shares to be redeemed, and identifies the shareholder's Portfolio account number; (2) the request is signed by each registered owner exactly as the shares are registered; and (3) if the shares to be redeemed were issued in certificate form, the certificates are endorsed for transfer (or are accompanied by an endorsed stock power) and accompany the redemption request. If shares to be redeemed represent an investment made by check, the Trust reserves the right not to transmit the redemption proceeds to the shareholder until the check has been collected, which may take up to 15 days after the purchase date. The Portfolios reserve the right to require signature guarantees. A guarantor of a signature must be an eligible guarantor institution, which term includes most banks and trust companies, savings associations, credit unions, and securities brokers or dealers. The purpose of a signature guarantee is to protect shareholders against the possibility of fraud. Mentor Distributors usually requires additional documentation for the sale of shares by a corporation, partnership, agent, fiduciary, or surviving joint owner. Contact Mentor Distributors for details. Mentor Distributors may facilitate any redemption request. There is no extra charge for this service. OTHER INFORMATION CONCERNING REDEMPTION. Under unusual circumstances, the Portfolios may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. In addition, the Portfolios reserve the right, if conditions exist which make cash payments undesirable, to honor any request for redemption by making payment in whole or in part in securities valued in the same way as they would be valued for purposes of computing the Portfolios' per share net asset value. If payment is made in securities, a shareholder may incur brokerage expenses in converting those securities into cash. HOW DISTRIBUTIONS ARE MADE A Portfolio determines its net income as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Each determination of a Portfolio's net income includes (i) all accrued interest on the Portfolio's investments, (ii) plus or minus all realized and unrealized gains and losses on the Portfolio's investments, (iii) less all accrued expenses of the Portfolio. A Portfolio declares all of its net income as a distribution on each day it is open for business, as a dividend to shareholders of record immediately prior to the close of regular trading on the New York Stock Exchange. Shareholders whose purchase of shares of a Portfolio are accepted at or before 12:00 noon on any day will receive the dividend declared by a Portfolio for that day; shareholders who purchase shares after 12:00 noon will 12 begin earning dividends on the next business day after the Portfolio accepts their order. A Portfolio's net income for Saturdays, Sundays, and holidays is declared as a dividend on the preceding business day. Dividends for any calendar month will be paid on the last day of that month (or, if that day is not a business day, on the next preceding business day), except that a Portfolio's schedule for payment of dividends during the month of December may be adjusted to assist in tax reporting and distribution requirements. A shareholder that withdraws the entire balance of an account at any time during a month will be paid all dividends declared through the time of withdrawal. Since the net income of a Portfolio is declared as a dividend each time it is determined, the net asset value per share of a Portfolio normally remains at $1 per share immediately after each determination and dividend declaration. All Portfolio distributions will be invested in additional Portfolio shares, unless the shareholder instructs the Portfolio otherwise. MANAGEMENT The Trustees are responsible for generally overseeing the conduct of the Trust's business. Mentor Investment Advisors, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, serves as investment adviser to each of the Portfolios, providing investment advisory services and advising and assisting the officers of the Trust in taking such steps as are necessary or appropriate to carry out the decisions of the Trustees. Subject to such policies as the Trustees may determine, Mentor Advisors furnishes a continuing investment program for the Portfolios and makes investment decisions on their behalf. Mentor Advisors has over $13 billion in assets under management and is a wholly owned subsidiary of Mentor Investment Group, LLC ("Mentor Investment Group") and its affiliates. Mentor Investment Group is a subsidiary of Wheat First Butcher Singer, Inc., which is in turn a wholly owned subsidiary of First Union Corp. First Union is a leading financial services company with approximately $234 billion in assets and $17 billion in total stockholders' equity as of September 30, 1998. EVEREN Capital Corporation has a 20% ownership in Mentor Investment Group and may acquire additional ownership based principally on the amount of Mentor Investment Group's revenues derived from assets attributable to clients of EVEREN Securities, Inc. and its affiliates. Each Portfolio pays management fees to Mentor Advisors monthly at the following annual rates (based on the average daily net assets of the Portfolio): 0.22% of the first $500 million of the Portfolio's average net assets; 0.20% of the next $500 million; 0.175% of the next $1 billion; 0.16% of the next $1 billion; and 0.15% of any amounts over $3 billion. For purposes of determining the annual rate at which management fees are payable by the Portfolios, a Portfolio's assets will be considered to include the assets of, in the case of the Money Market Portfolio, Cash Resource Money Market Fund; in the case of the U.S. Government Money Market Portfolio, Cash Resource U.S. Government Money Market Fund; and in the case of the Tax-Exempt Money Market Portfolio, Cash Resource Tax-Exempt Money Market Fund. Each of those Funds is managed by Mentor Advisors and is a series of shares of Cash Resource Trust. The Portfolios pay all expenses not assumed by Mentor Advisors, including Trustees' fees, auditing, legal, custodial, investor servicing, and shareholder reporting expenses, and payments under their Distribution Plans. General expenses of the Trust will be charged to the assets of each Portfolio on a basis that the Trustees deem fair and equitable, which may be based on the relative assets of each Portfolio (and other series of shares of the 13 Trust) or the nature of the services performed and relative applicability to each Portfolio. Expenses directly charged or attributable to a Portfolio will be paid from the assets of that Portfolio. Mentor Advisors places all orders for purchases and sales of the investments of each Portfolio. In selecting broker-dealers, Mentor Advisors may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the most favorable price and execution available, Mentor Advisors may consider sales of shares of the Portfolios (and, if permitted by law, of the other funds in the Mentor family) as a factor in the selection of broker-dealers. The Portfolios receive services from a number of providers which rely on the smooth functioning of their respective systems and the systems of others to perform those services. It is generally recognized that certain systems in use today may not perform their intended functions adequately after the Year 1999 because of the inability of the software to distinguish the Year 2000 from the Year 1900. Mentor Advisors is taking steps that it believes are reasonably designed to address this potential "Year 2000" problem and to obtain satisfactory assurances that comparable steps are being taken by the Portfolios' other major service providers. There can be no assurance, however, that these steps will be sufficient to avoid any adverse impact on the Portfolios from this problem. ADMINISTRATIVE SERVICES. Mentor Investment Group, LLC, located at 901 East Byrd Street, Richmond, Virginia 23219, provides each Portfolio with certain administrative personnel and services necessary to operate each Portfolio, such as bookkeeping and accounting services. Mentor Investment Group provides these services to each of the Portfolios at an annual rate of .02% of the Portfolio's average daily net assets. HOW A PORTFOLIO'S PERFORMANCE IS CALCULATED Quotations of yield for a period when an expense limitation was in effect will be greater than if the limitation had not been in effect. The Portfolio's performance may be compared to various indices. See the Statement of Additional Information. Information may be presented in advertisements about the Portfolio describing the background and professional experience of the Portfolio's investment adviser or its investment personnel. Yield and effective yield data of a Portfolio's Retail Shares may from time to time be included in advertisements about the Portfolios. "Yield" is calculated by dividing a Portfolio's annualized net investment income per Retail Share during a recent seven-day period by the net asset value per share on the last day of that period. "Effective yield" compounds that yield for a year and is, for that reason, greater than a Portfolio's yield. "Tax-equivalent" yield shows the affect on performance of the tax-exempt status of distributions received from the Tax-Exempt Money Market Portfolio. It reflects the approximate yield that a taxable investment must earn for shareholders at stated income levels to produce an after-tax yield equivalent to the Portfolio's tax-exempt yield. Quotations of yield for any period when an expense limitation was in effect will be greater than if the limitation had not been in effect. A Portfolio's performance may be compared to various indices. See the Statement of Additional Information. All data is based on a Portfolio's past investment results and does not predict future performance. Investment performance, which will vary, is based on many factors, including market conditions, the composition of a Portfolio's investments, a Portfolio's operating expenses, and the class of shares purchased. Investment performance also often reflects the risks associated with a Portfolio's investment objective and policies. These factors should be considered when comparing a Portfolio's investment results to those of other mutual funds and other investment vehicles. 14 GENERAL INFORMATION Mentor Funds is a Massachusetts business trust organized on January 20, 1992. A copy of the Agreement and Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The Trust is an open-end, management investment company with an unlimited number of authorized shares of beneficial interest. Shares of the Trust may, without shareholder approval, be divided into two or more series of shares representing separate investment portfolios, and are currently divided into twelve series of shares. Under the Declaration of Trust, a Portfolio's shares may be further divided, without shareholder approval, into two or more classes of shares having such preferences or special or relative rights and privileges as the Trustees may determine. Each Portfolio's shares are currently divided into two classes, Institutional Shares, which are offered by this Prospectus, and Retail Shares. Retail Shares are subject to Rule 12b-1 fees and to certain expenses of other types. Differences in expenses between the classes will affect performance. Contact Mentor Services Company at 1-800-869-6042 for information concerning Retail Shares of a Portfolio and your eligibility to purchase those shares. Each share has one vote, with fractional shares voting proportionally. Shares of each Portfolio are freely transferable, are entitled to dividends as declared by the Trustees, and, if a Portfolio were liquidated, would receive the net assets of the Portfolio. The Trust may suspend the sale of shares of any Portfolio at any time and may refuse any order to purchase shares. Although the Trust is not required to hold annual meetings of its shareholders, shareholders have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Declaration of Trust. Boston Financial Data Services, located at 2 Heritage Drive, North Quincy, MA 02171, is the transfer agent and dividend-paying agent for the Trust. BFDS engages at its own expense certain Financial Institutions, including affiliates of First Union, to perform bookkeeping, data processing, and administrative services pertaining to the maintenance of shareholder accounts. Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri 64105, serves as the Portfolios' custodian. If you own fewer shares of a Portfolio than a minimum amount set by the Trustees, the Trust may choose to redeem your shares and pay you for them. You will receive at least 30 days written notice before the Trust redeems your shares, and you may purchase additional shares at any time to avoid a redemption. The Trust may also redeem shares if you own shares of any Portfolio or of the Trust above any maximum amount set by the Trustees. There is presently no such minimum or maximum, but the Trustees may establish one at any time, which could apply to both present and future shareholders. The Trust may send a single copy of shareholder reports and communications to an address where there is more than one registered shareholder with the same last name, unless a shareholder at that address requests, by calling or writing his Financial Institution or Mentor Services Company, that the Trust do otherwise. 15 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES. ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE PORTFOLIO IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION. MENTOR FUNDS 901 East Byrd Street Richmond, VA 23219 (800) 869-6042 1998 MENTOR DISTRIBUTORS, LLC SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE MK 1341 MENTOR FUNDS MENTOR MONEY MARKET PORTFOLIO MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO --------------------------------- PROSPECTUS INSTITUTIONAL SHARES --------------------------------- December 15, 1998 [MENTOR LOGO] NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THIS PROSPECTUS OMITS CERTAIN INFORMATION CONTAINED IN THE REGISTRATION STATEMENT, TO WHICH REFERENCE IS MADE, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEMS WHICH ARE THUS OMITTED, INCLUDING CONTRACTS AND OTHER DOCUMENTS REFERRED TO OR SUMMARIZED HEREIN, MAY BE OBTAINED FROM THE COMMISSION UPON PAYMENT OF THE PRESCRIBED FEES. ADDITIONAL INFORMATION CONCERNING THE SECURITIES OFFERED HEREBY AND THE PORTFOLIO IS TO BE FOUND IN THE REGISTRATION STATEMENT, INCLUDING VARIOUS EXHIBITS THERETO AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED THEREIN, WHICH MAY BE INSPECTED AT THE OFFICE OF THE COMMISSION. MENTOR FUNDS 901 East Byrd Street Richmond, VA 23219 (800) 869-6042 1998 MENTOR DISTRIBUTORS, LLC SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE MK 1341 [MENTOR LOGO] MENTOR FUNDS MENTOR MONEY MARKET PORTFOLIO MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO --------------------------------- PROSPECTUS INSTITUTIONAL SHARES --------------------------------- December 15, 1998 [EVEREN SECURITIES LOGO] MENTOR FUNDS STATEMENT OF ADDITIONAL INFORMATION (MENTOR GROWTH PORTFOLIO, MENTOR PERPETUAL GLOBAL PORTFOLIO, MENTOR CAPITAL GROWTH PORTFOLIO, MENTOR BALANCED PORTFOLIO, MENTOR INCOME AND GROWTH PORTFOLIO, MENTOR MUNICIPAL INCOME PORTFOLIO, MENTOR QUALITY INCOME PORTFOLIO, MENTOR SHORT-DURATION INCOME PORTFOLIO, MENTOR HIGH INCOME PORTFOLIO) December 15, 1998 Mentor Funds (the "Trust") is an open-end series investment company. This Statement of Additional Information is not a prospectus and should be read in conjunction with the relevant prospectus of the Trust. A copy of a prospectus in respect of a Portfolio can be obtained upon request by writing to Mentor Services Company, Inc., at 901 East Byrd Street, Richmond, Virginia 23219, or by calling Mentor Services Company at 1-800-869-6042. This Statement is in parts. Part I contains information with respect to Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio, Mentor Municipal Income Portfolio, Mentor Income and Growth Portfolio, and Mentor Perpetual Global Portfolio. Part II contains information with respect to Mentor Growth Portfolio, Mentor Short-Duration Income Portfolio, and Mentor Balanced Portfolio. Part III contains information with respect to Mentor High Income Portfolio. Part IV provides general information with respect to the Trust and all of the Portfolios. TABLE OF CONTENTS Introduction ............................................................................. ii PART I ................................................................................... 1 Investment Restrictions ................................................................ 1 PART II .................................................................................. 4 Investment Restrictions ................................................................ 4 PART III ................................................................................. 7 Investment Restrictions ................................................................ 7 PART IV .................................................................................. 8 Certain Investment Techniques .......................................................... 8 Management of the Trust ................................................................ 27 Principal Holders of Securities ........................................................ 30 Investment Advisory Services ........................................................... 31 Administrative Services ................................................................ 33 Shareholder Servicing Plan ............................................................. 35 Brokerage Transactions ................................................................. 36 How to Buy Shares ...................................................................... 39 Distribution ........................................................................... 39 Determining Net Asset Value ............................................................ 40 Redemptions in Kind .................................................................... 42 Taxes .................................................................................. 42 Independent Accountants ................................................................ 46 Custodian .............................................................................. 46 Performance Information ................................................................ 47 Equivalent Yields: Tax-exempt Versus Taxable Securities for the Municipal Income 49 Portfolio Mentor Municipal Income Portfolio -- Federal Taxable Equivalent Yield Table-1998 Rates . 50 Members of Investment Management Teams ................................................. 51 Performance Comparisons ................................................................ 54 Shareholder Liability .................................................................. 59 Financial Statements ................................................................... 59
i INTRODUCTION Mentor Funds is a Massachusetts business trust organized on January 20, 1992 as Cambridge Series Trust. This Statement relates to the following nine portfolios of the Trust (collectively, the "Portfolios" and each individually, the "Portfolio"): Mentor Growth Portfolio (the "Growth Portfolio"); Mentor Quality Income Portfolio (the "Quality Income Portfolio"); Mentor Balanced Portfolio (the "Balanced Portfolio"); Mentor Capital Growth Portfolio (the "Capital Growth Portfolio"); Mentor Perpetual Global Portfolio (the "Global Portfolio"); Mentor Income and Growth Portfolio (the "Income and Growth Portfolio"); Mentor Municipal Income Portfolio (the "Municipal Income Portfolio"); Mentor Short-Duration Income Portfolio (the "Short-Duration Income Portfolio"); and Mentor High Income Portfolio ("the High Income Portfolio"). Each Portfolio has three classes of shares of beneficial interest, Class A shares, Class B shares, and Class Y (Institutional) shares. With respect to the investment restrictions described below, all percentage limitations on investments will apply at the time of investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for the investment restrictions listed below as fundamental or to the extent designated as such in the Prospectus in respect of a Portfolio, the other investment policies described in this Statement or in the Prospectus are not fundamental and may be changed by approval of the Trustees. As a matter of policy, the Trustees would not materially change a Portfolio's investment objective without shareholder approval. The Investment Company Act of 1940, as amended (the "1940 Act"), provides that a "vote of a majority of the outstanding voting securities" of a Portfolio means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Portfolio, or (2) 67% or more of the shares present at a meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy. ii PART I The following information relates to each of the Capital Growth, Quality Income, Municipal Income, Income and Growth, and the Global Portfolios, except where otherwise noted. INVESTMENT RESTRICTIONS The following investment restrictions are fundamental and may not be changed without a vote of a majority of the outstanding voting securities of a Portfolio: 1. (not applicable to the Quality Income Portfolio) The Portfolios will not issue senior securities except that a Portfolio (other than the Municipal Income Portfolio) may borrow money directly or through reverse repurchase agreements in amounts of up to one-third of the value of its net assets, including the amount borrowed; and except to the extent that a Portfolio may enter into futures contracts. The Municipal Income Portfolio may borrow money from banks for temporary purposes in amounts of up to 5% of its total assets. The Portfolios will not borrow money or engage in reverse repurchase agreements for investment leverage, but rather as a temporary, extraordinary, or emergency measure or to facilitate management of the Portfolio by enabling it to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. The Portfolios will not purchase any securities while any borrowings in excess of 5% of its total assets are outstanding. During the period any reverse repurchase agreements are outstanding, the Quality Income Portfolio will restrict the purchase of portfolio securities to money market instruments maturing on or before the expiration date of the reverse repurchase agreements, but only to the extent necessary to assure completion of the reverse repurchase agreements. Notwithstanding this restriction, the Portfolios may enter into when-issued and delayed delivery transactions. 2. The Portfolios will not sell any securities short or purchase any securities on margin, but may obtain such short-term credits as are necessary for clearance of purchases and sales of securities. The deposit or payment by a Portfolio of initial or variation margin in connection with futures contracts or related options transactions is not considered the purchase of a security on margin. 3. (not applicable to the Quality Income Portfolio) The Portfolios will not mortgage, pledge, or hypothecate any assets, except to secure permitted borrowings. In these cases the Portfolios may pledge assets having a value of 10% of assets taken at cost. For purposes of this restriction, (a) the deposit of assets in escrow in connection with the writing of covered put or call options and the purchase of securities on a when-issued basis; and (b) collateral arrangements with respect to (i) the purchase and sale of stock options (and options on stock indexes) and (ii) initial or variation margin for futures contracts, will not be deemed to be pledges of a Portfolio's assets. Margin deposits for the purchase and sale of futures contracts and related options are not deemed to be a pledge. 4. The Portfolios will not lend any of their respective assets except portfolio securities up to one-third of the value of total assets. (The Municipal Income Portfolio will not lend portfolio securities.) This shall not prevent a Portfolio from purchasing or holding U.S. government obligations, money market instruments, variable amount demand master notes, bonds, debentures, notes, certificates of indebtedness, or other debt 1 securities, entering into repurchase agreements, or engaging in other transactions where permitted by a Portfolio's investment objective, policies and limitations or Declaration of Trust. The Municipal Income Portfolio will not make loans except to the extent the obligations the Portfolio may invest in are considered to be loans. 5. The Portfolios (other than the Quality Income Portfolio) will not invest more than 10% of the value of their net assets in restricted securities; the Quality Income Portfolio will not invest more than 15% of the value of its net assets in restricted securities. 6. None of the Portfolios will invest in commodities, except to the extent that the Portfolios may engage in transactions involving futures contracts or options on futures contracts, and except to the extent the securities the Municipal Income Portfolio invests in are considered interests in commodities or commodities contracts or to the extent the Portfolio exercises its rights under agreements relating to such municipal securities. 7. None of the Portfolios will purchase or sell real estate, including limited partnership interests, except to the extent the securities the Income and Growth Portfolio and Municipal Income Portfolio may invest in are considered to be interests in real estate or to the extent the Municipal Income Portfolio exercises its rights under agreements relating to such municipal securities (in which case the Portfolio may liquidate real estate acquired as a result of a default on a mortgage), although the Portfolios may invest in securities of issuers whose business involves the purchase or sale of real estate or in securities which are secured by real estate or interests in real estate. 8. With respect to 75% of the value of its respective total assets, a Portfolio will not purchase securities issued by any one issuer (other than cash or securities issued or guaranteed by the government of the United States or its agencies or instrumentalities and repurchase agreements collateralized by such securities), if as a result more than 5% of the value of its total assets would be invested in the securities of that issuer. A Portfolio will not acquire more than 10% of the outstanding voting securities of any one issuer. 9. A Portfolio will not invest 25% or more of the value of its respective total assets in any one industry (other than securities issued by the U.S. Government, its agencies or instrumentalities). As described in the Trust's Prospectus, the Municipal Income Portfolio may from time to time invest more than 25% of its assets in a particular segment of the municipal bond market; however, that Portfolio will not invest more than 25% of its assets in industrial development bonds in a single industry except as described in the Trust's Prospectus. 10. A Portfolio will not underwrite any issue of securities, except as a Portfolio may be deemed to be an underwriter under the Securities Act of 1933 in connection with the sale of securities in accordance with its investment objective, policies, and limitations. 11. The Quality Income Portfolio will not issue any class of securities which are senior to the Portfolio's shares except that the Portfolio may borrow money as contemplated by the following restriction. 12. The Quality Income Portfolio will not borrow more than 33 1/3% of the value of its total assets less all liabilities and indebtedness (other than such borrowings). 2 In addition, the following practices are contrary to the current policy of each of the Portfolios (except as otherwise noted), and may be changed without shareholder approval: investing in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale (excluding securities determined by the Trustees of the fund (or the person designated by the Trustees of the fund to make such determinations) to be readily marketable), and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the Portfolio's net assets (taken at current value) would be invested in securities described in (a), (b) and (c) above. 3 PART II The following information relates to each of the Balanced, Growth, and Short-Duration Income Portfolios, except where otherwise noted. INVESTMENT RESTRICTIONS As fundamental investment restrictions, which may not be changed with respect to a Portfolio without a vote of a majority of the outstanding shares of that Portfolio, a Portfolio may not: 1. Issue any securities which are senior to the Portfolio's shares as described herein and in the relevant prospectus, except that each of the Portfolios other than the Growth Portfolio may borrow money to the extent contemplated by Restriction 4 below. 2. Purchase securities on margin (but a Portfolio may obtain such short-term credits as may be necessary for the clearance of transactions). (Margin payments in connection with transactions in futures contracts, options, and other financial instruments are not considered to constitute the purchase of securities on margin for this purpose.) 3. Make short sales of securities or maintain a short position, unless at all times when a short position is open, it owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short ("short sale against-the-box"), and unless not more than 25% of the Portfolio's net assets (taken at current value) is held as collateral for such sales at any one time. 4. (Growth Portfolio) Borrow money or pledge its assets except that a Portfolio may borrow from banks for temporary or emergency purposes (including the meeting of redemption requests which might otherwise require the untimely disposition of securities) in amounts not exceeding 10% (taken at the lower of cost or market value) of its total assets (not including the amount borrowed) and pledge its assets to secure such borrowings; provided that a Portfolio will not purchase additional portfolio securities when such borrowings exceed 5% of its total assets. (Collateral or margin arrangements with respect to options, futures contracts, or other financial instruments are not considered to be pledges.) (All other Portfolios included in Part II) Borrow more than 33 1/3% of the value of its total assets less all liabilities and indebtedness (other than such borrowings) not represented by senior securities. 5. Act as underwriter of securities of other issuers except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities laws. 6. Purchase any security if as a result the Portfolio would then have more than 5% of its total assets (taken at current value) invested in securities of companies (including predecessors) less than three years old or (in the case of Growth Portfolio) in equity securities for which market quotations are not readily available. 7. (as to the Growth Portfolio only) Purchase any security if as a result the Portfolio would then hold more than 10% of any class of securities of an issuer (taking all common stock issues of an issuer as a single class, all preferred stock issues as a single class, and all debt issues as a single class) or more than 10% of the outstanding voting securities of an issuer. 4 8. Purchase any security (other than obligations of the U.S. Government, its agencies or instrumentalities) if as a result: (i) more than 5% of the Portfolio's total assets (taken at current value) would then be invested in securities of a single issuer, or (ii) more than 25% of the Portfolio's total assets (taken at current value) would be invested in a single industry; provided that the restriction set out in (i) above shall apply, in the case of each Portfolio other than the Growth Portfolio, only as to 75% of such Portfolio's total assets. 9. Invest in securities of any issuer if, to the knowledge of the Trust, any officer or Trustee of the Trust or of Mentor Investment Advisors, LLC as the case may be, owns more than 1/2 of 1% of the outstanding securities of such issuer, and such officers and Trustees who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of such issuer. 10. Purchase or sell real estate or interests in real estate, including real estate mortgage loans, although it may purchase and sell securities which are secured by real estate and securities of companies that invest or deal in real estate (or, in the case of any Portfolio other than the Growth Portfolio, real estate or limited partnership interests). (For purposes of this restriction, investments by a Portfolio in mortgage-backed securities and other securities representing interests in mortgage pools shall not constitute the purchase or sale of real estate or interests in real estate or real estate mortgage loans.) 11. Make investments for the purpose of exercising control or management. 12. (as to the Growth Portfolio only) Participate on a joint or a joint and several basis in any trading account in securities. 13. (as to the Growth Portfolio only) Purchase any security restricted as to disposition under federal securities laws if as a result more than 5% of the Portfolio's total assets (taken at current value) would be invested in restricted securities. 14. (as to the Growth Portfolio only) Invest in securities of other registered investment companies, except by purchases in the open market involving only customary brokerage commissions and as a result of which not more than 5% of its total assets (taken at current value) would be invested in such securities, or except as part of a merger, consolidation or other acquisition. 15. Invest in interests in oil, gas or other mineral exploration or development programs or leases, although it may invest in the common stocks of companies that invest in or sponsor such programs. 16. (as to the Growth Portfolio only) Make loans, except through (i) repurchase agreements (repurchase agreements with a maturity of longer than 7 days together with other illiquid assets being limited to 10% of the Portfolio's assets,) and (ii) loans of portfolio securities (limited to 33% of the Portfolio's total assets). 17. (as to the Growth Portfolio only) Purchase foreign securities or currencies except foreign securities which are American Depository Receipts listed on exchanges or otherwise traded in the United States and certificates of deposit, bankers' acceptances and other obligations of foreign banks and foreign branches of U.S. banks if, giving effect to such purchase, such obligations would constitute less than 10% of the Trust's total assets (at current value). 5 18. (as to the Growth Portfolio only) Purchase warrants if as a result the Portfolio would then have more than 5% of its total assets (taken at current value) invested in warrants. 19. (as to each Portfolio other than the Growth Portfolio) Acquire more than 10% of the voting securities of any issuer. 20. (as to each Portfolio other than the Growth Portfolio) Make loans, except by purchase of debt obligations in which the Portfolio may invest consistent with its investment policies, by entering into repurchase agreements with respect to not more than 25% of its total assets (taken at current value), or through the lending of its portfolio securities with respect to not more than 25% of its total assets. 21. Purchase or sell commodities or commodity contracts, except that a Portfolio may purchase or sell financial futures contracts, options on financial futures contracts, and futures contracts, forward contracts, and options with respect to foreign currencies, and may enter into swap transactions. (This restriction applies to the Growth Portfolio.) In addition, it is contrary to the current policy of each of the Portfolios, which policy may be changed without shareholder approval, to invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale (excluding securities determined by the Trustees of the fund (or the person designated by the Trustees of the fund to make such determinations) to be readily marketable), and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the Portfolio's net assets (taken at current value) would be invested in securities described in (a), (b) and (c) above. 6 PART III The following information relates to the High Income Portfolio. INVESTMENT RESTRICTIONS As fundamental investment restrictions, which may not be changed with respect to the Portfolio without approval by the holders of a majority of the outstanding shares of the Portfolio, the Portfolio may not: 1. Purchase any security (other than U.S. Government securities) if as a result: (i) as to 75% of such Portfolio's total assets, more than 5% of the Portfolio's total assets (taken at current value) would then be invested in securities of a single issuer, or (ii) more than 25% of the Portfolio's total assets would be invested in a single industry. 2. Acquire more than 10% of the voting securities of any issuer. 3. Act as underwriter of securities of other issuers except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities laws. 4. Issue any class of securities which is senior to the Portfolio's shares of beneficial interest, except as contemplated by restriction 6 below. 5. Purchase or sell real estate or interests in real estate, including real estate mortgage loans, although it may purchase and sell securities which are secured by real estate and securities of companies that invest or deal in real estate or real estate limited partnership interests. (For purposes of this restriction, investments by a Portfolio in mortgage-backed securities and other securities representing interests in mortgage pools shall not constitute the purchase or sale of real estate or interests in real estate or real estate mortgage loans.) 6. Borrow more than 33 1/3% of the value of its total assets less all liabilities and indebtedness (other than such borrowings) 7. Purchase or sell commodities or commodity contracts, except that a Portfolio may purchase or sell financial futures contracts, options on futures contracts, and futures contracts, forward contracts, and options with respect to foreign currencies, and may enter into swap transactions. 8. Make loans, except by purchase of debt obligations in which the Portfolio may invest consistent with its investment policies, by entering into repurchase agreements, or by lending its portfolio securities. In addition, it is contrary to the current policy of the Portfolio, which policy may be changed without shareholder approval, to invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale (excluding securities determined by the Trustees of the Trust (or the person designated by the Trustees to make such determinations) to be readily marketable), and (c) repurchase agreements maturing in more then seven days, if, as a result, more than 15% of the Portfolio's net assets (taken at current value) would then be invested in securities described in (a), (b), and (c). 7 PART IV All percentage limitations on investments (including those described in Parts I, II, and III, above) will apply at the time of investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for the investment restrictions listed above as fundamental or to the extent designated as such in a Prospectus with respect to a Portfolio, the other investment policies described in this Statement or in a Prospectus are not fundamental and may be changed by approval of the Trustees. As a matter of policy, the Trustees would not materially change a Portfolio's investment objective without shareholder approval. The Investment Company Act of 1940, as amended (the "1940 Act"), provides that a "vote of a majority of the outstanding voting securities" of the Portfolio means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Portfolio, and (2) 67% or more of the shares present at a meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy. All information with respect to fees, expenses, and performance (except where otherwise indicated) is based on a Portfolio's fiscal year end. All of the Portfolios have a September 30 fiscal year end. Certain information with respect to certain Portfolios is given for partial fiscal years. See "Financial Highlights" in the Trust's prospectuses for information concerning the commencement of operations of each of the Portfolios. CERTAIN INVESTMENT TECHNIQUES Set forth below is information concerning certain investment techniques in which one or more of the Portfolios may engage, and certain of the risks they may entail. Certain of the investment techniques may not be available to a Portfolio. See the Prospectus relating to a particular Portfolio for a description of the investment techniques generally applicable to that Portfolio. For purposes of this section, a Portfolio's investment adviser or subadviser (if any) is referred to as an "Adviser". OPTIONS A Portfolio may purchase and sell put and call options on its portfolio securities to enhance investment performance or to protect against changes in market prices. COVERED CALL OPTIONS. A Portfolio may write covered call options on its securities to realize a greater current return through the receipt of premiums than it would realize on its securities alone. Such option transactions may also be used as a limited form of hedging against a decline in the price of securities owned by the Portfolio. A call option gives the holder the right to purchase, and obligates the writer to sell, a security at the exercise price at any time before the expiration date. A call option is "covered" if the writer, at all times while obligated as a writer, either owns the underlying securities (or comparable securities satisfying the cover requirements of the securities exchanges), or has the right to acquire such securities through immediate conversion of securities. In return for the premium received when it writes a covered call option, a Portfolio gives up some or all of the opportunity to profit from an increase in the market price of the securities covering the call option during the life of the option. The Portfolio retains the risk of loss should the price of such securities decline. If the option expires unexercised, the Portfolio realizes a gain equal to the premium, which may be offset by a decline in price of the underlying security. If the option is exercised, the Portfolio realizes a gain or loss equal to the 8 difference between the Portfolio's cost for the underlying security and the proceeds of sale (exercise price minus commissions) plus the amount of the premium. A Portfolio may terminate a call option that it has written before it expires by entering into a closing purchase transaction. A Portfolio may enter into closing purchase transactions in order to free itself to sell the underlying security or to write another call on the security, realize a profit on a previously written call option, or protect a security from being called in an unexpected market rise. Any profits from a closing purchase transaction may be offset by a decline in the value of the underlying security. Conversely, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from a closing purchase transaction is likely to be offset in whole or in part by unrealized appreciation of the underlying security owned by the Portfolio. COVERED PUT OPTIONS. A Portfolio may write covered put options in order to enhance its current return. Such options transactions may also be used as a limited form of hedging against an increase in the price of securities that the Portfolio plans to purchase. A put option gives the holder the right to sell, and obligates the writer to buy, a security at the exercise price at any time before the expiration date. A put option is "covered" if the writer segregates cash and high-grade short-term debt obligations or other permissible collateral equal to the price to be paid if the option is exercised. In addition to the receipt of premiums and the potential gains from terminating such options in closing purchase transactions, a Portfolio also receives interest on the cash and debt securities maintained to cover the exercise price of the option. By writing a put option, the Portfolio assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a potential capital loss unless the security later appreciates in value. A Portfolio may terminate a put option that it has written before it expires by a closing purchase transaction. Any loss from this transaction may be partially or entirely offset by the premium received on the terminated option. PURCHASING PUT AND CALL OPTIONS. A Portfolio may also purchase put options to protect portfolio holdings against a decline in market value. This protection lasts for the life of the put option because the Portfolio, as a holder of the option, may sell the underlying security at the exercise price regardless of any decline in its market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs that the Portfolio must pay. These costs will reduce any profit the Portfolio might have realized had it sold the underlying security instead of buying the put option. A Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. These costs will reduce any profit the Portfolio might have realized had it bought the underlying security at the time it purchased the call option. A Portfolio may also purchase put and sell options to enhance its current return. 9 OPTIONS ON FOREIGN SECURITIES. A Portfolio may purchase and sell options on foreign securities if in the opinion of its Adviser the investment characteristics of such options, including the risks of investing in such options, are consistent with the Portfolio's investment objectives. It is expected that risks related to such options will not differ materially from risks related to options on U.S. securities. However, position limits and other rules of foreign exchanges may differ from those in the U.S. In addition, options markets in some countries, many of which are relatively new, may be less liquid than comparable markets in the U.S. RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve certain risks, including the risks that a Portfolio's Adviser will not forecast interest rate or market movements correctly, that a Portfolio may be unable at times to close out such positions, or that hedging transactions may not accomplish their purpose because of imperfect market correlations. The successful use of these strategies depends on the ability of a Portfolio's Adviser to forecast market and interest rate movements correctly. An exchange-listed option may be closed out only on an exchange which provides a secondary market for an option of the same series. There is no assurance that a liquid secondary market on an exchange will exist for any particular option or at any particular time. If no secondary market were to exist, it would be impossible to enter into a closing transaction to close out an option position. As a result, a Portfolio may be forced to continue to hold, or to purchase at a fixed price, a security on which it has sold an option at a time when its Adviser believes it is inadvisable to do so. Higher than anticipated trading activity or order flow or other unforeseen events might cause The Options Clearing Corporation or an exchange to institute special trading procedures or restrictions that might restrict the Portfolio's use of options. The exchanges have established limitations on the maximum number of calls and puts of each class that may be held or written by an investor or group of investors acting in concert. It is possible that the Portfolio and other clients of the Portfolio's Adviser may be considered such a group. These position limits may restrict the Portfolio's ability to purchase or sell options on particular securities. Options which are not traded on national securities exchanges may be closed out only with the other party to the option transaction. For that reason, it may be more difficult to close out unlisted options than listed options. Furthermore, unlisted options are not subject to the protection afforded purchasers of listed options by The Options Clearing Corporation. Government regulations, particularly the requirements for qualification as a "regulated investment company" under the Internal Revenue Code, may also restrict the Portfolio's use of options. FUTURES CONTRACTS In order to hedge against the effects of adverse market changes a Portfolio that may invest in debt securities may buy and sell futures contracts on debt securities of the type in which the Portfolio may invest and on indexes of debt securities. In addition, a Portfolio that may invest in equity securities may purchase and sell stock index futures to hedge against changes in stock market prices. A Portfolio may also, to the extent permitted by applicable law, buy and sell futures contracts and options on futures contracts to increase its current return. All such futures and related options will, as may be required by applicable law, be traded on exchanges that are licensed and regulated by the Commodity Futures Trading Commission (the "CFTC"). 10 FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a debt security is a binding contractual commitment which, if held to maturity, will result in an obligation to make or accept delivery, during a particular month, of securities having a standardized face value and rate of return. By purchasing futures on debt securities -- assuming a "long" position -- a Portfolio will legally obligate itself to accept the future delivery of the underlying security and pay the agreed price. By selling futures on debt securities -- assuming a "short" position -- it will legally obligate itself to make the future delivery of the security against payment of the agreed price. Open futures positions on debt securities will be valued at the most recent settlement price, unless that price does not, in the judgment of persons acting at the direction of the Trustees as to the valuation of a Portfolio's assets, reflect the fair value of the contract, in which case the positions will be valued by the Trustees or such persons. Positions taken in the futures markets are not normally held to maturity, but are instead liquidated through offsetting transactions that may result in a profit or a loss. While futures positions taken by a Portfolio will usually be liquidated in this manner, a Portfolio may instead make or take delivery of the underlying securities whenever it appears economically advantageous to do so. A clearing corporation associated with the exchange on which futures are traded assumes responsibility for such closing transactions and guarantees that a Portfolio's sale and purchase obligations under closed-out positions will be performed at the termination of the contract. Hedging by use of futures on debt securities seeks to establish with more certainty than would otherwise be possible the effective rate of return on securities. A Portfolio may, for example, take a "short" position in the futures market by selling contracts for the future delivery of debt securities held by the Portfolio (or securities having characteristics similar to those held by the Portfolio) in order to hedge against an anticipated rise in interest rates that would adversely affect the value of the Portfolio's securities. When hedging of this character is successful, any depreciation in the value of securities may substantially be offset by appreciation in the value of the futures position. On other occasions, the Portfolio may take a "long" position by purchasing futures on debt securities. This would be done, for example, when the Portfolio expects to purchase particular securities when it has the necessary cash, but expects the rate of return available in the securities markets at that time to be less favorable than rates currently available in the futures markets. If the anticipated rise in the price of the securities should occur (with its concomitant reduction in yield), the increased cost to the Portfolio of purchasing the securities may be offset, at least to some extent, by the rise in the value of the futures position taken in anticipation of the subsequent purchase. Successful use by a Portfolio of futures contracts on debt securities is subject to its Adviser's ability to predict correctly movements in the direction of interest rates and other factors affecting markets for debt securities. For example, if a Portfolio has hedged against the possibility of an increase in interest rates which would adversely affect the market prices of debt securities held by it and the prices of such securities increase instead the Portfolio will lose part or all of the benefit of the increased value of its securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily margin maintenance requirements. The Portfolio may have to sell securities at a time when it may be disadvantageous to do so. 11 A Portfolio may purchase and write put and call options on certain debt futures contracts, as they become available. Such options are similar to options on securities except that options on futures contracts give the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option. As with options on securities, the holder or writer of an option may terminate his position by selling or purchasing an option of the same series. There is no guarantee that such closing transactions can be effected. A Portfolio will be required to deposit initial margin and maintenance margin with respect to put and call options on futures contracts written by it pursuant to brokers' requirements, and, in addition, net option premiums received will be included as initial margin deposits. See "Margin Payments" below. Compared to the purchase or sale of futures contracts, the purchase of call or put options on futures contracts involves less potential risk to a Portfolio because the maximum amount at risk is the premium paid for the options plus transactions costs. However, there may be circumstances when the purchase of call or put options on a futures contract would result in a loss to a Portfolio when the purchase or sale of the futures contracts would not, such as when there is no movement in the prices of debt securities. The writing of a put or call option on a futures contract involves risks similar to those risks relating to the purchase or sale of futures contracts. INDEX FUTURES CONTRACTS AND OPTIONS. A Portfolio may invest in debt index futures contracts and stock index futures contracts, and in related options. A debt index futures contract is a contract to buy or sell units of a specified debt index at a specified future date at a price agreed upon when the contract is made. A unit is the current value of the index. (Debt index futures in which the Portfolios are presently expected to invest are not now available, although such futures contracts are expected to become available in the future.) A stock index futures contract is a contract to buy or sell units of a stock index at a specified future date at a price agreed upon when the contract is made. A unit is the current value of the stock index. For example, the Standard & Poor's 100 Stock Index is composed of 100 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 100 Index assigns relative weightings to the common stocks included in the Index, and the Index fluctuates with changes in the market values of those common stocks. In the case of the S&P 100 Index, contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180, one contract would be worth $18,000 (100 units x $180). The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. For example, if a Portfolio enters into a futures contract to buy 100 units of the S&P 100 Index at a specified future date at a contract price of $180 and the S&P 100 Index is at $184 on that future date, the Portfolio will gain $400 (100 units x gain of $4). If the Portfolio enters into a futures contract to sell 100 units of the stock index at a specified future date at a contract price of $180 and the S&P 100 Index is at $182 on that future date, the Portfolio will lose $200 (100 units x loss of $2). A Portfolio may purchase or sell futures contracts with respect to any securities indexes. Positions in index futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. In order to hedge a Portfolio's investments successfully using futures contracts and related options, a Portfolio must invest in futures contracts with respect to indexes or sub-indexes the movements of which will, in its judgment, have a significant correlation with movements in the prices of the Portfolio's securities. 12 OPTIONS ON STOCK INDEX FUTURES. Options on index futures contracts are similar to options on securities except that options on index futures contracts give the purchaser the right, in return for the premium paid, to assume a position in an index futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option. Upon exercise of the option, the holder would assume the underlying futures position and would receive a variation margin payment of cash or securities approximating the increase in the value of the holder's option position. If an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash based on the difference between the exercise price of the option and the closing level of the index on which the futures contract is based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid. OPTIONS ON INDICES. As an alternative to purchasing and selling call and put options on index futures contracts, each of the Portfolios which may purchase and sell index futures contracts may purchase and sell call and put options on the underlying indexes themselves to the extent that such options are traded on national securities exchanges. Index options are similar to options on individual securities in that the purchaser of an index option acquires the right to buy (in the case of a call) or sell (in the case of a put), and the writer undertakes the obligation to sell or buy (as the case may be), units of an index at a stated exercise price during the term of the option. Instead of giving the right to take or make actual delivery of securities, the holder of an index option has the right to receive a cash "exercise settlement amount". This amount is equal to the amount by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of the exercise, multiplied by a fixed "index multiplier". A Portfolio may purchase or sell options on stock indices in order to close out its outstanding positions in options on stock indices which it has purchased. A Portfolio may also allow such options to expire unexercised. Compared to the purchase or sale of futures contracts, the purchase of call or put options on an index involves less potential risk to a Portfolio because the maximum amount at risk is the premium paid for the options plus transactions costs. The writing of a put or call option on an index involves risks similar to those risks relating to the purchase or sale of index futures contracts. MARGIN PAYMENTS. When a Portfolio purchases or sells a futures contract, it is required to deposit with its custodian an amount of cash, U.S. Treasury bills, or other permissible collateral equal to a small percentage of the amount of the futures contract. This amount is known as "initial margin". The nature of initial margin is different from that of margin in security transactions in that it does not involve borrowing money to finance transactions. Rather, initial margin is similar to a performance bond or good faith deposit that is returned to a Portfolio upon termination of the contract, assuming a Portfolio satisfies its contractual obligations. Subsequent payments to and from the broker occur on a daily basis in a process known as "marking to market". These payments are called "variation margin" and are made as the value of the underlying futures contract fluctuates. For example, when a Portfolio sells a futures contract and the price of the underlying security rises above the delivery price, the Portfolio's position declines in value. The Portfolio then pays the broker a variation margin payment equal to the difference between the delivery price of the futures contract and the market price of the securities underlying the futures contract. Conversely, if the price of the underlying security falls below the delivery price of the contract, the Portfolio's futures position increases in value. The broker then must 13 make a variation margin payment equal to the difference between the delivery price of the futures contract and the market price of the securities underlying the futures contract. When a Portfolio terminates a position in a futures contract, a final determination of variation margin is made, additional cash is paid by or to the Portfolio, and the Portfolio realizes a loss or a gain. Such closing transactions involve additional commission costs. SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS LIQUIDITY RISKS. Positions in futures contracts may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Although the Portfolio intends to purchase or sell futures only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. If there is not a liquid secondary market at a particular time, it may not be possible to close a futures position at such time and, in the event of adverse price movements, a Portfolio would continue to be required to make daily cash payments of variation margin. However, in the event financial futures are used to hedge portfolio securities, such securities will not generally be sold until the financial futures can be terminated. In such circumstances, an increase in the price of the portfolio securities, if any, may partially or completely offset losses on the financial futures. In addition to the risks that apply to all options transactions, there are several special risks relating to options on futures contracts. The ability to establish and close out positions in such options will be subject to the development and maintenance of a liquid secondary market. It is not certain that such a market will develop. Although a Portfolio generally will purchase only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option or at any particular time. In the event no such market exists for particular options, it might not be possible to effect closing transactions in such options with the result that a Portfolio would have to exercise the options in order to realize any profit. HEDGING RISKS. There are several risks in connection with the use by a Portfolio of futures contracts and related options as a hedging device. One risk arises because of the imperfect correlation between movements in the prices of the futures contracts and options and movements in the underlying securities or index or movements in the prices of a Portfolio's securities which are the subject of a hedge. A Portfolio's Adviser will, however, attempt to reduce this risk by purchasing and selling, to the extent possible, futures contracts and related options on securities and indexes the movements of which will, in its judgment, correlate closely with movements in the prices of the underlying securities or index and the securities sought to be hedged. Successful use of futures contracts and options by a Portfolio for hedging purposes is also subject to its Adviser's ability to predict correctly movements in the direction of the market. It is possible that, where a Portfolio has purchased puts on futures contracts to hedge its portfolio against a decline in the market, the securities or index on which the puts are purchased may increase in value and the value of securities held in the portfolio may decline. If this occurred, the Portfolio would lose money on the puts and also experience a decline in value in its portfolio securities. In addition, the prices of futures, for a number of reasons, may not correlate perfectly with movements in the underlying securities or index due to certain market distortions. First, all participants in the futures market are subject to margin deposit requirements. Such requirements may cause investors to close futures contracts through offsetting transactions which could distort the normal relationship between the 14 underlying security or index and futures markets. Second, the margin requirements in the futures markets are less onerous than margin requirements in the securities markets in general, and as a result the futures markets may attract more speculators than the securities markets do. Increased participation by speculators in the futures markets may also cause temporary price distortions. Due to the possibility of price distortion, even a correct forecast of general market trends by a Portfolio's Adviser may still not result in a successful hedging transaction over a short time period. OTHER RISKS. Portfolios will incur brokerage fees in connection with their futures and options transactions. In addition, while futures contracts and options on futures will be purchased and sold to reduce certain risks, those transactions themselves entail certain other risks. Thus, while a Portfolio may benefit from the use of futures and related options, unanticipated changes in interest rates or stock price movements may result in a poorer overall performance for the Portfolio than if it had not entered into any futures contracts or options transactions. Moreover, in the event of an imperfect correlation between the futures position and the portfolio position which is intended to be protected, the desired protection may not be obtained and the Portfolio may be exposed to risk of loss. FORWARD COMMITMENTS A Portfolio may enter into contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") if the Portfolio holds, and maintains until the settlement date in a segregated account, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or if the Portfolio enters into offsetting contracts for the forward sale of other securities it owns. Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Portfolio's other assets. Where such purchases are made through dealers, the Portfolios rely on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the Portfolio of an advantageous yield or price. Although a Portfolio will generally enter into forward commitments with the intention of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, a Portfolio may dispose of a commitment prior to settlement if its Adviser deems it appropriate to do so. A Portfolio may realize short-term profits or losses upon the sale of forward commitments. REPURCHASE AGREEMENTS A Portfolio may enter into repurchase agreements. A repurchase agreement is a contract under which the Portfolio acquires a security subject to the obligation of the seller to repurchase and the Portfolio to resell such security at a fixed time and price (representing the Portfolio's cost plus interest). It is the Trust's present intention to enter into repurchase agreements only with member banks of the Federal Reserve System and securities dealers meeting certain criteria as to creditworthiness and financial condition established by the Trustees of the Trust and only with respect to obligations of the U.S. government or its agencies or instrumentalities or other high quality short term debt obligations. Repurchase agreements may also be viewed as loans made by a Portfolio which are collateralized by the securities subject to repurchase. A Portfolio's Adviser will monitor such transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. If the seller defaults, a Portfolio could realize a loss on the sale of the underlying security to the extent that the proceeds of sale including accrued interest are less than the resale price provided in the agreement including interest. In addition, if the seller should be involved 15 in bankruptcy or insolvency proceedings, a Portfolio may incur delay and costs in selling the underlying security or may suffer a loss of principal and interest if a Portfolio is treated as an unsecured creditor and required to return the underlying collateral to the seller's estate. LOANS OF PORTFOLIO SECURITIES A Portfolio may lend its portfolio securities, provided: (1) the loan is secured continuously by collateral consisting of U.S. Government securities, cash, or cash equivalents adjusted daily to have market value at least equal to the current market value of the securities loaned; (2) the Portfolio may at any time call the loan and regain the securities loaned; (3) a Portfolio will receive any interest or dividends paid on the loaned securities; and (4) the aggregate market value of securities loaned will not at any time exceed one-third (or such other limit as the Trustee may establish) of the total assets of the Portfolio. In addition, it is anticipated that a Portfolio may share with the borrower some of the income received on the collateral for the loan or that it will be paid a premium for the loan. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Although voting rights or rights to consent with respect to the loaned securities pass to the borrower, a Portfolio retains the right to call the loans at any time on reasonable notice, and it will do so in order that the securities may be voted by a Portfolio if the holders of such securities are asked to vote upon or consent to matters materially affecting the investment. A Portfolio will not lend portfolio securities to borrowers affiliated with the Portfolio. COLLATERALIZED MORTGAGE OBLIGATIONS; OTHER MORTGAGE-RELATED SECURITIES Collateralized mortgage obligations or "CMOs" are debt obligations or pass-through certificates collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by certificates issued by the Government National Mortgage Association, ("GNMA"), the Federal National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"), but they also may be collateralized by whole loans or private pass-through certificates (such collateral collectively hereinafter referred to as "Mortgage Assets"). CMOs may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans. In a CMO, a series of bonds or certificates is generally issued in multiple classes. Each class of CMOs is issued at a specific fixed or floating rate coupon and has a stated maturity or final distribution date. Principal prepayments on the mortgage assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Interest is paid or accrues on most classes of the CMOs on a monthly, quarterly, or semi-annual basis. The principal of and interest on the mortgage assets may be allocated among the several classes of a series of a CMO in innumerable ways. In a CMO, payments of principal, including any principal prepayments, on the mortgage assets are applied to the classes of the series in a pre-determined sequence. RESIDUAL INTERESTS. Residual interests are derivative mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans. The cash flow generated by the mortgage assets underlying a series of mortgage securities is applied first to make required payments of principal of and interest on the mortgage securities and second to pay the related administrative expenses of the issuer. The residual generally represents the right to any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related residual represents income 16 and/or a return of capital. The amount of residual cash flow resulting from a series of mortgage securities will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of the mortgage securities, prevailing interest rates, the amount of administrative expenses, and the prepayment experience on the mortgage assets. In particular, the yield to maturity on residual interests may be extremely sensitive to prepayments on the related underlying mortgage assets in the same manner as an interest-only class of stripped mortgage-backed securities. In addition, if a series of mortgage securities includes a class that bears interest at an adjustable rate, the yield to maturity on the related residual interest may also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based. In certain circumstances, there may be little or no excess cash flow payable to residual holders. The Portfolio may fail to recoup fully its initial investment in a residual. Residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. The residual interest market has only recently developed and residuals currently may not have the liquidity of other more established securities trading in other markets. Residuals may be subject to certain restrictions on transferability. FOREIGN SECURITIES A Portfolio may invest in foreign securities and in certificates of deposit issued by United States branches of foreign banks and foreign branches of United States banks. Investments in foreign securities may involve considerations different from investments in domestic securities. There may be less publicly available information about a foreign company than about a U.S. company, and foreign companies may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those applicable to U.S. companies. Securities of some foreign companies are less liquid or more volatile than securities of U.S. companies, and foreign brokerage commissions and custodian fees are generally higher than in the United States. Investments in foreign securities can involve other risks different from those affecting U.S. investments, including local political or economic developments, expropriation or nationalization of assets and imposition of withholding taxes on dividend or interest payments. It may be more difficult to obtain and enforce a judgment against a foreign issuer. In addition, foreign investments may be affected favorably or unfavorably by changes in currency exchange rates, exchange control regulations, foreign withholding taxes and restrictions or prohibitions on the repatriation of foreign currencies. A Portfolio may incur costs in connection with conversion between currencies. In determining whether to invest in securities of foreign issuers, the Adviser of a Portfolio seeking current income will consider the likely impact of foreign taxes on the net yield available to the Portfolio and its shareholders. Income received by a Portfolio from sources within foreign countries may be reduced by withholding and other taxes imposed by such countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine the effective rate of foreign tax in advance since the amount of a Portfolio's assets to be invested in various countries is not known, and tax laws and their interpretations may change from time to time and may change without advance notice. Any such taxes paid by a Portfolio will reduce its net income available for distribution to shareholders. 17 FOREIGN CURRENCY TRANSACTIONS Except as otherwise described in the relevant Prospectus, a Portfolio may engage without limit in currency exchange transactions, including foreign currency forward and futures contracts, to protect against uncertainty in the level of future foreign currency exchange rates. In addition, a Portfolio may purchase and sell call and put options on foreign currency futures contracts and on foreign currencies for hedging purposes. A Portfolio may engage in both "transaction hedging" and "position hedging". When a Portfolio engages in transaction hedging, it enters into foreign currency transactions with respect to specific receivables or payables of the Portfolio generally arising in connection with the purchase or sale of its securities. A Portfolio will engage in transaction hedging when it desires to "lock in" the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging a Portfolio will attempt to protect against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold or on which the dividend or interest payment is declared, and the date on which such payments are made or received. A Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with transaction hedging. A Portfolio may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. For transaction hedging purposes, a Portfolio may purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives a Portfolio the right to assume a short position in the futures contract until expiration of the option. A put option on currency gives a Portfolio the right to sell a currency at an exercise price until the expiration of the option. A call option on a futures contract gives a Portfolio the right to assume a long position in the futures contract until the expiration of the option. A call option on currency gives a Portfolio the right to purchase a currency at the exercise price until the expiration of the option. A Portfolio will engage in over-the-counter transactions only when appropriate exchange-traded transactions are unavailable and when, in the opinion of its Adviser, the pricing mechanism and liquidity are satisfactory and the participants are responsible parties likely to meet their contractual obligations. When a Portfolio engages in position hedging, it enters into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which securities held by the Portfolio are denominated or are quoted in their principle trading markets or an increase in the value of currency for securities which a Portfolio expects to purchase. In connection with position hedging, a Portfolio may purchase put or call options on foreign currency and foreign currency futures contracts and buy or sell forward contracts and foreign currency futures contracts. A Portfolio may also purchase or sell foreign currency on a spot basis. The precise matching of the amounts of foreign currency exchange transactions and the value of the portfolio securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the values of those securities between the dates the currency exchange transactions are entered into and the dates they mature. It is impossible to forecast with precision the market value of a Portfolio's securities at the expiration or maturity of a forward or futures contract. Accordingly, it may be necessary for a Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security 18 or securities being hedged is less than the amount of foreign currency a Portfolio is obligated to deliver and if a decision is made to sell the security or securities and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the security or securities of a Portfolio if the market value of such security or securities exceeds the amount of foreign currency the Portfolio is obligated to deliver. To offset some of the costs to a Portfolio of hedging against fluctuations in currency exchange rates, the Portfolio may write covered call options on those currencies. Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which a Portfolio owns or intends to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in the value of such currency. CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of a foreign currency at a future date at a price set at the time of the contract. Foreign currency futures contracts traded in the United States are designed by and traded on exchanges regulated by the CFTC, such as the New York Mercantile Exchange. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in a given month. Forward contracts may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit. At the maturity of a forward or futures contract, a Portfolio may either accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. Closing transactions with respect to futures contracts are effected on a commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts. Positions in foreign currency futures contracts and related options may be closed out only on an exchange or board of trade which provides a secondary market in such contracts or options. Although a Portfolio will normally purchase or sell foreign currency futures contracts and related options only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a secondary market on an exchange or board of trade will exist for any particular contract or option or at any particular time. In such event, 19 it may not be possible to close a futures or related option position and, in the event of adverse price movements, a Portfolio would continue to be required to make daily cash payments of variation margin on its futures positions. FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly to options on securities, and are traded primarily in the over-the-counter market, although options on foreign currencies have recently been listed on several exchanges. Such options will be purchased or written only when a Portfolio's Adviser believes that a liquid secondary market exists for such options. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. Options on foreign currencies are affected by all of those factors which influence exchange rates and investments generally. The value of a foreign currency option is dependent upon the value of the foreign currency and the U.S. dollar, and may have no relationship to the investment merits of a foreign security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots. There is no systematic reporting of last sale information for foreign currencies and there is no regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the U.S. options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the U.S. options markets. SETTLEMENT PROCEDURES. Settlement procedures relating to investments in foreign securities and to foreign currency exchange transactions may be more complex than settlements with respect to investments in debt or equity securities of U.S. issuers, and may involve certain risks not present in domestic investments. For example, settlement of transactions involving foreign securities or foreign currency may occur within a foreign country, and the Portfolio may be required to accept or make delivery of the underlying securities or currency in conformity with any applicable U.S. or foreign restrictions or regulations, and may be required to pay any fees, taxes or charges associated with such delivery. Such investments may also involve the risk that an entity involved in the settlement may not meet its obligations. FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not charge a feefor currency conversion, they do realize a profit based on the difference (the "spread") between prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio at one rate, while offering a lesser rate of exchange should a Portfolio desire to resell that currency to the dealer. ZERO-COUPON SECURITIES Zero-coupon securities in which a Portfolio may invest are debt obligations which are generally issued at a discount and payable in full at maturity, and which do not provide for current payments of interest prior to maturity. Zero-coupon securities usually trade at a deep discount from their face or par value and are subject to 20 greater market value fluctuations from changing interest rates than debt obligations of comparable maturities which make current distributions of interest. As a result, the net asset value of shares of a Portfolio investing in zero-coupon securities may fluctuate over a greater range than shares of other mutual funds investing in securities making current distributions of interest and having similar maturities. Zero-coupon securities may include U.S. Treasury bills issued directly by the U.S. Treasury or other short-term debt obligations, and longer-term bonds or notes and their unmatured interest coupons which have been separated by their holder, typically a custodian bank or investment brokerage firm. A number of securities firms and banks have stripped the interest coupons from the underlying principal (the "corpus") of U.S. Treasury securities and resold them in custodial receipt programs with a number of different names, including Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in book-entry form at the Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered securities which are owned ostensibly by the bearer or holder thereof), in trust on behalf of the owners thereof. In addition, the Treasury has facilitated transfers of ownership of zero-coupon securities by accounting separately for the beneficial ownership of particular interest coupons and corpus payments on Treasury securities through the Federal Reserve book-entry record-keeping system. The Federal Reserve program as established by the Treasury Department is known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities." Under the STRIPS program, a Portfolio will be able to have its beneficial ownership of U.S. Treasury zero-coupon securities recorded directly in the book-entry record-keeping system in lieu of having to hold certificates or other evidences of ownership of the underlying U.S. Treasury securities. When debt obligations have been stripped of their unmatured interest coupons by the holder, the stripped coupons are sold separately. The principal or corpus is sold at a deep discount because the buyer receives only the right to receive a future fixed payment on the security and does not receive any rights to periodic cash interest payments. Once stripped or separated, the corpus and coupons may be sold separately. Typically, the coupons are sold separately or grouped with other coupons with like maturity dates and sold in such bundled form. Purchasers of stripped obligations acquire, in effect, discount obligations that are economically identical to the zero-coupon securities issued directly by the obligor. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The Portfolios may engage in when-issued and delayed delivery transactions. These transactions are arrangements in which a Portfolio purchases securities with payment and delivery scheduled for a future time. A Portfolio engages in when-issued and delayed delivery transactions only for the purpose of acquiring securities consistent with its investment objective and policies, not for investment leverage, but a Portfolio may sell such securities prior to settlement date if such a sale is considered to be advisable. No income accrues to a Portfolio on securities in connection with such transactions prior to the date the Portfolio actually takes delivery of securities. In when-issued and delayed delivery transactions, a Portfolio relies on the seller to complete the transaction. The seller's failure to complete the transaction may cause a Portfolio to miss a price or yield considered to be advantageous. These transactions are made to secure what is considered to be an advantageous price or yield for a Portfolio. Settlement dates may be a month or more after entering into these transactions, and the market values of 21 the securities purchased may vary from the purchase prices. No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of a Portfolio sufficient to make payment for the securities to be purchased are segregated at the trade date. These securities are marked to market daily and are maintained until the transaction is settled. BANK INSTRUMENTS A Portfolio may invest in the instruments of banks and savings and loans whose deposits are insured by the Bank Insurance Fund or the Savings Association Insurance Fund, both of which are administered by the Federal Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand and time deposits, savings shares, and bankers' acceptances. However, the above-mentioned instruments are not necessarily guaranteed by those organizations. In addition to domestic bank obligations, such as certificates of deposit, demand and time deposits, savings shares, and bankers' acceptances, a Portfolio may invest in: Eurodollar Certificates of Deposit ("ECDs") issued by foreign branches of U.S. or foreign banks; Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated deposits in foreign branches of U.S. or foreign banks; Canadian Time Deposits, which are U.S. dollar-denominated deposits issued by branches of major Canadian banks located in the U.S.; and Yankee Certificates of Deposit ("Yankee CDS"), which are U.S. dollar-denominated certificates of deposit issued by U.S. branches of foreign banks and held in the U.S. DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS A Portfolio may enter into dollar rolls, in which the Portfolio sells securities and simultaneously contracts to repurchase substantially similar securities on a specified future date. In the case of dollar rolls involving mortgage-related securities, the mortgage-related securities that are purchased typically will be of the same type and will have the same or similar interest rate and maturity as those sold, but will be supported by different pools of mortgages. The Portfolio forgoes principal and interest paid during the roll period on the securities sold in a dollar roll, but it is compensated by the difference between the current sales price and the price for the future purchase as well as by any interest earned on the proceeds of the securities sold. A Portfolio could also be compensated through the receipt of fee income. A Portfolio may also enter into reverse repurchase agreements in which the Portfolio sells securities and agrees to repurchase them at a mutually agreed date and price. Generally, the effect of such a transaction is that the Portfolio can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while it will be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous if the interest cost to the Portfolio of the reverse repurchase transaction is less than the cost of otherwise obtaining the cash. Dollar rolls and reverse repurchase agreements may be viewed as a borrowing by the Portfolio, secured by the security which is the subject of the agreement. In addition to the general risks involved in leveraging, dollar rolls and reverse repurchase agreements involve the risk that, in the event of the bankruptcy or insolvency of the Portfolio's counterparty, the Portfolio would be unable to recover the security which is the subject of the agreement, the amount of cash or other property transferred by the counterparty to the Portfolio under the agreement prior to such insolvency or bankruptcy is less than the value of the security subject to the agreement, or the Portfolio may be delayed or prevented, due to such insolvency or bankruptcy, from using such cash or property or may be required to return it to the counterparty or its trustee or receiver. 22 CONVERTIBLE SECURITIES A Portfolio may invest in convertible securities. Convertible securities are fixed income securities which may be exchanged or converted into a predetermined number of the issuer's underlying common stock at the option of the holder during a specified time period. Convertible securities may take the form of convertible preferred stock, convertible bonds or debentures, units consisting of "usable" bonds and warrants or a combination of the features of several of these securities. The investment characteristics of each convertible security vary widely, which allows convertible securities to be employed for a variety of investment strategies. A Portfolio will exchange or convert the convertible securities held in its portfolio into shares of the underlying common stock when, in its Adviser's opinion, the investment characteristics of the underlying common shares will assist the Portfolio in achieving its investment objectives. Otherwise, the Portfolio may hold or trade convertible securities. In selecting convertible securities for the Portfolio, the Portfolio's Adviser evaluates the investment characteristics of the convertible security as a fixed income instrument and the investment potential of the underlying equity security for capital appreciation. In evaluating these matters with respect to a particular convertible security, the Portfolio's Adviser considers numerous factors, including the economic and political outlook, the value of the security relative to other investment alternatives, trends in the determinants of the issuer's profits, and the issuer's management capability and practices. WARRANTS A Portfolio may invest in warrants. Warrants are basically options to purchase common stock at a specific price (usually at a premium above the market value of the optioned common stock at issuance) valid for a specific period of time. Warrants may have a life ranging from less than a year to twenty years or may be perpetual. However, most warrants have expiration dates after which they are worthless. In addition, if the market price of the common stock does not exceed the warrant's exercise price during the life of the warrant, the warrant will expire as worthless. Warrants have no voting rights, pay no dividends, and have no rights with respect to the assets of the corporation issuing them. The percentage increase or decrease in the market price of the warrant may tend to be greater than the percentage increase or decrease in the market price of the optioned common stock. Warrants acquired in units or attached to securities may be deemed to be without value for purposes of a Portfolio's policy. SWAPS, CAPS, FLOORS AND COLLARS A Portfolio may enter into interest rate, currency and index swaps and the purchase or sale of related caps, floors and collars. A Portfolio expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, to protect against currency fluctuations, as a duration management technique or to protect against any increase in the price of securities the Portfolio anticipates purchasing at a later date. A Portfolio would use these transactions as hedges and not as speculative investments and would not sell interest rate caps or floors where it does not own securities or other instruments providing the income stream the Portfolio may be obligated to pay. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. A currency swap is an agreement to exchange cash flows on a notional amount of two or more currencies based on the relative value differential among them and an index swap is an agreement to swap cash flows on a notional amount based on changes in the values of 23 the reference indices. The purchase of a cap entitles the purchaser to receive payments on a notional principal amount from the party selling such cap to the extent that a specified index exceeds a predetermined interest rate or amount. The purchase of a floor entitles the purchaser to receive payments on a notional principal amount from the party selling such floor to the extent that a specified index falls below a predetermined interest rate or amount. A collar is a combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates or values. A Portfolio will usually enter into swaps on a net basis, i.e., the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments. A Portfolio will not enter into any swap, cap, floor or collar transaction unless, at the time of entering into such transaction, the unsecured long-term debt of the counterparty, combined with any credit enhancements, is rated at least A by S&P or Moody's or has an equivalent rating from another nationally recognized securities rating organization or is determined to be of equivalent credit quality by the Portfolio's Adviser. If there is a default by the counterparty, a Portfolio may have contractual remedies pursuant to the agreements related to the transaction. As a result, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been fully developed and, accordingly, they are less liquid than swaps. LOWER-RATED SECURITIES A Portfolio may invest in lower-rated fixed-income securities (commonly known as "junk bonds") to the extent described in the relevant Prospectus. The lower ratings of certain securities held by a Portfolio reflect a greater possibility that adverse changes in the financial condition of the issuer or in general economic conditions, or both, or an unanticipated rise in interest rates, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payment of interest and principal would likely make the values of securities held by a Portfolio more volatile and could limit the Portfolio's ability to sell its securities at prices approximating the values the Portfolio had placed on such securities. In the absence of a liquid trading market for securities held by it, a Portfolio may be unable at times to establish the fair value of such securities. The rating assigned to a security by Moody's Investors Service, Inc. or Standard & Poor's (or by any other nationally recognized securities rating organization) does not reflect an assessment of the volatility of the security's market value or the liquidity of an investment in the security. Like those of other fixed-income securities, the values of lower-rated securities fluctuate in response to changes in interest rates. Thus, a decrease in interest rates will generally result in an increase in the value of the Portfolio's assets. Conversely, during periods of rising interest rates, the value of the Portfolio's assets will generally decline. In addition, the values of such securities are also affected by changes in general economic conditions and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of any fixed-income security and in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect cash income derived from such securities, but will affect the Portfolio's net asset value. A Portfolio will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase, although its Adviser will monitor the investment to determine whether its retention will assist in meeting the Portfolio's investment objective. 24 The amount of information about the financial condition of an issuer of tax exempt securities may not be as extensive as that which is made available by corporations whose securities are publicly traded. Therefore, to the extent a Portfolio invests in tax exempt securities in the lower rating categories, the achievement of the Portfolio's goals is more dependent on its Adviser's investment analysis than would be the case if the Portfolio were investing in securities in the higher rating categories. INDEXED SECURITIES A Portfolio may invest in indexed securities, the values of which are linked to currencies, interest rates, commodities, indices or other financial indicators ("reference instruments"). Most indexed securities have maturities of three years or less. Indexed securities differ from other types of debt securities in which a Portfolio may invest in several respects. First, the interest rate or, unlike other debt securities, the principal amount payable at maturity of an indexed security may vary based on changes in one or more specified reference instruments, such as an interest rate compared with a fixed interest rate or the currency exchange rates between two currencies (neither of which need be the currency in which the instrument is denominated). The reference instrument need not be related to the terms of the indexed security. For example, the principal amount of a U.S. dollar denominated indexed security may vary based on the exchange rate of two foreign currencies. An indexed security may be positively or negatively indexed; that is, its value may increase or decrease if the value of the reference instrument increases. Further, the change in the principal amount payable or the interest rate of an indexed security may be a multiple of the percentage change (positive or negative) in the value of the underlying reference instrument(s). Investment in indexed securities involves certain risks. In addition to the credit risk of the security's issuer and the normal risks of price changes in response to changes in interest rates, the principal amount of indexed securities may decrease as a result of changes in the value of reference instruments. Further, in the case of certain indexed securities in which the interest rate is linked to a reference instrument, the interest rate may be reduced to zero, and any further declines in the value of the security may then reduce the principal amount payable on maturity. Finally, indexed securities may be more volatile than the reference instruments underlying indexed securities. To reduce the effect of currency fluctuations on the value of existing or anticipated holdings of portfolio securities, a Portfolio may also engage in proxy hedging. Proxy hedging is often used when the currency to which the Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging entails entering into a forward contract to sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the Portfolio's securities are or are expected to be denominated, and to buy U.S. dollars. The amount of the contract would not exceed the value of the Portfolio's securities denominated in linked currencies. For example, if a Portfolio's Adviser considers that the Austrian schilling is linked to the German deutschmark (the "D-mark"), the Portfolio holds securities denominated in schillings and the Adviser believes that the value of schillings will decline against the U.S. dollar, the Adviser may enter into a contract to sell D-marks and buy dollars. EURODOLLAR INSTRUMENTS A Portfolio may make investments in Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated futures contracts or options thereon which are linked to the London Interbank Offered Rate ("LIBOR"), 25 although foreign currency-denominated instruments are available from time to time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. A Portfolio might use Eurodollar futures contracts and options thereon to hedge against changes in LIBOR, to which many interest rate swaps and fixed-income instruments are linked. SEGREGATION OF ASSETS A Portfolio may at times segregate assets in respect of certain transactions in which the Portfolio enters into a commitment to pay money or deliver securities at some future date (such as futures contracts or reverse repurchase agreements, to the extent not used for leverage). Any such segregated account will be maintained by the Trust's custodian and may contain cash, U.S. government securities, liquid high grade debt obligations, or other appropriate assets. 26 MANAGEMENT OF THE TRUST The following table provides biographical information with respect to each Trustee and officer of the Trust. Each Trustee who is an "interested person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk.
