-----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, CedzmYgmm0S93a3fUqYhhPfE3YzGeKv/VMr7QI6NwlKqlLEU478dKJ0uQ4xtl4gq ES6VjmRjM98LUKpWA3QbUw== 0000908737-99-000254.txt : 19990813 0000908737-99-000254.hdr.sgml : 19990813 ACCESSION NUMBER: 0000908737-99-000254 CONFORMED SUBMISSION TYPE: N-14AE/A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990812 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: N-14AE/A SEC ACT: SEC FILE NUMBER: 333-82853 FILM NUMBER: 99685330 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 N-14AE/A 1 1933 Act Registration No. 333-82853 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-14AE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective [ ] Post-Effective Amendment No. 1 Amendment No. MENTOR FUNDS (Mentor Balanced Portfolio) [Exact Name of Registrant as Specified in Charter] Area Code and Telephone Number: (804)782-3648 901 East Byrd Street Richmond, Virginia 23219 ----------------------------------- (Address of Principal Executive Offices) Paul F. Costello, Esq. 901 East Byrd Street Richmond, Virginia 23219 ----------------------------------------- (Name and Address of Agent for Service) Copies of All Correspondence to: Timothy W. Diggins, Esq. Robert N. Hickey, Esq. Ropes & Gray Sullivan Worcester LLP One International Plaza 1025 Connecticut Avenue, N.W. Boston, Massachusetts 02110 Washington, D.C. 20036 Approximate date of proposed public offering: As soon as possible after the effective date of this Registration Statement. The Registrant has registered an indefinite amount of securities under the Securities Act of 1933 pursuant to Section 24(f) under the Investment Company Act of 1940 (File No. 33- 45315); accordingly, no fee is payable herewith. Pursuant to Rule 429, this Registration Statement relates to the aforementioned registration on Form N-1A. A Rule 24f-2 Notice for the Registrant's fiscal year ended September 30, 1998 was filed with the Commission on or about December 31, 1998. The Registrant hereby amends this Registration Statement on such dates or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which 1 specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine. 2 The entire Registration Statement (File No. 333-82853) as filed with the Commission on July 14, 1999, including Part A, Part B, Part C, and all other documents contained therein, is hereby incorporated by reference in its entirety, except for the cover page and the signature page. The purpose of this filing is to add the Semi-annual Report of Mentor Income and Growth and Mentor Balanced for the six month period ended March 31, 1999 as an attachment to Part B, the Statement of Additional Information. 3 Mentor Funds ---------------------- Semi-Annual Report ---------------------- March 31, 1999 [MENTOR INVESTMENT GROUP LOGO] MENTOR FUNDS SEMI-ANNUAL REPORT TABLE OF CONTENTS MARCH 31, 1999 - --------------------------------------------------------------------------------
PAGE ----------- Message from the Chairman and President .................. 1 Growth Portfolio ......................................... 2 Perpetual Global Portfolio ............................... 12 Capital Growth Portfolio ................................. 25 Income and Growth Portfolio .............................. 33 Balanced Portfolio ....................................... 43 Municipal Income Portfolio ............................... 53 Quality Income & Short-Duration Income Portfolios ........ 64 High Income Portfolio .................................... 81 Notes to Financial Statements ............................ 90 Shareholder Information .................................. Inside back cover
MENTOR FUNDS MESSAGE FROM THE CHAIRMAN AND PRESIDENT MARCH 31, 1999 - -------------------------------------------------------------------------------- TO OUR SHAREHOLDERS: On behalf of all the associates at Mentor Investment Group, we would like to take this opportunity to thank you for your investment in the Mentor Family of Funds. This Semi-Annual Report reaffirms our commitment to our shareholders and details the financial performance of these investments for the period ended March 31, 1999. Founded in 1970, Mentor Investment Group is an investment advisory firm with more than $16 billion under management. We pride ourselves on a strong heritage of providing quality service and a variety of investment choices that help meet our shareholders' financial objectives by offering mutual funds and separately-invested portfolios. In the commentary that follows, Mentor's investment team presents an insightful perspective on the markets and strategies that shaped their investment decisions for the past fiscal year. Our investment teams operate with these priorities: FOCUS -- In most money management companies, each investment manager has multiple responsibilities. At Mentor, our investment managers are singularly focused on enhancing the value of the portfolios. This means that you can be assured of a consistent, proven approach to developing a winning financial strategy. OPPORTUNITIES -- By offering multiple management styles, portfolio diversification is simplified. Mentor gives investors the tools for long-term investment success through diversification and accommodation of changing investment needs. SERVICE -- To help serve our shareholders, Mentor has a fully dedicated Investor Relations Center. Our Relationship Coordinators are professionally trained and licensed to serve clients' needs. TECHNOLOGY -- Abreast of the most advanced technology and using the latest analytical tools, our investment managers have the ability to survey the financial markets and make informed decisions about where the best place is to invest. We at Mentor are honored to be a partner in the management of your financial assets. Mentor Investment Group provides diversified investment styles and services to over one million shareholders. We serve individuals, corporations, endowments, foundations, public funds, and municipalities. To learn more about Mentor, please contact your consultant or us at (800) 382-0016. We look forward to making the Mentor formula work for you, and to a mutually beneficial relationship. Sincerely, /s/ Daniel J. Ludeman /s/ Paul F. Costello Daniel J. Ludeman Paul F. Costello CHAIRMAN PRESIDENT [MENTOR INVESTMENT GROUP GRAPHIC] THE MENTOR MISSION TO PROVIDE PROFESSIONAL INVESTMENT MANAGEMENT SERVICES THROUGH A FIRM THAT IS SECOND TO NONE IN THE QUALITY OF ITS INVESTMENT PROCESS, THE SKILL AND TRAINING OF ITS PROFESSIONALS, AND THE COMMITMENT, SHARED BY ALL ITS ASSOCIATES, TO DELIVER THE HIGHEST LEVEL OF SERVICE AND ETHICAL BEHAVIOR TO CLIENTS. FOR MORE INFORMATION AND A PROSPECTUS FOR THE FUNDS, PLEASE CALL US, (800)382-0016, OR CONTACT YOUR CONSULTANT. THE PROSPECTUS CONTAINS COMPLETE INFORMATION ABOUT FEES, SALES CHARGES, AND EXPENSES. PLEASE READ IT CAREFULLY BEFORE INVESTING OR SENDING MONEY. 1 MENTOR GROWTH PORTFOLIO MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- MARKET REVIEW After an extremely strong fourth quarter of 1998, the first quarter of 1999 was one of the most difficult we have encountered in the nearly 15 years of the Small-Capitalization Growth Portfolio's existence. Not difficult in terms of company fundamentals, but rather in terms of market psychology. It seemed throughout the quarter that positive investment returns could only be achieved by buying the largest companies or by purchasing companies with ".com" after their names. The latter, of course, typically have no earnings streams at all. The market largely ignored our small-cap growth companies whose unit sales grew at double-digit rates and whose real earnings growth ranged from 25% and higher. The narrowness of the market has been mentioned often in the financial press recently, but a few facts and figures may be illustrative. The Russell 2000 Index has a total market capitalization of roughly $1 trillion dollars. This seems like a fairly sizeable amount of money until one realizes that the sum of the market capitalizations of the three largest companies in the Standard and Poor's 500 index, Microsoft, General Electric and Wal-Mart, exceed that amount! In fact, the 30 largest companies in the S&P 500 represent a third of the capitalization of the 8,000 public companies. The narrowness of the market has not been confined to size alone, although this was a very important factor in performance in the first quarter. During the quarter, 56% of all industries in the Russell 2000 saw market values decline by more than 10%. Indeed, 65% of all industries underperformed the index itself. Strange as it may seem, companies in the Russell 2000 losing money or having no income appreciated on average over 10% during the quarter while those companies with net income declined in value. MANAGEMENT STRATEGY We continue to believe that the company and industry diversification in our Portfolio makes great sense. We own over 125 rapidly growing companies with average market capitalizations of $950 million. Technology and healthcare companies figure heavily in the make up of the Portfolio with a combined weighting of over 40% of the assets. Consumer oriented industries such as broadcasting and retailing are also important holdings of the Portfolio and are sectors in which we believe earnings growth will be particularly strong this year. We are adding to our telecommunication holdings, believing that unit growth, particularly among the long distance and broadband companies, will be very strong. We are reducing our weighting in the transportation industries due to the fact that energy prices seem to have found a bottom, and at the same time we are investigating the potential for new investments in the energy sector. PERFORMANCE REVIEW For the six-month period ending March 31, 1999 the Mentor Growth Portfolio A shares returned 4.99%. The shift in investor psychology regarding small-capitalization equities can be seen by comparing the 22.87% return for the Portfolio in the September-December period and the -14.55% decline for the January-March period. Over the course of the first quarter we have seen the Portfolio's P/E multiple contract by 20%. For the six months we trailed the 10.00% return of our Russell 2000 index benchmark. This was due in part to our lack of Internet exposure as these companies do not meet our earnings growth requirements. Despite the first quarter decline, we 2 MENTOR GROWTH PORTFOLIO MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- are seeing some of the best fundamentals for our companies in some time. Fourth quarter earnings growth was in excess of 40% over the previous year and positive earnings surprises outnumbered negatives ones by nearly five to one. With its earnings expected to grow in excess of 30%, the Portfolio is selling at 19 times estimated 1999 earnings. Compare this to the S&P 500, which saw its earnings contract 2% in the final quarter of the year, whose earnings growth is expected to be in the single digits this year, and much is selling at a record level of 32 times those estimated earnings. MARKET OUTLOOK We do not believe that the present polarization of the market can continue indefinitely. Several times in the past similar market conditions have evolved in which a very small number of companies drove performance. This has typically led to severe P/E compression among many of the smaller growth companies and eventually to very strong outperformance by these same companies. The longest period of underperformance of small-caps relative to large-caps was six years and occurred during the Great Depression. Although the Portfolio has underperformed large-caps since the second half of 1996, small-cap growth stocks in general have now underperformed for over four years. At present, the top 50 stocks in the S&P 500 are selling at twice their long-term growth rates. Companies in the Growth Portfolio are selling at roughly 60% of their long-term growth rates. We remain convinced that over time, valuations revert to the mean and earnings ultimately drive stock prices. We believe that the present situation presents one of the more extraordinary periods of small cap undervaluation in market history. We are unaware of any time over the past 40 years when smaller companies have sold at greater discounts to larger-cap stocks than at the present. We suspect that when one looks back a few years from now, it will be clear that 1999 marked a historic low point in small-cap valuations, particularly relative to larger-cap issues. PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class A and the Russell 2000.~ Class A Russell 2,000 6/5/95 9425 10000 9/30/95 11251 11557 9/30/96 14640 13076 9/30/97 18418 17416 9/30/98 14352 14103 3/31/99 15068 15514 Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year Since Inception+++ Class A (27.56%) 11.32% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000 Index and represents approximately 7% of the U.S. equity market capitalization. The Russell 3000 is composed of the 3,000 largest U.S. companies by market capitalization and represents approximately 98% of the U.S. market. The indexes are not adjusted for sales charges or other fees. ++ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charge = $9,425). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. +++ Reflects operations of Mentor Growth Portfolio Class A Shares from the date of issuance on 6/5/95 through 3/31/99. 3 MENTOR GROWTH PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class B Shares and the Russell 2000.- Class B Russell 2000~ 9/30/88 10000 10000 12/31/88 8737 8859.93 12/31/89 10252 10835.34 12/31/90 9096 8289.97 12/31/91 13667 12107.64 12/31/92 15796 14336.85 12/31/93 18260 17047.50 12/31/94 17443 16736.97 9/30/95 23042 21041.03 9/30/96 29535 23804.37 9/30/97 36817 31705.64 9/30/98 32972 28788 3/31/99 46963 31667 Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year 5-Year 10-Year Class B (26.58%) 10.67% 12.20% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. + Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the five-year period following the date of purchase. The value of the Class B Shares reflects a redemption fee in effect at the end of each of the stated periods. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. ~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000 Index and represents approximately 7% of the U.S. equity market capitalization. The Russell 3000 is composed of the 3,000 largest U.S. companies by market capitalization and represents approximately 98% of the U.S. market. The indexes are not adjusted for sales charges or other fees. 4 MENTOR GROWTH PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class Y and the Russell 2000.~ Class Y Russell 2000~ 11/19/97 10000 10000 12/31/97 10021 10109 3/31/98 11314 11126 6/30/98 10500 10580 9/30/98 8301 8470 3/31/99 8721 9318 Total Returns as of 3/31/99 1-Year Since Inception++ Class Y (22.92%) (10.67%) PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000 Index and represents approximately 7% of the U.S. equity market capitalization. The Russell 3000 is composed of the 3,000 largest U.S. companies by market capitalization and represents approximately 98% of the U.S. market. The indexes are not adjusted for sales charges or other fees. + Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Growth Portfolio Class Y Shares from the date of issuance on 11/19/97 through 3/31/99. 5 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 93.84% CAPITAL GOODS & CONSTRUCTION - 4.48% Aviation Sales Company 98,250 $4,372,125 Communications Holdings, Inc. 62,700 2,899,875 Conrad Industries, Inc. 226,700 821,787 Denali, Inc. * 205,250 1,821,594 MotivePower Industries, Inc. 326,950 8,214,619 Rental Service Corporation * 222,700 3,897,250 ---------- 22,027,250 ---------- CONSUMER CYCLICAL - 17.37% Avis Rent A Car * 244,700 6,775,131 Cadmus Communications Corporation 265,500 3,816,562 Carey International, Inc. * 170,100 2,764,125 Chancellor Media Corporation * 64,750 3,051,344 Chattem, Inc. 175,450 5,482,812 Citadel Communications Corporation * 77,750 2,585,188 Clear Channel Communications 45,662 3,062,208 Cox Radio, Inc. - Class A * 103,400 5,299,250 Cumulus Media - Class A * 312,300 3,669,525 Dollar General Corporation 42,716 1,452,344 Dollar Tree Stores, Inc. * 155,425 4,808,461 Entercom Communications Corporation * 151,800 5,369,925 Family Dollar Stores 469,800 10,805,400 Lamar Advertising Company * 144,900 4,917,544 Media Arts Group, Inc. * 108,700 978,300 Papa John's International, Inc.* 165,900 7,320,337 SCP Pool Corporation * 330,075 4,621,050 SkyWest, Inc. 149,000 4,302,375 The Men's Wearhouse, Inc. 146,400 4,218,150 ---------- 85,300,031 ---------- CONSUMER STAPLES - 4.17% Bindley Western Industries 62,650 1,789,441 Celestial Seasonings, Inc. 103,250 2,232,781 Natrol, Inc. * 105,800 641,413 Parexel International Corporation 129,500 2,679,031 Richfood Holdings, Inc. 188,675 4,068,305 US Foodservice * 126,500 5,882,250 Wild Oats Markets, Inc. 118,050 3,202,106 ---------- 20,495,327 ---------- ENERGY - 2.87% Core Laboratories N.V. 252,200 4,429,263 Global Industries, Limited 378,250 3,829,781
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) ENERGY (CONTINUED) Hanover Compressor Company * 221,250 $5,863,125 ---------- 14,122,169 ---------- FINANCIAL - 8.47% CCB Financial Corporation 81,550 4,408,797 Commerce Bancorp, Inc. 92,350 3,809,438 Concord EFS, Inc. 111,716 3,079,172 Markel Corporation 55,760 10,050,740 National Commerce Bancorp 418,184 9,539,822 NOVA Corporation * 270,622 7,103,828 Pinnacle Holdings, Inc. 189,950 2,872,994 U.S. Trust Corporation 10,450 775,259 ---------- 41,640,050 ---------- HEALTH - 18.11% Biomatrix, Inc. * 41,600 3,244,800 Brookdale Living Communities * 299,400 5,164,650 CareMatrix Corporation * 180,750 3,434,250 Chirex, Inc. * 93,000 2,278,500 Express Scripts, Inc. - Class A * 122,950 10,566,016 Health Management Associates, Inc. * 78,961 962,337 Henry Schein, Inc. * 87,150 2,200,537 Mecon, Inc. * 235,400 1,647,800 Medquist, Inc. * 235,150 7,054,500 Molecular Devices Corporation * 206,000 5,562,000 NCS Healthcare, Inc. - Class A * 256,250 3,075,000 Omnicare, Inc. 254,010 4,842,066 Pharmaceutical Product Development * 180,700 6,064,744 Priority Healthcare Corporation - Class A * 28,067 1,270,032 Priority Healthcare Corporation - Class B * 161,100 7,289,775 Province Healthcare Company * 392,000 7,252,000 PSS World Medical, Inc. * 229,000 2,018,062 QuadraMed Corporation * 166,950 1,272,994 Serologicals Corporation * 288,050 3,906,678 Sunrise Assisted Living, Inc. * 51,750 2,357,859 United Payors & Providers, Inc. 219,900 5,071,444 Wesley Jessen Visioncare, Inc. * 90,000 2,480,625 ---------- 89,016,669 ----------
6 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) TECHNOLOGY - 23.44% ADE Corporation * 262,600 $2,494,700 Applied Micro Circuits * 89,700 3,834,675 ATMI, Inc. * 114,750 2,295,000 Axent Technologies, Inc. * 62,250 1,497,890 BEA Systems, Inc. * 101,600 1,587,500 Benchmark Electronics, Inc. * 245,940 7,378,200 Black Box Corporation * 54,400 1,686,400 C&D Technologies, Inc. 102,100 2,539,738 Cerprobe Corporation 418,900 5,340,975 Check Point Software Technology * 33,250 1,429,750 Concord Communications, Inc. * 38,400 2,188,800 Condor Technology Solutions * 115,000 1,092,500 CSG Systems International, Inc. * 118,400 4,669,400 Digital Microwave Corporation * 388,400 3,252,850 Galileo Technology Limited * 177,300 5,186,025 International Integration, Inc. * 10,000 320,000 ITC DeltaCom * 359,550 7,842,684 Medialink Worldwide, Inc. * 234,250 2,957,406 Metro Networks, Inc. * 95,350 5,244,250 Mylex Corporation * 149,750 973,375 Network Appliance, Inc. * 90,750 4,594,219 Optek Technology, Inc. * 66,400 975,250 P-Com, Inc. * 503,350 3,838,044 Parlex Corporation * 279,900 2,659,050 PCD, Inc. * 244,300 2,213,969 Peerless Systems * 379,450 3,225,325 Peregrine Systems, Inc. * 66,500 2,219,437 Photronics, Inc. * 190,700 3,551,787 Powerwave Technologies, Inc. * 181,400 5,147,225 PRI Automation, Inc. * 129,550 2,720,550 Remedy Corporation * 139,900 1,958,600 Research In Motion * 253,800 2,664,900 SCB Computer Technology, Inc. 514,300 2,346,494 Segue Software, Inc. * 116,600 1,122,275 Sensormatic Electronics Corporation 368,050 3,496,475 SIPEX Corporation * 113,950 1,488,472 Smith-Gardner & Associates * 80,000 1,130,000 Speedfam International, Inc. * 98,850 1,186,200 Vantive Corporation * 180,900 2,182,106
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) TECHNOLOGY (CONTINUED) Winstar Communications, Inc. * 73,500 $ 2,671,266 ----------- 115,203,762 ------------ TRANSPORTATION - 5.42% Atlantic Coast Airlines, Inc. * 236,650 6,655,781 Coach USA, Inc. * 182,650 5,022,875 Covenant Transport, Inc. - Class A * 218,700 3,253,162 Mesaba Holdings, Inc. 491,175 6,584,815 M.S. Carriers, Inc. * 144,900 3,830,794 US Xpress Enterprises - Class A * 110,750 1,287,469 ------------ 26,634,896 ------------ MISCELLANEOUS - 9.51% ABR Information Services, Inc. * 194,950 3,387,256 Action Performance Companies, Inc. * 114,800 3,429,650 AHL Services, Inc. * 281,300 5,766,650 Butler International, Inc. 181,550 3,335,981 Copart, Inc. * 245,050 5,084,788 Corporate Executive Board 41,100 1,073,738 Dendrite International, Inc. * 115,400 2,574,862 Global Vacation Group, Inc. * 106,000 1,258,750 Gulf Island Fabrication, Inc. 78,450 823,725 Imax Corporation * 44,400 865,800 Kulicke & Soffa Industries, Inc. 107,750 2,707,219 Outdoor Systems, Inc. * 336,489 10,094,670 Rent-Way, Inc. * 119,500 2,868,000 Select Appointments - 130,550 3,484,053 ------------ 46,755,142 ------------ TOTAL COMMON STOCKS (COST $414,597,391) 461,195,296 ------------
7 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE SHORT-TERM INVESTMENT - 5.84% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/99, 4.95%, due 4/01/99, collateralized by $28,512,021 Federal Home Loan Mortgage Corporation, 7.50%, 11/01/27, market value $ 9,296,102 (cost $28,692,449) $28,692,449 $ 28,692,449 ------------ TOTAL INVESTMENTS (COST $ 443,289,840)-99.68% 489,887,745 OTHER ASSETS LESS LIABILITIES - 0.32% 1,588,809 ------------ NET ASSETS - 100.00% $491,476,554 ============
* Non-income producing. ~ American Depository Receipts. INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $281,329,944 and $258,350,078, respectively. INCOME TAX INFORMATION At March 31, 1999, the aggregated cost of investment securities for federal income tax purposes was $443,289,840. Net unrealized appreciation aggregated $46,597,905, of which $89,157,037 related to appreciated investment securities and $42,559,132 related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 8 MENTOR GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (UNAUDITED) ASSETS Investments, at market value (Note 2) Investment securities $461,195,296 Repurchase agreements 28,692,449 ------------ Total investments (cost $443,289,840) 489,887,745 Collateral for securities loaned (Note 2) 83,131,779 Receivables Investments sold 3,366,115 Fund shares sold 1,440,088 Dividends and interest 114,547 ------------ TOTAL ASSETS 577,940,274 ------------ LIABILITIES Payables Investments purchased $1,746,758 Securities loaned (Note 2) 83,131,779 Fund shares redeemed 1,399,468 Accrued expenses and other liabilities 185,715 ---------- TOTAL LIABILITIES 86,463,720 ------------ NET ASSETS $491,476,554 ============ Net Assets represented by: (Note 2) Additional paid-in capital $450,296,488 Accumulated undistributed net investment loss (3,050,768) Accumulated net realized loss on investment transactions (2,367,071) Net unrealized appreciation of investments 46,597,905 ------------ NET ASSETS $491,476,554 ============ NET ASSET VALUE PER SHARE Class A Shares $ 14.74 Class B Shares $ 14.24 Class Y Shares $ 14.78 OFFERING PRICE PER SHARE Class A Shares $ 15.64 Class B Shares $ 14.24 Class Y Shares $ 14.78 SHARES OUTSTANDING Class A Shares 6,608,296 Class B Shares 25,411,548 Class Y Shares 2,178,068
SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) INVESTMENT INCOME Dividends $ 312,809 Interest 1,530,633 ----------- TOTAL INVESTMENT INCOME (NOTE 2) 1,843,442 EXPENSES Management fee (Note 4) $1,879,581 Distribution fee (Note 5) 1,518,365 Shareholder service fee (Note 5) 631,890 Transfer agent fee 379,384 Administration fee (Note 4) 268,512 Shareholder reports and postage expenses 72,800 Custodian and accounting fees 60,193 Registration expenses 46,425 Legal fees 11,955 Audit fees 8,405 Directors' fees and expenses 6,209 Miscellaneous 10,491 ---------- Total expenses 4,894,210 ----------- NET INVESTMENT LOSS (3,050,768) ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments (Note 2) (973,034) Change in unrealized appreciation (depreciation) on investments 29,904,306 ---------- NET GAIN ON INVESTMENTS 28,931,272 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $25,880,504 ===========
SEE NOTES TO FINANCIAL STATEMENTS. 9 MENTOR GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED 3/31/99 YEAR ENDED (UNAUDITED) 9/30/98 NET INCREASE IN NET ASSETS Operations Net investment loss $ (3,050,768) $ (6,962,845) Net realized gain (loss) on investments (973,034) 37,565,972 Change in unrealized appreciation (depreciation) on investments 29,904,306 (173,567,460) -------------- -------------- Increase (decrease) in net assets resulting from operations 25,880,504 (142,964,333) -------------- -------------- Distributions to Shareholders From net realized gain on investments Class A (2,988,326) (6,599,466) Class B (15,034,514) (31,307,757) Class Y (1,016,636) (10) -------------- -------------- Total distributions to shareholders (19,039,476) (37,907,233) -------------- -------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 351,383,493 313,753,597 Reinvested distributions 18,495,506 36,935,409 Cost of shares redeemed (371,504,132) (294,819,420) -------------- -------------- Change in net assets resulting from capital share transactions (1,625,133) 55,869,586 -------------- -------------- Increase (decrease) in net assets 5,215,895 (125,001,980) Net Assets Beginning of period 486,260,659 611,262,639 -------------- -------------- End of period (including accumulated undistributed net investment income (loss) of ($3,050,768) and $0, respectively) $ 491,476,554 $ 486,260,659 ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
SIX MONTHS YEAR ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 14.60 $ 19.94 -------- -------- Income from investment operations Net investment loss (0.10) (0.12) Net realized and unrealized gain (loss) on investments 0.80 (4.03) -------- -------- Total from investment operations 0.70 (4.15) -------- -------- Less distributions From capital gains (0.56) (1.19) -------- --------- Net asset value, end of period $ 14.74 $ 14.60 ======== ======== TOTAL RETURN* 4.99% (22.08%) RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 97,406 $ 77,720 Ratio of expenses to average net assets 1.27%(a) 1.26% Ratio of net investment loss to average net assets (0.57%)(a) (0.56%) Portfolio turnover rate 52% 88% YEAR YEAR PERIOD ENDED ENDED ENDED 9/30/97 9/30/96 9/30/95 (b) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.47 $ 16.08 $ 13.37 -------- -------- ----------- Income from investment operations Net investment loss (0.17) (0.10) (0.01) Net realized and unrealized gain (loss) on investments 4.19 4.23 2.72 -------- -------- ------------ Total from investment operations 4.02 4.13 2.71 -------- -------- ------------ Less distributions From capital gains (2.55) (1.74) -- -------- -------- ------------ Net asset value, end of period $ 19.94 $ 18.47 $ 16.08 ======== ======== ============ TOTAL RETURN* 25.81% 29.15% 20.27% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $105,033 $ 40,272 $ 20,368 Ratio of expenses to average net assets 1.28% 1.28% 1.36% (a) Ratio of net investment loss to average net assets (0.67%) (0.39%) (0.65%)(a) Portfolio turnover rate 77% 105% 70%
(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. 10 MENTOR GROWTH PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
SIX MONTHS YEAR ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 14.18 $ 19.53 ----------- -------- Income from investment operations Net investment loss (0.11) (0.23) Net realized and unrealized gain (loss) on investments 0.73 (3.93) ----------- -------- Total from investment operations 0.62 (4.16) ----------- -------- Less distributions From capital gains (0.56) (1.19) ----------- -------- Net asset value, end of period $ 14.24 $ 14.18 =========== ======== TOTAL RETURN* 4.56% (22.62%) RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 361,878 $383,188 Ratio of expenses to average net assets 2.02% (a) 2.01% Ratio of net investment loss to average net assets (1.32%)(a) (1.30%) Portfolio turnover rate 52% 88% YEAR YEAR PERIOD YEAR ENDED ENDED ENDED ENDED 9/30/97 9/30/96 9/30/95 (b) 12/31/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.29 $ 16.05 $ 12.15 $ 13.78 -------- -------- ----------- -------- Income from investment operations Net investment loss (0.22) (0.17) (0.13) (0.15) Net realized and unrealized gain (loss) on investments 4.01 4.15 4.03 (0.47) -------- -------- ----------- -------- Total from investment operations 3.79 3.98 3.90 (0.62) -------- -------- ----------- -------- Less distributions From capital gains (2.55) (1.74) -- (1.01) -------- -------- ----------- -------- Net asset value, end of period $ 19.53 $ 18.29 $ 16.05 $ 12.15 ======== ======== =========== ======== TOTAL RETURN* 24.66% 28.18% 32.10% (4.48%) RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $506,230 $ 371,578 $ 246,326 $190,126 Ratio of expenses to average net assets 2.03% 2.03% 2.08% (a) 2.01% Ratio of net investment loss to average net assets (1.42%) (1.13%) (1.20%)(a) (1.20%) Portfolio turnover rate 77% 105% 70% 77%
(a) Annualized. (b) For the period from January 1, 1995 to September 30, 1995. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. CLASS Y SHARES
SIX MONTHS PERIOD ENDED 3/3/99 ENDED (UNAUDITED) 9/30/98 (c) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 14.63 $ 18.12 ---------- ---------- Income from investment operations Net investment loss (0.01) (0.02) Net realized and unrealized gain (loss) on investments 0.72 (3.28) ----------- ---------- Total from investment operations 0.71 (3.30) ----------- ---------- Less distributions From capital gains (0.56) (0.19) ----------- ---------- Net asset value, end of period $ 14.78 $ 14.63 =========== ========== TOTAL RETURN* 5.05% 18.36% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 32,193 $ 25,353 Ratio of expenses to average net assets 1.02% (a) 1.01% (a) Ratio of net investment loss to average net assets (0.33%)(a) (0.04%)(a) Portfolio turnover rate 52% 88%
