-----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, Bh2S6GfIcZNt/dNqyW10qUZbAdPJbMaQoWiS83XjpB/dmUgoNUsK9z2BkPI71D2v 0TkwC8GWb5b4EkOeVXjBWw== 0000916641-96-000464.txt : 19960606 0000916641-96-000464.hdr.sgml : 19960606 ACCESSION NUMBER: 0000916641-96-000464 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960605 SROS: NYSE 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-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06550 FILM NUMBER: 96576896 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TOWER STREET 2: C/O FEDERATED INVESTORS CITY: PITTSBURGH STATE: PA ZIP: 15222 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-30D 1 MENTOR SEMI-ANNUAL REPORT N30D [LOGO HERE] MENTOR FUNDS SEMI-ANNUAL REPORT MARCH 31, 1996 MENTOR FUNDS TABLE OF CONTENTS
Page Message from the Chairman and President.................................................. 1 Manager's Commentary Growth Portfolio....................................................................... 3 Perpetual Global Portfolio............................................................. 6 Capital Growth Portfolio............................................................... 10 Strategy Portfolio..................................................................... 12 Income & Growth Portfolio.............................................................. 15 Municipal Income Portfolio............................................................. 17 Quality Income & Short-Duration Income Portfolios...................................... 19 Portfolios of Investments Growth Portfolio....................................................................... 22 Perpetual Global Portfolio............................................................. 27 Capital Growth Portfolio............................................................... 35 Strategy Portfolio..................................................................... 38 Income & Growth Portfolio.............................................................. 43 Municipal Income Portfolio............................................................. 49 Quality Income Portfolio............................................................... 53 Short-Duration Income Portfolio........................................................ 56 Statements of Assets and Liabilities..................................................... 58 Statements of Operations................................................................. 60 Statements of Changes in Net Assets...................................................... 62 Financial Highlights..................................................................... 65 Notes to Financial Statements............................................................ 76 Shareholder Information.................................................................. Inside back cover
MENTOR FUNDS MESSAGE FROM THE CHAIRMAN AND PRESIDENT TO OUR SHAREHOLDERS: Thank you for your investment in Mentor Funds. It is our privilege to send you Mentor Funds Semi-Annual Report for the period ended March 31, 1996. The Mentor family of funds is part of Mentor Investment Group, a firm that provides diversified investment services to a broad range of investors through its money management affiliates. Seven different investment styles are available to investors through Mentor Funds, an additional series of institutional funds, and through separately-invested portfolios. The Semi-Annual Report that follows represents the eight Portfolios of Mentor Funds. MENTOR FUNDS [GRAPH GOES HERE] [in order from lowest to highest risk and reward] (bullet)SHORT-DURATION INCOME PORTFOLIO a short-term bond fund (bullet)QUALITY INCOME PORTFOLIO an intermediate-term bond fund (bullet)MUNICIPAL INCOME PORTFOLIO a tax-free bond fund (bullet)INCOME & GROWTH PORTFOLIO a balanced fund (bullet)STRATEGY PORTFOLIO a tactical assset allocation high total return fund (bullet)CAPITAL GROWTH PORTFOLIO a large-capitalization, high-quality growth fund (bullet)PERPETUAL GLOBAL PORTFOLIO a global growth fund (bullet)GROWTH PORTFOLIO a small-to-mid-capitalization growth fund 1 MENTOR FUNDS MESSAGE FROM THE CHAIRMAN AND PRESIDENT (CONTINUED) The Portfolios of Mentor Funds are designed to give you flexibility in seeking to fulfill a broad range of investment objectives. To help you and your Financial Consultant identify a combination of Mentor Portfolios that may help you meet your investment objectives, we have an asset allocation program especially developed for Mentor Funds. It is designed to assist investors in determining personal risk/reward profiles, and it suggests where to distribute specific investments among Mentor Portfolios. In the commentaries that follow, the management teams of Mentor Portfolios present their perspectives on the markets and their strategies for investing your assets. Complete performance information for each Portfolio, relative to the appropriate index, is also included in the reports. Please review the information carefully. Should you have questions, please call your Financial Consultant, or call us directly, (800)382-0016. We welcome your communications. On behalf of all of us at Mentor Investment Group, we thank you for your investment in Mentor Funds. Sincerely, /s/ DANIEL J. LUDEMAN /s/ PAUL F. COSTELLO Daniel J. Ludeman Paul F. Costello CHAIRMAN AND CEO PRESIDENT [LOGO HERE] THE MENTOR MISSION To maintain an investment management firm that is second to none in the quality of its investment process, the skill and training of its Associates, and the shared commitment among all to provide the highest level of service and ethical behavior to clients. FOR MORE INFORMATION AND A PROSPECTUS FOR MENTOR FUNDS AND MENTOR INSTITUTIONAL SERIES TRUST, PLEASE CALL US, (800)382-0016, OR CONTACT YOUR FINANCIAL CONSULTANT. THE PROSPECTUSES CONTAIN COMPLETE INFORMATION REGARDING FEES, SALES CHARGES, AND EXPENSES. PLEASE READ THEM CAREFULLY BEFORE INVESTING OR SENDING MONEY. 2 MANAGER'S COMMENTARY MENTOR GROWTH PORTFOLIO During the six months ended March 31, 1996, Mentor Growth Portfolio A shares gained 15.44%, outperforming the benchmark Russell 2000 Index~ which returned 7.38%. B shares gained 14.93% during the period.* The market capitalization emphasis of the Growth Portfolio remains in small and mid-size companies, because we believe that the earnings outlook for this group of stocks is above average. In our last report to you we noted that in mid-1995, the market focused again on the strong, consistent earnings growth of small-capitalization growth companies, when it became apparent that the extraordinary earnings growth of larger, more cyclical companies was unsustainable. WHAT HAS CHANGED SINCE THAT REPORT? First, the economy. Following a surprisingly weak fourth quarter, the economy -- marked by the worst Christmas-selling season since 1990 -- has begun to gain strength. Many factors caused a stronger than expected first quarter, including the end of labor strikes in the transportation sector, and sizable and early tax refunds. In line with the economic strength, earnings reports for the first quarter were generally positive, but yielded few surprises. Second, interest rates rose in the first quarter, reflecting economic strength and surprising many who expected the general weakness of the fourth quarter to cause a further rate decline in the first quarter of 1996. Third, focus on the small- to- mid-capitalization stocks intensified, causing the S&P Mid-Capitalization Index to outperform the S&P 500 for the first time.** WHAT HAVE WE DONE DIFFERENTLY OVER THE PAST HALF YEAR, AND WHAT ARE WE DOING TO ADDRESS THE CHANGING MARKETS? Our emphasis remains on purchasing and holding companies with price/earnings ratios that do not adequately reflect the outlook for their earnings growth rates. At the end of March, 1996, the growth rates of our companies for the past twelve months and for the one and three years projected, relative to the S&P 500 companies, were as follow: EARNINGS GROWTH RATES*** past 12 est. next est. next months 12 months three years Growth Portfolio 27.4% 48.7% 24.0% S&P 500 11.7% 11.1% 7.0% With companies' earnings growing at rates double the S&P 500, one would expect to see a significant price/earnings multiple premium to the S&P 500; however, this is simply not the case. Price/Earnings Ratio Estimated 12-month earnings*** Growth Portfolio 19.4x S&P 500 16.9x 3 MENTOR GROWTH PORTFOLIO Despite the sizeable spread between the earnings growth rates of our companies and those of the S&P 500, the price/earnings premium is only roughly 15%. It is also worth noting that the overall price/earnings ratio of the Portfolio remains at a discount to projected and past earnings growth rates. We continue to find very attractive companies that meet our investment criteria. We believe that our strategy of buying rapidly growing small and mid-capitalization companies at discounts from their earnings growth rates will be rewarded by the market. Thank you for your support. Sincerely, Theodore W. Price, CFA Jeffrey S. Drummond PORTFOLIO MANAGER PORTFOLIO MANAGER Linda A. Ziglar, CFA Edward Rick IV PORTFOLIO MANAGER RESEARCH ANALYST * Return figures do not include sales charges. See accompanying tables with average annual total returns. ** The S&P Mid-Capitalization Index is an unmanaged index of mid-size companies with market values ranging from $85 million to $7.162 billion. The Standard & Poor's Index (S&P 500) is an unmanaged, market-value-weighted index of 500 widely held domestic common stocks. Both indexes do not reflect expenses and may not correspond to the performance of a managed portfolio in which expenses are incurred. Investors cannot invest in an index. *** Source: Indata, IBES PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class A and the Russell 2000.~ [GRAPH GOES HERE] 6/5/95 6/30/95 9/30/95 3/31/96 Class A 9,425 9,859 11,251 13,086 Russell 2000 10,000 10,518 11,557 12,346 Total Returns as of 3/31/96 Including Sales Charges 1-Year Since Inception++ Class A n/a 30.82% 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 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 3000 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 3/31/96. 4 MENTOR GROWTH PORTFOLIO PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class B Shares and the Russell 2000.~ [GRAPH GOES HERE] Class B Russell 2000~ 3/31/86 10,000 10,000 12/31/86 9,349 9,707 12/31/87 8,424 8,855 12/31/88 9,846 11,060 12/31/89 11,554 12,856 12/31/90 10,251 10,347 12/31/91 15,402 15,112 12/31/92 17,801 17,895 12/31/93 20,579 21,278 12/31/94 19,657 20,890 9/30/95 25,967 26,263 3/31/96 29,845 28,201 AVERAGE ANNUAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year 5-Year 10-Year Class B 37.68% 18.39% 11.55% 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 3000 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 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 ending value of the Class B Shares reflects a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. 5 MANAGER'S COMMENTARY MENTOR PERPETUAL GLOBAL PORTFOLIO Over the six-month period ended March 31, 1996, the Mentor Perpetual Global Portfolio achieved a total return of 11.90% for A shares, compared to the 9.27% of the MSCI World Index,* expressed in US dollars. The B shares gained 11.47%.** The market value of the Portfolio has increased from $18.7 million to $31.2 million over the same period. Asset allocation weightings on March 31, were as follow: (Bullet) 31.1% US (Bullet) 30.0% Europe (Bullet) 12.3% Japan (Bullet) 15.3% Asia (Bullet) 2.3% Latin America (Bullet) 9.0% Cash REVIEW OF THE MARKETS During the period most of the world's markets produced positive returns. US equities and the dollar-linked Asian markets were leaders, although the Japanese and European markets produced satisfactory returns, as well, despite some currency weakness. UNITED STATES After a relatively lackluster fourth quarter of 1995, economic growth proved to be surprisingly strong in the first quarter of 1996, despite harsh winter weather. Although inflation remained low, optimism faded that the Federal Reserve would further ease monetary policy, and the view that the Fed Funds rate might be increased later in the year became commonly expressed. Consequently, treasuries sold off. Despite this upset in fixed-income markets, stocks continued to make good gains with the S&P Index rising by 11.72%.*** Corporate profit growth was satisfactory, while the flow of funds into stock mutual funds was spectacular. EUROPE Most of the major European stock markets rose over the period in dollar terms, with the exception of Italy, which was held back by political worries ahead of a general election. Stock market gains were achieved despite a background of stagnant economies and disappointing corporate profits. Three factors were at work: First, European central banks continued to bring down short rates as, with fiscal policy constrained by Maastricht Treaty requirements, monetary policy remained the principal tool that governments could use to fight growing unemployment. Second, with the leading members of the European Union re-affirming their commitment to the European Monetary Union (EMU), bond market yields began to converge with German rates, which traditionally are the lowest in Europe. French, Dutch, and Italian bond markets rallied despite the weakness in US treasuries. Third, the duration of the downturn in corporate profits at last began forcing European companies to contemplate dramatic restructuring, potentially resulting in long-lasting fundamental improvements to profitability. 6 MANAGER'S COMMENTARY MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED) The outsider in these developments was the United Kingdom. The British economy proved to be surprisingly strong, and the bottom of the interest-rate cycle appeared to have been passed. Pressures on bond yields were further increased by the UK's refusal to commit to EMU, and by a burgeoning public sector deficit. As a result, British shares lagged considerably behind those of Germany, France, and the Netherlands. The best dollar-adjusted gains of all, however, were achieved by Switzerland, which, being outside the European Union, is on an independent cycle. JAPAN The equity market recovery, which began last summer, continued, although the gains were reduced somewhat, to dollar-investors, by weakness in the Japanese yen. The economy at last showed convincing signs of recovery, giving investors confidence that corporate profits, excluding the financial sector, would rise after five years of decline. Further encouragement was provided by the fact that domestic insurance companies, the largest institutional holders of shares, turned net buyers in March after many months of consistent selling. ASIA The core markets of Hong Kong, Singapore, and Malaysia were all strong. Singapore and Malaysia continued to enjoy rapid economic growth, while Hong Kong was boosted by signs that the policy of economic austerity was coming to an end in China. Political worries created considerable volatility in the peripheral markets of Korea, Taiwan, and India. LATIN AMERICA Positive foreign portfolio fund flows provided evidence that the "tequila hangover" created by the devaluation of the Mexico peso in December, 1994, had finally worn off. To dollar investors, however, the overall return of the period was limited. MARKET OUTLOOK The change in direction in bond yields is at least likely to slow down the rise in stock prices for the next quarter or so. Yields are now rising in the US, Japan, and the United Kingdom -- the countries with the world's three largest stock markets. Of these three markets, Japan is least likely to be held back, as rates are rising from historically low levels while the economy moves out of its longest post-war recession. Rising rates signal that the Japanese economy is returning to health and so can be tolerated, if not welcomed, by equity investors who should witness a spectacular recovery in corporate earnings. Short-term pressures on European yields are much less. The greater danger to European stock markets is posed by continued disappointment over poor corporate results, as continental economies do little more than stagnate. By contrast Asian economies are suffering from too much growth. Symptoms of over-heating (rising inflation and swelling 7 MANAGER'S COMMENTARY MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED) current account deficits) are likely to be treated by monetary tightening at a time when interest rates are already being pushed up as a result of currency links with the dollar. Even so, it is difficult to be too bearish about prospects for world equity markets. Although faster than expected US economic growth and recent spikes upward in certain commodity prices have increased inflation fears, little inflationary momentum seems to be rebuilding in the industrialized world. Japan and Western Europe are awash with surplus manufacturing capacity at a time when the capabilities of Asian and East European industries are rapidly expanding. Competitive pressures as world trade becomes ever more integrated should continue to keep a lid on inflation. The sell-off in US treasuries has helped to deflate some of the speculative pressures that had built up in global stock markets. In some markets stocks still look a little expensive when compared to bonds. Corrections in stock prices in the months to come should lay the foundation for solid rises later in the year when inflationary fears should no longer undermine the world's bond markets. Investors must keep in mind that investments outside the United States are subject to some additional considerations, including currency fluctuations; political and social instability; differing securities, regulations and accounting standards; possible changes in taxation; and periods of illiquidity. Sincerely, Scott McGlashan PORTFOLIO MANAGER, PERPETUAL 8 MENTOR PERPETUAL GLOBAL PORTFOLIO 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.