POSITION HELD NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------------- -------------- --------------------------------------------------------------- Daniel J. Ludeman* Chairman Chairman and Chief Executive Officer Mentor Investment c/o Mentor Funds and Trustee Group, Inc.; Managing Director of Wheat First Butcher 901 E. Byrd Street Singer, Inc. Director, Wheat, First Securities, Inc.; Chairman Richmond, VA 23219 and Director Mentor Income Fund, Inc., and America's Utility Fund, Inc.; Chairman and Trustee, Cash Resource Trust, Mentor Variable Investment Portfolios and Mentor Institutional Trust. Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corporation; Trustee, Cash Resource P.O. Box 18156 Trust, Mentor Variable Investment Portfolios and Mentor Richmond, Virginia 23226 Institutional Trust; Director, Mentor Income Fund, Inc. and America's Utility Fund, Inc.; formerly, Chairman and Chief Executive Officer, Hamilton Beach/Proctor-Silex, Inc. Thomas F. Keller Trustee R.J. Reynolds Industries Professor of Business Adminis- Fuqua School of Business tration and Former Dean of Fuqua School of Business, Duke Duke University University; Director of LADD Furniture, Inc., Wendy's Durham, NC 27706 International, Inc., American Business Products, Inc., Dimon, Inc., and Biogen, Inc.; Director of Nations Balanced Target Maturity Fund, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Hatteras Income Securities, Inc., Nations Institutional Reserves, Nations Fund Trust, Nations Fund, Inc., Nations Fund Portfolios, Inc., and Nations LifeGoal Funds, Inc. Trustee, Cash Resource Trust, Mentor Variable Investment Portfolios and Mentor Institutional Trust; Director, Mentor Income Fund, Inc. and America's Utility Fund, Inc. Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of Richmond; University of Richmond Trustee, Cash Resource Trust, Mentor Variable Investment Richmond, VA 23173 Portfolios and Mentor Institutional Trust; Director, Mentor Income Fund, Inc. and America's Utility Fund, Inc. Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company; Trustee, Cash Resource Heilig-Meyers Company Trust, Mentor Variable Investment Portfolios and Mentor 2235 Staples Mill Road Institutional Trust; Director, Mentor Income Fund, Inc. and Richmond, Virginia 23230 America's Utility Fund, Inc.
27
POSITION HELD NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - ---------------------- -------------- ------------------------------------------------------------- Peter J. Quinn, Jr.* Trustee Formerly, President, Mentor Distributors, Inc.; Managing c/o Mentor Funds Director, Mentor Investment Group, LLC, and Wheat First 901 E. Byrd Street Butcher Singer, Inc.; formerly, Senior Vice President/ Richmond, VA 23219 Director of Mutual Funds, Wheat First Butcher Singer, Inc.; Trustee, Cash Resource Trust, Mentor Variable Investment Portfolios and Mentor Institutional Trust; Director, Mentor Income Fund, Inc. and America's Utility Fund, Inc. Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee, Cash c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and 901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund, Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; formerly, Vice Chancellor for Development and University Relations, University of North Carolina at Chapel Hill. Weston E. Edwards Trustee President, Weston Edwards & Associates; Trustee Cash c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and 901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund, Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; Founder and Chairman, The Housing Roundtable; formerly, President, Smart Mortgage Access, Inc. Jerry R. Barrentine Trustee President, J.R. Barretine & Associates; Trustee, Cash c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and 901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund, Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; formerly, Executive Vice President and Chief Financial Officer, Barclays/ American Mortgage Director Corporation; Managing Partner, Barrentine Lott & Associates. J. Garnett Nelson Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee, Cash c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and 901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund, Richmond, VA 23219 Inc., America's Utility Fund, Inc., GE Investment Funds, Inc., and Lawyers Title Corporation; Member, Investment Advisory Committee, Virginia Retirement System; formerly, Senior Vice President, The Life Insurance Company of Virginia. Paul F. Costello President Managing Director, Wheat First Butcher Singer, Inc. and c/o Mentor Funds Mentor Investment Group, LLC; President, Cash Resource 901 E. Byrd Street Trust, Mentor Income Fund, Inc., Mentor Institutional Trust, Richmond, VA 23219 Mentor Variable Investment Portfolios and America's Utility Fund, Inc.; Director, Mentor Perpetual Advisors, LLC.
28
POSITION HELD NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------- -------------- ------------------------------------------------------------ Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group, LLC; c/o Mentor Funds Treasurer, Mentor Institutional Trust, Cash Resource Trust, 901 E. Byrd Street Mentor Variable Investment Portfolios, Mentor Income Richmond, VA 23219 Fund, Inc.; America's Utility Fund, Inc.; formerly, Treasurer and Comptroller, Ryland Capital Management, Inc. Michael Wade Assistant Vice President, Mentor Investment Group, LLC Assistant c/o Mentor Funds Treasurer Treasurer, Mentor Income Fund, Inc., Cash Resource Trust, 901 E. Byrd Street Mentor Institutional Trust, Mentor Variable Investment Richmond, VA 23219 Portfolios and America's Utility Fund; formerly, Senior Accountant, Wheat First Butcher Singer, Inc., Audit Senior, BDO Seidman. Geoffrey B. Sale Secretary Associate Vice President Mentor Investment Group, LLC; c/o Mentor Funds Secretary, Cash Resource Trust, Mentor Institutional Trust, 901 E. Byrd Street Mentor Variable Investment Portfolios; Clerk, America's Richmond, VA 23219 Utility Fund, Inc., Mentor Income Fund, Inc.
The table below shows the fees paid to each Trustee by the Trust for the 1998 fiscal year and the fees paid to each Trustee by all funds in the Mentor family (including the Trust) during the 1997 calendar year.
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM ALL FROM THE TRUST COMPLEX FUNDS (27 FUNDS) (FISCAL YEAR END 1998) (CALENDAR YEAR 1998) ------------------------ ---------------------------- Daniel J. Ludeman ............... $ 0 $ 0 Arnold H. Dreyfuss .............. $5,808 $32,000 Thomas F. Keller ................ $4,859 $32,000 Louis W. Moelchert, Jr. ......... $5,606 $32,000 J. Garnett Nelson ............... $5,393 $40,000 Troy A. Peery, Jr. .............. $5,405 $32,000 Peter J. Quinn, Jr. ............. $ 0 $ 0 Jerry R. Barrentine ............. $5,660 $40,000 Weston E. Edwards ............... $5,479 $42,000 Arch T. Allen III ............... $5,399 $35,000
- ---------- The Trustees do not receive pension or retirement benefits from the Trust. The Declaration of Trust of the Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, except if it is determined in the manner specified in the Agreement and Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust or that such indemnification would relieve any officer or Trustee of any liability to the Trust or its 29 Shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of his or her duties. The Trust, at its expense, provides liability insurance for the benefit of its Trustees and officers. PRINCIPAL HOLDERS OF SECURITIES As of November 2, 1998, the officers and Trustees of the Trust owned as a group less than 1% of the outstanding shares of any class of the Balanced Portfolio. To the knowledge of the Trust, no person owned of record or beneficially more than 5% of the outstanding shares of any class of the Portfolios as of that date, except as set forth below:
PORTFOLIO HOLDER PERCENTAGE OWNERSHIP - --------------------------------- ------------------------------- --------------------- Short Duration-Income Portfolio Partnership Healthplan of Cal 7.60% Class A Attn: Marion R. Schales CFO 421 Executive Ct North Ste #A Suisun City, CA 94585-4019 Short Duration-Income Portfolio EVEREN Clearing Corp. 5.91% Class A A/C 1902-3741 Calaveras County Water Dist 111 East Kilbourn Avenue Milwaukee, WI 53202-6611
30 INVESTMENT ADVISORY SERVICES Mentor Investment Advisors, LLC ("Mentor Advisors") serves as investment adviser to each Portfolio other than the Global Portfolio. Van Kampen Management, Inc. ("Van Kampen") serves as sub-adviser to the Municipal Income Portfolio and the High Income Portfolio; Wellington Management Company, LLP ("Wellington Management") serves as sub-adviser to the Income and Growth Portfolio. Each of these sub-advisers has complete discretion to purchase and sell portfolio securities for its respective Portfolio consistent with the particular Portfolio's investment objective, restrictions, and policies. Mentor Perpetual Advisors, LLC ("Mentor Perpetual") serves as investment adviser to the Global Portfolio. Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group, LLC, ("Mentor Investment Group") which is a subsidiary of Wheat First Butcher Singer, Inc. ("WFBS"). Mentor Perpetual is owned equally by Mentor Advisors and Perpetual plc, a diversified financial services holding company. EVEREN Capital Corporation has a 20% ownership in Mentor Investment Group and may acquire additional ownership based principally on the amount of Mentor Investment Group's revenues derived from assets attributable to clients of EVEREN Securities, Inc. and its affiliates. On October 31, 1996, Commonwealth Investment Counsel, Inc., the investment adviser to the Short-Duration Income and Balanced Portfolios, was reorganized as Mentor Investment Advisors, LLC. Also on October 31, 1996, each of Commonwealth Advisors, Inc., the investment adviser to the Capital Growth, Income and Growth, Municipal Income, and Quality Income Portfolios, Charter Asset Management, Inc., the investment adviser to the Growth Portfolio, and Wellesley Advisors, Inc., the investment adviser to the Strategy Portfolio, transferred its rights and obligations under its respective advisory contract with the Trust to Mentor Investment Advisors, LLC. In addition, Mentor Investment Group, Inc. and Mentor Distributors, Inc. were reorganized as Mentor Investment Group, LLC and Mentor Distributors, LLC, respectively. On October 29, 1996, shareholders of the Municipal Income Portfolio approved a new sub-advisory agreement with Van Kampen which became a subsidiary of Morgan Stanley Group, Inc. Subject to the general oversight of the Trustees, each investment adviser and/or sub-adviser manages the applicable Portfolio in accordance with the stated policies of that Portfolio and of the Trust. Each makes investment decisions for the Portfolio and places the purchase and sale orders for portfolio transactions. The investment advisers and sub-advisers bear all their expenses in connection with the performance of their services (except as may be approved from time to time by the Trustees) and pay the salaries of all officers and employees who are employed by them and the Trust. Each Portfolio's investment adviser and/or sub-adviser provides the Trust with investment officers who are authorized to execute purchases and sales of securities. Investment decisions for the Trust and for the other investment advisory clients of the investment advisers and sub-advisers and their affiliates are made with a view to achieving their respective investment objectives. Investment decisions are the product of many factors in addition to basic suitability for the particular client involved. Thus, a particular security may be bought or sold for certain clients even though it could have been bought or sold for other clients at the same time. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling the security. In some instances, one client may sell a particular security to another client. It also sometimes happens that two or more clients simultaneously purchase or sell the same security, in which event each day's transactions in such security are, insofar as possible, averaged as to price and allocated between such clients in a manner which in 31 the investment adviser's or sub-adviser's opinion is equitable to each and in accordance with the amount being purchased or sold by each. There may be circumstances when purchases or sales of securities for one or more clients will have an adverse effect on other clients. In the case of short-term investments, the Treasury area of Mentor Investment Group handles purchases and sales under guidelines approved by investment officers of the Trust. Each investment adviser and sub-adviser employs professional staffs of portfolio managers who draw upon a variety of resources for research information for the Trust. Expenses incurred in the operation of a Portfolio or otherwise allocated to a Portfolio, including but not limited to taxes, interest, brokerage fees and commissions, compensation paid under a Portfolio's 12b-1 plan and the Shareholder Service Plan, fees to Trustees who are not officers, directors, stockholders, or employees of Wheat, First Securities, Inc. and its subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees, charges of the custodian and transfer and dividend disbursing agents, outside auditing, accounting, and legal services, charges for the printing of prospectuses and statements of additional information for regulatory purposes or for distribution, and certain costs incurred by Mentor Investment Group in responding to shareholder inquiries as approved by the Trustees from time to time, to shareholders, certain shareholder report charges and charges relating to corporate matters are borne by the Portfolio. Under the applicable Management Contract with the Trust in respect of each Portfolio, subject to such policies as the Trustees may determine, Mentor Advisors or Mentor Perpetual, as the case may be, at its expense, furnishes continuously an investment program for the Portfolio and makes investment decisions on behalf of the Portfolio. Mentor Advisors or Mentor Perpetual, as the case may be, may place portfolio transactions with broker-dealers which furnish Mentor Advisors or Mentor Perpetual, without cost to it, certain research, statistical and quotation services of value to Mentor Advisors or Mentor Perpetual and their affiliates in advising the Portfolio and other clients. In so doing, Mentor Advisors or Mentor Perpetual may cause a Portfolio to pay greater brokerage commissions than it might otherwise pay. Each Management Contract provides that Mentor Advisors or Mentor Perpetual, as the case may be, shall not be subject to any liability to a Portfolio or to any shareholder of a Portfolio for any act or omission in the course of or connected with rendering services to a Portfolio in the absence of its willful misfeasance, bad faith, gross negligence, or reckless disregard of its duties. Each of the Management Contracts is subject to annual approval (beginning in 2000) by (i) the Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the affected Portfolio, provided that in either event the continuance is also approved by a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust or the investment adviser in question, by vote cast in person at a meeting called for the purpose of voting on such approval. The Management Contracts are terminable without penalty, on not more than sixty days' notice and not less than thirty days' notice, by the Trustees, by vote of the holders of a majority of the affected Portfolio's shares, or by the applicable investment adviser. Each terminates automatically in the event of its assignment (as defined in the 1940 Act). MANAGEMENT FEES The investment adviser of each Portfolio receives an annual management fee from such Portfolio (which is described in the relevant Prospectus). The investment adviser pays a portion of that fee to any sub-adviser to the Portfolio. 32 The Portfolios paid investment advisory fees in the amounts and for the periods indicated below (amounts shown reflect fee waivers where applicable):
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1998 1997 1996 ------------- ------------- ------------ Growth Portfolio ........................ $4,204,377 $3,238,498 $2,313,470 Capital Growth Portfolio ................ 2,153,467 1,063,903 728,536 Income and Growth Portfolio ............. 1,638,729 947,267 575,647 Global Portfolio ........................ 1,612,495 998,592 368,592 Quality Income Portfolio ................ 821,411 449,325 278,216 Municipal Income Portfolio .............. 557,332 370,232 344,784 Short-Duration Income Portfolio ......... 323,574 129,833 54,833 Balanced Portfolio ...................... 31,721 8,854 6,790
The investment advisers of the following Portfolios waived investment advisory fees in the following amounts for the periods indicated below:
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1998 1997 1996 ------------- ------------- ------------ Quality Income Portfolio ................ $204,530 $123,214 $217,329 Short-Duration Income Portfolio ......... 180,523 55,521 83,567 Balanced Portfolio ...................... -- 20,072 18,976 High Income Portfolio ................... 175,891 -- --
The investment advisers of the following Portfolios paid sub-advisory fees to the Portfolios' sub-advisers in the following amounts for the periods indicated below:
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1998 1997 1996 ------------- ------------- ------------ Income and Growth Portfolio ......... $ 575,028 $373,115 $236,071 Municipal Income Portfolio .......... 216,114 153,577 172,392
ADMINISTRATIVE SERVICES Mentor Investment Group, LLC serves as administrator to each of the Portfolios pursuant to an Administration Agreement. Pursuant to the Administration Agreement, Mentor Investment Group provides continuous business management services to the Portfolios and, subject to the general oversight of the Trustees, manages all of the business and affairs of the Portfolios subject to the provisions of the Trust's Declaration of Trust, By-laws and the 1940 Act, and other policies and instructions the Trustees may from time to time establish. Mentor Investment Group pays the compensation of all officers and executive employees of the Trust (except those employed by or serving at the request of an investment adviser or sub-adviser) and makes available to the Trust the services of its directors, officers, and employees as elected by the Trustees or officers of the Trust. In addition, Mentor 33 Investment Group provides all clerical services relating to the Portfolios' business. As compensation for its services, Mentor Investment Group receives a fee from each Portfolio calculated daily at the annual rate of .10% of a Portfolio's average daily net assets. The Administration Agreement must be approved at least annually with respect to each Portfolio by a vote of a majority of the Trustees who are not interested persons of Mentor Investment Group or the Trust. The Agreement may be terminated at any time without penalty on 30 days notice by Mentor Investment Group, or immediately in respect of any Portfolio upon notice by the Trustees or by vote of a majority of the outstanding voting securities of that Portfolio. The Agreement terminates automatically in the event of any assignment (as defined in the 1940 Act). The Portfolios paid administrative service fees in the following amounts for the periods indicated below (amounts shown reflect fee waivers where applicable):
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1998 1997 1996 ------------- ------------- ------------ Growth Portfolio .................... $600,625 $462,643 $330,496 Capital Growth Portfolio ............ 269,183 132,988 91,067 Income and Growth Portfolio ......... 218,497 126,302 76,753 Global Portfolio .................... 153,750 92,753 33,508 Quality Income Portfolio ............ 174,343 95,423 82,591 Municipal Income Portfolio .......... 92,888 61,705 57,464 High Income Portfolio ............... 24,979 -- --
The administrators waived administrative fees in the amounts and for the periods indicated below:
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1998 1997 1996 ------------- ------------- ------------ Short-Duration Income Portfolio ......... $101,237 37,151 $27,680 Balanced Portfolio ...................... 8,127 -- --
The Portfolios also provided direct reimbursement to Mentor for certain legal and compliance administration, investor relation and operation costs not covered under the Investment Management Agreement. These direct reimbursements were as follows:
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1998 1997 1996 ------------- ------------- ------------ Growth Portfolio ........................ $26,735 17,457 23,289 Capital Growth Portfolio ................ 12,494 5,036 5,901 Income and Growth Portfolio ............. 10,079 4,851 5,210 Global Portfolio ........................ 6,902 3,672 2,752 Quality Income Portfolio ................ 7,964 3,617 5,005 Municipal Income Portfolio .............. 4,318 2,293 3,465 Short-Duration Income Portfolio ......... 5,085 1,443 1,842
34 SHAREHOLDER SERVICING PLAN The Trust has adopted a Shareholder Servicing Plan (the "Service Plan") with Mentor Distributors, LLC with respect to the Class A and Class B shares of each Portfolio. Pursuant to the Service Plan, financial institutions will enter into shareholder service agreements to provide administrative support services to their customers who from time to time may be record or beneficial owners of shares of one or more Portfolios. In return for providing these support services, a financial institution may receive payments from one or more Portfolios at a rate not exceeding .25% of the average daily net assets of the Class A or Class B shares of the particular Portfolio or Portfolios owned by the financial institution's customers for whom it is the holder of record or with whom it has a servicing relationship. The Service Plan is designed to stimulate financial institutions to render administrative support services to the Portfolios and their shareholders. These administrative support services include, but are not limited to, the following functions: providing office space, equipment, telephone facilities, and various personnel including clerical, supervisory, and computer personnel as necessary or beneficial to establish and maintain shareholder accounts and records; processing purchase and redemption transactions and automatic investments of client account cash balances; answering routine client inquiries regarding the Portfolios; assisting clients in changing dividend options, account designations and addresses; and providing such other services as the Portfolios reasonably request. In addition to receiving payments under the Service Plan, financial institutions may be compensated by the investment adviser, a sub-adviser, and/or Mentor Investment Group, or affiliates thereof, for providing administrative support services to holders of Class A or Class B shares of the Portfolios. These payments will be made directly by the investment adviser, a sub- adviser, and/or Mentor Investment Group or affiliates, as applicable, and will not be made from the assets of any of the Portfolios. SHAREHOLDER SERVICES FEES During fiscal year 1998, the Portfolios incurred shareholder service fees in respect of Class A and Class B shares under the Service Plan as follows (amounts shown reflect fee waivers where applicable):
CLASS A CLASS B ----------- ------------- Growth Portfolio ......................... $255,596 $1,233,864 Capital Growth Portfolio ................. 283,728 389,229 Income and Growth Portfolio .............. 222,501 323,741 Global Portfolio ......................... 146,546 237,827 Quality Income Portfolio ................. 195,196 232,278 Municipal Income Portfolio ............... 108,151 124,069 Short-Duration Income Portfolio .......... 160,078 91,969 Balanced Portfolio ....................... 3,517 6,695 High Income Portfolio .................... 28,187 34,631
35 BROKERAGE TRANSACTIONS Transactions on U.S. stock exchanges, commodities markets, and futures markets and other agency transactions involve the payment by a Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Trust usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Trust includes a disclosed, fixed commission or discount retained by the underwriter or dealer. It is anticipated that most purchases and sales of securities by funds investing primarily in certain fixed-income securities will be with the issuer or with underwriters of or dealers in those securities, acting as principal. Accordingly, those funds would not ordinarily pay significant brokerage commissions with respect to securities transactions. It has for many years been a common practice in the investment advisory business for advisers of investment companies and other institutional investors to receive brokerage and research services (as defined in the Securities Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that execute portfolio transactions for the clients of such advisers and from third parties with which such broker-dealers have arrangements. Consistent with this practice, each investment adviser or sub-adviser may receive brokerage and research services and other similar services from many broker-dealers with which such investment adviser or sub- adviser places a Portfolio's portfolio transactions and from third parties with which these broker-dealers have arrangements. These services include such matters as general economic and market reviews, industry and company reviews, evaluations of investments, recommendations as to the purchase and sale of investments, newspapers, magazines, pricing services, quotation services, news services and personal computers utilized by the investment adviser's or sub-adviser's managers and analysts. Where the services referred to above are not used exclusively by the investment adviser or sub-adviser for research purposes, the investment adviser or sub-adviser, based upon its own allocations of expected use, bears that portion of the cost of these services which directly relates to its non-research use. Some of these services are of value to the investment adviser or sub-adviser and its affiliates in advising various of its clients (including the Portfolios), although not all of these services are necessarily useful and of value in managing all or any of the Portfolios. The management fee paid by a Portfolio is not reduced because its investment adviser or sub-adviser or any of their affiliates receive these services even though the investment adviser or sub-adviser might otherwise be required to purchase some of these services for cash. A Portfolio's investment adviser or sub-adviser, as the case may be, places all orders for the purchase and sale of portfolio investments for the Portfolio and buys and sells investments for the Portfolio through a substantial number of brokers and dealers. The investment adviser or sub- adviser seeks the best overall terms available for the Portfolio, except to the extent the investment adviser or sub-adviser may be permitted to pay higher brokerage commissions as described below. In doing so, the investment adviser or sub-adviser, having in mind the Portfolio's best interests, considers all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security or other investment, the amount of the commission, the timing of the transaction taking into account market prices and trends, the reputation, experience and financial stability of the broker-dealer involved and the quality of service rendered by the broker-dealer in other transactions. 36 As permitted by Section 28(e) of the 1934 Act, and by the advisory and sub-advisory agreements, a Portfolio's investment adviser or sub-adviser may cause the Portfolio to pay a broker-dealer which provides "brokerage and research services" (as defined in the 1934 Act) to that adviser an amount of disclosed commission for effecting securities transactions on stock exchanges and other transactions for the Portfolio on an agency basis in excess of the commission which another broker-dealer would have charged for effecting that transaction. The investment adviser's or sub-adviser's authority to cause a Portfolio to pay any such greater commissions is also subject to such policies as the Trustees may adopt from time to time. It is the position of the staff of the Securities and Exchange Commission that Section 28(e) does not apply to the payment of such greater commissions in "principal" transactions. Accordingly, each investment adviser and sub-adviser will use its best efforts to obtain the best overall terms available with respect to such transactions, as described above. Consistent with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. and subject to such other policies as the Trustees may determine, an investment adviser or sub-adviser may consider sales of shares of a Portfolio (and, if permitted by law, of the other funds in the Mentor family) as a factor in the selection of broker-dealers to execute portfolio transactions for a Portfolio. The Trustees have determined that portfolio transactions for the Trust may be effected through Wheat, First Securities, Inc. ("Wheat"), First Union Brokerage Services ("FUBS"), and EVEREN Securities, Inc. ("EVEREN"), broker-dealers affiliated with Mentor Advisors and Mentor Perpetual. The Trustees have adopted certain policies incorporating the standards of Rule 17e-l issued by the SEC under the 1940 Act which requires, among other things, that the commissions paid to Wheat, FUBS, and EVEREN must be reasonable and fair compared to the commissions, fees, or other remuneration received by other brokers in connection with comparable transactions involving similar securities during a comparable period of time. Wheat, FUBS, and EVEREN will not participate in brokerage commissions given by a Portfolio to other brokers or dealers. Over-the-counter purchases and sales are transacted directly with principal market makers except in those cases in which better prices and executions may be obtained elsewhere. A Portfolio will in no event effect principal transactions with Wheat, FUBS, and EVEREN in over-the-counter securities in which Wheat, FUBS, or EVEREN makes a market. Under rules adopted by the SEC, Wheat, FUBS, and EVEREN may not execute transactions for a Portfolio on the floor of any national securities exchange, but may effect transactions for a Portfolio by transmitting orders for execution and arranging for the performance of this function by members of the exchange not associated with them. Wheat, FUBS, and EVEREN will be required to pay fees charged to those persons performing the floor brokerage elements out of the brokerage compensation they receive from a Portfolio. The Trust has been advised by Wheat that on most transactions, the floor brokerage generally constitutes from 5% and 10% of the total commissions paid. 37 BROKERAGE COMMISSIONS The Portfolios paid brokerage commissions on brokerage transactions in the following aggregate amounts for the periods indicated:
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1998 1997 1996 ------------- ------------- ------------ Growth Portfolio ........................ $2,620,649 $1,482,817 $1,864,300 Capital Growth Portfolio ................ 920,105 275,151 299,554 Income and Growth Portfolio ............. 183,991 302,628 146,323 Global Portfolio ........................ 1,272,077 838,045 359,217 Quality Income Portfolio ................ -- 900 24,990 Municipal Income Portfolio .............. 18,968 5,044 2,422 Short-Duration Income Portfolio ......... -- -- 1,560 Balanced Portfolio ...................... 12,356 4,752 7,385
The following table shows brokerage commissions paid by each of the Portfolios to Wheat for the periods indicated:
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1998 1997 1996 ------------- ------------- ------------ Growth Portfolio .................... $148,289 $101,434 $72,923 Capital Growth Portfolio ............ 104,188 29,226 54,642 Income and Growth Portfolio ......... 73,192 101,434 52,534 Balanced Portfolio .................. 193 50 --
The following table shows brokerage commissions paid by each of the Portfolios to EVEREN for the period indicated.
FISCAL YEAR FISCAL YEAR 1998 1997 ------------- ------------ Growth Portfolio ................. $20,738 $2,331 Capital Growth Portfolio ......... 63,266 9,793 Balanced Portfolio ............... 2,023 --
The brokerage commissions paid to Wheat for fiscal year 1998 amounted to the following percentages of the aggregate brokerage commissions and brokerage transactions paid by each Portfolio:
PERCENT OF AGGREGATE PERCENT OF AGGREGATE DOLLAR AMOUNT OF COMMISSIONS BROKERAGE TRANSACTIONS ---------------------- ----------------------- Growth Portfolio .................... 5.66% 5.19% Capital Growth Portfolio ............ 11.32% 14.26% Income and Growth Portfolio ......... 39.78% 29.39% Balanced Portfolio .................. 1.56% 0.32%
38 The brokerage commissions paid to EVEREN for fiscal year 1998 amounted to the following percentages of the aggregate brokerage commissions and brokerage transactions paid by each Portfolio:
PERCENT OF AGGREGATE PERCENT OF AGGREGATE DOLLAR AMOUNT OF COMMISSIONS BROKERAGE TRANSACTIONS ---------------------- ----------------------- Growth Portfolio ................. 0.79% 0.71% Capital Growth Portfolio ......... 6.88% 6.29% Balanced Portfolio ............... 16.37% 3.89%
HOW TO BUY SHARES Except under certain circumstances described in the Trust's or an individual Portfolio's prospectus, Class A shares of the Portfolios are sold at their net asset value plus an applicable sales charge on days the New York Stock Exchange is open for business. Class B shares of the Portfolios and Institutional Shares of the Portfolios are sold at their net asset value with no sales charge on days the New York Stock Exchange is open for business. The procedure for purchasing Class A, Class B, and Institutional Shares of the Portfolios is explained in the relevant Prospectus under the section entitled "How to Buy Shares." DISTRIBUTION Each of the Portfolios makes payments to Mentor Distributors, LLC in accordance with its respective Distribution Plan adopted in respect of Class B shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. During fiscal year 1998, the Portfolios paid the following 12b-1 fees in respect of Class B shares to Mentor Distributors as shown below: Growth Portfolio ........................ $3,638,580 Capital Growth Portfolio ................ 1,227,717 Balanced Portfolio ...................... 30,319 Income and Growth Portfolio ............. 986,604 Global Portfolio ........................ 734,020 Quality Income Portfolio ................ 467,042 Municipal Income Portfolio .............. 257,381 Short-Duration Income Portfolio ......... 133,476 High Income Portfolio ................... 68,461
During fiscal year 1998, 12b-1 fees of $29,451 of the number above were waived in respect of Class B shares of the Balanced Portfolio. 39 CONTINGENT DEFERRED SALES CHARGES During fiscal year 1998, Mentor Distributors received the following contingent deferred sales charges with respect to Class B shares: Growth Portfolio ........................ $500,690 Capital Growth Portfolio ................ 132,159 Income and Growth Portfolio ............. 163,091 Global Portfolio ........................ 179,805 Quality Income Portfolio ................ 137,341 Municipal Income Portfolio .............. 26,436 Short-Duration Income Portfolio ......... 90,668 High Income Portfolio ................... 17,592
UNDERWRITING COMMISSIONS The following table shows the approximate amount of underwriting commissions retained by Mentor Distributors (and any predecessor) in respect of Class A and Class B shares for each Portfolio for the periods indicated:
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1998 1997 1996 ------------- ------------- ------------ Growth Portfolio ........................ $231,016 $116,796 38,398 Capital Growth Portfolio ................ 320,353 63,786 $10,477 Income and Growth Portfolio ............. 169,108 59,230 15,762 Global Portfolio ........................ 113,331 66,416 23,038 Quality Income Portfolio ................ 104,891 37,516 9,062 Municipal Income Portfolio .............. 80,007 21,433 4,110 Short-Duration Income Portfolio ......... 4,833 867 186 High Income Portfolio ................... 56,138 -- --
DETERMINING NET ASSET VALUE A Portfolio determines the net asset value per share of each class once each day the New York Exchange (the "Exchange") is open as of the close of regular trading on the Exchange. Currently, the Exchange is closed Saturdays, Sundays and the following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day, Thanksgiving and Christmas. Securities for which market quotations are readily available are valued at prices which, in the opinion of a Portfolio's investment adviser or sub-adviser, most nearly represent the market values of such securities. Currently, such prices are determined using the last reported sale price or, if no sales are reported (as in the case of some securities traded over-the-counter), the last reported bid price, except that certain U.S. Government securities are stated at the mean between the last reported bid and asked prices. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value. All other 40 securities and assets are valued at their fair value following procedures approved by the Trustees. Liabilities are deducted from the total, and the resulting amount is divided by the number of shares of the class outstanding. Reliable market quotations are not considered to be readily available for long-term corporate bonds and notes, certain preferred stocks, tax-exempt securities, or certain foreign securities. These investments are stated at fair value on the basis of valuations furnished by pricing services approved by the Trustees, which determine valuations for normal, institutional- size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. If any securities held by a Portfolio are restricted as to resale, the Portfolio's investment adviser or sub-adviser determines their fair values. The fair value of such securities is generally determined as the amount which a Portfolio could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. The valuation procedures applied in any specific instance are likely to vary from case to case. However, consideration is generally given to the financial position of the issuer and other fundamental analytical data relating to the investment and to the nature of the restrictions on disposition of the securities (including any registration expenses that might be borne by the Portfolio in connection with such disposition). In addition, specific factors are also generally considered, such as the cost of the investment, the market value of any unrestricted securities of the same class (both at the time of purchase and at the time of valuation), the size of the holding, the prices of any recent transactions or offers with respect to such securities and any available analysts' reports regarding the issuer. In the case of certain fixed-income securities, including certain less common mortgage-backed securities, market quotations are not readily available to the Portfolios on a daily basis, and pricing services may not provide price quotations. In such cases, the Portfolio's investment adviser or sub-adviser is typically able to obtain dealer quotations for each of the securities on at least a weekly basis. On any day when it is not practicable for the investment adviser or sub- adviser to obtain an actual dealer quotation for a security, the investment adviser or sub-adviser may reprice the securities based on changes in the value of a U.S. Treasury security of comparable duration. When the next dealer quotation is obtained, the investment adviser or sub-adviser compares the dealer quote against the price obtained by it using its U.S. Treasury-spread calculation, and makes any necessary adjustments to its calculation methodology. The investment adviser or sub-adviser attempts to obtain dealer quotes for each security at least weekly, and on any day when there has been an unusual occurrence affecting the securities which, in the investment adviser or sub-adviser's view, makes pricing the securities on the basis of U.S. Treasuries unlikely to provide a fair value of the securities. Generally, trading in certain securities (such as foreign securities) is substantially completed each day at various times prior to the close of the Exchange. The values of these securities used in determining the net asset value of a class of shares are computed as of such times. Also, because of the amount of time required to collect and process trading information as to large numbers of securities issues, the values of certain securities (such as convertible bonds, U.S. Government securities, and tax-exempt securities) are determined based on market quotations collected earlier in the day at the latest practicable time prior to the close of the Exchange. Occasionally, events affecting the value of such securities may occur between such times and the close of the Exchange which will not be reflected in the computation of net asset value. If events materially affecting the value of such securities occur during such period, then these securities will be valued at their fair value following procedures approved by the Trustees. 41 Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business on each business day in New York (i.e., a day on which the Exchange is open). In addition, European or Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York. Furthermore, trading takes place in Japanese markets on certain Saturdays and in various foreign markets on days which are not business days in New York and on which net asset value is not calculated. A Portfolio calculates net asset value per share of each class, and therefore effects sales, redemptions and repurchases of its shares, as of the close of the Exchange once on each day on which the Exchange is open. Such calculation does not take place contemporaneously with the determination of the prices of the majority of the portfolio securities used in such calculation. If events materially affecting the value of such securities occur between the time when their price is determined and the time when a classes' net asset value is calculated, such securities will be valued at fair value as determined in good faith by procedures approved as required by the Trustees. REDEMPTIONS IN KIND Although each Portfolio intends to redeem Class A, Class B and Institutional Shares in cash, it reserves the right under certain circumstances to pay the redemption price in whole or in part by a distribution of securities from its investment portfolio. Redemptions in kind will be made in conformity with applicable SEC rules, taking such securities at the same value employed in determining net asset value and selecting the securities in a manner that the Trustees determine to be fair and equitable. The Trust has elected to be governed by Rule 18f-1 of the 1940 Act, under which a Portfolio is obligated to redeem shares for any one shareholder in cash only up to the lesser of $250,000 or 1% of the respective classes' net asset value during any 90-day period. TAXES Each Portfolio intends to qualify each year and elect to be taxed as a regulated investment company under Subchapter M of the United States Internal Revenue Code of 1986, as amended (the "Code"). As a regulated investment company qualifying to have its tax liability determined under Subchapter M, a Portfolio will not be subject to federal income tax on any of its net investment income or net realized capital gains that are distributed to shareholders. A Portfolio will not under present law be subject to any excise or income taxes in Massachusetts. In order to qualify as a "regulated investment company," a Portfolio must, among other things, (a) derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other dispositions of stock, securities, or foreign currencies, and other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies; and (b) diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the market value of its total assets consists of cash and cash items, U.S. Government Securities, securities of other regulated investment companies, and other securities limited generally with respect to any one issuer to not more than 5% of the value of its total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities (other than those of the U.S. Government or other regulated investment companies) of any issuer or of two or more issuers which the Portfolio controls and which are engaged in the same, similar, or related trades or 42 businesses. In order to receive the favorable tax treatment accorded regulated investment companies and their shareholders, moreover, a Portfolio must in general distribute at least 90% of the sum of its taxable net investment income, its net tax-exempt income, and the excess, if any, of net short-term capital gains over net long-term capital losses for such year. If a Portfolio failed to qualify as a regulated investment company accorded special tax treatment in any taxable year, the Portfolio would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, would be taxable to shareholders as ordinary income. In addition, a Portfolio could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a regulated investment company that is accorded special tax treatment. If a Portfolio fails to distribute in a calendar year substantially all of its taxable ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31, plus any retained amount from the prior year, the Portfolio will be subject to a 4% excise tax on the undistributed amounts. A dividend paid to shareholders by a Portfolio in January of a year generally is deemed to have been paid by the Portfolio on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November or December of that preceding year. Each Portfolio intends generally to make distributions sufficient to avoid imposition of the 4% excise tax. Distributions from a Portfolio (other than exempt-interest dividends, as discussed below) will be taxable to shareholders as ordinary income to the extent derived from the Portfolio's investment income and net short-term gains. Distributions of net capital gain (that is, the excess of net gains from capital assets held by the Portfolio for more than one year over net losses from capital assets held for not more than one year) that are designed as capital gain dividends will be taxable to shareholders as long-term capital gain, which is generally taxable to individuals at a 20% rate. Dividends and distributions on a Portfolio's shares are generally subject to federal income tax as described herein to the extent they do not exceed the Portfolio's realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares purchased at a time when a Portfolio's net asset value reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed even when a Portfolio's net asset value also reflects unrealized losses. EXEMPT-INTEREST DIVIDENDS. A Portfolio will be qualified to pay exempt-interest dividends to its shareholders only if, at the close of each quarter of the Portfolio's taxable year, at least 50% of the total value of the Portfolio's assets consists of obligations the interest on which is exempt from federal income tax. Distributions that a Portfolio properly designates as exempt-interest dividends are treated by shareholders as interest excludable from their gross income for federal income tax purposes but may be taxable for federal alternative minimum tax purposes and for state and local purposes. If a Portfolio intends to be qualified to pay exempt-interest dividends, the Portfolio may be limited in its ability to enter into taxable transactions involving forward commitments, or repurchase agreements, financial futures, and options contracts on financial futures, tax-exempt bond indices, and other assets. Part or all of the interest on indebtedness, if any, incurred or continued by a shareholder to purchase or carry shares of a Portfolio paying exempt-interest dividends is not deductible. The portion of interest that is not 43 deductible is equal to the total interest paid or accrued on the indebtedness, multiplied by the percentage of a Portfolio's total distributions (not including distributions from net capital gain) paid to the shareholder that are exempt-interest dividends. Under rules used by the Internal Revenue Service for determining when borrowed funds are considered used for the purpose of purchasing or carrying particular assets, the purchase of shares may be considered to have been made with borrowed funds even though such funds are not directly traceable to the purchase of shares. In general, exempt-interest dividends, if any, attributable to interest received on certain private activity obligations and certain industrial development bonds will not be tax-exempt to any shareholders who are "substantial users" of the facilities financed by such obligations or bonds or who are "related persons" of such substantial users. A Portfolio which is qualified to pay exempt-interest dividends will inform investors within 60 days of the Portfolio's fiscal year-end of the percentage of its income distributions designated as tax-exempt. The percentage is applied uniformly to all distributions made during the year. The percentage of income designated as tax-exempt for any particular distribution may be substantially different from the percentage of the Portfolio's income that was tax-exempt during the period covered by the distribution. HEDGING TRANSACTIONS. If a Portfolio engages in hedging transactions, including hedging transactions in options, futures contracts, and straddles, or other similar transactions, it will be subject to special tax rules (including constructive sale, mark-to-market, straddle, wash sale, and short sale rules), the effect of which may be to accelerate income to the Portfolio, defer losses to the Portfolio, cause adjustments in the holding periods of the Portfolio's securities, or convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to shareholders. Each Portfolio will endeavor to make any available elections pertaining to such transactions in a manner believed to be in the best interests of the Portfolio. RETURN OF CAPITAL DISTRIBUTIONS. If a Portfolio makes a distribution to you in excess of its current and accumulated "earnings and profits" allocable to such distribution, the excess distribution will be treated as a return of capital to the extent of your tax basis in your shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces your tax basis in your shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by you or your shares. SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. A Portfolio's investment in securities issued at a discount and certain other obligations will (and investments in securities purchased at a discount may) require the Portfolio to accrue and distribute income not yet received. In order to generate sufficient cash to make the requisite distributions, a Portfolio may be required to sell securities in its portfolio that it otherwise would have continued to hold. FOREIGN CURRENCY-DENOMINATED SECURITIES AND RELATED HEDGING TRANSACTIONS. A Portfolio's transactions in foreign currencies, foreign currency-denominated debt securities and certain foreign currency options, futures contracts, and forward contacts (and similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned. Certain of a Portfolio's transactions, if any, in foreign currencies or foreign currency-denominated instruments are likely to produce a difference between its book income and its taxable income. If a Portfolio's book 44 income exceeds its taxable income, the distribution (if any) of such excess will be treated as a dividend to the extent of the Portfolio's remaining earnings and profits (including earnings and profits arising from tax-exempt income), and thereafter as a return of capital or as gain from the sale or exchange of a capital asset, as the case may be. If a Portfolio's book income is less than its taxable income, the Portfolio could be required to make distributions exceeding book income to qualify as a regulated investment company that is accorded special tax treatment. FOREIGN TAX CREDIT. If more than 50% of a Portfolio's assets at year end consists of the stock or securities of foreign corporations, the Portfolio may elect to permit shareholders to claim a credit or deduction on their income tax returns for their pro rata portion of qualified taxes paid by the Portfolio to foreign countries in respect of foreign securities the Portfolio has held for at least the minimum period, if any, specified in the Code. In such a case, shareholders will include in gross income from foreign sources their pro rata shares of such taxes. A shareholder's ability to claim a foreign tax credit or deduction in respect of foreign taxes paid by the Portfolio may be subject to certain limitations imposed by the Code, as a result of which a shareholder may not get a full credit or deduction for the amount of such taxes. Shareholders who do not itemize on their federal income tax returns may claim a credit (but no deduction) for such foreign taxes. PASSIVE FOREIGN INVESTMENT COMPANIES. Investment by a Portfolio in certain "passive foreign investment companies" ("PFICs") could subject the Portfolio to a U.S. federal income tax (including interest charges) on distributions received from the company or on proceeds received from the disposition of shares in the company, which tax cannot be eliminated by making distributions to Portfolio shareholders. However, the Portfolio in certain circumstances, may elect to treat a passive foreign investment company as a "qualified electing fund," in which case the Portfolio will be required to include its share of the company's income and net capital gain in income annually, regardless of whether it receives any distribution from the company. The Portfolio also may make an election to mark the gains (and to a limited extent losses) in such holdings "to the market" as though it had sold and repurchased its holdings in those PFICs on the last day of the Portfolio's taxable year. Such gains and losses are treated as ordinary income and loss, as are gains on disposition of the stock and losses on disposition of the stock is to the extent of previous inclusions in income. The qualified electing fund and mark-to-market elections may have the effect of accelerating the recognition of income (without the receipt of cash) and increasing the amount required to be distributed for the Portfolio to avoid taxation. Making either of these elections therefore may require a Portfolio to liquidate other investments (including when it is not advantageous to do so) to meet its distribution requirement, which also may accelerate the recognition of gain and affect a Portfolio's total return. SALE OR REDEMPTION OF SHARES. The sale, exchange or redemption of Portfolio shares may give rise to a gain or loss. In general, any gain realized upon a taxable disposition of shares held for more than one year will be taxed as long-term capital gain. Such gain is, in the case of an individual, generally taxed at a 20% rate. However, if a shareholder sells shares at a loss within six months of purchase, any loss will be disallowed for federal income tax purposes to the extent of any exempt-interest dividends received on such shares. In addition, any loss (not already disallowed as provided in the preceding sentence) realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, capital loss to the extent of any long-term capital gain distributions received by the shareholder with respect to the shares. All or a portion of any loss realized upon a taxable disposition of Portfolio shares will be disallowed if other Portfolio shares 45 are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss. SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS. Special tax rules apply to investments through defined contribution plans and other tax-qualified plans. Shareholders should consult their tax adviser to determine the suitability of shares of a Portfolio as an investment through such plans and the precise effect of an investment on their particular tax situation. BACKUP WITHHOLDING. A Portfolio generally is required to withhold and remit to the U.S. Treasury 31% of the taxable dividends and other distributions (including in redemption of Portfolio shares) paid to any individual shareholder who fails to furnish the Portfolio with a correct taxpayer identification number (TIN), who has under- reported dividend or interest income, or who fails to certify to the Portfolio that he or she is not subject to such withholding. Shareholders who fail to furnish their current TIN are subject to a penalty of $50 for each such failure unless the failure is due to reasonable cause and not wilful neglect. An individual's taxpayer identification number is his or her social security number. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and related regulations currently in effect. For the complete provisions, reference should be made to the pertinent Code sections and regulations. The Code and regulations are subject to change by legislative or administrative actions. Dividends, distributions, and redemption proceeds also may be subject to state, local, foreign and other taxes. Shareholders are urged to consult their tax advisers regarding specific questions as to federal, state, local or foreign taxes. The foregoing discussion relates solely to U.S. federal income tax law. Non-U.S. investors should consult their tax advisers concerning the tax consequences of ownership of shares of the Portfolio, including the possibility that distributions may be subject to a 30% United States withholding tax (or a reduced rate of withholding provided by treaty). INDEPENDENT ACCOUNTANTS KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts 02110, are the Trust's independent accountants, providing audit services, tax return review and other tax consulting services. CUSTODIAN Investors Fiduciary Trust Company, located at 127 West 10th Street, Kansas City, Missouri, is the custodian of each Portfolio, except that State Street Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts serves as custodian to the Global Portfolio and as the foreign custodian to each of the other Portfolios in respect of foreign assets. A custodian's responsibilities include generally safeguarding and controlling a Portfolio's cash and securities, handling the receipt and delivery of securities, and collecting interest and dividends on a Portfolio's investments. 46 PERFORMANCE INFORMATION (SHOWN THROUGH SEPTEMBER 30, 1998) The table below shows the average annual total return of Class A shares and Class B shares for the one-, five- and ten-year periods (or for the life of a class if shorter)**:
SINCE INCEPTION CLASS A SHARES 1 YEAR 5 YEARS OR 10 YEARS - ------------------------------------------ ------------ ----------- ---------------- Growth Portfolio* ........................ -26.57% N/A 11.47% Capital Growth Portfolio ................. 4.34% 15.75% 13.57% Balanced Portfolio ....................... N/A N/A -5.78% Income and Growth Portfolio .............. -0.29% 12.62% 12.84% Global Portfolio ......................... -10.44% N/A 8.50% Quality Income Portfolio ................. 4.71% 5.31% 5.51% Municipal Income Portfolio ............... 3.12% 4.53% 6.79% Short-Duration Income Portfolio* ......... 5.89% N/A 5.94% High Income Portfolio .................... N/A N/A -11.19%
SINCE INCEPTION CLASS B SHARES 1 YEAR 5 YEARS OR 10 YEARS - ------------------------------------------ ------------ --------- ---------------- Growth Portfolio* ........................ -25.53% 9.87% 8.19% Capital Growth Portfolio ................. 5.86% 16.17% 13.84% Balanced Portfolio ....................... 8.75% N/A 17.69% Income and Growth Portfolio .............. 1.22% 12.67% 14.70% Global Portfolio ......................... -9.23% N/A 8.89% Quality Income Portfolio ................. 5.46% 5.65% 7.14% Municipal Income Portfolio ............... 3.70% 4.85% 6.90% Short-Duration Income Portfolio* ......... 2.68% N/A 5.52% High Income Portfolio .................... N/A N/A -7.86%
SINCE INCEPTION CLASS Y SHARES 1 YEAR 5 YEARS OR 10 YEARS - ------------------------------------------ -------- --------- ---------------- Growth Portfolio* ........................ N/A N/A -18.36% Capital Growth Portfolio ................. N/A N/A 10.56% Balanced Portfolio* ...................... N/A N/A 0.00% Income and Growth Portfolio .............. N/A N/A 7.29% Global Portfolio ......................... N/A N/A 1.60% Quality Income Portfolio ................. N/A N/A 8.94% Municipal Income Portfolio ............... N/A N/A 7.51% Short-Duration Income Portfolio* ......... N/A N/A 6.64% High Income Portfolio .................... N/A N/A N/A
- ---------- * Prior to May 30, 1995, the Balanced, Growth, and Short-Duration Income Portfolios only offered one class of shares. Total return information prior to this date is shown under the Class B share table. As a result, the annual total return information beyond the one-year period shown above for the Balanced, Growth, and 47 Short-Duration Income Portfolios reflects various sales charges currently not applicable to the Portfolios. The Balanced, Growth, and Short-Duration Portfolios are the successors to Mentor Balanced Fund, Mentor Growth Fund, and Mentor Short-Duration Income Fund, respectively, each of which was previously a series of shares of beneficial interest of Mentor Series Trust. For fiscal 1994, none of these Funds bore a front-end sales charge, but each of them was subject to a maximum contingent deferred sales charge of 5%. ** No Institutional Shares were outstanding for these periods. Total return for the one-, five-, and ten-year periods for each class of shares of a Portfolio (or for the life of a class, if shorter) is determined by calculating the actual dollar amount of investment return on a $1,000 investment in shares of that class at the beginning of the period, and then calculating the annual compounded rate of return which would produce that amount. Total return for a period of one year is equal to the actual return of the particular class of a Portfolio during that period. Total return calculations assume deduction of a classes' maximum front-end or contingent deferred sales charge, if any, and reinvestment of all distributions at net asset value on their respective reinvestment dates. All data are based on past performance and do not predict future results. YIELD AND TAX-EQUIVALENT YIELD The thirty-day yield for Class A shares and Class B shares of certain of the Portfolios for the period ending September 30, 1998, was as follows*:
CLASS A CLASS B --------- ---------- Quality Income Portfolio ................. 4.59% 4.32% Municipal Income Portfolio ............... 3.99% 3.69% Short-Duration Income Portfolio .......... 4.81% 4.57% High Income Portfolio .................... 10.37% 10.36%
The tax-equivalent yield for the Municipal Income Portfolio for the thirty-day period ended September 30. Class A ............... 6.61% Class B ............... 6.11%
- ---------- * No Institutional Shares were outstanding for these periods. Yield for each class is presented for a specified thirty-day period (the "base period"). Yield is based on the amount determined by (i) calculating the aggregate amount of dividends and interest earned by a class of shares of a Portfolio during the base period less expenses accrued for that period, and (ii) dividing that amount by the product of (A) the average daily number of shares of the class outstanding during the base period and entitled to receive dividends and (B) the net asset value per share of the class on the last day of the base period. The result is annualized on a compounding basis to determine the yield. For this calculation, interest earned on debt obligations held by a Portfolio is generally calculated using the yield to maturity (or first expected call date) of such obligations based on their market values (or, in the case of receivables-backed securities such as GNMA's, based on costs). Dividends on equity securities are accrued daily at their stated dividend rates. 48 To the extent that financial institutions and broker/dealers charge fees in connection with services provided in conjunction with an investment in a Portfolio, the performance will be reduced for those shareholders paying those fees. The tax-equivalent yield for Class A shares of the Municipal Income Portfolio for the thirty-day period ending September 30, 1998, was 6.61%. The tax-equivalent yield for that Portfolio's Class B shares was 6.11% for the same period. The tax-equivalent yield for all classes of shares of the Municipal Income Portfolio is calculated similarly to the yield, but is adjusted to reflect the taxable yield that the Portfolio would have had to earn to equal its actual yield, assuming a 39.6% tax rate (the maximum effective federal rate for individuals) and assuming that income is 100% tax-exempt. The Municipal Income Portfolio may also use a tax-equivalency table in advertising and sales literature. The interest earned by the municipal bonds in the Portfolio's investment portfolio generally remains free from federal regular income tax but may be subject to state and local taxes. (Some portion of the Portfolio's income may be subject to federal alternative minimum tax and state and local taxes.) Capital gains, if any, are subject to federal, state and local tax. At times, a Portfolio's investment adviser or sub-adviser may reduce its compensation or assume expenses of the Portfolio in order to reduce the Portfolio's expenses. Any such fee reduction or assumption of expenses would increase a classes' yield and total return during the period of the fee reduction or assumption of expenses. Total return may be presented for other periods or without giving effect to any contingent deferred sales charge. Any quotation of total return or yield not reflecting the front-end or contingent deferred sales charge would be reduced if such sales charges were reflected. EQUIVALENT YIELDS: TAX-EXEMPT VERSUS TAXABLE SECURITIES FOR THE MUNICIPAL INCOME PORTFOLIO The table below shows the effect of the tax status of tax-exempt securities on the effective yield received by their individual holders under the federal income tax laws currently in effect for 1998. It gives the approximate yield a taxable security must earn at various income levels to produce after-tax yields equivalent to those of tax-exempt securities yielding from 2.0% to 10.0%. 49 MENTOR MUNICIPAL INCOME PORTFOLIO -- FEDERAL TAXABLE EQUIVALENT YIELD TABLE-1998 RATES
EFFECTIVE FEDERAL FEDERAL FEDERAL TAXPAYER TAXABLE TAX TAX YEAR STATUS INCOME BRACKET RATE - -------- ---------- ------------------ ----------- ---------- 1998 MARRIED $ 0-42,350 15.00% 15.00% $ 42,351-102,300 28.00% 28.00% $102,301-124,500 31.00% 31.00% $124,501-155,950 31.00% 31.93% $155,951-278,450 36.00% 37.08% OVER $278,450 39.60% 40.79% 1998 SINGLE $ 0-25,350 15.00% 15.00% $ 25,351-61,400 28.00% 28.00% $ 61,401-124,500 31.00% 31.00% $124,501-128,500 31.00% 31.93% 128,101-278,450 36.00% 37.08% OVER $278,450 39.60% 40.79% TAX-FREE YIELD ---------------------------------------------------------------------------------------------------- 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- YEAR - -------- TAXABLE EQUIVALENT YIELD 1998 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49% 2.94% 4.41% 5.88% 7.35% 8.81% 10.28% 11.75% 13.22% 14.69% 3.18% 4.77% 6.36% 7.95% 9.54% 11.13% 12.71% 14.30% 15.89% 3.38% 5.07% 6.76% 8.44% 10.13% 11.82% 13.51% 15.20% 16.89% 1998 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49% 2.94% 4.41% 5.88% 7.35% 8.81% 10.28% 11.75% 13.22% 14.69% 3.18% 4.77% 6.36% 7.95% 9.54% 11.13% 12.71% 14.30% 15.89% 3.38% 5.07% 6.76% 8.44% 10.13% 11.82% 13.51% 15.20% 16.89%
- --------- Note: This tables reflects the following: 1 Taxable Income, as reflected in the above table, equals Federal adjusted gross income (AGI), less personal exemptions and itemized deductions. However, certain itemized deductions are reduced by the lesser of (i) three percent of the amount of the taxpayer's AGI over $124,500, or (ii) 80 percent of the amount of such itemized deductions otherwise allowable. The effect of the three percent phase out on all itemized deductions and not just those deductions subject to the phase out is reflected above in the combined Federal and state tax rates through the use of higher effective Federal tax rates. In addition, the effect of the 80 percent cap on overall percent cap on overall itemized deductions is not reflected on this tables. Federal income tax rules also provide that personal exemptions are phased out at a rate of two percent for each $2,500 (or fraction thereof) of AGI in excess of $186,800 for married taxpayers filing a joint tax return and $124,500 for single taxpayers. The effect of the phase out of personal exemmptions is not reflected in the above table. 2 The effect of state income taxes are not considered in the above table. Such consideration would increase the taxable equivalent yield to the extent that the municipal obligations are issued by the taxpayer's state o f residence. 3 Interest earned on municipal obligations may be subject to the federal alternative minimum tax. This provision is not incorporated into the table. 4 The taxable equivalent yield table does not incorporate the effect of graduated rate structures in determinig yields. Instead, the tax rates used are the highest marginal tax rates applicable to the income levcels indicated within each bracket. 5 Interest earned on all municipal obligations may cause certain investors to be subject to tax on a portion of their Social Security an/dor railroad retirement benefits. The effect of this provision is not included in the above table. 50 MEMBERS OF INVESTMENT MANAGEMENT TEAMS The following persons are investment personnel of the Portfolio's investment advisers, as indicated. MENTOR INVESTMENT ADVISORS, LLC LARGE CAPITALIZATION QUALITY EQUITY GROWTH JOHN G. DAVENPORT, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER Mr. Davenport has 12 years of investment management experience. He joined the firm after leading equity research at the investment management firm of Lowe, Brockenbrough, & Tattersall, Inc. Mr. Davenport graduated from the University of Richmond and has an MBA from the University of Virginia. RICHARD H. SKEPPSTROM II -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER Mr. Skeppstrom has 7 years of investment management experience. Before joining the firm he was a global portfolio analyst for Saudi International Bank Portfolio Advisors. Mr. Skeppstrom began his career as a pension and benefit analyst at Johnson & Higgins of Virginia. He has earned both an undergraduate degree and an MBA from the University of Virginia. CHRISTOPHER W. RUSBULDT, CFA -- VICE PRESIDENT, PORTFOLIO MANAGER Mr. Rusbuldt joined the firm in 1995 and has 7 years' investment experience. Previously, he was an equity research analyst for Wheat First Butcher Singer. He began his career as a banker in the corporate group at NationsBank. Mr. Rusbuldt is a graduate of the University of Virginia. RICHARD L. RICE -- VICE PRESIDENT, PORTFOLIO MANAGER Mr. Rice has 22 years' experience in the securities industry. Before joining Mentor, he was a partner in Parata Analytics Research. Prior responsibilities include research for Signet Asset Management, senior research analyst for Capitoline Investment Services, and positions in research at Atlanta Corporation and Southwest Banking, Inc. Mr. Rice is a graduate of the University of Florida and has completed graduate work at Georgia State University. STEVEN A. CERTO -- VICE PRESIDENT, PORTFOLIO MANAGER Mr. Certo joined the firm in 1997, from the equity research department of Wheat First Butcher Singer where he was a research analyst following the software industry. Mr. Certo served five years as an intelligence officer in the US Navy. His professional background also includes a year as an investment representative for Edward Jones and Co. He is a graduate of Iona College and is a level III candidate in the CFA program. ACTIVE FIXED-INCOME P. MICHAEL JONES, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER Mr. Jones has 12 years of investment management experience. He is the manager of Mentor Short-Duration Income Portfolio and Mentor Quality Income Portfolio, as well as Mentor Income Fund, a $120 million closed-end bond fund. Mr. Jones is responsible for the design and implementation of the fixed-income group's proprietary analytical system. He has worked as an investment manager at Ryland Capital Management, Alliance Capital Management, and Central Fidelity Bank. Mr. Jones earned an undergraduate degree from the College of William and Mary, and an MBA from the Wharton School of the University of Pennsylvania. DENNIS F. CLARY, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER Mr. Clary joined Mentor in 1998 and has over 20 years of investment management experience. Prior to joining 51 Mentor's Fixed Income Team, he worked for three years as a Vice President and Senior Portfolio Manager for First America Investment Corporation. He previously was employed for four years as a Vice President and Portfolio Manager at CSI Asset Management, Inc. and prior to that for four years in a similar role by Investment & Capital Management Corporation. Mr. Clary received his BA and MBA degrees from Ohio State University. TIMOTHY ANDERSON, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER Mr. Anderson has 8 years of investment management experience. He joined Mentor in June, 1998. Prior to joining Mentor's Fixed-Income Team, he worked for two years as a Senior Fixed Income Analyst at Investment Advisors, Inc. Previous to that he was employed for five years as a Senior Investment Analyst at St. Paul Fire & Marine Insurance Company and for two years as an Analyst for Duff & Phelps Credit Rating Company. He received a BS degree from DePaul University and an MBA degree from the University of Chicago. TODD C. KUIMJIAN -- PORTFOLIO MANAGER Mr. Kuimjian has 4 years of investment management experience. He joined the Fixed-Income Team in January, 1997, initially as a Research Analyst and later as a Portfolio Manager. Prior to joining the Fixed-Income Team, Mr. Kuimjian served Mentor as an investment accountant/systems analyst and later as a senior investment administrator within Mentor's investment services group. Mr. Kuimjian is a Certified Public Accountant and received his BS degree from Virginia Polytechnic Institute. SMALL CAPITALIZATION EQUITY GROWTH THEODORE W. PRICE, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER Mr. Price has 30 years of investment management experience. Prior to establishing the small/mid cap. management style, Mr. Price served for 10 years as vice chairman and portfolio manager of the investment management subsidiary of Wheat First Butcher Singer. In 1985, he established the equity retail mutual fund, Mentor Growth Portfolio, which today represents nearly $600 million in assets. He is a member of the Richmond Society of Financial Analysts. Mr. Price earned both BA and MBA degrees from the University of Virginia. LINDA A. ZIGLAR, CFA -- MANAGING DIRECTOR, PORTFOLIO MANAGER Ms. Ziglar has 19 years investment management experience. Ms. Ziglar joined the firm in 1991 after serving seven years as vice president of Federal Investment Counseling and Federated Research Corporation in Pittsburgh. While at Federated, Ms. Ziglar shared responsibility for the management of more than $300 million in mutual fund and separate account assets. She is a member of the Richmond Society of Financial Analysts, the Financial Analysts Federation, and a former officer of the Pittsburgh Society of Financial Analysts. Ms. Ziglar is a summa cum laude, Phi Beta Kappa graduate of Randolph-Macon Woman's College. She earned an MBA from the University of Pittsburgh. JEFFREY S. DRUMMOND, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER Mr. Drummond joined the firm in 1993 after five years in investment strategy at Wheat First Butcher Singer. While working with Wheat's chief investment strategist, he shared responsibility for the management of the Strategic Sectors Portfolio. He is a member of the Richmond Society of Financial Analysts. Mr. Drummond graduated cum laude from the University of Richmond. CASH MANAGEMENT R. PRESTON NUTTALL, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER Mr. Nuttall has more than 30 years of investment management experience. Prior to Mentor Advisors, he led 52 short-term fixed-income management for fifteen years at Capitoline Investment Services, Inc. He has his undergraduate degree in economics from the University of Richmond and his graduate degree in finance from the Wharton School at the University of Pennsylvania. HUBERT R. WHITE III -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER Mr. White has 12 years of investment management experience. Prior to joining Mentor Advisors, he served for five years as portfolio manager with Capitoline Investment Services. He has his undergraduate degree in business from the University of Richmond. GREGORY S. KAPLAN -- ASSOCIATE VICE PRESIDENT, PORTFOLIO MANAGER Mr. Kaplan brings over 6 years of analytical and investment experience to Mentor. Prior to joining the firm, Mr. Kaplan served for four years as a credit specialist analyzing commercial credit for NationsBank. He began his career in the Investment Services division of Prudential Insurance. Mr. Kaplan is a graduate of Rutgers University and earned his MBS from the Pamplin College of Business at Virginia Polytechnic Institute and State University. MENTOR PERPETUAL ADVISORS, LLC MARTIN ARBIB -- CHAIRMAN, PERPETUAL PORTFOLIO MANAGEMENT Mr. Arbib is chairman and founder of Perpetual, a partner in the Mentor Perpetual Advisors joint venture, where he currently leads investment management. A chartered Accountant, he has 22 years' investment management experience. BOB YERBURY -- CHIEF INVESTMENT OFFICER Mr. Yerbury has 24 years' investment management experience, with over 21 years' experience in North American stock markets, and has been part of the Perpetual team for 13 years. Before joining Perpetual, he was a portfolio manager with Equity & Law Assurance Company. Mr. Yerbury is a graduate of Cambridge University. STEPHEN WHITTAKER -- UK TEAM LEADER Mr. Whittaker joined Perpetual eight years ago and has 16 years' investment management experience. Prior to joining Perpetual, he was responsible for UK equity funds for the Save & Prosper Group. He began his fund management career with Rowe & Pitman after graduation from Manchester University. MARGARET RODDAN -- EUROPE TEAM LEADER Ms. Roddan has 11 years of investment management experience, three years with Perpetual. She joined Perpetual from Mercury Asset Management, where she shared responsibility for management of continental European equity holdings. She began her career with the National Provident Institution. Ms. Roddan is a graduate of the Investment Management Program at the London Business School. She studied finance at City University and is a graduate of Bristol University. SCOTT MCGLASHAN -- FAR EAST TEAM LEADER Mr. McGlashan has 19 years' management experience, 13 years specializing in the Far East, and 11 years' tenure at Perpetual. He is a graduate of Yale and Cambridge University. 53 KATHRYN LANGRIDGE -- SOUTHEAST ASIA TEAM LEADER Ms. Langridge shares responsibility with Mr. McGlashan for Far East equity investments. Before joining Perpetual in 1990, she spent eight years in Hong Kong with the investment firm of Jardine Fleming. She specializes in equity investments in the non-Japanese stock markets of the Far East. Ms. Langridge is a graduate of Cambridge University. IAN BRADY -- AMERICAN TEAM LEADER Mr. Brady is head of the North American team at Perpetual. He has 12 years' investment management experience. Before joining Perpetual in 1997, he worked for Britannia Investment Management, Legal & General and Standard Life. He is a graduate of Aberdeen and Strathclyde Universities. PERFORMANCE COMPARISONS The performance of a Portfolio depends upon such variables as: portfolio quality; average portfolio maturity; type of instruments in which the particular Portfolio is invested; changes in the expenses of a particular Portfolio and class of shares; and various other factors. The performance of each Portfolio fluctuates on a daily basis largely because net earnings and net asset value per share of each class fluctuate daily. Both net earnings and net asset value per share are factors in the computation of yield and total return for each class of the Portfolios. Independent statistical agencies measure a Portfolio's investment performance and publish comparative information showing how a Portfolio, and other investment companies, performed in specified time periods. Agencies whose reports are commonly used for such comparisons are set forth below. From time to time, a Portfolio may distribute these comparisons to its shareholders or to potential investors. The agencies listed below measure performance based on their own criteria rather than on the standardized performance measures described in the preceding section. Lipper Analytical Services, Inc., ranks funds in various fund categories by making comparative calculations using total return. Total return assumes the reinvestment of all capital gains distributions and income dividends and takes into account any change in net asset value over a specified period of time. From time to time, a Portfolio will quote its Lipper ranking in advertising and sales literature. Morningstar, Inc. distributes mutual fund ratings twice a month. The ratings are divided into five groups: highest, above average, neutral, below average, and lowest. They represent a Portfolio's historical risk/reward ratio relative to other funds with similar objectives. The performance factor is a weighted-average assessment of the Portfolio's 3-year, 5-year, and 10-year total return performance (if available) reflecting deduction of expenses and sales charges. Performance is adjusted using quantitative techniques to reflect the risk profile of the Portfolio. The ratings are derived from a purely quantitative system that does not utilize the subjective criteria customarily employed by rating agencies such as Standard & Poor's Corporation and Moody's Investor Service, Inc. Weisenberger's Management Results publishes mutual fund rankings and is distributed monthly. The rankings are based entirely on total return calculated by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and 10-year performance. Mutual funds are ranked in general categories (e.g., international bond, international equity, municipal bond, and maximum capital gain). Weisenberger rankings do not reflect deduction of sales charges or fees. 54 A Portfolio's shares also may be compared to the following indices: Dow Jones Industrial Average ("DJIA") is an unmanaged index representing share prices of major industrial corporations, public utilities, and transportation companies. Produced by Dow Jones & Company, it is cited as a principal indicator of market conditions. Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a composite index of common stocks in industry, transportation, and financial and public utility companies, can be used to compare to the total returns of funds whose portfolios are invested primarily in common stocks. In addition, the Standard & Poor's listed on its index. Taxes due on any of these distributions are not included, nor are brokerage or other fees calculated, in the Standard & Poor's figures. Consumer Price Index is generally considered to be a measure of inflation. CDA Mutual Fund Growth Index is a weighted performance average of other mutual funds with growth of capital objectives. Lipper Growth Fund Index is an average of the net asset-valuated total returns for the top 30 growth funds tracked by Lipper Analytical Services, Inc., an independent mutual fund rating service. Lehman Brothers Government/Corporate (total) Index is comprised of approximately 5,000 issues, which include non-convertible bonds publicly issued by the U.S. government or its agencies; corporate bonds guaranteed by the U.S. government and quasi-federal corporations; and publicly issued, fixed-rate, non-convertible domestic bonds of companies in industry, public utilities and finance. The average maturity of these bonds approximates nine years. Tracked by Shearson Lehman Brothers Inc., the index calculates total returns for one month, three month, twelve month and ten year periods and year-to-date. Lehman Brothers Government Index is an unmanaged index comprised of all publicly issued, non-convertible domestic debt of the U.S. government, or any agency thereof, or any quasi-federal corporation and of corporate debt guaranteed by the U.S. government. Only notes and bonds with a minimum outstanding principal of $1 million and a minimum maturity of one year are included. Russell Growth 1000 (Russell 1000 Index) is a broadly diversified index consisting of approximately 1,000 common stocks of companies with market values between $20 million and $300 million that can be used to compare the total returns of funds whose portfolios are invested primarily in growth common stocks. Lehman Brothers Aggregate Bond Index is a total return index measuring both the capital price changes and income provided by the underlying universe of securities, weighted by market value outstanding. The Aggregate Bond Index is comprised of the Shearson Lehman Government Bond Index, Corporate Bond Index, Mortgage-Backed Securities Index, and Yankee Bond Index. These indices include: U.S. Treasury obligations, including bonds and notes; U.S. agency obligations, including those of the Federal Farm Credit Bank, Federal Land Bank, and the Bank for Cooperatives; foreign obligations; and U.S. investment-grade corporate debt and mortgage-backed obligations. All corporate debt included in the Aggregate Bond Index has a minimum S&P rating of BBB, a minimum Moody's rating of Baa, or a minimum Fitch rating of BBB. Salomon Brothers Mortgage-Backed Securities Index-15 Years includes the average of all 15-year mortgage securities, which include Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage Association (Fannie Mae), and Government National Mortgage Association (Ginnie Mae). 55 Lehman Brothers Municipal Bond Index is a total return performance benchmark for the long-term, investment-grade tax-exempt bond market. Returns and attributes for the Index are calculated semi-monthly using approximately 29,000 municipal bonds, which are priced by Muller Data Corporation. From time to time, certain of the Portfolios that invest in foreign securities may advertise the performance of their classes of shares compared to similar funds or portfolios using certain indices, reporting services, and financial publications. These may include the following: Morgan Stanley Capital International World Index, The Morgan Stanley Capital International EAFE (Europe, Australia, Far East) index, J.P. Morgan Global Traded Bond Index, Salomon Brothers World Government Bond Index, and the Standard & Poor's 500 Composite Stock Price Index (S&P 500). A Portfolio also may compare its performance to the performance of unmanaged stock and bond indices, including the total returns of foreign government bond markets in various countries. All index returns are translated into U.S. dollars. The total return calculation for these unmanaged indices may assume the reinvestment of dividends and any distributions, if applicable, may include withholding taxes, and generally do not reflect deductions for administrative and management costs. Investors may use such indices or reporting services in addition to the Trust or an individual Portfolio's prospectus to obtain a more complete view of a particular Portfolio's performance before investing. Of course, when comparing a Portfolio's performance to any index, conditions such as composition of the index and prevailing market conditions should be considered in assessing the significance of such comparisons. When comparing portfolios using reporting services, or total return and yield, investors should take into consideration any relevant differences in portfolios, such as permitted portfolio compositions and methods used to value portfolio securities and compute net asset value. Advertisements and other sales literature for a Portfolio may quote total returns which are calculated on non-standardized base periods. These total returns also represent the historic change in the value of an investment in a Portfolio based on monthly reinvestment of dividends over a specified period of time. From time to time the Portfolios may advertise their performance, using charts, graphs, and descriptions, compared to federally insured bank products, including certificates of deposit and time deposits, and to monthly market funds using the Lipper Analytical Service money market instruments average. Advertisements may quote performance information which does not reflect the effect of the sales load. Independent publications may also evaluate a Portfolio's performance. Certain of those publications are listed below, at the request of Mentor Distributors, which bears full responsibility for their use and the descriptions appearing below. From time to time any or all of the Portfolios may distribute evaluations by or excerpts from these publications to its shareholders or to potential investors. The following illustrates the types of information provided by these publications. Business Week publishes mutual fund rankings in its Investment Figures of the Week column. The rankings are based on 4-week and 52-week total return reflecting changes in net asset value and the reinvestment of all distributions. They do not reflect deduction of any sales charges. Funds are not categorized; they compete in a large universe of over 2,000 funds. The source for rankings is data generated by Morningstar, Inc. 56 Investor's Business Daily publishes mutual fund rankings on a daily basis. The rankings are depicted as the top 25 funds in a given category. The categories are based loosely on the type of fund, e.g., growth funds, balanced funds, U.S. government funds, GNMA funds, growth and income funds, corporate bond funds, etc. Performance periods for sector equity funds can vary from 4 weeks to 39 weeks; performance periods for other fund groups vary from 1 year to 3 years. Total return performance reflects changes in net asset value and reinvestment of dividends and capital gains. The rankings are based strictly on total return. They do not reflect deduction of any sales charges Performance grades are conferred from A+ to E. An A+ rating means that the fund has performed within the top 5% of a general universe of over 2000 funds; an A rating denotes the top 10%; an A- is given to the top 15%, etc. Barron's periodically publishes mutual fund rankings. The rankings are based on total return performance provided by Lipper Analytical Services. The Lipper total return data reflects changes in net asset value and reinvestment of distributions, but does not reflect deduction of any sales charges. The performance periods vary from short-term intervals (current quarter or year-to-date, for example) to long-term periods (five-year or ten-year performance, for example). Barron's classifies the funds using the Lipper mutual fund categories, such as Capital Appreciation Funds, Growth Funds, U.S. Government Funds, Equity Income Funds, Global Funds, etc. Occasionally, Barron's modifies the Lipper information by ranking the funds in asset classes. "Large funds" may be those with assets in excess of $25 million; "small funds" may be those with less than $25 million in assets. The Wall Street Journal publishes its Mutual Fund Scorecard on a daily basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper Analytical Services category. Lipper provides the rankings based on its total return data reflecting changes in net asset value and reinvestment of distributions and not reflecting any sales charges. The Scorecard portrays 4-week, year-to-date, one-year and 5-year performance; however, the ranking is based on the one-year results. The rankings for any given category appear approximately once per month. Fortune magazine periodically publishes mutual fund rankings that have been compiled for the magazine by Morningstar, Inc. Funds are placed in stock or bond fund categories (for example, aggressive growth stock funds, growth stock funds, small company stock funds, junk bond funds, Treasury bond funds etc.), with the top-10 stock funds and the top-5 bond funds appearing in the rankings. The rankings are based on 3-year annualized total return reflecting changes in net asset value and reinvestment of distributions and not reflecting sales charges. Performance is adjusted using quantitative techniques to reflect the risk profile of the fund. Money magazine periodically publishes mutual fund rankings on a database of funds tracked for performance by Lipper Analytical Services. The funds are placed in 23 stock or bond fund categories and analyzed for five-year risk adjusted return. Total return reflects changes in net asset value and reinvestment of all dividends and capital gains distributions and does not reflect deduction of any sales charges. Grades are conferred (from A to E): the top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a fund must be at least one year old, accept a minimum investment of $25,000 or less and have had assets of at least $25 million as of a given date. Financial World publishes its monthly Independent Appraisals of Mutual Funds, a survey of approximately 1000 mutual funds. Funds are categorized as to type, e.g., balanced funds, corporate bond funds, global bond funds, growth and income funds, U.S. government bond funds, etc. To compete, funds must be over one year old, have over $1 million in assets, require a maximum of $10,000 initial investment, and should be available in at least 10 states in the United States. The funds receive a composite past performance rating, which weighs 57 the intermediate- and long-term past performance of each fund versus its category, as well as taking into account its risk, reward to risk, and fees. An A+ rated fund is one of the best, while a D- rated fund is one of the worst. The source for Financial World rating is Schabacker investment management in Rockville, Maryland. Forbes magazine periodically publishes mutual fund ratings based on performance over at least two bull and bear market cycles. The funds are categorized by type, including stock and balanced funds, taxable bond funds, municipal bond funds, etc. Data sources include Lipper Analytical Services and CDA Investment Technologies. The ratings are based strictly on performance at net asset value over the given cycles. Funds performing in the top 5% receive an A+ rating; the top 15% receive an A rating; and so on until the bottom 5% receive an F rating. Each fund exhibits two ratings, one for performance in "up" markets and another for performance in "down" markets. Kiplinger's Personal Finance Magazine (formerly Changing Times), periodically publishes rankings of mutual funds based on one-, three- and five-year total return performance reflecting changes in net asset value and reinvestment of dividends and capital gains and not reflecting deduction of any sales charges. Funds are ranked by tenths: a rank of 1 means that a fund was among the highest 10% in total return for the period; a rank of 10 denotes the bottom 10%. Funds compete in categories of similar funds -- aggressive growth funds, growth and income funds, sector funds, corporate bond funds, global governmental bond funds, mortgage-backed securities funds, etc. Kiplinger's also provides a risk-adjusted grade in both rising and falling markets. Funds are graded against others with the same objective. The average weekly total return over two years is calculated. Performance is adjusted using quantitative techniques to reflect the risk profile of the fund. U.S. News and World Report periodically publishes mutual fund rankings based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co., a Boston research firm. Over 2000 funds are tracked and divided into 10 equity, taxable bond and tax-free bond categories. Funds compete within the 10 groups and three broad categories. The OPI is a number from 0-100 that measures the relative performance of funds at least three years old over the last 1, 3, 5 and 10 years and the last six bear markets. Total return reflects changes in net asset value and the reinvestment of any dividends and capital gains distributions and does not reflect deduction of any sales charges. Results for the longer periods receive the most weight. The 100 Best Mutual Funds You Can Buy authored by Gordon K. Williamson. The author's list of funds is divided into 12 equity and bond fund categories, and the 100 funds are determined by applying four criteria. First, equity funds whose current management teams have been in place for less than five years are eliminated. (The standard for bond funds is three years.) Second, the author excludes any fund that ranks in the bottom 20 percent of its category's risk level. Risk is determined by analyzing how many months over the past three years the fund has underperformed a bank CD or a U.S. Treasury bill. Third, a fund must have demonstrated strong results for current three-year and five-year performance. Fourth, the fund must either possess, in Mr. Williamson's judgment, "excellent" risk-adjusted return or "superior" return with low levels of risk. Each of the 100 funds is ranked in five categories: total return, risk/volatility, management, current income and expenses. The rankings follow a five-point system: zero designates "poor"; one point means "fair"; two points denote "good"; three points qualify as a "very good"; four points rank as "superior"; and five points mean "excellent." 58 SHAREHOLDER LIABILITY Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the Agreement and Declaration of Trust disclaims shareholder liability for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the Trust or the Trustees. The Agreement and Declaration of Trust provides for indemnification out of a Portfolio's property for all loss and expense of any shareholder held personally liable for the obligations of a Portfolio. Thus the risk of a shareholder's incurring financial loss on account of shareholder liability is limited to circumstances in which the Portfolio would be unable to meet its obligations. FINANCIAL STATEMENTS 59 FINANCIAL STATEMENTS MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 84.17% CAPITAL GOODS & CONSTRUCTION - 3.67% Conrad Industries, Inc. * 225,700 $ 1,495,262 Denali, Inc. * 180,950 2,442,825 Motivepower Industries, Inc. * 282,500 6,603,437 Pentacon, Inc. * 159,500 1,016,813 Rental Service Corporation * 237,900 4,282,200 Waste Industries, Inc. * 95,750 1,986,812 ----------- 17,827,349 ----------- CONSUMER CYCLICAL - 14.81% Cadmus Communications Corporation 192,900 3,761,550 Central Garden & Pet Company * 237,200 4,388,200 Chancellor Media Corporation * 110,950 3,702,956 Chattem, Inc. 121,100 3,307,544 Clear Channel Communications 113,712 5,401,320 Dollar General Corporation 105,116 2,798,720 Dollar Tree Stores, Inc. * 136,575 4,276,505 Fairfield Communities, Inc. * 239,450 2,394,500 Family Dollar Stores 348,900 5,495,175 Galey & Lord, Inc. * 171,700 2,049,669 Keystone Automotive Industries, Inc. * 303,300 5,990,175 Lamar Advertising Company * 111,300 3,116,400 Mail Well Holdings, Inc. * 76,300 653,319 Media Arts Group, Inc. * 190,300 1,736,487 Metro Networks, Inc. * 75,600 2,768,850 Outdoor Systems, Inc. * 469,589 9,156,986 Papa John's International, Inc. * 112,500 3,712,500 SCP Pool Corporation * 253,075 3,289,975 Suburban Lodges of America * 195,150 1,305,066 Travel Services International, Inc. * 198,250 2,688,766 ----------- 71,994,663 ----------- CONSUMER STAPLES - 5.70% Celestial Seasonings, Inc. * 154,800 2,341,350 Natrol, Inc. * 171,900 1,525,612 Omega Protein Corporation * 158,000 878,875 Rexall Sundown, Inc. * 196,700 3,036,556 Richfood Holdings, Inc. 274,725 4,223,897 Twinlab Corporation * 117,000 2,998,125 US Foodservice * 151,100 6,289,537 Wild Oats Markets, Inc. * 112,300 3,046,137 Whole Foods Market, Inc. * 80,050 3,372,106 ----------- 27,712,195 -----------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) ENERGY - 2.14% Core Laboratories N.V. * 340,500 $ 5,873,625 Global Industries, Limited * 265,850 3,073,891 Unifab International, Inc. * 140,000 1,470,000 ----------- 10,417,516 ----------- FINANCIAL - 7.28% Concord EFS, Inc. * 351,316 9,068,344 Hibernia Corporation - Class A 196,000 2,829,750 Markel Corporation * 66,360 10,119,900 National Commerce Bancorporation 424,834 7,009,761 NOVA Corporation * 208,423 6,395,965 ----------- 35,423,720 ----------- HEALTH - 19.18% American Dental Partners, Inc. * 68,600 591,675 Assisted Living Concepts, Inc. * 132,600 1,881,262 Brookdale Living Communities * 213,800 4,489,800 Curative Health Services, Inc. * 185,450 5,679,406 Express Scripts, Inc. - Class A * 77,300 6,357,925 Health Management Associates, Inc. * 310,061 5,658,613 Henry Schein, Inc. * 120,250 4,178,687 Mecon, Inc. * 184,600 1,384,500 Medquist, Inc. * 217,050 6,864,206 Molecular Devices Corporation * 232,000 3,973,000 Monarch Dental Corporation * 113,000 1,490,187 NCS Healthcare, Inc. - Class A * 131,350 2,315,044 Omnicare, Inc. 140,660 4,958,265 Osteotech, Inc. * 190,450 5,046,925 Pharmaceutical Product Development * 117,450 3,288,600 Priority Healthcare Corporation - Class B * 120,700 2,761,013 Province Healthcare Company * 222,700 7,585,719 QuadraMed Corporation * 201,400 4,053,175 Serologicals Corporation * 376,050 9,448,256 Sunrise Assisted Living, Inc. * 175,200 6,011,550 United Payors & Providers, Inc. * 171,450 3,343,275 Wesley Jessen Visioncare, Inc. * 90,000 1,912,500 ----------- 93,273,583 -----------
8 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) TECHNOLOGY - 18.23% ADE Corporation * 246,400 $2,402,400 Applied Micro Circuits * 135,100 2,009,612 Aspect Development, Inc. * 54,050 2,128,219 ATMI, Inc. * 147,950 2,052,806 Benchmark Electronics, Inc. * 289,440 6,602,850 Billing Concepts Corporation * 214,350 3,000,900 Black Box Corporation * 111,350 2,700,237 C&D Technologies, Inc. 150,600 3,595,575 Carrier Access Corporation * 30,100 538,037 Cerprobe Corporation 278,800 3,066,800 CSG Systems International, Inc. * 119,600 5,292,300 Cumulus Media - Class A * 220,550 1,791,969 E.spire Communications, Inc. * 196,600 1,769,400 FORE Systems, Inc. * 196,400 3,265,150 Genesis Microchip, Inc. * 25,000 235,937 ICG Communications * 167,500 2,826,562 ITC DeltaCom * 209,100 4,338,825 Medialink Worldwide, Inc. * 180,000 3,015,000 Network Appliance, Inc. * 37,100 1,878,187 Optek Technology, Inc. * 222,900 3,956,475 Parlex Corporation * 219,950 2,020,791 PCD, Inc. * 216,200 2,702,500 Powerwave Technologies, Inc. * 158,300 1,345,550 PRI Automation, Inc. * 238,800 2,985,000 RF Micro Devices, Inc. * 163,400 2,961,625 SCB Computer Technology, Inc. * 498,150 3,860,663 Segue Software, Inc. * 223,000 3,679,500 Sipex Corporation * 239,500 6,077,313 Speedfam International, Inc. * 236,700 2,544,525 World Access, Inc. 197,750 4,004,438 ---------- 88,649,146 ---------- TRANSPORTATION - 6.05% Atlantic Coast Airlines, Inc. * 222,750 5,206,781 Carey International, Inc. * 107,850 1,617,750 Coach USA, Inc. * 180,350 4,452,391 Comair Holdings, Inc. 190,225 5,468,969 Covenant Transport, Inc. - Class A * 217,700 2,476,338 Hunt (JB) Transportation Services, Inc. 86,850 1,259,325 Mesaba Holdings, Inc. 379,775 5,506,738 M.S. Carriers, Inc. * 89,850 1,785,769 US Xpress Enterprises - Class A * 135,650 1,661,713 ---------- 29,435,774 ----------
SHARES OR PRINCIPAL AMOUNT MARKET VALUE COMMON STOCKS (CONTINUED) MISCELLANEOUS - 7.11% ABR Information Services, Inc. * 130,500 $ 1,786,219 AccuStaff, Inc. * 145,635 2,120,810 AHL Services, Inc. * 261,050 8,549,388 Butler International, Inc. * 150,600 3,002,588 Gulf Island Fabrication, Inc. * 184,350 3,133,950 Kulicke & Soffa Industries, Inc. 186,400 2,493,100 Meta Group, Inc. * 76,750 2,508,766 NFO Worldwide, Inc. * 188,750 1,875,703 Rock of Ages Corporation * 129,800 1,444,025 Romac International, Inc. * 186,667 3,360,006 Select Appointments Holding ~ 133,850 2,325,644 StaffMark, Inc. * 106,850 1,950,013 ------------ 34,550,212 ------------ TOTAL COMMON STOCKS (COST $392,590,559) 409,284,158 ------------ SHORT-TERM INVESTMENT - 14.75% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/98, 5.60%, due 10/01/98, collateralized by $72,638,658 Federal National Mortgage Association, 6.00%, 8/01/13, market value $ 73,365,044 (cost $ 71,719,983) $71,719,983 71,719,983 ------------ TOTAL INVESTMENTS (COST $464,310,542)-98.92% 481,004,141 OTHER ASSETS LESS LIABILITIES - 1.08% 5,256,518 ------------ NET ASSETS - 100.00% $486,260,659 ============
* Non-income producing. ~ American Depository Receipts. 9 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - -------------------------------------------------------------------------------- INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $476,835,969 and $493,255,955, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $465,111,603. Net unrealized appreciation aggregated $15,892,538, of which $88,762,155, related to appreciated investment securities and $72,869,617, related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 10 MENTOR GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (Note 2) Investment securities $409,284,158 Repurchase agreements 71,719,983 ------------ Total investments (cost $464,310,542) 481,004,141 Collateral for securities loaned (Note 2) 115,219,699 Receivables Investments sold 9,099,966 Fund shares sold 958,924 Dividends and interest 60,844 Other 74,079 ------------ TOTAL ASSETS 606,417,653 ------------ LIABILITIES Payables Investments purchased $ 1,944,829 Securities loaned (Note 2) 115,219,699 Fund shares redeemed 2,791,991 Accrued expenses and other liabilities 200,475 ----------- TOTAL LIABILITIES 120,156,994 ------------ NET ASSETS $486,260,659 ============ Net Assets represented by: (Note 2) Additional paid-in capital $451,922,136 Accumulated undistributed net investment income - Accumulated net realized gain on investment transactions 17,644,924 Net unrealized appreciation of investments 16,693,599 ------------ NET ASSETS $486,260,659 ============ NET ASSET VALUE PER SHARE Class A Shares $ 14.60 Class B Shares $ 14.18 Class Y Shares $ 14.63 OFFERING PRICE PER SHARE Class A Shares $ 15.49 (a) Class B Shares $ 14.18 Class Y Shares $ 14.63 SHARES OUTSTANDING Class A Shares 5,323,225 Class B Shares 27,027,617 Class Y Shares 1,732,865
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME Dividends $ 524,466 Interest 3,725,963 ------------- TOTAL INVESTMENT INCOME (NOTE 2) 4,250,429 EXPENSES Management fee (Note 4) $ 4,204,377 Distribution fee (Note 5) 3,638,580 Shareholder service fee (Note 5) 1,489,460 Transfer agent fee 800,563 Administration fee (Note 4) 600,625 Shareholder reports and postage expenses 142,288 Registration expenses 130,378 Custodian and accounting fees 84,516 Legal fees 22,254 Directors' fees and expenses 17,864 Audit fees 12,320 Organizational expenses 8,526 Miscellaneous 61,523 ------------ Total expenses 11,213,274 ------------- NET INVESTMENT LOSS (6,962,845) ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments (Note 2) 37,565,972 Change in unrealized appreciation on investments (173,567,460) ------------ NET LOSS ON INVESTMENTS (136,001,488) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(142,964,333) =============
SEE NOTES TO FINANCIAL STATEMENTS. 11 MENTOR GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 9/30/98 9/30/97 NET INCREASE (DECREASE) IN NET ASSETS Operations Net investment loss $ (6,962,845) $ (6,118,383) Net realized gain on investments 37,565,972 35,210,825 Change in unrealized appreciation on investments (173,567,460) 90,598,141 -------------- ------------- Increase (decrease) in net assets resulting from operations (142,964,333) 119,690,583 -------------- ------------- Distributions to Shareholders From net realized gain on investments Class A (6,599,466) (5,768,516) Class B (31,307,757) (52,589,913) Class Y (10) - -------------- ------------- Total distributions to shareholders (37,907,233) (58,358,429) -------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 313,753,597 168,560,541 Reinvested distributions 36,935,409 57,233,448 Cost of shares redeemed (294,819,420) (87,713,664) -------------- ------------- Change in net assets resulting from capital share transactions 55,869,586 138,080,325 -------------- ------------- Increase (decrease) in net assets (125,001,980) 199,412,479 Net Assets Beginning of year 611,262,639 411,850,160 -------------- ------------- End of year $ 486,260,659 $ 611,262,639 ============== =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 (B) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 19.94 $ 18.47 $ 16.08 $ 13.37 ------- --------- -------- --------- Income from investment operations Net investment loss (0.12) (0.17) (0.10) (0.01) Net realized and unrealized gain (loss) on investments (4.03) 4.19 4.23 2.72 -------- --------- -------- ---------- Total from investment operations (4.15) 4.02 4.13 2.71 -------- --------- -------- ---------- Less distributions From capital gains (1.19) (2.55) (1.74) - -------- --------- -------- ---------- Net asset value, end of period $ 14.60 $ 19.94 $ 18.47 $ 16.08 ======== ========= ======== ========== TOTAL RETURN* (22.08%) 25.81% 29.15% 20.27% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $77,720 $105,033 $ 40,272 $ 20,368 Ratio of expenses to average net assets 1.26% 1.28% 1.28% 1.36%(a) Ratio of net investment loss to average net assets (0.56%) (0.67%) (0.39%) (0.65%)(a) Portfolio turnover rate 88% 77% 105% 70% Average commission rate on portfolio transactions $0.0658 $ 0.0651 $ 0.0602
(a) Annualized. (b) For the period from June 5, 1995 (initial offering of Class A Shares) to September 30, 1995. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 12 MENTOR GROWTH PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
YEAR YEAR YEAR PERIOD YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 (B) 12/31/94 12/31/93 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 19.53 $ 18.29 $ 16.05 $ 12.15 $ 13.78 $ 12.81 -------- --------- --------- -------- ------- ------- Income from investment operations Net investment loss (0.23) (0.22) (0.17) (0.13) (0.15) (0.08) Net realized and unrealized gain (loss) on investments (3.93) 4.01 4.15 4.03 (0.47) 2.07 -------- --------- --------- --------- ------- ------- Total from investment operations (4.16) 3.79 3.98 3.90 (0.62) 1.99 -------- --------- --------- --------- ------- ------- Less distributions From capital gains (1.19) (2.55) (1.74) -- (1.01) (1.02) -------- --------- --------- --------- ------- ------- Net asset value, end of period $ 14.18 $ 19.53 $ 18.29 $ 16.05 $ 12.15 $ 13.78 ======== ========= ========= ========= ======= ======= TOTAL RETURN* (22.62%) 24.66% 28.18% 32.10% (4.48%) 15.60% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 383,188 $506,230 $371,578 $ 246,326 $190,126 $186,978 Ratio of expenses to average net assets 2.01% 2.03% 2.03% 2.08% (a) 2.01% 2.02% Ratio of net investment loss to average net assets (1.30%) (1.42%) (1.13%) (1.20%)(a) (1.20%) (1.12%) Portfolio turnover rate 88% 77% 105% 70% 77% 64% Average commission rate on portfolio transactions $ 0.0658 $ 0.0651 $ 0.0602
CLASS Y SHARES
PERIOD ENDED 9/30/98 (C) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.12 --------- Income from investment operations Net investment loss (0.02) Net realized and unrealized loss on investments (3.28) ----------- Total from investment operations (3.30) ----------- Less distributions From capital gains (0.19) ----------- Net asset value, end of period $ 14.63 =========== TOTAL RETURN* (18.36%) RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 25,353 Ratio of expenses to average net assets 1.01%(a) Ratio of net investment loss to average net assets (0.04%)(a) Portfolio turnover rate 88% Average commission rate on portfolio transactions $ 0.0658
(a) Annualized. (b) For the period from January 1, 1995 to September 30, 1995. (c) For the period from November 19, 1997 (initial offering of Class Y shares) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 13 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 88.49% ARGENTINA - 0.10% Perez Company SA~ 4,437 $ 36,609 Telecom Argentina SA~ 2,100 62,344 Telefonica de Argentina SA~ 2,020 59,464 ---------- 158,417 ---------- AUSTRIA - 0.34% Bank Austria AG 14,000 535,988 ---------- BELGIUM - 1.18% Cofinimmo 7,576 920,068 Fortis AG 1,550 382,327 G.I.B. Group SA 11,200 557,400 ---------- 1,859,795 ---------- BRAZIL - 0.33% Cemig CIA Energetic~ (a) 1,700 37,593 CIA Brasil Petro Ipiranga 4,900,000 31,374 Companhia Cervejaria Brahma~ 3,500 27,344 Companhia Vale do Rio Doce~ 2,450 35,140 Compania Paulista de Forca e Luz 370,000 30,589 Electrobras - Centrais Eletricas Brasileiras SA 2,930 32,507 Electropaulo Metropolitana - Electricidade de Sao Paulo SA 690,000 35,443 Pao de Acucar# 2,630,000 34,611 Petroleo Brasileiro SA~ 2,520 25,833 Telecomonicacoes Brasileiras SA~ 2,030 142,988 Telecomunicacoes de Sao Paulo SA 240,000 34,824 Telecomunicacoes de Minas Gerais 1,130,000 40,037 Telerj Celular SA* 240,000 10,326 ---------- 518,609 ---------- CHILE - 0.09% Chilectra SA~ 3,450 56,411 Embotelladora Andina SA~* 1,200 16,500 Enersis SA~ 1,500 30,563 Telecomunicaciones de Chile~ 1,700 32,513 ---------- 135,987 ---------- CHINA - 0.25% Heilongjiang Electric Power Company 180,000 66,600 Huaneng Power International, Inc. - Class A~* 15,000 153,750 Yanzhou Coal Mining Company 1,000,000 174,216 ---------- 394,566 ----------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) FINLAND - 1.49% Huhtamaki 7,472 $ 230,812 Metra Oyj - Class B 38,220 744,472 Nokia Oyj - Class A 17,410 1,383,894 ---------- 2,359,178 ---------- FRANCE - 7.04% Accor SA 5,000 1,049,463 Atos SA 5,230 931,443 Axa 10,940 1,002,522 Casino Guichard Perrachn 7,350 741,814 Compagnie de Saint - Gobain 3,250 431,352 Colas 1,730 329,121 Comptoirs Modernes 1,320 825,280 Elf Aquitaine SA 10,400 1,283,721 Entrelec 12,000 531,609 Genset SA~* 30,000 772,500 ISIS 5,460 370,626 SEB SA 1,270 98,821 Serp Recyclage 3,039 295,317 Societe Generale D'Enterprises 12,610 471,909 Total SA - Class B 8,450 1,065,664 Vivendi 4,760 948,922 ---------- 11,150,084 ---------- GERMANY - 5.41% Allianz AG 3,785 1,172,150 Ava Allg Handels Der Verbrau 3,400 1,384,887 Porsche AG 805 1,408,009 Prosieben Media AG 12,650 697,116 Sauer, Inc. 34,050 270,272 Siemens AG 13,850 757,438 Veba AG 35,920 1,864,742 Viag AG 1,550 1,014,331 ---------- 8,568,945 ---------- GREAT BRITAIN - 10.50% Abbey National PLC 31,250 538,886 Allied Zurich PLC* 28,500 291,247 Arcadia Group 55,700 228,062 Arriva PLC 35,000 223,582 Asda Group 108,000 313,762 BAA PLC 32,250 327,925 Barclays PLC 26,000 422,733 Bass PLC 23,571 285,127 BAT Industries PLC 32,500 244,054 Britannic Assurance PLC 15,000 322,885 British Aerospace PLC 81,000 488,189 British Airways PLC 34,500 213,208 British Biotech PLC* 150,000 89,832
20 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) GREAT BRITAIN (CONTINUED) British Petroleum Company PLC 24,000 $ 366,565 Burmah Castrol PLC 25,000 353,806 Celltech PLC* 25,000 112,555 Centrica PLC* 149,500 288,282 Debenhams PLC 40,000 226,640 Dixons Group 16,000 163,507 Emap PLC 25,000 397,554 Enterprise Oil PLC 75,000 506,499 Glaxo Wellcome PLC 31,000 912,727 Granada Group PLC 36,000 470,032 Great Universal Stores PLC 22,000 245,379 Greenalls Group PLC 40,000 197,078 House of Fraser 50,000 70,506 Iceland Group PLC 31,250 101,169 III Group PLC 30,000 257,136 Imperial Chemical Industries PLC 30,000 236,239 Inchcape PLC 90,000 177,370 Lloyds TSB Group PLC 54,000 603,212 Medeva PLC 80,000 125,043 Meggitt PLC 50,000 113,830 National Westminster Bank 28,250 377,963 Northern Foods PLC 73,400 223,218 PowerGen PLC 44,000 653,348 Prudential Corporation PLC 33,000 479,639 Rank Group PLC 61,750 251,784 Reckitt & Colman PLC 13,300 198,506 Reuters Group PLC 32,000 268,298 Rolls-Royce PLC 138,000 478,875 Sainsbury (J.) PLC 51,000 489,119 Scotia Holdings * 30,000 50,968 Signet Group 312,500 136,712 Smith (H.W.) Group PLC 33,750 280,104 SmithKline Beecham PLC 47,000 518,630 Spirax-Sarco Engineering PLC 30,000 221,203 Stakis PLC 260,000 375,468 Standard Chartered 51,500 366,389 Tate & Lyle PLC 35,282 195,412 Tesco PLC 112,400 332,274 Trinity PLC 35,000 241,421 United Assurance Group PLC 23,000 229,180 United News & Media PLC 35,000 331,210 ---------- 16,614,342 ---------- GREECE - 0.00% Heilenic Telecommunication organization SA 122 2,926 ----------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) HONG KONG - 1.84% Cheung Kong 20,000 $ 92,657 China Foods Holdings, Limited * 575,000 143,954 China Telecom * 40,000 62,976 Citic Pacific, Limited 70,000 122,855 Elec & Eltek International Company, Limited 735,000 132,791 First Tractor Company 305,000 78,720 GZI Transport, Limited - Warrants 60,000 77 GZI Transport, Limited 484,000 101,185 HKR International, Limited 840,000 260,163 Hong Kong Electric 35,000 120,370 Hong Kong & China Gas 100,000 122,596 HSBC Holdings PLC 33,454 613,683 Hung Hing Printing Group 238,000 79,088 Hutchison Whampoa, Limited 48,000 252,729 National Mutual Asia, Limited 280,000 136,405 New World Development 130,951 175,750 Road King Infrastructure, Limited 464,544 254,783 Swire Pacific, Limited - Class A 50,000 157,440 ---------- 2,908,222 ---------- INDIA - 0.34% BSES, Limited #* 8,000 103,000 Hindalco Industries, Limited # 5,000 54,500 Indian Opportunity Fund, Limited* 11,000 93,390 Mahanagar Telephone Nigam, Limited #* 2,000 22,700 Tata Electric # 1,500 262,500 ---------- 536,090 ---------- INDONESIA - 0.06% Bat Indonesia 36,000 50,131 Gudang Garam 80,000 42,804 ---------- 92,935 ---------- IRELAND - 2.05% Bank of Ireland 72,465 1,289,008 CRH PLC 80,000 1,007,138 Elan Corporation PLC~ * 13,250 954,828 ---------- 3,250,974 ---------- ITALY - 4.77% Assicurazioni Generali 15,020 488,729 ENI SPA 192,000 1,177,350 Finmeccanica SPA 192,030 159,526 Grupo Editoriale L'Espresso 174,000 1,370,618 Ina SPA 185,000 470,809
21 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) ITALY (CONTINUED) Istituto Mobiliare Italiano 76,000 $1,003,908 Rinascente SPA 90,850 797,108 Telecom Italia Mobile 105,500 614,966 Telecom Italia SPA 185,000 1,275,108 Telecom Moblit 61,000 196,267 ---------- 7,554,389 ---------- JAPAN - 8.87% Asahi Glass Company, Limited 275,000 1,327,239 Daiwa House Industry Company, Limited 170,000 1,541,499 Kirin Brewery Company, Limited 160,000 1,277,660 Kokusai Securities Company, Limited 200,000 1,396,709 Mitsui Chemicals, Inc. 500,000 1,429,616 Nippon Steel Corporation 880,000 1,261,280 Sony Music Entertainment, Inc. 40,000 1,310,420 Sumitomo Warehouse 360,000 1,376,819 Tokyo Electric Power Company 75,000 1,431,444 Tokio Marine & Fire Insurance 190,000 1,695,064 ---------- 14,047,750 ---------- KOREA - 0.08% Atlantis Korean Smaller Companies * 20,000 100,200 CITC Seoul Excel * 2 3,700 LG Electronics # 6,400 8,000 Samsung Electronics # (a) 475 7,030 ---------- 118,930 ---------- MALAYSIA - 0.08% Boustead Holdings Berhad (c) 84,000 46,802 IOI Corporation (c) 100,000 37,319 Nanyang Press Berhad (c) 60,000 48,568 ---------- 132,689 ---------- MEXICO - 0.31% Cemex SA~* 5,600 27,368 Cifra SA 34,500 41,982 Coca-Cola Femsa SA~ 2,900 35,344 Corporacion Geo SA* 9,600 17,881 DESC SA~ 2,002 27,528 Empresas La Moderna SA~ 1,800 43,030 Grupo Carso SA~ 7,800 46,539 Grupo Televisa #* 1,400 26,928 Kimberly-Clark de Mexico SA~ 2,680 35,845 Panamerican Beverages - Class A * 2,000 35,625
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) MEXICO (CONTINUED) Telefonos de Mexico SA 3,500 $ 154,875 ---------- 492,945 ---------- NETHERLANDS - 1.14% Baan Company NV * 23,000 595,117 Royal Dutch Petroleum 12,748 633,285 Vendex International NV 15,325 569,960 Vendex International NV - Coupon 15,325 2,036 ---------- 1,800,398 ---------- PERU - 0.01% Telefonica del Peru SA~ 2,500 30,625 ---------- PHILIPPINES - 0.13% Benpres Holdings #* 68,000 187,000 Benpres Holdings - Rights 27,200 27,336 ---------- 214,336 ---------- PORTUGAL - 1.38% BPI SGPS SA 28,060 773,990 Cimpor Cimentos de Portugal 15,000 418,391 Elec de Portugal 29,600 681,196 Jeronimo Martins 9,050 306,623 ---------- 2,180,200 ---------- SINGAPORE - 0.72% City Developments, Limited 30,000 65,700 GP Batteries International, Limited 190,000 245,161 Marco Polo Developments, Limited 120,000 62,504 Overseas Chinese Bank * 80,287 201,490 Overseas Union Bank, Limited 80,000 114,117 Singapore Airlines, Limited 20,000 109,500 Singapore Press Holdings 10,000 82,865 United Overseas Bank 87,000 253,353 ---------- 1,134,690 ---------- SPAIN - 6.22% Acciona SA 5,000 1,252,952 Argentaria Corp Bancaria de Espana SA 45,143 898,946 Baron de Ley* 30,000 1,015,050 Centros Comerciales Continente, SA 50,560 1,286,587 Gas Natural SDG SA 11,600 821,767 Prosegur CIA de Seguridad SA 116,895 1,450,218 Tabacalera SA 64,000 1,405,280 Telefonica SA 24,745 903,529 Viscofan Envolturas Celulosicas SA 29,960 779,279
22 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) SPAIN (CONTINUED) Viscofan Envolturas Celulosicas SA - Warrants 29,960 $ 38,647 --------- 9,852,255 --------- SWEDEN - 1.88% BPA AB 265,000 673,829 Celsius AB - Class B 56,360 1,060,489 ForeningsSparbanken AB 54,040 1,236,692 --------- 2,971,010 --------- SWITZERLAND - 4.19% Jelmoli Holding AG 880 1,026,295 Nestle SA 790 1,575,994 Novartis AG 1,056 1,697,402 Roche Holding AG - Genussshein 152 1,640,565 UBS AG* 3,525 689,424 --------- 6,629,680 --------- TAIWAN - 0.20% Formosa Growth Fund * 5,000 88,125 Taipei Fund * 20 161,000 Taiwan Semiconductor~ 5,900 75,228 --------- 324,353 --------- THAILAND - 0.08% Cogenaration PLC 67,000 30,493 Electricity Generating Public Company 40,000 95,575 --------- 126,068 --------- UNITED STATES - 27.41% AccuStaff, Inc. * 25,000 364,063 American Home Products Company 14,000 733,250 American Tower Corporation * 10,000 255,000 Anadarko Petroleum Corporation 12,000 471,750 Anheuser-Busch Companies, Inc. 11,000 594,000 Associates First Capital 19,100 1,246,275 Aurora Foods, Inc.* 9,800 134,750 BankBoston Corporation* 10,800 356,400 Baxter International, Inc. 14,500 862,750 Bell Atlantic Corporation 18,900 915,469 Borders Group, Inc. * 18,000 400,500 Bristol-Myers Squibb Company* 9,700 1,007,588 Burlington Northern 16,500 528,000 Cardinal Health, Inc. 5,800 598,850 Chase Manhattan Corporation 11,700 506,025 Chevron Corporation 10,000 840,625
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) UNITED STATES (CONTINUED) Columbia/HCA Healthcare Corporation 27,900 $ 559,744 Comcast Corporation - Class A 15,000 704,063 Compaq Computer Corporation 24,500 774,813 CompUSA, Inc. 7,600 131,576 Conseco, Inc. 20,600 629,588 Consolidated Stores Corporation* 15,000 294,375 Duke Energy Corporation 7,700 509,644 El Paso Energy Corporation 20,000 648,750 EMC Corporation* 15,000 857,813 Federal National Mortgage Association 6,300 404,775 HealthSouth Corporation * 50,000 528,125 Intel Corporation 19,600 1,680,700 International Business Machines, Inc. 11,000 1,408,000 Lilly (Eli) & Company 9,000 704,813 Lockheed Martin Corporation 6,100 614,956 Mail-Well Holdings* 19,600 167,825 MBNA Corporation 29,200 835,850 McDonald's Corporation 9,000 537,188 MCI WorldCom, Inc. 29,000 1,417,375 Medicis Pharmaceutical* 22,000 871,750 Meditrust Corporation 27,654 471,846 Microsoft Corporation * 5,000 550,313 NationsBank Corporation 15,500 829,250 Newbridge Networks Corporation 24,500 439,469 Newcourt Credit Group, Inc. 11,000 287,375 Nextel Communications, Inc. 11,000 222,063 Ocular Sciences * 5,000 105,000 Omnicare, Inc. 15,000 528,750 Pfizer, Inc. 8,200 868,688 Philip Morris Companies, Inc. 15,000 690,938 Phillips Petroleum Company 7,100 320,388 Provident Companies, Inc. 20,000 675,000 Ralston-Purina Group 12,400 362,700 Republic Services, Inc.* 9,000 175,500 SBC Communications, Inc. 28,800 1,279,800 Staples, Inc.* 53,150 1,561,281 Stewart Enterprises 22,000 368,500 Sun Microsystems, Inc.* 9,000 448,313 Sybron International Corporation * 25,000 478,125 Tele-Communications International * 16,000 626,000 Texaco, Inc. 15,000 940,313 Texas Instruments, Inc. 7,500 395,625
23 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES OR PRINCIPAL AMOUNT MARKET VALUE COMMON STOCKS (CONTINUED) UNITED STATES (CONTINUED) 3Com Corporation* 10,000 $ 300,625 Time Warner, Inc. 17,500 1,532,340 Travelers Group, Inc. 12,500 468,750 Travelers Property and Casualty Corporation 18,000 574,875 Tyco International, Ltd. 10,000 552,500 U.S. Foodservice* 29,600 1,232,100 Viacom Industries, Inc. - Class A 20,000 1,150,000 Westpoint Stevens, Inc. - Class A * 16,000 488,000 Williams Companies, Inc. 12,500 359,375 ----------- 43,380,820 ----------- TOTAL COMMON STOCKS (COST $148,319,820) 140,078,196 ----------- CORPORATE BONDS - 0.29% GREAT BRITIAN Scotia Holdings, 8.50%, 3/26/02 $ 19,000 23,403 ----------- KOREA Republic of Korea, 8.88%, 4/15/08 208,000 177,450 ----------- MALAYSIA Telekom Malaysia Berhad, 4.00%, 10/03/04 - (9/22/94, $70,000) (a) (b) 70,000 37,800 ----------- THAILAND PTTEP International, Limited, 7.63%, 10/01/06 300,000 223,500 ----------- TOTAL CORPORATE BONDS (COST $461,458) 462,153 ----------- 140,540,349 ----------- SHORT-TERM INVESTMENT - 10.07% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/98, 5.60%, due 10/01/98, collateralized by Federal National Mortgage Association, $16,141,372 6.00%, 8/01/13, market value $16,302,785 (cost $15,936,519) 15,936,519 15,936,519 -----------
