-----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, C+mJum5e2uHrHis7jwittOR/EMd0N0DxeuhNrfYm9O7bcUazDFJ0hDGW+6T5870e PUkxdY8Kp1zwuZseGWShag== 0000916641-97-000576.txt : 19970604 0000916641-97-000576.hdr.sgml : 19970604 ACCESSION NUMBER: 0000916641-97-000576 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970602 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: 97618341 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 THE MENTOR FUNDS N30-D MENTOR FUNDS ------------------------------------- SEMI-ANNUAL REPORT ------------------------------------- March 31, 1997 [LOGO] MENTOR INVESTMENT GROUP MENTOR FUNDS TABLE OF CONTENTS - --------------------------------------------------------------------------------
Page ------------------ Message from the Chairman and President.................................................. 1 Managers' Commentaries Growth Portfolio....................................................................... 3 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...................................... 23 Portfolios of Investments Growth Portfolio....................................................................... 26 Global Portfolio....................................................................... 31 Capital Growth Portfolio............................................................... 40 Strategy Portfolio..................................................................... 42 Income and Growth Portfolio............................................................ 46 Municipal Income Portfolio............................................................. 50 Quality Income Portfolio............................................................... 55 Short-Duration Income Portfolio........................................................ 58 Statements of Assets and Liabilities..................................................... 60 Statements of Operations................................................................. 62 Statements of Changes in Net Assets...................................................... 64 Financial Highlights..................................................................... 67 Notes to Financial Statements............................................................ 78 Changes to Non-Fundamental Investment Restrictions....................................... 95 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' Semi-Annual Report for the six-month period ended March 31, 1997. Mentor Funds is part of Mentor Investment Group,* an investment management firm with more than $10 billion in assets under management. Mentor provides a choice of seven different investment styles to a broad range of investors that include corporations, foundations, endowments, municipalities, public funds, and individual investors. We are happy to report that we are introducing an international growth fund to investors. The Mentor Perpetual International Portfolio seeks the opportunity for long-term growth of capital through international equities. The fund is managed MENTOR INVESTMENT GROUP [GRAPH] SHORT-DURATION INCOME PORTFOLIO a short-term bond fund QUALITY INCOME PORTFOLIO an intermediate-term bond fund MUNICIPAL INCOME PORTFOLIO a tax-free bond fund INCOME & GROWTH PORTFOLIO a balanced fund STRATEGY PORTFOLIO a tactical asset allocation high total return fund CAPITAL GROWTH PORTFOLIO a large-capitalization, high-quality growth fund GLOBAL PORTFOLIO a global growth fund INTERNATIONAL PORTFOLIO an international growth fund GROWTH PORTFOLIO a small-to-mid-capitalization growth fund * Mentor Investment Advisors, LLC/dba Mentor Investment Group, LLC 1 MENTOR FUNDS MESSAGE FROM THE CHAIRMAN AND PRESIDENT (CONTINUED) - -------------------------------------------------------------------------------- by the same outstanding firm responsible for our Global Portfolio -- Perpetual -- the award-winning British investment advisor, established in 1973, and today, responsible for more than $10 billion in assets. As you may recall, Perpetual's long experience in global and international investing was made available for the first time to American investors through a joint venture between our two firms, which led to the creation of Mentor Perpetual Advisors. We welcome Perpetual once again as we introduce the international fund. In the pages that follow, you will find financial statements for the Portfolios of Mentor Funds, in addition to commentaries from each of the management teams regarding their investment strategies and outlooks. Thank you for your continuing investment in Mentor Funds. Sincerely, /s/ DANIEL J. LUDEMAN /s/ PAUL F. COSTELLO Daniel J. Ludeman Paul F. Costello CHAIRMAN PRESIDENT [LOGO] MENTOR INVESTMENT GROUP 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 ABOUT FEES, SALES CHARGES, AND EXPENSES. PLEASE READ IT CAREFULLY BEFORE INVESTING OR SENDING MONEY. 2 MANAGERS' COMMENTARY MENTOR GROWTH PORTFOLIO SIX-MONTHS ENDED MARCH 31, 1997 - -------------------------------------------------------------------------------- Since reaching their peak in late summer, rapidly growing small-capitalization companies have generally fallen out of favor. Investors have focused instead on better-known large-capitalization companies. As a result, the last six months have been an extremely difficult period for small-capitalization growth funds, and the Mentor Growth Portfolio is no exception. The recent performance of the Portfolio belies the general economic well-being of the companies held and, in reality, appears to have had little to do with fundamentals. Over the past year the strong returns that have been achieved by the major market indexes have been heavily concentrated in the largest companies. In part this situation has arisen as a result of the significant fund inflows to index funds. The impact is extraordinarily clear when the performance of the capitalization-weighted OTC composite (NASDAQ) is compared to the same period of performance, excluding the 100 largest companies.* CHART I: RELATIVE PERFORMANCE
Ex. top 100 NASDAQ cap.-weighted Period as reported companies 1996 22.7% 5.5% 1996 (first half) 12.6% 7.6% 1996 (second half) 10.0% -1.9%
Source: Smith Barney & Co.** Excluding the 100 largest companies in NASDAQ demonstrates how narrow performance in the small-capitalization market was. As Chart I indicates, the performance of the remaining 1,700 companies in the NASDAQ composite significantly underperformed the broader markets. It appears that a similar concentration in performance took place in the first quarter of 1997. Often during periods of uncertainty in the financial markets, it is helpful to return to basics. Generally speaking, stocks are influenced by three factors: (Bullet) (1) Earnings growth (Bullet) (2) Valuations (especially price/earning ratios relative to earnings growth) (Bullet) (3) Sentiment The Growth Portfolio may be attractively positioned in each of these areas. CHART II: EARNINGS GROWTH
Mentor Growth Portfolio S&P 500 43.4% (act. 1996) 9.0% (act. 1996) 37.5% (est. 1997) 7.6% (est. 1997) 37.5% (est. 1998) 6.0% (est. 1998)
Source: I/B/E/S*** As Chart II demonstrates, actual earnings growth during 1996 for the stocks held in the Mentor Growth Portfolio averaged 43.4%, relative to actual earnings growth for the S&P 500 of 9.0%.@ Similar differentials in growth 3 MANAGERS' COMMENTARY MENTOR GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- rates for the holdings of Mentor Growth Portfolio and for the S&P 500 are also expected for both 1997 and 1998. Although it is not unusual for companies like those in our Portfolio to have higher growth rates than the larger companies in the S&P 500, it is surprising that investors would not have to pay a significant market premium to purchase them. (2) VALUATION Comparing price/earnings ratios to earnings growth rates is a common way of judging the relative attractiveness of securities. When judged on a relative price/earnings ratio basis, the Mentor Growth Portfolio displays attractive characteristics relative to the S&P 500. In June, 1996, the Growth Portfolio was trading at 27.5x estimated 1996 earnings, compared to 17.5x for the S&P. By the end of the first quarter of 1997 the respective P/E multiples for the Growth Portfolio and the S&P 500 were more closely aligned at 23.6x and 18.0x 1997 earnings. Comparing current P/Es to 1998 estimated earnings, the Growth Portfolio trades at a multiple of 17.0x, below the 17.2x for the S&P. From an historical perspective, these price/earnings multiples appear to represent unusually attractive relative valuations. (3) SENTIMENT In terms of sentiment, the characteristics are somewhat harder to measure but still favor small-capitalization stocks. Negative press reviews about them usually occur at valuation extremes and generally mark a good point of entry for stock purchases. Such seems to be the case now with speculation almost non-existent in the small-capitalization sector. This lack of speculation is confirmed by the fact that after six months of small-capitalization stock underperformance, the pricing of initial public offerings (IPOs) remains depressed, a different situation from the summer of 1996 when small-capitalization stocks appeared more fully valued. Given the historical relationship between large-and small-company earnings-growth rates and price-earnings ratios, the current period may be an aberration. Thank you for your continuing support. Sincerely, The Small/Mid-Capitalization Growth Management Team * The NASDAQ Composite Index is a measure of all NASDAQ National Market System (NASDAQ/NMS) issues, exclusive of warrants, and all domestic common stocks traded in the regular NASDAQ market that are not part of the NASDAQ/NMS. The NASDAQ Composite Index is market-value-weighted. The representation of each security in the Index is proportional to its last sale price (NASDAQ/NMS) or bid price (regular NASDAQ) times the total number of shares outstanding, relative to the total market value of the Index. 4 MANAGERS' COMMENTARY MENTOR GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- ** Smith Barney & Co. is a nationally-recognized financial services provider. *** I/B/E/S is the Institutional Brokers Estimate System, a tabulator and provider of institutional earnings estimates and economic forecasts to the investment community. @ The Standard & Poor's Index (S&P 500) is an unmanaged, market-value-weighted index of 500 widely held domestic common stocks. An unmanaged index does not reflect expenses and may not correspond to the performance of a managed portfolio in which expenses are incurred. Investors cannot invest in the S&P 500 Index. PERFORMANCE COMPARISON Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class A and the Russell 2000. [CHART] Class A Russell 2,000 6/5/95 $ 9,425 $10,000 6/30/95 9,859 10,519 9/30/95 11,251 11,558 9/30/96 14,640 13,076 3/31/97 13,042+ 13,044~ AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year Since Inception++ Class A (6.08%) 15.68% 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 THESE ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000 Index and represents approximately 7% of the U.S. equity market capitalization. The Russell 3000 is composed of the 3,000 largest U.S. companies by market capitalization and represents approximately 98% of the U.S. market. The indexes are not adjusted for sales charges or other fees. + Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio Class A shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charge = $9,425). The Class A shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Growth Portfolio Class A shares from the date of issuance on 6/5/95 through 3/31/97. 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. [CHART] Class B Russell 2000~ 3/31/87 $10,000 $10,000 12/31/87 7,416 7,339 12/31/88 8,923 9,166 12/31/89 10,470 10,654 12/31/90 9,289 8,576 12/31/91 13,958 12,525 12/31/92 16,132 14,831 12/31/93 18,649 17,636 12/31/94 17,814 17,314 12/31/95 24,836 21,767 9/31/96 30,163 24,626 3/31/97 26,742+ 24,567~ AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year 5-Year 10-Year Class B (4.51%) 12.67% 10.34% 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 THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000 Index and represents approximately 7% of the U.S. equity market capitalization. The Russell 3000 is composed of the 3,000 largest U.S. companies by market capitalization and represents approximately 98% of the U.S. market. The indexes are not adjusted for sales charges or other fees. + Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio Class 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 SIX-MONTHS ENDED MARCH 31, 1997 - -------------------------------------------------------------------------------- In general, world markets were strong during the six months ended March 31, 1997, although the returns achieved in some overseas markets were reduced by the strength of the dollar. The Morgan Stanley Capital International (MSCI) World Index rose by 5.1%, while the MSCI EAFE (Europe, Australia, the Far East) Index was held back by poor Japanese performance and rose by 0.1%. UNITED STATES With interest-rate fears receding as inflation rates remained low and corporate profit growth continued satisfactory, stocks powered ahead on Wall Street. The market initially shrugged off Fed Chairman Greenspan's December warnings about "irrational exuberance" and the inevitability of the business cycle reasserting itself. A 25-basis point increase in the Fed Funds rate late in March, however, triggered a correction in stock prices. Even so, the S&P 500 Index managed a 11.3% rise over the six months. EUROPE Most European markets were strong, as well. Several factors were at work. Central banks kept monetary policy loose as economies were sluggish and unemployment high. Bond markets received a further boost as investors became more convinced that EMU -- European Monetary Union -- was a likelihood. Throughout the region bond yields converged on German rates, traditionally the lowest on the continent, save Switzerland's, because of the Bundesbank's success in holding inflation down. While interest rates fell, corporate earnings rose. The strength of the dollar improved export profitability. Moreover, many European companies began to enjoy the benefits of restructuring as management, at last, tried to come to grips with inflated payrolls. Over the period the MSCI Europe ex. United Kingdom Index was up 14.7% in dollar terms. UNITED KINGDOM British equities did not have the benefit of falling interest rates and strong bond markets. Investors also had to come to terms with the almost certain advent of a Labor government later in 1997 after 18 years of pro-free market Tory rule. A strong sterling damaged manufacturing sector profits as well. Even so, British shares moved ahead as the economy enjoyed the highest rate of growth, the lowest unemployment and the strongest currency of any major European economy -- an experience unique in post-war history. Consequently, in dollar terms, the MSCI UK Index rose 15.9%. JAPAN Unlike the stock markets of the industrialized West, the Tokyo Stock Exchange slumped. Economic growth appeared to have peaked in the first half of 1996, and investors began to fear the economy would slide back into 7 MANAGERS' COMMENTARY MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- recession in 1997 after the government introduced a fiscally-contractionary budget. The pace of corporate profit recovery was very disappointing, particularly given the major boost exporters received from the weak yen -- evidence that companies had abandoned any pretense at restructuring as soon as the economy showed any signs of life. Furthermore, the weakness of the financial sector, a significant factor for the past five years, continued to drain investor confidence. With property prices falling back to 1986 levels, a huge number of real estate and construction companies were pushed to the brink of collapse, jeopardizing the survival of much of the banking system, which is heavily-exposed to property. Two of Japan's leading 20 banks -- the group which the Bank of Japan has identified as "too big to fail" -- had to seek restructuring. Against this gloomy background, it is hardly surprising that the MSCI Japan Index fell by 21.9% in dollar-adjusted terms. ASIA (EXCLUDING JAPAN) Asian stock markets were mixed. The largest, Hong Kong, was strong, with the Hang Seng index up by 5.1% in dollar terms. The market was boosted by the revival of the Chinese economy and by the easing of Chinese monetary policy, especially as an increasing amount of Chinese money found its way into Hong Kong stocks and property. The China-related Taiwanese market was also strong. In contrast, Singapore and Korea were listless, both afflicted by an over-commitment to the electronics industry. Thailand was in a virtual state of collapse, as efforts to maintain a stable currency brought bust conditions to the property market after years of boom. Much of Thailand's finance and banking sectors was brought to its knees as a result. Malaysia and the Philippines enjoyed bullish stock markets for most of the period, although more recently investors began to fear that property bubbles might burst there as well. Overall the MSCI Pacific ex. Japan Free Index rose by 3.4%. LATIN AMERICA Latin American markets were virtually all strong. They were buoyed up by an influx of foreign capital as in 1993, but unlike 1993 fundamentals looked much better balanced. Corporate profits growth was strong, and P/Es were among the lowest internationally. Governments were successful in getting public sector expenditure under control, and in reducing inflation rates to less than 10% per annum in contrast to the 10% per month more typically experienced in the past. Currencies, with the possible exception of the Mexican peso, looked well-supported, as exports grew healthily. All this good news was reflected in a rise of 18.7% in the MSCI EMF Latin America Index. 8 MANAGERS' COMMENTARY MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- OUTLOOK Given the tremendous gains in Wall Street between last July's low point and this February's high, a period of correction to American stock prices is hardly unexpected, particularly given the rich valuation of many stocks and the near certainty that the Fed will tighten again. The question for investors must be whether or not weakness in Wall Street must inevitably bring down markets in London or Frankfurt, Kuala Lumpur or Santiago. We are optimistic that markets can de-couple from Wall Street to a large extent. The industrialized economy, and stock market, nearest in cyclical terms to America's is the UK's. In contrast to the US where stocks look expensive relative to bond yields, UK stocks look cheap relative to UK bond yields and UK bonds themselves are among the most attractively valued bonds available globally. Elsewhere in Europe the cycle of economic and corporate recovery has only just begun. In particular, corporate re-structuring, which has done so much to fuel the American bull market of the '90s, has only started to affect profits and stock values on continental Europe. Japan, if anything, has been negatively correlated with Wall Street in recent years. While serious structural problems remain and will put a relatively low ceiling on stock prices, a sell-off in American securities prices might actually be to Tokyo's benefit. Japanese institutions might be inclined to bring home some of the billions invested abroad over the past year or so. The emerging markets in the short term will necessarily be affected by movements in US interest rates and stock prices. Most of these countries link their currencies to a greater or lesser extent to the dollar, and portfolio flows from the states are one of the principal sources of buying demand in their stock markets. However, most Asian and Latin American markets have seen their P/E multiples decline considerably since 1993, making them less vulnerable to a sell-off by disenchanted foreign investors as happened in 1994 when the Fed tightened. In general, stock valuations are well below those prevailing in the industrialized nations. Today emerging markets offer superior rates of growth at discount valuations -- a compelling opportunity for long-term investors. Sincerely, The Mentor Perpetual Global/ International Growth Management Team 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.~ [CHART] Morgan Stanley Capital World~ Class A Class B 3/24/94 $10,000 $ 9,425 $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 3/31/97 14,553 12,958 13,409 AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year Since Inception++ Class A 3.37% 9.09% Class B 4.81% 9.69% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR 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 1,450 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. + 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 3/31/97. +++ 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 SIX-MONTHS ENDED MARCH 31, 1997 - -------------------------------------------------------------------------------- The S&P 500 gained 11.2% and 19.8% in the past six months and full year, respectively.* This index has now posted nine consecutive quarters of positive returns. Despite this apparently attractive performance, the past quarter's 2.7% gain left investors feeling less than elated. For starters, the S&P 500 continues to outpace the vast majority of investors. In fact, the average domestic equity mutual fund suffered a loss in the first quarter of 1997. This index's superior return is attributable to the continued strength in the largest "blue chip" stocks. Recently, however, even these stocks were experiencing the selling pressure that had been hitting other sectors of the market. After being up more than 10% earlier in the year, the S&P 500 began rapidly losing steam after the Federal Reserve increased interest rates in late March. The positive influences supporting the phenomenal stock market rise of the past two years are suddenly being questioned. Stock valuations are now above historical average levels. The economy has hit full stride and is leading the Federal Reserve to increase interest rates to avoid higher inflation. Corporate earnings growth has moderated and is likely to recede further in the year ahead. Both Alan Greenspan and Warren Buffett, two very knowledgeable and respected points-of-view, suggest that the stock market has become over-valued. Is it time to pull out of the stock market and put our money in a safer place? Fortunately, we don't own the "stock market." We own a portfolio of stocks chosen for their attractive business outlooks and reasonable current valuations. A close examination of these stocks reveals that they are currently no less attractive today than on average over the past 10 years. During the past 10 years these stocks have traded at an average price-to-earnings (P/E) ratio of 18. They are currently trading at 17.3 times their estimated 1997 earnings. During the past five and 10 years these companies have grown their earnings at an average 14% annual rate. We believe they will produce similar earnings growth again this year. By producing consistently attractive earnings growth, these stocks have delivered attractive returns over the past five- and 10-year periods. They are not currently over-valued according to historical levels and their earnings are continuing to grow at solid double-digit rates. These data indicate that the stocks we currently own can provide attractive returns from this level. After the strong gains of the past 27 months it is reasonable to expect some near-term retrenchment. The key is to look through the current volatility in the market at the attractive fundamentals supporting our holdings. Our strategy remains very focused and rewarding. We strive to own strong businesses with above-average earnings growth potential at reasonable valuations. We have stressed repeatedly that our performance relative to other managers will be best when S&P 500 11 MANAGERS' COMMENTARY MENTOR CAPITAL GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- earnings growth is moderate or worse. This was the case as S&P 500 earnings growth slipped to 9% in 1996. We believe that earnings growth for the broad stock market is likely to be very disappointing at some point in the next year or two. Our confidence in this outlook has been strengthened by the recent increases in interest rates and the value of the dollar, two negative influences on corporate profitability. Our solid relative performance so far in 1997 reflects the strength of our companies in this more difficult environment. 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 domestic common stocks. An unmanaged index does not reflect expenses and may not correspond to the performance of a managed portfolio in which expenses are incurred. Investors cannot invest in the S&P 500 Index. 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. [CHART] Class A Class B 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 3/31/97 16,706++ 17,134+ 20,779~ AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year Since Inception+++ Class A 14.20% 11.04% Class B 16.23% 11.43% 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 THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities in the index. The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Capital Growth Portfolio Class B shares. A contingent deferred sales charge will be imposed, if applicable, on Class B shares of rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. Class B shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B shares' performance assumes the reinvestment of all dividends and distributions. ++ Represents a hypothetical investment of $10,000 in Mentor Capital Growth Portfolio Class A shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A shares' performance assumes the reinvestment of all dividends and distributions. +++ Reflects operations of Mentor Capital Growth Portfolio Class A and Class B shares from the date of initial public investment on 4/29/92 through 3/31/97. 13 MANAGERS' COMMENTARY MENTOR STRATEGY PORTFOLIO SIX-MONTHS ENDED MARCH 31, 1997 - -------------------------------------------------------------------------------- In the last week of March, 1997, our asset allocation model suggested its second change of the quarter, the fourth such change in the last 12 months. Until May, 1996, our model indicated an extremely bullish posture on stocks and no exposure to bonds, which we implemented in the Portfolio with an allocation of 90% stocks and 10% cash. The transition from this bullish tenor began on May 6th, 1996. The model was further changed three weeks later on May 28th, to a more balanced allocation of 67% stocks, 23% bonds, and 10% cash. In hindsight, we can see that this period also marked the beginning date for a total change in personality for the stock market. In the ensuing eight weeks, the overall market suffered an expected decline, with the smaller-cap., faster-growing stocks getting hit especially hard. In July, however, an effective bottom was reached, with most stocks turning around and moving up. Large-cap. issues clearly began a period of out-performance at this point, which became increasingly obvious in the last two months of the year. On February 3rd, 1997, our asset allocation model started showing clearly that the earnings for the S&P 500 stock index had not moved up nearly as fast as had S&P 500 stock prices. At the same time, bond yields had increased. In other words, stocks were becoming less attractive, while bonds were becoming more attractive. These relative valuations reached levels that indicated that bonds were now as attractive as stocks, especially when viewed in an historical context. Hence our model recommended that we decrease stock positions and increase bond positions. It did not indicate that the stock market was at a risk juncture, but simply that bond performance was likely be as good in the upcoming period as that of the S&P 500. On March 21st, 1997, we reached another critical juncture, as our valuation gauge moved into slightly overvalued territory. As interest rates moved higher, our monetary composite dropped into negative territory, indicating for the first time in several years that potential serious trouble lay ahead for stocks. This precipitated a change in our model, and consequently in the Mentor Strategy Portfolio, to an extremely defensive allocation of 30% cash, 35% stocks, and 35% bonds. Shortly thereafter, the Federal Reserve announced the first increase in the short-term fed funds interest rate in over two years, and the stock market subsequently weakened significantly. Even though our asset allocation adjustments have been perceptive, the nature of the advance since June of last year has been very difficult for growth momentum-based investors like ourselves. It is well documented that the advance in the stock market -- especially since October of 1996 -- has been extremely narrow, led by the largest, most liquid issues in the market. As an example, if the largest 50 14 MANAGERS' COMMENTARY MENTOR STRATEGY PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- stocks are removed from the S&P 500, the remaining companies would have only been up 9.4% for the year versus a gain of over 20% for the index as a whole.