-----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, Huog0WhcHH7/l9PntXf0iWQ930juGdPn6Kdi0+1v42uQG4eZkwIX7a432zNJVi9K Q50A3xQzoFHzrPOAuOdh9A== 0000916641-96-001050.txt : 19961202 0000916641-96-001050.hdr.sgml : 19961202 ACCESSION NUMBER: 0000916641-96-001050 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961127 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: 96673958 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 FUNDS N-30D MENTOR FUNDS ANNUAL REPORT SEPTEMBER 30, 1996 [LOGO] MENTOR FUNDS TABLE OF CONTENTS - --------------------------------------------------------------------------------
Page ------------------ Message from the Chairman and President.................................................. 1 Manager's Commentary Growth Portfolio....................................................................... 3 Perpetual Global Portfolio............................................................. 7 Capital Growth Portfolio............................................................... 11 Strategy Portfolio..................................................................... 14 Income and Growth Portfolio............................................................ 17 Municipal Income Portfolio............................................................. 20 Quality Income & Short-Duration Income Portfolios...................................... 24 Portfolios of Investments Growth Portfolio....................................................................... 28 Perpetual Global Portfolio............................................................. 33 Capital Growth Portfolio............................................................... 42 Strategy Portfolio..................................................................... 44 Income and Growth Portfolio............................................................ 47 Municipal Income Portfolio............................................................. 53 Quality Income Portfolio............................................................... 57 Short-Duration Income Portfolio........................................................ 60 Statements of Assets and Liabilities..................................................... 62 Statements of Operations................................................................. 64 Statements of Changes in Net Assets...................................................... 66 Financial Highlights..................................................................... 69 Notes to Financial Statements............................................................ 80 Auditor's Report......................................................................... 96 Shareholder Information.................................................................. Inside back cover
MENTOR FUNDS MESSAGE FROM THE CHAIRMAN AND PRESIDENT - -------------------------------------------------------------------------------- TO OUR SHAREHOLDERS: It is our privilege to send you Mentor Funds' Annual Report for the year ended September 30, 1996. Mentor Funds is sponsored by Mentor Investment Group, a firm that provides diversified investment services to a broad range of investors including: corporations, foundations, endowments, municipalities, public funds, and individual investors. A wide variety of investment styles are available to investors through Mentor Funds and its separately-invested portfolios. The Annual Report that follows represents eight Portfolios of Mentor Funds. MENTOR FUNDS [Graph] Growth Portfolio--a small-to-mid-capitalization growth fund Perpetual Global Portfolio--a global growth fund Capital Growth Portfolio--a large-capitalization, quality growth fund Strategy Portfolio--a tactical asset allocation high total return fund Income and Growth Portfolio--a balanced fund Municipal Income Portfolio--a tax-free bond fund Quality Income Portfolio--an intermediate-term bond fund Short-Duration Income Portfolio--a short-term bond fund 1 MENTOR FUNDS MESSAGE FROM THE CHAIRMAN AND PRESIDENT (CONTINUED) - -------------------------------------------------------------------------------- Mentor Funds is designed to give you flexibility in seeking to fulfill a broad range of investment objectives. To help identify the combination of Mentor Funds that seek to meet your investment objectives, ask your Financial Consultant about WISDOM. It is an asset allocation program especially developed for Mentor Funds. It is designed to assist investors in determining personal risk/reward profiles, and suggests where to distribute specific investments among the Portfolios of Mentor Funds. In the commentaries that follow, the management teams of Mentor Funds present their perspectives on the markets and their strategies for investing your assets. 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] THE MENTOR MISSION OUR MISSION IS TO PROVIDE PROFESSIONAL INVESTMENT MANAGEMENT SERVICES THROUGH A FIRM THAT IS SECOND TO NONE IN THE QUALITY OF ITS INVESTMENT PROCESS, THE SKILL AND TRAINING OF ITS PROFESSIONALS, AND THE COMMITMENT, SHARED BY ALL ITS ASSOCIATES, TO DELIVER THE HIGHEST LEVEL OF SERVICE AND ETHICAL BEHAVIOR TO CLIENTS. FOR MORE INFORMATION AND A PROSPECTUS FOR MENTOR FUNDS, PLEASE CALL US, (800)382-0016, OR CONTACT YOUR FINANCIAL CONSULTANT. THE PROSPECTUS CONTAINS COMPLETE INFORMATION REGARDING FEES, SALES CHARGES, AND EXPENSES. PLEASE READ IT CAREFULLY BEFORE INVESTING OR SENDING MONEY. 2 MANAGERS' COMMENTARY MENTOR GROWTH PORTFOLIO - -------------------------------------------------------------------------------- Performance for Mentor Growth Portfolio for the year ended September 30, 1996 is indicated below. 12 MONTHS ENDING 9/30/96* TOTAL RETURN MENTOR GROWTH A SHARES Mentor Growth 29.15% Russell 2000 Index 13.13% S&P Mid-Cap. 14.00%
Since inception in 1985, Mentor Growth Portfolio has maintained an emphasis on investments in small-to-mid-cap. growth companies (with market capitalizations of between $100 million and $3 billion). We search out and invest in rapidly- growing companies with earnings growth rates not yet fully reflected in their price/earnings multiples. In our most recent letter to shareholders we noted that beginning in the third quarter of 1995 small-to-mid-cap. companies began to outperform larger capitalization stocks. This situation has continued through September 1996, with a brief interruption from June to late July, and we are encouraged that interest in companies, such as the ones in which the Growth Portfolio invests, appears far from peaking. In the comments that follow, we discuss several aspects of small-to-mid-cap. investing. PERFORMANCE Investors tend to gravitate to the best-performing stock groups, and over the last year, small-cap. and mid-cap. growth companies have performed particularly well. In part such performance is a result of accelerating earnings growth. Small companies are often able to produce high rates of earnings growth by operating in niche markets. These markets tend to grow very rapidly, often regardless of the growth of the economy. Large companies, on the other hand, with their higher revenue bases, find it increasingly difficult to achieve this kind of above-average earnings growth. PRICE/EARNING MULTIPLES Equities achieve price performance principally from two sources: Earnings growth and price/earnings multiple expansion. Consequently one of the most important factors in searching out good investments in growth companies is to find those with P/Es that are in line with or below their earnings growth rates. Although P/Es for all classes of stocks have risen over the past year, many of the stocks in our portfolio continue to trade at P/Es well below our target of 1x their growth rate. For companies held by the Portfolio, trailing 12-month earnings growth rates average 38%, and forward 12-month earnings growth rates (estimated by I/B/E/S)** are projected at 39%. Average price/earnings ratios for these stocks are only 26x estimated 1997 earnings. This significant discount in the Portfolio's P/E ratio, when compared to its projected earnings growth rate, is indicative of the potential value that we feel may reside within the stocks comprising the Portfolio. By comparison, the S&P 500's*** forward 12-month price/earnings multiple of 19x is well over twice its projected 12-month earnings growth rate of 7%. 3 MANAGERS' COMMENTARY MENTOR GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- FLOW OF FUNDS There has been a relatively high flow of investment funds into all equity funds over the past 12 months and, with the exception of a brief respite in June and July, these flows continue to be strong. Smaller-cap. funds have benefited from a sizable portion of these flows. Through August 1996, small-cap. funds had received inflows of over $41 billion.**** Industry sources indicate that the fourth quarter may see another $20 billion invested in this market sector. At the same time, following the market correction of this past summer, many managers have been slow to reinvest funds raised, resulting in cash levels substantially higher at the end of September than they were at the market peak in May. As the market moves higher, pressures to invest these funds will intensify, creating the potential for significant price moves in small- and mid-cap. stocks. THE ECONOMY The slow but steady growth of the GDP over the past year has been good for growth companies in general and particularly good for smaller growth companies. Niche companies serving rapidly growing markets, such as those in the Growth Portfolio, have stood out in their ability to produce exceptional earnings results. With the economic outlook for the coming year predicted to be a continuation of this slow economic growth/low inflation environment, we believe that small growth companies may continue to perform well. Please remember that historically, small-to-mid-size companies have grown faster than larger ones, and smaller companies generally exhibit greater price volatility than larger companies. We greatly appreciate the support of our many shareholders and look forward to serving you in the coming year. Sincerely, The Small/Mid-Capitalization Growth Management Team * RETURN FIGURES DO NOT INCLUDE SALES CHARGES. SEE ACCOMPANYING TABLE WITH AVERAGE ANNUAL TOTAL RETURNS. THE RUSSELL 2000 IS COMPOSED OF THE 2,000 SMALLEST STOCKS IN THE RUSSELL 3000 INDEX, A COMPOSITE OF THE 3000 LARGEST U.S. COMPANIES BY MARKET CAPITALIZATION, AND REPRESENTS APPROXIMATELY 7% OF THE U.S. EQUITY MARKET. AN UNMANAGED INDEX DOES NOT REFLECT EXPENSES AND MAY NOT CORRESPOND TO THE PERFORMANCE OF THE PORTFOLIO, WHICH INCURS EXPENSES. INVESTORS CANNOT INVEST IN THE RUSSELL 2000. THE S&P MID-CAP 400 STOCK PRICE INDEX MEASURES THE PERFORMANCE OF THE MID-RANGE SECTOR OF THE U.S. STOCK MARKET. THE INDEX IS BASED ON 400 STOCKS CHOSEN ON THE BASIS OF MARKET SIZE (MEDIUM MARKET CAPITALIZATION OF ABOUT $885 MILLION), LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. IT IS A MARKET-VALUE WEIGHTED INDEX (SHARE PRICE MULTIPLIED BY NUMBER OF SHARES OUTSTANDING). THE MID-CAP INDEX WAS INTRODUCED ON JUNE 19, 1991. ** I/B/E/S IS INSTITUTIONAL BROKERS ESTIMATE SYSTEM, A TABULATOR AND PROVIDER OF INSTITUTIONAL EARNINGS ESTIMATES AND ECONOMIC FORECASTS TO THE INVESTMENT COMMUNITY. *** THE STANDARD & POOR'S 500 (S&P 500) INDEX IS AN UNMANAGED INDEX OF 500 WIDELY-HELD COMPANIES AND IS REGARDED BY INVESTORS TO BE REPRESENTATIVE OF THE STOCK MARKET IN GENERAL. AN UNMANAGED INDEX DOES NOT REFLECT EXPENSES AND MAY NOT CORRESPOND TO THE PERFORMANCE OF THE PORTFOLIO, WHICH INCURS EXPENSES. INVESTORS CANNOT INVEST IN THE S&P 500. **** SOURCE: INVESTMENT COMPANY INSTITUTE WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE WITH A SMALL-CAP TO MID CAP EQUITY INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT THEY WILL BE SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL DISTRIBUTIONS. 4 MANAGERS' COMMENTARY MENTOR GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class A and the Russell 2000.~ [Performance Graph] Class A Russell 2,000~ ------- ------------- 6/5/95 $ 9,425 $10,000 6/30/95 9,859 10,518 9/30/95 11,251 11,557 9/30/96 14,640+ 13,076 Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception++ Class A 21.73% 33.35% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ 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 9/30/96. 5 MANAGERS' COMMENTARY MENTOR GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class B Shares and the Russell 2000.~ [Performance Graph] Class B Russell 2,000~ ------- ------------- 9/30/86 $10,000 $10,000 12/31/86 10,121 10,061 12/31/87 9,120 9,178 12/31/88 10,658 11,464 12/31/89 12,507 13,326 12/31/90 11,096 10,725 12/31/91 16,673 15,663 12/31/92 19,270 18,549 12/31/93 22,277 22,055 12/31/94 21,279 21,654 12/31/95 29,668 27,222 9/30/96 36,031+ 30,797~ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year 5-Year 10-Year Class B 24.18% 18.17% 13.68% 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. 6 MANAGERS' COMMENTARY MENTOR PERPETUAL GLOBAL PORTFOLIO - -------------------------------------------------------------------------------- Over the 12-month period ended September 30, 1996 the Mentor Perpetual Global Portfolio achieved a total return, prior to sales charges, of 18.40% for A shares and 17.39% for B shares, compared with a rise of 14.20% for the MSCI World Index,* expressed in US dollars. The market value of the Portfolio increased from $19.05 million to $55.0 million over the same period. Asset allocation weightings based on total investments held at September 30, 1996, were as follow: 31.25% US, 29.95% Europe, 14.73% Japan, 15.28% Asia, 2.27% Latin America, and 6.03% cash. REVIEW OF THE MARKETS Most of the world's markets produced satisfactory returns over the 12-month period. US equities and a number of leading European exchanges reached record levels, while most Asian and Latin American markets made gains in dollar terms, as well. Japan was a notable exception -- although the market rose over the period, virtually all these gains were lost to dollar investors through the weakness of the yen. UNITED STATES The economic environment remained very favorable for equities. Economic growth remained at the higher end of expectations, and inflation stayed low. Although the bond market was unsettled from time to time by fears that the Fed would tighten policy, the Fed held a steady course, so interest rates stayed low. Corporate profits continued to grow at a satisfactory rate as companies found ways to widen margins even where sales growth was lackluster. The flow of funds into stock mutual funds was enormous in most months, corporate share buy-back programs were widespread, and takeover and merger activity expanded -- all factors helping to push stock prices higher. Over the 12-month period the S&P 500 Index provided a total return of 20.70%. EUROPE Although near-recessionary conditions prevailed in most economies except the United Kingdom, the major markets were buoyant. For example, in US dollar terms the German DAX 30 Index rose by 13.12%, the French CAC 40 Index by 13.46%, the Italian BCI Index by 9.03%, the Swiss SBC General Index by 20.45% and the British FT All Share Index by 10.82%. Moves to meet Maastricht Treaty conditions for the European Monetary Union made continental bond yields converge on German rates, which were in any case declining as the Bundesbank responded to growing deflationary pressures within Germany and its main trading partners. The benefit of falling bond yields on equity valuations more than countered the negative impact of disappointing profits. Switzerland is outside the European Union, but here the central bank was forced to bring interest rates down to exceptionally low levels to ease upward pressure on the currency, as speculators switched from Deutschemarks to Swiss francs. As a consequence, stocks soared. Britain remains on the fringes of the European Monetary Union, but, unlike most of Europe, the British economy was strong and corporate profits were rising. Moreover, like the United States, inflation remained subdued and interest rates low. 7 MANAGERS' COMMENTARY MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- JAPAN The market made good gains until the end of June, before suffering a setback which saw the erosion of part of the advance. Moreover, the weakness of the yen meant that to dollar investors the market was flat over the year with the Tokyo Topix Index rising by only 0.24%. Despite economic recovery and a rebound in non-financial corporate profits, foreigners were the only consistent net buyers during the period. Private investors remained largely indifferent to the market; while banks, needing to realize stock market profits to offset losses caused by bad debts, and insurance companies, faced with a massive outflow of funds, were effectively forced sellers of shares. ASIA Asian markets were mixed over the period. The largest, Hong Kong, was strong, particularly late in the period as sentiment became more positive about the future course of US rates. With its currency pegged to the dollar, Hong Kong's monetary policy is effectively set by the Fed. In US dollar terms the Hang Seng Index rose by 23.36% over the year. Malaysia was strong, too, with the Kuala Lumpur Composite Index rising by 13.64% in dollar terms. Malaysian composite profit growth was strong, and improvements in the current account lessened pressure on the currency and interest rates. In contrast, corporate profits slumped in Thailand, and the current account deteriorated, causing the Bank of Thailand to increase interest rates to protect the baht. In dollar terms the Bangkok SET Index fell by 16.21%, one of the weaker performances among world markets. Singapore was weak as the heat went out of the global electronics industry, which is particularly important to the island economy. Over the year the Straits Time Index rose by only 3.63% dollar-adjusted. LATIN AMERICA Continued positive foreign flows were evidence that "the tequila hangover", caused by the devaluation of the Mexican peso in December 1994, had finally worn off. However, investor confidence remained somewhat fragile, and so the IFC Latin American Index made a dollar gain of only 7.49%. MARKETS' OUTLOOK After several years of global stock market leadership, Wall Street may well pass the baton to other major markets in the 12 months to come. Some slowdown in the economy is likely to emerge and cause corporate profit growth to falter, especially as the scope for productivity gains may be largely exhausted. Moreover, although inflationary pressures are likely to remain subdued, the Fed, having been reluctant to increase rates, may prove reluctant to decrease them as the economy initially slows. Even so, stock valuations are not so stretched that a bear market appears imminent. In contrast, European markets should enjoy the benefits of rising corporate profits and falling rates at the same time. European corporations are, at last, facing up to the need to restructure in an environment of sluggish domestic growth and an increasingly competitive global marketplace. Meanwhile, central banks continue to strive to bring down interest rates in order to combat deflationary pressures and crisis-level unemployment. 8 MANAGERS' COMMENTARY MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- Asian stock markets also seem positioned to do well. Most markets remain below January 1994 peaks. Stock prices have perhaps been the victim of too much economic success. Rates of growth sustained at too high a level have created inflation and balance of payments problems. Moreover, with so many investment opportunities available in the real economies of Asia, surplus funds from local sources that might otherwise flow into stock markets have been in short supply. With most Asian economies decelerating somewhat, these problems will ease. After more than two years of relative underperformance, stock price valuations again appear to represent a good value by international standards. The outlook for Japan is more problematical. At the beginning of the year, investors were offered the unusually favorable combination of record low interest rates, near-record levels of economic growth, and a powerful recovery in corporate profits after several years of decline. And yet, local investors did not buy. With economic recovery and corporate profits now visibly losing momentum, it is difficult to imagine the circumstances in the months to come which will result in the Japanese buying their own market. Although the stock market now trades at little more than half the peak levels of December 1989, it may have further yet to fall. Please remember that investments outside the U.S. are subject to currency fluctuations, political and social instability, differing securities regulations, and different accounting standards. All statistics are sourced from Datastream. Datastream is a subsidiary of the Primark Corporation, a $650 million provider of global financial and technology solutions (NYSE:PMK). Other Primark companies include: Disclosure Incorporated, a leading supplier of Securities and Exchange Commission filings and financial data on over 28,000 companies around the world; Worldscope/Disclosure Partners, which distributes comparable financial data on more than 12,800 companies in almost 50 countries; I/B/E/S, a premier source of analyst earnings per share forecast; Vastek, which develops investment software to manage and analyze portfolios; and TASC (The Analytical Sciences Corporation), a global provider of information technology applications. Sincerely, The Mentor Perpetual Global/International Growth Management Team * 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 SALES LOADS, EXPENSES, OR OTHER FEES THAT THE SEC REQUIRES TO BE REFLECTED IN THE PORTFOLIO'S PERFORMANCE. YOU CANNOT INVEST IN INDEXES. THE PERFORMANCE OF COUNTRIES AND UNMANAGED INDEXES DOES NOT REFLECT EXPENSES AND MAY NOT CORRESPOND TO THE PERFORMANCE OF MENTOR PERPETUAL GLOBAL PORTFOLIO, WHICH IS ACTIVELY MANAGED AND INCURS EXPENSES. WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE WITH A GLOBAL EQUITY INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT THEY WILL BE SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL DIVIDENDS. 9 MANAGERS' COMMENTARY MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- 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.* [Performance Graph] Morgan Stanley Capital World* A Shares B Shares ----------------------------- -------- -------- 3/24/94 $10,000 $ 9,996 $10,000 9/30/94 10,545 9,982 9,487 9/30/95 12,124 10,655 10,587 9/30/96 13,846* 12,501+ 12,677~ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception++ Class A Shares 11.58% 9.30% Class B Shares 13.39% 9.91% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. * 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. + 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 3/29/94 through 9/30/96. ~ 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. 10 MANAGERS' COMMENTARY MENTOR CAPITAL GROWTH PORTFOLIO - -------------------------------------------------------------------------------- The S&P 500* continued its advance in the past 12 months, providing a total return including dividends of 20.7%. Through September 30, 1996, this index has shown positive returns for nine consecutive quarters. This persistent advance is remarkable, considering how far stocks have risen since the last market low in 1990. Key to these gains has been continued positive earnings growth. Earnings grew at double-digit rates in each year from 1992 through 1995. It now appears as if earnings will grow approximately 7% in 1996 -- not as strong as previous years, but enough to keep the stock market moving ahead. The deceleration in S&P 500 earnings growth from 20% a year ago to 7% today has been very positive for our equity performance. We have been saying all along that our RELATIVE performance would sharply improve when earnings growth for the broader market slowed. This has definitely been the case in the past year. Our core equity holdings have continued to produce double-digit earnings growth during this period. As a result, our performance over the past year is solidly ahead of the S&P 500 and well ahead of our mutual fund peers as ranked by Lipper Analytical Services.