-----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, NFCZ90BL2MZaW8eyCzE/55Q8JbNkp1R2Y+9GngdxeyFNSkg2mgK9PUho627VLPz3 duZtBiCuYBv90aRYi6i2Tg== 0000916641-98-000788.txt : 19980710 0000916641-98-000788.hdr.sgml : 19980710 ACCESSION NUMBER: 0000916641-98-000788 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980709 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: SEC FILE NUMBER: 811-06550 FILM NUMBER: 98663477 BUSINESS ADDRESS: STREET 1: RIVERFRONT PLAZA STREET 2: WEST TOWER 901 E BYRD STREET CITY: RICHMOND STATE: VA ZIP: 23219 BUSINESS PHONE: 8047823648 MAIL ADDRESS: STREET 1: RIVERFRONT PLAZA STREET 2: WEST TOWER 901 E BYRD STREET CITY: RICHMOND STATE: VA ZIP: 23219 FORMER COMPANY: FORMER CONFORMED NAME: CAMBRIDGE SERIES TRUST DATE OF NAME CHANGE: 19920717 N-30D 1 MENTOR INVESTMENT GROUP FORM N-30D Mentor Funds ---------------------- Semi-Annual Report ---------------------- March 31, 1998 [MENTOR INVESTMENT GROUP LOGO] Mentor Funds Semi-Annual Report Table of Contents March 31, 1998 - -------------------------------------------------------------------------------- Page ------------------ Message from the Chairman and President .................. 1 Growth Portfolio ......................................... 3 Perpetual Global Portfolio ............................... 13 Capital Growth Portfolio ................................. 26 Strategy Portfolio ....................................... 33 Income and Growth Portfolio .............................. 41 Municipal Income Portfolio ............................... 51 Quality Income & Short-Duration Income Portfolios ........ 61 Notes to Financial Statements ............................ 77 Shareholder Information .................................. Inside back cover Mentor Funds Message from the Chairman and President March 31, 1998 - -------------------------------------------------------------------------------- To Our Shareholders: It is our privilege to provide you with the Semi-Annual Report for the six months ended March 31, 1998 for Mentor Funds. During the period covered by this report, the bulls continued to charge on. The strong gains registered by the leading domestic stock averages over this time may be considered close to astonishing. The S&P 500 gained 17.2% during the six months.* In the first three months of 1998 the S&P 500 gained almost 14%, climbing 5% in the final month of the quarter alone. It was the Index's thirteenth consecutive quarterly gain. Equally remarkable, the 1990s have witnessed the strongest bull market since the exponential advance of the 1920s. In the commentaries that follow, the management teams present their perspectives on the markets and their strategies for investing your assets. Performance information for each Portfolio, relative to the appropriate index, is also included in the reports. Mentor Investment Group** [GRAPH OMITTED] Seven Investment Styles *The Standard & Poor's (S&P) 500 Index, a proxy for the performance of larger capitalization companies, 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. You cannot invest in the S&P 500. ** Mentor Investment Advisors, LLC/dba Mentor Investment Group, LLC 1 Mentor Funds Message from the Chairman and President March 31, 1998 (continued) - -------------------------------------------------------------------------------- The Mentor fund family is sponsored by Mentor Investment Group, where we provide diversified investment services to corporations, foundations, endowments, municipalities, public funds, and individual investors. We offer a wide variety of investment styles through mutual funds, variable annuities, and separately-invested portfolios. Please review the information carefully. Should you have questions, please contact your consultant or call us directly at (800)382-0016. We welcome your communications. Thank you for your investment in Mentor Funds. Sincerely, /s/Daniel J. Ludeman /s/ Paul F. Costello - -------------------- -------------------- Daniel J. Ludeman Paul F. Costello Chairman President [MENTOR INVESTMENT GROUP LOGO] The Mentor Mission To provide professional investment management services through a firm that is second to none in the quality of its investment process, the skill and training of its professionals, and the commitment, shared by all its associates, to deliver the highest level of service and ethical behavior to clients. For more information and a prospectus for the funds, please call us, (800)382-0016, or contact your consultant. The prospectus contains complete information about fees, sales charges, and expenses. Please read it carefully before investing or sending money. 2 Mentor Growth Portfolio Managers' Commentary: The Small/Mid-Capitalization Management Team March 31, 1998 - -------------------------------------------------------------------------------- Performance* Mentor Growth Portfolio performance for the six-month period ended March 31, 1998 was modestly better than other small-capitalization growth stocks, as represented by the Russell 2000 Index, but lagged behind that of larger-capitalization companies. October, 1997 - March, 1998 Mentor Growth Portfolio (A share) 6.42% Russell 2000 6.37% The financial results of the companies held by the Portfolio continued to be excellent during the period - both absolutely and relative to most other companies. Despite these very strong absolute and relative financial results, a sizable difference between small-and large-cap. growth company performance continues. October, 1997 - March, 1998 Mentor Growth Portfolio (A share) 6.42% S&P 500** 17.22% The report that follows looks at issues that may account for recent small-cap. underperformance. Investor perception We are the first to admit that small companies are inherently riskier than larger ones because they are characterized by newer product lines, generally less-seasoned management, and fewer shares of outstanding stock. Small companies on average, however, grow their earnings at much higher rates than larger companies. The market is currently assigning comparable price/earnings multiples to large-cap. stocks and small-cap. stocks despite the higher earnings growth rates for small-cap. companies. Even on a risk-adjusted basis, similar valuations seem to us very hard to justify. The companies in our Portfolio have compounded their earnings over the past year at better than 40%. The 1998 outlook for our companies, according to I/B/E/S estimates, continues to be for earnings growth in excess of 40%, with a three-year estimated earnings growth rate of more than 26%.*** For this, on average, our companies have been accorded a P/E ratio of 25x estimated 1998 earnings, or a 40% discount to their expected growth rate. The S&P 500**, a proxy for larger- capitalization companies, grew its earnings at 9.3% in 1997, is expected to grow its earnings at 6.8% in the coming year, and at 6% over the next three years. Despite this lower earnings-growth rate, the S&P 500 currently sells at an average P/E of 25x estimated 1998 earnings, a 360% premium to its 1998 expected growth rate. The effect of Asian collapse In the fall of 1997, many investors, alarmed by what they had heard of the growing problems in Asian economies, began to concentrate their investments in larger companies, perceiving them to be safer than smaller ones. Small-cap. growth funds, which ordinarily have sizable portions of their portfolios concentrated in high-tech companies, suffered during the final quarter of 1997. Anticipating the potential for negative investor psychology in response to trauma in the Far East, we reduced our weighting in technology from 25% at mid-year to 14% in late December. We offset this * See notes to Performance Comparison, page 4. ** The Standard & Poor's Index (S&P 500), a proxy for the performance of larger capitalization companies, 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. You cannot invest in the S&P 500. *** I/B/E/S is the Institutional Broker's Estimate System. 3 Mentor Growth Portfolio Managers' Commentary: The Small/Mid-Capitalization Management Team March 31, 1998 - -------------------------------------------------------------------------------- reduction with an increase in our weighting of specialty retailing, healthcare, and miscellaneous growth companies. As it turned out, many of these companies, especially the specialty retailers, actually found their costs benefiting from the turmoil as import prices fell. Late in the first quarter we selectively increased our technology exposure, anticipating that the bottom for many of these companies may have been reached. Limited analytical coverage Small-cap. growth companies are generally sparsely followed by Wall Street analysts, a fact that we view as a major positive. Many of these smaller companies will become the Intels, Microsofts, and Home Depots of the future. At this point in their corporate lives, as relatively undiscovered companies, high growth can be bought at a major discount in P/E terms. As these companies grow, become better known and better followed, we believe that in many cases they will attract a greater analytical following and be accorded better valuations. Our conclusion Certainly, young companies growing at 40% to 50% or more, should be valued differently than larger seasoned growth companies. While risks will always be associated with owning small-cap. growth companies, past records of earnings successes for the companies in our Portfolio, combined with the comparatively full valuations of many larger-capitalization companies, argue that the present may be a particularly opportune time to own a small/mid-capitalization growth portfolio like ours.+ + While the managers will endeavor to invest the Portfolio in accordance with their proprietary process, there is no guarantee of investment success. Performance Comparison Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class A and the Russell 2000.- [GRAPH] Class A Russell 2,000 ------- ------------- 6/5/95 9,425 10,000 6/30/95 9,859 10,518 9/30/95 11,251 11,557 9/30/96 14,640 13,076 9/30/97 18,418 17,416 3/31/98 19,601 18,525 Average Annual Returns as of 3/31/98 Including Sales Charges 1-Year Since Inception+++ Class A 41.66% 26.92% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000 Index and represents approximately 7% of the U.S. equity market capitalization. The Russell 3000 is composed of the 3,000 largest U.S. companies by market capitalization and represents approximately 98% of the U.S. market. The indexes are not adjusted for sales charges or other fees. ++ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charge = $9,425). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. +++ Reflects operations of Mentor Growth Portfolio Class A Shares from the date of issuance on 6/5/95 through 3/31/98. 4 Mentor Growth Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class B Shares and the Russell 2000.~ [GRAPH] Class B Russell 2000- ------- ------------- 9/30/87 10,000 10,000.00 12/31/87 7,475 7,093.97 12/31/88 8,737 8,859.93 12/31/89 10,252 10,835.34 12/31/90 9,096 8,289.97 12/31/91 13,667 12,107.64 12/31/92 15,796 14,336.85 12/31/93 18,260 17,047.50 12/31/94 17,443 16,736.97 9/30/95 23,042 21,041.03 9/30/96 29,535 23,804.37 9/30/97 36,817 31,705.64 3/31/98 39,015 33,725.00 Average Annual Returns as of 3/31/98 Including Sales Charges 1-Year 5-Year 10-Year ------ ------ ------- Class B 45.00% 18.83% 16.63% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. ~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000 Index and represents approximately 7% of the U.S. equity market capitalization. The Russell 3000 is composed of the 3,000 largest U.S. companies by market capitalization and represents approximately 98% of the U.S. market. The indexes are not adjusted for sales charges or other fees. + Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the five-year period following the date of purchase. The ending value of the Class B Shares reflects a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. 5 Mentor Growth Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison Comparison of change in value of a hypothetical $10,000 investment in Mentor Growth Portfolio Class Y and the Russell 2000.~ [GRAPH] Class Y Russell 2,000 ------- ------------- 11/19/97 10,000 10,000 11/30/97 10,000 9,935 12/31/97 10,021 10,109 1/31/97 9,811 9,949 2/28/97 10,628 10,685 3/31/97 11,314 11,126 Total Returns as of 3/31/98 1-Year Since Inception++ ------ ----------------- Class Y n/a 13.14% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. ~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000 Index and represents approximately 7% of the U.S. equity market capitalization. The Russell 3000 is composed of the 3,000 largest U.S. companies by market capitalization and represents approximately 98% of the U.S. market. The indexes are not adjusted for sales charges or other fees. + Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Growth Portfolio Class Y Shares from the date of issuance on 11/19/97 through 3/31/98. 6 Mentor Growth Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks - 91.08% Capital Goods & Construction - 3.23% Brookdale Living Communities 2,088 $5,272,200 Denali, Inc. 148,200 2,672,400 PRI Automation, Inc. * 97,950 2,565,066 Superior Services, Inc. * 141,000 4,397,438 Waste Industries, Inc. * 95,750 1,885,078 World Access, Inc. 141,100 4,585,750 ---------- 21,377,932 ---------- Consumer Cyclical - 12.98% A.C. Morre Arts & Crafts, Inc. 196,150 3,775,888 Cadmus Communications Corporation 193,250 4,589,688 Chancellor Media Corporation* 197,200 9,046,550 Clear Channel Communications 50,650 4,963,700 Dollar General Corporation 236,744 9,159,024 Dollar Tree Stores, Inc. * 113,200 6,013,750 Family Dollar Stores 174,450 6,629,100 Heftel Broadcasting Corporation-Class A * 88,700 3,969,325 Keystone Automotive Industries, Inc. * 272,500 6,505,938 Media Arts Group, Inc. 228,200 4,506,950 Optek Technology, Inc. 58,300 1,493,938 Pillowtex Corporation 100,050 4,846,172 Rental Service Corporation * 209,850 4,879,013 Servico, Inc. * 188,650 3,985,231 Stage Stores, Inc. * 92,100 4,754,663 Suburban Lodges of America * 195,150 3,098,006 Travel Services International, Inc. 113,700 3,780,525 ---------- 85,997,461 ---------- Consumer Staples - 3.62% Rexall Sundown, Inc. * 190,500 6,488,906 Richfood Holdings, Inc. 274,725 8,791,200 US Foodservice 127,400 4,689,913 Whole Foods Market, Inc. * 57,250 3,993,188 ---------- 23,963,207 ---------- Energy - 6.84% American Oilfield Divers, Inc. * 239,500 3,457,781 Basin Exploration, Inc. 166,200 3,427,875 BJ Services Company * 131,700 4,798,819 Coach USA, Inc. * 121,250 5,274,375 Core Laboratories, Inc. * 442,700 10,790,813 Global Industries, Ltd. * 228,350 4,652,631 Shares Market Value Common Stocks (continued) Energy (continued) Precision Drilling Corporation* 76,600 $1,618,175 Pride International, Inc. * 191,750 4,578,013 St. Mary Land & Exploration Company 84,150 3,216,108 Tuboscope, Inc. * 185,600 3,526,400 ---------- 45,340,990 ---------- Financial - 8.06% Amresco, Inc. 223,900 7,332,725 Anthracite Capital, Inc. 182,500 2,737,500 Concord EFS, Inc. * 234,211 8,094,918 Cost Plus, Inc. 105,850 3,364,045 Friedman Billings Ramsey Group* 132,050 2,211,838 Markel Corporation * 66,360 11,476,133 National Commerce Bancorporation 274,192 11,687,434 PMT Services, Inc. * 363,200 6,514,872 ---------- 53,419,465 ---------- Health - 21.25% American Oncology Resources* 287,350 4,382,088 Assisted Living Concepts, Inc. * 132,600 2,867,475 Atria Communities, Inc. * 190,800 3,672,900 Centennial Healthcare Company* 104,400 2,623,050 Curative Health Services, Inc. * 170,150 5,668,122 Dentsply International, Inc. 100,800 3,143,700 ESC Medical Systems * 51,900 1,822,988 Express Scripts, Inc. - Class A * 77,300 6,553,591 Health Management Associates, Inc. * 229,641 6,573,474 Henry Schein, Inc. * 100,250 4,160,375 Mecon, Inc. 184,600 2,030,600 Medquist, Inc. * 210,775 7,759,155 Molecular Devices Corporation 226,000 4,350,500 Monarch Dental Corporation * 113,000 1,935,125 National Surgery Centers, Inc.* 247,425 6,324,802 NCS Healthcare, Inc. - Class A* 131,350 4,400,225 Omnicare, Inc. 174,060 6,897,128 7 Mentor Growth Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks (continued) Health (continued) Parexel International Corporation * 63,400 $ 1,981,250 Pediatric Services of America, Inc.* 174,250 3,724,594 Pediatrix Medical Group, Inc. * 75,800 3,524,700 Performance Food Group * 98,600 2,033,625 Pharmerica 254,000 3,778,250 PhyCor, Inc. * 123,735 2,791,771 PMR Corporation 136,400 2,148,300 Priority Healthcare Corporation- Class B 120,700 2,157,513 Province Healthcare Company 137,800 3,617,250 PSS World Medical, Inc. 247,600 5,818,600 QuadraMed Corporation * 107,000 3,571,125 Quorum Health Group * 158,575 5,332,084 Respironics, Inc. * 132,768 3,841,974 Rural/Metro Corporation * 124,000 4,076,500 Serologicals Corporation * 284,150 8,027,238 United Payors & United Providers, Inc. 114,300 3,786,188 Wesley Jessen Visioncare, Inc. 165,200 5,430,950 ----------- 140,807,210 ----------- Technology - 14.13% Advanced Fibre Communication* 63,400 2,306,175 Ansoft Corporation 176,700 2,484,844 Applied Microsystems Corporation * 160,400 1,223,050 Aspect Development, Inc. * 49,000 2,688,875 Atmi, Inc. * 150,950 4,566,238 Benchmark Electronics, Inc. * 250,440 5,963,603 Billing Information Concepts * 182,400 4,731,000 Black Box Corporation * 90,600 3,340,875 CerProbe Corporation 246,700 5,119,025 CSG Systems International, Inc.* 64,100 2,900,525 Galileo Technology, Ltd. 70,700 1,997,275 Medialink Worldwide, Inc. * 180,000 3,690,000 Medirisk, Inc. 113,000 2,401,250 Natural Microsystems Corporation 86,800 3,439,450 Network Appliance, Inc. * 83,900 2,978,450 Ontrack Data International * 155,250 2,522,813 Osteotech, Inc. 59,300 1,534,388 PairGain Technologies, Inc. * 130,800 3,139,200 Parlex Corporation * 191,200 3,393,800 Shares Market Value Common Stocks (continued) Technology (continued) PMC-Sierra, Inc. * 114,800 $ 4,362,400 Premiere Technologies, Inc. * 158,300 5,481,138 Qlogic Corporation * 103,200 3,663,600 SCB Computer Technology, Inc.* 230,525 5,302,075 Segue Software, Inc. 211,300 2,746,900 Select Appointments Holding- 188,100 4,749,525 Sipex Corporation 106,350 3,509,550 Speedfam International, Inc. 133,700 3,451,131 ----------- 93,687,155 ----------- Transportation - 5.59% Atlantic Coast Airlines, Inc. 22,800 1,094,400 Carey International, Inc. 51,050 1,193,294 Comair Holdings, Inc. 206,375 5,468,938 Covenant Transport, Inc. - Class A* 204,150 4,472,161 Hunt (JB) Transportation Services, Inc. 158,500 4,507,344 Mesaba Holdings, Inc. * 236,750 7,442,828 MotivePower Industries, Inc. 215,700 5,958,713 M.S. Carriers, Inc. * 89,850 3,043,669 US Xpress Enterprises - Class A* 187,500 3,890,625 ----------- 37,071,972 ----------- Utilities - 0.66% ITC DeltaCom 135,850 4,364,181 ----------- Miscellaneous - 14.72% ABR Information Services * 130,500 3,670,313 AccuStaff, Inc. * 179,985 6,209,483 AHL Services, Inc. * 261,050 8,516,756 C&D Technologies, Inc. 75,300 3,920,306 Central Garden & Pet Company* 198,600 7,757,813 Fairfield Communities, Inc. * 449,700 9,921,506 First Consulting Group 5,000 103,125 Gulf Island Fabrication, Inc. 144,650 2,676,025 Indus International 324,000 3,321,000 Kulicke & Soffa Industries 186,400 4,054,200 Meta Group, Inc. * 80,900 2,791,050 Outdoor Systems, Inc. * 373,893 13,109,623 Pentacon, Inc. 159,500 2,235,531 Rock of Ages Corporation 129,800 2,287,725 SCP Pool Corporation * 151,750 3,414,375 Silverleaf Resorts, Inc. * 141,450 3,403,641 8 Mentor Growth Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares or Principal Amont Market Value Common Stocks (continued) Miscellaneous (continued) SmarTalk Teleservices 74,900 $ 2,392,119 Source Services Corporation * 164,450 4,542,931 StaffMark, Inc. * 119,400 4,895,400 Sunrise Assisted Living, Inc. * 75,800 3,392,050 Universal Outdoor Holdings * 76,950 4,963,275 ------------ 97,578,247 ------------ Total Common Stocks (cost $409,221,289) 603,607,820 ------------ Short-Term Investment - 10.03% Repurchase Agreement Goldman Sachs & Company Dated 3/31/98, 6.05%, due 4/01/98 collateralized by $67,189,926 Federal Home Loan Mortgage Corporation, 7.00%, 11/01/27, market value 67,966,809 (cost $66,503,537) $66,503,537 66,503,537 ------------ Total Investments (cost $ 480,161,097)-101.11% 670,111,357 ------------ Other Assets less Liabilities - (1.11%) (7,371,076) ------------ Net Assets - 100.00% $662,740,281 ============ * Non-income producing. - American Depository Receipts. Investment Transactions Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $257,834,464 and $260,860,412, respectively. Income Tax Information At March 31, 1998, the aggregated cost of investment securities for federal income tax purposes was $480,161,099. Net unrealized appreciation aggregated $189,950,260, of which $200,136,099, related to appreciated investment securities and $10,185,839, related to depreciated investment securities. See notes to financial statements. 9 Mentor Growth Portfolio - -------------------------------------------------------------------------------- Statement of Assets and Liabilities March 31, 1998 (Unaudited) Assets Investments, at market value (Note 2) Investment securities $603,607,820 Repurchase agreements 66,503,537 ------------ Total investments (cost $480,161,097) 670,111,357 ------------ Collateral for securities loaned (Note 2) 166,799,324 Receivables Investments sold 3,496,076 Fund shares sold 1,966,551 Dividends and interest 67,687 Deferred expenses (Note 2) 74,328 ------------ Total assets 842,515,323 ------------ Liabilities Payables Investments purchased $12,104,661 Securities loaned (Note 2) 166,799,324 Fund shares redeemed 548,332 Accrued expenses and other liabilities 322,725 ----------- Total liabilities 179,775,042 ------------ Net Assets $662,740,281 ============ Net Assets represented by: (Note 2) Additional paid-in capital $ 442,057,181 Accumulated net investment loss (3,807,996) Accumulated net realized gain on investment transactions 34,540,836 Net unrealized appreciation of investments 189,950,260 ------------- Net Assets $662,740,281 ============= Net Asset Value per Share Class A Shares $ 19.94 Class B Shares $ 19.43 Class Y Shares $ 19.94 Offering Price per Share Class A Shares $ 21.16(a) Class B Shares $ 19.43 Class Y Shares $ 19.94 Shares Outstanding Class A Shares 6,163,342 Class B Shares 27,789,313 Class Y Shares 56 ------------- Total Shares Outstanding 33,952,711 ============= (a) Computation of offering price: 100/94.25 of net asset value. See notes to financial statements. Statement of Operations Six Months Ended March 31, 1998 (Unaudited) Investment income Dividends $ 255,959 Interest 1,666,143 ----------- Total investment income (Note 2) 1,922,102 Expenses Management fee (Note 3) $2,094,633 Distribution fee (Note 3) 1,836,172 Shareholder service fee (Note 5) 748,083 Transfer agent fee (Note 3) 375,694 Administration fee (Note 4) 299,233 Shareholder reports and postage expenses 68,725 Registration expenses 61,857 Custodian and accounting fees (Note 3) 40,079 Legal fees 10,680 Directors' fees and expenses 8,267 Audit fees 5,811 Organizational expenses 4,251 Miscellaneous 176,613 ---------- Total expenses 5,730,098 ----------- Net investment loss (3,807,996) ----------- Realized and unrealized gain on investments Net realized gain on investments (Note 2) 41,861,678 Change in unrealized appreciation on investments (310,799) ---------- Net gain on investments 41,550,879 ----------- Net increase in net assets resulting from operations $37,742,883 =========== See notes to financial statements. 10 Mentor Growth Portfolio - -------------------------------------------------------------------------------- Statements of Changes in Net Assets
Six Months Ended 3/31/98 Year Ended (Unaudited) 9/30/97 Net Increase in Net Assets Operations Net investment loss $ (3,807,996) $ (6,118,383) Net realized gain on investments 41,861,678 35,210,825 Change in unrealized appreciation on investments (310,799) 90,598,141 -------------- ------------- Increase in net assets resulting from operations 37,742,883 119,690,583 -------------- ------------- Distributions to Shareholders From net realized gain on investments Class A (6,598,992) (5,768,516) Class B (31,311,147) (52,589,913) Class Y (10) - -------------- ------------- Total distributions to shareholders (37,910,149) (58,358,429) -------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 116,398,878 168,560,541 Reinvested distributions 36,935,409 57,233,448 Cost of shares redeemed (101,689,379) (87,713,664) -------------- ------------- Change in net assets resulting from capital share transactions 51,644,908 138,080,325 -------------- ------------- Increase in net assets 51,477,642 199,412,479 Net Assets Beginning of period 611,262,639 411,850,160 -------------- ------------- End of period (including accumulated undistributed net investment income (loss) of ($3,807,996) and $0, respectively) $ 662,740,281 $ 611,262,639 ============== =============
See notes to financial statements. Financial Highlights Class A Shares
Six Months Year Year Period Ended 3/31/98 Ended Ended Ended (Unaudited) 9/30/97 9/30/96 9/30/95(b) Per Share Operating Performance Net asset value, beginning of period $ 19.94 $ 18.47 $ 16.08 $ 13.37 --------- ---------- -------- ---------- Income from investment operations Net investment loss (0.08) (0.17) (0.10) (0.01) Net realized and unrealized gain on investments 1.27 4.19 4.23 2.72 ----------- ---------- --------- ----------- Total from investment operations 1.19 4.02 4.13 2.71 ----------- ---------- --------- ----------- Less distributions From net realized capital gains (1.19) (2.55) (1.74) -- ----------- ---------- --------- ----------- Total distributions (1.19) (2.55) (1.74) -- ----------- ---------- --------- ----------- Net asset value, end of period $ 19.94 $ 19.94 $ 18.47 $ 16.08 =========== ========== ========= =========== Total Return* 6.42% 25.81% 29.15% 20.27% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 122,893 $105,033 $ 40,272 $ 20,368 Ratio of expenses to average net assets 1.28% (a) 1.28% 1.28% 1.36% (a) Ratio of net investment loss to average net assets (0.65%)(a) (0.67%) (0.39%) (0.65%)(a) Portfolio turnover rate 46% 77% 105% 70% Average commission rate on portfolio transactions $ 0.0617 $ 0.0651 $ 0.0602
(a) Annualized. (b) For the period from June 5, 1995 (initial offering of Class A Shares) to September 30, 1995. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 11 Mentor Growth Portfolio - -------------------------------------------------------------------------------- Financial Highlights Class B Shares
Six Months Year Year Ended 3/31/98 Ended Ended (Unaudited) 9/30/97 9/30/96 Per Share Operating Performance Net asset value, beginning of period $ 19.53 $ 18.29 $ 16.05 ---------- --------- ---------- Income from investment operations Net investment loss (0.12) (0.22) (0.17) Net realized and unrealized gain (loss) on investments 1.21 4.01 4.15 ------------ --------- ---------- Total from investment operations 1.09 3.79 3.98 ------------ --------- ---------- Less distributions From net realized capital gain (1.19) (2.55) (1.74) In excess of net realized capital gain -- -- -- ------------ --------- ---------- Total distributions (1.19) (2.55) (1.74) ------------ --------- ---------- Net asset value, end of period $ 19.43 $ 19.53 $ 18.29 ============ ========= ========== Total Return* 5.97% 24.66% 28.18% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 539,846 $506,230 $ 371,578 Ratio of expenses to average net assets 2.02% (a) 2.03% 2.03% Ratio of net investment loss to average net assets (1.39%)(a) (1.42%) (1.13%) Portfolio turnover rate 46% 77% 105% Average commission rate on portfolio transactions $ 0.0617 $ 0.0651 $ 0.0602 Period Year Year Ended Ended Ended 9/30/95 (c) 12/31/94 12/31/93 Per Share Operating Performance Net asset value, beginning of period $ 12.15 $ 13.78 $ 12.81 ----------- -------- -------- Income from investment operations Net investment loss (0.13) (0.15) (0.08) Net realized and unrealized gain (loss) on investments 4.03 (0.47) 2.07 ------------ -------- -------- Total from investment operations 3.90 (0.62) 1.99 ------------ -------- -------- Less distributions From net realized capital gain -- (1.00) (1.02) In excess of net realized capital gain -- (0.01) -- ------------ -------- -------- Total distributions -- (1.01) (1.02) ------------ -------- -------- Net asset value, end of period $ 16.05 $ 12.15 $ 13.78 ============ ======== ======== Total Return* 32.10% (4.48%) 15.60% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 246,326 $ 190,126 $ 186,978 Ratio of expenses to average net assets 2.08% (a) 2.01% 2.02% Ratio of net investment loss to average net assets (1.20%)(a) (1.20%) (1.12%) Portfolio turnover rate 70% 77% 64% Average commission rate on portfolio transactions