* Over the past 30 years, there have been many changing fads in investing. With our top-down methodology, we sometimes have had to painfully endure a few quarters when our style of stock selection was not in vogue. Even though it always is unsettling, we have avoided trying to flip-flop our disciplines to account for the current market fad. So far, at least, these periods have tended to serve as a prelude to major market turning points. We believe today's environment is one of those times. We fully expect this current season of instability/correction in the markets to continue for another three-to-six months. It is, however, very comforting to know that not only has our asset allocation model kept us on track over the many years of the sustained bull-market, but it has also transitioned us during these last 10 months to today's very defensive position. We thank you very much for your continued confidence in our asset allocation model, as expressed by your investment in the Mentor Strategy Portfolio. Sincerely, The Tactical Asset Allocation Management Team * The Standard & Poor's Index (S&P 500) is an unmanaged, market-value-weighted index of 500 widely held domestic common stocks. An unmanaged index does not reflect expenses and may not correspond to the performance of a managed portfolio in which expenses are incurred. Investors cannot invest in the S&P 500 Index. 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. [CHART] 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 3/31/97 12,003+ 14,785~ AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year Since Inception++ Class A (3.95%) 10.54% 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 3/31/97. Comparison of change of value of hypothetical $10,000 investment in Mentor Strategy Portfolio Class B shares and the S&P 500. [CHART] 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 14,018 15,860 3/31/97 13,530 17,643 AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year Since Inception~~ Class B (2.56%) 8.75% +++ Represents a hypothetical investment of $10,000 in Mentor Strategy Portfolio Class B shares. A contingent deferred sales charge will be imposed, if applicable, on Class B shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. The ending value of the Class B shares reflects a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B shares' performance assumes the reinvestment of all dividends and distributions. ~~ Reflects operations of Mentor Strategy Portfolio Class B from the date of issuance on 10/29/93 through 3/31/97. 16 MANAGERS' COMMENTARY MENTOR INCOME AND GROWTH PORTFOLIO SIX-MONTHS ENDED MARCH 31, 1997 - -------------------------------------------------------------------------------- REVIEW OF MARKETS The equity market posted strong returns through most of the six-month period ending March 31, 1997. After posting an 8.3% return for the fourth quarter of 1996, the equity market subsequently rose 10% from year-end to late February. However, a combination of stronger than expected economic reports and rising interest rates brought stock prices back down 7%, negating most of the returns provided during the quarter. The bond market continues to suffer from a bad case of inflation paranoia complicated by tighter monetary policy implemented by the Federal Reserve. This combination pushed long-term interest rates upward from 6.6% at the end of 1996 to 7.1% at the end of the first quarter. PORTFOLIO PERFORMANCE For the six-month period ending March 31, 1997, the Mentor Income & Growth Fund returned 6.1% for the A shares, and 5.7% for the B shares, outperforming the Lipper Balanced Fund Average which returned 5.5%.* During the last six months, the equity portion of the Portfolio benefited from overweighting the strong performing finance and energy sectors, while underweighting the weaker performing consumer staples and technology sectors. While the bond market did provide modest gains during the fourth quarter of 1996, prices fell back during the first quarter of 1997. At current levels, bond yields look very attractive relative to projected 1997 inflation of 2.5%. MARKET OUTLOOK Despite investor fears reflected in recent market volatility, our outlook for the economy remains favorable for a number of reasons. A high level of consumer confidence, persistent job growth, and some upward pressure on wages should continue to fuel consumer demand. Inflation is expected to remain low this year. Oil prices have been declining for the past several months, last year's run-up in agricultural commodity prices has reversed, and many industrial material prices are well below last year's level. The strength of the dollar over the past several months should keep corporate pricing flexibility at very low levels. Equities will continue to be challenged by the prospect of an additional rate hike at the next Federal Open Market Committee Meeting in late May and valuation levels that are not "cheap." Beyond that, the fundamentals still look supportive -- moderate growth, low inflation, and rising corporate earnings. While investors appear concerned about the potential for future increases in interest rates, given our view of the economy, and the recent preemptive rate hike by the Federal Reserve, we believe it is unlikely that the Fed will repeat their actions of 1994 when a series of increases were instituted. The present conditions are very different from that period when capacity utilization rates were rising and industrial material prices were increasing sharply. 17 MANAGERS' COMMENTARY MENTOR INCOME AND GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- PORTFOLIO STRATEGY As of March 31, 1997, the asset allocation of the Portfolio was 51% stocks, 44% bonds and 5% cash. While we will be raising the Portfolio's equity weighting modestly in the coming months, it remains at the low end of our historic and expected range, and reflects our view that the market's favorable outlook is largely discounted in current stock prices. It also reflects our belief that bonds are attractive relative to stocks and cash. EQUITY STRATEGY While we maintain a slight overweight position, we have recently reduced the Portfolio's exposure to the energy sector. We took profits in some of the Portfolio's energy positions because they had appreciated significantly and we had concerns about the sustainability of those gains in an environment of falling oil prices. In the financial sector we have reduced positions in large banks and allocated the proceeds into some smaller regional banks. The premium given to smaller banks, due largely to takeover speculation, has been reduced. While these smaller banks remain targets for consolidation, for the first time in a few years they are trading at a discount to their larger counterparts. Overall, the potential for a sloppy market remains. Given the very near-term orientation of the market, we believe that some interesting opportunities may develop in companies with strong long-term outlooks, but which suffer near-term earnings shortfalls. In this environment, our focus on individual stock selection should benefit shareholders. FIXED INCOME STRATEGY Although buying bonds into weakness, particularly while the Fed is raising short-term rates, is a painful process, that is precisely what we are doing. In our view, the valuation of bonds relative to either current or prospective inflation is now sufficiently attractive and we feel compelled to increase the Portfolio's duration. The Portfolio has had a modest weighting in corporate bonds for some time due to our belief that corporates were expensive. However, as yields become more generous relative to those of treasuries, we are becoming more interested in adding to the Portfolio's corporate holdings. Mortgages have performed well and are reasonably priced but we do not expect to be adding to the Portfolio's positions at these yield levels. Thank you for your continued support. Sincerely, The Balanced Management Team * 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. 18 MANAGERS' COMMENTARY MENTOR INCOME AND GROWTH PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- 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.++ [CHART] Class A Class B 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 3/31/97 15,698+ 16,208~ 15,815++ AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year Since Inception+++ Class A 7.02% 12.45% Class B 8.68% 12.94% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR 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 3/31/97. 19 MANAGERS' COMMENTARY MENTOR MUNICIPAL INCOME PORTFOLIO SIX-MONTHS ENDED MARCH 31, 1997 - -------------------------------------------------------------------------------- WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE? After the Fed ultimately decided not to tighten interest rates in the first half of 1996, the municipal market began to rally in May. Prices continued to rise through year end, gaining back most of the loss markets had experienced earlier in the year. By 12/31/96, the Bond Buyer 25 Revenue Index (with a weighted maturity of 30 years), yielded 5.92%, compared to a 30-year treasury which yielded 6.64%.* With tax-exempt yields at an 89% ratio to treasuries, municipals remained an attractive investment. The moderate growth environment experienced during the fourth quarter, plus growing concern about a spurt in inflation, led us to believe the economy would continue to expand through the first quarter of 1997 and that it was more likely that interest rates would rise than decline. This proved correct, with generic 30-year triple-A municipals increasing 25 basis points from year end. Long-term tax-exempt yields, nearly paralleling the path of treasuries, have hit their highest rate levels since last summer. WHAT OTHER FACTORS INFLUENCED THE FUND? Election year politics further strengthened the municipal market. The results of the presidential election were positive, as major tax reform is unlikely under the Clinton administration. Additionally, the status quo of a split government (a Democratic president and a Republican Congress) should help restrain potential spending increasing and tax cuts, therefore keeping the budget deficit under control. The trend which has probably had the most impact on the tax-exempt mutual fund industry is the rising number of insured issues coming to market. AAA-rated insured issuance has grown from 1989's level of 25% to nearly 50% in 1996. Year-to-date 1997, insured issuance has risen to 52%. In large part, this is due to an increasing appetite for safety from investors concerned about municipalities with financial difficulties such as Miami and Los Angeles County. Also, the cost of insurance has drastically decreased over the past three years. This trend has caused a scarcity of high-yield issues as well as a narrowing in yield spreads between insured and uninsured bonds. HOW DID WE MANAGE THE PORTFOLIO GIVEN THE ABOVE CONDITIONS? We managed the portfolio conservatively during the period, employing the following strategies: (Bullet) We maintained a barbell structure in rating distribution. At the end of the period 43% of assets were AAA-rated, the highest credit rating assigned to bonds by the Standard and Poor's Rating Group.** Another 36% of assets were BBB-rated or non-rated. This structure helps balance the portfolio's volatility to interest rate movements. While the AAA-rated securities provide safety of principal and total return opportunities, lower rated and non-rated securities provide income potential and tend to exhibit lower price volatility as interest rates change. 20 MANAGERS' COMMENTARY MENTOR MUNICIPAL INCOME PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- (Bullet) We identify securities that we believe will outperform within a sector and which can be purchased at an attractive price, rather than focusing on market timing. We also use our research expertise to identify sector trends and take advantage of spread relationships between industries. This "bottom up" approach to security selection helps us capture maximum price appreciation potential, while minimizing credit risk. (Bullet) We adjust the fund's duration to manage volatility. Duration, which is expressed in years, is a measurement of the portfolio's volatility to interest rate movements. Portfolios with shorter durations tend to perform better when interest rates are rising. At the end of the period, the fund had a duration of 7.52 years, compared to the Lehman Municipal Bond Index duration of 8.18 years.*** While maintaining a shorter duration prevented the fund from taking full advantage of the decline in interest rates in the fourth quarter, it benefited the fund in the first three months of 1997. WHAT IS OUR OUTLOOK? Going into the second quarter, our outlook continues to be slightly bearish, although the municipal market has strong underlying fundamentals. Higher interest rates have kept new issuance down, leaving municipal prices firm. Longer term yields are reaching attractive levels for investors (6.00% and higher). While the ratio of municipals to governments has declined from year-end, municipal security yields continue to outshine competing domestic fixed-income investments. Municipal credit quality looks strong on a number of fronts. State reserves continue to improve, and key revenue sectors have been showing strengthening coverage. We look for health care and airport special facilities to perform well. Given the anticipation that the Fed will probably tighten again, we are likely to see long-term municipal interest rates continue to rise over the next few months. At the current time, however, our longer-term interest-rate outlook is more positive. We believe the fund is positioned to perform well in the coming months and do not anticipate major changes in the Portfolio's characteristics. We will continue to balance the Portfolio's total return and dividend income and, at the same time, manage volatility by adjusting duration when necessary. Sincerely, The Tax-Free Management Team * The Bond Buyer 25 Revenue Index represents the arithmetic average of the yields-to-maturity of 25 municipal revenue bonds. The bonds comprising the index have a 30-year maturity and are rated A1 by Moodys Investor Services. ** Standard and Poor's Corporation corporate or municipal debt rating is a current assessment of the credit worthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. *** 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. 21 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. [CHART] Class A Class B 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 3/31/97 13,263 13,499 14,137 AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year Since Inception+++ Class A 0.88% 5.91% Class B 1.51% 6.28% 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 THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of interests on securities in the index. The Lehman Municipal Bond Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Municipal Income Portfolio Class B shares. A contingent deferred sales charge will be imposed, if applicable, on Class B shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. Class B shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B shares' performance assumes the reinvestment of all dividends and distributions. ++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income Portfolio Class A shares, after deducting the maximum sales charge of 4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A shares' performance assumes the reinvestment of all dividends and distributions. +++ Reflects operations of Mentor Municipal Income Portfolio Class A and Class B shares from the date of initial public investment on 4/29/92 through 3/31/97. 22 MANAGERS' COMMENTARY MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO SIX-MONTHS ENDED MARCH 31, 1997 - -------------------------------------------------------------------------------- MARKET CONDITIONS During the six-month period ended March 31, 1997 fixed-income interest rates increased modestly across the yield curve. Two-year and 10-year treasuries yielded 6.41% and 6.91% respectively on March 31, up 0.32% and 0.21% from six month ago levels. The fourth quarter of 1996 and the early part of 1997 saw interest rates fall modestly. However, with economic statistics showing continued strength during February and March, market participants began to assume that the Federal Reserve would intervene to slow economic growth and inflation prospects. The markets reacted accordingly, with rates trending upward throughout the latter part of the quarter. The Fed's decision to raise the Fed Funds rate by 0.25% to 5.50% at its late March Open Market Committee meeting confirmed the market's assumption of tighter monetary policy. We suspect that this will be only the first of several moderate rate increases by Mr. Greenspan and his colleagues in the coming months. PERFORMANCE The Portfolios generated competitive investment performance results for the six- month period ended March 31, 1997. The Mentor Short-Duration Income Portfolio had a return of 2.70% (for A shares) for the period, comfortably exceeding its Merrill Lynch 3-Year Treasury benchmark, which returned 2.37%.* It also exceeded its Lipper peer group average of 2.29%.** This result placed the Portfolio in the top quartile of its Lipper category. The Quality Income Portfolio returned 2.51% (for A shares) for the six months versus its Merrill Lynch 7-Year Treasury benchmark, which returned 1.89%.* This compared to 2.62% for its Lipper peer group, placing the fund in the third quartile of its Lipper category.** During the full six-month period we chose to make only very limited duration bets, deviating only occasionally and then very modestly from our Merrill Lynch Treasury benchmarks. We continued to seek to add value through security selection, sector allocation, and yield curve weighting strategies. As the quarter came to a close and the fixed-income markets weakened in the face of strong economic statistics and the likelihood of Fed intervention, we chose to move our portfolios to a higher weighting of government securities. To accomplish this, we sold part of our position in complex securities, like teaser ARMs (adjustable rate mortgages), which offer incremental yield but are vulnerable to Fed tightenings. MARKET OUTLOOK As noted previously, we believe that the recent Fed tightening is likely to be the first of several moderate interest rate increases in the coming months. This is likely to lead to choppy markets during the early part of the upcoming quarter and perhaps to continued weakness in the short-term. However, we strongly feel that the Fed's current inflation vigilance is laying the groundwork for extremely bullish long- 23 MENTOR QUALITY INCOME PORTFOLIO MENTOR SHORT-DURATION INCOME PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- term prospects for the fixed-income markets. When compared to other asset classes, and when compared to current levels of inflation, we believe that a 30-year bond yielding in excess of 7% represents compelling value. However, we plan to remain patient as we look for opportunities to extend duration, realizing through experience that markets often overreact in the short-term before establishing trends in keeping with long-term market fundamentals. Sincerely, The Fixed-Income Management Team * THE MERRILL LYNCH 3-YEAR AND 7-YEAR TREASURY INDEXES ARE ADJUSTED TO REFLECT REINVESTMENT OF INTEREST ON SECURITIES IN THE INDEX. THEY ARE NOT ADJUSTED TO REFLECT SALES LOADS, EXPENSES, OR OTHER FEES THAT THE SEC REQUIRES TO BE REFLECTED IN THE PORTFOLIO'S PERFORMANCE. OF COURSE, TREASURIES ARE GUARANTEED AS TO PRINCIPAL AND INTEREST, WHILE THE FUND'S SHARES ARE NOT GUARANTEED AND WILL FLUCTUATE. ** 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. 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. [CHART] Class A Class B 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 3/31/97 11,976++ 12,270+ 14,164~ AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year Since Inception+++ Class A (0.66%) 3.74% Class B (0.07%) 4.09% PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvestment of interest on securities in the index. The Merrill Lynch 7-Year Treasury Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Quality Income Portfolio Class B shares. A contingent deferred sales charge will be imposed, if applicable, on Class B shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. Class B shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B shares' performance assumes the reinvestment of all dividends and distributions. ++ Represents a hypothetical investment of $10,000 in Mentor Quality Income Portfolio Class A shares, after deducting the maximum sales charge of 4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A shares' performance assumes the reinvestment of all dividends and distributions. +++ Reflects operations of Mentor Quality Income Portfolio Class A and Class B shares from the date of initial public investment on 4/29/92 through 3/31/97. 24 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. [CHART] Class A 3-Year Treasury 6/16/95 $ 9,900 $10,000 6/30/95 9,946 10,061 9/30/95 9,931 10,214 9/30/96 10,532 10,753 3/31/97 10,817+ 11,008~ AVERAGE ANNUAL RETURNS AS OF 3/31/97 INCLUDING SALES CHARGES 1-Year Since Inception++ Class A 3.46% 4.48% 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. [CHART] 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 3/31/97 11,458 11,986 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 THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. ~ The Merrill Lynch 3-Year Treasury is adjusted to reflect reinvestment of interest on securities in the index. The Merrill Lynch 3-Year Treasury Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. The Portfolio invests in securities other than Treasuries. + Represents a hypothetical investment of $10,000 in Mentor Short-Duration Income Portfolio Class A shares, after deducting the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charges = $9,900. The Class A shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Short-Duration Income Portfolio Class A from the date of issuance on 6/16/95 through 3/31/97. +++ 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 3/31/97. 25 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 89.83% - ------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 1.31% Blount International, Inc.-Class A 69,050 $ 2,848,313 Tetra Tech, Inc. * 116,500 2,563,000 - ------------------------------------------------------------------------------------------------------------------------- 5,411,313 - ------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 0.76% Superior Services, Inc.* 141,000 3,137,250 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 17.89% Applebees International, Inc 73,400 1,770,775 Applied Graphics Technologies* 123,200 4,358,200 Cadmus Financial Communications 95,150 1,343,994 Casa Ole Restaurants, Inc.* 159,100 1,421,956 Clayton Homes, Inc. 268,384 3,421,896 Clear Channel Communications* 43,900 1,882,213 Consolidated Products Company* 191,012 2,650,292 Corporate Express, Inc.* 117,250 1,201,813 Dollar General Corporation 219,816 6,869,250 Evergreen Media Corporation* 129,300 3,773,944 Fairfield Communities, Inc.* 194,900 4,872,500 Friedman's, Inc.-Class A* 146,050 2,318,544 GTECH Holdings Corporation* 88,850 2,676,606 Heftel Broadcasting Corporation-Class A* 44,350 2,062,275 Keystone Automotive Industries, Inc.* 197,800 3,065,900 Paxar Corporation* 235,399 4,560,856 Regal Cinemas, Inc.* 171,562 4,632,174 Rental Service Corporation* 120,950 2,298,050 Scientific Games Holding* 175,470 3,728,738 Southern Energy Homes, Inc.* 363,175 3,767,941 Speedway Motorsports, Inc.* 118,350 2,810,813 Stage Stores, Inc.* 92,100 2,026,200 Suburban Lodges of America* 127,900 2,302,200 Watsco, Inc. 162,575 4,145,663 - ------------------------------------------------------------------------------------------------------------------------- 73,962,793 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 2.17% JP Food Services, Inc.* 89,400 2,469,675 Rexall Sundown, Inc.* 84,400 2,162,750 Richfood Holdings, Inc. 231,325 4,337,344 - ------------------------------------------------------------------------------------------------------------------------- 8,969,769 - -------------------------------------------------------------------------------------------------------------------------
26 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- ENERGY 7.77% American Oilfield Divers, Inc.* 194,900 $ 2,192,625 Coach USA, Inc.* 121,250 3,516,250 Core Laboratories, Inc.* 209,500 3,718,625 Mary Land and Exploration* 107,300 2,762,975 Maverick Tube Corporation* 204,550 3,630,763 Nuevo Energy Company* 151,000 5,794,625 Pride Petroleum Services, Inc.* 224,300 4,654,225 Trico Marine Services, Inc.* 74,600 3,543,500 Tuboscope Vetco International Corporation* 168,950 2,301,944 - ------------------------------------------------------------------------------------------------------------------------- 32,115,532 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL 3.20% Markel Corporation* 72,060 7,962,630 National Commerce Bancorporation 137,096 5,278,196 - ------------------------------------------------------------------------------------------------------------------------- 13,240,826 - ------------------------------------------------------------------------------------------------------------------------- HEALTH 25.12% American Medserve Corporation* 137,150 1,611,513 Atria Communities, Inc.* 190,800 2,003,400 Biosite Diagnostics* 101,450 989,137 Capstone Pharmacy Services* 244,400 2,688,400 Clintrials Research, Inc.* 144,350 1,226,975 CompDent Corporation* 36,520 1,022,560 Dentsply International, Inc. 77,950 3,897,500 Dura Pharmaceuticals* 80,150 2,865,362 Emcare Holdings, Inc.* 180,900 4,861,688 Express Scripts, Inc.-Class A* 77,300 2,763,475 First Commonwealth, Inc.* 92,800 1,368,800 FPA Medical Management, Inc.* 121,200 2,333,100 Genesis Health Ventures, Inc.* 91,900 2,871,875 Gulf South Medical Supply* 116,300 2,253,313 Health Management Associates, Inc.* 211,594 5,025,357 Healthdyne Information Enterprises* 122,150 458,062 Henry Schein, Inc.* 43,950 1,274,550 Home Health Corporation of America* 168,250 1,661,469 Manor Care, Inc. 100,310 2,445,056 Meridian Diagnostics, Inc. 256,400 2,820,400 Molecular Devices Corporation* 160,100 2,221,387