** We expect more of the same to come. The corporate earnings cycle that has been so strong for the past five years is clearly weakening. The key to superior performance will be sustained earnings growth and high financial quality. These characteristics are the hallmarks of our equity discipline. Observers of Wall Street have noticed a significant historical tendency for stock analysts to be overly optimistic in their earnings forecasts. Actual results come in below original expectations more often than not. Because analysts tend to extrapolate the recent past, they are overly optimistic at a peak in the corporate earnings cycle. We believe that we are approaching such a peak. As a result, forecasts today must be viewed with a high level of skepticism. The earnings forecast tracking service, I/B/E/S, recently wrote, "Odds are that analysts' 1997 earnings projections for the S&P 500 will not be attained. The current 1997 projection is for growth of 13.4%. We at I/B/E/S are expecting S&P 500 earnings growth in 1997 of 8% to 10%, but our historical data suggest that even this forecast may be optimistic."*** If I/B/E/S is right, and we think they are, the key to superior performance from here on should be owning stocks with high financial quality and predictable earnings growth. By investing in stocks with high financial quality and above- average earnings growth consistency, we seek to continue to perform well in a more difficult earnings growth environment. U.S. stocks have now enjoyed a remarkably persistent six-year advance. This market strength is due to improved corporate profitability and very moderate inflation. In our opinion, while the current level of the S&P 500 clearly reflects this positive environment, these stocks are not dramatically overvalued by 11 MANAGERS' COMMENTARY MENTOR CAPITAL GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- historical standards. However, we are unlikely to see similar returns over the next six years. Investors need to maintain reasonable expectations and expect more volatility. The Capital Growth Portfolio appears to be well-positioned to provide attractive returns, even in a less spectacular stock market. Sincerely, The Large-Capitalization Quality Growth Management Team * THE STANDARD & POOR'S INDEX (S&P 500) IS AN UNMANAGED, MARKET-VALUE WEIGHTED INDEX OF 500 WIDELY HELD COMMON STOCKS. AN UNMANAGED INDEX DOES NOT REFLECT EXPENSES AND MAY NOT CORRESPOND TO THE PERFORMANCE OF THE PORTFOLIO, WHICH IS ACTIVELY MANAGED AND INCURS EXPENSES. INVESTORS CANNOT INVEST IN THE S&P 500 INDEX. ** LIPPER ANALYTICAL SERVICES, AN INDEPENDENT RATING COMPANY, GROUPS FUNDS BY INVESTMENT OBJECTIVES AND CALCULATES PERFORMANCE FIGURES FOR EACH GROUP. PERFORMANCE DOES NOT INCLUDE SALES CHARGES AND DOES INCLUDE REINVESTMENT OF ALL DISTRIBUTIONS. FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 1996 THE CAPITAL GROWTH PORTFOLIO'S A SHARE PERFORMANCE IS RANKED 51ST OUT OF A PEER GROUP OF 632 FUNDS. THE FUNDS IN THE PEER GROUP ARE DEFINED AS THOSE WHICH NORMALLY INVEST IN COMPANIES WHOSE LONG-TERM EARNINGS ARE EXPECTED TO GROW SIGNIFICANTLY FASTER THAN THE EARNINGS OF THE STOCKS REPRESENTED IN THE MAJOR UNMANAGED STOCK INDICES. *** I/B/E/S U.S. COMMENTS, AUGUST 28, 1996. INSTITUTIONAL BROKERS ESTIMATE SYSTEM (I/B/E/S) IS A TABULATOR AND PROVIDER OF INSTITUTIONAL EARNINGS ESTIMATES AND ECONOMIC FORECASTS TO THE INVESTMENT COMMUNITY. WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE WITH A LARGE-CAP. GROWTH EQUITY INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT THEY WILL BE SUCCESSFUL. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES REFLECT REINVESTMENT OF DIVIDENDS. 12 MANAGERS' COMMENTARY MENTOR CAPITAL GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- 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.~ [Performance Graph] A Shares B Shares S&P 500 -------------- -------- -------- 4/29/92 $ 9,450 $10,000 $10,000 9/30/92 9,524 10,061 10,215 9/30/93 10,306 10,818 11,543 9/30/94 10,165 10,601 11,965 9/30/95 12,216 12,443 15,521 9/30/96 15,185++ 15,532+ 18,680~ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception+++ Class A Shares 17.45% 9.89% Class B Shares 19.64% 10.46% 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 9/30/96. 13 MANAGERS' COMMENTARY MENTOR STRATEGY PORTFOLIO - -------------------------------------------------------------------------------- Small-cap., mid-cap., large-cap., blue-chip, international, gold, bonds, aggressive, defensive....where are your investments headed? This is a question that has long perplexed investors. Because of the difficulty of answering that question, the largest brokerage firms in the country began making their dynamic asset allocation results public in 1989 -- to show the public their ability in advising clients regarding that age-old question. We were delighted, because our career had been spent analyzing market conditions, and dissecting the different cycles of the market. It became obvious to us -- early in our career -- that when you look at the annual performance numbers, the new fad in style at the time experienced the best performance numbers for that season. And just as the headlines were spotlighting the funds with the best performance numbers for that season, and causing a rush of new investors into the "hot" fund, the fad was about to go out of style. The performance leader of one time period became the laggard of the next -- leaving the hapless newcomer very discouraged and unhappy. Our goal is to be a fund for all seasons, gradually shifting our investment focus based upon the results of our asset allocation model.* Our methodology is targeted at locating the new fad early in the move, allowing us to shift our asset mix to take advantage of the changing tides. With the growing popularity of this proven model, in the fall of 1993, we were fortunate to be asked to provide investment management for your mutual fund -- the Mentor Strategy Portfolio. This was a very trying time to begin a fund, because for a fund that can freely reallocate its assets among bonds, stocks, or cash, the true mettle of the process was about to be challenged. The bond market was on the verge of entering the weakest 12-months performance in the previous 100 years. However, we weathered that storm successfully and continue to keep our eyes focused firmly on enhancing shareholder value through the strict application of our tactical asset allocation methodology. The Lipper rankings have certainly validated our results, with your fund placing in the top quartile of performance among asset allocation funds tracked by Lipper.** When reviewing the 12-month period ended September 30, 1996 it becomes immediately apparent that our portfolio was structured differently during the first eight months of the period (10/1/95 - 5/31/96) than it was in the last four months (6/1/96 - 9/30/96). For the first eight months our model suggested that assets be fully invested in the stock market. In May, 1996, when bond yields had moved up dramatically from the 6% level of the previous February to 7.19%, our model directed us that the time had come for bond exposure. As a result, we then implemented and continued to 14 MANAGERS' COMMENTARY MENTOR STRATEGY PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- maintain through fiscal year-end a 23% exposure to long-term government (treasury) strips that are showing strong performance results for your portfolio. There have also been shifting tides regarding the type of stocks favored by the market. The last 15 months has seen some of the best performance from smaller-cap. growth issues for the last decade. Our discipline, designed to shift with the emerging trends, has us weighted toward small-cap. stocks. Historically, small-to-mid-size companies have grown faster than larger ones, and smaller companies generally exhibit greater price volatility than larger companies. Our median market cap. is now a very low $816 million, giving your portfolio its current small-cap growth personality. We anticipate one last consolidation in stocks as 1996 comes to a close, ending in time for the normal year-end seasonally strong period. We expect to be investing the bulk of our currently increased cash reserves into small-cap., high-growth stocks. So thank you once again for your confidence in us. We hope to be with you in many different changing investment seasons. Sincerely, The Tactical Asset Allocation Management Team * WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE WITH A TACTICAL ASSET ALLOCATION PROCESS, THERE ARE NO GUARANTEES THAT THEY WILL BE SUCCESSFUL. ** LIPPER ANALYTICAL SERVICES, AN INDEPENDENT RATING COMPANY, GROUPS FUNDS BY INVESTMENT OBJECTIVE AND CALCULATES PERFORMANCE FIGURES FOR EACH GROUP. PERFORMANCE DOES NOT INCLUDE SALES CHARGES AND DOES INCLUDE REINVESTMENT OF ALL DISTRIBUTIONS. THE STRATEGY PORTFOLIO'S A SHARE PERFORMANCE IS RANKED 8TH OUT OF A PEER GROUP OF 178 FUNDS FOR THE TWELVE-MONTH PERIOD ENDED 9/30/96. THE FUNDS ARE DEFINED AS THOSE WHICH ALLOCATE INVESTMENTS ACROSS VARIOUS ASSET CLASSES, INCLUDING BOTH DOMESTIC COMMON STOCKS, BONDS, AND MONEY-MARKET INSTRUMENTS, WITH A FOCUS ON TOTAL RETURN. THE STRATEGY PORTFOLIO'S A SHARES WERE INTRODUCED 6/95. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL DISTRIBUTIONS. 15 MANAGERS' COMMENTARY MENTOR STRATEGY PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON Comparison of change of value of hypothetical $10,000 investment in Mentor Strategy Portfolio Class A Shares and the S&P 500.~ [Performance Graph] 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 9/30/96 12,747* 13,291~ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception** Class A 12.50% 20.14% PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL DISTRIBUTIONS. ~ 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 9/30/96. Comparison of change of value of hypothetical $10,000 investment in Mentor Strategy Portfolio Class B Shares and the S&P 500. [Performance Graph] Class B S&P 500 ------- --------- 10/29/93 $10,000 $10,000 12/31/93 10,160 10,024 12/31/94 9,798 10,157 9/30/95 12,175 13,180 9/30/96 14,125*** 15,860~ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception+ Class B 14.48% 12.51% *** 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 9/30/96. 16 MANAGERS' COMMENTARY MENTOR INCOME AND GROWTH PORTFOLIO - -------------------------------------------------------------------------------- REVIEW OF MARKETS Investors have profited from excellent returns in the previous twelve months as both the stock and bond markets continued their march ahead. Equity markets have made relatively steady progress going back into early 1995. The equity market has benefited from a steady cash flow from retail investors and better than expected profit growth driven by solid consumer spending. Bonds on the other hand have plodded along during the last 12 months, with only a short downturn during the second quarter as a burst in economic activity moved rates higher. MARKET CONDITIONS For the 12-month period ended September 30, 1996, the Portfolio returned, prior to sales charges, 19.13% for A shares, and 18.26% for B shares. During the last 12 months the equity portion of the Portfolio benefited from exposure to defense/aerospace companies and an underweighting in utilities, as this sector lagged the overall market. Our bond exposure also benefited from our neutral interest rate stance for most of the year. The equity and fixed-income portions of the portfolio have combined to provide above-average returns compared to their respective benchmarks (S&P 500, which returned 20.7% for the 12 months, and Lehman Brothers Aggregate which returned 4.9% for the 12 months).* MARKET OUTLOOK Recent developments reinforce our confidence that major economies will grow at moderate rates, with generally small rises in inflation. In the U.S., external demand should replace domestic demand as a growth source. The economies of France, Germany, and Japan have strengthened after weak periods. The UK is emerging from a mid-cycle pause, due to the end of a year-long inventory over-hang and renewed consumer confidence. By contrast, most smaller East Asian economies slowed in the second quarter, due to restrictive monetary policies and/or weak export demand. In the U.S., economic growth is moderating after an unexpectedly strong second quarter. We expect the government to report third quarter growth at a 1.5%-2.0% annual rate, versus the second quarter's 4.7%. Consumer spending, capital investment, and export growth have all slowed. Slower growth and a lack of price inflation enabled the Federal Reserve to hold policy -- and short-term interest rates -- steady. As external demand improves, offsetting slower domestic demand, the trade deficit should begin to narrow. The Consumer Price Index may rise slightly, from an average 3% this year to 3.2% in 1997, mainly due to food and energy. These two volatile categories seem likely to significantly boost near-term inflation reports. Unit labor costs are expected to rise modestly in the year ahead, as wages and salaries grow, and productivity growth slows. This will likely 17 MANAGERS' COMMENTARY MENTOR INCOME AND GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- pressure corporate profit margins, rather than boost consumer prices. PORTFOLIO STRATEGY We maintain the Portfolio's significant holdings in commercial aerospace suppliers, even as this sector has begun to be recognized. The domestic airlines are 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. The apparel sector has lagged the retail improvement, but should increase. Retail inventory per square foot is down substantially, which will lead to a reorder cycle regardless of end-use sales. Despite attractive prices, we continue to be cautious on the technology sector in general as demand slows and supply accelerates. However, certain areas are beginning to show value, particularly software, where new supply is contained and barriers to entry are higher. Two emerging areas of interest are trucking and non-pharmaceutical health care. Both are among the poorest performers over the last two years. We continued to take profits in the energy sector as it rallied. The surge in US natural gas prices has unfolded as anticipated, while oil prices have been stronger than expected. A global surge in drilling will eventually drive down product prices. The stock market rally has continued in 1996, leaving few sectors undervalued. While broad valuations remain high, we are still finding an abundance of new ideas on a company-specific basis, and are doing even less industry-oriented investing than usual. The fixed income portion of the Portfolio is neutral with respect to the direction of interest rates. Rather, we have chosen to emphasize those sectors of the fixed-income market, particularly mortgage-backed securities, which offer attractive yield levels. If we are right, and the market's uncertainty causes a rather aimless direction in rates for some period of time, then the higher yielding sectors will provide the best total returns. We expect to continue to add to both the Portfolio's mortgage and corporate holdings and to look for an opportunity to assume a more aggressive position with respect to the general direction of interest rates. Thank you for your continued support. Sincerely, Paul D. Kaplan FIXED-INCOME PORTFOLIO MANAGER Arnold C. Schneider, CFA EQUITY PORTFOLIO MANAGER 18 MANAGERS' COMMENTARY MENTOR INCOME AND GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- * THE STANDARD & POOR'S INDEX (S&P 500) IS AN UNMANAGED, MARKET-VALUE WEIGHTED INDEX OF 500 WIDELY HELD COMMON STOCKS. AN UNMANAGED INDEX DOES NOT REFLECT EXPENSES AND MAY NOT CORRESPOND TO THE PERFORMANCE OF THE PORTFOLIO, WHICH IS ACTIVELY MANAGED AND INCURS EXPENSES. THE LEHMAN AGGREGATE INDEX IS MADE UP OF THE GOVERNMENT/CORPORATE INDEX, THE MORTGAGE-BACKED SECURITIES INDEX, AND THE ASSET-BACKED SECURITIES INDEX. INVESTORS CANNOT INVEST IN THESE INDEXES. WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE WITH A BALANCED INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT THEY WILL BE SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL DISTRIBUTIONS. 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.+ [Performance Graph] A Shares B Shares LAGG/S&P 500 -------- -------- ------------ 5/24/93 $ 9,425 $10,133 $10,000 9/30/93 9,909 10,506 10,353 9/30/94 10,578 11,239 10,446 9/30/95 12,402 12,614 12,879 9/30/96 14,802*** 15,140** 14,686+ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception++ Class A Shares 12.25% 12.35% Class B Shares 14.26% 13.11% 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 and Growth Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the 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 and Growth Portfolio Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. + The Standard & Poor's Index (S&P 500) is an unmanaged, market-value-weighted index of 500 widely held domestic common stocks. An unmanaged index does not reflect expenses and may not correspond to the performance of a managed portfolio in which expenses are incurred. The Lehman Brothers Aggregate Index is made up of the Government/Corporate Index, the Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are adjusted to reflect reinvestment of interest and dividends on securities in the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. This index represents an asset allocation of 60% S&P 500 stocks and 40% Lehman Brothers Aggregate Bond Index. Investors cannot invest in an index. ++ Reflects operations of Mentor Income and Growth Portfolio Class A and Class B Shares from the date of initial public investment on 5/24/93 through 9/30/96. 19 MANAGERS' COMMENTARY MENTOR MUNICIPAL INCOME PORTFOLIO - -------------------------------------------------------------------------------- MARKET REVIEW Over the one-year period ended September 30, 1996, the municipal yield curve flattened, with 30-year triple-A rated securities yielding 5.61%, down 20 basis points (0.20%) from September 30, 1995, compared with 10-year and shorter yields, which increased an average of 18 basis points (0.18%). Taxable yields during the same period increased approximately 42 basis points (0.42%) on five- year securities and up to 55 basis points (0.55%) in the longer maturity ranges. The major period of volatility was encountered during the first quarter of 1996, when the market experienced a seven-point sell-off. Yields increased sharply during February and March, and have since traded in the 40-basis point (0.40%) range. Municipals out-performed treasuries throughout most of the period as indicated by the decreasing yield ratio of 30-year triple-A rated tax-exempts to treasuries, from a very high 91.5% at December 31, 1995 to 81% at September 30, 1996. Supply and demand fundamentals had the greatest impact on the tax-exempt market. While year-to-date primary volume is above original estimates, the outstanding supply of municipal bonds continues to shrink. Combined with the disproportionately large amount of retail cash flowing into the market -- as a result of redemptions, maturities and coupon payments -- demand continues to outpace the declining supply. PORTFOLIO REVIEW AND PERFORMANCE The Portfolio performed strongly during the one-year period ended September 30, 1996 with class A shares, returning 6.46%, prior to sales charges, compared to the 230-member Lipper peer group average return of 5.61% and the Lehman Municipal Bond Index return of 6.04%.* The strong performance of the Portfolio can be attributed to several factors. First, compared to the peer group, the Portfolio has a neutral duration of 7.64 years, relatively unchanged throughout the period.** Funds with longer durations tend to perform better when interest rates decline, but underperform significantly in rising interest rate environments. The neutral 7.64-year duration allows the Portfolio to balance dividend considerations while minimizing volatility. Second, the Portfolio is barbelled by rating, with 40% of assets triple-A-rated and 36% triple-B rated/non-rated. This structure minimizes volatility and maximizes performance because quality securities perform better as interest rates decline, while the triple-B/non-rated sectors (which trade based on their 20 MANAGERS' COMMENTARY MENTOR MUNICIPAL INCOME PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- credit-worthiness) are less sensitive to interest-rate fluctuations, and perform better in bearish markets. Finally, the Portfolio has exposure to 13 sectors, the two largest of which are single-family housing (21% of assets), and health care (16% of assets). Over the one-year period ended September 30, 1996, these two sectors had the highest average returns of 7.02% and 8.11%, respectively. The most significant sector shift during the period was a 5% decrease in higher education exposure and a 5% increase in single-family housing exposure. From a rating distribution standpoint, the credit quality of the Portfolio shifted slightly higher. OUTLOOK AND STRATEGY For the remainder of the year, we anticipate a volatile market, due to an uncertain economy and the national election. Factors affecting market levels will be the amount of supply and demand, election results, and economic strength and inflation. Looking forward, any acceleration in inflation is likely to be modest, and the Fed will probably not raise interest rates significantly, if at all, which suggests a limited upward potential for tax-exempt yields in the coming months. If interest rates remain at their current levels, supply should not deviate much from projected levels (the variable being the amount of unanticipated refunding issues that would come to market if rates dropped significantly). Much of the disproportionately large amount of cash that has been available for reinvestment in the tax-exempt market was invested in money-market funds, as noted by the growth in short-term funds experienced in July and August. With interest rates at levels which attract the retail investor, households are now beginning to extend maturity, in an attempt to maximize their yield. The retail market is beginning to show other signs of bullish behavior; for example, there has recently been strong individual investor demand for zero coupon bonds. Liquidity and call protection will continue to be important in the Portfolio. We expect that the most highly demanded securities will be long discounts and insured bonds. This demand for highly liquid insured paper should be partially offset by the increased supply of triple-A rated issues coming to market, which has dramatically increased on an annual basis (approximately 26% of total supply was insured in 1990, versus 48% year-to-date, 1996). This increase in "quality" securities, however, will continue to keep the supply of lower investment-grade paper at a minimum, likely resulting in the spread between triple-A 21 MANAGERS' COMMENTARY MENTOR MUNICIPAL INCOME PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- and triple-B paper remaining at current relatively narrow levels. We do not expect to make any significant structural changes in the Portfolio. Duration will likely be maintained close to the current level, or lengthened slightly. The Portfolio has an average acquisition yield of 7.24% and an average weighted coupon of 6.92%, both significantly above current market levels. As such, to offset any volatile market movement, duration may be adjusted through the use of futures positions, rather than the exchange of Portfolio securities. Sincerely, David C. Johnson PORTFOLIO MANAGER * THE LEHMAN MUNICIPAL BOND INDEX IS ADJUSTED TO REFLECT REINVESTMENT OF INTEREST ON SECURITIES IN THE INDEX. IT IS NOT ADJUSTED TO REFLECT SALES LOADS, EXPENSES, OR OTHER FEES THAT THE SEC REQUIRES TO BE REFLECTED IN THE PORTFOLIO'S PERFORMANCE. LIPPER ANALYTICAL SERVICES, AN INDEPENDENT RATING COMPANY, GROUPS FUNDS BY INVESTMENT OBJECTIVE AND CALCULATES PERFORMANCE FIGURES FOR EACH GROUP. PERFORMANCE DOES NOT INCLUDE SALES CHARGES AND DOES INCLUDE REINVESTMENT OF ALL DISTRIBUTIONS. THE MUNICIPAL INCOME PORTFOLIO'S A SHARE PERFORMANCE IS RANKED 48TH OUT OF A PEER GROUP OF 230 FUNDS. THE FUNDS ARE DEFINED AS THOSE THAT INVEST AT LEAST 65% OF ASSETS IN MUNICIPAL DEBT ISSUES IN THE TOP FOUR CREDIT RATINGS. FOR THE 3-YEAR PERIOD ENDED 9/30/96 THE MUNICIPAL INCOME PORTFOLIO'S A SHARE PERFORMANCE WAS RANKED IN QUARTILE 3, BEING 87TH OUT OF A PEER GROUP OF 154 FUNDS. THE PORTFOLIO'S CLASS A SHARES WERE INTRODUCED 4/92. ** DURATION MEASURES RISK BY INDICATING HOW SENSITIVE THE VALUE OF THE PORTFOLIO IS TO CHANGES IN INTEREST RATES. A PORTFOLIO DURATION OF 1 WOULD INDICATE THAT A 1% INCREASE IN INTEREST RATES SHOULD CAUSE THE VALUE OF THE PORTFOLIO TO DECREASE BY 1% WHILE A PORTFOLIO DURATION OF 2 WOULD SUGGEST THAT A 1% INCREASE IN INTEREST RATES SHOULD CAUSE THE VALUE OF THE PORTFOLIO TO DECREASE BY 2%. WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE WITH A TAX-EXEMPT FIXED-INCOME INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT THEY WILL BE SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENTS RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL DISTRIBUTIONS. 