(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. 11 MENTOR PERPETUAL GLOBAL PORTFOLIO MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- MARKET REVIEW UK During the period ending March 31, we initiated a process of judiciously building exposure to the mid- and small-cap sectors of the U.K. market. This strategy was aimed at taking advantage of the substantial valuation disparities existing between large companies and much of the rest of the market. During the fourth quarter of 1998 we also began a process of selective investment in cyclical stocks. Considerations such as wage growth, employment outlook, and greatly reduced home ownership costs suggested to us that the gloom surrounding many consumer cyclical stocks had been overdone. We also continued to build an exposure to selected commodity-related and economically sensitive stocks with international activities. At period-end, we maintained our relatively positive view of the domestic consumer market, causing us to add selectively to property, house construction, and building materials companies. During the six-month period we reduced our exposure to telecom stocks, feeling that stock valuations did not fully reflect the likely negative impact on future earnings of increasingly aggressive price competition. We also profitably disposed of the Portfolio's major pharmaceutical holdings, taking advantage of what we perceived as overly generous valuations. U.S. The intense focus on a very narrow range of ultra-large companies continued throughout the six-month period ending March 31, with the first quarter of 1999 being the worst quarter of the last two decades in terms of market breadth. Everything fundamentally now points to a broadenng out of the market. Among some of the very large caps there has been a modest change in leadership away from technology stocks towards cyclicals and commodity-related stocks. We currently maintain an overweight position at the cyclical/commodity end of the market, and an underweight position in technology. A recent survey by Ibbotson of the 8,000 largest U.S. companies indicated that, over the past year, only 1750 had seen their share price actually rise, and the median fall was 26%. The implication of this is that, while we might see a flattening of the S&P trajectory, there are still a lot of companies that represent very good value. Given the added support of growing money supply, we are relatively optimistic about the prospects for share prices generally. EUROPE Investments in Europe continue to focus on the peripheral states, such as Ireland, Portugal and Spain, where low interest rates are supporting already buoyant economies. During the first quarter of 1999, we began a shift towards commodity-related and more cyclical stocks, in line with our view that the global economic outlook is improving more rapidly than anticipated. Recently this move on our part has begun to be echoed by European equity markets. We continue to maintain an underweight position in telecommunication stocks, which hurt our performance early in the year but has helped us more recently. JAPAN In Japan, early indicators of economic recovery were beginning to appear in the final quarter of 1998. There were also very encouraging signs of genuine corporate restructuring that offered the 12 MENTOR PERPETUAL GLOBAL PORTFOLIO MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- prospect of significantly improved earnings in the years to come. We began to increase the exposure of the Portfolio to Japan during the last quarter of 1998, building to its present significantly overweight position. The Portfolio benefited from both the Japanese equity market's strong rally and our holdings' outperformance within that market. It should, however, be noted that our Japanese weighting still represents a relatively modest portion of the overall Portfolio's holdings. ASIA In Asia, the perception increasingly took hold that the worst of the regions' difficulties were behind it, with interest rates declining, debt service costs falling, the regional consumer beginning to spend again, and exports to the rest of the world starting to pick up. Worries over possible devaluation of the Chinese rnminbi were increasingly replaced by optimism over possible membership in the World Trade Organisation. We began the period under review slightly overweight in this region, and maintained this weighting as the regions' markets picked up. LATIN AMERICA In Brazil the economic outlook has improved. The IMF released a further $9 billion in aid, part of which can be used for foreign exchange intervention, and Congress passed a key element of the fiscal reform package. Better than expected figures for inflation have enabled the Central Bank to cut rates more quickly than expected. Each of these developments was positively received by the market. The privatization program is set to continue with further issues in the next few months. In short, the market has come a long way since the real's devaluation in January. We have consequently adopted a slightly overweight position in Brazil. MANAGEMENT STRATEGY The principal asset allocation shift during the six months ending March 31, 1999 was to modestly reduce the Portfolio's exposure to Europe and the UK, and increase its weighting in Japan. This increased weighting to Japan positioned the Portfolio to benefit from the combination of a strong rally in the Japanese equity market and a firm yen during the first quarter of 1999. Additionally, our Japanese stock selection, with its focus on companies likely to be able to both implement and benefit from the new found zeal for restructuring and cost cutting, further enhanced returns. PERFORMANCE REVIEW The performance impact of our allocation to sectors sensitive to economic cyclicality proved increasingly positive as the period progressed. For the six-month period ending March 31, 1999 the Mentor Global Portfolio A shares returned 21.52%. This compares to 25.66% for our Morgan Stanley World Index benchmark. Realistically speaking, given the World Index's large allocation to U.S. equities, outperformance by the Global Portfolio versus its index is likely only once non-U.S. markets begin to outperform domestic markets. MARKET OUTLOOK Although commodity prices, particularly those for oil, have firmed, and inflation in the U.S. and parts of Continental Europe have risen modestly, worldwide excess capacity and global competition should continue to restrain the prices of manufactured goods. The outlook for global interest rates, therefore, remains relatively positive. The US economy continues robust, and while retail price inflation has ticked up it still remains relatively 13 MENTOR PERPETUAL GLOBAL PORTFOLIO MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- benign. The Federal Reserve appears to have readjusted its views of the linkage between tight labor markets and inflationary pressures. In the UK, despite the continued challenge of sterling strength for manufacturers, there are increasing signs of renewed buoyancy in the domestic economy. Japan appears to be bottoming out, even if with glacial slowness. Asia is experiencing lower interest rates, falling debt service costs, a return of consumer expenditure, and a modest upturn in exports. In Europe, domestic demand remains buoyant, particularly in the periphery, and the gloom surrounding the steep decline in exports and depressed German business confidence may have been overdone. The general improvement in the outlook for the global economy has encouraged a recent shift of investment emphasis in all major equity markets towards economically cyclical and commodity-related stocks. In the light of this assessment, and barring any unforeseen shocks to global financial markets, we remain optimistic that 1999 will continue to provide positive investment opportunities. 14 MENTOR PERPETUAL GLOBAL PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 purchase in Mentor Perpetual Global Portfolio Class A and Class B Shares and the Morgan Stanley Capital International (MSCI) World Index.* Morgan Stanley A Shares B Shares 3/29/94 10000 9425 10000 9/30/94 10546 9982 9487 9/30/95 12125 10655 10587 9/30/96 13846 12501 12677 9/30/97 17256 15200 15668 9/30/98 17344 14445 14580 3/31/99 21794 17554 17715 Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year 5-Year Since Inception++ Class A (1.48%) 11.93% 11.89% Class B 2.90% 12.38% 12.35% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. * MSCI World Index is an arithmetic average, weighted by market value, of the performance of approximately 1,450 securities listed on the stock exchanges of 20 countries including the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The average company in the index has a market capitalization of about $3.5 billion. This is a total return index with gross dividends reinvested. MSCI World Index is not adjusted to reflect reinvestment of dividends on securities in the index, and is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. ~ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the five-year period following the date of purchase. The value of the Class B Shares reflects a redemption fee in effect at the end of each of the stated periods. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. + Represents a hypothetical investment of $10,000 in Mentor Perpetual Global Portfolio Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Perpetual Global Portfolio Class A and Class B Shares from the date of commencement of operations on 3/29/94 through 3/31/99. 15 MENTOR PERPETUAL GLOBAL PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 purchase in Mentor Perpetual Global Portfolio Class Y Share and the Morgan Stanley Capital International (MSCI) World Index.* MSCI World Index Class Y Shares 11/19/97 10000 10000 12/31/97 10304 10278 3/31/98 11790 11832 6/30/98 12050 11600 9/30/98 10608 10187 3/31/99 13329 12410 Total Returns as of 3/31/99 1-Year Since Inception++ Class Y Shares 4.89% 16.91% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. * MSCI World Index is an arithmetic average, weighted by market value, of the performance of approximately 1,450 securities listed on the stock exchanges of 20 countries including the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The average company in the index has a market capitalization of about $3.5 billion. This is a total return index with gross dividends reinvested. MSCI World Index is not adjusted to reflect reinvestment of dividends on securities in the index, and is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Perpetual Global Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Perpetual Global Portfolio Class Y Shares from the date of issuance on 11/19/97 through 3/31/99. 16 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES MARKET VALUE PREFERRED STOCK - 0.04% BRAZIL - 0.04% Embratel Participacoes SA (cost $76,209) 4,700,000 $ 78,379 ---------- COMMON STOCKS - 96.93% ARGENTINA - 0.09% Perez Company SA~ 6,637 61,994 Telecom Argentina SA~ 2,100 57,619 Telefonica de Argentina SA~ 2,020 61,105 ---------- 180,718 ---------- BELGIUM - 0.08% Cofinimmo 1,366 168,065 ---------- BRAZIL - 0.29% CIA Paranaense Energy~ 8,500 63,750 Companhia Energetica 1,700 37,914 Electrobras - Centrais Eletricas Brasileiras SA 2,200,000 46,181 Forca Paulista 740,000 53,504 Petroleo Brasileiro SA~ 560,000 78,008 Tele Centro Sul Participacoes SA~ 1,100 50,806 Tele Norte Leste Participacoes SA-* 3,800 58,425 Telecomonicacoes Brasileiras SA~ 920 74,175 Telerj Celular SA * 980,000 36,114 Telesp Participacoes SA~* 2,000 41,250 Vale do Rio Doche- 3,650 53,205 ---------- 593,332 ---------- CANADA - 0.58% Canadian Natural Resources * 27,500 473,824 MacMillan Bloedel 17,100 188,678 Newbridge Networks Corporation * 4,000 124,000 Northern Telecom 6,100 378,962 ---------- 1,165,464 ---------- CHILE - 0.11% Banco Santiago SA~ 1,600 28,200 Chilectra SA- 3,450 74,587 Cia de Telecomunicaciones de Chile SA~ 1,700 40,056 Enersis SA~ 3,000 80,438 ---------- 223,281 ---------- CHINA - 0.20% First Tractor 305,000 57,857 Huaneng Power International, Inc. - Class A~* 8,000 79,500 Pohang Iron & Steel~ 7,500 134,062 Yanzhou Coal Mining Company - Class H 800,000 133,173 ---------- 404,592 ----------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) CROATIA - 0.13% Zagrebacka Banka 27,000 $ 260,550 ---------- CZECH REPUBLIC - 0.14% Ceske Radiokomunikace * 8,100 277,627 ---------- ESTONIA - 0.24% Eesti Telekom # 21,700 479,027 ---------- FINLAND - 2.68% Hansabank * 18,000 104,903 Huhtamaki 15,332 546,053 Metra Oyj - Class B 47,770 964,093 Nokia Oyj - Class A 15,508 2,495,488 Upm-Kymmene Oyj 47,670 1,317,065 ---------- 5,427,602 ---------- FRANCE - 8.22% Accor SA 3,500 868,796 Alstom SA 22,640 671,941 Atos SA 14,100 1,293,481 Axa 7,520 996,640 BQE Paribas 4,280 477,624 Casino Guichard-Perrachon 8,800 780,686 Coflexip 7,770 545,075 Colas 1,730 334,585 Compagnie de Saint - Gobain 10,645 1,688,827 Elf Aquitaine SA 8,200 1,113,311 Entrelec 10,892 410,844 Imetal 5,130 592,411 ISIS 5,460 357,687 Sanofi SA 6,111 1,028,866 Schneider 17,436 964,412 Serp Recyclage 3,039 459,178 Societe Generale D'Enterprises 12,610 593,367 Total SA - Class B 15,050 1,853,294 Usinor SA 49,160 647,439 Vivendi 3,883 955,067 ---------- 16,633,531 ---------- GERMANY - 3.58% AVA Allgemeine Handelsge~ sellschaft der Verbraucher AG 2,420 901,066 Daimler-Chrysler Benz 14,193 1,234,614 Deutsche Lufthansa 44,250 976,627 Metro AG 4,400 279,224 Porsche AG 655 1,615,286 Siemens AG 9,241 606,380 Veba AG 31,100 1,636,278 ---------- 7,249,475 ---------- GREAT BRITAIN - 14.50% Abbey National PLC 44,550 924,254 Allied Zurich PLC * 20,951 282,174 Arcadia Group PLC 55,700 186,311 Arriva PLC 35,000 219,192 Asda Group 158,000 387,138 BAA PLC 34,250 380,404
17 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) GREAT BRITAIN (CONTINUED) Barclays PLC 36,500 $1,059,672 Bass PLC 35,571 482,520 BBA Group PLC 25,397 173,176 BG PLC 42,000 247,966 Blue Circle Industries 46,333 269,627 Britannic Assurance PLC 19,000 296,785 British Aerospace PLC 97,000 646,956 British Airways PLC 62,500 434,988 British-American Tobacco PLC 62,500 519,366 British Biotech PLC * 150,000 41,106 Burmah Castrol PLC 25,000 381,037 Canary Wharf Group 16,000 85,500 Carlton Communications 13,500 132,422 Celltech PLC* 25,000 161,805 Centrica PLC* 100,000 176,514 Chelsfield PLC 29,000 136,738 Coats Viyella 90,000 63,835 Debenhams PLC 44,000 335,844 Dixons Group 13,500 283,776 Emap PLC 35,200 690,555 Enterprise Oil PLC 75,000 430,102 Express Dairies PLC 48,000 88,209 Fairview Holdings 89,300 174,181 Frogmore Estates PLC 35,000 234,143 Gallaher Group PLC 40,000 234,385 Garban PLC 14,800 57,855 Glaxo Wellcome PLC 1,286 42,974 Granada Group PLC 36,000 735,846 Great Universal Stores PLC 18,000 196,293 Greenalls Group PLC 60,000 323,045 HSBC Holdings PLC 58,454 1,853,295 Iceland Group PLC 50,750 209,840 III Group PLC 51,000 514,647 Imperial Chemical Industries PLC 40,000 356,574 Inchcape PLC 90,000 206,014 Ladbroke Group 145,412 651,645 Land Securities 16,000 211,365 Lloyds TSB Group PLC 86,000 1,310,072 Medeva PLC 80,000 159,266 Meggitt PLC 75,000 226,688 National Westminster Bank 47,250 1,096,805 Next PLC 38,626 438,658 Northern Foods PLC 93,400 167,122 Nycomed Amersham PLC 54,500 469,799 Powderject Pharmaceuticals 31,559 460,402 PowerGen PLC 26,000 286,888 Prudential Corporation PLC 45,250 592,662 Railtrack Group PLC 6,000 137,149 Rank Group PLC 61,750 225,212 Reckitt & Colman PLC 17,300 186,707 Reuters Group PLC 30,000 438,383 Rio Tinto 25,000 348,595 Rolls-Royce PLC 161,000 687,111
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) GREAT BRITAIN (CONTINUED) Sainsbury (J.) PLC 65,000 $ 400,783 Scotia Holdings * 30,000 49,569 Scottish Power PLC 22,000 192,392 Securicor PLC 39,050 348,106 Shell 85,000 573,771 Signet Group 528,500 408,932 Smith (H.W.) Group PLC 44,750 479,350 Smiths Industries PLC 23,000 336,650 Spirax-Sarco Engineering PLC 31,000 245,862 Standard Chartered 63,500 901,297 Sun Life & Provin Holdings 32,330 266,834 Tate & Lyle PLC 35,282 235,745 Telewest Communications * 48,500 211,091 Tesco PLC 134,400 359,102 TI Group PLC 27,000 174,858 Trinity PLC 39,000 330,686 United Assurance Group PLC 43,000 304,297 United News & Media PLC 48,000 454,971 United Utilities 19,000 228,944 Wolseley 12,622 95,324 ---------- 29,350,157 ---------- GREECE - 0.19% Alpha Credit Bank 2,600 172,817 Chipita 6,000 218,579 ---------- 391,396 ---------- HONG KONG - 1.43% Aeon Credit Services 608,000 109,058 Axa China Region, Limited 433,000 304,524 Cafe de Coral Holdings, Limited 450,000 126,302 Cheung Kong 40,000 304,544 Dah Sing Financial Group 100,000 246,474 Henderson Investment, Limited 200,000 124,527 HKR International, Limited 640,000 394,358 Hong Kong Telecom 108,000 213,301 Hung Hing Printing Group 181,000 60,143 Hutchison Whampoa, Limited 48,000 377,841 New World Development 133,218 262,162 Road King Infrastructure, Limited 432,544 253,964 Swire Pacific, Limited - Class A 24,000 111,494 Wheelock & Company, Limited 3,000 2,333 ---------- 2,891,025 ---------- INDIA - 0.14% BSES Limited #* 8,000 78,000 Hindalco Industries, Limited # 5,000 61,125 Indian Opportunity Fund, Limited * 11,000 118,250 Mahanagar Telephone Nigam, Limited #* 2,000 20,200 ---------- 277,575 ---------- INDONESIA - 0.15% Bat Indonesia 36,000 74,913
18 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) INDONESIA (CONTINUED) PT Hajaya Mandala Sampoerna 200,000 $ 164,162 PT Indofoods Sukses Mak 114,000 71,168 ---------- 310,243 ---------- IRELAND - 2.18% Bank of Ireland 72,465 1,509,816 CRH PLC 83,100 1,427,984 Elan Corporation PLC~* 13,250 924,187 Irish Permanent 36,580 551,341 ---------- 4,413,328 ---------- ITALY - 3.14% Assicurazioni Generali 15,020 601,403 Finmeccanica SPA 882,030 889,103 Grupo Editoriale L'Espresso 111,550 1,252,060 Ina SPA 304,000 918,658 Rinascente SPA 90,850 708,901 Telecom Italia Mobile 146,600 985,698 Telecom Italia SPA 94,800 1,006,759 ---------- 6,362,582 ---------- JAPAN - 13.75% Asahi Bank 450,000 2,369,119 Asahi Glass Company, Limited 360,000 2,607,927 Chugai Pharmaceuticals 240,000 2,765,615 DDI Corporation 550 2,594,449 Funai Electric Company, Limited 24,000 2,213,705 Kokusai Securities Company, Limited 220,000 2,464,726 Nichiei Company 27,000 2,413,090 Nippon Steel Corporation 1,250,000 2,558,649 Ricoh Company, Limited 270,000 2,813,377 Shin-Etsu Chemical 100,000 2,619,719 Teijin, Limited 600,000 2,415,870 ---------- 27,836,246 ---------- KOREA - 0.23% Atlantic Korean Company 20,000 211,400 CITC Seoul Exel @ * 2 8,750 LG Electronics # 6,400 18,400 Samsung Electric # (a) 501 21,029 Samsung Electronics #(a) 13,500 209,250 ---------- 468,829 ---------- LUXEMBOURG - 0.24% Benpres Holdings (a)* 95,200 251,600 Quilmes Industries SA 2,100 19,819 Tata Electric Companies 1,500 209,400 ---------- 480,819 ---------- MALAYSIA - 0.08% Boustead Holdings Berhad (c) 84,000 65,432 IOI Corporation (c) 100,000 49,474 Nanyang Press Berhad (c) 60,000 46,106 ---------- 161,012 ----------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) MEXICO - 0.41% Carso Global Telecom 7,000 $ 36,287 Cemex SA-* 5,600 47,029 Cifra SA- 71,500 110,705 DESC SA- 3,002 80,116 Fomento Economico~ 2,000 61,875 Grupo Carso SA- 6,700 54,579 Grupo Continental SA~ 15,000 42,227 Grupo Fin Bancomer 154,000 51,603 Grupo Televisa #* 1,400 43,925 Kimberly-Clark de Mexico SA~ 2,680 48,562 Telefonos de Mexico SA - Class L~ 3,890 254,795 ---------- 831,703 ---------- NETHERLANDS - 2.62% Akzo Nobel 33,060 1,223,824 ING Groep NV 29,030 1,599,429 Royal Dutch Petroleum 32,738 1,740,125 Vendex International NV 30,325 731,477 ---------- 5,294,855 ---------- PHILIPPINES - 0.06% Bank of the Philippines Island 47,000 117,652 ---------- PORTUGAL - 0.80% BPI SGPS SA 28,060 852,488 Cimpor Cimentos de Portugal 13,920 389,100 Jeronimo Martins 12,066 428,871 ---------- 1,670,459 ---------- SINGAPORE - 0.84% DBS Land 100,000 147,655 GP Batteries International, Limited 190,000 278,344 Hong Leong Finance 100,000 163,289 Marco Polo Developments, Limited 60,000 75,738 Overseas Chinese Bank * 30,287 205,187 Overseas Chinese Bank ~ Warrants * 300,000 203,243 Overseas Union Bank, Limited 50,000 176,607 United Overseas Bank 73,000 456,514 ---------- 1,706,577 ---------- SPAIN - 4.46% Argentaria Corp Bancaria de Espana SA 24,109 579,197 Autopistas Cesa 17,390 222,778 Baron de Ley * 30,000 1,102,454 Centros Comerciales Continente SA 40,460 1,124,848 Dragados & Construcciones SA 18,700 613,532 Endesa SA 50,450 1,272,998 Prosegur CIA de Seguridad SA 116,895 1,267,897 Tabacalera SA 65,280 1,322,411 Telefonica SA 26,626 1,129,042
19 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) SPAIN (CONTINUED) Viscofan Envolturas Celulosicas SA - Warrants 29,960 $ 396,419 --------- 9,031,576 --------- SWEDEN - 1.97% BPA AB 265,000 746,361 Celsius AB - Class B 51,760 848,288 Ericsson LM - Class B 38,920 944,970 ForeningsSparbanken AB 45,740 1,074,465 Kinnevik AB 19,927 381,011 --------- 3,995,095 --------- SWITZERLAND - 1.80% Jelmoli Holding AG 785 744,538 Novartis AG 896 1,453,284 UBS AG * 4,565 1,433,983 --------- 3,631,805 --------- TAIWAN - 0.20% Formosa Growth Fund * 5,000 83,125 Taipei Fund * 20 159,500 Taiwan Semiconductor~ 5,900 134,778 --------- 377,403 --------- THAILAND - 0.08% Electricity Generating Public Company 40,000 79,819 Thai Airways - Alien Marketing * 50,000 75,163 --------- 154,982 --------- TURKEY - 0.26% Akbank 5,000,000 160,836 Haci Omer Sabanci~ 42,000 248,850 Turkiye IS Bankasi 2,700,000 117,612 --------- 527,298 --------- UNITED STATES - 31.02% Alcoa, Inc. 28,800 1,186,200 AlliedSignal, Inc. 16,000 787,000 Allstate Corporation 21,000 778,312 Anadarko Petroleum Corporation 12,000 453,000 Anheuser-Busch Companies, Inc. 7,000 533,312 Arden Realty Group, Inc. 25,000 556,250 Associates First Capital Corporation 21,200 954,000 AT&T Corporation 10,878 868,200 Aurora Foods, Inc. * 9,800 160,475 Avon Products 14,500 682,406 BankAmerica Corporation 13,300 939,312
SHARES MARKET VALUE COMMON STOCKS (CONTINUED) UNITED STATES (CONTINUED) BankBoston Corporation * 18,000 $ 779,625 Bell Atlantic Corporation 5,300 273,944 Bethlehem Steel Corporation 57,000 470,727 Bristol-Myers Squibb Company * 9,400 604,538 Cardinal Health, Inc. 8,700 574,200 Case Corporation 16,000 406,000 Chancellor Media Corporation * 12,000 565,500 Chase Manhattan Corporation 4,700 382,169 Chevron Corporation 7,000 619,063 Citigroup, Inc. 20,700 1,322,213 Columbia/HCA Healthcare Corporation 39,100 740,456 Compuware Corporation * 14,000 334,250 Conseco, Inc. 39,100 1,207,212 Dayton-Hudson Corporation 15,000 999,375 El Paso Energy Corporation 20,000 653,750 Enron Corporation 11,000 706,750 Federal National Mortgage Association 10,300 713,275 Federated Department Stores, Inc. * 37,000 1,484,625 General Electric Company 32,800 3,628,500 Global Telesystems Group, Inc. * 5,900 330,031 Halliburton Company 17,500 673,750 HealthSouth Corporation * 65,400 690,735 Hewlett-Packard 30,600 2,075,062 Home Depot, Inc. 22,200 1,381,950 Honeywell, Inc. 10,000 758,125 Household International 15,000 684,375 Infinity Broadcasting * 15,000 386,250 Intel Corporation 6,700 798,138 International Business Machines, Inc. 5,400 957,150 Johnson & Johnson 8,500 796,344 Lilly (Eli) & Company 6,000 509,250 Mail-Well Holdings* 19,600 262,150 MBNA Corporation 11,800 281,725 McDonald's Corporation 18,000 815,625 MCI WorldCom, Inc. * 13,400 1,186,738 McKesson HBOC, Inc. 9,000 594,000 Mead Corporation 51,000 1,568,250 Merck & Company, Inc. 9,000 721,688 Microsoft Corporation * 20,500 1,837,312
20 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES OR PRINCIPAL AMOUNT MARKET VALUE COMMON STOCKS (CONTINUED) UNITED STATES (CONTINUED) Monsanto 15,500 $ 712,031 Motorola, Inc. 14,300 1,047,475 Noble Affiliates, Inc. 11,000 319,000 Ocular Sciences, Inc. * 5,000 143,438 Pharmacia & Upjohn 15,000 935,625 Philip Morris Companies, Inc. 28,000 985,250 Platinum Technology International * 49,800 1,269,900 Procter & Gamble Company 8,500 832,469 Provident Companies, Inc. 20,000 691,250 Republic Services, Inc. * 19,000 307,562 SBC Communications, Inc. 6,200 292,175 Sears Roebuck & Company 7,700 347,944 Smurfit-Stone Container Corporation * 27,400 529,162 Stewart Enterprises 37,000 594,312 Suiza Foods Corporation * 10,100 340,244 Sybron International Corporation * 25,000 625,000 Symantec Corporation * 11,000 186,312 Texaco, Inc. 13,000 737,750 Time Warner, Inc. 10,000 710,625 Tosco Corporation 12,800 317,600 Travelers Property and Casualty - Class A 9,000 321,750 Tyco International Limited 15,000 1,076,250 U.S. Foodservice * 29,600 1,376,400 Wal-Mart Stores, Inc. 14,100 1,299,844 Warner-Lambert Company 15,000 992,812 Washington Mutual, Inc. 38,500 1,573,688 Waste Management, Inc. 33,800 1,499,875 Wells Fargo Company 23,500 823,969 Xerox Corporation 4,500 240,187 ----------- 62,803,186 ----------- TOTAL COMMON STOCKS (COST $184,297,637) 196,149,066 ----------- CORPORATE BONDS - 0.19% GREAT BRITIAN - 0.01% Scotia Holdings, 8.50%, 3/26/02 $19,000 18,530 ----------- MALAYSIA - 0.03% Telekom Malaysia Berhad, 4.00%, 10/03/04-(a)(b) 70,000 58,625 ----------- THAILAND - 0.15% PTTEP International, Limited, 7.63%, 10/01/06 300,000 280,500 ----------- TOTAL CORPORATE BONDS (COST $311,140) 357,655 ----------- TOTAL LONG-TERM INVESTMENTS (COST $184,684,986) 196,585,101 -----------
PRINCIPAL AMOUNT MARKET VALUE SHORT-TERM INVESTMENT - 1.63% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/99, 4.95%, due 4/01/99, collateralized by Federal National Mortgage Association $3,312,248, 7.50%, 11/01/27, market value $3,403,335 (cost $3,333,062) $3,333,062 $ 3,333,062 ------------ TOTAL INVESTMENTS (COST $188,574,104)-98.75% 199,918,163 OTHER ASSETS LESS LIABILITIES - 1.25% 2,528,545 ------------ NET ASSETS - 100.00% $202,446,708 ============
* Non-income producing. ~ American Depository Receipts. # Global Depoistory 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 $162,300,760 and $140,685,888, respectively. INCOME TAX INFORMATION At March 31, 1999, the aggregated cost of investment securities for federal income tax purposes was $188,574,104. Net unrealized appreciation aggregated $11,344,059, of which $22,716,961 related to appreciated investment securities and $11,372,902 related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 21 MENTOR PERPETUAL GLOBAL PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (UNAUDITED) ASSETS Investments, at market value (Note 2) Investment securities $196,585,101 Repurchase agreements 3,333,062 ------------ Total investments (cost $188,574,104) 199,918,163 Receivables Collateral for securities loaned (Note 2) 38,767,594 Investments sold 4,458,626 Fund shares sold 1,228,840 Dividends and interest 1,030,879 Unrealized appreciation on forward foreign currency exchange contracts (Note 6) 1,140 ------------ TOTAL ASSETS 245,405,242 ------------ LIABILITIES Payables Investments purchased $ 3,776,771 Securities loaned (Note 2) 38,767,594 Fund shares redeemed 261,608 Unrealized depreciation on forward foreign currency exchange contracts (Note 6) 2,596 Accrued expenses and other liabilities 149,965 ---------- TOTAL LIABILITIES 42,958,534 ------------ NET ASSETS $202,446,708 ============ Net Assets represented by: (Note 2) Additional paid-in capital $177,809,623 Accumulated undistributed net investment loss (350,537) Accumulated net realized gain on investment transactions 13,606,911 Net unrealized appreciation of investments and foreign currency related transactions 11,380,711 ------------ NET ASSETS $202,446,708 ============ NET ASSET VALUE PER SHARE Class A Shares $ 21.19 Class B Shares $ 20.25 Class Y Shares $ 21.27 OFFERING PRICE PER SHARE Class A Shares $ 22.48(a) Class B Shares $ 20.25 Class Y Shares $ 21.27 SHARES OUTSTANDING Class A Shares 3,998,046 Class B Shares 5,812,536 Class Y Shares 58
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) INVESTMENT INCOME Dividends (b) $ 1,405,493 Interest 256,459 ----------- TOTAL INVESTMENT INCOME (NOTE 2) 1,661,952 EXPENSES Management fee (Note 4) $ 945,039 Distribution fee (Note 5) 416,023 Shareholder service fee (Note 5) 226,909 Transfer agent fee 146,975 Custodian and accounting fees 122,065 Administration fee (Note 4) 90,764 Registration expenses 26,761 Shareholder reports and postage expenses 26,262 Legal fees 4,063 Audit fees 2,856 Organizational expenses 2,712 Directors' fees and expenses 2,110 Miscellaneous 3,565 ---------- Total expenses 2,016,104 ----------- NET INVESTMENT LOSS (354,152) ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS Net realized gain on investments and foreign currency related transactions (Note 2) 14,279,955 Change in unrealized appreciation (depreciation) on investments and foreign currency related transactions 19,653,366 ---------- NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS 33,933,321 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $33,579,169 ===========
(b) Net of withholding taxes of $117,672. SEE NOTES TO FINANCIAL STATEMENTS. 22 MENTOR PERPETUAL GLOBAL PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED 3/31/99 YEAR ENDED (UNAUDITED) 9/30/98 NET INCREASE IN NET ASSETS Operations Net investment loss $ (354,152) $ (757,843) Net realized gain on investments 14,279,955 14,799,387 Change in unrealized appreciation (depreciation) on investments 19,653,366 (25,459,714) ------------- ------------- Increase (decrease) in net assets resulting from operations 33,579,169 (11,418,170) ------------- ------------- Distributions to Shareholders From net realized gain on investments Class A (4,794,385) (2,382,830) Class B (8,453,299) (4,553,653) Class Y (85) (8) ------------- --------------- Total distributions to shareholders (13,247,769) (6,936,491) ------------- -------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 58,623,898 78,893,773 Reinvested distributions 12,654,682 6,732,722 Shares redeemed (47,452,979) (44,567,723) ------------- -------------- Change in net assets resulting from capital share transactions 23,825,601 41,058,772 ------------- -------------- Increase in net assets 44,157,001 22,704,111 Net Assets Beginning of period 158,289,707 135,585,596 ------------- -------------- End of period (including accumulated undistributed net investment income (loss) of ($350,537) and $3,616, respectively) $ 202,446,708 $158,289,707 ============= ==============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
SIX MONTHS YEAR YEAR ENDED 3/31/99 ENDED ENDED (UNAUDITED) 9/30/98 9/30/97 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.92 $ 20.94 $ 17.86 ----------- -------- -------- Income from investment operations Net investment income (loss) (0.04) (0.03) 0.04 Net realized and unrealized gain (loss) on investments 3.90 (0.97) 3.67 ----------- -------- -------- Total from investment operations 3.86 (1.00) 3.71 ----------- -------- -------- Less distributions From capital gains (1.59) (1.02) (0.63) ----------- -------- -------- Net asset value, end of period $ 21.19 $ 18.92 $ 20.94 =========== ======== ======== TOTAL RETURN* 21.52% (4.97%) 21.59% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 84,733 $ 59,012 $ 46,556 Ratio of expenses to average net assets 1.76% (a) 1.75% 1.89% Ratio of expenses to average net asset excluding waiver 1.76% (a) 1.75% 1.89% Ratio of net investment income (loss) to average net assets (0.07%)(a) (0.01%) 0.07% Portfolio turnover rate 80% 162% 128% YEAR YEAR PERIOD 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 asset 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%
(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. 23 MENTOR PERPETUAL GLOBAL PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
SIX MONTHS YEAR ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.21 $ 20.32 ----------- -------- Income from investment operations Net investment loss (0.06) (0.12) Net realized and unrealized gain (loss) on investments 3.69 (0.97) ----------- -------- Total from investment operations 3.63 (1.09) ----------- -------- Less distributions From capital gains (1.59) (1.02) ----------- -------- Net asset value, end of period $ 20.25 $ 18.21 =========== ======== TOTAL RETURN* 21.20% (5.65%) RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 117,713 $ 99,277 Ratio of expenses to average net assets 2.51% (a) 2.51% Ratio of expenses to average net asset excluding waiver 2.51% (a) 2.51% Ratio of net investment loss to average net assets (0.68%)(a) (0.77%) Portfolio turnover rate 80% 162% YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED 9/30/97 9/30/96 9/30/95 9/30/94 (d) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 17.46 $ 15.67 $ 14.15 $ 14.18 -------- -------- -------- ----------- Income from investment operations Net investment loss (0.02) (0.05) (0.05) (0.04) Net realized and unrealized gain (loss) on investments 3.51 2.64 1.57 0.01 -------- -------- -------- ------------ Total from investment operations 3.49 2.59 1.52 (0.03) -------- -------- -------- ------------ Less distributions From capital gains (0.63) (0.80) -- -- -------- -------- -------- ------------ Net asset value, end of period $ 20.32 $ 17.46 $ 15.67 $ 14.15 ======== ======== ======== ============ TOTAL RETURN* 20.74% 17.39% 10.74% (0.21%) RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 89,030 $ 42,131 $ 12,667 $ 7,987 Ratio of expenses to average net assets 2.64% 2.70% 2.72% 2.79% (a) Ratio of expenses to average net asset excluding waiver 2.64% 2.70% 2.79% 3.93% (a) Ratio of net investment loss to average net assets (0.68%) (0.91%) (0.40%) (0.82%)(a) Portfolio turnover rate 128% 130% 155% 2%