27 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- HEALTH (CONTINUED) Multicare Companies, Inc.* 261,225 $ 4,930,622 National Surgery Centers, Inc.* 149,550 4,336,950 Omnicare, Inc. 174,060 4,090,410 Parexel International Corporation* 83,500 1,920,500 Pediatric Services of America, Inc.* 174,250 3,288,969 Pediatrix Medical Group, Inc.* 85,000 2,794,375 Phycor, Inc.* 137,935 3,758,729 Physician Sales and Services, Inc.* 133,300 1,682,912 Quorum Health Group* 85,900 2,652,162 Raytel Medical Corporation* 248,350 2,607,675 Renal Treatment Center, Inc.* 235,730 5,303,925 Rural/Metro Corporation* 99,750 3,042,375 Serologicals Corporation* 128,550 1,928,250 Sofamor Danek Group, Inc.* 118,670 4,286,954 Suburban Ostomy Supply Company* 91,600 870,200 United Dental Care, Inc. 100,350 2,709,450 Vencor, Inc.* 132,655 5,024,308 - ------------------------------------------------------------------------------------------------------------------------- 103,892,145 - ------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY 24.64% ACC Corporation* 104,625 2,327,906 Advanced Technology* 118,650 2,046,712 Applied Materials, Inc.* 52,500 2,434,687 Applied Microsystems Corporation* 219,250 1,342,906 Aspect Development, Inc.* 205,400 4,724,200 Benchmark Electronics, Inc.* 149,570 4,374,922 Benchmarq Microelectronics* 230,650 2,883,125 Billing Information Concepts* 92,800 2,227,200 CFM Technologies, Inc.* 66,400 1,967,100 Cognos, Inc.* 99,550 2,588,300 Concord EFS, Inc.* 60,361 1,131,769 Dataworks Corporation* 252,150 3,656,175 Envoy Corporation* 89,400 2,089,725 Harbinger Corporation* 142,750 3,140,500 HPR, Inc.* 153,950 1,731,937 Indus Group* 200,600 2,908,700 Industri-Matematic International Corporation* 279,600 2,236,800 Intelligroup, Inc.* 170,650 1,727,831 Linear Technology Corporation 94,100 4,163,925
28 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY (CONTINUED) Maxim Integrated Products, Inc.* 99,100 $ 4,793,962 LSI Logic Corporation* 130,000 4,517,500 Micros Systems, Inc.* 128,250 4,472,719 National Education Corporation* 38,250 482,906 Pairgain Technologies* 77,500 2,295,937 Precision Response Corporation* 159,550 3,769,369 Radiant Systems, Inc.* 105,050 945,450 Rational Software Corporation* 122,250 2,521,406 SDL, Inc.* 122,660 2,100,552 Sipex Corporation* 129,650 3,792,262 Symmetricom, Inc.* 176,400 2,513,700 Techforce Corporation* 94,700 562,281 Triquint Semiconductor, Inc.* 140,400 3,352,050 Uniphase Corporation* 121,050 4,478,850 U.S. Long Distance Corporation* 198,100 2,302,912 Versant Object Technology* 113,850 1,010,419 Viasoft, Inc.* 87,700 2,850,250 Viisage Technology* 149,650 1,402,969 Worldcom, Inc.* 182,559 4,016,298 - ------------------------------------------------------------------------------------------------------------------------- 101,886,212 - ------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION 1.99% American Freightways* 80,700 1,124,756 Heartland Express, Inc.* 136,500 2,593,500 Mesaba Holdings, Inc.* 236,750 2,752,219 Swift Transportation* 69,550 1,773,525 - ------------------------------------------------------------------------------------------------------------------------- 8,244,000 - ------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS 4.98% Accustaff* 201,885 3,381,574 AHL Services, Inc.* 122,100 1,221,000 Barrett Business Services, Inc.* 89,600 1,299,200 Medquist, Inc.* 141,750 3,118,500 Outdoor Systems, Inc.* 138,025 4,123,497 Source Services Corporation* 147,400 2,616,350 Ultrak, Inc.* 115,150 2,072,700 Universal Outdoor Holdings* 96,200 2,789,800 - ------------------------------------------------------------------------------------------------------------------------- 20,622,621 - ------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $334,519,709) 371,482,461 - -------------------------------------------------------------------------------------------------------------------------
29 MENTOR GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 10.20% - ------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/97, 6.53%, due 4/1/97 collateralized by $44,912,587 Federal Home Loan Mortgage Corporation 7.00%, 8/01/26, market value $43,073,978, (cost $42,170,678) $42,170,678 $ 42,170,678 - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $376,690,387) 100.03% 413,653,139 - ------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES (0.03%) (111,834) - ------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $413,541,305 - -------------------------------------------------------------------------------------------------------------------------
* Securities not currently producing income. ~ American Depository Receipts. SEE NOTES TO FINANCIAL STATEMENTS. 30 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 87.82% - -------------------------------------------------------------------------------------------------------------------------- ARGENTINA 0.52% Banco Galacia~ 6,600 $ 160,875 Perez Company~ 9,718 156,703 Telecom Argentina~ 3,300 151,800 - -------------------------------------------------------------------------------------------------------------------------- 469,378 - -------------------------------------------------------------------------------------------------------------------------- BRAZIL 2.05% Brazil Fund, Inc. 6,100 150,212 CIA Cervejaria Brahma~ 9,100 121,713 CIA Energ~* 11,900 181,475 Cemig CIA Energetic~* 2,250 93,052 Centrais Eletrobras~* 12,000 258,000 Klabin Fabic Papel~* 16,600 156,704 PAO De Acucar#* 5,620 119,425 Perdigao~ 10,500 113,715 Petrol Brasileiros~* 6,900 137,310 Telebras~* 2,550 261,056 Usinas Sider~* 13,700 159,263 Vale Do Rio Doche~ 4,400 100,010 - -------------------------------------------------------------------------------------------------------------------------- 1,851,935 - -------------------------------------------------------------------------------------------------------------------------- CHILE 0.41% Banco BHIF~ 5,300 113,287 Chile Fund, Inc. 4,100 92,763 Chilectra~ 2,500 165,000 - -------------------------------------------------------------------------------------------------------------------------- 371,050 - -------------------------------------------------------------------------------------------------------------------------- CHINA 0.10% Huaneng Power International, Inc.-Class A~* 4,000 89,500 - -------------------------------------------------------------------------------------------------------------------------- FINLAND 1.20% Huhtamaki OY 9,100 443,520 Nokia OY-Class A 10,700 640,609 - -------------------------------------------------------------------------------------------------------------------------- 1,084,129 - -------------------------------------------------------------------------------------------------------------------------- FRANCE 4.60% Axime (Ex Segin)* 5,000 591,789 Banque National Paris* 12,600 560,025 Carbone Lorraine* 1,070 262,794
31 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- FRANCE (CONTINUED) Cardif SA* 2,090 $ 293,425 Cetelem 3,000 355,607 Credit Local France 3,900 420,704 Generale Des Eeux 3,290 447,281 Metropole TV* 5,750 583,481 Total-Class B* 4,400 380,728 Union Financiere De France* 2,300 255,056 - -------------------------------------------------------------------------------------------------------------------------- 4,150,890 - -------------------------------------------------------------------------------------------------------------------------- GERMANY 4.03% Daimler Benz AG* 6,940 558,269 Degussa 1,169 497,432 Krupp Fried AG* 2,110 412,353 SGL Carbon* 915 124,406 VIAG AG* 2,000 945,466 Volkswagen AG* 2,000 1,099,656 - -------------------------------------------------------------------------------------------------------------------------- 3,637,582 - -------------------------------------------------------------------------------------------------------------------------- GREAT BRITAIN 17.10% BAA PLC* 55,000 464,052 B.A.T. Industries, PLC 60,000 510,671 BG* 70,500 188,054 Bank of Ireland* 49,465 493,271 Barclays, PLC 30,000 502,791 British Aerospace PLC 21,000 470,364 British Biotech* 100,000 409,554 British Telecom 75,000 548,466 Burmah Castrol* 25,000 417,557 Centrica* 270,500 281,956 Coats Viyella* 100,000 221,602 Elan Corporation PLC~* 10,000 341,250 General Electric* 60,000 367,860 Glaxo Wellcome 31,000 568,148 Granada Group* 25,000 376,519 Grand Metropolitan 50,000 402,988 Great Universal Stores 30,000 328,710 Guinness 50,000 422,276 Inchcape PLC 105,000 451,577 Lucas Varity* 75,000 241,301 Medeva 80,000 403,809 National Westminister 30,000 338,067 Pearson 30,000 358,996 Prudential Corporation PLC 60,000 558,438 Rank Organisation PLC 65,000 451,330
32 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- GREAT BRITAIN (CONTINUED) Reckitt & Colman* 30,000 $ 401,593 Rolls Royce 90,000 336,836 Safeway 70,000 409,636 Scotia Holdings* 30,000 225,296 Standard Chartered 37,500 519,227 Sun Alliance Group PLC 50,000 366,875 Tate & Lyle PLC 40,000 284,964 Tesco PLC 60,000 344,223 Thorn PLC* 100,000 274,951 Transport Development Group 95,000 300,969 Unigate 20,000 148,392 Unilever PLC 45,000 1,192,960 United Utilities 50,000 515,432 - -------------------------------------------------------------------------------------------------------------------------- 15,440,961 - -------------------------------------------------------------------------------------------------------------------------- HONG KONG 5.30% CDL Hotels International 411,202 202,982 Cheung Kong Holdings 48,000 422,781 China Areospace* 200,000 69,689 China O/Seas Land 230,000 124,666 China Pharmaceutical 545,000 94,248 Chinese Estates 100,168 98,892 Citic Pacific Limited* 24,000 118,937 Dah Sing Financial 14,800 57,682 Elec & Eltek International 500,000 118,730 GZI Transport-Warrants* 60,000 10,685 GZI Transport* 200,000 118,085 Henderson China 45,056 80,823 Henderson Land Development 16,000 132,667 Hon Kwok Land 360,000 118,472 Hong Kong Electric 80,000 282,370 Hong Kong Telecom, Ltd. 123,327 210,884 HSBC Holdings PLC 28,679 666,205 Hutchison Whampoa, Ltd. 72,000 541,252 Hysan Development-Warrants* 700 361 International Bank of East Asia 160,000 98,081 LAI Sun Development 200,000 232,297 LAI Sun Hotels- Warrants* 40,160 0 National Mutual Asia 120,000 125,441 New World Development 56,057 302,396 Sino Land Company 100,000 103,243 Sun Hung Kai Properties 12,000 126,990 Swire Pacific Limited-Class A 20,000 157,445 Television Broadcast, Ltd. 16,000 65,043 USI Holdings Ltd.* 313,000 108,054 - -------------------------------------------------------------------------------------------------------------------------- 4,789,401 - --------------------------------------------------------------------------------------------------------------------------
33 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- INDIA 0.30% BSES Limited#* 4,000 $ 83,000 India Cement#* 20,000 52,500 Indian Opportunity* 11,000 99,660 Tata Electric Cies#* 100 33,750 - -------------------------------------------------------------------------------------------------------------------------- 268,910 - -------------------------------------------------------------------------------------------------------------------------- INDONESIA 0.56% Bank Dagang NA* 100,000 99,958 Bank Dagang NI* 75,000 74,969 Bank Dagang-Warrants* 25,000 8,850 Citra Marga Local* 120,000 107,455 PT Daya Gune Samudera* 42,000 61,224 Telekomunikasi Thoser B* 103,000 157,653 - -------------------------------------------------------------------------------------------------------------------------- 510,110 - -------------------------------------------------------------------------------------------------------------------------- ITALY 0.85% Seat SPA* 52,000 18,038 STET-Societa* 26,000 113,361 Telecom Italia Mobile* 220,000 631,579 - -------------------------------------------------------------------------------------------------------------------------- 762,978 - -------------------------------------------------------------------------------------------------------------------------- JAPAN 7.83% Canon, Inc. 28,000 600,081 Fuji Photo Film 17,000 559,563 Fujitsu 56,000 570,643 Hitachi Construction 58,000 515,973 Honda Motor Company 20,000 596,846 Nichiei Company 7,200 558,997 Nichiha Corporation 13,000 188,192 Nippon Telegraph & Telephone 87 612,835 Orix Corporation 10,000 440,760 ROHM Company 8,000 590,053 Sagami Chain Company 12,600 152,851 Taisho Pharmaceutical 24,000 560,938 Tokyo Denpa Company 5,000 95,026 Toyoda Automatic 30,000 497,372 UNI-Charm Corporation 20,000 525,677 - -------------------------------------------------------------------------------------------------------------------------- 7,065,807 - -------------------------------------------------------------------------------------------------------------------------- KOREA 0.11% CITC Seoul Exel@* 2 15,500 Korea-Europe Fund@* 18 41,670 LG Electronics#* 6,400 20,960 Samsung Electronics# (b)* 397 18,480 - -------------------------------------------------------------------------------------------------------------------------- 96,610 - --------------------------------------------------------------------------------------------------------------------------
34 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- MALAYSIA 2.06% ACP Industries 16,000 $ 132,351 Affin Holdings BHD* 65,000 184,909 Boustead Holdings 36,000 90,790 Cahya Mata Sarawak BHD 15,000 170,988 DCB Holdings 48,000 181,096 Diversified RES 40,000 130,737 Genting Berhad 20,000 135,580 Magnum Corporation 110,000 208,615 MBM Resources* 20,000 54,877 Malaysian Assurance 10,000 57,702 Public Finance* 80,000 132,351 Renong Berhad 80,000 135,580 Suremax Group 28,000 187,552 UMW Holdings Berhad 10,000 55,281 - -------------------------------------------------------------------------------------------------------------------------- 1,858,408 - -------------------------------------------------------------------------------------------------------------------------- MEXICO 1.44% Bufete Industrial* 7,720 160,190 CIFRA~ 100,000 137,500 Cont Com Mexicana#* 7,150 105,463 DESC~* 6,200 162,750 Empresas ICA~* 7,700 123,681 Empress La Modern~* 8,360 167,200 Fomento Economic~* 38,400 169,943 Grupo Financiero Bancomer~*(b) 4,800 121,200 Panamerica Beverages-Class A 2,900 155,513 - -------------------------------------------------------------------------------------------------------------------------- 1,303,439 - -------------------------------------------------------------------------------------------------------------------------- NETHERLANDS 3.38% ABN-Amro Holdings NV 6,100 418,809 ING Groep NV* 19,771 777,624 Oce-Van Der Grinten 3,200 413,519 Royal Dutch Petroleum* 3,187 577,728 Vendex International* 5,325 251,669 VNU-Ver Ned Uitgevers 30,000 616,318 - -------------------------------------------------------------------------------------------------------------------------- 3,055,665 - -------------------------------------------------------------------------------------------------------------------------- NORWAY 0.51% Orkla AS-Class A* 5,770 463,149 - --------------------------------------------------------------------------------------------------------------------------
35 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- PERU 0.17% CPT Telefonica Del Peru~ 6,700 $ 149,075 - -------------------------------------------------------------------------------------------------------------------------- PHILIPPINES 0.25% Bank Of The Philippines 15,000 101,840 Benpres Holdings#* 16,000 120,800 - -------------------------------------------------------------------------------------------------------------------------- 222,640 - -------------------------------------------------------------------------------------------------------------------------- SINGAPORE 0.74% ACMA Limited-Warrants 7,500 4,387 City Developments* 16,000 141,779 Development Bank Singapore* 20,000 232,606 Jardine Strategic 20,000 69,201 Jardine Strategic-Warrants 3,125 1,016 Overseas Union* 10,000 68,882 Singapore Press Holdings 5,000 91,035 Sing Tech Shipbuilding* 38,000 56,296 UTD Overseas-Warrants* 2,000 1,263 - -------------------------------------------------------------------------------------------------------------------------- 666,466 - -------------------------------------------------------------------------------------------------------------------------- SPAIN 1.07% Continente Cent* 12,500 222,724 Corporacion Financiera 3,700 366,199 Viscofan Envolturas Celulos 21,500 379,277 - -------------------------------------------------------------------------------------------------------------------------- 968,200 - -------------------------------------------------------------------------------------------------------------------------- SWEDEN 3.88% Celsisu-Class B* 30,000 573,318 Electrolux AB* 1,950 123,789 NCC-Class B* 33,700 450,150 Securitas-Class B* 12,540 358,226 Skandia Forsak* 3,750 117,788 Skandinaviska-Class A* 26,960 297,723 SKF AB-Class B* 5,280 138,263 Svenska Handel-Class A* 30,000 912,548 Volvo-Class B* 20,000 534,303 - -------------------------------------------------------------------------------------------------------------------------- 3,506,109 - --------------------------------------------------------------------------------------------------------------------------
36 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- SWITZERLAND 2.04% Credit Suisse Group* 6,000 $ 717,301 Roche Holding AG 117 1,007,657 Sulzer AG 180 117,716 - -------------------------------------------------------------------------------------------------------------------------- 1,842,675 - -------------------------------------------------------------------------------------------------------------------------- TAIWAN 0.34% Formosa Growth Fund* 5,000 90,625 Taipei Fund@* 20 214,000 - -------------------------------------------------------------------------------------------------------------------------- 304,625 - -------------------------------------------------------------------------------------------------------------------------- THAILAND 0.30% Bangkok Bank 16,000 155,345 Banpu Coal 8,000 120,209 - -------------------------------------------------------------------------------------------------------------------------- 275,554 - -------------------------------------------------------------------------------------------------------------------------- UNITED STATES 26.68% ACC Corporation* 17,500 389,375 AGCO Corporation 15,000 414,375 APAC Teleservices* 15,000 390,000 Abbott Laboratories 12,500 701,563 American Express Company 10,000 598,750 Amresco, Inc.* 25,000 418,750 Automatic Data Processing 15,000 628,125 Avnet, Inc. 12,000 676,500 BMC Industries 17,000 480,250 Borders Group, Inc. 30,000 566,250 Cardinal Health, Inc. 10,000 543,750 Carnival Corporation-Class A 15,000 555,000 Chase Manhattan Corporation 8,000 749,000 Chesapeake Energy 20,000 417,500 Cooper Cameron Corporation* 10,000 685,000 Diamond Offshore* 6,040 413,740 El Paso Natural Gas 14,000 792,750 Evergreen Media Corporation-Class A* 18,000 525,375 Federal National Mortage Association 17,500 632,188 Fisher Scientific 15,000 661,875 Fort Howard Corporation* 20,000 622,500 Furniture Brands International* 40,000 600,000 Halliburton Company 7,500 508,125 Healthsouth Corporation 25,000 478,125 Health Management Associates-Class A* 25,000 593,750 Household International 7,000 602,875 JP Food Services, Inc.* 20,000 552,500 Lilly (ELI) & Company 8,000 658,000 Lockheed Martin Corporation 6,000 504,000 Microsoft Corporation 2,000 183,375
37 MENTOR PERPETUAL GLOBAL PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Shares or Percent of Net Principal Assets Amount Market Value - -------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - -------------------------------------------------------------------------------------------------------------------------- UNITED STATES (CONTINUED) Mirage Resorts, Inc.* 25,000 $ 531,250 Motorola, Inc. 10,000 603,750 Omnicare 20,000 470,000 Oryx Energy* 20,000 385,000 Pepsico, Inc. 15,000 489,375 Reynolds & Reynolds Company-Class A 18,000 429,750 Safeway* 12,500 579,687 ST Jude Medical, Inc.* 17,500 584,062 Sonat, Inc.* 10,000 545,000 Staples, Inc.* 25,000 503,125 Sun Microsystems, Inc.* 17,000 490,875 Sybron International Corporation* 14,000 388,500 USF & G Corporation 25,000 537,500 Wendy's International 20,000 412,500 Whirlpool Corporation 12,500 595,312 - -------------------------------------------------------------------------------------------------------------------------- 24,089,052 - -------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $73,592,733) 79,294,298 - -------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS 1.27% - -------------------------------------------------------------------------------------------------------------------------- JAPAN Nippon Densan Corporation, 1.00%, 9/30/03 $ 7,000,000 69,632 Ricoh Company Corporation, 0.35%, 3/31/00 50,000,000 471,088 Sony Corporation Bond, 0.15%, 3/30/01 26,000,000 237,606 Sony Corporation Bond, 1.40%, 3/31/05 28,000,000 299,135 - -------------------------------------------------------------------------------------------------------------------------- 1,077,461 - -------------------------------------------------------------------------------------------------------------------------- MALAYSIA Telekom Malaysia Berhad, 4.00%, 10/3/04~ (9/22/94, $70,000) (a) (b) 70,000 66,413 - -------------------------------------------------------------------------------------------------------------------------- TOTAL CORPORATE BONDS (COST $1,072,005) 1,143,874 - --------------------------------------------------------------------------------------------------------------------------
38 MENTOR PERPETUAL GLOBAL PORTFOLIOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value - -------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 9.88% - -------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/97, 6.53%, due 4/01/97, collateralized by Federal Home Loan Mortgage Corporation, $9,500,096 7.00%, 8/01/97, market value $9,111,186, (cost $8,920,137) $ 8,920,137 $ 8,920,137 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $83,584,875) 98.97% 89,358,309 - -------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES 1.03% 930,659 - -------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $90,288,968 - --------------------------------------------------------------------------------------------------------------------------
* Non-income producing. # Global Depoistory Receipts ~ American Depository Receipts. @ International 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. 39 MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 87.85% - ------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 13.07% Bemis Company, Inc. 107,700 $ 4,308,000 Morton International, Inc. 83,900 3,544,775 Nalco Chemical Company 119,100 4,451,362 Sonoco Products Company 155,550 4,199,850 - ------------------------------------------------------------------------------------------------------------------------- 16,503,987 - ------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 6.21% Pall Corporation 168,400 3,894,250 W.W. Grainger, Inc. 53,300 3,944,200 - ------------------------------------------------------------------------------------------------------------------------- 7,838,450 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 16.06% Carnival Corporation 110,500 4,088,500 Interpublic Group Company 90,000 4,747,500 Mirage Resorts, Inc.* 187,970 3,994,362 Mattel, Inc. 153,600 3,686,400 Newell Company 112,200 3,758,700 - ------------------------------------------------------------------------------------------------------------------------- 20,275,462 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 17.87% Avon Products 74,900 3,932,250 CPC International, Inc. 55,650 4,563,300 McDonald's Corporation 110,700 5,230,575 Sherwin Williams Company 160,600 4,336,410 Sysco Corporation 132,000 4,504,500 - ------------------------------------------------------------------------------------------------------------------------- 22,567,035 - ------------------------------------------------------------------------------------------------------------------------- ENERGY 3.21% Schlumberger, Ltd. 37,800 4,054,050 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL 10.83% American Express Company 62,600 3,748,175 Banc One Corporation 75,900 3,017,025 Federal National Mortgage Association 84,000 3,034,500 General RE Corporation* 24,500 3,871,000 - ------------------------------------------------------------------------------------------------------------------------- 13,670,700 - -------------------------------------------------------------------------------------------------------------------------
40 MENTOR CAPITAL GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Shares or Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- HEALTH 7.08% Pfizer, Inc. 50,600 $ 4,252,305 Schering-Plough 64,200 4,680,000 - ------------------------------------------------------------------------------------------------------------------------- 8,932,305 - ------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY 3.84% Electronic Data Systems 39,100 1,578,663 Intel Corporation 23,500 3,269,437 - ------------------------------------------------------------------------------------------------------------------------- 4,848,100 - ------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION & SERVICES 3.20% Werner Enterprises, Inc. 215,650 4,043,439 - ------------------------------------------------------------------------------------------------------------------------- UTILITIES 3.52% Ameritech Corporation 37,300 2,293,950 GTE Corporation 46,000 2,144,750 - ------------------------------------------------------------------------------------------------------------------------- 4,438,700 - ------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS 2.96% S & P 500 - Depository Receipt 49,500 3,735,703 - ------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $95,433,267) 110,907,931 - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 16.84% - ------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/97, 6.53%, due 4/01/97, collateralized by $22,645,292 Federal Home Loan Mortgage Corporation, 7.00%, 08/01/26, market value $21,718,250, (cost $21,262,602) $21,262,602 21,262,602 - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $116,695,869) 104.69% 132,170,533 - ------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES (4.69%) (5,915,830) - ------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $126,254,703 - -------------------------------------------------------------------------------------------------------------------------
* Non-income producing. SEE NOTES TO FINANCIAL STATEMENTS. 41 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 29.61% - ------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 1.43% American Home Products Corporation* 41,800 $ 2,508,000 Synetic, Inc.* 29,500 1,393,875 Unifi, Inc. 20,800 634,400 - ------------------------------------------------------------------------------------------------------------------------- 4,536,275 - ------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 4.09% Bay Apartment Communities 46,500 1,668,187 Chicago Miniature Lamp, Inc.* 43,000 843,875 Fairfield Communities, Inc.* 43,000 1,075,000 Fuller (H. B.) Company 32,000 1,560,000 Hirsch International Corporation-Class A * 68,750 1,332,031 Interface, Inc. 49,100 1,230,569 Laidlaw, Inc.-Class B* 46,100 633,875 Medusa Corporation 40,000 1,500,000 Miller Industries, Inc. * 89,400 1,072,800 Sinter Metals, Inc.-Class A * 49,500 1,361,250 Southdown, Inc. 19,950 683,288 - ------------------------------------------------------------------------------------------------------------------------- 12,960,875 - ------------------------------------------------------------------------------------------------------------------------- COMMERCIAL SERVICES 0.59% Cintas Corporation 10,000 527,500 United Waste Systems, Inc.* 35,900 1,337,275 - ------------------------------------------------------------------------------------------------------------------------- 1,864,775 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 2.01% Bowne & Company, Inc. 9,000 244,125 Costco Companies, Inc.* 18,000 497,250 Honda Motor Company~ 2,360 138,060 Kimball International-Class B 12,800 486,400 Morningstar Group, Inc.* 20,050 385,962 Reebok International* 6,200 278,225 Smithfield Foods, Inc.* 20,300 857,675 Stride Rite Corporation* 24,700 370,500 Walgreen Company* 26,900 1,126,438 Watsco, Inc. 23,550 600,525 Zeigler Coal Holding 58,000 1,377,500 - ------------------------------------------------------------------------------------------------------------------------- 6,362,660 - -------------------------------------------------------------------------------------------------------------------------
