1933 Act Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [ ] Post-Effective
Amendment No. Amendment No.
EVERGREEN MUNICIPAL TRUST
(Evergreen Municipal Bond Fund)
[Exact Name of Registrant as Specified in Charter]
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
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(Address of Principal Executive Offices)
Michael H. Koonce, Esq.
Evergreen Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
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(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP 1025
Connecticut Avenue, N.W.
Washington, D.C. 20036
Approximate date of proposed public offering: As soon as possible after
the effective date of this Registration Statement.
The Registrant has registered an indefinite amount of securities under
the Securities Act of 1933 pursuant to Section 24(f) under the Investment
Company Act of 1940 (File No. 333- 36033); accordingly, no fee is payable
herewith. Pursuant to Rule 429, this Registration Statement relates to the
aforementioned registration on Form N-1A. A Rule 24f-2 Notice for the
Registrant's fiscal year ended May 31, 1999 will be filed with the Commission on
or about August 30, 1999.
It is proposed that this filing will become effective on August 13,
1999 pursuant to Rule 488 of the Securities Act of 1933.
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MENTOR FUNDS
901 East Byrd Street
Richmond, Virginia 23219
August 27, 1999
Dear Shareholder,
I am writing to shareholders of Mentor Municipal Income Portfolio (the "Fund")
to inform you of a Special Shareholders' meeting to be held on October 15, 1999.
Before that meeting, I would like your vote on the important issues affecting
your Fund as described in the attached Prospectus/Proxy Statement.
The meeting being held is to vote on four proposals designed to integrate the
Mentor family of mutual funds into the Evergreen family of funds. In effect,
your Fund will merge with Evergreen Municipal Bond Fund after your Fund is
converted into a newly-organized series of Evergreen Municipal Trust. The
proposals contemplate that the conversion to a series of Evergreen Municipal
Trust will occur in October 1999 and the merger of the two Funds will occur in
March 2000. This two-step consolidation is caused by certain timing issues.
The Prospectus/Proxy Statement includes four proposals. The first proposal
requests that shareholders consider and vote upon the conversion of the Fund to
a series of Evergreen Municipal Trust, a Delaware business trust. If approved,
the Fund will change its name to Evergreen Municipal Income Fund and Class A,
Class B and Class Y shares of the Fund will be converted to Class A, Class C and
Class Y shares, respectively, of Evergreen Municipal Income Fund. After the
conversion, the Fund will conduct its business until the effective date of the
reorganization described below.
The second proposal requests that shareholders consider the reclassification of
the Fund's investment objective from fundamental to nonfundamental. This
proposal is intended to provide consistency and increased flexibility throughout
the Evergreen fund family.
The third proposal requests that shareholders consider the adoption of
standardized investment restrictions for the Fund. This proposal is intended to
provide consistency and increased flexibility throughout the Evergreen fund
family.
The fourth proposal requests that shareholders consider and act upon an
Agreement and Plan of Reorganization whereby all of the assets of the Fund would
be acquired by Evergreen Municipal Bond Fund in exchange for either Class A,
Class C or Class Y shares of Evergreen Municipal Bond Fund and the assumption by
Evergreen Municipal Bond Fund of the identified liabilities of the Fund. You
will receive shares of Evergreen Municipal Bond Fund having an aggregate net
asset value equal to the aggregate net asset value of your Fund shares. Details
about Evergreen Municipal Bond Fund's investment objective, portfolio management
team, performance, etc. are
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contained in the attached Prospectus/Proxy Statement. For federal
income tax purposes, the transaction is a non-taxable event for
shareholders.
The Board of Trustees of Mentor Funds has approved the proposals and recommends
that you vote FOR these proposals.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposals. If you attend the meeting, you may vote your shares in person. If
you do not expect to attend the meeting, either complete, date, sign and return
the enclosed proxy card in the enclosed postage paid envelope, or vote by
calling toll free 1-800-690-6903, 24 hours a day, or vote through the Internet.
You may also FAX your completed and signed proxy card (both front and back
sides) to Management Information Services, an ADP Company, our proxy tabulator,
at 1-800-451-8683. Instructions on how to complete the proxy card, vote by
telephone or vote through the Internet are included immediately after the Notice
of Special Meeting.
If you have any questions about the proxy, please call our proxy solicitor,
Shareholder Communications Corporation, at 1-800-645- 7816. If we do not receive
your completed proxy card or your telephone or Internet vote within several
weeks, you may be contacted by Shareholder Communications Corporation, who will
remind you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
----------------
Paul F. Costello
President
Mentor Funds
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[SUBJECT TO COMPLETION, JULY 14, 1999 PRELIMINARY COPY]
MENTOR MUNICIPAL INCOME PORTFOLIO
901 East Byrd Street
Richmond, Virginia 23219
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 15, 1999
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of Mentor Municipal Income Portfolio (the "Fund"), a series of
Mentor Funds, will be held at the offices of the Mentor Funds, 901 East Byrd
Street, Richmond, Virginia 23219 on October 15, 1999 at 2:00 p.m. for the
following purposes:
1. To consider and act upon an Agreement and Plan of Conversion and
Termination (the "Conversion Plan") providing for the reorganization of the Fund
as a series (the "Successor Fund") of Evergreen Municipal Trust, a Delaware
business trust, and in connection therewith, the acquisition of all of the
assets of the Fund in exchange for shares of the Successor Fund, and the
assumption by the Successor Fund of all of the liabilities of the Fund. The
Conversion Plan also provides for the distribution of such shares of the
Successor Fund to shareholders of the Fund in liquidation and subsequent
termination of the Fund.
2. To consider and act upon the reclassification of the Fund's
investment objective from fundamental to nonfundamental.
3. To consider and act upon the adoption of standardized fundamental
investment restrictions by amending or reclassifying the current fundamental
investment restrictions of the Fund.
4. To consider and act upon an Agreement and Plan of Reorganization
(the "Reorganization Plan") providing for the acquisition of all of the assets
of the Successor Fund by Evergreen Municipal Bond Fund, a series of Evergreen
Municipal Trust ("Evergreen Municipal"), in exchange for shares of Evergreen
Municipal and the assumption by Evergreen Municipal of the identified
liabilities of the Successor Fund. The Reorganization Plan also provides for
distribution of these shares of Evergreen Municipal to shareholders of the
Successor Fund in liquidation and subsequent termination of the Successor Fund.
A vote in favor of the Reorganization Plan is a vote in favor of the liquidation
and dissolution of the Successor Fund.
5. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
On behalf of the Fund, the Trustees of Mentor Funds have fixed the
close of business on August 17, 1999 as the record date for the determination of
shareholders of the Fund entitled to notice of and to vote at the Meeting or any
adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND IN PERSON ARE URGED TO SIGN
WITHOUT DELAY AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED
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ENVELOPE, WHICH REQUIRES NO POSTAGE, OR FOLLOW THE INSTRUCTIONS IMMEDIATELY
AFTER THIS NOTICE RELATING TO TELEPHONE OR INTERNET VOTING SO THAT THEIR SHARES
MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY
WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Trustees
Michael H. Koonce
Secretary
August 27, 1999
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INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it appears
in the Registration on the proxy card.
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card.
3. ALL OTHER ACCOUNTS: The capacity of the individual
signing the proxy card should be indicated unless it is reflected in
the form of Registration. For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp. John Doe, Treasurer
c/o John Doe, Treasurer
ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith John B. Smith, Jr., Executor
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NSTRUCTIONS FOR TELEPHONE VOTING
To vote by telephone follow the three easy steps below:
1. Call 1-800-690-6903.
2. Please have your Proxy Card at hand when you call.
3. Enter the twelve-digit "Control No." found on the card, then
follow the simple recorded instructions.
INSTRUCTIONS FOR INTERNET VOTING
To vote by Internet follow the three easy steps below:
1. Go to website www.proxyvote.com
2. Please have your Proxy Card on hand.
3. Enter the twelve-digit "Control No." found on the card, then
follow the simple instructions.
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PROSPECTUS/PROXY STATEMENT DATED AUGUST 27, 1999
CONVERSION OF
MENTOR MUNICIPAL INCOME PORTFOLIO
a series of
Mentor Funds
901 East Byrd Street
Richmond, Virginia 23219
Into a Series of
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
AND
ACQUISITION OF ASSETS OF
MENTOR MUNICIPAL INCOME PORTFOLIO
By and in Exchange for Shares of
EVERGREEN MUNICIPAL BOND FUND
a series of
Evergreen Municipal Trust
Introduction
This Prospectus/Proxy Statement is being furnished to the shareholders
of Mentor Municipal Income Portfolio ("Mentor Municipal") in connection with a
Special Meeting of Shareholders to be held on October 15, 1999 at 2:00 p.m. at
the offices of Mentor Funds, 901 East Byrd Street, Richmond, Virginia 23219, and
any adjournments thereof (the "Meeting"). The Prospectus/Proxy Statement, which
consists of four parts, proposes that Mentor Municipal, a series of Mentor
Funds, a Massachusetts business trust, become a part of the Evergreen mutual
fund family. Shareholders of the other Mentor Funds are also being asked to
approve mergers or conversions of their funds into the Evergreen family of funds
which are managed by subsidiaries of First Union Corporation. The mergers and
conversions are designed to integrate and enhance the investment management,
distribution and operations of all the mutual funds in the Evergreen and Mentor
families of funds.
The ultimate objective is for Mentor Municipal to be merged into
Evergreen Municipal Bond Fund ("Evergreen Municipal") whose investment
objectives and policies are substantially similar to those of Mentor Municipal.
Because of certain timing issues which are described in Part III, it is proposed
that Mentor Municipal first convert to a series of Evergreen Municipal Trust,
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a Delaware business trust (the "Conversion"). Evergreen Municipal and Mentor
Municipal are hereinafter sometimes referred to as the "Fund" and collectively
as the "Funds."
Part I describes the Conversion. In Part II it is proposed, consistent
with all Evergreen Funds, that Mentor Municipal's investment objective be
reclassified from fundamental to nonfundamental. In addition, Part II relates to
the adoption by Mentor Municipal of fundamental investment restrictions common
to all Evergreen Funds. If approved by shareholders, the Conversion, the
reclassification of Mentor Municipal's investment objective and the adoption of
common fundamental investment restrictions will be effective on or about October
15, 1999 and Mentor Municipal's name will change to Evergreen Municipal Income
Fund ("Evergreen Municipal Income").
At the Meeting, shareholders of Mentor Municipal are also being asked
to approve the merger of their Fund with Evergreen Municipal. This merger is
scheduled to take place in March 2000. This transaction is described in Part
III.
In Part IV, voting information concerning the shareholders' meeting is
presented.
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TABLE OF CONTENTS
Page
PART I ...............................................................5
Introduction .............5
Selection of Delaware Business Trust Form of
Organization .............5
Description of the Conversion .............6
Evergreen Trust .............8
Certain Comparative Information About Mentor
Funds and Evergreen Trust .............9
Current and Successor Advisory Agreements ............14
Administration Agreements ............15
Current and Successor Distribution Arrangements ............15
Names ............16
Certain Votes to be Taken Prior to the Conversion ............16
Investment Objectives and Restrictions ............16
Federal Income Tax Consequences ............16
Appraisal Rights ............17
Recommendation of Trustees ............17
PART II ..............................................................18
Reclassification of Fundamental Investment
Objective as Nonfundamental ............18
Recommendation of Trustees ............19
Adoption of Standardized Investment
Restrictions (Proposals 3A-3H) ............19
Reclassification of Fundamental Restrictions
as Nonfundamental (Proposal 3I) ............20
Recommendation of Trustees ............21
PART III .................................................. ...........30
COMPARISON OF FEES AND EXPENSES........................................33
SUMMARY ..............................................................38
Proposed Plan of Reorganization ...........38
Tax Consequences ...........39
Investment Objectives and Policies of the Funds ...........40
Comparative Performance Information for Each Fund ...........41
Management of the Funds ...........42
Investment Advisers ...........42
Administrator ..........43
Portfolio Management ..........43
Distribution of Shares ..........44
Purchase and Redemption Procedures ..........46
Exchange Privileges ...........47
Dividend Policy ..........47
Risks ..........48
REASONS FOR THE REORGANIZATION.........................................50
Agreement and Plan of Reorganization .........52
Federal Income Tax Consequences .........54
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Pro-forma Capitalization .........56
Shareholder Information .........58
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES.......................58
ADDITIONAL INFORMATION........................................ ........60
FINANCIAL STATEMENTS AND EXPERTS.......................................61
LEGAL MATTERS..........................................................62
PART IV ..............................................................62
VOTING INFORMATION CONCERNING THE MEETING..............................62
OTHER BUSINESS.........................................................65
EXHIBIT A.............................................................A-1
EXHIBIT B.............................................................B-1
EXHIBIT C.............................................................C-1
EXHIBIT D.............................................................D-1
EXHIBIT E.............................................................E-1
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PART I
PROPOSAL 1 - THE PROPOSED CONVERSION OF MENTOR MUNICIPAL TO A
CORRESPONDING SERIES OF A DELAWARE BUSINESS TRUST
Introduction
At the Meeting, the shareholders of Mentor Municipal will be asked to
approve an Agreement and Plan of Conversion and Termination (the "Conversion
Plan") which provides for the Conversion of the Fund into a corresponding series
(the "Successor Fund") of Evergreen Municipal Trust, a Delaware business trust
("Evergreen Trust"). The Conversion is part of an overall restructuring of the
Mentor family of funds, each of which is advised by an affiliate of First Union
National Bank ("FUNB"). FUNB and its other investment adviser affiliates serve
as investment advisers to the Evergreen Funds. The Evergreen Funds were
reorganized into series of Delaware business trusts beginning in December 1997.
The restructuring into a series of the Evergreen Trust involves, among
other components, the Conversion, the reclassification of the investment
objective of Mentor Municipal from "fundamental" (i.e., changeable by
shareholder vote only) to "nonfundamental" (i.e., changeable by vote of the
Trustees), the adoption of standardized fundamental investment restrictions, and
the reclassification of certain investment restrictions from fundamental to
nonfundamental. The reclassification of the investment objective, the adoption
of standardized investment restrictions and the reclassification of certain
investment restrictions from fundamental to nonfundamental are discussed in Part
II of this Prospectus/Proxy Statement.
Selection of Delaware Business Trust Form of Organization
On July 13, 1999, the Board of Trustees of Mentor Funds unanimously
approved a proposal by Mentor Municipal's investment adviser to reorganize the
Fund as separate series of Evergreen Trust. Mentor Funds is currently organized
as a Massachusetts business trust. Mentor Municipal is proposed to be structured
as a series of a Delaware business trust, as opposed to a corporation, due to
the inherent flexibility of the business trust form of organization. The
principal reason for reorganizing Mentor Municipal in Delaware is the
availability of certain advantages of Delaware law with respect to business
trusts. The Delaware Business Trust Act (the "Delaware Act") has been
specifically drafted to accommodate the unique governance needs of investment
companies and provides that its policy is to give maximum freedom of contract to
the trust instrument of a Delaware business trust.
Under the Delaware Act, a shareholder of a Delaware business trust is
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar
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statutory or other authority limiting business trust shareholder liability
exists in Massachusetts. As a result, Delaware law is generally considered to
afford more protection against potential shareholder liability than is afforded
to shareholders of Massachusetts business trusts. See "Certain Comparative
Information About Mentor Funds and Evergreen Trust - Shareholder Liability."
Similarly, Delaware law provides that, should a Delaware trust issue multiple
series of shares, each series will not be liable for the debts of another
series, another potential though remote risk in the case of other business
trusts, including those, such as Mentor Funds, that are organized under
Massachusetts law.
Delaware has obtained a favorable national reputation for its business
laws and business environment. The Delaware courts, which may be called upon to
interpret the Delaware Act, are among the nation's most highly respected and
have an expertise in corporate matters which in part grew out of the fact that
Delaware legal issues are concentrated in the Court of Chancery where there are
no juries and where judges issue written opinions explaining their decisions.
Accordingly, there is a well established body of precedent which may be relevant
in deciding issues pertaining to a Delaware business trust.
There are other advantages that may be afforded by a Delaware business
trust. Under Delaware law, the Successor Fund will have the flexibility to
respond to future business contingencies. For example, the Trustees of Evergreen
Trust will have the power to incorporate Evergreen Trust, to merge or
consolidate it with another entity, to cause each series to become a separate
trust, and to change Evergreen Trust's domicile without a shareholder vote. This
flexibility could help to assure that Evergreen Trust operates under the most
advanced form of organization and could reduce the expense and frequency of
future shareholder meetings for non-investment related issues.
Description of the Conversion
The detailed terms and conditions of the Conversion are contained in
the Conversion Plan. The information in this Prospectus/Proxy Statement with
respect to the Conversion Plan is qualified in its entirety by reference to, and
made subject to, the complete text of the form of the Conversion Plan, a copy of
which is attached to this Prospectus/Proxy Statement as Exhibit A.
If shareholders of Mentor Municipal do not approve the Conversion, that
Fund will continue as currently organized.
If the shareholders of Mentor Municipal approve the Conversion and the
conditions of the Conversion are satisfied, all of the assets and liabilities of
the Fund will be transferred to the Successor Fund and each shareholder of the
Fund will receive shares of the Successor Fund (the "New Shares"). The New
Shares of the Successor Fund will be issued to Mentor Municipal
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in consideration of the transfer to the Successor Fund by the Fund of all assets
and liabilities of Mentor Municipal. Immediately thereafter, Mentor Municipal
will liquidate and distribute the New Shares to its shareholders. Holders of
Class A, Class B and Class Y shares of Mentor Municipal will receive Class A,
Class C and Class Y New Shares, respectively, of the Successor Fund. Class A and
Class Y shares of the Successor Fund have similar distribution-related and
shareholder servicing- related fees, if any, as the shares of Mentor Municipal
held prior to the Conversion. The distribution-related and shareholder
servicing-related fees of the Successor Fund's Class C shares are greater than
the fees attributable to Mentor Municipal's Class B shares. See Part III -
"Comparison of Fees and Expenses." As a result of the Conversion, each
shareholder will receive, in exchange for his or her Mentor Municipal shares,
New Shares with a total net asset value equal to the total net asset value of
the shareholder's Fund shares immediately prior to the consummation of the
Conversion. For information on classes of shares of the Successor Fund, see
"Part III - Summary Distribution of Shares."
It will not be necessary for holders of share certificates of Mentor
Municipal to exchange their certificates for new certificates following
consummation of the Conversion. Certificates for shares of the Fund issued prior
to the Conversion will represent outstanding shares of the Successor Fund after
the Conversion. Shareholders of the Fund who have not been issued certificates
and whose shares are held in an open account will automatically have those
shares designated as shares of the Successor Fund.
If approved by shareholders of Mentor Municipal, it is currently
contemplated that the Conversion will become effective on or about the close of
business on October 15, 1999. However, the Conversion may become effective at
another time and date should the Meeting be adjourned to a later date or should
any other condition to the Conversion not be satisfied at that time.
Notwithstanding prior shareholder approval, the Conversion Plan may be
terminated at any time prior to its implementation by the mutual agreement of
the parties thereto.
Evergreen Trust
Evergreen Trust was established pursuant to an Agreement and
Declaration of Trust ("Declaration of Trust") under the laws of the State of
Delaware. Evergreen Trust is organized as a "series company" as that term is
used in Rule 18f-2 under the Investment Company Act of 1940, as amended (the
"1940 Act"). Evergreen Trust consists of the Successor Fund and other mutual
funds of the same asset class.
The Board of Trustees of Evergreen Trust is currently comprised of
individuals who do not currently serve as trustees of Mentor Funds. Accordingly,
different Trustees will have ultimate responsibility for the oversight and
management of the Successor
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Fund subsequent to the Conversion. It is anticipated that subsequent to the
Conversion, two current Trustees of Mentor Funds, Arnold H. Dreyfuss and Louis
W. Moelchert, Jr., will be nominated and elected as Trustees of Evergreen Trust.
Information with respect to the current Trustees of Evergreen Trust, including
compensation received, is set forth in Exhibit B.
Evergreen Trust is authorized to issue shares divisible into an
indefinite number of different series. The interests of investors in the various
series of Evergreen Trust will be separate and distinct. All consideration
received for the sales of shares of a particular series of Evergreen Trust, all
assets in which such consideration is invested, and all income, earnings and
profits derived from such investments, will be allocated to that series. The
Declaration of Trust of Evergreen Trust provides that the Board of Trustees may:
(i) establish one or more additional series thereof; (ii) issue the shares of
any series in any number of classes; (iii) issue shares of a series to different
groups of investors; and (iv) convert a series into a pooled fund structure,
without any further action by the shareholders of Evergreen Trust.
The Declaration of Trust of Evergreen Trust provides for shareholder
voting only for the following matters: (a) the election or removal of Trustees
as provided in the Declaration of Trust; and (b) with respect to such additional
matters relating to Evergreen Trust as may be required by (i) applicable law,
(ii) any by-laws adopted by the Trustees, or (iii) as the Trustees may consider
necessary or desirable. Certain of the foregoing matters will involve separate
votes of one or more of the affected series (or affected classes of a series) of
Evergreen Trust, while others will require a vote of Evergreen Trust's
shareholders as a whole.
All shares of all series vote together as a single class for the
election or removal of Trustees of Evergreen Trust with each having one vote for
each dollar of net asset value applicable to each share, regardless of series.
See "Certain Comparative Information About the Mentor Funds and Evergreen Trust
- - Voting
Rights" below.
As required by the 1940 Act, shareholders of each series of Evergreen
Trust, voting separately, will have the power to vote at special meetings for,
among other things, changes in fundamental investment restrictions applicable to
such series, approval of any new or amended investment advisory agreement,
approval of any new or amended Rule 12b-1 plan and certain other matters that
affect the shareholders of that series. If, at any time, less than a majority of
the Trustees holding office has been elected by the shareholders, the Trustees
then in office will call a shareholders' meeting for the purpose of electing
Trustees of Evergreen Trust.
Certain Comparative Information About Mentor Funds and Evergreen
Trust
As a Delaware business trust, Evergreen Trust's operations will be
governed by its Declaration of Trust and applicable
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Delaware law, rather than by the Massachusetts Declaration of Trust of Mentor
Funds. As discussed below, certain of the differences between Mentor Funds and
Evergreen Trust derive from provisions of Evergreen Trust's Declaration of Trust
and By-laws. Shareholders entitled to vote at the Meeting may obtain a copy of
Evergreen Trust's Declaration of Trust and By-laws, without charge, upon written
request to Evergreen Trust at the address on the cover page of this
Prospectus/Proxy Statement.
Capitalization. The beneficial interests in Evergreen Trust are issued
as transferable shares of beneficial interest, $.001 par value per share. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
and to divide such shares into an unlimited number of series or classes thereof,
all without shareholder approval. Each share of a series of Evergreen Trust
represents an equal proportionate interest in the assets and liabilities
belonging to that series (or class) as declared by the Board of Trustees. Mentor
Funds is authorized to divide its shares into an unlimited number of series, and
the Trustees are empowered to establish other classes. Mentor Funds has the
authority to issue an unlimited number of transferable shares of beneficial
interest.
Amendments to Governing Instrument. Generally, the provisions of the
Declaration of Trust of Evergreen Trust may be amended without shareholder
approval so long as such amendment is not in contravention of applicable law, by
an instrument in writing signed by a majority of the then Trustees of Evergreen
Trust (or by an officer of Evergreen Trust pursuant to the vote of a majority of
such Trustees). Under the Declaration of Trust of Evergreen Trust, except as
provided by applicable law, a quorum is 25% of the shares entitled to vote. The
quorum requirement of Mentor Funds is 50% of the total number of outstanding
shares of all series and classes entitled to vote. The affirmative vote of a
majority of the shares of all series and classes then outstanding and entitled
to vote is generally required to amend the Declaration of Trust of Mentor Funds
(unless any larger vote may be required by applicable governing documents or
other law), except that the Declaration of Trust may be amended by the Trustees
of Mentor Funds without the vote of shareholders in certain limited
circumstances.
Voting Rights. Mentor Funds' Declaration of Trust and Evergreen Trust's
Declaration of Trust provide that a Trustee may be removed at any special
meeting of shareholders by a vote of two-thirds of the outstanding shares. The
Declaration of Trust further provides that special meetings of shareholders
shall be called by the Trustees upon the written request of shareholders
representing 10% of the outstanding shares of all series and classes entitled to
vote. If the Secretary fails to call the meeting or give notice for more than
two days following the shareholders' written request, then the shareholders
representing 10% of the outstanding shares may, in the name of the Secretary,
call such meeting by giving notice thereof. The By-laws of Evergreen Trust
provide that, to the extent required by the 1940
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Act, meetings of the shareholders for the purpose of voting on the removal of
any Trustee shall be called promptly by the Trustees upon the written request of
shareholders holding at least 10% of the outstanding shares of Evergreen Trust
entitled to vote. Like Mentor Funds, Evergreen Trust will not be required to
hold annual meetings of its shareholders and, at this time, does not intend to
do so. Under Mentor Funds' Declaration of Trust, the record date may not be more
than 60 days preceding the scheduled meeting date. Under the By-laws of
Evergreen Trust, the record date may not be more than 90 days nor less than 10
days preceding the scheduled meeting date.