(a) Annualized. (d) 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. CLASS Y SHARES
SIX MONTHS PERIOD ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 (e) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 18.96 $ 18.81 --------- --------- Income from investment operations Net investment income -- -- Net realized and unrealized gain on investments 3.90 0.30 ---------- ---------- Total from investment operations 3.90 0.30 ---------- ---------- Less distributions From capital gains ( 1.59) ( 0.15) ---------- ---------- Net asset value, end of period $ 21.27 $ 18.96 ========== ========== TOTAL RETURN 21.83% 1.60% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 $ 1 Ratio of expenses to average net assets 1.50% (a) 1.50% (a) Ratio of net investment loss to average net assets (0.07%)(a) (0.02%)(a) Portfolio turnover rate 80% 162%
(a) Annualized. (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 doesnot reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 24 MENTOR CAPITAL GROWTH PORTFOLIO MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION GROWTH MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- MARKET REVIEW It is now becoming increasingly apparent that the stock market may be evolving into a once-in-a-lifetime event, one to be written and talked about long after we are all gone. What was once a great bull market powered by strong earnings and declining inflation expectations has become an emotionally-charged environment where fundamental considerations are giving way to price momentum and speculation on a historic scale. As we have commented on repeatedly, most of the market's action has narrowed to a fairly limited group of stocks, the mega-sized blue chip growth stocks and Internet concepts, both of which have been in the spotlight for quite a while. This narrowness can be illustrated innumerable ways. The number of stocks reaching new highs is extremely low despite repeated records by the major indexes. On the day the Dow Jones Industrial Average first closed above 10,000 only 44 New York Stock Exchange stocks hit new highs and 88 made new lows. While the S&P 500 has returned 18% over the past twelve months, about 60% of the stocks in the index have actually DECLINED over the same period and the largest 50 stocks in the index are up an average 47%. It is starkly clear that the recent record breaking advances are riding on a select group. There is no doubt many of today's most popular mega-cap stocks have shown fantastic earnings growth. But in most cases these stocks have now far outpaced their earnings as price momentum has become the driving force. The largest five stocks in the NASDAQ composite gained an average 110% over the last 12 months and now trade at an average 67 times trailing earnings. This valuation level implies very little perceived risk to these companies' outlooks, despite the inherently volatile nature of this sector. Naturally, the higher these stocks' valuations rise, the more people seem to consider valuation irrelevant. Several thoughtful observers including Warren Buffett, Bill Gates, and Alan Greenspan have warned about these valuations, but most consider their rhetoric out-of- date. The performances, and particularly the valuations, of most Internet stocks are beyond adequate description. We never imagined we would see this level of speculation. Companies that were conceptualized less than two years ago and organized less than one year ago have since gone public with multi-billion dollar market values on minuscule revenues, income losses, and vague plans. The enticement of apparently easy gains in the obvious stocks that continue to go up without pause is incredible, but we know temptation is a deadly investment platform. Many people chasing today's most popular stocks decry the notion of temptation. They say they are buying these stocks with an eye toward the long-term, and this view obviates short-term valuation concerns. We believe the truth is precisely the opposite, that current demand is proportional to recent gains, and it's the long-term view that often crystallizes the level of speculation. For instance, if we assume the stock of America Online appreciates 20% a year over the next 10 years, a rate probably well below virtually all current owners' expectations, and its shares outstanding increase by 5% a year due to employee options, then it will have a market value exceeding $1.9 TRILLION. Assuming at that size the market will have priced the stock at a lower but arguably extreme P/E ratio of 50 then America Online will need net income of $39 billion, all in just ten years. 25 MENTOR CAPITAL GROWTH PORTFOLIO MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION GROWTH MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- By comparison, Microsoft currently has net income of $6.6 billion. It may happen, but it certainly seems a stretch. MANAGEMENT STRATEGY Fortunately, we know that long-term investment success is founded on consistent execution of a sound fundamental discipline, not popularity contests. In fact, we are increasingly comfortable with our current holdings. These are substantial companies and their results are generally tracking our expectations including average estimated earnings growth of 14-15% this quarter and year. These stocks trade at an average P/E ratio of 21.5 times estimated 1999 earnings-per-share, about 20% below the S&P 500's valuation, despite our belief that their outlooks are better than average. PERFORMANCE REVIEW Our "quality-growth-at-a-reasonable-price" investment philosophy and strategy are clearly out of sync with prevailing sentiment. After a few excellent years, our recent returns have slipped behind the S&P 500. This under-performance mostly reflects our lack of exposure to today's most popular stocks, not fundamental disappointments in our holdings. For the six-month period ending March 31, 1999 the Mentor Capital Growth A shares returned 19.63%, compared to 27.34% for the S&P 500. MARKET OUTLOOK We have no idea how the stock market will progress over the remainder of the year. The economy appears to be in remarkably good shape with solid growth and low inflation likely to continue. If market momentum continues along current lines our performance will continue to compare poorly to the major averages. In fact, it is very possible that current trends may grow even more extreme. At some point the speculative excess building today will be quashed. We have no idea when or what the catalyst may be, but it will certainly seem obvious when we look back. Between now and then the market could experience some significant volatility. Our singular goal is to get through this highly unusual period with our discipline intact, as we know most others will not. 26 MENTOR CAPITAL GROWTH PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Capital Growth Portfolio Class A and Class B Shares and the S&P 500.~ Class A Shares Class B Shares S&P 550 4/29/92 9450 10000 10000 9/30/92 9524 10061 10215 9/30/93 10306 10818 11543 9/30/94 10165 10601 11965 9/30/95 12216 12443 15521 9/30/96 15185 15532 18680 9/30/97 20467 20928 26236 9/30/98 22660 22767 28608 3/31/99 27116 27129 36430 Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year 5-Year Since Inception+++ Class A 3.67% 20.91% 15.49% Class B 8.01% 21.42% 15.64% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities in the index. The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Capital Growth Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares of rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the five-year period following the date of purchase. The value of the Class B Shares reflects a redemption fee in effect at the end of each of the stated periods. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. ++ Represents a hypothetical investment of $10,000 in Mentor Capital Growth Portfolio Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. +++ Reflects operations of Mentor Capital Growth Portfolio Class A and Class B Shares from the date of commencement of operations on 4/29/92 through 3/31/99. Comparison of change in value of a hypothetical $10,000 investment in Mentor Capital Growth Portfolio Class Y Shares and the S&P 500.~ Class Y Shares S&P 500 11/19/97 10000 10000 12/31/97 10300 10643 3/31/98 11835 12127 6/30/98 12200 12450 9/30/98 10895 11281 3/31/99 13055 14366 Total Returns as of 3/31/99 1-Year Since Inception++ Class Y Shares 10.32% 22.87% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities in the index. The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Capital Growth Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Capital Growth Portfolio Class Y from the date of issuance on 11/19/97 through 3/31/99. 27 MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 95.00% BASIC MATERIALS - 4.88% Bemis, Inc. 172,784 $ 5,367,103 Sherwin-Williams Company 736,600 20,716,875 ----------- 26,083,978 ----------- CAPITAL GOODS & CONSTRUCTION - 9.45% Emerson Electric Company 358,600 18,983,388 Illinois Tool Works 331,700 20,523,938 W. W. Grainger, Inc. 256,300 11,036,918 ----------- 50,544,244 ----------- CONSUMER CYCLICAL - 13.32% Chancellor Media Corporation * 379,750 17,895,719 Interpublic Group Companies, Inc. 252,800 19,686,800 Newell Rubbermaid, Inc. 501,419 23,817,383 Royal Caribbean Cruises, Limited 252,600 9,851,400 ----------- 71,251,302 ----------- CONSUMER STAPLES - 8.17% Bristol-Myers Squibb Company 341,500 21,962,719 Sysco Corporation 826,500 21,747,281 ----------- 43,710,000 ----------- FINANCIAL - 16.74% American Express Company 156,500 18,388,750 Federal National Mortgage Association 219,600 15,207,300 SouthTrust Corporation 481,500 17,965,969 Washington Mutual, Inc. 483,640 19,768,785 Wells Fargo Company 519,800 18,225,487 ----------- 89,556,291 ----------- HEALTH - 7.86% Johnson & Johnson 240,600 22,541,212 Tenet Healthcare Corporation 1,031,000 19,524,563 ----------- 42,065,775 ----------- TECHNOLOGY - 22.45% Automatic Data Processing 515,000 21,308,125 Computer Sciences Corporation 339,150 18,716,841 MCI WorldCom, Inc. 185,750 16,450,484 Sun Microsystems, Inc.* 183,350 22,907,291 SunGard Data Systems, Inc.* 550,000 22,000,000 Xerox Corporation 350,000 18,681,250 ----------- 120,063,991 -----------
SHARES OR PRINCIPAL AMOUNT MARKET VALUE COMMON STOCKS (CONTINUED) TRANSPORTATION & SERVICES - 1.31% Werner Enterprises, Inc. 446,312 $ 7,029,414 ------------ UTILITY - 2.67% MediaOne Group* 225,000 14,287,500 ------------ MISCELLANEOUS - 8.15% Tyco International Limited 295,600 21,209,300 UNUM Corporation 471,100 22,406,694 ------------ 43,615,994 ------------ TOTAL COMMON STOCKS (COST $451,750,680) 508,208,489 ------------ SHORT-TERM INVESTMENT - 3.32% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/99, 4.95%, due 4/01/99 collateralized by $28,720,000 Federal Home Loan Mortgage Corporation, 7.50%, 11/01/27, market value $18,147,748 (cost $17,773,445) $17,773,445 17,773,445 ------------ TOTAL INVESTMENTS (COST $469,524,125)-98.32% 525,981,934 OTHER ASSETS LESS LIABILITIES - 1.68% 8,960,759 ------------ NET ASSETS - 100.00% $534,942,693 ============
* Non-income producing. INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $289,346,132 and $182,295,844, respectively. INCOME TAX INFORMATION At March 31, 1999, the aggregated cost of investment securities for federal income tax purposes was $469,524,125. Net unrealized appreciation aggregated $56,457,809, of which $71,039,062 related to appreciated investment securities and $14,581,253 related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 28 MENTOR CAPITAL GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (UNAUDITED) ASSETS Investments, at market value (Note 2) Investment securities $508,208,489 Repurchase agreements 17,773,445 ------------ Total investments (cost $469,524,125) 525,981,934 Collateral for securities loaned (Note 2) 22,282,979 Receivables Investments sold 8,481,730 Fund shares sold 1,910,950 Dividends and interest 452,073 ------------ TOTAL ASSETS 559,109,666 ------------ LIABILITIES Payables Investments purchased $1,095,869 Securities loaned (Note 2) 22,282,979 Fund shares redeemed 703,600 Accrued expenses and other liabilities 84,525 ---------- TOTAL LIABILITIES 24,166,973 ------------ NET ASSETS $534,942,693 ============ Net Assets represented by: (Note 2) Additional paid-in capital $463,096,410 Accumulated undistributed net investment loss (1,003,192) Accumulated net realized gain on investment transactions 16,391,666 Net unrealized appreciation of investments 56,457,809 ------------ NET ASSETS $534,942,693 ============ NET ASSET VALUE PER SHARE Class A Shares $ 24.27 Class B Shares $ 22.95 Class Y Shares $ 24.34 OFFERING PRICE PER SHARE Class A Shares $ 25.75(a) Class B Shares $ 22.95 Class Y Shares $ 24.34 SHARES OUTSTANDING Class A Shares 11,553,848 Class B Shares 11,088,831 Class Y Shares 54
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) INVESTMENT INCOME Dividends $ 2,337,247 Interest 607,297 ----------- TOTAL INVESTMENT INCOME (NOTE 2) 2,944,544 EXPENSES Management fee (Note 4) $1,796,157 Distribution fee (Note 5) 881,368 Shareholder service fee (Note 5) 561,297 Transfer agent fee 323,963 Administration fee (Note 4) 224,520 Shareholder reports and postage expenses 56,547 Custodian and accounting fees 38,746 Registration expenses 32,333 Legal fees 10,583 Audit fees 7,440 Directors' fees and expenses 5,496 Miscellaneous 9,286 ---------- Total expenses 3,947,736 ----------- NET INVESTMENT LOSS (1,003,192) ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments (Note 2) 18,899,025 Change in unrealized appreciation (depreciation) on investments 49,993,788 ---------- NET GAIN ON INVESTMENTS 68,892,813 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $67,889,621 ===========
SEE NOTES TO FINANCIAL STATEMENTS. 29 MENTOR CAPITAL GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED 3/31/99 YEAR ENDED (UNAUDITED) 9/30/98 NET INCREASE IN NET ASSETS Operations Net investment loss $ (1,003,192) $ (1,099,960) Net realized gain on investments 18,899,025 45,438,253 Change in unrealized appreciation (depreciation) on investments 49,993,788 (32,273,002) ------------- ------------- Increase in net assets resulting from operations 67,889,621 12,065,291 ------------- ------------- Distributions to Shareholders From net investment income Class A -- (29,728) Class B -- (52,910) From net realized gain on investments Class A (16,354,928) (5,934,313) Class B (23,292,331) (10,484,517) Class Y (124) (12) ------------- ------------- Total distributions to shareholders (39,647,383) (16,501,480) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 202,131,046 220,347,636 Reinvested distributions 38,811,637 16,089,732 Shares redeemed (76,111,172) (69,421,743) ------------- ------------- Change in net assets resulting from capital share transactions 164,831,511 167,015,625 ------------- ------------- Increase in net assets 193,073,749 162,579,436 Net Assets Beginning of period 341,868,944 179,289,508 ------------- ------------- End of period (including accumulated undistributed net investment income (loss) of ($1,003,192) and $0, respectively) $ 534,942,693 $ 341,868,944 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. 30 MENTOR CAPITAL GROWTH PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS A SHARES
SIX MONTHS YEAR YEAR YEAR YEAR YEAR ENDED 3/31/99 ENDED ENDED ENDED ENDED ENDED (UNAUDITED) 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 $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26 --------- ------- ------- ------- ------- ------- Income from investment operations Net investment income (loss) (0.08) (0.10) (0.02) 0.11 0.02 0.09 Net realized and unrealized gain (loss) on investments 4.19 2.34 5.87 3.73 2.91 (0.30) ---------- -------- ------- ------- ------- ------- Total from investment operations 4.11 2.24 5.85 3.84 2.93 (0.21) ---------- -------- ------- ------- ------- ------- Less distributions From net investment loss - (0.01) - - - (0.04) From net realized capital loss (2.55) (1.94) (2.79) (0.50) (1.79) (0.13) ---------- -------- ------- ------- ------- ------- Total distributions (2.55) (1.95) (2.79) (0.50) (1.79) (0.17) ---------- -------- ------- ------- ------- ------- Net asset value, end of year $ 24.27 $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88 ========== ======== ======= ======= ======= ======= TOTAL RETURN* 19.66% 10.72% 34.78% 24.63% 20.18% (1.37%) RATIOS / SUPPLEMENTAL DATA Net assets, end of year (in thousands) $ 280,401 $145,117 $65,703 $31,889 $29,582 $ 21,181 Ratio of expenses to average net assets 1.36% (a) 1.34% 1.41% 1.43% 1.87% 1.70% Ratio of net investment income (loss) to average net assets (0.05%)(a) 0.06% 0.53% 0.51% 0.27% 0.53% Portfolio turnover rate 42% 104% 64% 98% 157% 149%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. CLASS B SHARES
SIX MONTHS YEAR YEAR YEAR YEAR YEAR ENDED 3/31/99 ENDED ENDED ENDED ENDED ENDED (UNAUDITED) 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 $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23 --------- ------- ------- ------- ------- ------- Income from investment operations Net investment income (loss) (0.06) (0.08) - (0.04) 0.25 (0.04) Net realized and unrealized gain (loss) on investments 3.84 2.07 5.55 3.67 2.53 (0.26) ---------- ------- ------- ------- ------- ------- Total from investment operations 3.78 1.99 5.55 3.63 2.78 (0.30) ---------- ------- ------- ------- ------- ------- Less distributions From net investment loss - (0.01) - - - - From capital loss (2.55) (1.94) (2.79) (0.50) (1.79) (0.13) ---------- ------- ------- ------- ------- ------- Total distributions (2.55) (1.95) (2.79) (0.50) (1.79) (0.13) ---------- ------- ------- ------- ------- ------- Net asset value, end of year $ 22.95 $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80 ========== ======= ======= ======= ======= ======= TOTAL RETURN* 18.97% 9.86% 33.88% 23.64% 19.26% (2.00%) RATIOS / SUPPLEMENTAL DATA Net assets, end of year (in thousands) $ 254,541 $196,751 $113,587 $68,213 $57,648 $41,106 Ratio of expenses to average net assets 2.11% (a) 2.09% 2.16% 2.18% 2.56% 2.46% Ratio of net investment loss to average net assets (0.80%)(a) (0.70%) (0.22%) (0.24%) (0.41%) (0.22%) Portfolio turnover rate 42% 104% 64% 98% 157% 149%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 31 MENTOR CAPITAL GROWTH PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS Y SHARES
SIX MONTHS PERIOD ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 (b) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 22.74 $ 20.81 --------- -------- Income from investment operations Net investment income 0.16 0.02 Net realized and unrealized gain on investments 1.44 2.16 --------- -------- Total from investment operations 1.60 2.18 --------- -------- Less distributions From net realized capital gain - (0.25) --------- -------- Total distributions - (0.25) --------- -------- Net asset value, end of period $ 24.34 $ 22.74 ========= ======== TOTAL RETURN* 19.83% 10.56% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 $ 1 Ratio of expenses to average net assets 1.09%(a) 1.09%(a) Ratio of net investment income to average net assets ( 0.04%)(a) 0.38%(a) Portfolio turnover rate 42% 104%
(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. 32 MENTOR INCOME AND GROWTH PORTFOLIO MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- MARKET REVIEW A number of milestones have been reached so far in 1999. The Dow Jones Industrial Average exceeded 10,000 for the first time. The Senate refused to oust President Clinton from office. The US economy continued its robust growth, with few signs of inflation. After four years of consecutive 20% plus returns, the stock market has gotten off to another good start, with the S&P500 returning 5.0% in the first quarter. The trends at play in 1998 continued to prevail, with a narrow group of stocks led by large-capitalization growth stocks, dominating the market. Large-capitalization technology issues, especially Internet-related companies, and capital markets-oriented financial stocks provided the leadership. Growth continued to outperform value. Interest rates rose again during the first quarter of 1999 as the bond market realigned yields in response to a somewhat stronger worldwide economic environment. Following three easing moves by the Federal Reserve in 1998, the bond market had established a yield curve that clearly envisioned further aggressive easing by the Fed. The Fed has now stated that global economic and financial situations have, for the moment, stabilized and that further lowering of the short rate is not warranted. With little immediate hope of further actions by the Fed to lower short-term yields, focus has moved to the strength of the US economy. The strong economy and generally rising interest rates have permitted both corporate and mortgage sectors to perform well. Corporate bonds have been supported by the fact that the robust US economy means that corporate balance sheets are strong and can easily support the current ratings of their debt. Rising interest rates mean lower refinancing volume, a clear benefit for mortgage-backed securities. PORTFOLIO PERFORMANCE For the six month period ended March 31, 1999, the Mentor Income & Growth Portfolio A shares returned 5.73% compared to 15.74% for its 60%S&P500/40%Lehman Brothers Aggregate Bond Index benchmark. Our value investment bias and consequent lack of exposure to the very large growth stocks, especially in the technology sector (with the exception of our large holding in IBM) was a major cause of our shortfall in performance. The recent disparity between growth and value investment performance can be seen by the difference in returns of the Russell 1000 Growth Index, up 34.8% over the past six months, and the Russell 1000 Value Index up 18.3%. EQUITY OUTLOOK AND STRATEGY While still ten months short of the mark, it appears the US economy will set a record for the longest expansion in the post-World War II era. At this stage of the cycle, the economy is in far better shape than it was during the record expansion of the 1960's. Inflation remains low, productivity is high, manufacturing labor costs continue to decline, and capacity utilization is below normal levels. The strength in the economy over the next few quarters is likely to be greater than many are now expecting. We have increased our estimate of real GDP growth to 3.5% for 1999. If world economic activity improves as we think it will, the market could broaden and reduce the significant dispersion in valuations. The Portfolio is broadly diversified and well positioned to take advantage of the change when it occurs. Two sectors that should be beneficiaries are industrial cyclicals and materials. Increased shipments on lean cost structures should enable industrial companies to show strong earnings gains. Improved demand 33 MENTOR INCOME AND GROWTH PORTFOLIO MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- for materials could result in a quick upward move in the price for certain commodities that would benefit the stock prices of the producers. The very recent performance of energy-related equities is an example of the sharp and rapid rally that can occur when a commodity price moves up from a very depressed level. FIXED INCOME OUTLOOK AND STRATEGY The bond market is clearly in uncharted waters. Not in recent memory has rapid economic growth this late in an economic expansion been accompanied by stable and even falling inflation. We believe that the economy will continue to grow at a reasonably rapid pace, though not as rapid as that of 1998. Furthermore, inflation should remain low, most likely between one and two percent. The Fed will not move toward either higher or lower rates during 1999, and as a result bond yields will move around within the context of a Fed Funds Rate stable at 4.75%. As a result, both mortgage-backed securities and corporate bonds will in all likelihood provide better total returns than Treasury securities. We therefore expect to permit the Portfolio's duration to drift downward and to de-emphasize Treasury securities in favor of the corporate and mortgage-backed sectors. 34 MENTOR INCOME AND GROWTH PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Income and Growth Portfolio Class A and Class B Shares, the S&P 500 and the Lehman Brothers Aggregate Bond Index.+ Class A Shares Class B Shares LAGG/S&P 500 5/24/93 9425 10133 10000 9/30/93 9909 10506 10353 9/30/94 10578 11239 10446 9/30/95 12402 12614 12879 9/30/96 14802 15140 14686 9/30/97 18076 18499 18723 9/30/98 19126 19302 20692 3/31/99 20068 20192 23979 Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year 5-Year Since Inception++ Class A (2.31%) 13.58% 12.75% Class B 1.95% 14.09% 13.09% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. + The Standard & Poor's Index (S&P 500) is an unmanaged, market-value-weighted index of 500 widely held domestic common stocks. An unmanaged index does not reflect expenses and may not correspond to the performance of a managed portfolio in which expenses are incurred. The Lehman Brothers Aggregate Index is made up of the Government/Corporate Index, the Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are adjusted to reflect reinvestment of interest and dividends on securities in the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. This index represents an asset allocation of 60% S&P 500 stocks and 40% Lehman Brothers Aggregate Bond Index. ** Represents a hypothetical investment of $10,000 in Mentor Income and Growth Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the five-year period following the date of purchase. The value of the Class B Shares reflects a redemption fee in effect at the end of each of the stated periods. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. *** Represents a hypothetical investment of $10,000 in Mentor Income and Growth Portfolio Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Income and Growth Portfolio Class A and Class B Shares from the date of commencement of operations on 5/24/93 through 3/31/99. 35 MENTOR INCOME AND GROWTH PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Income and Growth Portfolio Class Y Shares, the S&P 500 and the Lehman Brothers Aggregate Bond Index.+ Class Y Shares LAGG/S&P 500 11/19/97 10000 10000 12/31/97 10217 10443 3/31/98 10860 11374 6/30/98 10750 11800 9/30/98 10660 11211 3/31/99 11289 12987 Total Returns as of 3/31/99 1-Year Since Inception++ Class Y 3.95% 9.82% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. + The Standard & Poor's Index (S&P 500) is an unmanaged, market-value-weighted index of 500 widely held domestic common stocks. An unmanaged index does not reflect expenses and may not correspond to the performance of a managed portfolio in which expenses are incurred. The Lehman Brothers Aggregate Index is made up of the Government/Corporate Index, the Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are adjusted to reflect reinvestment of interest and dividends on securities in the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. This index represents an asset allocation of 60% S&P 500 stocks and 40% Lehman Brothers Aggregate Bond Index. *** Represents a hypothetical investment of $10,000 in Mentor Income and Growth Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Income and Growth Portfolio Class Y Shares from the date of issuance on 11/19/97 through 3/31/99. 36 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 56.10% BASIC MATERIALS - 4.99% Air Products & Chemicals, Inc. 98,900 $3,387,325 Alcoa, Inc. 48,000 1,977,000 AlliedSignal, Inc. 92,300 4,540,006 British Steel PLC- 108,900 2,198,419 Westvaco Corporation 68,300 1,434,300 ---------- 13,537,050 ---------- CAPITAL GOODS & CONSTRUCTION - 4.73% Caterpillar, Inc. 48,000 2,205,000 Cooper Industries, Inc. 47,500 2,024,687 Cooper Tire & Rubber 125,000 2,296,875 Hubbell, Inc. - Class B 89,400 3,576,000 Thomas & Betts Corporation 72,400 2,719,525 ---------- 12,822,087 ---------- COMMERCIAL SERVICES - 2.95% Supervalu, Inc. 143,900 2,967,938 Wallace Computer Services, Inc. 254,500 5,042,281 ---------- 8,010,219 ---------- CONSUMER CYCLICAL - 4.54% AvalonBay Communities, Inc. 51,000 1,612,875 Delphi Automotive Systems 130,000 2,307,500 Ford Motor Company 74,000 4,199,500 Maytag Corporation 28,900 1,744,838 Premark International, Inc. 74,100 2,440,668 ---------- 12,305,381 ---------- CONSUMER STAPLES - 6.33% American Home Products Corporation 36,100 2,355,525 Baxter International, Inc. 54,300 3,583,800 Bestfoods 49,700 2,336,158 Dimon, Inc. 228,100 869,631 Hormel Foods Corporation 118,100 4,207,312 Kimberly-Clark Corporation 28,600 1,371,013 Philip Morris Companies, Inc. 70,000 2,463,125 ---------- 17,186,564 ---------- ENERGY - 7.01% Baker Hughes, Inc. 193,100 4,694,744 Chevron Corporation 26,400 2,334,750 Phillips Petroleum Company 37,900 1,790,775 Repsol SA- 50,000 2,562,500 Total SA- 39,500 2,409,500 Unocal Corporation 65,800 2,422,262 USX-Marathon Group, Inc. 102,100 2,807,750 ---------- 19,022,281 ---------- FINANCIAL - 11.74% ACE Limited 119,300 3,720,669 CIT Group, Inc. - A 77,900 2,380,819 Citigroup, Inc. 71,900 4,592,612
SHARES OR PRINCIPAL AMOUNT MARKET VALUE COMMON STOCKS (CONTINUED) FINANCIAL (CONTINUED) Federal National Mortgage Association 58,900 $ 4,078,825 Jefferson Pilot Corporation 26,850 1,819,088 Spieker Properties, Inc. 65,000 2,291,250 U. S. Bancorp 163,800 5,579,976 UnionBanCal Corporation 56,100 1,910,906 Wachovia Corporation 39,000 3,166,312 Wilmington Trust Corporation 40,700 2,324,988 ----------- 31,865,445 ----------- HEALTH - 4.49% Abbott Laboratories 41,000 1,919,312 Columbia/HCA Healthcare Corporation 213,600 4,045,050 Johnson & Johnson 25,700 2,407,769 Pharmacia & Upjohn 61,000 3,804,875 ----------- 12,177,006 ----------- TECHNOLOGY - 3.55% Alcatel Alsthom SA- 75,500 1,722,344 International Business Machines Corporation 21,800 3,864,050 Xerox Corporation 76,000 4,056,500 ----------- 9,642,894 ----------- TRANSPORTATION & SERVICES - 1.28% Union Pacific Corporation 65,000 3,473,438 ----------- UTILITIES - 4.49% Bell Atlantic Corporation 67,700 3,499,244 DPL, Inc. 95,000 1,567,500 DQE, Inc. 43,000 1,650,125 Pinnacle West Capital 60,400 2,197,050 SBC Communications, Inc. 69,300 3,265,762 ----------- 12,179,681 ----------- TOTAL COMMON STOCKS (COST $139,059,876) 152,222,046 ----------- CORPORATE BONDS - 14.71% INDUSTRIAL - 7.15% Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 250,790 Archer-Daniels-Midland, 6.75%, 12/15/27 2,000,000 2,018,700 AT&T Corporation, 6.00%, 3/15/09 1,500,000 1,492,305 Computer Associates International, 6.50%, 4/15/08 (a) 1,000,000 969,040