* [GRAPH GOES HERE] Morgan Stanley A Shares B Shares 3/24/94 10,000 9,996 9,450 9/30/94 10,545 9,982 9,487 3/31/95 10,985 9,764 9,313 9/30/95 12,124 10,655 10,587 3/31/96 13,249 11,815 12,323 AVERAGE ANNUAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year Since Inception++ Class A Shares 19.90% 8.66% Class B Shares 22.21% 9.61% 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 Morgan Stanley Capital International (MSCI) World Index is an arithmetic average weighted by market value, of the performance of approximately 1450 securities listed on the stock exchanges of 20 countries including the USA, 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. ** Return figures do not include sales charges. See accompanying tables with average annual total returns. *** 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. Investors cannot invest in an index. + 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 initial public investment on 3/24/94 through 3/31/96. ~ 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 six-year period following the date of purchase. Class B Shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. 9 MANAGER'S COMMENTARY MENTOR CAPITAL GROWTH PORTFOLIO For the three- and six-month periods ended March 31, the Capital Growth Portfolio A shares returned 8.25% and 13.17%, respectively, outperforming the S&P 500 benchmark.* B shares returned 8.08% and 12.72% for the same periods. The S&P 500 returned 5.44% in the first quarter of 1996, marking the first time since 1959 that this index has returned more than 5% for five consecutive quarters. In the six-month period ended March 31, the S&P was up 11.72%. During this period the stock market has continued to advance, despite the fact that interest rates have reversed course and moved higher this year. Corporate earnings growth continues to decelerate. Given the substantial rise in the stock market over the past year, it can reasonably be asked whether equity prices are substantially overvalued. One approach to the answer: Compare our current holdings to their historical valuation and earnings outlook. Over the past 10 years the average annual earnings-per-share growth for the stocks in the Capital Growth Portfolio has been 14% -- approximately twice the average for the S&P 500. During the same period the price appreciation for those equities has also averaged 14%, indicating that over the long term, earnings trends are the key determinant of stock prices. Over the past 10 years, however, price growth has been substantially more volatile than earnings growth, in part a result of the fact that short-term fluctuations in equity prices are affected more than long-term price trends, by changes in investor psychology and interest rates. In fact, the P/E ratio for our current Portfolio, which has averaged 17.5x, has ranged from a low of 14x to a high of 22x. The potential risk to equities from negative shifts in investor psychology and interest rates is largely a function of valuation levels, with higher valuations associated with greater risk. Despite the gain in the market over the past year, the stocks in our Portfolio are in line with their historical average P/E levels. Specifically, because our Portfolio trades at 17x estimated 1996 earnings, we believe that equity prices, regarded in an historical context, are not significantly overvalued. The stable growth equities we own are performing well relative to the market, a trend we expect to continue if corporate earnings growth continues to slow. They trade at reasonable valuations relative to their long-term earnings potential. And we are presently unaware of reasons to prevent these holdings from continuing to show, on average, future earnings growth consistent with their historical above-average earnings growth rates. Sincerely, John G. Davenport, CFA Richard H. Skeppstrom II CHIEF EQUITY OFFICER PORTFOLIO MANAGER P. Barton Peters, CFA Chris W. Rusbuldt, CFA DIRECTOR OF EQUITY PORTFOLIO MANAGER RESEARCH * 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. Investors cannot invest in an index. ** Return figures do not include sales charges. See accompanying tables with average annual total returns. 10 MENTOR CAPITAL GROWTH PORTFOLIO 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.~ [GRAPH GOES HERE] S&P 500 B Shares A Shares 4/29/92 10,000 10,000 9,450 9/30/92 10,215 10,061 9,524 9/30/93 11,543 10,818 10,306 9/30/94 11,965 10,601 10,165 9/30/95 15,521 12,443 12,216 3/31/96 17,340 14,252 13,789 AVERAGE ANNUAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year Since Inception+++ Class A Shares 19.34% 8.52% Class B Shares 21.72% 9.06% 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 six-year period following the date of purchase. Class B Shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. 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 initial public investment on 4/29/92 through 3/31/96. 11 MANAGER'S COMMENTARY MENTOR STRATEGY PORTFOLIO In the last few days, subsequent to the closing of the March quarter, our asset allocation model directed us to invest 14% of fund assets into bonds, reducing the percentage allocated to stocks by that same amount. This recent shift is the first time since May 15, 1995, that the model has suggested any participation in the bond market. Our asset allocation model has continued to guide the Strategy Portfolio into what we believe to be the appropriate asset classes in a timely manner. While many of the portfolios in our category of mutual funds have suffered because of their bond concentration, our equity bias has caused our fund to perform well. We believe that the stock market may be getting ready for a short-term rest before embarking, later in the summer, on another spirited rally. In the last few months several factors have combined to improve investors' economic perception. Due to special "one-time" conditions, consumers began a flurry of buying in March and April, which has convinced many that the economy is on the rebound. We suspect that this perception will change in coming months, and that recent high bond yields will drop again. We also anticipate that the Federal Reserve will be forced to cut short-term rates further. For the last six months, we have gradually shifted the equity assets of your Portfolio into stocks with smaller capitalizations. This has proven timely, as the A shares of Mentor Strategy appreciated during the first THREE months of 1996 by 8.04%, compared to only 5.44% for the S&P 500.+ B shares returned 7.82% during the same period, and for the SIX-month period, A shares returned 10.32% and B shares returned 9.88%.++ Now that it appears that the performance of equities may take a short sabbatical, the decision to buy bonds is intended to enhance our ability to make the most of this lull. Active asset allocation is a clear advantage in managing the Strategy Portfolio. Even though we do not expect a significant correction in stocks for at least nine or 12 more months, if and when our model begins to pick up signs of increasing risks, we have the flexibility to move into cash reserves as a protective measure. In most funds investors who can detect signs of impending market danger typically have the limited options of riding out the vulnerable periods, or selling their fund shares. Selling fund shares creates the potential for leaving assets un-invested well into the next bullish phase. We are fortunate that the guidelines of our fund allow us to implement the recommendations of our asset allocation model. We have also been pleased with the results of our sector discipline. Late last year it directed a portion of the Portfolio's assets into the energy sector, which, with the rise in the price of oil and the relatively short current supply, has proven timely. We now find our system beginning to de-emphasize financial and medical/healthcare issues, which have enjoyed 12 MANAGER'S COMMENTARY MENTOR STRATEGY PORTFOLIO (CONTINUED) large price appreciation over the last 16 months. We are targeting new purchases in basic industry and consumer durables. Both sectors should be major beneficiaries of the continued world-wide capital expansion and the removal of trade restrictions. If our economic expectations prove to be accurate and the Federal Reserve again cuts short-term interest rates, economically sensitive stocks should prosper, particularly small-capitalization stocks. We expect to see investor optimism reach full maturity in the next 18 months, to an extent that has not occurred since the 1960s. INVESTORS SHOULD KEEP IN MIND THAT WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE WITH THE PROCESS DESCRIBED, THERE ARE NO GUARANTEES THAT IT WILL BE SUCCESSFUL. Sincerely, Don R. Hays PORTFOLIO MANAGER + 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. Investors cannot invest in an index. ++ Return figures do not include sales charges. See accompanying tables with average annual total returns. 13 MENTOR STRATEGY PORTFOLIO PERFORMANCE COMPARISON Comparison of change of value of hypothetical $10,000 investment in Mentor Strategy Portfolio Class A Shares and the S&P 500.~ [GRAPH GOES HERE] Class A S&P 500~ 6/5/95 9,425 10,000 6/30/95 9,695 10,235 9/30/95 10,554 10,890 3/31/96 11,781 12,346 TOTAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year Since Inception** Class A n/a 17.82% 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 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 Strategy 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 Strategy Portfolio Class A from the date of issuance on 6/5/95 through 3/31/96. Comparison of change of value of hypothetical $10,000 investment in Mentor Strategy Portfolio Class B Shares and the S&P 500.~ [GRAPH GOES HERE] S&P Class B 1/10/93 10,000 10,000 1/12/93 10,028 10,160 1/6/94 9,683 9,032 1/12/94 10,157 9,893 1/6/95 12,206 11,198 9/30/95 13,178 11,775 3/31/96 14,723 13,337 AVERAGE ANNUAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year Since Inception+ Class B 25.25% 11.69% *** Represents a hypothetical investment of $10,000 in Mentor Strategy 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 ending value of the Class B Shares reflects a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. + Reflects operations of Mentor Strategy Portfolio Class B from the date of issuance on 10/29/93 through 3/31/96. 14 MANAGER'S COMMENTARY MENTOR INCOME & GROWTH PORTFOLIO REVIEW OF MARKETS The fourth quarter of 1995 was a startlingly good period for both equity and fixed-income markets. The equity and fixed-income markets, however, "de-coupled" during the first quarter of 1996. Bond yields rose sharply, producing negative total returns for all but securities of the shortest maturities. Equities, on the other hand, continued their steady climb. The same backdrop remained in place during the last two quarters -- stable or slowing growth and low inflation - -- generally, a positive backdrop for both asset classes. MARKET CONDITIONS For the six-month period ending March 31, 1996, the Portfolio returned 11.28% for A shares, and 10.89% for B shares.~ During the last six months the equity portion of the Portfolio benefited from exposure to the materials and retail sectors. Conversely, the Portfolio was hurt by an underweighting in healthcare and information technology. The equity and fixed-income portions of the Portfolio continue to outperform their respective benchmarks (S&P 500, which returned 11.72% for the six months, Lehman Brothers Aggregate which returned 2.40% for the six months).+ MARKET OUTLOOK The United States economy appears to have crossed the low point of the slow-down, and should grow by 2.0-2.5% in 1996. Inflation continues to remain in check, excluding the volatile food and energy sectors, which have been a short-term negative. For the first time in many years, however, wage growth has outpaced inflation over the last few months. The inventory correction seems close to an end, as businesses have made considerable progress in curbing inventory accumulation. The housing sector continues to provide modest support to the economy, despite the quarter's harsh weather. Globally, the outlook is positive for the second half of 1996, with all three major central banks in an accommodative mode, while Japanese housing starts have made an important turn. Corporate profits should continue to grow into 1996, but at a slower pace than 1995. High single-digit earnings growth seems likely, given that most of the productivity gains from restructuring and capital spending are behind us. We should continue to see share repurchases and, to a lesser extent, dividend increases. PORTFOLIO STRATEGY We continued to add selectively to our significant holdings in commercial aerospace suppliers, as the sector has begun to be recognized. The domestic airlines are now in a position to spend on refurbishing and replacing their aging fleets, which should provide the next leg to the cycle. The strong order progress to date has been almost exclusively from international carriers. After many years of underweighting the retail sector we moved toward a market weighting. Margins of well-run companies should improve as department store consolidation and the contraction of specialty stores begin to ease the overcapacity problem. In addition individual companies have restructured operations to improve profitability. In the commodity cyclicals area we maintained our large commitment to aluminum stocks, as producers should continue to benefit from increased demand and restrained supply. On the other hand we virtually eliminated our position in paper stocks, as the supply/demand outlook continues to erode with further announcements of new supply. 15 MANAGER'S COMMENTARY MENTOR INCOME & GROWTH PORTFOLIO (CONTINUED) The stock market rally continued into 1996, leaving few sectors undervalued. While broad valuations remain high, we are still finding new opportunities in specific companies. With the optimism of year-end 1995 now removed from the yield structure, the question is, "What next?" We typically have a strong view on the fundamental economic outlook and the direction of interest rates, but at present, we are content to maintain a neutral duration structure relative to the market. It is equally possible at present to make the stronger economy/higher interest rate case, or the moderate growth/lower interest rate case, because the economy could go either way. In addition the economic data seem to be less precise, making economic analysis more difficult. Historically, we do not remain neutral for extended periods, and we expect a move from neutral to occur sometime during the second quarter. Sincerely, Paul D. Kaplan FIXED-INCOME PORTFOLIO MANAGER Arnold C. Schneider, CFA EQUITY PORTFOLIO MANAGER ~ Return figures do not include sales charges. See accompanying tables with average annual total returns. + 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 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. Investors cannot invest in an index. PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Income & Growth Portfolio Class A and Class B Shares, the S&P 500 and the Lehman Brothers Aggregate Bond Index.+ [GRAPH GOES HERE] LAGG/S&P 500 A Shares B Shares 5/24/93 10,000 9,450 10,133 9/30/93 10,353 9,909 10,506 9/30/94 10,446 10,578 11,239 9/30/95 12,879 12,402 12,614 3/31/96 13,998 13,764 14,319 AVERAGE ANNUAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year Since Inception++ Class A Shares 18.98% 11.97% Class B Shares 21.26% 12.69% 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. ** Represents a hypothetical investment of $10,000 in Mentor Income & 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 six-year period following the date of purchase. Class B Shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. *** Represents a hypothetical investment of $10,000 in Mentor Income & 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 & Growth Portfolio Class A and Class B Shares from the date of initial public investment on 5/24/93 through 3/31/96. 16 MANAGER'S COMMENTARY MENTOR MUNICIPAL INCOME PORTFOLIO GENERAL MARKET CONDITIONS The fixed-income markets were strong through January of 1996; however, concerns about the strength of the economy and the possibility of higher inflation led to weakness through February and March. Municipals increased in value relative to treasuries, as higher rate levels kept supply of new issues low, and the threat of tax reform's negative effect on the municipal market diminished. HOW MARKET CONDITIONS AFFECTED THE PORTFOLIO The Portfolio had a return of 3.03% for A shares and 2.72% for B shares+ over the past six months. This compares to 2.87% for the Lehman Municipal Bond Index++ for the same period. The Portfolio continues to be "barbelled" between AAA-insured bonds and higher yielding BBB and non-rated securities, which allows our extensive credit research to add value to the Portfolio. The Portfolio's largest exposure is to the healthcare industry (17% of assets). There have been no significant shifts in sector or rating distribution that have affected performance, and the Portfolio remains well diversified. This, coupled with low issuance due to virtually no refunding issues at current rates, should help municipals outperform treasuries during 1996. With the potential strength of the economy in question and inflation slowly increasing, the Portfolio will stay very close to its target maturities and structure. Economic weakness, which would allow the Federal Reserve to lower short rates, would be viewed very constructively from our viewpoint. We feel it will be difficult for the longer maturities to rally significantly without lower rates at the short end of the interest rate curve. Sincerely, David C. Johnson PORTFOLIO MANAGER + Return figures do not include sales charges. See accompanying tables with average annual total returns. ++ 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. 17 MENTOR MUNICIPAL INCOME PORTFOLIO 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 GOES HERE] Lehman Municipal Bond Index A Shares B Shares 4/29/92 10,000.00 9,525.00 10,000.00 9/30/92 10,561.21 10,034.00 10,528.00 9/30/93 11,906.12 11,637.00 12,134.00 9/30/94 11,615.75 11,101.00 11,511.11 9/30/95 12,915.57 12,151.00 12,348.00 3/31/96 13,286 12,519 12,690 AVERAGE ANNUAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year Since Inception*** Class A 2.39% 5.90% Class B 2.88% 6.26% 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. Class B Shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. 