The Declaration of Trust of Evergreen Trust provides for shareholder
voting in certain circumstances. See "Evergreen Trust" above. Shareholders of
Mentor Funds have the power to vote with respect to the election of Trustees,
the removal of Trustees, the approval or termination of any investment advisory
or management agreement, certain amendments to the Declaration of Trust, to the
same extent as the shareholders of a Massachusetts business corporation as to
whether or not a court action, proceeding or claim should be brought or
maintained derivatively or as a class action on behalf of Mentor Funds, and with
respect to certain other actions, such as a transfer of all or substantially all
of Mentor Funds' assets or the dissolution of Mentor Funds.
The Declaration of Trust of Evergreen Trust provides that a majority of
the shares voted at a meeting at which a quorum is present shall decide any
questions and that a plurality shall elect a Trustee, except when a different
vote is required or permitted by any provision of the 1940 Act or other
applicable law or by the Declaration of Trust or the By-laws of Evergreen Trust.
Similar requirements apply to Mentor Funds. Shareholders of Evergreen Trust are
not required to approve the termination of Evergreen Trust. The Declaration of
Trust of Mentor Funds provides that shareholders of the Trust are required to
approve the Trust's termination.
Under the Declaration of Trust of Evergreen Trust, each share of the
Successor Fund is entitled to one vote for each dollar of net asset value
applicable to such share. Under the current Declaration of Trust of Mentor
Funds, each whole share of beneficial interest is entitled to one vote, and each
fractional share is entitled to a proportionate fractional vote. Under Mentor
Funds' Declaration of Trust or applicable law, except with respect to matters as
to which a particular series or class is affected, all shares of each series or
class will vote as a single class. Generally, the Declaration of Trust further
provides that, where required by law or applicable regulation, certain matters
will be voted on separately by each fund. In all other matters, all funds vote
together as a group. Over time, the net asset values of funds in the Mentor
Funds have changed in relation to one another and are expected to continue to do
so in the future. Because of the divergence in net asset values, a given dollar
investment in a fund with a lower net asset value
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will purchase more shares, and under Mentor Funds' current voting provisions,
have more votes, than the same investment in a fund with a higher net asset
value. Under the Declaration of Trust of Evergreen Trust, voting power is
related to the dollar value of the shareholders' investments rather than to the
number of shares held.
Shareholder Liability. Under Delaware law, shareholders of a Delaware
business trust are entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. No similar statutory or other
authority limiting business trust shareholder liability exists under
Massachusetts law or under the laws of any other state. As a result, to the
extent that Evergreen Trust or a shareholder is subject to the jurisdiction of
courts in those states, the courts may not apply Delaware law, and may thereby
subject shareholders of a Delaware trust to liability. To guard against this
risk, the Declaration of Trust: (a) provides that any written obligation of
Evergreen Trust may contain a statement that such obligation may only be
enforced against the assets of Evergreen Trust; however, the omission of such a
disclaimer will not operate to create personal liability for any shareholder;
and (b) provides for indemnification out of trust property of any shareholder
held personally liable for the obligations of Evergreen Trust. Accordingly, the
risk of a shareholder of Evergreen Trust incurring financial loss beyond that
shareholder's investment because of shareholder liability is limited to
circumstances in which: (i) a court refuses to apply Delaware law; (ii) no
contractual limitation of liability was in effect; and (iii) Evergreen Trust
itself would be unable to meet its obligations. In view of Delaware law, the
nature of Evergreen Trust's business, and the nature of its assets, the risk of
personal liability to a shareholder of Evergreen Trust is remote.
Shareholders of Mentor Funds as shareholders of a Massachusetts
business trust may, under certain circumstances, be held personally liable under
the applicable state law for the obligations of Mentor Funds. However, the
Declaration of Trust under which Mentor Funds is currently established contains
an express disclaimer of shareholder liability and requires that notice of such
disclaimer be given in each agreement entered into or executed by Mentor Funds
or the Trustees of Mentor Funds. The Declaration of Trust also provides for
indemnification out of the assets of Mentor Municipal.
Liability and Indemnification of Trustees. Under the Declaration of
Trust of Evergreen Trust, a Trustee is liable to the Trust and its shareholders
only for such Trustee's own willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of the office of
Trustee or the discharge of the duties of a Trustee. Trustees and officers of
Evergreen Trust are entitled to be indemnified for the expenses of litigation
against them except with respect to any matter as to which it has been
determined that such person (i) did not act in good faith in the reasonable
belief that his
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or her action was in or not opposed to the best interests of Evergreen Trust; or
(ii) had acted with willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties; and (iii) for a criminal proceeding, had
reasonable cause to believe that his or her conduct was unlawful, such
determination to be based upon the outcome of a court action or administrative
proceeding or a reasonable determination, following a review of the facts, by
(a) a vote of a majority of those Trustees who are neither "interested persons"
within the meaning of the 1940 Act nor parties to the proceeding, or (b) an
independent legal counsel in a written opinion. Evergreen Trust may also advance
money to any Trustee or officer involved in a proceeding discussed above
provided that the Trustee or officer undertakes to repay Evergreen Trust if his
or her conduct is later determined to preclude indemnification and certain other
conditions are met. It is currently the view of the staff of the Securities and
Exchange Commission ("SEC") that to the extent that any provisions such as those
described above are inconsistent with the 1940 Act, the provisions of the 1940
Act may preempt the foregoing provisions.
The Declaration of Trust of Mentor Funds generally provides that its
Trustees shall not be liable to Mentor Funds or its shareholders, except for the
Trustees' acts of willful misfeasance, bad faith, gross negligence, or reckless
disregard of duties involved in the conduct of their office. The Declaration of
Trust generally also provides that Trustees and officers of Mentor Funds will be
indemnified against liability and expenses of litigation against them unless
their conduct constituted willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of their office.
Right of Inspection. The By-laws of Evergreen Trust provide that no
shareholder of Evergreen Trust shall have any right to inspect any account or
book or document of Evergreen Trust except as conferred by law or otherwise by
the Trustees or by resolution of the shareholders. The Declaration of Trust and
By-Laws of Mentor Funds are silent with respect to the right of inspection.
The foregoing is only a summary of certain of the differences between
the governing instruments and laws generally applicable to Mentor Funds and
Evergreen Trust. It is not a complete list of differences. Shareholders should
refer directly to the provisions of the governing instruments and applicable law
for more complete information.
Current and Successor Advisory Agreements
As a result of the Conversion, the Successor Fund will be subject to a
new investment advisory agreement (the "Successor Advisory Agreement") between
Evergreen Trust on behalf of the Successor Fund and Mentor Investment Advisors,
LLC ("Mentor"), the current investment adviser of Mentor Municipal. The current
investment advisory agreement of Mentor Municipal (the "Current
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Advisory Agreement") is similar in many respects to the Successor Advisory
Agreement. Except as noted below, the Successor Advisory Agreement contains the
material terms of the Current Advisory Agreement. The investment contract of Van
Kampen Management, Inc. as sub-adviser has been terminated and Mentor provides
investment services for Mentor Municipal. Investment services for the Successor
Fund will be performed by Mentor. Most importantly, the rate at which fees are
required to be paid by Mentor Municipal for investment advisory services, as a
percentage of average daily net assets, will remain the same for the Successor
Fund.
The following summarizes certain aspects of the Current Advisory
Agreement and the Successor Advisory Agreement for each Fund.
Brokerage Transactions. The Successor Advisory Agreement sets forth
specific terms as to brokerage transactions and the investment adviser's use of
broker-dealers. For example, the investment adviser will be obligated to use its
best efforts to seek to execute portfolio transactions at prices which, under
the circumstances, result in total costs or proceeds being most favorable to the
Successor Fund. In assessing the best overall terms available for any
transaction, the investment adviser will consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer,
research services provided and the reasonableness of the commission, if any,
both for the specific transaction and on a continuing basis. The Successor
Advisory Agreement also incorporates the provisions of Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), which permits an
investment adviser to have its client, including an investment company, pay more
than the lowest available commission for executing a securities trade in return
for research services and products. The Current Advisory Agreement of Mentor
Municipal permits the investment adviser to authorize sub-advisers to execute
portfolio transactions and select brokers pursuant to the provisions of Section
28(e) of the 1934 Act.
Liability. Both the Successor Advisory Agreement and the Current
Advisory Agreement provide that the investment adviser shall have no liability
in connection with rendering services thereunder, other than liabilities
resulting from the adviser's willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties.
Amendments. The Current Advisory Agreement of Mentor Municipal provides
that all changes (rather than only substantial changes) must be approved by a
majority of the shares of the Fund. The Successor Advisory Agreement provides
that only amendments of substance require shareholder approval.
Administration Agreements
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Mentor Investment Group, LLC ("MIG") served as administrator for Mentor
Municipal until June, 1999.
Evergreen Investment Services, Inc. ("EIS"), located at 200 Berkeley
Street, Boston, Massachusetts 02116, currently serves as administrator to Mentor
Municipal for the same fees (0.10% of the Fund's average daily net assets)
previously charged by MIG. After the Conversion, EIS will serve as administrator
to the Successor Fund. It is anticipated that no material change will occur in
Mentor Municipal's administrative arrangements as a result of the Conversion.
Current and Successor Distribution Arrangements
Mentor Distributors, LLC, located at 3435 Stelzer Road, Columbus, Ohio
43219, is the principal distributor for Mentor Funds. Mentor Distributors, LLC
is a wholly-owned subsidiary of BISYS Fund Services, Inc. ("BISYS") of the same
address.
After the Conversion, Evergreen Distributor, Inc., an affiliate of
BISYS located at 125 West 55th Street, New York, New York 10019, will serve as
principal underwriter for the Successor Fund. Except as described in Part III -
"Distribution of Shares" regarding the increased distribution-related and
shareholder servicing-related fees payable by the Class C shares of the
Successor Fund as opposed to the fees paid by the Class B shares of Mentor
Municipal, it is anticipated that no material change will occur in Mentor Funds'
distribution agreement or Mentor Municipal's aggregate amount payable under the
Fund's distribution-related and shareholder servicing-related expenses as a
result of the Conversion.
Names
At the time of its Conversion into the Successor Fund, the name of
Mentor Municipal will change by deletion of "Mentor" and "Portfolio" and their
replacement respectively with "Evergreen" and "Fund" in its name.
Certain Votes to be Taken Prior to the Conversion
Prior to the Conversion, Evergreen Distributor, Inc. will own a single
outstanding share of the Successor Fund. The purpose of the issuance by the
Successor Fund of this nominal share prior to the effective time of the
Conversion is to enable Evergreen Trust to eliminate the need to incur the
additional expense by Evergreen Trust of having to hold a separate meeting of
shareholders of the Successor Fund in order to comply with certain shareholder
approval requirements of the 1940 Act.
Investment Objectives and Restrictions
The Successor Fund will have the same investment objective as Mentor
Municipal except that, if Proposal 2 in this Prospectus/Proxy Statement is
approved by shareholders, the
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Successor Fund's investment objective will not be considered "fundamental". As a
result, the Successor Fund's investment objective could be changed by its
Trustees, without shareholder approval, after prior notice to shareholders. The
investment restrictions of Mentor Municipal are proposed to be changed as
described in Part II below.
Except as described in Part II below, the investment adviser does not
presently intend to change in any material way for the Successor Fund the
investment strategy or operations currently employed for Mentor Municipal.
Federal Income Tax Consequences
It is anticipated that the transactions contemplated by the Conversion
will be tax-free. Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W.,
Washington, D.C. 20036, counsel to the Successor Fund, has informed the Board
of Trustees of Mentor Funds and the Board of Trustees of Evergreen Trust that if
substantially all of the assets and liabilities of Mentor Municipal are
transferred to the Successor Fund, it will issue an opinion that the Conversion
will not give rise to the recognition of income, gain or loss to Mentor
Municipal, the Successor Fund, or shareholders of Mentor Municipal for federal
income tax purposes pursuant to sections 361, 1032(a) and 354(a)(1),
respectively, of the Internal Revenue Code of 1986, as amended (the "Code").
Such opinion will be based upon customary representations of Mentor Funds and
Evergreen Trust and certain customary assumptions. The receipt of such an
opinion is a condition to the consummation of the Conversion.
A shareholder's adjusted basis for tax purposes in shares of the
Successor Fund after the Conversion will be the same as the shareholder's
adjusted basis for tax purposes in the shares of Mentor Municipal immediately
before the Conversion. The holding period for the shares of the Successor Fund
received in the Conversion will include a shareholder's holding period for
shares of Mentor Municipal (provided that the shares of Mentor Municipal were
held as capital assets on the date of the Conversion). Shareholders should
consult their own tax advisers with respect to the state and local tax
consequences of the proposed transaction.
Appraisal Rights
Neither Mentor Funds' Declaration of Trust nor Massachusetts law grants
shareholders of Mentor Funds any rights in the nature of appraisal or
dissenters' rights with respect to any action upon which such shareholders may
be entitled to vote. However, the right of mutual fund shareholders to redeem
their shares is not affected by the proposed Conversion.
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Recommendation of Trustees
In evaluating the Conversion Plan, the Board of Trustees reviewed the
potential benefits associated with the proposed Conversion and adoption of the
Declaration of Trust of Evergreen Trust. In this regard, the Trustees of Mentor
Funds considered: (i) the potential disadvantages which apply to operating
Mentor Municipal under its current form of organization; (ii) the advantages
which apply to operating the Successor Fund as series of a Delaware business
trust; (iii) the advantages of adopting Evergreen Trust's Declaration of Trust
under Delaware law; (iv) the possible economies of scale that could result in
cost savings as a result of the smaller Mentor fund family becoming part of the
larger Evergreen family of funds; (v) the fact that there will essentially be no
change in the investment advisory function; and (vi) the expected federal tax
consequences to Mentor Municipal, the Successor Fund and shareholders of Mentor
Municipal resulting from the proposed Conversion, and the likelihood that no
recognition of income, gain or loss for federal income tax purposes will occur
as a result thereof.
At the meeting of the Board called for the purpose on July 13, 1999,
the Board of Trustees of Mentor Funds voted to approve the proposed Plan of
Conversion for Mentor Municipal and determined that participation in the
Conversion is in the best interests of the Fund and that the interests of
existing shareholders will not be diluted as a result of the Conversion.
THE TRUSTEES OF MENTOR FUNDS RECOMMEND THAT THE SHAREHOLDERS OF MENTOR
MUNICIPAL APPROVE PROPOSAL 1.
PART II
PROPOSAL 2 - RECLASSIFICATION OF MENTOR MUNICIPAL'S INVESTMENT
OBJECTIVE FROM FUNDAMENTAL TO NONFUNDAMENTAL
Reclassification of Fundamental Investment Objective as
Nonfundamental
Under the 1940 Act, the Fund's investment objective is not required to
be classified as "fundamental." A fundamental investment objective may be
changed only by vote of the Fund's shareholders. In order to provide the Fund's
investment adviser with enhanced investment management flexibility to respond to
market, industry or regulatory changes, the Trustees of the Mentor Funds have
approved the reclassification of the Fund's investment objective from
fundamental to nonfundamental. A nonfundamental investment objective may be
changed at any time by the Trustees without approval by the Fund's shareholders.
For a complete description of the investment objective of the Fund,
please see Part III of the Prospectus/Proxy Statement under the caption
"Comparison of Investment Objectives and
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Policies." The reclassification from fundamental to nonfundamental will not
alter the Fund's investment objective. If at any time in the future, the
Trustees approve a material change in the Fund's nonfundamental investment
objective, shareholders of the Successor Fund will be given notice of such
change prior to its implementation; however, if such a change were to occur,
shareholders would not be asked to approve such change.
If the reclassification of the Fund's investment objective from
fundamental to nonfundamental is not approved by shareholders of the Fund, the
Fund's investment objective will remain fundamental and shareholder approval
(and its attendant costs and delays) will continue to be required prior to any
change in investment objective.
Recommendation of Trustees
The Trustees of Mentor Funds have considered the enhanced management
flexibility to respond to market, industry or regulatory changes that would
accrue to the Fund if the Fund's fundamental investment objective was
reclassified as nonfundamental.
At the meeting of the Trustees called for the purpose on July 13, 1999,
the Trustees of Mentor Funds voted to approve the reclassification of the
investment objective of the Fund from fundamental to nonfundamental.
THE TRUSTEES OF MENTOR FUNDS RECOMMEND THAT THE SHAREHOLDERS OF MENTOR MUNICIPAL
APPROVE PROPOSAL 2.
PROPOSAL 3 - CHANGES TO FUNDAMENTAL
INVESTMENT RESTRICTIONS
Adoption of Standardized Investment Restrictions (Proposals 3A-3H)
The primary purpose of Proposals 3A through 3H below is to revise and
standardize the Fund's fundamental investment restrictions (the "Restrictions").
The Trustees have concurred with the efforts of the investment advisers to the
various funds comprising the Mentor mutual fund family to analyze the
fundamental and nonfundamental investment restrictions of the various funds
offered by the Mentor and Evergreen families of mutual funds and, where
practicable and appropriate to a fund's investment objective and policies as in
the case of Mentor Municipal, propose to shareholders adoption of standardized
Restrictions.
It is not anticipated that any of the changes will substantially affect
the way Mentor Municipal is currently managed. These proposals are being
presented to shareholders for
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approval because it is believed that increased standardization will help to
promote operational efficiencies and facilitate monitoring of compliance with
the Restrictions. Because the proposed standardized fundamental Restrictions in
general are phrased relatively more broadly than the Fund's current fundamental
Restrictions, the investment adviser is expected to be able to respond more
expeditiously to market, industry or regulatory developments. Set forth below,
as sub-sections of this Proposal, are general descriptions of each of the
proposed changes. You will be given the option to approve all, some, or none of
the proposed changes on the proxy card enclosed with this proxy statement.
A listing of the current fundamental Restrictions of the Fund is set
forth in Exhibit C. Those fundamental Restrictions that you are being requested
to vote to standardize are shown in Exhibit C by an "S", which stands for "To be
Standardized." If a particular change is not approved by shareholders, the
current fundamental Restriction will remain in place.
If approved by shareholders, the revised fundamental Restrictions
described in Proposals 3A through 3H will remain fundamental and, as such,
cannot be changed without a further shareholder vote. If a proposed standardized
fundamental Restriction is not approved by shareholders, the current Restriction
will remain fundamental and shareholder approval (and its attendant costs and
delays) will continue to be required prior to any change in the Restriction.
Reclassification of Fundamental Restrictions as Nonfundamental
(Proposal 3I)
The reclassification from fundamental to nonfundamental of certain of
the Fund's other current fundamental Restrictions will enhance the ability of
the Fund to achieve its investment objective because its investment adviser will
have greater investment management flexibility to respond to changed market,
industry or regulatory conditions without the delay and expense of the
solicitation of shareholder approval.
Recommendation of Trustees
The Trustees of Mentor Funds have reviewed the potential benefits
associated with the proposed standardization of the Fund's fundamental
Restrictions (Proposals 3A through 3H below) as well as the potential benefits
associated with the reclassification of certain of the Fund's other fundamental
Restrictions to nonfundamental (Proposal 3I).
At the meeting of the Trustees called for the purpose on July 13, 1999,
the Trustees of Mentor Funds voted to approve the proposed standardization of
the Fund's fundamental Restrictions (Proposals 3A through 3H below) and the
reclassification from fundamental to nonfundamental of certain of the Fund's
other fundamental Restrictions (Proposal 3I below).
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<PAGE>
THE TRUSTEES OF MENTOR FUNDS RECOMMEND THAT THE SHAREHOLDERS OF MENTOR MUNICIPAL
APPROVE PROPOSAL 3.
Proposal 3A: To Amend The Fundamental Restriction Concerning
Diversification of Investments
The current fundamental Restriction of the Fund concerning
diversification of investments provides generally that the Fund will not
purchase the securities of an issuer if the purchase would cause more than 5% of
the Fund's total assets taken at current value to be invested in the securities
of such issuer, except cash or U.S. government securities and repurchase
agreements collateralized by such securities, or if the purchase would cause
more than 10% of the outstanding voting securities of any one issuer to be held
in the Fund's portfolio. The Fund applies the 5% of assets test to 75% of its
total assets and the 10% of outstanding voting securities test to 100% of its
total assets. It is proposed that shareholders approve new language
standardizing this Restriction including the percentage of total assets to which
the Restriction is applied.
The Fund has elected to be a "diversified" open-end management
investment company under the 1940 Act, which requires the 5% of assets and 10%
of outstanding voting securities tests described above to apply to 75% of the
total assets of the Fund. As mentioned above, the current policy of the Fund is
for the 10% voting securities of an issuer test to be applied to 100% of the
Fund's assets, rather than to 75% of its assets. The primary purpose of the
proposed change with respect to the Fund is to allow the Fund to invest in
accordance with the less restrictive limits contained in the 1940 Act for
diversified investment companies. The proposed change would allow the Fund the
flexibility to purchase larger amounts of issuers' securities when its
investment adviser deems an opportunity attractive. The new policy would allow
the investment policies of the Fund to conform with the definition of
"diversified" as it appears in the 1940 Act.
The amendment of the fundamental Restriction will allow the Fund to
respond more quickly to changes of the 1940 Act standard, as well as to other
legal, regulatory, and market developments without the delay or expense of a
shareholder vote. The amendment of the fundamental Restriction would also
standardize the Restrictions across the Evergreen and Mentor families of funds.
Adoption of this change is not expected to materially affect the operation of
the Fund.
The Fund is not changing its current classification as a diversified
fund. As proposed, the Fund's fundamental Restriction regarding diversification
will be replaced with the following fundamental Restriction:
"The Fund may not make any investment
inconsistent with the Fund's
classification as a diversified
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investment company under the
Investment Company Act of 1940."
Proposal 3B: To Amend the Fundamental Restriction Concerning
Concentration of the Fund's Assets in a Particular
Industry.
The Fund currently has a fundamental Restriction concerning the
concentration of investments in a particular industry. The Restriction states
that the Fund will not invest 25% or more of the value of its total assets in
any one industry (other than securities issued by the U.S. government, its
agencies or instrumentalities). The current Restriction also states that, as
described in the Prospectus, the Fund may from time to time invest more than 25%
of its assets in a particular segment of the municipal bond market but will not
invest more than 25% of its assets in industrial development bonds in a single
industry except as described in the Prospectus.
The Prospectus of Mentor Municipal indicates that although governmental
issuers of municipal securities are not considered part of any "industry",
municipal securities backed only by the assets and revenues of nongovernmental
users may be deemed to be issued by such users and subject to the 25%
limitation. The Fund may currently invest more than 25% of its assets in a
broader segment of the municipal securities market, such as revenue obligations
of hospitals and health care facilities, housing agency revenue obligations or
airport revenue obligations; such obligations could be supported by the credit
of governmental users or that of nongovernmental users engaged in a number of
industries. The Fund reserves the right to invest more than 25% of its assets in
industrial development or private activity bonds or in issuers located in any
individual state, although the Fund's sub-adviser does not presently intend to
invest more than 25% of the Fund's assets in issuers located in the same state.
The staff of the SEC takes the position that a mutual fund
"concentrates" its investments in a particular industry if more than 25% of the
mutual fund's assets exclusive of cash and U.S. government securities are
invested in the securities of issuers in such industry. The Restriction embodies
the SEC staff interpretation by indicating that the Fund will not concentrate
its investments in a particular industry by investing more than 25% of its total
assets, exclusive of U.S. government obligations, in any one industry; however,
the Restriction also contains the additional language regarding concentration
described above.
Shareholders of the Fund are being asked to approve an amendment of the
foregoing fundamental Restriction. As proposed, the Fund's current fundamental
Restriction regarding concentration of the Fund's assets in a particular
industry will be replaced by the following fundamental Restriction:
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"The Fund may not concentrate its
investments in the securities of
issuers primarily engaged in any
particular industry (other than
securities issued or guaranteed by
the U.S. government or its agencies
or instrumentalities)."
The primary purpose of the proposed amendment is to adopt insofar as
possible a standardized Restriction regarding concentration for Mentor Municipal
and those funds in the Evergreen and Mentor families of mutual funds that do not
concentrate their investments. If in the future the SEC staff changed its
interpretation on concentration in an industry, the Fund would comply and avoid
the expense of a shareholder vote. Adoption of this change is not expected to
materially affect the operation of the Fund.
Proposal 3C: To Amend The Fundamental Restriction Concerning
the Issuance of Senior Securities
The Fund's current fundamental Restriction regarding the issuance of
senior securities states that the Fund will not issue senior securities, except
that the Fund may borrow money to the extent contemplated by the restriction on
borrowing which is discussed below and except to the extent that the Fund may
enter into futures contracts.
It is proposed that shareholders approve replacing the Fund's current
fundamental Restriction concerning the issuance of senior securities with the
following fundamental Restriction governing the issuance of senior securities:
"Except as permitted under the
Investment Company Act of 1940, the
Fund may not issue senior
securities."