37 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) INDUSTRIAL (CONTINUED) Computer Science, 6.25%, 3/15/09 $1,275,000 $1,279,488 Gap, Inc., 6.90%, 9/15/07 1,000,000 1,056,980 Gillette Company, 5.75%, 10/15/05 250,000 247,218 Hershey Foods Corporation, 7.20%, 8/15/27 1,000,000 1,069,470 ICI Wilmington, Inc., 6.95%, 9/15/04 1,000,000 1,005,280 International Business Machines Corporation, 5.50%, 1/15/09 1,500,000 1,448,175 Lucent Technologies, 6.45%, 3/15/29 1,250,000 1,222,337 Mead Corporation, 7.35%, 3/01/17 750,000 772,935 Praxair, Inc., 6.15%, 4/15/03 1,000,000 990,980 Rockwell International Corporation, 6.70%, 1/15/28 1,500,000 1,477,260 Scripps (E. W.) Company, 6.38%, 10/15/02 1,000,000 1,014,300 Tenneco, Inc, 7.50%, 4/15/07 500,000 518,045 Williams Companies, Inc., 6.50%, 11/15/02 1,000,000 1,008,170 Zeneca Wilmington, 7.00%, 11/15/23 1,500,000 1,562,100 ---------- 19,403,573 ---------- FINANCIAL - 4.90% Allmerica Financial Corporation, 7.63%, 10/15/25 1,130,000 1,179,664 Allstate Corporation, 6.75%, 5/15/18 1,000,000 1,000,270 American General Finance, 5.88%, 7/01/00 250,000 250,942 Associates Corporation of North America, 5.25%, 3/30/00 250,000 249,898 Bank One Texas, 6.25%, 2/15/08 1,000,000 996,690 BankAmerica Corporation, 7.88%, 12/01/02 1,000,000 1,063,990 Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 253,490 Comerica Bank, 7.13%, 12/01/13 250,000 250,702 Finova Capital Corporation, 6.39%, 10/08/02 1,000,000 1,008,440 First National Bank of Boston, 8.00%, 9/15/04 250,000 270,345 Fleet Financial Group, 6.88%, 1/15/28 1,000,000 994,300
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) FINANCIAL (CONTINUED) Great Western Financial, 6.38%, 7/01/00 $ 250,000 $ 252,265 Heller Financial, 6.38%, 11/10/00 1,000,000 1,009,980 Home Savings of America, 6.00%, 11/01/00 250,000 251,200 Key Bank, NA, 5.80%, 4/01/04 1,375,000 1,369,252 MBIA Inc., 7.00%, 12/15/25 1,000,000 1,007,760 NationsBank Corporation, 7.80%, 9/15/16 1,000,000 1,099,800 Security Benefits Life Company, 8.75%, 5/15/16 (a) 500,000 524,375 Toronto Dominion Bank, 6.13%, 11/01/08 250,000 245,828 ---------- 13,279,191 ---------- UTILITIES - 2.66% Duke Energy Corporation, 6.00%, 12/01/28 1,000,000 915,100 Florida Power & Light, 5.38%, 4/01/00 250,000 249,992 National Fuel Gas Company, 6.00%, 3/01/09 1,000,000 983,780 New York Telephone, 6.00%, 4/15/08 1,000,000 995,920 Northern Natural Gas, 6.75%, 9/15/08 (a) 2,000,000 2,011,540 Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 249,465 Southwestern Public Service Company, 6.88%, 12/01/99 250,000 252,748 System Energy Resources, 7.71%, 8/01/01 500,000 517,120 Union Electric Company, 6.75%, 10/15/99 250,000 252,353 U.S. West Capital Funding, Inc., 6.88%, 7/15/28 785,000 796,280 ---------- 7,224,298 ---------- TOTAL CORPORATE BONDS (COST $40,147,348) 39,907,062 ---------- U.S. GOVERNMENT SECURITIES AND AGENCIES - 26.58% Government National Mortgage Association 7.00%, 1/15/24 - 7/15/24 3,239,198 3,293,413 6.50%, 4/15/28 - 6/15/28 4,849,197 4,827,958 6.00%, 12/15/28 5,032,131 4,889,018 U.S. Treasury Bond, 6.25%, 8/15/23 3,000,000 3,134,130 U.S. Treasury Notes 5.63%, 11/30/00 10,400,000 10,504,312 6.25%, 6/30/02 12,000,000 12,385,200
38 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE U.S. GOVERNMENT SECURITIES AND AGENCIES (CONTINUED) U.S. Treasury Notes 6.38%, 8/15/02 $3,000,000 $ 3,110,160 7.50%, 2/15/05 3,000,000 3,323,040 6.50%, 8/15/05 - 10/15/06 14,000,000 14,870,960 6.13%, 12/31/01 - 8/15/07 11,350,000 11,774,273 ------------ TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $72,234,297) 72,112,464 ------------ SHORT-TERM INVESTMENT - 1.33% REPURCHASE AGREEMENT Paine Webber, Inc. Dated 3/31/99, 4.90% due 4/01/99, collateralized by $2,700,000 (original face value) U.S. Treasury Bond, 9.25%, 2/15/14, market value $3,657,656 (cost $3,619,000) 3,619,000 3,619,000 ------------ TOTAL INVESTMENTS (COST $255,060,521)-98.72% 267,860,572 OTHER ASSETS LESS LIABILITIES - 1.28% 3,485,013 ------------ NET ASSETS - 100.00% $271,345,585 ============
* 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 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 $88,104,642 and $74,687,844, respectively. INCOME TAX INFORMATION At March 31, 1999, the aggregated cost of investment securities for federal income tax purposes was $255,060,521. Net unrealized appreciation aggregated $12,800,051, of which $24,402,582 related toappreciated investment securities and $11,602,531 related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 39 MENTOR INCOME AND GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (UNAUDITED) ASSETS Investments, at market value (Note 2) Investment securities $264,241,572 Repurchase agreements 3,619,000 ------------ Total investments (cost $255,060,521) 267,860,572 Collateral for securities loaned (Note 2) 57,206,916 Receivables Investments sold 2,260,145 Fund shares sold 1,054,367 Dividends and interest 1,788,988 ------------ TOTAL ASSETS 330,170,988 ------------ LIABILITIES Payables Investments purchased $ 852,634 Securities loaned (Note 2) 57,206,916 Fund shares redeemed 668,713 Accrued expenses and other liabilities 97,140 ---------- TOTAL LIABILITIES 58,825,403 ------------ NET ASSETS $271,345,585 ============ Net Assets represented by: (Note 2) Additional paid-in capital $252,240,342 Accumulated undistributed net investment income 38,706 Accumulated net realized gain on investment transactions 6,266,485 Net unrealized appreciation of investments 12,800,052 ------------ NET ASSETS $271,345,585 ============ NET ASSET VALUE PER SHARE Class A Shares $ 19.42 Class B Shares $ 19.40 Class Y Shares $ 19.69 OFFERING PRICE PER SHARE Class A Shares $ 20.60(a) Class B Shares $ 19.40 Class Y Shares $ 19.69 SHARES OUTSTANDING Class A Shares 6,112,024 Class B Shares 7,869,390 Class Y Shares 58
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) INVESTMENT INCOME Dividends (b) $ 1,797,684 Interest 3,300,603 ----------- TOTAL INVESTMENT INCOME (NOTE 2) 5,098,287 EXPENSES Management fee (Note 3) $ 984,781 Distribution fee (Note 3) 571,335 Shareholder service fee (Note 5) 328,259 Transfer agent fee (Note 3) 197,877 Administration fee (Note 4) 131,304 Custodian and accounting fees (Note 3) 33,039 Shareholder reports and postage expenses 30,827 Registration expenses 29,662 Legal fees 6,223 Audit fees 4,375 Directors' fees and expenses 3,232 Miscellaneous 5,462 --------- Total expenses 2,326,376 ----------- NET INVESTMENT INCOME 2,771,911 ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments (Note 2) 8,229,407 Change in unrealized appreciation (depreciation) on investments 2,100,645 --------- NET GAIN ON INVESTMENTS 10,330,052 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $13,101,963 ===========
(b) Net of withholding taxes of $18,656. SEE NOTES TO FINANCIAL STATEMENTS. 40 MENTOR INCOME AND GROWTH PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED 3/31/99 YEAR ENDED (UNAUDITED) 9/30/98 NET INCREASE IN NET ASSETS Operations Net investment income $ 2,771,911 $ 4,930,518 Net realized gain on investments 8,229,407 10,845,766 Change in unrealized appreciation (depreciation) on investments 2,100,645 (5,423,416) ------------- ------------- Increase in net assets resulting from operations 13,101,963 10,352,868 ------------- ------------- Distributions to Shareholders From net investment income Class A (1,406,404) (2,350,498) Class B (1,418,753) (2,488,039) Class Y -- (29) From net realized gain on investments Class A (4,931,050) (5,325,307) Class B (7,246,255) (8,807,307) Class Y (54) (1) ------------- --------------- Total distributions to shareholders (15,002,516) (18,971,181) ------------- -------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 40,262,800 101,090,596 Reinvested distributions 14,251,560 17,902,342 Shares redeemed (23,909,198) (39,059,107) ------------- -------------- Change in net assets resulting from capital share transactions 30,605,162 79,933,831 ------------- -------------- Increase in net assets 28,704,609 71,315,518 Net Assets Beginning of period 242,640,976 171,325,458 ------------- -------------- End of period (including accumulated undistributed net investment income of $38,706 and $91,952, respectively) $ 271,345,585 $242,640,976 ============= ==============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
SIX MONTHS YEAR ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 19.54 $ 20.60 --------- ------- Income from investment operations Net investment income 0.24 0.51 Net realized and unrealized gain on investments 0.86 0.60 --------- ------- Total from investment operations 1.10 1.11 --------- ------- Less distributions From net investment income (0.24) (0.51) From net realized capital gain (0.98) (1.66) --------- ------- Total distributions (1.22) (2.17) --------- ------- Net asset value, end of period $ 19.42 $ 19.54 ========= ======= TOTAL RETURN* 5.73% 5.81% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 118,711 $98,794 Ratio of expenses to average net assets 1.34%(a) 1.32% Ratio of net investment income to average net assets 2.54%(a) 2.70% Portfolio turnover rate 28% 40% YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 19.16 $ 17.13 $ 15.27 $ 14.88 ------- ------- ------- ------- Income from investment operations Net investment income 0.44 0.37 0.40 0.31 Net realized and unrealized gain on investments 3.39 2.75 2.14 0.64 ------- ------- ------- ------- Total from investment operations 3.83 3.12 2.54 0.95 ------- ------- ------- ------- Less distributions From net investment income (0.47) (0.35) (0.43) (0.30) From net realized capital gain (1.92) (0.74) (0.25) (0.26) ------- ------- ------- ------- Total distributions (2.39) (1.09) (0.68) (0.56) ------- ------- ------- ------- Net asset value, end of period $ 20.60 $ 19.16 $ 17.13 $ 15.27 ======= ======= ======= ======= TOTAL RETURN* 22.11% 19.13% 17.24% 6.54% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $63,509 $24,210 $19,888 $17,773 Ratio of expenses to average net assets 1.35% 1.36% 1.69% 1.75% Ratio of net investment income to average net assets 2.63% 2.08% 2.53% 2.20% Portfolio turnover rate 75% 72% 62% 78%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 41 MENTOR INCOME AND GROWTH PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
SIX MONTHS ENDED YEAR YEAR YEAR YEAR YEAR 3/31/99 ENDED ENDED ENDED ENDED ENDED (UNAUDITED) 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 $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91 -------- ------- ------- ------- ------- ------- Income from investment operations Net investment income 0.17 0.37 0.34 0.23 0.28 0.21 Net realized and unrealized gain on investments 0.86 0.59 3.35 2.76 2.14 0.61 -------- ------- ------- ------- ------- ------- Total from investment operations 1.03 0.96 3.69 2.99 2.42 0.82 -------- ------- ------- ------- ------- ------- Less distributions From net investment income (0.18) (0.36) (0.36) (0.21) (0.31) (0.19) From net realized capital gain (0.98) (1.66) (1.92) (0.74) (0.25) (0.26) -------- -------- -------- ------- ------- ------- Total distributions (1.16) (2.02) (2.28) (0.95) (0.56) (0.45) -------- -------- -------- ------- ------- ------- Net asset value, end of period $ 19.40 $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28 ======== ======== ======== ======= ======= ======= TOTAL RETURN 5.36% 5.01% 21.24% 18.26% 16.32% 5.66% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $152,634 $143,846 $107,816 $66,548 $46,678 $43,219 Ratio of expenses to average net assets 2.08%(a) 2.07% 2.10% 2.13% 2.43% 2.44% Ratio of net investment income to average net assets 1.79%(a) 1.95% 1.87% 1.32% 1.78% 1.51% Portfolio turnover rate 28% 40% 75% 72% 62% 78%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. CLASS Y SHARES
SIX MONTHS ENDED 3/31/99 PERIOD ENDED (UNAUDITED) 9/30/98 (c) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 19.54 $ 18.75 -------- -------- Income from investment operations Net investment income 0.24 0.54 Net realized and unrealized gain on investments 0.89 0.82 -------- -------- Total from investment operations 1.13 1.36 -------- -------- Less distributions From net investment income -- (0.54) From net realized capital gain (0.98) (0.03) -------- -------- Total distributions (0.98) (0.57) -------- -------- Net asset value, end of period $ 19.69 $ 19.54 ======== ======== TOTAL RETURN 5.89% 7.29% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 1 Ratio of expenses to average net assets 1.07%(a) 1.07%(a) Ratio of net investment income to average net assets 2.54%(a) 3.15%(a) Portfolio turnover rate 28% 40%
(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. 42 MENTOR BALANCED PORTFOLIO MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- MARKET REVIEW What was once a great bull market powered by strong earnings and declining inflation expectations has become an emotionally-charged environment where fundamental considerations are giving way to price momentum and speculation on a historic scale. As we have commented on repeatedly, most of the "action" has narrowed to a fairly limited group of stocks -- the mega-sized blue chip growth stocks and Internet concepts, both of which have been in the spotlight for quite a while. While the S&P 500 has returned 18% over the past twelve months, about 60% of the stocks in the index have actually DECLINED over the same period and the largest 50 stocks in the index are up an average 47%. Several thoughtful observers including Warren Buffett, Bill Gates, and Alan Greenspan have warned about these valuations, but most consider their rhetoric out-of-date. The performances, and particularly the valuations, of most Internet stocks are beyond adequate description. We never imagined we would see this level of speculation. Companies that were conceptualized less than two years ago and organized less than one year ago have since gone public with multi-billion dollar market values on minuscule revenues, income losses, and vague plans. The enticement of apparently easy gains in the obvious stocks that continue to go up without pause is incredible, but we know temptation is a deadly investment platform. Treasury rates increased sharply during the six-month period ending March 31, 1999, with the 2-year note climbing 71 basis points (0.71%) to 4.98% and the long bond rising 66 basis points (0.66%) to 5.62%. The market sold off in reaction to much stronger than anticipated economic growth during both the final quarter of 1998 and the first quarter of 1999. Indeed, economic growth in the final quarter of 1998 surged more than 6.0% on an annualized basis. Despite turmoil in financial markets and in Brazil, the much-anticipated slowdown in U.S. economic growth has yet to materialize and the economy has continued its robust growth into 1999. MANAGEMENT STRATEGY We are increasingly comfortable with our current holdings. Our equity investments are substantial companies with average estimated earnings growth of 14-15% this quarter and year. These stocks trade at an average P/E ratio of 21.5 times estimated 1999 earnings-per-share, about 20% below the S&P 500's valuation, despite our belief that their outlooks are better than average. During the first quarter economic data has painted an ever-clearer picture of a robust U.S. economy. Consequently, we have cut back on the duration of our fixed-income holdings to approximately neutral levels and sector allocations have been tilted toward spread product. Mortgage-backed securities have been particularly emphasized given their high yield and strong performance potential in a stable to rising rate environment. The stronger economic growth also prompted us to increase allocation to lower rated corporate bonds, including high yield securities. PERFORMANCE DISCUSSION For the six-month period ending March 31, 1999 the Mentor Balanced Portfolio A shares returned 11.93% compared to 15.74% for our 60% S&P500/40% Lehman Brothers Aggregate Bond Index benchmark. Our "quality-growth-at-a- reasonable-price" equity investment philosophy and 43 MENTOR BALANCED PORTFOLIO MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- strategy are clearly out of sync with prevailing sentiment. Our recent under-performance mostly reflects lack of exposure to today's most popular stocks, not fundamental disappointments in our holdings. Our asset allocation weighting between stocks, bonds, and cash remains a conservative 52%, 46%, and 2%. MARKET OUTLOOK We have no idea how the stock market will progress over the remainder of the year. The economy appears to be in remarkably good shape with solid growth and low inflation likely to continue. It is very possible that current trends may grow even more extreme. At some point the speculative excess building today will be quashed. We have no idea when or what the catalyst may be, but it will certainly seem obvious when we look back. Between now and then the market could experience some significant volatility. Our singular goal is to get through this highly unusual period with our discipline intact, as we know most others will not. Our long-term fixed-income market outlook is for continued declines in inflation and therefore continued lower interest rates. This optimism is fueled by structural economic changes such as the Internet that offer the potential to substantially increase economic efficiency and reduce costs. In addition, slowing global economic growth and excess manufacturing capacity will continue to moderate price levels and therefore interest rates. As the summer wears on, we expect that stumbling growth in Europe and Latin America will exert significant pressure on the U.S. economy. This pressure on domestic economic growth and global inflation should allow bond prices to rally. We anticipate reducing our exposure to mortgages and corporate bonds at that time and aggressively extending portfolio durations. 44 MENTOR BALANCED PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Balanced Portfolio Class A, Class B and Class Y Shares, the S&P 500 and the Lehman Brothers Aggregate Bond Index.+
Class A Shares Class B Shares Class Y Shares S&P 500 6/21/94 10000 10000 10000 10000 12/31/94 9182 10108 9182 10335 6/30/95 10503 11561 10503 12055 9/30/95 10978 12085 10978 12723 9/30/96 12954 14260 12954 14505 9/30/97 16396 18048 16396 18499 9/30/98 18340 20181 18340 20462 3/31/99 20527 22429 20461 23683
Average Annual Returns as of 3/31/99 Without Sales Charges 1-Year Since Inception+++ Class B 9.62% 18.54% Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year Since Inception+++ Class A 3.56% 14.81% Class B 6.15% 18.43% Average Annual Returns as of 3/31/99 Without Sales Charges 1-Year Since Inception+++ Class Y 9.55% 18.52% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. + The Standard & Poor's Index (S&P 500) is an unmanaged, market- value-weighted index of 500 widely held domestic common stocks. An unmanaged index does not reflect expenses and may not correspond to the performance of a managed portfolio in which expenses are incurred. The Lehman Brothers Aggregate Index is made up of the Government/Corporate Index, the Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are adjusted to reflect reinvestment of interest and dividends on securities in the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. This index represents an asset allocation of 60% S&P 500 stocks and 40% Lehman Brothers Aggregate Bond Index. ~ Represents a hypothetical investment of $10,000 in Mentor Balanced Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the five-year period following the date of purchase. The value of Class B Shares reflects a redemption fee in effect at the end of each of the stated periods. Prior to September 16, 1998, contingent deferred sales charges of 5.00% were waived. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. * Represents a hypothetical investment of $10,000 in Mentor Balanced Portfolio Class A Shares after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charge). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. ** Represents a hypothetical investment of $10,000 in Mentor Balanced Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred slaes charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Balanced Portfolio Class A, Class B and Class Y Shares from the date of commencement of operations on 6/21/94 through 3/31/99. 45 MENTOR BALANCED PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES MARKET VALUE COMMON STOCKS - 51.78% BASIC MATERIALS - 2.76% Bemis Company 91,062 $2,828,614 Sherwin-Williams Company 234,985 6,608,953 ---------- 9,437,567 ---------- CAPITAL GOODS & CONSTRUCTION - 5.33% Emerson Electric Company 116,190 6,150,808 Illinois Tool Works 109,135 6,752,728 W. W. Grainger, Inc. 122,530 5,276,448 ---------- 18,179,984 ---------- CONSUMER CYCLICAL - 7.76% Chancellor Media Corporation - Class A * 129,600 6,107,400 Interpublic Group Companies, Inc. 87,335 6,801,213 Newell-Rubbermaid, Inc. 159,594 7,580,730 Royal Caribbean Cruises Limited 91,900 3,584,100 The Walt Disney Company 39,000 1,213,875 Tribune Company 18,300 1,197,506 ---------- 26,484,824 ---------- CONSUMER STAPLES - 1.86% Sysco Corporation 240,935 6,339,602 ---------- FINANCIAL - 9.00% American Express Company 36,860 4,331,050 Charter One Financial, Inc. 97,872 2,826,054 Citigroup, Inc. 45,300 2,893,537 Federal National Mortgage Association 52,910 3,664,018 M & T Bank Corporation 2,901 1,389,579 Marsh & McLennan 14,700 1,090,556 North Fork Bancorporation 111,750 2,360,719 SouthTrust Corporation 141,500 5,279,719 Washington Mutual, Inc. 70,880 2,897,220 Wells Fargo Company 113,495 3,979,418 ---------- 30,711,870 ---------- HEALTH - 5.95% Bristol-Myers Squibb Company 108,890 7,002,988 Johnson & Johnson 80,205 7,514,206 Tenet Healthcare Corporation * 304,970 5,775,369 ---------- 20,292,563 ---------- TECHNOLOGY - 11.89% Automatic Data Processing 167,800 6,942,725 Computer Sciences Corporation * 107,645 5,940,658 MCI WorldCom, Inc. * 54,585 4,834,184 Sun Microsystems, Inc. * 74,925 9,360,942
SHARES OR PRINCIPAL AMOUNT MARKET VALUE COMMON STOCKS (CONTINUED) TECHNOLOGY (CONTINUED) SunGard Data Systems, Inc.* 184,100 $ 7,364,000 Xerox Corporation 114,650 6,119,444 ----------- 40,561,953 ----------- TRANSPORTATION & SERVICES - 0.80% Werner Enterprises, Inc. 174,272 2,744,784 ----------- UTILITIES - 1.69% MediaOne Group * 91,000 5,778,500 ----------- MISCELLANEOUS - 4.74% Omnicom Group, Inc. 24,800 1,982,450 Tyco International, Inc. 104,145 7,472,404 UNUM Corporation 141,620 6,735,801 ----------- 16,190,655 ----------- TOTAL COMMON STOCKS (COST $161,484,581) 176,722,302 ----------- FIXED INCOME SECURITIES - 40.04% U.S. GOVERNMENT SECURITIES AND AGENCIES - 32.05% Federal Home Loan Bank 4.97%, 2/01/01 $2,000,000 1,989,272 Federal National Mortgage Association 4.63% - 6.64%, 10/15/01 - 7/02/07 1,480,000 1,463,992 Government National Mortgage Association 6.50%, 5/15/09 89,637 91,121 U.S. Treasury Notes 4.75% - 6.63%, 2/28/02 - 11/15/08 21,992,000 22,144,232 U.S. Treasury Bonds 4.25% - 7.50%, 11/15/03 - 8/15/28 78,098,000 83,682,925 ----------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $101,957,708) 109,371,542 ----------- COLLATERALIZED MORTGAGE OBLIGATIONS - 0.87% AFG Receivables Trust, 6.65%, 10/15/02 23,927 24,001 Capital One Master Trust Series 1998-4, 5.43%, 1/15/07 125,000 122,957 CS First Boston, 7.18%, 2/25/18 25,000 25,108 Equifax Credit Corporation, 6.33%, 1/15/22 900,000 902,392
46 MENTOR BALANCED PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
SHARES OR PRINCIPAL AMOUNT MARKET VALUE COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) Key Auto Finance Trust Series 1999-1, 5.63%, 7/15/03 $1,500,000 $ 1,500,288 Key Auto Finance Trust Series 1997-2 6.10%, 11/15/00 29,219 29,245 PNC Student Loan Trust, 6.73%, 1/25/07 75,000 77,993 Union Acceptance Corporation Series 97A, 6.48%, 5/10/04 45,000 45,486 Union Acceptance Corporation 5.75%, 6/09/03 250,000 249,119 ------------ TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $2,978,346) 2,976,589 ------------ CORPORATE BONDS - 7.12% Associates Corporation, 6.25%, 11/01/08 1,500,000 1,508,504 Continental Airlines, Inc., 7.46%, 4/01/15 1,711,944 1,818,085 Dayton Hudson Company, 6.65%, 8/01/28 1,700,000 1,660,278 Discover Series 1998-7, 5.60%, 5/15/06 125,000 123,545 Enron Corporation, 6.73%, 11/17/08 1,000,000 1,006,879 Ford Motor Credit Company, 5.80%, 1/12/09 1,250,000 1,211,687 General Electric Capital Corporation, 6.29%, 12/15/07 300,000 302,721 Georgia Power Company, 5.50% - 6.00%, 3/01/00 - 12/01/05 2,500,000 2,457,390 GTE California, 5.50%, 1/15/09 1,515,000 1,447,826 GTE North, Inc., 5.65%, 11/15/08 1,500,000 1,450,421 Household Financial Company, 5.88%, 2/01/09 800,000 768,552 IBM Corporation, 5.10%, 11/10/03 1,000,000 967,183
SHARES OR PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) Merrill Lynch & Company, 6.00%, 2/17/09 $1,250,000 $ 1,208,559 National City Corporation, 5.75%, 2/01/09 800,000 769,479 National Rural Utilities, 5.50%, 1/15/05 1,300,000 1,271,409 Norwest Corporation, 6.80%, 5/15/02 60,000 61,747 Pepsi Bottling Holdings, Inc., 5.63%, 2/17/09 1,800,000 1,735,674 PSI Energy, Inc., 6.00%, 12/14/01 1,000,000 987,764 Safeway, Inc., 5.75% - 6.50%, 11/15/00 - 11/15/08 1,650,000 1,670,989 SmithKline Beechum, 6.63%, 10/01/01 330,000 338,762 Sprint Capital Corporation, 6.13%, 11/15/08 1,450,000 1,427,457 Toyota Motor Credit, 5.63%, 11/13/03 100,000 99,215 ------------ TOTAL CORPORATE BONDS (COST $24,650,350) 24,294,126 ------------ TOTAL FIXED INCOME SECURITIES (COST $129,586,404) 136,642,257 ------------ SHORT-TERM INVESTMENT - 6.14% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/99, 4.95%, due 4/01/99, collateralized by $33,830,000 Federal Home Loan Mortgage Corporation, 7.50%, 11/01/27, market value $21,376,682 (cost $20,936,014) 20,936,014 20,936,014 ------------ TOTAL INVESTMENTS (COST $312,006,999)-97.96% 334,300,573 OTHER ASSETS LESS LIABILITIES - 2.04% 6,992,993 ------------ NET ASSETS - 100.00% $341,293,566 ============
* Non-income producing. 47 MENTOR BALANCED PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $350,988,737 and $74,148,245, respectively. INCOME TAX INFORMATION At March 31, 1999, the aggregated cost of investment securities for federal income tax purposes was $312,006,999. Net unrealized appreciation aggregated $22,293,574, of which $30,714,052 related to appreciated investment securities and $8,420,478 related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 48 MENTOR BALANCED PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (UNAUDITED) ASSETS Investments, at market value (Note 2) Investment securities $313,364,559 Repurchase agreements 20,936,014 ------------ Total investments (cost $312,006,999) 334,300,573 Collateral for securities loaned (Note 2) 87,189,594 Receivables Investments sold 1,002,666 Fund shares sold 4,851,369 Dividends and interest 2,689,063 Variation margin (Note 2) 366,563 Other 2,495 Prepaid expense 140,000 ------------ TOTAL ASSETS 430,542,323 ------------ LIABILITIES Investments purchased $1,514,077 Securities loaned (Note 2) 87,189,594 Fund shares redeemed 535,285 Accrued expenses and other liabilities 9,801 ---------- TOTAL LIABILITIES 89,248,757 ------------ NET ASSETS $341,293,566 ============ Net Assets represented by: (Note 2) Additional paid-in capital $312,761,476 Accumulated undistributed net investment loss (210,671) Accumulated net realized gain on investment transactions 3,689,030 Net unrealized appreciation of investments 25,053,731 ------------ NET ASSETS $341,293,566 ============ NET ASSET VALUE PER SHARE Class A Shares $ 15.17 Class B Shares $ 15.16 Class Y Shares $ 15.16 OFFERING PRICE PER SHARE Class A Shares $ 16.10(a) Class B Shares $ 15.16 Class Y Shares $ 15.16 SHARES OUTSTANDING Class A Shares 7,538,584 Class B Shares 14,958,738 Class Y Shares 13,189
(a) Computation of offering price: 100/94.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) INVESTMENT INCOME Dividends $ 810,724 Interest net of premium 2,879,894 ----------- TOTAL INVESTMENT INCOME (NOTE 2) 3,690,618 EXPENSES Management fee (Note 4) $ 871,032 Distribution fee (Note 5) 631,992 Shareholder service fee (Note 5) 288,984 Transfer agent fee 169,791 Administration fee (Note 4) 116,138 Registration expenses 55,851 Shareholder reports and postage expenses 52,503 Custodian and accounting fees 39,139 Legal fees 5,855 Audit fees 4,116 Directors' fees and expenses 3,041 Miscellaneous 5,139 ---------- Total expenses 2,243,581 ----------- NET INVESTMENT INCOME 1,447,037 ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments (Note 2) 4,564,399 Change in unrealized appreciation (depreciation) on investments 24,850,706 ---------- NET GAIN ON INVESTMENTS 29,415,105 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $30,862,142 ===========
SEE NOTES TO FINANCIAL STATEMENTS. 49 MENTOR BALANCED PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED 3/31/99 YEAR ENDED (UNAUDITED) 9/30/98 NET INCREASE IN NET ASSETS Operations Net investment income $ 1,447,037 $ 110,202 Net realized gain on investments 4,564,399 822,291 Change in unrealized appreciation (depreciation) on investments 24,850,706 (583,942) ------------- ------------ Increase in net assets resulting from operations 30,862,142 348,551 ------------- ------------ Distributions to Shareholders From net investment income Class A (630,596) -- Class B (1,044,583) -- Class Y (788) (159,807) From net realized gain on investments Class A (207,511) -- Class B (736,229) -- Class Y (655) (1,140,442) ------------- ------------ Total distributions to shareholders (2,620,362) (1,300,249) ------------- ------------ Capital Share Transactions (Note 7) Proceeds from sale of shares 327,679,217 9,280,672 Reinvested distributions 2,518,683 1,300,249 Shares redeemed (29,967,087) (910,125) ------------- ------------ Change in net assets resulting from capital share transactions 300,230,813 9,670,796 ------------- ------------ Increase in net assets 328,472,593 8,719,098 Net Assets Beginning of period 12,820,973 4,101,875 ------------- ------------ End of period (including accumulated undistributed net investement income of ($210,671) and $18,259, respectively) $ 341,293,566 $ 12,820,973 ============= ============
SEE NOTES TO FINANCIAL STATEMENTS. 50 MENTOR BALANCED PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS A SHARES (B)
SIX MONTHS YEAR YEAR ENDED 3/31/99 ENDED ENDED (UNAUDITED) 9/30/98 9/30/97 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 13.69 $ 17.61 $ 16.28 --------- ------- ------- Income from investment operations Net investment income 0.04 0.47 0.43 Net realized and unrealized gain (loss) on investments 1.59 1.41 3.35 --------- ------- ------- Total from investment operations 1.63 1.88 3.78 --------- ------- ------- Less distributions From net investment income ( 0.10) ( 0.71) ( 0.43) From net realized capital gain ( 0.05) ( 5.09) ( 2.02) --------- -------- -------- Total distributions ( 0.15) ( 5.80) ( 2.45) --------- -------- -------- Net asset value, end of period $ 15.17 $ 13.69 $ 17.61 ========= ======== ======== TOTAL RETURN* 11.93% 11.86% 26.09% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 114,384 $ 3,534 $ 4,102 Ratio of expenses to average net assets 1.37%(a) 0.36% 0.50% Ratio of expenses to average net assets excluding waiver 1.37%(a) 1.56% 2.13% Ratio of net investment income to average net assets 1.75%(a) 1.99% 2.78% Portfolio turnover rate 35% 89% 80% YEAR PERIOD PERIOD ENDED ENDED ENDED 9/30/96 9/30/95 (C) 12/31/94 (D) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 14.85 $ 12.44 $ 12.50 ------- --------- --------- Income from investment operations Net investment income 0.42 0.36 0.22 Net realized and unrealized gain (loss) on investments 2.09 2.08 ( 0.09) ------- --------- --------- Total from investment operations 2.51 2.44 0.13 ------- --------- --------- Less distributions From net investment income ( 0.48) ( 0.03) ( 0.19) From net realized capital gain ( 0.60) -- -- -------- --------- --------- Total distributions ( 1.08) ( 0.03) ( 0.19) -------- --------- --------- Net asset value, end of period $ 16.28 $ 14.85 $ 12.44 ======== ========= ========= TOTAL RETURN* 18.00% 19.28% 1.00% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 3,825 $ 3,210 $ 2,911 Ratio of expenses to average net assets 0.50% 0.50%(a) 0.50%(a) Ratio of expenses to average net assets excluding waiver 2.06% 2.12%(a) 2.72%(a) Ratio of net investment income to average net assets 2.83% 3.26%(a) 3.32%(a) Portfolio turnover rate 103% 65% 71%