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 initial public investment on 4/29/92 through 3/31/96. 18 MANAGERS' COMMENTARY MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO MARKET CONDITIONS During the six-month period ended March 31, two-year rates decreased 0.10% and 10-year rates increased 0.15%.+ While modest steepening of the yield curve suggests -- at first glance -- a period of relative tranquillity for the bond market, this was hardly the case. In fact, the first four months, October through January, saw a continuation of the strong market rally that began in early 1995, and was followed by a rapid and sustained sell-off during February and March. Two-year and 10-year treasuries yielded 5.75% and 6.32%, respectively, on March 31, up 0.60% and 0.75% from year-end levels. January optimism regarding timely resolution to the balanced budget impasse and the prospect of additional rate cuts quickly faded. February and March brought a surprisingly strong series of economic statistics, culminating in a March employment number showing the largest monthly job growth in more than 12 years. PERFORMANCE After a very strong 1995, Mentor Short-Duration Income and Quality Income Portfolios generated modest performance results for the January-March period. Mentor Short-Duration Income Portfolio A shares had a return of 2.98% for the six-month period ended March 31 and B shares returned 2.75%, which compares to 2.80% for the Merrill Lynch three-year Treasury Index.++ The Quality Income Portfolio A shares returned 2.30% and the B shares, 2.02% for the six-month period.+++ The Merrill Lynch seven-year Treasury Index returned 1.96%. Treasury securities, with their positive convexity characteristics, helped us to outperform during late 1995 and the first month of 1996, but hurt relative performance later in the quarter. In addition the decision to maintain Portfolio durations approximately 10% longer than the three-year and seven-year treasury benchmarks hampered performance during the market sell-off. MARKET OUTLOOK Economic growth clearly firmed in the first quarter and growth expectations for the second quarter now stand in the 2-3% range. At that level it appears increasingly likely that the Federal Reserve will remain on the sidelines for the present time. As a result, we have shortened the duration of our Portfolios to a market-neutral position, which we anticipate maintaining until a clearer picture of the economy's direction emerges. We remain optimistic on the market's longer-term prospects, and are looking for an opportunity to resume a more aggressive posture. Sincerely, P. Michael Jones, CFA Steven C. Henderson PORTFOLIO MANAGER PORTFOLIO MANAGER + Of course, CDs and treasury bills are guaranteed as to principal and interest, and money-market funds offer an opportunity for stability of principal, while the Portfolio's shares are not guaranteed and will fluctuate. ++ The Merrill Lynch 3-Year and 7-Year Treasury Indexes are adjusted to reflect reinvestment of interest on securities in the index. The Merrill Lynch 3-Year and 7-Year Treasury Indexes are not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. Investors cannot invest in an index. +++ Return figures do not include sales charges. See accompanying tables with average annual total returns. 19 MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO (CONTINUED) 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 GOES HERE] Merrill Lynch 7-Year Treasury Index A Shares B Shares 4/29/92 10,000 9,525 10,000 9/30/92 11,052 9,846 10,324 9/30/93 12,380 10,378 10,827 9/30/94 11,705 10,036 10,406 9/30/95 13,496 11,222 11,354 3/31/96 13,606 11,480 11,583 AVERAGE ANNUAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year Since Inception*** Class A Shares 4.80% 3.59% Class B Shares 5.54% 3.94% 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 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. Class B Shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. ** 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. *** Reflects operations of Mentor Quality Income Portfolio Class A and Class B Shares from the date of initial public investment on 4/29/92 through 3/31/96. 20 MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO 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.~ [GRAPH GOES HERE] Class A 3-Year Treasury 6/16/96 9,900 10,000 6/30/95 9,946 10,062 9/30/95 9,931 10,139 3/31/96 10,350 10,423 TOTAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year Since Inception** Class A n/a 3.49% 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 is adjusted to reflect reinvestment of interest on securities in the index. The Merrill Lynch 3-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. 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 3/31/96. 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. [GRAPH GOES HERE] Class B 3-Year Treasury 4/28/94 10,000 10,000 6/30/94 10,040 10,019 12/31/94 10,093 10,075 6/30/95 10,516 10,920 9/30/95 10,623 11,051 3/31/96 11,327 11,360 AVERAGE ANNUAL RETURNS AS OF 3/31/96 INCLUDING SALES CHARGES 1-Year Since Inception++ Class B 4.20% 4.71% 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 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 ending value of the Class B shares reflects a redemption fee of 4.00% on any redemption less than one year from the purchase date. 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 initial public investment on 4/28/94 through 3/31/96. 21 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS 89.13% BASIC MATERIALS 0.72% Blount, Inc.-Class A 77,300 $ 2,376,975 CAPITAL GOODS & CONSTRUCTION 3.01% Clayton Homes, Inc. 185,425 3,870,747 Continental Waste, Inc.* 161,850 1,760,119 LSI Industries, Inc. 91,650 1,649,700 Southern Energy Homes* 118,500 1,747,875 Superior Services, Inc.* 72,000 954,000 9,982,441 CONSUMER CYCLICAL 14.67% Apple South, Inc. 198,300 4,858,350 Baby Superstore, Inc.* 15,000 682,500 Casey's General Stores, Inc. 172,950 4,064,325 Consolidated Products Company* 133,725 2,373,619 Corporate Express, Inc.* 125,550 4,143,150 Dollar General Corporation 134,341 3,895,889 Friedman's, Inc.-Class A* 113,700 2,274,000 General Nutrition Companies, Inc.* 150,300 3,757,500 Leggett & Platt, Inc. 59,600 1,363,350 Outback Steakhouse, Inc.* 80,900 3,048,919 Quality Dining, Inc.* 158,200 4,666,900 Regal Cinemas, Inc.* 133,762 4,915,753 Rio Hotels & Casinos, Inc.* 105,150 1,603,538 Scientific Games Holding* 76,200 2,133,600 Sinclair Broadcasting Group, Inc.* 26,050 690,325 StudioPlus Hotels, Inc.* 89,700 2,489,175 Sunglass Hut International, Inc.* 52,050 1,724,156 48,685,049 CONSUMER STAPLES 1.71% Performance Food Group* 52,650 1,289,925 Richfood Holdings, Inc. 155,700 4,388,794 5,678,719 ENERGY 0.94% Nuevo Energy Company* 109,250 3,140,938
22 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) FINANCIAL 8.48% Compdent Corporation* 61,800 $ 2,224,800 Credit Acceptance Company* 64,300 1,189,550 First Commerce Corporation 99,750 3,291,750 First Commonwealth, Inc.* 75,550 1,945,412 First Data Corporation 38,458 2,711,289 First Investors Financial Services Group* 85,100 787,175 Jayhawk Acceptance Corporation* 87,700 1,074,325 Leader Financial Corporation 90,950 4,001,800 Markel Corporation* 66,510 5,852,880 National Commerce Bancorporation 114,996 3,564,876 United Dental Care, Inc.* 38,300 1,484,125 28,127,982 HEALTH 26.93% American Oncology Research, Inc.* 10,000 425,000 Dentsply International, Inc. 80,450 3,238,113 Emcare Holdings, Inc.* 88,500 2,400,563 Gelman Sciences, Inc.* 99,850 2,596,100 Gulf South Medical Supplies, Inc.* 97,150 3,667,412 Health Management Associates* 137,550 4,814,250 Healthdyne Technologies* 130,550 1,623,716 Healthsource, Inc.* 115,600 4,479,500 Henry Schein, Inc.* 84,200 2,462,850 Idexx Laboratories, Inc.* 57,000 2,394,000 Lunar Corporation* 53,100 2,270,025 Manor Care, Inc. 93,250 3,660,063 Medaphis Corporation* 41,500 2,012,750 Medcath, Inc.* 160,550 4,696,088 Meridian Diagnostics, Inc. 178,550 1,897,093 Multicare Companies, Inc.* 108,700 3,084,362 NCS Healthcare, Inc.-Class A* 3,000 73,500 National Dentex Corporation* 100,600 2,200,625 National Surgery Centers, Inc.* 96,300 3,105,675 Omnicare, Inc. 73,150 3,940,956 Orthodontic Centers of America, Inc.* 56,300 1,689,000 Parexel International Corporation* 39,200 1,695,400 Patterson Dental Company* 99,850 3,020,463 Pediatric Services of America, Inc.* 113,650 2,883,868 Phycor, Inc.* 85,500 3,762,000
23 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) HEALTH (CONTINUED) Physician Sales & Services, Inc.* 138,500 $ 3,427,875 Renal Treatment Centers* 169,700 4,030,375 Res-Care, Inc.* 15,000 313,125 Respironics, Inc.* 134,500 2,824,500 Serologicals Corporation* 82,200 2,260,500 Sofamor/Danek Group, Inc.* 112,450 3,809,243 Vencor, Inc.* 133,125 4,592,813 89,351,803 TECHNOLOGY 22.83% 3Com Corporation* 20,700 825,412 ACC Corporation* 137,850 4,083,806 Altera Corporation* 45,700 2,553,487 Applied Microsystems Corporation* 121,550 1,139,531 Benchmark Electronics, Inc.* 128,300 3,832,963 Casino Data Systems* 115,575 1,964,775 Cheyenne Software, Inc.* 66,750 1,051,313 Cisco Systems, Inc.* 50,000 2,318,750 Coherent Communications Systems Company* 67,850 1,408,947 Computational Systems Inc.* 70,650 1,254,037 Concord Electronics Fleet Services, Inc.* 58,175 1,541,638 Cooper & Chyan Technology, Inc.* 109,300 1,530,200 Danka Business Systems 78,500 3,316,625 Envoy Corporation* 107,650 2,529,775 Flextronics International, Ltd.* 94,950 2,895,975 Frontier Corporation* 172,600 5,436,900 Industrial Group, Inc.* 1,000 19,500 Intercel, Inc.* 80,500 1,811,250 JDA Software Group, Inc.* 110,400 1,311,000 Kent Electronics Corporation* 82,100 2,904,288 Linear Technology Corporation 61,950 2,586,413 Macromedia, Inc.* 47,900 2,047,725 Micros Systems, Inc.* 46,400 1,160,000 Natural Microsystems Corporation* 57,500 1,725,000 Novadigm, Inc.* 66,250 1,002,031 Palmer Wireless, Inc.* 50,900 973,463 Perceptron, Inc.* 85,625 2,215,547 Radisys Corporation* 73,650 1,178,400 SDL, Inc.* 54,050 1,621,500 Saville Systems, Inc.* 102,950 1,943,181
24 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) TECHNOLOGY (CONTINUED) TechForce Corporation 133,750 $ 1,404,375 Trident International, Inc.* 104,500 1,985,500 Uniphase Corporation* 73,200 2,836,500 US Long Distance Corporation* 76,600 1,522,425 Watsco, Inc. 81,150 2,109,900 Worldcom, Inc.* 123,762 5,693,052 75,735,184 TRANSPORTATION 2.30% Atlantic Southeast Airlines, Inc. 129,500 3,318,438 Mesaba Holdings, Inc 117,150 1,317,937 United Transnet, Inc.* 126,200 2,981,475 7,617,850 MISCELLANEOUS 7.54% ABR Information Services* 69,925 3,251,512 Accustaff, Inc.* 201,600 5,090,400 Alternative Resources Corporation* 16,000 520,000 Career Horizons, Inc.* 239,400 7,122,150 Childtime Learning Centers* 118,700 1,075,718 Clintrials Research, Inc.* 76,150 2,636,694 IntelliQuest Information Group, Inc.* 15,800 434,500 Olsten Corporation 75,450 2,433,263 Romac International* 79,950 2,458,462 25,022,699 TOTAL COMMON STOCKS (COST $198,292,653) 295,719,640
25 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value SHORT-TERM INVESTMENT 11.84% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/29/96, 5.48%, due 4/01/96 collateralized by $41,190,357 Federal National Mortgage Association 7.00%, 1/01/26, (cost $39,268,803) $39,268,803 $ 39,268,803 TOTAL INVESTMENTS (COST $237,561,456) 100.97% 334,988,443 OTHER ASSETS LESS LIABILITIES (0.97%) (3,204,610) NET ASSETS 100.00% $331,783,833
* Securities not currently producing income. SEE NOTES TO FINANCIAL STATEMENTS. 26 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS 89.91% ARGENTINA 0.24% Telefonica de Argentina 3,000 $ 76,875 BRAZIL 1.06% Cemig CIA Energetic 3,000 83,710 Telebras-Spons ADR~ 3,400 169,150 Vale Do Rio Doche 2,200 86,313 339,173 DENMARK 1.14% Danisco A/S 4,100 211,329 Sophus Berendsen 1,300 154,982 366,311 FINLAND 0.78% Cultor OY 5,500 249,035 FRANCE 3.40% AXA 3,497 214,938 Axime 3,000 381,293 Cardif SA 800 130,275 Comptoirs Modernes 300 113,494 Roussel-UCLAF 1,150 251,216 1,091,216 GERMANY 2.47% Deutche Bank AG 2,400 120,634 Merck KGAA 5,600 241,360 SAP AG 1,000 143,147 Veba AG 5,900 286,770 791,911 GREAT BRITAIN 10.56% Argyll Group, PLC 35,000 163,996 B.A.T. Industries, PLC 20,000 147,588 BASS 3,500 39,957 British Aerospace PLC 11,000 144,215 British Gas PLC 40,500 141,243 British Telecom 30,000 169,185
27 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) GREAT BRITAIN (CONTINUED) Cable & Wireless 20,000 $ 162,393 General Electric 20,000 111,874 Glaxo Wellcome 13,000 162,897 Grand Metro 25,000 161,019 Inchcape PLC 35,000 152,778 Land Securities 15,000 143,315 Prudential Corporation PLC 20,000 129,884 Rank Organisation PLC 15,000 111,035 Salvesen 20,000 78,144 Scotia Holdings 10,000 94,322 Scott & Newcastle 15,000 146,520 Smith H.W. Group PLC 15,000 101,877 Standard Chartered 17,500 162,660 Sun Alliance Group PLC 25,000 137,744 Tate & Lyle PLC 20,000 148,809 Tesco PLC 30,000 122,024 Transport Development Group 45,000 142,170 Unigate 20,000 124,847 Unilever PLC 10,000 186,203 3,386,699 HONG KONG 6.86% Bank of East Asia 9,600 32,891 CDL Hotels 150,000 90,178 Cheung Kong Holdings 24,000 169,108 China O/Seas Land 300,000 68,652 China Resource 30,000 17,260 Chinese Estates 74,000 66,971 Citic Pacific Limited 16,000 62,058 CP Pokphand 100,000 47,513 Dah Sing Financial 20,000 63,092 Goldlion Holdings 90,000 72,142 Henderson China 56 161 Henderson Investment 103,000 94,548 Henderson Land Development 14,000 98,194 Hong Kong Land Holdings 21,000 50,400 Hong Kong Telecom, Ltd.~ 108,200 216,129 HSBC Holdings PLC 19,125 286,824 Hutchison Whampoa, Ltd. 14,000 88,329 Hysan Development 14,000 45,160
28 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) HONG KONG (CONTINUED) International Bank of East Asia 100,000 $ 69,169 Jardine Matheson Holding 10,000 78,000 Jardine Strategic Holding 27,125 85,715 Jardine Strategic-Warrants* 3,125 1,172 JCG Holdings 70,000 69,731 Liu Chong Hing Investment 60,000 67,876 Mingly Corporation 117,000 25,715 National Mutual Asia 35,000 31,902 New World Infrastructure 20,000 42,665 Sun Hung Kai Property 3,000 26,860 Swire Pacific Limited-"A 12,000 105,499 Tingyi 100,000 26,342 2,200,256 INDIA 0.35% Indian Opportunity 11,000 111,760 INDONESIA 0.36% Citra Marga Local 60,000 77,631 PT Indonesia Satellite A 800 27,300 Sorini (Sorbitol) 2,000 10,051 114,982 JAPAN 12.22% Bridgestone Corporation 5,000 83,532 Dainippon Ink & Chemical 20,000 99,118 Dainippon Screen 9,000 84,838 Daiwa Kosho Lease Company 8,000 85,118 Futaba 1,000 45,172 Godo Steel 18,000 105,838 Hankyu 23,000 136,955 Heiwa Corporation 4,000 95,198 Hitachi, Ltd. 5,000 48,532 Izumiya 5,000 83,532 Jeol 7,000 53,834 Kamagumi Company, Ltd. 12,000 122,078 Kawasaki Heavy Industries 18,000 91,726 Kenwood Corporation 15,000 87,638
29 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) JAPAN (CONTINUED) Komatsu Seiren 4,000 $ 38,453 Kurimoto 8,000 85,118 Long Term Credit Bank 18,000 150,189 Mineba 8,000 68,319 Mitsubishi Estate 6,000 82,319 Mitsubishi Motors Company 10,000 85,305 Murata Manufacturing 3,000 103,038 Namco 2,000 61,599 NGK Insulators 5,000 53,666 Nichicon 8,000 104,531 Nippon Steel 24,000 82,430 Nippon Telegraph & Telephone 16 116,776 Nisshin Steel 9,000 35,867 Penta Ocean 10,000 71,585 PS Corporation 7,000 114,331 Raito Kogyo 4,000 75,412 Rinnai 5,000 113,864 Shizouka Bank 11,000 138,597 Showa Corporation 7,000 59,452 Skylark Company 3,000 56,559 Sodick Company 5,000 52,732 Sumitomo Heavy 10,000 39,199 Sumitomo Metal Mining 16,000 153,810 Taisei Corporation 12,000 85,118 Taisho Pharmaceutical 7,000 143,730 Tokushu Paper 7,000 79,052 Tokyo Electric Power 5,000 127,864 Tokyu Land 6,000 26,935 Tsubakimoto Chain 12,000 77,950 Yamato Kogyo 12,000 114,238 Yokohama Reito 5,000 64,399 York-Benimaru 1,000 35,933 3,921,479 KOREA 0.31% CITC Seoul Exel IDR 2 19,900 Korea-Europe Fund 18 78,750 98,650
30 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) MALAYSIA 2.25% Bolton Properties 20,000 $ 30,763 Boustead Holdings 12,000 26,030 Cement Manufacturing 15,000 82,232 Commerce Asset Holdings 12,000 68,626 IOI Properties 16,000 46,381 Larut Consolidated 50,000 78,091 Magnum Corporation 60,000 96,076 Malasian Resources 6,000 14,198 MBM Resources 20,000 35,811 Metacorp 20,000 61,132 Sime Daarby Berhad 16,000 44,173 Tenaga Nasional Berhad 25,000 105,502 UMW Holdings Berhad 10,000 33,919 722,934 MEXICO 0.87% Cemex - ADR~ 7,800 56,082 CIFRA - ADR~ 50,000 64,750 Empresas ICA SA - ADR~ 5,000 65,625 Telefonos de Mexico-Class L 2,800 92,050 278,507 NETHERLANDS 3.72% ABN-Amro Holdings 1,800 89,548 Aegon NV 5,400 254,917 Fortis Amev NV 3,000 211,523 Polygram NV 2,900 175,513 VNU-Ver Ned Uitgev V 16,000 266,295 Wolter Kluwer 1,780 195,851 1,193,647 NORWAY 0.73% Hafslund Nycomed 8,400 235,552 PHILIPPINES 0.39% Filinvest Land 50,000 23,396 Pilipino Telephone 74,300 100,750 124,146
31 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) SINGAPORE 1.54% ACMA Limited 30,000 $ 93,258 DBS Land 10,000 38,325 Development Bank Singapore 5,000 61,391 Keppel Bank 32,000 99,929 Keppel Finance 10,000 16,820 Straits Trading Company 20,000 52,520 UTD Overseas 32,000 67,452 Wing Tia Holdings 24,000 63,364 493,059 SPAIN 2.29% Aumar 15,000 180,017 Banco Popular Espano 1,200 207,225 Gas Natural 1,500 259,273 Tabacalera SA 1,900 88,760 735,275 SWEDEN 1.75% Asea AB 2,340 241,049 Securitas AB B-F 5,400 321,794 562,843 SWITZERLAND 2.94% Roche Holding AG 27 223,970 Sandoz AG Basel 150 175,685 Sulzer AG 360 238,781 Swissair 290 304,353 942,789 TAIWAN 0.42% Formosa Growth Fund 5,000 64,375 Taipei Fund 1 72,000 136,375