MARKET VALUE TOTAL INVESTMENTS (COST $164,717,797)-98.85% $156,476,868 OTHER ASSETS LESS LIABILITIES - 1.15% 1,812,839 ------------ NET ASSETS - 100.00% $158,289,707 ============
* Non-income producing. # Global Depository Receipts. - American Depository Receipts. @ International Depository Receipts. (a) These are securities that may be resold to "qualified institutional buyers" under Rule 144A or securities offered pursuant to Section 4 (2) of the Securities Act of 1933, as amended. These securities have been determined to be liquid under guidelines established by the Board of Trustees. (b) All or a portion of these securities are restricted (i.e., securities which may not be publicly sold without registration under the Federal Securities Act of 1933). Dates of acquisition and costs are set forth in parentheses after the title of the restricted securities. (c) These securities are considered illiquid due to a one year moratorium on the repatriation of assets from Malaysia. INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $248,291,695 and $235,288,192, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $165,477,184. Net unrealized depreciation aggregated $9,000,316, of which $11,442,631, related to appreciated investment securities and $20,442,947, related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 24 MENTOR PERPETUAL GLOBAL PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (Note 2) Investment securities $ 140,540,349 Repurchase agreements 15,936,519 ------------- Total investments (cost $164,717,797) 156,476,868 Receivables Collateral for securities loaned (Note 2) 12,707,641 Investments sold 6,315,010 Fund shares sold 354,472 Dividends and interest 443,615 Unrealized appreciation on forward foreign currency exchange contracts (Note 6) 617 Deferred expenses (Note 2) 5,424 ------------- TOTAL ASSETS 176,303,647 ------------- LIABILITIES Payables Investments purchased $ 2,697,553 Securities loaned (Note 2) 12,707,641 Fund shares redeemed 2,446,454 Unrealized depreciation on forward foreign currency exchange contracts (Note 6) 35,060 Accrued expenses and other liabilities 127,232 ----------- TOTAL LIABILITIES 18,013,940 ------------- NET ASSETS $ 158,289,707 ============= Net Assets represented by: (Note 2) Additional paid-in capital $ 153,975,854 Accumulated undistributed net investment income 3,616 Accumulated net realized gain on investment transactions 12,574,725 Net unrealized depreciation of investments and foreign currency related transactions (8,264,488) ------------- NET ASSETS $ 158,289,707 ============= NET ASSET VALUE PER SHARE Class A Shares $ 18.92 Class B Shares $ 18.21 Class Y Shares $ 18.96 OFFERING PRICE PER SHARE Class A Shares $ 20.07(a) Class B Shares $ 18.21 Class Y Shares $ 18.96 SHARES OUTSTANDING Class A Shares 3,118,915 Class B Shares 5,452,526 Class Y Shares 53
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME Dividends (b) $ 2,176,556 Interest 499,605 ------------ TOTAL INVESTMENT INCOME (NOTE 2) 2,676,161 EXPENSES Management fee (Note 4) $ 1,612,495 Distribution fee (Note 5) 734,020 Shareholder service fee (Note 5) 384,373 Transfer agent fee 220,815 Custodian and accounting fees 188,561 Administration fee (Note 4) 153,750 Registration expenses 67,081 Shareholder reports and postage expenses 36,249 Miscellaneous 14,317 Organizational expenses 11,067 Legal fees 4,542 Directors' fees and expenses 3,591 Audit fees 3,143 ----------- Total expenses 3,434,004 ------------ NET INVESTMENT LOSS (757,843) ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS Net realized gain on investments and foreign currency related transactions (Note 2) 14,799,387 Change in unrealized appreciation (depreciation) on investments and foreign currency related transactions (25,459,714) ----------- NET LOSS ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS (10,660,327) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(11,418,170) ============
(b) Net of withholding taxes of $206,565. SEE NOTES TO FINANCIAL STATEMENTS. 25 MENTOR PERPETUAL GLOBAL PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 9/30/98 9/30/97 NET INCREASE IN NET ASSETS Operations Net investment loss $ (757,843) $ (416,666) Net realized gain on investments and foreign currency related transactions 14,799,387 6,084,166 Change in unrealized appreciation (depreciation) on investments (25,459,714) 13,678,454 ------------- ------------- Increase (decrease) in net assets resulting from operations (11,418,170) 19,345,954 ------------- ------------- Distributions to Shareholders From net realized gain on investments Class A (2,382,830) (476,590) Class B (4,553,653) (1,576,577) Class Y (8) -- --------------- ------------- Total distributions to shareholders (6,936,491) (2,053,167) -------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 78,893,773 74,523,622 Reinvested distributions 6,732,722 2,007,927 Shares redeemed (44,567,723) (13,467,704) -------------- ------------- Change in net assets resulting from capital share transactions 41,058,772 63,063,845 -------------- ------------- Increase in net assets 22,704,111 80,356,632 Net Assets Beginning of year 135,585,596 55,228,964 -------------- ------------- End of year (including accumulated undistributed net investment income (loss) of $3,616 and ($97,957), respectively) $ 158,289,707 $ 135,585,596 ============== =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
YEAR YEAR ENDED ENDED 9/30/98 9/30/97 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 20.94 $ 17.86 --------- --------- Income from investment operations Net investment income (loss) (0.03) 0.04 Net realized and unrealized gain (loss) on investments (0.97) 3.67 --------- --------- Total from investment operations (1.00) 3.71 --------- --------- Less distributions From capital gains (1.02) (0.63) --------- ---------- Net asset value, end of period $ 18.92 $ 20.94 ========= ========== TOTAL RETURN* (4.97%) 21.59% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 59,012 $ 46,556 Ratio of expenses to average net assets 1.75% 1.89% Ratio of expenses to average net assets excluding waiver 1.75% 1.89% Ratio of net investment income (loss) to average net assets (0.01%) 0.07% Portfolio turnover rate 162% 128% Average commission rate on portfolio transactions $ 0.0188 $ 0.0319 YEAR YEAR YEAR ENDED ENDED ENDED 9/30/96 9/30/95 9/30/94 (C) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 15.88 $ 14.23 $ 14.18 -------- -------- ----------- Income from investment operations Net investment income (loss) (0.04) 0.05 (0.01) Net realized and unrealized gain (loss) on investments 2.82 1.60 0.06 --------- -------- ------------ Total from investment operations 2.78 1.65 0.05 --------- -------- ------------ Less distributions From capital gains (0.80) -- -- --------- --------- ------------ Net asset value, end of period $ 17.86 $ 15.88 $ 14.23 ========= ========= ============ TOTAL RETURN* 18.40% 11.60% 0.35% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 13,098 $ 6,854 $ 8,882 Ratio of expenses to average net assets 1.95% 2.06% 2.09% (a) Ratio of expenses to average net assets excluding waiver 1.95% 2.11% 3.18% (a) Ratio of net investment income (loss) to average net assets (0.21%) 0.26% (0.10%)(a) Portfolio turnover rate 130% 155% 2% Average commission rate on portfolio transactions $ 0.0320
(a) Annualized. (c) For the period from March 29, 1994 (commencement of operations), to September 30, 1994. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 26 MENTOR PERPETUAL GLOBAL PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
YEAR YEAR ENDED ENDED 9/30/98 9/30/97 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 20.32 $ 17.46 --------- -------- Income from investment operations Net investment loss (0.12) (0.02) Net realized and unrealized gain (loss) on investments (0.97) 3.51 --------- --------- Total from investment operations (1.09) 3.49 --------- --------- Less distributions From capital gains (1.02) (0.63) --------- --------- Net asset value, end of period $ 18.21 $ 20.32 ========= ========= TOTAL RETURN* (5.65%) 20.74% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 99,277 $ 89,030 Ratio of expenses to average net assets 2.50% 2.64% Ratio of expenses to average net assets excluding waiver 2.50% 2.64% Ratio of net investment loss to average net assets (0.77%) (0.68%) Portfolio turnover rate 162% 128% Average commission rate on portfolio transactions $ 0.0188 $ 0.0319 YEAR YEAR PERIOD ENDED ENDED ENDED 9/30/96 9/30/95 9/30/94 (D) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 15.67 $ 14.15 $ 14.18 -------- -------- ----------- Income from investment operations Net investment loss (0.05) (0.05) (0.04) Net realized and unrealized gain (loss) on investments 2.64 1.57 0.01 --------- -------- ------------ Total from investment operations 2.59 1.52 (0.03) --------- -------- ------------ Less distributions From capital gains (0.80) -- -- --------- -------- ------------ Net asset value, end of period $ 17.46 $ 15.67 $ 14.15 ========= ======== ============ TOTAL RETURN* 17.39% 10.74% (0.21%) RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 42,131 $ 12,667 $ 7,987 Ratio of expenses to average net assets 2.70% 2.72% 2.79% (a) Ratio of expenses to average net assets excluding waiver 2.70% 2.79% 3.93% (a) Ratio of net investment loss to average net assets (0.91%) (0.40%) (0.82%)(a) Portfolio turnover rate 130% 155% 2% Average commission rate on portfolio transactions $ 0.0320
CLASS Y SHARES
PERIOD ENDED 9/30/98 (E) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.81 --------- Income from investment operations Net investment income 0.00 (f) Net realized and unrealized gain on investments 0.30 --------- Total from investment operations 0.30 --------- Less distributions From capital gains (0.15) ----------- Net asset value, end of period $ 18.96 =========== TOTAL RETURN* 1.60% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 Ratio of expenses to average net assets 1.50% (a) Ratio of net investment loss to average net assets (0.02%)(a) Portfolio turnover rate 162% Average commission rate on portfolio transactions $ 0.0188
(a) Annualized. (d) For the period from March 29, 1994 (commencement of operations) to September 30, 1994. (e) For the period from November 19, 1997 (initial offering of Class Y shares) to September 30, 1998. (f) Income is less than $0.005 per share. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 27 MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 97.19% BASIC MATERIALS - 2.72% Bemis Company, Inc. 265,400 $9,305,587 ---------- CAPITAL GOODS & CONSTRUCTION - 9.68% Emerson Electric Company 191,000 11,889,750 Illinois Tool Works 223,700 12,191,650 W.W. Grainger, Inc. 214,300 9,027,387 ---------- 33,108,787 ---------- CONSUMER CYCLICAL - 14.08% Chancellor Media Corporation * 213,000 7,108,875 Clear Channel Communications 157,750 7,493,125 Gannett, Inc. 194,000 10,391,125 Interpublic Group Companies 210,800 11,370,025 Newell Company 255,650 11,775,878 ---------- 48,139,028 ---------- CONSUMER STAPLES - 10.75% Philip Morris Companies, Inc. 260,000 11,976,250 Sherwin-Williams Company 546,600 11,820,225 Sysco Corporation 549,500 12,947,594 ---------- 36,744,069 ---------- FINANCIAL - 20.44% Ahmanson HF & Company 210,500 11,682,750 American Express Company 139,500 10,828,687 Federal National Mortgage Association 171,600 11,025,300 NationsBank Corporation 199,150 10,654,525 Norwest Corporation 346,200 12,398,288 SouthTrust Corporation 32,700 1,142,456 UNUM Corporation 244,100 12,128,719 ---------- 69,860,725 ---------- HEALTH - 14.79% Bristol-Myers Squibb Company 128,250 13,321,969 HealthSouth Corporation 1,281,000 13,530,563 Johnson & Johnson 153,600 12,019,200 Tenet Healthcare Corporation 407,000 11,701,250 ---------- 50,572,982 ---------- TECHNOLOGY - 18.41% Automatic Data Processing 162,750 12,165,563 Computer Associates International, Inc. 362,300 13,405,100 Computer Sciences Corporation 226,900 12,366,050 MCI WorldCom, Inc. 254,750 12,450,906 Sun Microsystems, Inc. * 251,850 12,545,278 ---------- 62,932,897 ----------
SHARES OR PRINCIPAL AMOUNT MARKET VALUE COMMON STOCKS (CONTINUED) TRANSPORTATION & SERVICES - 2.04% Werner Enterprises, Inc. 443,312 $ 6,982,164 ------------- MISCELLANEOUS - 4.28% Tyco International Limited 264,600 14,619,150 ------------- TOTAL COMMON STOCKS (COST $325,801,368) 332,265,389 ------------- SHORT-TERM INVESTMENT - 5.06% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/98, 5.60%, due 10/01/98, collateralized by $17,523,355 Federal National Mortgage Association, 6.00%, 8/01/13, market value $ 17,698,589 (cost $17,301,645) $ 17,301,645 17,301,645 ------------- TOTAL INVESTMENTS (COST $343,103,013)-102.25% 349,567,034 OTHER ASSETS LESS LIABILITIES - (2.25%) (7,698,090) ------------- NET ASSETS - 100.00% $ 341,868,944 =============
* Non-income producing. INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $411,684,003 and $263,413,957, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $343,119,643. Net unrealized appreciation aggregated $6,447,391, of which $28,966,561, related to appreciated investment securities and $22,519,170, related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 31 MENTOR CAPITAL GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (Note 2) Investment securities $332,265,389 Repurchase agreements 17,301,645 ------------ Total investments (cost $343,103,013) 349,567,034 Collateral for securities loaned (Note 2) 15,562,984 Receivables Fund shares sold 3,633,968 Dividends and interest 315,098 ------------ TOTAL ASSETS 369,079,084 ------------ LIABILITIES Payables Investments purchased $10,840,843 Securities loaned (Note 2) 15,562,984 Fund shares redeemed 755,755 Accrued expenses and other liabilities 50,558 ----------- TOTAL LIABILITIES 27,210,140 ------------ NET ASSETS $341,868,944 ============ Net Assets represented by: (Note 2) Additional paid-in capital $298,264,898 Accumulated undistributed net investment income - Accumulated net realized gain on investment transactions 37,140,025 Net unrealized appreciation of investments 6,464,021 ------------ NET ASSETS $341,868,944 ============ NET ASSET VALUE PER SHARE Class A Shares $ 22.71 Class B Shares $ 21.72 Class Y Shares $ 22.74 OFFERING PRICE PER SHARE Class A Shares $ 24.09(a) Class B Shares $ 21.72 Class Y Shares $ 22.74 SHARES OUTSTANDING Class A Shares 6,391,508 Class B Shares 9,059,483 Class Y Shares 49
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME Dividends $ 2,936,795 Interest 804,494 ------------ TOTAL INVESTMENT INCOME (NOTE 2) 3,741,289 EXPENSES Management fee (Note 4) $ 2,153,467 Distribution fee (Note 5) 1,227,717 Shareholder service fee (Note 5) 672,957 Transfer agent fee 324,574 Administration fee (Note 4) 269,183 Shareholder reports and postage expenses 57,979 Registration expenses 52,663 Custodian and accounting fees 37,488 Legal fees 8,462 Directors' fees and expenses 6,830 Audit fees 4,556 Miscellaneous 25,373 ----------- Total expenses 4,841,249 ------------ NET INVESTMENT LOSS (1,099,960) ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments (Note 2) 45,438,253 Change in unrealized appreciation on investments (32,273,002) ----------- NET GAIN ON INVESTMENTS 13,165,251 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 12,065,291 ============
SEE NOTES TO FINANCIAL STATEMENTS. 32 MENTOR CAPITAL GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 9/30/98 9/30/97 NET INCREASE IN NET ASSETS Operations Net investment income (loss) $ (1,099,960) $ 55,807 Net realized gain on investments 45,438,253 14,469,617 Change in unrealized appreciation on investments (32,273,002) 24,877,344 ------------- ------------- Increase in net assets resulting from operations 12,065,291 39,402,768 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income Class A (29,728) - Class B (52,910) - From net realized gain on investments Class A (5,934,313) (4,657,749) Class B (10,484,517) (10,198,967) Class Y (12) - ------------- ------------- Total distributions to shareholders (16,501,480) (14,856,716) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 220,347,637 61,493,267 Reinvested distributions 16,089,732 14,535,885 Shares redeemed (69,421,744) (21,387,389) ------------- ------------- Change in net assets resulting from capital share transactions 167,015,625 54,641,763 ------------- ------------- Increase in net assets 162,579,436 79,187,815 Net Assets Beginning of year 179,289,508 100,101,693 ------------- ------------- End of year (including accumulated undistributed net investment income of $0 and $59,668, respectively) $ 341,868,944 $ 179,289,508 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26 --------- --------- --------- -------- -------- Income from investment operations Net investment income (loss) (0.10) (0.02) 0.11 0.02 0.09 Net realized and unrealized gain (loss) on investments 2.34 5.87 3.73 2.91 (0.30) ---------- ---------- --------- -------- -------- Total from investment operations 2.24 5.85 3.84 2.93 (0.21) ---------- ---------- --------- -------- -------- Less distributions From net investment income (0.01) - - - (0.04) From capital gains (1.94) (2.79) (0.50) (1.79) (0.13) ---------- ---------- ---------- -------- -------- Total distributions (1.95) (2.79) (0.50) (1.79) (0.17) ---------- ---------- ---------- -------- -------- Net asset value, end of year $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88 ========== ========== ========== ======== ======== TOTAL RETURN* 10.72% 34.78% 24.63% 20.18% (1.37%) RATIOS / SUPPLEMENTAL DATA Net assets, end of year (in thousands) $145,117 $ 65,703 $ 31,889 $ 29,582 $ 21,181 Ratio of expenses to average net assets 1.34% 1.41% 1.43% 1.87% 1.70% Ratio of net investment income to average net assets 0.06% 0.53% 0.51% 0.27% 0.53% Portfolio turnover rate 104% 64% 98% 157% 149% Average commission rate on portfolio transactions $ 0.0692 $ 0.0697 $ 0.0688
* Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 33 MENTOR CAPITAL GROWTH PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23 ---------- ---------- -------- -------- -------- Income from investment operations Net investment income (loss) (0.08) - (0.04) 0.25 (0.04) Net realized and unrealized gain (loss) on investments 2.07 5.55 3.67 2.53 (0.26) ---------- ---------- --------- -------- -------- Total from investment operations 1.99 5.55 3.63 2.78 (0.30) ---------- ---------- --------- -------- -------- Less distributions From net investment income (0.01) - - - - From capital gains (1.94) (2.79) (0.50) (1.79) (0.13) ---------- ---------- --------- -------- -------- Total distributions (1.95) (2.79) (0.50) (1.79) (0.13) ---------- ---------- --------- -------- -------- Net asset value, end of year $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80 ========== ========== ========= ======== ======== TOTAL RETURN* 9.86% 33.88% 23.64% 19.26% (2.00%) RATIOS / SUPPLEMENTAL DATA Net assets, end of year (in thousands) $196,751 $113,587 $ 68,213 $ 57,648 $ 41,106 Ratio of expenses to average net assets 2.09% 2.16% 2.18% 2.56% 2.46% Ratio of net investment loss to average net assets (0.70%) (0.22%) (0.24%) (0.41%) (0.22%) Portfolio turnover rate 104% 64% 98% 157% 149% Average commission rate on portfolio transactions $ 0.0692 $ 0.0697 $ 0.0688
CLASS Y SHARES
PERIOD ENDED 9/30/98 (B) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 20.81 -------- Income from investment operations Net investment income 0.02 Net realized and unrealized gain on investments 2.16 -------- Total from investment operations 2.18 -------- Less distributions From capital gains (0.25) ---------- Net asset value, end of period $ 22.74 ========== TOTAL RETURN* 10.56% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 Ratio of expenses to average net assets 1.09% (a) Ratio of net investment income to average net assets 0.38% (a) Portfolio turnover rate 104% Average commission rate on portfolio transactions $ 0.0692
(a) Annualized. (b) Reflects operations for the period from November 19, 1997 (initial offering of Class Y shares) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 34 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 52.08% CAPITAL GOODS & CONSTRUCTION - 5.59% Emerson Electric Company 75,100 $ 4,674,975 Illinois Tool Works 78,000 4,251,000 W.W. Grainger, Inc. 86,900 3,660,662 ------------ 12,586,637 ------------ COMMERCIAL SERVICES - 0.88% Omnicom Group 43,800 1,971,000 ------------ CONSUMER CYCLICAL - 8.43% Chancellor Media Corporation * 47,000 1,568,625 Clear Channel Communications 41,600 1,976,000 Gannett, Inc. 42,600 2,281,763 General Motors Corporation 19,100 1,044,531 Interpublic Group Company 54,600 2,944,987 Newell Company 90,200 4,154,837 Time Warner 25,800 2,259,113 Tribune Company 35,300 1,776,031 Walt Disney Company 39,000 987,188 ------------ 18,993,075 ------------ CONSUMER STAPLES - 4.38% Philip Morris Companies, Inc. 61,400 2,828,238 Sherwin-Williams Company 133,200 2,880,450 Sysco Corporation 176,000 4,147,000 ------------ 9,855,688 ------------ ENERGY - 0.43% Williams Companies 33,500 963,125 ------------ FINANCIAL - 11.48% Ahmanson HF & Company 25,500 1,415,250 Charter One Financial, Inc. 97,873 2,410,113 Dime Bancorp, Inc. 61,700 1,561,781 M & T Bank Corporation 2,901 1,337,361 Marsh & McLennan Companies, Inc. 14,700 731,325 North Fork Bancorp 111,750 2,235,000 Northern Trust Corporation 35,200 2,402,400 Old Republic International Corporation 92,550 2,082,375 Price (T. Rowe) & Associates, Inc. 70,000 2,056,250 Torchmark Corporation 52,000 1,868,750 Travelers Group, Inc. 45,300 1,698,750 UNUM Corporation 77,000 3,825,937 U S Bancorp 62,700 2,229,769 ------------ 25,855,061 ------------ HEALTH - 6.81% Bristol-Myers Squibb Company 37,600 3,905,700 HealthSouth Corporation * 188,700 1,993,144 Johnson & Johnson 62,600 4,898,450 Tenet Healthcare Corporation 158,000 4,542,500 ------------ 15,339,794 ------------
SHARES OR PRINCIPAL AMOUNT MARKET VALUE COMMON STOCKS (CONTINUED) RETAIL - 1.27% Safeway, Inc. * 61,600 $ 2,856,700 ------------ TECHNOLOGY - 10.42% Automatic Data Processing 60,100 4,492,475 Computer Associates International, Inc. 22,600 836,200 Computer Sciences Corporation 69,500 3,787,750 GTE Corporation 31,400 1,727,000 MCI WorldCom, Inc. 90,000 4,398,750 Sprint Corporation 23,900 1,720,800 Sun Microsystems, Inc. * 103,500 5,155,594 U S West, Inc. 25,905 1,358,393 ------------ 23,476,962 ------------ TRANSPORTATION - 0.70% Werner Enterprises, Inc. 100,000 1,575,000 ------------ MISCELLANEOUS - 1.69% Tyco International Limited 69,100 3,817,775 ------------ TOTAL COMMON STOCKS (COST $119,416,670) 117,290,817 ------------ U.S. GOVERNMENT SECURITIES - 41.72% U.S. Treasury Bond, 5.50%, 1/31/03 (a) $12,000,000 12,531,120 U.S. Treasury Bond, 6.50%, 11/15/26 68,323,000 81,437,600 ------------ TOTAL U.S. GOVERNMENT SECURITIES (COST $78,253,007) 93,968,720 ------------ 211,259,537 ------------ SHORT-TERM INVESTMENT - 6.03% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/98, 5.60%, due 10/01/98, collateralized by $13,769,132 Federal National Mortgage Association, 6.00%, 8/01/13, market value $ 13,906,823, (cost $13,594,355) 13,594,355 13,594,355 ------------ TOTAL INVESTMENTS (COST $211,264,032)-99.83% 224,853,892 OTHER ASSETS LESS LIABILITIES - 0.17% 379,555 ------------ NET ASSETS - 100.00% $225,233,447 ============
* Non-income producing. (a) A portion of this security is pledged as collateral for open futures contracts. 39 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - -------------------------------------------------------------------------------- INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $196,774,571 and $286,670,918, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $211,280,993. Net unrealized appreciation aggregated $13,572,899, of which $25,354,232, related to appreciated investment securities and $11,781,333, related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 40 MENTOR STRATEGY PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (Note 2) Investment securities $ 211,259,537 Repurchase agreements 13,594,355 ------------- Total investments (cost $211,264,032) 224,853,892 Collateral for securities loaned (Note 2) 60,165,776 Receivables Fund shares sold 61,401 Dividends and interest 1,908,750 Deferred expenses (Note 2) 5,034 ------------- TOTAL ASSETS 286,994,853 ------------- LIABILITIES Payables Securities loaned (Note 2) $ 60,165,776 Fund shares redeemed 502,685 Variation margin 1,032,188 Accrued expenses and other liabilities 60,757 ------------ TOTAL LIABILITIES 61,761,406 ------------- NET ASSETS $ 225,233,447 ============= Net Assets represented by: (Note 2) Additional paid-in capital $ 192,886,301 Accumulated undistributed net investment income 2,163,583 Accumulated net realized gain on investment transactions 20,465,541 Net unrealized appreciation of investments and open futures contracts 9,718,022 ------------- NET ASSETS $ 225,233,447 ============= NET ASSET VALUE PER SHARE Class A Shares $ 15.41 Class B Shares $ 14.97 Class Y Shares $ 15.43 OFFERING PRICE PER SHARE Class A Shares $ 16.35(a) Class B Shares $ 14.97 Class Y Shares $ 15.43 SHARES OUTSTANDING Class A Shares 1,602,162 Class B Shares 13,393,973 Class Y Shares 67
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME Dividends (b) $ 1,264,309 Interest 7,295,963 ----------- TOTAL INVESTMENT INCOME (NOTE 2) 8,560,272 EXPENSES Management fee (Note 4) $ 2,420,122 Distribution fee (Note 5) 1,875,172 Shareholder service fee (Note 5) 711,799 Transfer agent fee 375,675 Administration fee (Note 4) 284,720 Shareholder reports and postage expenses 67,926 Custodian and accounting fees 64,615 Registration expenses 47,295 Organizational expenses 20,152 Legal fees 10,523 Directors' fees and expenses 8,296 Audit fees 5,661 Miscellaneous 29,147 ----------- Total expenses 5,921,103 ----------- NET INVESTMENT INCOME 2,639,169 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments (Note 2) 24,557,938 Change in unrealized appreciation on investments and futures contracts (26,287,481) ----------- NET LOSS ON INVESTMENTS (1,729,543) ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 909,626 ===========
(b) Net of foreign withholding taxes of $8,800. SEE NOTES TO FINANCIAL STATEMENTS. 41 MENTOR STRATEGY PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 9/30/98 9/30/97 NET INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 2,639,169 $ 5,345,384 Net realized gain (loss) on investments 24,557,938 54,534,179 Change in unrealized appreciation on investments and futures contracts (26,287,481) (24,297,952) -------------- ------------- Increase in net assets resulting from operations 909,626 35,581,611 -------------- ------------- Distributions to Shareholders From net investment income Class A (617,602) - Class B (4,725,533) - From net realized gain on investments Class A (6,308,309) (1,531,137) Class B (48,272,257) (21,767,428) -------------- ------------- Total distributions to shareholders (59,923,701) (23,298,565) -------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 16,612,646 71,646,650 Reinvested distributions 58,353,501 22,750,654 Shares redeemed (133,155,402) (73,109,779) -------------- ------------- Change in net assets resulting from capital share transactions (58,189,255) 21,287,525 -------------- ------------- Increase (decrease) in net assets (117,203,330) 33,570,571 Net Assets Beginning of year 342,436,777 308,866,206 -------------- ------------- End of year (including accumulated undistributed net investment income of $2,163,583 and $5,365,536, respectively) $ 225,233,447 $ 342,436,777 ============== =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED 9/30/98 9/30/97 9/30/96 9/30/95 (B) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.61 $ 17.96 $ 15.24 $ 13.45 --------- --------- --------- ---------- Income from investment operations Net investment income 0.40 0.31 0.08 - Net realized and unrealized gain (loss) on investments (0.35) 1.68 2.86 1.79 ---------- --------- --------- ----------- Total from investment operations 0.05 1.99 2.94 1.79 ---------- --------- --------- ----------- Less distributions From net investment income (0.29) - - - From capital gains (2.96) (1.34) (0.22) - ---------- ---------- ---------- ----------- Total distributions (3.25) (1.34) (0.22) - ---------- ---------- ---------- ----------- Net asset value, end of period $ 15.41 $ 18.61 $ 17.96 $ 15.24 ========== ========== ========== =========== TOTAL RETURN* 0.32% 11.97% 19.36% 13.31% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 24,685 $ 40,552 $ 20,372 $ 10,503 Ratio of expenses to average net assets 1.42% 1.45% 1.42% 1.65% (a) Ratio of net investment income (loss) to average net assets 1.59% 2.29% 0.62% (0.06%)(a) Portfolio turnover rate 77% 192% 125% 122% Average commission rate on portfolio transactions $ 0.0708 $ 0.0644 $ 0.0669
(a) Annualized. (b) For the period from June 5, 1995 (initial offering of Class A Shares) to September 30, 1995. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 42 MENTOR STRATEGY PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
YEAR ENDED YEAR ENDED YEAR ENDED 9/30/98 9/30/97 9/30/96 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.29 $ 17.79 $ 15.21 -------- --------- ---------- Income from investment operations Net investment income (loss) 0.16 0.26 (0.03) Net realized and unrealized gain (loss) on investments (0.23) 1.58 2.83 --------- --------- ---------- Total from investment operations (0.07) 1.84 2.80 --------- --------- ---------- Less distributions From net investment income (0.29) - - From capital gains (2.96) (1.34) (0.22) --------- ---------- ---------- Total distributions (3.25) (1.34) (0.22) --------- ---------- ---------- Net asset value, end of period $ 14.97 $ 18.29 $ 17.79 ========= ========== ========== TOTAL RETURN* (0.46%) 11.19% 18.48% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $200,547 $301,885 $288,494 Ratio of expenses to average net assets 2.17% 2.20% 2.19% Ratio of net investment income (loss) to average net assets 0.84% 1.54% (0.19%) Portfolio turnover rate 77% 192% 125% Average commission rate on portfolio transactions $ 0.0708 $ 0.0644 $ 0.0669 PERIOD PERIOD ENDED YEAR ENDED ENDED 9/30/95 (C) 12/31/94 12/31/93 (D) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.24 $ 12.70 $ 12.50 ---------- -------- --------- Income from investment operations Net investment income (loss) - (0.06) - Net realized and unrealized gain (loss) on investments 2.97 (0.40) 0.20 ---------- -------- --------- Total from investment operations 2.97 (0.46) 0.20 ---------- -------- --------- Less distributions From net investment income - - - From capital gains - - - ---------- -------- --------- Total distributions - - - ---------- -------- --------- Net asset value, end of period $ 15.21 $ 12.24 $ 12.70 ========== ======== ========= TOTAL RETURN* 24.26% (3.61%) 1.60% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 224,643 $179,274 $ 122,177 Ratio of expenses to average net assets 2.31%(a) 2.19% 2.06%(a) Ratio of net investment income (loss) to average net assets 0.02%(a) (0.54%) 0.08%(a) Portfolio turnover rate 122% 143% 0% Average commission rate on portfolio transactions
CLASS Y SHARES
PERIOD ENDED 9/30/98 (E) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 15.01 -------- Income from investment operations Net investment income 0.25 Net realized and unrealized gain on investments 0.18 -------- Total from investment operations 0.43 -------- Less distributions From capital gains (0.01) ---------- Net asset value, end of period $ 15.43 ========== TOTAL RETURN* 2.87% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 Ratio of expenses to average net assets 1.17% (a) Ratio of net investment income to average net assets 2.18% (a) Portfolio turnover rate 77% Average commission rate on portfolio transactions $ 0.0708
(a) Annualized. (c) For the period from January 1, 1995 to September 30, 1995. (d) For the period from October 29, 1993 (commencement of operations) to December 31, 1993. (e) For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 43 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 58.78% BASIC MATERIALS - 4.46% AlliedSignal, Inc. 92,300 $ 3,265,113 Aluminum Company of America 24,000 1,704,000 British Steel PLC~ 137,000 2,491,687 Westvaco Corporation 68,300 1,639,200 Willamette Industries, Inc. 60,000 1,721,250 ----------- 10,821,250 ----------- CAPITAL GOODS & CONSTRUCTION - 4.46% Caterpillar, Inc. 50,000 2,228,125 Cooper Industries, Inc. 47,500 1,935,625 Cooper Tire & Rubber 125,000 2,250,000 Hubbell, Inc. 65,000 2,307,500 Thomas & Betts Corporation 55,000 2,093,438 ----------- 10,814,688 ----------- COMMERCIAL SERVICES - 3.17% Foster Wheeler Corporation 111,200 1,529,000 Supervalu, Inc. 91,300 2,128,431 Wallace Computer Services, Inc. 225,300 4,041,319 ----------- 7,698,750 ----------- CONSUMER CYCLICAL - 3.99% American Stores Company 58,900 1,895,844 Ford Motor Company 75,500 3,543,781 Maytag Corporation 28,900 1,379,975 Sears Roebuck & Company 65,000 2,872,188 ----------- 9,691,788 ----------- CONSUMER STAPLES - 7.94% American Home Products Corporation 53,200 2,786,350 Baxter International, Inc. 62,000 3,689,000 Dimon Incorporated 280,000 2,957,500 Hormel Foods Corporation 136,400 3,691,325 Kimberly-Clark Corporation 72,000 2,916,000 Philip Morris Companies, Inc. 70,000 3,224,375 ----------- 19,264,550 ----------- ENERGY - 6.52% Amoco Corporation 23,200 1,249,900 Baker Hughes, Inc. 89,800 1,880,187 Chevron Corporation 26,400 2,219,250 Phillips Petroleum Company 22,000 992,750 Repsol SA~ 50,000 2,109,375 Total SA~ 37,700 2,368,031 Unocal Corporation 65,800 2,385,250 USX-Marathon Group, Inc. 74,000 2,622,375 ----------- 15,827,118 -----------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) FINANCIAL - 10.96% Ace Limited 73,700 $ 2,211,000 Citicorp 36,600 3,401,513 Federal National Mortgage Association 78,600 5,050,050 First Union Corporation (b) 43,200 2,211,300 Jefferson-Pilot Corporation 33,750 2,041,875 Spieker Properties, Inc. 65,000 2,388,750 US Bancorp 99,000 3,520,687 Wachovia Corporation 39,000 3,324,750 Wilmington Trust Corporation 46,900 2,438,800 ----------- 26,588,725 ----------- HEALTH - 4.61% Abbott Laboratories 43,900 1,906,906 Columbia HCA Healthcare Corporation 150,000 3,009,375 Johnson & Johnson 41,000 3,208,250 Pharmacia & UpJohn 61,000 3,061,438 ----------- 11,185,969 ----------- TECHNOLOGY - 4.63% Amp, Inc. 45,700 1,633,775 International Business Machines Corporation 32,700 4,185,600 Lockheed Martin Corporation 21,700 2,187,631 Xerox Corporation 38,000 3,220,500 ----------- 11,227,506 ----------- TRANSPORTATION & SERVICES - 1.58% KLM Royal Dutch Air * 43,428 1,074,826 Union Pacific Corporation 65,000 2,770,625 ----------- 3,845,451 ----------- UTILITIES - 6.46% Bell Atlantic Corporation 78,900 3,821,719 BellSouth Corporation 33,000 2,483,250 DPL, Inc. 95,000 1,864,375 DQE, Inc. 43,000 1,660,875 Pinnacle West Capital 41,700 1,868,681 SBC Communications, Inc. 89,200 3,963,825 ----------- 15,662,725 ----------- TOTAL COMMON STOCKS (COST $137,623,841) 142,628,520 -----------
48 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS - 13.43% INDUSTRIAL - 6.03% Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 $ 254,350 Archer-Daniels-Midland, 6.75%, 12/15/27 2,000,000 2,078,040 Computer Associates International, 6.50%, 4/15/08 (a) 1,000,000 997,900 Gap, Inc., 6.90%, 9/15/07 1,000,000 1,114,180 Gillette Company, 5.75%, 10/15/05 250,000 260,167 Hershey Foods Corporation, 7.20%, 8/15/27 1,000,000 1,119,310 ICI Wilmington, Inc., 6.95%, 9/15/04 1,000,000 1,065,060 Mead Corporation, 7.35%, 3/01/17 750,000 814,223 Praxair, Inc., 6.15%, 4/15/03 1,000,000 1,027,020 Rockwell International Corporation, 6.70%, 1/15/28 1,500,000 1,589,775 Scripps (E.W.) Company, 6.38%, 10/15/02 1,000,000 1,037,830 Tenneco, Inc., 7.50%, 4/15/07 500,000 548,365 Williams Company, Inc., 6.50%, 11/15/02 1,000,000 1,032,510 Zeneca Wilmington, 7.00%, 11/15/23 1,500,000 1,688,745 ----------- 14,627,475 ----------- FINANCIAL - 5.08% Allmerica Financial Corporation, 7.63%, 10/15/25 1,130,000 1,252,729 Allstate Corporation, 6.75%, 5/15/18 1,000,000 1,028,290 American General Finance., 5.88%, 7/01/00 250,000 252,987 Associates Corporation of North America, 5.25%, 3/30/00 250,000 250,645 BankAmerica Corporation, 7.88%, 12/01/02 1,000,000 1,092,980 Bank One Texas, 6.25%, 2/15/08 1,000,000 1,043,010 Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 255,697 Comerica Bank, 7.13%, 12/01/13 250,000 267,703 Finova Capital Corporation, 6.39%, 10/08/02 1,000,000 1,036,390 First National Bank of Boston, 8.00%, 9/15/04 250,000 277,367 Fleet Financial Group, 6.88%, 1/15/28 1,000,000 1,029,320
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) FINANCIAL (CONTINUED) Great Western Financial, 6.38%, 7/01/00 $ 250,000 $ 254,623 Heller Financial, 6.38%, 11/10/00 1,000,000 1,026,960 Home Savings of Americas, 6.00%, 11/01/00 250,000 253,330 MBIA, Inc., 7.00%, 12/15/25 1,000,000 1,063,240 NationsBank Corporation, 7.80%, 9/15/16 1,000,000 1,134,400 Security Benefits Life Company, 8.75%, 5/15/16 (a) 500,000 549,375 Toronto Dominion Bank, 6.13%, 11/01/08 250,000 260,930 ----------- 12,329,976 ----------- UTILITIES - 2.32% Florida Power & Light Company, 5.38%, 4/01/00 250,000 251,090 New York Telephone, 6.00%, 4/15/08 1,000,000 1,052,340 Northern Natural Gas, 6.75%, 9/15/08 2,000,000 2,096,000 Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 262,700 Philadelphia Electric Company, 7.50%, 1/15/99 100,000 100,835 Southwestern Public Service Company, 6.88%, 12/01/99 250,000 255,188 System Energy Resources, 7.71%, 8/01/01 500,000 525,535 Union Electric Company, 6.75%, 10/15/99 250,000 254,688 US West Capital Funding Inc., 6.88%, 7/15/28 785,000 833,489 ----------- 5,631,865 ----------- TOTAL CORPORATE BONDS (COST $31,414,967) 32,589,316 ----------- U.S. GOVERNMENT SECURITIES AND AGENCIES - 27.27% Government National Mortgage Association 6.50% - 7.00%, 1/15/24 - 6/15/28 8,509,957 8,721,623 U.S. Treasury Bonds, 7.25%, 5/15/16 4,110,000 5,103,469 U.S. Treasury Notes, 5.63% - 7.50%, 11/15/99 - 10/15/06 48,550,000 52,331,514 ----------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $61,636,227) 66,156,606 ----------- 241,374,442 -----------
49 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE SHORT-TERM INVESTMENT - 0.18% REPURCHASE AGREEMENT Paribas Corporation Dated 9/30/98, 5.54%, due 10/01/98, collateralized by $368,000 U.S. Treasury Note, 7.88%, 11/13/04, market value $435,735 (cost $435,000) $435,000 $ 435,000 ------------ TOTAL INVESTMENTS (COST $231,110,035)-99.66% 241,809,442 OTHER ASSETS LESS LIABILITIES - 0.34% 831,534 ------------ NET ASSETS - 100.00% $242,640,976 ============
* Non-income producing. ~ American Depository Receipts. (a) These are securities that may be resold to "qualified institutional buyers" under rule 144A or securities offered pursuant to section 4(2) of the Securities Act of 1933, as amended. These securites have been determined to be liquid under guidelines established by the Board of Trustees. (b) At September 30, 1998, the Portfolio owned 43,200 shares of common stock of First Union Corporation at a cost of $1,599,696 and market value of $2,211,300. These shares were purchased by the Portfolio prior to the acquisition of Wheat First Union by First Union. INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $159,489,535 and $86,643,249, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $231,143,009. Net unrealized appreciation aggregated $10,666,433, of which $24,490,485, related to appreciated investment securities and $13,824,052, related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 50 MENTOR INCOME AND GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (Note 2) Investment securities $ 241,374,442 Repurchase agreements 435,000 ------------- Total investments (cost $231,110,035) 241,809,442 Collateral for securities loaned (Note 2) 40,344,784 Receivables Fund shares sold 290,524 Dividends and interest 1,702,285 Other 500 ------------- TOTAL ASSETS 284,147,535 ------------- LIABILITIES Payables Investments purchased $ 662,932 Securities loaned (Note 2) 40,344,784 Fund shares redeemed 426,881 Accrued expenses and other liabilities 71,962 ---------- TOTAL LIABILITIES 41,506,559 ------------- NET ASSETS $ 242,640,976 ============= Net Assets represented by: (Note 2) Additional paid-in capital $ 221,635,180 Accumulated undistributed net investment income 91,952 Accumulated net realized gain on investment transactions 10,214,437 Net unrealized appreciation of investments 10,699,407 ------------- NET ASSETS $ 242,640,976 ============= NET ASSET VALUE PER SHARE Class A Shares $ 19.54 Class B Shares $ 19.53 Class Y Shares $ 19.54 OFFERING PRICE PER SHARE Class A Shares $ 20.73(a) Class B Shares $ 19.53 Class Y Shares $ 19.54 SHARES OUTSTANDING Class A Shares 5,055,017 Class B Shares 7,364,927 Class Y Shares 55
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME Dividends (b) $ 2,856,521 Interest 5,943,480 ------------ TOTAL INVESTMENT INCOME (NOTE 2) 8,800,001 EXPENSES Management fee (Note 4) $ 1,638,729 Distribution fee (Note 5) 986,604 Shareholder service fee (Note 5) 546,242 Transfer agent fee 292,933 Administration fee (Note 4) 218,497 Registration expenses 50,615 Custodian and accounting fees 48,726 Shareholder reports and postage expenses 43,522 Legal fees 7,495 Directors' fees and expenses 5,917 Audit fees 4,195 Miscellaneous 26,008 ----------- Total expenses 3,869,483 ------------ NET INVESTMENT INCOME 4,930,518 ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments (Note 2) 10,845,766 Change in unrealized appreciation on investments (5,423,416) ----------- NET GAIN ON INVESTMENTS 5,422,350 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 10,352,868 ============
(b) Net of foreign withholding taxes of $50,731. SEE NOTES TO FINANCIAL STATEMENTS. 51 MENTOR INCOME AND GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 9/30/98 9/30/97 NET INCREASE IN NET ASSETS Operations Net investment income $ 4,930,518 $ 2,672,361 Net realized gain on investments 10,845,766 15,016,540 Change in unrealized appreciation on investments (5,423,416) 6,704,657 ------------ ------------- Increase in net assets resulting from operations 10,352,868 24,393,558 ------------ ------------- Distributions to Shareholders From net investment income Class A (2,350,498) (,097,197) Class B (2,488,039) (1,691,306) Class Y (29) - From net realized gain on investments Class A (5,325,307) (2,474,556) Class B (8,807,307) (6,846,186) Class Y (1) - --------------- ------------- Total distributions to shareholders (18,971,181) (12,109,245) -------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 101,090,596 74,239,398 Reinvested distributions 17,902,342 11,495,496 Shares redeemed (39,059,107) (17,451,330) -------------- ------------- Change in net assets resulting from capital share transactions 79,933,831 68,283,564 -------------- ------------- Increase in net assets 71,315,518 80,567,877 Net Assets Beginning of year 171,325,458 90,757,581 -------------- ------------- End of year (including accumulated undistributed net investment income of $91,952 and $0, respectively) $ 242,640,976 $ 171,325,458 ============== =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 20.60 $ 19.16 $ 17.13 $ 15.27 $ 14.88 --------- --------- --------- -------- -------- Income from investment operations Net investment income 0.51 0.44 0.37 0.40 0.31 Net realized and unrealized gain on investments 0.60 3.39 2.75 2.14 0.64 --------- --------- --------- -------- -------- Total from investment operations 1.11 3.83 3.12 2.54 0.95 --------- --------- --------- -------- -------- Less distributions From net investment income (0.51) (0.47) (0.35) (0.43) (0.30) From capital gains (1.66) (1.92) (0.74) (0.25) (0.26) ---------- ---------- ---------- -------- -------- Total distributions (2.17) (2.39) (1.09) (0.68) (0.56) ---------- ---------- ---------- -------- -------- Net asset value, end of year $ 19.54 $ 20.60 $ 19.16 $ 17.13 $ 15.27 ========== ========== ========== ======== ======== TOTAL RETURN* 5.81% 22.11% 19.13% 17.24% 6.54% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $ 98,794 $ 63,509 $ 24,210 $ 19,888 $ 17,773 Ratio of expenses to average net assets 1.32% 1.35% 1.36% 1.69% 1.75% Ratio of net investment income to average net assets 2.70% 2.63% 2.08% 2.53% 2.20% Portfolio turnover rate 40% 75% 72% 62% 78% Average commission rate on portfolio transactions $ 0.0540 $ 0.0515 $ 0.0492
* Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 52 MENTOR INCOME AND GROWTH PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91 --------- --------- --------- -------- -------- Income from investment operations Net investment income 0.37 0.34 0.23 0.28 0.21 Net realized and unrealized gain on investments 0.59 3.35 2.76 2.14 0.61 --------- --------- --------- -------- -------- Total from investment operations 0.96 3.69 2.99 2.42 0.82 --------- --------- --------- -------- -------- Less distributions From net investment income (0.36) (0.36) (0.21) (0.31) (0.19) From capital gains (1.66) (1.92) (0.74) (0.25) (0.26) ---------- ---------- ---------- -------- -------- Total distributions (2.02) (2.28) (0.95) (0.56) (0.45) ---------- ---------- ---------- -------- -------- Net asset value, end of year $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28 ========== ========== ========== ======== ======== TOTAL RETURN* 5.01% 21.24% 18.26% 16.32% 5.66% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $143,846 $107,816 $ 66,548 $ 46,678 $ 43,219 Ratio of expenses to average net assets 2.07% 2.10% 2.13% 2.43% 2.44% Ratio of net investment income to average net assets 1.95% 1.87% 1.32% 1.78% 1.51% Portfolio turnover rate 40% 75% 72% 62% 78% Average commission rate on portfolio transactions $ 0.0540 $ 0.0515 $ 0.0492
CLASS Y SHARES
PERIOD ENDED 9/30/98 (C) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.75 -------- Income from investment operations Net investment income 0.54 Net realized and unrealized gain on investments 0.82 -------- Total from investment operations 1.36 -------- Less distributions From net investment income (0.54) From capital gains (0.03) ---------- Total distributions (0.57) ---------- Net asset value, end of period $ 19.54 ========== TOTAL RETURN* 7.29% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 Ratio of expenses to average net assets 1.07% (a) Ratio of net investment income to average net assets 3.15% (a) Portfolio turnover rate 40% Average commission rate on portfolio transactions $ 0.0540
(a) Annualized. (c) For the period from November 19, 1997 (initial offering of Class Y shares) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 53 MENTOR BALANCED PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 51.46% BASIC MATERIALS - 1.89% Emerson Electric Company 3,890 $ 242,152 --------- CAPITAL GOODS & CONSTRUCTION - 5.56% Bemis Company 6,245 218,966 Illinois Tool Works 4,635 252,607 W. W. Grainger, Inc. 5,730 241,377 --------- 712,950 --------- CONSUMER CYCLICAL - 8.42% Chancellor Media Corporation - Class A * 5,245 175,052 Clear Channel Communications * 4,445 211,137 Gannett Company 4,105 219,874 Interpublic Group Companies, Inc. 4,335 233,819 Newell Company 5,220 240,446 --------- 1,080,328 --------- CONSUMER STAPLES - 5.52% Philip Morris Companies, Inc. 4,840 222,942 Sherwin-Williams Company 11,285 244,038 Sysco Corporation 10,235 241,162 --------- 708,142 --------- FINANCIAL - 10.84% Ahmanson (HF) & Company 3,950 219,225 American Express Company 2,860 222,007 Federal National Mortgage Association 3,510 225,517 NationsBank Corporation 2,990 159,965 Norwest Corporation 4,495 160,977 UNUM Corporation 4,720 234,525 SouthTrust Corporation 4,800 167,700 --------- 1,389,916 --------- HEALTH - 6.95% Bristol-Myers Squibb Company 2,345 243,587 HealthSouth Corporation * 18,340 193,716 Johnson & Johnson 2,805 219,492 Tenet Healthcare Corporation * 8,170 234,888 --------- 891,683 --------- TECHNOLOGY - 9.20% Automatic Data Processing 3,190 238,452 Computer Associates International, Inc. 6,770 250,490 Computer Sciences Corporation 4,145 225,903 MCI WorldCom, Inc. * 4,685 228,980 Sun Microsystems, Inc. * 4,725 235,364 --------- 1,179,189 --------- TRANSPORTATION & SERVICES - 1.16% Werner Enterprises, Inc. 9,472 149,184 --------- MISCELLANEOUS - 1.92% Tyco International, Inc. 4,445 245,586 --------- TOTAL COMMON STOCKS (COST $6,531,760) 6,599,130 ---------
PRINCIPAL AMOUNT MARKET VALUE FIXED INCOME SECURITIES - 36.99% U.S. GOVERNMENT SECURITIES AND AGENCIES - 34.26% Federal National Mortgage Association, MTN, 6.64%, 7/02/07 $ 130,000 $ 145,240 Government National Mortgage Association, MBS, 6.50%, 5/15/09 102,065 104,453 7.00%, 8/15/28 ARM 84,047 86,674 Government National Mortgage Association II, ARM, 6.88%, 4/20/22 71,868 73,307 7.00%, 11/20/22 - 8/15/28 78,240 79,458 U.S. Treasury Bonds, 6.00% - 7.50%, 2/15/23 - 2/15/26 725,000 910,182 U.S. Treasury Notes, 5.63% - 6.75%, 4/30/00 - 5/15/08 2,790,000 2,995,171 --------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $4,274,484) 4,394,485 --------- COLLATERALIZED MORTGAGE OBLIGATIONS - 1.22% AFG Receivables Trust, 6.65%, 10/15/02 32,527 32,782 CS First Boston, 7.18%, 2/25/18 25,000 26,800 Key Auto Finance Trust Series 1997-2 Class A3, 6.10%, 11/15/00 50,000 50,172 Union Acceptance Corporation, 6.48%, 5/10/04 45,000 46,240 --------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $152,201) 155,994 --------- CORPORATE BONDS - 1.51% Ford Motor Credit Company, 7.20%, 6/15/07 45,000 50,256 Norwest Corporation, 6.80%, 5/15/02 60,000 63,625 PNC Student Loan Trust I, 6.73%, 1/25/07, ARM 75,000 79,726 --------- TOTAL CORPORATE BONDS (COST $181,746) 193,607 --------- TOTAL FIXED INCOME SECURITIES (COST $4,608,431) 4,744,086 ---------
58 MENTOR BALANCED PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE SHORT-TERM INVESTMENT REPURCHASE AGREEMENT - 0.98% Goldman Sachs & Company Dated 09/30/98, 5.60%, due 10/01/98, collateralized by $127,262 Federal National Mortgage Association, 6.00%, 08/01/13, market value $128,534 (cost $125,344) $125,344 $ 125,344 ----------- TOTAL INVESTMENTS (COST $11,265,535)-89.43% 11,468,560 OTHER ASSETS LESS LIABILITIES - 10.57% 1,352,413 ----------- NET ASSETS - 100.00% $12,820,973 ===========
* Non-income producing. ARM - Adjustable Rate Mortgage MBS - Mortgage Backed Securities MTN - Medium Term Note INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $11,028,839 and $3,760,750, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $11,265,535. Net unrealized appreciation aggregated $203,025, of which $449,651, related to appreciated investment securities and $246,626, related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 59 MENTOR BALANCED PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (Note 2) Investment securities $ 11,343,216 Repurchase agreements 125,344 ------------ Total investments (cost $11,265,535) 11,468,560 Collateral for securities loaned (Note 2) 2,639,420 Cash 477,253 Receivables Investments sold 90,763 Fund shares sold 3,356,473 Dividends and interest 68,997 ------------ TOTAL ASSETS 18,101,466 ------------ LIABILITIES Investments purchased $ 2,537,038 Securities loaned (Note 2) 2,639,420 Fund shares redeemed 100,000 Accrued expenses and other liabilities 4,035 ----------- TOTAL LIABILITIES 5,280,493 ------------ NET ASSETS $ 12,820,973 ============ Net Assets represented by: (Note 2) Additional paid-in capital $ 12,530,663 Accumulated undistributed net investment income 18,259 Accumulated net realized gain on investment transactions 69,026 Net unrealized appreciation of investments 203,025 ------------ NET ASSETS $ 12,820,973 ============ NET ASSET VALUE PER SHARE Class A Shares $ 13.69 Class B Shares $ 13.69 Class Y Shares $ 13.69 OFFERING PRICE PER SHARE Class A Shares $ 14.53(a) Class B Shares $ 13.69 Class Y Shares $ 13.69 SHARES OUTSTANDING Class A Shares 258,246 Class B Shares 412,394 Class Y Shares 266,111
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME Dividends $ 29,221 Interest 104,135 -------- Total investment income (Note 2) 133,356 EXPENSES Management fee (Note 4) $ 31,721 Distribution fee (Note 5) 30,319 Shareholder service fee (Note 5) 10,212 Administration fee (Note 4) 4,219 Custodian and accounting fees 5,842 Registration expenses 2,363 Shareholder reports and postage expenses 2,043 Legal fees 115 Directors' fees and expenses 60 Audit fees 59 Miscellaneous 465 -------- Total expenses 87,418 -------- Deduct Waiver of distribution fee (Note 5) (29,451) Waiver of management fee (Note 4) (20,856) Waiver of shareholder servicing fee (Note 5) (9,738) Waiver of administration fee (Note 4) (4,219) -------- NET EXPENSES 23,154 -------- NET INVESTMENT INCOME 110,202 -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments (Note 2) 822,291 Change in unrealized appreciation on investments (583,942) -------- NET GAIN ON INVESTMENTS 238,349 -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $348,551 ========
SEE NOTES TO FINANCIAL STATEMENTS. 60 MENTOR BALANCED PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 9/30/98 9/30/97 NET INCREASE IN NET ASSETS Operations Net investment income $ 110,202 $ 107,324 Net realized gain on investments 822,291 408,111 Change in unrealized appreciation on investments (583,942) 397,175 ------------ ----------- Increase in net assets resulting from operations 348,551 912,610 ------------ ----------- Distributions to Shareholders From net investment income (159,807) (108,705) From net realized gain on investments (1,140,442) (449,369) ------------ ----------- Total distributions to shareholders (1,300,249) (558,074) ------------ ----------- Capital Share Transactions (Note 7) Proceeds from sale of shares 9,280,672 108,705 Reinvested distributions 1,300,249 449,370 Shares redeemed (910,125) (636,137) ------------ ----------- Change in net assets resulting from capital share transactions 9,670,796 (78,062) ------------ ----------- Increase in net assets 8,719,098 276,474 Net Assets Beginning of period 4,101,875 3,825,401 ------------ ----------- End of period (including accumulated undistributed net investement income of $18,259 and $67,864, respectively) $ 12,820,973 $ 4,101,875 ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
PERIOD ENDED 9/30/98 (B) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 13.69 -------- Income from investment operations Net investment income 0.00** Net realized and unrealized gain (loss) on investments 0.00** ---------- Total from investment operations 0.00** ---------- Net asset value, end of period $ 13.69 ========== TOTAL RETURN* 0.00% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 3,534 Ratio of expenses to average net assets 1.35%(a) Ratio of net investment income to average net assets 1.52%(a) Portfolio turnover rate 89% Average commission rate on portfolio transactions $ 0.0687
(a) Annualized. (b) For the period from September 16, 1998 (initial offering of Class A) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. ** Income for the period was less than $0.005 per share. SEE NOTES TO FINANCIAL STATEMENTS. 61 MENTOR BALANCED PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES (F)
YEAR ENDED YEAR ENDED YEAR ENDED 9/30/98 9/30/97 9/30/96 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 17.61 $ 16.28 $ 14.85 --------- --------- --------- Income from investment operations Net investment income 0.45 0.43 0.42 Net realized and unrealized gain (loss) on investments 1.43 3.35 2.09 --------- --------- --------- Total from investment operations 1.88 3.78 2.51 --------- --------- --------- Less distributions From net investment income (0.71) (0.43) (0.48) From net realized capital gain (5.09) (2.02) (0.60) ---------- ---------- ---------- Total distributions (5.80) (2.45) (1.08) ---------- ---------- ---------- Net asset value, end of period $ 13.69 $ 17.61 $ 16.28 ========== ========== ========== TOTAL RETURN* 11.86% 26.09% 18.00% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 5,645 $ 4,102 $ 3,825 Ratio of expenses to average net assets 0.52% 0.50% 0.50% Ratio of expenses to average net assets excluding waiver 2.12% 2.13% 2.06% Ratio of net investment income to average net assets 2.63% 2.78% 2.83% Portfolio turnover rate 89% 80% 103% Average commission rate on portfolio transactions $ 0.0687 $ 0.0696 $ 0.0694 PERIOD ENDED PERIOD ENDED 9/30/95 (C) 12/31/94 (D) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.44 $ 12.50 ----------- ---------- Income from investment operations Net investment income 0.36 0.22 Net realized and unrealized gain (loss) on investments 2.08 (0.09) ----------- ----------- Total from investment operations 2.44 0.13 ----------- ----------- Less distributions From net investment income (0.03) (0.19) From net realized capital gain -- -- ----------- ----------- Total distributions (0.03) (0.19) ----------- ----------- Net asset value, end of period $ 14.85 $ 12.44 =========== =========== TOTAL RETURN* 19.28% 1.00% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 3,210 $ 2,911 Ratio of expenses to average net assets 0.50% (a) 0.50% (a) Ratio of expenses to average net assets excluding waiver 2.12% (a) 2.72% (a) Ratio of net investment income to average net assets 3.26% (a) 3.32% (a) Portfolio turnover rate 65% 71% Average commission rate on portfolio transactions
CLASS Y SHARES (F)
PERIOD ENDED 9/30/98 (E) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 13.69 -------- Income from investment operations Net investment income 0.01 Net realized and unrealized loss on investments (0.01) --------- Total from investment operations 0.00 --------- Net asset value, end of period $ 13.69 ========= TOTAL RETURN* 0.00% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 3,642 Ratio of expenses to average net assets 1.10%(a) Ratio of net investment income to average net assets 2.31%(a) Portfolio turnover rate 89% Average commission rate on portfolio transactions $0.0687
(a) Annualized. (c) For the period from January 1, 1995 to September 30, 1995. (d) For the period from June 21, 1994 (commencement of operations) to December 31, 1994. (e) For the period from September 16, 1998 (initial offering of Class Y) to September 30, 1998. (f) Prior to September 16, 1998, all shareholders of the Balanced Portfolio were Class B shareholders. On September 16, 1998, shares of Class B were converted to Class Y shares. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 62 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES - 99.42% ARIZONA - 1.56% Pima County Arizona IDA, 7.25%, 7/15/10 (c) $1,550,000 $ 1,733,830 ------------- ARKANSAS - 1.12% Pulaski County Health Facilities, 5.00%, 12/01/28 1,250,000 1,248,950 ------------- CALIFORNIA - 10.51% California State Water Reserve Center, 4.75%, 12/01/29 3,500,000 3,427,270 California Statewide Community Development Authority, 5.63%, 10/01/34 2,070,000 2,132,514 Carson Improvement Board Act 1915, Special Assessment District 92, 7.38%, 9/02/22 700,000 770,392 East Bay Municipal Utility District, 4.75%, 6/01/21 1,915,000 1,887,424 Orange County Community Facilities District, Series A, 7.35%, 8/15/18 (c) 300,000 346,779 San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,101,250 University of California Revenues, 4.75%, 9/01/16 2,000,000 2,012,240 ------------- 11,677,869 ------------- COLORADO - 3.36% Colorado Housing Authority, 7.00%, 11/01/24 525,000 560,873 Denver City & County Airport Revenue, 7.75% - 8.50%, 11/15/13 - 11/15/23 2,700,000 3,167,089 ------------- 3,727,962 ------------- CONNECTICUT - 0.99% Connecticut State Development Authority, 6.15%, 4/01/35 1,000,000 1,104,860 ------------- DISTRICT OF COLUMBIA - 0.80% Metropolitan Washington, General Airport Revenue, Series A, 6.63%, 10/01/19 (c) 800,000 884,496 ------------- FLORIDA - 2.54% Hillsborough County, 6.25%, 12/01/34 1,250,000 1,396,750 Sarasota County Health Facilities Authority Revenue, 10.00%, 7/01/22 1,160,000 1,418,831 ------------- 2,815,581 -------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) GEORGIA - 2.92% Fulton County Georgia Housing Authority Multifamily, Housing Revenue, 6.38%, 2/01/08 $ 520,000 $ 528,346 George Smith World Congress Center, 5.50%, 7/01/20 1,500,000 1,509,345 Monroe County Development Authority PCRB, 6.75%, 1/01/10 1,000,000 1,205,240 ------------- 3,242,931 ------------- ILLINOIS - 9.53% Broadview Tax Increment Revenue, 8.25%, 7/01/13 1,000,000 1,145,030 Chicago Capital Appreciation, (effective yield-1.99%) (a), 7/01/16 2,000,000 718,080 Chicago Heights Residential Mortgage, (effective yield-3.29%) (a), 6/01/09 3,465,000 1,655,300 Illinois Health Facilities Authority Revenue, 5.50% - 9.50%, 11/15/19 - 10/01/22 2,250,000 2,527,477 Illinois Educational Facilities Authority Revenue, 6.00%, 10/01/24 1,000,000 1,042,200 Kane County School District No. 129, 5.50%, 2/01/11 2,000,000 2,167,620 Metropolitan Pier & Exposition, (effective yield-1.39%) (a), 6/15/21 1,950,000 644,962 Saint Clair County Public Building, (effective yield-1.99%) (a), 12/01/16 1,650,000 690,789 ------------- 10,591,458 ------------- INDIANA - 0.36% Indiana Transportation Finance Authority, Series A, (effective yield-1.92%) (a), 6/01/17 1,000,000 403,560 ------------- IOWA - 0.61% Student Loan Liquidity Corporation, Student Loan Revenue, Series C, 6.95%, 3/01/06 (c) 625,000 674,525 -------------
66 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) KENTUCKY - 4.58% Jefferson County Hospital Revenue, 8.70%, 10/01/08 (b) $ 500,000 $ 599,375 Kenton County Airport Board Revenue, OID, 7.50%, 2/01/20 1,400,000 1,546,342 Warren County Hospital Facility Revenue Bowling 4.88%, 4/01/27 3,000,000 2,945,580 ---------- 5,091,297 ---------- LOUISIANA - 3.38% Louisiana Public Facilities Authority Revenue, Dillard University-Louisiana, 5.00%, 2/01/28 2,750,000 2,755,720 Louisiana State University & Agriculture and Mechanical College, University Revenues, 5.00%, 10/01/30 1,000,000 1,001,340 ---------- 3,757,060 ---------- MAINE - 0.86% Maine State Housing Authority, Series C, 6.88%, 11/15/23 885,000 956,030 ---------- MASSACHUSETTS - 1.92% Massachusetts State Health and Education, 6.00%, 10/01/23 1,000,000 1,018,850 Massachusetts State Health and Educational Facilities Authority, OID Revenue Bonds, Series A, 6.88%, 4/01/22 1,000,000 1,119,950 ---------- 2,138,800 ---------- MICHIGAN - 4.93% Detroit Michigan Water Supply Systems, 5.00%, 7/01/27 1,000,000 1,000,310 Grand Traverse County Hospital, 5.00%, 7/01/28 2,500,000 2,486,375 Michigan State Hospital Financial Authority Revenue, 5.00%, 5/15/28 2,000,000 1,995,280 ---------- 5,481,965 ----------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) NEBRASKA - 1.22% Nebraska Investment Finance Authority, SFM, 9.42%, 9/15/24 (b) $ 300,000 $ 339,375 Nebraska Public Gas Agency Gas supply System, 5.00%, 4/01/00 1,000,000 1,017,810 ---------- 1,357,185 ---------- NEVADA - 2.26% Clark County, 5.90%, 10/01/30 2,000,000 2,050,800 Henderson Local Improvement District, Special Assessment, Series A, 8.50%, 11/01/12 440,000 458,876 ---------- 2,509,676 ---------- NEW JERSEY - 2.10% East Orange County Board of Education, Participation Notes, (effective yield-1.67%) (a), 2/01/20 1,000,000 365,000 New Jersey State Housing & Mortgage Finance, 5.40%, 11/01/28 1,170,000 1,209,406 Union Utilities Authority, 5.00%, 6/15/28 750,000 757,568 ---------- 2,331,974 ---------- NEW MEXICO - 0.92% Santa Fe Educational Facilities Revenue Bonds, 5.50% 3/01/24 1,000,000 1,020,210 ---------- NEW YORK - 4.93% Clifton Springs Hospital Refunding & Improvement, 8.00%, 1/01/20 700,000 786,947 Metropolitan Transportation Authority, 4.75%, 7/01/19 1,000,000 962,240 New York City Municipal Water Facility, 5.13%, 6/15/21 1,000,000 1,008,300 New York, Series H, 7.20%, 2/01/13 1,500,000 1,680,946 New York State Dormitory Authority Revenue Hospital, 5.20%, 2/15/14 1,000,000 1,034,250 ---------- 5,472,683 ----------