The primary purpose of this proposed change is to standardize the
Fund's fundamental Restriction regarding senior securities.
The proposed fundamental Restriction clarifies that the Fund may issue
senior securities to the full extent permitted under the 1940 Act. Although the
definition of a "senior security" involves complex statutory and regulatory
concepts, a senior security is generally an obligation of the Fund which has a
claim to the Fund's assets or earnings that takes precedence over the claims of
the Fund's shareholders. The 1940 Act generally prohibits open-end investment
companies (i.e. mutual funds) from issuing any senior securities; however, under
current SEC staff interpretations, mutual funds are permitted to engage in
certain types of transactions that might be considered "senior securities" as
long as certain conditions are satisfied. For example, a transaction that
obligates a Fund to pay money at a
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future date (e.g., the purchase of securities to be settled on a date that is
farther away than the normal settlement period) may be considered a "senior
security." A mutual fund is permitted to enter into this type of transaction if
it maintains a segregated account containing liquid securities in an amount
equal to its obligation to pay cash for the securities at a future date. The
Fund would engage in transactions that could be considered to involve "senior
securities" only in accordance with applicable regulatory requirements under the
1940 Act.
Adoption of the proposed fundamental Restriction concerning senior
securities is not expected to materially affect the operation of the Fund.
However, adoption of a standardized fundamental Restriction will facilitate the
Fund's investment adviser's investment compliance efforts and will allow the
Fund to respond to legal, regulatory and market developments which may make the
use of permissible senior securities advantageous to the Fund and its
shareholders.
Proposal 3D: To Amend The Fundamental Restriction Concerning
Borrowing
The Fund's current fundamental Restriction concerning borrowing states
that the Fund may borrow money from banks for temporary purposes in amounts of
up to 5% of its total assets, that the Fund will not purchase any securities
while borrowings in excess of 5% of its total assets are outstanding, and that
the Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage. In addition, the Prospectus of Mentor Municipal states that
the Fund may enter into reverse repurchase agreements with respect to up to 5%
of its assets. When reviewing the Fund's policies on borrowings as set forth in
Exhibit C, you should also review the Fund's policy on the issuance of senior
securities since the topics are interrelated.
In general, under the 1940 Act, the Fund may not borrow money, except
that (i) the Fund may borrow from banks (as defined in the 1940 Act) or enter
into reverse repurchase agreements, in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may borrow up to an additional 5%
of its total assets for temporary purposes, and (iii) the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities.
It is proposed that shareholders approve replacing the Fund's current
fundamental Restriction regarding borrowing with the following fundamental
Restriction:
"The Fund may not borrow money,
except to the extent permitted by
applicable law."
If the proposal is approved, the Fund will disclose that it
will not engage in leveraging. The primary purpose of the
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proposed change to the fundamental Restriction concerning borrowing is
to standardize the Restriction.
The Fund's current Restriction restricts borrowing to a lower
percentage of total assets than the 33 1/3% permitted under the 1940 Act. The
proposed Restriction also would allow the Fund to purchase a security while
borrowings representing more than 5% of total assets are outstanding, in order
to exercise prior commitments and to exercise subscription rights (as defined in
the 1940 Act) or enter into reverse repurchase agreements, in amounts up to 33
1/3% of the Fund's total assets (including the amount borrowed). While the Fund
has no current intention to use leverage, the flexibility to do so may be
beneficial to the Fund at a future date.
Proposal 3E: To Amend The Fundamental Restriction Concerning
Underwriting
The Fund is currently subject to a fundamental Restriction concerning
underwriting. The Restriction provides that the Fund will not underwrite any
issue of securities except as it may be deemed to be an underwriter under the
Securities Act of 1933 in connection with the sale of securities in accordance
with its investment objective, policies and limitations. It is proposed that
shareholders approve replacing the current fundamental Restriction with the
following fundamental Restriction concerning underwriting:
"The Fund may not underwrite securities of other issuers,
except insofar as the Fund may technically be deemed an
underwriter in connection with the disposition of its
portfolio securities."
The primary purpose of the proposed change is to standardize the
language of the Fund's fundamental Restriction regarding underwriting. While the
proposed change will have no current impact on the Fund, adoption of the
proposed standardized fundamental Restriction will advance the goals of
standardization.
Proposal 3F: To Amend The Fundamental Restriction Concerning
Investment in Real Estate
The Fund currently has a fundamental Restriction concerning the
purchase of real estate. The Restriction states that the Fund will not purchase
or sell real estate, including limited partnership interests, except to the
extent the securities the Fund may invest in are considered to be interests in
real estate or to the extent the Fund exercises its rights under agreements
relating to such municipal securities (in which case the Fund may liquidate real
estate acquired as a result of a default on a mortgage). The Fund may, however,
invest in securities which are secured by real estate or interests in real
estate, and
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<PAGE>
securities of issuers whose business involves the purchase or sale of real
estate.
Shareholders are being asked to approve an amended Restriction similar
to that described above. As proposed, the Fund's current fundamental Restriction
will be replaced by the following fundamental Restriction:
"The Fund may not purchase or sell real estate, except that,
to the extent permitted by applicable law, the Fund may invest
in (a) securities directly or indirectly secured by real
estate, or (b) securities issued by issuers that invest in
real estate."
The primary purpose of the proposed amendment is to standardize the
Fund's fundamental Restriction concerning real estate.
To the extent that the Fund buys securities and instruments of
companies in the real estate business, the Fund's performance will be affected
by the condition of the real estate market. This industry is sensitive to
factors such as changes in real estate values and property taxes, overbuilding,
variations in rental income, and interest rates. Performance could also be
affected by the structure, cash flow, and management skill of real estate
companies.
While the proposed change will have no current impact on the Fund,
adoption of the proposed standardized fundamental Restriction will advance the
goals of standardization.
Proposal 3G: To Amend The Fundamental Investment Restriction
Concerning Commodities
The Fund is currently subject to a fundamental Restriction that
provides that the Fund will not invest in commodities except that the Fund may
engage in transactions involving futures contracts or options on futures
contracts and except to the extent the securities the Fund invests in are
considered interests in commodities or commodities contracts or to the extent
the Fund exercises its rights under agreements relating to such municipal
securities.
It is proposed that shareholders approve replacing the current
fundamental Restriction with the following fundamental Restriction concerning
commodities:
"The Fund may not purchase or sell commodities or contracts on
commodities except to the extent that the Fund may engage in
financial futures contracts and related options
-26-
<PAGE>
and currency contracts and related options and may otherwise
do so in accordance with applicable law without registering as
a commodity pool operator under the Commodity Exchange Act."
The Fund currently has the ability to invest in financial futures.
Under the proposed amendment, these types of futures may be used for hedging or
for investment purposes and involve certain risks.
While the proposed change will have no material impact on the operation
of the Fund, adoption of the proposed fundamental Restriction will advance the
goals of standardization.
Proposal 3H: To Amend The Fundamental Investment Restriction
Concerning Lending
The Fund's current fundamental Restriction concerning lending states
that the Fund will not lend its portfolio securities, or make loans except to
the extent the obligations the Fund may invest in are considered to be loans.
It is proposed that shareholders approve replacing the current
fundamental Restriction with the following amended fundamental Restriction
concerning lending:
"The Fund may not make loans to other persons, except that the
Fund may lend its portfolio securities in accordance with
applicable law. The acquisition of investment securities or
other investments shall not be deemed to be the making of a
loan."
The proposed Restriction would permit the Fund to lend its portfolio
securities. Gains or losses in the market value of a lent security will affect
the Fund and its shareholders. When the Fund lends its securities, it runs the
risk that it will not be able to retrieve the securities on a timely basis,
possibly losing the opportunity to sell the securities at a desirable price.
Also, if the borrower files for bankruptcy or becomes insolvent, the Fund's
ability to dispose of the securities may be delayed. Lending the Fund's
portfolio securities would include the ability to invest in direct debt
instruments such as loans and loan participation interests, which are interests
in amounts owed to another party by a company, government or other borrower.
These types of securities may have additional risks beyond conventional debt
securities because they may provide less legal protection for the Fund, or there
may be a requirement that the Fund supply additional cash to a borrower on
demand.
The adoption of the standardized fundamental Restriction will advance
the goals of standardization.
-27-
<PAGE>
Proposal 3I: Reclassification as Nonfundamental of All Current
Fundamental Restrictions Other than the
Fundamental Restrictions Described in the
Foregoing Proposals 3A through 3H.
Like all mutual funds, when the Fund was established the Trustees
adopted certain investment Restrictions that would govern the efforts of the
Fund's investment adviser in seeking the Fund's investment objective. Some of
these Restrictions were designated as "fundamental" and, as such, may not be
changed unless the change has first been approved by the Trustees and then by
the shareholders of the Fund. Many of the Fund's investment restrictions were
required to be classified as fundamental under the securities laws of various
states. Since October 1996, such state securities laws and regulations regarding
fundamental investment restrictions have been preempted by federal law and no
longer apply.
The Fund's fundamental Restrictions were established to reflect certain
regulatory, business or industry conditions as they existed at the time the Fund
was established. Many such conditions no longer exist. The 1940 Act requires
only that the Restrictions discussed in Proposals 3A through 3H above be
classified as fundamental. As a result, this Proposal 3I proposes to reclassify
as nonfundamental all current fundamental Restrictions of the Fund other than
the fundamental Restrictions discussed in the foregoing Proposals 3A through 3H.
Nonfundamental Restrictions may be changed or eliminated by the
Trustees at any time without approval of the Fund's shareholders. The current
fundamental Restrictions proposed to be reclassified as nonfundamental are shown
in Exhibit C by an "R", which stands for "To be Reclassified."
None of the proposed changes will materially alter the way in which the
Fund is currently managed. Indeed, the Trustees believe that approval of the
reclassification of fundamental Restrictions to nonfundamental Restrictions will
enhance the ability of the Fund to achieve its investment objective because the
Fund's investment adviser will have greater investment management flexibility to
respond to changed market, industry or regulatory conditions without the delay
and expense of the solicitation of shareholder approval.
PART III
PROPOSAL 4 - MERGER OF MENTOR MUNICIPAL
INTO EVERGREEN MUNICIPAL
This Prospectus/Proxy Statement is also being furnished to shareholders
of Mentor Municipal in connection with a proposed Agreement and Plan of
Reorganization (the "Reorganization Plan") to be submitted to shareholders of
Mentor Municipal for consideration at the Meeting. As discussed above in Part I
regarding the Conversion Plan, prior to the Reorganization,
-28-
<PAGE>
Mentor Municipal will be converted to a series of a Delaware business trust
(Evergreen Trust) to be known as Evergreen Municipal Income Fund. Subject to
shareholder approval, the Conversion will occur on or about October 15, 1999.
Because of programming freezes in place as a result of upcoming year 2000 and
other issues, the Reorganization cannot occur during the period between October
1, 1999 and March 1, 2000.
In order for shareholders of Mentor Municipal to have an understanding
about the main purpose of this Prospectus/Proxy Statement and the
Reorganization, the discussion in this Part III refers to Mentor Municipal and
not Evergreen Municipal Income.
The Reorganization Plan provides for all of the assets of Mentor
Municipal to be acquired by Evergreen Municipal in exchange for shares of
Evergreen Municipal and the assumption by Evergreen Municipal of the identified
liabilities of Mentor Municipal (hereinafter referred to as the
"Reorganization"). Following the Reorganization, shares of Evergreen Municipal
will be distributed to shareholders of Mentor Municipal in liquidation of Mentor
Municipal and such Fund will be terminated. Holders of Class A, Class B and
Class Y shares of Mentor Municipal will receive Class A, Class C and Class Y
shares, respectively, of Evergreen Municipal. The Class A and Class Y shares of
Evergreen Municipal have similar distribution-related fees and shareholder
servicing-related fees, if any, as the shares of Mentor Municipal held prior to
the Reorganization. The distribution-related and shareholder servicing-related
fees of Evergreen Municipal Class C shares are greater than fees attributable to
Mentor Municipal's Class B shares. See "Comparison of Fees and Expenses."
No sales charge will be imposed in connection with Class A shares of
Evergreen Municipal received by holders of Class A shares of Mentor Municipal.
In addition, no contingent deferred sales charge ("CDSC") will be deducted at
the time of the Reorganization in connection with the Class C shares of
Evergreen Municipal received by holders of Class B shares of Mentor Municipal.
Holders of Class C shares of Evergreen Municipal received in the Reorganization
will be subject to the schedule of CDSCs applicable to the Class B shares of
Mentor Municipal and not the schedule of CDSCs presently applicable to Class C
shares of Evergreen Municipal. As a result of the proposed Reorganization,
shareholders of Mentor Municipal will receive that number of full and fractional
shares of Evergreen Municipal having an aggregate net asset value equal to the
aggregate net asset value of such shareholder's shares of Mentor Municipal. The
Reorganization is being structured as a tax-free reorganization for federal
income tax purposes.
Evergreen Municipal is a separate series of Evergreen Trust. The
investment objective of Evergreen Municipal is to seek the highest possible
current income, exempt from federal income taxes other than the alternative
minimum tax ("AMT"), while preserving capital. The investment objective of
Mentor Municipal is similar -- to provide investors with a high level of current
income
-29-
<PAGE>
exempt from federal regular income tax, consistent with preservation of capital.
Evergreen Municipal ordinarily invests at least 80% of its assets in investment
grade municipal securities the interest from which is exempt from federal income
taxes other than the AMT. Mentor Municipal normally invests at least 80% of its
assets in investment grade tax-exempt municipal securities, and may invest a
substantial portion of its assets in municipal securities which pay interest
that is subject to the AMT.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen Municipal that
shareholders of Mentor Municipal should know when voting on the Reorganization.
Certain relevant documents listed below, which have been filed with the SEC, are
incorporated in whole or in part by reference into this Prospectus/Proxy
Statement. A Statement of Additional Information dated August 27, 1999 relating
to this Prospectus/Proxy Statement and the Reorganization which includes the
financial statements of Evergreen Municipal dated May 31, 1999 and of Mentor
Municipal dated September 30, 1998 and March 31, 1999, has been filed with the
SEC and is incorporated by reference in its entirety into this Prospectus/Proxy
Statement. A copy of such Statement of Additional Information is available upon
request and without charge by writing to Evergreen Municipal at 200 Berkeley
Street, Boston, Massachusetts 02116 or by calling toll-free 1-800-645-7816.
The two Prospectuses of Evergreen Municipal dated April 1, 1999 and its
Annual Report for the fiscal year ended May 31, 1999 are incorporated herein by
reference in their entirety, insofar as they relate to Evergreen Municipal only,
and not to any other fund described therein. The Prospectuses, which pertain (i)
to Class A, Class B and Class C shares and (ii) to Class Y shares, differ only
insofar as they describe the separate distribution and shareholder servicing
arrangements applicable to the classes. Shareholders of Mentor Municipal will
receive, with this Prospectus/Proxy Statement, copies of the Prospectus
pertaining to the class of shares of Evergreen Municipal that they will receive
as a result of the consummation of the Reorganization. Additional information
about Evergreen Municipal is contained in its Statement of Additional
Information dated April 1, 1999, which has been filed with the SEC and which is
available upon request and without charge by writing to or calling Evergreen
Municipal at the address or telephone number listed in the paragraph above.
The two Prospectuses of Mentor Municipal which pertain (i) to Class A
and Class B shares and (ii) to Class Y shares dated December 15, 1998, insofar
as they relate to Mentor Municipal only, and not to any other fund described
therein, are incorporated herein in their entirety by reference. Copies of the
Prospectuses, the related Statement of Additional Information dated December 15,
1998, the Annual Report for the fiscal year ended September 30, 1998 and the
Semi-Annual Report for the six
-30-
<PAGE>
month period ended March 31, 1999, are available upon request and without charge
by writing to Mentor Municipal at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-645-7816.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk, including
possible loss of capital.
COMPARISON OF FEES AND EXPENSES
The amounts for Class A, Class C and Class Y shares of Evergreen
Municipal set forth in the following tables and in the examples are based on the
expenses of Evergreen Municipal for the twelve month period ended May 31, 1999.
The amounts for Class A, Class B and Class Y shares of Mentor Municipal set
forth in the following tables and in the examples are based on the expenses of
Mentor Municipal for the twelve month period ended May 31, 1999. The pro forma
amounts for Class A, Class C and Class Y shares of Evergreen Municipal are based
on what the estimated combined expenses of Evergreen Municipal would have been
for the twelve month period ended May 31, 1999.
The following tables show for Evergreen Municipal, Mentor Municipal and
Evergreen Municipal pro forma, assuming consummation of the Reorganization, the
shareholder transaction expenses and annual fund operating expenses associated
with an investment in the Class A, Class B, Class C and Class Y shares, as
applicable, of each Fund.
-31-
<PAGE>
<TABLE>
Comparison of Class A, Class C and Class Y Shares
of Evergreen Municipal With Class A, Class B
and Class Y Shares of Mentor Municipal
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Evergreen Municipal Mentor Municipal
Shareholder Class A Class C Class Y Class A Class B Class Y
Transaction Expenses
Maximum Sales Load 4.75% None None 4.75% None None
Imposed on Purchases
(as a percentage of
offering price)
Contingent Deferred None(1) 1.00% in None None(1) 4.00% in None
Sales Charge (as a the first the first
percentage of year and year
original purchase 0.00% declining
price or redemption thereafter to 1.00%
proceeds, whichever in the
is lower) sixth
year and
0.00%
there-
after (2)
Annual Fund
Operating Expenses
(as a percentage of
average daily net
assets)
Management Fee ____% ____% ____% ____% ____% ____%
12b-1 Fees (3) 0.25% 1.00% None None 0.50% None
Shareholder
Servicing Plan Fees None None None 0.25% 0.25% None
Other Expenses % % % % % %
Annual Fund % % % % % %
Operating Expenses
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Evergreen Municipal Pro Forma
Shareholder Transaction Class A Class C(4) Class Y
Expenses
Maximum Sales Load 4.75% None None
Imposed on Purchases
(as a percentage of
offering price)
Contingent Deferred None(1) 4.00% in the None
Sales Charge (as a first year
percentage of original declining to
purchase price or 1.00% in the
redemption proceeds, fifth year
whichever is lower) and 0.00%
thereafter
Annual Fund Operating
Expenses (as a
percentage of average
daily net assets)
Management Fee ____% ____% ____%
12b-1 Fees (3) 0.25% 1.00% None
Shareholder Servicing
Plan Fees None None None
Other Expenses ____% ____% ____%
------- ------ -----
Annual Fund Operating ____% ____% ____%
Expenses ======= ====== ======
- -------------------
</TABLE>
(1) Investments of $1 million or more are not subject to a front-end sales
charge, but may be subject to a CDSC of 1% upon redemption within one
year after the month of purchase.
(2) Shares purchased as part of asset-allocation plans pursuant to the BL
Purchase Program are subject to a CDSC of 1% if the shares are redeemed
within one year of purchase.
(3) Class A shares of Evergreen Municipal can pay up to 0.75% of average
daily net assets as a 12b-1 fee. For the foreseeable future, the Class
A 12b-1 fees will be limited to 0.25% of average daily net assets.
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<PAGE>
(4) Holders of Class C shares of Evergreen Municipal received in the
Reorganization will be subject to the schedule of CDSCs currently
applicable to Class B shares of Mentor Municipal and not the schedule
of CDSCs applicable to Class C shares of Evergreen Municipal.
Examples. The following tables show for Evergreen Municipal and Mentor
Municipal, and for Evergreen Municipal pro forma, assuming consummation of the
Reorganization, examples of the cumulative effect of shareholder transaction
expenses and annual fund operating expenses indicated above on a $10,000
investment in each class of shares for the periods specified, assuming (i) a 5%
annual return, and (ii) redemption at the end of such period. For Class B and
Class C shares, the tables also show the effect if the shares are not redeemed.
In the case of Evergreen Municipal pro forma, (1) the examples for Class A
shares do not reflect the imposition of the 4.75% maximum sales load on
purchases because Mentor Municipal shareholders who receive Class A shares of
Evergreen Municipal in the Reorganization will not incur any sales load; and (2)
the examples for Class C shares reflect, as described in footnote 4 above, the
CDSC schedule applicable to Class B shares of Mentor Municipal.
<TABLE>
<CAPTION>
Evergreen Municipal
<S> <C> <C> <C> <C>
Three Five
One Year Years Years Ten Years
Class A $___ $___ $___ $___
Class C (assuming $___ $___ $___ $___
redemption at the
end of the period)
Class C (assuming $___ $___ $___ $___
no redemption at
the end of the
period)
Class Y $___ $___ $___ $___
</TABLE>
Mentor Municipal
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Five
One Year Years Years Ten Years
Class A $___ $___ $___ $___
-34-
<PAGE>
Class B
(assuming $___ $___ $___ $___
redemption at the
end of the period)
Class B $___ $___ $___ $___
(assuming no
redemption at the
end of the period)
Class Y $___ $___ $___ $___
</TABLE>
Evergreen Municipal Pro Forma
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Five
One Year Years Years Ten Years
Class A $___ $___ $___ $___
Class C $___ $___ $___ $___
(assuming
redemption at
the end of the
period)
Class C $___ $___ $___ $___
(assuming no
redemption at
the end of the
period)
Class Y $___ $___ $___ $___
</TABLE>
The purpose of the foregoing examples is to assist Mentor Municipal
shareholders in understanding the various costs and expenses that an investor in
Evergreen Municipal as a result of the Reorganization would bear directly and
indirectly, as compared with the various direct and indirect expenses currently
borne by a shareholder in Mentor Municipal. These examples should not be
considered a representation of past or future expenses or annual return. Actual
expenses may be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this
-35-
<PAGE>
Prospectus/Proxy Statement, the Prospectuses of Evergreen Municipal dated April
1, 1999 and the Prospectuses of Mentor Municipal dated December 15, 1998 (which
are incorporated herein by reference) and the Reorganization Plan, the form of
which is attached to this Prospectus/Proxy Statement as Exhibit D.
Proposed Plan of Reorganization
The Reorganization Plan provides for the transfer of all of the assets
of Mentor Municipal (which at the time of the Reorganization will be known as
Evergreen Municipal Income pursuant to the Conversion Plan described above) in
exchange for shares of Evergreen Municipal and the assumption by Evergreen
Municipal of the identified liabilities of Mentor Municipal. The identified
liabilities consist only of those liabilities reflected on the Fund's statement
of assets and liabilities determined immediately preceding the Reorganization.
The Reorganization Plan also calls for the distribution of shares of Evergreen
Municipal to Mentor Municipal shareholders in liquidation of Mentor Municipal as
part of the Reorganization. As a result of the Reorganization, the holders of
Class A, Class B and Class Y shares of Mentor Municipal will become the owners
of that number of full and fractional Class A, Class C and Class Y shares,
respectively, of Evergreen Municipal having an aggregate net asset value equal
to the aggregate net asset value of the shareholders' shares of Mentor
Municipal, as of the close of business immediately prior to the date that Mentor
Municipal's assets are exchanged for shares of Evergreen Municipal. See "Reasons
for the Reorganization - Agreement and Plan of Reorganization."
The Trustees of Mentor Funds, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of Mentor Municipal. Accordingly, the Trustees have
submitted the Reorganization Plan for the approval of Mentor Municipal's
shareholders.
In addition, subsequent to the Conversion of Mentor Municipal to
Evergreen Municipal Income, the Trustees of Evergreen Trust will review the
Reorganization Plan on behalf of Evergreen Municipal Income (referred to in this
Part III as Mentor Municipal) to determine whether the Reorganization remains in
the best interests of the shareholders of Evergreen Municipal Income and that
the interests of the shareholders of Evergreen Municipal Income will not be
diluted as a result of the transactions contemplated by the Reorganization, even
though shareholders of Mentor Municipal have previously approved the
Reorganization.
-36-
<PAGE>
THE BOARD OF TRUSTEES OF MENTOR FUNDS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF MENTOR MUNICIPAL
OF THE REORGANIZATION PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Trust have also approved the Reorganization
Plan on behalf of Evergreen Municipal.
Approval of the Reorganization on the part of Mentor Municipal will
require the affirmative vote of a majority of Mentor Municipal's shares voted
and entitled to vote, with all classes voting together as a single class, at a
Meeting at which a quorum of the Fund's shares is present. Fifty percent of the
outstanding shares entitled to vote, represented in person or by proxy, is
required to constitute a quorum at the Meeting. See "Voting Information
Concerning the Meeting."
The Reorganization is scheduled to take place on or about March 11,
2000. If the shareholders of Mentor Municipal do not vote to approve the
Conversion and/or the Reorganization, the Trustees of Mentor Funds or Evergreen
Trust, as the case may be, will consider other possible courses of action in the
best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Mentor Municipal
will have received an opinion of Sullivan & Worcester LLP that the
Reorganization has been structured so that no gain or loss will be recognized by
the Fund or its shareholders for federal income tax purposes as a result of the
receipt of shares of Evergreen Municipal in the Reorganization. The holding
period and aggregate tax basis of shares of Evergreen Municipal that are
received by Mentor Municipal's shareholders will be the same as the holding
period and aggregate tax basis of shares of the Fund previously held by such
shareholders, provided that shares of the Fund are held as capital assets. In
addition, the holding period and tax basis of the assets of Mentor Municipal in
the hands of Evergreen Municipal as a result of the Reorganization will be the
same as in the hands of the Fund immediately prior to the Reorganization, and no
gain or loss will be recognized by Evergreen Municipal upon the receipt of the
assets of the Fund in exchange for shares of Evergreen Municipal and the
assumption by Evergreen Municipal of the identified liabilities of Mentor
Municipal.