22 MANAGERS' COMMENTARY MENTOR MUNICIPAL INCOME PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- 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.~ [Performance Graph] A Shares B Shares Lehman Municipal Bond Index~ -------- -------- ---------------------------- 4/29/92 $ 9,525 $10,000 $10,000 9/30/92 10,034 10,528 10,561 9/30/93 11,637 12,134 11,906 9/30/94 11,101 11,511 11,616 9/30/95 12,151 12,348 12,916 9/30/96 12,935++ 13,184+ 13,818~ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception*** Class A 1.42% 5.99% Class B 1.87% 6.45% 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 9/30/96. 23 MANAGERS' COMMENTARY MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO - -------------------------------------------------------------------------------- MARKET CONDITIONS The 12-month period ended September 30, 1996 saw a significant shift in the shape of the yield curve. While one-year yields were unchanged at 5.68%, interest rates in the money-market sector (maturities of less than one year) were lower by 0.30-0.40%. However, for maturities of greater than one year the opposite was the case. Two and 10-year treasuries closed the period at 6.09% and 6.70%, up 0.24% and 0.52% respectively from the beginning of the period. This steepening of the yield curve reflects several factors. First, during the period the Federal Reserve chose to lower the short-term federal funds rate (the rate member banks charge each other for overnight loans) by a total of 0.50%. This monetary easing coupled with other factors created the environment for accelerating economic growth for most of the period. This is reflected by the steady increase from fourth quarter 1995 GDP (gross domestic product) growth of - -0.3% to first quarter 1996 growth of 2.0% to second quarter 1996 growth of 4.7%. This strong economic acceleration has caused increased concerns that an overheating economy will rekindle inflation, eventually forcing the Fed to reverse course and raise rates. Despite current modest increases in core inflation, as reflected in benign producer and consumer price statistics, longer-term fixed-income buyers have demanded higher yields to compensate for expectations of future inflation. PERFORMANCE For the 12-month period ended September 30, 1996, the Mentor Quality Income Portfolio A shares outperformed its Merrill Lynch seven-year Treasury Index benchmark by 0.32%. Mentor Quality Income Portfolio A shares returned, prior to sales charges, 4.09% and the B shares returned 3.57% for the period, compared to 3.77% for the Merrill Lynch seven-year Treasury Index.* The Mentor Short-Duration Income Portfolio A shares and B shares returned, prior to sales charges, 4.80% and 4.53% respectively for the 12-month period, compared to 5.28% for the Merrill Lynch three-year Treasury Index.** The return of the Mentor Quality Income Portfolio during the past 12 months was strengthened by the significant outperformance of several of its asset classes, including high-grade adjustable rate mortgages, home equity loans, and mezzanine products. The benefits of participation in those sectors was partially offset by our duration extension this spring.*** That decision hurt our relative performance as the market declined due to concerns about the potential inflationary impact of the strong economy. The shorter end of the market offers fewer opportunities to participate in the asset classes that enhanced the performance of the Quality Income Portfolio, which explains the relatively weaker performance of the Short-Duration Income Portfolio. 24 MANAGERS' COMMENTARY MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- MARKET OUTLOOK The fixed-income markets have displayed high levels of volatility during the course of the last 12 months, particularly as strong economic statistics have raised concerns of Federal Reserve tightening. Indications are that third- quarter growth saw a significant deceleration from second quarter levels, likely to be in the 2-3% range. To date, the Fed has chosen not to raise rates, but the next Open Market Committee meeting in mid-November will be the first opportunity it will have to address the issue, absent concerns of influencing the Presidential election. Despite the fact the Fed is likely to retain the tightening bias reflected in the notes of its August meeting, there seems little likelihood that they will act to modify interest-rate levels in the near term. We continue to remain optimistic regarding the long-term prospects for fixed-income markets, assuming that efforts at continued deficit reduction and government downsizing remain on track. We anticipate continuing in a market- neutral posture relative to our benchmarks until the fall elections give us a better indication of the political and fiscal direction likely over the next two to four years. Sincerely, The Active Fixed-Income Management Team * 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. ** THE MERRILL LYNCH 3-YEAR TREASURY INDEX 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. *** DURATION MEASURES RISK BY INDICATING HOW SENSITIVE THE VALUE OF THE PORTFOLIO IS TO CHANGES IN INTEREST RATES. A PORTFOLIO DURATION OF 1 WOULD INDICATE THAT A 1% INCREASE IN INTEREST RATES SHOULD CAUSE THE VALUE OF THE PORTFOLIO TO DECREASE BY 1% WHILE A PORTFOLIO DURATION OF 2 WOULD SUGGEST THAT A 1% INCREASE IN INTEREST RATES SHOULD CAUSE THE VALUE OF THE PORTFOLIO TO DECREASE BY 2%. WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE WITH AN ACTIVE FIXED-INCOME INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT THEY WILL BE SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL DISTRIBUTIONS. 25 MANAGERS' COMMENTARY 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.~ [Performance Graph] A Shares B Shares Merrill Lynch 7-Year Treasury Index -------- -------- ----------------------------------- 4/29/92 $ 9,525 $10,000 $10,000 9/30/92 9,846 10,324 11,052 9/30/93 10,378 10,827 12,380 9/30/94 10,036 10,406 11,705 9/30/95 11,222 11,354 13,496 9/30/96 11,681++ 11,879+ 14,020~ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception+++ Class A Shares (0.83%) 3.58% Class B Shares (0.31%) 4.03% 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 9/30/96. 26 MANAGERS' COMMENTARY MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- 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. [Performance Graph] Class A 3-Year Treasury ------- --------------- 6/16/95 $ 9,900 $10,000 6/30/95 9,946 10,062 9/30/95 9,931 10,139 9/30/96 10,532* 11,038~ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception** Class A 3.73% 4.08% 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 9/30/96. 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.~ [Performance Graph] Class B 3-Year Treasury ------- --------------- 4/29/94 $10,000 $10,000 12/31/94 10,093 10,075 9/30/95 10,623 11,051 9/30/96 11,225+ 11,709~ Average Annual Returns as of 9/30/96 Including Sales Charges 1-Year Since Inception++ Class B 0.59% 4.87% + 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 4/29/94 through 9/30/96. 27 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 88.30% - ------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 1.23% Blount International, Inc.-Class A 82,800 $ 2,784,150 Tetra Tech, Inc.* 124,650 2,290,444 - ------------------------------------------------------------------------------------------------------------------------- 5,074,594 - ------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 1.50% Diamond Home Services, Inc.* 70,300 2,038,700 LSI Industries, Inc. 134,750 2,156,000 Superior Services, Inc.* 123,800 1,980,800 - ------------------------------------------------------------------------------------------------------------------------- 6,175,500 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 17.54% American Pad & Paper Company* 125,100 2,658,375 Applebees International, Inc. 61,850 1,639,025 Applied Graphics Technologies* 243,700 3,625,037 Cadmus Communications Corporation 90,600 1,517,550 Casa Ole Restaurants, Inc.* 139,100 1,790,912 Clayton Homes, Inc. 185,425 4,079,350 Clear Channel Communications* 19,200 1,699,200 Consolidated Products Company* 142,525 2,743,606 Corporate Express, Inc.* 80,750 3,139,156 Dollar General Corporation 188,526 5,867,871 Express Scripts, Inc.-Class A* 67,400 2,443,250 Fastenal Company 81,300 4,024,350 Friedman's, Inc.-Class A* 188,700 3,538,125 Gtech Holdings Corporation* 52,400 1,683,350 Keystone Automotive Industries, Inc.* 123,550 1,513,488 Paxar Corporation* 207,612 3,399,647 Regal Cinemas, Inc.* 147,393 3,684,825 Renaissance Communications* 70,800 2,495,700 Rental Service Corporation* 110,100 2,380,912 Rio Hotels & Casinos, Inc.* 94,850 1,493,887 Scientific Games Holding* 91,000 1,899,625 Sinclair Broadcasting Group, Inc.* 78,050 3,112,243 Southern Energy Homes, Inc.* 346,550 5,544,800 Speedway Motorsports, Inc.* 66,000 1,732,500 StudioPlus Hotels, Inc.* 116,300 1,918,950 Watsco, Inc. 128,725 2,622,772 - ------------------------------------------------------------------------------------------------------------------------- 72,248,506 - -------------------------------------------------------------------------------------------------------------------------
28 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 1.73% Richfood Holdings, Inc. 190,800 $ 7,107,300 - ------------------------------------------------------------------------------------------------------------------------- ENERGY 4.75% Coach USA, Inc.* 89,350 2,390,113 Core Laboratories, Inc.* 188,050 2,961,788 Maverick Tube Corporation* 212,100 2,969,400 Nuevo Energy Company* 169,050 6,867,656 Trico Marine Services, Inc.* 90,600 2,763,300 Tuboscope Vetco International Corporation* 103,950 1,624,219 - ------------------------------------------------------------------------------------------------------------------------- 19,576,476 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL 3.79% Concord EFS, Inc.* 71,812 1,849,159 Jayhawk Acceptance Corporation* 220,900 3,120,213 Markel Corporation* 74,910 6,367,350 National Commerce Bancorp 130,296 4,267,194 - ------------------------------------------------------------------------------------------------------------------------- 15,603,916 - ------------------------------------------------------------------------------------------------------------------------- HEALTH 29.09% Atria Communities, Inc.* 166,900 2,086,250 Clintrials Research, Inc.* 84,250 3,433,188 CompDent Corporation* 62,350 2,353,712 Dentsply International, Inc. 90,750 4,038,375 Emcare Holdings, Inc.* 157,000 4,239,000 Fairfield Communities, Inc.* 164,850 3,070,331 First Commonwealth, Inc.* 81,550 1,814,488 FPA Medical Management, Inc.* 146,300 3,858,662 Genesis Health Ventures, Inc.* 82,000 2,306,250 Gulf South Medical Supplies, Inc.* 129,500 3,334,625 HCIA, Inc.* 69,600 4,176,000 Health Management Associates, Inc.* 226,625 5,637,297 Henry Schein, Inc.* 32,100 1,235,850 Home Health Corporation of America* 164,200 1,970,400 Idexx Laboratories, Inc.* 47,350 2,142,587 Invacare Corporation 32,400 907,200 Manor Care, Inc. 84,950 3,259,956 Matria Healthcare, Inc.* 226,800 1,615,950 Mecon, Inc.* 126,000 3,150,000
29 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- HEALTH (CONTINUED) Meridian Diagnostics, Inc. 218,550 $ 2,923,106 Molecular Devices Corporation* 154,300 1,620,150 Multicare Companies, Inc.* 229,150 4,984,013 National Dentex Corporation* 72,900 1,394,213 National Surgery Centers, Inc.* 181,450 5,080,600 Omnicare, Inc. 177,300 5,407,650 Parexel International Corporation* 72,400 4,561,200 Pediatric Services of America, Inc.* 150,650 2,787,025 Phycor, Inc.* 138,150 5,258,334 Physician Sales & Services, Inc.* 120,600 2,834,100 Physicians Resource Group, Inc.* 86,350 2,040,019 Raytel Medical Corporation* 214,500 2,895,750 Renal Treatment Centers* 176,500 5,868,625 Respironics, Inc.* 123,600 2,997,300 Rural/Metro Corporation* 85,200 3,109,800 Serologicals Corporation* 76,100 2,644,475 Sofamor/Danek Group, Inc.* 111,900 3,454,912 United Dental Care, Inc.* 43,300 1,564,213 Vencor, Inc.* 116,525 3,757,931 - ------------------------------------------------------------------------------------------------------------------------- 119,813,537 - ------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY 21.78% ACC Corporation* 93,700 4,427,325 Applied Microsystems Corporation* 101,450 2,143,131 Ascend Communications, Inc.* 32,400 2,142,450 Aspect Development, Inc.* 77,950 2,650,300 Benchmark Electronics, Inc.* 61,350 1,840,500 Billing Information Concepts* 75,600 1,682,100 Boston Communications Group* 96,400 1,566,500 Business Objects~* 76,100 1,464,925 Checkmate Electronics, Inc.* 105,300 1,579,500 Chips & Technologies, Inc.* 75,000 1,021,875 Cisco Systems, Inc.* 42,800 2,656,275 Danka Business Systems 66,950 2,661,263 Dataworks Corporation* 133,200 3,463,200 Envoy Corporation* 75,850 2,939,188 Frontier Corporation 94,950 2,528,044 Harbinger Corporation* 71,300 1,782,500
30 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY (CONTINUED) Indus Group* 201,300 $ 4,026,000 Industri-Matematik International Corporation* 171,300 2,119,838 Intelligroup, Inc.* 126,500 1,755,187 Intercel, Inc.* 138,550 2,909,550 Linear Technology Corporation 46,000 1,696,250 Micros Systems, Inc.* 132,300 3,902,850 National Education Corporation* 172,400 3,297,150 National Techteam, Inc.* 79,150 2,146,944 Naturla Microsystems Corporation* 40,000 1,925,000 Novadigm, Inc.* 141,200 847,200 Palmer Wireless, Inc.* 25,350 448,378 Precision Response Corporation* 103,050 3,967,425 Rational Software Corporation* 66,400 2,265,900 SDL, Inc.* 69,325 1,421,163 Symmetricom, Inc.* 125,000 1,890,625 Systemsoft Corporation* 63,100 2,161,175 TechForce Corporation* 150,050 1,106,619 Triquint Semiconductor, Inc.* 161,000 3,743,250 U.S. Long Distance Corporation* 168,350 1,504,628 Uniphase Corporation* 88,400 3,734,900 Verilink Corporation* 99,500 2,437,750 Worldcom, Inc.* 180,774 3,864,044 - ------------------------------------------------------------------------------------------------------------------------- 89,720,902 - ------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION 0.43% Mesaba Holdings, Inc. 162,550 1,767,731 - ------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS 6.46% ABR Information Services* 58,075 4,181,400 Barrett Business Services, Inc.* 100,600 1,609,600 Career Horizons, Inc.* 200,250 7,784,719 Childtime Learning Centers* 46,300 474,575 Outdoor Systems, Inc.* 82,150 3,861,050 Source Services Corporation* 128,100 2,273,775 Ultrak, Inc.* 126,500 3,478,750 Universal Outdoor Holdings* 81,600 2,937,600 - ------------------------------------------------------------------------------------------------------------------------- 26,601,469 - ------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $264,027,013) 363,689,931 - -------------------------------------------------------------------------------------------------------------------------
31 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 12.63% - ------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/96, 5.78%, due 10/01/96 collateralized by $53,737,665 Federal National Mortgage Association 7.50%, 4/01/26, (cost $52,004,489) $52,004,489 $ 52,004,489 - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $316,031,502) 100.93% 415,694,420 - ------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES (0.93%) (3,844,260) - ------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $411,850,160 - -------------------------------------------------------------------------------------------------------------------------
* Securities not currently producing income. ~ American Depository Receipts. SEE NOTES TO FINANCIAL STATEMENTS. 32 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 93.35% - -------------------------------------------------------------------------------------------------------------------------- ARGENTINA 0.35% Perez Company~ 9,718 $ 121,475 YPF Associadad~ 3,100 70,913 - -------------------------------------------------------------------------------------------------------------------------- 192,388 - -------------------------------------------------------------------------------------------------------------------------- BRAZIL 0.94% Brazil Fund 3,400 74,375 Cemig CIA Energetic~(b) 3,000 89,614 Telebras~ 3,400 266,900 Vale Do Rio Doche~ 4,400 87,263 - -------------------------------------------------------------------------------------------------------------------------- 518,152 - -------------------------------------------------------------------------------------------------------------------------- CHILE 0.17% Chile Fund 4,100 94,300 - -------------------------------------------------------------------------------------------------------------------------- CHINA 0.09% Guanshen Railway 130,000 49,387 - -------------------------------------------------------------------------------------------------------------------------- DENMARK 0.95% Danisco A/S 5,700 328,213 Sophus Berendsen 1,675 200,052 - -------------------------------------------------------------------------------------------------------------------------- 528,265 - -------------------------------------------------------------------------------------------------------------------------- FINLAND 1.32% Cultor OY 7,200 385,027 Huhtamaki 9,100 343,035 - -------------------------------------------------------------------------------------------------------------------------- 728,062 - -------------------------------------------------------------------------------------------------------------------------- FRANCE 4.74% AXA 5,030 301,383 Axime (Ex Segin)* 3,000 299,779 Cardif SA 2,090 294,651 Cetelem 1,500 323,018 Comptoirs Modernes 770 365,034 Credit Local France 3,900 332,313 Generale Des Eeux 1,600 173,826 Television Franchise 2,500 277,412 Union Financiere France 2,300 248,983 - -------------------------------------------------------------------------------------------------------------------------- 2,616,399 - --------------------------------------------------------------------------------------------------------------------------
33 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- GERMANY 1.56% BASF AG 7,000 $ 218,499 Daimler Benz* 3,000 164,760 SGL Carbon 1,800 210,105 Veba AG 5,100 267,282 - -------------------------------------------------------------------------------------------------------------------------- 860,646 - -------------------------------------------------------------------------------------------------------------------------- GREAT BRITAIN 10.31% B.A.T. Industries, PLC 35,000 233,179 Barclays, PLC 20,000 294,048 British Aerospace PLC 16,000 264,674 British Gas PLC 70,500 220,219 British Telecom 75,000 418,642 Glaxo Wellcome 23,000 360,663 Grand Metro 25,000 186,520 Inchcape PLC 35,000 148,786 Land Securities 10,000 109,133 Lucasvarity 85,000 338,711 Medeva 80,000 320,039 Prudential Corporation PLC 60,000 422,283 Rank Organisation PLC 15,000 100,521 Rolls Royce 90,000 337,497 Safeway 35,000 180,022 Scotia Holdings 30,000 270,092 Standard Chartered 17,500 190,845 Sun Alliance Group PLC 50,000 317,456 Tate & Lyle PLC 20,000 146,398 Tesco PLC 30,000 142,562 Transport Development Group 45,000 131,758 Unigate 20,000 130,740 Unilever PLC 20,000 427,919 - -------------------------------------------------------------------------------------------------------------------------- 5,692,707 - -------------------------------------------------------------------------------------------------------------------------- HONG KONG 7.47% CDL Hotels International 320,000 173,801 Cheung Kong Holdings 36,000 276,995 China Light & Power 40,000 186,215 China O/Seas Land 310,000 105,231 Chinese Estates 74,000 66,986 Citic Pacific Limited 16,000 72,417
34 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- HONG KONG (CONTINUED) Dah Sing Financial 20,000 $ 70,348 Goldlion Holdings 100,000 84,702 Henderson China 45,056 102,546 Henderson Land Development 30,000 257,015 Hong Kong Electric 80,000 258,632 Hong Kong Telecom, Ltd.~ 120,200 217,613 HSBC Holdings PLC 24,361 452,063 Hutchison Whampoa, Ltd. 62,000 416,915 Hysan Development-Warrants* 700 326 International Bank of East Asia 320,000 193,457 JCG Holdings 154,000 138,407 Liu Chong Hing Investment 50,000 49,463 National Mutual Asia 120,000 105,522 New World Development 64,000 336,014 Shanghai Industrial 32,000 73,451 Sun Hung Kai Property 20,000 212,725 Swire Pacific Limited-"A" 16,000 143,282 Television Broadcast, Ltd. 16,000 59,485 Wing Hang Bank 20,000 75,003 - -------------------------------------------------------------------------------------------------------------------------- 4,128,614 - -------------------------------------------------------------------------------------------------------------------------- INDIA 0.51% BSES Limited GDR 4,000 69,000 Indian Opportunity 11,000 97,570 India Cement GDR 20,000 80,000 Tata Elec Cies GDR 100 36,750 - -------------------------------------------------------------------------------------------------------------------------- 283,320 - -------------------------------------------------------------------------------------------------------------------------- INDONESIA 0.27% Citra Marga Local 120,000 81,367 PT Daya Gune Samudera 42,000 35,395 PT Indonesia Satellite A~ 800 26,400 Sorini (Sorbitol) 9,000 5,812 - -------------------------------------------------------------------------------------------------------------------------- 148,974 - -------------------------------------------------------------------------------------------------------------------------- ITALY 0.46% Telecom Itialia Mobile 114,000 252,977 - --------------------------------------------------------------------------------------------------------------------------
35 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- JAPAN 14.73% Aiwa 11,000 $ 217,323 Chugai Pharm 5,000 48,045 Chugai Pharm-Warrants* 40 36,500 Eiden Sakakiya 7,000 85,492 Fujisawa Pharm 13,000 123,748 Futaba 6,000 269,409 Heiwa Corporation 10,000 198,464 Hitachi Construction 6,000 68,969 Hibiya Engineering 27,000 303,085 Kansai Paint 9,000 42,432 Kikkoman 30,000 233,038 Kirin Beverage 15,000 219,568 Kokusai Securities 3,000 40,411 Komatsu Seiren 18,000 156,796 Kurimoto 15,000 164,339 Kyocera Corporation-Warrants* 30 36,750 Makita Corporation 15,000 219,568 Max Co 9,000 176,193 Mos Foods 7,000 150,869 Nichiha 13,000 253,334 Nippon Telegraph & Telephone 32 235,643 Ono Pharmaceutical 8,000 260,788 Raito Kogyo 9,000 154,371 Sagami Chain 12,000 224,148 Sankura Bank, Ltd. 19,000 189,394 Santen Pharmaceutical 13,000 283,687 Sanyo Shinpan Finance Company 3,700 225,944 Sodick Company 10,000 104,171 Sumitomo Bank 24,000 443,985 Sumitomo Marine Fire 35,000 275,964 Sumitomo Realty & Development 19,000 146,397 Takuma 20,000 256,836 Takara Standard 22,000 215,347 Toagosei 42,000 196,507 Toho Company 1,000 166,135 Tokushu Paper 17,000 157,245 Tokyo Denpa Company 6,000 234,386 Tokyo Electric Power 5,000 121,234 Toyo Exterior 9,000 187,508 Tsudakoma 20,000 125,544
36 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- JAPAN (CONTINUED) Uniden 13,000 $ 243,994 Victor Company of Japan 18,000 224,687 Yokohama Reito 15,000 193,974 York-Benimaru 6,000 225,226 - -------------------------------------------------------------------------------------------------------------------------- 8,137,448 - -------------------------------------------------------------------------------------------------------------------------- KOREA 0.26% CITC Seoul Exel IDR 2 21,300 Korea-Europe Fund IDR 18 62,550 LG Electronics GDR 6,400 38,560 Samsung Electronics GDR (b) 397 20,168 - -------------------------------------------------------------------------------------------------------------------------- 142,578 - -------------------------------------------------------------------------------------------------------------------------- MALAYSIA 2.38% Affin Holdings Berhad 65,000 150,409 Boustead Holdings 12,000 25,135 Cahya Mata Sarawak BHD 15,000 106,523 Commerce Asset Holdings 8,000 49,791 DCB Holdings 36,000 123,519 IOI Properties 32,000 101,496 Kian Joo Can Factory 24,000 132,136 Larut Consolidated 60,000 92,400 Magnum Corporation 110,000 186,954 MBM Resources 20,000 43,886 Metacorp 20,000 57,451 Renong Berhad 40,000 61,281 Resorts World 16,000 90,644 Sime Daarby Berhad 16,000 52,982 UMW Holdings Berhad 10,000 38,500 - -------------------------------------------------------------------------------------------------------------------------- 1,313,107 - -------------------------------------------------------------------------------------------------------------------------- MEXICO 0.98% Cemex~ 7,800 64,108 CIFRA~ 50,000 71,500 Empresas ICA SA~ 5,000 72,500 Empress La Modern~ 3,400 65,025 Grupo Financiero Bancomer~ (b) 11,000 107,305