42 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 3.64% Cadbury Schweppes, Plc~ 29,200 $ 1,047,550 Coca Cola Femsa*~ 28,600 1,029,600 Ecolab, Inc. 33,800 1,284,400 Gillette Company 7,100 515,638 Health Management Association* 36,900 876,375 Interstate Bakeries 13,200 623,700 Panamerica Beverages 22,300 1,195,837 Sangstat Medical Corporation* 51,600 1,399,650 USA Detergents, Inc.* 41,800 961,400 Warner-Lambert, Company* 30,000 2,595,000 - ------------------------------------------------------------------------------------------------------------------------- 11,529,150 - ------------------------------------------------------------------------------------------------------------------------- ENERGY 2.97% CalEnergy, Inc. * 17,600 598,400 Chevron Corporation 16,600 1,155,775 Honeywell, Inc. 47,500 3,224,063 Mobile Corporation* 8,600 1,123,375 Panenergy Corporation 20,000 862,500 Ranger Oil, Limited 126,500 1,201,750 Smith International, Inc.* 11,000 501,875 Swift Energy Company * 31,100 734,737 - ------------------------------------------------------------------------------------------------------------------------- 9,402,475 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL 6.51% Alex Brown, Inc. 22,000 935,000 Bankamerica Corporation 20,000 2,015,000 Bankers Trust New York* 15,400 1,262,800 Cali Realty Corporation 23,400 748,800 Catellus Development Corporation* 77,000 1,174,250 Cityscape Financial Corporation* 26,600 472,150 Conseco, Inc. 26,000 926,250 Federal Home Loan Mortgage Corporation 18,400 501,400 First Chicago NBD Corporation* 20,300 1,098,737 Loews Corporation* 12,700 1,128,713 Merrill Lynch & Company 14,000 1,202,250 North Fork Bancorporation 25,000 903,125 Northern Trust Corporation 30,000 1,125,000 Old Republic International Corporation* 43,400 1,112,125 Synovus Financial Corporation 66,600 1,964,700
43 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL (CONTINUED) T. Rowe Price Associates 35,000 $ 1,299,375 Toronto-Dominion Bank 30,000 753,750 Travelers, Inc. 20,000 957,500 U.S. Bancorp 20,000 1,070,000 - ------------------------------------------------------------------------------------------------------------------------- 20,650,925 - ------------------------------------------------------------------------------------------------------------------------- RETAIL 0.44% Safeway, Inc. * 30,000 1,391,250 - ------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY 5.65% Act Manufacturing, Inc.* 54,200 1,124,650 Aspen Technology, Inc. * 15,000 408,750 Bell Microproducts, Inc.* 21,500 263,375 Computer Task Group* 38,000 1,349,000 Dell Computers* 15,300 1,034,663 EMC Corporation* 61,200 2,172,600 Level One Communications* 46,500 1,243,875 Parametric Technology Corporation * 30,000 1,353,750 Quickturn Design Systems* 75,000 1,200,000 Radisys Corporation * 27,000 789,750 Reynolds & Reynolds-Class A 13,100 312,762 Sanmina Corporation* 30,700 1,373,825 SBS Technologies, Inc.* 52,500 800,625 Smart Modular Technology* 100,000 2,375,000 Triquint Semiconductor* 43,000 1,026,625 Visio Corporation* 28,000 1,092,000 - ------------------------------------------------------------------------------------------------------------------------- 17,921,250 - ------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION 1.18% Greyhound Lines, Inc.* 27,500 116,875 Illinois Central Corporation 21,300 670,950 Paccar, Inc. 22,500 1,501,875 Wisconsin Central Transportation Corporation * 41,200 1,452,300 - ------------------------------------------------------------------------------------------------------------------------- 3,742,000 - -------------------------------------------------------------------------------------------------------------------------
44 MENTOR STRATEGY PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Shares or Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS 1.10% AG Services of America* 110,000 $ 1,787,500 Periphonics Corporation* 31,000 457,250 U.S. Industries, Inc.* 35,500 1,251,375 - ------------------------------------------------------------------------------------------------------------------------- 3,496,125 - ------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $93,376,851) 93,857,760 - ------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES AND AGENCIES 35.30% - ------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bond, 6.50%, 11/15/26 $81,943,000 75,455,573 U.S. Treasury Note-Strip, 8/15/20 72,000,000 13,204,800 U.S. Treasury Note-Strip, 8/15/21 136,000,000 23,249,200 - ------------------------------------------------------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $115,610,969) 111,909,573 - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 22.90% - ------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/97, 6.53%, due 4/01/97, collateralized by $77,305,050 Federal Home Loan Mortgage Corporation, 7.00%, 08/01/26, market value $74,302,214, (cost $72,586,394) 72,586,394 72,586,394 - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $281,574,214) 87.81% 278,353,727 - ------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES 12.19% 38,636,905 - ------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $316,990,632 - -------------------------------------------------------------------------------------------------------------------------
* Securities not currently producing income. ~ American Depository Receipts SEE NOTES TO FINANCIAL STATEMENTS. 45 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 50.24% - ------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 7.62% Aluminum Company of America 17,800 $ 1,210,400 British Steel PLC*~ 22,000 585,750 Dow Chemical 14,400 1,152,000 Du Pont (E.I.) De Nemours 9,100 964,600 Lubirzol Corporation 20,000 650,000 Norsk Hydro AS~ 13,000 635,375 Phelps Dodge Corporation 16,700 1,221,187 Rhone Poulenc SA-Class A*~ 36,000 1,197,000 Westvaco Corporation 34,000 855,020 Willamette Industries, Inc. 15,900 993,750 - ------------------------------------------------------------------------------------------------------------------------- 9,465,082 - ------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 5.66% Caterpillar, Inc.* 12,800 1,027,200 Cooper Industries, Inc. 20,000 867,500 Foster Wheeler Corporation 48,000 1,698,000 General Electric Company 11,000 1,091,750 Kimberly-Clark Corporation 15,000 1,490,625 Northrop Grumman Corporation 11,200 847,000 - ------------------------------------------------------------------------------------------------------------------------- 7,022,075 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 2.73% Ford Motor Company 53,500 1,678,562 May Department Stores Company 18,100 823,550 Sears Roebuck & Company 17,600 884,400 - ------------------------------------------------------------------------------------------------------------------------- 3,386,512 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 5.75% Abbot Laboratories 23,100 1,296,487 Baxter International 28,000 1,207,500 Dimon Incorporated 45,300 1,041,900 Pharmacia & Upjohn, Inc. 36,000 1,319,020 Phillip Morris Companies, Inc. 8,700 992,888 Supervalue, Inc. 43,000 1,279,250 - ------------------------------------------------------------------------------------------------------------------------- 7,137,045 - ------------------------------------------------------------------------------------------------------------------------- ENERGY 5.66% Amoco Corporation 12,900 1,117,463
46 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Assets Shares Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- ENERGY (CONTINUED) Exxon Corporation 11,300 $ 1,217,575 Honeywell Inc. 11,300 766,988 Phillips Petroleum Company 17,200 703,050 Repsol SA~ 21,200 863,900 Royal Dutch Pete Corporation* 3,600 630,000 Total SA*~ 20,000 847,500 Unocal Corporation 23,000 876,875 - ------------------------------------------------------------------------------------------------------------------------- 7,023,351 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL 10.09% Allstate Corporation 37,000 2,196,875 Banc One Corporation 14,300 568,425 Citicorp 21,000 2,273,250 Corestates Financial 28,400 1,349,000 First Bank System, Inc. 30,000 2,190,000 First Union Corporation 21,600 1,752,300 Jefferson-Pilot Corporation 18,500 1,005,938 Mercantile Bankshares Corporation 18,000 607,500 Wilmington Trust Corporation 13,600 579,527 - ------------------------------------------------------------------------------------------------------------------------- 12,522,815 - ------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY 2.49% International Business Machines Corporation 10,280 1,412,215 Xerox Corporation 29,600 1,683,500 - ------------------------------------------------------------------------------------------------------------------------- 3,095,715 - ------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION & SERVICES 3.63% Canadian Pacific, Ltd. 60,100 1,442,400 KLM Royal Dutch Air* 35,500 1,016,187 Union Pacific Corporation 36,000 2,043,000 - ------------------------------------------------------------------------------------------------------------------------- 4,501,587 - ------------------------------------------------------------------------------------------------------------------------- UTILITIES 3.09% DQE, Inc. 29,000 805,935 DPL, Inc. 34,000 820,685 Pinnacle West Capital 38,300 1,153,788 SBC Communications, Inc. 20,000 1,051,520 - ------------------------------------------------------------------------------------------------------------------------- 3,831,928 - ------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS 3.52% Brtistol Myers Squibb 16,800 991,200 Johnson & Johnson 13,300 703,237
47 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Shares or Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS (CONTINUED) Textron, Inc. 7,100 $ 745,500 Wallace Computer Services, Inc. 58,000 1,921,850 - ------------------------------------------------------------------------------------------------------------------------- 4,361,787 - ------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $60,983,935) 62,347,897 - ------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS 4.08% - ------------------------------------------------------------------------------------------------------------------------- BASIC MATERIALS 0.19% Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 238,775 - ------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION 0.08% Lockheed Corporation, 6.75%, 3/15/03 100,000 97,374 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL 0.15% Sears Roebuck Company, 9.25%, 4/15/98 175,000 179,988 - ------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 0.18% Gillette Company, 5.75%, 10/15/05 250,000 226,513 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL 2.13% American General Finance Corporation, 5.88%, 7/01/00 250,000 242,290 Associates Corporation of North America, 5.25%, 3/30/00 250,000 239,062 Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 255,172 Comerica Bank, 7.13%, 12/01/13 250,000 231,790 Dean Witter Discover, 6.25%, 3/15/00 100,000 98,237 First National Bank of Boston, 8.00%, 9/15/04 250,000 257,378 Ford Motor Credit, 8.88%, 6/15/99 100,000 104,287 Great Western Financial, 6.38%, 7/01/00 250,000 245,380 Home Savings of Americas, 6.00%, 11/01/00 250,000 241,942 Security Benefits Life Company, 8.75%, 5/15/16 (a) 500,000 507,500 Toronto Dominion Bank, 6.13%, 11/01/08 250,000 223,165 - ------------------------------------------------------------------------------------------------------------------------- 2,646,203 - ------------------------------------------------------------------------------------------------------------------------- UTILITIES 1.35% Duke Power Company, 7.00%, 6/01/00 100,000 100,236 Florida Power & Light Company, 5.38%, 4/01/00 250,000 240,210 Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 230,607 Philadelphia Electric Company, 7.50%, 1/15/99 100,000 101,279 Southwestern Public Service Company, 6.88%, 12/01/99 250,000 250,645 System Energy Resources, 7.71%, 8/01/01 500,000 503,140
48 MENTOR INCOME AND GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------- UTILITIES (CONTINUED) Union Electric Company, 6.75%, 10/15/99 $ 250,000 $ 249,655 - ------------------------------------------------------------------------------------------------------------------------- 1,675,772 - ------------------------------------------------------------------------------------------------------------------------- TOTAL CORPORATE BONDS (COST $5,275,855) 5,064,625 - ------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES AND AGENCIES 39.77% - ------------------------------------------------------------------------------------------------------------------------- Government National Mortgage Association 6.50%-7.00%, 7/15/23-2/15/26 7,163,352 6,810,442 U.S. Treasury Bonds, 5.75%-7.25%, 8/15/03-8/15/23 16,500,000 15,972,145 U.S. Treasury Notes, 5.00%-6.50%, 4/30/98-10/15/06 27,250,000 26,581,355 - ------------------------------------------------------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $50,730,641) 49,363,942 - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT 4.51% - ------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Swiss Bank Capital Markets Dated 3/31/97, 6.35%, Due 4/01/97, collateralized by $4,021,000, U.S. Treasury Note, 11.25%, 2/15/15 market value $5,660,814 (cost $5,597,000) 5,597,000 5,597,000 - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (COST $122,587,431) 98.60% 122,373,464 - ------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS LESS LIABILITIES 1.40% 1,738,887 - ------------------------------------------------------------------------------------------------------------------------- NET ASSETS 100.00% $124,112,351 - -------------------------------------------------------------------------------------------------------------------------
* Non-income producing. ~ American Depository Receipts. (a) These are securities that may be resold to "qualified institutional buyers" under rule 144A or securities offered pursuant to section 4(2) of the Securities Act of 1933, as amended. These securites have been determined to be liquid under guidelines established by the Board of Trustees. SEE NOTES TO FINANCIAL STATEMENTS. 49 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM MUNICIPAL SECURITIES 92.48% - ------------------------------------------------------------------------------------------------------------------------ ARIZONA 2.97% Pima County Arizona IDA, 7.25%, 7/15/10 $1,660,000 $ 1,824,622 - ------------------------------------------------------------------------------------------------------------------------ CALIFORNIA 11.62% Carson Improvement Board Act 1915, Special Assessment District 92, 7.38%, 9/02/22 720,000 753,422 East Bay Municipal Utility District, 4.75%, 6/01/21 1,915,000 1,623,365 Fresno Sewer Revenue, Series A, 4.75, 9/01/26 2,000,000 1,672,040 Orange County Community Facilities District, Series A, 7.35%, 8/15/18 300,000 342,702 San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,026,330 University of California Revenues, 4.75%, 9/01/16 2,000,000 1,718,520 - ------------------------------------------------------------------------------------------------------------------------ 7,136,379 - ------------------------------------------------------------------------------------------------------------------------ COLORADO 6.05% Colorado Housing Authority, 7.00%, 11/01/24 590,000 612,585 Denver City & County Airport Revenue, 7.75% - 8.50%, 11/15/13 - 11/15/23 2,700,000 3,101,661 - ------------------------------------------------------------------------------------------------------------------------ 3,714,246 - ------------------------------------------------------------------------------------------------------------------------ DISTRICT OF COLUMBIA 1.36% Metropolitan Washington, General Airport Revenue, Series A, 6.63%, 10/01/19 800,000 842,912 - ------------------------------------------------------------------------------------------------------------------------ FLORIDA 4.50% Hillsborough County, 6.25%, 12/01/34 1,250,000 1,299,963 Sarasota County, Health Facilities Authority Revenue, 10.00%, 7/01/22 1,180,000 1,465,666 - ------------------------------------------------------------------------------------------------------------------------ 2,765,629 - ------------------------------------------------------------------------------------------------------------------------ GEORGIA 3.45% Cobb County Development Authority Revenue Bonds, Series 92A, 8.00%, 6/01/22 1,000,000 1,015,000 Monroe County Development Authority PCRB, 6.75%, 1/01/10 1,000,000 1,103,690 - ------------------------------------------------------------------------------------------------------------------------ 2,118,690 - ------------------------------------------------------------------------------------------------------------------------ ILLINOIS 9.15% Broadview Tax Increment Revenue, 8.25%, 7/01/13 1,000,000 1,080,810 Chicago Heights Residential Mortgage, (effective yield-3.00%) (a), 6/01/09 3,465,000 1,460,220 Chicago, Capital Appreciation, (effective yield - 1.74%) (a), 7/01/16 2,000,000 598,160 llinois Health Facilities Authority Revenue, 9.50%, 10/01/22 1,250,000 1,534,600
50 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM MUNICIPAL SECURITIES (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------ ILLINOIS (CONTINUED) llinois Educational Facilities Authority Revenue, 6.00%,10/1/24 $1,000,000 $ 950,410 - ------------------------------------------------------------------------------------------------------------------------ 5,624,200 - ------------------------------------------------------------------------------------------------------------------------ INDIANA 0.49% Indiana Transportation Finance Authority, Series A, (effective yield - 1.76%) (a), 6/01/17 1,000,000 301,770 - ------------------------------------------------------------------------------------------------------------------------ IOWA 1.08% Student Loan Liquidity Corporation, Student Loan Revenue, Series C, 6.95%, 3/01/06 625,000 664,900 - ------------------------------------------------------------------------------------------------------------------------ KENTUCKY 3.37% Jefferson County, Hospital Revenue, 8.90%, 10/01/08 500,000 565,625 Kenton County Airport Board Revenue, OID, 7.50%, 2/01/20 1,400,000 1,506,022 - ------------------------------------------------------------------------------------------------------------------------ 2,071,647 - ------------------------------------------------------------------------------------------------------------------------ MAINE 1.69% Maine State Housing Authority, Series C, 6.88%, 11/15/23 1,000,000 1,039,210 - ------------------------------------------------------------------------------------------------------------------------ MASSACHUSETTS 3.19% Massachusetts State Health and Educational Facilities Authority, OID Revenue Bonds, Series A, 6.88%, 4/01/22 1,000,000 1,089,550 Massachusetts State Health and Education, 6.00%, 10/01/23 1,000,000 872,340 - ------------------------------------------------------------------------------------------------------------------------ 1,961,890 - ------------------------------------------------------------------------------------------------------------------------ MICHIGAN 0.99% Romulus Community Schools, Refunding, (effective yield - 1.49%) (a), 5/01/20 2,385,000 606,577 - ------------------------------------------------------------------------------------------------------------------------ NEBRASKA 0.59% Nebraska Investment Finance Authority, SFM, 9.31%, 9/15/24 350,000 363,563 - ------------------------------------------------------------------------------------------------------------------------ NEVADA 0.83% Henderson Local Improvement District, Special Assessment, Series A, 8.50%, 11/01/12 490,000 512,393 - ------------------------------------------------------------------------------------------------------------------------ NEW YORK 9.73% Clifton Springs Hospital Refunding & Improvement, 8.00%, 1/01/20 775,000 793,065 Herkimer County, IDA, 8.00%, 1/01/09 1,000,000 978,580
51 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM MUNICIPAL SECURITIES (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------ NEW YORK (CONTINUED) Metropolitan Transportation Authority, 4.75%, 7/01/19 $1,000,000 $ 815,250 New York City, Series H, 7.20%, 2/01/13 1,500,000 1,613,175 Port Authority New York & New Jersey, 5.38%, 1/15/32 1,915,000 1,773,577 - ------------------------------------------------------------------------------------------------------------------------ 5,973,647 - ------------------------------------------------------------------------------------------------------------------------ NORTH CAROLINA 1.62% North Carolina Eastern Municipal Power Agency Systems Revenue, 5.70%, 1/01/13 1,000,000 992,520 - ------------------------------------------------------------------------------------------------------------------------ OHIO 3.10% Ohio State Turnpike Common Turnpike Revenue, 5.50%, 2/15/26 2,000,000 1,906,840 - ------------------------------------------------------------------------------------------------------------------------ OKLAHOMA 1.67% Oklahoma City, Industrial and Cultural Facilities Trust, 6.75%, 9/15/17 1,000,000 1,023,950 - ------------------------------------------------------------------------------------------------------------------------ PENNSYLVANIA 2.50% Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 493,735 Philadelphia Hospital and Higher Education Facilities, 6.50%, 11/15/08 1,000,000 1,039,970 - ------------------------------------------------------------------------------------------------------------------------ 1,533,705 - ------------------------------------------------------------------------------------------------------------------------ RHODE ISLAND 0.68% West Warwick, Series A, GO Bonds, 6.80% - 7.30%, 7/15/98 - 7/15/08 395,000 416,596 - ------------------------------------------------------------------------------------------------------------------------ TENNESSEE 7.37% Memphis Shelby County Airport Authority Special Facilities Revenue Refunding, 7.88%, 9/01/09 1,500,000 1,662,675 Tennessee Housing Development Agency, 7.38%, 7/01/23 2,750,000 2,862,998 - ------------------------------------------------------------------------------------------------------------------------ 4,525,673 - ------------------------------------------------------------------------------------------------------------------------ TEXAS 5.49% Brazos Higher Education Authority Student Loan Revenue, 7.10%, 11/01/04 445,000 481,762 Dallas-Fort Worth International Airport Facility Revenue Bonds, 7.25%, 11/01/30 1,000,000 1,070,750 Houston Texas Airport Systems Revenue, 6.13%, 7/15/27 1,000,000 968,880 Texas State Department of Housing and Community Affairs Refunding, Series C, 9.99%, 7/02/24 750,000 853,125 - ------------------------------------------------------------------------------------------------------------------------ 3,374,517 - ------------------------------------------------------------------------------------------------------------------------
52 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Percent of Net Principal Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM MUNICIPAL SECURITIES (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------ UTAH 2.99% Bountiful Hospital Revenue, 9.50%, 12/15/18 $ 240,000 $ 264,482 Utah State Housing Finance Commission, 7.20%, 1/01/27 1,505,000 1,572,259 - ------------------------------------------------------------------------------------------------------------------------ 1,836,741 - ------------------------------------------------------------------------------------------------------------------------ WEST VIRGINIA 6.00% Harrison County, 6.75%, 8/01/24 2,000,000 2,156,360 West Virginia State Hospital Finance Authority Revenue, 9.70%, 1/01/18 1,500,000 1,527,165 - ------------------------------------------------------------------------------------------------------------------------ 3,683,525 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LONG-TERM MUNICIPAL SECURITIES (COST $54,458,418) 56,816,342 - ------------------------------------------------------------------------------------------------------------------------ SHORT-TERM MUNICIPAL SECURITIES 5.95% - ------------------------------------------------------------------------------------------------------------------------ ALABAMA 0.16% North Alabama Environ Impt, 3.80%, 12/01/00 100,000 100,000 - ------------------------------------------------------------------------------------------------------------------------ ARIZONA 1.63% Pinal County Arizona Industrial Development, 3.85%, 12/01/09 1,000,000 1,000,000 - ------------------------------------------------------------------------------------------------------------------------ DELAWARE 1.14% Delaware State Economic Development, 3.95%, 10/01/29 100,000 100,000 Wilmington Delaware Hospital Development, 3.80%, 7/01/11 600,000 600,000 - ------------------------------------------------------------------------------------------------------------------------ 700,000 - ------------------------------------------------------------------------------------------------------------------------ MISSISSIPPI 1.46% Jackson County PCRB, 3.80%, 6/01/23 900,000 900,000 - ------------------------------------------------------------------------------------------------------------------------ NEW YORK 1.56% New York City Subseries B-4, 3.70%, 8/15/21 200,000 200,000 Sanwa Bank LOC, 3.70%, 8/15/18 200,000 200,000 New York State Job Development Authority, 3.95%, 3/01/07 560,000 560,000 - ------------------------------------------------------------------------------------------------------------------------ 960,000 - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES (COST $3,660,000) 3,660,000 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (COST $58,118,418) 98.43% 60,476,342 - ------------------------------------------------------------------------------------------------------------------------ OTHER ASSETS LESS LIABILITIES 1.57% 963,293 - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS 100.00% $61,439,635 - ------------------------------------------------------------------------------------------------------------------------
53 MENTOR MUNICIPAL INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED) INVESTMENT ABBREVIATIONS GO -- General Obligation OID -- Original Issue Discount IDA -- Industrial Development Authority PCRB -- Pollution Control Revenue Bond LOC -- Line of Credit SFM -- Single Family Mortgage