-37-
<PAGE>
Investment Objectives and Policies of the Funds
The investment objectives and policies of Evergreen Municipal and
Mentor Municipal are similar.
The investment objective of Evergreen Municipal is to seek the highest
possible current income, exempt from federal income taxes other than the AMT,
while preserving capital. In pursuing its investment objective, the Fund
ordinarily invests at least 80% of its assets in investment grade municipal
securities the interest from which is exempt from federal income taxes other
than the AMT. The Fund may invest up to 20% of its assets under ordinary
circumstances in securities which pay interest that is not exempt from federal
income taxes and which are rated at least BBB by Standard & Poor's Ratings
Services ("S&P") or Baa by Moody's Investors Service ("Moody's"). The Fund may
also invest 20% of its assets in high yield, high risk bonds ("junk bonds"), but
will not invest in bonds rated below B by Moody's or S&P.
The investment objective of Mentor Municipal is to provide investors
with a high level of current income exempt from federal regular income tax,
consistent with preservation of capital. The Fund normally invests at least 80%
of its assets in investment grade tax-exempt municipal securities, and may
invest a substantial portion of its assets in municipal securities which pay
interest that is subject to the AMT. Up to 20% of the Fund's assets may be
invested in high yield, high risk tax-exempt municipal securities rated no lower
than B- by S&P or B3 by Moody's. See "Comparison of Investment Objectives and
Policies" below.
Comparative Performance Information for Each Fund
Discussions of the manner of calculation of total return are contained
in the Prospectuses and Statements of Additional Information of the Funds. The
following tables set forth, as applicable, the total return of the Class A,
Class C and Class Y shares of Evergreen Municipal and of the Class A, Class B
and Class Y shares of Mentor Municipal for the one year, five year and ten year
periods ended December 31, 1998, and for the period from inception through
December 31, 1998. The calculations of total return assume the reinvestment of
all dividends and capital gains distributions on the reinvestment date and the
deduction of all recurring expenses (including sales charges) that were charged
to shareholders' accounts.
-38-
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
From
1 Year 5 Years 10 Years Inception
Ended Ended Ended To
December December December December Inception
31, 1998 31, 1998 31, 1998 31, 1998 Date
------- ------- ------- --------- ---------
Evergreen
Municipal
Class A shares(1) 0.14% 4.04% 6.82% 7.26% 1/20/98
Class C shares(1) 3.43% 4.34% 6.45% 6.80% 1/26/98
Class Y shares(1) 5.45% 5.35% 7.63% 7.72% 4/30/99
Mentor Municipal
Class A shares 0.43% 4.26% N/A 6.55% 4/29/92
Class B shares 0.88% 4.60% N/A 6.79% 4/29/92
Class Y shares 5.60% N/A N/A 6.95% 11/19/97
- --------------
</TABLE>
(1) Historical performance for Class A, Class C and Class Y of
Evergreen Municipal prior to inception reflects that of Class B, the
original Class offered by the Fund (inception date: January 19, 1978)
and has been adjusted to reflect appropriate 12b-1 fees, if any, for
Class A, Class C and Class Y. If appropriate fees for Class A and Class
Y were not reflected, returns for those Classes would have been lower.
Important information about Evergreen Municipal (previously named
Evergreen Tax Free Fund) is also contained in management's discussion of
Evergreen Municipal's performance, attached hereto as Exhibit E. This
information also appears in Evergreen Municipal's most recent Annual Report.
Management of the Funds
The overall management of Evergreen Municipal and of Mentor Municipal
is the responsibility of, and is supervised by, the Board of Trustees of
Evergreen Trust and the Board of Trustees of Mentor Funds, respectively.
Subsequent to the Conversion, the overall management of Mentor Municipal will be
the responsibility of, and will be supervised by, the Board of Trustees of
Evergreen Trust.
Investment Advisers
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<PAGE>
The investment adviser to Evergreen Municipal is Evergreen Investment
Management Company ("EIMC"), an indirect subsidiary of FUNB. EIMC is located at
200 Berkeley Street, Boston, Massachusetts 02116-5034. FUNB is a subsidiary of
First Union Corporation ("First Union"), the sixth largest bank holding company
in the United States based on total assets as of March 31, 1999. EIMC and its
affiliates manage the Evergreen family of mutual funds with assets of
approximately $56.7 billion as of March 31, 1999. For further information
regarding EIMC, FUNB and First Union, see "Organization and Service Providers -
Service Providers - Investment Advisor" in the Prospectuses of Evergreen
Municipal.
EIMC manages investments and supervises the daily business affairs of
Evergreen Municipal subject to the authority of the Trustees. EIMC is entitled
to receive from the Fund an annual fee equal to 2.0% of the Fund's gross
dividend and interest income plus 0.50% of the first $100 million of the
aggregate net asset value of the Fund's shares, plus 0.45% of the next $100
million, plus 0.40% of the next $100 million, plus 0.35% of the next $100
million, plus 0.30% of the next $100 million, plus 0.25% of amounts over %500
million.
Mentor serves as the investment adviser for Mentor Municipal. Mentor
has overall responsibility for portfolio management of the Fund. For its
services as investment adviser, Mentor is entitled to receive a fee equal to
0.60% of the Fund's average daily net assets.
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Year 2000 Risks. Like other investment companies, financial and
business organizations and individuals around the world, Evergreen Municipal
could be adversely affected if the computer systems used by the Fund's
investment adviser and the Fund's other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The Fund's
investment adviser is taking steps to address the Year 2000 Problem with respect
to the computer systems that it uses and to obtain assurances that comparable
steps are being taken by the Fund's other major service providers. At this time,
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Fund. In addition, issuers of securities in which the
Fund may invest, especially foreign issuers, may be adversely affected by Year
2000 Problems. Such
-40-
<PAGE>
problems could negatively impact the value of the Fund's
portfolio securities.
Administrator
As described in Part I - "Administration Agreements", EIS acts as
administrator for Mentor Municipal. EIS also provides facilities, equipment and
personnel to Evergreen Municipal on behalf of the Fund's investment adviser.
Evergreen Municipal reimburses EIS for the cost of such services.
Portfolio Management
Evergreen Municipal is co-managed by George J. Kimball and
James T. Colby, III. Mr. Kimball has been employed by EIMC since
1991 and was an Analyst prior to becoming a Vice President and
Portfolio Manager. He has more than 10 years of investment
experience. Mr. Colby is a Vice President of FUNB. Mr. Colby
has also been associated with Evergreen Asset Management Corp., a
wholly-owned subsidiary of First Union, and its predecessor since
1992, and with EIMC since 1998. Both Mr. Colby and Mr. Kimball
have co-managed the Fund since March 1998.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of shares of Evergreen Municipal. EDI distributes
the Fund's shares directly or through broker-dealers, banks (including FUNB), or
other financial intermediaries. Evergreen Municipal offers four classes of
shares: Class A, Class B, Class C and Class Y. The Class B shares of Evergreen
Municipal are not involved in the Reorganization. Each Class has separate
distribution arrangements. (See "Distribution-Related and Shareholder
Servicing-Related Expenses" below.) No Class bears the distribution expenses
relating to the shares of any other Class.
In the proposed Reorganization, Class A shareholders of Mentor
Municipal will receive Class A shares of Evergreen Municipal, Class B
shareholders of Mentor Municipal will receive Class C shares of Evergreen
Municipal, and Class Y shareholders of Mentor Municipal will receive Class Y
shares of Evergreen Municipal. The Class A and Class Y shares of Evergreen
Municipal have similar arrangements with respect to the imposition of
distribution and service fees as the Class A and Class Y shares of Mentor
Municipal. As described below, the Class C shares of Evergreen Municipal are
subject to greater distribution-related and shareholder servicing-related fees
than the Class B shares of Mentor Municipal. Because the Reorganization will be
effected at net asset value without the imposition of a sales charge, Evergreen
Municipal shares acquired by shareholders of Mentor
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Municipal pursuant to the proposed Reorganization would not be subject to any
initial sales charge or CDSC as a result of the Reorganization. However, Class C
shares acquired as a result of the Reorganization would continue to be subject
to a CDSC upon subsequent redemption to the same extent as if shareholders had
continued to hold their shares of Mentor Municipal. The CDSC schedule applicable
to Class C shares of Evergreen Municipal received in the Reorganization will be
the CDSC schedule of Class B shares of Mentor Municipal in effect at the time
Class B shares of Mentor Municipal were originally purchased.
The following is a summary description of charges and fees for the
Class A, Class C and Class Y shares of Evergreen Municipal which will be
received by Mentor Municipal shareholders in the Reorganization. More detailed
descriptions of the distribution arrangements applicable to the classes of
shares are contained in the respective Prospectuses of Evergreen Municipal and
Mentor Municipal and in each Fund's Statement of Additional Information.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to a 12b-1 fee. For a
description of the initial sales charges applicable to purchases of Class A
shares, see "Purchase and Redemption of Shares - How to Buy Shares" in the
applicable Prospectus for Evergreen Municipal. No initial sales charge will be
imposed on Class A shares of Evergreen Municipal received by Mentor Municipal's
shareholders in the Reorganization.
Class C Shares. Class C shares are sold without initial sales charges
and are subject to distribution-related and shareholder servicing-related fees
which are higher than Class A shares. Class C shares will continue the CDSC
arrangement which currently applies to the Class B shares of Mentor Municipal.
The CDSC is 4.0% in the first year, declining to 1.0% in the fifth year, and
eliminated thereafter. No new Class C shares of Evergreen Municipal with the
CDSC described above will be offered following the Conversion.
Class Y Shares. Class Y shares are sold at net asset value without any
initial or deferred sales charge and are not subject to distribution-related or
shareholder servicing-related fees. Class Y shares are only available to certain
classes of investors as is more fully described in the Prospectuses for
Evergreen Municipal. Mentor Municipal shareholders who receive Evergreen
Municipal Class Y shares in the Reorganization and who wish to make subsequent
purchases of Evergreen Municipal will be able to purchase Class Y shares.
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Additional information regarding the classes of shares of each Fund is
included in its respective Prospectuses and Statement of Additional Information.
Distribution-Related and Shareholder Servicing-Related Expenses.
Evergreen Municipal has adopted a Rule 12b-1 plan with respect to its Class A
shares under which the Class may pay for distribution-related expenses at an
annual rate which may not exceed 0.75% of average daily net assets attributable
to the Class. Payments with respect to Class A shares are currently limited to
0.25% of average daily net assets attributable to the Class. This amount may be
increased to the full plan amount for the Fund by the Trustees without
shareholder approval.
Mentor Municipal has adopted a Shareholder Servicing Plan with respect
to its Class A shares under which the Class may pay for shareholder
servicing-related expenses at an annual rate of 0.25% of the average daily net
assets attributable to the Class. Evergreen Municipal does not impose a
Shareholder Servicing Plan fee.
Each of Evergreen Municipal and Mentor Municipal has also adopted a
12b-1 plan with respect to its Class C and Class B shares, respectively, under
which the Class may pay for distribution-related expenses at an annual rate
which may not exceed 1.00% (0.50% with respect to Mentor Municipal) of average
daily net assets attributable to the Class. Mentor Municipal has also adopted
for its Class B shares a Shareholder Servicing Plan whereby the Fund may incur a
fee for shareholder services of up to 0.25% of average daily net assets
attributable to the Class.
The Class C 12b-1 plan of Evergreen Municipal provides that, of the
total 1.00% 12b-1 fee, up to 0.25% may be for payment in respect of shareholder
services. Consistent with the requirements of Rule 12b-1 and the applicable
rules of the National Association of Securities Dealers, Inc., following the
Conversion and the Reorganization Evergreen Municipal may make
distribution-related and shareholder servicing-related payments with respect to
Mentor Municipal shares sold prior to the Conversion and the Reorganization
including payments to Mentor Municipal's former underwriter.
Additional information regarding the applicable 12b-1 plans adopted by
each Fund and the Shareholder Servicing Plan adopted by Mentor Municipal is
included in its respective Prospectuses and Statement of Additional Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related and shareholder servicing-related fees is
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provided above. Investments in the Funds are not insured. Generally, the minimum
initial purchase requirement for Evergreen Municipal and for the Class A and
Class B shares of Mentor Municipal is $1,000 ($500,000 for Class Y shares of
Mentor Municipal). There is no minimum for subsequent purchases of shares of
Evergreen Municipal. For Mentor Municipal, the minimum for subsequent
investments is $50 for Class A and Class B shares, and $25,000 for Class Y
shares. Each Fund provides for telephone, mail or wire redemption of shares at
net asset value, less any CDSC, as next determined after receipt of a redemption
request on each day the New York Stock Exchange ("NYSE") is open for trading.
Additional information concerning purchases and redemptions of shares, including
how each Fund's net asset value is determined, is contained in the respective
Prospectuses for each Fund. Unlike Mentor Municipal, Evergreen Municipal may
involuntarily redeem shareholders' accounts that have less than $1,000 of
invested funds. All funds invested in each Fund are invested in full and
fractional shares. The Funds reserve the right to reject any purchase order.
Exchange Privileges
Shares of Mentor Municipal can be exchanged for shares of the same
class of certain funds in the Mentor fund family. Holders of shares of a class
of Evergreen Municipal may exchange their shares for shares of the same class of
any other Evergreen fund. Mentor Municipal shareholders will be receiving Class
A, Class C and Class Y shares of Evergreen Municipal in the Reorganization and,
accordingly, with respect to shares of Evergreen Municipal received in the
Reorganization, the exchange privilege is limited to Class A, Class C and Class
Y shares, as applicable, of other Evergreen funds. Evergreen Municipal limits
exchanges to five per calendar year and three per calendar quarter. No sales
charge is imposed on an exchange. An exchange which represents an initial
investment in another Evergreen fund must amount to at least $1,000. The current
exchange privileges, and the requirements and limitations attendant thereto, are
described in each Fund's respective Prospectuses and Statement of Additional
Information.
Dividend Policy
Each Fund distributes its investment company taxable income monthly and
its net realized gains at least annually. Shareholders begin to earn dividends
on the first business day after shares are purchased unless shares were not paid
for, in which case dividends are not earned until the next business day after
payment is received. Dividends and distributions are reinvested in additional
shares of the same class of the respective Fund, or paid in cash, as a
shareholder has elected.
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See the respective Prospectuses of each Fund for further information concerning
dividends and distributions.
After the Reorganization, shareholders of Mentor Municipal who have
elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from Evergreen Municipal reinvested in
shares of Evergreen Municipal. Shareholders of Mentor Municipal who have elected
to receive dividends and/or distributions in cash will receive dividends and/or
distributions from Evergreen Municipal in cash after the Reorganization,
although they may, after the Reorganization, elect to have such dividends and/or
distributions reinvested in additional shares of Evergreen Municipal.
Each of Evergreen Municipal and Mentor Municipal has qualified and
intends to continue to qualify to be treated as a regulated investment company
under the Code. While so qualified, so long as each Fund distributes all of its
net investment company taxable income and any net realized gains to
shareholders, it is expected that a Fund will not be required to pay any federal
income taxes on the amounts so distributed. A 4% nondeductible excise tax will
be imposed on amounts not distributed if a Fund does not meet certain
distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements.
Risks
An investment in each Fund is subject to certain risks. There is no
assurance that investment performances will be positive and that the Funds will
meet their investment objectives. For a discussion of each Fund's investment
objectives and policies, see "Comparison of Investment Objectives and Policies."
Each Fund invests in municipal securities. The main risks of investing
in municipal securities are:
Interest Rate Risk. Bond prices move inversely to interest rates, i.e.,
as interest rates decline the values of the bonds increase, and vice versa. The
longer the maturity of a bond, the greater the exposure to market price
fluctuations. The same market factors are reflected in the share price or net
asset value of bond funds which will vary with interest rates. Prices of
longer-term bonds tend to be more volatile in periods of changing interest rates
than prices of shorter-term securities. At April 30, 1999, the dollar-weighted
effective maturity of Mentor Municipal's portfolio securities was
13.8 years, and the dollar-weighted effective maturity of Evergreen Municipal's
portfolio securities was 12.3 years. At April 30, 1999, the dollar-weighted
average duration of Mentor Municipal's
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portfolio was 9.5 years and that of Evergreen Municipal's
portfolio was 8.2 years.
In addition, certain of the obligations in which Evergreen Municipal
may invest may be variable or floating rate instruments, which may involve a
conditional or unconditional demand feature, and may include variable amount
master demand notes. Mentor Municipal may also invest in variable rate
securities. While these types of instruments may, to a certain degree, offset
the risk to principal associated with rising interest rates, they would not be
expected to appreciate in a falling interest rate environment.
Credit Risk. A Fund's ability to achieve its objective depends
partially on the prompt payment by issuers of the interest on and principal of
the municipal bonds held by the Fund. A moratorium, default, or other
non-payment of interest or principal when due on any municipal bond, in addition
to affecting the market value and liquidity of that particular security, could
affect the market value and liquidity of other municipal bonds held by a Fund.
In addition, the market for municipal bonds is often thin and can be temporarily
affected by large purchases and sales, including those by a Fund.
In addition, a Fund's income and/or share price may be adversely
affected if the issuer of a debt security has its credit rating reduced or fails
to make scheduled interest and principal payments. Neither Fund is required to
sell or otherwise dispose of any security that loses its rating or has its
rating reduced after the Fund has purchased it.
High Yield Bond Risk. Each Fund may invest a portion of its assets in
high yield, high risk bonds. High yield, high risk bonds are rated Ba or lower
by Moody's and BB or lower by S&P or Fitch IBCA, Inc. ("Fitch") and are
considered predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments. The lower ratings reflect a greater
possibility that real or perceived adverse changes in the financial condition of
the issuer or in general economic conditions or an unanticipated rise in
interest rates may impair the ability of the issuer to make payments of
principal and interest or to meet specific projected business forecasts or
obtain additional financing. The values of high yield, high risk bonds fluctuate
in response to changes in interest rates, and the secondary market for such
securities may be less liquid at certain times than the secondary market for
higher quality debt securities, thereby affecting the market price of the
security, a Fund's ability to dispose of a particular security, and its ability
to obtain accurate market quotations for purposes of valuing its assets.
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Derivatives Risk. Each Fund may invest in options, futures and options
on futures relating to both individual securities and indices. Evergreen
Municipal may also invest in certain other types of derivatives, including
structured securities. The market values of derivatives or structured securities
may vary depending upon the manner in which the investments have been structured
and may fluctuate much more rapidly and to a much greater extent than
investments in other securities. As a result, the values of such investments may
change at rates in excess of the rates at which traditional fixed income
securities change and, depending on the structure of a derivative, could change
in a manner opposite to the change in the market value of a traditional fixed
income security. See the Prospectuses and Statement of Additional Information of
Evergreen Municipal for further discussion of the risks inherent in the use of
certain derivatives.
Because Evergreen Municipal may invest in obligations of the governments of
the Virgin Islands, Guam and Puerto Rico, the Fund may be adversely affected by
local political and economic conditions and developments within those
territories affecting the issuers of such obligations. Mentor Municipal can
invest in such obligations but does not have a strategy to do so.
REASONS FOR THE REORGANIZATION
In order to combine and simplify the offering of mutual funds that are
advised by First Union and its affiliates, the Mentor funds are being brought
into the Evergreen fund family. Certain Mentor funds will continue as series of
applicable Evergreen Delaware business trusts. Other Mentor funds, including
Mentor Municipal, are in the process of being combined with existing Evergreen
funds in cases where the funds have similar investment objectives and policies.
Mentor is an indirect majority-owned subsidiary of First Union Capital
Markets Corp., which is in turn a wholly-owned subsidiary of First Union. EVEREN
Capital Corporation currently has a 45% ownership interest in Mentor. It is
anticipated that First Union will acquire EVEREN Capital Corporation in
September, 1999.
At a meeting of the Board of Trustees of Mentor Funds held on July 13,
1999, all of the Trustees, including the Independent Trustees, considered and
approved the Conversion and the Reorganization as being in the best interests of
shareholders of Mentor Municipal.
In approving the Reorganization Plan, the Trustees reviewed various
factors about the Funds and the proposed Reorganization. There are substantial
similarities between Evergreen Municipal
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and Mentor Municipal. Specifically, Evergreen Municipal and Mentor Municipal
have similar investment objectives and policies and comparable risk profiles.
See "Comparison of Investment Objectives and Policies" below. At the same time,
the Board of Trustees evaluated the potential economies of scale associated with
larger mutual funds and concluded that operational efficiencies may be achieved
by combining Mentor Municipal with Evergreen Municipal. As of June 30, 1999,
Evergreen Municipal's net assets were approximately $1.149 million and Mentor
Municipal's net assets were approximately $122 million.
In addition, assuming that an alternative to the Reorganization would
be that Mentor Municipal continue its existence and be separately managed by
FUNB or one of its affiliates, Mentor Municipal would be offered through common
distribution channels with Evergreen Municipal. Mentor Municipal would also have
to bear the cost of maintaining its separate existence. Mentor and FUNB believe
that the prospect of dividing the resources of the Evergreen mutual fund
organization between two similar funds could result in each Fund being
disadvantaged due to an inability to achieve optimum size, performance levels
and greater economies of scale. Accordingly, for the reasons noted above and
recognizing that there can be no assurance that any economies of scale or other
benefits will be realized, Mentor and FUNB believe that the proposed
Reorganization would be in the best interests of each Fund and its shareholders.
The Board of Trustees of Mentor Funds met and considered the recommendation
of Mentor and FUNB, and, in addition, considered among other factors, (i) the
terms and conditions of the Reorganization; (ii) expense ratios, fees and
expenses of Evergreen Municipal and Mentor Municipal; (iii) the comparative
performance records of each of the Funds; (iv) compatibility of their investment
objectives and policies; (v) the investment experience, expertise and resources
of FUNB; (vi) the service and distribution resources available to the Evergreen
funds and the broad array of investment alternatives available to shareholders
of the Evergreen funds; (vii) the personnel and financial resources of First
Union and its affiliates; (viii) the fact that Evergreen Municipal will assume
the identified liabilities of Mentor Municipal; and (ix) the expected federal
income tax consequences of the Reorganization. During their consideration of the
Reorganization the Trustees met with Fund counsel and counsel to the Independent
Trustees regarding the legal issues involved.
In addition, the Trustees considered that there are alternatives
available to shareholders of Mentor Municipal, including the ability to redeem
their shares, as well as the option to vote against the Reorganization.
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THE TRUSTEES OF MENTOR FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF MENTOR MUNICIPAL APPROVE
THE PROPOSED REORGANIZATION.
The Trustees of Evergreen Trust also concluded at a meeting on June 18,
1999 that the proposed Reorganization would be in the best interests of
shareholders of Evergreen Municipal and that the interests of the shareholders
of Evergreen Municipal would not be diluted as a result of the transactions
contemplated by the Reorganization. Subsequent to the Conversion of Mentor
Municipal into Evergreen Municipal Income, a series of Evergreen Trust, which is
scheduled to occur on or about October 15, 1999, the Trustees of Evergreen Trust
will review the proposed Reorganization to determine whether the proposed
Reorganization remains in the best interests of the shareholders of Evergreen
Municipal Income and that the interests of the shareholders of Evergreen
Municipal Income will not be diluted as a result of the transactions
contemplated by the Reorganization.
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the
Reorganization Plan (Exhibit D hereto).
The Reorganization Plan provides that Evergreen Municipal will acquire
all of the assets of Mentor Municipal in exchange for shares of Evergreen
Municipal and the assumption by Evergreen Municipal of the identified
liabilities of Mentor Municipal on or about March 11, 2000 or such other date as
may be agreed upon by the parties (the "Closing Date"). Prior to the Closing
Date, Mentor Municipal will endeavor to discharge all of its known liabilities
and obligations. Evergreen Municipal will not assume any liabilities or
obligations of Mentor Municipal other than those reflected in an unaudited
statement of assets and liabilities of Mentor Municipal prepared as of the close
of regular trading on the NYSE, currently 4:00 p.m. Eastern time, on the
business day immediately prior to the Closing Date. The number of full and
fractional shares of each class of Evergreen Municipal to be received by the
shareholders of Mentor Municipal will be determined by multiplying the
respective outstanding class of shares of Mentor Municipal by a factor which
shall be computed by dividing the net asset value per share of the respective
class of shares of Mentor Municipal by the net asset value per share of the
respective class of shares of Evergreen Municipal. Such computations will take
place as of the close of regular trading on the NYSE on the business day
immediately prior to the Closing Date. The net asset value per share of each
class will be determined by dividing assets, less liabilities, in each case
attributable to the respective class, by the total number of outstanding shares.