Class Y Shares Period Ended 3/31/98 (d) (Unaudited) Per Share Operating Performance Net asset value, beginning of period $ 18.03 --------- Income from investment operations Net investment loss (0.05) Net realized and unrealized gain on investments 2.15 ----------- Total from investment operations 2.10 ----------- Less distributions From net realized capital gain (0.19) ----------- Total distributions (0.19) ----------- Net asset value, end of period $ 19.94 =========== Total Return* 13.14 % Ratios / Supplemental Data Net assets, end of period $ 1,112 Ratio of expenses to average net assets 1.03% (a) Ratio of net investment loss to average net assets (0.82%)(a) Portfolio turnover rate 46% Average commission rate on portfolio transactions $ 0.0617 (a) Annualized. (c) For the period from January 1, 1995 to September 30, 1995. (d) For the period from November 19, 1997 (initial offering of Class Y Shares) to March 31, 1998. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 12 Mentor Perpetual Global Portfolio Managers' Commentary: The Global/International Management Team March 31, 1998 - -------------------------------------------------------------------------------- LOOKING BACK* Over the six-month period ended March 31, 1998, world markets continued to move ahead with the Morgan Stanley Capital International (MSCI) World Gross Index rising by 11.7% in U.S. dollar terms. Over the same period the MSCI Europe Australia and Far East (EAFE) Index advanced 5.9% despite turmoil in global emerging markets. USA The period began with a sharp correction to the U.S. equity market during October 1997, in response to the travails of Asian equity and currency markets. This correction was followed promptly by a recovery during November and December 1997, a recovery that continued into the new year and accelerated during January. At the same time the U.S. domestic economy continued in robust good health. Despite falling unemployment, a tightening labor market, rising real disposable incomes, and strong consumer expenditure, the U.S. Federal Reserve took the view that these potentially inflationary pressures would be effectively offset by the disinflationary effects of the collapse of Asia currencies and economies. Consequently interest rate policy remained on hold throughout the period. During the first quarter of 1998, positive bond markets, sustained low inflation, and strong money flows kept the U.S. equity market buoyant, although market volatility increased in response to investor anxiety over possible earnings disappointments. United Kingdom As with the USA, Asian travails prompted a correction to the U.K. equity market at the start of the period in October 1997. Despite a quarter-point rise in U.K. interest rates in November - the fifth such rise in six months - the equity market began a strong rally in December. The rally continued into the new year and on throughout the first quarter of 1997. The equity market was supported by strong interest from U.S. institutions, acquisitive U.S. corporations seeking English-language footholds in the new unified European market, and strong new money flows. The Bank of England Monetary Policy Committee (MPC) faced a difficult task in deciding U.K. interest-rate policy, given the conflicting demands of strong wage growth, mixed data on consumer expenditure, and a manufacturing sector driven to the brink of recession by the seemingly relentless strength of British sterling. Rates were kept unchanged at both the February and March meetings of the MPC. Europe Following an autumn correction, European equity markets bounced back strongly in December 1997, and continued to move ahead during the first quarter of 1998. Among the peripheral countries of Europe, domestic economies were boosted by European Monetary Unit (EMU)-driven falls in interest rates and, in France, the first signs of a broader-based domestic-led recovery began to appear. In core Europe, with unemployment remaining stubbornly high and inflation very subdued, interest rates continued at historic low levels. EMU-driven cross-border mergers and acquisitions, corporate restructuring, low interest rates, a positive liquidity situation and a populace increasingly keen to enter into equity investment all provided support for equity markets that reached record highs toward the end of the period. Japan Concerns over the effect of low-cost Asian competition on Japanese manufacturers, and of failed Asian corporate borrowers on Japan's already 13 Mentor Perpetual Global Portfolio Managers' Commentary: The Global/International Management Team March 31, 1998 - -------------------------------------------------------------------------------- beleagured banking system, led to dismal equity market performance during the final quarter of 1997. The equity market rallied strongly during January 1998, on hopes of successful action by the government to stimulate the domestic economy. This optimism, however, gave way to an air of resigned gloom as the government once more proved incapable of revitalizing an economy slipping into recession. Asia At the beginning of the period revelations of South Korea's foreign debt obligations, followed by Indonesia's hostile reaction to proposed International Monetary Fund (IMF) reforms, led to a collapse of confidence in Asian equity markets and currencies. Since mid-January, markets and currencies have bounced back from their oversold lows. Despite unhappiness at the austerity involved in reform programs, South Korea and Thailand have made valuable initial progress. Indonesia, however, balked at IMF demands, and remains a focus of concern. Despite massive currency depreciation, exports remain below their levels of a year ago, hampered by lack of finance and by the weakness of the region's principal trading partner, Japan. Asian equity markets are now discounting much of what is likely to prove a long road back to international credibility, and further progress in 1998 is likely to be modest. Latin American Strong performance by the world's principal equity markets has side-lined Latin American markets, which appear destined, for the time being, to remain hostage to the fortunes of Asia's equity markets. LOOKING AHEAD** USA Liquidity, momentum, and investor enthusiasm may well carry markets higher, but a pause for reflection may be due. Despite some very extended price/ earnings ratios and Asian travails, the overall picture is not bleak. Healthy consumer demand co-exists with subdued inflation, and interest rates that appear likely to remain stable, or to fall. Modest progress appears possible, although increased volatility seems likely. U.K. A range of data suggests that economic growth is slowing: wage rises and consumer expenditure appear to be abating, sterling strength is squeezing the profitability of U.K. manufacturers, and this year will see the full effect of last year's increases in taxes and interest rates. The MPC has again kept interest rates on hold and, although a further rise is possible, we believe U.K. interest rates should trend downward during 1998. The gilts market remains firm, merger and acquisition activity is still on the agenda, and institutional cash flow continues strong -- all providing support for the U.K. equity market. We believe potential exists for further modest progress from present levels, although it is unlikely to be at the brisk pace seen during the opening months of 1998. Europe Signs of domestic recovery are appearing in core economies, but unemployment remains high, and inflation low, and we do not expect core interest rates to rise for the time being Investor enthusiasm and strong inflows of new money may propel markets higher still, but signs of overheating in some of the more speculative areas are already appearing. Longer term, fundamental 14 Mentor Perpetual Global Portfolio Managers' Commentary: The Global/International Management Team March 31, 1998 - -------------------------------------------------------------------------------- economic issues will need to be resolved, with full integration likely to be an extended process. Both increasing volatility and divergence of returns between the various equity markets of the region seems likely. Latin America Latin America offers attractive fundamentals, with broadly positive economic statistics across the region and no evidence of capital flight. It seems almost inevitable, however, that the region will respond to Asian developments for the foreseeable future. Latin American equity markets will continue to find it difficult to attract significant foreign investment flows while the main equity markets of the world are performing so strongly. Japan Japan's new fiscal year has begun with a sharp fall in the equity market, dire warnings from the chairman of Sony and the governor of the Bank of Japan, and a downgrading of "the environment for the Japanese economy" that precipitated further weakening of the yen. The latest economic stimulus package, despite the promise of $4 billion yen in tax cuts, has failed to excite investors, any more than massive intervention by the Bank of Japan has succeeded in providing anything other than a transient strengthening of the yen. Poor corporate results and gloomy sentiment may well carry the market significantly lower in the short term, but the sheer scale of the economic problems facing Japan suggests that both the government and corporate Japan will be propelled into effective action to stimulate economic growth and focus on shareholder value. We will continue to remain patient in looking for the appropriate buying opportunity. Asia (excluding Japan) Although countries such as Thailand and South Korea have made some progress in instituting IMF reforms, the hoped-for boom in exports has failed to materialize because of a lack of trade finance and the weak economy of the region's principal trading partner, Japan. Despite a new agreement between the IMF and Indonesia, the second $3-billion tranche of the IMF rescue support package to Indonesia has yet to be released, and the commitment of president Suharto's regime to reform of the country's system of "crony capitalism" remains in doubt. The stability of Indonesia remains a concern to the region. Following their bounce-back in the early months of 1998, Asian equity markets appear now to be discounting much of what may well prove to be a long road to recovery. * See notes to Performance Comparison page 16. The MSCI EAFE Index with gross dividends reinvested is an unmanaged index of approximately 1,119 securities issued by companies listed on the European, Australian, and Far Eastern stock exchanges. It contains no U.S. equities and is therefore a broadly diversified proxy for international performance. ** While the managers will endeavor to invest the Portfolio in accordance with their proprietary process, there is no guarantee of investment success. 15 Mentor Perpetual Global Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison Comparison of change in value of a hypothetical $10,000 purchase in Mentor Perpetual Global Portfolio Class A and Class B Shares and the Morgan Stanley Capital International (MSCI) World Index.* [GRAPH]
3/24/94 9/30/94 9/30/95 9/30/96 9/30/97 3/31/98 ------- ------- ------- ------- ------- ------- Morgan Stanley 10,000 10,545 12,124 13,846 17,258 19,278 A Shares 9,425 9,982 10,655 12,501 15,200 16,795 B Shares 10,000 9,487 10,587 12,677 15,668 17,152
Average Annual Returns as of 3/31/98 Including Sales Charges 1-Year Since Inception++ ------- ----------------- Class A 22.15% 13.81% Class B 24.66% 20.46% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. * The 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 U.S., Europe, Canada, Australia, New Zealand, and the Far East. The average company in the index has a market capitalization of about $3.5 billion. This is a total return index with gross dividends reinvested. MSCI World Index is not adjusted to reflect reinvestment of dividends on securities in the index, and is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Perpetual Global Portfolio Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Perpetual Global Portfolio Class A and Class B Shares from the date of commencement of operations on 3/29/94 through 3/31/98. - Represents a hypothetical investment of $10,000 in Mentor Perpetual Global Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the five-year period following the date of purchase. 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. 16 Mentor Perpetual Global Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison Comparison of change in value of a hypothetical $10,000 purchase in Mentor Perpetual Global Portfolio Class Y Share and the Morgan Stanley Capital International (MSCI) World Index.* [GRAPH]
11/19/97 11/30/97 12/31/97 1/31/98 2/28/98 3/31/98 -------- -------- -------- ------- ------- ------- Morgan Stanley 10,000 10,178 10,304 10,592 11,311 11,790 Y Shares 10,000 10,000 10,278 10,359 11,192 11,832
Total Returns as of 3/31/98 1-Year Since Inception++ ------ ----------------- Class Y Shares n/a 18.32% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. * The 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 U.S., Europe, Canada, Australia, New Zealand, and the Far East. The average company in the index has a market capitalization of about $3.5 billion. This is a total return index with gross dividends reinvested. MSCI World Index is not adjusted to reflect reinvestment of dividends on securities in the index, and is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Perpetual Global Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Perpetual Global Portfolio Class Y Shares from the date of issuance on 11/19/97 through 3/31/98. 17 Mentor Perpetual Global Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks - 96.67% Argentina - 0.26% Banco Frances del Rio de la Plata SA~ 2,500 $ 75,313 Banco Rio de la Plata SA~ 5,620 70,250 Perez Company SA~ 7,037 95,298 Siderar~ 2,100 84,519 Telefonica de Argentina SA~ 2,270 86,402 ---------- 411,782 ---------- Brazil - 0.63% Cemig Energetic~ (a) 1,855 90,217 Companhia Cervejaria Brahma~ 5,300 82,150 Companhia Vale do Rio Doce~ 3,650 86,993 Compania Paulista de Forca e Luz 550,000 74,494 Electrobras - Centrais Eletricas Brasileiras SA 3,500 86,804 Electropaulo Metropolitana - Electricidade de Sao Paulo SA 390,000 65,858 Petroleo Brasileiro SA~ 3,150 74,799 Telecomonicacoes Brasileiras SA~ 2,200 285,588 Telecomunicacoes de Rio de Janeiro SA 610,000 86,108 Telecomunicacoes de Sao Paulo SA 240,000 77,045 ---------- 1,010,056 ---------- Chile - 0.16% Chilectra SA~ 3,450 93,065 Embotelladora Andina SA~* 3,400 78,200 Telecomunicaciones de Chile~ 3,300 90,956 ---------- 262,221 ---------- China - 0.19% Heilongjiang Electric Power Company 120,000 90,480 Huaneng Power International, Inc. - Class A~* 900 211,500 ---------- 301,980 ---------- Croatia - 0.19% Pliva d.d. # 11,000 195,250 Zagrebacka Banka d.d. * 3,500 104,650 ---------- 299,900 ---------- Finland - 0.99% Huhtamaki 8,470 460,605 Nokia Oyj - Class A 10,455 1,123,121 ---------- 1,583,726 ---------- France - 6.90% Accor SA 2,500 642,424 Atos SA 3,930 654,206 Axa 16,000 1,649,778 Compagnie Financiere de Paribas~ 10,500 1,064,000 Shares Market Value Common Stocks (continued) France (continued) Elf Aquitaine SA 12,000 $1,312,323 Entrelec * 12,000 655,127 Genset SA~ 15,000 435,000 Groupe SEB SA 2,180 322,728 ISIS * 5,460 607,990 Pinault - Printemps - Redoute SA 1,200 928,970 Schneider SA 20,000 1,541,818 Total - Class B 10,000 1,202,424 ---------- 11,016,788 ---------- Germany - 2.23% Allianz AG 7,600 1,176,144 Hochtief AG 7,650 311,805 Porsche AG 300 670,654 Viag AG 2,540 1,398,241 ---------- 3,556,844 ---------- Great Britain - 14.09% Abbey National 18,250 351,383 Arcadia Group 30,000 232,302 BAA PLC 52,250 510,881 Barclays PLC 18,500 553,499 Bass PLC 53,571 1,027,862 BAT Industries PLC 57,000 572,594 British Aerospace PLC 30,000 986,970 British Airways 47,500 481,138 British Biotech * 150,000 172,657 Burmah Castrol 25,000 507,296 Centrica * 195,500 369,867 Commercial Union 50,000 973,576 Debenhams PLC 60,000 371,181 Diageo PLC 20,040 235,199 Emap 25,000 470,883 Enterprise Oil 75,000 664,887 Glaxo Wellcome 30,000 796,608 Granada Group 60,000 1,078,384 Great Universal Stores 33,000 411,062 III Group 30,000 299,105 Imperial Chemical Industries PLC 21,000 371,985 London Sumatra 96,000 30,104 Medeva 80,000 222,340 National Westminster 57,250 1,048,287 PowerGen PLC 44,000 609,963 Prudential Corporation 57,000 835,987 Rank Group PLC 61,750 416,900 Reckitt & Colman PLC 35,000 645,172 Rolls-Royce 200,000 931,720 Scotia Holdings * 49,000 136,870 Shell Transport & Trading Company 25,000 183,330 Smith Group 37,500 349,632 SmithKline Beecham PLC 95,000 1,189,722 Stakis PLC 410,000 813,434 18 Mentor Perpetual Global Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks (continued) Great Britain (continued) Standard Chartered 57,500 $ 832,730 Tesco 85,000 849,598 United Utilities 67,500 1,000,720 UTD News & Media 70,000 952,816 ---------- 22,488,644 ---------- Greece - 0.05% Ergo Bank SA 1,000 71,652 ---------- Hong Kong - 6.26% Asia Satellite 80,000 157,446 Bank of East Asia 245,000 509,053 Beijing Enterprises Holdings Limited 40,000 102,985 CDL Hotels International 218,533 81,692 Cheung Kong 50,000 354,897 China Foods Holdings * 240,000 92,144 China Overseas Land & Investment 1,000,000 267,787 China Telecom * 210,000 425,491 Citic Pacific, Limited 120,000 424,329 CLP Holdings * 100,000 503,310 Elec & Eltek International Company, Limited 390,000 111,987 First Tractor Company 500,000 341,993 GZI Transport - Warrants 60,000 1,069 GZI Transport, Limited 500,000 180,675 Hang Seng Bank, Limited 40,000 391,033 HKR International, Limited 480,000 331,410 Hong Kong & China Gas 80,000 134,216 Hong Kong Electric 80,000 274,627 Hong Kong Telecom 100,386 207,283 HSBC Holdings PLC 86,506 2,639,405 Hutchison Whampoa, Limited 72,000 506,408 National Mutual Asia, Limited 240,000 198,227 New World Development 284,951 1,005,770 Road King Infrastructure, Limited 323,544 288,107 Shanghai Industrial Holding, Limited 80,000 327,281 Union Bank of Hong Kong, Limited 100,000 132,926 ---------- 9,991,551 ---------- Hungary - 0.51% Magyar Olaj-es Gazipari Rt # 5,200 159,380 Matav Rt~ 12,000 373,500 OTP Bank Sp # 3,000 152,250 Richter Gedeon Rt # 1,300 135,850 ---------- 820,980 ---------- India - 0.45% BSES Limited #* 4,000 72,200 Hindalco Industries, Limited # 8,000 142,000 India Cements # 20,000 30,000 Shares Market Value Common Stocks (continued) India (continued) Indian Opportunities Fund Limited * 11,000 $ 100,430 Mahanagar Telephone Nigam Limited #* 2,000 32,900 Tata Electric # 1,500 345,000 ---------- 722,530 ---------- Indonesia - 0.08% PT Bat Indonesia 36,000 122,775 ---------- Italy - 4.75% Assicurazioni Generali 51,040 1,575,205 IOI Corporation Berhad 76,000 76,503 Istituto Mobiliare Italiano 76,000 1,235,365 Telecom Italia SPA 200,000 236,161 Telecom Italia Mobile 227,900 1,225,854 Telecom Italia Spatial * 271,000 3,235,142 ---------- 7,584,230 ---------- Ireland - 2.64% Bank of Ireland 119,465 2,358,168 CRH PLC 80,000 1,205,460 Elan Corporation PLC * 10,000 646,250 ---------- 4,209,878 ---------- Japan - 8.55% Aoyamma Trading Company, Limited 62,000 1,489,769 Daiwa Securities * 125,000 915,149 Fuji Electric Company, Limited 420,000 1,441,261 Kirin Brewery Company, Limited 160,000 1,429,698 Kyocera Corporation 26,000 1,366,623 Nippon Steel Corporation * 800,000 1,285,527 Nippon Telegraph & Telephone Corporation * 170 1,416,933 Sumitomo Marine & Fire 245,000 1,515,900 Tokyo Electric Power 75,000 1,419,185 Toyoda Auto Loom Works, Limited 70,000 1,369,626 ---------- 13,649,671 ---------- Korea - 0.12% Atlantis Korean Smaller Companies * 20,000 135,400 CITC Seoul Excel * 2 6,500 Korea Europe Fund * 18 24,975 LG Electronics # 6,400 13,600 Samsung Electronics # (a) 403 10,931 ---------- 191,406 ---------- Malaysia - 0.45% Boustead Holdings Berhad 84,000 84,918 Magnum Corporation Berhad 660,000 562,623 Nanyang Press Berhad 60,000 63,934 RHB Sakura Merchant Bankers 2,400 1,836 ---------- 713,311 ---------- 19 Mentor Perpetual Global Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks (continued) Mexico - 0.66% ALFA SA 12,700 $ 71,818 Cemex SA~* 14,500 91,791 Cifra SA~* 5,834 106,436 DESC SA~ 2,402 73,862 Empresas La Moderna SA~ 3,600 71,550 Fomento Economico Mexicano~ 11,000 79,421 Grupo Fin Bancomer~* 5,800 69,020 Grupo Carso SA~ 6,200 76,865 Grupo Televisa #* 2,100 77,069 Kimberly-Clark de Mexico SA~ 3,180 81,885 Panamerican Beverages - Class A * 1,970 79,046 Telefono de Mexico SA~ 3,050 171,944 ---------- 1,050,707 ---------- Netherlands - 2.79% Baan Company NV * 23,000 1,101,262 Ispat International NV * 36,500 1,051,747 Oce NV 4,200 604,711 Royal Dutch Petroleum Company 12,748 722,422 Vendex International NV 15,325 971,497 ---------- 4,451,639 ---------- Peru - 0.07% Telefonica del Peru SA~ 5,000 107,813 ---------- Philippines - 0.19% Benpres 27,200 102,680 Benpres Holdings #* 68,000 204,000 ---------- 306,680 ---------- Poland - 0.24% Big Bank Gdanski SA # 9,500 198,788 Elecktrim SA 300,000 190,803 ---------- 389,591 ---------- Singapore - 1.03% ACMA Limited - Warrants 7,500 1,301 City Developments, Limited 50,000 246,206 Development Bank of Singapore 15,600 96,476 Elec & Eltek International Company, Limited 22,000 130,900 GP Batteries International, Limited 90,000 295,448 Jardine Strategic 40,000 109,600 Jardine Strategic - Warrants 3,125 31 Keppel Corporation, Limited 31,000 93,317 Marco Polo Developments, Limited 60,000 77,299 Overseas Chinese Bank * 20,000 112,728 Overseas Union Bank, Limited 100,000 390,214 Singapore Technologies Engineering, Limited * 108,794 96,376 United Overseas Land - Warrants 2,000 387 ---------- 1,650,283 ---------- Shares Market Value Common Stocks (continued) Spain - 3.00% Centros Comerciales Continente, SA 43,160 $1,021,131 Gas Natural SDG, SA 14,230 889,318 Prosegur CIA de Seguridad SA 116,895 1,505,822 Telefonica de Espana 17,000 750,207 Viscofan Envolturas Celulosicas, SA 14,960 620,114 ---------- 4,786,592 ---------- Sweden - 3.08% Astra AB - Class A 90,000 1,854,396 BPA AB 265,000 734,640 Celsius AB - Class B 30,000 618,132 Svenska Handelsbanken - Class A 36,860 1,703,072 ---------- 4,910,240 ---------- Switzerland - 3.66% Credit Suisse Group 6,000 1,202,010 Jelmoli Holding AG 480 578,541 Nestle SA 625 1,195,852 Novartis 485 859,490 Schwetz Bankgesellschaft - Class B 705 1,153,043 Zurich Versicherungs - Gesellschaft 1,465 851,604 ---------- 5,840,540 ---------- Taiwan - 0.24% Formosa Growth Fund * 5,000 108,125 Taiwan Semiconductor~ 2,000 52,563 Taipei Fund * 20 220,250 ---------- 380,938 ---------- Thailand - 0.05% Bangkok Bank 32,200 84,285 ---------- United States - 32.09% American Express Company 5,000 459,063 American Home Products Company 10,000 953,750 AT&T Corporation 8,000 525,000 Banc One Corporation * 12,400 784,300 BankAmerica Corporation 6,100 504,013 Bell Atlantic Corporation 9,000 922,500 Boeing Company 10,000 521,250 Borders Group, Inc. * 30,000 1,021,875 Carnival Corporation - Class A 10,000 697,500 CBS Corporation 22,000 746,625 Chancellor Media Corporation - Class A * 26,000 1,192,750 Chase Manhattan Corporation 7,500 1,011,563 Chevron Corporation 10,000 803,125 Circuit City Stores 11,500 491,625 Clear Channel Communications 10,000 980,000 Columbia/HCA Healthcare 27,900 899,775 Comcast Corporation - Class A 25,000 882,813 20 Mentor Perpetual Global Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks (continued) United States (continued) Computer Association International 14,000 $ 808,500 Crane Company 22,000 1,166,000 Crompton & Knowles 30,000 868,125 Demasz 5,000 82,100 El Paso Natural Gas Corporation 14,000 987,875 EMC Corporation * 30,000 1,134,375 Federal National Mortgage Association 23,000 506,000 Ford Motor Company 15,000 972,188 Fort James Corporation 20,000 916,250 Golden State Bancorporation * 20,000 763,750 Group Maintenance America * 16,000 271,000 Hasbro, Inc. 26,000 918,125 HealthSouth Corporation * 40,000 1,122,500 Hilton Hotels Corporation 20,000 637,500 Ingersoll-Rand 27,000 1,294,313 Intel 10,000 780,625 International Business Machines 7,000 727,125 Kimberly-Clark Corporation 8,000 401,000 La Quinta Inns, Inc. 50,000 1,050,000 Maytag Corporation 10,000 478,125 McDermott International, Inc. 13,000 537,063 Mead Corporation 14,310 512,477 Meyer (Fred), Inc. * 13,000 600,438 Microsoft Corporation * 5,000 447,500 Mirage Resorts, Inc. 10,000 243,125 Newmont 8,800 276,368 Ocular Sciences * 2,500 79,688 Omnicare, Inc. 15,000 594,375 Philip Morris Companies, Inc. 35,000 1,459,063 Phillips Petroleum Corporation 7,100 354,556 Progressive Corporation 8,000 1,077,500 Provident Companies, Inc. 12,900 442,631 Providian Financial Corporation 8,000 459,500 Sovereign Bancorporation 60,000 1,091,250 Sprint Corporation 16,000 1,083,000 St. Paul Companies, Inc. 8,000 713,000 Staples, Inc.* 36,250 1,304,297 Sunbeam Corporation 20,000 881,250 Shares or Principal Amount Market Value Common Stocks (continued) United States (continued) Sybron International Corporation * 27,000 $ 705,375 Tele-Communications International * 32,000 995,000 Time Warner, Inc. 17,500 1,260,000 Travelers Group 18,000 792,000 U.S. Food Services 30,000 1,104,375 U.S. Industries, Inc. 37,500 1,127,344 Wal-Mart Stores 15,000 762,188 Washington Mutual 5,000 358,594 Westpoint Stevens, Inc. - Class A * 16,000 458,000 Weyerhaeuser Company 14,500 819,250 Williams Companies, Inc. 12,500 400,000 WorldCom, Inc. * 23,000 990,438 ------------ 51,212,648 ------------ Venezuela - 0.07% Compania Anonima Nacional Telefonos~ 2,500 104,531 ------------ Total Common Stocks (cost $129,732,140) 154,286,412 ------------ Corporate Bonds - 0.06% Malaysia Telekom Malaysia Berhad, 4.00%, 10/3/04~ (9/22/94, $70,000) (a) (b) $ 70,000 57,575 ------------ Great Britian Scotia Holdings, 8.50%, 3/26/02 19,000 31,334 ------------ Total Corporate Bonds (cost $89,000) 88,909 ------------ Total Long-Term Investments (cost $129,821,140) 154,375,321 ------------ Short-Term Investment - 5.56% Repurchase Agreement Goldman Sachs & Company Dated 03/31/98, 6.05%, due 04/01/98, collateralized by Federal Home Loan Mortgage Corporation, $8,973,100 7.00%, 11/01/27, market value $ 9,076,852 (cost $ 8,881,546) 8,881,546 8,881,546 ------------ Total Investments (cost $ 138,702,686)-102.29% 163,256,867 ------------ Other Assets less Liabilities - (2.29%) (3,651,255) ------------ Net Assets - 100.00% $159,605,612 ============ 21 Mentor Perpetual Global Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- * Non-income producing. # Global Depository Receipts. ~ American Depository Receipts. @ International Depository Receipts. (a) These are securities that may be resold to "qualified institutional buyers" under Rule 144A or securities offered pursuant to Section 4 (2) of the Securities Act of 1933, as amended. These securities have been determined to be liquid under guidelines established by the Board of Trustees. (b) All or a portion of these securities are restricted (i.e., securities which may not be publicly sold without registration under the Federal Securities Act of 1933). Dates of acquisition and costs are set forth in parentheses after the title of the restricted securities. Investment Transactions Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $101,655,736 and $101,900,315, respectively. Income Tax Information At March 31, 1998, the aggregated cost of investment securities for federal income tax purposes was $138,702,686. Net unrealized appreciation aggregated $24,554,181, of which $28,319,427, related to appreciated investment securities and $3,765,246, related to depreciated investment securities. See notes to financial statements. 22 Mentor Perpetual Global Portfolio - -------------------------------------------------------------------------------- Statement of Assets and Liabilities March 31, 1998 (Unaudited) Assets Investments, at market value (Note 2) Investment securities $ 154,375,321 Repurchase agreements 8,881,546 ------------- Total investments (cost $138,702,686) 163,256,867 ------------- Receivables Collateral for securities loaned (Note 2) 5,780,650 Investments sold 2,127,048 Fund shares sold 910,731 Dividends and interest 481,160 Deferred expenses (Note 2) 9,655 ------------- Total assets 172,566,111 ------------- Liabilities Payables Investments purchased $6,829,816 Securities loaned (Note 2) 5,780,650 Fund shares redeemed 206,344 Unrealized depreciation on forward foreign currency exchange contracts (Note 6) 16,509 Accrued expenses and other liabilities 127,180 ---------- Total liabilities 12,960,499 ------------- Net Assets $ 159,605,612 ============= Net Assets represented by: (Note 2) Additional paid-in capital $ 129,223,015 Accumulated net investment loss (766,032) Accumulated net realized gain on investment transactions 6,594,196 Net unrealized appreciation of investments and foreign currency related transactions 24,554,433 ------------- Net Assets $ 159,605,612 ============= Net Asset Value per Share Class A Shares $ 22.01 Class B Shares $ 21.24 Class Y Shares $ 22.01 Offering Price per Share Class A Shares $ 23.35 Class B Shares $ 21.24 Class Y Shares $ 22.01 Shares Outstanding Class A Shares 2,593,624 Class B Shares 4,826,678 Class Y Shares 53 ------------- Total Shares Outstanding 7,420,355 ============= (a) Computation of offering price: 100/94.25 of net asset value. See notes to financial statements. Statement of Operations Six Months Ended March 31, 1998 (Unaudited) Investment income Dividends (b) $ 801,733 Interest 150,826 ------------ Total investment income (Note 2) 952,559 Expenses Management fee (Note 3) $ 730,095 Distribution fee (Note 3) 331,080 Shareholder service fee (Note 5) 173,174 Custodian and accounting fees (Note 3) 104,899 Transfer agent fee (Note 3) 104,545 Administration fee (Note 4) 69,270 Shareholder reports and postage expenses 20,121 Registration expenses 18,666 Organizational expenses 5,518 Legal fees 2,503 Directors' fees and expenses 1,943 Audit fees 1,362 Miscellaneous 57,458 --------- Total expenses 1,620,634 ------------ Net investment loss (668,075) ------------ Realized and unrealized gain on investments and foreign currency transactions Net realized gain on investments and foreign currency related transactions (Note 2) 7,971,794 Change in unrealized appreciation on investments and foreign currency related transactions 7,359,204 --------- Net gain on investments and foreign currency related transactions 15,330,998 ------------ Net increase in net assets resulting from operations $ 14,662,923 ============ (b) Net of withholding taxes of $83,339. See notes to financial statements. 23 Mentor Perpetual Global Portfolio - -------------------------------------------------------------------------------- Statements of Changes in Net Assets
Six Months Ended 3/31/98 Year Ended (Unaudited) 9/30/97 Net Increase in Net Assets Operations Net investment loss $ (668,075) $ (416,666) Net realized gain on investments and foreign currency related transactions 7,971,794 6,084,166 Change in unrealized appreciation on investments and foreign currency related 7,359,204 13,678,454 transactions ------------ ------------- Increase in net assets resulting from operations 14,662,923 19,345,954 ------------ ------------- Distributions to Shareholders From net realized gain on investments Class A (2,383,513) (476,590) Class B (4,554,255) (1,576,577) Class Y (8) - --------------- ------------- Total distributions to shareholders (6,937,776) (2,053,167) -------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 26,964,248 74,523,622 Reinvested distributions 6,732,714 2,007,927 Shares redeemed (17,402,093) (13,467,704) -------------- ------------- Change in net assets resulting from capital share transactions 16,294,869 63,063,845 -------------- ------------- Increase in net assets 24,020,016 80,356,632 Net Assets Beginning of period 135,585,596 55,228,964 -------------- ------------- End of period (including accumulated undistributed net investment loss of $766,032 and $97,957, respectively) $ 159,605,612 $ 135,585,596 ============== =============