37 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- MEXICO (CONTINUED) Mexico Fund 4,300 $ 68,263 Telefonos de Mexico-Class L~ 2,800 89,950 - -------------------------------------------------------------------------------------------------------------------------- 538,651 - -------------------------------------------------------------------------------------------------------------------------- NETHERLANDS 5.51% ABN-Amro Holdings 6,100 338,473 Aegon NV 7,200 355,727 DSM 2,200 216,102 Fortis Amev NV 10,300 307,741 ING Groep NV 7,000 218,558 Oce-Van Der Grinten 3,200 349,693 Polygram NV 5,600 313,676 Royal Dutch Petroleum 1,400 218,967 VNU-Ver Ned Uitgev V 21,000 411,331 Wolters Kluwer 2,480 312,193 - -------------------------------------------------------------------------------------------------------------------------- 3,042,461 - -------------------------------------------------------------------------------------------------------------------------- PHILIPPINES 0.50% Benpres Holdings GDR 8,000 60,000 Empire East Land 117,000 61,881 Filinvest Land 75,000 27,158 Hi Cement Placing 79,730 26,590 Pilipino Telephone 74,300 101,955 - -------------------------------------------------------------------------------------------------------------------------- 277,584 - -------------------------------------------------------------------------------------------------------------------------- SINGAPORE 1.18% ACMA Limited 30,000 71,591 ACMA Limited-Warrants* 7,500 5,167 Development Bank Singapore 4,000 49,148 Fraser & Neave 4,000 41,193 Jardine Strategic Holding 20,000 63,600 Jardine Strategic-Warrants* 3,125 844 Keppel Bank 40,000 109,091 Sembawang Corporation 12,000 56,250 Singapore Press Holdings 10,000 182,528 Straits Trading Company 8,000 19,205 UTD Overseas 32,000 50,455 UTD Overseas-Warrants* 2,000 1,417 - -------------------------------------------------------------------------------------------------------------------------- 650,489 - --------------------------------------------------------------------------------------------------------------------------
38 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- SPAIN 1.20% Corporacion Financiera 3,700 $ 308,165 Tabacalera SA 2,700 115,171 Viscofan Envolturas Celulos 16,000 241,613 - -------------------------------------------------------------------------------------------------------------------------- 664,949 - -------------------------------------------------------------------------------------------------------------------------- SWEDEN 1.50% Asea AB 3,140 331,576 Securitas AB B-Free 16,200 391,012 Volvo 5,000 107,483 - -------------------------------------------------------------------------------------------------------------------------- 830,071 - -------------------------------------------------------------------------------------------------------------------------- SWITZERLAND 2.23% Elektrowatt 620 243,748 Roche Holding AG 27 198,840 Sandoz AG Basel 282 338,670 Sulzer AG 360 211,579 Swissair* 290 238,429 - -------------------------------------------------------------------------------------------------------------------------- 1,231,266 - -------------------------------------------------------------------------------------------------------------------------- TAIWAN 0.44% Formosa Growth Fund 5,000 72,500 Taipei Fund IDR 20 169,500 - -------------------------------------------------------------------------------------------------------------------------- 242,000 - -------------------------------------------------------------------------------------------------------------------------- THAILAND 2.05% Banpu Coal 4,000 87,480 CMIC Finance & SEC Public Company 24,000 58,058 Cogeneration PLC 12,000 48,145 Dhana Siam Finance & SEC 40,000 188,805 First Bangkok City Bank 120,000 186,445 Krung Thai Bank 62,000 265,822 Loxley Public Company 5,000 48,775 Nation Multimedia Group 14,000 44,055 PTT Exploration 4,000 59,159 Telecomasia 30,000 60,772 Thai Military Bank, Ltd. 9,000 32,038 Thai Telephone 30,000 51,331 - -------------------------------------------------------------------------------------------------------------------------- 1,130,885 - --------------------------------------------------------------------------------------------------------------------------
39 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- UNITED STATES 31.25% Abacus Direct Corporation 25,000 $ 525,000 AGCO Corporation 20,000 510,000 American Home Products Corporation 9,000 573,750 AMR Corporation* 6,000 477,750 Avnet, Inc. 12,000 582,000 BMC Industries 25,000 715,625 Chesapeake Energy 15,000 939,375 Colgate Palmolive 6,000 521,250 Columbia Gas Systems 10,000 560,000 Columbia HCA Healthcare 9,000 511,875 Diamond Offshore 8,040 442,200 Fisher Scientific 15,000 618,750 Geotek Communications 40,000 335,000 Home Depot, Inc. 12,000 682,500 Household International 7,000 575,750 IMC Global, Inc. 12,000 469,500 Inbrand Corporation 15,000 427,500 Lear Corporation 15,000 495,000 Lockheed Martin Corporation 6,000 540,750 Micro Warehouse, Inc. 18,000 463,500 Microsoft Corporation 4,000 527,500 National Processing 30,000 585,000 National Semiconductor 25,000 503,125 Oak Industries* 17,000 565,250 Oryx Energy* 30,000 532,500 Outdoor Systems, Inc. 10,000 470,000 Price/Costco, Inc. 20,000 410,000 Reynolds & Reynolds Company-Class A 18,000 470,250 Shoney's, Inc.* 50,000 456,250 Staples, Inc. 20,000 443,750 Structural Dynamics 22,000 525,250 Sybron International Corporation 14,000 406,000 Wind River Systems 9,000 398,250 - -------------------------------------------------------------------------------------------------------------------------- 17,260,200 - -------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $48,040,789) 51,555,880 - --------------------------------------------------------------------------------------------------------------------------
40 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Principal Assets Amount Market Value - -------------------------------------------------------------------------------------------------------------------------- CORPORATE BOND 0.13% - -------------------------------------------------------------------------------------------------------------------------- MALAYSIA Telekom Malaysia Berhad, 4.00%, 10/3/04~ (9/22/94, $70,000) (a) (b) $ 70,000 $ 71,925 - -------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 6.03% - -------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/96, 5.78%, due 10/1/96, collateralized by Federal National Mortgage Association, $3,439,693 7.50%, 4/01/26, (cost $3,327,930) 3,327,930 3,327,930 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $51,438,719) 99.51% 54,955,735 - -------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES 0.49% 273,229 - -------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $55,228,964 - --------------------------------------------------------------------------------------------------------------------------
* Non-income producing. ~ American Depository Receipts. (a) All or a portion of these securities are restricted (i.e., securities which may not be publicly sold without registration under the Federal Securities Act of 1933). Dates of acquisition and costs are set forth in parentheses after the title of the restricted securities. (b) 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. 41 MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 93.90% - -------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 12.09% Bemis Company, Inc. 89,000 $ 3,014,875 Morton International, Inc. 75,000 2,981,250 Nalco Chemical Company 85,500 3,099,375 Sonoco Products Company 109,350 3,007,125 - -------------------------------------------------------------------------------------------------------------------------- 12,102,625 - -------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 9.00% Pall Corporation 113,000 3,192,250 W.W. Grainger, Inc. 38,700 2,718,675 York International Corporation 64,000 3,096,000 - -------------------------------------------------------------------------------------------------------------------------- 9,006,925 - -------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 14.46% Interpublic Group Company 66,500 3,142,125 Carnival Corporation-Class A 106,000 3,286,000 Mattel, Inc. 104,000 2,691,000 Newell Company 95,500 2,865,000 Olsten Corporation 100,250 2,493,719 - -------------------------------------------------------------------------------------------------------------------------- 14,477,844 - -------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 12.30% Avon Products 58,300 2,893,138 CPC International, Inc. 43,000 3,219,625 Sherwin Williams Company 63,700 2,954,087 Sysco Corporation 96,400 3,241,450 - -------------------------------------------------------------------------------------------------------------------------- 12,308,300 - -------------------------------------------------------------------------------------------------------------------------- ENERGY 2.53% Schlumberger, Ltd. 30,000 2,535,000 - -------------------------------------------------------------------------------------------------------------------------- FINANCIAL 13.48% American Express Company 64,000 2,960,000 Banc One Corporation 75,900 3,111,900 Federal National Mortgage Association 62,200 2,169,225 First Union Center 39,600 2,643,300 United Asset Management Corporation 110,400 2,608,200 - -------------------------------------------------------------------------------------------------------------------------- 13,492,625 - --------------------------------------------------------------------------------------------------------------------------
42 MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Shares or Percent of Net Principal Assets Amount Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- HEALTH 7.42% Johnson & Johnson 47,800 $ 2,449,750 Pfizer, Inc. 24,000 1,899,000 Schering -- Plough 50,000 3,075,000 - -------------------------------------------------------------------------------------------------------------------------- 7,423,750 - -------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY 10.03% AMP, Inc. 68,500 2,654,375 Electronic Data Systems 51,500 3,160,813 Intel Corporation 25,500 2,433,656 Linear Technology Company 48,600 1,792,125 - -------------------------------------------------------------------------------------------------------------------------- 10,040,969 - -------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION & SERVICES 2.66% Werner Enterprises, Inc. 166,450 2,663,200 - -------------------------------------------------------------------------------------------------------------------------- UTILITIES 2.84% Ameritech Corporation 27,000 1,420,875 GTE Corporation 37,000 1,424,500 - -------------------------------------------------------------------------------------------------------------------------- 2,845,375 - -------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS 7.09% S & P 500-Depository Receipt 68,000 4,666,500 Tyco International, Ltd. 56,400 2,432,250 - -------------------------------------------------------------------------------------------------------------------------- 7,098,750 - -------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $80,135,684) 93,995,363 - -------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 6.23% - -------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/96, 5.78%, due 10/01/96, collateralized by $6,440,215 Federal National Mortgage Association, 7.5%, 04/01/26, (cost $6,231,774) $6,231,774 6,231,774 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $86,367,458) 100.13% 100,227,137 - -------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES (0.13%) (125,444) - -------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $100,101,693 - --------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 43 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 55.17% - ------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 2.02% Praxair, Inc. 70,200 $ 3,018,600 RMI Titanium Company* 74,000 1,868,500 Uranium Resources, Inc.* 103,000 1,339,000 - ------------------------------------------------------------------------------------------------------------------------- 6,226,100 - ------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 3.96% JLG Industries 192,000 3,600,000 Hirsch International Corporation-Class A* 68,750 1,271,875 Miller Industries, Inc.* 29,800 1,177,100 Shaw Group* 148,000 5,143,000 Sinter Metals, Inc.-Class A* 52,000 1,040,000 - ------------------------------------------------------------------------------------------------------------------------- 12,231,975 - ------------------------------------------------------------------------------------------------------------------------- COMMERCIAL SERVICES 8.86% Cintas Corporation 26,200 1,467,200 Concord EFS, Inc.* 200,500 5,162,875 Correctional Services Corporation* 110,500 1,560,813 Corrections Corporation of America* 86,000 2,687,500 Equifax, Inc. 122,200 3,223,025 Omnicom Group, Inc. 71,500 3,342,625 Paychex, Inc. 92,305 5,353,690 Sitel Corporation* 28,600 1,272,700 United Waste Systems* 95,000 3,301,250 - ------------------------------------------------------------------------------------------------------------------------- 27,371,678 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 6.75% Cavalier Homes, Inc. 93,700 1,733,450 Clear Channel Communications* 72,000 6,372,000 Gentex Corporation* 94,000 2,138,500 HFS, Inc.* 54,000 3,611,250 Oakwood Homes 61,800 1,699,500 Redman Industries, Inc.* 74,200 2,077,600 Regal Cinemas, Inc.* 37,800 945,000 Watsco, Inc. 71,250 1,451,719 West Marine, Inc.* 25,000 825,000 - ------------------------------------------------------------------------------------------------------------------------- 20,854,019 - -------------------------------------------------------------------------------------------------------------------------
44 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 3.58% Gillette Company 46,000 $ 3,317,750 Rexall Sundown, Inc.* 115,050 4,199,325 Richfood Holdings, Inc. 95,000 3,538,750 - ------------------------------------------------------------------------------------------------------------------------- 11,055,825 - ------------------------------------------------------------------------------------------------------------------------- ENERGY 9.01% BJ Services Company* 78,500 2,845,625 CalEnergy, Inc.* 112,000 3,570,000 Chevron Corporation 48,400 3,031,050 Forcenergy Gas Exploration, Inc.* 132,000 3,267,000 Helmerich & Payne 38,700 1,688,288 Imperial Oil, Limited 34,400 1,462,000 Panenergy Corporation 84,900 2,939,662 Ranger Oil, Limited 177,500 1,331,250 Smith International, Inc.* 123,000 4,320,375 Swift Energy Company* 140,500 3,372,000 - ------------------------------------------------------------------------------------------------------------------------- 27,827,250 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL 5.07% AAMES Financial Corporation 26,000 1,309,750 Cityscape Financial Corporation* 83,000 2,199,500 North Fork Bancorporation 111,000 3,496,500 Safeguard Scientifics, Inc.* 54,200 2,161,225 Synovus Financial Corporation 130,800 3,400,800 U.S. Bancorp 78,000 3,081,000 - ------------------------------------------------------------------------------------------------------------------------- 15,648,775 - ------------------------------------------------------------------------------------------------------------------------- HEALTH 3.26% Renal Treatment Centers, Inc.* 64,400 2,141,300 Service Corporation International 131,200 3,968,800 U.S. Surgical Corporation 93,000 3,952,500 - ------------------------------------------------------------------------------------------------------------------------- 10,062,600 - ------------------------------------------------------------------------------------------------------------------------- RETAIL 3.01% Federated Department Stores* 84,000 2,814,000 Just For Feet* 32,300 1,619,037 Rent-Way, Inc.* 95,000 1,199,375 Safeway, Inc.* 86,000 3,665,750 - ------------------------------------------------------------------------------------------------------------------------- 9,298,162 - -------------------------------------------------------------------------------------------------------------------------
45 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Shares or Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY 7.29% ACC Corporation* 93,900 $ 4,436,775 Aspen Technology, Inc.* 41,600 2,818,400 Benchmark Electronics, Inc.* 29,300 879,000 Computer Task Group 38,000 1,182,750 Datastream Systems, Inc.* 50,000 1,512,500 HCIA, Inc.* 16,000 960,000 MDL Information Systems, Inc.* 54,000 1,707,750 Parametric Technology Corporation* 100,000 4,937,500 Radisys Corporation* 53,400 2,643,300 VeriFone, Inc.* 32,000 1,432,000 - ------------------------------------------------------------------------------------------------------------------------- 22,509,975 - ------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION 2.36% Air Express International Corporation 102,000 2,881,500 Wisconsin Central Transportation Corporation* 123,000 4,412,625 - ------------------------------------------------------------------------------------------------------------------------- 7,294,125 - ------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $112,944,592) 170,380,484 - ------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES AND AGENCIES 23.16% - ------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Note-PO Strip, 7.34%, 8/15/20 $154,000,000 28,194,320 U.S. Treasury Note-PO Strip, 7.44%, 8/15/21 253,000,000 43,346,490 - ------------------------------------------------------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $68,673,247) 71,540,810 - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 21.31% - ------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/96, 5.78%, due 10/01/96, collateralized by $68,027,459 Federal National Mortgage Association, 7.50%, 04/01/26 (cost $65,833,005) 65,833,005 65,833,005 - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $247,450,844) 99.64% 307,754,299 - ------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES 0.36% 1,111,907 - ------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $308,866,206 - -------------------------------------------------------------------------------------------------------------------------
PO - Principal Only Security * Securities not currently producing income. SEE NOTES TO FINANCIAL STATEMENTS. 46 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 56.84% - -------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 8.61% Aluminum Company of America 26,400 $ 1,557,600 Chirex Incorporated* 17,100 222,300 Hexcel Corporation* 66,200 1,282,625 IMC Global, Inc. 18,000 704,250 Precision Castparts Corporation 12,700 615,950 Quaker Chemical Corporation 25,000 371,875 Rhone Poulenc SA-Class A~ 28,534 798,952 Titanium Metals Corporation* 6,900 200,100 Tremont Corporation* 15,000 511,875 Witco Corporation 15,000 493,125 W.R. Grace & Company 20,000 1,050,000 - -------------------------------------------------------------------------------------------------------------------------- 7,808,652 - -------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 5.58% Albany International Corporation-Class A 27,000 583,875 Aviall, Inc. 60,000 487,500 BE Aerospace, Inc.* 42,700 880,688 Browning-Ferris Industries 15,000 375,000 Curtiss-Wright Corporation 9,700 528,650 Lone Star Technologies, Inc.* 25,100 367,088 Sequa Corporation-Class A* 18,100 807,712 Standard Pacific Corporation 77,200 443,900 WMX Technologies, Inc. 17,800 585,175 - -------------------------------------------------------------------------------------------------------------------------- 5,059,588 - -------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 8.40% Barry R.G.* 18,750 250,781 Blair Corporation 17,300 371,950 Brinker International, Inc.* 30,000 510,000 Darden Restaurants, Inc. 35,000 301,875 Deluxe Corporation 19,000 717,250 Fruit Of The Loom, Inc.* 20,000 620,000 Goodrich BF 17,400 785,175 Hasbro, Inc. 5,800 215,325 Hills Stores Company* 27,549 196,286 Kellwood Company 33,000 548,625 Kmart Corporation 60,000 615,000 Payless Shoesource, Inc.* 20,000 672,500 Polaroid Corporation 15,000 660,000 Tyco Toys, Inc.* 125,000 718,750 Valassis Communications* 28,300 442,188 - -------------------------------------------------------------------------------------------------------------------------- 7,625,705 - --------------------------------------------------------------------------------------------------------------------------
47 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 4.00% Chiquita Brands International 33,600 $ 411,600 Dimon Incorporated 17,000 325,125 International Multifoods Corporation 30,000 487,500 Interstate Bakeries Corporaton 20,200 737,300 Schweitzer-Mauduit International, Inc. 13,800 462,300 Universal Corporation 47,000 1,198,500 - -------------------------------------------------------------------------------------------------------------------------- 3,622,325 - -------------------------------------------------------------------------------------------------------------------------- ENERGY 8.48% Amerada Hess Corporation 18,000 951,750 Anderson Exploration* 18,216 183,191 Ashland Oil, Inc. 13,300 528,675 Burlington Resources, Inc. 19,200 852,000 Giant Industries, Inc. 42,600 612,375 Mitchell Energy-Class A 25,000 471,875 Noble Drilling Corporation* 34,500 521,812 Oryx Energy* 44,700 793,425 Patina Oil & Gas Corporation* 37,879 265,153 Patina Oil & Gas-Warrants* 18,939 18,939 Rowan Companies, Inc.* 60,000 1,117,500 Tosco Corporation 14,000 768,250 U.S.X. Marathon Group, Inc. 28,300 611,988 - -------------------------------------------------------------------------------------------------------------------------- 7,696,933 - -------------------------------------------------------------------------------------------------------------------------- FINANCIAL 4.91% California Federal Bank* 25,556 594,177 CIGNA Corporation 12,100 1,450,488 Danielson Holding Company* 76,000 418,000 Highlands Insurance Group* 30,000 600,000 Lehman Brothers Holding, Inc. 24,840 633,420 Old Republic International Corporation 16,500 408,375 Paul Revere Corporation 13,000 354,250 - -------------------------------------------------------------------------------------------------------------------------- 4,458,710 - -------------------------------------------------------------------------------------------------------------------------- HEALTH 1.10% Fresenius Medical Care 20,260 471,045 Novacare, Inc.* 56,000 525,000 - -------------------------------------------------------------------------------------------------------------------------- 996,045 - --------------------------------------------------------------------------------------------------------------------------
48 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY 3.19% Advanced Fibre Company* 200 $ 5,000 Alcatel Alsthom~ 50,378 850,129 Compuware Corporation* 10,000 457,500 Elsag Baily Process Auto NV* 25,000 534,375 International Business Machines Corporation 5,000 622,500 Qualcomm, Inc.* 10,000 425,000 - -------------------------------------------------------------------------------------------------------------------------- 2,894,504 - -------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION & SERVICES 4.19% AMR Corporation* 9,164 729,683 Bergesen Dyas-Class A~ 20,000 424,514 Boeing Company 6,000 567,000 Canadian Pacific, Ltd. 23,500 543,438 Halter Marine Group* 3,500 41,125 Nordic American Tanker Ship-Warrants* 20,000 95,000 OMI Corporation* 55,900 398,288 Overseas Shipholding Group 25,000 412,500 Roadway Express, Inc. 40,000 595,000 - -------------------------------------------------------------------------------------------------------------------------- 3,806,548 - -------------------------------------------------------------------------------------------------------------------------- UTILITIES 3.21% B.C.E., Inc. 25,400 1,085,850 Enserch Corporation 4,800 100,200 Niagara Mohawk Power 120,700 965,600 Petroleum Heat & Power 108,566 759,962 - -------------------------------------------------------------------------------------------------------------------------- 2,911,612 - -------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS 1.60% Bradley Real Estate 7,546 122,622 Catellus Development Corporation* 30,000 296,250 Koger Equity, Inc.* 27,500 429,688 Newhall Land & Farming Company~ 36,100 609,187 - -------------------------------------------------------------------------------------------------------------------------- 1,457,747 - --------------------------------------------------------------------------------------------------------------------------