32 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) THAILAND 2.16% Banpu Coal 4,000 $ 99,485 CMIC Finance 16,000 53,228 Cogeneration PLC 12,000 42,772 First Bangkok City Bank 72,000 67,723 Nation Publishing 40,000 106,139 PTT Exploration 4,000 50,693 Shinawatra Computer 1,000 25,663 Siam City Bank, Ltd. 40,000 49,901 Thai Military Bank, Ltd. 42,000 197,941 693,545 UNITED STATES 31.10% Aetna Life & Casualty Company 4,000 302,000 Amgen Incorporation 6,000 348,750 AMR Corporation 4,000 358,000 Arethusa Off-Shore, Ltd. 8,000 301,000 Arthrocare Corporation 22,000 484,000 BSES Limited GDR 4,000 66,500 Champion International Corporation 10,000 452,500 Chesapeake Energy 8,000 370,000 Columbia Gas Systems* 10,000 458,750 Columbia HCA Healthcare 6,000 346,500 Delta Air Lines 3,500 269,063 Dillard Department Stores-Class A 10,000 346,250 Enterprise Systems 10,000 276,250 Gilead Sciences, Inc.* 8,000 230,000 GT Interactive 15,000 161,250 HBO & Company 3,000 282,750 Inbrand Corporation 15,000 341,250 LG Electronics 6,400 52,800 Lockheed Martin Corporation 4,000 303,500 Louisiana Land & Exploration 7,000 326,375 Lyondell Petrochemical 10,000 305,000 Medpartners Incorporated 10,000 285,000 Oceaneering International 25,000 340,625 Office Depot, Inc. 15,000 294,375 Oracle Systems Corporation 5,000 235,625 Perez Company 9,718 99,610 Pharmacia & Upjohn 8,000 319,000 Quality Systems 12,000 264,000
33 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Shares or Principal Percent of Net Assets Amount Market Value COMMON STOCKS (CONTINUED) UNITED STATES (CONTINUED) Reading and Bates Corporation 10,000 $ 197,500 Reynolds & Reynolds Company-Class A 9,000 369,000 Samsung Electronics 402 23,015 Stanley Works 6,000 330,000 Structural Dynamics 10,000 337,500 Teekay Shipping Corporation 12,000 313,500 Wind River Systems 6,000 184,500 9,975,738 TOTAL COMMON STOCKS (COST $26,025,886) 28,842,757 PREFERRED STOCK 0.15% Wella AG (cost $75,668) 100 48,382 CORPORATE BOND 0.24% MALAYSIA Telekom Malaysia Berhad, 4.00%, 10/3/04~ (9/22/94, $70,000) (a) $ 70,000 76,300 SHORT-TERM INVESTMENT 6.83% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/29/96, 5.48%, due 4/1/96, collateralized by $2,750,000, Federal National Mortgage Association, 9.00%, 12/01/24, (cost $2,192,142) 2,192,142 2,192,142 TOTAL INVESTMENTS (COST $28,363,696) 97.13% 31,159,581 OTHER ASSETS LESS LIABILITIES 2.87% 920,488 NET ASSETS 100.00% $32,080,069
* 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. SEE NOTES TO FINANCIAL STATEMENTS. 34 MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS 94.86% BASIC MATERIALS 7.83% Bemis Company, Inc. 56,000 $ 1,757,000 Nalco Chemical Company 86,000 2,644,500 Sonoco Products Company 101,350 2,761,787 7,163,287 CAPITAL GOODS & CONSTRUCTION 8.41% General Electric Company 33,000 2,569,875 W.W. Grainger, Inc. 34,700 2,329,237 York International Corporation 57,000 2,793,000 7,692,112 CONSUMER CYCLICAL 21.25% Carnival Corporation-Class A 97,000 2,667,500 Interpublic Group Company 70,500 3,331,125 Mattel, Inc. 62,500 1,695,313 May Department Stores Company 34,500 1,664,625 Newell Company 105,000 2,808,750 Olsten Corporation 59,250 1,910,813 R.R. Donnelley & Sons 73,600 2,539,200 Sherwin Williams Company 63,700 2,826,688 19,444,014 CONSUMER STAPLES 12.88% Albertson's, Inc. 58,000 2,153,250 Avon Products 28,900 2,478,175 CPC International, Inc. 38,000 2,636,250 Pepsico Inc. 27,000 1,707,750 Sysco Corporation 85,400 2,807,525 11,782,950 ENERGY 2.79% Schlumberger, Ltd. 32,300 2,555,737
35 MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) FINANCIAL 13.96% American Express Company 64,000 $ 3,160,000 Banc One Corporation 75,900 2,703,938 Federal National Mortgage Association 57,200 1,823,250 First Union Corporation 37,100 2,244,550 United Asset Management Corporation 61,200 2,838,150 12,769,888 HEALTH 8.31% Johnson & Johnson 28,900 2,666,025 Merck & Company, Inc. 33,000 2,054,250 Pfizer, Inc. 43,000 2,881,000 7,601,275 TECHNOLOGY 11.21% AMP, Inc. 59,000 2,441,125 Atmel Corporation 65,000 1,657,500 General Motors Corporation-Class E 46,500 2,650,500 Intel Corporation 37,000 2,104,375 Linear Technology Company 33,600 1,402,800 10,256,300 TRANSPORTATION & SERVICES 2.84% Werner Enterprises, Inc. 108,300 2,599,200 MISCELLANEOUS 5.38% S & P 500-Depository Receipt 35,000 2,259,687 Tyco International, Ltd. 74,400 2,659,800 4,919,487 TOTAL COMMON STOCKS (COST $73,429,252) 86,784,250
36 MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value SHORT-TERM INVESTMENT 4.79% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/29/96, 5.48%, due 4/01/95, collateralized by $4,596,664 Federal National Mortgage Association, 7.00%, 01/01/26, (cost $4,381,988) $ 4,381,988 $ 4,381,988 TOTAL INVESTMENTS (COST $77,811,240) 99.65% 91,166,238 OTHER ASSETS LESS LIABILITIES 0.35% 319,453 NET ASSETS 100.00% $91,485,691
SEE NOTES TO FINANCIAL STATEMENTS. 37 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS 88.45% BASIC MATERIALS 3.18% Agnico Eagle Mines Ltd. 77,000 $ 1,376,375 Barrick Gold Corporation 42,800 1,300,050 Montsanto Company 20,000 3,070,000 Union Carbide Corp Holding 58,000 2,878,250 8,624,675 CAPITAL GOODS & CONSTRUCTION 3.87% AGCO Corporation 97,200 2,344,950 Gentex Corporation 47,000 1,398,250 Hirsch International Corporation-Class A* 31,000 434,000 JLG Industries* 138,000 6,313,500 10,490,700 COMMERCIAL SERVICES 8.13% Concord Electronic Fleet Services, Inc.* 120,600 3,195,900 Copart, Inc.* 50,000 1,237,500 Corrections Corporation of America* 64,000 3,648,000 Corvel Corporation* 14,700 514,500 Equifax, Inc. 122,200 2,459,275 GRC International, Inc.* 37,400 1,271,600 MBNA Corporation 97,425 2,886,215 Omnicom Group, Inc. 71,500 3,217,500 Paychex, Inc. 61,537 3,599,914 22,030,404 CONSUMER CYCLICAL 7.41% Cavalier Homes, Inc. 93,700 1,452,350 Chrysler Corporation 42,000 2,614,500 Clear Channel Communications* 72,000 4,068,000 Hospitality Franchise Systems* 54,000 2,625,750 National Media Corporation* 56,000 924,000 Oakwood Homes Corporation 30,900 1,533,413 Redman Industries, Inc.* 74,200 1,502,550 Staples, Inc.* 153,562 3,128,836 TCA Cable TV, Inc.* 76,400 2,225,150 20,074,549
38 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) CONSUMER STAPLES 8.88% Coca-Cola Company 32,000 $ 2,644,000 General Nutrition Company* 100,000 2,500,000 Gillette Company 46,000 2,380,500 Heinz Company 75,000 2,484,375 Hershy Foods Corporation 35,000 2,607,500 Longs Drug Stores, Inc. 28,500 1,346,625 Pepsico, Inc. 45,000 2,846,250 Rexall Sundown, Inc.* 76,700 2,310,588 Richfood Holdings, Inc. 95,000 2,677,812 Terra Industries 176,700 2,275,013 24,072,663 ENERGY 4.16% Panhandle Eastern Company 84,900 2,642,513 Smith International, Inc.* 123,000 3,105,750 Texaco, Inc. 31,000 2,666,000 Tidewater, Inc. 75,300 2,861,400 11,275,663 FINANCIAL 20.85% Banco Bilbao Vizcaya~ 17,200 638,550 Banco De Galacia Bueno~ 25,800 619,200 Banco Frances Del Rio De La~ 21,700 594,038 Bank of New York Company, Inc. 50,800 2,616,200 Berkley (W.R.) Corporation 13,000 601,250 Cityscape Financial Corporation* 41,500 1,494,000 First USA, Inc. 43,400 2,457,525 Greater New York Savings Bank* 183,000 2,173,125 Lehman Brothers Holdings, Inc. 94,000 2,514,500 Lincoln National Corporation 24,500 1,243,375 Mercury Finance Company 165,000 2,330,625 Meridian Bancorp, Inc.* 57,900 3,025,275 North Fork Bancorporation* 111,000 2,650,125 Old Republic International Corporation* 35,500 1,153,750 Penncorp Financial Group, Inc.* 43,200 1,360,800 Physicians Insurance Company-Class A* 28,000 693,000
39 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) FINANCIAL (CONTINUED) Reliastar Financial Corporation* 26,600 $ 1,203,650 Safeguard Scientific, Inc. 27,100 1,588,737 Standard Federal Bancorp, Inc.* 60,300 2,562,750 Student Loan Marketing Association 40,600 3,105,900 Summit Bancorp* 66,900 2,475,300 Synovus Financial Corporation 87,200 2,943,000 T. Rowe Price Associates, Inc. 60,500 3,206,500 The Money Store, Inc.* 36,000 1,003,500 Travelers Group, Inc. 48,500 3,201,000 Trenwick Group, Inc. 23,700 1,208,700 U.S. Bancorp* 78,000 2,652,000 United Insurance Companies, Inc.* 57,000 1,261,125 Waterhouse Investor Services* 100,000 3,312,500 Westpac Banking, Ltd.~ 27,300 624,488 56,514,488 HEALTH 13.89% Amgen, Inc.* 45,000 2,615,625 Bergen Brunswig Corporation-Class A 48,000 1,254,000 Conmed Corporation* 97,500 2,388,750 Gulf South Medical Supply, Inc.* 42,000 1,585,500 Healthsource, Inc.* 98,000 3,797,500 Invacare Corporation* 92,000 2,599,000 Lunar Corporation* 51,300 2,193,075 Nature Sunshine Products Corporation* 63,450 1,633,838 ORNDA Healthcorp* 110,000 3,162,500 Renal Treatment Centers, Inc.* 64,400 1,529,500 Respironics, Inc.* 127,300 2,673,300 Service Corporation International 65,600 3,198,000 Target Theraputics, Inc.* 98,600 5,977,625 U.S. Surgical Corporation 93,000 3,045,750 37,653,963 TECHNOLOGY 12.45% ACC Corporation* 62,600 1,854,525 Aspen Technology, Inc.* 41,600 1,788,800 Bel Fuse, Inc.* 82,600 1,517,775 Computer Horizons Corporation* 19,950 753,112 Digital Systems International, Inc.* 81,500 1,247,969
40 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) TECHNOLOGY (CONTINUED) Intervoice, Inc.* 99,500 $ 2,848,187 Mylex Corporation* 137,100 3,256,125 NU Horizons Electronics* 27,000 367,875 Oracle Systems Corporation* 52,300 2,464,637 Parametric Technologies Corporation* 100,000 3,912,500 SDL, Inc.* 40,000 1,200,000 Thermo Electron Corporation* 59,250 3,525,375 US Robotics Corporation* 35,200 4,558,400 Wind River Systems, Inc.* 63,000 1,937,250 Wyman-Gordon Company 149,000 2,514,375 33,746,905 TRANSPORTATION 2.41% Air Express International Corporation* 28,000 721,000 Comair Holdings, Inc. 88,500 3,075,375 Wisconsin Central Transportation* 41,000 2,726,500 6,522,875 UTILITIES 0.46% Frontier Corporation* 39,100 1,231,650 MISCELLANEOUS 2.76% ALCO Standard Corporation 53,000 2,762,625 Exel Limited 9,500 655,500 Primark Corporation* 109,700 4,058,900 7,477,025 TOTAL COMMON STOCKS (COST $178,486,161) 239,715,560
41 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value SHORT-TERM INVESTMENT 11.36% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/29/96, 5.48%, due 4/1/96, collateralized by $32,282,832 Federal National Mortgage Association, 7.00%, 01/01/26 (cost $30,776,523) $30,776,523 $ 30,776,523 TOTAL INVESTMENTS (COST $209,262,684) 99.81% 270,492,083 OTHER ASSETS LESS LIABILITIES 0.19% 517,143 NET ASSETS 100.00% $271,009,226
* Securities not currently producing income. ~ American Depository Receipts. SEE NOTES TO FINANCIAL STATEMENTS. 42 MENTOR INCOME & GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS 59.41% BASIC MATERIALS 7.11% Aluminum Company of America 37,800 $ 2,367,225 Hexcel Corporation* 66,200 777,850 IMC Global, Inc. 18,000 657,000 Precision Castparts Corporation 12,700 508,000 Rhone Poulenc SA- Class A~* 16,055 417,430 W.R. Grace & Company 10,000 782,500 5,510,005 CAPITAL GOODS & CONSTRUCTION 6.33% Elsag Baily Process Auto NV* 20,000 457,500 Aviall, Inc.* 60,000 517,500 BE Aerospace, Inc.* 42,700 469,700 Browning-Ferris Industries 15,000 472,500 Curtiss-Wright Corporation 9,700 504,400 Lone Star Technologies, Inc.* 25,100 263,550 Newhall Land & Farming Company 26,100 473,062 Sequa Corporation- Class A* 18,100 617,663 Standard Pacific Corporation 77,200 559,700 WMX Technologies, Inc. 17,800 565,150 4,900,725 CONSUMER CYCLICAL 6.65% Deluxe Corporation 19,000 596,125 Eastman Kodak Company 10,500 745,500 Goodrich BF 8,700 691,650 Hills Stores Company* 27,549 323,700 Kmart Corporation 60,000 562,500 Penske Motorsports, Inc.* 500 18,625 Poloroid Corporation 15,000 675,000 Sun International Hotels, Ltd.* 8,200 295,200 Valassis Communications* 28,300 470,488 Zale Corporation* 45,000 773,438 5,152,226 CONSUMER STAPLES 4.15% Chiquita Brands International 33,600 520,800 Chirex Incorporated* 17,100 175,275 Dimon Incorporated 17,000 299,625
43 MENTOR INCOME & GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) CONSUMER STAPLES (CONTINUED) Interstate Bakeries Corporaton 20,200 $ 494,900 Schweitzer-Mauduit International, Inc.* 19,800 544,500 Universal Corporation 47,000 1,180,875 3,215,975 ENERGY 11.51% Amerada Hess Corporation 18,000 990,000 Anderson Exploration* 18,216 270,963 Ashland Oil, Inc. 13,300 510,387 Burlington Resources, Inc. 19,200 712,800 Gerrity Oil & Gas Corporation* 87,000 271,875 Giant Industries Inc. 42,600 585,750 Gulf Canada Resources, Ltd.* 141,300 671,175 Mitchell Energy- Class A 25,000 431,250 Noble Drilling Corporation* 59,500 751,188 Oryx Energy* 44,700 620,213 Repsol SA- Sponsore* 3,200 119,600 Rowan Companies, Inc.* 60,000 765,000 Tosco Corporation 14,000 656,250 U.S.X. Marathon Group, Inc. 28,300 544,775 Unocal Corporation 21,400 714,225 YPF Associadad 15,000 301,875 8,917,326 FINANCIAL 6.23% California Federal Bank* 25,556 456,814 California Federal Bank Certificates* 1,555 11,274 Chubb Corporation 4,800 450,600 CIGNA Corporation 15,100 1,725,175 Danielson Holding Company* 66,000 503,250 Horace Mann Educator 6,800 207,400 Lehman Brothers Holding, Inc. 24,840 664,470 Long Island Bancorp 4,700 132,187 Old Republic International Corporation 11,000 357,500 Paul Revere Corporation* 13,000 315,250 4,823,920
44 MENTOR INCOME & GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Assets Shares Market Value COMMON STOCKS (CONTINUED) TECHNOLOGY 3.46% Alcatel Alsthom* 24,900 $ 460,650 B.C.E., Inc. 25,400 898,525 Compaq Computer Corporation* 10,000 386,250 Compuware Corporation* 20,000 460,000 Harman International* 12,500 468,750 Segue Sotware, Inc.* 200 4,200 2,678,375 TRANSPORTATION & SERVICES 4.68% AMR Corporation* 6,000 537,000 Bergesen Dyas Spon A* 10,000 174,644 Boeing Company 7,000 606,375 Canadian Pacific, Ltd. 23,500 470,000 Nordic American Tanke-Warrants* 20,000 87,500 OMI Corporation* 55,900 447,200 Overseas Shipholding Group 25,000 456,250 Trans World Airlines* 42,200 844,000 3,622,969 UTILITIES 3.21% Enserch Corporation 10,600 172,250 Niagara Mohawk Power 120,700 799,638 Petroleum Heat & Power 60,913 418,776 Public Service Company of New Mexico* 27,200 506,600 Seagull Energy Corporation* 26,000 588,250 2,485,514 MISCELLANEOUS 2.62% Bradley Real Estate* 7,546 108,473 Corning, Inc. 13,800 483,000 Essex Property Trust, Inc. 19,900 412,925 Foamex International* 64,100 608,950 Koger Equity, Inc.* 37,900 412,163 2,025,511
45 MENTOR INCOME & GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Shares or Principal Percent of Net Assets Amount Market Value COMMON STOCKS (CONTINUED) FOREIGN SECURITIES 3.46% CAE, Inc. 75,000 $ 647,288 Cameco Corporation* 12,000 634,618 Onex Corporation* 23,400 253,516 Pohjola Insurance Company* 8,000 130,293 Saskatchewan Wheat PLC* 12,700 111,939 St. Lawrence Cement, Inc.* 45,000 247,897 Technip SA* 7,500 655,347 2,680,898 TOTAL COMMON STOCKS (COST $37,965,342) 46,013,444 PREFERRED STOCKS 2.49% BASIC MATERIALS 0.61% Cooper Industries 29,000 467,625 CAPITAL GOODS & CONSTRUCTION 0.55% Elsag Bailey Process Auto NV 9,300 427,800 FINANCIAL 1.33% Glendale Federal Bank 21,700 1,033,463 TOTAL PREFERRED STOCKS (COST $1,378,600) 1,928,888 CORPORATE BONDS 6.05% BASIC MATERIALS 0.31% Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 242,122 CAPITAL GOODS & CONSTRUCTION 0.13% Lockheed Corporation, 6.75%, 3/15/03 100,000 99,569 CONSUMER CYCLICAL 0.59% Sears Roebuck Company, 9.25%, 4/15/98 175,000 185,010 Time Warner Entertainment, Inc., 8.88%, 10/01/12 250,000 271,670 456,680 CONSUMER STAPLES 0.30% Gillette Company, 5.75%, 10/15/05 250,000 232,920
46 MENTOR INCOME & GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value CORPORATE BONDS (CONTINUED) FINANCIAL 2.81% American General Finance Corporation, 5.88%, 7/01/00 $ 250,000 $ 243,918 Associates Corporation of North America, 5.25%, 3/30/00 250,000 239,737 Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 259,883 Comerica Bank, 7.13%, 12/01/13 250,000 237,017 Dean Witter Discover, 6.25%, 3/15/00 100,000 99,387 First National Bank, 8.00%, 9/15/04 250,000 266,233 Ford Motor Credit, 8.88%, 6/15/99 100,000 106,999 Great Western Financial, 6.38%, 7/01/00 250,000 248,457 Home Savings of Americas, 6.00%, 11/01/00 250,000 242,778 Toronto Dominion Bank, 6.13%, 11/01/08 250,000 230,882 2,175,291 TRANSPORTATION 0.37% AMR Corporation, 6.13%, 11/01/24 250,000 290,423 UTILITIES 1.54% Duke Power Company, 7.00%, 6/01/00 100,000 102,153 Florida Power & Light Company, 5.38%, 4/01/00 250,000 240,405 Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 236,715 Philadelphia Electric Company, 7.50%, 1/15/99 100,000 102,916 Southwestern Public Service Company, 6.88%, 12/01/99 250,000 253,798 Union Electric Company, 6.75%, 10/15/99 250,000 253,057 1,189,044 TOTAL CORPORATE BONDS (COST $4,774,490) 4,686,049 U.S. GOVERNMENT SECURITIES AND AGENCIES 26.99% Government National Mortgage Association, 6.50%, 9/15/23-2/15/26 2,376,973 2,252,158 Government National Mortgage Association, 7.00%, 1/15/24-1/15/26 3,201,763 3,118,677 U. S. Treasury Bond, 7.25%, 5/15/16 1,000,000 1,045,930 U.S. Treasury Note, 5.13%-7.50%, 4/30/97-11/15/16 14,500,000 14,485,910 TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $20,913,924) 20,902,675
47 MENTOR INCOME & GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value SHORT-TERM INVESTMENT 4.41% REPURCHASE AGREEMENT Paine Webber, Inc. Dated 3/29/96, 5.50%, due 4/01/96, collateralized by $3,500,000, U.S. Treasury Note, 8.13%, 2/15/98 (cost $3,417,000) $ 3,417,000 $ 3,417,000 TOTAL INVESTMENTS (COST $68,449,356) 99.35% 76,948,056 OTHER ASSETS LESS LIABILITIES 0.65% 500,950 NET ASSETS 100.00% $77,449,006
* Non-income producing. ~ American Depository Receipts. SEE NOTES TO FINANCIAL STATEMENTS. 48 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value LONG-TERM MUNICIPAL SECURITIES 98.68% ARIZONA 3.84% Pima County Arizona, 7.25%, 7/15/10 $2,000,000 $ 2,189,560 CALIFORNIA 8.34% California Educational Facilities, College of Osteopathic Medicine, 7.50%, 6/01/18 965,000 1,059,454 Carson Improvement Board Act 1915, Special Assessment District 92, 7.38%, 9/02/22 730,000 753,937 Los Angeles Convention, Series A, 5.13%, 8/15/21 1,750,000 1,569,400 Orange County Community Facilities District, Series A, 7.35%, 8/15/18 300,000 349,986 San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,026,000 4,758,777 COLORADO 6.64% Colorado Housing Authority, 7.00%, 11/01/24 625,000 646,350 Denver City & County Airport Revenue, 7.75%, 11/15/13 1,000,000 1,172,400 Denver City & County Airport Revenue, 8.50%, 11/15/23 1,700,000 1,972,697 3,791,447 DISTRICT OF COLUMBIA 1.48% Metropolitan Washington, General Airport Revenue, Series A, 6.63%, 10/01/19 800,000 843,544 FLORIDA 6.24% Dade County, 6.50%, 10/01/26 680,000 751,692 Hillsborough County, 6.25%, 12/01/34 1,250,000 1,290,650 Sarasota County, Health Facilities Authority Revenue, 10.00%, 7/01/22 1,190,000 1,517,845 3,560,187 GEORGIA 3.75% Cobb County Development Authority Revenue Bonds, Series 92A, 8.00%, 6/01/22 1,000,000 1,022,480 Monroe County Development Authority PCR, 6.75%, 1/01/10 1,000,000 1,118,380 2,140,860 ILLINOIS 9.44% Broadview Tax Increment Revenue, 8.25%, 7/01/13 1,000,000 1,089,770