See notes to financial statements. Financial Highlights Class A Shares
Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 20.94 $ 17.86 ---------- -------- Income from investment operations Net investment income (loss) (0.06) 0.04 Net realized and unrealized gain on investments 2.15 3.67 ------------ -------- Total from investment operations 2.09 3.71 ------------ -------- Less distributions From net realized capital gain (1.02) (0.63) ------------ ---------- Total distributions (1.02) (0.63) ------------ ---------- Net asset value, end of period $ 22.01 $ 20.94 ============ ========== Total Return* 10.49 % 21.59 % Ratios / Supplemental Data Net assets, end of period (in thousands) $ 57,092 $ 46,556 Ratio of expenses to average net assets 1.83% (a) 1.89% Ratio of expenses to average net asset excluding waiver 1.83% (a) 1.89% Ratio of net investment income (loss) to average net assets (0.48%)(a) 0.07% Portfolio turnover rate 75% 128% Average commission rate on portfolio transactions $ 0.0259 $ 0.0319 Year Year Year Ended Ended Ended 9/30/96 9/30/95 9/30/94 (b) Per Share Operating Performance Net asset value, beginning of period $ 15.88 $ 14.23 $ 14.18 -------- -------- ---------- Income from investment operations Net investment income (loss) (0.04) 0.05 (0.01) Net realized and unrealized gain on investments 2.82 1.60 0.06 --------- -------- --------- Total from investment operations 2.78 1.65 0.05 --------- -------- --------- Less distributions From net realized capital gain (0.80) - - --------- -------- --------- Total distributions (0.80) - - --------- -------- --------- Net asset value, end of period $ 17.86 $ 15.88 $ 14.23 ========= ======== ======== Total Return* 18.40% 11.60% 0.35% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 13,098 $ 6,854 $ 8,882 Ratio of expenses to average net assets 1.95% 2.06% 2.09% (a) Ratio of expenses to average net asset excluding waiver 1.95% 2.11% 3.18% (a) Ratio of net investment income (loss) to average net assets (0.21%) 0.26% (0.10%)(a) Portfolio turnover rate 130% 155% 2% Average commission rate on portfolio transactions $ 0.0320
(a) Annualized. (b) For the period from March 29, 1994 (commencement of operations), to September 30, 1994. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 24 Mentor Perpetual Global Portfolio - -------------------------------------------------------------------------------- Financial Highlights Class B Shares
Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 20.32 $ 17.46 ---------- -------- Income from investment operations Net investment loss (0.11) (0.02) Net realized and unrealized gain on investments 2.05 3.51 ------------ --------- Total from investment operations 1.94 3.49 ------------ --------- Less distributions From net realized capital gain (1.02) (0.63) ------------ --------- Total distributions (1.02) (0.63) ------------ --------- Net asset value, end of period $ 21.24 $ 20.32 ============ ========= Total Return* 10.11% 20.74% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 102,513 $ 89,030 Ratio of expenses to average net assets 2.57% (a) 2.64% Ratio of expenses to average net asset excluding waiver 2.57% (a) 2.64% Ratio of net investment loss to average net assets (1.22%)(a) (0.68%) Portfolio turnover rate 75% 128% Average commission rate on portfolio transactions $ 0.0259 $ 0.0319 Year Year Year Ended Ended Ended 9/30/96 9/30/95 9/30/94 (c) Per Share Operating Performance Net asset value, beginning of period $ 15.67 $ 14.15 $ 14.18 -------- -------- ----------- Income from investment operations Net investment loss (0.05) (0.05) (0.04) Net realized and unrealized gain on investments 2.64 1.57 0.01 --------- -------- ----------- Total from investment operations 2.59 1.52 (0.03) --------- -------- ----------- Less distributions From net realized capital gain (0.80) - - --------- -------- ----------- Total distributions (0.80) - - --------- -------- ----------- Net asset value, end of period $ 17.46 $ 15.67 $ 14.15 ========= ======== =========== Total Return* 17.39% 10.74% (0.21%) Ratios / Supplemental Data Net assets, end of period (in thousands) $ 42,131 $ 12,667 $ 7,987 Ratio of expenses to average net assets 2.70% 2.72% 2.79%)(a) Ratio of expenses to average net asset excluding waiver 2.70% 2.79% 3.93%)(a) Ratio of net investment loss to average net assets (0.91%) (0.40%) (0.82%)(a) Portfolio turnover rate 130% 155% 2% Average commission rate on portfolio transactions $ 0.0320
Class Y Shares Period Ended 3/31/98 (d) (Unaudited) Per Share Operating Performance Net asset value, beginning of period $ 18.60 --------- Income from investment operations Net investment loss (0.06) Net realized and unrealized gain on investments 3.62 ----------- Total from investment operations 3.56 ----------- Less distributions From net realized capital gain (0.15) ----------- Total distributions (0.15) ----------- Net asset value, end of period $ 22.01 =========== Total Return* 18.32% Ratios / Supplemental Data Net assets, end of period $ 1,175 Ratio of expenses to average net assets 1.64% (a) Ratio of expenses to average net asset excluding waiver 1.64% (a) Ratio of net investment loss to average net assets (0.56%)(a) Portfolio turnover rate 75% Average commission rate on portfolio transactions $ 0.0259 (a) Annualized. (c) For the period from March 29, 1994 (commencement of operations) to September 30, 1994. (d) For the period from November 19, 1997 (initial offering of Class Y Shares) to March 31, 1998. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 25 Mentor Capital Growth Portfolio Managers' Commentary: The Large-Capitalization Quality Growth Management Team March 31, 1998 - -------------------------------------------------------------------------------- Economic Overview The S&P 500 gained 17.2% during the six-month period ended March 31, 1998.* The first quarter of this year alone marked the index's thirteenth consecutive quarterly gain. The 1990s marked the best bull market of this century next to the meteoric market rise of the 1920s. Compared with its long-term average annual return of 11%, the S&P 500 has provided an annualized return of nearly 19% since this move began in September 1990. As always after such extended runs, the stock market is starting to appear more speculative. Investors pouring money into the market have combined with price momentum in a self-perpetuating cycle: rising prices attract more money, which in turn pushes prices higher. Certain stocks are moving up dramatically on no substantive news and valuation is an increasingly less important consideration. More games are being played in the market today than in a long while. Bidding up stocks after stock-split announcements has evolved into a huge force despite the fact that these events are devoid of any intrinsic value. This phenomenon is equivalent to paying more than $100 for two $50s. Of course, none of the practitioners sees it so simply. Each understandably has much more elaborate stock-split theories. Many of these same speculators are driving the prices of certain "hype" stocks to extraordinary levels. Some internet companies are trading at more than 100 times next year's estimated earnings - assuming earnings are even expected. These emerging internet businesses are experiencing tremendous revenue growth, but an equal amount of profit uncertainty. They do, however, have price momentum and enthralling stories, qualities that currently outweigh more fundamental considerations such as valuation and risk. The speculative forces have not confined themselves to trading games and emerging technologies. In fact, these forces have reached the bluest of the blue chip stocks. Coca-Cola, Gillette, Microsoft, Lucent, and Pfizer are currently trading at 50 or more times their earnings, with many more not far below these levels. The last time select blue chip stocks traded at these multiples was during the "one-decision" era in the early 1970s. The painful aftermath of that episode compelled investors later to decry it as blatantly speculative and emblematic of the herd mentality that dominates market extremes. The latest edition of a popular financial magazine has three columnists each aggressively recommending purchase of these mega-blue chips, based on money flow arguments - that is, the money has no place else to go. Amazingly, each of the columnists was there during the last 1950s debacle. Twenty-five years must bury a lot of memories. In its inevitable, irresistible way, the stock market is doling out plenty of hanging rope. Our best guess is that it is not over yet. The momentum and the money flows are truly extraordinary. If history is a reliable guide, the speculation could get much more intense. The Capital Growth Portfolio** Our fund has performed relatively well over the past three years as the market has skyrocketed; our returns have generally been in line with or better * See notes to Performance Comparison, page 27. ** While the management team will endeavor to invest the Portfolio according to their proprietary process, there is no guarantee of investment success. 26 Mentor Capital Growth Portfolio Managers' Commentary: The Large-Capitalization Quality Growth Management Team March 31, 1998 - -------------------------------------------------------------------------------- than our peers and the S&P 500. Most importantly, we believe that we have done so with meaningfully less risk. The volatility of our returns has been considerably less than the S&P 500 and the average growth manager. We attempt to control portfolio risk through the careful selection of financially strong companies that have developed leading competitive positions in attractive industries and trade at reasonable valuations relative to the S&P 500. This disciplined quality-growth-at-a-reasonable-price approach makes us particularly averse to speculation. While we are feeling increasingly out of sync with the prevailing mood, our objective view positions us well for the time when the market environment becomes less forgiving. We will not be immune to the next downturn, but we will not look back feeling foolish. Performance Comparison Comparison of change in value of a hypothetical $10,000 investment in Mentor Capital Growth Portfolio Class A and Class B Shares and the S&P 500.~ [GRAPH] A Shares B Shares S&P 500 -------- ------- --------- 4/29/92 $ 9,450 $10,000 $10,000 9/30/92 9,524 10,061 10,215 9/30/93 10,306 10,818 11,543 9/30/94 10,165 10,601 11,965 9/30/95 12,216 12,443 15,521 9/30/96 15,185 15,532 18,680 9/30/97 20,467 20,928 26,236 3/31/98 24,647 25,100 30,753 Average Annual Returns as of 3/31/98 Including Sales Charges 1-Year Since Inception+++ ------ ------------------ Class A 39.03% 16.44% Class B 42.49% 30.97% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. ~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities in the index. The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Capital Growth Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares of rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the five-year period following the date of purchase. 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 commencement of operations on 4/29/92 through 3/31/98. 27 Mentor Capital Growth Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison Comparison of change in value of a hypothetical $10,000 investment in Mentor Capital Growth Portfolio Class Y Shares and the S&P 500.~ [GRAPH] Y-Shares S&P 500 -------- ------- 11/19/97 $10,000 $10,000 11/30/97 10,000 10,462 12/31/97 10,300 10,642 1/31/98 10,430 10,760 2.28/98 11,336 11,536 3/31/98 11,835 12,127 Total Returns as of 3/31/98 1-Year Since Inception++ ------ ----------------- Class Y Shares n/a 18.35% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. ~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities in the index. The S&P 500 is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Capital Growth Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ++ Reflects operations of Mentor Capital Growth Portfolio Class Y from the date of issuance on 11/19/97 through 3/31/98. 28 Mentor Capital Growth Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks - 93.05% Basic Materials - 9.83% Bemis Company, Inc. 212,900 $9,607,113 Morton International, Inc. 268,400 8,806,875 Sonoco Products Company 228,550 9,156,284 ---------- 27,570,272 ---------- Capital Goods & Construction - 9.75% AlliedSignal, Inc. 210,000 8,820,000 Illinois Tool Works 145,000 9,388,750 W.W. Grainger, Inc. 88,800 9,129,750 ---------- 27,338,500 ---------- Consumer Cyclical - 13.20% Chancellor Media Corporation * 211,000 9,679,625 Federated Department Stores * 173,000 8,963,563 Interpublic Group Company 143,650 8,924,256 Newell Company 195,100 9,450,156 ---------- 37,017,600 ---------- Consumer Staples - 13.17% Bristol Myers Squibb Company 84,500 8,814,405 McDonald's Corporation 152,700 9,162,000 Sherwin Williams Company 264,800 9,400,400 Sysco Corporation 373,300 9,565,813 ---------- 36,942,618 ---------- Financial - 21.89% American Express Company 95,100 8,731,369 Banc One Corporation 145,069 9,175,616 Federal National Mortgage Association 115,000 7,273,750 General RE Corporation 40,800 9,001,500 NationsBank Corporation 131,800 9,613,163 Norwest Corporation 204,100 8,482,906 UNUM Corporation 165,200 9,116,975 ---------- 61,395,279 ---------- Health - 6.41% Johnson & Johnson 123,100 9,024,768 Schering - Plough Corporation 109,400 8,936,613 ---------- 17,961,381 ---------- Technology - 15.98% Automatic Data Processing 138,000 9,392,625 Computer Sciences Corporation 170,000 9,350,000 Emerson Electric Company 129,400 8,435,263 Sun Microsystems, Inc. * 203,000 8,468,904 WorldCom, Inc. 213,000 9,172,313 ---------- 44,819,105 ---------- Shares or Principal Amount Market Value Common Stocks (continued) Transportation & Services - 2.82% Werner Enterprises, Inc. 309,650 $ 7,896,075 ------------ Total Common Stocks (cost $ 201,812,749) 260,940,830 ------------ Short-Term Investment - 5.98% Repurchase Agreement Goldman Sachs & Company Dated 03/31/98, 6.05%, due 04/01/98, collateralized by $16,927,622 Federal Home Loan Mortgage Corporation, 7.00%, 11/01/27, market value $17,123,347 (cost $16,754,689) $16,754,689 16,754,689 ------------ Total Investments (cost $218,567,438)-99.03% 277,695,519 ------------ Other Assets less Liabilities-0.97% 2,720,271 ------------ Net Assets - 100.00% $280,415,790 ============ * Non-income producing. Investment Transactions Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $174,400,038 and $127,187,867, respectively. Income Tax Information At March 31, 1998, the aggregated cost of investment securities for federal income tax purposes was $218,567,438. Net unrealized appreciation aggregated $59,128,081, of which $59,530,633, related to appreciated investment securities and $402,552, related to depreciated investment securities. See notes to financial statements. 29 Mentor Capital Growth Portfolio - -------------------------------------------------------------------------------- Statement of Assets and Liabilities March 31, 1998 (Unaudited) Assets Investments, at market value (Note 2) Investment securities $ 260,940,830 Repurchase agreements 16,754,689 ------------- Total investments (cost $218,567,438) 277,695,519 Collateral for securities loaned (Note 2) 11,292,506 Receivables Investments sold 1,460,701 Fund shares sold 2,599,801 Dividends and interest 121,495 ------------- Total assets 293,170,022 ------------- Liabilities Payables Investments purchased $ 266,859 Securities loaned (Note 2) 11,292,506 Fund shares redeemed 1,090,799 Accrued expenses and other liabilities 104,068 ---------- Total liabilities 12,754,232 ------------- Net Assets $ 280,415,790 ============= Net Assets represented by: (Note 2) Additional paid-in capital $ 201,914,130 Accumulated net investment loss (487,548) Accumulated net realized gain on investment transactions 19,861,127 Net unrealized appreciation of investments 59,128,081 ------------- Net Assets $ 280,415,790 ============= Net Asset Value per Share Class A Shares $ 24.68 Class B Shares $ 23.69 Class Y Shares $ 24.68 Offering Price per Share Class A Shares $ 26.19(a) Class B Shares $ 23.69 Class Y Shares $ 24.68 Shares Outstanding Class A Shares 4,336,580 Class B Shares 7,318,348 Class Y Shares 49 ------------- Total Shares Outstanding 11,654,977 ============= (a) Computation of offering price: 100/94.25 of net asset value. See notes to financial statements. Statement of Operations Six Months Ended March 31, 1998 (Unaudited) Investment income Dividends $ 1,259,710 Interest 304,029 ------------ Total investment income (Note 2) 1,563,739 Expenses Management fee (Note 3) $ 856,388 Distribution fee (Note 3) 497,929 Shareholder service fee (Note 5) 267,621 Transfer agent fee (Note 3) 141,033 Administration fee (Note 4) 107,048 Shareholder reports and postage expenses 25,758 Registration expenses 22,151 Custodian and accounting fees (Note 3) 16,603 Legal fees 3,751 Directors' fees and expenses 2,953 Audit fees 2,048 Miscellaneous 85,059 ---------- Total expenses 2,028,342 ------------ Net investment income (464,603) ------------ Realized and unrealized gain on investments Net realized gain on investments (Note 2) 22,513,626 Change in unrealized appreciation on investments 20,391,057 ---------- Net gain on investments 42,904,683 ------------ Net increase in net assets resulting from operations $ 42,440,080 ============ See notes to financial statements. 30 Mentor Capital Growth Portfolio - -------------------------------------------------------------------------------- Statements of Changes in Net Assets
Six Months Ended 3/31/98 Year Ended (Unaudited) 9/30/97 Net Increase in Net Assets Operations Net investment income (loss) $ (464,603) $ 55,807 Net realized gain on investments 22,513,626 14,469,617 Change in unrealized appreciation on investments 20,391,057 24,877,344 ------------- ------------- Increase in net assets resulting from operations 42,440,080 39,402,768 ------------- ------------- Distributions to Shareholders From net investment income Class A (29,703) - Class B (52,910) - From net realized gain on investments Class A (5,934,345) (4,657,749) Class B (10,485,734) (10,198,967) Class Y (12) - ------------- ------------- Total distributions to shareholders (16,502,704) (14,856,716) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 88,774,399 61,493,267 Reinvested distributions 16,089,695 14,535,885 Shares redeemed (29,675,188) (21,387,389) ------------- ------------- Change in net assets resulting from capital share transactions 75,188,906 54,641,763 ------------- ------------- Increase in net assets 101,126,282 79,187,815 Net Assets Beginning of period 179,289,508 100,101,693 ------------- ------------- End of period (including accumulated undistributed net investment income (loss) of ($487,548) and $59,668, respectively) $ 280,415,790 $ 179,289,508 ============= =============
See notes to financial statements. Financial Highlights Class A Shares
Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 22.42 $ 19.36 -------- --------- Income from investment operations Net investment income (loss) (0.06) (0.02) Net realized and unrealized gain (loss) on investments 4.26 5.87 ---------- ---------- Total from investment operations 4.20 5.85 ---------- ---------- Less distributions From net investment income -- -- From net realized capital gain (1.94) (2.79) ---------- ---------- Total distributions (1.94) (2.79) ---------- ---------- Net asset value, end of period $ 24.68 $ 22.42 ========== ========== Total Return* 20.43% 34.78% Ratios / Supplemental Data Net assets, end of period (in thousands) $107,031 $ 65,703 Ratio of expenses to average net assets 1.40%(a) 1.41% Ratio of expenses to average net asset excluding waiver 1.40%(a) 1.41% Ratio of net investment income (loss) to average net assets 0.03%(a) 0.53% Portfolio turnover rate 61% 64% Average commission rate on portfolio transactions $ 0.0689 $ 0.0697 Year Year Year Year Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 Per Share Operating Performance Net asset value, beginning of period $ 16.02 $ 14.88 $ 15.26 $ 14.21 --------- -------- -------- -------- Income from investment operations Net investment income (loss) 0.11 0.02 0.09 0.14 Net realized and unrealized gain (loss) on investments 3.73 2.91 (0.30) 1.02 --------- -------- -------- -------- Total from investment operations 3.84 2.93 (0.21) 1.16 --------- -------- -------- -------- Less distributions From net investment income -- -- (0.04) (0.11) From net realized capital gain (0.50) (1.79) (0.13) -- ---------- -------- -------- -------- Total distributions (0.50) (1.79) (0.17) (0.11) ---------- -------- -------- -------- Net asset value, end of period $ 19.36 $ 16.02 $ 14.88 $ 15.26 ========== ======== ======== ======== Total Return* 24.63% 20.18% (1.37%) 8.21% Ratios / Supplemental Data Net assets, end of period (in thousands) $31,889 $ 29,582 $ 21,181 $31,360 Ratio of expenses to average net assets 1.43% 1.87% 1.70% 1.49% Ratio of expenses to average net asset excluding waiver 1.43% 1.87% 1.70% 1.59% Ratio of net investment income (loss) to average net assets 0.51% 0.27% 0.53% 0.96% Portfolio turnover rate 98% 157% 149% 192% Average commission rate on portfolio transactions $0.0688
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 31 Mentor Capital Growth Portfolio - -------------------------------------------------------------------------------- Financial Highlights Class B Shares Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 21.68 $ 18.92 --------- ---------- Income from investment operations Net investment income (loss) (0.03) -- Net realized and unrealized gain (loss) on investments 3.98 5.55 ----------- ---------- Total from investment operations 3.95 5.55 ----------- ---------- Less distributions Dividends from net investment income -- -- Distributions in excess of net investment income -- -- Distributions from net realized capital gain (1.94) (2.79) ----------- ---------- Total distributions (1.94) (2.79) ----------- ---------- Net asset value, end of period $ 23.69 $ 21.68 =========== ========== Total Return* 19.93% 33.88% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 173,384 $113,587 Ratio of expenses to average net assets 2.14%(a) 2.16% Ratio of expenses to average net asset excluding waiver 2.14% (a) 2.16% Ratio of net investment income (loss) to average net assets (0.71%)(a) (0.22%) Portfolio turnover rate 61% 64% Average commission rate on portfolio transactions $ 0.0689 $0.0697
Year Year Year Year Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 Per Share Operating Performance Net asset value, beginning of period $ 15.79 $ 14.80 $ 15.23 $ 14.22 -------- -------- -------- -------- Income from investment operations Net investment income (loss) (0.04) 0.25 (0.04) 0.05 Net realized and unrealized gain (loss) on investments 3.67 2.53 (0.26) 1.02 --------- -------- -------- -------- Total from investment operations 3.63 2.78 (0.30) 1.07 --------- -------- -------- -------- Less distributions Dividends from net investment income -- -- -- (0.05) Distributions in excess of net investment income -- -- -- (0.01) Distributions from net realized capital gain (0.50) (1.79) (0.13) -- --------- -------- -------- -------- Total distributions (0.50) (1.79) (0.13) (0.06) --------- -------- -------- -------- Net asset value, end of period $ 18.92 $ 15.79 $ 14.80 $ 15.23 ========= ======== ======== ======== Total Return* 23.64% 19.26% (2.00%) 7.52% Ratios / Supplemental Data Net assets, end of period (in thousands) $68,213 $ 57,648 $ 41,106 $ 57,030 Ratio of expenses to average net assets 2.18% 2.56% 2.46% 2.24% Ratio of expenses to average net asset excluding waiver 2.18% 2.56% 2.46% 2.34% Ratio of net investment income (loss) to average net assets (0.24%) (0.41%) (0.22%) 0.21% Portfolio turnover rate 98% 157% 149% 192% Average commission rate on portfolio transactions $0.0688
Class Y Shares Period Months Ended 3/31/98 (b) (Unaudited) Per Share Operating Performance Net asset value, beginning of period $ 20.89 -------- Income from investment operations Net investment income 0.01 Net realized and unrealized gain on investments 4.03 -------- Total from investment operations 4.04 -------- Less distributions From net realized capital gain (0.25) --------- Total distributions (0.25) --------- Net asset value, end of period $ 24.68 ========= Total Return* 18.35% Ratios / Supplemental Data Net assets, end of period $ 1,200 Ratio of expenses to average net assets 1.16%(a) Ratio of expenses to average net asset excluding waiver 1.16%(a) Ratio of net investment income to average net assets 0.00%(a) Portfolio turnover rate 61% Average commission rate on portfolio transactions $ 0.0689 (a) Annualized. (b) For the period from November 19, 1997 (initial offering of Class Y Shares) to March 31, 1998. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 32 Mentor Strategy Portfolio Managers' Commentary: The Tactical Asset Allocation Team March 31, 1998 - -------------------------------------------------------------------------------- The Asset Allocation Process* Our asset allocation process has had a long history of analyzing historical relationships and comparing them to current conditions to determine what mixture of stocks, bonds, and cash may be the most profitable for the coming one to two years. In May, 1996 our model began to indicate that bonds should be added to the Strategy Portfolio. As the stock market continued to soar, and bond yields remained dormant, the model stressed that stocks have rarely been more over-valued, relative to bonds, or even to Treasury bills. As a result, our most recent allocation, initially assumed in December, 1997, is an unusually heavy weighting of 32% bonds, supplementing 15% cash reserves. That produces, of course, a 53% weighting for stocks. The Stock Market We now find the S&P 500 with a price/earnings ratio of 28x trailing 12-month earnings, the highest in U.S. history.** In December, 1997, we would never have believed that the S&P 500 would be up at all, much less the 14% of the first quarter. Now we find that in the wake of the Asian Pacific crisis, and obvious profit problems in basic industry and technology companies, analysts are predicting that first-quarter earnings will be down 0.4%. The Commerce Department just released statistics to show that earnings for all domestic companies have actually been down 2% in the most recent year. And despite all this, large-cap. stocks continue to soar. Historical relationships have, at least temporarily, been rendered useless. Deviations from normal historical relationships, though not as dramatic as today, have occurred from time to time in the past, and have always eventually returned to norm. Each of these periods of abnormality has raised speculation that the stock market has entered a new paradigm. Never has there been as heavy a barrage of large-cap. mergers, acquisitions, and stock buy-backs as the market is experiencing today. The tumult in much of the Asian Pacific and Eastern European countries is causing huge amounts of investment dollars from those arenas to seek a safe haven, like the U.S. It is impossible to tell when these conditions will return to normal. The Portfolio Despite good performance in the equity segment of our Portfolio, the overall performance of our Portfolio has been greatly diminished by our low 53% commitment to stocks. We continue, however, to believe that investors must use the lessons of history to guide their investment decisions, even though relative performance can suffer during these abnormal periods. There are signs that temporarily this bull market is finally seeing upside resistance, and that the huge excess corporate cash involved in the merger, acquisition, and stock buy-backs will be negatively affected in the next few months. If that is the case, and if second quarter earnings do prove as disappointing as we expect, today's defensive strategy will prove to be very comforting. * While the managers will endeavor to invest the Portfolio according to their porprietary process, there is no guarantee of investment success. ** See notes to Performance Comparison, page 33. 33 Mentor Strategy Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison [GRAPH] Comparison of change of value of hypothetical $10,000 investment in Mentor Strategy Portfolio Class A Shares and the S&P 500.~ 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 9/30/97 14,273 18,668 3/31/98 14,913 21,882 Average Annual Returns as of 3/31/98 Including Sales Charges 1-Year Since Inception** ------ ----------------- Class A 17.13% 15.21% 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 3/31/98. Comparison of change of value of hypothetical $10,000 investment in Mentor Strategy Portfolio Class B Shares and the S&P 500.~ [GRAPH] Class B S&P 500 ------- ------- 10/29/93 $10,000 $10,000 12/31/93 10,160 10,024 12/31/94 9,798 10,157 9/30/95 12,175 13,180 9/30/96 14,125 15,860 9/30/97 15,838 22,275 3/31/98 16,589 26,111 Average Annual Returns as of 3/31/98 Including Sales Charges 1-Year Since Inception+ ------ ---------------- Class b 19.35% 12.11% *** 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 five-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 commencement of operations on 10/29/93 through 3/31/98. 34 Mentor Strategy Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison [GRAPH] Comparison of change of value of hypothetical $10,000 investment in Mentor Strategy Portfolio Class Y Shares and the S&P 500.~ Class Y S&P 500~ -------- -------- 11/19/97 $10,000 $10,000 11/30/97 10,000 10,462 12/31/97 10,060 10,642 1/31/98 9,980 10,760 2/28/98 10,400 11,536 3/31/98 10,707 12,127 Total Returns as of 3/31/98 1-Year Since Inception** ------ ----------------- Class Y n/a 7.07% 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 Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ** Reflects operations of Mentor Strategy Portfolio Class Y from the date of issuance on 11/19/97 through 3/31/98. 