67 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) NORTH CAROLINA - 2.12% Cumberland County, 5.00%, 12/01/24 $1,250,000 $1,253,875 North Carolina Eastern Municipal Power Agency Systems Revenue, 5.70%, 1/01/13 1,000,000 1,097,700 ---------- 2,351,575 ---------- NORTH DAKOTA - 0.91% Devils Lake Health Care, 6.10%, 10/01/23 1,000,000 1,012,690 ---------- OHIO - 1.91% Batavia Local School District Reference, 5.63%,12/01/22 1,000,000 1,121,040 Cuyahoga County Health Care Facilities, 5.50%, 12/01/28 1,000,000 1,001,990 ---------- 2,123,030 ---------- OKLAHOMA - 0.50% Oklahoma City, Industrial and Cultural Facilities Trust, 6.75%, 9/15/17 540,000 551,993 ---------- PENNSYLVANIA - 6.39% Beaver County Hospital Authority Revenue, 5.00%, 5/15/28 1,000,000 997,640 Delaware IDA, 6.20%, 7/01/19 2,000,000 2,191,040 Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 534,620 Philadelphia Gas Works Revenue, 5.00%, 7/01/28 2,250,000 2,250,698 Philadelphia Hospital and Higher Education Facilities, 6.50%, 11/15/08 1,000,000 1,121,430 ---------- 7,095,428 ---------- RHODE ISLAND - 0.31% West Warwick, Series A, GO Bonds, 7.30%, 7/15/08 310,000 348,372 ---------- SOUTH CAROLINA - 1.81% Cayce South Carolina Waterworks & Sewage Revenue, 5.00%, 7/01/20 2,000,000 2,006,740 ----------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) TENNESSEE - 3.73% Memphis Shelby County Airport Authority Special Facilities Revenue Refunding, 7.88%, 9/01/09 $1,500,000 $1,675,485 Metropolitan Government Nashville & Davidson County, 4.75% - 5.00%, 1/01/22 - 10/01/28 2,500,000 2,472,795 ---------- 4,148,280 ---------- TEXAS - 9.94% Abilene Health Facilities Development Corporation, 5.90%, 11/15/25 1,000,000 1,002,500 Alliance Airport Authority, 6.38%, 4/01/21 2,000,000 2,192,620 Brazos Higher Education Authority Student Loan Revenue, 7.10%, 11/01/04 416,000 472,410 Brazos River Authority Revenue, 4.90%, 10/01/15 2,000,000 2,054,760 Dallas Fort Worth International Airport Facility Revenue Bonds, 7.25%, 11/01/30 1,000,000 1,112,260 Edinburg Consolidated School District Public Facilities, 5.00%, 8/15/19 1,500,000 1,516,815 Lufkin Health Memorial East Texas, 5.70%, 2/15/28 1,000,000 1,025,010 Rockwall Independent School District, OID, 5.55%, 8/15/22 2,450,000 689,822 Texas State Department of Housing and Community Affairs Refunding, Series C, 9.74%, 7/02/24 (b) 750,000 973,125 ---------- 11,039,322 ---------- UTAH - 3.40% Bountiful Hospital Revenue, 9.50%, 12/15/18 230,000 281,237 Intermountain Power Agency Power Supply, 5.00%, 7/01/19 2,500,000 2,472,225 Utah State Housing Finance Agency, SFM, 7.20%, 1/01/27 945,000 1,025,108 ---------- 3,778,570 ----------
68 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) WEST VIRGINIA - 3.61% Harrison County, 6.75%, 8/01/24 $2,000,000 $ 2,271,020 West Virginia State Hospital Finance Authority Revenue, 8.80%, 1/01/18 (b) 1,500,000 1,742,445 ------------ 4,013,465 ------------ WISCONSIN - 3.39% Southeast Wisconsin Professional Baseball, 5.50%, 12/15/26 2,000,000 2,229,960 Wisconsin State Health & Educational Facility Authority Revenues, 5.50%, 2/15/28 1,500,000 1,537,530 ------------ 3,767,490 ------------ TOTAL LONG-TERM MUNICIPAL SECURITIES (COST $102,611,970) 110,459,857 ------------ SHORT-TERM MUNICIPAL SECURITIES - 2.16% CALIFORNIA - 0.45% California PCRB Series A, VRDN, 3.65%, 2/28/08 500,000 500,000 ------------ NEVADA - 0.54% Reno Nevada Hospital Revenue, VRDN, 4.10%, 5/15/23 600,000 600,000 ------------ NEW YORK - 0.54% City of New York VRDN, 4.25%, 8/01/16 200,000 200,000 New York City GO Bonds, VRDN, 3.95%, 8/15/19 200,000 200,000 New York State Energy Residential Housing & Development, VRDN, 4.10%, 7/01/15 200,000 200,000 ------------ 600,000 ------------ TEXAS - 0.45% North Central Texas Health Facility, Presbyterian Medical Center, VRDN, 4.10%, 12/01/15 500,000 500,000 ------------
PRINCIPAL AMOUNT MARKET VALUE SHORT-TERM MUNICIPAL SECURITIES (CONTINUED) WASHINGTON - 0.18% Washington Health Care, Sisters of Providence, Series I, VRDN, 4.05%, 10/01/05 $ 200,000 $ 200,000 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES (COST $2,400,000) 2,400,000 ------------ TOTAL INVESTMENTS (COST $105,011,970)-101.58% 112,859,857 OTHER ASSETS LESS LIABILITIES - (1.58%) (1,750,720) ------------ NET ASSETS - 100.00% $111,109,137 ============
INVESTMENT ABBREVIATIONS GO - General Obligation IDA - Industrial Development Authority OID - Original Issue Discount PCRB - Pollution Control Revenue Bond SFM - Single Family Mortgage VRDN - Variable Rate Demand Note (a) Effective yield is the yield as calculated at time of purchase at which the bond accretes on an annual basis until its maturity date. (b) Represents inverse floating rate securities. (c) A portion of this security is held as collateral for open futures contracts. INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $91,099,135 and $56,728,625, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $105,011,970. Net unrealized appreciation aggregated $7,847,887, of which $7,847,887, related to appreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 69 MENTOR MUNICIPAL INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (cost $105,011,970) (Note 2) $112,859,857 Cash 84,254 Receivables Investments sold 985,674 Fund shares sold 870,855 Interest 1,685,891 ------------- TOTAL ASSETS 116,486,531 ------------- LIABILITIES Payables Investments purchased $4,840,799 Fund shares redeemed 60,067 Dividends 349,921 Variation margin (Note 2) 90,000 Accrued expenses and other liabilities 36,607 ---------- TOTAL LIABILITIES 5,377,394 ------------- NET ASSETS $111,109,137 ============= Net Assets represented by: (Note 2) Additional paid-in capital $105,840,947 Accumulated distributions in excess of net investment income (349,922) Accumulated net realized loss on investment transactions (2,004,046) Net unrealized appreciation of investments 7,622,158 ------------- NET ASSETS $111,109,137 ============= NET ASSET VALUE PER SHARE Class A Shares $ 15.99 Class B Shares $ 15.94 Class Y Shares $ 16.00 OFFERING PRICE PER SHARE Class A Shares $ 16.79(a) Class B Shares $ 15.94 Class Y Shares $ 16.00 SHARES OUTSTANDING Class A Shares 3,237,676 Class B Shares 3,722,547 Class Y Shares 67
(a) Computation of offering price: 100/95.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME Interest (Note 2) $ 5,400,238 EXPENSES Management fee (Note 4) $ 557,332 Distribution fee (Note 5) 257,381 Shareholder service fee (Note 5) 232,220 Transfer agent fee 102,171 Administration fee (Note 4) 92,888 Registration expenses 53,355 Custodian and accounting fees 26,161 Shareholder reports and postage expenses 8,237 Legal fees 2,878 Directors' fees and expenses 2,275 Audit fees 1,991 Miscellaneous 9,070 --------- Total expenses 1,345,959 ----------- NET INVESTMENT INCOME 4,054,279 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FUTURES AND OPTIONS CONTRACTS Net realized loss on investments, futures and options contracts (Note 2) (41,138) Change in unrealized appreciation on investments 3,077,428 --------- NET GAIN ON INVESTMENTS, FUTURES AND OPTIONS CONTRACTS 3,036,290 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,090,569 ===========
SEE NOTES TO FINANCIAL STATEMENTS. 70 MENTOR MUNICIPAL INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 9/30/98 9/30/97 NET INCREASE IN NET ASSETS Operations Net investment income $ 4,054,279 $ 2,950,727 Net realized gain (loss) on investments, futures and options contracts (41,138) 548,498 Change in unrealized appreciation on investments 3,077,428 1,603,630 ------------- ------------- Increase in net assets resulting from operations 7,090,569 5,102,855 ------------- ------------- Distributions to Shareholders From net investment income Class A (1,979,908) (1,179,998) Class B (2,308,071) (1,981,316) Class Y (43) -- From net realized gain on investments Class A -- (39,820) Class B -- (66,849) ------------- ------------- Total distributions to shareholders (4,288,022) (3,267,983) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 45,477,369 25,738,018 Reinvested distributions 2,625,084 1,904,347 Shares redeemed (13,461,719) (10,560,419) ------------- ------------- Change in net assets resulting from capital share transactions 34,640,734 17,081,946 ------------- ------------- Increase in net assets 37,443,281 18,916,818 Net Assets Beginning of year 73,665,856 54,749,038 ------------- ------------- End of year (including accumulated distributions in excess of net investment income of ($349,922) and ($300,191), respectively) $ 111,109,137 $ 73,665,856 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05 ------- ------- ------- ------- ------- Income from investment operations Net investment income 0.66 0.81 0.82 0.81 0.82 Net realized and unrealized gain (loss) on investments 0.59 0.49 0.12 0.51 (1.54) ------- ------- ------- ------- ------- Total from investment operations 1.25 1.30 0.94 1.32 (0.72) ------- ------- ------- ------- ------- Less distributions From net investment income (0.76) (0.81) (0.82) (0.82) (0.81) From capital gains -- (0.03) -- - (0.10) ------- ------- ------- ------- ------- Total distributions (0.76) (0.84) (0.82) (0.82) (0.91) ------- ------- ------- ------- ------- Net asset value, end of year $ 15.99 $ 15.50 $ 15.04 $ 14.92 $ 14.42 ======= ======= ======= ======= ======= TOTAL RETURN* 8.24% 8.89% 6.46% 9.46% (4.83%) RATIOS / SUPPLEMENTAL DATA Net assets, end of year (in thousands) $51,757 $29,394 $17,558 $20,460 $25,056 Ratio of expenses to average net assets 1.17% 1.22% 1.24% 1.43% 1.24% Ratio of expenses to average net assets excluding waiver 1.17% 1.22% 1.24% 1.43% 1.33% Ratio of net investment income to average net assets 4.63% 5.09% 5.47% 5.56% 5.43% Portfolio turnover rate 62% 59% 46% 43% 87%
* Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 71 MENTOR MUNICIPAL INCOME PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06 ------- ------- ------- ------- ------- Income from investment operations Net investment income 1.30 0.71 0.75 0.74 0.74 Net realized and unrealized gain (loss) on investments (0.14) 0.52 0.11 0.52 (1.54) ------- ------- ------- ------- ------- Total from investment operations 1.16 1.23 0.86 1.26 (0.80) ------- ------- ------- ------- ------- Less distributions From net investment income (0.71) (0.71) (0.76) (0.74) (0.73) From capital gains -- (0.08) -- -- (0.10) ------- ------- ------- ------- ------- Total distributions (0.71) (0.79) (0.76) (0.74) (0.83) ------- ------- ------- ------- ------- Net asset value, end of year $ 15.94 $ 15.49 $ 15.05 $ 14.95 $ 14.43 ======= ======= ======= ======= ======= TOTAL RETURN* 7.70% 8.33% 5.87% 9.01% (5.34%) RATIOS / SUPPLEMENTAL DATA Net assets, end of year (in thousands) $59,351 $44,272 $37,191 $39,493 $46,157 Ratio of expenses to average net assets 1.67% 1.72% 1.74% 1.92% 1.74% Ratio of expenses to average net assets excluding waiver 1.67% 1.72% 1.74% 1.92% 1.86% Ratio of net investment income to average net assets 4.13% 4.60% 4.95% 5.07% 4.93% Portfolio turnover rate 62% 59% 46% 43% 87%
CLASS Y SHARES
PERIOD ENDED 9/30/98 (B) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 15.51 -------- Income from investment operations Net investment income 1.39 Net realized and unrealized loss on investments (0.23) -------- Total from investment operations 1.16 -------- Less distributions From net investment income (0.67) -------- Net asset value, end of period $ 16.00 ======== TOTAL RETURN* 7.51% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 Ratio of expenses to average net assets 0.92%(a) Ratio of net investment income to average net assets 5.66%(a) Portfolio turnover rate 62%
(a) Annualized. (b) For the period from November 19, 1997 (initial offering of Class Y shares) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 72 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM INVESTMENTS - 143.47% PREFERRED STOCK - 2.11% Home Ownership Funding Corporation (cost $3,939,796) $4,350,000 $ 4,373,725 ----------- ASSET-BACKED SECURITIES - 7.61% Advanta Mortgage Loan Trust, Series 1993-4, 5.55%, 3/25/10 - 1/25/25 1,960,695 1,985,118 AFG Receivables Trust, 7.00%, 2/15/03 (a) 1,250,918 1,260,091 CS First Boston, Series 1996-2 A6, 7.18%, 2/25/18 6,500,000 6,968,124 Equifax Credit Corporation, Series 1994-1 B, 5.75%, 3/15/09 1,504,448 1,509,739 Fifth Third Bank Auto Grantor Trust, 6.20%, 9/15/01 702,998 706,572 NASCOR, Series 1997-18, 6.75%, 12/25/27 2,587,927 2,697,132 Old Stone Credit Corporation Home Equity Trust, Series 1993-1 B1, 6.00%, 3/15/08 624,707 630,054 ----------- TOTAL ASSET-BACKED SECURITIES (COST $14,997,748) 15,756,830 ----------- U.S. GOVERNMENT SECURITIES AND AGENCIES - 102.27% Federal Home Loan Mortgage Corporation 6.50%, Series 1647B, 11/15/08, REMIC 3,263,696 3,263,696 6.00%, Series 1693Z, 3/15/09, REMIC 6,116,037 6,218,120 6.50%, Series 26C, 7/25/18 7,000,000 7,241,864 Federal National Mortgage Association 6.50%, 5/18/28 2,992,041 2,977,081 6.00% - 6.50%, 9/25/08 - 8/01/28 68,855,587 69,140,559 Government National Mortgage Association 7.00%, 12/15/08 2,974,460 3,094,571 6.00% - 7.00%, 3/15/28 - 8/15/28 44,411,497 45,459,522 Government National Mortgage Association II 4.50% - 7.00%, 4/20/22 - 1/20/28 7,152,832 7,209,007 U.S. Treasury Bonds, 6.13%, 11/15/27 8,600,000 9,909,178 U.S. Treasury Notes, 5.38% - 5.63% 7/31/00 - 5/15/08 53,650,000 57,369,396 ----------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $205,742,125) 211,882,994 -----------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS - 11.63% Capital One Bank, 7.15% - 7.20%, 7/19/99 - 9/15/06 $4,750,000 $ 4,948,018 Ford Capital, 9.88%, 5/15/02 2,525,000 2,929,000 Lehman Brothers Holdings, 8.50%, 5/01/07 3,000,000 3,345,159 Lehman Brothers, Inc., 7.50%, 8/01/26 3,500,000 3,635,943 ReliaStar Financial Corporation, 6.63%, 9/15/03 5,000,000 5,259,300 Salomon, Inc., 7.30%, 5/15/02 2,000,000 2,140,834 United Dominion Realty, 7.07%, 11/15/06 1,700,000 1,827,512 ----------- TOTAL CORPORATE BONDS (COST $23,143,699) 24,085,766 ----------- MISCELLANEOUS - 0.97% CSC Holdings, Inc., 7.25%, 7/15/08 1,000,000 1,007,239 Playtex Family Production Corporation, 9.00%, 12/15/03 1,000,000 1,007,685 ----------- TOTAL MISCELLANEOUS (COST $2,024,403) 2,014,924 ----------- COLLATERALIZED MORTGAGE OBLIGATIONS - 14.75% Chase Mortgage Finance Corporation, Series 1993-L2 M, 7.00%, 10/25/24 2,958,977 3,113,602 Equifax Credit Corporation, Series 1998-2, 6.16%, 4/15/08 2,370,000 2,407,761 General Electric Capital Mortgage Services, Inc., Series 1993-18 B1, 6.00%, 2/25/09 1,924,384 1,946,511 General Electric Capital Mortgage Services, Inc., Series 1998-11, 6.50% - 7.00%, 1/25/13 - 1/25/28 4,607,307 4,786,961 Key Auto Finance Trust, 6.15%, 10/15/01 1,500,000 1,513,112 NASCOR, Series 1996-2 Class M, 7.00%, 9/25/11 1,751,689 1,855,812 Prudential Home, Series 1995-5 B1, 7.25%, 9/25/25 (a) 1,453,140 1,515,504 Prudential Home, Series 1995-5 M, 7.25%, 9/25/25 2,562,369 2,667,547 Prudential Home, Series 1995-7 M, 7.00%, 11/25/25 2,813,484 2,959,016
78 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) Prudential Home, Series 1996-4 M, 6.50%, 4/25/26 $5,172,223 $ 5,342,964 Prudential Home, Series 1996-8 M, 6.75%, 6/25/26 2,340,523 2,448,236 ------------ TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $28,983,412) 30,557,026 ------------ RESIDUAL INTERESTS (A) - 4.13% Capital Mortgage Funding I, Inc., 1998-1, 1/22/27 43,831 689,073 General Mortgage Securities II, Inc., 1995-1, 1998, 6/25/20 14,918 419,119 General Mortgage Securities II, Inc., 1995-4, 1998, 6/25/23 8,768 397,338 General Mortgage Securities II, Inc., 1997-4, 1998, 5/20/22 11,724 506,284 General Mortgage Securities II, Inc., 1997-5, 1998, 7/20/23 23,164 735,034 National Mortgage Funding I, Inc., 1995-4, 1998, 3/20/21 7,182 127,547 National Mortgage Funding I, Inc., 1997-6, 9/20/21 32,943 640,712 National Mortgage Funding I, Inc., 1997-7, 7/20/22 35,133 648,314 National Mortgage Funding I, Inc., 1997-9, 10/20/24 25,739 632,940 National Mortgage Funding I, Inc., 1997-10, 10/20/24 34,246 475,067 National Mortgage Funding I, Inc., 1998-1, 10/20/22 17,335 440,254 National Mortgage Funding I, Inc., 1998-2, 10/20/23 19,397 462,999 National Mortgage Funding I, Inc., 1998-3, 11/20/23 19,847 469,598 National Mortgage Funding I, Inc., 1998-5, 11/25/22 7,274 381,156 National Mortgage Funding I, Inc., 1998-8, 5/20/24 34,593 498,670 National Mortgage Funding I, Inc., 1998-9, 11/20/22 28,893 502,352 National Mortgage Funding I, Inc., 1998-10, 1/20/23 17,413 540,932 ------------ TOTAL RESIDUAL INTERESTS (COST $9,933,404) 8,567,389 ------------ 297,238,654 ------------
PRINCIPAL AMOUNT MARKET VALUE SHORT-TERM INVESTMENT - 0.67% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/98, 5.60%, due 10/01/98, collateralized by $1,417,776 Federal National Mortgage Association, 6.00%, 8/01/13, market value $1,431,511 (cost $1,399,604) $1,399,604 $ 1,399,604 ---------- ------------ TOTAL INVESTMENTS (COST $290,164,191) -144.14% $298,638,258 OTHER ASSETS LESS LIABILITIES - (44.14%) (91,456,993) ------------ NET ASSETS - 100.00% $207,181,265 ============
INVESTMENT ABBREVIATIONS ARM - Adjustable Rate Mortgage MBS - Mortgage-Backed Security REMIC - Real Estate Mortgage Investment Conduit (a) These are securities that may be resold to "qualified institutional buyers" under Rule 144A or securities offered pursuant to Section 4 (2) of the Securities Act of 1933, as amended. These securities have been determined to be liquid under guidelines established by the Board of Trustees. INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $426,685,104 and $225,275,749, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $290,164,191. Net unrealized appreciation aggregated $8,474,067, of which $9,931,057, related to appreciated investment securities and $1,456,990, related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 79 MENTOR QUALITY INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (Note 2) Investment securities $297,238,654 Repurchase agreements 1,399,604 ------------ Total investments (cost $290,164,191) 298,638,258 Collateral for securities loaned (Note 2) 1,605,500 Cash 118,918 Receivables Fund shares sold 1,324,653 Dividends and interest 2,790,157 Other assets 35,189 ------------ TOTAL ASSETS 304,512,675 ------------ LIABILITIES Payables Securities loaned (Note 2) $ 1,605,500 Reverse repurchase agreement 94,533,000 Fund shares redeemed 101,673 Dividends 923,573 Accrued expenses and other liabilities 167,664 ----------- TOTAL LIABILITIES 97,331,410 ------------ NET ASSETS $207,181,265 ============ Net Assets represented by: (Note 2) Additional paid-in capital $213,925,048 Accumulated distributions in excess of net investment income (923,573) Accumulated net realized loss on investment transactions (14,294,277) Net unrealized appreciation of investments 8,474,067 ------------ NET ASSETS $207,181,265 ============ NET ASSET VALUE PER SHARE Class A Shares $ 13.61 Class B Shares $ 13.61 Class Y Shares $ 13.69 OFFERING PRICE PER SHARE Class A Shares $ 14.29(a) Class B Shares $ 13.61 Class Y Shares $ 13.69 SHARES OUTSTANDING Class A Shares 6,927,132 Class B Shares 8,297,359 Class Y Shares 80
(a) Computation of offering price: 100/95.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME Interest (b) (Note 2) $ 11,610,166 EXPENSES Management fee (Note 4) $ 1,025,941 Distribution fee (Note 5) 467,042 Shareholder service fee (Note 5) 427,474 Transfer agent fee 212,090 Administration fee (Note 4) 174,343 Registration expenses 84,362 Custodian and accounting fees 34,008 Shareholder reports and postage expenses 24,577 Legal fees 5,369 Directors' fees and expenses 4,244 Audit fees 3,715 Miscellaneous 16,925 ----------- Total expenses 2,480,090 Deduct Waiver of management fee (Note 4) (204,530) ------------ NET INVESTMENT INCOME 9,334,606 ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND INTEREST-RATE SWAP CONTRACTS Net realized gain on investments and interest-rate swap contracts (Note 2) 713,191 Change in unrealized appreciation on investments 6,558,180 ----------- NET GAIN ON INVESTMENTS AND INTEREST-RATE SWAP CONTRACTS 7,271,371 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 16,605,977 ============
(b) Net of interest expense of $1,961,350 ($921,496 related to interest- rate swaps and $1,039,854 related to borrowings). SEE NOTES TO FINANCIAL STATEMENTS. 80 MENTOR QUALITY INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 9/30/98 9/30/97 NET INCREASE IN NET ASSETS Operations Net investment income $ 9,334,606 $ 6,390,445 Net realized gain on investments and interest-rate swap contracts 713,191 222,072 Change in unrealized appreciation on investments 6,558,180 2,224,113 ------------- ------------- Increase in net assets resulting from operations 16,605,977 8,836,630 ------------- ------------- Distributions to Shareholders From net investment income Class A (4,831,082) (2,180,277) Class B (5,431,749) (4,210,168) Class Y (51) - In excess of net investment income Class A - (150,441) Class B - (212,242) ------------- ------------- Total distributions to shareholders (10,262,882) (6,753,128) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 106,644,051 63,942,122 Reinvested distributions 6,677,759 4,044,282 Shares redeemed (40,705,601) (21,179,174) ------------- ------------- Change in net assets resulting from capital share transactions 72,616,209 46,807,230 ------------- ------------- Increase in net assets 78,959,304 48,890,732 Net Assets Beginning of year 128,221,961 79,331,229 ------------- ------------- End of year (including accumulated distributions in excess of net investment income of ($923,573) and ($390,590), respectively) $ 207,181,265 $ 128,221,961 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 13.18 $ 12.91 $ 13.29 $ 12.75 $ 14.04 -------- -------- -------- -------- -------- Income from investment operations Net investment income 0.79 0.97 0.89 0.84 0.84 Net realized and unrealized gain (loss) on investments 0.47 0.26 (0.37) 0.61 (1.30) -------- -------- -------- -------- -------- Total from investment operations 1.26 1.23 0.52 1.45 (0.46) -------- -------- -------- -------- -------- Less distributions From net investment income (0.83) (0.96) (0.90) (0.91) (0.83) -------- -------- -------- -------- -------- Net asset value, end of year $ 13.61 $ 13.18 $ 12.91 $ 13.29 $ 12.75 ======== ======== ======== ======== ======== TOTAL RETURN* 9.95% 9.86% 4.09% 11.82% (3.39%) RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $ 94,279 $ 53,176 $ 21,092 $ 24,472 $ 30,142 Ratio of expenses to average net assets 1.05% 1.05% 1.05% 1.32% 1.38% Ratio of expenses to average net assets excluding waiver 1.18% 1.18% 1.31% 1.36% 1.39% Ratio of net investment income to average net assets 5.73% 7.01% 6.84% 6.73% 6.33% Portfolio turnover rate 114% 100% 254% 368% 455%
* Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 81 MENTOR QUALITY INCOME PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 13.18 $ 12.93 $ 13.31 $ 12.76 $ 14.06 -------- -------- -------- -------- -------- Income from investment operations Net investment income 0.72 0.86 0.84 0.79 0.82 Net realized and unrealized gain (loss) on investments 0.48 0.30 (0.38) 0.61 (1.37) -------- -------- -------- -------- -------- Total from investment operations 1.20 1.16 0.46 1.40 (0.55) -------- -------- -------- -------- -------- Less distributions From net investment income (0.77) (0.91) (0.84) (0.85) (0.75) --------- -------- -------- -------- -------- Net asset value, end of year $ 13.61 $ 13.18 $ 12.93 $ 13.31 $ 12.76 ========= ======== ======== ======== ======== TOTAL RETURN* 9.46% 9.29% 3.57% 11.33% (3.97%) RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $112,901 $ 75,046 $ 58,239 $ 62,155 $ 77,888 Ratio of expenses to average net assets 1.55% 1.55% 1.55% 1.74% 1.88% Ratio of expenses to average net assets excluding waiver 1.67% 1.68% 1.81% 1.79% 1.90% Ratio of net investment income to average net assets 5.22% 6.51% 6.36% 6.24% 6.21% Portfolio turnover rate 114% 100% 254% 368% 455%
CLASS Y SHARES
PERIOD ENDED 9/30/98 (B) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 13.20 ---------- Income from investment operations Net investment income 0.78 Net realized and unrealized gain on investments 0.39 ---------- Total from investment operations 1.17 ---------- Less distributions From net investment income (0.68) ---------- Net asset value, end of period $ 13.69 ========== TOTAL RETURN* 8.94% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 Ratio of expenses to average net assets 0.80% (a) Ratio of expenses to average net assets exluding waiver 0.93% (a) Ratio of net investment income to average net assets 7.09% (a) Portfolio turnover rate 114%
(a) Annualized. (b) for the period from November 19, 1997 (initial offering of Class Y shares) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 82 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE ASSET-BACKED SECURITIES - 12.18% Advanta Home Equity Loan, 6.15%, 10/25/09 $ 766,206 $ 780,265 Advanta Mortgage Loan Trust 1993-3 A3, 4.75% - 5.55%, 2/25/10 - 3/25/10 948,868 947,007 AFC Home Equity Loan Trust, 6.60%, 2/25/27 1,499,955 1,514,193 AFG Receivables Trust, 6.20% - 7.05%, 9/15/00 - 2/15/03 (a) 3,098,596 3,116,978 CS First Boston 1996-2, 6.32% - 7.18%, 2/25/18 5,428,834 5,722,852 Equifax Credit Corporation 1994-1B, 5.75%, 3/15/09 478,313 479,995 Fifth Third Auto Grantor Trust, 6.20%, 9/15/01 351,859 353,648 Old Stone Credit Corporation, 6.20%, 6/15/08 274,327 277,455 Olympic Automobiles Receivables Trust, 6.85% - 7.35%, 6/15/01 - 10/15/01 1,431,929 1,440,041 Union Acceptance Corporation, 6.45% - 6.70%, 6/08/03 - 5/10/04 3,211,430 3,274,164 ----------- TOTAL ASSET-BACKED SECURITIES (COST $17,569,230) 17,906,598 ----------- U.S. GOVERNMENT SECURITIES AND AGENCIES - 74.00% Federal National Mortgage Association 6.00%, 5/01/13, ARM 13,278,924 13,415,870 10.00%, 6/01/05, MBS 188,066 197,098 Government National Mortgage Association 7.00%, 12/15/08 1,123,686 1,169,061 6.50%, 3/15/28 2,940,243 3,003,643 7.00%, 8/15/28 9,991,943 10,304,191 Government National Mortgage Association II 4.50%, 10/20/27 - 1/20/28 6,599,445 6,581,813
PRINCIPAL AMOUNT MARKET VALUE U.S. GOVERNMENT SECURITIES AND AGENCIES (CONTINUED) Government National Mortgage Association II 7.00%, 7/20/22 - 9/20/23 $9,244,030 $ 9,411,333 U.S. Treasury Notes, 5.38% - 6.63%, 7/31/00 - 5/15/08 61,950,000 64,731,078 ----------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $107,576,668) 108,814,087 ----------- COLLATERALIZED MORTGAGE OBLIGATIONS - 3.68% Equifax Credit Corporation, 6.16%, 4/15/08 1,362,750 1,384,463 Key Auto Finance Trust, 6.15%, 10/15/01 4,000,000 4,034,964 ----------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $5,359,496) 5,419,427 ----------- CORPORATE BONDS - 16.63% Association Corporation NA, 7.88%, 9/30/01 1,000,000 1,077,892 Capital One Bank, 7.15% - 7.20%, 7/19/99 - 9/15/06 2,500,000 2,577,034 Dayton Hudson Company, 6.63%, 3/01/03 2,000,000 2,121,698 Ford Capital, 9.88%, 5/15/02 2,525,000 2,929,000 General Motors Acceptance Corporation, 5.63% - 6.88%, 2/01/99 - 7/15/01 2,750,000 2,854,932 Lehman Brothers, 6.20% - 6.63%, 11/15/00 - 1/15/02 3,750,000 3,799,689 Playtex Family Production Corporation, 9.00%, 12/15/03 1,000,000 1,007,685 Salomon Incorporated, 5.50% - 7.30%, 1/15/99 - 5/15/02 3,750,000 3,935,117 The Money Store, 6.28%, 12/15/22 4,000,000 4,143,804 ----------- TOTAL CORPORATE BONDS (COST $23,808,616) 24,446,851 -----------
83 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE RESIDUAL INTERESTS (A) - 1.57% General Mortgage Securities II, Inc., 1997-4, 1998, 5/20/22 $ 3,908 $ 167,785 National Mortgage Funding, Inc., 1998-7, 7/20/23 49,685 674,478 National Mortgage Funding, Inc., 1998-6, 1/20/23 53,627 706,457 National Mortgage Funding, Inc., 1998-8, 5/20/24 23,062 332,447 National Mortgage Funding, Inc., 1997-9, 11/20/24 17,159 421,960 ------------ TOTAL RESIDUAL INTERESTS (COST $2,666,160) 2,303,127 ------------ SHORT-TERM INVESTMENTS - 2.88% VARIABLE RATE DEMAND NOTE Hilander Finance, LLC, 5.70%, 12/01/25 1,850,000 1,850,000 ------------ REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/98, 5.60%, due 10/01/98, collateralized by $2,422,945 Federal National Mortgage Association, 6.00%, 8/01/13, market value $2,446,418 2,391,457 2,391,457 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $4,241,457) 4,241,457 ------------ TOTAL INVESTMENTS (COST $161,221,627)-110.94% 163,131,547 OTHER ASSETS LESS LIABILITIES - (10.94%) (16,087,108) ------------ NET ASSETS - 100.00% $147,044,439 ============
INVESTMENT ABBREVIATIONS ARM - Adjustable Rate Mortgage MBS - Mortgage Backed Securities (a) These are securities that may be resold to "qualified institutional buyers" under rule 144A or securities offered pursuant to section 4(2) of the Securities Act of 1933, as amended. These securites have been determined to be liquid under guidelines established by the Board of Trustees. INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $296,888,520 and $175,441,302, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $161,223,032. Net unrealized appreciation aggregated $1,908,515 of which $2,467,650, related to appreciated investment securities and $559,135, related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 84 SHORT-DURATION INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (Note 2) Investment securities $160,740,090 Repurchase agreements 2,391,457 ------------ Total investments (cost $161,221,627) 163,131,547 Receivables Fund shares sold 4,126,138 Dividends and interest 1,260,809 Deferred expenses (Note 2) 25,241 ------------ TOTAL ASSETS 168,543,735 ------------ LIABILITIES Payables Reverse repurchase agreement $ 18,555,000 Fund shares redeemed 2,139,010 Dividends 544,779 Accrued expenses and other liabilities 260,507 ------------ TOTAL LIABILITIES 21,499,296 ------------ NET ASSETS $147,044,439 ============ Net Assets represented by: (Note 2) Additional paid-in capital $145,502,924 Accumulated distributions in excess of net investment income (512,293) Accumulated net realized gain on investment transactions 143,888 Net unrealized appreciation of investments and interest-rate swap contracts 1,909,920 ------------ NET ASSETS $147,044,439 ============ NET ASSET VALUE PER SHARE Class A Shares $ 12.74 Class B Shares $ 12.75 Class Y Shares $ 12.79 OFFERING PRICE PER SHARE Class A Shares $ 12.87(a) Class B Shares $ 12.75 Class Y Shares $ 12.79 SHARES OUTSTANDING Class A Shares 7,313,315 Class B Shares 4,228,466 Class Y Shares 83
(a) Computation of offering price: 100/99 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 INVESTMENT INCOME Interest (b) (Note 2) $ 6,170,420 EXPENSES Management fee (Note 4) $ 504,097 Shareholder service fee (Note 5) 252,047 Transfer agent fee 148,709 Distribution fee (Note 5) 133,476 Administration fee (Note 4) 101,237 Registration expenses 74,882 Custodian and accounting fees 26,595 Shareholder reports and postage expenses 14,335 Miscellaneous 12,548 Organizational expenses 7,337 Legal fees 3,980 Directors' fees and expenses 3,147 Audit fees 2,754 --------- Total expenses 1,285,144 Deduct Waiver of administration fee (Note 4) (101,237) Waiver of management fee (Note 4) (180,523) ----------- NET INVESTMENT INCOME 5,167,036 ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND INTEREST-RATE SWAP CONTRACTS Net realized gain on investments and interest-rate swap contracts (Note 2) 325,954 Change in unrealized appreciation on investments 1,608,387 --------- NET GAIN ON INVESTMENTS 1,934,341 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,101,377 ===========
(b) Net of interest expenses of $588,099 ($283,529 related to interest-rate swaps and $304,570 related to borrowings). SEE NOTES TO FINANCIAL STATEMENTS. 85 SHORT-DURATION INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 9/30/98 9/30/97 NET INCREASE IN NET ASSETS Operations Net investment income $ 5,167,036 $ 2,155,953 Net realized gain on investments 325,954 7,748 Change in unrealized appreciation on investments 1,608,387 386,023 ------------- ------------- Increase in net assets resulting from operations 7,101,377 2,549,724 ------------- ------------- Distributions to Shareholders From net investment income Class A (3,203,099) (763,890) Class B (2,394,223) (1,415,914) Class Y (49) -- ------------- ------------- Total distributions to shareholders (5,597,371) (2,179,804) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 169,053,248 39,889,219 Reinvested distributions 4,352,285 1,755,339 Shares redeemed (82,572,822) (19,273,346) ------------- ------------- Change in net assets resulting from capital share transactions 90,832,711 22,371,212 ------------- ------------- Increase in net assets 92,336,717 22,741,132 Net Assets Beginning of year 54,707,722 31,966,590 ------------- ------------- End of year (including accumulated distributions in excess of net investment income of ($512,293) and ($95,798), respectively) $ 147,044,439 $ 54,707,722 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 9/30/95 (C) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.62 $ 12.50 $ 12.68 $ 12.74 -------- -------- -------- ---------- Income from investment operations Net investment income 0.70 0.77 0.82 0.22 Net realized and unrealized gain (loss) on investments 0.15 0.12 (0.23) (0.03) -------- -------- --------- ---------- Total from investment operations 0.85 0.89 0.59 0.19 -------- -------- --------- ---------- Less distributions From net investment income (0.73) (0.77) (0.77) (0.25) -------- -------- --------- ---------- Net asset value, end of period $ 12.74 $ 12.62 $ 12.50 $ 12.68 ======== ======== ========= ========== TOTAL RETURN* 6.98% 7.33% 4.80% 1.51% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 93,135 $ 27,619 $ 7,450 $ 1,002 Ratio of expenses to average net assets 0.86% 0.86% 0.86% 0.71% (a) Ratio of expenses to average net assets excluding waiver 1.14% 1.12% 1.26% 1.00% (a) Ratio of net investment income to average net assets 5.24% 6.00% 5.90% 4.10% (a) Portfolio turnover rate 171% 75% 411% 126%
(a) Annualized. (c) For the period from June 16, 1995 (initial offering of Class A Shares) to September 30, 1995. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 86 SHORT-DURATION INCOME PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
YEAR YEAR YEAR ENDED ENDED ENDED 9/30/98 9/30/97 9/30/96 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.62 $ 12.50 $ 12.67 -------- -------- -------- Income from investment operations Net investment income 0.66 0.73 0.73 Net realized and unrealized gain (loss) on investments 0.16 0.12 (0.17) -------- -------- --------- Total from investment operations 0.82 0.85 0.56 -------- -------- --------- Less distributions From net investment income (0.69) (0.73) (0.73) --------- --------- --------- Net asset value, end of period $ 12.75 $ 12.62 $ 12.50 ========= ========= ========= TOTAL RETURN* 6.68% 6.96% 4.53% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 53,908 $ 27,089 $ 24,517 Ratio of expenses to average net assets 1.16% 1.16% 1.16% Ratio of expenses to average net assets excluding waiver 1.44% 1.42% 1.56% Ratio of net investment income to average net assets 4.94% 5.70% 5.60% Portfolio turnover rate 171% 75% 411% PERIOD PERIOD ENDED ENDED 9/30/95 (D) 12/31/94 (E) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.18 $ 12.50 ----------- ----------- Income from investment operations Net investment income 0.59 0.41 Net realized and unrealized gain (loss) on investments 0.52 (0.29) ----------- ----------- Total from investment operations 1.11 0.12 ----------- ----------- Less distributions From net investment income (0.62) (0.44) ----------- ----------- Net asset value, end of period $ 12.67 $ 12.18 =========== =========== TOTAL RETURN* 9.22% 0.95% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 19,871 $ 17,144 Ratio of expenses to average net assets 1.20%(a) 1.29% (a) Ratio of expenses to average net assets excluding waiver 1.70%(a) 1.29% (a) Ratio of net investment income to average net assets 5.04%(a) 4.90% (a) Portfolio turnover rate 126% 166%
CLASS Y SHARES
PERIOD ENDED 9/30/98 (F) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.57 ---------- Income from investment operations Net investment income 0.67 Net realized and unrealized gain on investments 0.16 ---------- Total from investment operations 0.83 ---------- Less distributions From net investment income (0.61) ---------- Net asset value, end of period $ 12.79 ========== TOTAL RETURN* 6.64% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 Ratio of expenses to average net assets 0.61% (a) Ratio of expenses to average net assets excluding waiver 0.87% (a) Ratio of net investment income to average net assets 6.10% (a) Portfolio turnover rate 171%
(a) Annualized. (d) For the period from January 1, 1995 to September 30, 1995. (e) For the period from April 29, 1994 (commencement of operations) to December 31, 1994. (f) For the period from November 19, 1997 (initial offering of Class Y shares) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 87 MENTOR HIGH INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS - 79.65% CONSUMER DISTRIBUTION - 7.13% Aurora Foods, Inc. Senior Subordinated Notes, Series D, 9.88%, 2/15/07 $ 1,000,000 $ 1,075,000 Big 5 Corporation Senior Notes, Series B, 10.88%, 11/15/07 1,000,000 955,000 CHS Electronics, Inc. Senior Notes, 9.88%, 4/15/05 1,000,000 925,000 Del Monte Foods Company Senior Discount Notes, 12.50%, 12/15/07 (a) 1,500,000 870,000 Disco S.A. Notes, 9.88%, 5/15/08 (a) 1,000,000 675,000 Musicland Group, Inc. Senior Subordinated Notes-B, 9.88%, 3/15/08 1,500,000 1,432,500 Pantry, Inc. Senior Notes, 12.50%, 11/15/00 1,148,000 1,202,530 Pantry, Inc. Senior Subordinated Notes, 10.25%, 10/15/07 1,000,000 980,000 ------------ 8,115,030 ------------ CONSUMER DURABLES - 9.48% Aetna Industries, Inc. Senior Notes, 11.88%, 10/01/06 1,500,000 1,530,000 Cluett American Corporation Senior Subordinated Notes, 10.13%, 5/15/08 (a) 1,000,000 920,000 Consoltex Group Senior Notes, 11.00%, 10/01/03 200,000 208,000 Decora Industries, Inc. Secured Notes, 11.00%, 5/01/05 (a) 1,000,000 907,500 Derby Cycle Corporation Senior Notes, 10.00%, 5/15/08 (a) 1,000,000 930,000 Galey & Lord, Inc. Senior Subordinated Notes, 9.13%, 3/01/08 1,500,000 1,316,250 MCII Holdings Senior Secured Discount Notes, 15.00%, 11/15/02 1,000,000 825,000 Outsourcing Services Group Senior Subordinated Notes, 10.88%, 3/01/06 (a) 1,150,000 1,092,500 Oxford Automotive, Inc., 10.13%, 6/15/07 1,000,000 965,000 Talon Automotive Group Senior Subordinated Notes, 9.63%, 5/01/08 (a) 1,000,000 935,000
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) CONSUMER DURABLES (CONTINUED) Venture Holdings Trust Senior Notes-B, 9.50%, 7/01/05 $ 1,175,000 $ 1,151,500 ------------ 10,780,750 ------------ CONSUMER SERVICES - 14.23% Americredit Corporation, 9.25%, 2/01/04 (a) 1,000,000 965,000 Argosy Gaming Company, 13.25%, 6/01/04 (a) 1,500,000 1,597,500 Booth Creek Ski Holdings Senior Notes-B, 12.50%, 3/15/07 1,000,000 985,000 Capstar Broadcasting Senior Discount Notes, 12.75%, 2/01/09 (a) 1,000,000 755,000 Carrols Corporation Senior Notes, 11.50%, 8/15/03 1,000,000 1,045,000 Diamond Cable Communications Senior Discount Notes, 11.75%, 12/15/05 1,500,000 1,207,500 Globo Communicacoes Senior Notes, 10.63%, 12/05/08 (a) 1,000,000 520,000 Grupo Televisa S.A. Senior Discount Notes-Euro, 13.25%, 5/15/08 1,000,000 695,000 Hollywood Casino Corporation Senior Notes, 12.75%, 11/01/03 1,000,000 1,045,000 Interep National Radio Sales, 10.00%, 7/01/08 (a) 1,000,000 980,000 Isles of Capri Casinos, 12.50%, 8/01/03 1,000,000 1,085,000 La Petite Academy LPA Holdings-B, 10.00%, 5/15/08 1,250,000 1,212,500 Majestic Star Casino, LLC, 12.75%, 5/15/03 1,500,000 1,556,250 Northland Cable Television Senior Subordinated Notes, 10.25%, 11/15/07 1,000,000 1,060,000 Silver Cinemas, Inc. Senior Subordinated Notes, 10.50%, 4/15/05 (a) 1,000,000 955,000 Young American Corporation Senior Subordinated Notes, 11.63%, 2/15/06 (a) 1,000,000 530,000 ------------ 16,193,750 ------------
90 MENTOR HIGH INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) ENERGY - 8.14% Abraxas Petroleum Senior Notes, Series D, 11.50%, 11/01/04 $ 1,000,000 $ 780,000 Dawson Production Services, Inc. Senior Notes, 9.38%, 2/01/07 1,000,000 1,002,500 Gothic Production Corporation, 11.13%, 5/01/05 1,000,000 760,000 Houston Exploration Company Senior Subordinated Notes-B, 8.63%, 1/01/08 1,000,000 960,000 Hurricane Hydrocarbons Senior Notes, 11.75%, 11/01/04 (a) 1,000,000 560,000 Moll Industries Senior Subordinated Notes, 10.50%, 7/01/08 (a) 1,100,000 1,023,000 Ocean Energy, Inc. Senior Subordinated Notes-B, 8.88%, 7/15/07 1,000,000 1,010,000 Tesoro Petroleum Corporation Senior Subordinated Notes, 9.00%, 7/01/08 (a) 1,000,000 967,500 Universal Compression, Inc. Senior Discount Notes, 9.88%, 2/15/08 (a) 2,000,000 1,190,000 Vintage Petroleum Senior Subordinated Notes, 8.63%, 2/01/09 1,000,000 1,010,000 ------------ 9,263,000 ------------ HEALTH CARE - 0.97% Mariner Post-Acute Network Senior Subordinated Notes, 10.50%, 11/01/07 1,500,000 832,500 Vencor, Inc. Senior Subordinated Notes, 9.88%, 5/01/05 (a) 350,000 276,500 ------------ 1,109,000 ------------ PRODUCER MANUFACTURING - 8.22% Anthony Crane Rentals, 10.38%, 8/01/08 (a) 1,000,000 940,000 Compass Aerospace Corporation, 10.13%, 4/15/05 (a) 1,000,000 985,000 Del Webb Corporation Senior Subordinated Debentures, 9.38%, 5/01/09 750,000 720,000 Dine S.A. de C.V., 8.75%, 10/15/07 (a) 1,000,000 720,000
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) PRODUCER MANUFACTURING (CONTINUED) Hydrochemical Industrial Service Senior Subordinated Notes-B, 10.38%, 8/01/07 $ 1,000,000 $ 940,000 Kevco, Inc. Senior Subordinated Notes, 10.38%, 12/01/07 1,000,000 955,000 Outboard Marine Corporation, 10.75%, 6/01/08 (a) 1,000,000 945,000 Schuler Homes Senior Notes, 9.00%, 4/15/08 (a) 750,000 701,250 Tekni-Plex, Inc. Senior Subordinated Notes-B, 11.25%, 4/01/07 500,000 522,500 Terex Corporation Senior Subordinated Notes, 8.88%, 4/01/08 (a) 1,000,000 932,500 W. R. Carpenter North America Senior Subordinated Notes, 10.63%, 6/15/07 1,000,000 985,000 ------------ 9,346,250 ------------ RAW MATERIALS/PRODUCTS INDUSTRIES - 4.28% Acetex Corporation Senior Notes, 9.75%, 10/01/03 900,000 859,500 Anchor Lamina, Inc. Senior Subordinated Notes, 9.88%, 2/01/08 800,000 656,000 GS Technologies Operation, Inc. Senior Notes, 12.25%, 10/01/05 875,000 748,125 Hylsa S.A. de C.V. Bonds, 9.25%, 9/15/07 (a) 1,000,000 685,000 Pioneer Americas Acquisition Senior Notes, 9.25%, 6/15/07 1,500,000 1,230,000 Vicap S.A.Guaranteed Notes, 11.38%, 5/15/07 (a) 1,000,000 685,000 ------------ 4,863,625 ------------ TECHNOLOGY - 3.10% Advanced Micro Devices Senior Notes, 11.00%, 8/01/03 2,000,000 2,030,000 DecisionOne Holdings Discount Notes, 11.50%, 8/01/08 1,500,000 562,500 Dictaphone Corporation Senior Subordinated Notes, 11.75%, 8/01/05 1,000,000 930,000 ------------ 3,522,500 ------------
91 MENTOR HIGH INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) TRANSPORTATION - 4.02% Atlas Air, Inc. Senior Notes, 10.75%, 8/01/05 $ 1,000,000 $ 985,000 American Communication Lines, LLC Bonds, 10.25%, 6/30/08 (a) 1,000,000 990,000 Cenargo International PLC-1st Mortgage, 9.75%, 6/15/08 (a) 1,000,000 820,000 Greyhound Lines Senior Notes, 11.50%, 4/15/07 1,250,000 1,337,500 Pegasus Shipping Hellas Notes-A, 11.88%, 11/15/04 500,000 435,000 ----------- 4,567,500 ----------- UTILITIES - 20.08% American Cellular Corporation Senior Notes, 10.50%, 5/15/08 (a) 500,000 487,500 Cathay International Limited Senior Notes, 13.00%, 4/15/08 (a) 1,000,000 600,000 CIA Transporte Energia Notes, 9.25%, 4/01/08 (a) 1,000,000 760,000 Clearnet Communications Senior Discount Notes, 14.75%, 12/15/05 1,500,000 1,248,750 Comcast Cellular Holdings Senior Notes, 9.50%, 5/01/07 1,000,000 1,030,000 Crown Castle International Corporation Senior Discount Notes, 10.63%, 11/15/07 750,000 453,750 e.spire Communications, Inc. Senior Discount Notes, 12.75% - 13.75%, 4/01/06 - 7/15/07 1,050,000 985,000 Esprit Telecommunications Group PLC Senior Notes, 11.50%, 10.88% - 11.50%, 12/15/07 - 6/15/08 (a) 1,000,000 922,500 ICG Holdings, Inc. Discount Notes, 11.63% - 13.50%, 9/15/05 - 3/15/07 1,500,000 1,103,750 Intermedia Communications Senior Discount Notes, 8.60%, 6/01/08 525,000 527,625 Intermedia Communications of Florida, 12.50%, 5/15/06 600,000 492,000 McLeodusa, Inc. Senior Discount Notes, 10.50%, 3/01/07 1,250,000 912,500
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) UTILITIES (CONTINUED) MetroNet Communications Senior Discount Notes, 9.95%, 6/15/08 (a) $ 1,500,000 $ 832,500 Microcell Telecommuni- cations Senior Discount Notes-B, 14.00%, 6/01/06 1,000,000 715,000 Millicom International Cellular Senior Discount Notes, 13.50%, 6/01/06 1,250,000 793,750 MJD Communications, Inc., 9.50%, 5/01/08 (a) 750,000 753,750 Netia Holdings Senior Discount Notes-B, 11.25%, 11/01/07 1,500,000 660,000 Optel Inc. Senior Notes, 11.50%, 7/01/08 (a) 500,000 470,000 Pinnacle Holdings, Inc. Senior Discount Notes, 10.00%, 3/15/08 (a) 750,000 401,250 Price Communications Wireless, Inc. Senior Subordinated Notes, 11.75%, 7/15/07 1,000,000 1,035,000 Primus Telecommunications Group Strips, 11.75%, 8/01/04 1,000,000 945,000 PSINet, Inc. Senior Notes, Series B, 10.00%, 2/15/05 1,000,000 1,005,000 Rogers Cantel, Inc.Debentures, 9.38%, 6/01/08 1,000,000 1,020,000 Satelites Mexicanos Senior Notes, 10.13%, 11/01/04 (a) 1,000,000 685,000 SBA Communications Corporation Senior Discount Notes, 12.00%, 3/01/08 (a) 1,000,000 520,000
92 MENTOR HIGH INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
SHARES OR PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) UTILITIES (CONTINUED) Spectrasite Holdings, Inc. Senior Discount Notes, 12.00%, 7/15/08 (a) $1,000,000 $ 480,000 Sprint Spectrum Senior Notes, 11.00%, 8/15/06 1,000,000 1,140,000 Startec Global Communications Units, 12.00%, 5/15/08 (a) 1,000,000 870,000 Verio, Inc. Senior Notes, 10.38%, 4/01/05 (a) 1,000,000 995,000 ------------ 22,844,625 ------------ TOTAL CORPORATE BONDS (COST $99,855,713) 90,606,030 ------------ FOREIGN GOVERNMENT - 0.75% Republic of Korea Bond, 8.88%, 4/15/08 (cost $938,803) 1,000,000 855,000 ------------ PREFERRED STOCK - 0.80% Rural Cellular Corporation (cost $900,000) 10,000 910,000 ------------ 92,371,030 ------------ SHORT TERM INVESTMENT - 14.24% U.S. Government Agency Federal Home Loan Bank 5.00%, 10/01/98 (cost $16,195,000) 16,195,000 16,195,000 ------------ TOTAL INVESTMENTS (COST $117,889,516)-95.44% 108,566,030 OTHER ASSETS LESS LIABILITIES - 4.56% 5,190,110 ------------ NET ASSETS - 100.00% $113,756,140 ============
(a) These are securities that may be resold to "qualified institutional buyers" under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. These securities have been determined to be liquid under guidelines established by the Board of Trustees. INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $107,457,273 and $5,763,938, respectively. INCOME TAX INFORMATION At September 30, 1998, the aggregated cost of investment securities for federal income tax purposes was $117,889,516. Net unrealized depreciation aggregated $9,323,486, of which $286,135, related to appreciated investment securities and $9,609,621, related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 93 MENTOR HIGH INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 ASSETS Investments, at market value (cost $117,889,516)(Note 2) Investment securities $108,566,030 Cash 2,492,668 Receivables Investments sold 485,622 Fund shares sold 3,115,774 Dividends and interest 2,576,302 Deferred expenses (Note 2) 17,486 ------------ TOTAL ASSETS 117,253,882 ------------ LIABILITIES Payables Investments purchased $ 2,981,590 Fund shares redeemed 110,985 Dividends 371,873 Accrued expenses and other liabilities 33,294 ----------- TOTAL LIABILITIES 3,497,742 ------------ NET ASSETS $113,756,140 ============ Net Assets represented by: (Note 2) Additional paid-in capital $123,540,215 Accumulated distributions in excess of net investment income (371,874) Accumulated net realized loss on investment transactions (88,715) Net unrealized depreciation of investments (9,323,486) ------------ NET ASSETS $113,756,140 ============ NET ASSET VALUE PER SHARE Class A Shares $ 10.92 Class B Shares $ 10.91 OFFERING PRICE PER SHARE Class A Shares $ 11.46(a) Class B Shares $ 10.91 SHARES OUTSTANDING Class A Shares 4,658,188 Class B Shares 5,762,202
(a) Computation of offering price: 100/95.25 of net asset value. (b) For the period from June 23, 1998 (commencement of operations) to September 30, 1998. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS PERIOD ENDED SEPTEMBER 30, 1998 (B) INVESTMENT INCOME Interest (Note 2) $ 2,037,403 ------------ EXPENSES Management fee (Note 4) $ 175,891 Distribution fee (Note 5) 68,461 Shareholder service fee (Note 5) 62,818 Administration fee (Note 4) 24,979 Transfer agent fee 23,292 Custodian and accounting fees 16,350 Registration expenses 11,840 Shareholder reports and postage expenses 3,449 Legal fees 753 Directors' fees and expenses 596 Audit fees 521 Miscellaneous 6,164 ---------- Total expenses 395,114 ------------ Deduct Waiver of management fee (Note 4) (175,891) ------------ NET INVESTMENT INCOME 1,818,180 ------------ REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss on investments (88,715) Change in unrealized depreciation on investments (9,323,486) ---------- NET LOSS ON INVESTMENTS (9,412,201) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (7,594,021) ============
SEE NOTES TO FINANCIAL STATEMENTS. MENTOR HIGH INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED 9/30/98 (B) NET INCREASE IN NET ASSETS Operations Net investment income $ 1,818,180 Net realized loss on investments (88,715) Change in unrealized depreciation on investments (9,323,486) ------------- Decrease in net assets resulting from operations (7,594,021) ------------- Distributions to Shareholders From net investment income Class A (1,040,534) Class B (1,178,956) In excess of net investment income Class A - Class B - ------------- Total distributions to shareholders (2,219,490) ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 126,286,107 Reinvested distributions 1,281,553 Shares redeemed (3,998,009) ------------- Change in net assets resulting from capital share transactions 123,569,651 ------------- Increase in net assets 113,756,140 Net Assets Beginning of period - ------------- End of period (including accumulated distributions in excess of net investment income of ($371,874) ) $ 113,756,140 =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
PERIOD ENDED 9/30/98 (B) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.00 ---------- Income from investment operations Net investment income 0.24 Net realized and unrealized loss on investments (1.04) ---------- Total from investment operations (0.80) ---------- Less distributions From net investment income (0.28) ---------- Net asset value, end of period $ 10.92 ========== TOTAL RETURN* (6.75%) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 50,887 Ratio of expenses to average net assets 0.60% (a) Ratio of expenses to average net asset excluding waiver 1.30% (a) Ratio of net investment income to average net assets 7.36% (a) Portfolio turnover rate 27%
(a) Annualized. (b) For the period from June 23, 1998 (commencement of operations) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. MENTOR HIGH INCOME PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
PERIOD ENDED 9/30/98 (C) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.00 ---------- Income from investment operations Net investment income 0.22 Net realized and unrealized loss on investments (1.05) ---------- Total from investment operations (0.83) ---------- Less distributions From net investment income (0.26) ---------- Net asset value, end of period $ 10.91 ========== TOTAL RETURN* (6.95%) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 62,869 Ratio of expenses to average net assets 1.10% (a) Ratio of expenses to average net asset excluding waiver 1.80% (a) Ratio of net investment income to average net assets 6.87% (a) Portfolio turnover rate 27%
(a) Annualized. (c) For the period from June 23, 1998 (commencement of operations) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998 - -------------------------------------------------------------------------------- NOTE 1: ORGANIZATION Mentor Funds is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. Mentor Funds consists of twelve separate Portfolios (hereinafter each individually referred to as a "Portfolio" or collectively as the "Portfolios") at September 30, 1998, as follows: Mentor Growth Portfolio ("Growth Portfolio") Mentor Perpetual Global Portfolio ("Global Portfolio") Mentor Capital Growth Portfolio ("Capital Growth Portfolio") Mentor Strategy Portfolio ("Strategy Portfolio") Mentor Income and Growth Portfolio ("Income and Growth Portfolio") Mentor Balanced Portfolio ("Balanced Portfolio") Mentor Municipal Income Portfolio ("Municipal Income Portfolio") Mentor Quality Income Portfolio ("Quality Income Portfolio") Mentor Short-Duration Income Portfolio ("Short-Duration Income Portfolio") Mentor High Income Portfolio ("High Income Portfolio") Mentor U.S. Government Money Market Portfolio ("Government Portfolio") Mentor Money Market Portfolio ("Money Market Portfolio") The assets of each Portfolio are segregated and a shareholder's interest is limited to the Portfolio in which shares are held. These financial statements do not include Money Market Portfolio and the U.S. Government Money Market Portfolio. Mentor Funds currently issues three classes of shares. Class A shares are sold subject to a maximum sales charge of 5.75% (4.75% for the Quality Income Portfolio, Municipal Income Portfolio and High Income Portfolio and 1% for Short-Duration Income Portfolio) payable at the time of purchase. Class B shares are sold subject to a contingent deferred sales charge payable upon redemption which decreases depending on when shares were purchased and how long they have been held. Class Y shares are sold to institutions and high net-worth individual investors and are not subject to any sales or contingent deferred sales charges. During the year, the Balanced Portfolio added two classes of shares designated as Class A and Class Y and designated its existing class of shares as Class B. Shareholders of the Balanced Portfolio who on September 16, 1998, held Class B shares had such shares converted to Class Y shares having an aggregate value equal to that of the shareholder's Class B shares prior to the conversion. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Portfolios in the preparation of their financial statements. The policies are in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect amounts reported therein. Although actual results could differ from these estimates, any such differences are expected to be immaterial to the net assets of the Portfolios. (a) Valuation of Securities - Listed securities held by the Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio, and Balanced Portfolio traded on national stock exchanges and over-the-counter securities quoted on the NASDAQ National Market MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- System are valued at the last reported sales price or, lacking any sales, at the last available bid price. In cases where securities are traded on more than one exchange, the securities are valued on the exchange determined by the advisor of the Portfolios as the primary market. Securities traded in the over-the-counter market, other than those quoted on the NASDAQ National Market System, are valued at the last available bid price. Short-term investments with remaining maturities of 60 days or less are carried at amortized cost, which approximates market value. Securities for which market quotations are not readily available are valued at fair value as determined in good faith under procedures established by the Board of Trustees. U.S. Government obligations held by the Income and Growth Portfolio, Balanced Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio, and High Income Portfolio are valued at the mean between the over-the-counter bid and asked prices as furnished by an independent pricing service. Listed corporate bonds, other fixed income securities, mortgage backed securities, mortgage related, asset-backed and other related securities are valued at the prices provided by an independent pricing service. Security valuations not available from an independent pricing service are provided by dealers approved by the Portfolios' Board of Trustees. In determining value, the pricing services use information with respect to transactions in such securities, market transactions in comparable securities, various relationships between securities, and yield to maturity. Municipal bonds, held by the Municipal Income Portfolio, are valued at fair value. An independent pricing service values the Portfolio's municipal bonds taking into consideration yield, stability, risk, quality, coupon, maturity, type of issue, trading characteristics, special circumstances of a security or trading market, and any other factors or market data it deems relevant in determining valuations for normal institutional size trading units of debt securities. The pricing service does not rely exclusively on quoted prices. Short-term investments with remaining maturities of 60 days or less shall be their amortized cost value unless the particular circumstances of the security indicate otherwise. Foreign currency amounts are translated into United States dollars as follows: market value of investments, other assets and liabilities at the daily rate of exchange, purchases and sales of investments, income and expenses at the rate of exchange prevailing on the respective dates of such transactions. Net unrealized foreign exchange gains/losses are a component of unrealized appreciation/depreciation of investments. Net realized foreign currency gains and losses include foreign currency gains and losses between trade date and settlement date on investment securities transactions, foreign currency transactions and the difference between the amounts of interest and dividends recorded on the books of the Portfolio and the amount actually received. The portion of investment gains and losses related to foreign currency fluctuations in exchange rates between the initial purchase trade date and subsequent sale trade date is included in realized gains and losses on security transactions. (b) Repurchase Agreements -- It is the policy of Mentor Funds to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book entry system all securities held as collateral in support of repurchase agreement investments. Additionally, procedures have been established by Mentor Funds to monitor, on a daily basis, the market value of each repurchase agreement's MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- underlying securities to ensure the existence of a proper level of collateral. Mentor Funds will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by Mentor Funds' adviser to be creditworthy pursuant to guidelines established by the Mentor Funds' Trustees. Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreement. Accordingly, Mentor Funds could receive less than the repurchase price on the sale of collateral securities. (c) Borrowings -- Each of the Portfolios (except for the Growth Portfolio, Strategy Portfolio and Municipal Income Portfolio) may, under certain circumstances, borrow money directly or through dollar-roll and reverse repurchase agreements (arrangements in which the Portfolio sells a security for a percentage of its market value with an agreement to buy it back on a set date). Each Portfolio may borrow up to one-third of the value of its net assets. The average daily balance of reverse repurchase agreements outstanding for Quality Income Portfolio during the year ended September 30, 1998, was approximately $16,388,088 or $1.24 per share based on average shares outstanding during the period at a weighted average interest rate of 5.16%. The maximum amount of borrowings outstanding for any day during the period was $71,061,218 (including accrued interest), as of September 17, 1998, at an interest rate of 5.52% and was 26.09% of total assets at that date. The average daily balance of reverse repurchase agreements outstanding for Short-Duration Income Portfolio during the year ended September 30, 1998, was approximately $6,026,021 or $0.72 per share based on average shares outstanding during the period at a weighted average interest rate of 5.55%. The maximum amount of borrowings outstanding for any day during the period was $35,037,791 (including accrued interest), as of September 3, 1998, at an interest rate of 5.55% and was 18.35% of total assets at that date. (d) Portfolio Securities Loaned -- Each of the Portfolios (except for Municipal Income Portfolio) is authorized by the Board of Trustees to participate in securities lending transactions. The Portfolios may receive fees for participating in lending securities transactions. During the period that a security is out on loan, Portfolios continue to receive interest or dividends on the securities loaned. The Portfolio receives collateral in an amount at least equal to, at all times, the fair value of the securities loaned plus interest. When cash is received as collateral, the Portfolios record an asset and obligation for the market value of that collateral. Cash received as collateral may be reinvested, in which case that security is recorded as an asset of the Portfolio. Variations in the market value of the securities loaned occurring during the term of the loan are reflected in the value of the Portfolio. At September 30, 1998, certain Portfolios had loaned securities to brokers which were collateralized by cash, U.S. Treasury securities and letters of credit. Cash collateral at September 30, 1998 was reinvested in U.S. Treasury and high quality money market instruments. Income from securities lending activities amounted to $283,424, $50,923, $25,753, $88,906, $47,564, $702, and $46,419, for the Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio and Quality Income Portfolio, respectively for the year ended September 30, 1998. MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Among the risks to a Portfolio from securities lending are that the borrower may not provide additional collateral when required or return the securities when due. At September 30, 1998, the value of the securities on loan and the value of the related collateral were as follows:
SECURITIES CASH SECURITIES TRI-PARTY PORTFOLIO ON LOAN COLLATERAL COLLATERAL COLLATERAL - ------------------- --------------- --------------- ------------ ------------ Growth $106,657,061 $115,219,699 $771,567 $ - Global 11,714,972 12,707,641 - - Capital Growth 14,483,537 15,562,984 - - Strategy 58,005,353 60,165,776 215,110 - Income and Growth 47,343,071 40,344,784 6,360 7,911,321 Balanced 2,544,039 2,639,420 - 39,456 Quality Income 3,244,448 1,605,500 - 1,687,662 - ------------------- ------------ ------------ -------- ---------
(e) Dollar Roll Transactions -- Each of the Portfolios (except for the Growth, Strategy and Municipal Income Portfolios) may engage in dollar roll transactions with respect to mortgage-backed securities issued by GNMA, FNMA, and FHLMC. In a dollar-roll transaction, a Portfolio sells a mortgage-backed security to a financial institution, such as a bank or broker/dealer, and simultaneously agrees to repurchase a substantially similar (i.e., same type, coupon, and maturity) security from the institution at a later date at an agreed upon price. The mortgage-backed securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. (f) Security Transactions and Investment Income -- Security transactions for the Portfolios are accounted for on trade date. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Interest income (except for Municipal Income Portfolio) includes interest and discount earned (net of premium) on short-term obligations, and interest earned on all other debt securities including original issue discount as required by the Internal Revenue Code. Dividends to shareholders and capital gain distributions, if any, are recorded on the ex-dividend date. Interest income for the Municipal Income Portfolio includes interest earned net of premium, and original issue discount as required by the Internal Revenue Code. (g) Federal Income Taxes -- No provision for federal income taxes has been made since it is each Portfolio's policy to comply with the provisions applicable to regulated investment companies under the Internal Revenue Code and to distribute to its shareholders within the allowable time limit substantially all taxable income and realized capital gains. Dividends paid by the Municipal Income Portfolio representing net interest received on tax-exempt municipal securities are not includable by shareholders as gross income for federal income tax purposes because the Portfolio intends to meet certain requirements of the Internal Revenue Code applicable to regulated investment companies which will enable the Portfolio to pay tax-exempt interest dividends. The portion of such interest, if any, earned on private purpose municipal bonds issued after August 7, 1986, may by considered a tax preference item to shareholders. MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- At September 30, 1998, capital loss carryforwards for federal tax purposes were as follows:
MUNICIPAL QUALITY EXPIRES INCOME PORTFOLIO INCOME PORTFOLIO - ----------- ------------------ ----------------- 9/30/2001 $ - $ 244,512 9/30/2002 - 3,678,547 9/30/2003 317,478 7,326,035 9/30/2004 1,616,817 1,708,773 9/30/2005 - 1,325,149 9/30/2006 295,480 - ---------- ----------- $2,229,775 $14,283,016 ========== ===========
Such capital loss carryforwards will reduce the Portfolios' taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code, and thus will reduce the amount of the distributions to shareholders which would otherwise relieve the Portfolios of any liability for federal tax. (h) When-Issued and Delayed Delivery Transactions -- The Portfolios may engage in when-issued or delayed delivery transactions. To the extent the Portfolios engage in such transactions, they will do so for the purpose of acquiring portfolio securities consistent with their investment objectives and policies and not for the purpose of investment leverage. The Portfolios will record a when-issued security and the related liability on the trade date. Until the securities are received and paid for, the Portfolios will maintain security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily, and begin earning interest on the settlement date. (i) Futures Contracts -- In order to gain exposure to or protect against declines in security values, the Portfolios may buy and sell futures contracts. The Portfolios may also buy or write put or call options on futures contracts. The Portfolios may sell futures contracts to hedge against declines in the value of portfolios securities. The Portfolios may also purchase futures contracts to gain exposure to market changes as it may be more efficient or cost effective than actually buying securities. The Portfolios will segregate assets to cover its commitments under such speculative futures contracts. Upon entering into a futures contract, the Portfolios are required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolios each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolios recognize a realized gain or loss when the contract is closed. For the year ended September 30, 1998, Strategy Portfolio, Municipal Income Portfolio and Short-Duration Income Portfolio had realized losses of $1,950,741, $923,251, and $88,910, respectively, on closed futures contracts. Risks of entering into futures contracts (and related options) include the possibility that there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. At September 30, 1998, Strategy Portfolio and Municipal Income Portfolio had open positions in the following futures contracts: MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
NET NUMBER OF NOTIONAL UNREALIZED PORTFOLIO CONTRACTS POSITION CONTRACTS EXPIRATION VALUE DEPRECIATION - ------------------ ----------- ---------- ------------------ ------------ -------------- ---------------- Strategy 734 Short U.S. Long Bond Dec-98 $73,400,000 ($3,871,838) Municipal Income 90 Short Muni Bond Future Dec-98 $ 9,000,000 ($ 225,729) - ------------------ --- ---------- ------------------ ------ ----------- ----------
(j) Options - In order to produce incremental earnings or protect against changes in the value of portfolio securities, the Portfolios may buy and sell put and call options, write covered call options on portfolio securities and write cash-secured put options. The Portfolios generally purchase put options or write covered call options to hedge against adverse movements in the value of portfolio holdings. The Portfolios may also use options for speculative purposes, although they do not employ options for this at the present time. The Portfolios will segregate assets to cover their obligations under option contracts. Options contracts are valued daily based upon the last sales price on the principal exchange on which the option is traded and unrealized appreciation or depreciation is recorded. The Portfolios will realize a gain or loss upon the expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option, or the cost of the security for a purchased put or call option is adjusted by the amount of premium received or paid. For the year ended September 30, 1998, Municipal Income Portfolio had a net realized gain of $10,940 on closed option contracts. The risk in writing a call option is that the Portfolios give up the opportunity for profit if the market price of the security increases and the option is exercised. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised or the counterparty is unwilling or unable to perform. The Portfolio also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. The Portfolio may also write over-the-counter options where the completion of the obligation is dependent upon the credit standing of the counterparty. Activity in written options for the Municipal Income Portfolio for the year ended September 30, 1998, was as follows:
PREMIUM RECEIVED FACE VALUE ------------ --------------- Options outstanding at September 30, 1997 $ 36,693 $ 10,000,000 Options written 53,274 21,000,000 Options closed (49,292) (20,000,000) Options expired (40,675) (11,000,000) - ----------------------- -------- ------------ Options outstanding at September 30, 1998 $ - $ - - ----------------------- -------- ------------
(k) Residual Interests - A derivative security is any investment that derives its value from an underlying security, asset, or market index. Quality Income Portfolio and Short-Duration Income Portfolio invest in mortgage security residual interests ("residuals") which are considered derivative securities. The Portfolios' investments in residuals have been primarily in securities issued by proprietary mortgage trusts. While these entities have been highly leveraged, often having indebtedness of up to 95% of their total value, the Portfolios have not incurred any indebtedness in the course of making these residual investments; nor have the Portfolios' assets been MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- pledged to secure the indebtedness of the issuing structure or the Portfolios' investment in the residuals. In consideration of the risk associated with investment in residual securities, it is the Portfolios' policy to limit their exposure at the time of purchase to no more than 20% of their total assets. (l) Interest-Rate Swap - An interest-rate swap is a contract between two parties on a specified principal amount (referred to as the notional principal) for a specified period. In the most common instance, a swap involves the exchange of streams of variable and fixed-rate interest payments. During the term of the swap, changes in the value of the swap are recognized as unrealized gains or losses by marking-to-market the value of the swap. When the swap is terminated, the Fund will record a realized gain or loss. At September 30, 1998, there were no open interest rate swap agreements. (m) Deferred Expenses - Costs incurred by the Portfolios in connection with their initial share registration and organization costs were deferred by the Portfolios and are being amortized on a straight-line basis over a five-year period. (n) Distributions - Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for net operating losses, certain futures and deferral of wash sales and equalization deficits. The Growth Portfolio, Capital Growth Portfolio and Strategy Portfolio also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the distributions for income tax purposes. NOTE 3: DIVIDENDS Dividends will be declared daily and paid monthly to all shareholders invested in Municipal Income Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio and High Income Portfolio. Dividends are declared and paid annually to all shareholders invested in the Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Global Portfolio and Balanced Portfolio. Dividends are declared and paid quarterly to all shareholders invested in Income and Growth Portfolio. Dividends will be reinvested in additional shares of the same class and Portfolio on payment dates at the ex-dividend date net asset value without a sales charge unless cash payments are requested by shareholders in writing to Mentor Investment Group, LLC. Dividends of all Portfolios are paid to shareholders of record on the record date. Capital gains realized by each Portfolio, if any, are paid annually. NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment advisor, receives for its services an annual investment advisory fee not to exceed the following percentages of the average daily net assets of the particular Portfolio: Growth Portfolio, 0.70%; Capital Growth Portfolio, 0.80%; Strategy Portfolio, 0.85%; Income and Growth Portfolio, 0.75%; Balanced Portfolio, 0.75%; Municipal Income Portfolio, 0.60%; Quality Income Portfolio, 0.60%; Short-Duration Income Portfolio, 0.50%; and High Income Portfolio, 0.70%. Mentor Advisors pays Van Kampen American Capital Management, Inc., the sub-advisor to Municipal Income Portfolio, an annual fee expressed as a percentage of the Portfolio's average net assets as MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- follows: 0.25% of the first $60 million of the Portfolio's average net assets and 0.20% of the Portfolio's average net assets over $60 million. For the period from October 1, 1997 to June 30, 1998, Wellington Management Company, LLC, the sub-advisor to the Income and Growth Portfolio, received from the Investment Adviser an annual fee expressed as a percentage of that Portfolio's assets as follows: 0.325% on the first $50 million of the Portfolio's average net assets, 0.275% on the next $150 million of the Portfolio's average net assets, 0.225% of the next $300 million of the Portfolio's average net assets, and 0.200% of the Portfolio's net assets over $500 million. Effective July 1, 1998, the sub-advisor to the Income and Growth Portfolio received the following fees: 0.325% on the first $50 million of the Portfolio's average net assets, 0.250% on the next $150 million of the Portfolio's average net assets, and 0.200% of the Portfolio's average net assets over $150 million. Van Kampen American Capital Management, Inc., the sub-advisor to the High Income Portfolio receives from the Investment Advisor an annual fee of 0.20% of the Portfolio's average daily net assets. No performance or incentive fees are paid to the sub-advisors. Under certain Sub-Advisory Agreements, the particular sub-advisor may, from time to time, voluntarily waive some or all of its sub-advisory fee charged to the Investment Advisor and may terminate any such voluntary waiver at any time in its sole discretion. The Global Portfolio has entered into an Investment Advisory Agreement with Mentor Perpetual Advisors, LLC ("Mentor Perpetual"). Mentor Perpetual is owned equally by Mentor and Perpetual PLC, a diversified financial services holding company. Under this agreement, Mentor Perpetual's management fee is accrued daily and paid monthly at an annual rate of 1.10% applied to the average daily net assets of the Portfolio up to and including $75 million and 1.00% of its average daily net assets in excess of $75 million. For the year ended September 30, 1998, Mentor Advisors and sub-advisors, earned and voluntarily waived the following management fees:
MANAGEMENT MANAGEMENT FEE SUB ADVISOR FEE VOLUNTARILY FEE PORTFOLIO EARNED WAIVED EARNED/(WAIVED) - ----------------------- ------------ ------------- ---------------- Growth $4,204,377 $ - $ - Global 1,612,495 - - Capital Growth 2,153,467 - - Strategy 2,420,122 - - Income and Growth 1,638,729 - 575,028 Balanced 31,721 - 20,856 Municipal Income 557,332 - 216,114 Quality Income 1,025,941 204,530 - Short-Duration Income 504,097 180,523 - High Income 175,891 175,891 (51,279) - ----------------------- ---------- ------- -------
Administrative personnel and services are provided by Mentor, under an Administration Agreement, at an annual rate of 0.10% of the average daily net assets of each Portfolio. For the year ended September 30, 1998, Mentor earned the following administration fees:
ADMINISTRATION ADMINISTRATION FEE VOLUNTARILY PORTFOLIO FEE EARNED WAIVED - ----------------------- ---------------- ---------------- Growth $600,625 $ - Global 153,750 - Capital Growth 269,183 - Strategy 284,720 - Income and Growth 218,497 - Balanced 4,219 4,219 Municipal Income 92,888 - Quality Income 174,343 - Short-Duration Income 101,237 101,237 High Income 24,979 - - ----------------------- -------- -------
MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- The Portfolios also provide direct reimbursement to Mentor for certain legal and compliance administration, investor relation and operation related costs not covered under the Investment Management Agreement. For the year ended September 30, 1998, these direct reimbursements were as follows:
DIRECT PORTFOLIO REIMBURSEMENTS - ----------------------- --------------- Growth $26,735 Global 6,902 Capital Growth 12,494 Strategy 12,317 Income and Growth 10,079 Municipal Income 4,318 Quality Income 7,964 Short-Duration Income 5,085 - ----------------------- -------
NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES The Class B shares of the Portfolios have adopted a Distribution Plan (the Plan) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a Distribution Agreement between the Portfolios and Mentor Distributors, LLC ("Mentor Distributors") a wholly-owned subsidiary of BYSIS Fund Services, Inc., Mentor Distributors was appointed distributor of the Portfolios. To compensate Mentor Distributors for the services it provides and for the expenses it incurs under the Distribution Agreement, the Portfolios pay a distribution fee, which is accrued daily and paid monthly at the annual rate of 0.75% of the Portfolios' average daily net assets for the Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio and Global Portfolio, 0.50% of the average daily net assets of the Quality Income Portfolio, High Income Portfolio and Municipal Income Portfolio, and 0.30% of the average daily net assets for the Short-Duration Income Portfolio. Mentor Distributors may select financial institutions, such as investment dealers and banks to provide sales support services as agents for their clients or customers who beneficially own Class B shares of the Portfolios. Financial institutions will receive fees from Mentor Distributors based upon Class B shares owned by their clients or customers. Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with Mentor Distributors with respect to Class A and Class B shares of each Portfolio. Under the Service Plan, financial institutions will enter into shareholder service agreements with the Portfolios to provide administrative support services to their customers who from time to time may be owners of record or beneficial owners of Class A or Class B shares of one or more Portfolios. In return for providing these support services, a financial institution may receive payments from one or more Portfolios at a rate not exceeding 0.25% of the average daily net assets of the Class A or Class B shares of the particular Portfolio or Portfolios beneficially owned by the financial institution's customers for whom it is holder of record or with whom it has a servicing relationship. MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Presently, the Portfolios' class specific expenses are limited to expenses incurred by a class of shares pursuant to its respective Distribution Plan. Under the Distribution Plan, shareholder service fees are charged in Class A and B and distribution fees are charged to Class B. For the year ended September 30, 1998, distribution fees and shareholder servicing fees were as follows:
CLASS B CLASS B SHAREHOLDER SERVICE FEE DISTRIBUTION DISTRIBUTION --------------------------- SHAREHOLDER SERVICE PORTFOLIO FEE FEE WAVIED CLASS A CLASS B FEE WAIVED - ----------------------- -------------- -------------- ----------- ------------- -------------------- Growth $3,638,580 $ -- $255,596 $1,233,864 $ -- Global 734,020 -- 146,546 237,827 -- Capital Growth 1,227,717 -- 283,728 389,229 -- Strategy 1,875,172 -- 77,994 633,805 -- Income and Growth 986,604 -- 222,501 323,741 -- Balanced 30,319 29,451 3,517 6,695 9,738 Municipal Income 257,381 -- 108,151 124,069 -- Quality Income 467,042 -- 195,196 232,278 -- Short-Duration Income 133,476 -- 160,078 91,969 -- High Income 68,461 -- 28,187 34,631 -- - ----------------------- ---------- ------- -------- ---------- ------
NOTE 6: FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS In connection with portfolio purchases and sales of securities denominated in a foreign currency, Global Portfolio may enter into forward foreign currency exchange contracts ("contracts"). Additionally, from time to time Global Portfolio may enter into contracts to hedge certain foreign currency assets. Contracts are recorded at market value. Realized gains and losses arising from such transactions are included in net gain (loss) on investments and forward foreign currency exchange contracts. The Portfolio is subject to the credit risk that the other party will not complete the obligations of the contract. At September 30, 1998, Global Portfolio had outstanding forward contracts as set forth below.
CONTRACTS NET UNREALIZED TO DELIVER/ IN EXCHANGE APPRECIATION/ SETTLEMENT DATE RECEIVE VALUE FOR (DEPRECIATION) - ----------------------------- ------------- ------------ ------------- --------------- PURCHASES 10/01/98 British Pound 34,560 $ 58,716 $ 58,925 $ (209) 10/01/98 British Pound 19,415 32,985 33,102 (117) SALES 10/01/98 British Pound 32,471 55,166 55,362 196 10/02/98 British Pound 33,054 56,156 56,356 200 10/02/98 British Pound 36,586 62,159 62,380 221 10/30/98 French Franc 3,859,918 689,505 685,598 (3,907) 3/18/99 Hong Kong Dollar 7,928,000 1,006,040 1,000,000 (6,040) 11/30/98 Singapore Dollar 885,000 524,787 500,000 (24,787) - -------- ------------------ --------- --------- ---------- ---------
MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7: CAPITAL SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in Portfolio shares were as follows:
MENTOR GROWTH PORTFOLIO ------------------------------------------------------------------- YEAR ENDED YEAR ENDED 9/30/98 9/30/97 ---------------------------------- -------------------------------- SHARES DOLLARS SHARES DOLLARS ---------------- ----------------- --------------- ---------------- CLASS A: Shares sold 12,016,618 $ 210,103,016 5,018,131 $ 82,270,375 Shares issued upon reinvestment of distributions 346,751 6,474,795 369,088 5,744,163 Shares redeemed (12,306,743) (213,035,017) (2,301,180) (37,823,031) ----------- -------------- ---------- ------------- Change in net assets from capital share transactions 56,626 $ 3,542,794 3,086,039 $ 50,191,507 =========== ============== ========== ============= CLASS B: Shares sold 4,138,131 $ 73,047,883 5,392,199 $ 86,290,167 Shares issued upon reinvestment of distributions 1,667,456 30,460,604 3,348,283 51,489,284 Shares redeemed (4,698,527) (80,890,251) (3,140,076) (49,890,633) ----------- -------------- ---------- ------------- Change in net assets from capital share transactions 1,107,060 $ 22,618,236 5,600,406 $ 87,888,818 =========== ============== ========== ============= CLASS Y: (A) Shares sold 1,786,672 $ 30,602,698 - - Shares issued upon reinvestment of distributions 1 10 - - Shares redeemed (53,808) (894,152) - - ----------- -------------- ---------- ------------- Change in net assets from capital share transactions 1,732,865 $ 29,708,556 - - =========== ============== ========== =============
MENTOR PERPETUAL GLOBAL PORTFOLIO ------------------------------------------------------------------- YEAR ENDED YEAR ENDED 9/30/98 9/30/97 ---------------------------------- ------------------------------ SHARES DOLLARS SHARES DOLLARS --------------- ---------------- ------------- -------------- CLASS A: Shares sold 2,057,945 $ 42,154,809 1,732,413 $ 32,107,036 Shares issued upon reinvestment of distributions 113,726 2,255,270 26,897 463,738 Shares redeemed (1,275,534) (25,637,616) (270,161) (5,115,471) ---------- ------------- --------- ------------ Change in net assets from capital share transactions 896,137 $ 18,772,463 1,489,149 $ 27,455,303 ========== ============= ========= ============ CLASS B: Shares sold 1,821,588 $ 36,737,964 2,325,365 $ 42,416,589 Shares issued upon reinvestment of distributions 232,932 4,477,444 91,695 1,544,189 Shares redeemed (983,971) (18,930,107) (447,724) (8,352,236) ---------- ------------- --------- ------------ Change in net assets from capital share transactions 1,070,549 $ 22,285,301 1,969,336 $ 35,608,542 ========== ============= ========= ============ CLASS Y: (A) Shares sold 53 $ 1,000 - - Shares issued upon reinvestment of distributions - 8 - - Shares redeemed - - - - ---------- ------------- --------- ------------ Change in net assets from capital share transactions 53 $ 1,008 - - ========== ============= ========= ============
(a) For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
MENTOR CAPITAL GROWTH PORTFOLIO -------------------------------------------------------------------- YEAR ENDED YEAR ENDED 9/30/98 9/30/97 --------------------------------- -------------------------------- SHARES DOLLARS SHARES DOLLARS --------------- --------------- ------------- ---------------- CLASS A: Shares sold 5,110,051 $ 121,415,173 1,422,449 $ 28,161,248 Shares issued upon reinvestment of distributions 278,288 5,833,664 264,769 4,552,490 Shares redeemed (1,926,775) (45,709,577) (404,403) (7,959,184) ---------- ------------- --------- ------------- Change in net assets from capital share transactions 3,461,564 $ 81,539,260 1,282,815 $ 24,754,554 ========== ============= ========= ============= CLASS B: Shares sold 4,375,173 $ 98,931,464 1,749,992 $ 33,332,019 Shares issued upon reinvestment of distributions 507,715 10,256,056 596,606 9,983,395 Shares redeemed (1,063,324) (23,712,167) (711,342) (13,428,205) ---------- ------------- --------- ------------- Change in net assets from capital share transactions 3,819,564 $ 85,475,353 1,635,256 $ 29,887,209 ========== ============= ========= ============= CLASS Y: (A) Shares sold 48 $ 1,000 - - Shares issued upon reinvestment of distributions 1 12 - - Shares redeemed - - - ---------- ------------- --------- ------------- Change in net assets from capital share transactions 49 $ 1,012 - - ========== ============= ========= =============
MENTOR STRATEGY PORTFOLIO ------------------------------------------------------------------ YEAR ENDED YEAR ENDED 9/30/98 9/30/97 --------------------------------- -------------------------------- SHARES DOLLARS SHARES DOLLARS --------------- ----------------- --------------- ---------------- CLASS A: Shares sold 508,748 $ 7,933,524 1,695,322 $ 28,517,096 Shares issued upon reinvestment of distributions 444,548 6,836,196 91,017 1,513,610 Shares redeemed (1,529,689) (24,220,890) (742,169) (12,677,413) ---------- ------------- --------- ------------- Change in net assets from capital share transactions (576,393) ($ 9,451,170) 1,044,170 $ 17,353,293 ========== ============= ========= ============= CLASS B: Shares sold 564,916 $ 8,678,121 2,587,894 $ 43,129,553 Shares issued upon reinvestment of distributions 3,423,558 51,517,305 1,291,000 21,237,045 Shares redeemed (7,097,154) (108,934,512) (3,591,125) (60,432,366) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions (3,108,680) ($ 48,739,086) 287,769 $ 3,934,232 ========== ============= ========== ============= CLASS Y: (A) Shares sold 67 $ 1,001 - - Shares redeemed - - - - ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 67 $ 1,001 - - ========== ============= ========== =============
(a) For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
MENTOR INCOME AND GROWTH PORTFOLIO --------------------------------------------------------------------- YEAR ENDED YEAR ENDED 9/30/98 9/30/97 ---------------------------------- -------------------------------- SHARES DOLLARS SHARES DOLLARS --------------- ---------------- ------------- ---------------- CLASS A: Shares sold 2,515,923 $ 49,323,113 1,945,245 $ 37,552,063 Shares issued upon reinvestment of distributions 371,373 7,153,831 179,904 3,303,336 Shares redeemed (915,370) (18,005,450) (305,497) (5,925,176) --------- ------------- --------- ------------- Change in net assets from capital share transactions 1,971,926 $ 38,471,494 1,819,652 $ 34,930,223 ========= ============= ========= ============= CLASS B: Shares sold 2,642,784 $ 51,766,483 1,913,241 $ 36,687,335 Shares issued upon reinvestment of distributions 559,471 10,748,481 450,665 8,192,160 Shares redeemed (1,074,795) (21,053,657) (596,371) (11,526,154) ---------- ------------- --------- ------------- Change in net assets from capital share transactions 2,127,460 $ 41,461,307 1,767,535 $ 33,353,341 ========== ============= ========= ============= CLASS Y: (A) Shares sold 53 $ 1,000 - - Shares issued upon reinvestment of distributions 2 30 - - Shares redeemed - - - - ---------- ------------- --------- ------------- Change in net assets from capital share transactions 55 $ 1,030 - - ========== ============= ========= =============
MENTOR BALANCED PORTFOLIO ------------------------------------------------------------- PERIOD ENDED YEAR ENDED 9/30/98 9/30/97 ------------------------------ ---------------------------- SHARES DOLLARS SHARES DOLLARS ------------ --------------- ------------ ------------- CLASS A: (B) Shares sold 258,246 $ 3,577,935 - $ - Shares issued upon reinvestment of distributions - - - - Shares redeemed - - - - ------- ------------ ------- ---------- Change in net assets from capital share transactions 258,246 $ 3,577,935 - $ - ======= ============ ======= ========== CLASS B: Shares sold 412,403 $ 5,702,737 - $ - Shares issued upon reinvestment of distributions 88,886 1,300,249 37,773 558,075 Shares redeemed (48,378) (810,125) (39,915) (636,137) Conversion of Class B Shares to Class Y Shares (273,416) (3,350,117) - - -------- ------------ ------- ---------- Change in net assets from capital share transactions 179,495 $ 2,842,744 (2,142) $ (78,062) ======== ============ ======= ========== CLASS Y: (B) Shares sold - $ - - $ - Shares issued upon reinvestment of distributions - - - - Shares redeemed (7,305) (100,000) - - Conversion of Class B Shares to Class Y Shares 273,416 3,350,117 - - -------- ------------ ------- ---------- Change in net assets from capital share transactions 266,111 $ 3,250,117 - $ - ======== ============ ======= ==========
(a) For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. (b) For the period from September 16, 1998 (initial offering of Class A and Class Y Shares) to September 30, 1998. MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
MENTOR MUNICIPAL INCOME PORTFOLIO ------------------------------------------------------------------- YEAR ENDED YEAR ENDED 9/30/98 9/30/97 -------------------------------- -------------------------------- SHARES DOLLARS SHARES DOLLARS ------------- ---------------- ------------- ---------------- CLASS A Shares sold 1,688,990 $ 26,509,509 901,683 $ 13,789,961 Shares issued upon reinvestment of distributions 75,715 1,188,701 41,778 635,539 Shares redeemed (423,337) (6,641,364) (214,874) (3,272,170) --------- ------------ -------- ------------ Change in net assets from capital share transactions 1,341,368 $ 21,056,846 728,587 $ 11,153,330 ========= ============ ======== ============ CLASS B: Shares sold 1,208,341 $ 18,966,860 782,655 $ 11,948,057 Shares issued upon reinvestment of distributions 91,662 1,436,340 83,433 1,268,808 Shares redeemed (436,001) (6,820,355) (478,013) (7,288,249) --------- ------------ -------- ------------ Change in net assets from capital share transactions 864,002 $ 13,582,845 388,075 $ 5,928,616 ========= ============ ======== ============ CLASS Y: (A) Shares sold 64 $ 1,000 - - Shares issued upon reinvestment of distributions 3 43 - - Shares redeemed - - - - --------- ------------ -------- ------------ Change in net assets from capital share transactions 67 $ 1,043 - - ========= ============ ======== ============
MENTOR QUALITY INCOME PORTFOLIO ---------------------------------------------------------------------- YEAR ENDED YEAR ENDED 9/30/98 9/30/97 ---------------------------------- --------------------------------- SHARES DOLLARS SHARES DOLLARS --------------- ---------------- --------------- --------------- CLASS A: Shares sold 4,256,782 $ 56,191,423 2,838,801 $ 37,052,906 Shares issued upon reinvestment of distributions 233,015 3,077,659 91,837 1,196,422 Shares redeemed (1,597,720) (21,178,895) (529,521) (6,928,329) ---------- ------------- --------- ------------- Change in net assets from capital share transactions 2,892,077 $ 38,090,187 2,401,117 $ 31,320,999 ========== ============= ========= ============= CLASS B: Shares sold 3,811,046 $ 50,451,628 2,058,671 $ 26,889,217 Shares issued upon reinvestment of distributions 272,551 3,600,049 218,332 2,847,859 Shares redeemed (1,478,885) (19,526,706) (1,089,318) (14,250,845) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 2,604,712 $ 34,524,971 1,187,685 $ 15,486,231 ========== ============= ========== ============= CLASS Y: (A) Shares sold 76 $ 1,000 - - Shares issued upon reinvestment of distributions 4 51 - - Shares redeemed - - - - ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 80 $ 1,051 - - ========== ============= ========== =============
(a) For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
MENTOR SHORT-DURATION INCOME PORTFOLIO ---------------------------------------------------------------------- YEAR ENDED YEAR ENDED 9/30/98 9/30/97 --------------------------------- ---------------------------------- SHARES DOLLARS SHARES DOLLARS --------------- --------------- --------------- ---------------- CLASS A: Shares sold 9,921,692 $ 124,978,729 2,047,670 $ 25,768,187 Shares issued upon reinvestment of distributions 200,895 2,525,409 49,602 623,647 Shares redeemed (4,997,458) (62,897,886) (505,078) (6,351,983) ---------- ------------- --------- ------------- Change in net assets from capital share transactions 5,125,129 $ 64,606,252 1,592,194 $ 20,039,851 ========== ============= ========= ============= CLASS B: Shares sold 3,500,465 $ 44,073,519 1,121,483 $ 14,121,033 Shares issued upon reinvestment of distributions 145,226 1,826,827 89,996 1,131,691 Shares redeemed (1,563,684) (19,674,936) (1,027,042) (12,921,363) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 2,082,007 $ 26,225,410 184,437 $ 2,331,361 ========== ============= ========== ============= CLASS Y: (A) Shares sold 79 $ 1,000 - - Shares issued upon reinvestment of distributions 4 49 - - ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 83 $ 1,049 - - ========== ============= ========== =============
MENTOR HIGH INCOME PORTFOLIO ------------------------------ PERIOD ENDED 9/30/98 (C) ------------------------------ SHARES DOLLARS ------------- -------------- CLASS A: Shares sold 4,775,208 $ 56,602,255 Shares issued upon reinvestment of distributions 51,541 580,207 Shares redeemed (168,561) (1,889,222) --------- ------------ Change in net assets from capital share transactions 4,658,188 $ 55,293,240 ========= ============ CLASS B: Shares sold 5,890,307 $ 69,683,852 Shares issued upon reinvestment of distributions 62,441 701,346 Shares redeemed (190,546) (2,108,787) --------- ------------ Change in net assets from capital share transactions 5,762,202 $ 68,276,411 ========= ============
(a) For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. (c) For the period from June 23, 1998 (commencement of operations) to September 30, 1998. NOTE 8: SUBSEQUENT EVENT Effective November 16, 1998, the Balanced Portfolio acquired substantially all the assets and assumed the liabilities of the Strategy Portfolio in exchange for Class A, Class B and Class Y shares of the Balanced Portfolio. The acquisition was accomplished by a tax-free exchange of the respective shares of the Balanced Portfolio for the net assets of the Strategy Portfolio. The net assets acquired amounted to $222,601,303. The aggregate net assets of the Balanced Portfolio immediately after the acquisition were $255,551,169. MENTOR FUNDS INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- THE TRUSTEES AND SHAREHOLDERS MENTOR FUNDS We have audited the accompanying statements of assets and liabilities, including the portfolios of investments of Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio, Municipal Income Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio and High Income Portfolio, portfolios of Mentor Funds as of September 30, 1998 and the related statements of operations for the year or period then ended, the statements of changes in net assets for each of the years or periods in the two-year period then ended and the financial highlights for each of the years or periods in the five-year period ended September 30, 1998 as described more fully in each of the financial highlights of each of the funds. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of September 30, 1998 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio, Municipal Income Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio and High Income Portfolio, portfolios of Mentor Funds as of September 30, 1998, the results of their operations for the year or period then ended, the changes in their net assets for each of the years or periods in the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period ended September 30, 1998, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick Boston, Massachusetts November 20, 1998 MENTOR FUNDS ADDITIONAL INFORMATION SEPTEMBER 30, 1998 - -------------------------------------------------------------------------------- YEAR 2000 (UNAUDITED) The Portfolio receives services from a number of providers which rely on the effective functioning of their respective systems and the systems of others to perform those services. It is generally recognized that certain systems in use today may not be able to perform their intended functions adequately after 1999 because of the inability of computer software to distinguish the year 2000 from the year 1900. Mentor Advisors is taking steps that it believes are reasonably designed to address this potential "Year 2000" problem and to obtain satisfactory assurances that comparable steps are being taken by each of the Portfolio's other major service providers. There can be no assurance, however, that these steps will be sufficient to avoid any adverse impact on the Portfolio from this problem. FEDERAL TAX STATUS OF DIVIDENDS DECLARED (UNAUDITED) Long-term capital gain dividends paid during the period are presented below. For federal income tax purposes, dividends from short-term capital gains are classified as ordinary income. All net investment income dividends were ordinary income, except for Municipal Income Portfolio that paid exempt income dividends. The percentage of qualifying dividends eligible for the corporate dividends received deduction are also listed below for the applicable Portfolios.
LONG-TERM TAX-EXEMPT CAPITAL GAIN INCOME QUALIFYING PORTFOLIO DIVIDENDS DIVIDENDS DIVIDENDS - ----------------------- -------------- ------------ ----------- Growth $37,907,233 $ - - Global 3,028,816 - - Capital Growth 9,208,016 - 21.04% Strategy 41,130,602 - 9.69% Income and Growth 8,656,201 - 37.12% Municipal Income - 3,949,481 - Balanced 893,299 - 11.33% High Income - - - Quality Income - - - Short-Duration Income - - - - ----------------------- ----------- ---------- -----
Shareholders of Mentor Strategy Portfolio (the "Strategy Portfolio") considered and acted upon the proposal listed below at a special meeting of shareholders held on Thursday November 12, 1998. In addition, below the proposal are the results of that vote. 1. To approve or disapprove an Agreement and Plan of Reorganization providing for the transfer of all of the assets of Strategy Portfolio to Mentor Balanced Portfolio (the "Balanced Portfolio") in exchange for shares of the Balanced Portfolio and the assumption by the Balanced Portfolio of all of the liabilities of the Strategy Portfolio, and the distribution of such shares to the shareholders of the Strategy Portfolio in complete liquidation of the Strategy Portfolio: Affirmative 7,281,296 Against 313,087 Abstain 331,983
MENTOR FUNDS SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- TRUSTEES DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN Chairman and Chief Executive Officer Mentor Investment Group, LLC ARCH T. ALLEN III, TRUSTEE Attorney at Law Allen & Moore, LLP JERRY R. BARRENTINE, TRUSTEE President J.R. Barrentine & Associates ARNOLD H. DREYFUSS, TRUSTEE Chairman Eskimo Pie Corporation WESTON E. EDWARDS, TRUSTEE President Weston Edwards & Associates THOMAS F. KELLER, TRUSTEE Former Dean, Fuqua School of Business Duke University LOUIS W. MOELCHERT, JR., TRUSTEE Vice President for Business & Finance University of Richmond J. GARNETT NELSON, TRUSTEE Consultant Mid-Atlantic Holdings, LLC TROY A. PEERY, JR., TRUSTEE President Heilig-Meyers Company PETER J. QUINN, JR., TRUSTEE Managing Director Mentor Investment Group, LLC OFFICERS PAUL F. COSTELLO, PRESIDENT Managing Director Mentor Investment Group, LLC TERRY L. PERKINS, TREASURER Senior Vice President Mentor Investment Group, LLC GEOFFREY B. SALE, SECRETARY Associate Vice President Mentor Investment Group, LLC MICHAEL A. WADE, ASSISTANT TREASURER Vice President Mentor Investment Group, LLC This report is authorized for distribution to prospective investors only when preceded or accompanied by a Mentor Funds prospectus, which contains complete information about fees, sales charges and expenses. Please read it carefully before you invest or send money. MENTOR FUNDS STATEMENT OF ADDITIONAL INFORMATION (Mentor U.S. Government Money Market Portfolio, Mentor Money Market Portfolio, and Mentor Tax-Exempt Money Market Portfolio) December 15, 1998 This Statement of Additional Information relates to Retail and Institutional Shares of the Mentor U.S. Government Money Market Portfolio, Mentor Money Market Portfolio, and Mentor Tax-Exempt Money Market Portfolio (each a "Portfolio" and collectively the "Portfolios"). Each of the Portfolios is a series of shares of beneficial interest of Mentor Funds (the "Trust"). The Mentor U.S. Government Money Market and Mentor Money Market Portfolios were previously known as the "Mentor Institutional U.S. Government Money Market Portfolio" and "Mentor Institutional Money Market Portfolio," respectively. This Statement is not a prospectus and should be read in conjunction with the relevant prospectus. Separate statements of additional information relate to the other Portfolios comprising the Trust. A copy of any prospectus or statement of additional information can be obtained upon request made to Mentor Services Company, Inc., at P.O. Box 1357, Richmond, Virginia 23218-1357, or calling Mentor Services Company, Inc. at 1-800-869-6042. TABLE OF CONTENTS
CAPTION PAGE - ------- ----- General .................................................................................. 1 Investment Restrictions .................................................................. 1 Certain Investment Techniques ............................................................ 3 Management of the Trust .................................................................. 6 Principal Holders of Securities .......................................................... 10 Investment Advisory and Other Services ................................................... 10 Brokerage ................................................................................ 12 Determination of Net Asset Value ......................................................... 14 Tax Status ............................................................................... 15 The Distributor .......................................................................... 18 Independent Accountants .................................................................. 18 Custodian ................................................................................ 18 Performance Information .................................................................. 18 Mentor Tax Exempt Money Market Portfolio -- Federal Taxable Equivalent Yield Table-1998 19 Rates Shareholder Liability ........................................................... 23 Members of Investment Management Teams ................................................... 23 APPENDIX ................................................................................. 24
i GENERAL Mentor Funds (the "Trust") is a Massachusetts business trust organized on January 20, 1992 as Cambridge Series Trust. INVESTMENT RESTRICTIONS As fundamental investment restrictions, which may not be changed with respect to a Portfolio without approval by the holders of a majority of the outstanding shares of that Portfolio, a Portfolio may not: 1. Purchase any security (other than U.S. Government securities) if as a result: (i) as to 75% of such Portfolio's total assets, more than 5% of the Portfolio's total assets (taken at current value) would then be invested in securities of a single issuer, or (ii) more than 25% of the Portfolio's total assets would be invested in a single industry; except that the Institutional Money Market Portfolio may invest up to 100% of its assets in securities of issuers in the banking industry. 2. Acquire more than 10% of the voting securities of any issuer. 3. Act as underwriter of securities of other issuers except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities laws. 4. Issue any class of securities which is senior to the Portfolio's shares of beneficial interest. 5. Purchase or sell real estate or interests in real estate, including real estate mortgage loans, although it may purchase and sell securities which are secured by real estate and securities of companies that invest or deal in real estate or real estate limited partnership interests. (For purposes of this restriction, investments by a Portfolio in mortgage-backed securities and other securities representing interests in mortgage pools shall not constitute the purchase or sale of real estate or interests in real estate or real estate mortgage loans.) 6. Borrow money in excess of 5% of the value (taken at the lower of cost or current value) of its total assets (not including the amount borrowed) at the time the borrowing is made, and then only from banks as a temporary measure to facilitate the meeting of redemption requests (not for leverage) which might otherwise require the untimely disposition of portfolio investments or for extraordinary or emergency purposes. 7. Purchase or sell commodities or commodity contracts, except that a Portfolio may purchase or sell financial futures contracts, options on futures contracts, and futures contracts, forward contracts, and options with respect to foreign currencies, and may enter into swap transactions. 8. Make loans, except by purchase of debt obligations in which the Portfolio may invest consistent with its investment policies, by entering into repurchase agreements, or by lending its portfolio securities. In addition, it is contrary to the current policy of each Portfolio, which policy may be changed without shareholder approval, to invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale (excluding securities determined by the Trustees of the Trust (or the person designated by the Trustees to make such determinations) to be readily marketable), and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 10% of the Portfolio's net assets (taken at current value) would then be invested in securities described in (a), (b), and (c). 1 All percentage limitations on investments will apply at the time of investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for the investment restrictions listed above as fundamental or to the extent designated as such in a Prospectus with respect to a Portfolio, the other investment policies described in this Statement or in a Prospectus are not fundamental and may be changed by approval of the Trustees. The Investment Company Act of 1940, as amended (the "1940 Act"), provides that a "vote of a majority of the outstanding voting securities" of a Portfolio means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Portfolio, and (2) 67% or more of the shares present at a meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy. 2 CERTAIN INVESTMENT TECHNIQUES Set forth below is information concerning certain investment techniques in which each Portfolio may engage, and certain of the risks they may entail. REPURCHASE AGREEMENTS A Portfolio may enter into repurchase agreements. A repurchase agreement is a contract under which the Portfolio acquires a security for a relatively short period (usually not more than one week) subject to the obligation of the seller to repurchase and the Portfolio to resell such security at a fixed time and price (representing the Portfolio's cost plus interest). It is the Trust's present intention to enter into repurchase agreements only with member banks of the Federal Reserve System and securities dealers meeting certain criteria as to creditworthiness and financial condition established by the Trustees of the Trust and only with respect to obligations of the U.S. government or its agencies or instrumentalities or other high quality short term debt obligations. Repurchase agreements may also be viewed as loans made by a Portfolio which are collateralized by the securities subject to repurchase. The investment adviser will monitor such transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. If the seller defaults, a Portfolio could realize a loss on the sale of the underlying security to the extent that the proceeds of sale including accrued interest are less than the resale price provided in the agreement including interest. In addition, if the seller should be involved in bankruptcy or insolvency proceedings, a Portfolio may incur delay and costs in selling the underlying security or may suffer a loss of principal and interest if a Portfolio is treated as an unsecured creditor and required to return the underlying collateral to the seller's estate. LOANS OF PORTFOLIO SECURITIES A Portfolio may lend its portfolio securities, provided: (1) the loan is secured continuously by collateral consisting of U.S. Government Securities, cash, or cash equivalents adjusted daily to have market value at least equal to the current market value of the securities loaned; (2) the Portfolio may at any time call the loan and regain the securities loaned; (3) a Portfolio will receive any interest or dividends paid on the loaned securities; and (4) the aggregate market value of securities of any Portfolio loaned will not at any time exceed one-third (or such other limit as the Trustee may establish) of the total assets of the Portfolio. Cash collateral received by a Portfolio may be invested in any securities in which the Portfolio may invest consistent with its investment policies. In addition, it is anticipated that a Portfolio may share with the borrower some of the income received on the collateral for the loan or that it will be paid a premium for the loan. Before a Portfolio enters into a loan, its investment adviser considers all relevant facts and circumstances including the creditworthiness of the borrower. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Although voting rights or rights to consent with respect to the loaned securities pass to the borrower, a Portfolio retains the right to call the loans at any time on reasonable notice, and it will do so in order that the securities may be voted by a Portfolio if the holders of such securities are asked to vote upon or consent to matters materially affecting the investment. A Portfolio will not lend portfolio securities to borrowers affiliated with the Portfolio. 3 TAX-EXEMPT SECURITIES GENERAL DESCRIPTION. As used in the prospectus and in this Statement the term "Tax-Exempt Securities" includes debt obligations issued by a state, its political subdivisions (for example, counties, cities, towns, villages, districts and authorities) and their agencies, instrumentalities or other governmental units, the interest from which is, in the opinion of bond counsel, exempt from federal income tax. Such obligations are issued to obtain funds for various public purposes, including the construction of a wide range of public facilities, such as airports, bridges, highways, housing, hospitals, mass transportation, schools, streets and water and sewer works. Other public purposes for which Tax-Exempt Securities may be issued include the refunding of outstanding obligations or the payment of general operating expenses. Short-term Tax-Exempt Securities are generally issued by state and local governments and public authorities as interim financing in anticipation of tax collections, revenue receipts, or bond sales to finance such public purposes. In addition, certain types of "private activity" bonds may be issued by public authorities to finance such projects as privately operated housing facilities and certain local facilities for water supply, gas, electricity or sewage or solid waste disposal, student loans, or the obtaining of funds to lend to public or private institutions for the construction of facilities such as educational, hospital and housing facilities. Other types of private activity bonds, the proceeds of which are used for the construction, repair or improvement of, or to obtain equipment for, privately operated industrial or commercial facilities, may constitute Tax-Exempt Securities, although the current federal tax laws place substantial limitations on the size of such issues. Tax-Exempt Securities also include tax-exempt commercial paper, which are promissory notes issued by municipalities to enhance their cash flows. PARTICIPATION INTERESTS. The Tax-Exempt Money Market Portfolio may invest in Tax-Exempt Securities either by purchasing them directly or by purchasing certificates of accrual or similar instruments evidencing direct ownership of interest payments or principal payments, or both, on Tax-Exempt Securities, provided that, in the opinion of counsel to the initial seller of each such certificate or instrument, any discount accruing on the certificate or instrument that is purchased at a yield not greater than the coupon rate of interest on the related Tax-Exempt Securities will be exempt from federal income tax to the same extent as interest on the Tax-Exempt Securities. The Tax-Exempt Money Market Portfolio may also invest in Tax-Exempt Securities by purchasing from banks participation interests in all or part of specific holdings of Tax-Exempt Securities. These participations may be backed in whole or in part by an irrevocable letter of credit or guarantee of the selling bank. The selling bank may receive a fee from a Fund in connection with the arrangement. STAND-BY COMMITMENTS. When the Tax-Exempt Money Market Portfolio purchases Tax-Exempt Securities, it has the authority to acquire stand-by commitments from banks and broker-dealers with respect to those Tax-Exempt Securities. A stand-by commitment may be considered a security independent of the state tax-exempt security to which it relates. The amount payable by a bank or dealer during the time a stand-by commitment is exercisable, absent unusual circumstances, would be substantially the same as the market value of the underlying Tax-Exempt Security to a third party at any time. The Tax-Exempt Money Market Portfolio expects that stand-by commitments generally will be available without the payment of direct or indirect consideration. No Fund expects to assign any value to stand-by commitments. YIELDS. The yields on Tax-Exempt Securities depend on a variety of factors, including general money market conditions, effective marginal tax rates, the financial condition of the issuer, general conditions of the tax- exempt security market, the size of a particular offering, the maturity of the obligation and the rating of the issue. The ratings of Moody's Investors Service, Inc. and Standard & Poor's represent their opinions as to the quality 4 of the Tax-Exempt Securities which they undertake to rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, Tax-Exempt Securities with the same maturity and interest rate but with different ratings may have the same yield. Yield disparities may occur for reasons not directly related to the investment quality of particular issues or the general movement of interest rates, due to such factors as changes in the overall demand or supply of various types of Tax-Exempt Securities or changes in the investment objectives of investors. Subsequent to purchase by the Tax-Exempt Money Market Portfolio, an issue of Tax-Exempt Securities or other investments may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Portfolio. Neither event will require the elimination of an investment from the Tax-Exempt Money Market Portfolio's portfolio, but Mentor Advisors will consider such an event in its determination of whether the Tax-Exempt Money Market Portfolio should continue to hold an investment in its portfolio. "MORAL OBLIGATION" BONDS. The Tax-Exempt Money Market Portfolio does not currently intend to invest in so-called "moral obligation" bonds, where repayment is backed by a moral commitment of an entity other than the issuer, unless the credit of the issuer itself, without regard to the "moral obligation," meets the investment criteria established for investments by the Tax-Exempt Money Market Portfolio. ADDITIONAL RISKS. Securities in which the Tax-Exempt Money Market Portfolio may invest, including Tax-Exempt Securities, are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the federal Bankruptcy Code (including special provisions related to municipalities and other public entities), and laws, if any, which may be enacted by Congress or state legislatures extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations. There is also the possibility that as a result of litigation or other conditions the power, ability or willingness of issuers to meet their obligations for the payment of interest and principal on their Tax-Exempt Securities may be materially affected. There is no assurance that any issuer of a Tax-Exempt Security will make full or timely payments of principal or interest or remain solvent. From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax-exemption for interest on debt obligations issued by states and their political subdivisions. Federal tax laws limit the types and amounts of tax-exempt bonds issuable for certain purposes, especially industrial development bonds and private activity bonds. Such limits may affect the future supply and yields of these types of Tax-Exempt Securities. Further proposals limiting the issuance of tax-exempt bonds may well be introduced in the future. If it appeared that the availability of Tax-Exempt Securities for investment by the Portfolio and the value of the Tax-Exempt Money Market Portfolio's portfolio could be materially affected by such changes in law, the Trustees of the Trust would reevaluate the Tax-Exempt Money Market Portfolio's investment objectives and policies and consider changes in the structure of the Tax-Exempt Money Market Portfolio or its dissolution. 5 MANAGEMENT OF THE TRUST The following table provides biographical information with respect to each Trustee and officer of the Trust. Each Trustee who is an "interested person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk.
POSITION HELD NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------------- ---------------------- ----------------------------------------------------- Daniel J. Ludeman* Chairman and Trustee Chairman and Chief Executive Officer Mentor c/o Mentor Funds Investment Group, Inc.; Managing Director of 901 E. Byrd Street Wheat First Butcher Singer, Inc. Director, Wheat, Richmond, VA 23219 First Securities, Inc.; Chairman and Director Mentor Income Fund, Inc., and America's Utility Fund, Inc.; Chairman and Trustee, Cash Resource Trust, Mentor Variable Investment Portfolios and Mentor Institutional Trust. Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corporation; Trustee, Cash P.O. Box 18156 Resource Trust, Mentor Variable Investment Richmond, Virginia 23226 Portfolios and Mentor Institutional Trust; Director, Mentor Income Fund, Inc. and America's Utility Fund, Inc.; formerly, Chairman and Chief Executive Officer, Hamilton Beach/Proctor-Silex, Inc. Thomas F. Keller Trustee R.J. Reynolds Industries Professor of Business Fuqua School of Business Administration and Former Dean of Fuqua School Duke University of Business, Duke University; Director of LADD Durham, NC 27706 Furniture, Inc., Wendy's International, Inc., American Business Products, Inc., Dimon, Inc., and Biogen, Inc.; Director of Nations Balanced Target Maturity Fund, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Hatteras Income Securities, Inc., Nations Institutional Reserves, Nations Fund Trust, Nations Fund, Inc., Nations Fund Portfolios, Inc., and Nations LifeGoal Funds, Inc. Trustee, Cash Resource Trust, Mentor Variable Investment Portfolios and Mentor Institutional Trust; Director, Mentor Income Fund, Inc. and America's Utility Fund, Inc.
6
POSITION HELD NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------------- -------------- ----------------------------------------------------- Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of University of Richmond Richmond; Trustee, Cash Resource Trust, Mentor Richmond, VA 23173 Variable Investment Portfolios and Mentor Institutional Trust; Director, Mentor Income Fund, Inc. and America's Utility Fund, Inc. Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company; Trustee, Cash Heilig-Meyers Company Resource Trust, Mentor Variable Investment 2235 Staples Mill Road Portfolios and Mentor Institutional Trust; Director, Richmond, Virginia 23230 Mentor Income Fund, Inc. and America's Utility Fund, Inc. Peter J. Quinn, Jr.* Trustee Formerly, President, Mentor Distributors, Inc.; c/o Mentor Funds Managing Director, Mentor Investment Group, LLC, 901 E. Byrd Street and Wheat First Butcher Singer, Inc.; formerly, Richmond, VA 23219 Senior Vice President/Director of Mutual Funds, Wheat First Butcher Singer, Inc.; Trustee, Cash Resource Trust, Mentor Variable Investment Portfolios and Mentor Institutional Trust; Director, Mentor Income Fund, Inc. and America's Utility Fund, Inc. Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee, c/o Mentor Funds Cash Resource Trust, Mentor Variable Investment 901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director, Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility Fund, Inc.; formerly, Vice Chancellor for Development and University Relations, University of North Carolina at Chapel Hill. Weston E. Edwards Trustee President, Weston Edwards & Associates; Trustee c/o Mentor Funds Cash Resource Trust, Mentor Variable Investment 901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director, Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility Fund, Inc.; Founder and Chairman, The Housing Roundtable; formerly, President, Smart Mortgage Access, Inc.