(a) Annualized. (b) Prior to September 16, 1998, all shareholders of the Balanced Portfolio were Class A shareholders. On September 16, 1998, shares of Class A were converted to Class Y shares. (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. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS B SHARES
SIX MONTHS PERIOD ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 (E) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 13.69 $ 13.69 -------- -------- Income from investment operations Net investment income 0.06 -- Net realized and unrealized gain on investments 1.53 -- -------- -------- Total from investment operations 1.59 -- -------- -------- Less distributions From net investment income ( 0.07) -- From net realized capital gain ( 0.05) -- -------- -------- Total distributions ( 0.12) -- -------- -------- Net asset value, end of period $ 15.16 $ 13.69 ======== ======== TOTAL RETURN* 11.63% 0.00% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $226,710 $ 5,645 Ratio of expenses to average net assets 2.12%(a) 1.50%(a) Ratio of expenses to average net assets excluding waiver 2.12%(a) 1.50%(a) Ratio of net investment income to average net assets 0.99%(a) 0.42%(a) Portfolio turnover rate 35% 89%
(a) Annualized. (e) For the period from September 16, 1998 (initial offering of Class B) to September 30, 1998. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 51 MENTOR BALANCED PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS Y SHARES (G)
SIX MONTHS PERIOD ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 (F) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 13.69 $ 13.69 -------- --------- Income from investment operations Net investment income 0.97 0.01 Net realized and unrealized gain (loss) on investments 0.61 ( 0.01) -------- --------- Total from investment operations 1.58 -- -------- --------- Less distributions From net investment income ( 0.06) -- From net realized capital gain ( 0.05) -- -------- --------- Total distributions ( 0.11) -- -------- --------- Net asset value, end of period $ 15.16 $ 13.69 ======== ========= TOTAL RETURN* 11.57% 0.00% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 200 $ 3,642 Ratio of expenses to average net assets 1.12%(a) 1.10% (a) Ratio of net investment income to average net assets 1.75%(a) 2.32% (a) Portfolio turnover rate 35% 89%
(a) Annualized. (f) For the period from September 16, 1998 (initial offering of Class Y) to September 30, 1998. (g) Prior to September 16, 1998, all shareholders of the Balanced Portfolio were Class A shareholders. On September 16, 1998, shares of Class A were converted to Class Y shares. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMSNTS. 52 MENTOR MUNICIPAL INCOME PORTFOLIO MANAGERS' COMMENTARY: THE MUNICIPAL INCOME PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- MARKET REVIEW Although most of the financial markets experienced significant volatility over the six-month period ending March 31, 1999 the municipal market remained relatively stable. For the majority of the six months, long-term municipal bond yields stayed within a range of 5.20 to 5.40 percent, even as the Federal Reserve cut interest rates and the 30-year U.S. Treasury bond reached its lowest yield on record. In large part, this stability in tax-exempt rates can be attributed to the municipal market's isolation from turbulence abroad. Concerns about the financial conditions in Asia and Latin America hurt the stock and high-yield bond markets last fall, but had little effect on municipals. The positive domestic economic and market conditions encouraged more municipalities to take advantage of low interest rates and issue new bonds. In 1998, we experienced the second-highest level of municipal issuance in history. Although the volume of municipal debt increased, the credit quality of most issuers was not compromised -- in fact, it improved as the positive economic environment led to stronger balance sheets. As a result, we saw a larger number of issuers financing special growth and expansion projects, as opposed to using municipal bonds to finance their regular operations. The proportion of higher-yielding municipal bonds also increased during the period as the percentage of insured bonds declined slightly. Because bond insurers tightened their underwriting criteria, more issuers came to market without insurance. As a result, these bonds offered higher yields to compensate investors for the increased credit risk. This benefited the Portfolio because it allowed our experienced research staff to seek out those higher-yielding bonds that we felt had strong underlying quality. Toward the end of 1998, the yields on 30-year insured municipal bonds and comparable U.S. Treasury bonds were equal -- something that rarely occurs. Typically, investment-grade municipal bonds offer about 80 to 90 percent as much yield as comparable Treasury bonds because their interest payments are exempt from federal income taxes. However, as Treasury yields fell and municipal yields remained stable during the reporting period, the yield difference between the two types of bonds compressed and municipal yields became very attractive. Early in 1999, investors realized the tremendous opportunities available in the municipal market, and demand for municipals began to increase. In conjunction with a recent slowdown in supply, this boost in municipal demand pushed the municipal-to-Treasury yield ratio back to more traditional but still attractive levels. MANAGEMENT STRATEGY During the reporting period, we focused on the insured sector of the market, increasing our exposure to triple-A rated securities by nearly five percent. Although the percentage of insured issuance dropped slightly, we found a good selection of securities from which to choose. We also selectively purchased several positions of non-rated and lower-rated securities that help support the Portfolio's dividend. Regarding specific sector exposure, we have become more cautious with respect to health care and the electric utility industries. Although many health care bonds remain attractive, the challenges imposed by managed care and changing Medicare 53 MENTOR MUNICIPAL INCOME PORTFOLIO MANAGERS' COMMENTARY: THE MUNICIPAL INCOME PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- reimbursement policies have put financial pressures on an increasing number of medical facilities. Due to deregulation as well as problems at specific utility plants, this sector is also experiencing some weakness. As a result, we are modestly decreasing our exposure to both sectors. Many purchases were bonds with maturities in the intermediate range of the yield curve as we felt they offered the most value compared to other maturity ranges. By purchasing securities in the 10 to 20 year maturity range rather than longer term securities, we were able to add almost as much yield with significantly less volatility. We also looked for areas of the municipal marketplace where a heavy issuance caused bond prices to be temporarily reduced. For example, smaller states often do not have enough instate demand to absorb a large volume of new bond issuance immediately. We took advantage of those situations to purchase bonds at what we felt were below-market prices and then sold them when prices had risen. PERFORMANCE REVIEW For the six-month period ending March 31, 1999 the Mentor Municipal Income Portfolio A shares returned 0.52% compared to 1.49% for its Lehman Brothers Municipal Bond Index benchmark. MARKET OUTLOOK Strong economic performance continues to bolster the credit conditions of municipal issuers -- a trend we expect to continue. As we mentioned earlier, economic strength has made issuers more likely to issue debt for special projects rather than for general operating financing. We believe that as long as municipalities remain economically healthy, this situation is likely to continue. Although insured debt has been increasing in recent years, we have started to see a reversal of this trend, as municipal bond insurers have become more cautious. If, as anticipated, this caution continues, credit spreads may widen as the proportion of higher-yielding uninsured bonds increases. Inflation remains low, so we don't foresee any significant increase in interest rates in the near term -- a favorable situation for bond prices. Because we don't expect interest rates to rise in the near term, we believe the supply of municipal debt will be lower than last year's, helping to restore the price relationship between municipals and Treasuries to more traditional levels. Finally, we see the potential for changes in traditional economic activity toward the end of the year because of investor concerns about the Year 2000 computer problem. These temporary concerns, however, may result in attractive investment opportunities that our research staff can explore to uncover value. 54 MENTOR MUNICIPAL INCOME PORTFOLIO MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 purchase in Mentor Municipal Income Portfolio Class A and Class B Shares and Lehman Municipal Bond Index.- [GRAPH]
4/29/92 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99 Class A Shares(double dagger) 9,525 10,034 11,637 11,101 12,151 12,935 14,085 15,245 15,324 Class B Shares(dagger) 10,000 10,528 12,134 11,511 12,348 13,184 14,291 15,289 15,338 Lehman Municipal Bond Index~ 10,000 10,561 11,906 11,616 12,916 13,818 14,933 16,232 16,475
Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year 5-Year Since Inception* Class A (0.33%) 5.89% 6.36% Class B 3.10% 6.38% 6.58% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of interests on securities in the index. The Lehman Municipal Bond Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Municipal Income Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. The value of Class B Shares reflects a redemption fee in effect at the end of each stated periods. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. ++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income Portfolio Class A Shares, after deducting the maximum sales charge of 4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. * Reflects operations of Mentor Municipal Income Portfolio Class A and Class B Shares from the date of commencement of operations on 4/29/92 through 3/31/99. Comparison of change in value of a hypothetical $10,000 purchase in Mentor Municipal Income Portfolio Class Y Shares and Lehman Municipal Bond Index.- [GRAPH]
11/19/97 12/31/97 3/31/98 6/30/98 9/30/98 3/31/99 Class Y Shares(triple dagger) 10,000 10,147 10,263 10,390 10,689 10,763 Lehman Municipal Bond Index~ 10,000 10,206 10,323 10,490 10,802 10,963
Total Returns as of 3/31/99 1-Year Since Inception* Class Y 4.87% 6.00% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. - The Lehman Municipal Bond Index is adjusted to reflect reinvestment of interests on securities in the index. The Lehman Municipal Bond Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. +++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ** Reflects operations of Mentor Municipal Income Portfolio Class Y Shares from the date of issuance on 11/19/97 through 3/31/99. 55 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES - 98.38% ALABAMA - 6.15% Birmingham, Alabama Water & Sewer Revenue, 4.75%, 1/01/29 $1,000,000 $ 930,030 Montgomery, Alabama Special Care Facilities, 5.00%, 11/15/25 7,500,000 7,221,000 ---------- 8,151,030 ---------- ARIZONA - 1.20% Pima County, Arizona IDA, 7.25%, 7/15/10 1,430,000 1,582,939 ---------- CALIFORNIA - 6.44% Alameda Corridor Transportation, (effective yield-1.00%) (a), 10/01/30 2,000,000 389,360 California Statewide Community Development Authority, 5.63%, 10/01/34 2,070,000 2,125,662 Carson Improvement Board Act 1915, Special Assessment District 1992, 7.38%, 9/02/22 700,000 758,835 East Bay Municipal Utility District, 4.75%, 6/01/21 1,915,000 1,840,009 Orange County Community Facilities District Series A, 7.35%, 8/15/18 300,000 341,706 San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,101,110 University of California Revenue, 4.75%, 9/01/16 2,000,000 1,977,740 ---------- 8,534,422 ---------- COLORADO - 2.61% Colorado Housing Authority, 7.00%, 11/01/24 475,000 514,083 Denver City & County Airport Revenue, 7.75% - 8.50%, 11/15/13 - 11/15/23 2,555,000 2,938,480 ---------- 3,452,563 ---------- CONNECTICUT - 0.82% Connecticut State Development Authority, 6.15%, 4/01/35 1,000,000 1,085,430 ---------- DISTRICT OF COLUMBIA - 0.66% Metropolitan Washington, General Airport Revenue Series A, 6.63%, 10/01/19 800,000 876,784 ---------- FLORIDA - 3.95% Governmental Utilities Authority Utility Revenue, 5.00%, 10/01/29 2,453,900 2,453,865
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) FLORIDA (CONTINUED) Hillsborough County, 6.25%, 12/01/34 $1,250,000 $1,381,988 Sarasota County Health Facilities Authority Revenue, 10.00%, 7/01/22 1,160,000 1,391,768 ---------- 5,227,621 ---------- GEORGIA - 4.11% Fulton County Georgia Housing Authority, Housing Revenue, 6.38%, 2/01/08 520,000 525,184 Fulton County Georgia Water & Sewer Revenue, 4.75%, 1/01/28 2,350,000 2,224,769 George Smith World Congress Center, 5.50%, 7/01/20 1,500,000 1,507,695 Monroe County Development Authority PCRB, 6.75%, 1/01/10 1,000,000 1,174,600 ---------- 5,432,248 ---------- ILLINOIS - 10.83% Broadview Tax Increment Revenue, 8.25%, 7/01/13 1,000,000 1,127,790 Chicago Capital Appreciation, (effective yield-2.09%) (a), 7/01/16) 2,000,000 766,520 Chicago Heights Residential Mortgage, (effective yield-3.42%) (a), 6/01/09 3,175,000 1,558,989 Chicago School Reform Board Series A, 5.50%, 12/01/26 2,000,000 2,125,480 Chicago State University Revenue, 5.50%, 12/01/23 1,000,000 1,060,800 Illinois Development Finance Authority Revenue, 5.70%, 1/01/18 1,680,000 1,822,951 Illinois Health Facilities Authority Revenue, 5.50% - 9.50%, 11/15/19 - 10/01/22 2,250,000 2,456,200 Kane County School District No. 129, 5.50%, 2/01/11 2,000,000 2,121,120 Metropolitan Pier & Exposition, (effective yield-1.44%) (a), 6/15/21 1,950,000 616,434 Saint Clair County Public Building, (effective yield-2.06%) (a), 12/01/16 1,650,000 670,807 ---------- 14,327,091 ----------
56 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) INDIANA - 2.55% Fort Wayne, Indiana Hospital Authority Revenue, 4.75%, 11/15/28 $3,250,000 $2,986,425 Indiana Transportation Finance Authority Series A, (effective yield-1.99%) (a), 6/01/17 1,000,000 394,230 ---------- 3,380,655 ---------- IOWA - 0.50% Student Loan Liquidity Corporation, Student Loan Revenue Series C, 6.95%, 3/01/06 625,000 664,888 ---------- KANSAS - 0.74% Wyandotte County Kansas City Utility Revenue, 4.30%, 9/01/10 1,000,000 981,650 ---------- KENTUCKY - 1.60% Jefferson County Hospital Revenue, 8.92%, 10/01/08 (b) 500,000 590,625 Kenton County Airport Board Revenue, 7.50%, 2/01/20 1,400,000 1,524,936 ---------- 2,115,561 ---------- LOUISIANA - 4.90% Louisiana Public Facilities Authority Revenue, Dillard University-Louisiana, 5.00%, 2/01/28 2,750,000 2,690,215 Louisiana State University & Agriculture and Mechanical College, University Revenues, 5.00%, 10/01/30 1,000,000 972,950 New Orleans, Louisiana, 4.75%, 12/01/26 3,000,000 2,821,740 ---------- 6,484,905 ---------- MAINE - 0.72% Maine State Housing Authority Series C, 6.88%, 11/15/23 885,000 959,676 ---------- MARYLAND - 0.67% Baltimore Series B, 4.25%, 10/01/09 900,000 891,360 ---------- MASSACHUSETTS - 1.59% Massachusetts State Health and Education, 6.00%, 10/01/23 1,000,000 997,450
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) MASSACHUSETTS (CONTINUED) Massachusetts State Health and Educational Facilities Authority, OID Revenue Bonds Series A, 6.88%, 4/01/22 $1,000,000 $1,106,840 ---------- 2,104,290 ---------- MICHIGAN - 0.69% Michigan State Hospital Financial Authority Revenue, 5.25%, 8/15/28 1,000,000 909,730 ---------- MINNESOTA - 0.38% Dakota County Housing & Redevelopment Authority Multifamily Housing Revenue, 6.25%, 5/01/29 500,000 500,000 ---------- MISSISSIPPI - 0.75% Municipal Facility Authority Natural Gas Project, 4.13%, 1/01/07 1,000,000 989,160 ---------- MISSOURI - 1.47% Missouri State Health & Educational Facilities Revenue, 5.00%, 5/15/28 1,000,000 960,690 Ozarks Tech Community College Project, 5.00%, 3/01/19 1,000,000 986,920 ---------- 1,947,610 ---------- NEBRASKA - 1.75% Nebraska Investment Finance Authority, SFM, 9.42%, 9/15/24 (b) 280,000 312,200 Nebraska Public Gas Agency, Gas Supply System, 5.00%, 4/01/00 1,000,000 1,014,520 Omaha Nebraska Airport Authority Revenue, 4.20%, 1/01/07 1,000,000 992,310 ---------- 2,319,030 ---------- NEVADA - 1.87% Clark County, 5.90%, 10/01/30 2,000,000 2,042,840 Henderson Local Improvement District, Special Assessment Series A, 8.50%, 11/01/12 415,000 439,755 ---------- 2,482,595 ----------
57 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) NEW JERSEY - 1.77% East Orange County Board of Education, (effective rate-1.75%) (a) 2/01/20 $1,000,000 $ 348,810 New Jersey Economic Development Authority Revenue, 6.00%, 5/15/28 1,000,000 978,380 Ocean County Utilities Authority, 4.00%, 1/01/08 1,040,000 1,022,975 --------- 2,350,165 --------- NEW MEXICO - 1.87% New Mexico State Hospital Equipment Lane Council, 5.50%, 6/01/28 1,500,000 1,469,985 Santa Fe Educational Facilities Revenue, 5.50%, 3/01/24 1,000,000 1,001,000 --------- 2,470,985 --------- NEW YORK - 5.56% Clifton Springs Hospital Refunding & Improvement, 8.00%, 1/01/20 625,000 685,462 Metropolitan Transportation Authority, 4.75%, 7/01/19 1,000,000 935,070 New York State Dormitory Authority Revenue Hospital, WYCKOFF, 5.20%, 2/15/14 1,000,000 1,013,790 New York Series H, 7.20%, 2/01/13 1,500,000 1,656,973 New York Series F - Ambac TCRS, 5.25%, 8/01/14 2,000,000 2,074,340 Suffolk County Industrial Development Agency 4.25%, 2/01/07 1,000,000 1,002,270 --------- 7,367,905 --------- NORTH CAROLINA - 1.91% North Carolina Eastern Municipal Power Agency Systems Revenue, 5.70%, 1/01/13 1,000,000 1,077,170 Sampson Area Development Corporation, 4.70%, 6/01/14 1,500,000 1,455,565 --------- 2,532,735 --------- NORTH DAKOTA - 0.74% Devils Lake Health Care, 6.10%, 10/01/23 1,000,000 983,160 --------- OHIO - 3.91% Batavia Local School District Reference, 5.63%, 12/01/22 1,000,000 1,080,980
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) OHIO (CONTINUED) Canton, Ohio Pension Reference, 4.75%, 12/01/18 $1,000,000 $ 973,140 Cleveland, Ohio, 4.50%, 10/01/12 1,015,000 996,364 Cuyahoga County Health Care Facilities, 5.50%, 12/01/28 1,000,000 985,530 Ohio University General Receipts, 4.60%, 12/01/11 1,145,000 1,142,859 --------- 5,178,873 --------- OKLAHOMA - 0.41% Oklahoma City Industrial and Cultural Facilities Trust, 6.75%, 9/15/17 540,000 546,804 --------- PENNSYLVANIA - 1.28% Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 524,605 Philadelphia Hospital and Higher Education Facilities, 6.50%, 11/15/08 1,075,000 1,171,008 --------- 1,695,613 --------- RHODE ISLAND - 0.26% West Warwick, Series A, GO Bonds, 7.30%, 7/15/08 310,000 345,002 --------- TENNESSEE - 3.62% Chattanooga, Tennessee Health Educational & Housing Facility, 5.00%, 12/01/28 1,500,000 1,440,555 Memphis Shelby County Airport Authority Special Facilities Revenue Refunding, 7.88%, 9/01/09 1,500,000 1,654,485 Metropolitan Government, Nashville & Davidson County, 4.75% - 5.00%, 1/01/22 - 10/01/28 250,000 244,900 Municipal Energy Corporation, Tennessee Gas, 4.13%, 3/01/09 1,500,000 1,455,930 --------- 4,795,870 --------- TEXAS - 9.06% Abilene Health Facilities Development Corporation, 5.90%, 11/15/25 1,000,000 966,740 Alliance Airport Authority, 6.38%, 4/01/21 2,000,000 2,161,280 Brazos Higher Education Authority Student Loan Revenue, 7.10%, 11/01/04 416,000 465,462
58 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE LONG-TERM MUNICIPAL SECURITIES (CONTINUED) TEXAS (CONTINUED) Brazos River Authority Revenue, 4.90%, 10/01/15 $2,000,000 $ 2,016,940 Dallas Fort Worth International Airport Facility Revenue Bonds, 7.25%, 11/01/30 1,000,000 1,096,770 Houston, Texas School District, 4.75%, 2/15/26 1,500,000 1,412,085 Lufkin Health Memorial East Texas, 5.70%, 2/15/28 1,000,000 994,730 Matagorda County Revenue, 5.13%, 11/01/28 2,000,000 1,978,860 Texas State Department of Housing and Community Affairs Refunding, Series C, 10.12%, 7/02/24 (b) 750,000 907,500 ----------- 12,000,367 ----------- UTAH - 2.53% Bountiful Hospital Revenue, 9.50%, 12/15/18 230,000 294,633 Intermountain Power Agency Power Supply, 5.00%, 7/01/19 2,500,000 2,463,800 Utah State Housing Finance Agency, 7.20%, 1/01/27 585,000 596,998 ----------- 3,355,431 ----------- WASHINGTON - 1.41% Central Puget Sound Water Regional Transportation, 4.75%, 2/01/28 2,000,000 1,869,000 ----------- WEST VIRGINIA - 2.96% Harrison County, 6.75%, 8/01/24 2,000,000 2,244,180 West Virginia State Hospital Finance Authority Revenue, 9.70%, 1/01/18 (b) 1,500,000 1,681,005 ----------- 3,925,185 ----------- WISCONSIN - 4.14% Southeast Wisconsin Professional Baseball, 5.50%, 12/15/26 2,000,000 2,141,080 Wisconsin State Health & Educational Facility Authority Revenues, 4.75% - 5.50%, 2/15/28 - 6/01/28 3,500,000 3,342,325 ----------- 5,483,405 ----------- TOTAL LONG-TERM MUNICIPAL SECURITIES (COST $ 125,609,460) 130,301,738 -----------
PRINCIPAL AMOUNT MARKET VALUE SHORT-TERM MUNICIPAL SECURITIES - 5.21% MISSOURI - 1.13% Kansas City, Missouri Individual Development, 5.00%, 10/15/14 (c) $1,500,000 $ 1,500,000 ------------ NEW YORK - 1.66% New York State Energy Research & Development, 5.00%, 7/01/15 (c) 1,700,000 1,700,000 City of New York A-7, 5.00%, 10/01/22 (c) 500,000 500,000 ------------ 2,200,000 ------------ TEXAS - 1.74% Harris County, Texas Health Facilities, 5.00%, 2/15/27 (c) 2,300,000 2,300,000 ------------ WASHINGTON - 0.68% Washington Health Care, Sisters of Providence Series I, 4.05%, 10/01/05 (c) 900,000 900,000 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES (COST $ 6,900,000) 6,900,000 ------------ TOTAL INVESTMENTS (COST $ 132,509,460)-103.59% 137,201,738 OTHER ASSETS LESS LIABILITIES - (3.59%) (4,751,557) ------------ NET ASSETS - 100.00% $132,450,181 ============
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) Floating Rate Securities - The rates shown are the effective rates at March 31, 1999. * Certain of these securities are used as collateral for options written contracts. 59 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- INVESTMENT TRANSACTIONS Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $90,312,688 and $68,279,000, respectively. INCOME TAX INFORMATION At March 31, 1999, the aggregated cost of investment securities for federal income tax purposes was $132,509,460. Net unrealized depreciation aggregated $4,692,278, of which $5,127,601 related to appreciated investment securities and $435,323 related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 60 MENTOR MUNICIPAL INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (UNAUDITED) ASSETS Investments, at market value (cost $132,509,460) (Note 2) $137,201,738 Cash 62,828 Receivables Fund shares sold 1,859,153 Dividends and interest 2,036,819 Variation margin (Note 2) 60,938 ------------ TOTAL ASSETS 141,221,476 ------------ LIABILITIES Payables Investments purchased $7,967,465 Fund shares redeemed 317,601 Dividends 420,673 Accrued expenses and other liabilities 65,556 ---------- TOTAL LIABILITIES 8,771,295 ------------ NET ASSETS $132,450,181 ============ Net Assets represented by: (Note 2) Additional paid-in capital $129,086,452 Accumulated distributions in excess of net investment income (329,232) Accumulated net realized loss on investment transactions (1,046,267) Net unrealized appreciation of investments 4,739,228 ------------ NET ASSETS $132,450,181 ============ NET ASSET VALUE PER SHARE Class A Shares $ 15.73 Class B Shares $ 15.69 Class Y Shares $ 16.11 OFFERING PRICE PER SHARE Class A Shares $ 16.51(a) Class B Shares $ 15.69 Class Y Shares $ 16.11 SHARES OUTSTANDING Class A Shares 4,558,605 Class B Shares 3,869,243 Class Y Shares 67
(a) Computation of offering price: 100/95.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) INVESTMENT INCOME Interest (Note 2) $3,296,816 ---------- EXPENSES Management fee (Note 4) $ 360,928 Shareholder service fee (Note 5) 150,385 Distribution fee (Note 5) 150,302 Administration fee (Note 4) 60,155 Transfer agent fee 53,330 Registration expenses 23,924 Custodian and accounting fees 21,040 Shareholder reports and postage expenses 11,834 Legal fees 2,909 Audit fees 2,045 Directors' fees and expenses 1,511 Miscellaneous 2,553 ---------- Total expenses 840,916 ---------- NET INVESTMENT INCOME 2,455,900 ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FUTURES AND OPTIONS CONTRACTS Net realized gain on investments, futures and options contracts (Note 2) 957,780 Change in unrealized appreciation (depreciation) on investments (2,882,930) ---------- NET LOSS ON INVESTMENTS, FUTURES AND OPTIONS CONTRACTS (1,925,150) ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 530,750 ==========
SEE NOTES TO FINANCIAL STATEMENTS. 61 MENTOR MUNICIPAL INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED 3/31/99 YEAR ENDED (UNAUDITED) 9/30/98 NET INCREASE IN NET ASSETS Operations Net investment income $ 2,455,900 $ 4,054,279 Net realized gain (loss) on investments, futures and options contracts 957,780 (41,138) Change in unrealized appreciation (depreciation) on investments (2,882,930) 3,077,428 ------------ ------------- Increase in net assets resulting from operations 530,750 7,090,569 ------------ ------------- Distributions to Shareholders From net investment income Class A (1,293,015) (1,979,908) Class B (1,142,196) (2,308,071) Class Y -- (43) ------------ ------------- Total distributions to shareholders (2,435,211) (4,288,022) ------------ ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 30,176,197 45,477,369 Reinvested distributions 1,362,987 2,625,084 Shares redeemed (8,293,679) (13,461,719) ------------ ------------- Change in net assets resulting from capital share transactions 23,245,505 34,640,734 ------------ ------------- Increase in net assets 21,341,044 37,443,281 Net Assets Beginning of period 111,109,137 73,665,856 ------------ ------------- End of period (including accumulated distributions in excess of net investment income of ($329,232) and ($349,922), respectively) $132,450,181 $ 111,109,137 ============ =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
SIX MONTHS ENDED YEAR 3/31/99 ENDED (UNAUDITED) 9/30/98 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 15.99 $ 15.50 --------- ------- Income from investment operations Net investment income 0.35 0.66 Net realized and unrealized gain (loss) on investments ( 0.27) 0.59 --------- ------- Total from investment operations 0.08 1.25 --------- ------- Less distributions From net investment income ( 0.34) ( 0.76) From net realized capital gain -- -- --------- ------- Total distributions ( 0.34) ( 0.76) --------- ------- Net asset value, end of year $ 15.73 $ 15.99 ========= ======= TOTAL RETURN* 0.52% 8.24% RATIOS / SUPPLEMENTAL DATA Net assets, end of year (in thousands) $ 71,724 $51,757 Ratio of expenses to average net assets 1.14%(a) 1.17% Ratio of expenses to average net asset excluding waiver 1.14%(a) 1.17% Ratio of net investment income to average net assets 4.33%(a) 4.63% Portfolio turnover rate 56% 62% YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 15.04 $ 14.92 $ 14.42 $ 16.05 ------- ------- ------- ------- Income from investment operations Net investment income 0.81 0.82 0.81 0.82 Net realized and unrealized gain (loss) on investments 0.49 0.12 0.51 ( 1.54) ------- ------- ------- ------- Total from investment operations 1.30 0.94 1.32 ( 0.72) ------- ------- ------- ------- Less distributions From net investment income ( 0.81) ( 0.82) ( 0.82) ( 0.81) From net realized capital gain ( 0.03) -- -- ( 0.10) ------- ------- ------- ------- Total distributions ( 0.84) ( 0.82) ( 0.82) ( 0.91) ------- ------- ------- ------- Net asset value, end of year $ 15.50 $ 15.04 $ 14.92 $ 14.42 ======= ======= ======= ======= TOTAL RETURN* 8.89% 6.46% 9.46% ( 4.83%) RATIOS / SUPPLEMENTAL DATA Net assets, end of year (in thousands) $29,394 $17,558 $20,460 $25,056 Ratio of expenses to average net assets 1.22% 1.24% 1.43% 1.24% Ratio of expenses to average net asset excluding waiver 1.22% 1.24% 1.43% 1.33% Ratio of net investment income to average net assets 5.09% 5.47% 5.56% 5.43% Portfolio turnover rate 59% 46% 43% 87%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. SEE NOTES TO FINANCIAL STATEMENTS. 62 MENTOR MUNICIPAL INCOME PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
SIX MONTHS ENDED YEAR 3/31/99 ENDED (UNAUDITED) 9/30/98 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 15.94 $ 15.49 --------- ------- Income from investment operations Net investment income 0.31 1.30 Net realized and unrealized gain (loss) on investments ( 0.26) ( 0.14) --------- ------- Total from investment operations 0.05 1.16 --------- ------- Less distributions From net investment income ( 0.30) ( 0.71) From net realized capital gain -- -- --------- ------- Total distributions ( 0.30) ( 0.71) --------- ------- Net asset value, end of year $ 15.69 $ 15.94 ========= ======= TOTAL RETURN* 0.32% 7.70% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $ 60,725 $59,351 Ratio of expenses to average net assets 1.65%(a) 1.67% Ratio of expenses to average net asset excluding waiver 1.65%(a) 1.67% Ratio of net investment income to average net assets 3.83%(a) 4.13% Portfolio turnover rate 56% 62% YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 15.05 $ 14.95 $ 14.43 $ 16.06 ------- ------- ------- ------- Income from investment operations Net investment income 0.71 0.75 0.74 0.74 Net realized and unrealized gain (loss) on investments 0.52 0.11 0.52 ( 1.54) ------- ------- ------- ------- Total from investment operations 1.23 0.86 1.26 ( 0.80) ------- ------- ------- ------- Less distributions From net investment income ( 0.71) ( 0.76) ( 0.74) ( 0.73) From net realized capital gain ( 0.08) -- -- ( 0.10) ------- ------- ------- ------- Total distributions ( 0.79) ( 0.76) ( 0.74) ( 0.83) ------- ------- ------- ------- Net asset value, end of year $ 15.49 $ 15.05 $ 14.95 $ 14.43 ======= ======= ======= ======= TOTAL RETURN* 8.33% 5.87% 9.01% ( 5.34%) RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $44,272 $37,191 $39,493 $46,157 Ratio of expenses to average net assets 1.72% 1.74% 1.92% 1.74% Ratio of expenses to average net asset excluding waiver 1.72% 1.74% 1.92% 1.86% Ratio of net investment income to average net assets 4.60% 4.95% 5.07% 4.93% Portfolio turnover rate 59% 46% 43% 87%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. CLASS Y SHARES