(a) Effective yield is the yield as calculated at time of purchase at which the bond accretes on an annual basis until its maturity date. (b) Interest rates represent annualized yield to date of maturity. For each security, cost (for financial reporting and federal income tax purposes) and carrying value are the same. SEE NOTES TO FINANCIAL STATEMENTS. 54 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Principal Percent of Net Asset Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM INVESTMENTS 87.58% - ------------------------------------------------------------------------------------------------------------------------ ASSET-BACKED SECURITIES 9.16% Advanta Mortgage Loan Trust, Series 1993-4, 5.55%, 3/25/10 - 1/25/25 $ 2,905,562 $ 2,707,670 Equifax Credit Corporation, Series 1994-1,B 5.75%, 3/15/09 2,623,718 2,516,143 Fifth Third Auto Grantor Trust 6.20%, 9/15/01 2,059,456 2,050,207 Old Stone Credit Corporation Home Equity Trust, Series 1993-1 B1, 6.00%, 3/15/08 1,114,258 1,078,370 World Omni, Series 1993-B, 5.05%, 8/15/99 (b) 230,741 228,687 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSET-BACKED SECURITIES ($8,652,375) 8,581,077 - ------------------------------------------------------------------------------------------------------------------------ U.S. GOVERNMENT SECURITIES AND AGENCIES 37.12% Federal Home Loan Mortgage Corporation 6.50%, Series 1422, 2/15/07, REMIC 4,408,039 4,135,107 6.50%, Series 1647B, 11/15/08, REMIC 4,241,194 3,962,297 7.50%, 11/01/11* 3,314,905 3,319,943 Government National Mortgage Association 7.00%, 12/15/08 4,027,323 3,992,181 6.88%, 12/20/22 3,530,706 3,587,483 5.00%, 1/20/27 3,533,240 3,418,805 6.00%, 4/01/27, TBA (a) 1,625,000 1,612,770 U.S. Treasury Notes, 6.25% - 6.63%, 3/31/02 - 2/15/27 10,831,000 10,732,291 - ------------------------------------------------------------------------------------------------------------------------ TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $35,079,710) 34,760,877 - ------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS 18.44% - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL 14.50% Capital One Bank, 7.15% - 7.20%, 7/19/99 - 9/15/06* 4,750,000 4,779,112 Lehman Brothers, Inc., 7.50%, 8/01/26 3,500,000 3,529,432 Nationsbank Corporation, 7.50%, 9/15/06 1,500,000 1,493,142 Salomon, Inc., 7.65%, 6/27/05 1,000,000 991,183 Sunamerica, Inc., 7.34%, 8/30/05* 1,200,000 1,174,406 United Dominion Realty, 7.07%, 11/15/06 1,700,000 1,632,510 - ------------------------------------------------------------------------------------------------------------------------ 13,599,785 - ------------------------------------------------------------------------------------------------------------------------
55 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Principal Percent of Net Asset Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------ TECHNOLOGY 2.59% Phillips Electronics, 7.20%, 6/01/26 $ 2,500,000 $ 2,428,543 - ------------------------------------------------------------------------------------------------------------------------ UTILITIES 1.35% Mississippi Power & Light, 8.80%, 4/01/05 1,250,000 1,263,655 - ------------------------------------------------------------------------------------------------------------------------ Total Corporate Bonds (cost $17,459,905) 17,291,983 - ------------------------------------------------------------------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATIONS 11.79% Chase Mortgage Finance Corporation, Series 1993 - L2 M, 7.00%, 10/25/24 3,028,459 2,827,024 CS First Boston, Series 1996-2, A6 7.18%, 2/25/18 2,500,000 2,395,757 General Electric Capital Mortgage Services, Inc., Series 1993-18 B1, 6.00%, 2/25/09 2,124,025 1,953,440 Prudential Home, Series 1995-5, 7.25%, 9/25/25* 4,083,293 3,874,510 - ------------------------------------------------------------------------------------------------------------------------ Total Collateralized Mortgage Obligations (cost $11,337,232) 11,050,731 - ------------------------------------------------------------------------------------------------------------------------ INTEREST ONLY SECURITIES 4.45% Home Ownership, Series 144A, 12/30/26 (cost $4,409,731) 4,350,000 4,173,138 - ------------------------------------------------------------------------------------------------------------------------ RESIDUAL INTERESTS 6.62% Capital Mortgage Funding I, Inc., 1996-1, 1/27/27 29,959 963,752 Capital Mortgage Funding I, Inc., 1997-1, 12/10/26 35,876 644,038 General Mortgage Securities II, Inc., 1995-1, 6/25/20 27,379 645,156 General Mortgage Securities II, Inc., 1995-4, 6/25/23 15,285 541,865 General Mortgage Securities II, Inc., 1996-1, 11/25/22 14,837 593,451 National Mortgage Funding I, Inc., 1995-4, 3/20/21 13,146 215,484 National Mortgage Funding I, Inc., 1995-5, 3/25/22 5,421 415,994 National Mortgage Funding I, Inc., 1995-7, 9/17/25 33,920 813,273 National Mortgage Funding I, Inc., 1995-8, 8/25/22 45,000 776,065 National Mortgage Funding I, Inc., 1995-9, 11/19/25 39,219 602,628 - ------------------------------------------------------------------------------------------------------------------------ Total Residual Interests (cost $6,323,848) 6,211,706 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LONG-TERM INVESTMENTS (COST $83,262,801) 82,069,512 - ------------------------------------------------------------------------------------------------------------------------
56 MENTOR QUALITY INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Principal Percent of Net Asset Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENT 18.15% - ------------------------------------------------------------------------------------------------------------------------ REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/97, 6.53%, due 4/01/97, collateralized by $18,121,155 Federal Home Loan Mortgage Coprporation, 7.00%, 8/01/26, market value $17,379,320 (cost $17,014,325) $17,014,325 $17,014,325 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (COST $100,277,126) 105.73% 99,083,837 - ------------------------------------------------------------------------------------------------------------------------ OTHER ASSETS LESS LIABILITIES (5.73%) (5,319,695 ) - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS 100.00% $93,764,142 - ------------------------------------------------------------------------------------------------------------------------
INVESTMENT ABBREVIATIONS CMO - Collateralized Mortgage Obligation REMIC - Real Estate Mortgage Investment Conduit TBA - To Be Announced (a) At March 31, 1997 the cost of securities purchased on a when-issued basis totaled $1,617,383. (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 March 31, 1997, $13,348,198 principal amount of these securities has been segregated for a commitment to purchase when-issued securities. SEE NOTES TO FINANCIAL STATEMENTS. 57 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ ASSET-BAKED SECURITIES 34.67% Advanta Mortgage Loan Trust 1993-4, 4.75% - 6.15%, 10/25/09 - 3/25/10* $2,768,100 $ 2,647,341 AFC Home Equity Loan, 6.60%, 2/25/27 1,499,955 1,457,570 AFG Receivables Trust, 6.45% - 7.05%, 9/15/00 - 4/15/01* 1,918,180 1,902,650 Equifax Credit Corporation 1994-1B, 5.75%, 3/15/09 834,165 799,964 Fifth Third Auto Grantor Trust, 6.20%, 9/15/01 1,030,783 1,026,154 General Motors Acceptance Corporation, 6.30%, 6/15/99 168,051 167,906 Old Stone Credit Corporation, 6.20%, 6/15/08 470,926 457,642 Olympic Automobiles Receivables Trust, 6.85% - 7.35%, 6/15/01 - 10/15/01* 2,776,241 2,793,386 Union Acceptance Corporation, 6.45%, 7/08/03* 1,112,090 1,106,654 World Omni 1993 B, 5.05%, 8/15/99 (b) 93,544 92,711 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSET-BACKED SECURITIES (COST $12,523,415) 12,451,978 - ------------------------------------------------------------------------------------------------------------------------ U.S. GOVERNMENT SECURITIES AND AGENCIES 37.83% Federal National Mortgage Association 10.00%, 6/01/05, MBS 386,856 404,099 Government National Mortgage Association 7.00%, 12/15/08, MBS 1,521,438 1,508,162 5.50%, 11/20/26 - 12/20/26 5,676,389 5,594,206 5.00%, 1/20/27 3,614,470 3,497,405 6.00%, 4/01/27, ARM, TBA (a) 2,600,000 2,580,432 - ------------------------------------------------------------------------------------------------------------------------ TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $13,672,348) 13,584,304 - ------------------------------------------------------------------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATION 1.04% Ryland Acceptance Corporation, 9.63%, 9/25/17 (cost $371,177) 376,487 374,335 - ------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS 9.81% Capital One Bank, 7.15% - 7.20%, 7/19/99 - 9/15/06* 2,500,000 2,512,404 Mississippi Power & Light, 8.80%, 4/01/05 1,000,000 1,010,924 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CORPORATE BONDS (COST $3,513,087) 3,523,328 - ------------------------------------------------------------------------------------------------------------------------
58 MENTOR SHORT-DURATION INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS MARCH 31, 1997 (UNAUDITED)
Principal Percent of Net Assets Amount Market Value - ------------------------------------------------------------------------------------------------------------------------ RESIDUAL INTERESTS 1.50% Capital Mortgage Funding I, Inc., 1996-1, 1/27/27 $ 11,651 $ 374,792 National Mortgage Funding, Inc., 1996-4, 10/25/21 3,993 162,754 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RESIDUAL INTERESTS (COST $596,801) 537,546 - ------------------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENT 11.78% - ------------------------------------------------------------------------------------------------------------------------ REPURCHASE AGREEMENT Goldman Sachs & Company Dated 3/31/97, 6.53%, due 4/01/97, collateralized by $4,504,449 Federal Home Loan Mortgage Corporation, 7.00%, 8/01/26, market value $4,320,048 (cost $4,228,787) 4,228,787 4,228,787 - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (COST $34,905,615) 96.63% 34,700,278 - ------------------------------------------------------------------------------------------------------------------------ OTHER ASSETS LESS LIABILITIES 3.37% 1,211,169 - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS 100.00% $35,911,447 - ------------------------------------------------------------------------------------------------------------------------
INVESTMENT ABBREVIATIONS ARM -- Adjustable Rate Mortgage CMO -- Collateralized Mortgage Obligations MBS -- Mortgage Backed Securities TBA -- To Be Announced (a) At March 31, 1997 the cost of securities purchased on a when-issued basis totaled $2,587,813. (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 March 31, 1997, $9,806,466 principal amount of these securities has been segregated for a commitment to purchase when-issued securities. SEE NOTES TO FINANCIAL STATEMENTS. 59 MENTOR FUNDS STATEMENTS OF ASSETS AND LIABILITIES MARCH 31, 1997 (UNAUDITED)
Mentor Mentor Mentor Perpetual Capital Growth Global Growth Portfolio Portfolio Portfolio - ---------------------------------------------------------------------------------------------------------------------- ASSETS Investments, at market value* (Note 2) Investment securities $371,482,461 $80,438,172 $ 110,907,931 Repurchase agreements 42,170,678 8,920,137 21,262,602 - ---------------------------------------------------------------------------------------------------------------------- Total Investments 413,653,139 89,358,309 132,170,533 - ---------------------------------------------------------------------------------------------------------------------- Cash - - - Receivables Investments sold 2,527,836 270,736 - Fund shares sold 1,520,995 1,234,433 785,156 Dividends and interest 58,771 244,879 103,824 Forward foreign currency exchange contracts held (Note 8) - 220,294 - Variation margin (Note 2) - - - Deferred expenses (Note 2) 14,807 22,039 18,000 Other assets - - - - ---------------------------------------------------------------------------------------------------------------------- Total assets 417,775,548 91,350,690 133,077,513 - ---------------------------------------------------------------------------------------------------------------------- LIABILITIES Payables Investments purchased 3,242,077 872,723 6,368,985 Fund shares redeemed 705,411 69,711 369,562 Dividends - - - Unrealized depreciation on interest-rate swap - - - Accrued expenses and other liabilities 286,755 119,288 84,263 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities 4,234,243 1,061,722 6,822,810 - ---------------------------------------------------------------------------------------------------------------------- NET ASSETS $413,541,305 $90,288,968 $ 126,254,703 - ---------------------------------------------------------------------------------------------------------------------- Net Assets represented by: (Note 2) Additional paid-in capital $370,276,453 $85,009,728 $ 103,341,944 Accumulated net investment income (2,801,490) (461,303) 34,265 Accumulated distributions in excess of net investment income - - - Accumulated net realized gain (loss) on investment transactions 9,103,590 (244,791) 7,403,830 Net unrealized appreciation of investments and foreign currency related transactions 36,962,752 5,985,334 15,474,664 - ---------------------------------------------------------------------------------------------------------------------- NET ASSETS $413,541,305 $90,288,968 $ 126,254,703 - ---------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE Class A Shares $14.12 $17.86 $18.30 Class B Shares $13.89 $17.39 $17.75 OFFERING PRICE PER SHARE Class A Shares $14.98(a) $18.95(a) $19.42(a) Class B shares $13.89 $17.39 $17.75 SHARES OUTSTANDING Class A Shares 4,142,707 1,568,222 2,385,455 Class B Shares 25,568,747 3,580,360 4,654,251 - ---------------------------------------------------------------------------------------------------------------------- Total Shares Outstanding 29,711,454 5,148,582 7,039,706 - ----------------------------------------------------------------------------------------------------------------------
* Investments at cost $376,690,387, $83,584,875, $116,695,869, $281,574,214, $122,587,431, $58,118,418, $100,277,126 and $34,905,615 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. 60
Mentor Mentor Mentor Mentor Mentor Income and Municipal Quality Short-Duration Strategy Growth Income Income Income Portfolio Portfolio Portfolio Portfolio Portfolio - --------------------------------------------------------------------------------------- $205,767,333 $116,776,464 $60,476,342 $ 82,069,512 $ 30,471,491 72,586,394 5,597,000 - 17,014,325 4,228,787 - --------------------------------------------------------------------------------------- 278,353,727 122,373,464 60,476,342 99,083,837 34,700,278 - --------------------------------------------------------------------------------------- - - 136,656 - 17,510 35,012,440 959,986 - 3,662,594 3,574,165 2,123,978 1,055,433 1,156,661 2,219,575 549,942 2,171,532 991,052 935,957 737,168 223,651 - - - - - - 7,812 - - 35,289 - - 5,415 28,101 - - - 54,627 13,076 - --------------------------------------------------------------------------------------- 317,696,966 125,379,935 62,713,428 105,763,216 39,106,723 - --------------------------------------------------------------------------------------- - 943,581 977,826 10,966,066 2,597,346 520,807 83,600 10,990 133,493 353,187 - - 258,970 516,049 160,388 - - - 256,227 60,045 185,527 240,403 26,007 127,239 24,310 - --------------------------------------------------------------------------------------- 706,334 1,267,584 1,273,793 11,999,074 3,195,276 - --------------------------------------------------------------------------------------- $316,990,632 $124,112,351 $61,439,635 $ 93,764,142 $ 35,911,447 - --------------------------------------------------------------------------------------- $278,149,733 $112,381,306 $61,319,429 $110,476,181 $ 36,369,140 1,927,482 48,037 - - - - - (215,346) (359,979) (49,435) 40,133,904 11,897,094 (2,170,405) (14,902,544) (142,876) (3,220,487) (214,086) 2,505,957 (1,449,516) (265,382) - --------------------------------------------------------------------------------------- $316,990,632 $124,112,351 $61,439,635 $ 93,764,142 $ 35,911,447 - --------------------------------------------------------------------------------------- $15.65 $18.13 $15.00 $12.76 $12.46 $15.43 $18.13 $15.01 $12.77 $12.46 $16.60(A) $19.24(A) $15.75(B) $13.40(B) $12.59(C) $15.43 $18.13 $15.01 $12.77 $12.46 2,265,859 2,269,721 1,469,256 2,548,525 950,634 18,241,882 4,576,082 2,625,041 4,796,615 1,931,952 - --------------------------------------------------------------------------------------- 20,507,741 6,845,803 4,094,297 7,345,140 2,882,586 - ---------------------------------------------------------------------------------------
61 MENTOR FUNDS STATEMENTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
Mentor Mentor Mentor Perpetual Capital Growth Global Growth Portfolio Portfolio Portfolio - ------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Interest $ 1,190,238 $ 153,016 $ 235,555 Dividends (Net of withholding taxes)*** 236,054 407,108 880,797 - ------------------------------------------------------------------------------------------------------------------------- Total investment income (Note 2) 1,426,292 560,124 1,116,352 - ------------------------------------------------------------------------------------------------------------------------- EXPENSES Management fee (Note 4) 1,502,702 383,362 454,208 Distribution fees (Note 5) 1,418,801 193,859 287,850 Shareholder services fees (Note 5) 536,679 87,476 141,940 Transfer agent fee 312,148 67,273 87,696 Administration fee (Note 4) 214,672 34,991 56,776 Shareholder reports and postage expenses 77,807 19,107 23,105 Registration expenses 64,106 13,342 12,676 Custodian and accounting fees 45,496 111,660 13,743 Legal and audit fees 18,898 3,243 4,832 Organizational expenses 8,171 5,518 3,862 Directors' fees and expenses 5,660 971 1,447 Miscellaneous 22,641 3,885 5,788 - ------------------------------------------------------------------------------------------------------------------------- Total expenses 4,227,781 924,687 1,093,923 - ------------------------------------------------------------------------------------------------------------------------- Deduct Waiver of administration fee (Note 4) - - - Waiver of management fee (Note 4) - - - - ------------------------------------------------------------------------------------------------------------------------- NET EXPENSES 4,227,781 924,687 1,093,923 - ------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (2,801,489) (364,563) 22,429 - ------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS Net realized gain (loss) on investments (Note 2) 13,761,286 (214,739) 8,117,672 Change in unrealized appreciation (depreciation) (62,700,166) 2,468,561 1,614,985 - ------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments and futures contracts (48,938,880) 2,253,822 9,732,657 - ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $(51,740,369) $1,889,259 $9,755,086 - -------------------------------------------------------------------------------------------------------------------------
** Net of interest expense $24,143 for the Mentor Quality Income Portfolio and $65,311 for the Mentor Short-Duration Income Portfolio. *** Withholding taxes were $1,632, $41,002, $8,221 and $7,559 for the Mentor Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Strategy Portfolio, and Mentor Income and Growth Portfolio, respectively for the six months ended March 31, 1997. SEE NOTES TO FINANCIAL STATEMENTS. 62
Mentor Mentor Mentor Mentor Mentor Income and Municipal Quality Short-Duration Strategy Growth Income Income Income Portfolio Portfolio Portfolio Portfolio Portfolio - -------------------------------------------------------------------------------------------------- $ 4,826,917 $ 1,412,459 $ 1,829,150 $ 3,316,453** $ 1,168,430** 590,110 565,485 - - - - -------------------------------------------------------------------------------------------------- 5,417,027 1,977,944 1,829,150 3,316,453 1,168,430 - -------------------------------------------------------------------------------------------------- 1,383,034 395,474 171,109 252,776 82,496 1,114,145 284,183 93,771 150,040 36,349 406,775 131,825 71,296 105,323 41,248 239,392 79,630 37,300 57,724 20,325 162,710 52,730 28,518 42,129 16,488 58,765 18,268 5,817 12,386 3,805 43,715 14,115 5,316 7,235 4,159 34,827 21,269 10,685 13,118 4,848 14,468 4,629 2,403 3,271 1,208 10,048 1,280 3,348 - 3,658 4,333 1,386 720 980 362 17,333 5,545 2,879 3,919 1,447 - -------------------------------------------------------------------------------------------------- 3,489,545 1,010,334 433,162 648,901 216,393 - -------------------------------------------------------------------------------------------------- - - - - 16,488 - - - 65,665 21,662 - -------------------------------------------------------------------------------------------------- 3,489,545 1,010,334 433,162 583,236 178,243 - -------------------------------------------------------------------------------------------------- 1,927,482 967,610 1,395,988 2,733,217 990,187 - -------------------------------------------------------------------------------------------------- 40,394,212 13,394,771 341,001 179,956 5,905 (63,523,942) (9,632,252) (435,142) (1,141,290) (180,892) - -------------------------------------------------------------------------------------------------- (23,129,730) 3,762,519 (94,141) (961,334) (174,987) - -------------------------------------------------------------------------------------------------- (21,202,248) $ $ 4,730,129 $ 1,301,847 $ 1,771,883 $ 815,200 - --------------------------------------------------------------------------------------------------
63 MENTOR FUNDS STATEMENTS OF CHANGES IN NET ASSETS
Mentor Perpetual Global Mentor Growth Portfolio Portfolio ------------------------------ ---------------------------- Six Months Six Months Ended Year Ended Period 3/31/97 Ended 3/31/97 Ended (Unaudited) 9/30/96 (Unaudited) 9/30/96 - -------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ (2,801,489) $ (3,564,174) $ (364,563) $ (246,968) Net realized gain (loss) on investments and futures contracts 13,761,286 63,686,744 (214,739) 2,247,124 Change in unrealized appreciation (depreciation) of investments (62,700,166) 22,942,450 2,468,561 2,553,849 - -------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations (51,740,369) 83,065,020 1,889,259 4,554,005 - -------------------------------------------------------------------------------------------------------------------- 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 (5,768,516) (2,238,213) (476,593) (338,447) Class B (52,596,202) (27,048,016) (1,578,405) (688,165) - -------------------------------------------------------------------------------------------------------------------- Net decrease from distributions (58,364,718) (29,286,229) (2,054,998) (1,026,612) - -------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions 111,796,232 91,376,945 35,225,743 32,180,438 - -------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets 1,691,145 145,155,736 35,060,004 35,707,831 NET ASSETS Beginning of period 411,850,160 266,694,424 55,228,964 19,521,133 - -------------------------------------------------------------------------------------------------------------------- End of period $413,541,305 $411,850,160 $90,288,968 $55,228,964 - --------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 64
Mentor Capital Growth Mentor Income and Growth Mentor Municipal Income Portfolio Mentor Strategy Portfolio Portfolio Portfolio - ----------------------------- ----------------------------- ---------------------------- --------------------------- Six Months Six Months Six Months Six Months Ended Period Ended Year Ended Year Ended Year 3/31/97 Ended 3/31/97 Ended 3/31/97 Ended 3/31/97 Ended (Unaudited) 9/30/96 (Unaudited) 9/30/96 (Unaudited) 9/30/96 (Unaudited) 9/30/96 - -------------------------------------------------------------------------------------------------------------------------------- $ 22,429 $ 7,974 $ 1,927,482 $ (396,451) $ 967,610 $ 1,183,705 $ 1,395,988 $ 2,945,818 8,117,672 16,294,346 40,394,212 24,144,971 13,394,771 8,390,313 341,001 149,379 1,614,985 3,307,505 (63,523,942) 22,559,071 (9,632,252) 3,327,836 (435,142) 320,865 - -------------------------------------------------------------------------------------------------------------------------------- 9,755,086 19,609,825 (21,202,248) 46,307,591 4,730,129 12,901,854 1,301,847 3,416,062 - -------------------------------------------------------------------------------------------------------------------------------- - - - - (367,935) (431,692) (539,297) (1,063,836) - - - - (650,200) (655,745) (982,434) (919,043) - - - - - - - - - - - - - - - - (4,657,749) (871,361) (1,531,137) (224,749) (2,474,556) (857,221) - - (10,198,949) (1,783,019) (21,767,353) (3,506,588) (6,846,186) (2,018,269) - - - -------------------------------------------------------------------------------------------------------------------------------- (14,856,698) (2,654,380) (23,298,490) (3,731,337) (10,338,877) (3,962,927) (1,521,731) (2,982,879) - -------------------------------------------------------------------------------------------------------------------------------- 31,254,622 (4,083,713) 52,625,164 31,148,786 38,963,518 15,252,843 6,910,481 (5,637,324) - -------------------------------------------------------------------------------------------------------------------------------- 26,153,010 12,871,732 8,124,426 73,725,040 33,354,770 24,191,770 6,690,597 (5,204,141) 100,101,693 87,229,961 308,866,206 235,141,166 90,757,581 66,565,811 54,749,038 59,953,179 - -------------------------------------------------------------------------------------------------------------------------------- $126,254,703 $100,101,693 $316,990,632 $308,866,206 $124,112,351 $90,757,581 $61,439,635 $54,749,038 - --------------------------------------------------------------------------------------------------------------------------------
65 MENTOR FUNDS STATEMENTS OF CHANGES IN NET ASSETS
Mentor Quality Income Mentor Short-Duration Portfolio Income Portfolio ----------------------------- ----------------------------- Six Months Six Months Ended Period Ended Year 3/31/97 Ended 3/31/97 Ended (Unaudited) 9/30/96 (Unaudited) 9/30/96 - ------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net realized gain (loss) $ 2,733,217 $ 5,381,252 $ 990,187 $ 1,563,529 Net realized gain (loss) on investments and futures contracts 179,956 (1,415,843) 5,905 (113,895) Change in unrealized appreciation (depreciation) of investments (1,141,290) (937,621) (180,892) (364,509) - ------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations 1,771,883 3,027,788 815,200 1,085,125 - ------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income Class A (887,356) (1,587,199) (262,313) (243,822) Class B (2,094,564) (3,816,798) (681,577) (1,354,465) Distributions in excess of net investment income Class A - - - - Class B - - - - Net realized gain on investments Class A - - - - Class B - - - - - ------------------------------------------------------------------------------------------------------------------- Net decrease from distributions (2,981,920) (5,403,997) (943,890) (1,598,287) - ------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 9) Change in net assets from portfolio share transactions 15,642,950 (4,919,453) 4,073,547 11,607,207 - ------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets 14,432,913 (7,295,662) 3,944,857 11,094,045 NET ASSETS Beginning of period 79,331,229 86,626,891 31,966,590 20,872,545 - ------------------------------------------------------------------------------------------------------------------- End of period $93,764,142 $79,331,229 $35,911,447 $31,966,590 - -------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 66 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES
Mentor Growth Portfolio Mentor Perpetual Global Portfolio -------------------------------- ------------------------------------------------- Six Months Six Months Ended Year Period Ended Year Year Year 3/31/97 Ended Ended 3/31/97 Ended Ended Ended (Unaudited) 9/30/96 9/30/95* (Unaudited) 9/30/96 9/30/95 9/30/94(c) - ------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 18.47 $ 16.08 $ 13.37 $ 17.86 $ 15.88 $14.23 $ 14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.04 (0.10) (0.01) 0.01 (0.04) 0.05 (0.01) Net realized and unrealized gain (loss) on investments (1.84) 4.23 2.72 0.62 2.82 1.60 0.06 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations (1.80) 4.13 2.71 0.63 2.78 1.65 0.05 LESS DISTRIBUTIONS Dividends from net investment income - - - - - - - Distributions in excess of net investment income - - - - - - - Distributions from capital gains (2.55) (1.74) - (0.63) (0.80) - - Distributions in excess of capital gains - - - - - - - - ------------------------------------------------------------------------------------------------------------------------ Total distributions (2.55) (1.74) - (0.63) (0.80) - - - ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 14.12 $ 18.47 16.08 $ 17.86 $ 17.86 $15.88 $ 14.23 - ------------------------------------------------------------------------------------------------------------------------ Total Return (10.91%) 29.15% 20.27% 3.66% 18.40% 11.60% 0.35% - ------------------------------------------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $58,513 $40,272 20,368 $28,013 $13,098 $6,854 $ 8,882 Ratio of expenses to average net assets 1.27%(a) 1.28% 1.36%(a) 2.01%(a) 1.95% 2.06% 2.09%(a) Ratio of expenses to average net assets excluding waiver 1.27%(a) 1.28% 1.36%(a) 2.01%(a) 1.95% 2.11% 3.18%(a) Ratio of net investment income (loss) to average net assets (0.65%)(a) (0.39%) (0.65%)(a) (0.50%)(a) (0.21%) 0.26% (0.10%)(a) Portfolio turnover rate 38% 105% 70% 70% 130% 155% 2% Average commission rate on portfolio transactions $0.0661 $0.0602 - $0.0353 $0.0320 - - - ------------------------------------------------------------------------------------------------------------------------
* For the period from June 5, 1995 (initial offering of Class A Shares) to September 30, 1995. (a) Annualized. (c) Reflects operations for the period from March 29, 1994 (commencement of operations), to September 30, 1994. SEE NOTES TO FINANCIAL STATEMENTS. 67 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES
Mentor Capital Growth Portfolio ---------------------------------------------------------------------------- Six Months Ended Year Year Year Year Year 3/31/97 Ended Ended Ended Ended Ended (Unaudited) 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92** - ------------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 19.36 $ 16.02 $ 14.88 $ 15.26 $ 14.21 $ 14.18 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.03) 0.11 0.02 0.09 0.14 0.08 Net realized and unrealized gain (loss) on investments 1.77 3.73 2.91 (0.30) 1.02 0.03 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.74 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 (2.80) (0.50) (1.79) (0.13) - - Distributions in excess of capital gains - - - - - - - ------------------------------------------------------------------------------------------------------------------------ Total distributions (2.80) (0.50) (1.79) (0.17) (0.11) (0.08) - ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 18.30 $ 19.36 $ 16.02 $ 14.88 $ 15.26 $ 14.21 - ------------------------------------------------------------------------------------------------------------------------ Total Return 10.01% 24.63% 20.18% (1.37%) 8.21% 0.78% - ------------------------------------------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $43,646 $31,889 $29,582 $21,181 $31,360 $ 20,864 Ratio of expenses to average net assets 1.41%(a) 1.43% 1.87% 1.70% 1.49% 1.14%(a) Ratio of expenses to average net assets excluding waiver 1.41%(a) 1.43% 1.87% 1.70% 1.59% 1.43%(a) Ratio of net investment income (loss) to average net assets 0.55%(a) 0.51% 0.27% 0.53% 0.96% 1.54%(a) Portfolio turnover rate 39% 98% 157% 149% 192% 61% Average commission rate on portfolio transactions $0.0695 $0.0688 - - - - - ------------------------------------------------------------------------------------------------------------------------
* For the period from June 5, 1995 (initial offering of Class A Shares) to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. (a) Annualized. (b) Reflects operations for the period from May 24, 1993 (commencement of operations), to September 30, 1993. SEE NOTES TO FINANCIAL STATEMENTS. 68
Mentor Strategy Portfolio Mentor Income and Growth Portfolio - ------------------------------------ ------------------------------------------------------------------ Six Months Six Months Ended Year Period Ended Year Year Year Year 3/31/97 Ended Ended 3/31/97 Ended Ended Ended Ended (Unaudited) 9/30/96 9/30/95* (Unaudited) 9/30/96 9/30/95 9/30/94 9/30/93(b) - ----------------------------------------------------------------------------------------------------------- $ 17.96 $ 15.24 $ 13.45 $ 19.16 $ 17.13 $ 15.27 $ 14.88 $14.14 0.17 0.08 - 0.19 0.37 0.40 0.31 0.09 ) (1.14 2.86 1.79 0.90 2.75 2.14 0.64 0.73 - ----------------------------------------------------------------------------------------------------------- (0.97) 2.94 1.79 1.09 3.12 2.54 0.95 0.82 - - - (0.20) (0.35) (0.40) (0.30) (0.08) - - - - - (0.03) - - (1.34) (0.22) - (1.92) (0.74) (0.25) (0.26) - - - - - - - - - - ----------------------------------------------------------------------------------------------------------- (1.34) (0.22) - (2.12) (1.09) (0.68) (0.56) (0.08) - ----------------------------------------------------------------------------------------------------------- $ 15.65 $ 17.96 $ 15.24 $ 18.13 $ 19.16 $ 17.13 $ 15.27 $14.88 - ----------------------------------------------------------------------------------------------------------- (5.84%) 19.36% 13.31 % 6.05% 19.13% 17.24% 6.54% 5.54% - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- $35,465 $20,372 $10,503 $41,155 $24,210 $19,888 $17,773 $9,849 1.40%(a) 1.42% 1.65%(a) 1.36%(a) 1.36% 1.69% 1.75% 1.56%(a) 1.40%(a) 1.42% 1.65%(a) 1.36%(a) 1.36% 1.69% 1.75% 1.94%(a) 1.88%(a) 0.62% (0.06%)(a) 2.41%(a) 2.08% 2.53% 2.20% 2.35%(a) 81% 125% 122% 76% 72% 62% 78% 13% $0.0647 $0.0669 - $0.0510 $0.0492 - - - - -----------------------------------------------------------------------------------------------------------
69 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS A SHARES
Mentor Municipal Income Portfolio ---------------------------------------------------------------------------- Six Months Ended Year Year Year Year Year 3/31/97 Ended Ended Ended Ended Ended (Unaudited) 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92** - ------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76 $ 14.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.41 0.82 0.81 0.82 0.92 0.32 Net realized and unrealized gain (loss) on investments (0.03) 0.12 0.51 (1.54) 1.32 0.47 - ------------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.38 0.94 1.32 (0.72) 2.24 0.79 LESS DISTRIBUTIONS Dividends from net investment income (0.41) (0.82) (0.82) (0.81) (0.92) (0.32) Distributions in excess of net investment income (0.01) - - - (0.03) - Distributions from capital gains - - - (0.10) - - Distributions in excess of capital gains - - - - - - - ------------------------------------------------------------------------------------------------------------------------- Total distributions (0.42) (0.82) (0.82) (0.91) (0.95) (0.32) - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 15.00 $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76 - ------------------------------------------------------------------------------------------------------------------------- Total Return 2.53% 6.46 % 9.46 % (4.83%) 16.00% 5.34% - ------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $22,045 $17,558 $20,460 $25,056 $29,245 $ 18,801 Ratio of expenses to average net assets 1.17%(a) 1.24 % 1.43 % 1.24% 0.71% 0.00%(a) Ratio of expenses to average net assets excluding waiver 1.17%(a) 1.24 % 1.43 % 1.33% 1.39% 1.26%(a) Ratio of net investment income to average net assets 5.23%(a) 5.47 % 5.56 % 5.43% 5.92% 6.21%(a) Portfolio turnover rate 32% 46 % 43 % 87% 88% 0% Average commission rate on portfolio transactions - - - - - - - -------------------------------------------------------------------------------------------------------------------------
* For the period from June 5, 1995 (initial offering of Class A Shares) to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. (a) Annualized. SEE NOTES TO FINANCIAL STATEMENTS. 70
Mentor Short-Duration Mentor Quality Income Portfolio Income Portfolio - -------------------------------------------------------------------------------- ------------------------------------------ Six Months Six Months Ended Year Year Year Year Year Ended Year Period 3/31/97 Ended Ended Ended Ended Ended 3/31/97 Ended Ended (Unaudited) 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92** (Unaudited) 9/30/96 9/30/95* - ------------------------------------------------------------------------------------------------------------------------------- $ 12.91 $ 13.29 $ 12.75 $ 14.04 $ 14.39 $ 14.30 $ 12.50 $ 12.68 $12.74 0.50 0.89 0.84 0.84 1.06 0.44 0.36 0.80 0.22 (0.17) (0.37) 0.61 (1.30) (0.31) 0.09 (0.02) (0.21) (0.03) - ------------------------------------------------------------------------------------------------------------------------------- 0.33 0.52 1.45 (0.46 ) 0.75 0.53 0.34 0.59 0.19 (0.48) (0.89) (0.85) (0.83) (1.06) (0.44) (0.36) (0.77) (0.22) - (0.01) (0.06) - (0.04) - (0.02) - (0.03) - - - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------- (0.48) (0.90) (0.91) (0.83) (1.10) (0.44) (0.38) (0.77) (0.25) - ------------------------------------------------------------------------------------------------------------------------------- $ 12.76 $ 12.91 $ 13.29 $ 12.75 $ 14.04 $ 14.39 $ 12.46 $ 12.50 $12.68 - ------------------------------------------------------------------------------------------------------------------------------- 2.53% 4.09% 11.82% (3.39%) 5.41% 3.37% 2.71% 4.80% 1.51% - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- $32,509 $21,092 $ 24,472 $30,142 $ 47,780 $ 36,740 $11,844 $ 7,450 $1,002 1.05%(a) 1.06% 1.32% 1.38% 1.04% 0.36%(a) 0.84%(a) 0.86% 0.71%(a) 1.17%(a) 1.32% 1.36% 1.39% 1.22% 1.21%(a) 1.06%(a) 1.26% 1.00%(a) 6.87%(a) 6.91% 6.73% 6.33% 7.31% 8.00%(a) 6.23%(a) 5.65% 4.10%(a) 76% 254% 368% 455% 102% 9% 68% 411% 126% - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------------
71 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Growth Portfolio ------------------------------------------------------------------------------- Six Months Ended Year Period Year Year Year 3/31/97 Ended Ended Ended Ended Ended (Unaudited) 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 $ 18.29 $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.06 (0.17) (0.13) (0.15) (0.08) (0.06) Net realized and unrealized gain (loss) on investments (1.91) 4.15 4.03 (0.47) 2.07 1.94 - -------------------------------------------------------------------------------------------------------------------------- Total from investment operations (1.85) 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 (2.55) (1.74) - (1.00) (1.02) (1.23) Distributions in excess of capital gains - - - (0.01) - - - -------------------------------------------------------------------------------------------------------------------------- Total distributions (2.55) (1.74) - (1.01) (1.02) (1.23) - -------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 13.89 $ 18.29 $ 16.05 $ 12.15 $ 13.78 $ 12.81 - -------------------------------------------------------------------------------------------------------------------------- Total Return (11.34%) 28.18% 32.10% (4.48%) 15.60% 15.46% - -------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 355,028 $371,578 $246,326 $190,126 $186,978 $136,053 Ratio of expenses to average net assets 2.06%(a) 2.03% 2.08%(a) 2.01% 2.02% 2.05% Ratio of expenses to average net assets excluding waiver 2.06%(a) 2.03% 2.08%(a) 2.01% 2.02% 2.05% Ratio of net investment income (loss) to average net assets (1.40%)(a) (1.13%) (1.20%)(a) (1.20%) (1.12%) (0.76%) Portfolio turnover rate 38% 105% 70% 77% 64% 50% Average commission rate on portfolio transactions $ 0.0661 $ 0.0602 - - - - - --------------------------------------------------------------------------------------------------------------------------
(a) Annualized. (c) Reflects operations for the period from March 29, 1994 (commencement of operations), to September 30, 1994. * For the period from January 1, 1995 to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. SEE NOTES TO FINANCIAL STATEMENTS. 72
Mentor Perpetual Global Portfolio Mentor Capital Growth Portfolio - ----------------------------------------------- --------------------------------------------------------------------------- Six Months Six Months Ended Year Year Year Ended Year Year Year Year Year 3/31/97 Ended Ended Ended 3/31/97 Ended Ended Ended Ended Ended (Unaudited) 9/30/96 9/30/95 9/30/94(c) (Unaudited) 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92** - --------------------------------------------------------------------------------------------------------------------------------- $ 17.46 $ 15.67 $ 14.15 $ 14.18 $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 14.18 (0.01) (0.05) (0.05) (0.04) 0.01 (0.04) 0.25 (0.04) 0.05 0.46 0.57 2.64 1.57 0.01 1.62 3.67 2.53 (0.26) 1.02 0.04 - --------------------------------------------------------------------------------------------------------------------------------- 0.56 2.59 1.52 (0.03) 1.63 3.63 2.78 (0.30) 1.07 0.50 - - - - - - - - (0.05) (0.46) - - - - - - - - (0.01) - (0.63) (0.80) - - (2.80) (0.50) (1.79) (0.13) - - - - - - - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- (0.63) (0.80) - - (2.80) (0.50) (1.79) (0.13) (0.06) (0.46) - --------------------------------------------------------------------------------------------------------------------------------- $ 17.39 $ 17.46 $ 15.67 $ 14.15 $ 17.75 $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22 - --------------------------------------------------------------------------------------------------------------------------------- 3.33% 17.39% 10.74% (0.21%) 9.61% 23.64% 19.26% (2.00%) 7.52% 0.61% - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- $62,276 $42,131 $12,667 $ 7,987 $82,609 $68,213 $57,648 $41,106 $57,030 $25,468 2.76%(a) 2.70% 2.72% 2.79%(a) 2.16%(a) 2.18% 2.56% 2.46% 2.24% 1.86%(a) 2.76%(a) 2.70% 2.79% 3.93%(a) 2.16%(a) 2.18% 2.56% 2.46% 2.34% 2.16%(a) (1.26%)(a) (0.91%) (0.40%) (0.82%)(a) (0.21%)(a) (0.24%) (0.41%) (0.22%) 0.21% 0.83%(a) 70% 130% 155% 2% 39% 98% 157% 149% 192% 61% $0.0353 $0.0320 - - $0.0695 $0.0688 - - - - - ---------------------------------------------------------------------------------------------------------------------------------
73 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Strategy Portfolio --------------------------------------------------------------------- Six Months Ended Year Period Year Year 3/31/97 Ended Ended Ended Ended (Unaudited) 9/30/96 9/30/95* 9/30/94 9/30/93*** - ------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 17.79 $ 15.21 $ 12.24 $ 12.70 $ 12.50 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.11 (0.03) - (0.06) - Net realized and unrealized gain (loss) on investments (1.13) 2.83 2.97 (0.40) 0.20 - ------------------------------------------------------------------------------------------------------------------- Total from investment operations (1.02) 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 (1.34) (0.22) - - - Distributions in excess of capital gains - - - - - - ------------------------------------------------------------------------------------------------------------------- Total distributions (1.34) (0.22) - - - - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 15.43 $ 17.79 $ 15.21 $ 12.24 $ 12.70 - ------------------------------------------------------------------------------------------------------------------- Total Return (6.20%) 18.48% 24.26% (3.61%) 1.60% - ------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 281,527 $288,494 $224,643 $179,274 $122,177 Ratio of expenses to average net assets 2.21%(a) 2.19%(a) 2.31%(a) 2.19% 2.06%(a) Ratio of expenses to average net assets excluding waiver 2.21%(a) 2.19% 2.31%(a) 2.19% 2.06%(a) Ratio of net investment income (loss) to average net assets 1.13%(a) (0.19%) 0.02%(a) (0.54%) 0.08%(a) Portfolio turnover rate 81% 125% 122% 143% 0% Average commission rate on portfolio transactions $ 0.0647 $ 0.0669 - - - - -------------------------------------------------------------------------------------------------------------------
* For the period from January 1, 1995 to September 30, 1995. ** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. *** Reflects operations from the period of October 29, 1993 (commencement of operations), to December 31, 1994. (a) Annualized. (b) Reflects operations for the period from May 24, 1993 (commencement of operations), to September 30, 1993. SEE NOTES TO FINANCIAL STATEMENTS. 74
Mentor Income and Growth Portfolio Mentor Municipal Income Portfolio - ------------------------------------------------------ -------------------------------------------------------------------- Six Months Six Months Ended Year Year Year Year Ended Year Year Year Year Year 3/31/97 Ended Ended Ended Ended 3/31/97 Ended Ended Ended Ended Ended (Unaudited) 9/30/96 9/30/95 9/30/94 9/30/93(b) (Unaudited) 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92** - ------------------------------------------------------------------------------------------------------------------------------- $ 19.18 $ 17.14 $ 15.28 $ 14.91 $ 14.14 $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78 $ 14.29 0.14 0.23 0.28 0.21 0.05 0.36 0.75 0.74 0.74 0.82 0.29 0.88 2.76 2.14 0.61 0.77 (0.01) 0.11 0.52 (1.54) 1.32 0.49 - ------------------------------------------------------------------------------------------------------------------------------- 1.02 2.99 2.42 0.82 0.82 0.35 0.86 1.26 (0.80) 2.14 0.78 (0.15) (0.21) (0.28) (0.19) (0.05) (0.36) (0.76) (0.74) (0.73) (0.82) (0.29) - - (0.03) - - (0.03) - - - (0.04) - (1.92) (0.74) (0.25) (0.26) - - - - (0.10) - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------- (2.07) (0.95) (0.56) (0.45) (0.05) (0.39) (0.76) (0.74) (0.83) (0.86) (0.29) - ------------------------------------------------------------------------------------------------------------------------------- $ 18.13 $ 19.18 $ 17.14 $ 15.28 $ 14.91 $ 15.01 $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78 - ------------------------------------------------------------------------------------------------------------------------------- 5.65% 18.26% 16.32% 5.66% 5.54% 2.37% 5.87% 9.01% (5.34%) 15.27% 5.28% - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- $82,957 $66,548 $46,678 $43,219 $ 18,127 $39,395 $37,191 $39,493 $46,157 $50,976 $ 24,265 2.12%(a) 2.13% 2.43% 2.44% 2.13%(a) 1.69%(a) 1.74% 1.92% 1.74% 1.21% 0.50%(a) 2.12%(a) 2.13% 2.43% 2.44% 2.69%(a) 1.69%(a) 1.74% 1.92% 1.86% 1.89% 1.76%(a) 1.65%(a) 1.32% 1.78% 1.51% 1.60%(a) 4.73%(a) 4.95% 5.07% 4.93% 5.42% 5.80%(a) 76% 72% 62% 78% 13% 32% 46% 43% 87% 88% 0% $0.0510 $0.0492 - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------------
75 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Quality Income Portfolio ---------------------------------------------------------------------- Six Months Ended Year Year Year Year Year 3/31/97 Ended Ended Ended Ended Ended (Unaudited) 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92** - ------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 12.93 $ 13.31 $ 12.76 $ 14.06 $ 14.40 $ 14.30 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.44 0.84 0.79 0.82 0.99 0.41 Net realized and unrealized gain (loss) on investments (0.15) (0.38) 0.61 (1.37) (0.31) 0.10 - ------------------------------------------------------------------------------------------------------------------ Total from investment operations 0.29 0.46 1.40 (0.55) 0.68 0.51 LESS DISTRIBUTIONS Dividends from net investment income (0.44) (0.84) (0.79) (0.75) (0.99) (0.41) Distributions in excess of net investment income (0.01) - (0.06) - (0.03) - Distributions from capital gains - - - - - - Distributions in excess of capital gains - - - - - - - ------------------------------------------------------------------------------------------------------------------ Total distributions (0.45) (0.84) (0.85) (0.75) (1.02) (0.41) - ------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 12.77 $ 12.93 $ 13.31 $ 12.76 $ 14.06 $ 14.40 - ------------------------------------------------------------------------------------------------------------------ Total Return 2.26% 3.57% 11.33% (3.97%) 4.86% 3.24% - ------------------------------------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $61,255 $58,239 $62,155 $ 77,888 $127,346 $ 65,661 Ratio of expenses to average net assets 1.55%(a) 1.55% 1.74% 1.88% 1.54% 0.83%(a) Ratio of expenses to average net assets excluding waiver 1.68%(a) 1.82% 1.79% 1.90% 1.72% 1.67%(a) Ratio of net investment income (loss) to average net assets 6.37%(a) 6.39% 6.24% 6.21% 6.81% 7.53%(a) Portfolio turnover rate 76% 254% 368% 455% 102% 9% Average commission rate on portfolio transactions - - - - - - - ------------------------------------------------------------------------------------------------------------------
** Reflects operations for the period from April 29, 1992 (commencement of operations), to September 30, 1992. (a) Annualized. SEE NOTES TO FINANCIAL STATEMENTS. 76 MENTOR FUNDS FINANCIAL HIGHLIGHTS CLASS B SHARES
Mentor Short-Duration Income Portfolio ------------------------------------------------------------- Six Months Ended Period Period Year 3/31/97 Ended Ended Ended (Unaudited) 9/30/96 9/30/95* 9/30/94(d) - ------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.67 $ 12.18 $ 12.50 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.40 0.73 0.59 0.41 Net realized and unrealized gain (loss) on investments (0.09) (0.17 ) 0.52 (0.29) - ------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.31 0.56 1.11 0.12 LESS DISTRIBUTIONS Dividends from net investment income (0.35) (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 (0.35) (0.73 ) (0.62 ) (0.44) - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.46 $ 12.50 $ 12.67 $ 12.18 - ------------------------------------------------------------------------------------------------------------------------- Total Return 2.52% 4.53% 9.22% 0.95% - ------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $24,067 $24,517 $19,871 $ 17,144 Ratio of expenses to average net assets 1.16%(a) 1.16% 1.20%(a) 1.29%(a) Ratio of expenses to average net assets excluding waiver 1.39%(a) 1.56% 1.70%(a) 1.29%(a) Ratio of net investment income (loss) to average net assets 5.93%(a) 5.64% 5.04%(a) 4.90%(a) Portfolio turnover rate 68% 411% 126% 166% Average commission rate on portfolio transactions - - - - - -------------------------------------------------------------------------------------------------------------------------
(a) Annualized. * For the period from January 1, 1995 to September 30, 1995. (d) Reflects operations for the period from April 29, 1994 (commencement of operations), to December 31, 1994. 77 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) NOTE 1: ORGANIZATION Mentor Funds (formerly Cambridge Series Trust) is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. Mentor Funds consists of nine separate Portfolios (hereinafter each individually referred to as a "Portfolio" or collectively as the "Portfolios") at March 31, 1997, as follows: Mentor Growth Portfolio ("Growth Portfolio") Mentor Capital Growth Portfolio ("Capital Growth Portfolio") Mentor Strategy Portfolio ("Strategy Portfolio") Mentor Income and Growth Portfolio ("Income and Growth Portfolio") Mentor Perpetual Global Portfolio ("Global Portfolio") Mentor Quality Income Portfolio ("Quality Income Portfolio") Mentor Short-Duration Income Portfolio ("Short-Duration Income Portfolio") Mentor Municipal Income Portfolio ("Municipal 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. 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 78 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 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 79 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 dollar-roll and reverse repurchase agreements (arrangements in which the Portfolio sells a security for a percentage of its market value with an agreement to buy it back on a set date). Each Portfolio may borrow up to one-third of the value of its net assets. The average daily balance of reverse repurchase agreements outstanding for Short-Duration Income Portfolio during the six months ended March 31, 1997, was approximately $1,279,186 or $0.48 per share based on average shares outstanding during the period at a weighted average interest rate of 5.47%. The maximum amount of borrowings outstanding for any day during the period was $7,007,350 (including accrued interest), as of January 28, 1997, at an interest rate of 5.40% and was 17.56% of total assets. (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 80 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) bank or broker/dealer, and simultaneously agrees to repurchase a substantially similar (i.e., same type, coupon, and maturity) security from the institution at 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 a capital loss carryforward 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. At September 30, 1996, Municipal Income Portfolio for federal tax purposes, had a capital loss carryforward of approximately $2,510,000. Pursuant to the Internal revenue Code, such capital loss carryforwards expire as 81 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. Risks of entering into futures contracts (and related options) include the possibility that there may be an illiquid market and that a 82 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) change in the value of the contract or option may not correlate with changes in the value of the underlying securities. At March 31, 1997, the Municipal Income Portfolio had a position in the following futures contracts:
Net Number of Contract Unrealized Contracts Contracts Expiration Value Appreciation - ---------------------------------------------------------------- 50 U.S. Long Bond 6/97 $5,509,375 $148,034 - ----------------------------------------------------------------
(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. 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 83 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) Interest-Rate Swap An interest-rate swap is a contract between two parties on a specified principal amount (referred to as the notional principal) for a specified period. In the most common instance, a swap involves the exchange of streams of variable and fixed-rate interest payments. During the term of the swap, changes in the value of the swap are recognized as unrealized gains or losses by marking-to-market to reflect the market value of the swap. When the swap is terminated, the Fund will record a realized gain or loss. As of March 31, 1997, Quality Income Portfolio and Short-Duration Income Portfolio had entered into the following interest rate swap agreements. In each agreement, the Portfolios have exchanged fixed rates for floating rates. The terms vary among the contracts but provide for the interest rate differential to be settled on a semi annual basis. During the period ended March 31, 1997, no cash payments were received in connection with the interest rate swap agreement, however, the net interest receivable accrued at the end of the period for Quality Income Portfolio and Short-Duration Income Portfolio were $25,869 and $6,574, respectively.