35 Mentor Strategy Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks - 54.58% Basic Materials - 1.02% Southdown, Inc. 34,250 $ 2,386,796 United Stationers, Inc. 8,500 525,406 ------------ 2,912,202 ------------ Capital Goods & Construction - 2.22% Applied Power, Inc.- Class A 12,600 485,100 Centex Corporation 27,800 1,059,875 Clayton Homes 41,300 836,325 Kuhlman Corporation 35,400 1,723,537 Oakwood Homes 21,200 776,450 Paccar, Inc. 24,100 1,435,456 ------------ 6,316,743 ------------ Commercial Services - 1.34% Comdisco, Inc. 40,500 1,766,813 Omnicom Group, Inc. 43,800 2,061,338 ------------ 3,828,151 ------------ Consumer Cyclical - 7.21% Best Buy Company, Inc. * 9,800 652,925 Bowne & Company 31,100 1,286,762 Chrysler Corporation 19,200 798,000 Ford Motor Company 13,600 881,450 General Motors Corporation 11,000 741,813 Jacor Communications, Inc. * 37,300 2,200,700 McGraw-Hill Companies 9,100 692,169 Royal Caribbean Cruises, Limited 26,400 1,849,650 Sinclair Broadcast Group * 47,800 2,754,475 Time Warner 25,800 1,857,600 Tribune Company 35,300 2,488,650 Walt Disney Company 13,000 1,387,750 Young Broadcasting * 59,900 2,995,000 ------------ 20,586,944 ------------ Consumer Staples - 1.35% Express Scripts - Class A * 38,000 3,221,687 Sysco Corporation 24,400 625,250 3,846,937 ------------ Energy - 0.98% TransCanada Pipelines, Limited 36,400 859,950 Westcoast Energy 34,800 852,600 Williams Companies 33,500 1,072,000 ------------ 2,784,550 ------------ Financial - 9.92% Associated Banc-Corporation 32,000 1,726,000 Charter One Financial, Inc. 46,606 3,105,125 Dime Bancorp, Inc. 61,700 1,854,856 Shares Market Value Common Stocks (continued) Financial (continued) First Republic Bancorp, Inc. 46,300 $ 1,666,800 Marsh & McLennan Companies, Inc. 9,800 855,663 North Fork Bancorp 74,500 2,877,563 Northern Trust Corporation 35,200 2,631,200 Old Republic International Corporation 61,700 2,734,081 Onbancorp, Inc. 23,400 1,620,450 Price (T. Rowe) & Associates, Inc. 35,000 2,463,125 Synovus Financial Corporation 38,200 1,418,175 Travelers Group, Inc. 45,300 2,718,000 U.S. Bancorp 20,900 2,607,275 ------------ 28,278,313 ------------ Health - 3.76% Health Management Association - Class A * 55,350 1,584,394 McKesson Corporation 58,400 3,372,600 Paragon Health Network 54,333 1,079,868 Sunrise Assisted Living * 40,800 1,825,800 Watson Pharmacueticals * 79,100 2,847,600 ------------ 10,710,262 ------------ Retail - 7.83% American Eagle Outfitters * 65,100 2,864,400 Costco Companies, Inc. * 91,000 4,857,125 Family Dollar Stores, Inc. 85,750 3,258,500 Federated Department Stores * 71,700 3,714,956 G & K Services - Class A 6,800 298,350 Gap, Inc. 27,825 1,252,125 Linens 'n Things, Inc. * 25,300 1,389,919 Safeway, Inc. * 61,600 2,275,350 TJX Companies, Inc. 53,200 2,407,300 ------------ 22,318,025 ------------ Technology - 11.67% AFC Cable System, Inc. * 54,500 2,118,688 Affiliated Computer Services- Class A * 35,300 1,171,519 Airtouch Communications * 122,500 5,994,844 Applied Graphics Technology * 41,800 2,011,656 AT&T Corporation 22,800 1,496,250 BCE, Inc. 35,600 1,486,300 CACI International * 54,500 1,199,000 Computer Task Group 14,400 593,100 Dell Computer Corporation * 37,000 2,504,437 EMC Corporation * 28,400 1,073,875 36 Mentor Strategy Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks (continued) Technology (continued) ICG Communications * 38,000 $1,415,500 Intelligroup, Inc. * 70,200 1,136,362 Kellstrom Industries, Inc. * 128,900 3,246,669 Mobile Telecom Technical Corporation * 63,000 1,409,625 OfficeMax * 30,800 550,550 Sprint Corporation 23,900 1,617,731 Telefonica de Espana 11,900 1,573,775 Torchmark 58,600 2,684,613 ---------- 33,284,494 ---------- Transportation - 2.69% Airborne Freight Corporation 57,000 2,144,625 Alaska Airgroup 30,800 1,668,975 American Classic Voyages Company 30,900 710,700 AMR Corporation 9,300 1,331,644 Continental Airlines - Class B * 30,900 1,817,306 ---------- 7,673,250 ---------- Utilities - 2.51% Conectiv, Inc. - Class A 2,412 81,707 Duke Energy Corporation 7,300 434,806 FPL Group, Inc. 7,100 456,175 GTE Corporation 23,700 1,419,038 Illinova Corporation 13,800 416,587 IPALCO Enterprises, Inc. 9,800 441,613 New York State Electric & Gas 11,500 458,562 NIPSCO Industries 16,000 448,000 U.S. West Communications Group 24,600 1,346,850 U.S. West Media Group * 47,800 1,661,050 ---------- 7,164,388 ---------- Miscellaneous - 2.08% Carlisle Companies, Inc. 33,400 1,640,775 Delia'S, Inc. * 45,800 1,099,200 Lennar Corporation 39,962 1,376,191 Rent Way, Inc. * 49,100 1,166,125 Tyco International Limited 12,000 655,500 ---------- 5,937,791 ---------- Principal Amount Market Value Common Stocks (continued) Total Common Stocks (cost $112,521,982) $ 155,642,050 ------------- U.S. Government Securities 33.20% U.S. Treasury Note, 5.50%, 1/31/03 $ 12,000,000 11,912,160 U.S. Treasury Bond, 6.50%, 11/15/26 77,523,000 82,736,422 ------------- Total U.S. Government Securities (cost $ 87,088,991) 94,648,582 ------------- Short-Term Investment - 11.08% Repurchase Agreement Goldman Sachs & Company Dated 03/31/98, 6.05%, due 04/01/98, collateralized by $31,908,279 Federal Home Loan Mortgage Corporation, 7.00%, 11/01/27, market value $32,227,218, (cost $31,581,849) 31,581,849 31,581,849 ------------- Total Investments (cost $ 231,192,822)-98.86% 281,872,481 ------------- Other Assets less Liabilities - 1.14% 3,251,380 ------------- Net Assets - 100.00% $ 285,123,861 ============= * Non-income producing. (a) American Depository Receipts. Investment Transactions Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $88,381,538 and $144,726,891, respectively. Income Tax Information At March 31, 1998, the aggregated cost of investment securities for federal income tax purposes was $231,192,822. Net unrealized appreciation aggregated $50,679,659, of which $50,806,778, related to appreciated investment securities and $127,119, related to depreciated investment securities. See notes to financial statements. 37 Mentor Strategy Portfolio - -------------------------------------------------------------------------------- Statement of Assets and Liabilities March 31, 1998 (Unaudited) Assets Investments, at market value (Note 2) Investment securities $ 250,290,632 Repurchase agreements 31,581,849 ------------- Total investments (cost $231,192,822) 281,872,481 ------------- Collateral for securities loaned (Note 2) 54,376,329 Receivables Investments sold 1,797,664 Fund shares sold 272,519 Dividends and interest 2,126,104 Deferred expenses (Note 2) 15,138 ------------- Total assets 340,460,235 ------------- Liabilities Payables Securities loaned (Note 2) $54,376,329 Fund shares redeemed 811,048 Accrued expenses and other liabilities 148,997 ----------- Total liabilities 55,336,374 ------------- Net Assets $ 285,123,861 ============= Net Assets represented by: (Note 2) Additional paid-in capital $ 238,532,347 Accumulated net investment income 1,104,109 Accumulated net realized loss on investment transactions (5,192,254) Net unrealized appreciation of investments 50,679,659 ------------- Net Assets $ 285,123,861 ============= Net Asset Value per Share Class A Shares $ 16.05 Class B Shares $ 15.65 Class Y Shares $ 16.05 Offering Price per Share Class A Shares $ 17.03(a) Class B Shares $ 15.65 Class Y Shares $ 16.05 Shares Outstanding Class A Shares 2,157,686 Class B Shares 16,006,748 Class Y Shares 67 ------------- Total Shares Outstanding 18,164,501 ============= (a) Computation of offering price: 100/94.25 of net asset value. See notes to financial statements. Statement of Operations Six Months Ended March 31, 1998 (Unaudited) Investment income Dividends $ 622,780 Interest 3,720,968 ------------ Total investment income (Note 2) 4,343,748 Expenses Management fee (Note 3) $1,317,072 Distribution fee (Note 3) 1,020,717 Shareholder service fee (Note 5) 387,373 Transfer agent fee (Note 3) 231,465 Administration fee (Note 4) 154,950 Shareholder reports and postage expenses 40,040 Custodian and accounting fees (Note 3) 39,628 Registration expenses 28,555 Organizational expenses 10,048 Legal fees 6,270 Directors' fees and expenses 5,216 Audit fees 3,466 Miscellaneous 17,240 ---------- Total expenses 3,262,040 ------------ Net investment income 1,081,708 ------------ Realized and unrealized gain (loss) on investments Net realized loss on investments (Note 2) (5,098,824) Change in unrealized appreciation on investments 14,674,155 ---------- Net gain on investments 9,575,331 ------------ Net increase in net assets resulting from operations $ 10,657,039 ============ See notes to financial statements. 38 < Mentor Strategy Portfolio - -------------------------------------------------------------------------------- Statements of Changes in Net Assets
Six Months Ended 3/31/98 Year Ended (Unaudited) 9/30/97 Net Increase (Decrease) in Net Assets Operations Net investment income $ 1,081,708 $ 5,345,384 Net realized gain (loss) on investments (5,098,824) 54,534,179 Change in unrealized appreciation on investments 14,674,155 (24,297,952) ------------- ------------- Increase in net assets resulting from operations 10,657,039 35,581,611 ------------- ------------- Distributions to Shareholders From net investment income Class A (617,602) - Class B (4,725,533) - From net realized gain on investments Class A (6,308,214) (1,531,137) Class B (48,259,012) (21,767,428) ------------- ------------- Total distributions to shareholders (59,910,361) (23,298,565) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 10,114,698 71,646,650 Reinvested distributions 58,353,503 22,750,654 Shares redeemed (76,527,795) (73,109,779) ------------- ------------- Change in net assets resulting from capital share transactions (8,059,594) 21,287,525 ------------- ------------- Increase (decrease) in net assets (57,312,916) 33,570,571 Net Assets Beginning of period 342,436,777 308,866,206 ------------- ------------- End of period (including accumulated undistributed net investement income of $1,104,109 and $5,365,536, respectively) $ 285,123,861 $ 342,436,777 ============= =============
See notes to financial statements. Financial Highlights Class A Shares
Six Months Year Year Period Ended 3/31/98 Ended Ended Ended (Unaudited) 9/30/97 9/30/96 9/30/95 (b) Per Share Operating Performance Net asset value, beginning of period $ 18.61 $ 17.96 $ 15.24 $ 13.45 -------- --------- --------- ---------- Income from investment operations Net investment income 0.13 0.31 0.08 -- Net realized and unrealized gain on investments 0.56 1.68 2.86 1.79 -------- --------- --------- ----------- Total from investment operations 0.69 1.99 2.94 1.79 -------- --------- --------- ----------- Less distributions From net investment income (0.29) -- -- -- In excess of net investment income From net realized capital gain (2.96) (1.34) (0.22) -- -------- ---------- ---------- ----------- Total distributions (3.25) (1.34) (0.22) -- -------- ---------- ---------- ----------- Net asset value, end of period $ 16.05 $ 18.61 $ 17.96 $ 15.24 ======== ========== ========== =========== Total Return* 4.48% 11.97 19.36 % 13.31% Ratios / Supplemental Data Net assets, end of period (in thousands) $34,627 $ 40,552 $ 20,372 $ 10,503 Ratio of expenses to average net assets 1.45%(a) 1.45 % 1.42 % 1.65% (a) Ratio of net investment income (loss) to average net assets 1.36%(a) 2.29 % 0.62 % (0.06%)(a) Portfolio turnover rate 32% 192% 125% 122% Average commission rate on portfolio transactions $0.0659 $ 0.0644 $ 0.0669
(a) Annualized. (b) For the period from June 5, 1995 (initial offering of Class A Shares) to September 30, 1995. * Total return does not reflect sales commisions and is not annualized. See notes to financial statements. 39 Mentor Strategy Portfolio - -------------------------------------------------------------------------------- Financial Highlights Class B Shares
Six Months Year Year Ended 3/31/98 Ended Ended (Unaudited) 9/30/97 9/30/96 Per Share Operating Performance Net asset value, beginning of period $ 18.29 $ 17.79 $ 15.21 -------- --------- ---------- Income from investment operations Net investment income (loss) 0.05 0.26 (0.03) Net realized and unrealized gain (loss) on investments 0.56 1.58 2.83 -------- --------- ---------- Total from investment operations 0.61 1.84 2.80 -------- --------- ---------- Less distributions From net investment income (0.29) -- -- From net realized capital gain (2.96) (1.34) (0.22) ---------- ---------- ---------- Total distributions (3.25) (1.34) (0.22) ---------- ---------- ---------- Net asset value, end of period $ 15.65 $ 18.29 $ 17.79 ========== ========== ========== Total Return* 4.06% 11.19% 18.48 % Ratios / Supplemental Data Net assets, end of period (in thousands) $250,496 $301,885 $288,494 Ratio of expenses to average net assets 2.20%(a) 2.20% 2.19 % Ratio of net investment income (loss) to average net assets 0.61%(a) 1.54% (0.19)% Portfolio turnover rate 32% 192% 125% Average commission rate on portfolio transactions $ 0.0659 $ 0.0644 $ 0.0669 Period Year Period Ended Ended Ended 9/30/95 (c) 12/31/94 12/31/93(d) Per Share Operating Performance Net asset value, beginning of period $ 12.24 $ 12.70 $ 12.50 ---------- -------- ---------- Income from investment operations Net investment income (loss) -- (0.06) -- Net realized and unrealized gain (loss) on investments 2.97 (0.40) 0.20 ---------- -------- ---------- Total from investment operations 2.97 (0.46) 0.20 ---------- -------- ---------- Less distributions From net investment income -- -- -- From net realized capital gain -- -- -- ---------- -------- ---------- Total distributions -- -- -- ---------- -------- ---------- Net asset value, end of period $ 15.21 $ 12.24 $ 12.70 ========== ======== ========== Total Return* 24.26% (3.61)% 1.60% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 224,643 $ 179,274 $ 122,177 Ratio of expenses to average net assets 2.31%(a) 2.19% 2.06%(a) Ratio of net investment income (loss) to average net assets 0.02%(a) (0.54)% 0.08%(a) Portfolio turnover rate 122% 143% 0% Average commission rate on portfolio transactions
Class Y Shares
Period Ended 3/31/98 (e) (Unaudited) Per Share Operating Performance Net asset value, beginning of period $ 15.01 -------- Income from investment operations Net investment income 0.10 Net realized and unrealized gain on investments 0.95 -------- Total from investment operations 1.05 -------- Less distributions From net realized capital gain ( 0.01) --------- Net asset value, end of period $ 16.05 ========= Total Return* 7.07 % Ratios / Supplemental Data Net assets, end of period $ 1,070 Ratio of expenses to average net assets 1.20 %(a) Ratio of net investment income (loss) to average net assets 1.89 %(a) Portfolio turnover rate 32% Average commission rate on portfolio transactions $ 0.0659
(a) Annualized. (c) For the period from January 1, 1995 to September 30, 1995. (d) For the period from October 29, 1993 (commencement of operations) to December 31, 1993. (e) For the period from November 19, 1997 (initial offering of Class Y Shares) to March 31, 1998. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. Mentor Income and Growth Portfolio Managers' Commentary: The Income and Growth Management Team March 31, 1998 - -------------------------------------------------------------------------------- Review of Markets* The S&P 500 completed its thirteenth consecutive quarter of price appreciation and posted a strong total return of 17.2% for the six-month period ending March 31, 1998. Since the end of 1994, the index has appreciated 140% on a principal basis. The primary drivers of this appreciation have been a significant decline in interest rates and a 30% increase in companies' reported profits. If we look at the last three quarters of 1997 in sequence, however, reported earnings display a deteriorating trend: +3.1%, +0.9%, and -8.8%, respectively.** With regard to the fixed-income markets, the first half of the period was marked by strong performance in the bond market. During the most recent three months (the second half of the period addressed in this report) interest rates were virtually unchanged. This stability was true of all yields along the treasury yield curve and marked a period which was devoid of profound changes in the economic fundamentals which drive bond markets. Portfolio Performance* For the six-month period ending March 31, 1998, the Mentor Income & Growth Portfolio returned 7.95% for the A shares and 7.52% for the B shares. Market Outlook Economic activity remains strong and GDP (gross domestic product) growth for the first quarter should exceed the expectations that were in place at year-end. Lower interest rates set off another round of mortgage refinancings that has boosted housing activity and consumer durable spending. Economic expansion continues to appear favorable. Low unemployment, upward pressure on wages, declining energy prices, and low interest rates should keep the economy growing. The pace of activity should moderate, however, from the very strong rate of the past couple of quarters, the result of a further deterioration in foreign trade. In addition, it is expected that the strong growth of spending on technology and capital goods should begin to slow. On balance, we are somewhat more optimistic about economic growth than we were last quarter, and currently estimate GDP growth for 1998 of 2.5%. Despite the strength of the economy, the outlook for inflation continues to improve. Primarily because of the recent sharp drop in oil prices, we are once again revising our inflation forecast downward to 1.1%. The strong dollar and the potential threat of Asian imports also continue to dampen inflationary pressures. Some important areas of the economy, however, are exhibiting upward price pressures, with labor and real estate being the most notable examples. Given the positive outlook for inflation and the emerging surplus in the Federal budget, interest rates are likely to be stable and have the potential to move down modestly. Portfolio Strategy+ As of March 31, 1998, the asset allocation of the Portfolio was 57% equity, 40% bonds, and 3% cash. We modestly increased equity exposure during the most recent six-month period; however, it remains at the lower end of the expected range. We feel that given the performance of the equity market and the possibility of a slowing in earnings growth, conservative equity commitment is appropriate. The current ratio is still healthy and reflects our underlying view that declining interest rates will help to offset the drag of slowing earnings growth. Equity Strategy The Portfolio continues to be most heavily weighted in the industrial & commercial, finance, and 41 Mentor Income and Growth Portfolio Managers' Commentary: The Income and Growth Management Team March 31, 1998 - -------------------------------------------------------------------------------- healthcare sectors. During the quarter we continued to increase the weighting of the industrial sector by investing in two new companies and adding to some existing positions. In addition, we modestly reduced the Portfolio's exposure to the finance sector, because of continued strong stock performance. Given that profit margins are at the levels of historical peaks and that companies are finding it difficult to raise prices because of competitive conditions, wage pressures could negatively affect profit margins and profit comparisons could become more difficult. A growing list of restructuring announcements would confirm this difficulty. Therefore, with the market selling at 28x trailing 12-month earnings, and a fairly flat profit outlook, we believe further progress in the stock market may be dependent on lower interest rates. Fixed-Income Strategy As we look further into 1998, we remain convinced that inflation is under control and probably declining, and that as a result, interest rates are still too high. We felt this way before the financial and economic problems in Asia became well known, and those developments simply make the case stronger. We therefore expect to retain the Portfolio's longer-than-benchmark duration in anticipation of lower short-term interest rates from the Federal Reserve and declining long-term rates in response to persistently low inflation. Frankly, the U.S. economy will need to slow before interest-rate declines can continue, but we expect a decline later in 1998. Although the corporate bond market does not offer substantial value, we also see little danger to the corporate market in the upcoming environment. Therefore we will continue to add corporate bonds when there is sufficient additional yield to justify positions. Mortgages are fairly valued, and again we believe that capturing the additional yield makes sense, so we expect to raise our mortgage commitment a moderate degree. * See notes to Performance Comparison, page 42. ** Source: I/B/E/S. The Institutional Broker's Estimate System. + While the management team will endeavor to invest the Portfolio according to their proprietary process, there is no guarantee of investment success. 42 Mentor Income and Growth Portfolio March 31, 1998 - -------------------------------------------------------------------------------- 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.+ A Shares B Shares LAGG/S&P 500 -------- -------- ------------ 5/24/93 9,425 10,133 10,000 9/30/93 9,909 10,506 10,353 9/30/94 10,578 11,239 10,446 9/30/95 12,402 12,614 12,879 9/30/96 14,802 15,140 14,686 9/30/97 18,076 18,499 18,723 3/31/98 19,512 19,897 21,001 Average Annual Returns as of 3/31/98 Including Sales Charges 1-Year Since Inception++ ------- ----------------- Class A 17.12% 14.73% Class B 19.38% 18.78% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. ** Represents a hypothetical investment of $10,000 in Mentor Income and Growth Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the five-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. ++ Reflects operations of Mentor Income and Growth Portfolio Class A and Class B Shares from the date of commencement of operations on 5/24/93 through 3/31/98. 43 Mentor Income and Growth Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison Comparison of change in value of a hypothetical $10,000 investment in Mentor Income & Growth Portfolio Class Y Shares, the S&P 500 and the Lehman Brothers Aggregate Bond Index.+ [GRAPH] Y-Shares LAGG/S&P 500 ---------- ------------ 11/19/97 $10,000 $10,000 11/30/97 10,000 10,296 12/31/97 10,217 10,443 1/31/98 10,281 10,566 2/28/98 10,584 11,020 3/31/98 10,860 11,374 Total Returns as of 3/31/98 1-Year Since Inception++ ------ ----------------- Class Y n/a 8.60% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. *** Represents a hypothetical investment of $10,000 in Mentor Income and Growth Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. + 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. ++ Reflects operations of Mentor Income and Growth Portfolio Class Y Shares from the date of issuance operations on 11/19/97 through 3/31/98. 44 Mentor Income and Growth Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Shares Market Value Common Stocks - 55.64% Basic Materials - 4.04% Aluminum Company of America 24,000 $1,651,500 British Steel PLC~ 98,600 2,391,050 duPont (E.I.) de Nemours 25,400 1,727,200 Westvaco Corporation 42,000 1,291,500 Willamette Industries, Inc. 60,000 2,253,750 ---------- 9,315,000 ---------- Capital Goods & Construction - 4.41% Caterpillar, Inc. 25,500 1,404,094 Cooper Industries, Inc. 33,000 1,961,436 General Signal Corporation 16,800 785,400 Honeywell, Inc. 25,000 2,067,188 Thomas & Betts Corporation 36,600 2,342,400 Waste Management, Inc. 51,800 1,596,088 ---------- 10,156,606 ---------- Commercial Services - 5.31% Fluor Corporation 64,000 3,184,000 Foster Wheeler Corporation 100,000 3,056,250 Supervalu, Inc. 30,500 1,422,063 Wallace Computer Services, Inc. 132,000 4,570,500 ---------- 12,232,813 ---------- Consumer Cyclical - 5.61% American Stores Company 112,200 2,917,200 Ford Motor Company 76,000 4,925,750 Maytag Corporation 42,400 2,027,250 Sears, Roebuck & Company 53,000 3,044,188 ---------- 12,914,388 ---------- Consumer Staples - 6.49% American Home Products Corporation 22,900 2,184,086 Baxter International, Inc. 62,000 3,417,750 Dimon Incorporated 190,900 3,185,644 Hormel Foods Corporation 28,200 1,094,513 Kimberly-Clark Corporation 58,700 2,942,338 Philip Morris Companies, Inc. 50,900 2,121,894 ---------- 14,946,225 ---------- Energy - 4.55% Amoco Corporation 29,700 2,565,338 Norsk Hydro AS~ 24,900 1,245,000 Phillips Petroleum Company 22,000 1,098,625 Repsol SA~ 35,000 1,780,625 Total SA 22,000 1,321,375 Unocal Corporation 36,000 1,392,750 USX-Marathon Group, Inc. 29,000 1,091,125 ---------- 10,494,838 ---------- Shares Market Value Common Stocks - (continued) Financial - 10.33% Allstate Corporation 28,200 $ 2,592,648 Citicorp 32,500 4,615,000 Federal National Mortgage Association 60,000 3,795,000 First Union Corporation 43,200 2,451,600 Jefferson-Pilot Corporation 22,500 2,001,094 Spieker Properties, Inc. 28,000 1,155,000 U.S. Bancorp 33,000 4,116,750 Wachovia Corporation 19,000 1,611,438 Wilmington Trust Corporation 22,000 1,460,250 ----------- 23,798,780 ----------- Health - 5.10% Abbot Laboratories 35,000 2,635,937 Columbia HCA Healthcare Corporation 86,200 2,779,950 Johnson & Johnson 25,000 1,832,813 Pharmacia & UpJohn 61,000 2,668,750 Rhone-Poulenc SA - Class A~ 36,633 1,845,387 ----------- 11,762,837 ----------- Technology - 3.68% Alltel Corporation 15,100 659,681 International Business Machines Corporation 26,000 2,700,750 Lockheed Martin Corporation 22,200 2,497,500 Phelps Dodge Corporation 12,300 794,119 Xerox Corporation 17,200 1,831,063 ----------- 8,483,113 ----------- Transportation & Services - 2.29% Canadian Pacific, Limited 32,700 964,650 KLM Royal Dutch Air 40,000 1,625,000 Union Pacific Corporation 48,000 2,697,000 ----------- 5,286,650 ----------- Utilities - 3.83% BellSouth Corporation 33,000 2,229,561 DPL, Inc. 65,999 1,286,981 DQE, Inc. 32,000 1,192,000 Pinnacle West Capital 41,700 1,853,044 SBC Communications, Inc. 52,000 2,268,500 ----------- 8,830,086 ----------- Total Common Stocks (cost $104,186,491) 128,221,336 ----------- 45 Mentor Income and Growth Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Principal Amount Market Value Corporate Bonds - 6.79% Industrial - 1.84% Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 $ 248,185 Gillette Company, 5.75%, 10/15/05 250,000 244,773 ICI Wilmington, 6.95%, 9/15/04 1,000,000 1,026,010 Scripps (E.W.) Company, 6.375%, 10/15/02 1,000,000 1,009,540 Sears, Roebuck & Company, 9.25%, 4/15/98 175,000 175,315 Tenneco, Inc., 7.50%, 4/15/07 500,000 532,610 Williams Company, Inc., 6.50%, 11/15/02 1,000,000 1,005,970 ------------ 4,242,403 ------------ Financial - 4.25% American General Finance Corporation, 5.88%, 7/01/00 250,000 249,272 Associates Corporation of North America, 5.25%, 3/30/00 250,000 246,853 BankAmerica Corporation, 7.88%, 12/01/02 1,000,000 1,067,900 Bank One Texas, 6.25%, 2/15/08 1,000,000 989,760 Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 256,828 Comerica Bank, 7.13%, 12/01/13 250,000 254,538 Finova Capital Corporation, 6.39%, 10/08/02 1,000,000 1,003,900 First National Bank of Boston, 8.00%, 9/15/04 250,000 270,303 Fleet Financial Group, 6.88%, 1/15/28 1,000,000 990,250 Great Western Financial, 6.38%, 7/01/00 250,000 251,083 Heller Financial, 6.38%, 11/10/00 1,000,000 1,002,520 Home Savings of Americas, 6.00%, 11/01/00 250,000 249,273 MBIA, Inc., 7.00%, 12/15/25 1,000,000 1,036,470 NationsBank Corporation, 7.80%, 9/15/16 1,000,000 1,113,200 Security Benefits Life Company, 8.75%, 5/15/16 (a) 500,000 559,375 Toronto Dominion Bank, 6.13%, 11/01/08 250,000 243,243 ------------ 9,784,768 ------------ Principal Amount Market Value Corporate Bonds (continued) Utilities - 0.70% Florida Power & Light Company, 5.38%, 4/01/00 $ 250,000 $ 247,934 Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 248,148 Philadelphia Electric Company, 7.50%, 1/15/99 100,000 101,402 Southwestern Public Service Company, 6.88%, 12/01/99 250,000 254,440 System Energy Resources, 7.71%, 8/01/01 500,000 517,515 Union Electric Company, 6.75%, 10/15/99 250,000 253,265 ------------ 1,622,704 ------------ Total Corporate Bonds (cost $15,548,961) 15,649,875 ------------ Government Securities and Agencies - 34.21% Government National Mortgage Association 7.00%, 1/15/24-7/15/24 3,796,406 3,846,071 U.S. Treasury Bonds, 6.25%- 7.25%, 5/15/16-8/15/23 17,725,000 19,166,902 U.S. Treasury Notes, 5.00%- 7.50%, 2/15/99-10/15/06 54,550,000 55,802,978 ------------ Total U.S. Government Securities and Agencies (cost $76,549,975) 78,815,951 ------------ Short-Term Investment - 1.80% Repurchase Agreement Paine Webber, Inc. Dated 3/31/98, 5.90%, Due 04/01/98, collateralized by $4,310,000 U.S. Treasury Bills, 5.10%, 9/17/98, market value $4,210,795 (cost $4,121,000) 4,121,000 4,121,000 ------------ Total Investments (cost $ 200,406,427)-98.44% 226,808,162 ------------ Other Assets less Liabilities - 1.56% 3,595,869 ------------ Net Assets - 100.00% $230,404,031 ============ ~ American Depository Receipts. (a) These are securities that may be resold to "qualified institutional buyers" under rule 144A or securities offered pursuant to section 4(2) of the Securities Act of 1933, as amended. These securities have been determined to be liquid under guidelines established by the Board of Trustees. 46 Mentor Income and Growth Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Investment Transactions Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $78,283,164 and $32,017,116, respectively. Income Tax Information At March 31, 1998, the aggregated cost of investment securities for federal income tax purposes was $200,406,428. Net unrealized appreciation aggregated $26,401,735, of which $27,785,964, related to appreciated investment securities and $1,384,229, related to depreciated investment securities. See notes to financial statements. 47 Mentor Income and Growth Portfolio - -------------------------------------------------------------------------------- Statement of Assets and Liabilities March 31, 1998 (Unaudited) Assets Investments, at market value (Note 2) Investment securities $ 222,687,162 Repurchase agreements 4,121,000 ------------- Total investments (cost $200,406,427) 226,808,162 ------------- Collateral for securities loaned (Note 2) 44,064,557 Receivables Investments sold 1,175,672 Fund shares sold 1,112,668 Dividends and interest 1,602,788 Other 2,774 ------------- Total assets 274,766,621 ------------- Liabilities Payables Investments purchased $ 29,648 Securities loaned (Note 2) 44,064,557 Fund shares redeemed 184,534 Accrued expenses and other liabilities 83,851 ---------- Total liabilities 44,362,590 ------------- Net Assets $ 230,404,031 ============= Net Assets represented by: (Note 2) Additional paid-in capital $ 201,139,557 Accumulated net investment income 29,400 Accumulated net realized gain (loss) on investment transactions 2,833,339 Net unrealized appreciation of investments 26,401,735 ------------- Net Assets $ 230,404,031 ============= Net Asset Value per Share Class A Shares $ 20.22 Class B Shares $ 20.20 Class Y Shares $ 20.46 Offering Price per Share Class A Shares $ 21.45(a) Class B Shares $ 20.20 Class Y Shares $ 20.46 Shares Outstanding Class A Shares 4,497,871 Class B Shares 6,902,326 Class Y Shares 53 ------------- Total Shares Outstanding 11,400,250 ============= (a) Computation of offering price: 100/94.25 of net asset value. See notes to financial statements. Statement of Operations Six Months Ended March 31, 1998 (Unaudited) Investment income Dividends (b) $ 1,142,622 Interest 2,662,499 ------------ Total investment income (Note 2) 3,805,121 Expenses Management fee (Note 3) $ 734,692 Distribution fee (Note 3) 445,217 Shareholder service fee (Note 5) 244,896 Transfer agent fee (Note 3) 130,077 Administration fee (Note 4) 97,959 Registration expenses 22,394 Custodian and accounting fees (Note 3) 22,275 Shareholder reports and postage expenses 19,840 Legal fees 3,416 Directors' fees and expenses 2,671 Audit fees 1,862 Organizational expenses 800 Miscellaneous 61,767 ---------- Total expenses 1,787,866 ------------ Net investment income 2,017,255 ------------ Realized and unrealized gain on investments Net realized gain on investments (Note 2) 3,466,384 Change in unrealized appreciation on investments 10,278,911 ---------- Net gain on investments 13,745,295 ------------ Net increase in net assets resulting from operations $ 15,762,550 ============ (b) Net of withholding taxes of $5,567. See notes to financial statements. 48 Mentor Income and Growth Portfolio - -------------------------------------------------------------------------------- Statements of Changes in Net Assets