7
POSITION HELD NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - --------------------- --------------------- ----------------------------------------------------- Jerry R. Barrentine Trustee President, J.R. Barretine & Associates; Trustee, c/o Mentor Funds Cash Resource Trust, Mentor Variable Investment 901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director, Richmond, VA 23219 Mentor Income Fund, Inc. and America's Utility Fund, Inc.; formerly, Executive Vice President and Chief Financial Officer, Barclays/American Mortgage Director Corporation; Managing Partner, Barrentine Lott & Associates. J. Garnett Nelson Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee, c/o Mentor Funds Cash Resource Trust, Mentor Variable Investment 901 E. Byrd Street Portfolios and Mentor Institutional Trust; Director, Richmond, VA 23219 Mentor Income Fund, Inc., America's Utility Fund, Inc., GE Investment Funds, Inc., and Lawyers Title Corporation; Member, Investment Advisory Committee, Virginia Retirement System; formerly, Senior Vice President, The Life Insurance Company of Virginia. Paul F. Costello President Managing Director, Wheat First Butcher Singer, Inc. c/o Mentor Funds and Mentor Investment Group, LLC; President, 901 E. Byrd Street Cash Resource Trust, Mentor Income Fund, Inc., Richmond, VA 23219 Mentor Institutional Trust, Mentor Variable Investment Portfolios and America's Utility Fund, Inc.; Director, Mentor Perpetual Advisors, LLC Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group, c/o Mentor Funds LLC; Treasurer, Mentor Institutional Trust, Cash 901 E. Byrd Street Resource Trust, Mentor Variable Investment Richmond, VA 23219 Portfolios, Mentor Income Fund, Inc.; America's Utility Fund, Inc.; formerly, Treasurer and Comptroller, Ryland Capital Management, Inc. Michael Wade Assistant Treasurer Vice President, Mentor Investment Group, LLC c/o Mentor Funds Assistant Treasurer, Mentor Income Fund, Inc., 901 E. Byrd Street Cash Resource Trust, Mentor Institutional Trust, Richmond, VA 23219 Mentor Variable Investment Portfolios and America's Utility Fund; formerly, Senior Accountant, Wheat First Butcher Singer, Inc., Audit Senior, BDO Seidman.
8
POSITION HELD NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - -------------------- -------------- -------------------------------------------------- Geoffrey B. Sale Secretary Associate Vice President Mentor Investment Group, c/o Mentor Funds LLC; Secretary, Cash Resource Trust, Mentor 901 E. Byrd Street Institutional Trust, Mentor Variable Investment Richmond, VA 23219 Portfolios; Clerk, America's Utility Fund, Inc., Mentor Income Fund, Inc.
- ---------- * This Trustee is deemed to be an "interested person" of a Fund as defined in the 1940 Act. The table below shows the fees paid to each Trustee by the Trust for the 1998 fiscal year and the fees paid to each Trustee by all funds in the Mentor family (including the Trust) during the 1997 calendar year.
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM FROM THE TRUST ALL COMPLEX FUNDS (27 FUNDS) TRUSTEES (FISCAL YEAR END 1998) (CALENDAR YEAR 1998) - --------------------------------- ------------------------ ----------------------------- Daniel J. Ludeman ............... $ 0 $ 0 Arnold H. Dreyfuss .............. $5,808 $32,000 Thomas F. Keller ................ $4,859 $32,000 Louis W. Moelchert, Jr. ......... $5,606 $32,000 J. Garnett Nelson ............... $5,393 $40,000 Troy A. Peery, Jr. .............. $5,405 $32,000 Peter J. Quinn, Jr. ............. $ 0 $ 0 Jerry R. Barrentine ............. $5,660 $40,000 Weston E. Edwards ............... $5,479 $42,000 Arch T. Allen III ............... $5,399 $35,000
The Trustees do not receive pension or retirement benefits from the Trust. The Declaration of Trust of the Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, except if it is determined in the manner specified in the Agreement and Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust or that such indemnification would relieve any officer or Trustee of any liability to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of his or her duties. The Trust, at its expense, provides liability insurance for the benefit of its Trustees and officers. 9 PRINCIPAL HOLDERS OF SECURITIES As of November 2, 1998, the officers and Trustees of the Trust owned as a group less than one percent of the outstanding shares of each Portfolio. To the knowledge of the Trust, no person owned of record or beneficially more than 5% of the outstanding shares of any Portfolio as of that date except that the following persons owned of record Institutional Shares of the Money Market Portfolio:
PORTFOLIO HOLDER PERCENTAGE OWNERSHIP - ------------------------- --------------------------- --------------------- Money Market Portfolio- EVEREN Clearing Corp Cust 5.81% Institutional Class FBO Alif A Kuri IRA 112 Francis St Kent, OH 44240 Money Market Portfolio- Dinwiddie County 5.89% Institutional Class PO Box 178 Dinwiddie, VA 23841-0178 Money Market Portfolio- Greensville County 5.94% Institutional Class 1750 E. Atlantic St Rm 213 Emporia, VA 23847-6584 Money Market Portfolio- Sussex County 6.75% Institutional Class PO Box 13999 Sussex, VA 23884-0399 Money Market Portfolio- City of Hopewell 9.08% Institutional Class 300 N. Main St Hopewell, VA 23860-2740
INVESTMENT ADVISORY AND OTHER SERVICES INVESTMENT ADVISORY SERVICES Mentor Investment Advisors, LLC ("Mentor Advisors") serves as investment adviser to each Portfolio pursuant to a Management Contract with the Trust. Subject to the supervision and direction of the Trustees, Mentor Advisors manages a Portfolio's portfolio in accordance with the stated policies of that Portfolio and of the Trust. Mentor Advisors makes investment decisions for the Portfolios and places the purchase and sale orders for portfolio transactions. Mentor Advisors bears all of its expenses in connection with the performance of its services. In addition, Mentor Advisors pays the salaries of all officers and employees who are employed by it and the Trust. Mentor Advisors provides the Portfolios with investment officers who are authorized to execute purchases and sales of securities. Investment decisions for the Portfolios and for the other investment advisory clients of 10 Mentor Advisors and its affiliates are made with a view to achieving their respective investment objectives. Investment decisions are the product of many factors in addition to basic suitability for the particular client involved. Thus, a particular security may be bought or sold for certain clients even though it could have been bought or sold for other clients at the same time. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling the security. In some instances, one client may sell a particular security to another client. It also sometimes happens that two or more clients simultaneously purchase or sell the same security, in which event each day's transactions in such security are, insofar as possible, averaged as to price and allocated between such clients in a manner which in an investment adviser's opinion is equitable to each and in accordance with the amount being purchased or sold by each. In some cases, this procedure could have an adverse effect on the price or amount of the securities purchased or sold by a Portfolio. Purchase and sale orders for a Portfolio may be combined with those of other clients of Mentor Advisors in the interest achieving the most favorable net results for the Portfolio. The proceeds received by each Portfolio for each issue or sale of its shares, and all income, earnings, profits, and proceeds thereof, subject only to the rights of creditors, will be specifically allocated to such Portfolio, and constitute the underlying assets of that Portfolio. The underlying assets of each Portfolio will be segregated on the Trust's books of account, and will be charged with the liabilities in respect of such Portfolio and with a share of the general liabilities of the Trust. Expenses with respect to a Portfolio may be allocated in proportion to the net asset values of that Portfolio except where allocations of direct expenses can otherwise be fairly made. Expenses incurred in the operation of a Portfolio or otherwise allocated to a Portfolio, including but not limited to taxes, interest, brokerage fees and commissions, fees to Trustees who are not officers, directors, stockholders, or employees of Wheat First Butcher Singer and subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees, charges of the custodian and transfer and dividend disbursing agents, outside auditing, accounting, and legal services, investor servicing fees and expenses, charges for the printing of prospectuses and statements of additional information for regulatory purposes or for distribution to shareholders, certain shareholder report charges and charges relating to corporate matters are borne by the Portfolio. Each Management Contract is subject to annual approval (beginning in 2000) by (i) the Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the affected Portfolio, provided that in either event the continuance is also approved by a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust or Mentor Advisors, by vote cast in person at a meeting called for the purpose of voting on such approval. Each Management Contract is terminable without penalty, on not more than sixty days' notice and not less than thirty days' notice, by the Trustees, by vote of the holders of a majority of the affected Portfolio's shares, or by Mentor Advisors. Each Management Contract terminates automatically in the event of its assignment (as defined in the 1940 Act). MANAGEMENT FEES The investment adviser of each Portfolio receives an annual management fee from such Portfolio (which is described in the relevant Prospectus). The investment adviser pays a portion of that fee to any sub-adviser to the Portfolio. 11 The Portfolios paid investment advisory fees in the amounts and for the periods indicated below (amounts shown reflect fee waivers where applicable):
FISCAL YEAR FISCAL YEAR 1998 1997 ------------- ------------ Money Market Portfolio ............ $ 52,000 N/A U.S. Government Portfolio ......... $202,000 29,982 Tax-Exempt Portfolio .............. N/A N/A
BROKERAGE Transactions on U.S. stock exchanges, commodities markets, and futures markets and other agency transactions involve the payment by a Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Portfolio usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Portfolio includes a disclosed, fixed commission or discount retained by the underwriter or dealer. It is anticipated that most purchases and sales of portfolio securities by a Portfolio will be with the issuer or with underwriters of or dealers in those securities, acting as principal. Accordingly, the Portfolios would not ordinarily pay significant brokerage commissions with respect to securities transactions. It has for many years been a common practice in the investment advisory business for advisers of investment companies and other institutional investors to receive brokerage and research services (as defined in the Securities Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that execute portfolio transactions for the clients of such advisers and from third parties with which such broker-dealers have arrangements. Consistent with this practice, Mentor Advisors receives brokerage and research services and other similar services from many broker-dealers with which it places the Portfolios' portfolio transactions and from third parties with which these broker-dealers have arrangements. These services include such matters as general economic and market reviews, industry and company reviews, evaluations of investments, recommendations as to the purchase and sale of investments, newspapers, magazines, pricing services, quotation services, news services and personal computers utilized by the investment advisers' managers and analysts. Where the services referred to above are not used exclusively by Mentor Advisors for research purposes, Mentor Advisors, based upon its own allocations of expected use, bears that portion of the cost of these services which directly relates to its non-research use. Some of these services are of value to Mentor Advisors and its affiliates in advising various of its clients (including the Portfolios), although not all of these services are necessarily useful and of value in managing the Portfolios. Mentor Advisors places all orders for the purchase and sale of portfolio investments for the Portfolios and buys and sells investments for the Portfolios through a substantial number of brokers and dealers. Mentor Advisors seeks the best overall terms available for the Portfolios, except to the extent it may be permitted to pay higher brokerage commissions as described below. In doing so, Mentor Advisors, having in mind a Portfolio's best interests, considers all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security or other investment, the amount of the commission, the 12 timing of the transaction taking into account market prices and trends, the reputation, experience and financial stability of the broker-dealer involved and the quality of service rendered by the broker-dealer in other transactions. As permitted by Section 28(e) of the 1934 Act, and by the Management Contract, Mentor Advisors may cause a Portfolio to pay a broker-dealer which provides "brokerage and research services" (as defined in the 1934 Act) to it an amount of disclosed commission for effecting securities transactions on stock exchanges and other transactions for a Portfolio on an agency basis in excess of the commission which another broker-dealer would have charged for effecting that transaction. Mentor Advisors' authority to cause a Portfolio to pay any such greater commissions is also subject to such policies as the Trustees may adopt from time to time. Mentor Advisors does not currently intend to cause a Portfolio to make such payments. It is the position of the staff of the Securities and Exchange Commission that Section 28(e) does not apply to the payment of such greater commissions in "principal" transactions. Accordingly, Mentor Advisors will use its best efforts to obtain the best overall terms available with respect to such transactions, as described above. Consistent with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. and subject to such other policies as the Trustees may determine, Mentor Advisors may consider sales of shares of a Portfolio (and, if permitted by law, of the other Mentor funds) as a factor in the selection of broker-dealers to execute portfolio transactions for a Portfolio. The Trustees have determined that portfolio transactions for the Trust may be effected through Wheat, First Securities, Inc. ("Wheat"), First Union Brokerage Services ("FUBS") or EVEREN Securities, Inc. ("EVEREN"), broker-dealers affiliated with Mentor Advisors. The Trustees have adopted certain policies incorporating the standards of Rule 17e-l issued by the SEC under the 1940 Act which requires, among other things, that the commissions paid to Wheat, FUBS, and EVEREN must be reasonable and fair compared to the commissions, fees, or other remuneration received by other brokers in connection with comparable transactions involving similar securities during a comparable period of time. Wheat and EVEREN will not participate in brokerage commissions paid by a Portfolio to other brokers or dealers. Over-the-counter purchases and sales are transacted directly with principal market makers except in those cases in which better prices and executions may be obtained elsewhere. A Portfolio will in no event effect principal transactions with Wheat, FUBS, or EVEREN in over-the-counter securities in which Wheat, FUBS, or EVEREN makes a market, as the case may be. Under rules adopted by the SEC, neither Wheat, FUBS, nor EVEREN may execute transactions for a Portfolio on the floor of any national securities exchange, but either may effect transactions for a Portfolio by transmitting orders for execution and arranging for the performance of this function by members of the exchange not associated with them. Wheat, FUBS, and EVEREN will be required to pay fees charged to those persons performing the floor brokerage elements out of the brokerage compensation it receives from a Portfolio. The Trust has been advised by Wheat that, on most transactions, the floor brokerage generally constitutes from 5% and 10% of the total commissions paid. The Portfolios paid no brokerage fees for the fiscal periods ended September 30, 1997 and 1998. 13 DETERMINATION OF NET ASSET VALUE The net asset value per share of each class of a Portfolio is determined twice each day as of 12:00 noon and as of the close of regular trading (generally 4:00 p.m. New York time) on each day the New York Stock Exchange is open for trading. The New York Stock Exchange is normally closed on the following national holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas. The valuation of each Portfolio's portfolio securities is based upon its amortized cost, which does not take into account unrealized securities gains or losses. This method involves initially valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. By using amortized cost valuation, each Portfolio seeks to maintain a constant net asset value of $1.00 per share, despite minor shifts in the market value of its portfolio securities. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price a Portfolio would receive if it sold the instrument. During periods of declining interest rates, the quoted yield on shares of a Portfolio may tend to be higher than a like computation made by a fund with identical investments utilizing a method of valuation based on market prices and estimates of market prices for all of its portfolio instruments. Thus, if the use of amortized cost by a Portfolio resulted in a lower aggregate portfolio value on a particular day, a prospective investor in the Portfolio would be able to obtain a somewhat higher yield if he purchased shares of the Portfolio on that day, than would result from investment in a fund utilizing solely market values, and existing investors in the Portfolio would receive less investment income. The converse would apply on a day when the use of amortized cost by a Portfolio resulted in a higher aggregate portfolio value. However, as a result of certain procedures adopted by the Trust, the Trust believes any difference will normally be minimal. The valuation of a Portfolio's portfolio instruments at amortized cost is permitted in accordance with Securities and Exchange Commission Rule 2a-7 and certain procedures adopted by the Trustees. Under these procedures, a Portfolio must maintain a dollar-weighted average portfolio maturity of 90 days or less, purchase only instruments having remaining maturities of 397 days or less, and invest in securities determined by the Trustees to be of high quality with minimal credit risks. The Trustees have also established procedures designed to stabilize, to the extent reasonably possible, a Portfolio's price per share as computed for the purpose of distribution, redemption and repurchase at $1.00. These procedures include review of a Portfolio's portfolio holdings by the Trustees, at such intervals as they may deem appropriate, to determine whether a Portfolio's net asset value calculated by using readily available market quotations deviates from $1.00 per share, and, if so, whether such deviation may result in material dilution or is otherwise unfair to existing shareholders. In the event the Trustees determine that such a deviation may result in material dilution or is otherwise unfair to existing shareholders, they will take such corrective action as they regard as necessary and appropriate, including the sale of portfolio instruments prior to maturity to realize capital gains or losses or to shorten the average portfolio maturity; withholding dividends; redemption of shares in kind; or establishing a net asset value per share by using readily available market quotations. Since the net income of a Portfolio is declared as a dividend each time it is determined, the net asset value per share of a Portfolio remains at $1.00 per share immediately after such determination and dividend declaration. Any increase in the value of a shareholder's investment in a Portfolio representing the reinvestment of dividend income is reflected by an increase in the number of shares of a Portfolio in the shareholder's account on 14 the last day of each month (or, if that day is not a business day, on the next business day). It is expected that a Portfolio's net income will be positive each time it is determined. However, if because of realized losses on sales of portfolio investments, a sudden rise in interest rates, or for any other reason the net income of a Portfolio determined at any time is a negative amount, that Portfolio will offset such amount allocable to each then shareholder's account from dividends accrued during the month with respect to such account. If at the time of payment of a dividend by a Portfolio (either at the regular monthly dividend payment date, or, in the case of a shareholder who is withdrawing all or substantially all of the shares in an account, at the time of withdrawal), such negative amount exceeds a shareholder's accrued dividends, that Portfolio will reduce the number of outstanding shares by treating the shareholder as having contributed to the capital of the Portfolio that number of full and fractional shares which represent the amount of the excess. Each shareholder is deemed to have agreed to such contribution in these circumstances by its investment in a Portfolio. Should a Portfolio incur or anticipate any unusual or unexpected significant expense or loss which would affect disproportionately the Portfolio's income for a particular period, the Trustees would at that time consider whether to adhere to the dividend policy described above or to revise it in light of the then prevailing circumstances in order to ameliorate to the extent possible the disproportionate effect of such expense or loss on then existing shareholders. Such expenses or losses may nevertheless result in a shareholder's receiving no dividends for the period during which the shares are held and receiving upon redemption a price per share lower than that which was paid. TAX STATUS Each Portfolio intends to qualify each year and elect to be taxed as a regulated investment company under Subchapter M of the United States Internal Revenue Code of 1986, as amended (the "Code"). As a regulated investment company qualifying to have its tax liability determined under Subchapter M, a Portfolio will not be subject to federal income tax on any of its net investment income or net realized capital gains that are distributed to its shareholders. As series of a Massachusetts business trust, the Portfolios under present law will not be subject to any excise or income taxes in Massachusetts. Distributions from a Portfolio will be taxable to a shareholder whether received in cash or additional shares. Such distributions that are designated as capital gains dividends will be taxable as such, regardless of how long Portfolio shares have been held, while other taxable distributions will be taxed as ordinary income. In order to qualify as a "regulated investment company," a Portfolio must, among other things, (a) derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, and other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies and (b) diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets consists of cash, cash items, U.S. Government Securities, securities of other regulated investment companies, and other securities limited generally with respect to any one issuer to not more than 5% of the total assets of a Fund and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities (other than those of U.S. Government or other regulated investment companies) of any issuer or of two or more issuers which the Portfolio controls and which are engaged in the same, similar, or related trades or businesses. In 15 order to receive the favorable tax treatment accorded regulated investment companies and their shareholders, moreover, a Portfolio must in general distribute at least 90% of the sum of its taxable net investment income, its net tax-exempt income, and the excess, if any, of net short-term capital gains over net long-term capital losses for such year. To satisfy these requirements, a Portfolio may engage in investment techniques that affect the amount, timing and character of its income and distributions. If a Portfolio failed to qualify as a regulated investment company accorded special tax treatment in any taxable year, the Portfolio would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, would be taxable to shareholders as ordinary income. In addition, a Portfolio could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a regulated investment company that is accorded special tax treatment. An excise tax at the rate of 4% will be imposed on the excess, if any, of each Portfolio's "required distribution" over its distributions in any calendar year. Generally, the "required distribution" is 98% of the Portfolio's ordinary income for the calendar year plus 98% of its capital gain net income realized during the one-year period ending on October 31, plus undistributed amounts from prior years. Each Portfolio intends to make distributions sufficient to avoid imposition of the excise tax. Distributions declared by a Portfolio during October, November or December to shareholders of record on a date in any such month and paid by the Portfolio during the following January will be treated for federal tax purposes as paid by the Portfolio and received by shareholders on December 31 of the year in which declared. Distributions from a Portfolio (other than exempt-interest dividends, as discussed below) will be taxable to shareholders as ordinary income to the extent derived from the Portfolio's investment income and net short-term gains. Net capital gain (that is, the excess of net gains from capital assets held for more than one year over net losses from capital assets held for not more than one year) of a Portfolio that is distributed and designated as a capital gain dividend will be taxable to shareholders as long-term capital gain, generally taxable to individuals at a 20% rate, regardless of how long a shareholder has held the shares in the Portfolio. Each Portfolio is required to withhold 31% of all ordinary income dividends and capital gain distributions, and 31% of the gross proceeds of all redemptions of Portfolio shares, in the case of any shareholder who does not provide a correct taxpayer identification number, about whom a Portfolio is notified that the shareholder has underreported income in the past, or who fails to certify to a Portfolio that the shareholder is not subject to such withholding. Shareholders who fail to furnish their current tax identification numbers are subject to a penalty of $50 for each such failure unless the failure is due to reasonable cause and not willfull neglect. An individual's taxpayer identification number is his or her Social Security number. Tax-exempt shareholders are not subject to these back-up withholding rules so long as they furnish the Portfolio with a proper certification. EXEMPT-INTEREST DIVIDENDS. A Portfolio will be qualified to pay exempt-interest dividends to its shareholders only if, at the close of each quarter of the Portfolio's taxable year, at least 50% of the total value of the Portfolio's assets consists of obligations the interest on which is exempt from federal income tax. Distributions that a Portfolio properly designates as exempt-interest dividends are treated as interest excludable from shareholders' gross income for federal income tax purposes but may be taxable for federal alternative minimum tax purposes 16 and for state and local purposes. If a Portfolio intends to be qualified to pay exempt-interest dividends, the Portfolio may be limited in its ability to enter into taxable transactions involving forward commitments, repurchase agreements, financial futures and options contracts on financial futures, tax-exempt bond indices and other assets. Part or all of the interest on indebtedness, if any, incurred or continued by a shareholder to purchase or carry shares of a Portfolio paying exempt-interest dividends is not deductible. The portion of interest that is not deductible is equal to the total interest paid or accrued on the indebtedness, multiplied by the percentage of a Portfolio's total distributions (not including capital gain dividends) paid to the shareholder that are exempt- interest dividends. Under rules used by the Internal Revenue Service for determining when borrowed funds are considered used for the purpose of purchasing or carrying particular assets, the purchase of shares may be considered to have been made with borrowed funds even though such funds are not directly traceable to the purchase of shares. In general, exempt-interest dividends, if any, attributable to interest received on certain private activity obligations and certain industrial development bonds will not be tax-exempt to any shareholders who are "substantial users" of the facilities financed by such obligations or bonds or who are "related persons" of such substantial users. A Portfolio which is qualified to pay exempt-interest dividends will inform investors within 60 days of the Portfolio's fiscal year-end of the percentage of its income distributions designated as tax-exempt. The percentage is applied uniformly to all distributions made during the year. The percentage of income designated as tax-exempt for any particular distribution may be substantially different from the percentage of a Portfolio's income that was tax-exempt during the period covered by the distribution. REDEMPTIONS. Each Portfolio seeks to maintain a stable net asset value of $1.00 per share; however, there can be no assurance that a Portfolio will be able to do so. A shareholder may therefore recognize gain or loss on the sale or redemption of shares of a Portfolio in an amount equal to the difference between the proceeds of the sale or redemption and the shareholder's adjusted tax basis in the shares. All or a portion of any loss so recognized may be disallowed if the shareholder purchases other shares of that Portfolio within 30 days before or after the sale or redemption. In general, any gain or loss arising from (or treated as arising from) the sale or redemption of shares of a Portfolio will be considered capital gain or loss and will be long-term capital gain or loss if the shares were held for longer than one year. Long-term capital gain is generally taxable to individuals at a 20% rate. However, any capital loss arising from the sale or redemption of shares held for six months or less will be disallowed to the extent of the amount of exempt-interest dividends received on such shares and (to the extent not disallowed) will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received on such shares. SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. A Portfolio's investment in securities issued at a discount and certain other obligations will (and investments in securities purchased at a discount may) require the Portfolio to accrue and distribute income not yet received. In order to generate sufficient cash to make the requisite distributions, a Portfolio may be required to sell securities in its portfolio that it otherwise would have continued to hold. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and related regulations currently in effect. For the complete provisions, reference should be made to the pertinent Code sections and regulations. The Code and regulations are subject to change by legislative or administrative actions. 17 Dividends and distributions also may be subject to state, local, foreign and other taxes. Shareholders are urged to consult their tax advisers regarding specific questions as to federal, state, local, or foreign taxes. The foregoing discussion relates solely to U.S. federal income tax law. Non-U.S. investors should consult their tax advisers concerning the tax consequences of ownership of shares of the Fund, including the possibility that distributions may be subject to a 30% United States withholding tax (or a reduced rate of withholding provided by treaty). THE DISTRIBUTOR Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus, Ohio 43219, is the principal distributor of the Portfolios' shares. Mentor Distributors, LLC is a wholly owned subsidiary of BISYS Fund Services, Inc. INDEPENDENT ACCOUNTANTS KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts 02110, are the Portfolios' independent auditors, providing audit services, tax return review, and other tax consulting services. CUSTODIAN The custodian of the Portfolios, Investors Fiduciary Trust Company, is located at 127 West 10th Street, Kansas City, Missouri 64105. A custodian's responsibilities include generally safeguarding and controlling a Portfolio's cash and securities, handling the receipt and delivery of securities, and collecting interest and dividends on a Portfolio's investments. PERFORMANCE INFORMATION The yield of each Portfolio is computed by determining the percentage net change, excluding capital changes, in the value of an investment in one share of the Portfolio over the base period, and multiplying the net change by 365/7 (or approximately 52 weeks). A Portfolio's effective yield represents a compounding of the yield by adding 1 to the number representing the percentage change in value of the investment during the base period, raising that sum to a power equal to 365/7, and subtracting 1 from the result. The U.S. Government Money Market Portfolio's yield and effective yield for the seven-day period ended September 30, 1998 were 5.13% and 5.26%, respectively. The Money Market Portfolio's yield and effective yield for the seven-day period ended September 30, 1998 were 5.28% and 5.42%, respectively. All data for each of the Portfolios are based on past performance and do not predict future results. 18 MENTOR TAX-EXEMPT MONEY MARKET PORTFOLIO -- FEDERAL TAXABLE EQUIVALENT YIELD TABLE-1998 RATES
FEDERAL FEDERAL EFFECTIVE TAXPAYER TAXABLE TAX FEDERAL YEAR STATUS INCOME BRACKET RATE - -------- ---------- ------------------ ----------- ---------- 1998 MARRIED $ 0-42,350 15.00% 15.00% $ 42,351-102,300 28.00% 28.00% $102,301-124,500 31.00% 31.00% $124,501-155,950 31.00% 31.93% $155,951-278,450 36.00% 37.08% OVER $278,450 39.60% 40.79% 1998 SINGLE $ 0-25,350 15.00% 15.00% $ 25,351-61,400 28.00% 28.00% $ 61,401-124,500 31.00% 31.00% $124,501-128,500 31.00% 31.93% 128,101-278,450 36.00% 37.08% OVER $278,450 39.60% 40.79% TAX-FREE YIELD -------------------------------------------------------------------------------------------------- 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- YEAR - -------- TAXABLE EQUIVALENT YIELD 1998 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59% 5.88% 6.61% 7.35% 8.08% 8.81% 9.55% 10.28% 11.02% 11.75% 6.36% 7.15% 7.95% 8.74% 9.54% 10.33% 11.13% 11.92% 12.71% 6.76% 7.60% 8.44% 9.29% 10.13% 10.98% 11.82% 12.67% 13.51% 1998 4.71% 5.29% 5.88% 6.47% 7.06% 7.69% 8.24% 8.82% 9.41% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59% 5.88% 6.61% 7.35% 8.08% 8.81% 9.55% 10.28% 11.02% 11.75% 6.36% 7.15% 7.95% 8.74% 9.54% 10.33% 11.13% 11.92% 12.71% 6.76% 7.60% 8.44% 9.29% 10.13% 10.98% 11.82% 12.67% 13.51%
- --------- Note: This tables reflects the following: 1 Taxable Income, as reflected in the above table, equals Federal adjusted gross income (AGI), less personal exemptions and itemized deductions. However, certain itemized deductions are reduced by the lesser of (i) three percent of the amount of the taxpayer's AGI over $124,500, or (ii) 80 percent of the amount of such itemized deductions otherwise allowable. The effect of the three percent phase out on all itemized deductions and not just those deductions subject to the phase out is reflected above in the combined Federal and state tax rates through the use of higher effective Federal tax rates. In addition, the effect of the 80 percent cap on overall percent cap on overall itemized deductions is not reflected on this table. Federal income tax rules also provide that personal exemptions are phased out at a rate of two percent for each $2,500 (or fraction thereof) of AGI in excess of $186,800 for married taxpayers filing a joint tax return and $124,500 for single taxpayers. The effect of the phase out of personal exemptions is not reflected in the above table. 2 The effect of state income taxes are not considered in the above table. Such consideration would increase the taxable equivalent yield to the extent that the municipal obligations are issued by the taxpayer's state of residence. 3 Interest earned on municipal obligations may be subject to the federal alternative minimum tax. This provision is not incorporated into the table. 4 The taxable equivalent yield table does not incorporate the effect of graduated rate structures in determinig yields. Instead, the tax rates used are the highest marginal tax rates applicable to the income levels indicated within each bracket. 5 Interest earned on all municipal obligations may cause certain investors to be subject to tax on a portion of their Social Security and/or railroad retirement benefits. The effect of this provision is not included in the above table. 19 Of course, there is no assurance that the Tax-Exempt Money Market Portfolio will achieve any specific tax-exempt yield. While it is expected that the Tax-Exempt Money Market Portfolio will invest principally in obligations which pay interest exempt from federal income tax, other income received by the Tax-Exempt Money Market Portfolio may be taxable. The table does not take into account any state or local taxes payable on Tax-Exempt Money Market Portfolio distributions. Independent statistical agencies measure a Portfolio's investment performance and publish comparative information showing how the Portfolio, and other investment companies, performed in specified time periods. Agencies whose reports are commonly used for such comparisons are set forth below. From time to time, a Portfolio may distribute these comparisons to its shareholders or to potential investors. The agencies listed below measure performance based on the basis of their own criteria rather than on the basis of the standardized performance measures described above. Lipper Analytical Services, Inc. distributes mutual fund rankings monthly. The rankings are based on total return performance calculated by Lipper, reflecting generally changes in net asset value adjusted for reinvestment of capital gains and income dividends. They do not reflect deduction of any sales charges. Lipper rankings cover a variety of performance periods, for example year-to-date, 1-year, 5-year, and 10-year performance. Lipper classifies mutual funds by investment objective and asset category. Morningstar, Inc. distributes mutual fund ratings twice a month. the ratings are divided into five groups: highest, above average, neutral, below average and lowest. They represent a fund's historical risk/reward ratio relative to other funds with similar objectives. The performance factor is a weighted-average assessment of the Portfolio's 3-year, 5-year, and 10-year total return performance (if available) reflecting deduction of expenses and sales charges. Performance is adjusted using quantitative techniques to reflect the risk profile of the fund. The ratings are derived from a purely quantitative system that does not utilize the subjective criteria customarily employed by rating agencies such as Standard & Poor's Corporation and Moody's Investor Service, Inc. Weisenberger's Management Results publishes mutual fund rankings and is distributed monthly. The rankings are based entirely on total return calculated by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and 10-year performance. Mutual funds are ranked in general categories (e.g., international bond, international equity, municipal bond, and maximum capital gain). Weisenberger rankings do not reflect deduction of sales charges or fees. Independent publications may also evaluate a Portfolio's performance. Certain of those publications are listed below, at the request of Mentor Distributors, which bears full responsibility for their use and the descriptions appearing below. From time to time any or all of the Portfolios may distribute evaluations by or excerpts from these publications to its shareholders or to potential investors. The following illustrates the types of information provided by these publications. Business Week publishes mutual fund rankings in its Investment Figures of the Week column. The rankings are based on 4-week and 52-week total return reflecting changes in net asset value and the reinvestment of all distributions. They do not reflect deduction of any sales charges. Portfolios are not categorized; they compete in a large universe of over 2,000 funds. The source for rankings is data generated by Morningstar, Inc. 20 Investor's Business Daily publishes mutual fund rankings on a daily basis. The rankings are depicted as the top 25 funds in a given category. The categories are based loosely on the type of fund, e.g., growth funds, balanced funds, U.S. government funds, GNMA funds, growth and income funds, corporate bond funds, etc. Performance periods for sector equity funds can vary from 4 weeks to 39 weeks; performance periods for other fund groups vary from 1 year to 3 years. Total return performance reflects changes in net asset value and reinvestment of dividends and capital gains. The rankings are based strictly on total return. They do not reflect deduction of any sales charges Performance grades are conferred from A+ to E. An A+ rating means that the fund has performed within the top 5% of a general universe of over 2000 funds; an A rating denotes the top 10%; an A- is given to the top 15%, etc. Barron's periodically publishes mutual fund rankings. The rankings are based on total return performance provided by Lipper Analytical Services. The Lipper total return data reflects changes in net asset value and reinvestment of distributions, but does not reflect deduction of any sales charges. The performance periods vary from short-term intervals (current quarter or year-to-date, for example) to long-term periods (five-year or ten-year performance, for example). Barron's classifies the funds using the Lipper mutual fund categories, such as Capital Appreciation Portfolios, Growth Portfolios, U.S. Government Portfolios, Equity Income Portfolios, Global Portfolios, etc. Occasionally, Barron's modifies the Lipper information by ranking the funds in asset classes. "Large funds" may be those with assets in excess of $25 million; "small funds" may be those with less than $25 million in assets. The Wall Street Journal publishes its Mutual Portfolio Scorecard on a daily basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper Analytical Services category. Lipper provides the rankings based on its total return data reflecting changes in net asset value and reinvestment of distributions and not reflecting any sales charges. The Scorecard portrays 4-week, year-to-date, one-year and 5-year performance; however, the ranking is based on the one-year results. The rankings for any given category appear approximately once per month. Fortune magazine periodically publishes mutual fund rankings that have been compiled for the magazine by Morningstar, Inc. Portfolios are placed in stock or bond fund categories (for example, aggressive growth stock funds, growth stock funds, small company stock funds, junk bond funds, Treasury bond funds etc.), with the top-10 stock funds and the top-5 bond funds appearing in the rankings. The rankings are based on 3-year annualized total return reflecting changes in net asset value and reinvestment of distributions and not reflecting sales charges. Performance is adjusted using quantitative techniques to reflect the risk profile of the fund. Money magazine periodically publishes mutual fund rankings on a database of funds tracked for performance by Lipper Analytical Services. The funds are placed in 23 stock or bond fund categories and analyzed for five-year risk adjusted return. Total return reflects changes in net asset value and reinvestment of all dividends and capital gains distributions and does not reflect deduction of any sales charges. Grades are conferred (from A to E): the top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a fund must be at least one year old, accept a minimum investment of $25,000 or less and have had assets of at least $25 million as of a given date. Financial World publishes its monthly Independent Appraisals of Mutual Portfolios, a survey of approximately 1000 mutual funds. Portfolios are categorized as to type, e.g., balanced funds, corporate bond funds, global bond funds, growth and income funds, U.S. government bond funds, etc. To compete, funds must be over one year old, have over $1 million in assets, require a maximum of $10,000 initial investment, and should be 21 available in at least 10 states in the United States. The funds receive a composite past performance rating, which weighs the intermediate- and long-term past performance of each fund versus its category, as well as taking into account its risk, reward to risk, and fees. An A+ rated fund is one of the best, while a D- rated fund is one of the worst. The source for Financial World rating is Schabacker investment management in Rockville, Maryland. Forbes magazine periodically publishes mutual fund ratings based on performance over at least two bull and bear market cycles. The funds are categorized by type, including stock and balanced funds, taxable bond funds, municipal bond funds, etc. Data sources include Lipper Analytical Services and CDA Investment Technologies. The ratings are based strictly on performance at net asset value over the given cycles. Portfolios performing in the top 5% receive an A+ rating; the top 15% receive an A rating; and so on until the bottom 5% receive an F rating. Each fund exhibits two ratings, one for performance in "up" markets and another for performance in "down" markets. Kiplinger's Personal Finance Magazine (formerly Changing Times), periodically publishes rankings of mutual funds based on one-, three- and five-year total return performance reflecting changes in net asset value and reinvestment of dividends and capital gains and not reflecting deduction of any sales charges. Portfolios are ranked by tenths: a rank of 1 means that a fund was among the highest 10% in total return for the period; a rank of 10 denotes the bottom 10%. Portfolios compete in categories of similar funds -- aggressive growth funds, growth and income funds, sector funds, corporate bond funds, global governmental bond funds, mortgage-backed securities funds, etc. Kiplinger's also provides a risk-adjusted grade in both rising and falling markets. Portfolios are graded against others with the same objective. The average weekly total return over two years is calculated. Performance is adjusted using quantitative techniques to reflect the risk profile of the fund. U.S. News and World Report periodically publishes mutual fund rankings based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co., a Boston research firm. Over 2000 funds are tracked and divided into 10 equity, taxable bond and tax-free bond categories. Portfolios compete within the 10 groups and three broad categories. The OPI is a number from 0-100 that measures the relative performance of funds at least three years old over the last 1, 3, 5 and 10 years and the last six bear markets. Total return reflects changes in net asset value and the reinvestment of any dividends and capital gains distributions and does not reflect deduction of any sales charges. Results for the longer periods receive the most weight. The 100 Best Mutual Portfolios You Can Buy (1992), authored by Gordon K. Williamson. The author's list of funds is divided into 12 equity and bond fund categories, and the 100 funds are determined by applying four criteria. First, equity funds whose current management teams have been in place for less than five years are eliminated. (The standard for bond funds is three years.) Second, the author excludes any fund that ranks in the bottom 20 percent of its category's risk level. Risk is determined by analyzing how many months over the past three years the fund has underperformed a bank CD or a U.S. Treasury bill. Third, a fund must have demonstrated strong results for current three-year and five-year performance. Fourth, the fund must either possess, in Mr. Williamson's judgment, "excellent" risk-adjusted return or "superior" return with low levels of risk. Each of the 100 funds is ranked in five categories: total return, risk/volatility, management, current income and expenses. The rankings follow a fivepoint system: zero designates "poor"; one point means "fair"; two points denote "good"; three points qualify as a "very good"; four points rank as "superior"; and five points mean "excellent." 22 SHAREHOLDER LIABILITY Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the Agreement and Declaration of Trust disclaims shareholder liability for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the Trust or the Trustees. The Agreement and Declaration of Trust provides for indemnification out of a Portfolio's property for all loss and expense of any shareholder held personally liable for the obligations of a Portfolio. Thus the risk of a shareholder's incurring financial loss on account of shareholder liability is limited to circumstances in which the Portfolio would be unable to meet its obligations. MEMBERS OF INVESTMENT MANAGEMENT TEAMS The following persons are investment personnel of Mentor Advisors: MENTOR INVESTMENT ADVISORS, LLC CASH MANAGEMENT R. PRESTON NUTTALL, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER Mr. Nuttall has more than 30 years of investment management experience. Prior to Mentor Advisors, he led short-term fixed-income management for fifteen years at Capitoline Investment Services, Inc. He has his undergraduate degree in economics from the University of Richmond and his graduate degree in finance from the Wharton School at the University of Pennsylvania. HUBERT R. WHITE III -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER Mr. White has 12 years of investment management experience. Prior to joining Mentor Advisors, he served for five years as portfolio manager with Capitoline Investment Services. He has his undergraduate degree in business from the University of Richmond. GREGORY S. KAPLAN -- ASSOCIATE VICE PRESIDENT, PORTFOLIO MANAGER Mr. Kaplan brings over six years of analytical and investment experience to Mentor. Prior to joining the firm, Mr. Kaplan served for four years as a credit specialist analyzing commercial credit for NationsBank. He began his career in the Investment Services division of Prudential Insurance. Mr. Kaplan is a graduate of Rutgers University and earned his MBS from the Pamplin College of Business at Virginia Polytechnic Institute and State University. 23 APPENDIX MOODY'S INVESTORS SERVICE, INC., BOND RATINGS AAA -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. BAA -- Bonds which are rated Baa are considered as medium-grade obligations, (I.E., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA -- Bonds which are Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principle or interest. CA -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. STANDARD AND POOR'S RATINGS SERVICE, INC., BOND RATINGS AAA -- An obligation rated AAA has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. AA -- An obligation rated AA differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. 24 A -- An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB -- An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Obligations rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the lowest degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B -- An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligations. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. CC -- An obligation rated CC is currently highly vulnerable to nonpayment. C -- The C rating may be used to cover a situation where a bankruptcy petition has been filed, or similar action has been taken, but payments on this obligation are being continued. D -- An obligation rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition, or the taking of a similar action if payments on an obligtion are jeopardized. MOODY'S NOTE RATINGS MIG1/VMIG1 -- This designation denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broadbased access to the market for refinancing. MIG2/VMIG2 -- This designation denotes high quality. Margins of protection are ample although not so large as in the preceding group. 25 STANDARD AND POOR'S NOTE RATINGS SP-1 -- Strong capacity to pay principal and interest. Issues determined to possess overwhelming safety characteristics are given a plus sign (+) designation. SP-2 -- Satisfactory capacity to pay principal and interest. SP-3 -- Speculative capacity to pay principal and interest. MOODY'S COMMERCIAL PAPER RATINGS Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by the following characteristics: -- Leading market positions in well established industries. -- High rates of return on funds employed. -- Conservative capitalization structure with moderate reliance on debt and ample asset protection. -- Broad margins in earnings coverage of fixed financial charges and high internal cash generation. -- Well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. STANDARD AND POOR'S COMMERCIAL PAPER RATINGS A-1 -- This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 -- Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of saety is not as high as for issues designated A-1. A-3 -- Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. 26 FINANCIAL STATEMENTS MENTOR MONEY MARKET PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE BANKERS ACCEPTANCES - 5.56% Bank of Montreal, 5.51%, 12/08/98 $1,335,740 $ 1,321,838 NationsBank Corporation, 5.45%, 7/19/99 1,000,000 955,946 ----------- TOTAL BANKERS ACCEPTANCES 2,277,784 ----------- BANK NOTES - 21.97% Abbey National North America, 5.88%, 12/22/98 1,000,000 1,000,663 Banc One Milwaukee National Association, 5.55%, 1/29/99 1,000,000 999,842 Bank of NewYork, 5.66%, 6/17/99 1,000,000 999,503 FCC National Bank, 5.74%, 5/07/99 1,000,000 999,657 First Tennessee Bank National Association, 5.65% - 5.70%, 4/15/99 - 7/09/99 2,000,000 1,999,373 Harris Trust, 5.55%, 10/13/98 2,000,000 2,000,000 Key Bank National Association, 5.51%, 1/14/99 (b) 1,000,000 999,881 ----------- TOTAL BANK NOTES 8,998,919 ----------- CERTIFICATES OF DEPOSIT - 9.76% Bankers Trust Delaware, 5.69%, 7/27/99 1,000,000 999,529 Canadian Imperial Bank, 5.55%, 11/02/98 2,000,000 2,000,071 Rabobank Nederland NV, 5.70%, 4/20/99 1,000,000 1,000,688 ----------- TOTAL CERTIFICATES OF DEPOSIT 4,000,288 ----------- COMMERCIAL PAPER - 36.45% General Electric Company, 5.51%, 10/22/98 2,000,000 1,993,572 Greenwich Funding Corporation, 5.48%, 11/09/98 (a)(c) 2,000,000 1,988,127 Mont Blanc Capital Corporation, 5.54%, 10/22/98 (a) 2,000,000 1,993,537 Monte Rosa Capital Corporation, 5.53%, 10/23/98 (a) 2,000,000 1,993,241 Rincon Securities Inc., 5.52%, 11/23/98 (a) 1,000,000 991,873 Special Purpose Accounts Receivable Cooperative Corporation, 5.56%, 10/23/98 2,000,000 1,993,204 Vehicle Services of America, Limited, 5.52%, 11/04/98 2,000,000 1,989,573
PRINCIPAL AMOUNT MARKET VALUE COMMERCIAL PAPER (CONTINUED)% Windmill Funding Corporation, 5.55%, 10/29/98 (a) $2,000,000 $ 1,991,367 ----------- TOTAL COMMERCIAL PAPER 14,934,494 ----------- FOOD & KINDRED PRODUCTS - 2.44% Mississippi Business Financial Corporation (Taxable Variable Rate Demand Note), 5.55%, 1/01/23 (b) 1,000,000 1,000,000 ----------- HEALTH CARE - 2.44% Catholic Health Initiatives (Taxable Variable Rate Demand Note), 5.30%, 12/01/27 (b) 1,000,000 1,000,000 ----------- REAL ESTATE - 2.93% C.C.M. Properties, 5.70%, 2/01/11 (b) 1,200,000 1,200,000 ----------- U.S. GOVERNMENT AGENCIES - 4.64% Federal National Mortgage Association, 4.93%, 1/21/99 (b) 1,000,000 999,877 Student Loan Marketing Association, 4.73%, 11/10/98 (b) 900,000 899,666 ----------- TOTAL U.S. GOVERNMENT AGENCIES 1,899,543 ----------- REPURCHASE AGREEMENTS - 13.23% Goldman Sachs & Company Dated 9/30/98, 5.61%, due 10/01/98, collateralized by $5,437,311 (original face value) Federal Home Loan Mortgage Corporation, 6.50% - 7.75%, 10/01/01 - 05/01/13, market value $5,528,343 (cost $5,419,944) 5,419,944 5,419,944 ----------- TOTAL INVESTMENTS (COST $40,730,972)-99.42% 40,730,972 ----------- OTHER ASSETS LESS LIABILITIES - 0.58% 239,317 ----------- NET ASSETS - 100.00% $40,970,289 ===========
Interest rates disclosed represent annualized yield to date of maturity, except for floating rate securities described in (b). (a) These are securities that may be resold to qualified institutional buyers under Rule 144A or securities offered pursuant to section 4(2) of the Securities Act of 1933, as amended. These securities have been determined to be liquid under guidelines that have been established by the Board of Trustees unless otherwise noted. (b) Floating Rate Securities -- The rates shown are the effective rates at September 30, 1998. (c) The security is deemed illiquid because it can not be resold within seven business days from September 30, 1998. SEE NOTES TO FINANCIAL STATEMENTS. 3 MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE U.S. GOVERNMENT AGENCIES - 52.13% Federal Farm Credit Bank, 5.70%, 11/03/98 $ 1,000,000 $ 1,000,172 Federal Home Loan Bank, 5.01%, 10/20/98 (a) 3,000,000 2,999,955 Federal Home Loan Bank, 5.40% - 5.63%, 1/15/99 - 7/15/99 9,560,000 9,557,718 Federal Home Loan Mortgage Corporation, 5.30% - 5.45%, 10/06/98 - 12/21/98 15,000,000 14,875,620 Federal Home Loan Mortgage Corporation, 5.33% - 5.47%, 1/26/99 - 8/17/99 (a) 6,000,000 5,997,524 Federal National Mortgage Association, 5.20% - 5.63%, 2/12/99 - 5/6/99 10,000,000 9,969,153 Federal National Mortgage Association, 4.93% - 5.38%, 11/09/98 - 5/28/99 (a) 11,000,000 10,997,535 ------------ TOTAL U.S. GOVERNMENT AGENCIES 55,397,677 ------------ REPURCHASE AGREEMENTS - 47.70% Dean Witter Dated 9/30/98, 5.62%, due 10/1/98, collateralized by various U.S. Government securities with total original face value of $25,889,000, 5.49% - 7.55%, 10/06/98 - 4/15/27, market value $25,500,152 25,000,000 25,000,000 Goldman Sachs & Company Dated 9/30/98, 5.61%, due 10/01/98, collateralized by $16,131,941 (original face value) Federal Home Loan Mortgage Corporation, 7.50%, 10/01/27, market value $12,946,065 12,692,220 12,692,220 J.P. Morgan Securities, Inc. (b) Dated 7/16/98, 5.56%, due 10/19/98, collateralized by $25,970,039 (original face value) Government National Mortgage Association, 8.50% - 9.00%., 6/15/16 - 10/15/27, market value $8,217,789 8,000,000 8,000,000
PRINCIPAL AMOUNT MARKET VALUE REPURCHASE AGREEMENTS (CONTINUED) Merrill Lynch Dated 7/13/98, 5.54%, due 10/13/98, collateralized by $20,347,264 (original face value) Federal National Mortgage Association, 10/01/24 - 12/01/25, market value $5,100,858 $ 5,000,000 $ 5,000,000 ------------ TOTAL REPURCHASE AGREEMENTS 50,692,220 ------------ TOTAL INVESTMENTS (COST $106,089,897)-99.83% $106,089,897 ------------ OTHER ASSETS LESS LIABILITIES - 0.17% 183,141 ------------ NET ASSETS - 100.00% $106,273,038 ============
(a) Floating Rate Securities -- The rates shown are the effective rates at September 30, 1998. (b) The security is deemed illiquid because it can not be resold within seven business days from September 30, 1998. SEE NOTES TO FINANCIAL STATEMENTS. 4 MENTOR FUNDS - -------------------------------------------------------------------------------- STATEMENTS OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998
MONEY MARKET U.S. GOVERNMENT PORTFOLIO MONEY MARKET PORTFOLIO ASSETS Investments, at amortized cost (Note 2) Investment securities $ 35,311,028 $ 55,397,677 Repurchase agreements 5,419,944 50,692,220 ------------- -------------- Total investments 40,730,972 106,089,897 Receivables Dividends and interest 270,031 585,632 Fund shares sold 167,750 54,000 Deferred expenses (Note 2) 16,210 15,375 ------------- -------------- TOTAL ASSETS 41,184,963 106,744,904 ------------- -------------- LIABILITIES Dividends payable 194,865 465,840 Accrued expenses and other liabilities 19,809 6,026 ------------- -------------- TOTAL LIABILITIES 214,674 471,866 ------------- -------------- NET ASSETS $ 40,970,289 $ 106,273,038 ============= ============== SHARES OUTSTANDING 40,970,289 106,273,038 NET ASSET VALUE PER SHARE $ 1.00 $ 1.00
STATEMENTS OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998
U.S. GOVERNMENT MONEY MARKET MONEY MARKET PORTFOLIO (A) PORTFOLIO INVESTMENT INCOME Interest (Note 2) $ 1,816,540 $ 5,164,328 ----------- ----------- EXPENSES Management fee (Note 4) 51,691 202,179 Transfer agent fee 22,291 34,490 Custodian and accounting fees 16,449 35,521 Registration expenses 8,933 18,100 Legal fees 727 1,659 Shareholder reports and postage expenses 652 1,444 Directors' fees and expenses 575 1,327 Audit fees 489 1,008 Organizational expenses - 4,100 Miscellaneous 3,480 3,440 ----------- ----------- Total expenses 105,287 303,268 ----------- ----------- NET INVESTMENT INCOME $ 1,711,253 $ 4,861,060 =========== ===========
(a) For the period from November 19, 1997 (commencement of operations) to September 30, 1998. SEE NOTES TO FINANCIAL STATEMENTS. 5 MENTOR FUNDS - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
MONEY MARKET U.S. GOVERNMENT PORTFOLIO MONEY MARKET PORTFOLIO PERIOD ENDED YEAR ENDED PERIOD 9/30/98 (B) 9/30/98 ENDED 9/30/97 (C) NET INCREASE IN NET ASSETS Operations Net investment income $ 1,711,253 $ 4,861,060 $ 741,466 ------------- -------------- ------------ Increase in net assets resulting from operations 1,711,253 4,861,060 741,466 ------------- -------------- ------------ Distributions to Shareholders From net investment income (1,711,253) (4,861,060) (741,466) ------------- -------------- ------------ Total distributions to shareholders (1,711,253) (4,861,060) (741,466) ------------- -------------- ------------ Capital Share Transactions (Note 5) Proceeds from sale of shares 69,738,706 170,787,913 70,658,240 Reinvested distributions 1,450,841 4,466,073 612,639 Shares redeemed (30,219,258) (130,785,595) (9,466,232) ------------- -------------- ------------ Change in net assets resulting from capital share transactions 40,970,289 44,468,391 61,804,647 ------------- -------------- ------------ Increase in net assets 40,970,289 44,468,391 61,804,647 Net Assets Beginning of period - 61,804,647 - ------------- -------------- ------------ End of period $ 40,970,289 $ 106,273,038 $ 61,804,647 ============= ============== ============
FINANCIAL HIGHLIGHTS
MONEY MARKET U.S. GOVERNMENT MONEY MARKET PORTFOLIO PORTFOLIO PERIOD ENDED YEAR ENDED PERIOD ENDED 9/30/98 (B) 9/30/98 9/30/97 (C) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- Income from investment operations Net investment income 0.05 0.05 0.01 -------- -------- -------- Total from investment operations 0.05 0.05 0.01 -------- -------- -------- Less distributions From net investment income (0.05) (0.05) (0.01) --------- --------- --------- Total distributions (0.05) (0.05) (0.01) --------- --------- --------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 ========= ========= ========= TOTAL RETURN (D) 4.74% 5.42% 1.39% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 40,970 $ 106,273 $ 61,805 Ratio of expenses to average net assets 0.33% (a) 0.33% 0.33% (a) Ratio of net investment income to average net assets 5.35% (a) 5.27% 5.26% (a)
(a) Annualized. (b) For the period from November 19, 1997 (commencement of operations) to September 30, 1998. (c) For the period from June 27, 1997 (commencement of operations) to September 30, 1997. (d) Not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 6 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998 - -------------------------------------------------------------------------------- NOTE 1: ORGANIZATION Mentor Funds is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. Mentor Funds consists of twelve separate Portfolios (hereinafter each individually referred to as a "Portfolio" or collectively as the "Portfolios") at September 30, 1998, as follows: Mentor Growth Portfolio ("Growth Portfolio") Mentor Perpetual Global Portfolio ("Global Portfolio") Mentor Capital Growth Portfolio ("Capital Growth Portfolio") Mentor Strategy Portfolio ("Strategy Portfolio") Mentor Income and Growth Portfolio ("Income and Growth Portfolio") Mentor Balanced Portfolio ("Balanced Portfolio") Mentor Municipal Income Portfolio ("Municipal Income Portfolio") Mentor Quality Income Portfolio ("Quality Income Portfolio") Mentor Short-Duration Income Portfolio ("Short-Duration Income Portfolio") Mentor High Income Portfolio ("High Income Portfolio") Mentor U.S. Government Money Market Portfolio ("Government Portfolio") Mentor Money Market Portfolio ("Money Market Portfolio") The assets of each Portfolio are segregated and a shareholder's interest is limited to the Portfolio in which shares are held. These financial statements include only Money Market Portfolio and Government Portfolio. The investment objective of the Money Market Portfolio is to seek a high rate of current income consistent with preservation of capital and maintenance of liquidity. The Portfolio will invest in high-quality short-term instruments including U.S. Government securities, banker's acceptances, prime commercial paper, fixed-income securities of corporations and other private issuers, and money market instruments. The Government Portfolio's investment objective is to seek a high rate of current income consistent with preservation of capital and maintenance of liquidity. The Portfolio invests exclusively in U.S. Treasury bills, notes and bonds, and other obligations issued or guaranteed as to principal or interest by the U.S. Government, its agencies, or instrumentalities, and in repurchase agreements with respect to such obligations. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Portfolios in the preparation of their financial statements. The policies are in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect amounts reported therein. Although actual results could differ from these estimates, any such differences are expected to be immaterial to the net assets of the Portfolio. (a) Valuation of Securities -- Securities held by the Portfolios are stated at amortized cost, which approximates market value as permitted by Rule 2a-7 of the Investment Company Act of 1940. In the event that a deviation of 1/2 of 1% or more exists between the Portfolios' $1.00 per share net asset value calculated at amortized cost, and the net asset value calculated by reference to market-based values, or if there is any other deviation that the Board of Trustees believes would result in a material dilution to 7 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- shareholders or purchasers, the Board of Trustees will promptly consider what action should be initiated. Net asset value per share is determined each business day for the Fund and is calculated by dividing net asset value by the number of shares outstanding at the end of each business day. (b) Repurchase Agreements -- It is the policy of the Trust to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book entry system, or to have segregated within the custodian bank's possession all securities held as collateral in support of repurchase agreement investments. Additionally, procedures have been established by the Trust to monitor, on a daily basis, the market value of each repurchase agreement's underlying securities to ensure the existence of a proper level of collateral. The Trust will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Trust's adviser to be creditworthy pursuant to guidelines established by the Trustees. Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreement. Accordingly, the Trust could receive less than the repurchase price on the sale of collateral securities. (c) Security Transactions and Interest Income -- Security transactions for the Portfolios are accounted for on a trade date basis. Interest income is recorded on the accrual basis and includes amortization of premium and discount on investments. (d) Federal Taxes -- No provision for federal income taxes has been made since it is each Portfolios' intent to comply with the provisions applicable to regulated investment companies under the Internal Revenue Code and to distribute to its shareholders within the allowable time limit substantially all taxable income and realized capital gains. (e) Deferred Expenses -- Costs incurred by the Portfolios in connection with their initial share registration and organization costs were deferred by the Portfolios and are being amortized on a straight-line basis over a five-year period. (f) Distributions -- Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. NOTE 3: DIVIDENDS Each Portfolio declares a daily dividend, equal to its net investment income for that day. Dividends for the immediately preceding month will be paid on the fifteenth day of each calendar month. Distributions from net realized capital gains, if any, will be distributed annually. NOTE 4: INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENTS Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment adviser, receives for its services an annual investment advisory fee not to exceed the following percentages of the average daily net assets of the Portfolios: 0.22% of the first $500 million of the Portfolios' average net assets; 0.20% of the next $500 million; 0.175% of the next $1 billion; 0.16% of the next $1 billion; and 0.15% of any amounts over $3 billion. For the period ended September 30, 1998, Mentor Advisors earned advisory fees of $51,691 and $202,179 from Money Market Portfolio and Government Portfolio, respectively. 8 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC ("Mentor") which is in turn a subsidiary of Wheat First Union ("Wheat"). EVEREN Capital Corporation owns 20% of the outstanding interest in Mentor. NOTE 5: CAPITAL SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in capital shares were as follows:
MENTOR MONEY MARKET PORTFOLIO PERIOD ENDED 9/30/98 (A) Shares sold 69,738,706 Shares issued upon reinvestment of distributions 1,450,841 Shares redeemed (30,219,258) ----------- Change in net assets from capital share transactions 40,970,289 ===========
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO YEAR ENDED PERIOD ENDED 9/30/98 9/30/97 (B) Shares sold 170,787,913 70,658,240 Shares issued upon reinvestment of distributions 4,466,073 612,639 Shares redeemed (130,785,595) (9,466,232) ------------ ---------- Change in net assets from capital share transactions 44,468,391 61,804,647 ============ ==========
(a) For the period from November 19, 1997 (commencement of operations) to September 30, 1998. (b) For the period from June 27, 1997 (commencement of operations) to September 30, 1997. YEAR 2000 (UNAUDITED) The Portfolios receive services from a number of providers which rely on the effective functioning of their respective systems and the systems of others to perform those services. It is generally recognized that certain systems in use today may not be able to perform their intended functions adequately after 1999 because of the inability of computer software to distinguish the year 2000 from the year 1900. Mentor Advisors is taking steps that it believes are reasonably designed to address this potential "Year 2000" problem and to obtain satisfactory assurances that comparable steps are being taken by each of the Portfolios' other major service providers. There can be no assurance, however, that these steps will be sufficient to avoid any adverse impact on the Portfolio from this problem. 9 MENTOR FUNDS INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- THE TRUSTEES AND SHAREHOLDERS MENTOR MONEY MARKET PORTFOLIO MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, as of September 30, 1998 of Money Market Portfolio and U.S. Government Money Market Portfolio, portfolios of Mentor Funds, and the related statement of operations, statement of changes in net assets and financial highlights for Money Market Portfolio for the period from November 19, 1997 (commencement of operations) to September 30, 1998 and for U.S. Government Money Market Portfolio, the related statement of operations for the year then ended, the statements of changes in net assets and financial highlights for the year then ended and for the period from June 27, 1997 (commencement of operations) to September 30, 1998. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of September 30, 1998 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Money Market Portfolio and U.S. Government Money Market Portfolio, portfolios of Mentor Funds, as of September 30, 1998, the results of their operations, the changes in their net assets and financial highlights for each of the years or periods indicated in the first paragraph above, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick Boston, Massachusetts November 20, 1998 10 MENTOR FUNDS SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- TRUSTEES DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN Chairman and Chief Executive Officer Mentor Investment Group, LLC ARCH T. ALLEN III, TRUSTEE Attorney at Law Allen & Moore, LLP JERRY R. BARRENTINE, TRUSTEE President J.R. Barrentine & Associates ARNOLD H. DREYFUSS, TRUSTEE Chairman Eskimo Pie Corporation WESTON E. EDWARDS, TRUSTEE President Weston Edwards & Associates THOMAS F. KELLER, TRUSTEE Former Dean, Fuqua School of Business Duke University LOUIS W. MOELCHERT, JR., TRUSTEE Vice President for Business & Finance University of Richmond J. GARNETT NELSON, TRUSTEE Consultant Mid-Atlantic Holdings, LLC TROY A. PEERY, JR., TRUSTEE President Heilig-Meyers Company PETER J. QUINN, JR., TRUSTEE Managing Director Mentor Investment Group, LLC OFFICERS PAUL F. COSTELLO, PRESIDENT Managing Director Mentor Investment Group, LLC TERRY L. PERKINS, TREASURER Senior Vice President Mentor Investment Group, LLC GEOFFREY B. SALE, SECRETARY Associate Vice President Mentor Investment Group, LLC MICHAEL A. WADE, ASSISTANT TREASURER Vice President Mentor Investment Group, LLC This report is authorized for distribution to prospective investors only when preceded or accompanied by a Mentor Funds prospectus, which contains complete information about fees, sales charges and expenses. Please read it carefully before you invest or send money. PART C. OTHER INFORMATION Item 24. Financial Statements and Exhibits: (a) Financial Statements (1) Audited Financial Statements and Financial Highlights (For all Portfolios other than Mentor Asset Allocation Portfolio, Mentor Growth Opportunities Portfolio, and Mentor Tax-Exempt Money Market Portfolio) Financial Statements: Portfolios of Investments -- September 30, 1998* Statements of Assets and Liabilities -- September 30, 1998* Statements of Operations -- year ended September 30, 1998* Statements of Changes in Net Assets -- years/periods ended September 30, 1998 and September 30, 1997* Financial Highlights (+)* Notes to Financial Statements* Independent Auditors' Report* _____________ * Included in Part B to this Registration Statement. (+) Included in Part A to this Registration Statement. (b) Exhibits: (1)(i) Conformed copy of Declaration of Trust of the Registrant, with Amendments No. 1 and 2 (2); (ii) Amendment No. 5 to the Declaration of Trust of the Registrant (12); (iii) Form of Amendment to the Declaration of Trust of the Registrant (13) (iv) Form of Proposed Amendment to the Declaration of Trust of the Registrant to be dated as of May 12, 1998 (14) (v) Amendment No. 6 to the Declaration of Trust of the Registrant (18) (vi) Amendment No. 7 to the Declaration of Trust of the Registrant (18) (vii) Amendment No. 8 to the Declaration of Trust of the Registrant (18) (2) (i) Copy of By-Laws of the Registrant (1); (ii) Amendment to By-Laws (18) (3) Not applicable; (4) Portions of Registrant's Declaration of Trust and By-Laws relating to shareholder rights (1)(2)(12)(13); (5)(i) Form Management Agreement of the Registrant (Capital Growth, Income and Growth, Quality Income, and Municipal Income Portfolios) (14); (ii) Form of Investment Advisory Agreement (Municipal Income Portfolio) (14); (iii) Form of Investment Advisory Agreement (Income and Growth Portfolio) (14); (iv) Form of Investment Advisory and Management Agreement (Perpetual Global Portfolio) (8); (v) Form of Investment Advisory and Management Agreement (Growth Portfolio) (14); (vi) Not Applicable (vii) Form of Investment Advisory and Management Agreement (Short-Duration Income Portfolio) (14); (viii) Form of Investment Advisory and Management Agreement (Balanced Portfolio) (14); (ix) Form of Investment Advisory and Management Agreement (Institutional Money Market Portfolio) (14); (x) Form of Investment Advisory and Management Agreement (Institutional U.S. Government Money Market Portfolio) (14); (xi) Form of Investment Advisory and Management Agreement (Growth Opportunities Portfolio) (11); (xii) Form of Investment Advisory and Management Agreement (Mentor High Income Portfolio) (14) (xiii) Sub-Advisory Agreement (Mentor High Income Portfolio)(14) (xiv) Form of Investment Advisory and Management Agreement (Mentor Asset Allocation Portfolio) (13) (xv) Form of Investment Advisory and Management Agreement (Mentor Institutional Tax-Exempt Money Market Portfolio) (17) (6) Form of Distribution Agreement of the Registrant (14) (7) Not applicable; (8)(i) Conformed copy of Custodian Contract of the Registrant with Investors Fiduciary Trust Company (2); (ii) Conformed copy of Custodian Contract of the Registrant with State Street Bank and Trust Company (2); (iii) Form of Administration Agreement of the Registrant in respect of certain Portfolios (14); (iv) Form of Custodian Contract with State Street Bank and Trust Company in respect of foreign securities(7); (v) Form of Administration Agreement of the Registrant in respect of the Money Market Portfolios (17) (9)(i) Conformed copy of Transfer Agency and Registrar Agreement of the Registrant (2); (ii) (a) Conformed copy of Shareholder Services Plan of the Registrant through and including Exhibit B in respect of the Capital Growth, Quality Income, Municipal Income, Income and Growth, and Global Portfolios (3); (b) Form of Instrument of Transfer of Shareholder Services Plan (8); (c) Form of New Exhibit C to the Shareholder Services Plan in respect of the Class A and B shares of the Growth, Strategy, Short-Duration Income Portfolios and the Balanced Portfolio (6); (d) Form of New Exhibit D to Shareholder Services Plan in respect of Class A and B shares of the Growth Opportunities Portfolio (11); (e) Form of New Exhibit E to Shareholder Services Plan in respect of Class A and B shares of the High Yield and Asset Allocation Portfolios (13); (9)(iii) Form of Agency Agreement with Investors Fiduciary Trust Company (Money Market Portfolios) (17); (9)(iv) Form of Draft Processing Agreement with Investors Fiduciary Trust Company (Money Market Portfolios) (17) (10) Not applicable; (11)(i) Conformed copy of Consent of Independent Auditors (18); (ii) Conformed copy of KPMG Peat Marwick LLP opinion on Methodology and Procedures for Accounting for Multiple Classes of Shares (5); (12) Not applicable; (13) Conformed copy of Initial Capital Understanding (1); (14) Not applicable; (15)(i) Plan of Distribution (12) (ii) Revised Exhibit A to Plan of Distribution (17) (16)(i) Schedules for Computation of Performance (all Portfolios)(8) (18) Amended and Restated Rule 18f-3(d) Plan (18) (24) Powers of Attorney (18) (27)(i) Financial Data Schedules (18) 1. Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 on Form N-1A filed April 14, 1992. 2. Incorporated by reference to Registrant's Post-Effective Amendment No. 3 on Form N-1A filed May 14, 1993. 3. Incorporated by reference to Registrant's Post-Effective Amendment No. 5 on Form N-1A filed November 26, 1993. 4. Incorporated by reference to Registrant's Post-Effective Amendment No. 7 on Form N-1A filed August 3, 1994. 5. Incorporated by reference to Registrant's Post-Effective Amendment No. 8 on Form N-1A filed January 27, 1995. 6. Incorporated by reference to Registrant's Post-Effective Amendment No. 9 on Form N-1A filed March 15, 1995. 7. Incorporated by reference to Registrant's Post-Effective Amendment No. 10 on Form N-1A filed January 15, 1996. 8. Incorporated by reference to Registrant's Post-Effective Amendment No. 11 on Form N-1A filed November 29, 1996. 9. Incorporated by reference to Registrant's Post-Effective Amendment No. 12 on Form N-1A filed January 22, 1997. 10. Incorporated by reference to Registrant's Post-Effective Amendment No. 13 on Form N-1A filed March 4, 1997. 11. Incorporated by reference to Registrant's Post-Effective Amendment No. 14 on Form N-1A filed November 7, 1997. 12. Incorporated by reference to Registrant's Post-Effective Amendment No. 15 on Form N-1A filed December 22, 1997. 13. Incorporated by reference to Registrant's Post-Effective Amendment No. 16 on Form N-1A filed on January 30, 1998. 14. Incorporated by reference to Registrant's Post-Effective Amendment No. 17 on Form N-1A filed on May 7, 1998. 15. Incorporated by reference to Registrant's Post-Effective Amendment No. 18 on Form N-1A filed on May 12, 1998. 16. Incorporated by reference to Registrant's Post-Effective Amendment No. 19 on form N-1A filed on July 10, 1998. 17. Incorporated by reference to Registrant's Post-Effective Amendment No. 20 on form N-1A filed on July 31, 1998. 18. Filed herewith. Item 25. Persons Controlled by or Under Common Control with Registrant: Reference is made to "Principal Holders of Securities" in Part B of this Registration Statement Item 26. Number of Holders of Securities as of November 2, 1998 Multiclass Portfolios Class A Class B Class Y Non-Money Market Portfolios Capital Growth Portfolio 8,171 14,513 -- Global Portfolio 3,528 8,647 -- Growth Portfolio 6,391 30,247 8 Income and Growth Portfolio 4,074 8,644 -- Municipal Income Portfolio 826 1,350 -- Quality Income Portfolio 2,645 4,796 -- Short-Duration Income Portfolio 1,067 872 -- Balanced Portfolio 377 526 7 High Income Portfolio 1,953 2,951 -- Retail Institutional Money Market Portfolio 4 4 U.S. Government Money Market Portfolio 4 74 Tax Exempt Money Market Portfolio 4 3 Item 27. Indemnification: 1. Response is incorporated by reference to Registrant's Initial Registration Statement on Form N-1A filed January 31, 1992 (File Nos. 33-45315 and 811-6550). Item 28. Business and Other Connections of Investment Advisers The business and other connections of each director, officer, or partner of the entities below in which such director, officer, or partner is or has been, at any time during the past two fiscal years, engaged for his own account or in the capacity of director, officer, employee, partner, or trustee are set forth in the following tables. (a) The following is additional information with respect to the directors and officers of Mentor Investment Advisors, LLC: Business, Profession, Vocation or Employment Position with during the past Name Investment Adviser two fiscal years John G. Davenport Managing Director Managing Director, Mentor Investment Group, LLC. R. Preston Nuttall Managing Director Managing Director, Mentor Investment Group, LLC. Paul F. Costello Managing Director Managing Director, Mentor Investment Group, LLC; President, Mentor Funds, Mentor Institutional Trust, Cash Resource Trust, Mentor Income Fund, Inc.; and America's Utility Fund, Inc.; Senior Vice President, Mentor Distributors, LLC; Managing Director, Mentor Perpetual Advisors, LLC. Theodore W. Price Managing Director Managing Director, Mentor Investment Group, LLC. P. Michael Jones Managing Director Managing Director, Mentor Investment Group, LLC. Peter J. Quinn, Jr. Managing Director Managing Director, Mentor Investment Group, LLC. -3- Daniel J. Ludeman Chairman Chairman and Chief Executive Officer, Mentor Investment Group, LLC. Karen H. Wimbish Managing Director Managing Director, Mentor Investment Group, LLC. Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group, L.L.C. Michael A. Wade Controller Vice President, Mentor Investment Group, L.L.C. Geoffrey B. Sale Secretary Associate Vice President Mentor Investment Group, LLC; Clerk Mentor Institutional Trust; Secretary Cash Resource Trust, Mentor Income Fund, Inc., Mentor Funds and Mentor Variable Investment Portfolios. (b) The following is additional information with respect to the directors and officers of Mentor Perpetual Advisors, LLC ("Mentor Perpetual"): Other Substantial Position with the Business, Profession, Name Investment Advisor Vocation or Employment Scott A. McGlashan President Director, Perpetual Portfolio Management Limited. Martyn Arbib Managing Director Chairman, Perpetual Portfolio Management Limited. Roger C. Cormick Managing Director Deputy Chairman - Marketing, Perpetual Portfolio Management Limited. Paul F. Costello Managing Director Managing Director, Mentor Investment Group, LLC and Mentor Investment Advisors, LLC; President, Mentor Funds, Mentor Institutional Trust, Cash Resource Trust, Mentor Income Fund, Inc., and America's Utility Fund, Inc.; Senior Vice President, Mentor Distributors, LLC. Daniel J. Ludeman Managing Director Chairman and Chief Executive Officer, Mentor Investment Group, LLC; Director, Wheat First Securities, Inc.; Managing Director, Wheat First Butcher Singer, Inc. David S. Mossop Managing Director Director, Perpetual Portfolio Management Limited Peter J. Quinn, Jr. Managing Director Managing Director, Mentor Investment Group, LLC. Roderick A. Smyth Managing Director Managing Director, Mentor Investment Group, LLC. * The address of Mentor Investment Group, LLC, Wheat, First Securities, Inc., Wheat First Butcher Singer, Inc., Mentor Funds, Mentor Income Fund, Inc., Mentor Investment Advisors, LLC, and Mentor Perpetual Advisors, LLC is 901 East Byrd Street, Richmond, VA 23219. The address of Ryland Capital Management, Inc. and RAC Income Fund, Inc. is 11000 Broken Land Parkway, Columbia, MD 21044. The address of Perpetual Portfolio Management Limited is 48 Hart Street, Henley-on-Thames, Oxon, England, RG92AZ.