Rate Paid Rate by the Received by Net Swap Notional Portfolio the Portfolio Floating Termination Unrealized Portfolio Counter-Party Principal at 3/31/97 at 3/31/97 Rate Index Date Loss - ------------------------------------------------------------------------------------------------------------------- Quality Lehman Brothers $6,500,000 3.11% 6.39% 3-Month Canadian 2/28/07 $(163,739) Bankers Acceptance Lehman Brothers 6,500,000 3.15% 6.60% 3-Month Canadian 3/7/07 (92,488) Bankers Acceptance --------- $(256,227) --------- --------- Short Duration Lehman Brothers 5,000,000 3.15% 6.60% 3-Month Canadian 3/7/02 $ (60,045) --------- --------- Bankers Acceptance - -------------------------------------------------------------------------------------------------------------------
84 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) (l) 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. (m) 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 Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment adviser, receives for its services an annual investment advisory fee not to exceed the following percentages of the average daily net assets of the particular Portfolio: Growth Portfolio, 0.70%; Capital Growth Portfolio, 0.80%; Strategy Portfolio, 0.85%; Income and Growth Portfolio, 0.75%; Municipal Income Portfolio, 0.60%; Quality Income Portfolio, 0.60%; and Short-Duration Income Portfolio, 0.50%. Mentor Advisors pays the sub-adviser to Municipal Income Portfolio an annual fee expressed as a percentage of the Portfolio's average net assets as follows: 0.25% of the first $60 million of the Portfolio's average net assets and 0.20% of the Portfolio's average net assets over $60 million. The sub-adviser to the Income and Growth Portfolio receives from Mentor Advisors an annual fee expressed as a percentage of that Portfolio's assets as follows: 0.325% on the first $50 million of the Portfolio's average net assets, 0.275% on the next $150 million of the Portfolio's average net assets, 0.225% of the next $300 million of the 85 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) Portfolio's average net assets, and 0.200% of the Portfolio's 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 Global Portfolio has entered into an Investment Advisory Agreement with Mentor Perpetual Advisors, L.L.C. ("Mentor Perpetual"). Mentor Perpetual is owned equally by Mentor and Perpetual PLC, a diversified financial services holding company. Under this agreement, Mentor Perpetual's management fee is accrued daily and paid monthly at an annual rate of 1.10% applied to the average daily net assets of the Portfolio. For the six months ended March 31, 1997, Mentor Advisors and sub-advisers, earned and voluntarily waived the following advisory fees:
Adviser Adviser Fees Fees Voluntarily Sub-Adviser Portfolio Earned Waived Fees - -------------------------------------------------------------------- Growth $1,502,702 - - Global 383,362 - - Capital Growth 454,208 - - Strategy 1,383,034 - - Income and Growth 395,474 - $ 155,467 Municipal Income 171,109 - 71,181 Quality Income 252,776 $ 65,665 - Short-Duration Income 82,496 21,662 - - --------------------------------------------------------------------
Administrative personnel and services are provided by Mentor, under an Administration Agreement, at an annual rate of 0.10% of the average daily net assets of each Portfolio. For the six months ended March 31, 1997, Mentor earned the following administrative fees: 86 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Administrative Administrative Fee Fee Voluntarily Portfolio Earned Waived - ----------------------------------------------------------- Growth $214,672 - Global 34,991 - Capital Growth 56,776 - Strategy 162,710 - Income and Growth 52,730 - Municipal Income 28,518 - Quality Income 42,129 - Short-Duration Income 16,488 $16,488 - -----------------------------------------------------------
The Portfolios also provide direct reimbursement to Mentor for certain legal and compliance administration, investor relation and operation related costs not covered under the Investment Management Agreement. For the six months ended March 31, 1997, these direct reimbursements were as follows:
Direct Portfolio Reimbursements - ------------------------------------------------------ Growth $7,839 Global 1,473 Capital Growth 2,189 Strategy 5,944 Income and Growth 2,101 Municipal Income 1,089 Quality Income 1,625 Short-Duration Income 632 - ------------------------------------------------------
Mentor Advisors has 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 six months ended March 31, 1997, no reimbursement from Mentor Advisors was required as a result of such state expense limitations. NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES The Class B shares of the Portfolios have adopted a Distribution Plan (the Plan) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a Distribution Agreement between the Portfolios and Mentor Distributors, LLC ("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 87 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) it incurs under the Distribution Agreement, the Portfolios pay a distribution fee, which is accrued daily and paid monthly at the annual rate of 0.75% of the Portfolios' average daily net assets for the Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio and Global Portfolio, 0.50% of the average daily net assets of the Quality Income Portfolio and Municipal Income Portfolio, and 0.30% of the average daily net assets for the Short-Duration Income Portfolio. Mentor Distributors may select financial institutions, such as investment dealers and banks to provide sales support services as agents for their clients or customers who beneficially own Class B shares of the Portfolios. Financial institutions will receive fees from Mentor Distributors based upon Class B shares owned by their clients or customers. Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with 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 six months ended March 31, 1997, distribution fees and shareholder servicing fees were as follows:
Shareholder Distribution Servicing Fees Portfolio Fees Class A Class B - --------------------------------------------------------------- Growth $1,418,801 $75,934 $460,745 Global 193,859 26,644 60,832 Capital Growth 287,850 49,068 92,872 Strategy 1,114,145 45,503 361,272 Income and Growth 284,183 43,712 88,113 Municipal Income 93,771 25,807 45,489 Quality Income 150,040 35,352 69,971 Short-Duration Income 36,349 13,337 27,911 - ---------------------------------------------------------------
88 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6: INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term investments), for the six months ended March 31, 1997, were as follows:
Portfolio Purchases Sales - ------------------------------------------------------- Growth $201,272,247 $144,540,837 Global 67,835,897 41,148,870 Capital Growth 48,315,223 41,111,559 Strategy 206,765,440 222,316,625 Income and Growth 106,195,933 73,390,665 Municipal Income 19,587,679 16,819,700 Quality Income 76,366,561 69,539,168 Short-Duration Income 29,231,233 22,608,633 - -------------------------------------------------------
NOTE 7: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS The cost of investments for federal income tax purposes amounted to $376,690,387, for Growth Portfolio, $83,584,875 for Global Portfolio, $116,695,869 for Capital Growth Portfolio, $281,574,214 for Strategy Portfolio, $122,587,431 for Income and Growth Portfolio, $58,118,418 for Municipal Income Portfolio, $100,277,126 for Quality Income Portfolio and $34,905,615 for Short-Duration Income Portfolio at March 31, 1997. Gross unrealized appreciation and depreciation of investments at March 31, 1997, based on such costs were as follows:
Net Gross Gross Unrealized Unrealized Unrealized Appreciation Portfolio Appreciation Depreciation (Depreciation) - -------------------------------------------------------------------------- Growth $ 62,416,271 $(25,453,519) $ 36,962,752 Global 8,250,861 (2,477,426) 5,773,435 Capital Growth 16,476,986 (1,002,322) 15,474,664 Strategy 9,177,213 12,397,700 (3,220,487) Income and Growth 2,740,077 (2,954,044) (213,967) Municipal Income 2,650,241 (292,317) 2,357,924 Quality Income 324,695 (1,517,986) (1,193,291) Short-Duration Income 26,101 (231,438) (205,337) - --------------------------------------------------------------------------
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 89 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8: FORWARD CONTRACTS (CONTINUED) time to time Global Portfolio may enter into contracts to hedge certain foreign currency assets. Contracts are recorded at market value. Realized gains and losses arising from such transactions are included in net gain (loss) on investments and forward foreign currency exchange contracts. The Portfolio is subject to the credit risk that the other party will not complete the obligations of the contract. At March 31, 1997, Global Portfolio had outstanding forward contracts as set forth below.
Net Unrealized Contracts to In Exchange Appreciation/ Settlement Date Deliver/Receive For (Depreciation) - --------------------------------------------------------------------------------------------------------- Purchases 4/02/97 British Pound 249,233 $ 404,007 $ 409,116 $ 5,109 4/02/97 British Pound 93,400 151,402 153,317 1,915 4/02/97 French Frank 1,205,200 214,068 214,182 114 5/21/97 French Frank 1,952,911 346,000 347,061 1,061 5/21/97 German Mark 5,183,882 3,100,000 3,098,092 (1,908) 4/02/97 Hong Kong Dollar 645,044 83,285 83,245 (40) 4/02/97 Malaysian Ringgit 150,714 60,882 60,814 (68) 4/03/97 Singapore Dollar 104,336 72,255 72,230 (25) 5/21/97 Swiss Frank 1,852,296 1,294,000 1,281,866 (12,134) Sales 4/02/97 Finnish Markka 714,024 142,833 143,211 (378) 4/02/97 French Frank 1,861,999 346,000 330,904 15,096 4/01/97 German Mark 211,649 126,139 126,490 (351) 5/21/97 German Mark 4,942,640 3,100,000 2,953,916 146,084 5/21/97 Swiss Frank 1,774,721 1,294,000 1,228,181 65,819 - --------------------------------------------------------------------------------------------------------- Net Unrealized Appreciation on Forward Contracts $220,294 - ---------------------------------------------------------------------------------------------------------
90 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:
Six MonthsMentor Growth Portfolio Year Ended 3/31/97 Ended 9/30/96 Shares Dollars Shares Dollars ----------------------------------------------------------- CLASS A: Shares sold 2,394,289 $ 37,314,378 1,900,420 $ 31,071,851 Shares issued upon reinvestment of distributions 369,088 5,744,163 159,334 2,229,091 Shares redeemed (801,231) (12,247,823) (1,145,852) (19,021,763) ----------------------------------------------------------- Change in net assets from capital share transactions 1,962,146 $ 30,810,718 913,902 $ 14,279,179 ----------------------------------------------------------- CLASS B: Shares sold 3,154,310 $ 48,928,273 4,577,893 $ 75,279,336 Shares issued upon reinvestment of distributions 3,348,283 51,489,284 1,885,731 26,287,441 Shares redeemed (1,253,996) (19,432,043) (1,493,872) (24,469,011) ----------------------------------------------------------- Change in net assets from capital share transactions 5,248,597 $ 80,985,514 4,969,752 $ 77,097,766 -----------------------------------------------------------
Mentor Perpetual Global Portfolio Six Months Year Ended 3/31/97 Ended 9/30/96 Shares Dollars Shares Dollars -------------------------------------------------------- CLASS A: Shares sold 931,984 $16,695,368 412,686 $ 7,129,198 Shares issued upon reinvestment of distributions 26,897 463,738 21,809 331,049 Shares redeemed (124,289) (2,217,140) (132,328) (2,244,328) -------------------------------------------------------- Change in net assets from capital share transactions 834,592 $14,941,966 302,167 $ 5,215,919 -------------------------------------------------------- CLASS B: Shares sold 1,201,618 $20,938,047 1,723,938 $29,034,247 Shares issued upon reinvestment of distributions 91,682 1,543,952 45,012 672,932 Shares redeemed (125,580) (2,198,222) (164,743) (2,742,660) -------------------------------------------------------- Change in net assets from capital share transactions 1,167,720 $20,283,777 1,604,207 $26,964,519 --------------------------------------------------------
91 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9: CAPITAL SHARE TRANSACTIONS (CONTINUED)
Mentor Capital Growth Portfolio Six Months Year Ended 3/31/97 Ended 9/30/96 Shares Dollars Shares Dollars ---------------------------------------------------------- CLASS A: Shares sold 648,323 $ 11,961,517 148,975 $ 2,580,775 Shares issued upon reinvestment of distributions 264,769 4,552,490 53,208 849,718 Shares redeemed (174,767) (3,214,027) (401,455) (6,845,340) ---------------------------------------------------------- Change in net assets from capital share transactions 738,325 $ 13,299,980 (199,272) $ (3,414,847) ---------------------------------------------------------- CLASS B: Shares sold 788,140 $ 13,911,704 635,818 $ 10,950,459 Shares issued in connection with acquisition of Mentor/Cambridge Growth Portfolio - - - - Shares issued upon reinvestment of distributions 596,606 9,983,395 111,273 1,748,109 Shares redeemed (335,157) (5,940,457) (793,484) (13,367,434) ---------------------------------------------------------- Change in net assets from capital share transactions 1,049,589 $ 17,954,642 (46,393) $ (668,866) ----------------------------------------------------------
Mentor Strategy Portfolio Six Months Year Ended 3/31/97 Ended 9/30/96 Shares Dollars Shares Dollars ----------------------------------------------------------- CLASS A: Shares sold 1,297,791 $ 21,713,680 625,652 $ 10,425,353 Shares issued upon reinvestment of distributions 91,017 1,513,610 12,905 221,980 Shares redeemed (257,333) (4,250,438) (192,977) (3,147,176) ----------------------------------------------------------- Change in net assets from capital share transactions 1,131,475 $ 18,976,852 445,580 $ 7,500,157 ----------------------------------------------------------- CLASS B: Shares sold 1,999,590 $ 33,258,327 2,946,568 $ 48,230,745 Shares issued upon reinvestment of distributions 1,291,000 21,237,045 201,006 3,417,749 Shares redeemed (1,263,593) (20,847,060) (1,706,367) (27,999,865) ----------------------------------------------------------- Change in net assets from capital share transactions 2,026,997 $ 33,648,312 1,441,207 $ 23,648,629 -----------------------------------------------------------
92 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9: CAPITAL SHARE TRANSACTIONS (CONTINUED)
Mentor Income and Growth Portfolio Six Months Year Ended 3/31/97 Ended 9/30/96 Shares Dollars Shares Dollars ----------------------------------------------------------- CLASS A: Shares sold 963,207 $ 17,995,466 193,095 $ 3,508,748 Shares issued upon reinvestment of distributions 147,891 2,654,798 69,612 1,186,199 Shares redeemed (104,816) (1,959,734) (160,516) (2,896,387) ----------------------------------------------------------- Change in net assets from capital share transactions 1,006,282 $ 18,690,530 102,191 $ 1,798,560 ----------------------------------------------------------- CLASS B: Shares sold 912,933 $ 16,960,792 1,025,114 $ 18,562,371 Shares issued upon reinvestment of distributions 403,014 7,228,125 150,385 2,545,180 Shares redeemed (209,797) (3,915,929) (428,846) (7,653,268) ----------------------------------------------------------- Change in net assets from capital share transactions 1,106,150 $ 20,272,988 746,653 $ 13,454,283 -----------------------------------------------------------
Mentor Municipal Income Portfolio Six Months Year Ended 3/31/97 Ended 9/30/96 Shares Dollars Shares Dollars ------------------------------------------------------ CLASS A: Shares sold 385,652 $ 5,843,356 53,174 $ 797,588 Shares issued upon reinvestment of distributions 18,564 281,220 36,380 547,438 Shares redeemed (102,682) (1,555,229) (291,238) (4,349,702) ------------------------------------------------------ Change in net assets from capital share transactions 301,534 $ 4,569,347 (201,684) $ (3,004,676) ------------------------------------------------------ CLASS B: Shares sold 320,520 $ 4,854,981 240,061 $ 3,594,252 Shares issued upon reinvestment of distributions 40,527 614,368 75,360 1,135,186 Shares redeemed (206,475) (3,128,215) (488,067) (7,362,086) ------------------------------------------------------ Change in net assets from capital share transactions 154,572 $ 2,341,134 (172,646) $ (2,632,648) ------------------------------------------------------
93 MENTOR FUNDS NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9: CAPITAL SHARE TRANSACTIONS (CONTINUED)
Mentor Quality Income Portfolio Six Months Year Ended 3/31/97 Ended 9/30/96 Shares Dollars Shares Dollars ----------------------------------------------------------- CLASS A: Shares sold 1,051,830 $ 13,662,498 261,361 $ 3,431,466 Shares issued upon reinvestment of distributions 34,130 446,549 65,422 864,412 Shares redeemed (171,374) (2,236,572) (533,765) (6,992,390) ----------------------------------------------------------- Change in net assets from capital share transactions 914,586 $ 11,872,475 (206,982) $ (2,696,512) ----------------------------------------------------------- CLASS B: Shares sold 695,245 $ 9,073,934 765,460 $ 10,058,721 Shares issued upon reinvestment of distributions 103,637 1,357,824 177,855 2,348,000 Shares redeemed (507,228) (6,661,283) (1,108,119) (14,629,662) ----------------------------------------------------------- Change in net assets from capital share transactions 291,654 $ 3,770,475 (164,804) $ (2,222,941) -----------------------------------------------------------
Mentor Short-Duration Income Portfolio Six Months Period Ended 3/31/97 Ended 9/30/96 Shares Dollars Shares Dollars -------------------------------------------------------- CLASS A: Shares sold 452,742 $ 5,692,794 626,588 $ 7,923,068 Shares issued upon reinvestment of distributions 18,489 232,967 15339 193,207 Shares redeemed (116,588) (1,468,765) (124,945) (1,577,491) -------------------------------------------------------- Change in net assets from capital share transactions 354,643 $ 4,456,996 516,982 $ 6,538,784 -------------------------------------------------------- CLASS B: Shares sold 462,277 $ 5,820,462 1,146,855 $14,558,230 Shares issued upon reinvestment of distributions 44,013 554,487 88,449 1,119,155 Shares redeemed (536,361) (6,758,398) (841,749) (10,608,962) -------------------------------------------------------- Change in net assets from capital share transactions (30,071) $ (383,449) 393,555 $ 5,068,423 --------------------------------------------------------
94 At a meeting held on March 25, 1997, the Trustees of Mentor Funds approved the REMOVAL of certain non-fundamental investment restrictions of the Portfolios. THE FOLLOWING INVESTMENT RESTRICTIONS OF THE CAPITAL GROWTH, INCOME AND GROWTH, MUNICIPAL INCOME, QUALITY INCOME, AND GLOBAL PORTFOLIOS WERE ELIMINATED: 1. The Portfolios will not invest more than 15% of the value of their respective net assets in illiquid securities, including repurchase agreements providing for settlement more than seven days after notice; over-the-counter options; certain restricted securities not determined by the Trustees to be liquid; and non-negotiable fixed income time deposits with maturities over seven days. 2. The Portfolios will limit their respective investments in other investment companies to no more than 3% of the total outstanding voting stock of any investment company, invest no more than 5% of total assets in any one investment company, or invest more than 10% of total assets in investment companies in general. The Portfolios will purchase securities of closed-end investment companies only in open market transactions involving only customary broker's commissions. However, these limitations are not applicable if the securities are acquired in a merger, consolidation, reorganization, or acquisition of assets. It should be noted that investment companies incur certain expenses such as management fees, and therefore any investment by a Portfolio in shares of another investment company would be subject to duplicative expenses. 3. Except for the Municipal Income Portfolio, no Portfolio will invest more than 5% of the value of its respective total assets in securities of issuers which have records of less than three years of continuous operations, including the operation of any predecessor. The Municipal Income Portfolio will not invest more than 5% of its total assets in industrial development bonds where the payment of principal and interest is the responsibility of companies with less than three years of operating history. 4. A Portfolio will not purchase or retain the securities of any issuer if the officers and Trustees of the Trust, the investment adviser, or sub-adviser own individually more than 1/2 of 1% of the issuer's securities or together own more than 5% of the issuer's securities. 5. A Portfolio will not purchase interests in oil, gas, or other mineral exploration or development programs or leases, except it may purchase the securities of issuers which invest in or sponsor such programs and except pursuant to the exercise by the Municipal Income Portfolio of its rights under agreements relating to municipal securities. 6. A Portfolio will not enter into transactions for the purpose of engaging in arbitrage. 7. A Portfolio will not purchase securities of a company for the purpose of exercising control or management, except to the extent that exercise by the Municipal Income Portfolio of its rights under agreements related to municipal securities would be deemed to constitute such control or management. 8. A Portfolio (1) will limit the aggregate value of the assets underlying covered call options or put options written by a Portfolio to not more than 25% of its net assets, (2) will limit the premiums paid for options purchased to 5% of its net assets, (3) will limit the margin deposits on futures contracts entered into to 5% of its net assets, and (4) will limit investment in warrants to 5% of its net assets to meet certain state registration requirements. No more than 2% will be warrants which are not listed on the New York or American Stock Exchange. Also, the Capital Growth Portfolio and the Income and Growth Portfolio will limit their investment in restricted securities to 5% of total assets. THE FOLLOWING INVESTMENT RESTRICTIONS OF THE BALANCED, GROWTH, SHORT-DURATION INCOME, AND STRATEGY PORTFOLIOS WERE ELIMINATED: 1. Invest in warrants (other than warrants acquired by the Portfolio as a part of a unit or attached to securities at the time of purchase) if as a result such investment (valued at the lower of cost or market value) would exceed 5% of the value of the Portfolio's net assets, provided that not more than 2% of the Portfolio's net assets may be invested in warrants not listed on the New York or American Stock Exchanges. 2. Purchase securities restricted as to resale if as a result (i) more than 10% of the Portfolio's total assets would be invested in such securities or (ii) more than 5% of the Portfolio's total assets (excluding any securities eligible for resale under Rule 144A under the Securities Act of 1933) would be invested in such securities. 95 3. Invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale, and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the Portfolio's net assets (taken at current value) would then be invested in the aggregate in securities described in (a), (b), and (c) above. 4. Invest in securities of other registered investment companies, except by purchases in the open market involving only customary brokerage commissions and as a result of which not more than 5% of its total assets (taken at current value) would be invested in such securities, or except as part of a merger, consolidation, or other acquisition. 5. Purchase puts, calls, straddles, spreads, or any combination thereof (other than futures contracts, options on futures contracts or indices, and options on foreign currencies), if, by reason of such purchase, the value of its aggregate investment therein will exceed 5% of its total assets. 6. Invest in real estate limited partnerships. ********* IN ADDITION, THE TRUSTEES ADOPTED THE FOLLOWING NON-FUNDAMENTAL RESTRICTION FOR ALL OF THE PORTFOLIOS OF MENTOR FUNDS: [A Portfolio may not] invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale (excluding securities determined by the Trustees (or the person designated by the Trustees to make such determinations) to be readily marketable), and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the Portfolio's net assets (taken at current value) would then be invested in the aggregate in securities described in (a), (b), and (c) above. 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 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. [logo] RIVERFRONT PLAZA 901 EAST BYRD STREET RICHMOND, VIRGINIA 23219 1-800-382-0016 --------------- BULK RATE U.S. POSTAGE PAID PERMIT #1193 RICHMOND, VA --------------- Mentor Balanced Portfolio Portfolio of Investments March 31, 1997 (Unaudited)