Six Months Ended 3/31/98 Year Ended (Unaudited) 9/30/97 Net Increase in Net Assets Operations Net investment income $ 2,017,255 $ 2,672,361 Net realized gain on investments 3,466,384 15,016,540 Change in unrealized appreciation on investments 10,278,911 6,704,657 ------------- ------------- Increase in net assets resulting from operations 15,762,550 24,393,558 ------------- ------------- Distributions to Shareholders From net investment income Class A (963,522) (1,054,162) Class B (1,024,333) (1,618,199) In excess of net investment income Class A - (43,035) Class B - (73,107) From net realized gain on investments Class A (5,326,213) (2,474,556) Class B (8,808,116) (6,846,186) ------------- ------------- Total distributions to shareholders (16,122,184) (12,109,245) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 61,088,504 74,239,398 Reinvested distributions 15,276,494 11,495,496 Shares redeemed (16,926,791) (17,451,330) ------------- ------------- Change in net assets resulting from capital share transactions 59,438,207 68,283,564 ------------- ------------- Increase in net assets 59,078,573 80,567,877 Net Assets Beginning of period 171,325,458 90,757,581 ------------- ------------- End of period (including accumulated undistributed net investment income of $29,400 and $0, respectively) $ 230,404,031 $ 171,325,458 ============= =============
See notes to financial statements. Financial Highlights Class A Shares
Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 20.60 $ 19.16 -------- --------- Income from investment operations Net investment income 0.25 0.44 Net realized and unrealized gain on investments 1.25 3.39 -------- --------- Total from investment operations 1.50 3.83 -------- --------- Less distributions From net investment income (0.22) (0.45) In excess of net investment income - (0.02) From net realized capital gain (1.66) (1.92) ---------- ---------- Total distributions (1.88) (2.39) ---------- ---------- Net asset value, end of period $ 20.22 $ 20.60 ========== ========== Total Return* 7.95% 22.11% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 90,961 $63,509 Ratio of expenses to average net assets 1.35%(a) 1.35% Ratio of expenses to average net asset excluding waiver 1.35%(a) 1.35% Ratio of net investment income to average net assets 2.47%(a) 2.63% Portfolio turnover rate 17% 75% Average commission rate on portfolio transactions $ 0.0549 $0.0515 Year Year Year Year Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 (c) Per Share Operating Performance Net asset value, beginning of period $ 17.13 $ 15.27 $ 14.88 $ 14.14 --------- -------- -------- ---------- Income from investment operations Net investment income 0.37 0.40 0.31 0.09 Net realized and unrealized gain on investments 2.75 2.14 0.64 0.73 --------- -------- -------- ---------- Total from investment operations 3.12 2.54 0.95 0.82 --------- -------- -------- ---------- Less distributions From net investment income (0.35) (0.40) (0.30) (0.08) In excess of net investment income - (0.03) - - From net realized capital gain (0.74) (0.25) (0.26) - ---------- -------- -------- ---------- Total distributions (1.09) (0.68) (0.56) (0.08) ---------- -------- -------- ---------- Net asset value, end of period $ 19.16 $ 17.13 $ 15.27 $ 14.88 ========== ======== ======== ========== Total Return* 19.13% 17.24% 6.54% 5.54% Ratios / Supplemental Data Net assets, end of period (in thousands) $24,210 $ 19,888 $ 17,773 $ 9,849 Ratio of expenses to average net assets 1.36% 1.69% 1.75% 1.56%(a) Ratio of expenses to average net asset excluding waiver 1.36% 1.69% 1.75% 1.94%(a) Ratio of net investment income to average net assets 2.08% 2.53% 2.20% 2.35%(a) Portfolio turnover rate 72% 62% 78% 13% Average commission rate on portfolio transactions $0.0492
(a) Annualized. (c) For the period from May 24, 1993 (commencement of operations), to September 30, 1993. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 49 Mentor Income and Growth Portfolio - -------------------------------------------------------------------------------- Financial Highlights Class B Shares Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 20.59 $ 19.18 -------- -------- Income from investment operations Net investment income 0.14 0.34 Net realized and unrealized gain on investments 1.29 3.35 -------- -------- Total from investment operations 1.43 3.69 -------- -------- Less distributions From net investment income (0.16) (0.34) In excess of net investment income - (0.02) From net realized capital gain (1.66) (1.92) --------- --------- Total distributions (1.82) (2.28) --------- --------- Net asset value, end of period $ 20.20 $ 20.59 ========= ========= Total Return* 7.52% 21.24% Ratios / Supplemental Data Net assets, end of period (in thousands) $139,442 $107,816 Ratio of expenses to average net assets 2.09%(a) 2.10% Ratio of expenses to average net asset excluding waiver 2.09%(a) 2.10% Ratio of net investment income to average net assets 1.73%(a) 1.87% Portfolio turnover rate 17% 75% Average commission rate on portfolio transactions $ 0.0549 $ 0.0515
Year Year Year Period Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 (d) Per Share Operating Performance Net asset value, beginning of period $ 17.14 $ 15.28 $ 14.91 $ 14.14 -------- ------- ------- --------- Income from investment operations Net investment income 0.23 0.28 0.21 0.05 Net realized and unrealized gain on investments 2.76 2.14 0.61 0.77 -------- ------- ------- --------- Total from investment operations 2.99 2.42 0.82 0.82 -------- ------- ------- --------- Less distributions From net investment income (0.21) (0.28) (0.19) (0.05) In excess of net investment income - (0.03) - - From net realized capital gain (0.74) (0.25) (0.26) - --------- ------- ------- --------- Total distributions (0.95) (0.56) (0.45) (0.05) --------- ------- ------- --------- Net asset value, end of period $ 19.18 $ 17.14 $ 15.28 $ 14.91 ========= ======= ======= ========= Total Return* 18.26% 16.32% 5.66% 5.54% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 66,548 $ 46,678 $ 43,219 $ 18,127 Ratio of expenses to average net assets 2.13% 2.43% 2.44% 2.31%(a) Ratio of expenses to average net asset excluding waiver 2.13% 2.43% 2.44% 2.69%(a) Ratio of net investment income to average net assets 1.32% 1.78% 1.51% 1.60% Portfolio turnover rate 72% 62% 78% 13% Average commission rate on portfolio transactions $ 0.0492
Class Y Shares Period Ended 3/31/98 (e) (Unaudited) Per Share Operating Performance Net asset value, beginning of period $ 18.75 -------- Income from investment operations Net investment income 0.25 Net realized and unrealized gain on investments 1.49 -------- Total from investment operations 1.74 -------- Less distributions From net realized capital gain (0.03) --------- Total distributions (0.03) --------- Net asset value, end of period $ 20.46 ========= Total Return* 8.60% Ratios / Supplemental Data Net assets, end of period $ 1,093 Ratio of expenses to average net assets 1.10%(a) Ratio of expenses to average net asset excluding waiver 1.10%(a) Ratio of net investment income to average net assets 3.26%(a) Portfolio turnover rate 17% Average commission rate on portfolio transactions $ 0.0549 (a) Annualized. (d) For the period from May 24, 1993 (commencement of operations), to September 30, 1993. (e) For the period from November 19, 1997 (initial offering of Class Y Shares) to March 31, 1998. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 50 Mentor Municipal Income Portfolio Managers' Commentary: The Tax-Exempt Management Team March 31, 1998 - -------------------------------------------------------------------------------- Economic Factors The U.S. economy continues to be nearly ideal. Growth is strong, unemployment is low, the dollar is rising against currencies around the world, and the national budget is headed for surplus. Despite this persistent growth trend, inflation not only remains low, but also is currently on a declining trend. While a 3% inflation rate had been anticipated, a 1 to 1.5% inflation rate is now a possibility for the year. Looking forward, however, market watchers remain alert for signs of surging prices. One cause of concern is the extremely tight labor market. The percentage of Americans unemployed fell to a 24-year low of 4.6% in February as the economy added more jobs than expected and wages rose. To date, however, increased productivity has allowed us to withstand the higher labor costs, a scenario that cannot continue indefinitely. The Federal Reserve Board left monetary policy unchanged over the six-month reporting period. In addition to signs that the economy was slowing modestly from its breakneck pace of early 1997, the Fed was concerned about the effect that higher U.S. interest rates might have on the struggling economies of Southeast Asia. With nearly all Asian currencies at depressed levels, an increase in U.S. rates would force monetary authorities in Asia to choose between allowing their currencies to decline further, or to matching the U.S. rate increase, thereby slowing their already sluggish economies. As the reporting period began, there were strong concerns about the effect of Asia's financial crisis on the U.S. economy. Over the past few months, there has been little evidence that the Asian crisis has significantly affected the U.S. economy. GDP (gross domestic product) grew at a rate of 3.9% in the fourth quarter, and jobs remained abundant. Corporate profits, while slightly decelerating from the strong pace of a year earlier, still remain healthy. Going forward, however, we do expect further deceleration, although on a much milder level than originally anticipated. Market Review Although we saw some volatility in March, the market rallied over the six-month reporting period. Thirty-year treasury yields decreased 47 basis points (0.47%), from 6.40% on September 30 to 5.93% on March 31. As is typical in market rallies, tax-exempt yields also decreased, but municipals did not perform as strongly as the taxable market. Generic general obligation triple A-rated insured municipal yields declined 12 basis points (0.12%), ending the period at 5.05%. Consistent with the trend over the past few years, insured issuance remained high, totaling more than 50% of volume being brought to the market. This trend creates a scarcity of lower-rated, higher- yielding offerings, and causes the spread in basis points between quality securities and lower-rated paper to narrow. The demand for higher yielding securities and the scarcity of these issues kept credits spreads extremely tight. Municipal yields continue to look very attractive when compared to taxable yields. The Bond Buyer Revenue Bond Index is composed of 25 revenue bonds with an average rating of single-A and an average maturity of 30 years. This index, which is representative of the bonds we typically purchase for the funds, yielded 5.42% at the end of the reporting period. The ratio of this index to 30-year treasury yields was 91%, compared to more historical levels of 78-80% 51 Mentor Municipal Income Portfolio Managers' Commentary: The Tax-Exempt Management Team March 31, 1998 - -------------------------------------------------------------------------------- Management Strategy* Over the six months, we employed the following strategies to manage the municipal Portfolio: [] We adjusted the duration of the Portfolio based on our interest-rate outlook. Duration, which is expressed in years, is a measurement of a mutual fund's volatility to interest-rate movements. Funds with shorter durations tend to perform better when interest rates rise, while funds with longer durations tend to outperform when interest rates decline. At the end of the reporting period, the duration of the Portfolio stood at 7.86 years, compared to the benchmark 7.72 years. This neutral duration relative to the benchmark allowed the Portfolio to perform well as interest rates whipsawed during the first quarter of 1998.** [] We increased our concentration in the healthcare sector to 21% of assets, given our research expertise in this industry as well as the strong performance of this sector. The healthcare sector continues to do well, in part because of the continuing debt-restructuring associated with mergers, acquisitions and consolidations. Also, hospitals continue to improve their financial positions, which has led to a high number of rating upgrades. [] When looking for acquisitions, we take advantage of the new issue market and look for value in state, coupon, rating and sector yield spread swaps. For example, the majority of purchases made during the reporting period were triple A-rated, given the high relative value of quality offerings, versus lower-yielding securities. As a result, almost 56% of assets were triple A-rated at the end of the reporting period. If we see credit spreads begin to widen, we will redeploy some assets to lower-rating categories. [] We continue to trade conservatively, maintaining a strong core position in the Portfolio. Close to 50% of assets have coupons exceeding 6%, for example. These bonds help maintain the Portfolio's dividend-paying ability and, given the significant embedded profits, would create capital gains if sold. Outlook The fixed-income market remains caught between two conflicting forces. The recession in Asia is still likely to exert at least a mild drag on U.S. economic growth. Conversely, the domestic economy is thriving on low unemployment, rising wages and record high consumer confidence. Although the domestic economy has escaped serious harm from the Asian financial crisis so far, in the months ahead we would anticipate a shrinking export market and falling import prices, providing some difficult competition. Such a scenario would have a positive effect on the price of fixed-income securities. Consumers continue to be flush with cash, however, and are in a spending mood, thus providing further fuel to an economy that is already straining against the ceiling of sustainable growth. We expect that uncertainties over the eventual resolution of this conflict will result in mild upward pressure on long-term interest rates in the near term. Supply and demand fundamentals in the tax-exempt market might also put some pressure on municipals, unless demand continues to keep up with record levels of supply. 52 Mentor Municipal Income Portfolio Managers' Commentary: The Tax-Exempt Management Team March 31, 1998 - -------------------------------------------------------------------------------- Regarding municipal yields, we believe they will remain near current levels through at least the middle of the summer. This will depend not only on the general economy and the taxable market, but also on fundamental tax-exempt supply and demand levels. In February, long-term municipal interest rates hit 25-year lows, causing heavy refunding supply. It appears that 1998 will continue to be a push/pull between heavy supply if rates are low or lighter issuance if rates back-up. Given what we have seen to date this year, the market appears to be in a solid position of equilibrium, with strong demand to accommodate record municipal supply. The Portfolio performed strongly over the past six months, and we seek to position it to do well in the future. We appreciate your confidence in our management team. * While the managers seek to invest the Portfolio according to their proprietary process, there is no guarantee of investment success. ** See notes to Performance Comparison, this page. Performance Comparison Comparison of change in value of a hypothetical $10,000 purchase in Mentor Municipal Income Portfolio Class A and Class B Shares and Lehman Municipal Bond Index.~ [GRAPH] A Shares B Shares Lehman Municipal Bond Index -------- -------- -------------------------- 4/29/92 $ 9,525 $10,000 $10,000 9/30/92 10,034 10,528 10,561 9/30/93 11,637 12,134 11,906 9/30/94 11,101 11,511 11,616 9/30/95 12,151 12,348 12,916 9/30/96 12,935 13,184 13,818 9/30/97 14,085 14,291 14,933 3/31/98 14,648 14,835 15,513 Average Annual Returns as of 3/31/98 Including Sales Charges 1-Year Since Inception*** ------ ------------------ Class A 5.18% 6.66% Class B 5.82% 7.02% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. ~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of interests on securities in the index. The Lehman Municipal Bond Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Municipal Income Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. Class B Shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. ++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income Portfolio Class A Shares, after deducting the maximum sales charge of 4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. *** Reflects operations of Mentor Municipal Income Portfolio Class A and Class B Shares from the date of commencement of operations on 4/29/92 through 3/31/98. 53 Mentor Municipal Income Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison [GRAPH] Comparison of change in value of a hypothetical $10,000 purchase in Mentor Municipal Income Portfolio Class Y Shares and Lehman Municipal Bond Index.~ Y Shares Lehman Municipal Bond Index --------- --------------------------- 11/19/97 $10,000 $10,000 11/30/97 10,000 10,058 12/31/97 10,147 10,205 1/31/98 10,212 10,310 2/28/98 10,250 10,313 3/31/98 10,263 10,323 Total Returns as of 3/31/98 1-Year Since Inception*** ------ ------------------ Class Y n/a 2.63% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. ~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of interests on securities in the index. The Lehman Municipal Bond Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Municipal Income Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. *** Reflects operations of Mentor Municipal Income Portfolio Class Y Shares from the date of issuance on 11/19/97 through 3/31/98. 54 Mentor Municipal Income Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
Principal Amount Market Value Long-Term Municipal Securities - 101.56 % Arizona - 1.84% Pima County Arizona IDA, 7.25%, 7/15/10** $1,550,000 $1,731,877 ---------- California - 11.97% Carson Improvement Board Act 1915, Special Assessment District 92, 7.38%, 9/02/22 710,000 777,436 California State Water Reserve Center, 4.75%, 12/01/29 3,500,000 3,266,760 California Statewide Communities Development Authority, 5.63%, 10/01/34 2,070,000 2,098,877 East Bay Municipal Utility District, 4.75%, 6/01/21 1,915,000 1,804,524 Orange County Community Facilities District, Series A, 7.35%, 8/15/18** 300,000 344,256 San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,078,090 University of California Revenue Bonds, 4.75%, 9/01/16 2,000,000 1,916,960 ---------- 11,286,903 ---------- Colorado - 6.30% Colorado Housing Authority, 7.00%, 11/01/24 560,000 596,534 Colorado Springs County School District, 5.00%, 12/01/17 1,250,000 1,223,875 Denver City & County Airport Revenue, 7.75% - 8.50% 11/15/13 - 11/15/23 2,700,000 3,147,446 East 470 Highway Authority, 5.00%, 9/01/26 1,000,000 966,120 ---------- 5,933,975 ---------- Connecticut - 1.15% Connecticut State Development Authority, 6.15%, 4/01/35 1,000,000 1,079,440 ---------- District of Columbia - 0.93% Metropolitan Washington, General Airport Revenue, Series A, 6.63%, 10/01/19** 800,000 879,248 ---------- Florida - 2.98% Hillsborough County, 6.25%, 12/01/34 1,250,000 1,374,250 Sarasota County Health Facilities Authority Revenue, 10.00%, 7/01/22** 1,170,000 1,438,691 ---------- 2,812,941 ----------
Principal Amount Market Value Long-Term Municipal Securities (continued) Georgia - 3.35% Fulton County Georgia Multiple Family Housing Revenue, 6.38%, 2/01/08 $ 520,000 $ 519,943 George Smith World Congress Center, 5.50%, 7/01/20 1,500,000 1,467,570 Monroe County Development Authority PCRB, 6.75%, 1/01/10 1,000,000 1,170,040 ---------- 3,157,553 ---------- Illinois - 9.83% Broadview Tax Increment Revenue, 8.25%, 7/01/13 1,000,000 1,138,330 Chicago Heights Residential Mortgage, (effective yield - 3.21%) (a), 6/01/09 3,465,000 1,595,840 Chicago Capital Appreciation, (effective yield - 1.74%) (a), 7/01/16 2,000,000 679,540 Illinois Health Facilities Authority Revenue, 9.50%, 10/01/22 1,250,000 1,534,600 lllinois Educational Facilities Authority Revenue, 6.00%,10/01/24 1,000,000 1,023,370 Kane County Illinois School District Number 129, 5.50%, 2/01/11 2,000,000 2,094,200 Metropolitan Pier & Exposition Authority (effective yield - 1.37%) (a), 6/15/21 1,950,000 580,145 Saint Clair County Public Building, (effective yield - 1.94%) (a), 12/01/16 1,650,000 628,287 ---------- 9,274,312 ---------- Indiana - 0.39% Indiana Transportation Finance Authority, Series A, (effective yield - 1.87%) (a), 6/01/17 1,000,000 366,240 ---------- Iowa - 0.72% Student Loan Liquidity Corporation, Student Loan Revenue, Series C, 6.95%, 3/01/06** 625,000 678,363 ---------- Kentucky - 5.29% Jefferson County Hospital Revenue, 8.90%*, 10/01/08 500,000 596,875 Kenton County Airport Board Revenue, OID, 7.50%, 2/01/20 1,400,000 1,553,874
55 Mentor Municipal Income Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Principal Amount Market Value Long-Term Municipal Securities (continued) Kentucky (continued) Warren County Kentucky Hospital Facilities Revenue 4.88%, 4/01/27 $3,000,000 $2,837,670 ---------- 4,988,419 ---------- Louisiana - 3.07% Louisiana Public Facilities Authority Revenue, 5.00%, 2/01/28 3,000,000 2,896,140 ---------- Maine - 1.14% Maine State Housing Authority, Series C, 6.88%, 11/15/23 1,000,000 1,070,690 ---------- Massachusetts - 3.28% Brockton State Massachuetts, 5.00%, 4/01/17 100,000 970,181 Massachusetts State Health and Educational Facilities Authority, OID Revenue Bonds, Series A, 6.88%, 4/01/22 1,000,000 1,115,870 Massachusetts State Health and Education, 6.00%, 10/01/23 1,000,000 1,004,490 ---------- 3,090,541 ---------- Michigan - 3.07% Detroit Michigan Water Supply Systems, 5.00%, 7/01/27 1,000,000 967,110 Michigan State Hospital Financial Authority Revenue, 5.00%, 5/15/28 2,000,000 1,921,720 ---------- 2,888,830 ---------- Montana - 1.02% Montana State Health Facilities Authority Revenue, 5.00%, 12/01/24 1,000,000 964,270 ---------- Nebraska - 0.42% Nebraska Investment Finance Authority, SFM, 9.39%*, 9/15/24 350,000 391,125 ---------- Nevada - 2.69% Clark County Nevada Industrial Development Revenue, 5.90%, 10/01/30 2,000,000 2,052,340 Henderson Local Improvement District, Special Assessment, Series A, 8.50%, 11/01/12 460,000 480,631 ---------- 2,532,971 ---------- New Jersey - 1.26% New Jersey State Housing & Mortgage Finance Agency Multi- Family Housing Revenue, 5.40%, 11/01/28 1,170,000 1,191,130 ---------- Principal Amount Market Value Long-Term Municipal Securities (continued) New Mexico - 1.05% Santa Fe Educational Facilities Revenue, 5.50%, 3/01/24 $1,000,000 $ 986,360 ---------- New York - 9.75% Clifton Springs Hospital Refunding & Improvement, 8.00%, 1/01/20 700,000 773,682 Herkimer County, IDA, 8.00%, 1/01/09 1,000,000 1,046,410 Metropolitan Transportation Authority, 4.75%, 7/01/19 1,000,000 921,910 New York City, Series H, 7.20%, 2/01/13 1,500,000 1,675,056 New York City Municipal Water Facility, 5.13%, 6/15/21 1,000,000 979,320 New York State Dormitory Authority Revenue, 5.25%, 2/15/18 2,800,000 2,802,128 New York State Dormitory Authority Revenue Hospitals, 5.20%, 2/15/14 1,000,000 990,350 ---------- 9,188,856 ---------- North Carolina - 1.13% North Carolina Eastern Municipal Power Agency Systems Revenue, 5.70%, 1/01/13 1,000,000 1,061,000 ---------- Ohio - 3.22% Batavia Ohio Local School District, 5.63%, 12/01/22 1,000,000 1,080,510 Mahoning County Ohio Hospital Facilities, 5.00%, 11/15/25 1,000,000 970,790 Oak Hills Ohio Local School District, 5.13%, 12/01/25 1,000,000 987,540 ---------- 3,038,840 ---------- Oklahoma - 0.59% Oklahoma City Industrial and Cultural Facilities Trust, 6.75%, 9/15/17 540,000 554,234 ---------- Pennsylvania - 4.05% Delaware County Pennsylvania IDA, 6.20%, 7/01/19 2,000,000 2,167,600 Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 530,945 56 Mentor Municipal Income Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
Principal Amount Market Value Long-Term Municipal Securities (continued) Pennsylvania (continued) Philadelphia Hospital and Higher Education Facilities, 6.50%, 11/15/08 $1,000,000 $ 1,118,010 ----------- 3,816,555 ----------- Rhode Island - 0.42% West Warwick, Series A, GO Bonds, 6.80% - 7.30%, 7/15/98 - 7/15/08 355,000 391,453 ----------- Tennessee - 6.88% Memphis Shelby County Airport Authority Special Facilities Revenue Refunding, 7.88%, 9/01/09 1,500,000 1,685,640 Metropolitan Government Nashville & Davidson County Hospital, 4.75%, 11/01/18 2,000,000 1,887,000 Tennessee Housing Development Agency, 7.38%, 7/01/23 2,750,000 2,908,510 ----------- 6,481,150 ----------- Texas - 7.87% Alliance Airport Authority, 6.38%, 4/01/21 2,000,000 2,163,620 Brazos Higher Education Authority Student Loan Revenue, 7.10%, 11/01/04 416,000 454,480 Dallas Fort Worth International Airport Facility Revenue Bonds, 7.25%, 11/01/30 1,000,000 1,120,160 Edinburg Texas County School District, 5.00%, 8/15/19 1,500,000 1,455,825 Tarrant County Texas Health Facilities, 5.25%, 2/15/22 1,315,000 1,307,833 Texas State Department of Housing and Community Affairs Refunding, Series C, 9.78%*, 7/02/24 750,000 918,750 ----------- 7,420,668 ----------- Utah - 1.75% Bountiful Hospital Revenue, 9.50%, 12/15/18 230,000 276,209 Utah State Housing Finance Agency, SFM, 7.20%, 1/01/27 1,275,000 1,370,689 ----------- 1,646,898 ----------- West Virginia - 4.15% Harrison County, 6.75%, 8/01/24 2,000,000 2,242,600
Principal Amount Market Value Long-Term Municipal Securities (continued) West Virginia (continued) West Virginia State Hospital Finance Authority Revenue, 8.90%*, 1/01/18 $1,500,000 $ 1,664,190 ----------- 3,906,790 ----------- Total Long-Term Municipal Securities (cost $90,305,365) 95,707,771 ----------- Total Investments (cost $ 90,305,365)-101.56% 95,707,771 ----------- Other Assets less Liabilities - (1.56%) (1,465,586) ----------- Net Assets - 100.00% $94,242,185 ===========
Investment Abbreviations GO - General Obligation IDA - Industrial Development Authority OID - Original Issue Discount PCRB- Pollution Control Revenue Bond 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. * Represents inverse floating rate securities. ** Certain of these securities are used as collateral for futures contracts. Investment Transactions Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $40,194,581 and $17,582,412, respectively. Income Tax Information At March 31, 1998, the aggregated cost of investment securities for federal income tax purposes was $90,305,365. Net unrealized appreciation aggregated $5,402,406, of which $5,511,783, related to appreciated investment securities and $109,377, related to depreciated investment securities. See notes to financial statements. 57 Mentor Municipal Income Portfolio - -------------------------------------------------------------------------------- Statement of Assets and Liabilities March 31, 1998 (Unaudited) Assets Investments, at market value (cost $90,305,365) (Note 2) $ 95,707,771 Cash 891,671 Receivables Fund shares sold 282,882 Dividends and interest 1,412,653 ------------ Total assets 98,294,977 ------------ Liabilities Payables Investments purchased $3,635,148 Dividends 349,504 Variation margin (Note 2) 61,875 Accrued expenses and other liabilities 6,265 ---------- Total liabilities 4,052,792 ------------ Net Assets $ 94,242,185 ============ Net Assets represented by: (Note 2) Additional paid-in capital $ 90,859,171 Accumulated distributions in excess of net investment income (429,768) Accumulated net realized loss on investment transactions (1,633,483) Net unrealized appreciation of investments 5,446,265 ------------ $ 94,242,185 ============ Net Assets Net Asset Value per Share Class A Shares $ 15.73 Class B Shares $ 15.70 Class Y Shares $ 16.01 Offering Price per Share Class A Shares $ 16.51(a) Class B Shares $ 15.70 Class Y Shares $ 16.01 Shares Outstanding Class A Shares 2,667,228 Class B Shares 3,331,177 Class Y Shares 65 ------------ Total Shares Outstanding 5,998,470 ============