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State Street Bank and Trust Company, the custodian for Evergreen
Municipal, will compute the value of each Fund's respective portfolio
securities. The method of valuation employed will be consistent with the
procedures set forth in the Prospectuses and Statement of Additional Information
of Evergreen Municipal, Rule 22c-1 under the 1940 Act, and with the
interpretations of such Rule by the SEC's Division of Investment Management.
At or prior to the Closing Date, Mentor Municipal will have declared a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
the Fund's shareholders (in shares of the Fund, or in cash, as the shareholder
has previously elected) all of the Fund's net investment company taxable income
for the taxable period ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
As soon after the Closing Date as conveniently practicable, Mentor
Municipal will liquidate and distribute pro rata to shareholders of record as of
the close of business on the Closing Date the full and fractional shares of
Evergreen Municipal received by Mentor Municipal. Such liquidation and
distribution will be accomplished by the establishment of accounts in the names
of the Fund's shareholders on Evergreen Municipal's share records. Each account
will represent the respective pro rata number of full and fractional shares of
Evergreen Municipal due to the Fund's shareholders. All issued and outstanding
shares of Mentor Municipal, including those represented by certificates, will be
canceled. The shares of Evergreen Municipal to be issued will have no preemptive
or conversion rights. After these distributions and the winding up of its
affairs, Mentor Municipal will be terminated.
The consummation of the Reorganization is subject to the conditions set
forth in the Reorganization Plan, including approval by Mentor Municipal's
shareholders and the determination by the Trustees of Evergreen Trust,
subsequent to the meeting of Mentor Municipal's shareholders, that the
Reorganization remains in the best interests of the shareholders of both Mentor
Municipal and Evergreen Municipal and the interests of each Fund's shareholders
will not be diluted as a result of the transactions contemplated by the
Reorganization, accuracy of various representations and warranties and receipt
of opinions of counsel, including opinions with respect to those matters
referred to in "Federal Income Tax Consequences" below. Notwithstanding approval
of Mentor Municipal's shareholders, the Reorganization Plan may be terminated
(a) by the mutual agreement
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of Mentor Municipal and Evergreen Municipal; or (b) at or prior to the Closing
Date by either party (i) because of a breach by the other party of any
representation, warranty, or agreement contained therein to be performed at or
prior to the Closing Date if not cured within 30 days, or (ii) because a
condition to the obligation of the terminating party has not been met and it
reasonably appears that it cannot be met.
The expenses of Mentor Municipal and Evergreen Municipal in connection with
the Conversion and the Reorganization (including the cost of any proxy
soliciting agent) will be borne equally by the Funds whether or not the
Conversion and the Reorganization are consummated. It is expected that the cost
of retaining Shareholder Communications Corporation to assist in the proxy
solicitation process will not exceed $_____.
If the Conversion and/or the Reorganization is not approved by
shareholders of Mentor Municipal, the Board of Trustees of Mentor Funds or
Evergreen Trust, as the case may be, will consider other possible courses of
action in the best interests of shareholders.
Federal Income Tax Consequences
The Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Mentor Municipal will receive an
opinion of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued thereunder,
current administrative rules, pronouncements and court decisions, for federal
income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of Mentor Municipal solely in
exchange for shares of Evergreen Municipal and the assumption by Evergreen
Municipal of the identified liabilities, followed by the distribution of
Evergreen Municipal's shares by Mentor Municipal in dissolution and liquidation
of Mentor Municipal, will constitute a "reorganization" within the meaning of
section 368(a)(1)(C) of the Code, and Evergreen Municipal and Mentor Municipal
will each be a "party to a reorganization" within the meaning of section 368(b)
of the Code;
(2) No gain or loss will be recognized by Mentor Municipal on the
transfer of all of its assets to Evergreen Municipal solely in exchange for
Evergreen Municipal's shares and the assumption by Evergreen Municipal of the
identified liabilities of Mentor Municipal or upon the distribution of Evergreen
Municipal's shares to Mentor Municipal's shareholders in exchange for their
shares of Mentor Municipal;
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(3) The tax basis of the assets transferred will be the same to
Evergreen Municipal as the tax basis of such assets to Mentor Municipal
immediately prior to the Reorganization, and the holding period of such assets
in the hands of Evergreen Municipal will include the period during which the
assets were held by Mentor Municipal;
(4) No gain or loss will be recognized by Evergreen Municipal upon the
receipt of the assets from Mentor Municipal solely in exchange for the shares of
Evergreen Municipal and the assumption by Evergreen Municipal of the identified
liabilities of Mentor Municipal;
(5) No gain or loss will be recognized by Mentor Municipal's
shareholders upon the issuance of the shares of Evergreen Municipal to them,
provided they receive solely such shares (including fractional shares) in
exchange for their shares of Mentor Municipal; and
(6) The aggregate tax basis of the shares of Evergreen Municipal,
including any fractional shares, received by each of the shareholders of Mentor
Municipal pursuant to the Reorganization will be the same as the aggregate tax
basis of the shares of Mentor Municipal held by such shareholder immediately
prior to the Reorganization, and the holding period of the shares of Evergreen
Municipal, including fractional shares, received by each such shareholder will
include the period during which the shares of Mentor Municipal exchanged
therefor were held by such shareholder (provided that the shares of Mentor
Municipal were held as a capital asset on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Mentor Municipal would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Fund shares and the fair market value of Evergreen Municipal
shares he or she received. Shareholders of Mentor Municipal should consult their
tax advisers regarding the effect, if any, of the proposed Reorganization in
light of their individual circumstances. Since the foregoing discussion relates
only to the federal income tax consequences of the Reorganization, shareholders
of Mentor Municipal should also consult their tax advisers as to the state and
local tax consequences, if any, of the Reorganization.
As of June 30, 1999 Mentor Municipal had a capital loss carryforward of
approximately $1,244,000. The utilization of the capital loss carryforward by
Evergreen Municipal following the Reorganization will be subject to various
limitations, which cannot be calculated precisely at this time. On a pro forma
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basis, all such limitations are greater than the capital loss carryforward with
the exception of the following:
For Evergreen Municipal's taxable year which includes the merger date,
utilization of the capital loss carryforward would be limited to
Evergreen Municipal's net capital gain for the year multiplied by a
fraction, the numerator of which is the days in the taxable year
following the merger date and the denominator of which is 365.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen
Municipal and Mentor Municipal as of May 31, 1999, and the capitalization of
Evergreen Municipal on a pro forma basis as of that date, giving effect to the
proposed acquisition of assets at net asset value. The pro forma data reflects
an exchange ratio of approximately ___, ___ and ___ Class A, Class C and Class Y
shares respectively, of Evergreen Municipal issued for each Class A, Class B and
Class Y share, respectively, of Mentor Municipal.
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Capitalization of Mentor Municipal,
Evergreen Municipal and Evergreen Municipal
(Pro Forma)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Mentor Evergreen Evergreen Municipal
Municipal Municipal (After Reorganization)
------------ ------------- --------------
Net Assets
Class A........................ $ ____ $____ $____
Class B........................ $ ____ $____ $____
Class C........................ N/A $____ $____
Class Y........................ $ ____ $____ $____
------------ -------------- --------------
Total Net $____ $____ $____
Assets . . .
Net Asset Value Per
Share
Class A........................ $____ $____ $____
Class B........................ $____ $____ $____
Class C........................ N/A $____ $____
Class Y........................ $____ $____ $____
Shares Outstanding
Class A........................ ____ ____ ____
Class B........................ ____ ____ ____
Class C........................ N/A ____ ____
Class Y........................ ____ 0 ____
--------- ----------- -----------
All Classes.................... ____ ____ ____
</TABLE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
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Shareholder Information
As of August 17, 1999 (the "Record Date"), the following number of each
Class of shares of beneficial interest of Mentor Municipal was outstanding:
Class of Shares
- ---------------
Class A.................................................
Class B.................................................
Class Y.................................................
All Classes............................................. ------------
As of June 30, 1999, the officers and Trustees of Mentor Funds
beneficially owned as a group less than 1% of the outstanding shares of Mentor
Municipal. To Mentor Funds' knowledge, no persons owned beneficially
or of record more than 5% of Mentor Municipal's total outstanding shares as of
June 30, 1999.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectuses and Statements of
Additional Information of the Funds. The investment objective, policies and
restrictions of Evergreen Municipal can be found in the Prospectuses for
Evergreen Municipal under the caption "Description of the Funds Investment
Objectives and Policies." The Prospectuses for Evergreen Municipal also offer
additional funds advised by FUNB or its affiliates. These additional funds are
not involved in the Reorganization, their investment objectives and policies are
not discussed in this Prospectus/Proxy Statement, and their
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shares are not offered hereby. The investment objective, policies and
restrictions of Mentor Municipal can be found in the respective Prospectuses of
the Fund under the caption "Investment Objectives and Policies." Unlike the
investment objective of Mentor Municipal, which is fundamental, the investment
objective of Evergreen Municipal is nonfundamental and can be changed by the
Board of Trustees without shareholder approval. If approved by shareholders as
described in Part II, the investment objective of Mentor Municipal, which
currently is fundamental, will be changed to nonfundamental.
The investment objective of Evergreen Municipal is to seek the highest
possible current income, exempt from federal income taxes other than the AMT,
while preserving capital.
The Fund will ordinarily invest at least 80% of its assets in municipal
securities the interest from which is exempt from federal income taxes other
than the AMT. Municipal securities may include municipal bonds, short-term
municipal notes and tax-exempt commercial paper. In addition, the Fund will
invest at least 80% of its assets in bonds that, at the date of investment, are
rated within the four highest categories by S&P (AAA, AA, A and BBB), by Moody's
(Aaa, Aa, A and Baa), by Fitch (AAA, AA, A and BBB) or, if not rated or rated
under a different system, are of comparable quality to obligations so rated as
determined by another nationally recognized statistical ratings organization or
by the Fund's investment adviser. The Fund may invest the remaining 20% of its
assets in lower rated bonds, but it will not invest in bonds rated below B.
In normal market conditions the Fund may invest up to 20% of its assets
(and up to 100% of its assets for temporary defensive purposes) in securities
that pay interest which is not exempt from federal income taxes, such as
corporate and bank obligations, obligations issued or guaranteed by the U.S.
government or by any of its agencies or instrumentalities, commercial paper and
repurchase agreements. Such securities must be rated at least BBB by S&P or Baa
by Moody's or if not rated, must be determined by the Fund's investment adviser
to be of comparable quality.
In addition, the Fund may invest in the obligations of the governments of
the Virgin Islands, Guam and Puerto Rico but does not presently intend to invest
more than 10% of its net assets in the obligations of each of the Virgin Islands
or Guam or 25% of its net assets in the obligations of Puerto Rico. Mentor
Municipal can invest in such obligaitons but does not have a strategy to do so.
The investment objective of Mentor Municipal is to provide investors with a
high level of current income exempt from federal regular income tax, consistent
with preservation of capital.
The Fund will normally invest at least 80% of its assets in tax-exempt
municipal securities rated investment grade or deemed by the Fund's sub-adviser
to be of comparable quality. The Fund may invest a substantial portion of its
assets in municipal securities that pay interest which is subject to the AMT.
Mentor Municipal may also invest up to 10% of its assets in tax-exempt
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money market funds, which will be considered tax-exempt municipal securities for
this purpose. Although Evergreen Municipal has the ability to invest in other
investment companies, including tax-exempt money market funds, it currently has
no intention to do so. Mentor Municipal has no policy regarding defensive
investments.
The Fund may invest up to 20% of its assets in tax-exempt municipal
securities rated below investment grade (or, if unrated, determined by the
adviser to be of comparable quality). The Fund will not invest in securities
rated below B- by S&P or below B3 by Moody's.
Like Evergreen Municipal, Mentor Municipal may buy and sell futures and
options on futures but Mentor Municipal will not engage in futures transactions
if as a result the sum of the initial margin deposits on its existing futures
positions and premiums paid for outstanding options on futures contracts would
exceed 5% of the Fund's assets. Evergreen Municipal has no stated limitations.
After the Reorganization, Evergreen Municipal may dispose of a portion
of the securities received from Mentor Municipal in the ordinary course of
business. This may result in additional transaction costs (and/or capital gains)
to shareholders of Evergreen Municipal.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectuses and Statement of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectuses and Statement of Additional Information of
each Fund.
ADDITIONAL INFORMATION
Evergreen Municipal. Information concerning the operation and
management of Evergreen Municipal is incorporated herein by reference from the
Prospectuses dated April 1, 1999, copies of which are enclosed, and the
Statement of Additional Information of the same date. A copy of such Statement
of Additional Information is available upon request and without charge by
writing to Evergreen Municipal at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-645-7816.
Mentor Municipal . Information about the Fund is included in its
current Prospectuses dated December 15, 1998 and in the Statement of Additional
Information of the same date, that have been filed with the SEC, all of which
are incorporated herein by reference. Copies of the Prospectuses and Statement
of
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Additional Information are available upon request and without charge by writing
to Mentor Municipal at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-645-7816.
Evergreen Municipal and Mentor Municipal are each subject to the
informational requirements of the 1934 Act and the 1940 Act, and in accordance
therewith file reports and other information including proxy material, and
charter documents with the SEC. These items can be inspected and copies obtained
at the Public Reference Facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located at
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511
and Seven World Trade Center, Suite 1300, New York, New York 10048.
The SEC maintains a Web site (http://www.sec.gov) that contains the
Funds' Statements of Additional Information and other material incorporated by
reference herein together with other information regarding Evergreen Municipal
and Mentor Municipal.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report of Evergreen Municipal as of May 31, 1999 and the
financial statements and financial highlights for the periods indicated therein,
have been incorporated by reference herein and in the Registration Statement in
reliance upon the report of __________, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The Annual Report of Mentor Municipal as of September 30, 1998, and the
financial highlights and financial statements for the periods indicated therein,
have been incorporated by reference herein and in the Registration Statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Municipal will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
PART IV
VOTING INFORMATION CONCERNING THE MEETING
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This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of Mentor Funds, to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., October 15, 1999, at
the offices of the Mentor Funds, 901 East Byrd Street, Richmond, Virginia 23219,
and at any adjournments thereof. This Prospectus/Proxy Statement, along with a
Notice of the Meeting and a proxy card, is first being mailed to shareholders of
Mentor Municipal on or about August 27, 1999. Only shareholders of record as of
the close of business on the Record Date will be entitled to notice of, and to
vote at, the Meeting or any adjournment thereof. The holders of fifty percent
(50%) of the total number of outstanding shares entitled to vote at the Meeting
present in person or represented by proxy will constitute a quorum for the
Meeting.
If the enclosed form of proxy is properly executed and returned in time
to be voted at the Meeting, the proxies named therein will vote the shares
represented by the proxy in accordance with the instructions marked thereon.
Unmarked proxies will be voted FOR the proposed Conversion, FOR the
reclassification of the Fund's investment objective from fundamental to
nonfundamental, FOR the adoption of standardized fundamental investment
restrictions, FOR the proposed Reorganization and FOR any other matters deemed
appropriate. Proxies that reflect abstentions and "broker non-votes" (i.e.,
shares held by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners or the persons entitled to vote or (ii) the
broker or nominee does not have discretionary voting power on a particular
matter) will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum, but will not have the effect
of being counted as votes against either the Conversion Plan or the
Reorganization Plan, which must be approved by a majority of the votes cast and
entitled to vote. However, such abstentions and "broker non-votes" will have the
effect of being counted as votes against the reclassification of the Fund's
investment objective from fundamental to nonfundamental and the adoption of
standardized fundamental investment restrictions, which must be approved by a
certain percentage of the Fund's outstanding voting securities as described
below. A proxy may be revoked at any time on or before the Meeting by written
notice to the Secretary of Mentor Funds at the address set forth on the cover of
this Prospectus/Proxy Statement. Unless revoked, all valid proxies will be voted
in accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Conversion Plan, FOR approval of the
reclassification of the Fund's investment objective from fundamental to
nonfundamental, FOR adoption of standardized fundamental investment
restrictions, and FOR approval of the Reorganization Plan and the Reorganization
contemplated thereby.
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Approval of the Conversion Plan and the Reorganization Plan will
require the affirmative vote of a majority of the votes cast and entitled to
vote, with all classes voting together as a single class at the Meeting at which
a quorum of the Fund's shares is present. Each full share outstanding is
entitled to one vote and each fractional share outstanding is entitled to a
proportionate share of one vote.
Pursuant to the 1940 Act, the affirmative vote of the holders of a
majority of the outstanding voting securities of the Fund is required to approve
the reclassification of the Fund's investment objective from fundamental to
nonfundamental (proposal 2) and the adoption of standardized fundamental
investment restrictions (proposals 3A to 3I). Under the 1940 Act, the
affirmative vote of a "majority of the outstanding voting securities" of the
Fund is defined as the lesser of (a) 67% or more of the voting securities of the
Fund present or represented by proxy at the Meeting, if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy, or (b) more than 50% of the outstanding voting securities of the Fund.
Proxy solicitations will be made primarily by mail, but proxy
solicitations may also be made by telephone, e-mail or personal solicitations
conducted by officers and employees of Mentor or FUNB, their affiliates or other
representatives of Mentor Municipal (who will not be paid for their solicitation
activities). Shareholder Communications Corporation and its agents have been
engaged by Mentor Municipal to assist in soliciting proxies. If you wish to
participate in the Meeting, you may submit the proxy card included with this
Prospectus/Proxy Statement, vote by fax, vote by telephone or Internet or attend
in person. Any proxy given by you is revocable.
In the event that sufficient votes to approve the Conversion and the
Reorganization are not received by October 15, 1999, the persons named as
proxies may propose one or more adjournments of the Meeting to permit further
solicitation of proxies. In determining whether to adjourn the Meeting for a
period of not more than 60 days in the aggregate, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote of a plurality of the
votes cast on the question in person or by proxy at the session of the Meeting
to be adjourned. The persons named as proxies will vote upon such adjournment
after consideration of all circumstances which may bear upon a decision to
adjourn the Meeting.
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A shareholder who objects to the proposed Conversion or Reorganization
will not be entitled under either Delaware or Massachusetts law or the
Declaration of Trust of Evergreen Trust or Mentor Funds to demand payment for,
or an appraisal of, his or her shares. However, shareholders should be aware
that the Conversion and the Reorganization as proposed are not expected to
result in recognition of gain or loss to shareholders for federal income tax
purposes and that, if the Conversion and the Reorganization are consummated,
shareholders will be free to redeem the shares of Evergreen Municipal which they
receive in the transaction at their then-current net asset value. In addition,
shares of Mentor Municipal may be redeemed at any time prior to the consummation
of the Conversion or the Reorganization. Shareholders of Mentor Municipal may
wish to consult their tax advisers as to any differing consequences of redeeming
Fund shares prior to the Conversion or the Reorganization or exchanging such
shares in the Conversion or the Reorganization.
Mentor Municipal does not hold annual shareholder meetings. If the
Conversion or the Reorganization is not approved, shareholders wishing to submit
proposals for consideration for inclusion in a proxy statement for a subsequent
shareholder meeting should send their written proposals to the Secretary of
Mentor Funds at the address set forth on the cover of this Prospectus/Proxy
Statement such that they will be received by the Fund in a reasonable period of
time prior to any such meeting.
The votes of the shareholders of Evergreen Municipal are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Mentor Municipal whether other persons are beneficial owners of
shares for which proxies are being solicited and, if so, the number of copies of
this Prospectus/Proxy Statement needed to supply copies to the beneficial owners
of the respective shares.
OTHER BUSINESS
The Trustees of Mentor Funds do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
THE TRUSTEES OF MENTOR FUNDS RECOMMEND APPROVAL OF THE CONVERSION PLAN,
THE RECLASSIFICATION OF THE FUND'S INVESTMENT OBJECTIVE FROM FUNDAMENTAL TO
NONFUNDAMENTAL, THE ADOPTION OF STANDARDIZED FUNDAMENTAL INVESTMENT RESTRICTIONS
AND THE APPROVAL
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OF THE REORGANIZATION PLAN AND ANY UNMARKED PROXIES WITHOUT
INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF THESE
PROPOSALS.
August 27, 1999
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EXHIBIT A
AGREEMENT AND PLAN OF CONVERSION AND TERMINATION
AGREEMENT AND PLAN OF CONVERSION AND TERMINATION dated _____________,
1999 (the "Agreement"), between Mentor Funds, a Massachusetts business trust
having its principal office at 901 East Byrd Street, Richmond, Virginia 23219
(the "Original Trust") on behalf of its Mentor Municipal Income Portfolio (the
"Original Fund"), one of the Original Trust's series portfolios, and Evergreen
Municipal Trust, a Delaware business trust having its principal office at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Successor Trust") on behalf
of its Evergreen Municipal Income Fund (the "Successor Fund"), one of the
Successor Trust's series portfolios.
WHEREAS, the Board of Trustees of the Original Trust and the Board of
Trustees of the Successor Trust have respectively determined that it is in the
best interests of the Original Fund and the Successor Fund, respectively, that
the assets of the Original Fund be acquired by the Successor Fund pursuant to
this Agreement and in accordance with, respectively, the applicable laws of the
Commonwealth of Massachusetts and the State of Delaware; and
WHEREAS, the parties desire to enter into a plan of exchange which
would constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"):
NOW THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
1. PLAN OF EXCHANGE.
(a) Subject to the terms and conditions set forth herein, on
the Exchange Date (as defined herein), the Original Fund shall assign, transfer
and convey the assets, including all securities and cash held by the Original
Fund (subject to the liabilities of the Original Fund) to the Successor Fund and
the Successor Fund shall acquire all of the assets of the Original Fund (subject
to the liabilities of the Original Fund) in exchange for full and fractional
shares of beneficial interest of the Successor Fund, $.001 par value per share
(the "Successor Fund Shares"), to be issued by the Successor Trust on behalf of
the Successor Fund, having, in the case of the Successor Fund, an aggregate net
asset value equal to the value of the net assets of the Original Fund acquired.
The value of the assets of the Original Fund and the net asset value per share
of the Successor
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Fund Shares shall be determined as of the Valuation Date (as defined herein) in
accordance with the procedures for determining the value of the Original Fund's
assets set forth in the Successor Fund's Declaration of Trust and the
then-current prospectus and statement of additional information for the
Successor Fund that forms a part of the Successor Fund's Registration Statement
on Form N-1A (the "Registration Statement"). In lieu of delivering certificates
for the Successor Fund Shares, the Successor Trust shall credit the Successor
Fund Shares to the Original Fund's account on the share record books of the
Successor Trust and shall deliver a confirmation thereof to the Original Fund.
The Original Fund shall then deliver written instructions to the Successor
Trust's transfer agent to establish accounts for the shareholders on the share
record books relating to the Original Fund. Holders of Class A shares, Class B
shares and Class Y shares of the Original Fund shall receive in the transaction
described above, Class A shares, Class C shares and Class Y shares,
respectively, of the Successor Fund. Successor Fund Shares of each such class
shall have the same aggregate net asset value as the aggregate net asset value
of the corresponding class of the Original Fund.
(b) Delivery of the assets of the Original Fund shall be made not later
than the next business day following the Valuation Date (the "Exchange Date").
Assets transferred shall be delivered to State Street Bank and Trust Company,
the Successor Trust's custodian (the "Custodian"), for the account of the
Successor Trust and the Successor Fund, with all securities not in bearer or
book entry form duly endorsed, or accompanied by duly executed separate
assignments or stock powers, in proper form for transfer, with signatures
guaranteed, and with all necessary stock transfer stamps, sufficient to transfer
good and marketable title thereto (including all accrued interest and dividends
and rights pertaining thereto) to the Custodian for the account of the Successor
Trust and the Successor Fund free and clear of all liens, encumbrances, rights,
restrictions and claims. All cash delivered shall be in the form of immediately
available funds payable to the order of the Custodian for the account of the
Successor Trust and the Successor Fund. All assets delivered to the Custodian as
provided herein shall be allocated by the Successor Trust to the Successor Fund.
(c) The Original Fund will pay or cause to be paid to the Successor
Trust any interest received on or after the Exchange Date with respect to assets
transferred from the Original Fund to the Successor Fund hereunder and to the
Successor Trust any distributions, rights or other assets received by the
Original Fund after the Exchange Date as distributions on or with respect to the
securities transferred from the Original Fund to the Successor Fund hereunder
and the Successor Trust shall allocate any such distributions, rights or other
assets to the Successor
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Fund. All such assets shall be deemed included in assets
transferred to the Successor Fund on the Exchange Date and shall
not be separately valued.
(d) The Valuation Date shall be October 15, 1999, or such earlier or
later date as may be mutually agreed upon by the parties.
(e) As soon as practicable after the Exchange Date, the Original Fund
shall distribute all of the Successor Fund Shares received by it among the
shareholders of the Original Fund in proportion to the number of shares each
such shareholder holds in the Original Fund and, upon the effecting of such a
distribution on behalf of the Fund, the Original Fund will dissolve and
terminate. After the Exchange Date, the Original Fund shall not conduct any
business except in connection with its dissolution and termination.