49 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value LONG-TERM MUNICIPAL SECURITIES (CONTINUED) ILLINOIS (CONTINUED) Chicago Heights Residential Mortgage, (effective yield - 2.75%) (a), 6/01/09 $3,465,000 $ 1,364,760 Chicago, Capital A, (effective yield - 1.70%) (a), 7/01/16 2,000,000 550,600 Illinois Health Facilities Authority Revenue, 9.50%, 10/01/22 1,250,000 1,580,850 Robins Illinois Residential, 9.25%, 10/15/14 1,000,000 800,000 5,385,980 INDIANA 0.50% Indiana Transportation Finance Authority, Series A, (effective yield - 1.65%) (a), 6/01/17 1,000,000 282,470 IOWA 1.16% Student Loan Liquidity Corporation, Student Loan Revenue, Series C, 6.95%, 3/01/06 625,000 664,188 KENTUCKY 3.61% Jefferson County, Hospital Revenue, 8.85%, 10/01/08 500,000 559,375 Kenton County Airport Board Revenue, OID, 7.50%, 2/01/20 1,400,000 1,500,338 2,059,713 MAINE 1.80% Maine State Housing Authority, Series C, 6.88%, 11/15/23 1,000,000 1,025,930 MASSACHUSETTS 4.78% Massachusetts State Health and Educational Facilities Authority, OID Revenue Bonds, Series A, 6.00%, 10/01/23 2,000,000 1,646,820 Massachusetts State Health and Education, 6.88%, 4/01/22 1,000,000 1,079,950 2,726,770 MICHIGAN 0.97% Romulus Community Schools, Refunding, (effective yield-1.40%) (a), 5/01/20 2,385,000 555,657 MONTANA 0.83% Montana State Resource Recovery Revenue Bonds, 7.00%, 12/31/19 500,000 475,830
50 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value LONG-TERM MUNICIPAL SECURITIES (CONTINUED) NEBRASKA 0.74% Nebraska Finance Authority, SFM, 9.48%, 9/15/24 $ 400,000 $ 419,500 NEVADA 0.92% Henderson Local Improvement District, Special Assessment, Series A, 8.50%, 11/01/12 500,000 523,205 NEW YORK 12.55% Clifton Springs Hospital Refunding & Improvement, 8.00%, 1/01/20 855,000 869,868 Herkimer County, IDA, 8.00%, 1/01/09 1,000,000 1,052,700 Metropolitan Transportation Authority, 4.75%, 7/01/16 1,000,000 823,100 New York City, Series H, 7.20%, 2/01/13 1,500,000 1,594,560 New York City, Series I, 5.88%, 3/15/13 1,000,000 959,080 New York State Dorm Authority, 6.75%, 7/01/24 1,000,000 1,088,100 New York State Dorm Authority, 5.38%, 2/15/26 870,000 773,386 7,160,794 NORTH DAKOTA 1.92% Ward County, Healthcare Facilities, 8.88%, 11/15/24 1,000,000 1,096,690 OKLAHOMA 1.80% Oklahoma City, Industrial and Cultural Facilities Trust, 6.75%, 9/15/17 1,000,000 1,027,480 PENNSYLVANIA 4.18% Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 490,265 Pennsylvania Intergovernmental Cooperative Authority, Special Tax Revenue, 6.80%, 6/15/12 750,000 836,910 Philadelphia Hospital and Higher Education Facilities, 6.50%, 11/15/08 1,000,000 1,057,830 2,385,005 RHODE ISLAND 0.81% West Warwick, Series A, GO Bonds, 6.80% - 7.30%, 7/15/98 - 7/15/08 435,000 464,602 TENNESSEE 7.95% Memphis Shelby County Airport Authority Special Facilities Revenue Refunding, 7.88%, 9/01/09 1,500,000 1,673,340 Tennessee Housing, 7.38%, 7/01/23 2,750,000 2,861,293 4,534,633
51 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value LONG-TERM MUNICIPAL SECURITIES (CONTINUED) TEXAS 4.40% Brazos Higher Education Authority Student Loan Revenue, 7.10%, 11/01/04 $ 550,000 $ 599,737 Dallas-Fort Worth International Airport Facility Revenue Bonds, 7.25%, 11/01/30 1,000,000 1,065,610 Texas State Department of Housing and Community Affairs Refunding, Series C, 9.92%, 7/02/24 750,000 844,688 2,510,035 UTAH 3.55% Bountiful Hospital Revenue, 9.50%, 12/15/18 240,000 264,482 Utah State Housing Finance Commission, 7.20%, 1/01/27 1,695,000 1,758,986 2,023,468 WEST VIRGINIA 6.48% Harrison County, 6.75%, 8/01/24 2,000,000 2,175,920 West Virginia State Hospital Finance Authority Revenue, 9.44%, 1/01/18 1,500,000 1,519,965 3,695,885 TOTAL LONG-TERM MUNICIPAL SECURITIES (COST $53,536,283) 56,302,210 SHORT-TERM MUNICIPAL SECURITIES (B) 0.35% LOUISIANA Louisiana State Recovery, 3.45%, 7/01/97, VRDN (cost $200,000) 200,000 200,000 TOTAL INVESTMENTS (COST $53,736,283) 99.03% 56,502,210 OTHER ASSETS LESS LIABILITIES 0.97% 557,711 NET ASSETS 100.00% $57,059,921
INVESTMENT ABBREVIATIONS GO - General Obligation PCR - Pollution Control Revenue HFA - Housing Finance Authority PFA - Public Financing Authority IDA - Industrial Development Authority SFM - Single Family Mortgage OID - Original Issue Discount VRDN - Variable Rate Demand Note, rate shown represents current interest rate at 3/3196. (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) Interest rates represent annualized yield to date of maturity. For each security, cost (for financial reporting and federal income tax purposes) and carrying value are the same. SEE NOTES TO FINANCIAL STATEMENTS. 52 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value LONG-TERM INVESTMENTS 95.92% ASSET-BACKED SECURITIES 11.44% Advanta Mortgage Loan Trust, Series 1993-3 A5, 5.55%, 1/25/25 $ 1,810,976 $ 1,694,134 Advanta Mortgage Loan Trust, Series 1993-4 A2, 5.55%, 3/25/25 2,126,841 2,014,108 Equifax Credit Corporation, Series 1994-1,B 5.75%, 3/15/09 3,567,326 3,460,931 Old Stone Credit Corporation Home Equity Trust, Series 1993-1 B1, 6.00%, 3/15/08 1,685,983 1,650,765 World Omni, Series 1993-B, 5.05%, 8/15/99 575,663 567,115 TOTAL ASSET-BACKED SECURITIES (COST $9,379,553) 9,387,053 U.S. GOVERNMENT SECURITIES AND AGENCIES 43.56% FEDERAL HOME LOAN MORTGAGE CORPORATION 27.30% 6.00%, 2/01/11-3/01/11 15,825,444 15,197,099 6.00%, Series 48 H, 7/15/20 - REMIC 3,500,000 3,157,798 6.50%, Series 1647B, 11/15/08 - REMIC 4,259,188 4,034,499 22,389,396 FEDERAL NATIONAL MORTGAGE ASSOCIATION - REMIC 2.26% PO, Class G93-28C, 7/25/22 2,500,000 1,856,107 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 11.64% 6.00%, 12/15/08 - 6/15/09 7,155,972 6,896,568 7.00%, 9/20/22 2,616,190 2,655,318 9,551,886 TREASURY SECURITIES 2.36% U.S. Treasury Note, 5.00%, 1/31/98 1,515,000 1,494,335 U.S. Treasury Note, 5.63%, 2/28/01 450,000 441,103 1,935,438 TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $36,224,497) 35,732,827
53 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value CORPORATE BONDS 10.36% FINANCE 8.78% Developers Diversified Realty, 7.63%, 5/15/00 $ 2,000,000 $ 2,009,180 Salomon, Inc., 6.00%, 1/12/98 3,000,000 2,971,053 Sunamerica, Inc., 7.34%, 8/30/05 1,200,000 1,220,245 Travelers, Inc., 6.88%, 6/01/25 1,000,000 1,005,217 7,205,695 UTILITIES 1.58% Mississippi Power & Light, 8.80%, 4/01/05 1,250,000 1,295,902 TOTAL CORPORATE BONDS (COST $8,401,156) 8,501,597 COLLATERALIZED MORTGAGE OBLIGATIONS 22.34% Chase Mortgage Finance Corporation, Series 1993-L2 M, 7.00%, 10/25/24 3,070,370 2,890,210 First Boston Mortgage Securities Corporation, Series 1993-5 M2, 7.30%, 7/25/23 2,430,974 2,364,139 General Electric Capital Mortgage Services, Inc., Series 1993-18 B1, 6.00%, 2/25/09 2,250,695 2,080,495 Prudential Home, Series 1995-5 B1, 7.25%, 9/25/25 1,492,159 1,434,929 Prudential Home, Series 1995-5 M, 7.25%, 9/25/25 2,631,173 2,561,553 Securitized Asset Sales, Inc., Series 1994-5 AM, 7.00%, 7/25/24 7,360,928 6,997,556 TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $18,314,235) 18,328,882 RESIDUAL INTERESTS 8.22% General Mortgage Securities, Inc., 1995-1, 6/25/20 18,061 186,944 General Mortgage Securities II, Inc., 1995-3, 6/25/20 18,180 635,956 General Mortgage Securities II, Inc., 1995-4, 6/25/23 19,606 603,757 General Mortgage Securities II, Inc., 1996-1, 11/25/22 19,402 696,504 National Mortgage Funding I, Inc., 1995-1, 4/28/25 33,213 544,274 National Mortgage Funding I, Inc., 1995-4, 3/20/21 16,836 276,365 National Mortgage Funding I, Inc., 1995-5, 3/25/22 12,673 730,248 National Mortgage Funding I, Inc., 1995-7, 9/17/25 43,383 886,956 National Mortgage Funding I, Inc., 1995-8, 8/25/22 45,000 800,357 National Mortgage Funding I, Inc., 1995-9, 11/19/25 44,528 594,855 National Mortgage Funding I, Inc., 1996-3, 2/22/25 27,376 774,646 TOTAL RESIDUAL INTERESTS (COST $6,867,549) 6,730,862 TOTAL LONG-TERM INVESTMENTS (COST $79,186,990) 78,681,221
54 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value SHORT-TERM INVESTMENT 3.94% REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/29/96, 5.48%, due 4/01/96, collateralized by $3,391,925 Federal National Mortgage Association, 7.00%, 1/01/26 (cost $3,233,203) 3,233,203 $ 3,233,203 TOTAL INVESTMENTS (COST $82,420,193) 99.86% 81,914,424 OTHER ASSETS LESS LIABILITIES 0.14% 112,984 NET ASSETS 100.00% $82,027,408
INVESTMENT ABBREVIATIONS CMO - Collateralized Mortgage Obligation PO - Principal Only REMIC - Real Estate Mortgage Investment Conduit SEE NOTES TO FINANCIAL STATEMENTS. 55 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value ASSET-BACKED SECURITIES 11.10% Advanta Mortgage Loan Trust 1993-4, 5.55%, 3/25/10 $ 851,094 $ 805,982 Equifax Credit Corporation 1994-1, 5.75%, 3/15/09 1,134,169 1,100,342 General Motors Acceptance Corporation, 6.30%, 6/15/99 372,330 373,009 Old Stone Credit Corporation, 6.20%, 6/15/08 689,229 679,454 World Omni 1993 B, 5.05%, 8/15/99 233,377 229,911 TOTAL ASSET-BACKED SECURITIES (COST $3,183,763) 3,188,698 U.S. GOVERNMENT SECURITIES AND AGENCIES 76.33% FEDERAL HOME LOAN MORTGAGE CORPORATION 26.87% 8.19%, 10/06/04 2,000,000 2,091,796 6.50%, 5/15/08 - REMIC 2,473,962 2,373,168 6.00%, 2/11/11 3,389,377 3,254,862 7,719,826 FEDERAL NATIONAL MORTGAGE ASSOCIATION 2.04% 10.00%, 6/01/05 555,154 585,948 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 4.79% 7.00%, 9/20/22 1,356,682 1,376,972 TREASURY SECURITIES 42.63% U.S. Treasury Note, 5.00%, 1/31/98 1,010,000 996,224 U.S. Treasury Note, 5.88%, 8/15/98 8,650,000 8,651,989 U.S. Treasury Note, 5.63%, 2/28/01 2,650,000 2,597,609 12,245,822 TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $22,306,850) 21,928,568 COLLATERALIZED MORTGAGE OBLIGATION 1.69% Ryland Acceptance Corporation, 9.63%, 9/25/17 (cost $478,017) 485,967 485,701 CORPORATE BONDS 6.26% Mississippi Power & Light, 8.80%, 4/1/05 750,000 777,542 Salomon, Inc., 8.62%, 2/17/97 1,000,000 1,020,962 TOTAL CORPORATE BONDS (COST $1,790,793) 1,798,504
56 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value RESIDUAL INTERESTS 1.85% General Mortgage Securities II, Inc., 1996-3, 3/29/22 $ 16,000 $ 250,627 National Mortgage Funding, Inc., 1996-4, 3/29/25 7,500 279,797 TOTAL RESIDUAL INTERESTS (COST $532,656) 530,424 SHORT-TERM INVESTMENT 2.14% Federal Home Loan Bank, 5.25%, 4/01/96 (cost $616,000) 616,000 616,000 TOTAL INVESTMENTS (COST $28,908,079) 99.37% 28,547,895 OTHER ASSETS LESS LIABILITIES 0.63% 181,653 NET ASSETS 100.00% $28,729,548
SEE NOTES TO FINANCIAL STATEMENTS. 57 MENTOR FUNDS STATEMENTS OF ASSETS AND LIABILITIES MARCH 31, 1996 (UNAUDITED)
Mentor Mentor Mentor Perpetual Capital Growth Global Growth Portfolio Portfolio Portfolio ASSETS Investments, at market value * (Note 2) Investment securities $295,719,640 $28,967,439 $86,784,250 Repurchase agreements 39,268,803 2,192,142 4,381,988 Total Investments 334,988,443 31,159,581 91,166,238 Receivables Investments sold 121,863 150,925 257,500 Fund shares sold 851,058 1,267,829 106,926 Dividends and interest 110,153 89,830 80,537 Closed forward foreign currency contracts - 3,831 - Deferred expenses (Note 2) 23,333 33,106 18,000 Other assets - - - Total assets 336,094,850 32,705,102 91,629,201 LIABILITIES Payables Investments purchased 4,093,802 558,692 - Fund shares redeemed 146,520 30,305 94,350 Dividends - - - Forward foreign currency exchange contracts held (Note 8) - 676 - Forward contract payable - 19,676 - Accrued expenses and other liabilities 70,695 15,684 49,160 Total liabilities 4,311,017 625,033 143,510 NET ASSETS $331,783,833 $32,080,069 $91,485,691 Net Assets represented by: (Note 2) Additional paid-in capital $217,163,902 $28,624,212 $72,229,013 Accumulated net investment income (loss) (1,409,287) (164,371) (14,174) Accumulated distributions in excess of net investment income - - - Accumulated net realized gain (loss) on investment transactions 18,602,231 825,835 5,915,854 Net unrealized appreciation (depreciation) of investments and foreign currency related transactions 97,426,987 2,794,393 13,354,998 NET ASSETS $331,783,833 $32,080,069 $91,485,691 NET ASSET VALUE PER SHARE Class A Shares $ 16.51 $ 16.88 $ 17.58 Class B Shares $ 16.40 $ 16.58 $ 17.25 OFFERING PRICE PER SHARE Class A Shares $ 17.52(a) $ 17.91(a) $ 18.65(a) Class B shares $ 16.40 $ 16.58 $ 17.25 REDEMPTION PROCEEDS PER SHARE Class A Shares $ 16.51 $ 16.88 $ 17.58 Class B Shares (d) $ 16.24 $ 16.41 $ 17.08 SHARES OUTSTANDING Class A Shares 1,720,868 507,721 1,709,034 Class B Shares 18,494,841 1,418,356 3,561,612 Total Shares Outstanding 20,215,709 1,926,077 5,270,646
58 MENTOR FUNDS STATEMENTS OF ASSETS AND LIABILITIES MARCH 31, 1996 (UNAUDITED) (continued)
Mentor Mentor Mentor Income and Municipal Strategy Growth Income Portfolio Portfolio Portfolio ASSETS Investments, at market value * (Note 2) Investment securities $239,715,560 $73,531,056 $56,502,210 Repurchase agreements 30,776,523 3,417,000 - Total Investments 270,492,083 76,948,056 56,502,210 Receivables Investments sold - 62,237 - Fund shares sold 522,336 257,589 4,801 Dividends and interest 134,013 511,445 1,021,501 Closed forward foreign currency contracts - - - Deferred expenses (Note 2) 55,440 - - Other assets - - - Total assets 271,203,872 77,779,327 57,528,512 LIABILITIES Payables Investments purchased - 73,394 - Fund shares redeemed 161,375 47,434 179,926 Dividends - - 232,128 Forward foreign currency exchange contracts held (Note 8) - - - Forward contract payable - - - Accrued expenses and other liabilities 33,271 209,493 56,537 Total liabilities 194,646 330,321 468,591 NET ASSETS $271,009,226 $77,449,006 $57,059,921 Net Assets represented by: (Note 2) Additional paid-in capital $206,039,559 $64,985,879 $57,002,997 Accumulated net investment income (loss) (653,213) 12,823 - Accumulated distributions in excess of net investment income - - (54,062) Accumulated net realized gain (loss) on investment transactions 4,393,481 3,951,595 (2,654,941) Net unrealized appreciation (depreciation) of investments and foreign currency related transactions 61,229,399 8,498,709 2,765,927 NET ASSETS $271,009,226 $77,449,006 $57,059,921 NET ASSET VALUE PER SHARE Class A Shares $ 16.79 $ 18.07 $ 14.96 Class B Shares $ 16.69 $ 18.08 $ 14.98 OFFERING PRICE PER SHARE Class A Shares $ 17.81(a) $ 19.17(a) $ 15.71(b) Class B shares $ 16.69 $ 18.08 $ 14.98 REDEMPTION PROCEEDS PER SHARE Class A Shares $ 16.79 $ 18.07 $ 14.96 Class B Shares (d) $ 16.52 $ 17.90 $ 14.83 SHARES OUTSTANDING Class A Shares 821,892 1,232,083 1,333,939 Class B Shares 15,410,446 3,051,166 2,476,532 Total Shares Outstanding 16,232,338 4,283,249 3,810,471
59 MENTOR FUNDS STATEMENTS OF ASSETS AND LIABILITIES MARCH 31, 1996 (UNAUDITED) (continued)
Mentor Mentor Quality Short-Duration Income Income Portfolio Portfolio ASSETS Investments, at market value * (Note 2) Investment securities $ 78,681,221 $ 27,931,895 Repurchase agreements 3,233,203 616,000 Total Investments 81,914,424 28,547,895 Receivables Investments sold 1,258,060 533,814 Fund shares sold 110,278 79,322 Dividends and interest 775,852 259,702 Closed forward foreign currency contracts - - Deferred expenses (Note 2) - 34,948 Other assets 150,692 31,401 Total assets 84,209,306 29,487,082 LIABILITIES Payables Investments purchased 1,451,845 532,656 Fund shares redeemed 265,484 80,660 Dividends 419,566 127,801 Forward foreign currency exchange contracts held (Note 8) - - Forward contract payable - - Accrued expenses and other liabilities 45,003 16,417 Total liabilities 2,181,898 757,534 NET ASSETS $ 82,027,408 $ 28,729,548 Net Assets represented by: (Note 2) Additional paid-in capital $ 96,153,154 $ 28,718,766 Accumulated net investment income (loss) - - Accumulated distributions in excess of net investment income (234,102) (113,380) Accumulated net realized gain (loss) on investment transactions (12,995,609) 484,346 Net unrealized appreciation (depreciation) of investments and foreign currency related transactions (896,035) (360,184) NET ASSETS $ 82,027,408 $ 28,729,548 NET ASSET VALUE PER SHARE Class A Shares $ 13.15 $ 12.66 Class B Shares $ 13.17 $ 12.64 OFFERING PRICE PER SHARE Class A Shares $ 13.81(b) $ 12.79(c) Class B shares $ 13.17 $ 12.64 REDEMPTION PROCEEDS PER SHARE Class A Shares $ 13.15 $ 12.66 Class B Shares (d) $ 13.04 $ 12.51 SHARES OUTSTANDING Class A Shares 1,767,396 273,122 Class B Shares 4,463,263 1,998,884 Total Shares Outstanding 6,230,659 2,272,006
* Investments at cost $237,561,456, $77,811,240, $209,262,684, $68,449,356, $28,363,696, $82,420,193, $28,908,079 and $53,736,283 respectively. (a) Computation of offering price: 100/94.25 of net asset value. (b) Computation of offering price: 100/95.25 of net asset value. (c) Computation of offering price: 100/99 of net asset value. (d) Computation of redemption proceeds: 99/100 of net asset value. SEE NOTES TO FINANCIAL STATEMENTS. 59 MENTOR FUNDS STATEMENTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
Mentor Mentor Mentor Perpetual Capital Growth Global Growth Portfolio Portfolio Portfolio INVESTMENT INCOME Interest $ 344,122 $ 28,076 $ 106,245 Dividends (Net of withholding taxes)*** 1,089,746 137,383 732,274 Total investment income (Note 2) 1,433,868 165,459 838,519 EXPENSES Management fee (Note 4) 1,001,608 129,333 351,830 Distribution fees (Note 5) 987,902 60,664 219,956 Shareholder services fees (Note 5) 357,717 29,394 109,947 Transfer agent fee 149,532 16,392 55,197 Administration fee (Note 4) 143,087 11,757 43,979 Shareholder reports and postage expenses 94,766 1,759 19,792 Custodian and accounting fees 44,322 17,586 12,625 Registration expenses 32,911 12,639 12,813 Legal and Audit fees 11,683 3,228 12,160 Directors' fees and expenses 4,924 387 1,366 Organizational expenses 4,275 5,549 1,800 Miscellaneous 10,428 334 11,228 Total expenses 2,843,155 289,022 852,693 Deduct Waiver of administration fee (Note 4) - - - Waiver of management fee (Note 4) - - - NET EXPENSES 2,843,155 289,022 852,693 NET INVESTMENT INCOME (LOSS) (1,409,287) (123,563) (14,174) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS Net realized gain on investments (Note 2) 23,098,822 895,963 7,862,081 Change in unrealized appreciation (depreciation) 20,706,519 1,831,469 2,802,824 Net realized and unrealized gain (loss) on investments and futures contracts 43,805,341 2,727,432 10,664,905 Net increase in net assets resulting from operations $42,396,054 $2,603,869 $10,650,731