(a) Computation of offering price: 100/95.25 of net asset value. See notes to financial statements. Statements of Operations Six Months Ended March 31, 1998 (Unaudited) Investment income Interest (Note 2) $ 2,505,933 ----------- Expenses Management fee (Note 3) $254,793 Distribution fee (Note 3) 120,112 Shareholder service fee (Note 5) 106,163 Transfer agent fee (Note 3) 54,551 Administration fee (Note 4) 42,465 Custodian and accounting fees (Note 3) 14,072 Registration expenses 9,245 Shareholder reports and postage expenses 5,858 Legal fees 1,743 Directors' fees and expenses 1,348 Audit fees 948 Miscellaneous 14,153 -------- Total expenses 625,451 ----------- Net investment income 1,880,482 ----------- Realized and unrealized gain on investments, Futures and Options contracts Net realized gain on investments, futures and options contracts (Note 2) 329,425 Change in unrealized appreciation on investments 901,535 -------- Net gain on investments, futures and options contracts 1,230,960 ----------- Net increase in net assets resulting from operations $ 3,111,442 =========== See notes to financial statements. 58 Mentor Municipal Income Portfolio - -------------------------------------------------------------------------------- Statements of Changes in Net Assets
Six Months Ended 3/31/98 Year Ended (Unaudited) 9/30/97 Net Increase in Net Assets Operations Net investment income $ 1,880,482 $ 2,950,727 Net realized gain on investments, futures and options contracts 329,425 548,498 Change in unrealized appreciation on investments 901,535 1,603,630 ------------ ------------- Increase in net assets resulting from operations 3,111,442 5,102,855 ------------ ------------- Distributions to Shareholders From net investment income Class A (902,300) (1,179,998) Class B (1,107,759) (1,981,316) From net realized gain on investments Class A - (39,820) Class B - (66,849) ------------ ------------- Total distributions to shareholders (2,010,059) (3,267,983) ------------ ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 23,755,397 25,738,018 Reinvested distributions 1,296,794 1,904,347 Shares redeemed (5,577,245) (10,560,419) ------------ ------------- Change in net assets resulting from capital share transactions 19,474,946 17,081,946 ------------ ------------- Increase in net assets 20,576,329 18,916,818 Net Assets Beginning of period 73,665,856 54,749,038 ------------ ------------- End of period (including accumulated distributions in excess of net investment income of $429,768 and $300,191, respectively) $ 94,242,185 $ 73,665,856 ============ =============
See notes to financial statements. Financial Highlights Class A Shares
Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 15.50 $ 15.04 ----------- -------- Income from investment operations Net investment income 0.39 0.81 Net realized and unrealized gain (loss) on investments 0.23 0.49 ----------- -------- Total from investment operations 0.62 1.30 ----------- -------- Less distributions From net investment income (0.39) (0.81) In excess of net investment income - - From net realized capital gain - (0.03) ----------- -------- Total distributions (0.39) (0.84) ----------- -------- Net asset value, end of period $ 15.73 $ 15.50 =========== ======== Total Return* 4.00% 8.89% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 41,947 $ 29,394 Ratio of expenses to average net assets 1.17%(a) 1.22% Ratio of expenses to average net asset excluding waiver 1.17%(a) 1.22% Ratio of net investment income to average net assets 4.64%(a) 5.09% Portfolio turnover rate 21% 59% Year Year Year Year Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 Per Share Operating Performance Net asset value, beginning of period $ 14.92 $ 14.42 $ 16.05 $ 14.76 -------- -------- -------- -------- Income from investment operations Net investment income 0.82 0.81 0.82 0.92 Net realized and unrealized gain (loss) on investments 0.12 0.51 (1.54) 1.32 -------- -------- -------- -------- Total from investment operations 0.94 1.32 (0.72) 2.24 -------- -------- -------- -------- Less distributions From net investment income (0.82) (0.82) (0.81) (0.92) In excess of net investment income - - - (0.03) From net realized capital gain - - (0.10) - -------- -------- -------- -------- Total distributions (0.82) (0.82) (0.91) (0.95) -------- -------- -------- -------- Net asset value, end of period $ 15.04 $ 14.92 $ 14.42 16.05 ======== ======== ======== ======== Total Return* 6.46% 9.46% (4.83%) 16.00% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 17,558 $ 20,460 $25,056 $ 29,245 Ratio of expenses to average net assets 1.24% 1.43% 1.24% 0.71% Ratio of expenses to average net asset excluding waiver 1.24% 1.43% 1.33% 1.39% Ratio of net investment income to average net assets 5.47% 5.56% 5.43% 5.92% Portfolio turnover rate 46% 43% 87% 88%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 59 Mentor Municipal Income Portfolio - -------------------------------------------------------------------------------- Financial Highlights Class B Shares
Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 15.49 $ 15.05 ---------- -------- Income from investment operations Net investment income 0.34 0.71 Net realized and unrealized gain (loss) on investments 0.23 0.52 ---------- -------- Total from investment operations 0.57 1.23 ---------- -------- Less distributions From net investment income ( 0.36) ( 0.71) In excess of net investment income - - From net realized capital gain - ( 0.08) ---------- --------- Total distributions ( 0.36) ( 0.79) ---------- --------- Net asset value, end of period $ 15.70 $ 15.49 ========== ========= Total Return* 3.78% 8.33% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 52,294 $ 44,272 Ratio of expenses to average net assets 1.66%(a) 1.72% Ratio of expenses to average net asset excluding waiver 1.66%(a) 1.72% Ratio of net investment income (loss) to average net assets 4.15%(a) 4.60% Portfolio turnover rate 21% 59% Year Year Year Year Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 Per Share Operating Performance Net asset value, beginning of period $ 14.95 $ 14.43 $ 16.06 $ 14.78 -------- -------- --------- -------- Income from investment operations Net investment income 0.75 0.74 0.74 0.82 Net realized and unrealized gain (loss) on investments 0.11 0.52 ( 1.54) 1.32 -------- -------- --------- -------- Total from investment operations 0.86 1.26 ( 0.80) 2.14 -------- -------- --------- -------- Less distributions From net investment income ( 0.76) ( 0.74) ( 0.73) ( 0.82) In excess of net investment income - - - ( 0.04) From net realized capital gain - - ( 0.10) - --------- --------- --------- --------- Total distributions ( 0.76) ( 0.74) ( 0.83) ( 0.86) --------- --------- --------- --------- Net asset value, end of period $ 15.05 $ 14.95 $ 14.43 $ 16.06 ========= ========= ========= ========= Total Return* 5.87% 9.01% ( 5.34%) 15.27% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 37,191 $ 39,493 $ 46,157 $ 50,976 Ratio of expenses to average net assets 1.74% 1.92% 1.74% 1.21% Ratio of expenses to average net asset excluding waiver 1.74% 1.92% 1.86% 1.89% Ratio of net investment income (loss) to average net assets 4.95% 5.07% 4.93% 5.42% Portfolio turnover rate 46% 43% 87% 88%
Class Y Shares Period Ended 3/31/98 (b) (Unaudited) Per Share Operating Performance Net asset value, beginning of period $ 15.55 --------- Income from investment operations Net investment income 0.37 Net realized and unrealized gain on investments 0.09 --------- Total from investment operations 0.46 --------- Net asset value, end of period $ 16.01 ========= Total Return* 2.63% Ratios / Supplemental Data Net assets, end of period $ 1,032 Ratio of expenses to average net assets 0.97%(a) Ratio of expenses to average net asset excluding waiver 0.97%(a) Ratio of net investment income to average net assets 6.02%(a) Portfolio turnover rate 21% (a) Annualized. (b) For the period from November 19, 1997 (initial offering of Class Y Shares) to March 31, 1998. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 60 Mentor Quality Income Portfolio Mentor Short-Duration Income Portfolio Managers' Commentary: The Fixed-Income Management Team March 31, 1998 - -------------------------------------------------------------------------------- Market Conditions The six-month period ending March 31, 1998 saw a flattening of the yield curve, continuing the trend that characterized fixed-income markets for much of 1997. The yield differential between three-month treasury bills and 30-year treasury bonds, which stood at 1.31% on September 30, 1997, narrowed 0.50% to close the period at 0.81%. Two-and 10-year treasuries closed the period at 5.56% and 5.65%, respectively, down 0.22% and 0.46% from the beginning of the period. The Federal Reserve continued to leave the federal funds rate (the rate member banks charge each other on inter-bank loans and the primary way in which the Fed influences short-term interest rates) unchanged, continuing the neutral monetary stance that it has maintained since its last tightening in March of 1997. The attractive combination of low-inflation and strong-growth, which has characterized the domestic economy in recent years, remains firmly intact. Annualized GDP (gross domestic product), the most comprehensive measure of overall domestic economic growth, increased at a rate of 3.7% for the fourth quarter of 1997. This increase comes on the heels of comparable increases of 3.3% and 3.1% during the second and third quarters of 1997, respectively. Despite continued steady economic growth, inflation at both the wholesale and retail levels remains remarkably subdued. At no time during the past year has the monthly CPI (consumer price index) increase exceeded 0.2%. The PPI (producer price index) readings have been even weaker. During each of the last five months PPI numbers have been negative, resulting in a year-to-date annualized producer price growth rate of negative 4.2%. That negative rate points to an emerging deflationary environment for basic industrial commodities like oil and metals. And amazingly, these falling prices are occurring in a period of the lowest unemployment rates of the past 30 years. In fact, the 4.6% to 4.7% unemployment rates of the first quarter represent levels that were viewed well below "full employment" only a few years ago. As expected, the turmoil in emerging Asian markets and Japan has been positive for U.S. fixed-income markets, particularly the highest quality sectors such as U.S. treasuries. The current low interest-rate environment has made mortgage refinancing particularly attractive for homeowners. As a result, we reconfigured our Portfolios to provide protection from the increased likelihood of mortgage prepayments. It was our belief that increased prepayment pressure would inevitably negatively affect the relative attractiveness of mortgage-backed bonds. Likewise we felt that the Asian crisis would negatively affect the earnings of U.S. multi-national corporations that rely on exports to those countries. The likely consequence of this lack of predictability of corporate earnings would be a widening of spreads. This anticipated widening of spreads versus treasuries did in fact occur in both the mortgage and corporate markets. By quarter-end, however, widened spreads made high-grade mortgage and corporate product sufficiently attractive to cause us to reverse course and selectively raise non-treasury allocations within our Portfolios. 61 Mentor Quality Income Portfolio Mentor Short-Duration Income Portfolio Managers' Commentary: The Fixed-Income Management Team March 31, 1998 - -------------------------------------------------------------------------------- Performance* For the six-month period ending March 31, 1998, the Mentor Quality Income Portfolio A shares returned 2.76% and the B shares 2.53%, compared to 5.05% for the Merrill Lynch 7-Year Treasury Index. The Mentor Short-Duration Income Portfolio A shares and B shares returned 2.39% and 2.22% respectively for the six-month period, compared to 3.60% for the Merrill Lynch 3-Year Treasury Index. The Portfolios** At period-end we maintained a portfolio duration approximately 5% longer than our Merrill Lynch 3-year and 7-year Treasury Index benchmarks. This represents a modest lengthening from the beginning of the period when both the Quality Income and Short-Duration Income Portfolios had durations approximately 5% shorter than their respective benchmarks. This lengthening occurred in response to the continued crisis in Asia, which in our view significantly improved the prospects for lower interest rates. During the period we also sold our international bond positions, replacing them with domestic holdings. Market Outlook The outlook going forward is little changed from what it appeared to be at the beginning of the year. Prospects for continued low inflation remain good. The likely long-term consequence is that long rates, which are more sensitive to inflation than they are to economic growth, are likely to continue to decline over the course of the year. The wild card continues to be the ultimate effect of Pacific Rim dislocations on the rate of U.S. domestic growth. So far at least, the impact seems more modest than might have been expected. Although declining exports and surging imports are depressing U.S. growth rates, this effect has been more than offset by accelerating domestic consumption expenditures driven by the lower rate environment. It seems clear, however, that the crisis has prevented inflationary pressures from emerging in the U.S. economy, as exhibited by year-to-date inflation trends. That in turn should continue to provide an attractive backdrop for lower interest rates. * The Merrill Lynch 7-Year and 3-Year Treasury Indexes are adjusted to reflect reinvestment of interest on securities in the indexes. The Merrill Lynch 7-Year and 3-Year Treasury Indexes are not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolios' performance. Investors cannot invest in the Indexes. See notes to Performance Comparison, pages ** While the management team will endeavor to invest the Portfolios according to their proprietary process, there is no guarantee of investment success. 62 Mentor Quality Income Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison Comparison of change in value of a hypothetical $10,000 purchase in Mentor Quality Income Portfolio Class A and Class B Shares and the Merrill Lynch 7-Year Treasury Index.~ [GRAPH] [plot points missing] Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. ~ The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvestment of interest on securities in the index. The Merrill Lynch 7-Year Treasury Index is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. + Represents a hypothetical investment of $10,000 in Mentor Quality Income Portfolio Class B Shares. A contingent deferred sales charge will be imposed, if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of amounts redeemed during the first year following the date of purchase to 1.00% of amounts redeemed during the six-year period following the date of purchase. Class B Shares are charged a redemption fee of 4.00% on any redemption less than one year from the purchase date. The Class B Shares' performance assumes the reinvestment of all dividends and distributions. ++ Represents a hypothetical investment of $10,000 in Mentor Quality Income Portfolio Class A Shares, after deducting the maximum sales charge of 4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A Shares' performance assumes the reinvestment of all dividends and distributions. +++ Reflects operations of Mentor Quality Income Portfolio Class A and Class B Shares from the date of commencement of operations on 4/29/92 through 3/31/98. Performance Comparison Comparison of change in value of a hypothetical $10,000 purchase in Mentor Quality Income Portfolio Class Y Shares and the Merrill Lynch 7-Year Treasury Index.~ [GRAPH] Y-Shares Merrill Lynch 7-Year -------- -------------------- 11/28/97 $10,000 $10,000 11/30/97 10,000 10,031 12/31/97 10,038 10,142 1/31/97 10,197 10,329 2/28/98 10,151 10,287 3/31/98 10,144 10,310 Total Returns as of 3/31/98 1-Year Since Inception** ------ ---------------- Class Y n/a 1.44% Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. * Represents a hypothetical investment of $10,000 in Mentor Quality Income Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ** Reflects operations of Mentor Quality Income Portfolio Class Y Shares from the date of issuance on 11/19/97 through 3/31/98. 63 Mentor Short-Duration Income Portfolio March 31, 1998 - -------------------------------------------------------------------------------- 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.~ Class A 3-Year Treasury ------- --------------- 6/16/95 $ 9,900 $10,000 6/30/95 9,946 10,062 9/30/95 9,931 10,139 9/30/96 10,532 11,038 9/30/97 11,304 11,571 3/31/98 11,574 11,988 Average Annual Returns as of 3/31/98 Including Sales Charges 1-Year Since Inception** ------ ----------------- Class A 5.98% 5.37% 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.~ 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 9/30/97 12,125 12,600 3/31/98 12,398 13,053 Past performance is not indicative of future performance. Your investment return and principal value will fluctuate so when shares are redeemed, they may be worth more or less than original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured. ~ The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment of interest on securities in the index. It is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. The Portfolio invests in securities other than Treasuries. * Represents a hypothetical investment of $10,000 in Mentor Short-Duration Income Portfolio Class A Shares, after deducting the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charges = $9,900. The Class A Shares' performance assumes the reinvestment of all dividends and distributions. ** Reflects operations of Mentor Short-Duration Income Portfolio Class A from the date of issuance on 6/16/95 through 3/31/98. + 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 commencement of operations on 4/29/94 through 3/31/98. 64 Mentor Short-Duration Income Portfolio March 31, 1998 - -------------------------------------------------------------------------------- Performance Comparison Comparison of change in value of hypothetical $10,000 purchase in Mentor Short-Duration Income Portfolio Class Y Shares and the Merrill Lynch 3-Year Treasury.~ [plot points missimg] ~ The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment of interest on securities in the index. It is not adjusted to reflect sales loads, expenses, or other fees that the SEC requires to be reflected in the Portfolio's performance. The Portfolio invests in securities other than Treasuries. * Represents a hypothetical investment of $10,000 in Mentor Short-Duration Income Portfolio Class Y Shares. These shares are not subject to any sales or contingent deferred sales charges. The Class Y Shares' performance assumes the reinvestment of all dividends and distributions. ** Reflects operations of Mentor Short-Duration Income Portfolio Class Y from the date of issuance on 11/19/97 through 3/31/98. 65 Mentor Quality Income Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Principal Amount Market Value Long-Term Investments - 117.55% Preferred Stock - 2.42% Home Ownership Funding Corporation (cost $ 4,082,562) $4,350,000 $ 4,177,853 ----------- Asset-Backed Securities - 5.81% Advanta Mortgage Loan Trust, Series 1993-4, 5.55%, 3/25/10 - 1/25/25 2,288,803 2,206,680 AFG Receivables Trust 7.00%, 2/15/03 1,621,016 1,621,955 CS First Boston, Series 1996-2 A6 7.18%, 2/25/18 2,500,000 2,525,093 Equifax Credit Corporation, Series 1994-1 B 5.75%, 3/15/09 1,884,967 1,844,692 Fifth Third Auto Grantor Trust 6.20%, 9/15/01 1,076,041 1,078,040 Old Stone Credit Corporation Home Equity Trust, Series 1993-1 B1, 6.00%, 3/15/08 751,628 741,605 ----------- Total Asset-Backed Securities (cost $9,873,741) 10,018,065 ----------- U.S. Government Securities and Agencies - 66.08% Federal Home Loan Mortgage Corporation 6.50%, Series 1647 B, 11/15/08 4,097,545 4,066,485 6.00%, Series 1693 Z, 3/15/09 5,935,721 5,643,951 6.50%, Series 26 C, 7/25/18 7,000,000 6,927,354 Federal National Mortgage Association 6.00% - 7.00%, 5/25/98 - 5/25/28, ARM 82,539,256 80,744,761 Government National Mortgage Association 4.50% - 7.38%, 12/20/22 - 3/15/28, ARM 12,775,457 12,767,001 7.00%, 12/15/08, MBS 3,355,666 3,418,548 U.S. Treasury Strip, 8.00%, 11/15/21 1,500,000 359,009 ----------- Total U.S. Government Securities and Agencies (cost $114,132,513) 113,927,109 ----------- Principal Amount Market Value Corporate Bonds - 19.21% Financial - 14.09% Capital One Bank, 7.15% - 7.20%, 7/19/99 - 9/15/06 $4,750,000 $ 4,836,664 Ford Motor Credit, 6.55%, 9/10/02 2,500,000 2,544,630 Lehman Brothers, Inc., 7.50% - 8.50%, 5/01/07 - 8/01/26 6,500,000 7,122,530 NationsBank Corporation, 7.50%, 9/15/06 1,500,000 1,609,788 Reliastar Financial Corporation, 6.63%, 9/15/03 5,000,000 5,032,585 Salomon, Inc., 7.30% - 7.65%, 5/15/02-6/27/05 3,000,000 3,150,716 ----------- 24,296,913 ----------- Technology - 3.39% Philips Electronics, 7.20%, 6/01/26 5,500,000 5,838,828 ----------- Utilities - 0.73% Mississippi Power & Light, 8.80%, 4/01/05 1,250,000 1,252,268 ----------- Other - 1.00% United Dominion Realty Trust, 7.07%, 11/15/06 1,700,000 1,729,965 ----------- Total Corporate Bonds (cost $32,028,876) 33,117,974 ----------- Miscellaneous - 6.12% Allegheny County Industrial Development 5.75%, 7/01/27 (cost $6,000,000) 6,000,000 6,000,000 Barton Health Care, LLC, 5.75%, 2/15/25 (cost $4,555,000) 4,555,000 4,555,000 ----------- 10,555,000 ----------- Collateralized Mortgage Obligations - 11.67% Chase Mortgage Finance Corporation, Series 1993-L2 M, 7.00%, 10/25/24 2,982,896 3,008,895 General Electric Capital Mortgage Services, Inc., Series 1993-18 B1, 6.00%, 2/25/09 (a) 1,996,656 1,928,157 66 Mentor Quality Income Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
Principal Amount Market Value Collateralized Mortgage Obligations (continued) General Electric Capital Mortgage Services, Inc., Series 1998-01 & 1998-03, 6.75% - 7.00%, 1/25/13 - 1/25/28 $3,488,530 $ 3,504,620 Key Auto Finance Trust, 6.15%, 10/15/01 1,500,000 1,504,250 NASCOR, Series 1996-2 Class M, 7.00%, 9/25/11 1,795,232 1,813,059 Prudential Home, Series 1995-5, 7.25%, 9/25/25 (a) 4,039,081 4,119,334 Prudential Home, Series 1996-4, 6.50%, 4/25/26 4,319,881 4,247,778 ------------ Total Collateralized Mortgage Obligations (cost $19,570,344) 20,126,093 ------------ Residual Interests (b) - 6.24% Capital Mortgage Funding I, Inc. 1997-5, 5/20/24 42,522 692,178 Capital Mortgage Funding I, Inc. 1997-13, 11/20/22 34,665 639,153 Capital Mortgage Funding I, Inc. 1997-20, 1/20/23 21,173 708,372 Capital Mortgage Funding I, Inc. 1998-1, 12/20/27 44,878 705,693 General Mortgage Securities II, Inc., 1995-1, 1997, 6/25/20 18,923 494,390 General Mortgage Securities II, Inc., 1995-4, 1997, 6/25/23 11,379 458,540 General Mortgage Securities II, Inc., 1997-4, 5/20/22 14,809 599,759 General Mortgage Securities II, Inc., 1997-5, 7/20/23 29,020 891,660 National Mortgage Funding, Inc., 1995-4, 1997, 3/20/21 9,669 172,188 National Mortgage Funding, Inc., 1997-6, 9/20/21 41,157 877,955 National Mortgage Funding, Inc., 1997-7, 7/20/22 40,968 834,374 National Mortgage Funding, Inc., 1997-9, 11/20/24 30,935 836,598 National Mortgage Funding, Inc., 1997-10, 10/20/24 41,214 584,924
Principal Amount Market Value Residual Interests (b) (continued) National Mortgage Funding, Inc., 1998-1, 1/01/90 $ 21,532 $ 577,753 National Mortgage Funding, Inc., 1998-2, 1/01/90 23,791 604,583 National Mortgage Funding, Inc., 1998-3, 11/20/23 23,872 595,394 National Mortgage Funding, Inc., 1998-5, 11/25/22 10,594 478,894 ------------ Total Residual Interests (cost $10,950,306) 10,752,408 ------------ Total Long-Term Investments (cost $201,193,342) 202,674,502 ------------ Short-Term Investment - 20.34% Repurchase Agreement Goldman Sachs & Company Dated 3/31/98, 6.05%, due 4/01/98, collateralized by $35,404,190 Federal Home Loan Mortgage Corporation, 7.00%, 11/01/27, market value $35,813,551 (cost $35,042,919) 35,042,919 35,042,919 ------------ Total Investments (cost $ 236,236,261)-137.89% 237,717,421 ------------ Other Assets less Liabilities - (37.89%) (65,317,377) ------------ Net Assets - 100.00% $172,400,044 ============
Investment abbreviations ARM - Adjustable Rate Mortgage MBS - Mortgage-Backed Security REMIC - Real Estate Mortgage Investment Conduit (a) These are securities that may be resold to "qualified institutional buyers" under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. These securities have been determined to be liquid under guidelines established by the Board of Trustees. (b) All or a portion of these securities are illiquid securities, and are valued using market quotations 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. 67 Mentor Quality Income Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Investment Transactions Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $255,996,215 and $153,710,236, respectively. Income Tax Information At March 31, 1998, the aggregated cost of investment securities for federal income tax purposes was $236,236,261. Net unrealized appreciation aggregated $1,481,160, of which $2,381,193, related to appreciated investment securities and $900,033, related to depreciated investment securities. At September 30, 1997, Quality Income Portfolio for federal income tax purposes, had a capital loss carryforward of approximately $14,860,000. Pursuant to the Internal Revenue Code, such capital loss carryforwards expire as follows: $820,000 in 2001, $3,680,000 in 2002, $7,320,000 in 2003, $1,710,000 in 2004 and $1,330,000 in 2005. Such capital loss carryforward will reduce the Portfolio's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code, and thus will reduce the amount of the distributions to shareholders which would otherwise relieve the Portfolio's of any liability for federal tax. See notes to financial statements. 68 Mentor Quality Income Portfolio - -------------------------------------------------------------------------------- Statement of Assets and Liabilities March 31, 1998 (Unaudited) Assets Investments, at market value (Note 2) Investment securities $ 202,674,502 Repurchase agreements 35,042,919 ------------- Total investments (cost $ 236,236,261) 237,717,421 ------------- Collateral for securities loaned (Note 2) 236,600 Receivables Fund shares sold 1,114,372 Dividends and interest 1,468,733 Other 22,572 ------------- Total assets 240,559,698 ------------- Liabilities Payables Investments purchased $67,019,948 Securities loaned (Note 2) 236,600 Fund shares redeemed 96,013 Dividends 801,228 Accrued expenses and other liabilities 5,865 ----------- Total liabilities 68,159,654 ----------- Net Assets $ 172,400,044 ============= Net Assets represented by: (Note 2) Additional paid-in capital $ 186,938,544 Accumulated distributions in excess of net investment income (915,556) Accumulated net realized loss on investment transactions (15,104,104) Net unrealized appreciation of investments 1,481,160 ------------- Net Assets $ 172,400,044 ============= Net Asset Value per Share Class A Shares $ 13.11 Class B Shares $ 13.11 Class Y Shares $ 13.42 Offering Price per Share Class A Shares $ 13.76(a) Class B Shares $ 13.11 Class Y Shares $ 13.42 Shares Outstanding Class A Shares 5,840,172 Class B Shares 7,304,559 Class Y Shares 76 ------------- Total Shares Outstanding 13,144,807 ============= (a) Computation of offering price: 100/95.25 of net asset value. See notes to financial statements. Statement of Operations Six Months Ended March 31, 1998 (Unaudited) Investment income Interest (b) (Note 2) $5,380,502 ---------- Expenses Management fee (Note 3) $467,022 Distribution fee (Note 3) 215,035 Shareholder service fee (Note 5) 194,591 Transfer agent fee (Note 3) 95,515 Administration fee (Note 4) 77,837 Registration expenses 14,882 Shareholder reports and postage expenses 11,983 Custodian and accounting fees (Note 3) 11,092 Legal fees 2,673 Directors' fees and expenses 2,307 Audit fees 1,256 Miscellaneous 7,363 -------- Total expenses 1,101,556 ---------- Deduct Waiver of management fee (Note 4) (56,110) ---------- Net investment income 4,335,056 ---------- Realized and unrealized loss on investments and interest-rate swap contracts Net realized loss on investments and interest-rate swap contracts (Note 2) (5,167) Change in unrealized appreciation on investments (434,728) -------- Net loss on investments and interest-rate swap contracts (439,895) ---------- Net increase in net assets resulting from operations $3,895,161 ========== b) Net of interest expenses of $1,013,609 ($917,460 related to interest-rate swap and $96,149 related to borrowings). See notes to financial statements. 69 Mentor Quality Income Portfolio - -------------------------------------------------------------------------------- Statements of Changes in Net Assets
Six Months Ended 3/31/98 Year Ended (Unaudited) 9/30/97 Net Increase in Net Assets Operations Net investment income $ 4,335,056 $ 6,390,445 Net realized gain (loss) on investments and interest-rate swap contracts (5,167) 222,072 Change in unrealized appreciation on investments (434,728) 2,224,113 ------------- ------------- Increase in net assets resulting from operations 3,895,161 8,836,630 ------------- ------------- Distributions to Shareholders From net investment income Class A (2,252,882) (2,180,277) Class B (2,607,138) (4,210,168) In excess of net investment income Class A -- (150,441) Class B -- (212,242) ------------- ------------- Total distributions to shareholders (4,860,020) (6,753,128) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 57,130,216 63,942,122 Reinvested distributions 2,890,510 4,044,282 Shares redeemed (14,877,784) (21,179,174) ------------- ------------- Change in net assets resulting from capital share transactions 45,142,942 46,807,230 ------------- ------------- Increase in net assets 44,178,083 48,890,732 Net Assets Beginning of period 128,221,961 79,331,229 ------------- ------------- End of period (including accumulated distributions in excess of net investment income of $915,556 and $390,590, respectively) $ 172,400,044 $ 128,221,961 ============= =============