SIX MONTHS ENDED PERIOD 3/31/99 ENDED (UNAUDITED) 9/30/98 (B) PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.00 $ 15.51 -------- -------- Income from investment operations Net investment income 0.35 1.39 Net realized and unrealized loss on investments ( 0.24) ( 0.23) -------- -------- Total from investment operations 0.11 1.16 -------- -------- Less distributions From net investment income -- ( 0.67) -------- -------- Net asset value, end of period $ 16.11 $ 16.00 ======== ======== TOTAL RETURN* 0.69% 7.51% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 $ 1 Ratio of expenses to average net assets 0.92%(a) 0.92%(a) Ratio of net investment income to average net assets 4.33%(a) 5.66%(a) Portfolio turnover rate 56% 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. 63 MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- MARKET REVIEW The six-month period ending March 31, 1999 was not kind to the bond market. Treasury rates increased sharply, with the 2-year note climbing 71 basis points to 4.98% and the long bond rising 66 basis points to 5.62%. The market sold off in reaction to much stronger than anticipated economic growth during both the final quarter of 1998 and the first quarter of 1999. In early October of 1998, the stock market was weak, world markets were in turmoil and fears of global deflation were rampant. The crisis in world financial markets was prompted by Russia's default on its debt obligations, and was exacerbated by the bankruptcy of the highly leveraged investment firm Long Term Capital Management. Over the ensuing three-month period the Federal Reserve lowered the Federal Funds rate 0.75% in response to these alarming market conditions. Economists expected U.S. economic growth in 1999 to be significantly depressed by the severe shock that financial markets experienced during September and October. These forecasts for slower growth garnered support in early January when the Brazilian government was forced to devalue their currency, the real. The sudden drop in the value of the real implied that Brazil would suffer a fairly deep recession in 1999. In addition, the lower currency value has made American exports too expensive for Brazilian markets. Despite turmoil in financial markets and in Brazil, the much-anticipated slowdown in U.S. economic growth has yet to materialize. Indeed, economic growth in the final quarter of 1998 surged more than 6.0% on an annualized basis. Economic indicators for the first quarter of 1999 suggest that the economy has continued its robust growth into 1999. Some market observers are beginning to question the aggressiveness with which the Federal Reserve reacted to the market crisis in late 1998. These economists have gone so far as to suggest that the Fed should reverse course and raise rates in response to a potentially overheating American economy. The fear that the Federal Reserve may move to increase short-term borrowing rates prompted the bond market's severe price declines and interest rate increases during the first quarter of 1999. MANAGEMENT STRATEGY Portfolio durations were 5% to 10% longer than their benchmark indices at the beginning of 1999. This long duration tilt led to strong relative performance early in January as the bond market responded to the Brazilian devaluation. However, as economic data painted an ever-clearer picture of a robust U.S. economy, portfolio durations were cut back to approximately neutral levels. Sector allocations were heavily tilted toward spread product. Mortgage backed securities were particularly emphasized given their high yield and strong performance potential in a stable to rising rate environment. The stronger economic growth prompted an increased allocation to lower-rated corporate bonds, including high yield securities. Portfolio weightings in high yield were increased from roughly 5% to 10%. PERFORMANCE REVIEW Portfolio performance during the six-month period ending March 31, 1999 was superior to index objectives. Our mortgage overweight and our lower-rated corporate bond investments allowed our portfolios to outpace indices comprised of treasury obligations. For the period the Mentor 64 MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- Quality Income A share returned -1.16% compared to -2.76% for the Merrill Lynch 7-Year Treasury Index. The Mentor Short-Duration Income Portfolio A shares returned 0.83% for the period compared to 0.44% for the Merrill Lynch 3-Year Treasury Index. MARKET OUTLOOK Our long-term market outlook is for continued declines in inflation and therefore continued lower interest rates. This optimism is fueled by structural economic changes such as the Internet that offer the potential to substantially increase economic efficiency and reduce costs. In addition, the increasing productivity of the U.S. labor force suggests that the economy can grow faster than previously thought without generating inflationary pressures. However, short-term prospects for the bond market are less clear. The long-term picture for bonds has continued to improve in recent months. Brazil's currency devaluation has made their products extremely price competitive with U.S. made products. Since Brazil is the dominant economy in Latin America, their devaluation implies falling growth rates for every economy within the region. Lower growth in Latin America has coincided with slow growth in Europe. The introduction of a single currency across much of Europe, the euro, has yet to ignite economic growth in the region. Indeed, the newly created European central bank has repeatedly revised down its growth estimates for 1999, and is currently forecasting growth of little more than 2% for the year. Despite the good news for bonds overseas, domestic U.S. conditions continue to put upward pressure on interest rates. The U.S. economy has repeatedly defied predictions of an imminent slowdown. With unemployment as of March hitting 4.2%, inflation fears are mounting. Despite these fears, most broad measures of inflation have continued to trend downward. This combination of robust economic growth and benign inflation is almost unprecedented. As a result, the Federal Reserve is examining whether old models of the growth and inflation trade-off accurately describe the new American economy. Although the Federal Reserve is considering whether or not the U.S. has entered a new economic era, market participants are understandably reluctant to gamble on such theoretical notions. Without some evidence of slowing economic growth, the bond market is likely to at best trade within a fairly narrow range around current interest rate levels and at worst could continue to decline somewhat. Given that no signs of a slacking in economic activity are yet apparent, we are anticipating a range-bound market in the weeks and months ahead. In such an environment our overweight position in mortgage backed securities and lower-rated corporate bonds should continue to perform well. As the summer wears on, we expect that stumbling growth in Europe and Latin America will exert pressure on the U.S. economy. This pressure on domestic economic growth and global inflation should allow the rally in bond prices to continue. We anticipate significantly reducing our exposure to mortgages and corporate bonds at that time and extending portfolio durations. 65 MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 purchase in Mentor Quality Income Portfolio Class A and Class B Shares and the Merrill Lynch 7-Year Treasury Index.- [GRAPH]
4/29/92 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99 Class A Shares(dagger) 9,525 9,846 10,378 10,036 11,222 11,681 12,833 14,110 13,861 Class B Shares(double dagger) 10,000 10,324 10,827 10,406 11,585 11,999 13,113 14,071 13,946 Merrill Lynch 7-Year Treasury Index~ 10,000 11,041 12,345 11,721 13,533 14,043 15,388 17,815 17,324
Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year 5-Year Since Inception(triple dagger) Class A 0.76% 5.69% 4.92% Class B 4.21% 6.18% 5.13% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. - The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvestment of interest on securities in the index. The Merrill Lynch 7-Year Treasury Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Quality Income Portfolio Class A Shares, after deducting the maximum sales charge of 4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. ++ Represents a hypothetical investment of $10,000 in Mentor Quality Income Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. The value of Class B Shares reflects a redemption fee in effect at the end of each of the stated periods. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. +++ Reflects operations of Mentor Quality Income Portfolio Class A and Class B Shares from the date of commencement of operations on 4/29/92 through 3/31/99. Comparison of change in value of a hypothetical $10,000 purchase in Mentor Quality Income Portfolio Class Y Shares and the Merrill Lynch 7-Year Treasury Index.- [GRAPH]
11/19/97 12/31/97 3/31/98 6/30/98 9/30/98 3/31/99 Class Y Shares* 10,000 10,038 10,144 10,378 10,869 10,758 Merrill Lynch 7-Year Treasury Index~ 10,000 10,142 10,311 10,562 11,364 11,050
Total Returns as of 3/31/99 1-Year Since Inception** Class Y 6.06% 5.69% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. - The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvesment of interest on securities in the index. Ther Merrill Lynch 7-year Treasury Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requries to be reflect in the Portfolio's performance. * Represents a hypothetical investment of $10,000 in Mentor Quality Income Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ** Reflects operations of Mentor Quality Income Portfolio Class Y Shares from the date of issuance on 11/19/97 through 3/31/99. 66 MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of hypothetical $10,000 purchase in Mentor Short-Duration Income Portfolio Class A Shares and the Merrill Lynch 3-Year Treasury Index.- [GRAPH]
6/16/95 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99 Class A Shares* 9,900 9,931 10,532 11,304 12,093 12,194 Merrill Lynch 3-Year Treasury Index~ 10,000 10,139 11,038 11,571 12,732 12,788
Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year Since Inception** Class A 4.28% 5.37% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. - The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment of interest on securities in the index. It is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. The Portfolio invests in securities other than Treasuries. * Represents a hypothetical investment of $10,000 in Mentor Short-Duration Income Portfolio Class A Shares, after deducting the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charges = $9,900. The Class A Shares' performance assumes the reinvestment of all dividends and distributions. ** Reflects operations of Mentor Short-Duration Income Portfolio Class A from the date of issuance on 6/16/95 through 3/31/99. Comparison of change in value of hypothetical $10,000 purchase in Mentor Short-Duration Income Portfolio Class B Shares and Merrill Lynch 3-year Treasury Index.- [GRAPH]
4/29/94 12/31/94 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99 Class B Shares(dagger) 10,000 10,093 10,623 11,225 12,125 12,945 13,043 Merrill Lynch 3-Year Treasury Index~ 10,000 10,075 11,051 11,709 12,600 13,053 13,924
Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year Since Inception(double dagger) Class B 4.12% 5.87% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. - The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment of interest on securities in the index. It is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. The Portfolio invests in securities other than Treasuries. + Represents a hypothetical investment of $10,000 in Mentor Short-Duration Income Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. The value of Class B Shares reflects a redemption fee in effect at the end of each of the stated periods. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Short-Duration Income Portfolio Class B Shares from the date of commencement of operations on 4/29/94 through 3/31/99. 67 MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of hypothetical $10,000 purchase in Mentor Short-Duration Income Portfolio Class Y Shares and the Merrill Lynch 3-Year Treasury Index.- [GRAPH]
11/19/97 12/31/97 3/31/98 6/30/98 9/30/98 3/31/99 Class Y Shares* 10,000 10,032 10,167 10,317 10,638 10,746 Merrill Lynch 3-Year Treasury Index~ 10,000 10,081 10,239 10,413 10,875 10,923
Total Returns as of 3/31/99 1-Year Since Inception** Class Y 5.70% 5.61% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. - The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment of interest on securities in the index. It is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. The Portfolio invests in securities other than Treasuries. * Represents a hypothetical investment of $10,000 in Mentor Short-Duration Income Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ** Reflects operations of Mentor Short-Duration Income Portfolio Class Y from the date of issuance on 11/19/97 through 3/31/99. 68 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL MARKET AMOUNT VALUE LONG-TERM INVESTMENTS - 134.54% PREFERRED STOCK - 1.84% Home Ownership, Inc., 12/30/26 (cost $3,796,225) $4,350,000 $ 4,075,438 ----------- ASSET-BACKED SECURITIES - 20.93% Advanta Mortgage Loan Trust Series 1993-4 AZ, 5.55%, 3/25/10 693,663 682,548 Advanta Mortgage Loan Trust Series 1993-3 A5, 5.55%, 1/25/25 990,524 962,672 AFG Receivables Trust Series 1997-B C, 7.00%, 2/15/03 941,241 943,079 Capital One Master Trust Series 1998-4 A, 5.43%, 1/15/07 2,535,000 2,493,557 CS First Boston Mortgage Series 1996-2 A6, 7.18%, 2/25/18 6,500,000 6,528,190 Discover Card Master Trust Series 1998-7 A, 5.60%, 5/15/06 3,005,000 2,970,016 Equifax Credit Corporation of America Series 1998-2 A6F, 6.16%, 4/15/08 2,370,000 2,371,822 Series 1994-1 B, 5.75%, 3/15/09 1,253,328 1,251,187 Series 1999-1 A6F, 6.20%, 9/20/09 5,250,000 5,217,834 Series 1998-2 A4F, 6.33%, 1/15/22 1,800,000 1,804,784 Fifth Third Auto Grantor Trust Series 1996-A A, 6.20%, 9/15/01 435,617 436,476 First USA Credit Card Master Trust, 1998-9 A, 5.28%, 9/18/06 2,700,000 2,652,729 General Electric Capital Mortgage, - 6.27%, Series 1999-HE1 A7, 4/25/29 4,000,000 3,961,951 Green Tree Home Equity, Series 1999-A A5, 6.13%, 2/15/19 3,900,000 3,896,482 J.C. Penney Master Credit Card Trust, Series 1998-E A, 5.50%, 6/15/07 4,000,000 3,931,427 Key Auto Finance Trust Series 1997-2 A4, 6.15%, 10/15/01 1,500,000 1,505,792 Old Stone Credit Corporation, Series 93-1 B1, 6.00%, 3/15/08 520,913 521,875
PRINCIPAL MARKET AMOUNT VALUE ASSET-BACKED SECURITIES (CONTINUED) Saxon Asset Securities Series 1999-1 AF6, 6.35%, 2/25/29 $4,000,000 $ 4,012,999 ----------- TOTAL ASSET-BACKED SECURITIES (COST $24,821,467) 46,145,420 ----------- U.S. GOVERNMENT SECURITIES AND AGENCIES -- 69.94% Federal Home Loan Mortgage Association Series 26 C, 6.50%, 7/25/18 7,000,000 7,032,774 Series 1693 Z, 6.00%, 3/15/09, REMIC 6,301,827 6,138,331 Series 1647 B, 6.50%, 11/15/08, REMIC 2,201,275 2,204,038 Federal National Mortgage Association Series 1993-181 O, 6.50%, 9/25/08 2,335,000 2,333,916 6.00% - 6.50%, 1/01/00 20,500,000 20,175,313 6.00%, 12/01/13 3,479,988 3,456,991 Series 1998-24 JZ, 6.50%, 5/18/28 2,028,936 2,008,577 Government National Mortgage Association I 6.00% - 6.50%, 3/15/28 - 1/15/29 ARM 39,414,072 38,749,338 6.00% - 7.00%, 12/15/08 - 3/15/29 67,400,000 69,309,762 Government National Mortgage Association II 6.13% - 6.88%, 4/20/22 - 12/20/22, ARM 2,765,717 2,820,511 ----------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $ 154,747,659) 154,229,551 ----------- CORPORATE BONDS - 19.95% FINANCIAL - 6.28% Capital One Bank, 7.15% - 7.20%, 7/19/99 - 9/15/06 4,750,000 4,780,917 CIT Group, Inc. 5.91%, 11/23/05 3,000,000 2,937,333 Ford Capital, 9.88%, 5/15/02 2,525,000 2,813,162 Household Financial Company, 5.88%, 2/01/09 1,300,000 1,248,897 Salomon, Inc., 7.30%, 5/15/02 2,000,000 2,078,222 ----------- 13,858,531 ----------- INDUSTRIAL - 13.27% Adelphia Communications, 9.88%, 3/01/05 625,000 678,125
69 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL MARKET AMOUNT VALUE CORPORATE BONDS (CONTINUED) INDUSTRIAL (CONTINUED) Capstar Broadcasting, 9.25%, 7/01/07 $ 700,000 $ 740,250 Century Communications, 9.50%, 8/15/00 1,400,000 1,441,774 Chancellor Media Corporation, 9.00%, 10/01/08 800,000 856,000 Charter Communications, 8.63%, 4/01/09 (a) 1,200,000 1,227,000 Clearnet Communications, 12/15/05 550,000 504,625 Comcast Cellular, 9.50%, 5/01/07 1,750,000 1,986,250 CSC Holdings, Inc., 9.88%, 5/15/06 750,000 819,375 Enron Corporation, 6.73%, 11/17/08 4,000,000 4,027,516 JCAC, Inc., 10.13%, 6/15/06 750,000 823,125 Jitney-Jingle Stores, 12.00%, 3/01/06 1,500,000 1,668,750 Lenfest Communications, 7.63%, 2/15/08 530,000 540,600 McLeodUSA, Inc., 9.25%, 7/15/07 1,400,000 1,466,500 Metromedia Fiber, 10.00%, 11/15/08 1,120,000 1,201,200 Microcell Telecomm, 14.00%, 6/01/06 420,000 343,350 Nextel Communications, 10.65%, 9/15/07 750,000 551,250 PSINet, Inc., 10.00%, 2/15/05 785,000 828,175 Randall's Food Marketings, 9.38%, 7/01/07 1,145,000 1,242,325 RBF Finance, 11.38%, 3/15/09 (a) 250,000 263,750 Rogers Cablesystems, 9.63% - 10.00%, 8/01/02 - 3/15/05 1,600,000 1,762,000 Rogers Cantel, 8.80%, 10/01/07 1,250,000 1,306,250 Safeway, Inc., 6.50%, 11/15/08 2,000,000 2,028,692 Sprint Capital Corporation, 6.13%, 11/15/08 3,000,000 2,953,358 ----------- 29,260,240 ----------- UTILITY - 0.40% CMS Energy Corporation, 6.75%, 1/15/04 900,000 885,600 -----------
PRINCIPAL MARKET AMOUNT VALUE CORPORATE BONDS (CONTINUED) TOTAL CORPORATE BONDS (COST $46,813,941) $44,004,371 ----------- MISCELLANEOUS - 0.47% Platex Family Production Corporation 8.88%, 7/15/04 (cost $ 1,050,599) $1,000,000 1,035,000 ----------- COLLATERALIZED MORTGAGE OBLIGATIONS - 17.71% BA Mortgage Securities B1, 6.50%, 7/25/13 420,848 411,549 BA Mortgage Securities M, 6.50%, 7/25/13 649,696 642,073 Chase Mortgage Finance Corporation Series 1993-C B1, 7.00%, 10/25/24 2,854,534 2,858,996 General Electric Capital Mortgage Series 1993-18 B1, 6.00%, 2/25/09 1,827,816 1,769,918 Series 1998-13 M, 6.50%, 6/25/13 1,122,946 1,111,956 Series 1998-01 M, 6.75%, 1/25/13 716,397 715,215 Series 1998-03 M, 7.00%, 1/25/28 2,713,700 2,713,145 Norwest Asset Securities Corporation Series 1996-2 M, 7.00%, 9/25/11 1,706,660 1,713,853 Series 1997-18 B1, 6.75%, 12/25/27 2,574,548 2,529,457 Series 1998-22 B1, 6.25%, 9/25/28 2,146,841 2,069,647 Series 1998-22 B2, 6.25%, 9/25/28 3,109,938 2,968,642 NationsBanc Montgomery Funding Corporation Series 1998-5 M, 6.00%, 11/25/13 2,089,024 1,997,678 Series 1998-5 B1, 6.00, 11/25/13 974,520 919,168 Series 1998-4 B2, 6.25%, 10/25/28 2,583,242 2,428,918 Prudential Homes Series 1996-4 B1, 6.50%, 4/25/26 871,544 848,835 Series 1996-4 M, 6.50%, 4/25/26 4,269,598 4,191,860
70 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL MARKET AMOUNT VALUE COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) Prudential Homes Series 1996-8 M, 6.75%, 6/25/26 $2,326,163 $ 2,312,068 Series 1995-7 M, 7.00%, 11/25/25 2,795,735 2,807,699 Series 1995-5 B1, 7.25%, 9/25/25 (a) 1,444,123 1,455,785 Series 1995-5 M, 7.25%, 9/25/25 2,546,471 2,584,484 ------------ TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $ 57,268,043) 39,050,946 ------------ RESIDUAL INTERESTS - 3.70% Capital Mortgage Funding 1999-1, 10/20/22 14,088 410,616 Capital Mortgage Funding 1999-2, 10/20/23 15,369 422,935 Capital Mortgage Funding 1999-3, 11/20/23 15,928 432,212 Capital Mortgage Funding 1998-1, 1999, 1/22/27 40,016 671,630 General Mortgage Securities II 1995-1, 1998, 6/25/20 9,057 304,207 General Mortgage Securities II 1998-5, 9/20/21 28,489 628,261 General Mortgage Securities II 1997-4 1998, 5/20/22 9,802 438,928 General Mortgage Securities II 1998-6, 7/20/22 30,853 648,487 General Mortgage Securities II 1995-4, 1998, 6/25/23 6,267 339,970 General Mortgage Securities II 1997-5 1998, 7/20/23 18,194 641,663 General Mortgage Securities II 1999-1, 8/20/24 40,000 658,476 General Mortgage Securities II 1998-1, 10/20/24 21,132 590,657 General Mortgage Securities II 1998-2, 10/20/24 27,670 434,402 National Mortgage Funding 1995-4, 1998, 3/20/21 5,019 102,273 National Mortgage Funding 1998-9, 11/20/22 24,128 460,073 National Mortgage Funding 1998-10, 1/20/23 13,573 503,279 National Mortgage Funding 1998-8, 5/20/24 28,801 480,355 ------------
PRINCIPAL MARKET AMOUNT VALUE RESIDUAL INTERESTS (CONTINUED) TOTAL RESIDUAL INTERESTS (COST $ 8,635,785) 8,168,424 ------------ TOTAL LONG-TERM INVESTMENTS (COST $297,133,719) $296,709,150 ------------ SHORT-TERM INVESTMENT - 0.21% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/99, 4.95%, due 4/01/99, collateralized by $445,241 Federal Home Loan Mortgage Corporation, 7.50%, 11/01/27, market value $457,485 (cost $447,914) $ 447,914 447,914 ------------ TOTAL INVESTMENTS (COST $297,581,633)- 134.75% 297,157,064 OTHER ASSETS LESS LIABILITIES - (34.75%) (76,639,834) ------------ NET ASSETS - 100.00% $220,517,230 ============
INVESTMENT ABBREVIATIONS ARM -- Adjustable Rate Mortgage 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 $384,867,076 and $357,935,935, respectively. INCOME TAX INFORMATION At March 31, 1999, the aggregated cost of investment securities for federal income tax purposes was $297,581,633. Net unrealized depreciation aggregated $424,569, of which $2,019,646 related to appreciated investment securities and $2,444,215 related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 71 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE ASSET-BACKED SECURITIES - 11.60% Advanta Home Equity Loan, 6.15%, 10/25/09 $ 617,283 $ 616,032 Advanta Mortgage Loan Trust, 5.05%, 3/25/10 277,581 273,134 Advanta Mortgage Loan Trust 1993-3 A3, 4.75%, 2/25/10 402,385 397,700 AFC Home Equity Loan Trust, 6.60%, 2/25/27 1,395,483 1,394,227 AFG Receivables Trust, 6.45%, 9/15/00 (a) 145,295 145,295 7.05%, 4/15/01 (a) 239,677 239,889 7.00%, 2/15/03 (a) 705,931 707,309 AFG Receivables Trust 1997 A, 6.35%, 10/15/02 1,036,846 1,041,669 AFG Receivables Trust 1997 B, 6.20%, 2/15/2003 94,118 94,114 Capital One Master Trust 1998-4, 5.43%, 1/15/07 2,000,000 1,967,303 CS First Boston 1996-2, 6.39%, 2/25/18 675,598 673,292 7.18%, 2/25/18 4,000,000 4,017,347 Equifax Credit Corporation 1994-1 B, 5.75%, 3/15/09 398,474 397,793 Fifth Third Bank Auto Grantor Trust, 6.20%, 9/15/01 218,032 218,462 MMCA Automobile Trust 1999-1, 5.50%, 7/15/05 3,000,000 2,993,466 Old Stone Credit Corporation 1993-2, 6.20%, 6/15/08 230,854 231,783 Olympic Automobiles Receivables Trust 1994-B A2, 6.85%, 6/15/01 388,097 388,097 Olympic Automobiles Receivables Trust, 7.35%, 10/15/01 605,458 607,451 Perpetual Savings Bank 1990-1, 7.17%, 3/01/20 2,319,946 2,311,340 Union Acceptance Corporation Auto Trust 1997 A, 6.48%, 5/10/04 430,000 434,644 Union Acceptance Corporation, 6,70%, 6/08/03 2,020,000 2,036,827 6.45%, 7/09/03 593,504 597,274 Union Acceptance Corporation 1998-D A3, 5.75%, 6/09/03 2,400,000 2,391,536 ----------- TOTAL ASSET-BACKED SECURITIES (COST $24,212,755) 24,175,984 -----------
PRINCIPAL AMOUNT MARKET VALUE U.S. GOVERNMENT SECURITIES AND AGENCIES - 49.00% Federal National Mortgage Association 10.00%, 6/01/05 MBS $ 136,411 $ 141,174 6.00%, 11/01/13 - 4/01/14 37,051,196 36,750,156 9.00%, 5/01/14 ARM 4,580,657 4,626,474 7.00%, 12/15/08 ARM 24,470,286 24,844,881 6.00%, 11/15/13 1,985,917 1,977,229 6.00%, 12/15/13 - 1/15/14 ARM 7,787,433 7,753,363 6.63%, 7/20/22 3,101,843 3,173,415 6.50%, 3/15/28 ARM 2,879,888 2,866,389 6.50%, 6/15/28 MBS 2,799,999 2,786,874 Government National Mortgage Association II 7.00%, 11/20/22 2,083,124 2,124,688 6.88%, 4/20/22 5,227,054 5,347,726 6.13%, 10/20/22-12/20/22 4,084,247 4,163,533 6.63%, 9/20/23 732,024 748,693 U.S. Treasury Bonds, 4.25%, 11/15/03 5,000,000 4,834,000 ----------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $102,541,046) 102,138,595 ----------- COLLATERALIZED MORTGAGE OBLIGATION - 22.39% Chase 1999-S3 B1, 6.25%, 3/25/14 401,178 387,032 Chase 1999-S3 M, 6.25%, 3/25/14 1,260,846 1,233,774 Citigroup 1992-18 A-A, 6.60%, 11/25/22 7,570,244 7,617,880 Equifax Credit Corporation, 1998-2, 6.16%, 4/15/08 1,926,750 1,928,231 1999-1 A6F, 6.20%, 9/20/09 4,750,000 4,720,897 1998-A, 6.33%, 1/15/22 1,350,000 1,353,588 First USA Credit Card Master Trust 1998-9 1997, 5.28%, 9/18/06 2,300,000 2,259,732 Glendale Federal Bank 1990-1 A, 6.60%, 10/25/29 5,222,348 5,222,253 Green Tree Home Equity Loan Trust 1999-4, 6.13%, 2/15/19 3,100,000 3,097,204 J.C. Penney Master Credit Card Trust 1998-E, 5.50%, 6/15/07 3,575,000 3,513,713 Key Auto Finance Trust, 6.15%, 10/15/01 4,000,000 4,015,444 Saxon 1995-1A A1, 7.52%, 4/25/25 3,693,031 3,713,644
72 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE COLLATERALIZED MORTGAGE OBLIGATION (CONTINUED) Saxon Asset Securities Trust 1999-1 AF3, 6.17%, 8/25/21 $ 3,000,000 $ 2,997,277 Saxon Asset Securities Trust, 6.27%, 7/25/23 3,800,000 3,805,955 Structured Asset Securities Corporation, 6.19%, 10/25/28 816,176 816,177 ------------ TOTAL COLLATERIZED MORTGAGE OBLIGATIONS (COST $46,792,705) 46,682,801 ------------ CORPORATE BONDS - 20.26% Adelphia Communications, 7.50%, 1/15/04 1,000,000 996,250 Argosy Gaming Company, 13.25%, 6/01/04 (a) 1,000,000 1,132,500 Associates Corporation, NA, 7.88%, 9/30/01 1,000,000 1,051,554 Capital One Bank, 7.20%, 7/19/99 1,500,000 1,509,421 7.15%, 9/15/06 1,000,000 1,006,642 Carr-Gottstein Foods Company, 12.00%, 11/15/05 1,500,000 1,725,000 Century Communications, 9.50%, 8/15/00 1,207,000 1,243,210 Clearnet Communications, 14.75%, 12/15/05 850,000 779,875 CMS Energy Corporation, 6.75%, 1/15/04 1,000,000 984,000 CSC Holdings, Inc., 9.88%, 5/15/06 750,000 819,375 Discover Card Master Trust I, 1998-7, 5.60%, 5/15/06 2,000,000 1,976,716 Ford Capital, 9.88%, 5/15/02 2,525,000 2,813,162 General Motors Acceptance Corporation, 6.88%, 7/15/01 2,250,000 2,306,781 JCAC Inc., 10.13%, 6/15/06 1,250,000 1,371,875 Jitney-Jungle Stores, 12.00%, 3/01/06 1,500,000 1,668,750 Lehman, 6.20%, 1/15/02 2,000,000 1,978,146 Nextel Communications, 9.75%, 8/15/04 1,000,000 1,037,500 Playtex Products, 8.88%, 7/15/04 1,000,000 1,035,000 PSI Energy, Inc., 6.00%, 12/14/01 (a) 2,000,000 1,975,529 PSINet, Inc., 10.00%, 2/15/05 750,000 791,250 Randall's Food Marketings, 9.38%, 7/01/07 925,000 1,003,625
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) Rogers Cablesystems, 9.63%, 8/01/02 $ 1,057,000 $ 1,133,632 Rogers Cablesystems, 10.00%, 3/15/05 650,000 734,500 Salomon, Inc., 7.25%, 5/01/01 2,250,000 2,317,981 Salomon, Inc., 7.30%, 5/15/02 1,000,000 1,039,111 Shoppers Food Warehouse, 9.75%, 6/15/04 1,500,000 1,631,250 Sprint Capital Corporation, 5.70%, 11/15/03 2,155,000 2,129,921 The Money Store, 6.28%, 12/15/22 4,000,000 4,034,731 ------------ TOTAL CORPORATE BONDS (COST $42,208,731) 42,227,287 ------------ RESIDUAL INTERESTS (A) - 1.29% General Mortgage Funding II, 1997-4 1998, 5/20/22 3,267 145,339 General Mortgage Funding II, 1998-1, 10/20/24 14,088 393,771 General Mortgage Funding II, 1999-1, 8/20/24 30,000 492,850 National Mortgage Funding I, 1998-6, 1/20/23 47,266 669,012 National Mortgage Funding I, 1998-7, 7/20/23 44,360 670,734 National Mortgage Funding I, 1998-8, 5/20/24 19,201 320,236 ------------ TOTAL RESIDUAL INTERESTS (COST $2,815,666) 2,691,942 ------------ SHORT-TERM INVESTMENT - 7.93% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/99, 4.95%, due 4/01/99, collateralized by $19,026,000 Federal Home Loan Mortgage Corporation, 7.00%, 5/01/28, market value $16,887,351 (cost $16,529,179) 16,529,179 16,529,179 ------------ TOTAL INVESTMENTS (COST $235,100,082)-112.47% 234,445,788 OTHER ASSETS LESS LIABILITIES - (12.47%) (25,998,859) ------------ NET ASSETS - 100.00% $208,446,929 ============
73 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- 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 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 $447,271,432 and $361,018,924, respectively. INCOME TAX INFORMATION At March 31, 1999, the aggregated cost of investment securities for federal income tax purposes was $235,100,082. Net unrealized depreciation aggregated $654,294 of which $535,181 related to appreciated investment securities and $1,189,475 related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 74 MENTOR QUALITY INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (UNAUDITED) ASSETS Investments, at market value (Note 2) Investment securities $296,709,150 Repurchase agreements 447,914 ------------ Total investments (cost $297,581,633) 297,157,064 Collateral for securities loaned (Note 2) 341,000 Receivables Investments sold 13,304,297 Fund shares sold 573,083 Dividends and interest 2,710,870 Other 43,892 ------------ TOTAL ASSETS 314,130,206 ------------ LIABILITIES Payables Securities loaned (Note 2) $ 341,000 Reverse repurchase agreement 71,419,000 Investments purchased 20,334,685 Fund shares redeemed 287,986 Dividends 1,007,199 Accrued expenses and other liabilities 223,106 ---------- TOTAL LIABILITIES 93,612,976 ------------ NET ASSETS $220,517,230 ============ Net Assets represented by: (Note 2) Additional paid-in capital $236,027,963 Accumulated distributions in excess of net investment income (1,194,808) Accumulated net realized loss on investment transactions (13,891,356) Net unrealized depreciation of investments (424,569) ------------ NET ASSETS $220,517,230 ============ NET ASSET VALUE PER SHARE Class A Shares $ 13.05 Class B Shares $ 13.04 Class Y Shares $ 13.55 OFFERING PRICE PER SHARE Class A Shares $ 13.70(a) Class B Shares $ 13.04 Class Y Shares $ 13.55 SHARES OUTSTANDING Class A Shares 8,450,057 Class B Shares 8,453,227 Class Y Shares 80
(a) Computation of offering price: 100/95.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) INVESTMENT INCOME Interest (b) (Note 2) $ 7,236,750 ----------- EXPENSES Management fee (Note 4) $ 631,092 Distribution fee (Note 5) 273,958 Shareholder service fee (Note 5) 262,954 Transfer agent fee 153,950 Administration fee (Note 4) 105,182 Registration expenses 43,688 Custodian and accounting fees 42,537 Shareholder reports and postage expenses 31,474 Audit fees 11,021 Legal fees 7,259 Directors' fees and expenses 3,771 Miscellaneous 6,372 ---------- Total expenses 1,573,258 ----------- Deduct Waiver of management fee (Note 4) (194,745) ----------- NET INVESTMENT INCOME 5,858,237 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments (Note 2) 402,920 Change in unrealized appreciation (depreciation) on investments (8,898,636) ---------- NET LOSS ON INVESTMENTS (8,495,716) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,637,479) ===========
(b) Net of interest expense of $1,604,124 related to borrowings. SEE NOTES TO FINANCIAL STATEMENTS. 75 MENTOR QUALITY INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED 3/31/99 YEAR ENDED (UNAUDITED) 9/30/98 NET INCREASE IN NET ASSETS Operations Net investment income $ 5,858,237 $ 9,334,606 Net realized gain on investments 402,920 713,191 Change in unrealized appreciation (depreciation) on investments (8,898,636) 6,558,180 ------------- ------------- Increase in net assets resulting from operations (2,637,479) 16,605,977 ------------- ------------- Distributions to Shareholders From net investment income Class A (3,050,569) (4,831,082) Class B (3,078,903) (5,431,749) Class Y -- (51) ------------- ------------- Total distributions to shareholders (6,129,472) (10,262,882) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 51,165,151 106,644,051 Reinvested distributions 4,065,893 6,677,759 Shares redeemed (33,128,128) (40,705,601) ------------- ------------- Change in net assets resulting from capital share transactions 22,102,916 72,616,209 ------------- ------------- Increase in net assets 13,335,965 78,959,304 Net Assets Beginning of period 207,181,265 128,221,961 ------------- ------------- End of period (including accumulated distributions in excess of net investment income of ($1,194,808) and ($923,573), respectively) $ 220,517,230 $ 207,181,265 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