(c) Wellington Management Company, LLP ("Wellington Management") is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). The list required by this Item 28 of officers and partners of Wellington Management, together with any information as to any business profession, vocation or employment of a substantial nature engaged in by such officers and partners during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Wellington Management pursuant to the Advisers Act (SEC File No. 801-15908). (d) The following is additional information with respect to the directors and officers of Van Kampen American Capital Management Inc., located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181-4486: Other Substantial Position with Business, Profession, Name Investment Advisor Vocation or Employment ---- ------------------ ---------------------- Don G. Powell Chairman and Director Chairman and Director, VK/AC Holding, Inc., Van Kampen American Capital, Inc., Van Kampen American Capital Distributors, Inc., Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital Investment Advisory Corp., and Van Kampen American Capital Advisors, Inc. Philip N. Duff Chief Executive Officer President and Chief Executive Officer, VK/AC Holding, Inc. and Van Kampen American Capital, Inc. Dennis J. McDonnell President and Chief Executive Vice Operating Officer President, VK/AC Holding, Inc. and Van Kampen American Capital, Inc.; President and Chief Operating Officer, Van Kampen American Capital Advisors, Inc., Van Kampen American Capital Asset Management, Inc., and Van Kampen American Capital Investment Advisory Corp. Ronald A. Nyberg Executive Vice President Executive Vice and General Counsel President and General Counsel, VK/AC Holding, Inc., Van Kampen American Capital, Inc., Van Kampen American Capital Distributors, Inc., Van Kampen American Asset Management, Inc., Van Kampen American Investment Advisory Corp., and Van Kampen American Capital Advisors, Inc. William R. Rybak Executive Vice President Executive Vice and Chief Financial President and Chief Officer Financial Officer, VK/AC Holding, Inc., Van Kampen American Capital, Inc., Van Kampen American Capital Distributors, Inc., Van Kampen American Capital Asset Management Inc., Van Kampen American Capital Investment Advisory Corp., and Van Kampen American Capital Advisors, Inc. Peter W. Hegel Executive Vice President Executive Vice President, Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital Investment Advisory Corp., and Van Kampen American Capital Advisors, Inc. Alan T. Sachtleben Executive Vice President Executive Vice President, Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital Investment Advisory Corp., and Van Kampen American Capital Advisors, Inc. Item 29. Principal Underwriters: (a) Mentor Distributors, LLC, the Fund's principal underwriter, acts as principal underwriter for the following investment companies: The Mentor Funds o Mentor Growth Portfolio o Mentor Short-Duration Income Portfolio o Mentor Balanced Portfolio o Mentor Capital Growth Portfolio o Mentor Perpetual Global Portfolio o Mentor High Income Portfolio o Mentor Income and Growth Portfolio o Mentor Quality Income Portfolio o Mentor Municipal Income Portfolio o Mentor U.S. Government Money Market Portfolio o Mentor Money Market Portfolio o Mentor Tax-Exempt Money Market Portfolio Cash Resource Trust o Cash Resource Money Market Fund o Cash Resource U.S. Government Money Market Fund o Cash Resource Tax-Exempt Money Market Fund o Cash Resource California Tax-Exempt Money Market Fund o Cash Resource New York Tax-Exempt Money Market Fund Mentor Institutional Trust o Mentor U.S. Government Cash Management Portfolio o Mentor Fixed-Income Portfolio o Mentor Perpetual International Portfolio Mentor Investment Group o Mentor Income Fund o America's Utility Fund Mentor Variable Investment Portfolios o Mentor VIP Growth Portfolio o Mentor VIP Strategy Portfolio o Mentor VIP Balanced Portfolio o Mentor VIP Capital Growth Portfolio o Mentor VIP Perpetual International Portfolio (b) Information concerning officers of Mentor Distributors, LLC: -10- Name And Principal Positions And Offices Positions And Offices Business Address* With Underwriter With Registrant - ----------------- -------------------- --------------------- Lynn Mangum Chairman Inapplicable D'Ray Moore President Inapplicable Dennis Sheehan Executive Vice President Inapplicable William J. Tomko Senior Vice President Inapplicable Mark J. Rybarczyk Senior Vice President Inapplicable Kevin J. Dell Vice President and Inapplicable Secretary Michael D. Burns Vice President Inapplicable David Blackmore Vice President Inapplicable Robert L. Tuch Assistant Secretary Inapplicable Steven Ludwig Compliance Officer Inapplicable *Principal Address for all Officers: BISYS Fund Services, Inc. 3435 Stelzer Road Columbus, Ohio 43219-8000 (c) Inapplicable. Item 30. Location of Accounts and Records Certain accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the rules promulgated thereunder are maintained by the Fund at 901 East Byrd Street, Richmond, Virginia 23219 or by Boston Financial Data Services, Inc., the Registrant's transfer agent, at 2 Heritage Drive, North Quincy, Massachusetts 02171. Records relating to the duties of the Registrant's custodian are maintained by the Registrant's Custodian, Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri 64105. Records relating to the duties of the Registrant's distributor are maintained by the Registrant's Distributor, Mentor Distributors, LLC, 3435 Stelzer Road, Columbus, Ohio 43219-8000. Item 31. Management Services None. Item 32. Undertakings: (a) Registrant hereby undertakes to comply with the provisions of Section 16(c) of the 1940 Act with respect to the removal of Trustees and the calling of special shareholder meetings by shareholders. (b) Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, and has duly caused this Amendment to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Richmond, and the Commonwealth of Virginia on this 30th day of November, 1998. MENTOR FUNDS By: /s/ Paul F. Costello ---------------------------- Paul F. Costello Pursuant to the requirements of the Securities Act of 1933, this Amendment has been signed below by the following persons in the capacity and on the 30th day of November, 1998:
Name Title * - ----------------------- Chairman and Trustee Daniel J. Ludeman (Chief Executive Officer) * Trustee - ----------------------- Peter J. Quinn, Jr. * - ---------------------- Trustee Arnold H. Dreyfuss * Trustee - ----------------------- Thomas F. Keller * Trustee - ----------------------- Louis W. Moelchert, Jr. * Trustee - ----------------------- Troy A. Peery, Jr. * Trustee - ----------------------- Arch T. Allen, III * Trustee - ----------------------- Weston E. Edwards * Trustee - ----------------------- Jerry R. Barrentine * Trustee - ----------------------- J. Garnett Nelson /s/ Paul F. Costello President - ------------------------ Paul F. Costello /s/ Terry L. Perkins Treasurer (Principal Financial - ------------------------ and Accounting Officer) Terry L. Perkins /s/ Paul F. Costello Attorney-in-fact - ------------------------ Paul F. Costello
EXHIBIT INDEX Exhibit 1(v) Amendment No. 6 to the Declaration of Trust of the Registrant. Exhibit 1(vi) Amendment No. 7 to the Declaration of Trust of the Registrant. Exhibit 1(vii) Amendment No. 8 to the Declaration of Trust of the Registrant. Exhibit 2(ii) Amendment to By-Laws Exhibit 11(i) Conformed copy of Consent of Independent Auditors. Exhibit 18 Amended and Restated Rule 18f-3(d) Plan. Exhibit 24 Powers of Attorney. Exhibit 27 Financial Data Schedules. EX-1 2 EXHIBIT 1 (V) Exhibit 1 (v) MENTOR FUNDS Amendment No. 6 to DECLARATION OF TRUST dated January 20, 1992 This Declaration of Trust is amended as follows: 1. Section 5 of Article III is replaced in its entirety by the following: Section 5. Establishment and Designation of Series or Class. The following Portfolios shall be designated as separate series of shares of beneficial interest of the Trust, with the relative rights and preferences set forth in this Declaration of Trust as it may be amended from time to time: Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio, Mentor Municipal Income Portfolio, Mentor Income and Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Growth Portfolio, Mentor Strategy Portfolio, Mentor Short-Duration Income Portfolio, Mentor Balanced Portfolio, Mentor Institutional U.S. Government Money Market Portfolio, Mentor Institutional Money Market Portfolio, Mentor Asset Allocation Portfolio, and Mentor Income Portfolio. There hereby are established and created four classes of shares of each such Portfolio, the classes so established to be designated Class A shares, Class B shares, Institutional or Y shares, and Class E shares, with the relative rights and preferences set forth in this Declaration of Trust as it may be amended from time to time. Shares of any Series or Class established in this Section 5 shall have the following relative rights and preferences: (1) Assets belonging to Series or Class. All consideration received by the Trust for the issue or sale of Shares of a particular Series or Class, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that Series or Class for all purposes, subject only to the rights of creditors, and shall be so recorded upon the books of account of the Trust. Such consideration, assets, income, earnings, profits and proceeds thereof, from whatever source derived, including, without 1 limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets belonging to" that Series or Class. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds or payments which are not readily identifiable as belonging to any particular Series or Class (collectively "General Assets"), the Trustees shall allocate such General Assets to, between or among any one or more of the Series or Classes established and designated from time to time in such manner and on such basis as they, in their sole discretion, deem fair and equitable, and any General Assets so allocated to a particular Series or Class shall belong to that Series or Class. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all Series or Classes for all purposes. (2) Liabilities Belonging to Series or Class. The assets belonging to each particular Series of Class shall be charged with the liabilities of the Trust in respect to that Series or Class and all expenses, costs, charges and reserves attributable to that Series or Class, and any general liabilities of the Trust which are not readily identifiable as belonging to any particular Series or Class shall be allocated and charged by the Trustees to and among any one or more of the Series or Classes established and designated from time to time in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. The liabilities, expenses, costs, charges and reserves so charged to a Series or Class are herein referred to as "liabilities belonging to" that Series or Class. Each allocation of liabilities belonging to a Series or Class by the Trustees shall be conclusive and binding upon the Shareholders of all Series or Classes for all purposes. (3) Dividends, Distributions, Redemptions, Repurchases and Indemnification. Notwithstanding any other provisions of this Declaration, including, without limitation, Article X, no dividend or distribution (including, without limitation, any distribution paid upon termination of the Trust or of any Series or Class) with respect to, nor any redemption or repurchase of the Shares of any Series or Class shall be effected by the Trust other than from the assets belonging to such Series or Class, nor except as specifically provided in Section 1 of Article XI hereof, shall any Shareholder of any particular Series or Class otherwise have any right or claim against the assets belonging to any other Series or Class except to the extent that such Shareholder has such a right or claim hereunder as a Shareholder of such other Series or Class. (4) Voting. Notwithstanding any of the other provisions of this Declaration, including, without limitation, Section 1 of Article VIII, only Shareholders of a particular Series or Class shall be entitled to vote on any matters affecting such Series or Class. Except with respect to matters as to which any particular Series or Class is affected, all of the Shares of each Series or Class shall, on matters as to which such Series or Class is entitled to vote, vote with other Series or Classes so entitled as a single class. Notwithstanding the foregoing, with respect to matters which would otherwise be voted on by two or more Series or Classes as a single class, the Trustees may, in their sole discretion, submit such matters to the Shareholders of any or all 2 such Series or Classes, separately. (5) Fraction. Any fractional Share of a Series or Class shall carry proportionately all the rights and obligations of a whole Share of that Series or Class, including rights with respect to voting, receipt of dividends and distributions, redemption of Shares and termination of the Trust or of any Series or Class. (6) Exchange Privilege. The Trustees shall have the authority to provide that the holders of Shares of any Series or Class shall have the right to exchange said Shares for Shares of one or more other Series or Classes in accordance with such requirements and procedures as may be established by the Trustees. (7) Combination of Series and Classes. The Trustees shall have the authority, without the approval of the Shareholders of any Series or Class, unless otherwise required by applicable law, to combine the assets and liabilities belonging to a single Series or Class with the assets and liabilities of one of the other Series or Classes. (8) Elimination of Series or Classes. At any time that there are no Shares outstanding of any particular Series or Class previously established and designated, the Trustees may amend this Declaration of Trust to abolish that Series or Class and to rescind the establishment and designation thereof. ------------------ This Amendment is executed as of the 13th day of October, 1998, to be effective as of June 1, 1998, to give effect to the previous intention and action of the Trustees that all shares of Mentor Asset Allocation Portfolio and Mentor Income Portfolio issued from and after that date be and for all purposes be considered to have been duly authorized in accordance with this Declaration of Trust. 3 IN WITNESS WHEREOF, the undersigned, being at least a majority of the Trustees in office, have executed this instrument. /s/ Arch T. Allen, III /s/ Jerry R. Barrentine - ------------------------ ------------------------ Arch T. Allen, III Jerry R. Barrentine /s/ Arnold H. Dreyfuss /s/ Weston E. Edwards - ------------------------ ------------------------ Arnold H. Dreyfuss Weston E. Edwards /s/ Thomas F. Keller /s/ Daniel J. Ludeman - ------------------------ ------------------------ Thomas F. Keller Daniel J. Ludeman /s/ Louis W. Moelchert, Jr. /s/ J. Garnett Nelson - --------------------------- ------------------------ Louis W. Moelchert, Jr. J. Garnett Nelson /s/ Troy A. Peery, Jr. /s/ Peter J. Quinn, Jr. - ------------------------ ------------------------ Troy A. Peery, Jr. Peter J. Quinn, Jr. 4 EX-1 3 EXHIBIT 1 (VI) Exhibit 1 (vi) MENTOR FUNDS Amendment No. 7 to DECLARATION OF TRUST dated January 20, 1992 This Declaration of Trust is amended as follows: 1. Section 5 of Article III is hereby amended by replacing the reference therein to "Mentor Income Portfolio" with a reference to "Mentor High Income Portfolio". ------------------ This Amendment is executed as of the 13th day of October 1998, to be effective as of June 1, 1998. IN WITNESS WHEREOF, the undersigned, being at least a majority of the Trustees in office, have executed this instrument. /s/ Arch T. Allen, III /s/ Jerry R. Barrentine - ------------------------ ------------------------ Arch T. Allen, III Jerry R. Barrentine /s/ Arnold H. Dreyfuss /s/ Weston E. Edwards - ------------------------ ------------------------ Arnold H. Dreyfuss Weston E. Edwards /s/ Thomas F. Keller /s/ Daniel J. Ludeman - ------------------------ ------------------------ Thomas F. Keller Daniel J. Ludeman /s/ Louis W. Moelchert, Jr. /s/ J. Garnett Nelson - --------------------------- ------------------------ Louis W. Moelchert, Jr. J. Garnett Nelson /s/ Troy A. Peery, Jr. /s/ Peter J. Quinn, Jr. - ------------------------ ------------------------ Troy A. Peery, Jr. Peter J. Quinn, Jr. 1 EX-1 4 EXHIBIT 1 (VII) Exhibit 1 (vii) MENTOR FUNDS Amendment No. 8 to DECLARATION OF TRUST dated January 20, 1992 This Declaration of Trust is amended as follows: 1. Section 5 of Article III is hereby amended by replacing the first and second paragraphs thereto with the following: Section 5. Establishment and Designation of Series or Class. The following Portfolios shall be designated as separate series of shares of beneficial interest of the Trust, with the relative rights and preferences set forth in this Declaration of Trust as it may be amended from time to time: Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio, Mentor Municipal Income Portfolio, Mentor Income and Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Growth Portfolio, Mentor Strategy Portfolio, Mentor Short-Duration Income Portfolio, Mentor Balanced Portfolio, Mentor U.S. Government Money Market Portfolio (formerly, Mentor Institutional U.S. Government Money Market Portfolio), Mentor Money Market Portfolio (formerly, Mentor Institutional Money Market Portfolio), Mentor Tax-Exempt Money Market Portfolio (formerly, Mentor Institutional Tax-Exempt Money Market Portfolio), Mentor Asset Allocation Portfolio, and Mentor High Income Portfolio. There hereby are established and created (i) four classes of shares of each such Portfolio other than Mentor U.S. Government Money Market Portfolio, Mentor Money Market Portfolio, and Mentor Tax-Exempt Money Market Portfolio, the classes so established to be designated Class A shares, Class B shares, Class Y shares, and Class E shares, respectively, and (ii) two classes of shares of each of Mentor U.S. Government Money Market Portfolio, Mentor Money Market Portfolio, and Mentor Tax-Exempt Money Market Portfolio to be designated Institutional Shares and Retail Shares, respectively, in each case with the relative rights and preferences set forth in this Declaration of Trust as it may be amended from time to time. Shares of any Series or Class established in this Section 5 shall have the following relative rights and preferences: (1) Assets belonging to Series or Class. All consideration received by the Trust for the 1 issue or sale of Shares of a particular Series or Class, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that Series or Class for all purposes, subject only to the rights of creditors, and shall be so recorded upon the books of account of the Trust. Such consideration, assets, income, earnings, profits and proceeds thereof, from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets belonging to" that Series or Class. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds or payments which are not readily identifiable as belonging to any particular Series or Class (collectively "General Assets"), the Trustees shall allocate such General Assets to, between or among any one or more of the Series or Classes established and designated from time to time in such manner and on such basis as they, in their sole discretion, deem fair and equitable, and any General Assets so allocated to a particular Series or Class shall belong to that Series or Class. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all Series or Classes for all purposes. (2) Liabilities Belonging to Series or Class. The assets belonging to each particular Series or Class shall be charged with the liabilities of the Trust in respect to that Series or Class and all expenses, costs, charges and reserves attributable to that Series or Class, and any general liabilities of the Trust which are not readily identifiable as belonging to any particular Series or Class shall be allocated and charged by the Trustees to and among any one or more of the Series or Classes established and designated from time to time in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. The liabilities, expenses, costs, charges and reserves so charged to a Series or Class are herein referred to as "liabilities belonging to" that Series or Class. Each allocation of liabilities belonging to a Series or Class by the Trustees shall be conclusive and binding upon the Shareholders of all Series or Classes for all purposes. (3) Dividends, Distributions, Redemptions, Repurchases and Indemnification. Notwithstanding any other provisions of this Declaration, including, without limitation, Article X, no dividend or distribution (including, without limitation, any distribution paid upon termination of the Trust or of any Series or Class) with respect to, nor any redemption or repurchase of the Shares of any Series or Class shall be effected by the Trust other than from the assets belonging to such Series or Class, nor except as specifically provided in Section 1 of Article XI hereof, shall any Shareholder of any particular Series or Class otherwise have any right or claim against the assets belonging to any other Series or Class except to the extent that such Shareholder has such a right or claim hereunder as a Shareholder of such other Series or Class. 2 (4) Voting. Notwithstanding any of the other provisions of this Declaration, including, without limitation, Section 1 of Article VIII, only Shareholders of a particular Series or Class shall be entitled to vote on any matters affecting such Series or Class. Except with respect to matters as to which any particular Series or Class is affected, all of the Shares of each Series or Class shall, on matters as to which such Series or Class is entitled to vote, vote with other Series or Classes so entitled as a single class. Notwithstanding the foregoing, with respect to matters which would otherwise be voted on by two or more Series or Classes as a single class, the Trustees may, in their sole discretion, submit such matters to the Shareholders of any or all such Series or Classes, separately. (5) Fraction. Any fractional Share of a Series or Class shall carry proportionately all the rights and obligations of a whole Share of that Series or Class, including rights with respect to voting, receipt of dividends and distributions, redemption of Shares and termination of the Trust or of any Series or Class. (6) Exchange Privilege. The Trustees shall have the authority to provide that the holders of Shares of any Series or Class shall have the right to exchange said Shares for Shares of one or more other Series or Classes in accordance with such requirements and procedures as may be established by the Trustees. (7) Combination of Series and Classes. The Trustees shall have the authority, without the approval of the Shareholders of any Series or Class, unless otherwise required by applicable law, to combine the assets and liabilities belonging to a single Series or Class with the assets and liabilities of one of the other Series or Classes. (8) Elimination of Series or Classes. At any time that there are no Shares outstanding of any particular Series or Class previously established and designated, the Trustees may amend this Declaration of Trust to abolish that Series or Class and to rescind the establishment and designation thereof. ------------------ This Amendment is to be effective as of October 13, 1998. 3 IN WITNESS WHEREOF, the undersigned, being at least a majority of the Trustees in office, have executed this instrument. /s/ Arch T. Allen, III /s/ Jerry R. Barrentine - ------------------------ ------------------------ Arch T. Allen, III Jerry R. Barrentine /s/ Arnold H. Dreyfuss /s/ Weston E. Edwards - ------------------------ ------------------------ Arnold H. Dreyfuss Weston E. Edwards /s/ Thomas F. Keller /s/ Daniel J. Ludeman - ------------------------ ------------------------ Thomas F. Keller Daniel J. Ludeman /s/ Louis W. Moelchert, Jr. /s/ J. Garnett Nelson - --------------------------- ------------------------ Louis W. Moelchert, Jr. J. Garnett Nelson /s/ Troy A. Peery, Jr. /s/ Peter J. Quinn, Jr. - ------------------------ ------------------------ Troy A. Peery, Jr. Peter J. Quinn, Jr. 4 EX-2 5 EXHIBIT 2 (II) Exhibit 2 (ii) VOTED: That a new Section 6 of Article IV be added to the Bylaws to read in its entirety as follows: "Section 6. The placing of a shareholder's name on a proxy pursuant to telephone or electronically transmitted instructions obtained pursuant to procedures reasonably designed to verify that such instructions have been authorized by such shareholder shall constitute execution of such proxy by or on behalf of such shareholder." EX-11 6 EXHIBIT 11 Exhibit 11 (i) Consent of Independent Auditors The Board of Trustees Mentor Funds: We consent to the use of our reports dated November 20, 1998, included herein and to the references to our firm under the headings "FINANCIAL HIGHLIGHTS" in the prospectuses and "INDEPENDENT ACCOUNTANTS" in the statements of additional information. KPMG Peat Marwick LLP Boston, Massachusetts November 30, 1998 EX-18 7 EXHIBIT 18 Exhibit 18 MENTOR FUNDS Amended and Restated Plan pursuant to Rule 18f-3(d) under the Investment Company Act of 1940 Effective October 13, 1998 Each series of shares of beneficial interest in Mentor Funds (the "Trust") (each a "Portfolio" and, together, the "Portfolios") may from time to time issue one or more of the following classes of shares: Class A shares, Class B shares, and Class Y shares, or in the case of the Money Market Portfolios, Retail shares and Institutional shares. Each class is subject to such investment minimums and other conditions of eligibility as are set forth in the prospectus in respect of any such Portfolio as from time to time in effect (each, the "Prospectus"). The differences in expenses among these classes of shares, and the conversion and exchange features of each class of shares, are set forth below in this Amended and Restated Plan. Except as noted below, expenses are allocated among the classes of shares of each Portfolio based upon the expenses incurred by each class or as otherwise determined to be fair and equitable by the Trustees. This Amended and Restated Plan is subject to change, to the extent permitted by law and by the Declaration of Trust and By-laws of the Trust, by action of the Trustees of the Trust. CLASS A SHARES Distribution and Service Fees Class A shares pay no Rule 12b-1 distribution fees, but pay shareholder service fees of .25% of the relevant Portfolio's average net assets attributable to Class A shares. Exchange Features Class A shares of any Portfolio may be exchanged, at the holder's option, for Class A shares of any other Portfolio that offers Class A shares without the payment of a sales charge beginning 15 days after purchase, provided that Class A shares of such other Portfolio are available to residents of the relevant state. The holding period for determining any CDSC will include the holding period of the shares exchanged, and will be calculated using the schedule of any Portfolio into or from which shares have been exchanged that would result in the highest CDSC applicable to such shares. (If a shareholder exchanges his shares for shares of the Cash Resource U.S. Government Money Market Fund, the period during which he holds -1- shares of that Fund will not be included in calculating the length of time he has owned the shares subject to the CDSC, and any CDSC payable on redemption of his shares will be reduced by the amount of any payment collected by that Fund under its distribution plan in respect of those shares.) Conversion Features Class A shares do not convert into any other class of shares. Initial Sales Charge Class A shares are offered at a public offering price that is equal to their net asset value ("NAV") plus a sales charge of up to 5.75% of the public offering price (which maximum may be less for certain Portfolios, as described in the Prospectus). The sales charges on Class A shares are subject to reduction or waiver as permitted by Rule 22d-1 under the Investment Company Act of 1940, as amended (the "1940 Act") and as described in the Prospectus. Contingent Deferred Sales Charge Purchases of Class A shares of $1 million or more that are redeemed within one year of purchase are subject to a CDSC of 1.00% of either the purchase price or the NAV of the shares redeemed, whichever is less. Class A shares are not otherwise subject to a CDSC. The CDSC on Class A shares is subject to reduction or waiver in certain circumstances, as permitted by Rule 6c-10 under the 1940 Act and as described in the Prospectus. CLASS B SHARES Distribution and Service Fees Class B shares pay distribution fees pursuant to plans adopted pursuant to Rule 12b-1 under the 1940 Act (the "Class B Plans"). Class B shares also bear any costs associated with obtaining shareholder approval of the Class B Plans (or an amendment to a Class B Plan). Pursuant to the Class B Plans, Class B shares may pay up to .75% of the relevant Portfolio's average net assets attributable to Class B shares (which percentage may be less for certain Portfolios, as described in the Prospectus). Amounts payable under the Class B Plans are subject to such further limitations as the Trustees may from time to time determine and as set forth in the Prospectus. -2- Exchange Features Class B shares of any Portfolio may be exchanged, at the holder's option, for Class B shares of any other Portfolio that offers Class B shares without the payment of a sales charge beginning 15 days after purchase, provided that Class B shares of such other Portfolio are available to residents of the relevant state. The holding period for determining any CDSC will include the holding period of the shares exchanged, and will be calculated using the schedule of any Portfolio into or from which shares have been exchanged that would result in the highest CDSC applicable to such Class B shares. (If a shareholder exchanges his shares for shares of the Cash Resource U.S. Government Money Market Fund, the period which he holds shares of that Fund will not be included in calculating the length of time he has owned the shares subject to the CDSC, and any CDSC payable on redemption of his shares will be reduced by the amount of any payment collected by that Fund under its distribution plan in respect of those shares.) Conversion Features Class B shares do not convert into any other class of shares. Initial Sales Charge Class B shares are offered at their NAV, without an initial sales charge. Contingent Deferred Sales Charge Class B shares that are redeemed within 6 years of purchase are subject to a CDSC of up to 4.00% of either the purchase price or the NAV of the shares redeemed, whichever is less (which period may be shorter and which percentage may be less for certain Portfolios, as described in the Prospectus); such percentage declines the longer the shares are held, as described in the Prospectus. Class B shares purchased with reinvested dividends or capital gains are not subject to a CDSC. The CDSC on Class B shares is subject to reduction or waiver in certain circumstances, as permitted by Rule 6c-10 under the 1940 Act and as described in the Prospectus. Y SHARES Distribution and Service Fees Y Shares pay no Rule 12b-1 distribution fees. -3- Exchange Features Y Shares of any Portfolio may be exchanged, at the holder's option, (i) for Y Shares of any other Portfolio and (ii) for shares of the Cash Resource U.S. Government Money Market Fund, without the payment of a sales charge beginning 15 days after purchase, provided that such other shares are available to residents of the relevant state. Conversion Features Y Shares do not convert into any other class of shares. Initial Sales Charge Y Shares are offered at their NAV, without an initial sales charge. Contingent Deferred Sales Charge Y Shares are not subject to any CDSC. RETAIL SHARES (Money Market Portfolios) Distribution and Service Fees Retail Shares pay distribution fees pursuant to plans adopted pursuant to Rule 12b-1 under the 1940 Act (the "Retail Share Plans"). Retail Shares also bear any costs associated with obtaining shareholder approval of the Retail Share Plans (or an amendment to a Retail Share Plan). Pursuant to the Retail Share Plans, Retail Shares may pay up to .38% of the relevant Portfolio's average net assets attributable to Retail Shares (which percentage may be less for certain Portfolios, as described in the Prospectus). Amounts payable under the Retail Share Plans are subject to such further limitations as the Trustees may from time to time determine and as set forth in the Prospectus. Exchange Features Retail Shares of any Portfolio may be exchanged, at the holder's option, for Retail Shares of any other Portfolio that offers Retail Shares without the payment of a sales charge beginning 15 days after purchase, provided that Retail Shares of such other Portfolio are available to residents of the relevant state. Conversion Features Retail Shares do not convert into any other class of shares. -4- Initial Sales Charge Retail Shares are offered at their NAV, without an initial sales charge. Contingent Deferred Sales Charge Retail Shares are not subject to any CDSC. INSTITUTIONAL SHARES (Money Market Portfolios) Distribution and Service Fees Institutional Shares pay no Rule 12b-1 distribution fees. Exchange Features Institutional Shares of any Portfolio may be exchanged, at the holder's option, for Institutional Shares of any other Fund, without the payment of a sales charge beginning 15 days after purchase, provided that such other shares are available to residents of the relevant state. Conversion Features Institutional Shares do not convert into any other class of shares. Initial Sales Charge Institutional Shares are offered at their NAV, without an initial sales charge. Contingent Deferred Sales Charge Institutional Shares are not subject to any CDSC. -5- EX-24 8 EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY We, the undersigned Officers and Trustees of Mentor Funds (the "Trust"), hereby severally constitute and appoint Daniel J. Ludeman, Paul F. Costello and Terry L. Perkins, and each of them singly, our true and lawful attorneys, with full power to them and each of them, to sign for us, and in our names and in the capacities indicated below, the Registration Statement on Form N-1A of the Trust and any and all amendments (including post-effective amendments) to said Registration Statement and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto our said attorneys, and each of them acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratify and confirm all that said attorneys or any of them may lawfully do or cause to be done by virtue thereof. WITNESS our hands and common seal on the date set forth below. Signature Title Date /s/ Arch T. Allen, III Trustee November 10, 1998 - --------------------------- Arch T. Allen, III /s/ Jerry R. Barrentine Trustee November 10, 1998 - --------------------------- Jerry R. Barrentine /s/ Arnold H. Dreyfuss Trustee November 10, 1998 - --------------------------- Arnold H. Dreyfuss /s/ Weston E. Edwards Trustee November 10, 1998 - --------------------------- Weston E. Edwards /s/ Thomas F. Keller Trustee November 10, 1998 - --------------------------- Thomas F. Keller -1- /s/ Daniel J. Ludeman Chairman;Trustee November 10, 1998 - --------------------------- Daniel J. Ludeman /s/ Louis W. Moelchert, Jr. Trustee November 10, 1998 - --------------------------- Louis W. Moelchert, Jr. /s/ J. Garnett Nelson Trustee November 10, 1998 - --------------------------- J. Garnett Nelson /s/ Troy A. Peery, Jr. Trustee November 10, 1998 - --------------------------- Troy A. Peery, Jr. /s/ Peter J. Quinn, Jr. Trustee November 10, 1998 - --------------------------- Peter J. Quinn, Jr. /s/ Paul F. Costello President November 10, 1998 - --------------------------- (Principal Paul F. Costello Executive Officer) /s/ Terry L. Perkins Treasurer November 10, 1998 - --------------------------- (Principal Terry L. Perkins Financial and Accounting Officer) -2- EX-27 9 EXHIBIT 27.1
6 1 MENTOR GROWTH PORTFOLIO-CLASS A 1,000 YEAR SEP-30-1998 SEP-30-1998 464,311 481,004 10,120 74 115,220 606,418 1,945 0 118,212 120,157 0 451,922 5,323 5,267 0 0 17,645 0 16,694 486,261 524 3,726 0 11,213 (6,963) 37,566 (173,567) (142,964) 0 0 6,599 0 12,017 12,307 347 (125,002) 0 30,589 0 0 4,204 0 11,213 110,307 19.94 (0.12) (4.03) 0.00 1.19 0.00 14.60 1.27 0 0
EX-27 10 EXHIBIT 27.2
6 2 MENTOR GROWTH PORTFOLIO-CLASS B 1,000 YEAR SEP-30-1998 SEP-30-1998 464,311 481,004 10,120 74 115,220 606,418 1,945 0 118,212 120,157 0 451,922 27,028 25,921 0 0 17,645 0 16,694 486,261 524 3,726 0 11,213 (6,963) 37,566 (173,567) (142,964) 0 0 31,308 0 4,138 4,699 1,667 (125,002) 0 30,589 0 0 4,204 0 11,213 484,933 19.53 (0.23) (3.93) 0.00 1.19 0.00 14.18 2.01 0 0
EX-27 11 EXHIBIT 27.3
6 3 MENTOR GROWTH PORTFOLIO-CLASS Y 1,000 YEAR SEP-30-1998 SEP-30-1998 464,311 481,004 10,120 74 115,220 606,418 1,945 0 118,212 120,157 0 451,922 1,733 0 0 0 17,645 0 16,694 486,261 524 3,726 0 11,213 (6,963) 37,566 (173,567) (142,964) 0 0 0 0 1,787 54 0 (125,002) 0 30,589 0 0 4,204 0 11,213 5,803 18.12 (0.02) (3.28) 0.00 0.19 0.00 14.63 1.01 0 0
EX-27 12 EXHIBIT 27.4
6 4 MENTOR GLOBAL PORTFOLIO-CLASS A 1,000 YEAR SEP-30-1998 SEP-30-1998 164,718 156,477 19,821 0 5 176,303 2,698 0 15,315 18,013 0 153,976 3,119 2,223 3,616 0 12,575 0 (8,264) 158,290 2,177 500 0 3,434 (757) 14,799 (25,460) (11,418) 0 0 2,383 0 2,058 1,276 114 22,704 (98) 5,560 0 0 1,612 0 3,434 56,009 20.94 (0.03) (0.97) 0.00 1.02 0.00 18.92 1.75 0 0
EX-27 13 EXHIBIT 27.5
6 5 MENTOR PERPETUAL GLOBAL PORTFOLIO-CLASS B 1,000 YEAR SEP-30-1998 SEP-30-1998 164,718 156,477 19,821 0 5 176,303 2,698 0 15,315 18,013 0 153,976 5,453 4,382 3,616 0 12,575 0 (8,264) 158,290 2,177 500 0 3,434 (757) 14,799 (25,460) (11,418) 0 0 4,554 0 1,822 984 233 22,704 (98) 5,560 0 0 1,612 0 3,434 97,925 20.32 (0.12) (0.97) 0.00 1.02 0.00 18.21 2.51 0 0
EX-27 14 EXHIBIT 27.6
6 6 MENTOR PERPETUAL GLOBAL PORTFOLIO-CLASS Y 1,000 YEAR SEP-30-1998 SEP-30-1998 164,718 156,477 19,821 0 5 176,303 2,698 0 15,315 18,013 0 153,976 0 0 3,616 0 12,575 0 (8,264) 158,290 2,177 500 0 3,434 (757) 14,799 (25,460) (11,418) 0 0 0 0 0 0 0 22,704 (98) 5,560 0 0 1,612 0 3,434 1 18.81 0.00 0.30 0.00 0.15 0.00 18.96 1.50 0 0
EX-27 15 EXHIBIT 27.7
6 7 MENTOR CAPITAL GROWTH PORTFOLIO-CLASS A 1,000 YEAR SEP-30-1998 SEP-30-1998 343,103 349,567 3,949 0 15,563 369,079 10,841 0 16,369 27,210 0 298,265 6,392 2,930 0 0 37,140 0 6,464 341,869 2,937 804 0 4,841 (1,100) 45,438 (32,273) 12,065 0 30 5,934 0 5,130 1,927 278 162,579 60 13,768 0 0 2,153 0 4,841 105,795 22.42 (0.10) 2.34 0.01 1.94 0.00 22.71 1.33 0 0
EX-27 16 EXHIBIT 27.8
6 8 MENTOR CAPITAL GROWTH PORTFOLIO-CLASS B 1,000 YEAR SEP-30-1998 SEP-30-1998 343,103 349,567 3,949 0 15,563 369,079 10,841 0 16,369 27,210 0 298,265 9,059 5,240 0 0 37,140 0 6,464 341,869 2,937 804 0 4,841 (1,100) 45,438 (32,273) 12,065 0 53 10,485 0 4,375 1,063 508 162,579 60 13,768 0 0 2,153 0 4,841 164,065 21.68 (0.08) 2.07 0.01 1.94 0.00 21.72 2.09 0 0
EX-27 17 EXHIBIT 27.9
6 9 MENTOR CAPITAL GROWTH PORTFOLIO-CLASS Y 1,000 YEAR SEP-30-1998 SEP-30-1998 343,103 349,567 3,949 0 15,563 369,079 10,841 0 16,369 27,210 0 298,265 0 0 0 0 37,140 0 6,464 341,869 2,937 804 0 4,841 (1,100) 45,438 (32,273) 12,065 0 0 0 0 0 0 0 162,579 60 13,768 0 0 2,153 0 4,841 1 20.81 0.02 2.16 0.00 0.25 0.00 22.74 1.09 0 0
EX-27 18 EXHIBIT 27.10
6 10 MENTOR INCOME AND GROWTH PORTFOLIO-CLASS A 1,000 YEAR SEP-30-1998 SEP-30-1998 231,110 241,809 1,993 1 40,345 284,148 663 0 40,844 41,507 0 221,635 5,055 3,083 92 0 10,214 0 10,699 242,641 2,856 5,943 0 3,869 4,930 10,846 (5,423) 10,353 0 2,350 5,325 0 2,516 915 371 71,316 0 13,501 0 0 1,639 0 3,869 87,119 20.60 0.51 0.60 0.51 1.66 0.00 19.54 1.32 0 0
EX-27 19 EXHIBIT 27.11
6 11 MENTOR INCOME AND GROWTH PORTFOLIO-CLASS B 1,000 YEAR SEP-30-1998 SEP-30-1998 231,110 241,809 1,993 1 40,345 284,148 663 0 40,844 41,507 0 221,635 7,365 5,237 92 0 10,214 0 10,699 242,641 2,856 5,943 0 3,869 4,930 10,846 (5,423) 10,353 0 2,488 8,807 0 2,643 1,075 559 71,316 0 13,501 0 0 1,639 0 3,869 131,644 20.59 0.37 0.59 0.36 1.66 0.00 19.53 2.07 0 0
EX-27 20 EXHIBIT 27.12
6 12 MENTOR INCOME AND GROWTH PORTFOLIO-CLASS Y 1,000 YEAR SEP-30-1998 SEP-30-1998 231,110 241,809 1,993 1 40,345 284,148 663 0 40,844 41,507 0 221,635 0 0 92 0 10,214 0 10,699 242,641 2,856 5,943 0 3,869 4,930 10,846 (5,423) 10,353 0 0 0 0 0 0 0 71,316 0 13,501 0 0 1,639 0 3,869 1 18.75 0.54 0.82 0.54 0.03 0.00 19.54 1.07 0 0
EX-27 21 EXHIBIT 27.13
6 13 MENTOR BALANCED PORTFOLIO-CLASS A 1,000 YEAR SEP-30-1998 SEP-30-1998 11,266 11,469 3,516 0 3,116 18,101 2,537 0 2,743 5,280 0 12,531 258 0 18 0 69 0 203 12,821 29 104 0 23 110 822 (584) 348 0 0 0 0 258 0 0 8,719 0 0 0 0 32 0 87 1,261 13.69 0.00 0.00 0.00 0.00 0.00 13.69 1.35 0 0
EX-27 22 EXHIBIT 27.14
6 14 MENTOR BALANCED PORTFOLIO-CLASS B 1,000 YEAR SEP-30-1998 SEP-30-1998 11,266 11,469 3,516 0 3,116 18,101 2,537 0 2,743 5,280 0 12,531 412 233 18 0 69 0 203 12,821 29 104 0 23 110 822 (584) 348 0 0 0 0 139 48 89 8,719 68 387 0 0 32 0 87 4,012 17.61 0.45 1.43 0.71 5.09 0.00 13.69 2.12 0 0
EX-27 23 EXHIBIT 27.15
6 15 MENTOR BALANCED PORTFOLIO-CLASS Y 1,000 YEAR SEP-30-1998 SEP-30-1998 11,266 11,469 3,516 0 3,116 18,101 2,537 0 2,743 5,280 0 12,531 266 0 18 0 69 0 203 12,821 29 104 0 23 110 822 (584) 348 0 160 1,140 0 273 7 0 8,719 0 0 0 0 32 0 87 3,773 13.69 0.01 (0.01) 0.00 0.00 0.00 13.69 1.10 0 0
EX-27 24 EXHIBIT 27.16
6 16 MENTOR MUNI INCOME PORTFOLIO-CLASS A 1,000 YEAR SEP-30-1998 SEP-30-1998 105,012 112,860 3,543 0 84 116,487 4,841 0 536 5,377 0 105,841 3,237 1,896 0 (350) (2,004) 0 7,622 111,109 0 5,400 0 1,346 4,054 (41) 3,077 7,090 0 1,980 0 0 1,689 423 76 37,443 0 0 300 1,963 557 0 1,346 41,490 15.50 0.66 0.59 0.76 0.00 0.00 15.99 1.17 0 0
EX-27 25 EXHIBIT 27.17
6 17 MENTOR MUNI INCOME PORTFOLIO-CLASS B 1,000 YEAR SEP-30-1998 SEP-30-1998 105,102 112,860 3,543 0 84 116,487 4,841 0 536 5,377 0 105,841 3,723 2,859 0 (350) (2,004) 0 7,622 111,109 0 5,400 0 1,346 4,054 (41) 3,077 7,090 0 2,308 0 0 1,208 436 92 37,443 0 0 300 1,963 557 0 1,346 51,566 15.49 1.30 (0.14) 0.71 0.00 0.00 15.94 1.67 0 0
EX-27 26 EXHIBIT 27.18
6 18 MENTOR MUNI INCOME PORTFOLIO-CLASS Y 1,000 YEAR SEP-30-1998 SEP-30-1998 105,012 112,860 3,543 0 84 116,487 4,841 0 536 5,377 0 105,841 0 0 0 (350) (2,004) 0 7,622 111,109 0 5,400 0 1,346 4,054 (41) 3,077 7,090 0 0 0 0 0 0 0 37,443 0 0 300 1,963 557 0 1,346 1 15.51 1.39 (0.23) 0.67 0.00 0.00 16.00 0.92 0 0
EX-27 27 EXHIBIT 27.19
6 19 MENTOR QUALITY INCOME PORTFOLIO-CLASS A 1,000 9-MOS SEP-30-1998 SEP-30-1998 290,164 298,638 4,115 35 1,725 304,513 0 0 97,331 97,331 0 213,925 6,927 4,035 0 (924) (14,294) 0 8,474 207,181 0 11,610 0 2,275 9,335 713 6,558 16,606 0 4,831 0 0 4,257 1,598 233 78,959 0 0 391 15,099 1,026 0 2,480 77,738 13.18 0.79 0.47 0.83 0.00 0.00 13.61 1.05 0 0.00
EX-27 28 EXHIBIT 27.20
6 20 MENTOR QUALITY INCOME PORTFOLIO-CLASS B 1,000 9-MOS SEP-30-1998 SEP-30-1998 290,165 298,638 4,115 35 1,725 304,513 0 0 97,331 97,331 0 213,925 8,297 5,693 0 (924) (14,294) 0 8,474 207,181 0 11,610 0 2,275 9,335 713 6,558 16,606 0 5,432 0 0 3,811 1,479 272 78,959 0 0 391 15,099 1,026 0 2,480 93,548 13.18 0.72 0.48 0.77 0.00 0.00 13.61 1.55 0 0.00
EX-27 29 EXHIBIT 27.21
6 21 MENTOR QUALITY INCOME PORTFOLIO-CLASS Y 1,000 9-MOS SEP-30-1998 SEP-30-1998 290,165 298,638 4,115 35 1,725 304,513 0 0 97,331 97,331 0 213,925 0 0 0 (924) (14,294) 0 8,474 207,181 0 11,610 0 2,275 9,335 713 6,558 16,606 0 0 0 0 0 0 0 78,959 0 0 391 15,099 1,026 0 2,480 1 13.20 0.78 0.39 0.68 0.00 0.00 13.69 0.80 0 0.00
EX-27 30 EXHIBIT 27.22
6 22 MENTOR SHORT DURATION INCOME-CLASS A 1,000 9-MOS SEP-30-1998 SEP-30-1998 161,222 163,132 5,387 0 25 168,544 0 0 21,499 21,499 0 145,503 7,313 2,188 (512) 0 144 0 1,910 147,044 0 6,170 0 1,003 5,167 326 1,608 7,101 0 3,203 0 0 9,922 4,997 201 92,337 0 0 96 176 504 0 1,285 56,628 12.62 0.70 0.15 0.73 0.00 0.00 12.74 0.86 0 0.00
EX-27 31 EXHIBIT 27.23
6 23 MENTOR SHORT DURATION INCOME-CLASS B 1,000 9-MOS SEP-30-1998 SEP-30-1998 161,222 163,132 5,387 0 25 168,544 0 0 21,499 21,499 0 145,503 4,228 2,146 (512) 0 144 0 1,910 147,044 0 6,170 0 1,003 5,167 326 1,608 7,101 0 2,394 0 0 3,500 1,564 145 92,337 0 0 96 176 504 0 1,285 44,607 12.62 0.66 0.16 0.69 0.00 0.00 12.75 1.16 0 0.00
EX-27 32 EXHIBIT 27.24
6 24 MENTOR SHORT DURATION INCOME-CLASS Y 1,000 9-MOS SEP-30-1998 SEP-30-1998 161,222 163,132 5,387 0 25 168,544 0 0 21,499 21,499 0 145,503 0 0 (512) 0 144 0 1,910 147,044 0 6,170 0 1,003 5,167 326 1,608 7,101 0 0 0 0 0 0 0 92,337 0 0 96 176 504 0 1,285 1 12.57 0.67 0.16 0.61 0.00 0.00 12.79 0.61 0 0.00
EX-27 33 EXHIBIT 27.25
6 25 MENTOR U.S. GOVT MONEY MARKET PORTFOLIO 1,000 9-MOS SEP-30-1998 SEP-30-1998 106,090 106,090 640 0 15 106,745 0 0 472 472 0 106,273 106,273 61,805 0 0 0 0 0 106,273 0 5,164 0 303 4,861 0 0 4,861 0 4,861 0 0 170,788 130,786 4,466 44,468 0 0 0 0 202 0 303 92,242 1.00 0.05 0.00 0.05 0.00 0.00 1.00 0.33 0 0.00
EX-27 34 EXHIBIT 27.26
6 26 MENTOR MONEY MARKET PORTFOLIO 1,000 9-MOS SEP-30-1998 SEP-30-1998 40,731 40,731 438 0 16 41,185 0 0 215 215 0 40,970 40,970 0 0 0 0 0 0 40,970 0 1,816 0 105 1,711 0 0 1,711 0 1,711 0 0 69,738 30,219 1,451 40,970 0 0 0 0 52 0 105 36,943 1.00 0.05 0.00 0.05 0.00 0.00 1.00 0.33 0 0.00
EX-27 35 EXHIBIT 27.27
6 27 MENTOR HIGH INCOME-CLASS A 1,000 9-MOS SEP-30-1998 SEP-30-1998 117,889 108,566 6,178 0 2,510 117,254 2,982 0 516 3,498 0 123,540 4,658 0 0 (372) (89) 0 (9,323) 113,756 0 2,037 0 219 1,818 (89) (9,323) (7,594) 0 1,041 0 0 4,775 169 52 113,756 0 0 0 0 176 0 395 42,576 12.00 0.24 (1.04) 0.28 0.00 0.00 10.92 0.60 0 0.00
EX-27 36 EXHIBIT 27.28
6 28 MENTOR HIGH INCOME-CLASS B 1,000 9-MOS SEP-30-1998 SEP-30-1998 117,889 108,566 6,178 0 2,510 117,254 2,982 0 516 3,498 0 123,540 5,762 0 0 (372) (89) 0 (9,323) 113,756 0 2,037 0 219 1,818 (89) (9,323) (7,594) 0 1,179 0 0 5,890 191 62 113,756 0 0 0 0 176 0 395 51,007 12.00 0.22 (1.05) 0.26 0.00 0.00 10.91 1.10 0 0.00
EX-27 37 EXHIBIT 27.29
6 29 MENTOR STRATEGY PORTFOLIO-CLASS A 1,000 9-MOS SEP-30-1998 SEP-30-1998 211,264 224,854 1,970 0 60,171 286,995 0 0 61,761 61,761 0 192,886 1,602 2,179 2,164 0 20,466 0 9,718 225,233 1,264 7,296 0 5,921 2,639 24,558 (26,287) 910 0 618 6,308 0 509 1,530 445 (117,203) 5,366 54,474 0 0 2,420 0 5,921 34,676 18.61 0.40 (0.35) 0.29 2.96 0.00 15.41 1.42 0 0
EX-27 38 EXHIBIT 27.30
6 30 MENTOR STRATEGY PORTFOLIO-CLASS B 1,000 9-MOS SEP-30-1998 SEP-30-1998 211,264 224,854 1,970 0 60,171 286,995 0 0 61,761 61,761 0 192,886 13,394 16,503 2,164 0 20,466 0 9,718 225,233 1,264 7,296 0 5,921 2,639 24,558 (26,287) 910 0 4,726 48,272 0 564 7,097 3,424 (117,203) 5,366 54,474 0 0 2,420 0 5,921 249,870 18.29 0.16 (0.23) 0.29 2.96 0.00 14.97 2.17 0 0
EX-27 39 EXHIBIT 27.31
6 31 MENTOR STRATEGY PORTFOLIO-CLASS Y 1,000 9-MOS SEP-30-1998 SEP-30-1998 211,264 224,854 1,970 0 60,171 286,995 0 0 61,761 61,761 0 192,886 0 0 2,164 0 20,466 0 9,718 225,233 1,264 7,296 0 5,921 2,639 24,558 (26,287) 910 0 0 0 0 0 0 0 (117,203) 5,366 54,474 0 0 2,420 0 5,921 1 15.01 0.25 0.18 0.00 0.01 0.00 15.43 2.87 0 0
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