Financial Highlights Class A Shares
Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 13.18 $ 12.91 ---------- -------- Income from investment operations Net investment income (loss) 0.42 0.97 Net realized and unrealized gain (loss) on investments (0.06) 0.26 ---------- -------- Total from investment operations 0.36 1.23 ---------- -------- Less distributions From net investment income (0.43) (0.90) In excess of net investment income - (0.06) Total distributions (0.43) (0.96) ---------- -------- Net asset value, end of period $ 13.11 $ 13.18 ========== ======== Total Return* 2.76% 9.86% Ratios/Supplemental Data Net assets, end of period (in thousands) $ 76,592 $ 53,176 Ratio of expenses to average net assets 1.05%(a) 1.05% Ratio of expenses to average net asset excluding waiver 1.12%(a) 1.18% Ratio of net investment income (loss) to average net assets 5.75%(a) 7.01% Portfolio turnover rate 104% 100% Year Year Year Year Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 Per Share Operating Performance Net asset value, beginning of period $ 13.29 $ 12.75 $ 14.04 $ 14.39 -------- -------- -------- -------- Income from investment operations Net investment income (loss) 0.89 0.84 0.84 1.06 Net realized and unrealized gain (loss) on investments (0.37) 0.61 (1.30) (0.31) -------- -------- -------- -------- Total from investment operations 0.52 1.45 (0.46) 0.75 -------- -------- -------- -------- Less distributions From net investment income (0.89) (0.85) (0.83) (1.06) In excess of net investment income (0.01) (0.06) - (0.04) Total distributions (0.90) (0.91) (0.83) (1.10) -------- -------- -------- -------- Net asset value, end of period $ 12.91 $ 13.29 $ 12.75 $ 14.04 ======== ======== ======== ======== Total Return* 4.09% 11.82% (3.39%) 5.41% Ratios/Supplemental Data Net assets, end of period (in thousands) $ 21,092 $ 24,472 $ 30,142 $ 47,780 Ratio of expenses to average net assets 1.05% 1.32% 1.38% 1.04% Ratio of expenses to average net asset excluding waiver 1.31% 1.36% 1.39% 1.22% Ratio of net investment income (loss) to average net assets 6.84% 6.73% 6.33% 7.31% Portfolio turnover rate 254% 368% 455% 102%
(a) Annualized. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 70 Mentor Quality Income Portfolio - -------------------------------------------------------------------------------- Financial Highlights Class B Shares
Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 13.18 $ 12.93 ---------- -------- Income from investment operations Net investment income 0.38 0.86 Net realized and unrealized gain (loss) on investments (0.05) 0.30 ---------- -------- Total from investment operations 0.33 1.16 ---------- -------- Less distributions From net investment income (0.40) (0.87) In excess of net investment income - (0.04) ---------- -------- Total distributions (0.40) (0.91) ---------- -------- Net asset value, end of period $ 13.11 $ 13.18 ========== ======== Total Return* 2.53% 9.29% Ratios/Supplemental Data Net assets, end of period (in thousands) $ 95,807 $ 75,046 Ratio of expenses to average net assets 1.54%(a) 1.55% Ratio of expenses to average net asset excluding waiver 1.61%(a) 1.68% Ratio of net investment income to average net assets 5.26%(a) 6.51% Portfolio turnover rate 104% 100% Year Year Year Year Ended Ended Ended Ended 9/30/96 9/30/95 9/30/94 9/30/93 Per Share Operating Performance Net asset value, beginning of period $ 13.31 $ 12.76 $ 14.06 $ 14.40 -------- -------- -------- --------- Income from investment operations Net investment income 0.84 0.79 0.82 0.99 Net realized and unrealized gain (loss) on investments (0.38) 0.61 (1.37) (0.31) -------- -------- -------- --------- Total from investment operations 0.46 1.40 (0.55) 0.68 -------- -------- -------- --------- Less distributions From net investment income (0.84) (0.79) (0.75) (0.99) In excess of net investment income - (0.06) - (0.03) -------- -------- -------- --------- Total distributions (0.84) (0.85) (0.75) (1.02) -------- -------- -------- --------- Net asset value, end of period $ 12.93 $ 1 3.31 $ 12.76 $ 14.06 ======== ======== ======== ========= Total Return* 3.57% 11.33% (3.97%) 4.86% Ratios/Supplemental Data Net assets, end of period (in thousands) $ 58,239 $ 62,155 $ 77,888 $ 127,346 Ratio of expenses to average net assets 1.55% 1.74% 1.88% 1.54% Ratio of expenses to average net asset excluding waiver 1.81% 1.79% 1.90% 1.72% Ratio of net investment income to average net assets 6.36% 6.24% 6.21% 6.81% Portfolio turnover rate 254% 368% 455% 102%
Class Y Shares Period Ended 3/31/98 (b) (Unaudited) Per Share Operating Performance Net asset value, beginning of period $ 13.22 --------- Income from investment operations Net investment income 0.39 Net realized and unrealized gain on investments (0.19) --------- Total from investment operations 0.20 --------- Net asset value, end of period $ 13.42 ========= Total Return* 1.44% Ratios/Supplemental Data Net assets, end of period $ 1,017 Ratio of expenses to average net assets 0.80%(a) Ratio of expenses to average net asset excluding waiver 0.93%(a) Ratio of net investment income to average net assets 7.53%(a) Portfolio turnover rate 104% (a) Annualized. (b) For the period from November 19, 1997 (initial offering of Class Y Shares) to March 31, 1998. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 71 Mentor Short-Duration Income Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
Principal Amount Market Value Asset-Backed Securities - 12.98% Advanta Home Equity Loan, 6.15%, 10/25/09 $ 942,268 $ 934,766 Advanta Mortgage Loan Trust 1993-3 A3, 4.75% - 5.55%, 2/25/10 - 3/25/10 1,236,213 1,210,748 AFC Home Equity Loan Trust, 6.60%, 2/25/27 1,499,955 1,498,970 AFG Receivables Trust, 6.45% - 7.05%, 9/15/00 - 2/15/03 4,020,678 4,027,702 CS First Boston 1996-2, 6.39%, 2/25/18 1,300,000 1,293,900 Equifax Credit Corporation 1994-1B, 5.75%, 3/15/09 599,292 586,488 Fifth Third Auto Grantor Trust, 6.20%, 9/15/01 538,572 539,573 Old Stone Credit Corporation, 6.20%, 6/15/08 328,868 325,737 Olympic Automobiles Receivables Trust, 6.85% - 7.35%, 6/15/01 - 10/15/01 1,997,611 2,013,460 Union Acceptance Corporation, 6.45% - 6.48%, 7/08/03 - 5/10/04 1,403,478 1,410,721 ------------ Total Asset-Backed Securities (cost $13,766,065) 13,842,065 ------------ U.S. Government Securities and Agencies - 60.26% Federal National Mortgage Association 6.00%, 3/25/98 - 5/25/28, ARM 5,015,000 4,827,759 10.00%, 6/01/05, MBS 267,531 279,815 Government National Mortgage Association 7.00%, 12/15/08, MBS 1,267,698 1,291,453 7.00%, 7/20/22 - 12/20/22, ARM 7,907,994 8,122,351 6.88%, 10/20/22, ARM 2,903,717 2,980,204 4.50%, 10/20/27 - 1/20/28, ARM 6,677,409 6,583,807 6.50%, 3/15/28, ARM 2,970,000 2,944,725 U.S. Treasury Notes, 5.63% - 6.63%, 11/15/00 - 11/30/02 36,550,000 37,252,094 ------------ Total U.S. Government Securities and Agencies (cost $64,326,722) 64,282,208 ------------ Collateralized Mortgage Obligation - 3.76% Key Auto Finance Corporation 6.15%, 10/15/01 (cost $3,996,798) 4,000,000 4,011,332 ------------
Principal Amount Market Value Corporate Bonds - 22.53% Association Corporation NA, 7.88%, 9/30/01 $1,000,000 $ 1,058,187 Capital One Bank, 7.15% - 7.20%, 7/19/99 - 9/15/06 2,500,000 2,541,503 Dayton Hudson Company, 6.63%, 3/01/03 2,000,000 2,039,294 Ford Motor Credit, 6.55%, 9/10/02 2,500,000 2,544,630 General Motors Acceptance Corporation, 5.63% - 6.88%, 2/01/99 - 7/15/01 2,750,000 2,807,241 Hilander Finance, LLC, 5.70%, 12/01/25 1,900,000 1,900,000 Lehman Brothers, 6.20% - 6.63%, 11/15/00 - 1/15/02 3,750,000 3,761,869 Merrill Lynch, 6.00%, 3/01/01 2,500,000 2,507,100 Mississippi Power & Light, 8.80%, 4/01/05 1,000,000 1,001,814 Salomon Incorporated, 5.50% - 7.30%, 1/15/99 - 5/15/02 3,750,000 3,861,323 ------------ Total Corporate Bonds (cost $23,943,797) 24,022,961 ------------ Residual Interests (b) - 1.14% Capital Mortgage Funding I, Inc., 1997-5, 5/20/24 28,348 461,452 General Mortgage Securities II, Inc., 1997-4, 5/20/22 7,936 200,074 National Mortgage Funding, Inc., 1997-9, 11/20/24 20,623 557,732 ------------ Total Residual Interests (cost $1,258,810) 1,219,258 ------------ Short-Term Investment - 2.05% Repurchase Agreement Goldman Sachs & Company Dated 3/31/98, 6.05%, due 4/01/98, collateralized by $2,214,600 Federal Home Loan Mortgage Corporation, 7.00%, 11/01/27, market value $2,240,206 (cost $2,191,534) 2,191,534 2,191,534 ------------ Total Investments (cost $109,483,726)-102.72% 109,569,358 ------------ Other Assets less Liabilities - (2.72%) (2,903,122) ------------ Net Assets - 100.00% $106,666,236 ============
72 Mentor Short-Duration Income Portfolio Portfolio of Investments March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Investment Abbreviations ARM - Adjustable Rate Mortgage MBS - Mortgage Backed Securities (b) All or a portion of these securities are illiquid securities, and are valued using market quotations 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. Investment Transactions Cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $132,720,570 and $64,947,450, respectively. Income Tax Information At March 31, 1998, the aggregated cost of investment securities for federal income tax purposes was $109,483,726. Net unrealized appreciation aggregated $85,632, of which $362,810, related to appreciated investment securities and $277,178, related to depreciated investment securities. See notes to financial statements. 73 Mentor Short-Duration Income Portfolio - -------------------------------------------------------------------------------- Statement of Assets and Liabilities March 31, 1998 (Unaudited) Assets Investments, at market value (Note 2) Investment securities $107,377,824 Repurchase agreements 2,191,534 ------------ Total investments (cost $109,483,726) 109,569,358 Receivables Fund shares sold 382,891 Dividends and interest 854,904 Deferred expenses (Note 2) 20,275 ------------ Total assets 110,827,428 ------------ Liabilities Payables Investments purchased $3,396,094 Fund shares redeemed 206,784 Dividends 462,390 Accrued expenses and other liabilities 95,924 ---------- Total liabilities 4,161,192 ------------ Net Assets $106,666,236 ============= Net Assets represented by: (Note 2) Additional paid-in capital $107,219,513 Accumulated distributions in excess of net investment income (348,093) Accumulated net realized loss on investment transactions (290,816) Net unrealized appreciation of investments 85,632 ------------- Net Assets $106,666,236 ============= Net Asset Value per Share Class A Shares $ 12.54 Class B Shares $ 12.54 Class Y Shares $ 12.81 Offering Price per Share Class A Shares $ 12.67(a) Class B Shares $ 12.54 Class Y Shares $ 12.81 Shares Outstanding Class A Shares 4,653,228 Class B Shares 3,852,088 Class Y Shares 79 ------------- Total Shares Outstanding 8,505,395 ============= (a) Computation of offering price: 100/99 of net asset value. See notes to financial statements. Statement of Operations Six Months Ended March 31, 1998 (Unaudited) Investment income Interest (b) (Note 2) $ 2,678,183 ----------- Expenses Management fee (Note 3) $216,938 Shareholder service fee (Note 5) 108,469 Distribution fee (Note 3) 58,978 Transfer agent fee (Note 3) 38,055 Custodian and accounting fees (Note 3) 8,432 Registration expenses 6,840 Shareholder reports and postage expenses 4,218 Organizational expenses 3,658 Legal fees 1,174 Directors' fees and expenses 985 Audit fees 543 Administration fee (Note 4) 43,746 Miscellaneous 3,167 -------- Total expenses 495,203 ----------- Deduct Waiver of administration fee (Note 4) (43,746) Waiver of management fee (Note 4) (16,483) ----------- Net investment income 2,243,209 ----------- Realized and unrealized gain on investments and interest-rate swap contracts Net realized loss on investments and interest-rate swap contracts (Note 2) (117,746) Change in unrealized appreciation on investments (213,406) -------- Net loss on investments (331,152) ----------- Net increase in net assets resulting from operations $ 1,912,057 =========== (b) Net of interest expenses of $437,123 ($281,897 related to interest-rate swap and $155,225 related to borrowings). See notes to financial statements. 74 Mentor Short-Duration Income Portfolio - -------------------------------------------------------------------------------- Statements of Changes in Net Assets
Six Months Ended 3/31/98 Year Ended Unaudited 9/30/97 Net Increase in Net Assets Operations Net investment income $ 2,243,209 $ 2,155,953 Net realized gain (loss) on investments (117,746) 7,748 Change in unrealized appreciation (depreciation) on investments (213,406) 386,023 ------------- ------------- Increase in net assets resulting from operations 1,912,057 2,549,724 ------------- ------------- Distributions to Shareholders From net investment income Class A (1,399,133) (751,850) Class B (1,096,371) (1,404,103) In excess of net investment income Class A -- (12,040) Class B -- (11,811) ------------- ------------- Total distributions to shareholders (2,495,504) (2,179,804) ------------- ------------- Capital Share Transactions (Note 7) Proceeds from sale of shares 76,927,793 39,889,219 Reinvested distributions 1,860,038 1,755,339 Shares redeemed (26,245,870) (19,273,346) ------------- ------------- Change in net assets resulting from capital share transactions 52,541,961 22,371,212 ------------- ------------- Increase in net assets 51,958,514 22,741,132 Net Assets Beginning of period 54,707,722 31,966,590 ------------- ------------- End of period (including accumulated distributions in excess of net investment income of $348,093 and $95,798, respectively) $ 106,666,236 $ 54,707,722 ============= =============
See notes to financial statements. Financial Highlights Class A Shares
Six Months Year Year Period Ended 3/31/98 Ended Ended Ended (Unaudited) 9/30/97 9/30/96 9/30/95 (b) Per Share Operating Performance Net asset value, beginning of period $ 12.62 $ 12.50 $ 12.68 $ 12.74 --------- -------- -------- --------- Income from investment operations Net investment income 0.35 0.77 0.82 0.22 Net realized and unrealized gain (loss) on investments (0.05) 0.12 (0.23) (0.03) --------- -------- --------- --------- Total from investment operations 0.30 0.89 0.59 0.19 Less distributions From net investment income (0.38) (0.76) (0.77) (0.22) In excess of net investment income - (0.01) - (0.03) --------- -------- --------- --------- Total distributions (0.38) (0.77) (0.77) (0.25) --------- -------- --------- --------- Net asset value, end of period $ 12.54 $ 12.62 $ 12.50 $ 12.68 ========= ======== ========= ========= Total Return* 2.39% 7.33% 4.80% 1.51% Ratios / Supplemental Data Net assets, end of period (in thousands) $ 58,340 $ 27,619 $ 7,450 $ 1,002 Ratio of expenses to average net assets 0.85%(a) 0.86% 0.86% 0.71%(a) Ratio of expenses to average net asset excluding waiver 0.99%(a) 1.12% 1.26% 1.00%(a) Ratio of net investment income to average net assets 5.20%(a) 6.00% 5.90% 4.10%(a) Portfolio turnover rate 74% 75% 411% 126%
(a) Annualized. (b) For the period from June 16, 1995 (initial offering of Class A Shares) to September 30, 1995. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 75 Mentor Short-Duration Income Portfolio - -------------------------------------------------------------------------------- Financial Highlights Class B Shares
Six Months Year Ended 3/31/98 Ended (Unaudited) 9/30/97 Per Share Operating Performance Net asset value, beginning of period $ 12.62 $ 12.50 ---------- -------- Income from investment operations Net investment income 0.35 0.73 Net realized and unrealized gain (loss) on investments (0.07) 0.12 ---------- -------- Total from investment operations 0.28 0.85 Less distributions From net investment income (0.36) (0.72) In excess of net investment income - (0.01) From net realized gain - - In excess of net realized gain - - ---------- --------- Total distributions (0.36) (0.73) ---------- --------- Net asset value, end of period $ 12.54 $ 12.62 ========== ========= Total Return* 2.22% 6.96% Ratios / Supplemental Data Net assets, end of period (in thousands) 48,325 27,089 Ratio of expenses to average net assets 1.14%(a) 1.16% Ratio of expenses to average net asset excluding waiver 1.28%(a) 1.42% Ratio of net investment income to average net assets 4.91%(a) 5.70% Portfolio turnover rate 74% 75% Year Period Year Ended Ended Ended 9/30/96 9/30/95(c) 9/30/94(d) Per Share Operating Performance Net asset value, beginning of period $ 12.67 $ 12.18 $ 12.50 -------- ---------- ---------- Income from investment operations Net investment income 0.73 0.59 0.41 Net realized and unrealized gain (loss) on investments (0.17) 0.52 (0.29) --------- ---------- ---------- Total from investment operations 0.56 1.11 0.12 Less distributions From net investment income (0.73) (0.59) (0.41) In excess of net investment income - (0.03) (0.03) From net realized gain - - - In excess of net realized gain - - - --------- ---------- ---------- Total distributions (0.73) (0.62) (0.44) --------- ---------- ---------- Net asset value, end of period $ 12.50 $ 12.67 $ 12.18 ========= ========== ========== Total Return* 4.53% 9.22% 0.95% Ratios / Supplemental Data Net assets, end of period (in thousands) 24,517 19,871 17,144 Ratio of expenses to average net assets 1.16% 1.20%(a) 1.29%(a) Ratio of expenses to average net asset excluding waiver 1.56% 1.70%(a) 1.29%(a) Ratio of net investment income to average net assets 5.64% 5.04%(a) 4.90%(a) Portfolio turnover rate 411% 126% 166%
Class Y Shares Period Ended 3/31/98 (e) (Unaudited) Per Share Operating Performance Net asset value, beginning of period $ 12.58 --------- Income from investment operations Net investment income 0.40 Net realized and unrealized gain on investments (0.11) --------- Total from investment operations 0.29 --------- Less distributions From net investment income (0.06) --------- Net asset value, end of period $ 12.81 ========= Total Return* 1.67% ========= Ratios / Supplemental Data Net assets, end of period $ 1,019 Ratio of expenses to average net assets 0.61%(a) Ratio of expenses to average net asset excluding waiver 0.87%(a) Ratio of net investment income to average net assets 6.77%(a) Portfolio turnover rate 74% (a) Annualized. (c) For the period from January 1, 1995 to September 30, 1995. (d) For the period from April 29, 1994 (commencement of operations) to December 31, 1994. (e) For the period from November 19, 1997 (initial offering of Class Y Shares) to March 31, 1998. * Total return does not reflect sales commissions and is not annualized. See notes to financial statements. 76 Mentor Funds Notes to Financial Statements March 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- Note 1: Organization Mentor Funds is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. Mentor Funds consists of eleven separate Portfolios (hereinafter each individually referred to as a "Portfolio" or collectively as the "Portfolios") at March 31, 1998, 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") Mentor U.S. Government Institutional Money Market Portfolio ("Government Portfolio") Mentor Institutional Money Market Portfolio ("Money Market Portfolio") The assets of each Portfolio are segregated and a shareholder's interest is limited to the Portfolio in which shares are held. These financial statements do not include the Balanced Portfolio, Institutional Money Market Portfolio and the U.S. Government Institutional Money Market Portfolio. The Balanced Portfolio is not currently being offered to new investors. Mentor Funds currently issues three classes of shares. Class A shares are sold subject to a maximum sales charge of 5.75% (4.75% for the Quality Income Portfolio 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. Class Y shares are sold to institutions and high net-worth individual investors and are not subject to any sales or contingent deferred sales charges. Note 2: Significant Accounting Policies The following is a summary of significant accounting policies consistently followed by the Portfolios in the preparation of their financial statements. The policies are in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect amounts reported therein. Although actual results could differ from these estimates, any such differences are expected to be immaterial to the net assets of the Portfolio. (a) Valuation of Securities - Listed securities held by the Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio and Global Portfolio traded on national stock exchanges and over-the-counter securities quoted on the NASDAQ National Market System are valued at the last reported sales price or, lacking any sales, at the last available bid price. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by the Board of Trustees of the Portfolios as the primary market. Securities traded in the over-the-counter market, other than those quoted on the NASDAQ National Market System, are valued at the last available bid price. Short-term investments with remaining maturities of 77 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- 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 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 78 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- set date). Each Portfolio may borrow up to one-third of the value of its net assets. The average daily balance of reverse repurchase agreements outstanding for Quality Income Portfolio and Short-Duration Income Portfolio during the six months ended March 31, 1998, were approximately $14,466,795 and $7,136,691 or $2.38 and $1.94 per share based on average shares outstanding during the period at a weighted average interest rate of 3.47% and 4.30%, respectively. For Short-Duration Income Portfolio the maximum amount of borrowings outstanding for any day during the period was $13,001,997 (including accrued interest), as of January 6, 1998, at an interest rate of 5.53% and was 11.73% of total assets. For Quality Income Portfolio the maximum amount of borrowings outstanding for any day during the period was $16,687,461 (including accrued interest), as of October 3, 1997, at an interest rate of 3.65% and was 10.18% of total assets. (d) Portfolio Securities Loaned Each of the Portfolios (except for Municipal Income Portfolio) is authorized by the Board of Trustees to participate in securities lending transactions. The Portfolios may receive fees for participating in lending securities transactions. During the period that a security is out on loan, Portfolios continue to receive interest or dividends on the securities loaned. The Portfolio receives collateral in an amount at least equal to, at all times, the fair value of the securities loaned plus interest. When cash is received as collateral, the Portfolios record an asset and obligation for the market value of that collateral. Cash received as collateral may be reinvested, in which case that security is recorded as an asset of the Portfolio. Variations in the market value of the securities loaned occurring during the term of the loan are reflected in the value of the Portfolio. At March 31, 1998, certain Portfolios had loaned securities to brokers which were collateralized by cash, U.S. Treasury securities and letters of credits. Income from securities lending activities amounted to $73,462, $16,474, $16,495, $44,233, $21,672, and $38,271, for the Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income & Growth Portfolio and Quality Income Portfolio, respectively for the six months ended March 31, 1998. The risks to the Portfolio from securities lending are that the borrower may not provide additional collateral when required or return the securities when due. At March 31, 1998, the value of the securities on loan and the value of the related collateral were as follows:
Letters of Securities Cash Securities Credit Portfolio On Loan Collateral Collateral Collateral - --------------------------------------------------------------------------------------- Growth $169,112,776 $169,535,519 $2,708,650 Global 5,651,857 5,780,650 $1,702,755 Capital Growth 10,874,288 11,292,506 Strategy 66,714,498 54,376,329 13,758,624 Income and Growth 53,001,603 44,064,557 10,141,450 Quality Income 232,086 236,600 - ---------------------------------------------------------------------------------------
(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 79 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- security to a financial institution, such as a bank or broker/dealer, and simultaneously agrees to repurchase a substantially similar (i.e., same type, coupon, and maturity) security from the institution at 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, 1997, Quality income Portfolio for federal tax purposes, had a capital loss carryforward of approximately $14,860,000. 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, $1,710,000 in 2004 and $1,330,000 in 2005. At September 30, 1997, Short-Duration Income Portfolio for federal tax purposes, had a capital loss carryforward of approximately $106,000. Pursuant to the Internal Revenue Code, such capital loss carryforward will expire in 2005. At September 30, 1997, Municipal Income Portfolio for federal tax purposes, had a capital loss carryforward of approximately $1,930,000. Pursuant to the Internal revenue Code, such capital loss carryforwards expire as follows: $320,000 in 2003 and $1,610,000 in 2004. Such capital loss carryforwards will reduce the Portfolios' taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code, and thus will reduce the amount of the distributions to shareholders which would otherwise relieve the Portfolios of any liability for federal tax. (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 80 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- with their investment objectives and policies and not for the purpose of investment leverage. The Portfolios will record a when-issued security and the related liability on the trade date. Until the securities are received and paid for, the Portfolios will maintain security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. (h) Futures Contracts - In order to gain exposure to or protect against declines in security values, Quality Income Portfolio, Short-Duration Income Portfolio and Municipal Income Portfolio may buy and sell futures contracts. The Portfolios may also buy or write put or call options on these futures contracts. The Portfolios generally sell futures contracts to hedge against declines in the value of portfolios securities. The Portfolios may also purchase futures contracts to gain exposure to market changes as it may be more efficient or cost effective than actually buying securities. The Portfolios will segregate assets to cover its commitments under such speculative futures contracts. Upon entering into a futures contract, the Portfolios are required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolios each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolios recognize a realized gain or loss when the contract is closed. For the six months ended March 31, 1998, the Municipal Income Portfolio had realized losses of $70,658 on closed futures contracts. Risks of entering into futures contracts (and related options) include the possibility that there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. At March 31, 1998, the Municipal Income Portfolio had an open position in the following futures contracts: Number Net of Contract Unrealized Contracts Contracts Expiration Value Appreciation - ----------- ------------------- ------------ -------------- ------------- 180 U.S. 10 Year Note Jun-98 $18,000,000 $43,860 (i) Options - In order to produce incremental earnings or protect against changes in the value of portfolio securities, Quality Income Portfolio and Short-Duration Income Portfolio may buy and sell put and call options, write covered call options on portfolio securities and write cash-secured put options. The Portfolios generally purchase put options or write covered call options to hedge against adverse movements in the value of portfolio holdings. The Portfolios may also use options for speculative purposes, although they do not employ options for this at the present time. The Portfolios will segregate assets to cover their obligations under option contracts. Options contracts are valued daily based upon the last sales price on the principal exchange on which the option is traded and unrealized appreciation or depreciation is recorded. The Portfolios will realize a gain or loss upon the expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option, or the cost of the security for a purchased put or call option is adjusted by the amount of premium received or paid. For the six months ended March 31, 1998, Municipal Income Portfolio had realized loss of $35,132. 81 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- 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. Activity in written options for the Municipal Income Portfolio for the six months ended March 31, 1998, was as follows: Premium Face Value ----------- --------------- Options outstanding at September 30, 1997 $ 36,693 $ 10,000,000 Options written - - Options exercised - - Options expired (36,693) (10,000,000) --------- ------------- Options outstanding at March 31, 1998 $ - $ - --------- ------------- (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 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, 1998, Quality Income Portfolio had entered into the following interest rate swap agreement. In the agreement, the Portfolio has 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 six months ended March 31, 1998, net cash payments of $264,715 by Quality Income Portfolio was received in connection with the interest rate swap agreement.