SIX MONTHS YEAR ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 13.61 $ 13.18 --------- ------- Income from investment operations Net investment income 0.39 0.79 Net realized and unrealized gain (loss) on investments (0.55) 0.47 --------- ------- Total from investment operations (0.16) 1.26 --------- ------- Less distributions From net investment income (0.40) (0.83) --------- ------- Net asset value, end of year $ 13.05 $ 13.61 ========= ======= TOTAL RETURN* (1.16%) 9.95% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $ 110,263 $94,279 Ratio of expenses to average net assets 1.05%(a) 1.05% Ratio of expenses to average net asset excluding waiver 1.14%(a) 1.18% Ratio of net investment income to average net assets 5.83%(a) 5.73% Portfolio turnover rate 121% 114% YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 12.91 $ 13.29 $ 12.75 $ 14.04 ------- ------- ------- ------- Income from investment operations Net investment income 0.97 0.89 0.84 0.84 Net realized and unrealized gain (loss) on investments 0.26 (0.37) 0.61 (1.30) ------- ------- ------- ------- Total from investment operations 1.23 0.52 1.45 (0.46) ------- ------- ------- ------- Less distributions From net investment income (0.96) (0.90) (0.91) (0.83) ------- ------- ------- ------- Net asset value, end of year $ 13.18 $ 12.91 $ 13.29 $ 12.75 ======= ======= ======= ======= TOTAL RETURN* 9.86% 4.09% 11.82% (3.39%) RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $53,176 $21,092 $24,472 $30,142 Ratio of expenses to average net assets 1.05% 1.05% 1.32% 1.38% Ratio of expenses to average net asset excluding waiver 1.18% 1.31% 1.36% 1.39% Ratio of net investment income to average net assets 7.01% 6.84% 6.73% 6.33% Portfolio turnover rate 100% 254% 368% 455%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. 76 MENTOR QUALITY INCOME PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
SIX MONTHS YEAR ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 13.61 $ 13.18 --------- -------- Income from investment operations Net investment income 0.35 0.72 Net realized and unrealized gain (loss) on investments (0.55) 0.48 --------- -------- Total from investment operations (0.20) 1.20 --------- -------- Less distributions From net investment income (0.37) (0.77) --------- -------- Net asset value, end of year $ 13.04 $ 13.61 ========= ======== TOTAL RETURN* (1.46%) 9.46% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $ 110,253 $112,901 Ratio of expenses to average net assets 1.55%(a) 1.55% Ratio of expenses to average net asset excluding waiver 1.74%(a) 1.67% Ratio of net investment income to average net assets 5.33%(a) 5.22% Portfolio turnover rate 121% 114% YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 9/30/97 9/30/96 9/30/95 9/30/94 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 12.93 $ 13.31 $ 12.76 $ 14.06 ------- ------- ------- ------- Income from investment operations Net investment income 0.86 0.84 0.79 0.82 Net realized and unrealized gain (loss) on investments 0.30 (0.38) 0.61 (1.37) ------- ------- ------- ------- Total from investment operations 1.16 0.46 1.40 (0.55) ------- ------- ------- ------- Less distributions From net investment income (0.91) (0.84) (0.85) (0.75) ------- ------- ------- ------- Net asset value, end of year $ 13.18 $ 12.93 $ 13.31 $ 12.76 ======= ======= ======= ======= TOTAL RETURN* 9.29% 3.57% 11.33% (3.97%) RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) $75,046 $58,239 $62,155 $77,888 Ratio of expenses to average net assets 1.55% 1.55% 1.74% 1.88% Ratio of expenses to average net asset excluding waiver 1.68% 1.81% 1.79% 1.90% Ratio of net investment income to average net assets 6.51% 6.36% 6.24% 6.21% Portfolio turnover rate 100% 254% 368% 455%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. CLASS Y SHARES
SIX MONTHS PERIOD ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 (b) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 13.69 $ 13.20 -------- -------- Income from investment operations Net investment income 0.39 0.78 Net realized and unrealized gain (loss) on investments (0.53) 0.39 -------- -------- Total from investment operations (0.14) 1.17 -------- -------- Less distributions From net investment income -- (0.68) -------- -------- Net asset value, end of period $ 13.55 $ 13.69 ======== ======== TOTAL RETURN* (1.02%) 8.94% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 $ 1 Ratio of expenses to average net assets 0.80%(a) 0.80%(a) Ratio of expenses to average net assets exluding waiver 0.99%(a) 0.93%(a) Ratio of net investment income to average net assets 5.83%(a) 7.09%(a) Portfolio turnover rate 121% 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. 77 MENTOR SHORT-DURATION INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (UNAUDITED) ASSETS Investments, at market value (Note 2) Investment securities $217,916,609 Repurchase agreements 16,529,179 ------------ Total investments (cost $235,100,082) 234,445,788 Cash Receivables 30,939 Investments sold 12,842,753 Fund shares sold 6,342,238 Dividends and interest 2,078,786 Deferred expenses (Note 2) 21,970 ------------ TOTAL ASSETS 255,762,474 ------------ LIABILITIES Payables Investments purchased $16,346,132 Reverse repurchase agreement 29,000,000 Fund shares redeemed 1,006,854 Dividends 828,582 Accrued expenses and other liabilities 133,977 ----------- TOTAL LIABILITIES 47,315,545 ------------ NET ASSETS $208,446,929 ============ Net Assets represented by: (Note 2) Additional paid-in capital $209,980,897 Accumulated distributions in excess of net investment income (764,158) Accumulated net realized loss on investment transactions (115,517) Net unrealized depreciation of investments (654,293) ------------ NET ASSETS $208,446,929 ============ NET ASSET VALUE PER SHARE Class A Shares $ 12.49 Class B Shares $ 12.51 Class Y Shares $ 12.92 OFFERING PRICE PER SHARE Class A Shares $ 12.62(a) Class B Shares $ 12.51 Class Y Shares $ 12.92 SHARES OUTSTANDING Class A Shares 12,368,595 Class B Shares 4,310,930 Class Y Shares 83
(a) Computation of offering price: 100/99 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) INVESTMENT INCOME Interest (Note 2) $5,246,726 ---------- EXPENSES Management fee (Note 4) $ 439,105 Shareholder service fee (Note 5) 219,551 Administration fee (Note 4) 88,030 Distribution fee (Note 5) 82,684 Transfer agent fee 64,278 Custodian and accounting fees 25,415 Registration expenses 24,322 Organizational expenses 12,620 Shareholder reports and postage expenses 11,143 Legal fees 3,965 Audit fees 2,788 Directors' fees and expenses 2,059 Miscellaneous 3,479 ---------- Total expenses 979,439 ---------- Deduct Waiver of administration fee (Note 4) (88,030) Waiver of management fee (Note 4) (52,159) ---------- NET INVESTMENT INCOME 4,407,476 ---------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss on investments (Note 2) (102,249) Change in unrealized appreciation (depreciation) on investments (2,564,213) ---------- NET LOSS ON INVESTMENTS (2,666,462) ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,741,014 ==========
(a) Net of interest expense of $163,166 related to borrowings. SEE NOTES TO FINANCIAL STATEMENTS. 78 MENTOR SHORT-DURATION INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED 3/31/99 YEAR ENDED (UNAUDITED) 9/30/98 NET INCREASE IN NET ASSETS Operations Net investment income $ 4,407,476 $ 5,167,036 Net realized gain (loss) on investments (102,249) 325,954 Change in unrealized appreciation (depreciation) on investments (2,564,213) 1,608,387 ------------- ------------- Increase in net assets resulting from operations 1,741,014 7,101,377 ------------- ------------- Distributions to Shareholders From net investment income Class A (3,256,831) (3,203,099) Class B (1,402,510) (2,394,223) Class Y -- (49) From net realized gain on investments Class A (110,579) -- Class B (46,577) -- ------------- ------------- Total distributions to shareholders (4,816,497) (5,597,371) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 111,629,716 169,053,248 Reinvested distributions 3,456,128 4,352,285 Shares redeemed (50,607,871) (82,572,822) ------------- ------------- Change in net assets resulting from capital share transactions 64,477,973 90,832,711 ------------- ------------- Increase in net assets 61,402,490 92,336,717 Net Assets Beginning of period 147,044,439 54,707,722 ------------- ------------- End of period (including accumulated distributions in excess of net investment income of ($764,158) and ($512,293), respectively) $ 208,446,929 $ 147,044,439 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
SIX MONTHS YEAR YEAR YEAR PERIOD ENDED 3/31/99 ENDED ENDED ENDED ENDED (UNAUDITED) 9/30/98 9/30/97 9/30/96 9/30/95 (c) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.74 $ 12.62 $ 12.50 $ 12.68 $ 12.74 -------- ------- ------- ------- -------- Income from investment operations Net investment income 0.35 0.70 0.77 0.82 0.22 Net realized and unrealized gain (loss) on investments (0.25) 0.15 0.12 (0.23) (0.03) -------- ------- ------- -------- -------- Total from investment operations 0.10 0.85 0.89 0.59 0.19 -------- ------- ------- -------- -------- Less distributions From net investment income (0.35) (0.73) (0.77) (0.77) (0.25) -------- ------- ------- -------- -------- Net asset value, end of period $ 12.49 $ 12.74 $ 12.62 $ 12.50 $ 12.68 ======== ======= ======= ======== ======== TOTAL RETURN* 0.84% 6.98% 7.33% 4.80% 1.51% RATIOS / SUPPLEMENTAL DATA Net assets, end of period (in thousands) $154,509 $93,135 $27,619 $ 7,450 $ 1,002 Ratio of expenses to average net assets 0.86%(a) 0.86% 0.86% 0.86% 0.71%(a) Ratio of expenses to average net asset excluding waiver 1.02%(a) 1.14% 1.12% 1.26% 1.00%(a) Ratio of net investment income to average net assets 5.10%(a) 5.24% 6.00% 5.90% 4.10%(a) Portfolio turnover rate 186% 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. 79 MENTOR SHORT-DURATION INCOME PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
SIX MONTHS YEAR YEAR ENDED 3/31/99 ENDED ENDED (UNAUDITED) 9/30/98 9/30/97 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.75 $ 12.62 $ 12.50 --------- ------- ------- Income from investment operations Net investment income 0.31 0.66 0.73 Net realized and unrealized gain (loss) on investments (0.22) 0.16 0.12 --------- ------- ------- Total from investment operations 0.09 0.82 0.85 --------- ------- ------- Less distributions From net investment income (0.33) (0.69) (0.73) --------- ------- ------- Net asset value, end of period $ 12.51 $ 12.75 $ 12.62 ========= ======= ======= TOTAL RETURN* 0.72% 6.68% 6.96% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 53,937 $53,908 $27,089 Ratio of expenses to average net assets 1.16%(a) 1.16% 1.16% Ratio of expenses to average net asset excluding waiver 1.32%(a) 1.44% 1.42% Ratio of net investment income to average net assets 4.80%(a) 4.94% 5.70% Portfolio turnover rate 186% 171% 75% YEAR PERIOD PERIOD ENDED ENDED ENDED 9/30/96 9/30/95 (D) 12/31/94 (e) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.67 $ 12.18 $ 12.50 ------- ------- --------- Income from investment operations Net investment income 0.73 0.59 0.41 Net realized and unrealized gain (loss) on investments (0.17) 0.52 (0.29) ------- ------- --------- Total from investment operations 0.56 1.11 0.12 ------- ------- --------- Less distributions From net investment income (0.73) (0.62) (0.44) ------- ------- --------- Net asset value, end of period $ 12.50 $ 12.67 $ 12.18 ======= ======= ========= TOTAL RETURN* 4.53% 9.22% 0.95% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $24,517 $19,871 $ 17,144 Ratio of expenses to average net assets 1.16% 1.20% 1.29%(a) Ratio of expenses to average net asset excluding waiver 1.56% 1.70% 1.29%(a) Ratio of net investment income to average net assets 5.60% 5.04% 4.90%(a) Portfolio turnover rate 411% 126% 166%
(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. * Total return does not reflect sales commissions and is not annualized. SEE NOTES TO FINANCIAL STATEMENTS. CLASS Y SHARES
SIX MONTHS PERIOD ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 (f) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.79 $ 12.57 -------- -------- Income from investment operations Net investment income 0.33 0.67 Net realized and unrealized gain (loss) on investments (0.20) 0.16 -------- -------- Total from investment operations 0.13 0.83 -------- -------- Less distributions From net investment income -- (0.61) -------- -------- Net asset value, end of period $ 12.92 $ 12.79 ======== ======== TOTAL RETURN* 1.02% 6.64% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 1 $ 1 Ratio of expenses to average net assets 0.61%(a) 0.61%(a) Ratio of expenses to average net asset excluding waiver 0.77%(a) 0.87%(a) Ratio of net investment income to average net assets 5.10%(a) 6.10%(a) Portfolio turnover rate 186% 171%
(a) Annualized. (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. 80 MENTOR HIGH INCOME PORTFOLIO COMMENTARY: THE MENTOR HIGH INCOME PORTFOLIO TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- MARKET REVIEW For the six-month period ending March 31, 1999 fixed-income Treasury yields rose across the yield curve. Two-year notes increased 71 basis points to 4.98% and 30-year rates increased 66 basis points to 5.62%. Despite the rise in Treasury yields the quarter saw good returns for high yield. Against this rise in interest rates, the spread between high yield debt and Treasuries declined during the early months of 1999, dropping from 631 basis points at year-end to 579 basis points at first quarter-end, according to the Chase High Yield Index. This leaves the spread, representing risk premium, much lower than last year's third quarter flight to quality level, but well above historical norms. New issuance for the first quarter of 1999 remained somewhat lower than the first quarter of 1998. This year's new issuance of $30.1 billion compares to $49.7 billion from last year. Inflows into the high yield market have remained lower as well, with cash inflows of $4.3 billion for this year's first quarter, against inflows of $8.9 billion for the same period in 1998. MANAGEMENT STRATEGY Significant cash flow into the Mentor High Income Portfolio increased total assets in the Fund from approximately $207 million at the end of the fourth quarter of 1998 to $267 million at 1999 first quarter-end. In spite of this 29% increase in the size of Portfolio assets, we were able to continue to find many attractive investment opportunities for the new funds. In fact, the percentage of Portfolio assets invested in cash has actually declined from 6.6% to 6.2% so far this year. The number of securities held increased from 152 to 167, with no single issuer representing more than 1.5% of the total portfolio. Over the course of the period we increased our emphasis on wider-spread paper, thereby allowing the Portfolio to outperform as spreads compressed with favorable economic conditions. By the end of March we had increased the single-B component of the Portfolio to 71.2%. This increase in single-B paper serves to make the portfolio more highly correlated to changes in the rate of growth in gross domestic product, and less correlated to the level of Treasury yields. We have continued to increase the Portfolio's concentration in telecommunication and media credits, these credits have outperformed against a background of consolidation and favorable regulatory developments. Our March 31 telecom/ media weighting of 34.7%, however, still represents a minor underweight against the high yield universe. PERFORMANCE REVIEW Corporate high yield assets performed well during the six-month period compared to other fixed-income asset classes. This is a trend that has been in place since the Federal Reserve lowered rates in October of last year. For the six-month period ended March 31, 1999 the Mentor High Income Portfolio A shares returned 6.97%, comparing favorably to a 4.64% return for its Merrill Lynch High Yield Index benchmark. MARKET OUTLOOK Positive news for bonds overseas is offset by domestic U.S. conditions that continue to put upward pressure on interest rates. The U.S. economy has repeatedly defied predictions of an imminent slowdown. With unemployment hitting 4.2% in March, inflation fears are mounting. Despite these fears, most broad measures of inflation have continued to trend downward. 81 MENTOR HIGH INCOME PORTFOLIO COMMENTARY: THE MENTOR HIGH INCOME PORTFOLIO TEAM MARCH 31, 1999 - -------------------------------------------------------------------------------- Without some new evidence of slowing economic growth, the bond market seems likely to trade within a fairly narrow range around current interest rate levels. In such an environment, lower-rated corporate bonds should continue to perform well. The outlook for high yield bonds continues to look favorable. Our forecast for continued strong domestic growth and benign inflation provides a favorable backdrop for the high yield market. The emerging markets, which detonated last fall's melt down, have been star performers this year after shrugging off Brazil's currency devaluation. While the equity markets have bounced off their early October lows to set new records, high yield spreads have only retraced about one half of their third quarter 1998 widening. Some potential pitfalls for our six-month outlook would include a resurgence in inflation, the continued escalation in default rates, or another flight-to-quality move caused by some extraneous event. PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 purchase in Mentor High Income Portfolio Class A and Class B Shares and the Merrill Lynch High Yield Master II Bond Index.~ [GRAPH]
6/23/98 7/31/98 8/31/98 9/30/98 3/31/99 Class A Shares(double dagger) 9,525 9,614 8,904 8,882 9,876 Class B Shares(dagger) 10,000 10,081 9,332 9,305 9,919 Merrill Lynch High Yield Master II Bond Index~ 10,000 10,064 9,556 9,581 10,025
Average Annual Returns as of 3/31/99 Including Sales Charges 1-Year Since Inception(triple dagger) Class A n/a (1.60%) Class B n/a (5.82%) PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The Merrill Lynch High Yield Master II Bond Index provides a broad-based measure of the performance of the non-investment grade U.S. domestic bond market. The index currently captures close to $200 billion of the outstanding debt of domestic market issuers rated below investment grade but not in default. + Represents a hypothetical investment of $10,000 in Mentor High Income Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. The Class B Shares reflects a redemption fee in effect at the end of each of the stated periods. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. ++ Represents a hypothetical investment of $10,000 in Mentor High Income Portfolio Class A Shares, after deducting the maximum sales charge of 4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. +++ Reflects operations of Mentor High Income Portfolio Class A and Class B Shares from the date of commencement of operations on 6/23/98 through 3/31/99. 82 MENTOR HIGH INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS - 93.20% CONSUMER DISTRIBUTION - 13.19% Agrilink Foods, 11.88%, 11/01/08 $2,500,000 $2,693,750 Big 5 Corporation Senior Notes, Series B, 10.88%, 11/15/07 2,000,000 2,040,000 CHS Electronics, Inc. Senior Notes, 9.88%, 4/15/05 2,000,000 1,640,000 Community Distributors, 10.25%, 10/15/04 1,250,000 1,156,250 Del Monte Foods Company Senior Discount Notes, 12.50%, 12/15/07 (a) 2,625,000 1,968,750 Disco S.A. Notes, 9.13% - 9.88%, 5/15/03 - 5/15/08 (a) 2,000,000 1,808,750 Fleming Companies, Inc., 10.50%, 12/01/04 2,300,000 2,167,750 Gruma S.A. de C.V. Senior Notes, 7.63%, 10/15/07 2,000,000 1,780,000 Jitney-Jungle Stores, 12.00%, 3/01/06 1,500,000 1,672,500 Kmart Corporation Debentures, 7.95%, 2/01/23 2,500,000 2,525,000 Luigino's Inc. Senior Subordinated Notes, 10.00%, 2/01/06 2,500,000 2,509,375 Musicland Group, Inc. Senior Subordinated Notes-B, 9.88%, 3/15/08 2,500,000 2,562,500 Owens & Minor, Inc., 10.88%, 6/01/06 2,000,000 2,170,000 Packaging Corporation of America, 9.63%, 4/01/09 1,000,000 1,027,500 Pantry, Inc. Senior Subordinated Notes, 10.25%, 10/15/07 2,500,000 2,637,500 Pathmark Stores Senior Subordinated Notes, 9.63%, 5/01/03 2,000,000 2,065,000 Phar-Mor, Inc. Senior Notes, 11.72%, 9/11/02 1,635,000 1,684,050 Supreme International Corporation, 12.25%, 4/01/06 2,000,000 1,990,000 ---------- 36,098,675 ---------- CONSUMER DURABLES - 5.79% Aetna Industries, Inc. Senior Notes, 11.88%, 10/01/06 1,500,000 1,567,500 Cluett American Corporation Senior Subordinated Notes, 10.13%, 5/15/08 (a) 2,000,000 1,840,000 Consoltex Group Senior Notes, 11.00%, 10/01/03 200,000 204,000 Decora Industries, Inc. Secured Notes, 11.00%, 5/01/05 (a) 2,000,000 1,930,000 French Fragrances, Inc. Senior Notes, 10.38%, 5/15/07 1,500,000 1,537,500 Galey & Lord, Inc. Senior Subordinated Notes, 9.13%, 3/01/08 2,225,000 1,724,375
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) CONSUMER DURABLES (CONTINUED) MCII Holdings Senior Secured Discount Notes, 12.00%, 11/15/02 1,500,000 1,297,500 Outsourcing Services Group Senior Subordinated Notes, 10.88%, 3/01/06 (a) 1,150,000 1,121,250 Simmons Company Senior Subordinated Notes, 10.25%, 3/15/09 500,000 519,375 Talon Automotive Group Senior Subordinated Notes, 9.63%, 5/01/08 (a) 1,855,000 1,632,400 Venture Holdings Trust Senior Notes, 9.75%, 4/01/04 2,500,000 2,462,500 ---------- 15,836,400 ---------- CONSUMER SERVICES - 25.36% American Media Operations, 11.63%, 11/15/04 2,380,000 2,576,350 AmeriCredit Corporation, 9.25%, 2/01/04 (a) 2,000,000 1,980,000 Argosy Gaming Company, 12.00%, 6/01/01 1,000,000 1,030,000 Argosy Gaming Company, 13.25%, 6/01/04 (a) 1,500,000 1,700,625 Booth Creek Ski Holdings Senior Notes-B, 12.50%, 3/15/07 2,250,000 2,148,750 Capstar Broadcasting Senior Discount Notes, 12.75%, 2/01/09 (a) 1,000,000 850,000 Casino America, 12.50%, 8/01/03 1,000,000 1,150,000 Centennial Cellular Senior Subordinated Notes, 10.75%, 12/15/08 2,350,000 2,496,875 Charter Communications, 8.63%, 4/01/09 (a) 2,000,000 2,050,000 Citadel Broadcasting Company Senior Subordinated Notes, 9.25%, 11/15/08 400,000 431,000 ContiFinancial Corporation, 7.50%, 3/15/02 2,000,000 1,560,000 CTI Holdings S.A. Senior Notes, 11.50%, 4/15/08 $3,000,000 $1,650,000 Diamond Cable Communi- cations Senior Discount Notes, 11.75%, 12/15/05 1,500,000 1,331,250 Filtronic PLC Senior Notes, 10.00%, 12/01/05 2,500,000 2,612,500 Frontiervision LP Senior Discount Notes, 11.88%, 9/15/07 2,375,000 2,075,156 Globo Communicacoes Senior Notes, 10.63%, 12/05/08 (a) 2,000,000 1,310,000 Group Maintenance America Senior Subordinated Notes, 9.75%, 1/15/09 500,000 512,500
83 MENTOR HIGH INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) CONSUMER SERVICES (CONTINUED) Grupo Televisa S.A. Senior Discount Notes-Euro, 13.25%, 5/15/08 $ 2,335,000 $ 1,973,075 Hermes Europe Railtel Senior Notes, 10.38%, 1/15/09 2,500,000 2,687,500 Hollywood Casino Corporation Senior Notes, 12.75%, 11/01/03 2,000,000 2,195,000 Hollywood Park, Inc. Senior Subordinated Notes, 9.50%, 8/01/07 2,000,000 2,030,000 Integrated Electric Services Senior Subordinated Notes, 9.38%, 2/01/09 1,000,000 1,023,750 Intrawest Corporation Senior Notes, 9.75%, 8/15/08 2,000,000 2,062,500 IXC Communications, Inc. Senior Subordinated Notes, 9.00%, 4/15/08 2,000,000 2,090,000 La Petite Academy LPA Holdings-B, 10.00%, 5/15/08 1,250,000 1,231,250 Level 3 Communications Senior Discount Notes, 10.50%, 12/01/08 2,000,000 1,260,000 Mail-Well Corporation Senior Subordinated Notes, 8.75%, 12/15/08 (a) 1,000,000 1,030,000 Majestic Star Casino, LLC, 12.75%, 5/15/03 1,500,000 1,665,000 Multicanal Participacoes, 12.63%, 6/18/04 1,000,000 865,000 Northland Cable Television Senior Subordinated Notes, 10.25%, 11/15/07 700,000 749,000 NTL Incorporated Senior Notes, 12.38%, 10/01/08 2,000,000 1,370,000 Oxford Automotive, Inc. 10.13%, 6/15/07 2,000,000 2,070,000 Premier Graphics, Inc. Senior Notes, 11.50%, 12/01/05 2,500,000 2,462,500 Premier Parks, Inc. Senior Discount Notes, 10.00%, 4/01/08 3,000,000 2,111,250 Sinclair Broadcast Group Senior Subordinated Notes, 8.75% - 9.00%, 7/15/07 - 12/15/07 2,750,000 2,811,250 Splitrock Services Inc., 11.75%, 7/15/08 2,000,000 1,910,000 Splitrock Services Inc., 11.75%, 7/15/08 - Warrants 2,000 40,000 Telewest Communication PLC Debentures, 11.00%, 10/01/07 1,500,000 1,320,000 Triton PCS, Inc., 11.63%, 5/01/08 4,000,000 2,380,000 United International Holdings Senior Discount Notes, 10.75%, 2/15/08 3,000,000 2,055,000
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) CONSUMER SERVICES (CONTINUED) Webb Corporation Senior Subordinated Notes, 10.25%, 2/15/10 $ 2,000,000 $ 2,030,000 Young American Corporation Senior Subordinated Notes, 11.63%, 2/15/06 (a) 1,000,000 500,000 ---------- 69,387,081 ---------- ENERGY - 4.47% Canadian Forest Oil Limited, 8.75%, 9/15/07 2,500,000 2,412,500 Cross Timbers Oil Company Senior Subordinated Notes, 8.75%-9.25%, 4/01/07- 11/01/09 2,120,000 2,054,600 Gulf Canada Resources Limited Debentures, 9.00%, 8/15/99 1,000,000 1,012,500 Houston Exploration Company Senior Subordinated Notes-B, 8.63%, 1/01/08 1,000,000 1,000,000 Hurricane Hydrocarbons Senior Notes, 11.75%, 11/01/04 (a) 1,000,000 460,000 Nationsrent, Inc, 10.38%, 12/15/08 2,000,000 2,100,000 Pride International, Inc., 9.38%, 5/01/07 1,000,000 980,000 Tesoro Petroleum Corporation Senior Subordinated Notes, 9.00%, 7/01/08 (a) 1,000,000 997,500 Universal Compression, Inc. Senior Discount Notes, 9.88%, 2/15/08 (a) 2,000,000 1,200,000 ---------- 12,217,100 ---------- HEALTH CARE - 4.02% Biovail Corporation International Senior Notes, 10.88%, 11/15/05 (a) 2,600,000 2,671,500 Columbia/HCA Healthcare, 6.91%, 6/15/05 1,000,000 922,500 King Pharmaceutical, Inc., 10.75%, 2/15/09 2,000,000 2,070,000 Mariner Post-Acute Network Senior Subordinated Notes, 10.50%, 11/01/07 1,500,000 270,000 Oxford Health Plans Senior Notes, 11.00%, 5/15/05 2,500,000 2,562,500 Tenet Healthcare Corporation, 8.63%, 1/15/07 2,500,000 2,500,000 ---------- 10,996,500 ---------- PRODUCER MANUFACTURING - 12.26% Agriculture Minerals & Chemicals, 10.75%, 9/30/03 3,000,000 3,030,000 Cambridge Industries, Inc., 10.25%, 7/15/07 2,000,000 1,700,000 CMI Industries Senior Subordinated Notes, 9.50%, 10/01/03 2,760,000 2,718,600
84 MENTOR HIGH INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) PRODUCER MANUFACTURING (CONTINUED) Compass Aerospace Corporation, 10.13%, 4/15/05 (a) $ 2,250,000 $2,160,000 Delta Mills, Inc., 9.63%, 9/01/07 1,500,000 1,511,250 Dine S.A. de C.V., 8.75%, 10/15/07 (a) 1,000,000 835,000 Globe Manufacturing Corporation Senior Subordinated Notes, 10.00%, 8/01/08 2,250,000 1,788,750 Hayes Lemmerz International Inc., 9.13%, 7/15/07 1,500,000 1,578,750 Hydrochemical Industrial Service Senior Subordinated Notes-B, 10.38%, 8/01/07 1,000,000 885,000 K&F Industries Senior Subordinated Notes, 9.25%, 10/15/07 2,000,000 2,065,000 Muzak LLC Senior Subordinated Notes, 9.88%, 3/15/09 2,000,000 2,035,000 Pacifica Papers, Inc. Senior Notes, 10.00%, 3/15/09 2,000,000 2,065,000 Repap New Brunswick, 9.00%, 6/01/04 2,000,000 1,950,000 Schuler Homes Senior Notes, 9.00%, 4/15/08 (a) 750,000 723,750 Tekni-Plex, Inc. Senior Subordinated Notes-B, 11.25%, 4/01/07 2,500,000 2,737,500 Terex Corporation Senior Subordinated Notes, 8.88%, 4/01/08 (a) 2,000,000 1,975,000 United Industries Group Senior Subordinated Notes, 9.88%, 4/01/09 1,750,000 1,802,500 W. R. Carpenter North America Senior Subordinated Notes, 10.63%, 6/15/07 2,000,000 1,995,000 ---------- 33,556,100 ---------- RAW MATERIALS/PRODUCTS INDUSTRIES - 6.86% Acetex Corporation Senior Notes, 9.75%, 10/01/03 2,250,000 2,126,250 Ackerley Group, 9.00%, 1/15/09 2,000,000 2,070,000 Advanced Micro Devices Senior Notes, 11.00%, 8/01/03 2,000,000 2,080,000 AEP Industries, 9.88%, 11/15/07 1,750,000 1,802,500 Anchor Lamina, Inc. Senior Subordinated Notes, 9.88%, 2/01/08 800,000 746,000 GS Technologies Operation, Inc. Senior Notes, 12.25%, 10/01/05 875,000 678,125 Hylsa S.A. de C.V. Bonds, 9.25%, 9/15/07 (a) 2,000,000 1,540,000
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) RAW MATERIALS/PRODUCTS INDUSTRIES (CONTINUED) Metromedia Fiber Network Senior Notes, 10.00%, 11/15/08 $1,000,000 $ 1,077,500 Panolam Industries International Senior Subordinated Notes, 11.50%, 2/15/09 1,000,000 1,030,000 Pioneer Americas Acquisition Senior Notes, 9.25%, 6/15/07 2,450,000 2,070,250 Ucar Global Enterprises Senior Subordinated Notes, 12.00%, 1/15/05 1,500,000 1,601,250 Vicap S.A. Guaranteed Notes, 10.25% - 11.38%, 5/15/02 - 5/15/07 (a) 2,000,000 1,940,250 ---------- 18,762,125 ---------- TECHNOLOGY - 3.50% Amazon.Com, Inc., 10.00%, 5/01/08 4,000,000 2,735,000 DecisionOne Holdings Discount Notes, 11.50%, 8/01/08 1,500,000 45,000 Dictaphone Corporation Senior Subordinated Notes, 11.75%, 8/01/05 1,000,000 730,000 Fairchild Semiconductor Senior Subordinated Notes, 10.38%, 10/01/07 2,500,000 2,543,750 Nextel Communications Senior Discount Notes, 9.75% - 12.00%, 8/15/04 - 11/01/08 3,500,000 3,520,000 ---------- 9,573,750 ---------- TRANSPORTATION - 2.37% Atlas Air, Inc. Senior Notes, 9.38% - 10.75%, 8/01/05 - 11/15/06 2,600,000 2,683,375 American Communication Lines, LLC Bonds, 10.25%, 6/30/08 (a) 1,000,000 1,032,500 Cenargo International PLC-1st Mortgage, 9.75%, 6/15/08 (a) 1,000,000 900,000 Greyhound Lines Senior Notes, 11.50%, 4/15/07 1,335,000 1,541,925 Pegasus Shipping Hellas Notes-A, 11.88%, 11/15/04 500,000 330,000 ---------- 6,487,800 ---------- UTILITIES - 15.38% American Cellular Corporation Senior Notes, 10.50%, 5/15/08 (a) 500,000 523,750 Cathay International Limited Senior Notes, 13.00%, 4/15/08 (a) 1,000,000 250,000 CIA Transporte Energia Senior Notes, 9.25%, 4/01/08 1,155,000 1,053,938 Clearnet Communications Senior Discount Notes, 14.75%, 12/15/2005 2,500,000 2,325,000
85 MENTOR HIGH INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) UTILITIES (CONTINUED) Crown Castle International Corporation Senior Discount Notes, 10.63%, 11/15/07 $1,500,000 $ 1,042,500 E.Spire Communications, Inc. Senior Discount Notes, 12.75% - 13.75%, 11/01/05 - 7/15/07 2,300,000 1,912,500 ICG Holdings, Inc. Discount Notes, 12.50%, 5/01/06 1,770,000 1,380,600 Intermedia Communications of Florida, 12.50%, 5/15/06 3,500,000 3,045,000 McLeodusa, Inc. Senior Discount Notes, 10.50%, 3/01/07 2,000,000 1,612,500 MetroNet Communications Senior Discount Notes, 9.95%, 6/15/08 (a) 1,500,000 1,166,250 Microcell Telecommunications Senior Discount Notes-B, 14.00%, 6/01/06 2,000,000 1,650,000 Millicom International Cellular Senior Discount Notes, 13.50%, 6/01/06 2,250,000 1,687,500 Netia Holdings Senior Discount Notes-B, 11.25%, 11/01/07 $2,500,000 $ 1,725,000 Optel, Inc. Senior Notes, 13.00%, 2/15/05 (a) 500,000 482,500 Pinnacle Holdings, Inc. Senior Discount Notes, 10.00%, 3/15/08 (a) 2,000,000 1,215,000 Price Communications Cellular, 11.25%, 8/15/08 750,000 727,500 Price Communications Wireless, Inc. Senior Subordinated Notes, 11.75%, 7/15/07 2,000,000 2,210,000 Primus Telecommunications Group Strips, 11.25% - 11.75%, 8/01/04 - 1/15/09 1,750,000 1,811,875 PSINet, Inc. Senior Notes, Series B, 11.50%, 11/01/08 2,000,000 2,260,000 Rogers Cantel, Inc. Debentures, 9.38%, 6/01/08 2,000,000 2,200,000 Rural Cellular Corporation, 9.63% - 11.38%, 5/15/08 - 5/15/10 1,260,577 2,350,235 Satelites Mexicanos Senior Notes, 10.13%, 11/01/04 (a) 2,000,000 1,650,000 SBA Communications Corporation Senior Discount Notes, 12.00%, 3/01/08 (a) 2,000,000 1,270,000 Sprint Spectrum Senior Notes, 11.00% - 12.50%, 8/15/06 2,000,000 2,067,500
PRINCIPAL AMOUNT MARKET VALUE CORPORATE BONDS (CONTINUED) UTILITIES (CONTINUED) Startec Global Communications Units, 12.00%, 5/15/08 (a) $ 2,000,000 $ 1,830,000 Startec Global Communications Units, 12.00%, 5/15/08 - Warrants (a) 2,000 500 Verio, Inc. Senior Notes, 10.38% - 11.25%, 4/01/05 - 12/01/08 2,400,000 2,629,500 ------------ 42,079,148 ------------ TOTAL CORPORATE BONDS (COST $257,187,903) 254,994,679 ------------ SHORT TERM INVESTMENT - 6.07% U.S. Government Agency Federal Home Loan Bank 5.00%, 4/01/99 (cost $16,617,000) 16,617,000 16,617,000 ------------ TOTAL INVESTMENTS (COST $ 273,804,903)-99.27% 271,611,679 OTHER ASSETS LESS LIABILITIES - 0.73% 1,989,123 ------------ NET ASSETS - 100.00% $273,600,802 ============