49 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Shares or Percent of Net Principal Assets Amount Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- FOREIGN SECURITIES 3.57% CAE, Inc. 75,000 $ 575,293 Cameco Corporation 12,000 590,597 Far East Levingston 180,000 850,142 Onex Corporation 23,400 243,042 St. Lawrence Cement, Inc. 45,000 298,932 Technip SA* 7,500 685,396 - -------------------------------------------------------------------------------------------------------------------------- 3,243,402 - -------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $42,362,092) 51,581,771 - -------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS 2.21% - -------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 0.66% Cooper Industries 29,000 594,500 - -------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 0.41% Elsag Bailey Process Auto NV (a) 9,300 378,975 - -------------------------------------------------------------------------------------------------------------------------- FINANCIAL 1.13% Glendale Federal Bank 21,700 1,022,613 - -------------------------------------------------------------------------------------------------------------------------- RETAIL 0.01% Intertan, Inc.* 1,200 7,650 - -------------------------------------------------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (COST $1,385,599) 2,003,738 - -------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS 5.61% - -------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 0.26% Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 239,395 - -------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 0.11% Lockheed Corporation, 6.75%, 3/15/03 100,000 98,287 - -------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 0.20% Sears Roebuck Company, 9.25%, 4/15/98 175,000 182,740 - --------------------------------------------------------------------------------------------------------------------------
50 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Principal Assets Amount Market Value - -------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 0.25% Gillette Company, 5.75%, 10/15/05 $ 250,000 $ 227,892 - -------------------------------------------------------------------------------------------------------------------------- FINANCIAL 2.93% American General Finance Corporation, 5.88%, 7/01/00 250,000 242,642 Associates Corporation of North America, 5.25%, 3/30/00 250,000 238,995 Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 257,758 Comerica Bank, 7.13%, 12/01/13 250,000 232,285 Dean Witter Discover, 6.25%, 3/15/00 100,000 98,480 First National Bank of Boston, 8.00%, 9/15/04 250,000 260,835 Ford Motor Credit, 8.88%, 6/15/99 100,000 105,552 Great Western Financial, 6.38%, 7/01/00 250,000 246,625 Home Savings of Americas, 6.00%, 11/01/00 250,000 241,848 Security Benefits Life Company, 8.75%, 5/15/16 (a) 500,000 510,800 Toronto Dominion Bank, 6.13%, 11/01/08 250,000 225,985 - -------------------------------------------------------------------------------------------------------------------------- 2,661,805 - -------------------------------------------------------------------------------------------------------------------------- UTILITIES 1.86% Duke Power Company, 7.00%, 6/01/00 100,000 101,092 Florida Power & Light Company, 5.38%, 4/01/00 250,000 238,972 Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 233,045 Philadelphia Electric Company, 7.50%, 1/15/99 100,000 101,968 Southwestern Public Service Company, 6.88%, 12/01/99 250,000 251,723 System Energy Resources, 7.71%, 8/01/01 500,000 507,345 Union Electric Company, 6.75%, 10/15/99 250,000 250,463 - -------------------------------------------------------------------------------------------------------------------------- 1,684,608 - -------------------------------------------------------------------------------------------------------------------------- TOTAL CORPORATE BONDS (COST $5,275,855) 5,094,727 - -------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES AND AGENCIES 23.95% - -------------------------------------------------------------------------------------------------------------------------- Government National Mortgage Association 6.50%-7.00%, 9/15/23-2/15/26 5,393,155 5,155,657 U.S. Treasury Bond, 7.25%, 5/15/16 2,500,000 2,554,975 U.S. Treasury Notes, 5.13%-6.50%, 3/31/98-8/15/05 14,250,000 14,027,505 - -------------------------------------------------------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $21,976,652) 21,738,137 - --------------------------------------------------------------------------------------------------------------------------
51 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Principal Assets Amount Market Value - -------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 10.25% - -------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Lehman Brothers, Inc. Dated 9/30/96, 5.70%, Due 10/01/96, collateralized by $9,531,000, U.S. Treasury Bond, 4.93%, 10/31/96 (cost $9,302,000) $ 9,302,000 $ 9,302,000 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $80,302,197) 98.86% 89,720,373 - -------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES 1.14% 1,037,208 - -------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $90,757,581 - --------------------------------------------------------------------------------------------------------------------------
* 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. 52 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM MUNICIPAL SECURITIES 99.01% - ------------------------------------------------------------------------------------------------------------------------ ARIZONA 3.36% Pima County Arizona IDA, 7.25%, 7/15/10 $1,665,000 $ 1,840,591 - ------------------------------------------------------------------------------------------------------------------------ CALIFORNIA 3.92% Carson Improvement Board Act 1915, Special Assessment District 92, 7.38%, 9/02/22 720,000 757,865 Orange County Community Facilities District, Series A, 7.35%, 8/15/18 300,000 347,718 San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,041,950 - ------------------------------------------------------------------------------------------------------------------------ 2,147,533 - ------------------------------------------------------------------------------------------------------------------------ COLORADO 6.87% Colorado Housing Authority, 7.00%, 11/01/24 605,000 628,341 Denver City & County Airport Revenue, 7.75%-8.50%, 11/15/13-11/15/23 2,700,000 3,133,234 - ------------------------------------------------------------------------------------------------------------------------ 3,761,575 - ------------------------------------------------------------------------------------------------------------------------ DISTRICT OF COLUMBIA 1.55% Metropolitan Washington, General Airport Revenue, Series A, 6.63%, 10/01/19 800,000 852,048 - ------------------------------------------------------------------------------------------------------------------------ FLORIDA 5.10% Hillsborough County, 6.25%, 12/01/34 1,250,000 1,309,763 Sarasota County, Health Facilities Authority Revenue, 10.00%, 7/01/22 1,180,000 1,484,251 - ------------------------------------------------------------------------------------------------------------------------ 2,794,014 - ------------------------------------------------------------------------------------------------------------------------ GEORGIA 3.88% Cobb County Development Authority Revenue Bonds, Series 92A, 8.00%, 6/01/22 1,000,000 1,015,000 Monroe County Development Authority PCR, 6.75%, 1/01/10 1,000,000 1,111,440 - ------------------------------------------------------------------------------------------------------------------------ 2,126,440 - ------------------------------------------------------------------------------------------------------------------------ ILLINOIS 8.46% Broadview Tax Increment Revenue, 8.25%, 7/01/13 1,000,000 1,088,190 Chicago Heights Residential Mortgage, (effective yield-2.85%) (a), 6/01/09 3,465,000 1,410,740 Chicago, Capital Appreciation, (effective yield-1.74%) (a), 7/01/16 2,000,000 569,840 Illinois Health Facilities Authority Revenue, 9.50%, 10/01/22 1,250,000 1,564,237 - ------------------------------------------------------------------------------------------------------------------------ 4,633,007 - ------------------------------------------------------------------------------------------------------------------------
53 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM MUNICIPAL SECURITIES (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------ INDIANA 0.54% Indiana Transportation Finance Authority, Series A, (effective yield-1.70%) (a), 6/01/17 $1,000,000 $ 293,010 - ------------------------------------------------------------------------------------------------------------------------ IOWA 1.23% Student Loan Liquidity Corporation, Student Loan Revenue, Series C, 6.95%, 3/01/06 625,000 671,831 - ------------------------------------------------------------------------------------------------------------------------ KENTUCKY 3.78% Jefferson County, Hospital Revenue, 8.85%*, 10/01/08 500,000 565,625 Kenton County Airport Board Revenue, OID, 7.50%, 2/01/20 1,400,000 1,501,458 - ------------------------------------------------------------------------------------------------------------------------ 2,067,083 - ------------------------------------------------------------------------------------------------------------------------ MAINE 1.90% Maine State Housing Authority, Series C, 6.88%, 11/15/23 1,000,000 1,037,700 - ------------------------------------------------------------------------------------------------------------------------ MASSACHUSETTS 3.53% Massachusetts State Health and Educational Facilities Authority, OID Revenue Bonds, Series A, 6.00%, 10/01/23 1,000,000 833,870 Massachusetts State Health and Education, 6.88%, 4/01/22 1,000,000 1,100,660 - ------------------------------------------------------------------------------------------------------------------------ 1,934,530 - ------------------------------------------------------------------------------------------------------------------------ MICHIGAN 1.10% Romulus Community Schools, Refunding, (effective yield-1.42%) (a), 5/01/20 2,385,000 599,637 - ------------------------------------------------------------------------------------------------------------------------ NEBRASKA 0.67% Nebraska Finance Authority, SFM, 9.27%*, 9/15/24 350,000 365,750 - ------------------------------------------------------------------------------------------------------------------------ NEVADA 0.96% Henderson Local Improvement District, Special Assessment, Series A, 8.50%, 11/01/12 500,000 524,995 - ------------------------------------------------------------------------------------------------------------------------ NEW YORK 21.47% Clifton Springs Hospital Refunding & Improvement, 8.00%, 1/01/20 855,000 872,331 Herkimer County, IDA, 8.00%, 1/01/09 1,000,000 975,650 Metropolitan Transportation Authority, 4.75%, 7/01/19 1,000,000 828,040 New York City, Series H, 7.20%, 2/01/13 1,500,000 1,609,830 New York State Dorm Authority, 5.50%, 7/01/16 5,000,000 4,919,700 New York State Mortgage Agency, 6.15%, 10/01/17 2,500,000 2,548,900 - ------------------------------------------------------------------------------------------------------------------------ 11,754,451 - ------------------------------------------------------------------------------------------------------------------------
54 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM MUNICIPAL SECURITIES (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------ NORTH DAKOTA 1.97% Ward County, Healthcare Facilities, 8.88%, 11/15/24 $1,000,000 $ 1,080,480 - ------------------------------------------------------------------------------------------------------------------------ OKLAHOMA 1.88% Oklahoma City, Industrial and Cultural Facilities Trust, 6.75%, 9/15/17 1,000,000 1,026,640 - ------------------------------------------------------------------------------------------------------------------------ PENNSYLVANIA 2.82% Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 492,240 Philadelphia Hospital and Higher Education Facilities, 6.50%, 11/15/08 1,000,000 1,050,030 - ------------------------------------------------------------------------------------------------------------------------ 1,542,270 - ------------------------------------------------------------------------------------------------------------------------ RHODE ISLAND 0.77% West Warwick, Series A, GO Bonds, 6.80%-7.30%, 7/15/98-7/15/08 395,000 421,576 - ------------------------------------------------------------------------------------------------------------------------ TENNESSEE 8.29% Memphis Shelby County Airport Authority Special Facilities Revenue Refunding, 7.88%, 9/01/09 1,500,000 1,673,310 Tennessee Housing, 7.38%, 7/01/23 2,750,000 2,865,748 - ------------------------------------------------------------------------------------------------------------------------ 4,539,058 - ------------------------------------------------------------------------------------------------------------------------ TEXAS 4.59% Brazos Higher Education Authority Student Loan Revenue, 7.10%, 11/01/04 550,000 606,034 Dallas-Fort Worth International Airport Facility Revenue Bonds, 7.25%, 11/01/30 1,000,000 1,065,060 Texas State Department of Housing and Community Affairs Refunding, Series C, 9.85%*, 7/02/24 750,000 840,000 - ------------------------------------------------------------------------------------------------------------------------ 2,511,094 - ------------------------------------------------------------------------------------------------------------------------ UTAH 3.59% Bountiful Hospital Revenue, 9.50%, 12/15/18 240,000 264,487 Utah State Housing Finance Commission, 7.20%, 1/01/27 1,630,000 1,703,024 - ------------------------------------------------------------------------------------------------------------------------ 1,967,511 - ------------------------------------------------------------------------------------------------------------------------ WEST VIRGINIA 6.78% Harrison County, 6.75%, 8/01/24 2,000,000 2,185,380 West Virginia State Hospital Finance Authority Revenue, 8.48%*, 1/01/18 1,500,000 1,529,190 - ------------------------------------------------------------------------------------------------------------------------ 3,714,570 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LONG-TERM MUNICIPAL SECURITIES (COST $51,266,294) 54,207,394 - ------------------------------------------------------------------------------------------------------------------------
55 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Market Value - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (COST $51,266,294) 99.01% $54,207,394 - ------------------------------------------------------------------------------------------------------------------------ OTHER ASSETS LESS LIABILITIES 0.99% 541,644 - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS 100.00% $54,749,038 - ------------------------------------------------------------------------------------------------------------------------
INVESTMENT ABBREVIATIONS GO - General Obligation PCR - Pollution Control Revenue IDA - Industrial Development Authority SFM - Single Family Mortgage OID - Original Issue Discount
* Represents inverse floating rate securities. (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. SEE NOTES TO FINANCIAL STATEMENTS. 56 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Principal Percent of Net Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM INVESTMENTS 100.09% - ------------------------------------------------------------------------------------------------------------------------ ASSET-BACKED SECURITIES 13.02% Advanta Mortgage Loan Trust, Series 1993-4, 5.55%, 3/25/10-1/25/25 $ 3,301,256 $ 3,074,200 Equifax Credit Corporation, Series 1994-1,B 5.75%, 3/15/09 3,031,444 2,917,531 Fifth Third Auto Grantor Trust 6.20%, 9/15/01 2,653,538 2,649,407 Old Stone Credit Corporation Home Equity Trust, Series 1993-1 B1, 6.00%, 3/15/08 1,356,995 1,320,021 World Omni, Series 1993-B, 5.05%, 8/15/99 (b) 373,717 369,611 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSET-BACKED SECURITIES (COST $10,382,856) 10,330,770 - ------------------------------------------------------------------------------------------------------------------------ U.S. GOVERNMENT SECURITIES AND AGENCIES 42.91% Federal Home Loan Mortgage Corporation 6.50%, Series 1647B, 11/15/08 - REMIC, CMO* 4,259,188 3,995,395 7.50%, 9/17/11 (a) 6,500,000 6,517,251 6.00%, Series 48 H, 7/15/20 - REMIC, CMO 3,500,000 3,062,007 Government National Mortgage Association 7.00%, 12/15/08-9/20/22* 10,097,915 10,072,328 8.00%, 6/17/26, TBA (a) 3,300,000 3,332,713 7.00%, 10/17/26, TBA (a) 6,000,000 5,749,890 U.S. Treasury Note-PO Strip, 5/15/21 7,500,000 1,307,925 - ------------------------------------------------------------------------------------------------------------------------ TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $34,051,083) 34,037,509 - ------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS 25.15% - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL 20.39% Capital One Bank, 7.15%-7.20%, 7/19/99-9/15/06 4,750,000 4,786,204 Developers Diversified Realty, 6.58%-7.63%, 5/15/00-2/06/01* 2,750,000 2,733,704 Lehman Brothers, Inc., 7.50%, 8/01/26 2,000,000 2,013,058 Nationsbank, 7.50%, 9/15/06 1,500,000 1,514,457 Salomon, Inc., 6.00%, 1/12/98* 3,000,000 2,975,190 Sunamerica, Inc., 7.34%, 8/30/05* 1,200,000 1,183,643 Travelers, Inc., 6.88%, 6/01/25* 1,000,000 974,118 - ------------------------------------------------------------------------------------------------------------------------ 16,180,374 - ------------------------------------------------------------------------------------------------------------------------ TECHNOLOGY 3.15% Phillips Electronics, 7.20%, 6/01/26 2,500,000 2,496,093 - ------------------------------------------------------------------------------------------------------------------------
57 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Principal Percent of Net Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------ UTILITIES 1.61% Mississippi Power & Light, 8.80%, 4/01/05* $ 1,250,000 $ 1,278,556 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CORPORATE BONDS (COST $19,825,752) 19,955,023 - ------------------------------------------------------------------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATIONS 11.08% Chase Mortgage Finance Corporation, Series 1993-L2 M, 7.00%, 10/25/2 3,049,878 2,862,033 General Electric Capital Mortgage Services, Inc., Series 1993-18 B1, 6.00%, 2/25/09 2,189,212 2,015,658 Prudential Home, Series 1995-5, 7.25%, 9/25/25 4,103,834 3,914,409 - ------------------------------------------------------------------------------------------------------------------------ TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $8,974,599) 8,792,100 - ------------------------------------------------------------------------------------------------------------------------ RESIDUAL INTERESTS 7.93% General Mortgage Securities II, Inc., 1995-1, 6/25/20 30,725 711,083 General Mortgage Securities II, Inc., 1995-4, 6/25/23 16,730 580,564 General Mortgage Securities II, Inc., 1996-1, 11/25/22 16,749 650,567 National Mortgage Funding I, Inc., 1995-1, 4/28/25 25,599 442,830 National Mortgage Funding I, Inc., 1995-4, 3/20/21 14,171 220,518 National Mortgage Funding I, Inc., 1995-5, 3/25/22 9,018 534,696 National Mortgage Funding I, Inc., 1995-7, 9/17/25 39,671 966,635 National Mortgage Funding I, Inc., 1995-8, 8/25/22 45,000 761,310 National Mortgage Funding I, Inc., 1995-9, 11/19/25 42,588 679,954 National Mortgage Funding I, Inc., 1996-3, 2/17/26 23,343 738,131 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RESIDUAL INTERESTS (COST $6,475,626) 6,286,288 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LONG-TERM INVESTMENTS (COST $79,709,916) 79,401,690 - ------------------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENT 19.42% - ------------------------------------------------------------------------------------------------------------------------ REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/96, 5.78%, due 10/01/96, collateralized by $15,918,267 Federal National Mortgage Association, 7.50%, 4/01/26 (cost $15,404,136) 15,404,136 15,404,136 - ------------------------------------------------------------------------------------------------------------------------
58 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Percent of Net Assets Market Value - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (COST $95,114,052) 119.51% $94,805,826 - ------------------------------------------------------------------------------------------------------------------------ OTHER ASSETS LESS LIABILITIES (19.51%) (15,474,597 ) - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS 100.00% $79,331,229 - ------------------------------------------------------------------------------------------------------------------------
INVESTMENT ABBREVIATIONS CMO - Collateralized Mortgage Obligation PO - Principal Only Security REMIC - Real Estate Mortgage Investment Conduit TBA - To Be Announced (a) At September 30, 1996, the cost of securities purchased on a when-issued basis totaled $15,552,760. (b) 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. * At September 30, 1996, $15,595,000 principal amount of these securities has been segregated for a commitment to purchase when-issued securities. SEE NOTES TO FINANCIAL STATEMENTS. 59 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Principal Percent of Net Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ ASSET-BACKED SECURITIES 36.68% Advanta Mortgage Loan Trust 1993-4, 4.75%-5.55% 2/25/10-3/25/10 $2,287,765 $ 2,180,893 AFC Home Equity Loan, 6.60%, 2/25/27 1,499,955 1,456,568 Equifax Credit Corporation 1994-1B, 5.75%, 3/15/09 963,794 927,578 Fifth Third Auto Grantor Trust, 6.20%, 9/15/01 1,328,128 1,326,061 General Motors Acceptance Corporation, 6.30%, 6/15/99 254,502 254,505 Old Stone Credit Corporation, 6.20%, 6/15/08 559,383 546,747 Olympic Automobiles Receivables Trust, 6.85%- 7.35%, 6/15/01-10/15/01 3,524,642 3,557,808 Union Acceptance Corporation, 6.45%, 7/08/03 1,324,393 1,324,005 World Omni 1993 B, 5.05%, 8/15/99 (b) 151,506 149,842 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSET-BACKED SECURITIES (COST $11,732,069) 11,724,007 - ------------------------------------------------------------------------------------------------------------------------ U.S. GOVERNMENT SECURITIES AND AGENCIES 30.01% Federal Home Loan Mortgage Corporation 6.50%, 5/15/08, CMO* 2,322,657 2,200,608 7.50%, 4/16/26, MBS, TBA (a) 2,800,000 2,807,431 Federal National Mortgage Association 10.00%, 6/01/05, MBS 445,462 466,379 Government National Mortgage Association 7.00%, 12/15/08, MBS* 2,897,091 2,876,036 7.00%, 9/20/22, ARM 1,230,226 1,246,075 - ------------------------------------------------------------------------------------------------------------------------ TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $9,682,181) 9,596,529 - ------------------------------------------------------------------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATION 1.31% Ryland Acceptance Corporation, 9.63%, 9/25/17 (cost $413,133) 419,778 419,193 - ------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS 16.50% Capital One Bank, 7.15%-7.20%, 7/19/99-9/15/06 2,500,000 2,517,656 Developers Diversified Realty, 6.58%, 2/06/01 750,000 724,375 Mississippi Power & Light, 8.80%, 4/01/05 1,000,000 1,022,845 Salomon, Inc., 8.62%, 2/17/97 1,000,000 1,009,141 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CORPORATE BONDS (COST $5,247,846) 5,274,017 - ------------------------------------------------------------------------------------------------------------------------
60 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
Principal Percent of Net Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ RESIDUAL INTERESTS 1.96% General Mortgage Securities II, Inc., 1996-3, 6/20/25 $ 13,960 $ 223,478 National Mortgage Funding, Inc., 1996-4, 10/25/21 5,630 204,491 National Mortgage Funding, Inc., 1996-6, 5/22/26 14,923 198,628 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RESIDUAL INTERESTS (COST $649,604) 626,597 - ------------------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENT 22.82% - ------------------------------------------------------------------------------------------------------------------------ REPURCHASE AGREEMENT Goldman Sachs & Company Dated 9/30/96, 5.78%, due 10/01/96, collateralized by $7,537,663 Federal National Mortgage Association, 7.50%, 4/01/26 (cost $7,294,053) 7,294,053 7,294,053 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (COST $35,018,886) 109.28% 34,934,396 - ------------------------------------------------------------------------------------------------------------------------ OTHER ASSETS LESS LIABILITIES (9.28%) (2,967,806 ) - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS 100.00% $31,966,590 - ------------------------------------------------------------------------------------------------------------------------