60 MENTOR FUNDS STATEMENTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED) (continued)
Mentor Mentor Mentor Income and Municipal Strategy Growth Income Portfolio Portfolio Portfolio INVESTMENT INCOME Interest $ 814,958 $ 795,220 $ 1,986,850 Dividends (Net of withholding taxes)*** 1,118,500 417,559 - Total investment income (Note 2) 1,933,458 1,212,779 1,986,850 EXPENSES Management fee (Note 4) 1,050,443 263,827 178,719 Distribution fees (Note 5) 882,532 186,400 97,450 Shareholder services fees (Note 5) 308,954 87,942 74,466 Transfer agent fee 108,020 33,217 29,274 Administration fee (Note 4) 123,582 35,177 29,786 Shareholder reports and postage expenses 67,191 10,714 6,138 Custodian and accounting fees 37,158 16,045 7,949 Registration expenses 25,332 26,218 26,831 Legal and Audit fees 8,686 3,951 3,962 Directors' fees and expenses 3,581 1,310 1,282 Organizational expenses 10,103 - - Miscellaneous 8,725 1,302 - Total expenses 2,634,307 666,103 455,857 Deduct Waiver of administration fee (Note 4) - - - Waiver of management fee (Note 4) - - - NET EXPENSES 2,634,307 666,103 455,857 NET INVESTMENT INCOME (LOSS) (700,849) 546,676 1,530,993 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS Net realized gain on investments (Note 2) 1,828,970 4,516,900 32,845 Change in unrealized appreciation (depreciation) 23,485,014 2,408,379 145,691 Net realized and unrealized gain (loss) on investments and futures contracts 25,313,984 6,925,279 178,536 Net increase in net assets resulting from operations $ 24,613,135 $ 7,471,955 $ 1,709,529
61 MENTOR FUNDS STATEMENTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED) (continued)
Mentor Mentor Quality Short-Duration Income Income Portfolio Portfolio INVESTMENT INCOME Interest $ 3,302,796 $ 795,231** Dividends (Net of withholding taxes)*** - 488 Total investment income (Note 2) 3,302,796 795,719 EXPENSES Management fee (Note 4) 256,275 61,656 Distribution fees (Note 5) 153,257 33,448 Shareholder services fees (Note 5) 106,781 30,828 Transfer agent fee 33,584 1,053 Administration fee (Note 4) 42,713 11,149 Shareholder reports and postage expenses 10,772 1,052 Custodian and accounting fees 15,107 5,333 Registration expenses 30,568 13,347 Legal and Audit fees 2,779 537 Directors' fees and expenses 1,923 143 Organizational expenses - 2,754 Miscellaneous - 47 Total expenses 653,759 161,347 Deduct Waiver of administration fee (Note 4) - 11,149 Waiver of management fee (Note 4) 42,713 46,729 NET EXPENSES 611,046 103,469 NET INVESTMENT INCOME (LOSS) 2,691,750 692,250 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS Net realized gain on investments (Note 2) 671,827 519,232 Change in unrealized appreciation (depreciation) (1,525,429) (640,202) Net realized and unrealized gain (loss) on investments and futures contracts (853,602) (120,970) Net increase in net assets resulting from operations $ 1,838,148 $ 571,280
** Net of interest expense $35,691 for the Mentor Short-Duration Income Portfolio. *** Withholding taxes were $1,069, $12,419 and $12,486 for the Mentor Growth Portfolio, Mentor Income and Growth Portfolio, and Mentor Perpetual Global Portfolio, respectively for the period ended March 31, 1996. SEE NOTES TO FINANCIAL STATEMENTS. 61 MENTOR FUNDS STATEMENTS OF CHANGES IN NET ASSETS
Mentor Perpetual Global Mentor Growth Portfolio Portfolio Six Months Six Months Ended Period Ended Year 3/31/96 Ended 3/31/96 Ended (Unaudited) 9/30/95* (Unaudited) 9/30/95 NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ (1,409,287) $ (1,966,059) $ (123,563) $ (16,767) Net realized gain (loss) on investments and futures contracts 23,098,822 24,885,052 895,963 862,461 Change in unrealized appreciation (depreciation) of investments 20,706,519 38,888,234 1,831,469 942,613 Increase in net assets from operations 42,396,054 61,807,227 2,603,869 1,788,307 DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A - - - - Class B - - - - Distributions in excess of net investment income Class A - - - - Class B - - - - Net realized gain on investments Class A (2,238,211) - (338,446) - Class B (27,048,013) - (688,164) - Net decrease from distributions (29,286,224) - (1,026,610) - CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions 51,979,579 14,761,239 10,981,677 863,287 Increase (decrease) in net assets 65,089,409 76,568,466 12,558,936 2,651,594 NET ASSETS Beginning of period 266,694,424 190,125,958 19,521,133 16,869,539 End of period $331,783,833 $266,694,424 $32,080,069 $19,521,133
62 MENTOR FUNDS STATEMENTS OF CHANGES IN NET ASSETS (continued)
Mentor Capital Growth Portfolio Mentor Strategy Portfolio Six Months Six Months Ended Period Ended Year 3/31/96 Ended 3/31/96 Ended (Unaudited) 9/30/95 (Unaudited) 9/30/95* NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ (14,174) $ (107,886) $ (700,849) $ 32,564 Net realized gain (loss) on investments and futures contracts 7,862,081 5,567,739 1,828,970 13,062,170 Change in unrealized appreciation (depreciation) of investments 2,802,824 8,926,628 23,485,014 30,325,565 Increase in net assets from operations 10,650,731 14,386,481 24,613,135 43,420,299 DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A - - - - Class B - - - - Distributions in excess of net investment income Class A - - - - Class B - - - - Net realized gain on investments Class A (871,658) (2,027,725) (15,039) - Class B (1,783,036) (4,095,792) (302,757) - Net decrease from distributions (2,654,694) (6,123,517) (317,796) - CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions (3,740,307) 16,680,084 11,572,721 12,447,061 Increase (decrease) in net assets 4,255,730 24,943,048 35,868,060 55,867,360 NET ASSETS Beginning of period 87,229,961 62,286,913 235,141,166 179,273,806 End of period $ 91,485,691 $ 87,229,961 $271,009,226 $235,141,166
63 MENTOR FUNDS STATEMENTS OF CHANGES IN NET ASSETS (continued)
Mentor Income and Growth Mentor Municipal Income Portfolio Portfolio Six Months Six Months Ended Year Ended Year 3/31/96 Ended 3/31/96 Ended (Unaudited) 9/30/95 (Unaudited) 9/30/95 NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 546,676 $ 1,236,537 $ 1,530,993 $ 3,337,904 Net realized gain (loss) on investments and futures contracts 4,516,900 2,495,422 32,845 (2,056,061) Change in unrealized appreciation (depreciation) of investments 2,408,379 5,833,996 145,691 4,099,300 Increase in net assets from operations 7,471,955 9,565,955 1,709,529 5,381,143 DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A (206,168) (464,855) (561,389) (1,233,641) Class B (327,682) (771,682) (971,123) (2,106,334) Distributions in excess of net investment income Class A - (38,935) - - Class B - (64,635) - - Net realized gain on investments Class A (857,221) (298,324) - - Class B (2,018,268) (712,920) - - Net decrease from distributions (3,409,339) (2,351,351) (1,532,512) (3,339,975) CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions 6,820,579 (1,640,309) (3,070,275) (13,301,743) Increase (decrease) in net assets 10,883,195 5,574,295 (2,893,258) (11,260,575) NET ASSETS Beginning of period 66,565,811 60,991,516 59,953,179 71,213,754 End of period $77,449,006 $66,565,811 $ 57,059,921 $ 59,953,179
* For the period from January 1, 1995 to September 30, 1995. SEE NOTES TO FINANCIAL STATEMENTS. 63 MENTOR FUNDS STATEMENTS OF CHANGES IN NET ASSETS
Mentor Quality Income Mentor Short-Duration Portfolio Income Portfolio Six Months Six Months Ended Year Ended Period 3/31/96 Ended 3/31/96 Ended (Unaudited) 9/30/95 (Unaudited) 9/30/95* NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income $ 2,691,750 $ 5,884,441 $ 692,250 $ 820,190 Net realized gain (loss) on investments and futures contracts 671,827 (1,948,938) 519,232 258,876 Change in unrealized appreciation (depreciation) of investments (1,525,429) 5,945,462 (640,202) 423,995 Increase in net assets from operations 1,838,148 9,880,965 571,280 1,503,061 DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A (804,299) (1,780,925) (71,018) (7,777) Class B (1,878,664) (4,084,639) (649,123) (812,803) Distributions in excess of net investment income Class A - (130,142) - (2,635) Class B - (298,487) - (39,850) Net realized gain on investments Class A - - - - Class B - - - - Net decrease from distributions (2,682,963) (6,294,193) (720,141) (863,065) CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions (3,754,668) (24,989,530) 8,005,864 3,088,707 Increase (decrease) in net assets (4,599,483) (21,402,758) 7,857,003 3,728,703 NET ASSETS Beginning of period 86,626,891 108,029,649 20,872,545 17,143,842 End of period $82,027,408 $86,626,891 $28,729,548 $20,872,545
* For the period from January 1, 1995 to September 30, 1995. 64 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES
Mentor Growth Portfolio Mentor Perpetual Global Portfolio Six Months Six Months Ended Period Ended Year Year 3/31/96 Ended 3/31/96 Ended Ended (Unaudited) 9/30/95* (Unaudited) 9/30/95 9/30/94(c) PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.08 $ 13.37 $ 15.88 $14.23 $14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.02) (0.01) (0.04) 0.05 (0.01) Net realized and unrealized gain (loss) on investments 2.19 2.72 1.84 1.60 0.06 Total from investment operations 2.17 2.71 1.80 1.65 0.05 LESS DISTRIBUTIONS Dividends from net investment income - - - - - Distributions in excess of net investment income - - - - - Distributions from capital gains (1.74) - (0.80) - - Distributions in excess of capital gains - - - - - Total distributions (1.74) - (0.80) - - NET ASSET VALUE, END OF PERIOD $ 16.51 $ 16.08 $ 16.88 $15.88 $14.23 Total Return 15.44% 20.27% 11.90% 11.60% 0.35% Ratios/Supplemental Data Net assets, end of period (in thousands) $28,405 $20,368 $ 8,571 $6,854 $8,882 Ratio of expenses to average net assets 1.32%(a) 1.36%(a) 2.00%(a) 2.06 2.09%(a) Ratio of expenses to average net asset excluding waiver 1.32%(a) 1.36%(a) 2.00%(a) 2.11% 3.18%(a) Ratio of net investment income (loss) to average net assets (0.29%)(a) (0.65%)(a) (0.54%)(a) 0.26% (0.10%)(a) Portfolio turnover rate 51% 70% 70% 155% 2% Average commission rate on portfolio transactions $0.0549 - $0.0306 - -
* For the period from June 5, 1995 to September 30, 1995. (a) Annualized. (c) Reflects operations for the period from March 30, 1994 (commencement of operations), to September 30, 1994. SEE NOTES TO FINANCIAL STATEMENTS. 65 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES
Six Months Mentor Capital Growth Portfolio Ended Year Year Year Year 3/31/96 Ended Ended Ended Ended (Unaudited) 9/30/95 9/30/94 9/30/93 9/30/92** PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.02 $ 14.88 $ 15.26 $ 14.21 $ 14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.04 0.02 0.09 0.14 0.08 Net realized and unrealized gain (loss) on investments 2.02 2.91 (0.30 ) 1.02 0.03 Total from investment operations 2.06 2.93 (0.21 ) 1.16 0.11 LESS DISTRIBUTIONS Dividends from net investment income - - (0.04 ) (0.11 ) (0.08) Distributions in excess of net investment income - - - - - Distributions from capital gains (0.50) (1.79 ) (0.13 ) - - Distributions in excess of capital gains - - - - - Total distributions (0.50) (1.79 ) (0.17 ) (0.11 ) (0.08) NET ASSET VALUE, END OF PERIOD $ 17.58 $ 16.02 $ 14.88 $ 15.26 $ 14.21 Total Return 13.17% 20.18 % (1.37 %) 8.21% 0.78% Ratios/Supplemental Data Net assets, end of period (in thousands) $30,044 $29,582 $21,181 $31,360 $ 20,864 Ratio of expenses to average net assets 1.44%(a) 1.87 % 1.70 % 1.49% 1.14%(a) Ratio of expenses to average net asset excluding waiver 1.44%(a) 1.87 % 1.70 % 1.59% 1.43%(a) Ratio of net investment income (loss) to average net assets 0.46%(a) 0.27 % 0.53 % 0.96% 1.54%(a) Portfolio turnover rate 45% 157 % 149 % 192% 61% Average commission rate on portfolio transactions $0.0694 - - - -
66 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES (continued)
Mentor Strategy Portfolio Mentor Income and Growth Portfolio Six Months Six Months Ended Period Ended Year Year Year 3/31/96 Ended 3/31/96 Ended Ended Ended (Unaudited) 9/30/95* (Unaudited) 9/30/95 9/30/94 9/30/93(b) PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 15.24 $ 13.45 $ 17.13 $ 15.27 $ 14.88 $14.14 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.01 - 0.18 0.40 0.31 0.09 Net realized and unrealized gain (loss) on investments 1.56 1.79 1.67 2.14 0.64 0.73 Total from investment operations 1.57 1.79 1.85 2.54 0.95 0.82 LESS DISTRIBUTIONS Dividends from net investment income - - (0.17) (0.40) (0.30) (0.08) Distributions in excess of net investment income - - - (0.03) - - Distributions from capital gains (0.02) - (0.74) (0.25) (0.26) - Distributions in excess of capital gains - - - - - - Total distributions (0.02) - (0.91) (0.68) (0.56) (0.08) NET ASSET VALUE, END OF PERIOD $ 16.79 $ 15.24 $ 18.07 $ 17.13 $ 15.27 $14.88 Total Return 10.32% 13.31% 11.28% 17.24% 6.54% 5.54% Ratios/Supplemental Data Net assets, end of period (in thousands) $13,802 $ 10,503 $22,270 $19,888 $17,773 $9,849 Ratio of expenses to average net assets 1.47%(a) 1.65%(a) 1.37%(a) 1.69% 1.75% 1.56%(a) Ratio of expenses to average net asset excluding waiver 1.47%(a) 1.65%(a) 1.37%(a) 1.69% 1.75% 1.94%(a) Ratio of net investment income (loss) to average net assets 0.14%(a) (0.06%)(a) 2.07%(a) 2.53% 2.20% 2.35%(a) Portfolio turnover rate 43% 122% 41% 62% 78% 13% Average commission rate on portfolio transactions $0.0686 - $0.0513 - - -
* For the period from June 5, 1995 to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. (a) Annualized. (b) Reflects operations for the period from May 21, 1993 (commencement of operations), to September 30, 1993. SEE NOTES TO FINANCIAL STATEMENTS. 67 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES
Six Months Mentor Municipal Income Portfolio Ended Year Year Year Year 3/31/96 Ended Ended Ended Ended (Unaudited) 9/30/95 9/30/94 9/30/93 9/30/92** PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 14.92 $ 14.42 $ 16.05 $ 14.76 $ 14.29 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.41 0.81 0.82 0.92 0.32 Net realized and unrealized gain (loss) on investments 0.04 0.51 (1.54 ) 1.32 0.47 Total from investment operations 0.45 1.32 (0.72 ) 2.24 0.79 LESS DISTRIBUTIONS Dividends from net investment income (0.41) (0.82 ) (0.81 ) (0.92 ) (0.32) Distributions in excess of net investment income - - - (0.03 ) - Distributions from capital gains - - (0.10 ) - - Distributions in excess of capital gains - - - - - Total distributions (0.41) (0.82 ) (0.91 ) (0.95 ) (0.32) NET ASSET VALUE, END OF PERIOD $ 14.96 $ 14.92 $ 14.42 $ 16.05 $ 14.76 Total Return 3.03% 9.46 % (4.83 %) 16.00% 5.34% Ratios/Supplemental Data Net assets, end of period (in thousands) $19,951 $20,460 $25,056 $29,245 $ 18,801 Ratio of expenses to average net assets 1.21%(a) 1.43 % 1.24 % 0.71% 0.00%(a) Ratio of expenses to average net asset excluding waiver 1.21%(a) 1.43 % 1.33 % 1.39% 1.26%(a) Ratio of net investment income to average net assets 5.48%(a) 5.56 % 5.43 % 5.92% 6.21%(a) Portfolio turnover rate 8% 43 % 87 % 88% 0% Average commission rate on portfolio transactions - - - - -
68 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES (continued)
Mentor Short-Duration Mentor Quality Income Portfolio Income Portfolio Six Months Six Months Ended Year Year Year Year Ended Period 3/31/96 Ended Ended Ended Ended 3/31/96 Ended (Unaudited) 9/30/95 9/30/94 9/30/93 9/30/92** (Unaudited) 9/30/95* PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 13.29 $ 12.75 $ 14.04 $ 14.39 $ 14.30 $ 12.68 $ 12.74 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.45 0.84 0.84 1.06 0.44 0.42 0.22 Net realized and unrealized gain (loss) on investments (0.14) 0.61 (1.30) (0.31 ) 0.09 (0.05) (0.03) Total from investment operations 0.31 1.45 (0.46) 0.75 0.53 0.37 0.19 LESS DISTRIBUTIONS Dividends from net investment income (0.45) (0.85 ) (0.83) (1.06 ) (0.44) (0.39) (0.22) Distributions in excess of net investment income - (0.06 ) - (0.04 ) - - (0.03) Distributions from capital gains - - - - - - - Distributions in excess of capital gains - - - - - - - Total distributions (0.45) (0.91 ) (0.83) (1.10 ) (0.44) (0.39) (0.25) NET ASSET VALUE, END OF PERIOD $ 13.15 $ 13.29 $ 12.75 $ 14.04 $ 14.39 $ 12.66 $ 12.68 Total Return 2.30% 11.82 % (3.39)% 5.41% 3.37% 2.98% 1.51% Ratios/Supplemental Data Net assets, end of period (in thousands) $ 23,242 $24,472 $30,142 $47,780 $ 36,740 $ 3,457 $ 1,002 Ratio of expenses to average net assets 1.07%(a) 1.32% 1.38% 1.04% 0.36%(a) 0.86%(a) 0.71%(a) Ratio of expenses to average net asset excluding waiver 1.15%(a) 1.36% 1.39% 1.22% 1.21%(a) 1.34%(a) 1.00%(a) Ratio of net investment income to average net assets 6.67%(a) 6.73% 6.33% 7.31% 8.00%(a) 5.77%(a) 4.10%(a) Portfolio turnover rate 137% 368% 455% 102% 9% 143% 126% Average commission rate on portfolio transactions - - - - - - -
* For the period from June 5, 1995 to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. (a) Annualized. SEE NOTES TO FINANCIAL STATEMENTS. 69 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Growth Portfolio Six Months Ended Year Year Year Year Year 3/31/96 Ended Ended Ended Ended Ended (Unaudited) 9/30/95* 12/31/94 12/31/93 12/31/92 12/31/91 PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 $ 8.37 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.07) (0.13) (0.15) (0.08) (0.06) (0.09) Net realized and unrealized gain (loss) on investments 2.16 4.03 (0.47) 2.07 1.94 4.30 Total from investment operations 2.09 3.90 (0.62) 1.99 1.88 4.21 LESS DISTRIBUTIONS Dividends from net investment income - - - - - - Distributions in excess of net investment income - - - - - - Distributions from capital gains (1.74) - (1.00) (1.02) (1.23) (0.42) Distributions in excess of capital gains - - (0.01) - - - Total distributions (1.74) - (1.01) (1.02) (1.23) (0.42) NET ASSET VALUE, END OF PERIOD $ 16.40 $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 Total Return 14.93% 32.10% (4.48%) 15.60% 15.46% 50.30% Ratios/Supplemental Data Net assets, end of period (in thousands) $ 303,379 $246,326 190,126 $186,978 $136,053 $ 108,719 Ratio of expenses to average net assets 2.05%(a) 2.08%(a) 2.01% 2.02% 2.05% 2.17% Ratio of expenses to average net asset excluding waiver 2.05%(a) 2.08%(a) 2.01% 2.02% 2.05% 2.17% Ratio of net investment income (loss) to average net assets (1.01%)(a) (1.20%)(a) (1.20%) (1.12%) (0.76%) (0.80%) Portfolio turnover rate 51% 70% 77% 64% 50% 40% Average commission rate on portfolio transactions $ 0.0549 - - - - -