Rate Paid Rate Received Net Notional by the Fund by the Fund Floating Termination Unrealized Portfolio Swap Counter Party Principal at 3/31/98 at 3/31/98 Rate Index Date (Loss) - ---------------- -------------------- ------------ ------------- --------------- -------------------- ------------- ------------- Quality Income Lehman Brothers 11,700,000 7.56% 7.05% 3-Month Canadian 2/24/00 Bankers Acceptance $ (67,470) =========
82 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 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 the Investment Adviser an annual fee expressed as a percentage of that Portfolio's assets as follows: 0.325% on the first $50 million of the Portfolio's average net assets, 0.275% on the next $150 million of the Portfolio's average net assets, 0.225% of the next $300 million of the Portfolio's average net assets, and 0.200% of the Portfolio's net assets over $500 million. 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. 83 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- For the six months ended March 31, 1998, Mentor Advisors and sub-advisers, earned and voluntarily waived the following advisory fees: > Adviser Adviser Fee Sub Adviser Fee Voluntarily Fee Portfolio Earned Waived Earned - ------------------- ------------- ------------- ------------ Growth $2,094,633 - - Global 730,095 - - Capital Growth 856,388 - - Strategy 1,317,072 - - Income and Growth 734,692 - $283,459 Municipal Income 254,793 - 100,311 Quality Income 467,022 $56,110 - Short-Duration Income 216,938 16,483 - - ------------------- ---------- ------- -------- 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, 1998, Mentor earned the following administrative fees: Administrative Administrative Fee Fee Voluntarily Portfolio Earned Waived - ----------------------- ---------------- --------------- Growth $299,233 - Global 69,270 - Capital Growth 107,048 - Strategy 154,950 - Income and Growth 97,959 - Municipal Income 42,465 - Quality Income 77,837 - Short-Duration Income 43,746 $43,746 - ----------------------- -------- ------- 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, 1998, these direct reimbursements were as follows: Direct Portfolio Reimbursements - ----------------------- --------------- [S] [C] Growth $9,204 Global 2,156 Capital Growth 3,445 Strategy 4,587 Income and Growth 3,093 Municipal Income 1,320 Quality Income 2,429 Short-Duration Income 1,438 - ----------------------- ------ 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 BISYS Fund Services, Inc., Mentor Distributors was appointed distributor of the Portfolios. To compensate Mentor Distributors for the services it provides and for the expenses it incurs under the Distribution Agreement, the Portfolios pay a distribution fee, which is accrued daily and paid monthly at the annual rate of 0.75% of the Portfolios' average daily net assets for the Growth Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio 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. 84 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with respect to Class A and Class B shares of each Portfolio. Under the Service Plan, financial institutions will enter into shareholder service agreements with the Portfolios to provide administrative support services to their customers who from time to time may be owners of record or beneficial owners of Class A or Class B shares of one or more Portfolios. In return for providing these support services, a financial institution may receive payments from one or more Portfolios at a rate not exceeding 0.25% of the average daily net assets of the Class A or Class B shares of the particular Portfolio or Portfolios beneficially owned by the financial institution's customers for whom it is holder of record or with whom it has a servicing relationship. Presently, the Portfolios' class specific expenses are limited to expenses incurred by a class of shares pursuant to its respective Distribution Plan. For the year ended March 31, 1998, distribution fees and shareholder servicing fees were as follows: Shareholder Servicing Fees Distribution -------------------------- Portfolio Fees Class A Class B - ----------------------- ------------- ------------ ----------- Growth $1,836,172 $ 138,725 $609,358 Global 331,080 61,944 111,229 Capital Growth 497,929 102,145 165,476 Strategy 1,020,717 47,044 340,330 Income and Growth 445,217 96,679 148,218 Municipal Income 120,112 47,253 58,911 Quality Income 215,035 86,833 107,759 Short-Duration Income 58,978 59,329 49,140 - ----------------------- ---------- --------- -------- Note 6: Forward Foreign Currency Exchange Contracts In connection with portfolio purchases and sales of securities denominated in a foreign currency, Global Portfolio may enter into forward foreign currency exchange contracts ("contracts"). Additionally, from time to time Global Portfolio may enter into contracts to hedge certain foreign currency assets. Contracts are recorded at market value. Realized gains and losses arising from such transactions are included in net gain (loss) on investments and forward foreign currency exchange contracts. The Portfolio is subject to the credit risk that the other party will not complete the obligations of the contract. At March 31, 1998, Global Portfolio had outstanding forward contracts as set forth below.
Contracts to Deliver/ In Exchange Net Unrealized Settlement Date Receive Value For (Depreciation) - --------------------------- ------------- ------------- ------------- --------------- Sales 5/19/98 Hong Kong Dollar 20,633,550 $2,577,984 $2,561,475 $ (16,509) - --------------------------- ---------- ---------- ---------- ---------
85 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Note 7: Capital Share Transactions The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in capital shares were as follows:
Mentor Growth Portfolio ----------------------------------------------------------------------- Six Months Year Ended 3/31/98 Ended 9/30/97 ---------------------------------- ---------------------------------- Shares Dollar Shares Dollar --------------- ---------------- --------------- ---------------- Class A: Shares sold 4,194,490 $ 76,668,179 5,018,131 $ 82,270,375 Shares issued upon reinvestment of distributions 346,751 6,474,795 369,088 5,744,163 Shares redeemed (3,644,498) (66,325,173) (2,301,180) (37,823,031) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 896,743 $ 16,817,801 3,086,039 $ 50,191,507 ========== ============= ========== ============= Class B: Shares sold 2,214,883 $ 39,729,701 5,392,199 $ 86,290,167 Shares issued upon reinvestment of distributions 1,667,456 30,460,604 3,348,283 51,489,284 Shares redeemed (2,013,582) (35,364,206) (3,140,076) (49,890,633) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 1,868,757 $ 34,826,099 5,600,406 $ 87,888,818 ========== ============= ========== ============= Class Y: (a) Shares sold 55 $ 1,010 - - Shares issued upon reinvestment of distributions - - - - Shares redeemed - - - - ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 55 $ 1,010 - - ========== ============= ========== =============
Mentor Perpetual Global Portfolio ----------------------------------------------------------------- Six Months Year Ended 3/31/98 Ended 9/30/97 -------------------------------- ------------------------------ Shares Dollar Shares Dollar ------------- ---------------- ------------- -------------- Class A: Shares sold 603,955 $ 11,898,673 1,732,413 $ 32,107,036 Shares issued upon reinvestment of distributions 113,726 2,255,270 26,897 463,738 Shares redeemed (346,836) (6,873,466) (270,161) (5,115,471) -------- ------------- --------- ------------ Change in net assets from capital share transactions 370,845 $ 7,280,477 1,489,149 $ 27,455,303 ======== ============= ========= ============ Class B: Shares sold 774,144 $ 15,064,569 2,325,365 $ 42,416,589 Shares issued upon reinvestment of distributions 232,932 4,477,443 91,695 1,544,189 Shares redeemed (562,374) (10,528,628) (447,724) (8,352,236) -------- ------------- --------- ------------ Change in net assets from capital share transactions 444,702 $ 9,013,384 1,969,336 $ 35,608,542 ======== ============= ========= ============ Class Y: (a) Shares sold 53 $ 1,008 - - Shares issued upon reinvestment of distributions - - - - Shares redeemed - - - - -------- ------------- --------- ------------ Change in net assets from capital share transactions 53 $ 1,008 - - ======== ============= ========= ============
86 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Note 7: Capital Share Transactions (continued)
Mentor Capital Growth Portfolio ------------------------------------------------------------------- Six Months Year Ended 3/31/98 Ended 9/30/97 -------------------------------- -------------------------------- Shares Dollar Shares Dollar ------------- ---------------- ------------- ---------------- Class A: Shares sold 1,955,402 $ 43,574,633 1,422,449 $ 28,161,248 Shares issued upon reinvestment of distributions 278,288 5,833,639 264,769 4,552,490 Shares redeemed (827,055) (18,520,523) (404,403) (7,959,184) --------- ------------- --------- ------------- Change in net assets from capital share transactions 1,406,635 $ 30,887,749 1,282,815 $ 24,754,554 ========= ============= ========= ============= Class B: Shares sold 2,094,422 $ 45,198,754 1,749,992 $ 33,332,019 Shares issued upon reinvestment of distributions 507,715 10,256,056 596,606 9,983,395 Shares redeemed (523,707) (11,154,665) (711,342) (13,428,205) --------- ------------- --------- ------------- Change in net assets from capital share transactions 2,078,430 $ 44,300,145 1,635,256 $ 29,887,209 ========= ============= ========= ============= Class Y: (a) Shares sold 49 $ 1,012 - - Shares issued upon reinvestment of distributions - - - Shares redeemed - - - - --------- ------------- --------- ------------- Change in net assets from capital share transactions 49 $ 1,012 - - ========= ============= ========= =============
Mentor Strategy Portfolio ----------------------------------------------------------------------- Six Months Year Ended 3/31/98 Ended 9/30/97 ---------------------------------- ---------------------------------- Shares Dollar Shares Dollar --------------- ---------------- --------------- ---------------- Class A: Shares sold 312,205 $ 4,763,997 1,695,322 $ 28,517,096 Shares issued upon reinvestment of distributions 444,548 6,836,197 91,017 1,513,610 Shares redeemed (777,622) (12,080,086) (742,169) (12,677,413) -------- ------------ --------- ------------- Change in net assets from capital share transactions (20,869) ($ 479,892) 1,044,170 $ 17,353,293 ======== ============ ========= ============= Class B: Shares sold 353,802 $ 5,349,702 2,587,894 $ 43,129,553 Shares issued upon reinvestment of distributions 3,423,559 51,517,305 1,291,000 21,237,045 Shares redeemed (4,273,266) (64,447,708) (3,591,125) (60,432,366) ---------- ------------ ---------- ------------- Change in net assets from capital share transactions (495,905) ($ 7,580,701) 287,769 $ 3,934,232 ========== ============ ========== ============= Class Y: (a) Shares sold 67 $ 1,001 - - Shares issued upon reinvestment of distributions - - - - Shares redeemed - - - - ---------- ------------ ---------- ------------- Change in net assets from capital share transactions 67 $ 1,001 - - ========== ============ ========== =============
87 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Note 7: Capital Share Transactions (continued)
Mentor Income and Growth Portfolio ------------------------------------------------------------------ Six Months Year Ended 3/31/98 Ended 9/30/97 ------------------------------- -------------------------------- Shares Dollars Shares Dollars ------------- --------------- ------------- ---------------- Class A: Shares sold 1,551,636 $ 29,989,933 1,945,245 $ 37,552,063 Shares issued upon reinvestment of distributions 306,756 5,887,059 179,904 3,303,336 Shares redeemed (443,613) (8,563,507) (305,497) (5,925,176) --------- ------------ --------- ------------- Change in net assets from capital share transactions 1,414,779 $ 27,313,485 1,819,652 $ 34,930,223 ========= ============ ========= ============= Class B: Shares sold 1,607,077 $ 31,097,571 1,913,241 $ 36,687,335 Shares issued upon reinvestment of distributions 490,174 9,389,433 450,665 8,192,160 Shares redeemed (432,392) (8,363,284) (596,371) (11,526,154) --------- ------------ --------- ------------- Change in net assets from capital share transactions 1,664,859 $ 32,123,720 1,767,535 $ 33,353,341 ========= ============ ========= ============= Class Y: (a) Shares sold 54 $ 1,002 - - Shares issued upon reinvestment of distributions - - - - Shares redeemed - - - - --------- ------------ --------- ------------- Change in net assets from capital share transactions 54 $ 1,002 - - ========= ============ ========= =============
Mentor Municipal Income Portfolio ----------------------------------------------------------------- Six Months Year Ended 3/31/98 Ended 9/30/97 ------------------------------- ------------------------------- Shares Dollars Shares Dollars ------------- --------------- ------------- --------------- Class A Shares sold 891,254 $ 13,930,563 901,683 $ 13,789,961 Shares issued upon reinvestment of distributions 37,636 589,566 41,778 635,539 Shares redeemed (157,969) (2,462,941) (214,874) (3,272,170) -------- ------------ -------- ------------ Change in net assets from capital share transactions 770,921 $ 12,057,188 728,587 $ 11,153,330 ======== ============ ======== ============ Class B: Shares sold 626,506 $ 9,824,135 782,655 $ 11,948,057 Shares issued upon reinvestment of distributions 45,214 707,228 83,433 1,268,808 Shares redeemed (199,088) (3,114,005) (478,013) (7,288,249) -------- ------------ -------- ------------ Change in net assets from capital share transactions 472,632 $ 7,417,358 388,075 $ 5,928,616 ======== ============ ======== ============ Class Y: (a) Shares sold 64 $ 1,000 - - Shares issued upon reinvestment of distributions - - - - Shares redeemed - - - - -------- ------------ -------- ------------ Change in net assets from capital share transactions 64 $ 1,000 - - ======== ============ ======== ============
88 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Note 7: Capital Share Transactions (continued)
Mentor Quality Income Portfolio -------------------------------------------------------------------- Six Months Year Ended 3/31/98 Ended 9/30/97 -------------------------------- --------------------------------- Shares Dollars Shares Dollars ------------- ---------------- --------------- --------------- Class A: Shares sold 2,219,561 $ 29,373,425 2,838,801 $ 37,052,906 Shares issued upon reinvestment of distributions 89,934 1,107,080 91,837 1,196,422 Shares redeemed (504,377) (6,662,826) (529,521) (6,928,329) --------- ------------ --------- ------------- Change in net assets from capital share transactions 1,805,118 $ 23,817,679 2,401,117 $ 31,320,999 ========= ============ ========= ============= Class B: Shares sold 2,098,737 $ 27,755,791 2,058,671 $ 26,889,217 Shares issued upon reinvestment of distributions 134,930 1,783,430 218,332 2,847,859 Shares redeemed (621,756) (8,214,958) (1,089,318) (14,250,845) --------- ------------ ---------- ------------- Change in net assets from capital share transactions 1,611,911 $ 21,324,263 1,187,685 $ 15,486,231 ========= ============ ========== ============= Class Y: (a) Shares sold 76 $ 1,000 - - Shares issued upon reinvestment of distributions - - - - Shares redeemed - - - - --------- ------------ ---------- ------------- Change in net assets from capital share transactions 76 $ 1,000 - - ========= ============ ========== =============
Mentor Short-Duration Income Portfolio ----------------------------------------------------------------------- Six Months Year Ended 3/31/98 Ended 9/30/97 ---------------------------------- ---------------------------------- Shares Dollar Shares Dollar --------------- ---------------- --------------- ---------------- Class A: Shares sold 3,937,877 $ 49,587,366 2,047,670 $ 25,768,187 Shares issued upon reinvestment of distributions 83,690 1,053,433 49,602 623,647 Shares redeemed (1,556,524) (19,574,787) (505,078) (6,351,983) ---------- ------------- --------- ------------- Change in net assets from capital share transactions 2,465,043 $ 31,066,012 1,592,194 $ 20,039,851 ========== ============= ========= ============= Class B: Shares sold 2,171,475 $ 27,339,426 1,121,483 $ 14,121,033 Shares issued upon reinvestment of distributions 64,062 806,605 89,996 1,131,691 Shares redeemed (529,910) (6,671,082) (1,027,042) (12,921,363) ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 1,705,627 $ 21,474,949 184,437 $ 2,331,361 ========== ============= ========== ============= Class Y: (a) Shares sold 80 $ 1,000 - - Shares issued upon reinvestment of distributions - - - - Shares redeemed - - - - ---------- ------------- ---------- ------------- Change in net assets from capital share transactions 80 $ 1,000 - - ========== ============= ========== =============
(a) For the period from November 19, 1997 (initial offering of Class Y Shares) to March 31, 1998. Year 2000 The Portfolios receive services from a number of providers which rely on the smooth functioning of their respective systems and the systems of others to perform those services. It is generally recognized that certain systems in use today may not perform their intended functions adequately after the Year 1999 because of the inability of computer software to distinguish the Year 2000 from the Year 1900. Mentor Advisors is taking steps that it 89 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- believes are reasonably designed to address this potential "Year 2000" problem and to obtain satisfactory assurances that comparable steps are being taken by each of the Portfolio's other major service providers. There can be no assurance, however, that these steps will be sufficient to avoid any adverse impact on the Portfolios from this problem. Additional Information (unaudited) Mentor Growth Portfolio: Shareholders of the Portfolio considered and acted upon the proposals listed below at a special meeting of shareholders held Monday December 22, 1997. In addition, below each proposals are the results of that vote. 1. To elect the following Trustees: Affirmative Withheld Daniel J. Ludeman 27,544,542 171,023 Troy A. Peery, Jr. 27,544,488 171,077 Arnold H. Dreyfuss 27,564,520 151,045 Thomas F. Keller 27,566,624 148,941 Peter J. Quinn, Jr. 27,561,643 153,922 Louis W. Moelchert, Jr. 27,569,404 146,161 Arch T. Allen, III 27,569,936 145,629 Weston E. Edwards 27,567,618 147,947 Jerry R. Barrentine 27,571,709 143,856 J. Garnett Nelson 27,573,524 142,041 2. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher Singer, Inc., with First Union Corporation: Affirmative 27,235,755 Against 180,309 Abstain 299,501 3. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC in contemplation of the potential acquisition of an additional interest in Mentor Investment Group, LLC by EVEREN Securities Holdings, Inc.: Affirmative 27,195,722 Against 191,665 Abstain 328,178 Mentor Perpetual Global Portfolio: Shareholders of the Portfolio considered and acted upon the proposals listed below at a special meeting of shareholders held Monday December 22, 1997. In addition, below each proposals are the results of that vote. 90 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- 1. To elect the following Trustees: Affirmative Withheld Daniel J. Ludeman 6,098,523 2,311 Troy A. Peery, Jr. 6,036,156 64,678 Arnold H. Dreyfuss 6,037,243 63,591 Thomas F. Keller 6,048,524 52,310 Peter J. Quinn, Jr. 6,048,794 52,040 Louis W. Moelchert, Jr. 6,048,794 52,040 Arch T. Allen, III 6,048,794 52,040 Weston E. Edwards 6,048,794 52,040 Jerry R. Barrentine 6,050,235 50,599 J. Garnett Nelson 6,050,235 50,599 2. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher Singer, Inc., with First Union Corporation: Affirmative 5,989,446 Against 53,948 Abstain 57,440 3. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC in contemplation of the potential acquisition of an additional interest in Mentor Investment Group, LLC by EVEREN Securities Holdings, Inc.: Affirmative 5,975,753 Against 64,034 Abstain 61,047 Mentor Capital Growth Portfolio: Shareholders of the Portfolio considered and acted upon the proposals listed below at a special meeting of shareholders held Monday December 22, 1997. In addition, below each proposals are the results of that vote. 1. To elect the following Trustees: Affirmative Withheld Daniel J. Ludeman 7,397,245 93,135 Troy A. Peery, Jr. 7,395,588 94,792 Arnold H. Dreyfuss 7,404,586 85,794 Thomas F. Keller 7,404,873 85,507 Peter J. Quinn, Jr. 7,407,129 83,251 Louis W. Moelchert, Jr. 7,406,066 84,314 Arch T. Allen, III 7,406,560 83,820 Weston E. Edwards 7,406,560 83,820 Jerry R. Barrentine 7,406,560 83,820 J. Garnett Nelson 7,406,560 83,820 91 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- 2. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher Singer, Inc., with First Union Corporation: Affirmative 7,331,649 Against 71,967 Abstain 86,764 3. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC in contemplation of the potential acquisition of an additional interest in Mentor Investment Group, LLC by EVEREN Securities Holdings, Inc.: Affirmative 7,297,369 Against 72,886 Abstain 120,125 Mentor Strategy Portfolio: Shareholders of the Portfolio considered and acted upon the proposals listed below at a special meeting of shareholders held Monday December 22, 1997. In addition, below each proposals are the results of that vote. 1. To elect the following Trustees: Affirmative Withheld Daniel J. Ludeman 20,152,299 171,413 Troy A. Peery, Jr. 20,152,236 171,476 Arnold H. Dreyfuss 20,156,434 167,278 Thomas F. Keller 20,159,264 164,448 Peter J. Quinn, Jr. 20,157,621 166,091 Louis W. Moelchert, Jr. 20,158,819 164,893 Arch T. Allen, III 20,159,366 164,346 Weston E. Edwards 20,159,233 164,479 Jerry R. Barrentine 20,163,690 160,022 J. Garnett Nelson 20,163,690 160,022 2. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher Singer, Inc., with First Union Corporation: Affirmative 19,987,030 Against 124,613 Abstain 212,069 3. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC in contemplation of the potential acquisition of an additional interest in Mentor Investment Group, LLC by EVEREN Securities Holdings, Inc.: Affirmative 19,973,828 Against 140,299 Abstain 209,585 92 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Mentor Income and Growth Portfolio: Shareholders of the Portfolio considered and acted upon the proposals listed below at a special meeting of shareholders held Monday December 22, 1997. In addition, below each proposals are the results of that vote. 1. To elect the following Trustees: Affirmative Withheld Daniel J. Ludeman 7,985,170 106,710 Troy A. Peery, Jr. 7,986,482 105,398 Arnold H. Dreyfuss 7,992,380 99,500 Thomas F. Keller 7,992,184 99,696 Peter J. Quinn, Jr. 7,992,380 99,500 Louis W. Moelchert, Jr. 7,992,648 99,232 Arch T. Allen, III 7,992,648 99,232 Weston E. Edwards 7,992,648 99,232 Jerry R. Barrentine 7,992,648 99,232 J. Garnett Nelson 7,992,648 99,232 2. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher Singer, Inc., with First Union Corporation: Affirmative 7,917,636 Against 92,036 Abstain 82,208 3. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC in contemplation of the potential acquisition of an additional interest in Mentor Investment Group, LLC by EVEREN Securities Holdings, Inc.: Affirmative 7,934,503 Against 67,845 Abstain 89,532 4. To approve a new sub-advisory agreement with Wellington Management Company, LLP Van Kampen American Capital Management, Inc.: Affirmative 7,921,655 Against 73,911 Abstain 96,314 Mentor Municipal Income Portfolio: Shareholders of the Portfolio considered and acted upon the proposals listed below at a special meeting of shareholders held Monday December 22, 1997. In addition, below each proposals are the results of that vote. 93 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- 1. To elect the following Trustees: Affirmative Withheld Daniel J. Ludeman 4,647,367 11,903 Troy A. Peery, Jr. 4,647,367 11,903 Arnold H. Dreyfuss 4,647,943 11,327 Thomas F. Keller 4,647,943 11,327 Peter J. Quinn, Jr. 4,647,943 11,327 Louis W. Moelchert, Jr. 4,647,943 11,327 Arch T. Allen, III 4,647,943 11,327 Weston E. Edwards 4,647,943 11,327 Jerry R. Barrentine 4,647,943 11,327 J. Garnett Nelson 4,647,943 11,327 2. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher Singer, Inc., with First Union Corporation: Affirmative 4,586,630 Against 11,033 Abstain 61,607 3. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC in contemplation of the potential acquisition of an additional interest in Mentor Investment Group, LLC by EVEREN Securities Holdings, Inc.: Affirmative 4,597,715 Against 14,184 Abstain 47,371 4. To approve a new sub-advisory agreement with Van Kampen American Capital Management, Inc.: Affirmative 4,599,957 Against 16,575 Abstain 42,738 Mentor Quality Income Portfolio: Shareholders of the Portfolio considered and acted upon the proposals listed below at a special meeting of shareholders held Monday December 22, 1997. In addition, below each proposals are the results of that vote. 94 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- 1. To elect the following Trustees: Affirmative Withheld Daniel J. Ludeman 10,228,357 236,339 Troy A. Peery, Jr. 10,232,514 232,182 Arnold H. Dreyfuss 10,236,054 228,642 Thomas F. Keller 10,235,754 228,942 Peter J. Quinn, Jr. 10,236,184 228,512 Louis W. Moelchert, Jr. 10,236,700 227,996 Arch T. Allen, III 10,236,700 227,996 Weston E. Edwards 10,242,580 222,116 Jerry R. Barrentine 10,245,717 218,979 J. Garnett Nelson 10,245,717 218,979 2. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher Singer, Inc., with First Union Corporation: Affirmative 10,053,860 Against 139,703 Abstain 271,133 3. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC in contemplation of the potential acquisition of an additional interest in Mentor Investment Group, LLC by EVEREN Securities Holdings, Inc.: Affirmative 10,064,644 Against 128,145 Abstain 271,907 4. Proposal to amend fundamental investment restrictions of the Portfolio to permit it to borrow money to invest in additional securities. Affirmative 6,053,769 Against 586,586 Abstain 286,481 Broker Non-vote 3,537,860 Mentor Short-Duration Income Portfolio: Shareholders of the Portfolio considered and acted upon the proposals listed below at a special meeting of shareholders held Monday December 22, 1997. In addition, below each proposals are the results of that vote. 95 Mentor Funds Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- 1. To elect the following Trustees: Affirmative Withheld [S] [C] [C] Daniel J. Ludeman 5,233,538 1,899 Troy A. Peery, Jr. 5,223,681 11,756 Arnold H. Dreyfuss 5,223,681 11,756 Thomas F. Keller 5,223,681 11,756 Peter J. Quinn, Jr. 5,224,488 10,949 Louis W. Moelchert, Jr. 5,224,488 10,949 Arch T. Allen, III 5,224,488 10,949 Weston E. Edwards 5,224,488 10,949 Jerry R. Barrentine 5,224,488 10,949 J. Garnett Nelson 5,224,488 10,949 2. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher Singer, Inc., with First Union Corporation: Affirmative 5,164,387 Against 22,153 Abstain 48,897 3. To approve a new management contract between the Portfolio and Mentor Investment Advisors, LLC in contemplation of the potential acquisition of an additional interest in Mentor Investment Group, LLC by EVEREN Securities Holdings, Inc.: Affirmative 5,171,233 Against 19,851 Abstain 44,353 96 Mentor Funds Shareholder Information - -------------------------------------------------------------------------------- Trustees Daniel J. Ludeman, Trustee & Chairman Chairman and Chief Executive Officer Mentor Investment Group, LLC Arch T. Allen III, Trustee Attorney at Law Allen & Moore, LLP Jerry R. Barrentine, Trustee President J.R. Barrentine & Associates Arnold H. Dreyfuss, Trustee Former Chairman & Chief Executive Officer Hamilton Beach/Proctor-Silex, Inc. Weston E. Edwards, Trustee President Weston Edwards & Associates Thomas F. Keller, Trustee Former Dean, Fuqua School of Business Duke University Louis W. Moelchert, Jr., Trustee Vice President for Business & Finance University of Richmond J. Garnett Nelson, Trustee Consultant Mid-Atlantic Holdings, LLC Troy A. Peery, Jr., Trustee President Heilig-Meyers Company Peter J. Quinn, Jr., Trustee Managing Director Mentor Investment Group, LLC Officers Paul F. Costello, President Managing Director Mentor Investment Group, LLC Terry L. Perkins, Treasurer Senior Vice President Mentor Investment Group, LLC Geoffrey B. Sale, Secretary Associate Vice President Mentor Investment Group, LLC Michael A. Wade, Assistant Treasurer Vice President Mentor Investment Group, LLC This report is authorized for distribution to prospective investors only when preceded or accompanied by a Mentor Funds prospectus, which contains complete information about fees, sales charges and expenses. Please read it carefully before you invest or send money. 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