INVESTMENT ABBREVIATIONS ARM - Adjustable Rate Mortgage CMO - Collateralized Mortgage Obligations MBS - Mortgage Backed Securities TBA - To Be Announced (a) At September 30, 1996, the cost of securities purchased on a when-issued basis totaled $2,798,906. (b) 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. * At September 30, 1996, $3,030,000 principal amount of these securities has been segregated for a commitment to purchase when-issued securities. SEE NOTES TO FINANCIAL STATEMENTS. 61 MENTOR FUNDS STATEMENTS OF ASSETS AND LIABILITIES SEPTEMBER 30, 1996
Mentor Mentor Mentor Perpetual Capital Growth Global Growth Portfolio Portfolio Portfolio - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments, at market value * (Note 2) Investment securities $363,689,931 $51,627,805 $ 93,995,363 Repurchase agreements 52,004,489 3,327,930 6,231,774 - ---------------------------------------------------------------------------------------------------------------------------------- Total Investments 415,694,420 54,955,735 100,227,137 - ---------------------------------------------------------------------------------------------------------------------------------- Cash - - - Receivables Investments sold 4,441,279 1,376,197 - Fund shares sold 1,625,128 887,129 180,798 Dividends and interest 64,822 108,226 93,131 Closed forward foreign currency contracts - 444 - Deferred expenses (Note 2) 19,058 27,558 18,000 Other assets - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 421,844,707 57,355,289 100,519,066 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Payables Investments purchased 9,602,057 2,085,235 256,000 Dollar roll agreement - - - Fund shares redeemed 200,159 19,254 97,424 Dividends - - - Forward foreign currency exchange contracts held (Note 8) - 1,629 - Accrued expenses and other liabilities 192,331 20,207 63,949 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 9,994,547 2,126,325 417,373 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $411,850,160 $55,228,964 $100,101,693 - ---------------------------------------------------------------------------------------------------------------------------------- Net Assets represented by: (Note 2) Additional paid-in capital $258,480,220 $49,783,985 $ 72,087,322 Accumulated net investment income - (96,740) 11,836 Accumulated distributions in excess of net investment income - - - Accumulated net realized gain (loss) on investment transactions 53,707,022 2,024,947 14,142,856 Net unrealized appreciation (depreciation) of investments and foreign currency related transactions 99,662,918 3,516,772 13,859,679 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $411,850,160 $55,228,964 $100,101,693 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE Class A Shares $18.47 $17.86 $19.36 Class B Shares $18.29 $17.46 $18.92 OFFERING PRICE PER SHARE Class A Shares $19.60(a) $18.95(a) $20.54(a) Class B shares $18.29 $17.46 $18.92 SHARES OUTSTANDING Class A Shares 2,180,561 733,629 1,647,133 Class B Shares 20,320,150 2,412,641 3,604,659 - ---------------------------------------------------------------------------------------------------------------------------------- Total Shares Outstanding 22,500,711 3,146,270 5,251,792 - ----------------------------------------------------------------------------------------------------------------------------------
* Investments at cost are $316,031,502, $51,438,719, $86,367,458, $247,450,844, $80,302,197, $51,266,294, $95,114,052 and $35,018,886, 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. SEE NOTES TO FINANCIAL STATEMENTS. 62
Mentor Mentor Mentor Income and Municipal Strategy Growth Income Portfolio Portfolio Portfolio - ----------------------------------------------------------------------------------------------------------------------- ASSETS Investments, at market value * (Note 2) Investment securities $241,921,294 $80,418,373 $54,207,394 Repurchase agreements 65,833,005 9,302,000 - - ----------------------------------------------------------------------------------------------------------------------- Total Investments 307,754,299 89,720,373 54,207,394 - ----------------------------------------------------------------------------------------------------------------------- Cash 764 447 - Receivables Investments sold 596,250 9,126 - Fund shares sold 962,296 1,059,199 88,333 Dividends and interest 89,400 429,407 872,064 Closed forward foreign currency contracts - - - Deferred expenses (Note 2) 45,337 - - Other assets - - - - ----------------------------------------------------------------------------------------------------------------------- Total assets 309,448,346 91,218,552 55,167,791 - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES Payables Investments purchased - 49,900 - Dollar roll agreement - - - Fund shares redeemed 444,817 86,935 138,109 Dividends - - 237,075 Forward foreign currency exchange contracts held (Note 8) - - - Accrued expenses and other liabilities 137,323 324,136 43,569 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 582,140 460,971 418,753 - ----------------------------------------------------------------------------------------------------------------------- NET ASSETS $308,866,206 $90,757,581 $54,749,038 - ----------------------------------------------------------------------------------------------------------------------- Net Assets represented by: (Note 2) Additional paid-in capital $225,524,569 $73,417,788 $54,408,948 Accumulated net investment income - 98,562 - Accumulated distributions in excess of net investment income - - (89,604) Accumulated net realized gain (loss) on investment transactions 23,038,182 7,823,065 (2,511,406) Net unrealized appreciation (depreciation) of investments and foreign currency related transactions 60,303,455 9,418,166 2,941,100 - ----------------------------------------------------------------------------------------------------------------------- NET ASSETS $308,866,206 $90,757,581 $54,749,038 - ----------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE Class A Shares $17.96 $19.16 $15.04 Class B Shares $17.79 $19.18 $15.05 OFFERING PRICE PER SHARE Class A Shares $19.06(a) $20.33(a) $15.79(b) Class B shares $17.79 $19.18 $15.05 SHARES OUTSTANDING Class A Shares 1,134,383 1,263,439 1,169,466 Class B Shares 16,214,886 3,469,932 2,468,725 - ----------------------------------------------------------------------------------------------------------------------- Total Shares Outstanding 17,349,269 4,733,371 3,638,191 - -----------------------------------------------------------------------------------------------------------------------
Mentor Mentor Quality Short-Duration Income Income Portfolio Portfolio - ----------------------------------------------------------------------------------------------------------------- ASSETS Investments, at market value * (Note 2) Investment securities $79,401,690 $ 27,640,343 Repurchase agreements 15,404,136 7,294,053 - ----------------------------------------------------------------------------------------------------------------- Total Investments 94,805,826 34,934,396 - ----------------------------------------------------------------------------------------------------------------- Cash 67,381 19,011 Receivables Investments sold - - Fund shares sold 111,616 114,516 Dividends and interest 764,606 200,675 Closed forward foreign currency contracts - - Deferred expenses (Note 2) - 31,269 Other assets 8,120 - - ----------------------------------------------------------------------------------------------------------------- Total assets 95,757,549 35,299,867 - ----------------------------------------------------------------------------------------------------------------- LIABILITIES Payables Investments purchased 9,046,666 2,801,750 Dollar roll agreement 6,506,094 - Fund shares redeemed 372,664 373,170 Dividends 458,127 147,268 Forward foreign currency exchange contracts held (Note 8) - - Accrued expenses and other liabilities 42,769 11,089 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 16,426,320 3,333,277 - ----------------------------------------------------------------------------------------------------------------- NET ASSETS $79,331,229 $ 31,966,590 - ----------------------------------------------------------------------------------------------------------------- Net Assets represented by: (Note 2) Additional paid-in capital $94,833,231 $ 32,295,594 Accumulated net investment income - - Accumulated distributions in excess of net investment income (111,276) (95,733) Accumulated net realized gain (loss) on investment transactions (15,082,500) (148,781) Net unrealized appreciation (depreciation) of investments and foreign currency related transactions (308,226) (84,490) - ----------------------------------------------------------------------------------------------------------------- NET ASSETS $79,331,229 $ 31,966,590 - ----------------------------------------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE Class A Shares $12.91 $12.50 Class B Shares $12.93 $12.50 OFFERING PRICE PER SHARE Class A Shares $13.55(b) $12.63 (c) Class B shares $12.93 $12.50 SHARES OUTSTANDING Class A Shares 1,633,938 595,992 Class B Shares 4,504,962 1,962,022 - ----------------------------------------------------------------------------------------------------------------- Total Shares Outstanding 6,138,900 2,558,014 - -----------------------------------------------------------------------------------------------------------------
63 MENTOR FUNDS STATEMENTS OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1996
Mentor Mentor Mentor Perpetual Capital Growth Global Growth Portfolio Portfolio Portfolio - ------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Interest $ 2,364,361 $ 132,950 $ 221,224 Dividends (Net of withholding taxes)*** 642,265 474,933 1,552,160 - ------------------------------------------------------------------------------------------------------------------- Total investment income (Note 2) 3,006,626 607,883 1,773,384 - ------------------------------------------------------------------------------------------------------------------- EXPENSES Management fee (Note 4) 2,313,470 368,592 728,536 Distribution fees (Note 5) 2,260,899 183,636 458,606 Shareholder services fees (Note 5) 826,239 83,771 227,668 Transfer agent fee 417,843 45,295 126,606 Administration fee (Note 4) 330,496 33,508 91,067 Registration expenses 126,424 9,288 20,554 Shareholder reports and postage expenses 119,543 18,583 39,158 Custodian and accounting fees 84,681 80,604 26,605 Legal and audit fees 37,713 8,650 23,559 Directors' fees and expenses 9,857 996 2,732 Organizational expenses 8,550 11,097 3,862 Miscellaneous 35,085 10,831 16,457 - ------------------------------------------------------------------------------------------------------------------- Total expenses 6,570,800 854,851 1,765,410 - ------------------------------------------------------------------------------------------------------------------- Deduct Waiver of administration fee (Note 4) - - - Waiver of management fee (Note 4) - - - - ------------------------------------------------------------------------------------------------------------------- NET EXPENSES 6,570,800 854,851 1,765,410 - ------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (3,564,174) (246,968) 7,974 - ------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS Net realized gain (loss) on investments and futures contracts (Note 2) 63,686,744 2,247,124 16,294,346 Change in unrealized appreciation (depreciation) 22,942,450 2,553,849 3,307,505 - ------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments and futures contracts 86,629,194 4,800,973 19,601,851 - ------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $83,065,020 $4,554,005 $19,609,825 - -------------------------------------------------------------------------------------------------------------------
** Net of interest expense $38,793 for the Mentor Short-Duration Income Portfolio. *** Withholding taxes were $2,014, $51,311, $4,820 and $23,319 for the Mentor Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Strategy Portfolio, and Mentor Income and Growth Portfolio, respectively for the year ended September 30, 1996. SEE NOTES TO FINANCIAL STATEMENTS. 64
Mentor Mentor Mentor Mentor Mentor Income and Municipal Quality Short-Duration Strategy Growth Income Income Income Portfolio Portfolio Portfolio Portfolio Portfolio - ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME Interest $ 3,888,338 $ 1,797,747 $3,850,534 $ 6,546,848 $1,872,241** Dividends (Net of withholding taxes)*** 1,528,175 857,844 - - - - ------------------------------------------------------------------------------------------------------------------------------------ Total investment income (Note 2) 5,416,513 2,655,591 3,850,534 6,546,848 1,872,241 - ------------------------------------------------------------------------------------------------------------------------------------ EXPENSES Management fee (Note 4) 2,287,369 575,647 344,784 495,545 138,400 Distribution fees (Note 5) 1,910,928 411,096 190,043 298,041 70,827 Shareholder services fees (Note 5) 672,756 191,882 143,660 206,477 69,200 Transfer agent fee 316,931 99,286 63,210 145,276 70,180 Administration fee (Note 4) 269,102 76,753 57,464 82,591 27,680 Registration expenses 108,021 20,713 38,453 37,079 7,412 Shareholder reports and postage expenses 94,506 32,871 32,588 30,044 9,383 Custodian and accounting fees 76,182 36,677 16,047 37,170 12,579 Legal and audit fees 29,550 23,033 12,590 27,714 3,894 Directors' fees and expenses 7,726 2,648 2,529 3,683 1,011 Organizational expenses 20,207 - - - 6,432 Miscellaneous 19,686 1,280 3,348 19,305 2,961 - ------------------------------------------------------------------------------------------------------------------------------------ Total expenses 5,812,964 1,471,886 904,716 1,382,925 419,959 - ------------------------------------------------------------------------------------------------------------------------------------ Deduct Waiver of administration fee (Note 4) - - - - 27,680 Waiver of management fee (Note 4) - - - 217,329 83,567 - ------------------------------------------------------------------------------------------------------------------------------------ NET EXPENSES 5,812,964 1,471,886 904,716 1,165,596 308,712 - ------------------------------------------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME (LOSS) (396,451) 1,183,705 2,945,818 5,381,252 1,563,529 - ------------------------------------------------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS Net realized gain (loss) on investments and futures contracts (Note 2) 24,144,971 8,390,313 149,379 (1,415,843) (113,895) Change in unrealized appreciation (depreciation) 22,559,071 3,327,836 320,865 (937,621) (364,509) - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments and futures contracts 46,704,042 11,718,149 470,244 (2,353,464) (478,404) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase in net assets resulting from operations $46,307,591 $12,901,854 $3,416,062 $ 3,027,788 $1,085,125 - ------------------------------------------------------------------------------------------------------------------------------------
65 MENTOR FUNDS STATEMENTS OF CHANGES IN NET ASSETS
Mentor Perpetual Global Mentor Growth Portfolio Portfolio ---------------------------- -------------------------- Year Period Year Year Ended Ended Ended Ended 9/30/96 9/30/95* 9/30/96 9/30/95 - ------------------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ (3,564,174) $ (1,966,059) $ (246,968) $ (16,767) Net realized gain (loss) on investments and futures contracts 63,686,744 24,885,052 2,247,124 862,461 Change in unrealized appreciation (depreciation) 22,942,450 38,888,234 2,553,849 942,613 - ------------------------------------------------------------------------------------------------------------------------ Increase in net assets from operations 83,065,020 61,807,227 4,554,005 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 (2,238,213) - (338,447) - Class B (27,048,016) - (688,165) - - ------------------------------------------------------------------------------------------------------------------------ Net decrease from distributions (29,286,229) - (1,026,612) - - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions 91,376,945 14,761,239 32,180,438 863,287 - ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets 145,155,736 76,568,466 35,707,831 2,651,594 NET ASSETS Beginning of period 266,694,424 190,125,958 19,521,133 16,869,539 - ------------------------------------------------------------------------------------------------------------------------ End of period $411,850,160 $266,694,424 $55,228,964 $19,521,133 - ------------------------------------------------------------------------------------------------------------------------
* For the period from January 1, 1995 to September 30, 1995. SEE NOTES TO FINANCIAL STATEMENTS. 66
Mentor Capital Growth Portfolio Mentor Strategy Portfolio ---------------------------- ----------------------------- Year Year Year Period Ended Ended Ended Ended 9/30/96 9/30/95 9/30/96 9/30/95* - -------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 7,974 $ (107,886) $ (396,451) $ 32,564 Net realized gain (loss) on investments and futures contracts 16,294,346 5,567,739 24,144,971 13,062,170 Change in unrealized appreciation (depreciation) 3,307,505 8,926,628 22,559,071 30,325,565 - -------------------------------------------------------------------------------------------------------------------------------- Increase in net assets from operations 19,609,825 14,386,481 46,307,591 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 (871,361) (2,027,725) (224,749) - Class B (1,783,019) (4,095,792) (3,506,588) - - -------------------------------------------------------------------------------------------------------------------------------- Net decrease from distributions (2,654,380) (6,123,517) (3,731,337) - - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions (4,083,713 16,680,084 31,148,786 12,447,061 - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets 12,871,732 24,943,048 73,725,040 55,867,360 NET ASSETS Beginning of period 87,229,961 62,286,913 235,141,166 179,273,806 - -------------------------------------------------------------------------------------------------------------------------------- End of period $100,101,693 $87,229,961 $308,866,206 $235,141,166 - --------------------------------------------------------------------------------------------------------------------------------
Mentor Income and Growth Mentor Municipal Income Portfolio Portfolio --------------------------- ----------------------------- Year Year Year Year Ended Ended Ended Ended 9/30/96 9/30/95 9/30/96 9/30/95 - --------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,183,705 $ 1,236,537 $ 2,945,818 $ 3,337,904 Net realized gain (loss) on investments and futures contracts 8,390,313 2,495,422 149,379 (2,056,061) Change in unrealized appreciation (depreciation) 3,327,836 5,833,996 320,865 4,099,300 - --------------------------------------------------------------------------------------------------------------------------- Increase in net assets from operations 12,901,854 9,565,955 3,416,062 5,381,143 - --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A (431,692) (464,855) (1,063,836) (1,233,641) Class B (655,745) (771,682) (1,919,043) (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 (2,018,269) (712,920) - - - --------------------------------------------------------------------------------------------------------------------------- Net decrease from distributions (3,962,927) (2,351,351) (2,982,879) (3,339,975) - --------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions 15,252,843 (1,640,309) (5,637,324) (13,301,743) - --------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets 24,191,770 5,574,295 (5,204,141) (11,260,575) NET ASSETS Beginning of period 66,565,811 60,991,516 59,953,179 71,213,754 - --------------------------------------------------------------------------------------------------------------------------- End of period $90,757,581 $66,565,811 $ 54,749,038 $ 59,953,179 - ---------------------------------------------------------------------------------------------------------------------------
67 MENTOR FUNDS STATEMENTS OF CHANGES IN NET ASSETS
Mentor Quality Income Mentor Short-Duration Portfolio Income Portfolio ---------------------------- --------------------------- Year Year Year Period Ended Ended Ended Ended 9/30/96 9/30/95 9/30/96 9/30/95* - -------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income loss $ 5,381,252 $ 5,884,441 $ 1,563,529 $ 820,190 Net realized gain (loss) on investments and futures contracts (1,415,843) (1,948,938) (113,895) 258,876 Change in unrealized appreciation (depreciation) (937,621) 5,945,462 (364,509) 423,995 - -------------------------------------------------------------------------------------------------------- Increase in net assets from operations 3,027,788 9,880,965 1,085,125 1,503,061 - -------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A (1,580,519) (1,780,925) (243,822) (7,777) Class B (3,800,733) (4,084,639) (1,354,465) (812,803) Distributions in excess of net investment income Class A (6,680) (130,142) - (2,635) Class B (16,065) (298,487) - (39,850) Net realized gain on investments Class A - - - - Class B - - - - - -------------------------------------------------------------------------------------------------------- Net decrease from distributions (5,403,997) (6,294,193) (1,598,287) (863,065) - -------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions (4,919,453) (24,989,530) 11,607,207 3,088,707 - -------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets (7,295,662) (21,402,758) 11,094,045 3,728,703 NET ASSETS Beginning of period 86,626,891 108,029,649 20,872,545 17,143,842 - -------------------------------------------------------------------------------------------------------- End of period $ 79,331,229 $86,626,891 $31,966,590 $20,872,545 - --------------------------------------------------------------------------------------------------------
* For the period from January 1, 1995 to September 30, 1995. SEE NOTES TO FINANCIAL STATEMENTS. 68 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES
Mentor Growth Portfolio Mentor Perpetual Global Portfolio -------------------- ---------------------------------------------- Year Period Year Year Period Ended Ended Ended Ended Ended 9/30/96 9/30/95* 9/30/96 9/30/95 9/30/94(b) - ---------------------------------------------------------------------------------------------------------------------------------- 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) (0.10) (0.01) (0.04) 0.05 (0.01) Net realized and unrealized gain (loss) on investments 4.23 2.72 2.82 1.60 0.06 - ---------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 4.13 2.71 2.78 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 $ 18.47 $ 16.08 $ 17.86 $ 15.88 $14.23 - ---------------------------------------------------------------------------------------------------------------------------------- Total Return 29.15% 20.27% 18.40% 11.60% 0.35% - ---------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $40,272 $ 20,368 $13,098 $ 6,854 $8,882 Ratio of expenses to average net assets 1.28% 1.36%(a) 1.95% 2.06% 2.09%(a) Ratio of expenses to average net asset excluding waiver 1.28% 1.36%(a) 1.95% 2.11% 3.18%(a) Ratio of net investment income (loss) to average net assets (0.39%) (0.65%)(a) (0.21%) 0.26% (0.10%)(a) Portfolio turnover rate 105% 70% 130% 155% 2% Average commission rate on portfolio transactions $0.0602 $0.0320 - ----------------------------------------------------------------------------------------------------------------------------------
* For the period from June 5, 1995 (initial offering of Class A shares) to September 30, 1995. (a) Annualized. (b) Reflects operations for the period from March 29, 1994 (commencement of operations), to September 30, 1994. SEE NOTES TO FINANCIAL STATEMENTS. 69 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES
Mentor Capital Growth Portfolio ------------------------------------------------------------------- Year Year Year Year Period Ended Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c) - ----------------------------------------------------------------------------------------------------------------------------------- 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) 0.11 0.02 0.09 0.14 0.08 Net realized and unrealized gain (loss) on investments 3.73 2.91 (0.30) 1.02 0.03 - ----------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 3.84 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 $ 19.36 $ 16.02 $ 14.88 $ 15.26 $ 14.21 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return 24.63% 20.18% (1.37%) 8.21% 0.78% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $31,889 $29,582 $21,181 $31,360 $20,864 Ratio of expenses to average net assets 1.43% 1.87% 1.70% 1.49% 1.14%(a) Ratio of expenses to average net asset excluding waiver 1.43% 1.87% 1.70% 1.59% 1.43%(a) Ratio of net investment income (loss) to average net assets 0.51% 0.27% 0.53% 0.96% 1.54%(a) Portfolio turnover rate 98% 157% 149% 192% 61% Average commission rate on portfolio transactions $0.0688 - -----------------------------------------------------------------------------------------------------------------------------------
* For the period from June 5, 1995 (initial offering of Class A shares) to September 30, 1995 ** Reflects net investment income (loss) which was under $0.01 per share. (a) Annualized. (c) Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992 (d) Reflects operations for the period from May 24, 1993 (commencement of operations), to September 30, 1993. SEE NOTES TO FINANCIAL STATEMENTS. 70
Mentor Strategy Portfolio ------------------------------- Year Period Ended Ended 9/30/96 9/30/95* - ------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 15.24 $ 13.45 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.08 -** Net realized and unrealized gain (loss) on investments 2.86 1.79 - ------------------------------------------------------------------------------------------------- Total from investment operations 2.94 1.79 LESS DISTRIBUTIONS Dividends from net investment income - - Distributions in excess of net investment income - - Distributions from capital gains (0.22 ) - Distributions in excess of capital gains - - - ------------------------------------------------------------------------------------------------- Total distributions (0.22 ) - - ------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 17.96 $ 15.24 - ------------------------------------------------------------------------------------------------- Total Return 19.36% 13.31% - ------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $20,372 $ 10,503 Ratio of expenses to average net assets 1.42% 1.65%(a) Ratio of expenses to average net asset excluding waiver 1.42 1.65%(a) Ratio of net investment income (loss) to average net assets 0.62 (0.06%)(a) Portfolio turnover rate 125% 122% Average commission rate on portfolio transactions $0.0669 - -------------------------------------------------------------------------------------------------
Mentor Income and Growth Portfolio --------------------------------------------------- Year Year Year Period Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93(d) - ------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 17.13 $ 15.27 $ 14.88 $14.14 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.37 0.40 0.31 0.09 Net realized and unrealized gain (loss) on investments 2.75 2.14 0.64 0.73 - ------------------------------------------------------------------------------------------------------------------- Total from investment operations 3.12 2.54 0.95 0.82 LESS DISTRIBUTIONS Dividends from net investment income (0.35) (0.40) (0.30) (0.08) 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 (1.09) (0.68) (0.56) (0.08) - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 19.16 $ 17.13 $ 15.27 $14.88 - ------------------------------------------------------------------------------------------------------------------- Total Return 19.13% 17.24% 6.54% 5.54% - ------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $24,210 $19,888 $17,773 $9,849 Ratio of expenses to average net assets 1.36% 1.69% 1.75% 1.56%(a) Ratio of expenses to average net asset excluding waiver 1.36% 1.69% 1.75% 1.94%(a) Ratio of net investment income (loss) to average net assets 2.08% 2.53% 2.20% 2.35%(a) Portfolio turnover rate 72% 62% 78% 13% Average commission rate on portfolio transactions $0.0492 - -------------------------------------------------------------------------------------------------------------------
71 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES
Mentor Municipal Income Portfolio --------------------------------------------------------------------- Year Year Year Year Period Ended Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c) - ------------------------------------------------------------------------------------------------------------------------- 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 (loss) 0.82 0.81 0.82 0.92 0.32 Net realized and unrealized gain (loss) on investments 0.12 0.51 (1.54) 1.32 0.47 - ------------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.94 1.32 (0.72) 2.24 0.79 LESS DISTRIBUTIONS Dividends from net investment income (0.82) (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 (0.82) (0.82) (0.91) (0.95) (0.32) - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76 - ------------------------------------------------------------------------------------------------------------------------- Total Return 6.46% 9.46% (4.83%) 16.00% 5.34% - ------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $17,558 $20,460 $25,056 $29,245 $ 18,801 Ratio of expenses to average net assets 1.24% 1.43% 1.24% 0.71% 0.00%(a) Ratio of expenses to average net asset excluding waiver 1.24% 1.43% 1.33% 1.39% 1.26%(a) Ratio of net investment income (loss) to average net assets 5.47% 5.56% 5.43% 5.92% 6.21%(a) Portfolio turnover rate 46% 43% 87% 88% 0% Average commission rate on portfolio transactions - -------------------------------------------------------------------------------------------------------------------------
* For the period from June 16, 1995 (initial offering of Class A shares) to September 30, 1995. (a) Annualized. (c) Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. SEE NOTES TO FINANCIAL STATEMENTS. 72
Mentor Quality Income Portfolio -------------------------------------------------------------- Year Year Year Year Period Ended Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c) - --------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 13.29 $ 12.75 $ 14.04 $ 14.39 $ 14.30 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.89 0.84 0.84 1.06 0.44 Net realized and unrealized gain (loss) on investments (0.37) 0.61 (1.30) (0.31 ) 0.09 - --------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.52 1.45 (0.46) 0.75 0.53 LESS DISTRIBUTIONS Dividends from net investment income (0.89) (0.85) (0.83) (1.06) (0.44) Distributions in excess of net investment income (0.01) (0.06) - (0.04) - Distributions from capital gains - - - - - Distributions in excess of capital gains - - - - - - --------------------------------------------------------------------------------------------------------------------- Total distributions (0.90 ) (0.91) (0.83) (1.10) (0.44) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.91 $ 13.29 $ 12.75 $ 14.04 $ 14.39 - --------------------------------------------------------------------------------------------------------------------- Total Return 4.09% 11.82% (3.39)% 5.41% 3.37% - --------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $21,092 $24,472 $ 30,142 $47,780 $ 36,740 Ratio of expenses to average net assets 1.05% 1.32% 1.38% 1.04% 0.36%(a) Ratio of expenses to average net asset excluding waiver 1.31% 1.36% 1.39% 1.22% 1.21%(a) Ratio of net investment income (loss) to average net assets 6.84% 6.73% 6.33% 7.31% 8.00%(a) Portfolio turnover rate 254% 368% 455% 102% 9% Average commission rate on portfolio transactions - ---------------------------------------------------------------------------------------------------------------------
Mentor Short-Duration Income Portfolio ------------------------ Year Period Ended Ended 9/30/96 9/30/95* - ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $12.68 $ 12.74 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.82 0.22 Net realized and unrealized gain (loss) on investments (0.23) (0.03) - ------------------------------------------------------------------------------ Total from investment operations 0.59 0.19 LESS DISTRIBUTIONS Dividends from net investment income (0.77) (0.22) Distributions in excess of net investment income - (0.03) Distributions from capital gains - - Distributions in excess of capital gains - - - ------------------------------------------------------------------------------ Total distributions (0.77) (0.25) - ------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $12.50 $ 12.68 - ------------------------------------------------------------------------------ Total Return 4.80% 1.51% - ------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------ Net assets, end of period (in thousands) $7,450 $ 1,002 Ratio of expenses to average net assets 0.86% 0.71%(a) Ratio of expenses to average net asset excluding waiver 1.26% 1.00%(a) Ratio of net investment income (loss) to average net assets 5.90% 4.10%(a) Portfolio turnover rate 411% 126% Average commission rate on portfolio transactions - ------------------------------------------------------------------------------ 73 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Growth Portfolio --------------------------------------------------------------- Year Period Year Year Year Ended Ended Ended Ended Ended 9/30/96 9/30/95* 12/31/94 12/31/93 12/31/92 - ---------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.17) (0.13) (0.15) (0.08) (0.06) Net realized and unrealized gain (loss) on investments 4.15 4.03 (0.47) 2.07 1.94 - ---------------------------------------------------------------------------------------------------------- Total from investment operations 3.98 3.90 (0.62) 1.99 1.88 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) Distributions in excess of capital gains - - (0.01) - - - ---------------------------------------------------------------------------------------------------------- Total distributions (1.74) - (1.01) (1.02) (1.23) - ---------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 18.29 $ 16.05 $ 12.15 $ 13.78 $ 12.81 - ---------------------------------------------------------------------------------------------------------- Total Return 28.18% 32.10% (4.48%) 15.60% 15.46% - ---------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ---------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $371,578 $246,326 $190,126 $186,978 $136,053 Ratio of expenses to average net assets 2.03% 2.08%(a) 2.01% 2.02% 2.05% Ratio of expenses to average net asset excluding waiver 2.03% 2.08%(a) 2.01% 2.02% 2.05% Ratio of net investment income (loss) to average net assets (1.13%) (1.20%)(a) (1.20%) (1.12%) (0.76%) Portfolio turnover rate 105% 70% 77% 64% 50% Average commission rate on portfolio transactions $ 0.0602 - ----------------------------------------------------------------------------------------------------------
* For the period from January 1, 1995 to September 30, 1995. (a) Annualized. (b) Reflects operations for the period from March 29, 1994 (commencement of operations), to September 30, 1994. (c) Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. SEE NOTES TO FINANCIAL STATEMENTS. 74
Mentor Perpetual Global Portfolio ------------------------------------ Year Year Period Ended Ended Ended 9/30/96 9/30/95 9/30/94(b) - ------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 15.67 $ 14.15 $ 14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.05 ) (0.05) (0.04) Net realized and unrealized gain (loss) on investments 2.64 1.57 0.01 - ------------------------------------------------------------------------------------ Total from investment operations 2.59 1.52 (0.03) LESS DISTRIBUTIONS 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 $ 17.46 $ 15.67 $ 14.15 - ------------------------------------------------------------------------------------ Total Return 17.39% 10.74% (0.21%) - ------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $42,131 $12,667 $ 7,987 Ratio of expenses to average net assets 2.70% 2.72% 2.79%(a) Ratio of expenses to average net asset excluding waiver 2.70% 2.79% 3.93%(a) Ratio of net investment income (loss) to average net assets (0.91%) (0.40%) (0.82%)(a) Portfolio turnover rate 130% 155% 2% Average commission rate on portfolio transactions $0.0320 - ------------------------------------------------------------------------------------
Mentor Capital Growth Portfolio ------------------------------------------------------------------ Year Year Year Year Period Ended Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c) - ------------------------------------------------------------------------------------------------------------ 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) (0.04) 0.25 (0.04) 0.05 0.46 Net realized and unrealized gain (loss) on investments 3.67 2.53 (0.26) 1.02 0.04 - ------------------------------------------------------------------------------------------------------------ Total from investment operations 3.63 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 $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22 - ------------------------------------------------------------------------------------------------------------ Total Return 23.64% 19.26% (2.00%) 7.52% 0.61% - ------------------------------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $68,213 $57,648 $41,106 $57,030 $ 25,468 Ratio of expenses to average net assets 2.18% 2.56% 2.46% 2.24% 1.86%(a) Ratio of expenses to average net asset excluding waiver 2.18% 2.56% 2.46% 2.34% 2.16%(a) Ratio of net investment income (loss) to average net assets (0.24%) (0.41%) (0.22%) 0.21% 0.83%(a) Portfolio turnover rate 98% 157% 149% 192% 61% Average commission rate on portfolio transactions $0.0688 - ------------------------------------------------------------------------------------------------------------
75 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Strategy Portfolio --------------------------------------------------------------- Year Period Year Period Ended Ended Ended Ended 9/30/96 9/30/95* 12/31/94 12/31/93(d) - ------------------------------------------------------------------------------------------------------------- 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) (0.03) - (0.06) - Net realized and unrealized gain (loss) on investments 2.83 2.97 (0.40) 0.20 - ------------------------------------------------------------------------------------------------------------- Total from investment operations 2.80 2.97 (0.46) 0.20 LESS DISTRIBUTIONS Dividends from net investment income - - - - Distributions in excess of net investment income - - - - Distributions from capital gains (0.22) - - - Distributions in excess of capital gains - - - - - ------------------------------------------------------------------------------------------------------------- Total distributions (0.22) - - - - ------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 17.79 $ 15.21 $ 12.24 $ 12.70 - ------------------------------------------------------------------------------------------------------------- Total Return 18.48% 24.26% (3.61%) 1.60% - ------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 288,494 $224,643 $179,274 $ 122,177 Ratio of expenses to average net assets 2.19% 2.31%(a) 2.19% 2.06%(a) Ratio of expenses to average net asset excluding waiver 2.19% 2.31%(a) 2.19% 2.06%(a) Ratio of net investment income (loss) to average net assets (0.19%) 0.02%(a) (0.54%) 0.08%(a) Portfolio turnover rate 125% 122% 143% 0% Average commission rate on portfolio transactions $ 0.0669 - -------------------------------------------------------------------------------------------------------------
* For the period from January 1, 1995 to September 30, 1995. (a) Annualized. (c) Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. (d) Reflects operations for the period of October 29, 1993 (commencement of operations), to December 31, 1993. (e) Reflects operations for the period from May 24, 1993 (commencement of operations), to September 30, 1993. SEE NOTES TO FINANCIAL STATEMENTS. 76
Mentor Income and Growth Portfolio -------------------------------------------------- Year Year Year Period Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93(e) - ------------------------------------------------------------------------------------------------------ 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) 0.23 0.28 0.21 0.05 Net realized and unrealized gain (loss) on investments 2.76 2.14 0.61 0.77 - ------------------------------------------------------------------------------------------------------ Total from investment operations 2.99 2.42 0.82 0.82 LESS DISTRIBUTIONS Dividends from net investment income (0.21) (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 (0.95) (0.56) (0.45) (0.05) - ------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 19.18 $ 17.14 $ 15.28 $ 14.91 - ------------------------------------------------------------------------------------------------------ Total Return 18.26% 16.32% 5.66% 5.54% - ------------------------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $66,548 $46,678 $43,219 $18,127 Ratio of expenses to average net assets 2.13% 2.43% 2.44% 2.31%(a) Ratio of expenses to average net asset excluding waiver 2.13% 2.43% 2.44% 2.69%(a) Ratio of net investment income (loss) to average net assets 1.32% 1.78% 1.51% 1.60%(a) Portfolio turnover rate 72% 62% 78% 13% Average commission rate on portfolio transactions $0.0492 - ------------------------------------------------------------------------------------------------------
Mentor Municipal Income Portfolio ---------------------------------------------------------------- Year Year Year Year Period Ended Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c) - --------------------------------------------------------------------------------------------------------------- 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) 0.75 0.74 0.74 0.82 0.29 Net realized and unrealized gain (loss) on investments 0.11 0.52 (1.54) 1.32 0.49 - --------------------------------------------------------------------------------------------------------------- Total from investment operations 0.86 1.26 (0.80) 2.14 0.78 LESS DISTRIBUTIONS Dividends from net investment income (0.76) (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 (0.76) (0.74) (0.83) (0.86) (0.29) - --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78 - --------------------------------------------------------------------------------------------------------------- Total Return 5.87% 9.01% (5.34%) 15.27% 5.28% - --------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $37,191 $39,493 $46,157 $50,976 $ 24,265 Ratio of expenses to average net assets 1.74% 1.92% 1.74% 1.21% 0.50%(a) Ratio of expenses to average net asset excluding waiver 1.74% 1.92% 1.86% 1.89% 1.76%(a) Ratio of net investment income (loss) to average net assets 4.95% 5.07% 4.93% 5.42% 5.80%(a) Portfolio turnover rate 46% 43% 87% 88% 0% Average commission rate on portfolio transactions - ---------------------------------------------------------------------------------------------------------------
77 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Quality Income Portfolio -------------------------------------------------------------------------- Year Year Year Year Period Ended Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c) - ------------------------------------------------------------------------------------------------------------------------ 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 (loss) 0.84 0.79 0.82 0.99 0.41 Net realized and unrealized gain (loss) on investments (0.38) 0.61 (1.37) (0.31) 0.10 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 0.46 1.40 (0.55) 0.68 0.51 LESS DISTRIBUTIONS Dividends from net investment income (0.84) (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 (0.84) (0.85) (0.75) (1.02) (0.41) - ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 12.93 $ 13.31 $ 12.76 $ 14.06 $ 14.40 - ------------------------------------------------------------------------------------------------------------------------ Total Return 3.57% 11.33% (3.97%) 4.86% 3.24% - ------------------------------------------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $58,239 $62,155 $77,888 $127,346 $ 65,661 Ratio of expenses to average net assets 1.55% 1.74% 1.88% 1.54% 0.83%(a) Ratio of expenses to average net asset excluding waiver 1.81% 1.79% 1.90% 1.72% 1.67%(a) Ratio of net investment income (loss) to average net assets 6.36% 6.24% 6.21% 6.81% 7.53%(a) Portfolio turnover rate 254% 368% 455% 102% 9% Average commission rate on portfolio transactions - ------------------------------------------------------------------------------------------------------------------------
(a) Annualized. (c) Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. SEE NOTES TO FINANCIAL STATEMENTS. 78 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Short-Duration Income Portfolio ---------------------------------------------- Year Period Period Ended Ended Ended 9/30/96 9/30/95* 12/31/94(f) - -------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 12.67 $ 12.18 $ 12.50 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.72 0.59 0.41 Net realized and unrealized gain (loss) on investments (0.16) 0.52 (0.29) - -------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.56 1.11 0.12 LESS DISTRIBUTIONS Dividends from net investment income (0.73) (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 (0.73) (0.62) (0.44) - -------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.50 $ 12.67 $ 12.18 - -------------------------------------------------------------------------------------------------------------------------- Total Return 4.53% 9.22% 0.95% - -------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $24,517 $19,871 $17,144 Ratio of expenses to average net assets 1.16% 1.20%(a) 1.29%(a) Ratio of expenses to average net asset excluding waiver 1.56% 1.70%(a) 1.29%(a) Ratio of net investment income (loss) to average net assets 5.60% 5.04%(a) 4.90%(a) Portfolio turnover rate 411% 126% 166% Average commission rate on portfolio transactions - --------------------------------------------------------------------------------------------------------------------------