70 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES (continued)
Mentor Perpetual Global Portfolio Six Months Ended Year Year 3/31/96 Ended Ended (Unaudited) 9/30/95 9/30/94(c) PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 15.67 $ 14.15 $ 14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.04) (0.05) (0.04) Net realized and unrealized gain (loss) on investments 1.75 1.57 0.01 Total from investment operations 1.71 1.52 (0.03) LESS DISTRIBUTIONS Dividends from net investment income - - - Distributions in excess of net investment income - - - Distributions from capital gains (0.80) - - Distributions in excess of capital gains - - - Total distributions (0.80) - - NET ASSET VALUE, END OF PERIOD $ 16.58 $ 15.67 $ 14.15 Total Return 11.47% 10.74% (0.21%) Ratios/Supplemental Data Net assets, end of period (in thousands) $23,509 $12,667 $ 7,987 Ratio of expenses to average net assets 2.73%(a) 2.72% 2.79%(a) Ratio of expenses to average net asset excluding waiver 2.73%(a) 2.79% 3.93%(a) Ratio of net investment income (loss) to average net assets (1.24%)(a) (0.40%) (0.82%)(a) Portfolio turnover rate 70% 155% 2% Average commission rate on portfolio transactions $0.0306 - -
71 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES (continued)
Mentor Capital Growth Portfolio Six Months Ended Year Year Year Year 3/31/96 Ended Ended Ended Ended (Unaudited) 9/30/95 9/30/94 9/30/93 9/30/92** PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.02) 0.25 (0.04) 0.05 0.46 Net realized and unrealized gain (loss) on investments 1.98 2.53 (0.26) 1.02 0.04 Total from investment operations 1.96 2.78 (0.30) 1.07 0.50 LESS DISTRIBUTIONS Dividends from net investment income - - - (0.05) (0.46) Distributions in excess of net investment income - - - (0.01) - Distributions from capital gains (0.50) (1.79) (0.13) - - Distributions in excess of capital gains - - - - - Total distributions (0.50) (1.79) (0.13) (0.06) (0.46) NET ASSET VALUE, END OF PERIOD $ 17.25 $ 15.79 $ 14.80 $ 15.23 $ 14.22 Total Return 12.72% 19.26% (2.00%) 7.52% 0.61% Ratios/Supplemental Data Net assets, end of period (in thousands) $61,442 $57,648 $41,106 $57,030 $ 25,468 Ratio of expenses to average net assets 2.19%(a) 2.56% 2.46% 2.24% 1.86%(a) Ratio of expenses to average net asset excluding waiver 2.19%(a) 2.56% 2.46% 2.34% 2.16%(a) Ratio of net investment income (loss) to average net assets (0.29%)(a) (0.41%) (0.22%) 0.21% 0.83%(a) Portfolio turnover rate 45% 157% 149% 192% 61% Average commission rate on portfolio transactions $0.0693 - - - -
* For the period from January 1, 1995 to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. (a) Annualized. (c) Reflects operations for the period from March 30, 1994 (commencement of operations), to September 30, 1994. SEE NOTES TO FINANCIAL STATEMENTS. 71 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Strategy Portfolio Six Months Ended Period Year Year 3/31/96 Ended Ended Ended (Unaudited) 9/30/95* 9/30/94 9/30/93*** PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 15.21 $ 12.24 $ 12.70 $ 12.50 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.05) - (0.06) - Net realized and unrealized gain (loss) on investments 1.55 2.97 (0.40) 0.20 Total from investment operations 1.50 2.97 (0.46) 0.20 LESS DISTRIBUTIONS Dividends from net investment income - - - - Distributions in excess of net investment income - - - - Distributions from capital gains (0.02) - - - Distributions in excess of capital gains - - - - Total distributions (0.02) - - - NET ASSET VALUE, END OF PERIOD $ 16.69 $ 15.21 $ 12.24 $ 12.70 Total Return 9.88% 24.26% (3.61%) 1.60% Ratios/Supplemental Data Net assets, end of period (in thousands) $ 257,207 $ 224,643 $ 179,274 $ 122,177 Ratio of expenses to average net assets 2.21%(a) 2.08%(a) 2.19% 2.06%(a) Ratio of expenses to average net asset excluding waiver 2.21%(a) 2.08%(a) 2.19% 2.06%(a) Ratio of net investment income (loss) to average net assets (0.60%)(a) 0.25%(a) (0.54%) 0.08%(a) Portfolio turnover rate 43% 122% 143% 0% Average commission rate on portfolio transactions $ 0.0686 - - -
72 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES (continued)
Mentor Income and Growth Portfolio Six Months Ended Year Year Year 3/31/96 Ended Ended Ended (Unaudited) 9/30/95 9/30/94 9/30/93(b) PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 17.14 $ 15.28 $ 14.91 $ 14.14 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.11 0.28 0.21 0.05 Net realized and unrealized gain (loss) on investments 1.68 2.14 0.61 0.77 Total from investment operations 1.79 2.42 0.82 0.82 LESS DISTRIBUTIONS Dividends from net investment income (0.11) (0.28) (0.19) (0.05) Distributions in excess of net investment income - (0.03) - - Distributions from capital gains (0.74) (0.25) (0.26) - Distributions in excess of capital gains - - - - Total distributions (0.85) (0.56) (0.45) (0.05) NET ASSET VALUE, END OF PERIOD $ 18.08 $ 17.14 $ 15.28 $ 14.91 Total Return 10.89% 16.32% 5.66% 5.54% Ratios/Supplemental Data Net assets, end of period (in thousands) $55,179 $46,678 $43,219 $ 18,127 Ratio of expenses to average net assets 2.10%(a) 2.43% 2.44% 2.31%(a) Ratio of expenses to average net asset excluding waiver 2.10%(a) 2.43% 2.44% 2.69%(a) Ratio of net investment income (loss) to average net assets 1.33%(a) 1.78% 1.15% 1.60%(a) Portfolio turnover rate 41% 62% 78% 13% Average commission rate on portfolio transactions $0.0513 - - -
73 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES (continued)
Mentor Municipal Income Portfolio Six Months Ended Year Year Year Year 3/31/96 Ended Ended Ended Ended (Unaudited) 9/30/95 9/30/94 9/30/93 9/30/92** PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 14.95 $ 14.43 $ 16.06 $ 14.78 $ 14.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.38 0.74 0.74 0.82 0.29 Net realized and unrealized gain (loss) on investments 0.03 0.52 (1.54) 1.32 0.49 Total from investment operations 0.41 1.26 (0.80) 2.14 0.78 LESS DISTRIBUTIONS Dividends from net investment income (0.38) (0.74) (0.73) (0.82) (0.29) Distributions in excess of net investment income - - - (0.04) - Distributions from capital gains - - (0.10) - - Distributions in excess of capital gains - - - - - Total distributions (0.38) (0.74) (0.83) (0.86) (0.29) NET ASSET VALUE, END OF PERIOD $ 14.98 $ 14.95 $ 14.43 $ 16.06 $ 14.78 Total Return 2.72% 9.01% (5.34%) 15.27% 5.28% Ratios/Supplemental Data Net assets, end of period (in thousands) $ 37,109 $39,493 $46,157 $50,976 $24,265 Ratio of expenses to average net assets 1.71%(a) 1.92% 1.74% 1.21% 0.50%(a) Ratio of expenses to average net asset excluding waiver 1.71%(a) 1.92% 1.86% 1.89% 1.76%(a) Ratio of net investment income (loss) to average net assets 4.98%(a) 5.07% 4.93% 5.42% 5.80%(a) Portfolio turnover rate 8% 43% 87% 88% 0% Average commission rate on portfolio transactions - - - - -
* For the period from January 1, 1995 to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. *** Reflects operations for the period of October 29, 1993 (commencement of operations), to December 31, 1994. (a) Annualized. (b) Reflects operations for the period from May 21, 1993 (commencement of operations), to September 30, 1993. SEE NOTES TO FINANCIAL STATEMENTS. 73 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Quality Income Portfolio Six Months Ended Year Year Year Year 3/31/96 Ended Ended Ended Ended (Unaudited) 9/30/95 9/30/94 9/30/93 9/30/92** PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 13.31 $ 12.76 $ 14.06 $ 14.40 $ 14.30 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.41 0.79 0.82 0.99 0.41 Net realized and unrealized gain (loss) on investments (0.14) 0.61 (1.37) (0.31) 0.10 Total from investment operations 0.27 1.40 (0.55) 0.68 0.51 LESS DISTRIBUTIONS Dividends from net investment income (0.41) (0.79) (0.75) (0.99) (0.41) Distributions in excess of net investment income - (0.06) - (0.03) - Distributions from capital gains - - - - - Distributions in excess of capital gains - - - - - Total distributions (0.41) (0.85) (0.75) (1.02) (0.41) NET ASSET VALUE, END OF PERIOD $ 13.17 $ 13.31 $ 12.76 $ 14.06 $ 14.40 Total Return (2.02%) 11.33% (3.97%) 4.86% 3.24% Ratios/Supplemental Data Net assets, end of period (in thousands) $58,785 $62,155 $77,888 $127,346 $ 65,661 Ratio of expenses to average net assets 1.58%(a) 1.74% 1.88% 1.54% 0.83%(a) Ratio of expenses to average net asset excluding waiver 1.69%(a) 1.79% 1.90% 1.72% 1.67%(a) Ratio of net investment income to average net assets 6.18%(a) 6.24% 6.21% 6.81% 7.53%(a) Portfolio turnover rate 137% 368% 455% 102% 9% Average commission rate on portfolio transactions - - - - -
** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. (a) Annualized. SEE NOTES TO FINANCIAL STATEMENTS. 74 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Short-Duration Income Portfolio Six Months Ended Period Year 3/31/96 Ended Ended (Unaudited) 9/30/95* 9/30/94(d) PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 12.67 $ 12.18 $ 12.50 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.36 0.59 0.41 Net realized and unrealized gain (loss) on investments (0.02) 0.52 (0.29) Total from Investment Operations 0.34 1.11 0.12 LESS DISTRIBUTIONS Dividends from net investment income (0.37) (0.59 ) (0.41) Distributions in excess of net investment income - (0.03 ) (0.03) Distributions from capital gains - - - Distributions in excess of capital gains - - - Total distributions (0.37) (0.62 ) (0.44) NET ASSET VALUE, END OF PERIOD $ 12.64 $ 12.67 $ 12.18 Total Return 2.75% 9.22% 0.95% Ratios/Supplemental Data Net assets, end of period (in thousands) $25,273 $19,871 $ 17,144 Ratio of expenses to average net assets 1.16%(a) 1.20%(a) 1.29%(a) Ratio of expenses to average net asset excluding waiver 1.64%(a) 1.70%(a) 1.29%(a) Ratio of net investment income to average net assets 5.58%(a) 5.04%(a) 4.90%(a) Portfolio turnover rate 143% 126% 166% Average commission rate on portfolio transactions - - -
* For the period from January 1, 1995 to September 30, 1995. (a) Annualized. (d) Reflects operations for the period from April 29, 1994 (commencement of operations), to December 31, 1994. SEE NOTES TO FINANCIAL STATEMENTS. 75 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED) NOTE 1: ORGANIZATION Mentor Funds (formerly Cambridge Series Trust) is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. On April 12, 1995 the name of the Trust was changed to Mentor Funds ("Mentor Funds"). On April 12, 1995 the portfolios of Mentor Series Trust were merged into newly formed portfolios of Mentor. Mentor Funds consists of nine separate Portfolios (hereinafter each individually referred to as a "Portfolio" or collectively as the "Portfolios") at March 31, 1996, as follows: Mentor Growth Portfolio (formerly Mentor Growth Fund) ("Growth Portfolio") Mentor Perpetual Global Portfolio (formerly Cambridge Global Portfolio) ("Global Portfolio") Mentor Capital Growth Portfolio (formerly Cambridge Capital Growth Portfolio) ("Capital Growth Portfolio") Mentor Strategy Portfolio (formerly Mentor Strategy Fund) ("Strategy Portfolio") Mentor Income and Growth Portfolio (formerly Cambridge Income and Growth Portfolio) ("Income and Growth Portfolio") Mentor Municipal Income Portfolio (formerly Cambridge Municipal Income Portfolio) ("Municipal Income Portfolio") Mentor Quality Income Portfolio (formerly Cambridge Government Income Portfolio) ("Quality Income Portfolio") Mentor Short-Duration Income Portfolio (formerly Mentor Short-Duration Income Fund) ("Short-Duration Income Portfolio") Mentor Balanced Portfolio (formerly Mentor Balanced Fund) ("Balanced Portfolio") The assets of each Portfolio are segregated and a shareholder's interest is limited to the Portfolio in which shares are held. The Balanced Portfolio is not currently being offered to new investors. These financial statements do not include the Balanced Portfolio. Mentor Funds currently issues two classes of shares. Class A shares are sold subject to a maximum sales charge of 5.75% (4.75% for Quality Income Portfolio and Municipal 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. 76 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 required management to make estimates and assumptions that affect amounts reported therein. Although actual results could differ from these estimates, any such differences are expected to be immaterial to the net assets of the Portfolio. (a) Valuation of Securities Listed securities held by the Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio and Global 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 designated by the Board of Trustees 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 and under the general supervision and responsibility of the Board of Trustees. U.S. Government obligations held by the Quality Income Portfolio, Short-Duration Income Portfolio and Income and Growth 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 Portfolio's 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, 77 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. The Board of Trustees has determined that the fair value of debt securities 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, assets and liabilities at the daily rate of exchange, purchases and sales of investment, 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. (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, or to have segregated within the custodian bank's vault all securities held as collateral in support of repurchase agreement investments. Additionally, procedures have been established by Mentor Funds to monitor, on a daily basis, the market value of each repurchase agreement's 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 Growth Portfolio, Strategy Portfolio and Municipal Income Portfolio) may, under certain circumstances, borrow money directly or through dollar-roll and reverse repurchase agreements (arrangements in which the Portfolio sells a security for a percentage of its market value with an agreement to buy it back on a set date). Each Portfolio may borrow up to one-third of the value of its net assets. The average daily balance of reverse repurchase agreements outstanding for Short-Duration Income Portfolio during the six months ended March 31, 1996, was approximately $1,321,190 or $0.63 per share based on average shares outstanding during the period at a 78 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) weighted average rate of 5.54%. The maximum amount of borrowings outstanding for any day during the period was $8,001,222 (including accrued interest), as of February 29, 1996, at an interest rate of 5.50% and was 22.32% of total assets. (d) 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 (except for Municipal Income Portfolio) is recorded on the accrual basis. Interest income 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. (e) Federal Income Taxes No provision for federal income taxes has been made since it is each Portfolio's policy to comply with the provisions applicable to regulated investment companies under the Internal Revenue Code and to distribute to its shareholders within the allowable time limit substantially all taxable income and realized capital gains. Dividends paid by the Municipal Income Portfolio representing net interest received on tax-exempt municipal securities are not includable by shareholders as gross income for federal income tax purposes because the Portfolio intends to meet certain requirements of the Internal Revenue Code applicable to regulated investment companies which will enable the Portfolio to pay tax-exempt interest dividends. The portion of such interest, if any, earned on private purpose municipal bonds issued after August 7, 1986, may be considered a tax preference item to shareholders. At September 30, 1995, Quality Income Portfolio for federal tax purposes, had a capital loss carryforward of approximately $11,750,000. Pursuant to the Code, such capital loss carryforwards expire as follows: $820,000 in 2001 and $3,680,000 in 2002 and $7,250,000 in 2003. At September 30, 1995, Short-Duration Income Portfolio for federal tax purposes, had a capital loss carryforward of approximately $35,000. Pursuant to the Internal Revenue Code, such capital loss carryforward will expire in 2003. At September 30, 1995, Municipal Income Portfolio for federal tax purposes, had a capital loss carryforward of approximately 79 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) $895,000. Pursuant to the Internal Revenue Code, such capital loss carryforward will expire in 2003. 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. (f) 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. (g) Futures Contracts In order to gain exposure to or protect against declines in security values, Quality Income Portfolio, Short-Duration Income Portfolio and Municipal Income Portfolio may buy and sell futures contracts. The Portfolios may also buy or write put or call options on these futures contracts. The Portfolios generally 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, 1996, Quality Income Portfolio and Municipal Income Portfolio had realized losses of $421,502, and $262,489 respectively on closed futures contracts. 80 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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, 1996, the Quality Income Portfolio had open U.S. Treasury Note futures contracts with an aggregate notional value of $15,300,000. The Portfolio recorded unrealized losses of $390,266 on such futures contracts. (h) Options In order to produce incremental earnings or protect against changes in the value of portfolio securities, Quality Income Portfolio and Short-Duration Income Portfolio 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, 1996, Quality Income Portfolio and Short-Duration Income Portfolio had realized losses of $38,603, and $10,016 respectively on closed options 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. 