2. THE ORIGINAL TRUST'S REPRESENTATIONS AND WARRANTIES.
The Original Trust represents and warrants to and agrees with the
Successor Trust as follows:
(a) The Original Trust is a business trust duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Massachusetts and has power to own all of its properties and assets and, subject
to the approval of its shareholders as contemplated hereby, to carry out this
Agreement on behalf of the Original Fund.
(b) The Original Trust is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company, and such registration has not been revoked or rescinded and is in full
force and effect.
(c) On the Exchange Date, the Original Trust will have full right,
power and authority to sell, assign, transfer and deliver the assets to be
transferred by it hereunder.
(d) The current prospectuses and statement of additional information of
the Original Fund conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
1940 Act and the rules and regulations of the Securities and Exchange Commission
(the "Commission") thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(e) The Original Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder
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approval) will not result, in violation of any provision of the Original Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Original Trust or
the Original Fund is a party or by which it is bound.
(f) Except as otherwise disclosed in writing to and accepted by the
Successor Fund, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or to its knowledge
threatened against the Original Trust or the Original Fund or any of their
properties or assets, which, if adversely determined, would materially and
adversely affect their financial condition, the conduct of their business, or
the ability of the Original Trust or the Original Fund to carry out the
transactions contemplated by this Agreement. The Original Trust and the Original
Fund know of no facts that might form the basis for the institution of such
proceedings and are not parties to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially and
adversely affects their business or their ability to consummate the transactions
herein contemplated.
(g) The unaudited semi-annual financial statements of the Original Fund
at March 31, 1999 are in accordance with generally accepted accounting
principles consistently applied, and such statements (copies of which have been
furnished to the Successor Fund) fairly reflect the financial condition of the
Original Fund as of such date, and there are no known contingent liabilities of
the Original Fund as of such date not disclosed therein.
(h) Since March 31, 1999 there has not been any material adverse change
in the Original Fund's financial condition, assets, liabilities, or business
other than changes occurring in the ordinary course of business, or any
incurrence by the Original Fund of indebtedness maturing more than one year from
the date such indebtedness was incurred, except as otherwise disclosed to and
accepted by the Successor Trust. For the purposes of this subparagraph (h), a
decline in the net asset value of the Original Fund shall not constitute a
material adverse change.
(i) At the Exchange Date, all federal and other tax returns and reports
of the Original Fund required by law to have been filed by such dates shall have
been filed, and all federal and other taxes shown due on said returns and
reports shall have been paid, or provision shall have been made for the payment
thereof. To the best of the Original Trust's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
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(j) For each fiscal year of its operation, the Original Fund has met
the requirements of Subchapter M of the Code for qualification and treatment as
a regulated investment company and has distributed in each such year all net
investment income and realized capital gains required to so qualify.
(k) All issued and outstanding shares of the Original Fund are, and at
the Exchange Date will be, duly and validly issued and outstanding, fully paid
and non-assessable by the Original Fund. All of the issued and outstanding
shares of the Original Fund will, at the time of the Exchange Date, be held by
the persons and in the amounts set forth in the records of the transfer agent.
The Original Fund does not have outstanding any options, warrants, or other
rights to subscribe for or purchase any of the Original Fund shares, nor is
there outstanding any security convertible into any of the Original Fund shares.
(l) At the Exchange Date, the Original Trust will have good and
marketable title to the Original Fund's assets to be transferred to the
Successor Fund pursuant to Section 1 and full right, power, and authority to
sell, assign, transfer, and deliver such assets hereunder, and, upon delivery
and payment for such assets, the Successor Trust will acquire good and
marketable title thereto, subject to no restrictions on the full transfer
thereof, including such restrictions as might arise under the 1933 Act, other
than as disclosed to the Successor Trust and accepted by the Successor Trust.
(m) The execution, delivery, and performance of this Agreement have
been duly authorized by all necessary action on the part of the Original Fund
and, subject to the approval of the shareholders of the Original Fund, this
Agreement constitutes a valid and binding obligation of the Original Trust on
behalf of the Original Fund, enforceable in accordance with its terms, subject
as to enforcement, to bankruptcy, insolvency, reorganization, moratorium, and
other laws relating to or affecting creditors' rights and to general equity
principles.
(n) The information furnished by the Original Fund for use in no-action
letters, applications for orders, registration statements, proxy materials, and
other documents that may be necessary in connection with the transactions
contemplated hereby is accurate and complete in all material respects and
complies in all material respects with federal securities and other laws and
regulations thereunder applicable thereto.
3. THE SUCCESSOR TRUST'S REPRESENTATIONS AND WARRANTIES.
The Successor Trust represents and warrants to and agrees with the
Original Trust as follows:
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(a) The Successor Trust is a business trust duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
power to carry on its business as it is now being conducted and to carry out
this Agreement on behalf of the Successor Fund.
(b) The Successor Trust is registered as an open-end management
investment company and adopts the Registration Statement of the Original Trust
and the Original Fund, for purposes of the 1933 Act.
(c) At the Exchange Date, the Successor Fund Shares to be issued to the
Original Fund will have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be legally and validly issued and will be fully
paid and non-assessable by the Successor Trust. No Successor Trust or Successor
Fund shareholder will have any preemptive right of subscription or purchase in
respect thereof.
(d) The current prospectuses and statement of additional information of
the Successor Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(e) The Successor Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Successor
Trust's Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Successor Fund is
a party or by which it is bound.
(f) Except as otherwise disclosed in writing to the Original Trust and
accepted by the Original Trust, no litigation, administrative proceeding or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Successor Trust or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Successor Trust to carry out the transactions contemplated by
this Agreement. The Successor Trust knows of no facts that might form the basis
for the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
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(g) The Successor Fund has no known liabilities of a material amount,
contingent or otherwise.
(h) At the Exchange Date, there shall not have been any material
adverse change in the Successor Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Successor Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Original Trust. For the purposes of this subparagraph (h), a
decline in the net asset value of the Successor Fund shall not constitute a
material adverse change.
(i) At the Exchange Date, all federal and other tax returns and reports
of the Successor Fund required by law then to be filed by such date shall have
been filed, and all federal and other taxes shown due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof. To the best of the Successor Trust's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Successor Fund has met
the requirements of Subchapter M of the Code for qualification and treatment as
a regulated investment company and has distributed in each such year all net
investment income and realized capital gains required to so qualify.
(k) All issued and outstanding Successor Fund Shares are, and at the
Exchange Date will be, duly and validly issued and outstanding, fully paid and
non-assessable. The Successor Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Successor Fund
Shares, nor is there outstanding any security convertible into any Successor
Fund Shares.
(l) The execution, delivery, and performance of this Agreement have
been duly authorized by all necessary action on the part of the Successor Trust,
and this Agreement constitutes a valid and binding obligation of the Successor
Trust enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium, and other laws relating to
or affecting creditors' rights and to general equity principles.
(m) The Successor Fund Shares to be issued and delivered to the
Original Fund, for the account of the Original Trust shareholders, pursuant to
the terms of this Agreement will, at the Exchange Date, have been duly
authorized and, when so issued and delivered, will be duly and validly issued
Successor Fund Shares, and will be fully paid and non-assessable.
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(n) The information furnished by the Successor Trust for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations applicable thereto.
4. THE SUCCESSOR TRUST'S CONDITIONS PRECEDENT. The
obligations of the Successor Trust hereunder shall be subject to the
following conditions:
(a) The Original Trust shall have furnished to the Successor Trust a
statement of the Original Fund's assets, including a list of securities owned by
the Original Fund with their respective tax costs and values determined as
provided in Section 1 hereof, all as of the Exchange Date.
(b) As of the Exchange Date, all representations and warranties of the
Original Trust on behalf of the Original Fund made in this Agreement shall be
true and correct as if made at and as of such date, and the Original Trust on
behalf of the Original Fund shall have complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such date.
(c) For the Original Trust, a vote approving this Agreement and the
transactions and exchange contemplated hereby shall have been duly adopted by
the shareholders of the Original Fund.
(d) The Successor Trust shall have received on the Exchange Date an
opinion of Ropes & Gray, counsel to the Original Trust, dated as of the Exchange
Date, in a form satisfactory to the Successor Trust covering the following
points:
(i) The Original Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(ii) The Original Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(iii) This Agreement has been duly authorized, executed and
delivered by the Original Trust and, assuming due authorization, execution, and
delivery of this Agreement by the Successor Trust, is a valid and binding
obligation of the
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<PAGE>
Original Fund enforceable against the Original Trust in accordance with its
terms, subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights generally
and to general equity principles.
(iv) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or the Commonwealth of Massachusetts is required for consummation by the
Original Trust of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the Securities Exchange Act of 1934, as amended
(The "1934 Act") and the 1940 Act, and as may be required under state securities
laws.
(v) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Original Trust's Declaration of Trust or By-laws, or any
provision of any material agreement, indenture, instrument, contract, lease or
other undertaking (in each case known to such counsel) to which the Original
Trust is a party or by which it or any of its properties may be bound or, to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which the
Original Trust is a party or by which it is bound.
(vi) Only insofar as they relate to the Original Trust, the
descriptions in the proxy materials of statutes, legal and government
proceedings and material contracts, if any, are accurate and fairly present the
information required to be shown.
(vii) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Original Trust or
the Original Fund or any of their respective properties or assets and the
Original Trust and the Original Fund are neither parties to nor subject to the
provisions of any order, decree or judgment of any court or governmental body,
which materially and adversely affects their business other than as previously
disclosed in the proxy materials.
(viii) Assuming that a consideration therefor of not less than
the net asset value thereof has been paid, and assuming that such shares were
issued in accordance with the terms of the Original Fund's registration
statement, or any amendment thereto, in effect at the time of such issuance, all
issued and outstanding shares of the Original Fund are legally issued and fully
paid and non-assessable.
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Such opinion shall contain such other assumptions and limitations as shall be in
the opinion of Ropes & Gray appropriate to render the opinions expressed
therein.
5. THE ORIGINAL TRUST'S CONDITIONS PRECEDENT. The obligations of the
Original Trust hereunder shall be subject to the following conditions: (a) that
as of the Exchange Date all representations and warranties of the Successor
Trust made in the Agreement shall be true and correct as if made at and as of
such date, and that the Successor Trust shall have complied with all of the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such date.
(b) The Original Trust shall have received on the Exchange Date an
opinion from Sullivan & Worcester LLP, counsel to the Successor Trust, dated as
of the Exchange Date, in a form reasonably satisfactory to the Original Trust,
covering the following points:
(i) The Successor Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(ii) The Successor Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(iii) This Agreement has been duly authorized, executed, and
delivered by the Successor Trust and, assuming due authorization, execution and
delivery of this Agreement by the Original Trust, is a valid and binding
obligation of the Successor Fund enforceable against the Successor Trust in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(iv) The Successor Fund Shares to be issued and delivered to
the Original Trust on behalf of the Original Fund Shareholders as provided by
this Agreement are duly authorized and upon such delivery will be legally issued
and outstanding and fully paid and non-assessable, and no shareholder of the
Successor Fund has any preemptive rights in respect thereof.
(v) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or the State of Delaware is
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<PAGE>
required for consummation by the Successor Trust of the transactions
contemplated herein, except such as have been obtained under the 1933 Act, the
1934 Act and the 1940 Act, and as may be required under state securities laws.
(vi) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Successor Trust's Declaration of Trust or By-Laws or any
provision of any material agreement, indenture, instrument, contract, lease or
other undertaking (in each case known to such counsel) to which the Successor
Trust is a party or by which it or any of its properties may be bound or to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which the
Successor Trust is a party or by which it is bound.
(vii) Only insofar as they relate to the Successor Trust and
the Successor Fund, the descriptions in the proxy materials of statutes, legal
and governmental proceedings and material contracts, if any, are accurate and
fairly present the information required to be shown.
(viii) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Successor Trust and the
Successor Fund, existing on or before the effective date of the proxy materials
or the Exchange Date required to be described in the proxy materials which are
not described or filed as required.
(ix) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Successor Trust
or any of its properties or assets and the Successor Trust is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the proxy materials.
Such opinion shall contain such assumptions and limitations as shall be in the
opinion of Sullivan & Worcester LLP appropriate to render the opinions expressed
therein.
6. THE SUCCESSOR TRUST'S AND THE ORIGINAL TRUST'S CONDITIONS PRECEDENT.
The obligations of both the Successor Trust and the Original Trust hereunder as
to the Successor Fund and the Original Fund respectively, shall be subject to
the following conditions:
(a) The receipt of such authority, including "no-action"
letters and orders from the Commission or state securities
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commissions, as may be necessary to permit the parties to carry out the
transaction contemplated by this Agreement shall have been received.
(b) The Successor Trust's adoption of the Registration Statement on
Form N-1A under the 1933 Act shall have become effective, and any post-effective
amendments to such Registration Statement as are determined by the Trustees of
the Successor Trust to be necessary and appropriate shall have been filed with
the Commission and shall have become effective.
(c) The Commission shall not have issued an unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted nor threatened to institute
any proceeding seeking to enjoin consummation of the reorganization transactions
contemplated hereby under Section 25(c) of the 1940 Act and no other action,
suit or other proceeding shall be threatened or pending before any court or
governmental agency which seeks to restrain or prohibit, or obtain damages or
other relief in connection with, this Agreement or the transactions contemplated
herein.
(d) All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Successor Fund or the Original Fund,
provided that either party hereto may for itself waive any of such conditions.
(e) The parties shall have received a favorable opinion of Sullivan &
Worcester LLP addressed to the Successor Trust and the Original Trust
substantially to the effect that for federal income tax purposes:
(i) The transfer of all of the Original Fund assets in
exchange for the Successor Fund Shares and the assumption by the Successor Fund
of all the liabilities of the Original Fund followed by the distribution of the
Successor Fund Shares to the Original Fund shareholders in dissolution and
liquidation of the Original Fund will constitute a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code and the Successor Trust and the
Original Trust will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code.
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<PAGE>
(ii) No gain or loss will be recognized by the Successor Fund
upon the receipt of the assets of the Original Fund solely in exchange for the
Successor Fund Shares and the assumption by the Successor Fund of the
liabilities of the Original Fund.
(iii) No gain or loss will be recognized by the Original Fund
upon the transfer of the Original Fund assets to the Successor Fund in exchange
for the Successor Fund Shares and the assumption by the Successor Fund of the
liabilities of the Original Fund or upon the distribution (whether actual or
constructive) of the Successor Fund Shares to Original Fund shareholders in
exchange for their shares of the Original Fund.
(iv) No gain or loss will be recognized by the Original Fund
Shareholders upon the exchange of their Original Fund shares for the Successor
Fund Shares in liquidation of the Original Fund.
(v) The aggregate tax basis for the Successor Fund Shares
received by each Original Fund shareholder pursuant to the transactions
contemplated by this Agreement will be the same as the aggregate tax basis of
the Original Fund shares held by such shareholder immediately prior to the
transactions contemplated by this Agreement, and the holding period of the
Successor Fund Shares to be received by each Original Fund Shareholder will
include the period during which the Original Fund shares exchanged therefor were
held by such shareholder (provided the Original Fund shares were held as capital
assets on the date of the transactions contemplated by this Agreement).
(vi) The tax basis of the Original Fund assets acquired by the
Successor Fund will be the same as the tax basis of such assets to the Original
Fund immediately prior to the transactions contemplated by this Agreement, and
the holding period of the assets of the Original Fund in the hands of the
Successor Fund will include the period during which those assets were held by
the Original Fund.
Notwithstanding anything herein to the contrary, neither the Successor
Fund nor the Original Fund may waive the conditions set forth in this Section 6.
7. INDEMNIFICATION. The Successor Trust hereby agrees with the Original
Trust and each Trustee of the Original Trust: (i) to indemnify each Trustee of
the Original Trust against all liabilities and expenses referred to in the
indemnification provisions of the Original Trust's organizational documents, to
the extent provided therein, incurred by any Trustee of the Original Trust; and
(ii) in addition to the indemnification provided in (i) above, to indemnify each
Trustee of the Original
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<PAGE>
Trust against all liabilities and expenses and pay the same as they arise and
become due, without any exception, limitation or requirement of approval by any
person, and without any right to require repayment thereof by any such Trustee
(unless such Trustee has had the same repaid to him or her) based upon any
subsequent or final disposition or findings made in connection therewith or
otherwise, if such action, suit or other proceeding involves such Trustee's
participation in authorizing or permitting or acquiescing in, directly or
indirectly, by action or inaction, the making of any distribution in any manner
of all or any assets of the Original Fund without making provision for the
payment of any liabilities of any kind, fixed or contingent, of the Original
Fund, which liabilities were not actually and consciously personally known to
such Trustee to exist at the time of such Trustee's participation in so
authorizing or permitting or acquiescing in the making of any such distribution.
8. TERMINATION OF AGREEMENT. As to the Original Fund and the Successor
Fund, this Agreement and the transactions contemplated hereby may be terminated
and abandoned by resolution of the Board of Trustees of the Original Trust or
the Board of Trustees of the Successor Trust, at any time prior to the Exchange
Date (and notwithstanding any vote of the shareholders of the Original Fund) if
circumstances should develop that, in the opinion of either the Board of
Trustees of the Original Trust or the Board of Trustees of the Successor Trust,
make proceeding with this Agreement inadvisable.
As to the Original Fund and the Successor Fund, if this Agreement is
terminated and the exchange contemplated hereby is abandoned pursuant to the
provisions of this Section 8, this Agreement shall become void and have no
effect, without any liability on the part of any party hereto or the Trustees,
officers or shareholders of the Successor Trust or the Trustees, officers or
shareholders of the Original Trust, in respect of this Agreement.
9. WAIVER AND AMENDMENTS. At any time prior to the Exchange Date, any
of the conditions set forth in Section 4 may be waived by the Board of Trustees
of the Successor Trust, and any of the conditions set forth in Section 5 may be
waived by the Board of Trustees of the Original Trust, if, in the judgment of
the waiving party, such waiver will not have a material adverse effect on the
benefits intended under this Agreement to the shareholders of the Original Fund
or the shareholders of the Successor Fund, as the case may be. In addition,
prior to the Exchange Date, any provision of this Agreement may be amended or
modified by the Board of Trustees of the Original Trust and the Board of
Trustees of the Successor Trust in such manner as may be mutually agreed upon in
writing by such Trustees if such amendment or modification would not have a
material adverse
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<PAGE>
effect upon the benefits intended under this Agreement and would be consistent
with the best interests of shareholders.
10. NO SURVIVAL OF REPRESENTATIONS. None of the representations
and warranties included or provided for herein shall survive consummation
of the transactions contemplated hereby.
11. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to
principles of conflict of laws; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Original Trust,
shall be governed and construed in accordance with the laws of the Commonwealth
of Massachusetts without giving effect to principles of conflict of laws.
12. CAPACITY OF TRUSTEES, ETC. With respect to both the Original Trust
and the Successor Trust, the names used herein refer respectively to the Trust
created and, as the case may be, the Trustees, as trustees but not individually
or personally, acting from time to time under organizational documents filed in
Massachusetts in the case of the Original Trust and Delaware, in the case of the
Successor Trust, which are hereby referred to and are also on file at the
principal offices of the Original Trust or, as the case may be, the Successor
Trust. The obligations of the Original Trust or of the Successor Trust entered
into in the name or on behalf thereof by any of the Trustees, representatives or
agents of the Original Trust or the Successor Trust, as the case may be, are
made not individually, but in such capacities, and are not binding upon any of
the Trustees, shareholders or representatives of the Original Trust or, as the
case may be, the Successor Trust personally, but bind only the trust property,
and all persons dealing with any Original Fund of the Original Trust or any
Successor Fund of the Successor Trust must look solely to the trust property
belonging to such Original Fund or, as the case may be, Successor Fund for the
enforcement of any claims against the Original Fund or, as the case may be,
Successor Fund.
13. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which, when executed and delivered, shall be deemed
to be an original.
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<PAGE>
IN WITNESS WHEREOF, the Original Trust and the Successor Trust have
caused this Agreement and Plan of Conversion and Termination to be executed as
of the date above first written.
MENTOR FUNDS on behalf of
Mentor Municipal Income
Portfolio
ATTEST:_______________________ By:__________________________
Title:
EVERGREEN MUNICIPAL TRUST
on behalf of Evergreen
Municipal Income Fund
ATTEST:_______________________ By:__________________________
Title:
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<PAGE>
EXHIBIT B
MANAGEMENT OF EVERGREEN TRUST
Evergreen Trust is supervised by a Board of Trustees that is responsible for
representing the interests of the shareholders. The Trustees meet periodically
throughout the year to oversee the Successor Fund's activities, reviewing, among
other things, each Successor Fund's performance and its contractual arrangements
with various service providers. Each Trustee is paid a fee for his or her
services.
Evergreen Trust has an Executive Committee which consists of the
Chairman of the Board, James Howell, and Messrs. Scofield and Salton, each of
whom is an Independent Trustee. The executive Committee recommends Trustees to
fill vacancies, prepares the agenda for Board meetings and acts on routine
matters between scheduled Board meetings.
Set forth below are the Trustees and officers of Evergreen Trust and
their principal occupations and affiliations over the last five years. Unless
otherwise indicated, the address for each Trustee and officer is 200 Berkeley
Street, Boston, Massachusetts 02116. Each Trustee is also a Trustee of each of
the other Trusts in the Evergreen Fund complex.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Position Principal Occupations for Last
with Trust Five Years
Laurence B. Ashkin Trustee Real estate developer and
(DOB: 2/2/28) construction consultant; and
President of Centrum Equities
and Centrum Properties, Inc.
Charles A. Austin Trustee Investment Counselor to Appleton
III partners, Inc.; former Director,
(DOB: 10/23/34) Executive Vice President and
Treasurer, State Street Research
& Management Company (investment
advice); Director, The Andover
Companies (Insurance); and
Trustee, Arthritis Foundation of
New England
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<PAGE>
K. Dun Gifford Trustee Trustee, Treasurer and Chairman
(DOB: 10/12/38) of the Finance Committee,
Cambridge
College;
Chairman
Emeritus and
Director,
American
Institute of
Food and Wine;
Chairman and
President,
Oldways
Preservation
and Exchange
Trust
(education);
former Chairman
of the Board,
Director, and
Executive Vice
President, The
London Harness
Company; former
Managing
Partner,
Roscommon
Capital Corp.;
former Chief
Executive
Officer,
Gifford Gifts
of Fine Foods;
former
Chairman,
Gifford,
Drescher &
Associates
(environmental
consulting)
James S. Howell Chairman of Former Chairman of the
(DOB: 8/13/24) the Board of Distribution Foundation for the
Trustees Carolinas; and former Vice
President of Lance Inc. (food
manufacturing).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief
(DOB: 2/14/39) Executive Officer, Carson
Products
Company;
Director of
Phoenix Total
Return Fund and
Equifax, Inc.;
Trustee of
Phoenix Series
Fund, Phoenix
Multi-Portfolio
Fund, and The
Phoenix Big
Edge Series
Fund; and
former
President,
Morehouse
College.
Gerald M. McDonnell Trustee Sales Representative with Nucor-
(DOB: 7/14/39) Yamoto, Inc. (steel producer).
Thomas L. McVerry Trustee Former Vice President and
(DOB: 8/2/39) Director of Rexham Corporation
(manufacturing); and former
Director of Carolina Cooperative
Federal Credit Union.
William Walt Pettit Trustee Partner in the law firm of
(DOB: 8/26/55) William Walt Pettit, P.A.
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<PAGE>
David M. Richardson Trustee Vice Chair and former Executive
(DOB: 9/14/41) Vice President, DHR
International, Inc. (executive
recruitment); former Senior Vice
President, Boyden International
Inc. (executive recruitment);
and Director, Commerce and
Industry Association of New
Jersey, 411 International, Inc.,
and J&M Cumming Paper Co.
Russell A. Salton, Trustee Medical Director, U.S. Health
III, MD Care/Aetna Health Services;
(DOB: 6/2/47) former Managed Health Care
Consultant; and former
president, Primary Physician
Care.
Michael S. Scofield Trustee Attorney, Law Offices of Michael
(DOB: 2/20/43) S. Scofield.
Richard J. Shima Trustee Former Chairman, Environmental
(DOB: 8/11/39) Warranty, Inc. (insurance
agency);
Executive
Consultant,
Drake Beam
Morin, Inc.
(executive
outplacement);
Director of
Connecticut
Natural Gas
Corporation-Hartford
Hospital, Old
State House
Association,
Middlesex
Mutual
Assurance
Company, and
Enhance
Financial
Services, Inc.;
Chairman, Board
of Trustees,
Hartford
Graduate
Center;
Trustee,
Greater
Hartford YMCA;
former
Director, Vice
Chairman and
Chief
Investment
Officer, The
Travelers
Corporation;
former Trustee,
Kingswood-Oxford
School; and
former Managing
Director and
Consultant,
Russell Miller,
Inc.
Anthony J. Fischer* President Vice President/Client Services,
(DOB: 2/10/59) and BISYS Fund Services.
Treasurer
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<PAGE>
Nimish S. Bhatt** Vice Assistant Vice President,
(DOB: 6/6/63) President EAMC/First Union Bank; former
and Senior Tax Consulting/Acting
Assistant Manager, Investment Companies
Treasurer Group, PricewaterhouseCoopers
LLP, New York.