(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 $196,856,099 and $40,074,143, respectively. INCOME TAX INFORMATION At March 31, 1999, the aggregated cost of investment securities for federal income tax purposes was $273,804,903. Net unrealized depreciation aggregated $2,193,224, of which $6,150,546 related to appreciated investment securities and $8,343,770 related to depreciated investment securities. SEE NOTES TO FINANCIAL STATEMENTS. 86 MENTOR HIGH INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999 (UNAUDITED) ASSETS Investments, at market value (Note 2) Investment securities $254,994,679 Repurchase agreements 16,617,000 ------------ Total investments securities (cost $273,804,903) 271,611,679 ------------ Receivables Investments sold 991,194 Fund shares sold 4,740,070 Dividends and interest 5,969,856 Deferred expenses (Note 2) 17,586 ------------ TOTAL ASSETS 283,330,385 ------------ LIABILITIES Payables Investments purchased $7,393,451 Fund shares redeemed 128,615 Dividends 2,014,498 Accrued expenses and other liabilities 193,019 ---------- TOTAL LIABILITIES 9,729,583 ------------ NET ASSETS $273,600,802 ============ Net Assets represented by: (Note 2) Additional paid-in capital $280,028,597 Accumulated distributions in excess of net investment income (1,387,486) Accumulated net realized loss on investment transactions (2,847,085) Net unrealized depreciation of investments (2,193,224) ------------ NET ASSETS $273,600,802 ============ NET ASSET VALUE PER SHARE Class A Shares $ 11.11 Class B Shares $ 11.09 OFFERING PRICE PER SHARE Class A Shares $ 11.66(a) Class B Shares $ 11.09 SHARES OUTSTANDING Class A Shares 14,968,702 Class B Shares 9,672,181
(a) Computation of offering price: 100/95.25 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) INVESTMENT INCOME Interest (a) (Note 2) $ 9,734,692 ----------- EXPENSES Management fee (Note 4) $ 683,266 Shareholder service fee (Note 5) 244,024 Distribution fee (Note 5) 216,898 Transfer agent fee 189,210 Administration fee (Note 4) 97,610 Registration expenses 62,253 Shareholder reports and postage expenses 33,072 Custodian and accounting fees 32,590 Legal fees 9,128 Audit fees 6,417 Directors' fees and expenses 4,741 Organizational expenses 1,748 Miscellaneous 8,012 ---------- Total expenses 1,588,969 ----------- Deduct Waiver of management fee (Note 4) (269,733) Waiver of administration fee (Note 4) (38,398) ----------- NET INVESTMENT INCOME 8,453,854 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments (2,758,369) Change in unrealized appreciation (depreciation) on investments 7,130,262 ---------- NET GAIN ON INVESTMENTS 4,371,893 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,825,747 ===========
SEE NOTES TO FINANCIAL STATEMENTS. 87 MENTOR HIGH INCOME PORTFOLIO - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED 3/31/99 PERIOD ENDED (UNAUDITED) 9/30/98 (a) NET INCREASE IN NET ASSETS Operations Net investment income $ 8,453,854 $ 1,818,180 Net realized loss on investments (2,758,369) (88,715) Change in unrealized appreciation (depreciation) on investments 7,130,262 (9,323,486) ------------- ------------ Increase in net assets resulting from operations 12,825,747 (7,594,021) ------------- ------------ Distributions to Shareholders From net investment income Class A (5,362,802) (1,040,534) Class B (4,106,664) (1,178,956) ------------- ------------ Total distributions to shareholders (9,469,466) (2,219,490) ------------- ------------ Capital Share Transactions (Note 7) Proceeds from sale of shares 164,826,318 126,286,107 Reinvested distributions 4,363,177 1,281,553 Shares redeemed (12,701,114) (3,998,009) ------------- ------------ Change in net assets resulting from capital share transactions 156,488,381 123,569,651 ------------- ------------ Increase in net assets 159,844,662 113,756,140 Net Assets Beginning of period 113,756,140 -- ------------- ------------ End of period (including accumulated distributions in excess of net investment income of ($1,387,486) and ($371,874), respectively) $ 273,600,802 $113,756,140 ============= ============
(a) For the period from June 23, 1998 (commencement of operations) to September 30, 1998. SEE NOTES TO FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS CLASS A SHARES
SIX MONTHS PERIOD ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 (b) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 10.92 $ 12.00 -------- -------- Income from investment operations Net investment income 0.91 0.24 Net realized and unrealized loss on investments (0.17) (1.04) -------- -------- Total from investment operations 0.74 (0.80) -------- -------- Less distributions From net investment income (0.55) (0.28) -------- -------- Net asset value, end of period $ 11.11 $ 10.92 ======== ======== TOTAL RETURN* 6.97% (6.75%) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $166,294 $ 50,887 Ratio of expenses to average net assets 1.00%(a) 0.60%(a) Ratio of expenses to average net asset excluding waiver 1.11%(a) 1.30%(a) Ratio of net investment income to average net assets 9.07%(a) 7.36%(a) Portfolio turnover rate 29% 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. 88 MENTOR HIGH INCOME PORTFOLIO - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS CLASS B SHARES
SIX MONTHS PERIOD ENDED 3/31/99 ENDED (UNAUDITED) 9/30/98 (c) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 10.91 $ 12.00 -------- -------- Income from investment operations Net investment income 0.37 0.22 Net realized and unrealized gain (loss) on investments 0.33 (1.05) -------- -------- Total from investment operations 0.70 (0.83) -------- -------- Less distributions From net investment income (0.52) (0.26) -------- -------- Net asset value, end of period $ 11.09 $ 10.91 ======== ======== TOTAL RETURN* 6.60% (6.95%) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $107,307 $ 62,869 Ratio of expenses to average net assets 1.50%(a) 1.10%(a) Ratio of expenses to average net asset excluding waiver 1.61%(a) 1.80%(a) Ratio of net investment income to average net assets 8.57%(a) 6.87%(a) Portfolio turnover rate 29% 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. 89 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 - -------------------------------------------------------------------------------- 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 March 31, 1999, as follows: Mentor Growth Portfolio ("Growth Portfolio") Mentor Perpetual Global Portfolio ("Global Portfolio") Mentor Capital Growth Portfolio ("Capital Growth 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 Money Market Portfolio ("Money Market Portfolio") Mentor U.S. Government Money Market Portfolio ("Government Portfolio") Mentor Tax-Exempt Money Market Portfolio ("Tax-Exempt 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 the Money Market Portfolio, Government Portfolio and Tax-Exempt 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. 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. 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, Income and Growth Portfolio, and 90 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Balanced Portfolio traded on national stock exchanges and over-the-counter securities quoted on the NASDAQ National Market 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 91 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- established by Mentor Funds 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. 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 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 six months ended March 31, 1999, was approximately $19,877,322 or $1.23 per share based on average shares outstanding during the period at a weighted average interest rate of 4.57%. The maximum amount of borrowings outstanding for any day during the period was $83,156,353 (including accrued interest), as of February 10, 1999, at an interest rate of 4.84% and was 27.46% of total assets at that date. The average daily balance of reverse repurchase agreements outstanding for Short-Duration Income Portfolio during the six months ended March 31, 1999, was approximately $7,799,523 or $0.09 per share based on average shares outstanding during the period at a weighted average interest rate of 4.35%. The maximum amount of borrowings outstanding for any day during the period was $22,005,806 (including accrued interest), as of January 25, 1999, at an interest rate of 4.75% and was 7.31% 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 March 31, 1999, certain Portfolios had loaned securities to brokers which were collateralized by cash, U.S. Treasury securities and letters of credits. Cash collateral at March 31, 1999 was reinvested in U.S. Treasury and high quality money market instruments. Income from securities lending activities amounted to $233,048, $60,254, $28,592, $51,219, $65,533, and $14,285, for the Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Income and Growth Portfolio, Balanced Portfolio and Quality Income 92 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Portfolio, respectively for the six months ended March 31, 1999. 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 March 31, 1999, 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 $81,699,455 $83,131,779 $510,369 - Global 37,467,506 38,767,594 - - Capital Growth 21,805,109 22,282,979 - - Income and Growth 64,983,143 57,206,916 - $9,826,621 Balanced 85,449,627 87,189,594 92,520 521,991 Quality Income 332,669 341,000 - - - ------------------- ----------- ----------- -------- ----------
(e) Dollar Roll Transactions - Each of the Portfolios (except for the Growth 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, 93 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- may by considered a tax preference item to shareholders. 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 six months ended March 31, 1999, Balanced Portfolio and Municipal Income Portfolio had net realized gains of $1,366,401 and $47,700, 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 March 31, 1999, Balanced Portfolio and Municipal Income Portfolio had open positions in the following futures contracts: 94 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
NET UNREALIZED NUMBER OF NOTIONAL APPRECIATION PORTFOLIO CONTRACTS POSITION CONTRACTS EXPIRATION VALUE (DEPRECIATION) - ------------------ ----------- ---------- ------------------ ------------ -------------- --------------- Balanced 690 Short U.S. Long Bond Jun-99 $69,000,000 ($2,760,157) Municipal Income 130 Short Muni Bond Future Jun-99 $13,000,000 ($ 41,000) - ------------------ --- ---------- ------------------ ------ ----------- ----------
(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 six months ended March 31, 1999, Municipal Income Portfolio had a net realized gain of $61,690 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 Muncipal Income Portfolio for the six months ended March 31, 1999, was as follows:
PREMIUM RECEIVED FACE VALUE ------------ ------------- Options outstanding at September 30, 1998 $ - - Options written 110,880 200,000 Options closed (61,690) (100,000) - ------------------------ ------- -------- Options outstanding at March 31, 1999 $49,190 100,000 - ------------------------ ------- --------
(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 pledged to secure 95 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 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 of March 31, 1999, there was no open interest rate swap agreement. (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 and Capital Growth 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 delared and paid annually to all shareholders invested in the Growth Portfolio, Capital Growth 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 the 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") is a wholly owned subsidiary of Mentor Investment Group, LLC ("Mentor") and its affiliates. Mentor is a subsidiary of Wheat First Butcher Singer, Inc., which in turn is a wholly owned subsidiary of First Union Corporation ("First Union"). First Union is a leading financial services company; First Union has announced plans to acquire EVEREN Capital Corporation, which currently has a minority ownership interest in Mentor. 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 particular 96 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Portfolio: Growth Portfolio, 0.70%; Capital Growth Portfolio, 0.80%; 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-adviser to Municipal Income Portfolio, an annual fee expressed as a percentage of the Portfolio's average net assets as 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-adviser 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-adviser to the High Income Portfolio receives from the Investment Adviser an annual fee of 0.20% of the Portfolio's average daily net assets. No performance or incentive fees are paid to the sub-advisers. Under certain Sub-Advisory Agreements, the particular sub-adviser may, from time to time, voluntarily waive some or all of its sub-advisory fee charged to the Investment Adviser 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 on and 1.00% of its average daily net assets in excess of $75 million. For the six months ended March 31, 1999, Mentor Advisors and sub-advisers, earned and voluntarily waived the following management fees:
MANAGEMENT MANAGEMENT FEE SUB ADVISER FEE VOLUNTARILY FEE PORTFOLIO EARNED WAIVED EARNED/(WAIVED) - ------------------ ------------ ------------- ---------------- Growth $1,879,581 - - Global 945,039 - - Capital Growth 1,796,157 - - Income and Growth 984,781 - $318,695 Balanced 871,032 - - Municipal Income 360,928 - 135,265 Quality Income 631,092 $194,745 - Short-Duration Income 439,105 52,159 - High Income 683,266 269,733 118,103 - ------------------ ---------- -------- --------
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 six months ended 97 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- March 31, 1999, Mentor earned the following administrative fees:
ADMINISTRATIVE ADMINISTRATIVE FEE FEE VOLUNTARILY PORTFOLIO EARNED WAIVED - ----------------------- ---------------- --------------- Growth $268,512 - Global 90,764 - Capital Growth 224,520 - Income and Growth 131,304 - Balanced 116,138 - Municipal Income 60,155 - Quality Income 105,182 - Short-Duration Income 88,030 $88,030 High Income 97,610 38,398 - ----------------------- -------- -------
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 six months ended March 31, 1999, these direct reimbursements were as follows:
DIRECT PORTFOLIO REIMBURSEMENTS - ----------------------- --------------- Growth $16,887 Global 5,918 Capital Growth 15,307 Income and Growth 8,269 Balanced 9,752 Municipal Income 3,857 Quality Income 6,561 Short-Duration Income 6,006 - ----------------------- -------
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, Income and Growth Portfolio, Balanced Portfolio and Global Portfolio, 0.50% of the average daily net assets of the Municiap Income Portfolio, Quality Income Portfolio and High 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. 98 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 six months ended March 31, 1999, distribution fees and shareholder servicing fees were as follows:
SHAREHOLDER SERVICING FEE CLASS B ------------------------- PORTFOLIO DISTRIBUTION FEE CLASS A CLASS B - ----------------------- ----------------- ----------- ----------- Growth $1,518,365 $125,769 $506,121 Global 416,023 88,235 138,674 Capital Growth 881,368 267,508 293,790 Income and Growth 571,335 137,814 190,445 Balanced 631,992 78,320 210,664 Municipal Income 150,302 75,234 75,151 Quality Income 273,958 125,975 136,979 Short-Duration Income 82,684 150,647 68,903 High Income 216,898 135,872 108,152 - ----------------------- ---------- -------- --------
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 March 31, 1999, 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 4/01/99 British Pound 52,800 $ 85,113 $ 85,483 $ (370) 4/01/99 British Pound 92,130 148,513 149,158 (645) 4/01/99 British Pound 2,175 3,506 3,521 (15) 4/01/99 British Pound 14,584 23,509 23,611 (102) 4/01/99 British Pound 70,256 113,253 113,745 (492) 4/01/99 British Pound 24,996 40,294 40,469 (175) 4/06/99 British Pound 15,488 24,967 25,075 (108) 4/06/99 British Pound 39,804 64,164 64,443 (279) 4/06/99 British Pound 8,419 13,571 13,630 (59) 4/30/99 Eruo 213,787 230,730 230,249 481 4/01/99 Singapore Dollar 267,060 154,638 154,281 357 4/01/99 Singapore Dollar 90,042 52,137 52,017 120 4/06/99 Turkish Lira 6,092,812,500 163,324 163,675 (351) SALES 4/01/99 British Pound 25,808 41,602 41,784 182 - ------- ------------------ ------------- -------- -------- ------
99 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 --------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED 3/31/99 9/30/98 ---------------------------------- ---------------------------------- SHARES DOLLAR SHARES DOLLAR ---------------- ----------------- ---------------- ----------------- CLASS A: Shares sold 20,554,242 $ 317,331,063 12,016,618 $ 210,103,016 Shares issued upon reinvestment of distributions 209,824 2,939,628 346,751 6,474,795 Shares redeemed (19,478,995) (302,983,556) (12,306,743) (213,035,017) ----------- -------------- ----------- -------------- Change in net assets from capital share transactions 1,285,071 $ 17,287,135 56,626 $ 3,542,794 =========== ============== =========== ============== CLASS B: Shares sold 1,528,098 $ 22,897,224 4,138,130 $ 73,047,883 Shares issued upon reinvestment of distributions 1,070,622 14,539,244 1,667,456 30,460,604 Shares redeemed (4,214,789) (62,923,290) (4,698,525) (80,890,251) ----------- -------------- ----------- -------------- Change in net assets from capital share transactions (1,616,069) $ (25,486,822) 1,107,061 $ 22,618,236 =========== ============== =========== ============== CLASS Y: (A) Shares sold 738,165 $ 11,155,206 1,786,672 $ 30,602,698 Shares issued upon reinvestment of distributions 72,358 1,016,634 1 10 Shares redeemed (365,320) (5,597,286) (53,808) (894,152) ----------- -------------- ----------- -------------- Change in net assets from capital share transactions 445,203 $ 6,574,554 1,732,865 $ 29,708,556 =========== ============== =========== ==============
MENTOR PERPETUAL GLOBAL PORTFOLIO ----------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED 3/31/99 9/30/98 ---------------------------------- ---------------------------------- SHARES DOLLARS SHARES DOLLARS --------------- ---------------- --------------- ---------------- CLASS A: Shares sold 2,369,455 $ 47,572,822 2,057,945 $ 42,154,809 Shares issued upon reinvestment of distributions 247,790 4,601,451 113,726 2,255,270 Shares redeemed (1,738,114) (34,619,252) (1,275,534) (25,637,616) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 879,131 $ 17,555,021 896,137 $ 18,772,463 ========== ============= ========== ============= CLASS B: Shares sold 575,905 $ 11,051,076 1,821,588 $ 36,737,964 Shares issued upon reinvestment of distributions 452,424 8,053,146 232,932 4,477,444 Shares redeemed (668,319) (12,833,727) (983,971) (18,930,107) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 360,010 $ 6,270,495 1,070,549 $ 22,285,301 ========== ============= ========== ============= CLASS Y: (A) Shares sold - $ - 53 $ 1,000 Shares issued upon reinvestment of distributions 5 85 - 8 Shares redeemed - - - - ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 5 $ 85 53 $ 1,008 ========== ============= ========== =============
(a) For the year ended 9/30/98 - For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. 100 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
MENTOR CAPITAL GROWTH PORTFOLIO ---------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED 3/31/99 9/30/98 -------------------------------- ------------------------------- SHARES DOLLARS SHARES DOLLARS --------------- ---------------- --------------- --------------- CLASS A: Shares sold 6,564,289 $ 156,453,797 5,110,051 $ 121,415,173 Shares issued upon reinvestment of distributions 741,596 16,051,578 278,288 5,833,664 Shares redeemed (2,143,545) (51,113,253) (1,926,775) (45,709,577) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 5,162,340 $ 121,392,122 3,461,564 $ 81,539,260 ========== ============= ========== ============= CLASS B: Shares sold 2,032,338 $ 45,677,249 4,375,173 $ 98,931,464 Shares issued upon reinvestment of distributions 1,106,815 22,759,934 507,715 10,256,056 Shares redeemed (1,109,805) (24,997,919) (1,063,324) (23,712,167) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 2,029,348 $ 43,439,264 3,819,564 $ 85,475,353 ========== ============= ========== ============= CLASS Y: (A) Shares sold -- $ -- 48 $ 1,000 Shares issued upon reinvestment of distributions 5 125 1 12 Shares redeemed -- -- -- -- ========== ============= ========== ============= Change in net assets from capital share transactions 5 $ 125 49 $ 1,012 ========== ============= ========== =============
MENTOR INCOME AND GROWTH PORTFOLIO --------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED 3/31/99 9/30/98 -------------------------------- ---------------------------------- SHARES DOLLARS SHARES DOLLARS ------------- ---------------- --------------- ---------------- CLASS A: Shares sold 1,370,480 $ 27,029,221 2,515,923 $ 49,323,113 Shares issued upon reinvestment of distributions 307,537 5,973,032 371,373 7,153,831 Shares redeemed (621,010) (12,256,523) (915,370) (18,005,450) --------- ------------- --------- ------------- Change in net assets from capital share transactions 1,057,007 $ 20,745,730 1,971,926 $ 38,471,494 ========= ============= ========= ============= CLASS B: Shares sold 672,499 $ 13,233,579 2,642,784 $ 51,766,483 Shares issued upon reinvestment of distributions 426,951 8,278,473 559,471 10,748,481 Shares redeemed (594,987) (11,652,675) (1,074,795) (21,053,657) --------- ------------- ---------- ------------- Change in net assets from capital share transactions 504,463 $ 9,859,377 2,127,460 $ 41,461,307 ========= ============= ========== ============= CLASS Y: (A) Shares sold -- $ -- 53 $ 1,000 Shares issued upon reinvestment of distributions 3 55 2 30 Shares redeemed -- -- -- -- --------- ------------- ---------- ------------- Change in net assets from capital share transactions 3 $ 55 55 $ 1,030 ========= ============= ========== =============
(a) For the year ended 9/30/98 - For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. 101 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
MENTOR BALANCED PORTFOLIO ---------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED 3/31/99 9/30/98 ---------------------------------- --------------------------------- SHARES DOLLARS SHARES DOLLARS --------------- ---------------- --------------- --------------- CLASS A: Shares sold 7,357,872* $ 113,523,480 258,246 $ 3,577,935 Shares issued upon reinvestment of distributions 53,133 797,522 88,886 1,300,249 Shares redeemed (130,667) (3,234,796) (48,369) (810,000) Conversion of Class A Shares to Class Y Shares -- -- (273,416) (3,350,117) --------- ------------- -------- ------------ Change in net assets from capital share transactions 7,280,338 $ 111,086,206 25,347 $ 718,067 ========= ============= ======== ============ CLASS B: Shares sold 15,954,616* $ 214,154,434 412,403 $ 5,702,737 Shares issued upon reinvestment of distributions 115,470 1,719,720 -- -- Shares redeemed (1,523,742) (23,070,275) (9) (125) ---------- ------------- ----------- ------------ Change in net assets from capital share transactions 14,546,344 $ 192,803,879 412,394 $ 5,702,612 ========== ============= ========== ============ CLASS Y: (A) Shares sold 89 $ 1,303 -- $ -- Shares issued upon reinvestment of distributions 98 1,441 -- -- Shares redeemed (253,109) (3,662,016) (7,305) (100,000) Conversion of Class A Shares to Class Y Shares -- -- 273,416 3,350,117 ---------- ------------- ---------- ------------ Change in net assets from capital share transactions (252,922) $ (3,659,272) 266,111 $ 3,250,117 ========== ============= ========== ============
MENTOR MUNICIPAL INCOME PORTFOLIO ------------------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED 3/31/99 9/30/98 ------------------------------- -------------------------------- SHARES DOLLARS SHARES DOLLARS ------------- --------------- ------------- ---------------- CLASS A Shares sold 1,504,089 $ 23,829,403 1,688,990 $ 26,509,509 Shares issued upon reinvestment of distributions 42,336 672,278 75,715 1,188,701 Shares redeemed (225,496) (3,573,184) (423,337) (6,641,364) --------- ------------ --------- ------------ Change in net assets from capital share transactions 1,320,929 $ 20,928,497 1,341,368 $ 21,056,846 ========= ============ ========= ============ CLASS B: Shares sold 401,215 $ 6,346,794 1,208,341 $ 18,966,860 Shares issued upon reinvestment of distributions 43,605 690,709 91,662 1,436,340 Shares redeemed (298,124) (4,720,495) (436,001) (6,820,355) --------- ------------ --------- ------------ Change in net assets from capital share transactions 146,696 $ 2,317,008 864,002 $ 13,582,845 ========= ============ ========= ============ 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 ========= ============ ========= ============
(a)For the year ended 9/30/98 - For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. * Includes the following shares acquired from Strategy Portfolio in the tax-free exchange into the Balanced Portfolio on 11/13/98: Class A: 1,671,179 shares and Class B: 13,702,270 shares. 102 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
MENTOR QUALITY INCOME PORTFOLIO ---------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED 3/31/99 9/30/98 ---------------------------------- --------------------------------- SHARES DOLLARS SHARES DOLLARS --------------- ---------------- --------------- --------------- CLASS A: Shares sold 2,563,679 $ 33,699,152 4,256,782 $ 56,191,423 Shares issued upon reinvestment of distributions 143,437 1,900,220 233,015 3,077,659 Shares redeemed (1,184,191) (15,537,997) (1,597,720) (21,178,895) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 1,522,925 $ 20,061,375 2,892,077 $ 38,090,187 ========== ============= ========== ============= CLASS B: Shares sold 1,324,721 $ 17,465,999 3,811,046 $ 50,451,628 Shares issued upon reinvestment of distributions 163,492 2,165,673 272,551 3,600,049 Shares redeemed (1,332,345) (17,590,131) (1,478,885) (19,526,706) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 155,868 $ 2,041,541 2,604,712 $ 34,524,971 ========== ============= ========== ============= 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 ========== ============= ========== =============
MENTOR SHORT-DURATION INCOME PORTFOLIO ---------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED 3/31/99 9/30/98 -------------------------------- ------------------------------- SHARES DOLLAR SHARES DOLLAR --------------- ---------------- --------------- --------------- CLASS A: Shares sold 7,806,852 $ 97,941,814 9,921,692 $ 124,978,729 Shares issued upon reinvestment of distributions 183,533 2,308,531 200,895 2,525,409 Shares redeemed (2,935,105) (36,833,260) (4,997,458) (62,897,886) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 5,055,280 $ 63,417,085 5,125,129 $ 64,606,252 ========== ============= ========== ============= CLASS B: Shares sold 1,087,645 $ 13,687,902 3,500,465 $ 44,073,519 Shares issued upon reinvestment of distributions 91,026 1,147,597 145,226 1,826,827 Shares redeemed (1,096,207) (13,774,611) (1,563,684) (19,674,936) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 82,464 $ 1,060,888 2,082,007 $ 26,225,410 ========== ============= ========== ============= 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 ========== ============= ========== =============
(a) For the year ended 9/30/98 - For the period from November 19, 1997 (initial offering of Class Y Shares) to September 30, 1998. 103 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
MENTOR HIGH INCOME PORTFOLIO ------------------------------------------------------------------ SIX MONTHS ENDED PERIOD ENDED 3/31/99 9/30/1998 (B) --------------------------------- ------------------------------ SHARES DOLLAR SHARES DOLLAR -------------- ---------------- ------------- -------------- CLASS A: Shares sold 10,801,852 $119,005,627 4,775,208 $ 56,602,255 Shares issued upon reinvestment of distributions 204,356 2,252,051 51,541 580,207 Shares redeemed (695,694) (7,699,179) (168,561) (1,889,222) ---------- ------------ --------- ------------ Change in net assets from capital share transactions 10,310,514 $113,558,499 4,658,188 $ 55,293,240 ========== ============ ========= ============ CLASS B: Shares sold 4,173,805 $ 45,820,691 5,890,307 $ 69,683,852 Shares issued upon reinvestment of distributions 192,281 2,111,126 62,441 701,346 Shares redeemed (456,107) (5,001,935) (190,546) (2,108,787) ---------- ------------ --------- ------------ Change in net assets from capital share transactions 3,909,979 $ 42,929,882 5,762,202 $ 68,276,411 ========== ============ ========= ============
(b) For the period from June 23, 1998 (commencement of operations) to March 31, 1999. ADDITIONAL INFORMATION 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 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. 104 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 Former Chairman & Chief Executive Officer Hamilton Beach/Proctor-Silex, Inc. 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 Former 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 AND SECRETARY Senior 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 INVESTMENT GROUP LOGO] RIVERFRONT PLAZA 901 EAST BYRD STREET RICHMOND, VIRGINIA 23219 (800) 382-0016 1999 MENTOR DISTRIBUTORS, LLC MK 364 ---------- BULK RATE U.S. POSTAGE PAID RICHMOND, VIRGINIA PERMIT NO. 1209 ---------- SIGNATURES As required by the Securities Act of 1933, this Pre- Effective Amendment No. 1 to the Registration Statement has been signed on behalf of the Registrant, in the City of Richmond in the State of Virginia on the 12th day of August, 1999. Mentor Funds By: /s/Paul F. Costello ------------------------------ Paul F. Costello President and Principal Executive Officer As required by the Securities Act of 1933, this Pre-Effective Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the 12th day of August, 1999.
Signature Title - ------------ ------ */s/Daniel J. Ludeman Chairman and Trustee (Chief - ------------------------------ Executive Officer) Daniel J. Ludeman */s/Peter J. Quinn, Jr. Trustee - ------------------------------ Peter J. Quinn, Jr. */s/Arnold H. Dreyfuss Trustee - ------------------------------ Arnold H. Dreyfuss */s/Thomas F. Keller Trustee - ------------------------------ Thomas F. Keller */s/Louis W. Moelchert, Jr. Trustee - ------------------------------ Louis W. Moelchert, Jr. Trustee - ------------------------------ Troy A. Peery, Jr. 4 */s/Arch T. Allen, III Trustee - ------------------------------ Arch T. Allen, III */s/Weston E. Edwards Trustee - ------------------------------ Weston E. Edwards Trustee - ------------------------------ Jerry R. Barrentine */s/J. Garnett Nelson Trustee - ------------------------------ J. Garnett Nelson /s/Paul F. Costello President - ------------------------------ Paul F. Costello /s/Michael A. Wade Assistant Treasurer (Principal - ------------------------------ Financial and Accounting Michael A. Wade Officer) */s/Paul F. Costello Attorney-in-fact - ------------------------------ Paul F. Costello
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