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. (i) Residual Interests A derivative security is any investment that derives its value from an underlying security, 81 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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' investment 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 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. The Portfolios will continue to invest in residual securities because, in the opinion of the Investment Manager, these investments can play a key role in fulfilling the Portfolios' objective of achieving high monthly income through providing a means of economic leverage. (j) 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. (k) 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 and deferral of wash sales. NOTE 3: DIVIDENDS Dividends will be declared daily and paid monthly to all shareholders invested in Quality Income Portfolio, Short-Duration Income Portfolio and Municipal Income Portfolio on the record date. Dividends are declared and paid semi-annually to all shareholders invested in Capital Growth Portfolio on the record date, dividends are declared and paid annually to all shareholders invested in the Growth Portfolio, Strategy Portfolio and Global Portfolio on the record date, and dividends are declared and paid quarterly to all shareholders invested in Income and Growth Portfolio on the record date. Dividends will be reinvested in additional shares of the same class and Portfolio on payment dates at the ex-dividend date net asset value without a sales charge unless cash payments are requested by shareholders in writing to Mentor. Capital gains realized by each Portfolio, if any, are paid annually. 82 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS Commonwealth Advisors, Inc., (formerly Cambridge Investment Advisors, Inc.), the Portfolios' investment adviser ("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 Portfolio: Capital Growth Portfolio, 0.80%; Quality Income Portfolio, 0.60%; Municipal Income Portfolio, 0.60%; and Income and Growth Portfolio, 0.75%. The Investment Adviser pays the sub-adviser to Municipal Income Portfolio an annual fee of 0.30%. The sub-adviser to the Income and Growth Portfolio receives 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 in Portfolio assets, 0.275% on the next $150 million in assets, 0.225% on the next $300 million in assets, and 0.200% on assets over $500 million. 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 Growth Portfolio has entered into an Investment Advisory and Management Agreement with Charter Asset Management, Inc. ("Charter"), a wholly-owned subsidiary of Mentor Investment Group, Inc., (formerly Investment Management Group, Inc.) ("Mentor") which is a wholly-owned subsidiary of Wheat First Butcher Singer, Inc. Under this agreement, Charter's management fee is accrued daily and paid monthly at an annual rate of 0.70% applied to the average daily net assets of the Portfolio. The Strategy Portfolio has entered into an Investment Advisory Agreement with Wellesley Advisors, Inc. ("Wellesley"), a wholly-owned subsidiary of Mentor. Under this agreement, Wellesley's management fee is accrued daily and paid monthly at an annual rate of 0.85% applied to the average daily net assets of the Portfolio. The Global Portfolio has entered into an Investment Advisory Agreement with Mentor Perpetual Advisors, L.L.C. ("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. The Short-Duration Income Portfolio has entered into an Investment Advisory Agreement with Commonwealth Investment Counsel, Inc. ("Commonwealth"), a wholly-owned subsidiary of Mentor. Under this agreement, Commonwealth's management fee is accrued daily 83 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) and paid monthly at an annual rate of 0.50% applied to the average daily net assets of the Portfolio. For the six months ended March 31, 1996 the Investment Adviser and sub-advisers, Charter, Wellesley and Commonwealth earned and voluntarily waived the following advisory fees: Adviser Adviser Fee Sub Adviser Fee Voluntarily Fee Portfolio Earned Waived Earned Growth $1,001,608 - - Global 129,333 - - Capital Growth 351,830 - - Strategy 1,050,443 - - Income and Growth 263,827 - $ 109,237 Municipal Income 178,719 - 89,360 Quality Income 256,275 $42,713 - Short-Duration Income 61,656 46,729 - 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 March 31, 1996, Mentor earned the following administrative fees: Administrative Administrative Fee Fee Voluntarily Portfolio Earned Waived Growth $143,087 - Global 11,757 - Capital Growth 43,979 - Strategy 123,582 - Income and Growth 35,177 - Municipal Income 29,786 - Quality Income 42,713 - Short-Duration Income 11,149 $ 11,149 Charter, Wellesley, and Commonwealth have agreed to reimburse the Portfolios for the operating expenses (exclusive of interest, taxes, brokerage and distributions fees, and extraordinary expenses) in excess of the most restrictive expense limitation imposed by state securities commissions with jurisdiction over the Portfolios. The most stringent state expense limitation applicable to the Portfolios requires reimbursement of expenses not including expenses under the Portfolios' Distribution Plan, in any year that such expenses exceed 2.5% of the 84 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) first $30,000,000 of average daily net assets, 2% of the next $70,000,000 of average daily net assets, and 1.5% of the average daily net assets over $100,000,000. During the six months ended March 31, 1996, no reimbursement from Charter, Wellesley or Commonwealth was required as a result of such state expense limitations. 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, Inc. ("Mentor Distributors") (formerly, Cambridge Distributors, Inc.) a wholly-owned subsidiary of Mentor, was appointed distributor of the Portfolios. To compensate Mentor Distributors for the services it provides and for the expenses it incurs under the Distribution Agreement, the Portfolios pay a distribution fee, which is accrued daily and paid monthly at the annual rate of 0.75% of the Portfolios' average daily net assets for the Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio and Global Portfolio, 0.50% of the average daily net assets of the Quality Income Portfolio and Municipal Income Portfolio, and 0.30% of the average daily net assets for the Short-Duration Income Portfolio. Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with respect to Class A and Class B shares of each Portfolio. Under the Service Plan, financial institutions will enter into shareholder service agreements with 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 .25 of 1% 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. Presently, the Portfolios' class specific expenses are limited to expenses incurred by a class of shares pursuant to its respective Distribution Plan. For the six months ended March 31, 1996, distribution fees and shareholder servicing fees were as follows: 85 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) Shareholder-Servicing Fees Distribution Portfolio Fees*** Class A Class B Growth $987,902 $30,624 $327,093 Global 60,664 7,853 21,541 Capital Growth 219,956 36,105 73,842 Strategy 882,532 15,733 293,221 Income and Growth 186,400 25,286 62,656 Municipal Income 97,450 25,987 48,479 Quality Income 153,257 30,207 76,574 Short-Duration Income 33,448 3,709 27,119 NOTE 6: INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term investments), for the six months ended March 31, 1996, were as follows: Portfolio Purchases Sales Growth $143,518,168 $105,353,531 Global 24,216,755 14,828,086 Capital Growth 37,644,773 40,829,847 Strategy 117,610,477 89,343,587 Income and Growth 33,407,301 22,887,335 Municipal Income 4,361,813 6,255,057 Quality Income 113,104,626 113,713,712 Short-Duration Income 45,905,812 37,698,262 NOTE 7: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS The cost of investments for federal income tax purposes amounted to $237,561,456, for the Growth Portfolio, $77,811,240 for the Capital Growth Portfolio, $209,262,684 for the Strategy Portfolio, $68,449,356 for the Income and Growth Portfolio, $28,363,696 for the Global Portfolio, $82,420,193 for the Quality Income Portfolio, $28,908,079 for the Short-Duration Income Portfolio and $53,736,283 for Municipal Income Portfolio at March 31, 1996. Gross unrealized appreciation and depreciation of investments at March 31, 1996, based on such costs were as follows: 86 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) Gross Gross Net Unrealized Unrealized Unrealized Portfolio Appreciation Depreciation Appreciation Growth $102,489,437 $(5,062,450) $ 97,426,987 Global 3,434,906 (639,020) 2,795,885 Capital Growth 13,628,991 (273,993) 13,354,998 Strategy 63,276,684 (2,047,285) 61,229,399 Income and Growth 10,175,530 (1,676,830) 8,498,700 Municipal Income 3,512,062 (746,135) 2,765,927 Quality Income 562,603 (1,068,372) (505,769) Short-Duration Income 45,368 (405,552) (360,184) NOTE 8: FORWARD 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, 1996 Global Portfolio had outstanding forward contracts as set forth below. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Net Unrealized Contracts In Exchange Appreciation/ Settlement Date to Deliver/Receive For (Depreciation) Purchases 4/2/96 British Pound 86,100 $ 131,410 $ (21) 4/1/96 Japanese Yen 11,306,346 105,524 (923) Sales 4/1/96 Japanese Yen 5,136,710 47,942 268 Net Unrealized Depreciation on Forward Contracts $ (676)
87 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9: 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 Period Ended 3/31/96 Ended 9/30/95 Shares Dollar Shares Dollar CLASS A*: Shares sold 665,581 $ 10,147,402 1,270,059 $ 19,846,126 Shares issued upon reinvestment of distributions 159,331 2,229,040 - - Shares redeemed (370,702) (5,641,814) (3,410) (53,044) Change in net assets from capital share transactions 454,210 $ 6,734,628 1,266,649 $ 19,793,082 CLASS B**: Shares sold 1,971,825 $ 29,883,780 2,282,441 $ 32,813,557 Shares issued upon reinvestment of distributions 1,885,567 26,284,995 - - Shares redeemed (712,949) (10,923,824) (2,585,359) (37,845,400) Change in net assets from capital share transactions 3,144,443 $ 45,244,951 (302,918) $ (5,031,843)
Mentor Perpetual Global Portfolio Six Months Year Ended 3/31/96 Ended 9/30/95 Shares Dollars Shares Dollars CLASS A: Shares sold 110,262 $ 1,801,043 142,470 $ 2,073,646 Shares issued upon reinvestment of distributions 21,809 331,048 - - Shares redeemed (55,813) (899,374) (335,189) (4,810,857) Change in net assets from capital share transactions 76,258 $ 1,232,717 (192,719) $(2,737,211) CLASS B: Shares sold 641,205 $10,291,399 417,981 $ 6,078,915 Shares issued upon reinvestment of distributions 45,012 672,932 - - Shares redeemed (76,295) (1,215,371) (174,218) (2,478,417) Change in net assets from capital share transactions 609,922 $ 9,748,960 243,763 $ 3,600,498
88 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mentor Capital Growth Portfolio Six Months Year Ended 3/31/96 Ended 9/30/95 Shares Dollars Shares Dollars CLASS A: Shares sold 82,781 $ 1,373,689 100,226 $ 949,902 Shares issued in connection with acquisition of Mentor/Cambridge Growth Portfolio~ - - 671,791 10,681,477 Shares issued upon reinvestment of distributions 53,223 849,967 125,218 1,954,221 Shares redeemed (273,374) (4,509,483) (473,840) (7,405,251) Change in net assets from capital share transactions (137,370) $(2,285,827) 423,395 $ 6,180,349 CLASS B: Shares sold 256,003 $ 4,175,801 329,014 $ 1,869,220 Shares issued in connection with acquisition of Mentor/Cambridge Growth Portfolio~ - - 1,255,213 19,669,182 Shares issued upon reinvestment of distributions 111,275 1,748,137 256,857 3,961,731 Shares redeemed (456,718) (7,378,418) (968,058) (15,000,398) Change in net assets from capital share transactions (89,440) $(1,454,480) 873,026 $ 10,499,735
Mentor Strategy Portfolio Six Months Period Ended 3/31/96 Ended 9/30/95 Shares Dollar Shares Dollar CLASS A*: Shares sold 245,827 $ 3,785,238 690,271 $ 10,122,356 Shares issued upon reinvestment of distributions 992 14,915 - - Shares redeemed (114,135) (1,759,862) (1,062) (15,555) Change in net assets from capital share transactions 132,684 $ 2,040,291 689,209 $ 10,106,801 CLASS B**: Shares sold 1,530,318 $ 23,486,662 2,247,821 $ 31,437,475 Shares issued upon reinvestment of distributions 19,535 292,836 1,708 20,979 Shares redeemed (913,087) (14,247,068) (2,121,049) (29,118,194) Change in net assets from capital share transactions 636,766 $ 9,532,430 128,480 $ 2,340,260
89 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mentor Income and Growth Portfolio Six Months Year Ended 3/31/96 Ended 9/30/95 Shares Dollars Shares Dollars CLASS A: Shares sold 69,584 $ 1,210,224 255,128 $ 3,928,730 Shares issued upon reinvestment of distributions 58,804 983,372 49,436 741,971 Shares redeemed (57,553) (988,990) (307,376) (4,818,528) Change in net assets from capital share transactions 70,835 $ 1,204,606 (2,812) $ (147,827) CLASS B: Shares sold 412,432 $ 7,133,998 602,055 $ 9,529,693 Shares issued upon reinvestment of distributions 134,192 2,241,138 98,685 1,467,195 Shares redeemed (218,737) (3,759,163) (806,196) (12,489,370) Change in net assets from capital share transactions 327,887 $ 5,615,973 (105,456) $ (1,492,482)
Mentor Municipal Income Portfolio Six Months Year Ended 3/31/96 Ended 9/30/95 Shares Dollars Shares Dollars CLASS A Shares sold 20,446 $ 311,492 71,110 $ 1,021,048 Shares issued upon reinvestment of distributions 18,257 277,956 45,425 658,265 Shares redeemed (75,914) (1,151,996) (483,463) (6,926,047) Change in net assets from capital share transactions (37,211) $ (562,548) (366,928) $ (5,246,734) CLASS B: Shares sold 87,255 $ 1,327,618 247,851 $ 3,605,763 Shares issued upon reinvestment of distributions 36,032 549,508 99,198 1,439,916 Shares redeemed (288,126) (4,384,853) (903,907) (13,100,688) Change in net assets from capital share transactions (164,839) $(2,507,727) (556,858) $ (8,055,009)
90 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mentor Quality Income Portfolio Six Months Year Ended 3/31/96 Ended 9/30/95 Shares Dollars Shares Dollars CLASS A: Shares sold 95,332 $ 1,280,815 132,285 $ 1,706,716 Shares issued upon reinvestment of distributions 33,076 447,139 89,969 1,159,149 Shares redeemed (201,932) (2,720,661) (745,107) (9,570,406) Change in net assets from capital share transactions (73,524) $ (992,707) (522,853) $ (6,704,541) CLASS B: Shares sold 313,692 $ 4,240,173 421,513 $ 5,506,753 Shares issued upon reinvestment of distributions 82,683 1,119,148 223,602 2,883,354 Shares redeemed (602,878) (8,121,282) (2,078,944) (26,675,096) Change in net assets from capital share transactions (206,503) $(2,761,961) (1,433,829) $(18,284,989)
Mentor Short-Duration Income Portfolio Six Months Period Ended 3/31/96 Ended 9/30/95 Shares Dollar Shares Dollar CLASS A*: Shares sold 237,635 $ 3,045,519 80,087 $ 1,015,595 Shares issued upon reinvestment of distributions 4,096 52,608 322 4,089 Shares redeemed (47,618) (611,070) (1,399) (17,786) Change in net assets from capital share transactions 194,113 $ 2,487,057 79,010 $ 1,001,898 CLASS B**: Shares sold 726,866 $ 9,306,173 1,116,509 $ 14,138,694 Shares issued upon reinvestment of distributions 42,794 548,044 56,501 708,003 Shares redeemed (339,243) (4,335,410) (1,011,667) (12,759,888) Change in net assets from capital share transactions 430,417 $ 5,518,807 161,343 $ 2,086,809
* For the period from June 5, 1995 (issuance of Class A shares) to September 30, 1995. ** For the period from January 1, 1995 to September 30, 1995. *** Distribution fees are only applicable to Class B shares. ~ On September 27, 1995, Capital Growth Portfolio acquired the net assets of Mentor/Cambridge Growth Portfolio in exchange for Class A and Class B shares of the Capital Growth Portfolio pursuant to a plan of reorganization approved by the shareholders of Mentor/Cambridge Growth Portfolio on September 21, 1995. The acquisition was accomplished by a tax free exchange of 1,927,004 shares of the Capital Growth Portfolio for the net assets of Mentor/Cambridge Growth Portfolio. The net assets of Mentor/Cambridge Growth Portfolio on that date including $3,953,496 of unrealized appreciation on investments, were combined with Capital Growth Portfolio. The aggregate net assets of Capital Growth Portfolio and Mentor/Cambridge Growth Portfolio immediately before the acquisition were $56,351,987 and $30,350,659, respectively. The net assets of Capital Growth Portfolio immediately after the acquisition were $86,702,646. 91 MENTOR FUNDS SHAREHOLDER INFORMATION TRUSTEES DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN Chairman and Chief Executive Officer Mentor Investment Group, Inc. ARNOLD H. DREYFUSS, TRUSTEE Former Chairman and Chief Executive Officer Hamilton Beach/Proctor-Silex, Inc. THOMAS F. KELLER, TRUSTEE Dean, Fuqua School of Business Duke University LOUIS W. MOELCHERT, JR., TRUSTEE Vice President for Business & Finance University of Richmond STANLEY F. PAULEY, JR., TRUSTEE Chairman and Chief Executive Officer Carpenter Company TROY A. PEERY, JR., TRUSTEE President Heilig-Meyers Company PETER J. QUINN, JR., TRUSTEE Managing Director Mentor Investment Group, Inc. OFFICERS PAUL F. COSTELLO, PRESIDENT Managing Director Mentor Investment Group, Inc. TERRY L. PERKINS, TREASURER Senior Vice President Mentor Investment Group, Inc. JOHN M. IVAN, SECRETARY Managing Director and Assistant General Counsel Wheat First Butcher Singer, Inc. MICHAEL A. WADE, ASSISTANT TREASURER Associate Vice President Mentor Investment Group, Inc. 92 [MENTOR FUNDS LOGO] RIVERFRONT PLAZA 901 EAST BYRD STREET RICHMOND, VIRGINIA 23219 1-800-382-0016 This report is authorized for distribution to prospective investors only when preceded or accompanied by a Mentor Fund Prospectus, which contains complete information about fees, sales charges and expenses. Please read it carefully before you invest or send money. -----END PRIVACY-ENHANCED MESSAGE-----