Bryan Haft** Vice Team Leader, Fund
(DOB: 1/23/65 President Administration, BISYS Fund
Services
Michael H. Koonce Secretary Senior Vice President and
(DOB: 4/20/60) Assistant General Counsel, First
Union Corporation; former Senior
Vice President and General
Counsel, Colonial Management
Association, Inc.
</TABLE>
* Address: BISYS Fund Services, 90 Park Avenue, New York,
New York 10016
**Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
Trustee Compensation
Listed below is the Trustee compensation paid by Evergreen Trust and
the other trusts in the Evergreen Fund Complex for the twelve months ended April
30, 1999. The Trustees do not receive pension or retirement benefits from the
Funds.
<TABLE>
<CAPTION>
<S> <C> <C>
Aggregate Total Compensation
Compensation from the Trust and
Trustee from the Trust Fund Complex Paid to
Trustees*
Laurence B. Ashkin $5,489 $75,000
Charles A. Austin, III $5,489 $75,000
K. Dun Gifford $5,292 $72,500
James S. Howell $7,061 $97,500
Leroy Keith, Jr. $5,292 $72,500
Gerald M. McDonnell $5,489 $75,000
Thomas L. McVerry $6,353 $86,000
William Walt Pettit $5,292 $72,500
David M. Richardson $5,240 $71,875
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<PAGE>
Russell A. Salton, III $5,489 $77,500
MD
Michael S. Scofield $5,489 $77,500
Richard J. Shima $5,292 $72,500
</TABLE>
*Certain Trustees have elected to defer all or part of their total compensation
for the twelve months ended April 30, 1999. The amounts listed below will be
payable in later years to the respective Trustees:
Austin $11,250
Howell $77,600
McDonnell $75,000
McVerry $86,000
Pettit $72,500
Salton $77,000
Scofield $11,250
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<PAGE>
EXHIBIT C
MENTOR FUNDS
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS
"S": Fundamental Restriction to be Standardized
"R": Fundamental Restriction to be Reclassified as Non-
Fundamental
Topic MENTOR MUNICIPAL INCOME PORTFOLIO
1. Investment The investment objective of the
Objective Municipal Income Portfolio is to
(R) provide investors with a high level
of current income exempt from
federal regular income tax,
consistent with preservation
of capital.
2. Diversification With respect to 75% of the value of
(S) its total assets, the Portfolio will
not purchase securities issued
by any one issuer (other than
cash or securities issued or
guaranteed by the government
of the United States or its
agencies or instrumentalities
and repurchase agreements
collateralized by such
securities), if as a result
more than 5% of the value of
its total assets would be
invested in the securities of
that issuer. The Portfolio
will not acquire more than 10%
of the outstanding voting
securities of any one issuer.
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<PAGE>
Topic MENTOR MUNICIPAL INCOME PORTFOLIO
3. Concentration The Portfolio will not invest 25% or
(S) more of the value of its total assets
in any one industry (other than
securities issued by the U.S.
government, its agencies or
instrumentalities). As described in
the Trust's Prospectus, the Portfolio
may from time to time invest more
than 25% of its assets in a
particular segment of the municipal
bond market; however, the Portfolio
will not invest more than 25% of its
assets in industrial development
bonds in a single industry except as
described in the Trust's Prospectus.
4. Issuing Senior See "Borrowing."
Securities
(S)
5. Borrowing The Portfolio will not issue senior
(Including Reverse securities except that the Portfolio
Repurchase may borrow money as discussed below
Agreements) and except to the extent that the
(S) Portfolio may enter into futures
contracts.
The Portfolio may borrow money
from banks for temporary
purposes in amounts of up to
5% of its total assets. The
Portfolio will not borrow
money or engage in reverse
repurchase agreements for
investment leverage, but
rather as a temporary,
extraordinary, or emergency
measure or to facilitate
management of the Portfolio by
enabling it to meet redemption
requests when the liquidation
of portfolio securities is
deemed to be inconvenient or
disadvantageous. The Portfolio
will not purchase any
securities while any
borrowings in excess of 5% of
its total assets are
outstanding. Notwithstanding
this restriction, the
Portfolio may enter into
when-issued and delayed
delivery transactions.
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<PAGE>
Topic MENTOR MUNICIPAL INCOME PORTFOLIO
6. Underwriting The Portfolio will not underwrite any
Securities of Other issue of securities, except as the
Issuers Portfolio may be deemed to be an
(S) underwriter under the Securities Act
of 1933 in connection with the
sale of securities in
accordance with its investment
objective, policies, and
limitations.
7. Real Estate The Portfolio will not purchase or
(S) sell real estate, including limited
partnership interests, except
to the extent the securities
the Portfolio may invest in
are considered to be interests
in real estate or to the
extent the Portfolio exercises
its rights under agreements
relating to such municipal
securities (in which case the
Portfolio may liquidate real
estate acquired as a result of
a default on a mortgage),
although the Portfolio may
invest in securities of
issuers whose business
involves the purchase or sale
of real estate or in
securities which are secured
by real estate or interests in
real estate.
8. Commodities The Portfolio will not invest in
(S) commodities, except to the extent
that the Portfolio may engage in
transactions involving futures
contracts or options on
futures contracts, and except
to the extent the securities
the Portfolio invests in are
considered interests in
commodities or commodities
contracts or to the extent the
Portfolio exercises its rights
under agreements relating to
such municipal securities.
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Topic MENTOR MUNICIPAL INCOME PORTFOLIO
9. Loans to Others The Portfolio will not lend portfolio
(S) securities. This shall not prevent
the Portfolio from purchasing or
holding U.S. government obligations,
money market instruments, variable
amount demand master notes, bonds,
debentures, notes, certificates of
indebtedness, or other debt
securities, entering into repurchase
agreements, or engaging in other
transactions where permitted by the
Portfolio's investment objective,
policies and limitations or
Declaration of Trust. The Portfolio
will not make loans except to the
extent the obligations the Portfolio
may invest are considered to be
loans.
10. Short Sales See "Margin Purchases."
(R)
11. Margin Purchases The Portfolio will not sell any
(R) securities short or purchase any
securities on margin, but may
obtain such short-term credits
as are necessary for clearance
of purchases and sales of
securities. The deposit or
payment by the Portfolio or
initial or variation margin in
connection with futures
contracts or related options
transactions is not considered
the purchase of a security on
margin.
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Topic MENTOR MUNICIPAL INCOME PORTFOLIO
12. Pledging The Portfolio will not mortgage,
(R) pledge, or hypothecate any assets,
except to secure permitted
borrowings. In these cases the
Portfolio may pledge assets having a
value of 10% of assets taken at cost.
For purposes of this restriction, (a)
the deposit of assets in escrow in
connection with the writing of
covered put or call options and the
purchase of securities on a when-
issued basis; and (b) collateral
arrangements with respect to (i) the
purchase and sale of stock options
(and options on stock indexes) and
(ii) initial or variation margin for
futures contracts, will not be deemed
to be pledges of the Portfolio's
assets. Margin deposits for the
purchase and sale of futures
contracts and related options are not
deemed to be a pledge.
13. Restricted The Portfolio will not invest more
Securities than 10% of the value of its net
(R) assets in restricted securities.
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EXHIBIT D
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this ___ day of ___________, 1999, by and between Evergreen Municipal Trust,
a Delaware business trust, with its principal place of business at 200 Berkeley
Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its Evergreen
Municipal Bond Fund series (the "Acquiring Fund"), and the Trust, with respect
to its Evergreen Municipal Income Fund series (the "Selling Fund"). For purposes
of this Agreement, the Selling Fund shall be deemed to include, as applicable,
the Selling Fund's predecessor, Mentor Municipal Income Portfolio, a series of
Mentor Funds ("Mentor Municipal").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A, Class C and Class
Y shares of beneficial interest, $.001 par value per share, of the Acquiring
Fund (the "Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of
the identified liabilities of the Selling Fund; and (iii) the distribution,
after the Closing Date hereinafter referred to, of the Acquiring Fund Shares to
the shareholders of the Selling Fund in liquidation of the Selling Fund as
provided herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, pursuant to an Agreement and Plan of Conversion and
Termination approved by the shareholders of Mentor Municipal, on October __,
1999 Mentor Municipal was reorganized as a series of the Trust.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of the identified liabilities of the Selling Fund by the Acquiring
Fund on the terms and conditions hereinafter set forth are in the best interests
of the Acquiring Fund's shareholders;
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WHEREAS, the Trustees of the Trust have determined that the Selling
Fund should exchange all of its assets and the identified liabilities for
Acquiring Fund Shares and that the interests of the existing shareholders of the
Selling Fund will not be diluted as a result of the transactions contemplated
herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, computed in the manner and as of the
time and date set forth in paragraphs 2.2 and 2.3; and (ii) to assume the
identified liabilities of the Selling Fund, as set forth in paragraph 1.3. Such
transactions shall take place on the Closing Date provided for in paragraph 3.1.
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses. The
Selling Fund reserves the right to sell any of such securities, but will not,
without the prior written approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest.
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The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable period of time prior to
the Closing Date, furnish the Acquiring Fund with a list of its portfolio
securities and other investments. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund, if requested
by the Acquiring Fund, will dispose of such securities prior to the Closing
Date. In addition, if it is determined that the Selling Fund and the Acquiring
Fund portfolios, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Selling Fund if requested by the Acquiring Fund will dispose of
a sufficient amount of such investments as may be necessary to avoid violating
such limitations as of the Closing Date. Notwithstanding the foregoing, nothing
herein will require the Selling Fund to dispose of any investments or securities
if, in the reasonable judgment of the Selling Fund, such disposition would
adversely affect the tax-free nature of the Reorganization or would violate the
Selling Fund's fiduciary duty to its shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately prior
to the Reorganization the Aggregate NASD Cap of the Selling Fund immediately
prior to the Reorganization, in each case calculated in accordance with such
Rule 2830.
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1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the Prospectus/Proxy
Statement on Form N-14 which has been distributed to shareholders of the Selling
Fund as described in paragraph 4.1(o).
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's
assets to be acquired by the Acquiring Fund hereunder shall be the value of
such assets computed as of the close of business on
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the New York Stock Exchange on the business day next preceding the Closing Date
(such time and date being hereinafter called the "Valuation Date"), using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information or such other valuation procedures as shall be mutually agreed upon
by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of Class A,
Class B and Class Y shares of the Selling Fund will receive Class A, Class C and
Class Y shares, respectively, of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
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ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The closing of the Reorganization (the "Closing")
shall take place on or about March __, 2000 or such other date as the parties
may agree to in writing (the "Closing Date"). All acts taking place at the
Closing shall be deemed to take place simultaneously immediately prior to the
opening of business on the Closing Date unless otherwise provided. The Closing
shall be held as of 9:00 a.m. at the offices of the Evergreen Funds, 200
Berkeley Street, Boston, MA 02116, or at such other time and/or place as the
parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as
custodian for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets have been delivered in proper
form to the Acquiring Fund on the Closing Date; and (b) all necessary taxes
including all applicable federal and state stock transfer stamps, if any, have
been paid, or provision for payment have been made, in conjunction with the
delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund, shall deliver at the Closing a certificate
of an authorized officer stating that its records contain the names and
addresses of the Selling Fund Shareholders and the number and percentage
ownership of outstanding shares owned by each such shareholder immediately prior
to the Closing. The Acquiring Fund shall issue and deliver or cause Evergreen
Service Company, its transfer agent, to issue and deliver a confirmation
evidencing the Acquiring Fund Shares to be credited on the Closing Date to the
Secretary of the Trust or provide evidence satisfactory to the Selling Fund that
such Acquiring Fund Shares have been credited to the Selling Fund's account on
the books of the Acquiring Fund. At the Closing, each party shall deliver to the
other such bills of sale, checks,
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assignments, share certificates, if any, receipts and other documents as such
other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
Delaware business trust duly organized, validly existing, and in good standing
under the laws of the State of Delaware.
(b) The Selling Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Securities and Exchange Commission (the "Commission") as an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), is in
full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of the Trust's Declaration of Trust or By-Laws or
of any material agreement, indenture, instrument, contract, lease, or other
undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected in the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or
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governmental body is presently pending or to its knowledge threatened against
the Selling Fund or any of its properties or assets, which, if adversely
determined, would materially and adversely affect its financial condition, the
conduct of its business, or the ability of the Selling Fund to carry out the
transactions contemplated by this Agreement. The Selling Fund knows of no facts
that might form the basis for the institution of such proceedings and is not a
party to or subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially and adversely affects its business or
its ability to consummate the transactions herein contemplated.
(g) The unaudited semi-annual financial statements of the
Selling Fund at March 31, 1999 are in accordance with generally accepted
accounting principles consistently applied, and such statements (copies of which
have been furnished to the Acquiring Fund) fairly reflect the financial
condition of the Selling Fund as of such date, and there are no known contingent
liabilities of the Selling Fund as of such date not disclosed therein.
(h) Since March 31, 1999 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund. All of the issued and outstanding
shares of the
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Selling Fund will, at the time of the Closing Date, be held by the persons and
in the amounts set forth in the records of the transfer agent as provided in
paragraph 3.4. The Selling Fund does not have outstanding any options, warrants,
or other rights to subscribe for or purchase any of the Selling Fund shares, nor
is there outstanding any security convertible into any of the Selling Fund
shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund including the shareholders of the Selling Fund and this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information furnished by the Selling Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations thereunder applicable thereto.
(o) The Selling Fund has provided the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus, which
included the proxy statement of the Selling Fund (the "Prospectus/Proxy
Statement"), all of which was included in a Registration Statement on Form N-14
of the Acquiring Fund (the "Registration Statement"), in compliance with the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") and
the 1940 Act in connection with the meeting of the shareholders of the Selling
Fund to approve this Agreement and the transactions contemplated hereby. The
Prospectus/Proxy Statement included in the Registration Statement (other than
information therein that relates to the Acquiring Fund) does not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to
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make the statements therein, in light of the circumstances under which such
statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring
Fund represents and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
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(f) The financial statements of the Acquiring Fund at May 31,
1999 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly reflect the financial condition of the Acquiring
Fund as of such date, and there are no known contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
(g) Since May 31, 1999 there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
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(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information furnished by the Acquiring Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations applicable thereto.
(n) The Prospectus/Proxy Statement included in the
Registration Statement (only insofar as it relates to the Acquiring Fund) does
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
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ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.3 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.4 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.5 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by KPMG LLP and
certified by the Trust's President and Treasurer.
5.6 CAPITAL LOSS CARRYFORWARDS. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause KPMG LLP to issue a letter addressed to the Acquiring
Fund and the Selling Fund, in form and substance satisfactory to the Funds,
setting forth the federal income tax implications relating to capital loss
carryforwards (if any) of the Selling Fund.
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ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
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(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which the Acquiring Fund is
a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of
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any order, decree or judgment of any court or governmental body, which
materially and adversely affects its business, other than as previously
disclosed in the Registration Statement.
Such opinion shall contain such assumptions and limitations as shall be in the
opinion of Sullivan & Worcester LLP appropriate to render the opinions expressed
therein.
In this paragraph 6.2, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by the Trust's
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of the Trust.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of Sullivan & Worcester LLP, counsel to the Selling Fund, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has
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the power to own all of its properties and assets and to carry on its
business as presently conducted.
(b) The Selling Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or the State of Delaware is required for consummation by the Selling Fund
of the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act, and as may be required under state
securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-laws, or any provision of
any material agreement, indenture, instrument, contract, lease or other
undertaking (in each case known to such counsel) to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) Only insofar as they relate to the Selling Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and government
proceedings and material contracts, if any, are accurate and fairly present the
information required to be shown.
(g) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and the Selling Fund is neither a
party to nor subject to the provisions of any order, decree or judgment of any
court or
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governmental body, which materially and adversely affects its business other
than as previously disclosed in the Prospectus/Proxy Statement.
(h) Assuming that a consideration therefor of not less than
the net asset value thereof has been paid, and assuming that such shares were
issued in accordance with the terms of the Selling Fund's registration
statement, or any amendment thereto, in effect at the time of such issuance, all
issued and outstanding shares of the Selling Fund are legally issued and fully
paid and non-assessable.
Such opinion shall contain such other assumptions and limitations as shall be in
the opinion of Sullivan & Worcester LLP appropriate to render the opinions
expressed therein.
In this paragraph 7.3, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.2 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or
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properties of the Acquiring Fund or the Selling Fund, provided that either party
hereto may for itself waive any of such conditions.
8.3 No stop orders suspending the effectiveness of the Registration
Statement shall have been issued and, to the best knowledge of the parties
hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act.
8.4 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the shareholders of the Selling Fund all of the Selling Fund's net investment
company taxable income for all taxable periods ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on or prior to the
Closing Date (after reduction for any capital loss carryforward).
8.5 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP addressed to the Acquiring Fund and the Selling Fund substantially
to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund followed by the distribution of the
Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of the
Selling Fund will constitute a "reorganization" within the meaning of Section
368(a)(1)(C) of the Code and the Acquiring Fund and the Selling Fund will each
be a "party to a reorganization" within the meaning of Section 368(b) of the
Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the identified
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
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(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.5.
8.6 The Acquiring Fund shall have received from KPMG LLP a letter
addressed to the Acquiring Fund, in form and substance satisfactory to the
Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus/Proxy Statement has been
obtained from and is consistent with the accounting records of the Selling Fund;
and
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and Prospectus/Proxy
Statement agree to the underlying accounting records of the Acquiring Fund and
the Selling Fund or with written estimates provided by officers of the Trust who
have responsibility for financial and
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reporting matters, and were found to be mathematically correct; and
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the pro forma expense ratios appearing in the Registration
Statement and Prospectus/Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, unless waived by the Acquiring Fund, the Acquiring Fund
shall have received from KPMG LLP a letter addressed to the Acquiring Fund dated
on the Closing Date, in form and substance satisfactory to the Acquiring Fund,
to the effect that on the basis of limited procedures agreed upon by the
Acquiring Fund (but not an examination in accordance with generally accepted
auditing standards), the net asset value per share of the Selling Fund as of the
Valuation Date was computed and the valuation of the portfolio was consistent
with the valuation practices of the Acquiring Fund.
8.7 The Selling Fund shall have received from KPMG LLP a letter
addressed to the Selling Fund, in form and substance satisfactory to the Selling
Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) they had performed limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards) which consisted of a reading of any
unaudited pro forma financial statements included in the Registration Statement
and Prospectus/Proxy Statement, and making inquiries of appropriate officials of
the Trust responsible for financial and accounting matters whether such
unaudited pro forma financial statements comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus/Proxy Statement has been obtained
from and is consistent with the accounting records of the Acquiring Fund; and
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(d) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the pro forma
expense ratio appearing in the Registration Statement and Prospectus/Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
8.8 The Board of Trustees of the Trust, subsequent to the vote of the
shareholders of Mentor Municipal, shall have considered and approved the
Reorganization as in the best interests of both the Selling Fund and the
Acquiring Fund.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund whether incurred before or after the date of this Agreement will
be borne equally by the Selling Fund and the Acquiring Fund. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus/Proxy
Statement to such shareholders; (d) postage; (e) printing; (f) accounting fees;
(g) legal fees; and (h) solicitation costs of the transaction. Notwithstanding
the foregoing, the Acquiring Fund shall pay its own federal and state
registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
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ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, its Trustees or officers, to the
other party, but each shall bear the expenses incurred by it incidental to the
preparation and carrying out of this Agreement as provided in paragrapph 9.1.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that no such
amendment may have the effect of changing the provisions for determining the
number of the Acquiring Fund Shares to be issued to the Selling Fund
Shareholders under this Agreement to the detriment of such Shareholders without
their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof.
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13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 It is expressly agreed that the obligations of the Acquiring Fund
and the Selling Fund hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents, or employees of the Trust personally,
but shall bind only the trust property of the Acquiring Fund and of the Selling
Fund, as provided in the Declaration of Trust of the Trust. The execution and
delivery of this Agreement have been authorized by the Trustees of the Trust on
behalf of the Acquiring Fund and the Selling Fund and signed by authorized
officers of the Trust, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officers shall be deemed to
have been made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property of the Acquiring Fund
and of the Selling Fund as provided in the Declaration of Trust of the Trust.
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
EVERGREEN MUNICIPAL TRUST ON
BEHALF OF EVERGREEN MUNICIPAL
INCOME FUND
By:
Name:
Title:
EVERGREEN MUNICIPAL TRUST ON
BEHALF OF EVERGREEN MUNICIPAL
BOND FUND
By:
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Name:
Title:
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CONVERSION OF
MENTOR MUNICIPAL INCOME PORTFOLIO
a series of
MENTOR FUNDS
901 East Byrd Street
Richmond, Virginia 23219
(800) 869-6042
Into a Series of
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
AND
ACQUISITION OF THE ASSETS OF
MENTOR MUNICIPAL INCOME PORTFOLIO
By and In Exchange For Shares of
EVERGREEN MUNICIPAL BOND FUND
a series of
EVERGREEN MUNICIPAL TRUST
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Mentor Municipal Income
Portfolio ("Mentor Municipal"), a series of Mentor Funds, to Evergreen Municipal
Bond Fund ("Evergreen Municipal"), a series of Evergreen Municipal Trust, in
exchange for Class A shares (to be issued to holders of Class A shares of Mentor
Municipal), Class C shares (to be issued to holders of Class B shares of Mentor
Municipal), and Class Y shares (to be issued to holders of Class Y shares of
Mentor Municipal) of beneficial interest, $.001 par value per share, of
Evergreen Municipal, consists of this cover page and the following described
documents, each of which is attached hereto and incorporated by reference
herein:
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(1) The Statement of Additional Information of Mentor
Municipal dated December 15, 1998;
(2) The Statement of Additional Information of Evergreen
Municipal dated April 1, 1999;
(3) Annual Report of Mentor Municipal for the year ended September
30, 1998;
(4) Semi-Annual Report of Mentor Municipal for the six month
period ended March 31, 1999;
(5) Annual Report of Evergreen Municipal for the year ended May
31, 1999 (to be filed by amendment); and
(6) Pro-Forma Combining Financial Statements for May 31, 1999 and
the twelve months then ended (unaudited) (to be filed by
amendment).
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Municipal and Mentor Municipal dated August 27, 1999. A
copy of the Prospectus/Proxy Statement may be obtained without charge by writing
to Evergreen Municipal or Mentor Municipal at the addresses set forth above or
by calling toll free 1-800-645-7816.
The date of this Statement of Additional Information is August 27,
1999.
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MENTOR FUNDS
STATEMENT OF ADDITIONAL INFORMATION
(MENTOR GROWTH PORTFOLIO, MENTOR PERPETUAL GLOBAL PORTFOLIO,
MENTOR CAPITAL GROWTH PORTFOLIO,
MENTOR BALANCED PORTFOLIO, MENTOR INCOME AND GROWTH PORTFOLIO,
MENTOR MUNICIPAL INCOME PORTFOLIO,
MENTOR QUALITY INCOME PORTFOLIO, MENTOR SHORT-DURATION INCOME PORTFOLIO,
MENTOR HIGH INCOME PORTFOLIO)
December 15, 1998
Mentor Funds (the "Trust") is an open-end series investment company. This
Statement of Additional Information is not a prospectus and should be read in
conjunction with the relevant prospectus of the Trust. A copy of a prospectus
in respect of a Portfolio can be obtained upon request by writing to Mentor
Services Company, Inc., at 901 East Byrd Street, Richmond, Virginia 23219, or
by calling Mentor Services Company at 1-800-869-6042.
This Statement is in parts. Part I contains information with respect to
Mentor Capital Growth Portfolio, Mentor Quality Income Portfolio, Mentor
Municipal Income Portfolio, Mentor Income and Growth Portfolio, and Mentor
Perpetual Global Portfolio. Part II contains information with respect to Mentor
Growth Portfolio, Mentor Short-Duration Income Portfolio, and Mentor Balanced
Portfolio. Part III contains information with respect to Mentor High Income
Portfolio. Part IV provides general information with respect to the Trust and
all of the Portfolios.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction ............................................................................. ii
PART I ................................................................................... 1
Investment Restrictions ................................................................ 1
PART II .................................................................................. 4
Investment Restrictions ................................................................ 4
PART III ................................................................................. 7
Investment Restrictions ................................................................ 7
PART IV .................................................................................. 8
Certain Investment Techniques .......................................................... 8
Management of the Trust ................................................................ 27
Principal Holders of Securities ........................................................ 30
Investment Advisory Services ........................................................... 31
Administrative Services ................................................................ 33
Shareholder Servicing Plan ............................................................. 35
Brokerage Transactions ................................................................. 36
How to Buy Shares ...................................................................... 39
Distribution ........................................................................... 39
Determining Net Asset Value ............................................................ 40
Redemptions in Kind .................................................................... 42
Taxes .................................................................................. 42
Independent Accountants ................................................................ 46
Custodian .............................................................................. 46
Performance Information ................................................................ 47
Equivalent Yields: Tax-exempt Versus Taxable Securities for the Municipal Income
Portfolio .............................................................................. 49
Mentor Municipal Income Portfolio -- Federal Taxable Equivalent Yield Table-1998 Rates . 50
Members of Investment Management Teams ................................................. 51
Performance Comparisons ................................................................ 54
Shareholder Liability .................................................................. 59
</TABLE>
i
<PAGE>
INTRODUCTION
Mentor Funds is a Massachusetts business trust organized on January 20,
1992 as Cambridge Series Trust. This Statement relates to the following nine
portfolios of the Trust (collectively, the "Portfolios" and each individually,
the "Portfolio"): Mentor Growth Portfolio (the "Growth Portfolio"); Mentor
Quality Income Portfolio (the "Quality Income Portfolio"); Mentor Balanced
Portfolio (the "Balanced Portfolio"); Mentor Capital Growth Portfolio (the
"Capital Growth Portfolio"); Mentor Perpetual Global Portfolio (the "Global
Portfolio"); Mentor Income and Growth Portfolio (the "Income and Growth
Portfolio"); Mentor Municipal Income Portfolio (the "Municipal Income
Portfolio"); Mentor Short-Duration Income Portfolio (the "Short-Duration Income
Portfolio"); and Mentor High Income Portfolio ("the High Income Portfolio").