Percent of Net Assets Shares Market Value - --------------------------------------------------------------------------------------------------------------------------- Common Stocks 62.29% - --------------------------------------------------------------------------------------------------------------------------- Basic Materials 9.54% Bemis Company 2,100 $ 84,000 Morton International, Inc. 2,100 88,725 Nalco Chemical Company 2,400 89,700 Sonoco Products Company 3,200 86,400 - --------------------------------------------------------------------------------------------------------------------------- 348,825 - --------------------------------------------------------------------------------------------------------------------------- Capital Goods & Construction 4.45% Pall Corporation 3,600 83,250 W.W. Grainger, Inc. 1,075 79,550 - --------------------------------------------------------------------------------------------------------------------------- 162,800 - --------------------------------------------------------------------------------------------------------------------------- Consumer Cyclical 12.07% Carnival Corporation - Class A 2,500 92,500 Interpublic Group Companies, Inc. 1,750 92,312 Mattel, Inc. 3,700 88,800 Mirage Resorts, Inc.* 3,800 80,750 Newell Company 2,600 87,100 - --------------------------------------------------------------------------------------------------------------------------- 441,462 - --------------------------------------------------------------------------------------------------------------------------- Consumer Staples 13.57% Avon Products Company 1,400 73,500 CPC International, Inc. 1,050 86,100 McDonald's Corporation 2,000 94,500 Pfizer, Inc. 900 75,712 Sherwin Williams Company 3,000 81,000 Sysco Corporation 2,500 85,313 - --------------------------------------------------------------------------------------------------------------------------- 496,125 - --------------------------------------------------------------------------------------------------------------------------- Energy 2.35% Schlumberger, Ltd. 800 85,800 - --------------------------------------------------------------------------------------------------------------------------- Financial 8.31% American Express Company 1,350 80,831 Banc One Corporation 1,900 75,525 Federal National Mortgage Association* 1,900 68,638 General RE Corporation* 500 79,000 --------------------------------------------------------------------------------------------------------------------------- 303,994 --------------------------------------------------------------------------------------------------------------------------- Common Stocks (continued) --------------------------------------------------------------------------------------------------------------------------- Health 2.39% Schering-Plough 1,200 $ 87,300 - --------------------------------------------------------------------------------------------------------------------------- Technology 4.16% Electronic Data Systems 1,700 68,638 Intel Corporation 600 83,475 - --------------------------------------------------------------------------------------------------------------------------- 152,113 - --------------------------------------------------------------------------------------------------------------------------- Transportation & Services 2.41% Werner Enterprises, Inc. 4,700 88,125 - --------------------------------------------------------------------------------------------------------------------------- Utilities 3.04% Ameritech Corporation 900 55,350 GTE Corporation 1,200 55,950 - --------------------------------------------------------------------------------------------------------------------------- 111,300 - --------------------------------------------------------------------------------------------------------------------------- Total Common Stocks (cost $1,900,648) 2,277,844 - --------------------------------------------------------------------------------------------------------------------------- Fixed Income Securities 34.06% - --------------------------------------------------------------------------------------------------------------------------- U.S. Government Securities and Agencies 27.26% Government National Mortgage Association, 5.50%, 2/20/27 $ 64,279 63,105 U.S. Treasury Notes, 5.50% - 7.50%, 9/30/98 - 7/15/06 700,000 696,253 U.S. Treasury Bonds, 6.88% - 7.88%, 11/15/04 - 8/15/25 235,000 237,319 - --------------------------------------------------------------------------------------------------------------------------- Total U.S. Government Securities and Agencies (cost $1,009,023) 996,677 - --------------------------------------------------------------------------------------------------------------------------- Corporate Bonds (a) 6.80% CS First Boston, 7.18%, 2/25/18, CMO 25,000 23,958 Merrill Lynch, 6.64%, 9/19/02 45,000 43,763 Nationsbank Corporation, 7.50%, 9/15/06 35,000 34,840 Norwest Corporation, 6.80%, 5/15/02 60,000 59,047 Travelers, Inc., 8.63%, 2/01/07 40,000 42,925 Union Acceptance Corporation, 6.48%, 5/10/04, CMO 45,000 44,158 - --------------------------------------------------------------------------------------------------------------------------- Total Corporate Bonds (cost $254,748) 248,691 - --------------------------------------------------------------------------------------------------------------------------- Total Fixed Income Securities (cost $1,263,771) $1,245,368 - --------------------------------------------------------------------------------------------------------------------------- Short-Term Investment 5.37% - --------------------------------------------------------------------------------------------------------------------------- Repurchase Agreement Goldman Sachs & Company Dated 3/31/97, 6.53%, due 4/01/97, collateralized by $209,670 Federal Home Loan Mortgage Corporation, 7.00%, 4/01/26, market value $201,087 (cost $196,372) $196,372 196,372 - --------------------------------------------------------------------------------------------------------------------------- Total Investments (cost $3,360,791) 101.72% 3,719,584 - --------------------------------------------------------------------------------------------------------------------------- Other Assets less Liabilities (1.72%) (63,466) - --------------------------------------------------------------------------------------------------------------------------- Net Assets 100.00% $3,656,118 - ---------------------------------------------------------------------------------------------------------------------------
*Non-income producing. CMO- Collateralized Mortgage Obligations (a) All or a portion of these securities are illiquid securities, and are valued using market quatations where readily available. In the absence of market quotations, the securities are valued based upon their fair value determined under procedures approved by the board of Trustees. See notes to financial statements. Mentor Balanced Portfolio Statement of Assets and Liabilities March 31, 1997 (Unaudited) - --------------------------------------------------------------------------------------------------- Assets Investments, at market value * (Note 2) $3,719,584 Receivables Investments sold 98,609 Dividend and interest 21,134 Other assets 1,237 - --------------------------------------------------------------------------------------------------- Total assets 3,840,564 - --------------------------------------------------------------------------------------------------- Liabilities Payable for investments purchased 182,151 Accrued expenses and other liabilities 2,295 - --------------------------------------------------------------------------------------------------- Total liabilities 184,446 - --------------------------------------------------------------------------------------------------- Net Assets $3,656,118 - --------------------------------------------------------------------------------------------------- Net Assets represented by: Additional paid-in capital $3,069,867 Accumulated net investment income 14,179 Accumulated net realized gain on investment transactions 213,279 Net unrealized appreciation of investments (Note 6) 358,793 - --------------------------------------------------------------------------------------------------- Net Assets $3,656,118 Shares Outstanding 245,594 - --------------------------------------------------------------------------------------------------- Net Asset Value and Offering Price per Share $ 14.89 - ---------------------------------------------------------------------------------------------------
*Investments at cost are $3,360,791. See notes to financial statements. Mentor Balanced Portfolio Statements of Changes in Net Assets
Six-Month Ended Year 3/31/97 Ended (Unaudited) 9/30/96 - ------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Operations Net investment income $ 53,639 $ 97,401 Net realized gain on investments 234,214 453,033 Change in unrealized appreciation (depreciation) of investments (30,999) 26,238 - ------------------------------------------------------------------------------------------------------------- Increase in net assets from operations 256,854 576,672 - ------------------------------------------------------------------------------------------------------------- Distributions to Shareholders Net investment income (108,705) (105,563) Net realized gain in investments (449,370) (129,654) - ------------------------------------------------------------------------------------------------------------- Net decrease from distributions (558,075) (235,217) - ------------------------------------------------------------------------------------------------------------- Capital Share Transactions (Note 7) Change in net assets from capital share transactions 131,938 274,373 - ------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets (169,283) 615,828 Net Assets Beginning of period 3,825,401 3,209,573 - ------------------------------------------------------------------------------------------------------------- End of period $3,656,118 $3,825,401 - -------------------------------------------------------------------------------------------------------------
See notes to financial statements. Mentor Balanced Portfolio Statement of Operations Six Months Ended March 31, 1997 (Unaudited) - ------------------------------------------------------------------------------ Investment Income Dividends $ 19,686 Interest 43,386 - ------------------------------------------------------------------------------ Total investment income (Note 2) 63,072 - ------------------------------------------------------------------------------ Expenses Management fee (Note 3) 14,150 Distribution fee (Note 4) 14,150 Shareholder servicing fee (Note 4) 4,716 Custodian and accounting fees 3,881 Registration expenses 415 Legal and audit fees 193 Shareholder reports and postage expenses 117 Directors' fees and expenses 52 Miscellaneous expenses 156 - ------------------------------------------------------------------------------ Total expenses 37,830 - ------------------------------------------------------------------------------ Deduct Waiver of management fee (Note 3) 9,531 Waiver of distribution fee (Note 4) 14,150 Waiver of shareholder servicing fee (Note 4) 4,716 - ------------------------------------------------------------------------------ Net expenses 9,433 - ------------------------------------------------------------------------------ Net investment income 53,639 - ------------------------------------------------------------------------------ Realized and unrealized gain on investments Net realized gain on investments 234,214 Change in unrealized appreciation (depreciation) of investments (30,999) - ------------------------------------------------------------------------------ Net realized and unrealized gain on investments 203,215 - ------------------------------------------------------------------------------ Net increase in net assets resulting from operations $256,854 - ------------------------------------------------------------------------------
See notes to financial statements. Mentor Balanced Portfolio Financial Highlights
Six Months Ended Year Period Period 3/31/97 Ended Ended Ended (Unaudited) 9/30/96 9/30/95* 12/31/94** - ------------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance Net asset value, beginning of period $ 16.28 $ 14.85 $ 12.44 $ 12.50 Income from investment operations Net investment income 0.19 0.42 0.36 0.22 Net realized and unrealized gain (loss) on investments 0.19 2.09 2.08 (0.09) - --------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.38 2.51 2.44 0.13 Less distributions Dividends from net investment income (0.43) (0.48) (0.03) (0.19) Distributions from capital gains (1.34) (0.60) - - - --------------------------------------------------------------------------------------------------------------------- Total distributions (1.77) (1.08) (0.03) (0.19) Net asset value, end of period $ 14.89 $ 16.28 $ 14.85 $ 12.44 - --------------------------------------------------------------------------------------------------------------------- Total Return 6.62% 18.00% 19.28% 1.00% - --------------------------------------------------------------------------------------------------------------------- Ratios / Supplemental Data - --------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 3,656 $ 3,825 $ 3,210 $ 2,911 Ratio of expenses to average net assets 0.50%(a) 0.50% 0.50(a) 0.50%(a) Ratio of expenses to average net assets excluding waiver 2.00%(a) 2.06% 2.12(a) 2.72%(a) Ratio of net investment income to average net assets 2.83% 2.83% 3.26(a) 3.32%(a) Portfolio turnover rate 46% 103% 65% 71% Average commission rate on portfolio transactions $ 0.069 $ 0.0694 - ------------------------------------------------------------------------------------------------------------------------
(a) Annualized. * For the period from January 1, 1995 to September 30, 1995. **For the period from June 21, 1994 (commencement of operations) to December 31, 1994. See notes to financial statements. Mentor Balanced Portfolio Notes to Financial Statements March 31, 1997 (Unaudited) Note 1: Organization The Mentor Funds (formerly Cambridge Series Trust) is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. Mentor Funds consists of nine separate Portfolios (hereinafter each individually referred to as a "Portfolio" or collectively as the "Portfolios") at March 31, 1997 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 financial statements included in this report are for the Balanced Portfolio only (hereinafter referred to as the "Portfolio"). Shares of the Portfolio are sold without an initial sales charges, although a contingent deferred sales charge may be imposed if shares are redeemed within 5 years of purchase. Shares of the Portfolio are not currently being offered to public. Note 2: Significant Accounting Policies The following is a summary of significant accounting policies consistently followed by the Portfolio 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 Portfolio and 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 Portfolio 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 of the Board of Trustees. Notes to Financial Statements (continued) U.S. Government obligations held by the 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 dealers use information with respect to transactions in such securities, market transactions in comparable securities, various relationships between securities, and yield to maturity. (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 Fund's adviser to be creditworthy pursuant to guidelines established by the Mentor Fund's 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) Security Transactions and Investment Income - Security transactions for the Portfolio are accounted for on a trade date basis. Dividend income is recorded on the ex-dividend date and interest is recorded on the accrual basis. Interest income includes interest and discount earned (net of premium) on short term obligations, and interest earned on all other debt securities including original issue discounts as required by the Internal Revenue Code. Realized and unrealized gains and losses on investment security transactions are calculated on an identified cost basis. (d) Federal Income Taxes - No provision for federal income taxes has been made since it is the 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, if any. (e) Distributions to Shareholders- Distributions from net investment income and net realized capital gains, after offsetting capital loss carryovers are distributed annually for the Portfolio. Note 3: Investment Advisory and Management and Administration Agreements The Portfolio has entered into an Investment Advisory Agreement with Mentor Investment Advisors, LLC ("Mentor Advisors"). Under this agreement, Mentor Advisors' management fee is accrued daily and paid monthly at an annual rate of 0.75% applied to the daily average net assets of the Portfolio. In order to limit the Portfolio's expenses, during the six months ended March 31, 1997, Mentor Advisors has agreed to reduce its compensation to the extent expenses of the Portfolio (exclusive of brokerage, interest, taxes, deferred organization expenses, and payments under the Portfolio's Distributions Plan) exceed an annual rate of 0.50% of the Portfolio's average net assets. For the six months ended March 31, 1997, Mentor Advisors earned advisory fees of $14,150 and voluntarily waived $9,531 of such fees. Notes to Financial Statements (continued) Effective November 1, 1996, Commonwealth Advisors, Inc., Charter Asset Management, Inc. and Wellesley Advisors, Inc., were reorganized into Commonwealth Investment Counsel, Inc., which then became Mentor Investment Advisors, LLC. Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC ("Mentor") (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. Administrative personnel and services are provided by Mentor to the Portfolio, under an Administration Agreement, at an annual rate of 0.10% of 1% of the average daily net assets of the Portfolio. In order to limit the Portfolio's expenses, Mentor agreed to waive its fees during the six months ended March 31, 1997. Mentor Advisors has agreed to reimburse the Portfolio 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 Portfolio. The most stringent state expense limitation applicable to the Portfolio requires reimbursement of expenses 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 six months ended March 31, 1997, no reimbursement from Mentor Advisors was required as a result of such state expense limitations. Note 4: Distribution Agreement and Other Transactions with Affiliates Under a Distribution Agreement between the Portfolio and Mentor Distributors, Inc. ("Mentor Distributors") a wholly-owned subsidiary of Mentor, Mentor Distributors was appointed distributor of the Portfolio. To compensate Mentor Distributors for the services it provides and for the expenses it incurs under the Distribution Agreement, the Portfolio has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940, under which the Portfolio pays a distribution fee, which is accrued daily and paid monthly at the annual rate of 0.75% of the Portfolio's average daily net assets. Effective November 1, 1996, Mentor Distributors became Mentor Distributors, LLC. Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with respect to each Portfolio. Under the Service Plan, financial institutions will enter into shareholder service agreements with the Portfolio to provide administrative support services at an annual rate of 0.25% of the Portfolio's average daily net assets. The total charges to be borne by the Portfolio, under the Distribution and Shareholder Service Agreements is expected to remain at an annual rate of 1% of the Portfolio's average daily net assets. For the six months ended March 31, 1997 distribution and shareholder services fees were as follows:
Shareholder Distribution Fee Shareholder Servicing Fee Distribution Fee Waived Servicing Fee Waived - -------------------------------------------------------------------------------------------------------------------- Balanced Portfolio $14,150 $(14,150) $4,716 $(4,716)
Notes to Financial Statements (continued) Note 5: Investment Transactions Purchases and sales of investments, exclusive of short-term securities, aggregated $1,664,723 and $1,808,676 respectively, for the six months ended March 31, 1997. Note 6: Unrealized Appreciation and Depreciation of Investments At March 31, 1997, the cost of investments for federal income tax purposes amounted to $3,360,791 and net unrealized appreciation aggregated $358,793, of which $415,396 related to appreciated securities and $56,603 related to depreciated securities. Note 7: Capital Share Transactions The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in Portfolio shares were as follows:
Six Months Year Ended Ended 3/31/97 9/30/96 Shares Dollars Shares Dollars - -------------------------------------------------------------------------------------------------------------------- Shares sold 0 $ 0 48,575 $ 734,947 Shares issued upon reinvestment of distributions 37,772 558,075 16,321 235,217 Shares redeemed (27,219) (426,137) (45,946) (695,791) ---------------------------------------------------- Change in net assets from capital share transactions 10,553 $131,938 18,950 $274,373 ----------------------------------------------------
Performance Comparisons Mentor Balanced Portfolio [GRAPH] [INSERT PLOT POINTS] * Includes maximum Contingent Deferred Sales Charge (CDSC) of 5%. ** This Index represents asset allocation of 60% S&P 500 Stocks and 40% Lehman Brothers Government/Corporate Bonds. Average Annual Return as of 3/31/97 Average Annual Return as of 3/31/97 Without Sales Charges Including Sales Charges 1 Year Inception*** 1 year Inception*** 15.10% 16.28% 10.16% 15.44% *** For the period from June 21, 1994 (commencement of operations) to March 31, 1997. Performance Information for the Mentor Balanced Portfolio This graph compares the investment performance of the Portfolio from its inception date to the index that is most representative of the fund's portfolio. The graph reflects the performance of a $10,000 investment from the date the fund started through March 31, 1997. Return does not reflect taxes payable (if any) on distributions. In comparing the performance of a fund to an index, you should keep in mind that market indexes do not take into account brokerage commissions that would be incurred if you purchased the individual securities that make up the index. They also do not include taxes payable on dividends and interest payments, or operating expenses necessary to maintain a portfolio investing in the index. The performance data quoted in this report is historical and does not guarantee future investment results. Your investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is as of March 31, 1997 and includes change in share price and reinvestment of dividends and capital gains. The maximum contingent deferred sales charge (CDSC) is 5% for the Balanced Portfolio. -----END PRIVACY-ENHANCED MESSAGE-----