* For the period from January 1, 1995 to September 30, 1995. (f) Reflects operations for the period from April 29, 1994 (commencement of operations), to December 31, 1994. SEE NOTES TO FINANCIAL STATEMENTS. 79 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 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 Funds. Mentor Funds consists of nine separate Portfolios (hereinafter each individually referred to as a "Portfolio" or collectively as the "Portfolios") at September 30, 1996, as follows: Mentor Growth Portfolio ("Growth Portfolio") Mentor Perpetual Global Portfolio ("Global Portfolio") Mentor Capital Growth Portfolio ("Capital Growth Portfolio") Mentor Strategy Portfolio ("Strategy Portfolio") Mentor Income and Growth Portfolio ("Income and Growth Portfolio") Mentor Municipal Income Portfolio ("Municipal Income Portfolio") Mentor Quality Income Portfolio ("Quality Income Portfolio") Mentor Short-Duration Income Portfolio ("Short-Duration Income Portfolio") Mentor Balanced Portfolio ("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 the 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. 80 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 require management to make estimates and assumptions that affect amounts reported therein. Although actual results could differ from these estimates, any such differences are expected to be immaterial to the net assets of the Portfolio. (a) Valuation of Securities 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, and any other factors or market data it deems relevant in determining valuations for normal institutional size trading units of debt securities. The pricing 81 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 investments, income and expenses at the rate of exchange prevailing on the respective dates of such transactions. Net unrealized foreign exchange gains/losses are a component of unrealized appreciation/depreciation of investments. (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 the Growth Portfolio, Strategy Portfolio and Municipal Income Portfolio) may, under certain circumstances, borrow money directly or through 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 year ended September 30, 1996, was approximately $1,228,251 or $0.55 per share based on average shares outstanding during the period at a weighted average interest rate of 5.44%. 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 22.21% of total assets. 82 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) (d) Dollar Roll Transactions Each of the Portfolios (except for the Growth, Strategy and Municipal Income Portfolios) may engage in dollar roll transactions with respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a dollar roll transaction, a Portfolio sells a mortgage-related security to a financial institution, such as a bank or broker/dealer, and simultaneously agrees to repurchase a substantially similar (i.e., same type, coupon, and maturity) security from the institution at a later date at an agreed upon price. The mortgage-related securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. (e) Security Transactions and Investment Income Security transactions for the Portfolios are accounted for on trade date. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Interest income (except for Municipal Income Portfolio) includes interest and discount earned (net of premium) on short-term obligations, and interest earned on all other debt securities including original issue discount as required by the Internal Revenue Code. Dividends to shareholders and capital gain distributions, if any, are recorded on the ex-dividend date. Interest income for the Municipal Income Portfolio includes interest earned net of premium, and original issue discount as required by the Internal Revenue Code. (f) Federal Income Taxes No provision for federal income taxes has been made since it is each Portfolio's policy to comply with the provisions applicable to regulated investment companies under the Internal Revenue Code and to distribute to its shareholders within the allowable time limit substantially all taxable income and realized capital gains. Dividends paid by the Municipal Income Portfolio representing net interest received on tax-exempt municipal securities are not includable by shareholders as gross income for federal income tax purposes because the Portfolio intends to meet certain requirements of the Internal Revenue Code applicable to regulated investment companies which will enable the Portfolio to pay tax-exempt interest dividends. The portion of such interest, if any, earned on private purpose municipal bonds issued after August 7, 1986, may by considered a tax preference item to shareholders. At September 30, 1996, Quality Income Portfolio for federal tax purposes, had capital loss carryforwards of approximately $13,500,000. Pursuant to the Code, such capital loss carryforwards expire as follows: $820,000 in 2001, $3,680,000 in 2002, $7,320,000 in 2003 and $1,680,000 in 2004. 83 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) At September 30, 1996, Municipal Income Portfolio for federal tax purposes, had capital loss carryforwards of approximately $2,510,000. Pursuant to the Internal revenue Code, such capital loss carryforwards expire as follows: $895,000 in 2003 and $1,615,000 in 2004. Capital loss carryforwards 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 reduce the amount of the distributions to shareholders which would otherwise relieve the Portfolios of any liability for federal tax. (g) 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. (h) 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 year ended September 30, 1996, Municipal Income Portfolio, Quality Income Portfolio, and Short-Duration Income Portfolio had realized losses of $262,489, $932,762, and $24,106 respectively on closed futures contracts. 84 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. (i) 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 year ended September 30, 1996, Municipal Income Portfolio, Quality Income Portfolio and Short-Duration Income Portfolio had realized losses of $49,245, $82,978, and $25,016 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. (j) Residual Interests A derivative security is any investment that derives its value from an underlying security, asset, or market index. Quality Income Portfolio and Short-Duration Income Portfolio invest in mortgage security residual interests ("residuals") which are considered derivative securities. The Portfolios' investment in residuals have been primarily in securities issued by proprietary mortgage trusts. While these entities have been highly leveraged, often 85 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. (k) 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. (l) 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 the Mentor. Capital gains realized by each Portfolio, if any, are paid annually. NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS Commonwealth 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 respective Portfolio: Capital Growth Portfolio, 0.80%; Quality Income Portfolio, 0.60%; Municipal Income Portfolio, 0.60%; and Income and Growth Portfolio, 0.75%. 86 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Investment Adviser pays Van Kampen, the sub-adviser to the Municipal Income Portfolio, an annual fee of 0.30% of average daily net assets. As of September 1, 1996, the sub-adviser reduced the rate at which fees are paid to it by the Investment Adviser to an annual rate of 0.25% of the first $60 million of average daily net assets and 0.20% of the Portfolio's average net assets over $60 million. Wellington, 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 average daily net assets as follows: 0.325% on the first $50 million of average net assets, 0.275% on the next $150 million, 0.225% on the next $300 million, and 0.200% on average net 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 Agreement with Charter Asset Management, Inc. ("Charter"), a wholly-owned subsidiary of Mentor Investment 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, LLC ("Mentor Perpetual"). Mentor Perpetual is owned equally by Mentor and Perpetual plc., a diversified financial services holding company. Under this agreement, Mentor Perpetual's management fee is accrued daily and paid monthly at an annual rate of 1.10% applied to the average daily net assets of the Portfolio. 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 and paid monthly at an annual rate of 0.50% applied to the average daily net assets of the Portfolio. Effective November 1, 1996, Commonwealth Advisors, Inc., Charter Asset Management, Inc. and Wellesley Advisors, Inc. were reorganized into Commonwealth Investment Counsel, Inc., 87 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) which then became Mentor Investment Advisors, LLC ("Mentor Advisors"). Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group, LLC (formerly, Mentor Investment Group, Inc.). Mentor Investment Group, LLC is a subsidiary of Wheat First Butcher Singer, Inc. Also effective November 1, 1996, EVEREN Capital Corporation, a previously unrelated broker dealer, acquired a 20% ownership interest in Mentor Investment Group, LLC from Wheat First Butcher Singer, Inc. As part of the acquisition agreement, EVEREN may acquire additional ownership based principally on the amount of Mentor Investment Group, LLC's revenues derived from clients of EVEREN Securities, Inc. and assets attributable to its affiliates. For the year ended September 30, 1996 the Investment Adviser and sub-advisers, Charter, Wellesley and Commonwealth earned and voluntarily waived the following advisory fees:
Adviser Fees Adviser Voluntarily Sub Adviser Portfolio Fees Waived Fees - -------------------------------------------------------------------- Growth $2,313,470 - - Global 368,592 - - Capital Growth 728,536 - - Strategy 2,287,369 - - Income and Growth 575,647 - $ 236,071 Municipal Income 344,784 - 172,392 Quality Income 495,545 $ 217,329 - Short-Duration Income 138,400 83,567 - - --------------------------------------------------------------------
Administrative personnel and services are provided by Mentor, under an Administration Agreement, at an annual rate of 0.10% of the average daily net assets of each Portfolio. For the year ended September 30, 1996, Mentor earned the following administrative fees:
Administrative Administrative Fee Fee Voluntarily Portfolio Earned Waived - ----------------------------------------------------------- Growth $330,496 - Global 33,508 - Capital Growth 91,067 - Strategy 269,102 - Income and Growth 76,753 - Municipal Income 57,464 - Quality Income 82,591 - Short-Duration Income 27,680 $ 27,680 - -----------------------------------------------------------
88 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 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 year ended September 30, 1996, no reimbursement from Charter, Wellesley or Commonwealth was required as a result of such state expense limitations. In addition, the Portfolios provide direct reimbursement to Mentor for certain accounting, legal, blue sky and operations related costs not covered under the Investment Management Agreement. For the year ended September 30, 1996, the Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio, Municipal Income Portfolio, Quality Income Portfolio and Short-Duration Income Portfolio paid $23,289, $2,752, $5,901, $17,744, $5,210, $3,465, $5,005, and $1,842, respectively to Mentor for these direct reimbursements. 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") a wholly-owned subsidiary of Mentor, Mentor Distributors was appointed distributor of the Portfolios. To compensate Mentor Distributors for the services it provides and for the expenses it incurs under the Distribution Agreement, the Portfolios pay a distribution fee, which is accrued daily and paid monthly at the annual rate of 0.75% of the Portfolios' average daily net assets for the Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio 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. Effective November 1, 1996, Mentor Distributors became Mentor Distributors, LLC. Mentor Distributors may select financial institutions, such as investment dealers and banks to provide sales support services as agents for their clients or customers who beneficially own Class B shares of the Portfolios. Financial institutions will receive fees from Mentor Distributors based upon 89 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) Class B shares owned by their clients or customers. 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 0.25% of the average daily net assets of the Class A or Class B shares of the particular Portfolio or Portfolios beneficially owned by the financial institution's customers for whom it is holder of record or with whom it has a servicing relationship. Presently, the Portfolios' class specific expenses are limited to expenses incurred by a class of shares pursuant to its respective Distribution Plan. For the year ended September 30, 1996, distribution fees and shareholder servicing fees were as follows:
Shareholder Distribution Servicing Fees Portfolio Fees Class A Class B - --------------------------------------------------------------- Growth $2,260,899 $80,690 $745,549 Global 183,636 19,855 63,916 Capital Growth 458,606 72,458 155,210 Strategy 1,910,928 44,177 628,579 Income and Growth 411,096 51,223 140,659 Municipal Income 190,043 46,017 97,643 Quality Income 298,041 55,094 151,383 Short-Duration Income 70,827 15,971 53,229 - ---------------------------------------------------------------
NOTE 6: INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term investments), for the year ended September 30, 1996, were as follows:
Portfolio Purchases Sales - ------------------------------------------------------- Growth $344,812,435 $304,600,182 Global 69,752,090 40,762,570 Capital Growth 85,067,355 97,757,062 Strategy 291,829,295 286,405,905 Income and Growth 60,558,554 52,162,734 Municipal Income 25,685,173 30,665,695 Quality Income 206,317,542 199,038,469 Short-Duration Income 122,150,195 110,731,556 - -------------------------------------------------------
90 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS The cost of investments for federal income tax purposes amounted to $316,695,993, for Growth Portfolio, $51,479,468 for Global Portfolio, $86,381,865 for Capital Growth Portfolio, $247,450,844 for Strategy Portfolio, $80,342,488 for Income and Growth Portfolio, $51,266,294 for Municipal Income Portfolio, $95,245,051 for Quality Income Portfolio and $35,036,969 for Short-Duration Income Portfolio at September 30, 1996. Gross unrealized appreciation and depreciation of investments at September 30, 1996, based on such costs were as follows:
Net Gross Gross Unrealized Unrealized Unrealized Appreciation Portfolio Appreciation Depreciation (Depreciation) - -------------------------------------------------------------------------- Growth $105,763,324 $(6,764,897) $ 98,998,427 Global 5,045,620 (1,569,353) 3,476,267 Capital Growth 13,999,832 (154,560) 13,845,272 Strategy 60,930,911 (627,456) 60,303,455 Income and Growth 11,910,257 (2,532,372) 9,377,885 Municipal Income 3,105,640 (164,540) 2,941,100 Quality Income 507,959 (947,184) (439,225) Short-Duration Income 66,358 (168,931) (102,573) - --------------------------------------------------------------------------
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 September 30, 1996 Global Portfolio had outstanding forward contracts as set forth below.
Net Unrealized Contracts to In Exchange Appreciation/ Settlement Date Deliver/Receive For (Depreciation) - ------------------------------------------------------------------------------------------------ Purchases 10/1/96 German Mark 325,658 $212,787 $ 213,553 $ (766) 10/1/96 Italian Lira 347,398,971 226,399 228,080 (1,681) Sales 10/1/96 Japanese Yen 18,530,650 167,229 166,411 818 - ------------------------------------------------------------------------------------------------ Net Unrealized Depreciation on Forward Contracts $ (1,629) - ------------------------------------------------------------------------------------------------
91 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:
Year Mentor Growth Portfolio Period Ended 9/30/96 Ended 9/30/95 Shares Dollars Shares Dollars ----------------------------------------------------------- CLASS A*: Shares sold 1,900,420 $ 31,071,851 1,270,059 $ 19,846,126 Shares issued upon reinvestment of distributions 159,334 2,229,091 - - Shares redeemed (1,145,852) (19,021,763) (3,410) (53,044) ----------------------------------------------------------- Change in net assets from capital share transactions 913,902 $ 14,279,179 1,266,649 $ 19,793,082 ----------------------------------------------------------- CLASS B**: Shares sold 4,577,893 $ 75,279,336 2,282,441 $ 32,813,557 Shares issued upon reinvestment of distributions 1,885,731 26,287,441 - - Shares redeemed (1,493,872) (24,469,011) (2,585,359) (37,845,400) ----------------------------------------------------------- Change in net assets from capital share transactions 4,969,752 $ 77,097,766 (302,918) $ (5,031,843) -----------------------------------------------------------
Mentor Perpetual Global Portfolio Year Year Ended 9/30/96 Ended 9/30/95 Shares Dollars Shares Dollars ------------------------------------------------------ CLASS A: Shares sold 412,686 $ 7,129,198 142,470 $ 2,073,646 Shares issued upon reinvestment of distributions 21,809 331,049 -- -- Shares redeemed (132,328) (2,244,328) (335,189) (4,810,857) ------------------------------------------------------ Change in net assets from capital share transactions 302,167 $ 5,215,919 (192,719) $(2,737,211) ------------------------------------------------------ CLASS B: Shares sold 1,723,938 $29,034,247 417,981 $ 6,078,915 Shares issued upon reinvestment of distributions 45,012 672,932 -- -- Shares redeemed (164,743) (2,742,660) (174,218) (2,478,417) ------------------------------------------------------ Change in net assets from capital share transactions 1,604,207 $26,964,519 243,763 $ 3,600,498 ------------------------------------------------------
92 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9: CAPITAL SHARE TRANSACTIONS (CONTINUED)
Mentor Capital Growth Portfolio Year Year Ended 9/30/96 Ended 9/30/95 Shares Dollars Shares Dollars -------------------------------------------------------- CLASS A: Shares sold 148,975 $ 2,580,775 100,226 $ 949,902 Shares issued in connection with acquisition of Mentor/Cambridge Growth Portfolio~ - - 671,791 10,681,477 Shares issued upon reinvestment of distributions 53,208 849,718 125,218 1,954,221 Shares redeemed (401,455) (6,845,340) (473,840) (7,405,251) -------------------------------------------------------- Change in net assets from capital share transactions (199,272) $ (3,414,847) 423,395 $ 6,180,349 -------------------------------------------------------- CLASS B: Shares sold 635,818 $ 10,950,459 329,014 $ 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 111,273 1,748,109 256,857 3,961,731 Shares redeemed (793,484) (13,367,434) (968,058) (15,000,398) -------------------------------------------------------- Change in net assets from capital share transactions (46,393) $ (668,866) 873,026 $ 10,499,735 --------------------------------------------------------
Year Mentor Strategy PortfolioPeriod Ended 9/30/96 Ended 9/30/95 Shares Dollars Shares Dollars ----------------------------------------------------------- CLASS A*: Shares sold 625,652 $ 10,425,353 690,271 $ 10,122,356 Shares issued upon reinvestment of distributions 12,905 221,980 - - Shares redeemed (192,977) (3,147,176) (1,062) (15,555) ----------------------------------------------------------- Change in net assets from capital share transactions 445,580 $ 7,500,157 689,209 $ 10,106,801 ----------------------------------------------------------- CLASS B**: Shares sold 2,946,568 $ 48,230,745 2,247,821 $ 31,437,475 Shares issued upon reinvestment of distributions 201,006 3,417,749 1,708 20,979 Shares redeemed (1,706,367) (27,999,865) (2,121,049) (29,118,194) ----------------------------------------------------------- Change in net assets from capital share transactions 1,441,207 $ 23,648,629 128,480 $ 2,340,260 -----------------------------------------------------------
93 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9: CAPITAL SHARE TRANSACTIONS (CONTINUED)
Mentor Income and Growth Portfolio Year Year Ended 9/30/96 Ended 9/30/95 Shares Dollars Shares Dollars --------------------------------------------------------- CLASS A: Shares sold 193,095 $ 3,508,748 255,128 $ 3,928,730 Shares issued upon reinvestment of distributions 69,612 1,186,199 49,436 741,971 Shares redeemed (160,516) (2,896,387) (307,376) (4,818,528) --------------------------------------------------------- Change in net assets from capital share transactions 102,191 $ 1,798,560 (2,812) $ (147,827) --------------------------------------------------------- CLASS B: Shares sold 1,025,114 $ 18,562,371 602,055 $ 9,529,693 Shares issued upon reinvestment of distributions 150,385 2,545,180 98,685 1,467,195 Shares redeemed (428,846) (7,653,268) (806,196) (12,489,370) --------------------------------------------------------- Change in net assets from capital share transactions 746,653 $ 13,454,283 (105,456) $ (1,492,482) ---------------------------------------------------------
Mentor Municipal Income Portfolio Year Year Ended 9/30/96 Ended 9/30/95 Shares Dollars Shares Dollars ------------------------------------------------------ CLASS A Shares sold 53,174 $ 797,588 71,110 $ 1,021,048 Shares issued upon reinvestment of distributions 36,380 547,438 45,425 658,265 Shares redeemed (291,238) (4,349,702) (483,463) (6,926,047) ------------------------------------------------------ Change in net assets from capital share transactions (201,684) $(3,004,676) (366,928) $ (5,246,734) ------------------------------------------------------ CLASS B: Shares sold 240,061 $ 3,594,252 247,851 $ 3,605,763 Shares issued upon reinvestment of distributions 75,360 1,135,186 99,198 1,439,916 Shares redeemed (488,067) (7,362,086) (903,907) (13,100,688) ------------------------------------------------------ Change in net assets from capital share transactions (172,646) $(2,632,648) (556,858) $ (8,055,009) ------------------------------------------------------
94 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9: CAPITAL SHARE TRANSACTIONS (CONTINUED)
Mentor Quality Income Portfolio Year Year Ended 9/30/96 Ended 9/30/95 Shares Dollars Shares Dollars ----------------------------------------------------------- CLASS A: Shares sold 261,361 $ 3,431,466 132,285 $ 1,706,716 Shares issued upon reinvestment of distributions 65,422 864,412 89,969 1,159,149 Shares redeemed (533,765) (6,992,390) (745,107) (9,570,406) ----------------------------------------------------------- Change in net assets from capital share transactions (206,982) $ (2,696,512) (522,853) $ (6,704,541) ----------------------------------------------------------- CLASS B: Shares sold 765,460 $ 10,058,721 421,513 $ 5,506,753 Shares issued upon reinvestment of distributions 177,855 2,348,000 223,602 2,883,354 Shares redeemed (1,108,119) (14,629,662) (2,078,944) (26,675,096) ----------------------------------------------------------- Change in net assets from capital share transactions (164,804) $ (2,222,941) (1,433,829) $(18,284,989) -----------------------------------------------------------
Mentor Short-Duration Income Portfolio Year Period Ended 9/30/96 Ended 9/30/95 Shares Dollars Shares Dollars -------------------------------------------------------- CLASS A*: Shares sold 626,588 $ 7,923,068 80,087 $ 1,015,595 Shares issued upon reinvestment of distributions 15,339 193,207 322 4,089 Shares redeemed (124,945) (1,577,491) (1,399) (17,786) -------------------------------------------------------- Change in net assets from capital share transactions 516,982 $ 6,538,784 79,010 $ 1,001,898 -------------------------------------------------------- CLASS B**: Shares sold 1,146,855 $14,558,230 1,116,509 $14,138,694 Shares issued upon reinvestment of distributions 88,449 1,119,155 56,501 708,003 Shares redeemed (841,749) (10,608,962) (1,011,667) (12,759,888) -------------------------------------------------------- Change in net assets from capital share transactions 393,555 $ 5,068,423 161,343 $ 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. ~ 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. 95 MENTOR FUNDS INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- THE TRUSTEES AND SHAREHOLDERS MENTOR FUNDS We have audited the accompanying statements of assets and liabilities, including the portfolios of investments of the Growth Portfolio, Perpetual Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio, Municipal Income Portfolio, Quality Income Portfolio, and Short-Duration Income Portfolio, portfolios of Mentor Funds (the Funds) as of September 30, 1996 and the related statements of operations for the year then ended, the statements of changes in net assets for each of the years or periods in the two-year period then ended (pages 64 to 68) and the financial highlights for Class A Shares and Class B Shares for each of the years or periods in the five-year period then ended (pages 69 to 79). These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Growth Portfolio, Perpetual Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio, Municipal Income Portfolio, Quality Income Portfolio, and Short-Duration Income Portfolio, portfolios of Mentor Funds as of September 30, 1996, the results of their operations for the year then ended, the changes in their net assets for each of the years or periods as indicated on pages 64 to 68, and the financial highlights for each of the years or periods as indicated on pages 69 to 79, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP -------------------------- KPMG PEAT MARWICK LLP Boston, Massachusetts November 8, 1996 96 MENTOR FUNDS SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- TRUSTEES DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN Chairman and Chief Executive Officer Mentor Investment Group, LLC ARNOLD H. DREYFUSS, TRUSTEE Former Chairman and Chief Executive Officer Hamilton Beach/Proctor-Silex, Inc. THOMAS F. KELLER, TRUSTEE Former Dean, Fuqua School of Business Duke University LOUIS W. MOELCHERT, JR., TRUSTEE Vice President for Business & Finance University of Richmond 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, LLC OFFICERS PAUL F. COSTELLO, PRESIDENT Managing Director Mentor Investment Group, LLC TERRY L. PERKINS, TREASURER Senior Vice President Mentor Investment Group, LLC JOHN M. IVAN, SECRETARY Managing Director and Assistant General Counsel Wheat First Butcher Singer, Inc. MICHAEL A. WADE, ASSISTANT TREASURER Vice President Mentor Investment Group, LLC [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-----