Each Portfolio has three classes of shares of beneficial interest, Class A
shares, Class B shares, and Class Y (Institutional) shares.
With respect to the investment restrictions described below, all
percentage limitations on investments will apply at the time of investment and
shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of such investment. Except for the
investment restrictions listed below as fundamental or to the extent designated
as such in the Prospectus in respect of a Portfolio, the other investment
policies described in this Statement or in the Prospectus are not fundamental
and may be changed by approval of the Trustees. As a matter of policy, the
Trustees would not materially change a Portfolio's investment objective without
shareholder approval.
The Investment Company Act of 1940, as amended (the "1940 Act"), provides
that a "vote of a majority of the outstanding voting securities" of a Portfolio
means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, or (2) 67% or more of the shares present
at a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
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PART I
The following information relates to each of the Capital Growth, Quality
Income, Municipal Income, Income and Growth, and the Global Portfolios, except
where otherwise noted.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be
changed without a vote of a majority of the outstanding voting securities of a
Portfolio:
1. (not applicable to the Quality Income Portfolio) The Portfolios will
not issue senior securities except that a Portfolio (other than the
Municipal Income Portfolio) may borrow money directly or through reverse
repurchase agreements in amounts of up to one-third of the value of its net
assets, including the amount borrowed; and except to the extent that a
Portfolio may enter into futures contracts. The Municipal Income Portfolio
may borrow money from banks for temporary purposes in amounts of up to 5%
of its total assets. The Portfolios will not borrow money or engage in
reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate management
of the Portfolio by enabling it to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Portfolios will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, the Quality
Income Portfolio will restrict the purchase of portfolio securities to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements. Notwithstanding this
restriction, the Portfolios may enter into when-issued and delayed delivery
transactions.
2. The Portfolios will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as are
necessary for clearance of purchases and sales of securities. The deposit
or payment by a Portfolio of initial or variation margin in connection with
futures contracts or related options transactions is not considered the
purchase of a security on margin.
3. (not applicable to the Quality Income Portfolio) The Portfolios will
not mortgage, pledge, or hypothecate any assets, except to secure permitted
borrowings. In these cases the Portfolios may pledge assets having a value
of 10% of assets taken at cost. For purposes of this restriction, (a) the
deposit of assets in escrow in connection with the writing of covered put
or call options and the purchase of securities on a when-issued basis; and
(b) collateral arrangements with respect to (i) the purchase and sale of
stock options (and options on stock indexes) and (ii) initial or variation
margin for futures contracts, will not be deemed to be pledges of a
Portfolio's assets. Margin deposits for the purchase and sale of futures
contracts and related options are not deemed to be a pledge.
4. The Portfolios will not lend any of their respective assets except
portfolio securities up to one-third of the value of total assets. (The
Municipal Income Portfolio will not lend portfolio securities.) This shall
not prevent a Portfolio from purchasing or holding U.S. government
obligations, money market instruments, variable amount demand master notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
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securities, entering into repurchase agreements, or engaging in other
transactions where permitted by a Portfolio's investment objective,
policies and limitations or Declaration of Trust. The Municipal Income
Portfolio will not make loans except to the extent the obligations the
Portfolio may invest in are considered to be loans.
5. The Portfolios (other than the Quality Income Portfolio) will not
invest more than 10% of the value of their net assets in restricted
securities; the Quality Income Portfolio will not invest more than 15% of
the value of its net assets in restricted securities.
6. None of the Portfolios will invest in commodities, except to the
extent that the Portfolios may engage in transactions involving futures
contracts or options on futures contracts, and except to the extent the
securities the Municipal Income Portfolio invests in are considered
interests in commodities or commodities contracts or to the extent the
Portfolio exercises its rights under agreements relating to such municipal
securities.
7. None of the Portfolios will purchase or sell real estate, including
limited partnership interests, except to the extent the securities the
Income and Growth Portfolio and Municipal Income Portfolio may invest in
are considered to be interests in real estate or to the extent the
Municipal Income Portfolio exercises its rights under agreements relating
to such municipal securities (in which case the Portfolio may liquidate
real estate acquired as a result of a default on a mortgage), although the
Portfolios may invest in securities of issuers whose business involves the
purchase or sale of real estate or in securities which are secured by real
estate or interests in real estate.
8. With respect to 75% of the value of its respective total assets, a
Portfolio will not purchase securities issued by any one issuer (other than
cash or securities issued or guaranteed by the government of the United
States or its agencies or instrumentalities and repurchase agreements
collateralized by such securities), if as a result more than 5% of the
value of its total assets would be invested in the securities of that
issuer. A Portfolio will not acquire more than 10% of the outstanding
voting securities of any one issuer.
9. A Portfolio will not invest 25% or more of the value of its
respective total assets in any one industry (other than securities issued
by the U.S. Government, its agencies or instrumentalities). As described in
the Trust's Prospectus, the Municipal Income Portfolio may from time to
time invest more than 25% of its assets in a particular segment of the
municipal bond market; however, that Portfolio will not invest more than
25% of its assets in industrial development bonds in a single industry
except as described in the Trust's Prospectus.
10. A Portfolio will not underwrite any issue of securities, except as a
Portfolio may be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
11. The Quality Income Portfolio will not issue any class of securities
which are senior to the Portfolio's shares except that the Portfolio may
borrow money as contemplated by the following restriction.
12. The Quality Income Portfolio will not borrow more than 33 1/3% of
the value of its total assets less all liabilities and indebtedness (other
than such borrowings).
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In addition, the following practices are contrary to the current policy of
each of the Portfolios (except as otherwise noted), and may be changed without
shareholder approval: investing in (a) securities which at the time of such
investment are not readily marketable, (b) securities restricted as to resale
(excluding securities determined by the Trustees of the fund (or the person
designated by the Trustees of the fund to make such determinations) to be
readily marketable), and (c) repurchase agreements maturing in more than seven
days, if, as a result, more than 15% of the Portfolio's net assets (taken at
current value) would be invested in securities described in (a), (b) and (c)
above.
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PART II
The following information relates to each of the Balanced, Growth, and
Short-Duration Income Portfolios, except where otherwise noted.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to a Portfolio without a vote of a majority of the outstanding shares
of that Portfolio, a Portfolio may not:
1. Issue any securities which are senior to the Portfolio's shares as
described herein and in the relevant prospectus, except that each of the
Portfolios other than the Growth Portfolio may borrow money to the extent
contemplated by Restriction 4 below.
2. Purchase securities on margin (but a Portfolio may obtain such
short-term credits as may be necessary for the clearance of transactions).
(Margin payments in connection with transactions in futures contracts,
options, and other financial instruments are not considered to constitute
the purchase of securities on margin for this purpose.)
3. Make short sales of securities or maintain a short position, unless
at all times when a short position is open, it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and
equal in amount to, the securities sold short ("short sale
against-the-box"), and unless not more than 25% of the Portfolio's net
assets (taken at current value) is held as collateral for such sales at any
one time.
4. (Growth Portfolio) Borrow money or pledge its assets except that a
Portfolio may borrow from banks for temporary or emergency purposes
(including the meeting of redemption requests which might otherwise require
the untimely disposition of securities) in amounts not exceeding 10% (taken
at the lower of cost or market value) of its total assets (not including
the amount borrowed) and pledge its assets to secure such borrowings;
provided that a Portfolio will not purchase additional portfolio securities
when such borrowings exceed 5% of its total assets. (Collateral or margin
arrangements with respect to options, futures contracts, or other financial
instruments are not considered to be pledges.)
(All other Portfolios included in Part II) Borrow more than 33 1/3% of
the value of its total assets less all liabilities and indebtedness (other
than such borrowings) not represented by senior securities.
5. Act as underwriter of securities of other issuers except to the
extent that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities laws.
6. Purchase any security if as a result the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years old
or (in the case of Growth Portfolio) in equity securities for which market
quotations are not readily available.
7. (as to the Growth Portfolio only) Purchase any security if as a
result the Portfolio would then hold more than 10% of any class of
securities of an issuer (taking all common stock issues of an issuer as a
single class, all preferred stock issues as a single class, and all debt
issues as a single class) or more than 10% of the outstanding voting
securities of an issuer.
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8. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) more than 5% of the
Portfolio's total assets (taken at current value) would then be invested in
securities of a single issuer, or (ii) more than 25% of the Portfolio's
total assets (taken at current value) would be invested in a single
industry; provided that the restriction set out in (i) above shall apply,
in the case of each Portfolio other than the Growth Portfolio, only as to
75% of such Portfolio's total assets.
9. Invest in securities of any issuer if, to the knowledge of the Trust,
any officer or Trustee of the Trust or of Mentor Investment Advisors, LLC
as the case may be, owns more than 1/2 of 1% of the outstanding securities
of such issuer, and such officers and Trustees who own more than 1/2 of 1%
own in the aggregate more than 5% of the outstanding securities of such
issuer.
10. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell securities
which are secured by real estate and securities of companies that invest or
deal in real estate (or, in the case of any Portfolio other than the Growth
Portfolio, real estate or limited partnership interests). (For purposes of
this restriction, investments by a Portfolio in mortgage-backed securities
and other securities representing interests in mortgage pools shall not
constitute the purchase or sale of real estate or interests in real estate
or real estate mortgage loans.)
11. Make investments for the purpose of exercising control or
management.
12. (as to the Growth Portfolio only) Participate on a joint or a joint
and several basis in any trading account in securities.
13. (as to the Growth Portfolio only) Purchase any security restricted
as to disposition under federal securities laws if as a result more than 5%
of the Portfolio's total assets (taken at current value) would be invested
in restricted securities.
14. (as to the Growth Portfolio only) Invest in securities of other
registered investment companies, except by purchases in the open market
involving only customary brokerage commissions and as a result of which not
more than 5% of its total assets (taken at current value) would be invested
in such securities, or except as part of a merger, consolidation or other
acquisition.
15. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks
of companies that invest in or sponsor such programs.
16. (as to the Growth Portfolio only) Make loans, except through (i)
repurchase agreements (repurchase agreements with a maturity of longer than
7 days together with other illiquid assets being limited to 10% of the
Portfolio's assets,) and (ii) loans of portfolio securities (limited to 33%
of the Portfolio's total assets).
17. (as to the Growth Portfolio only) Purchase foreign securities or
currencies except foreign securities which are American Depository Receipts
listed on exchanges or otherwise traded in the United States and
certificates of deposit, bankers' acceptances and other obligations of
foreign banks and foreign branches of U.S. banks if, giving effect to such
purchase, such obligations would constitute less than 10% of the Trust's
total assets (at current value).
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18. (as to the Growth Portfolio only) Purchase warrants if as a result
the Portfolio would then have more than 5% of its total assets (taken at
current value) invested in warrants.
19. (as to each Portfolio other than the Growth Portfolio) Acquire more
than 10% of the voting securities of any issuer.
20. (as to each Portfolio other than the Growth Portfolio) Make loans,
except by purchase of debt obligations in which the Portfolio may invest
consistent with its investment policies, by entering into repurchase
agreements with respect to not more than 25% of its total assets (taken at
current value), or through the lending of its portfolio securities with
respect to not more than 25% of its total assets.
21. Purchase or sell commodities or commodity contracts, except that a
Portfolio may purchase or sell financial futures contracts, options on
financial futures contracts, and futures contracts, forward contracts, and
options with respect to foreign currencies, and may enter into swap
transactions. (This restriction applies to the Growth Portfolio.)
In addition, it is contrary to the current policy of each of the
Portfolios, which policy may be changed without shareholder approval, to invest
in (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the fund (or the person designated by the
Trustees of the fund to make such determinations) to be readily marketable),
and (c) repurchase agreements maturing in more than seven days, if, as a
result, more than 15% of the Portfolio's net assets (taken at current value)
would be invested in securities described in (a), (b) and (c) above.
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PART III
The following information relates to the High Income Portfolio.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed with
respect to the Portfolio without approval by the holders of a majority of the
outstanding shares of the Portfolio, the Portfolio may not:
1. Purchase any security (other than U.S. Government securities) if as a
result: (i) as to 75% of such Portfolio's total assets, more than 5% of the
Portfolio's total assets (taken at current value) would then be invested in
securities of a single issuer, or (ii) more than 25% of the Portfolio's
total assets would be invested in a single industry.
2. Acquire more than 10% of the voting securities of any issuer.
3. Act as underwriter of securities of other issuers except to the
extent that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities laws.
4. Issue any class of securities which is senior to the Portfolio's
shares of beneficial interest, except as contemplated by restriction 6
below.
5. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell securities
which are secured by real estate and securities of companies that invest or
deal in real estate or real estate limited partnership interests. (For
purposes of this restriction, investments by a Portfolio in mortgage-backed
securities and other securities representing interests in mortgage pools
shall not constitute the purchase or sale of real estate or interests in
real estate or real estate mortgage loans.)
6. Borrow more than 33 1/3% of the value of its total assets less all
liabilities and indebtedness (other than such borrowings)
7. Purchase or sell commodities or commodity contracts, except that a
Portfolio may purchase or sell financial futures contracts, options on
futures contracts, and futures contracts, forward contracts, and options
with respect to foreign currencies, and may enter into swap transactions.
8. Make loans, except by purchase of debt obligations in which the
Portfolio may invest consistent with its investment policies, by entering
into repurchase agreements, or by lending its portfolio securities.
In addition, it is contrary to the current policy of the Portfolio, which
policy may be changed without shareholder approval, to invest in (a) securities
which at the time of such investment are not readily marketable, (b) securities
restricted as to resale (excluding securities determined by the Trustees of the
Trust (or the person designated by the Trustees to make such determinations) to
be readily marketable), and (c) repurchase agreements maturing in more then
seven days, if, as a result, more than 15% of the Portfolio's net assets (taken
at current value) would then be invested in securities described in (a), (b),
and (c).
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PART IV
All percentage limitations on investments (including those described in
Parts I, II, and III above) will apply at the time of investment and shall not
be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment. Except for the investment
restrictions listed above as fundamental or to the extent designated as such in
a Prospectus with respect to a Portfolio, the other investment policies
described in this Statement or in a Prospectus are not fundamental and may be
changed by approval of the Trustees. As a matter of policy, the Trustees would
not materially change a Portfolio's investment objective without shareholder
approval.
The Investment Company Act of 1940, as amended (the "1940 Act"), provides
that a "vote of a majority of the outstanding voting securities" of the
Portfolio means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Portfolio, and (2) 67% or more of the shares present
at a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
All information with respect to fees, expenses, and performance (except
where otherwise indicated) is based on a Portfolio's fiscal year end. All of
the Portfolios have a September 30 fiscal year end. Certain information with
respect to certain Portfolios is given for partial fiscal years. See "Financial
Highlights" in the Trust's prospectuses for information concerning the
commencement of operations of each of the Portfolios.
CERTAIN INVESTMENT TECHNIQUES
Set forth below is information concerning certain investment techniques in
which one or more of the Portfolios may engage, and certain of the risks they
may entail. Certain of the investment techniques may not be available to a
Portfolio. See the Prospectus relating to a particular Portfolio for a
description of the investment techniques generally applicable to that
Portfolio. For purposes of this section, a Portfolio's investment adviser or
subadviser (if any) is referred to as an "Adviser".
OPTIONS
A Portfolio may purchase and sell put and call options on its portfolio
securities to enhance investment performance or to protect against changes in
market prices.
COVERED CALL OPTIONS. A Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may
also be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call option, a
Portfolio gives up some or all of the opportunity to profit from an increase in
the market price of the securities covering the call option during the life of
the option. The Portfolio retains the risk of loss should the price of such
securities decline. If the option expires unexercised, the Portfolio realizes a
gain equal to the premium, which may be offset by a decline
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in price of the underlying security. If the option is exercised, the Portfolio
realizes a gain or loss equal to the difference between the Portfolio's cost
for the underlying security and the proceeds of sale (exercise price minus
commissions) plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
COVERED PUT OPTIONS. A Portfolio may write covered put options in order to
enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a
potential capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may
be partially or entirely offset by the premium received on the terminated
option.
PURCHASING PUT AND CALL OPTIONS. A Portfolio may also purchase put options
to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs that the Portfolio must pay. These costs will reduce any profit the
Portfolio might have realized had it sold the underlying security instead of
buying the put option.
A Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. These costs will reduce any profit the
Portfolio might have realized had it bought the underlying security at the time
it purchased the call option.
A Portfolio may also purchase put and sell options to enhance its current
return.
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OPTIONS ON FOREIGN SECURITIES. A Portfolio may purchase and sell options
on foreign securities if in the opinion of its Adviser the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Portfolio's investment objectives. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may differ from those in the U.S. In addition,
options markets in some countries, many of which are relatively new, may be
less liquid than comparable markets in the U.S.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve
certain risks, including the risks that a Portfolio's Adviser will not forecast
interest rate or market movements correctly, that a Portfolio may be unable at
times to close out such positions, or that hedging transactions may not
accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, a Portfolio may be forced to continue to hold,
or to purchase at a fixed price, a security on which it has sold an option at a
time when its Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to institute
special trading procedures or restrictions that might restrict the Portfolio's
use of options. The exchanges have established limitations on the maximum
number of calls and puts of each class that may be held or written by an
investor or group of investors acting in concert. It is possible that the
Portfolio and other clients of the Portfolio's Adviser may be considered such a
group. These position limits may restrict the Portfolio's ability to purchase
or sell options on particular securities.
Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that
reason, it may be more difficult to close out unlisted options than listed
options. Furthermore, unlisted options are not subject to the protection
afforded purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification as
a "regulated investment company" under the Internal Revenue Code, may also
restrict the Portfolio's use of options.
FUTURES CONTRACTS
In order to hedge against the effects of adverse market changes a
Portfolio that may invest in debt securities may buy and sell futures contracts
on debt securities of the type in which the Portfolio may invest and on indexes
of debt securities. In addition, a Portfolio that may invest in equity
securities may purchase and sell stock index futures to hedge against changes
in stock market prices. A Portfolio may also, to the extent permitted by
applicable law, buy and sell futures contracts and options on futures contracts
to increase its current return. All such futures and related options will, as
may be required by applicable law, be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission (the "CFTC").
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FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- a
Portfolio will legally obligate itself to accept the future delivery of the
underlying security and pay the agreed price. By selling futures on debt
securities -- assuming a "short" position -- it will legally obligate itself to
make the future delivery of the security against payment of the agreed price.
Open futures positions on debt securities will be valued at the most recent
settlement price, unless that price does not, in the judgment of persons acting
at the direction of the Trustees as to the valuation of a Portfolio's assets,
reflect the fair value of the contract, in which case the positions will be
valued by the Trustees or such persons.
Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions that may result in a
profit or a loss. While futures positions taken by a Portfolio will usually be
liquidated in this manner, a Portfolio may instead make or take delivery of the
underlying securities whenever it appears economically advantageous to do so. A
clearing corporation associated with the exchange on which futures are traded
assumes responsibility for such closing transactions and guarantees that a
Portfolio's sale and purchase obligations under closed-out positions will be
performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish with more
certainty than would otherwise be possible the effective rate of return on
securities. A Portfolio may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Portfolio (or securities having characteristics similar to those
held by the Portfolio) in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of the Portfolio's
securities. When hedging of this character is successful, any depreciation in
the value of securities may substantially be offset by appreciation in the
value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Portfolio
expects to purchase particular securities when it has the necessary cash, but
expects the rate of return available in the securities markets at that time to
be less favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Portfolio of
purchasing the securities may be offset, at least to some extent, by the rise
in the value of the futures position taken in anticipation of the subsequent
purchase.
Successful use by a Portfolio of futures contracts on debt securities is
subject to its Adviser's ability to predict correctly movements in the
direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of
an increase in interest rates which would adversely affect the market prices of
debt securities held by it and the prices of such securities increase instead
the Portfolio will lose part or all of the benefit of the increased value of
its securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to meet daily margin
maintenance requirements. The Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
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A Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to
options on securities except that options on futures contracts give the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option. As with options on securities, the holder or writer of an
option may terminate his position by selling or purchasing an option of the
same series. There is no guarantee that such closing transactions can be
effected. A Portfolio will be required to deposit initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements, and, in addition, net option
premiums received will be included as initial margin deposits. See "Margin
Payments" below. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to a Portfolio because the maximum amount at risk is the premium paid for
the options plus transactions costs. However, there may be circumstances when
the purchase of call or put options on a futures contract would result in a
loss to a Portfolio when the purchase or sale of the futures contracts would
not, such as when there is no movement in the prices of debt securities. The
writing of a put or call option on a futures contract involves risks similar to
those risks relating to the purchase or sale of futures contracts.
INDEX FUTURES CONTRACTS AND OPTIONS. A Portfolio may invest in debt index
futures contracts and stock index futures contracts, and in related options. A
debt index futures contract is a contract to buy or sell units of a specified
debt index at a specified future date at a price agreed upon when the contract
is made. A unit is the current value of the index. (Debt index futures in which
the Portfolios are presently expected to invest are not now available, although
such futures contracts are expected to become available in the future.) A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index.
For example, the Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 100 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 100 Index, contracts are
to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180,
one contract would be worth $18,000 (100 units x $180). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the
contract. For example, if a Portfolio enters into a futures contract to buy 100
units of the S&P 100 Index at a specified future date at a contract price of
$180 and the S&P 100 Index is at $184 on that future date, the Portfolio will
gain $400 (100 units x gain of $4). If the Portfolio enters into a futures
contract to sell 100 units of the stock index at a specified future date at a
contract price of $180 and the S&P 100 Index is at $182 on that future date,
the Portfolio will lose $200 (100 units x loss of $2).
A Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, a Portfolio must invest in futures contracts
with respect to indexes or sub-indexes the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.
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OPTIONS ON STOCK INDEX FUTURES. Options on index futures contracts are
similar to options on securities except that options on index futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in an index futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
holder would assume the underlying futures position and would receive a
variation margin payment of cash or securities approximating the increase in
the value of the holder's option position. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash based on the difference between the exercise
price of the option and the closing level of the index on which the futures
contract is based on the expiration date. Purchasers of options who fail to
exercise their options prior to the exercise date suffer a loss of the premium
paid.
OPTIONS ON INDICES. As an alternative to purchasing and selling call and
put options on index futures contracts, each of the Portfolios which may
purchase and sell index futures contracts may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options
are traded on national securities exchanges. Index options are similar to
options on individual securities in that the purchaser of an index option
acquires the right to buy (in the case of a call) or sell (in the case of a
put), and the writer undertakes the obligation to sell or buy (as the case may
be), units of an index at a stated exercise price during the term of the
option. Instead of giving the right to take or make actual delivery of
securities, the holder of an index option has the right to receive a cash
"exercise settlement amount". This amount is equal to the amount by which the
fixed exercise price of the option exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the underlying index on the
date of the exercise, multiplied by a fixed "index multiplier".
A Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
MARGIN PAYMENTS. When a Portfolio purchases or sells a futures contract,
it is required to deposit with its custodian an amount of cash, U.S. Treasury
bills, or other permissible collateral equal to a small percentage of the
amount of the futures contract. This amount is known as "initial margin". The
nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to a Portfolio upon termination of the contract,
assuming a Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract
fluctuates. For example, when a Portfolio sells a futures contract and the
price of the underlying security rises above the delivery price, the
Portfolio's position declines in value. The Portfolio then pays the broker a
variation margin payment equal to the difference between the delivery price of
the futures contract and the market price of the securities underlying the
futures contract. Conversely, if the price of the underlying security falls
below the delivery price of the contract, the Portfolio's futures position
increases in value. The broker then must
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make a variation margin payment equal to the difference between the delivery
price of the futures contract and the market price of the securities underlying
the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures. Although the Portfolio intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular
time. If there is not a liquid secondary market at a particular time, it may
not be possible to close a futures position at such time and, in the event of
adverse price movements, a Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event financial
futures are used to hedge portfolio securities, such securities will not
generally be sold until the financial futures can be terminated. In such
circumstances, an increase in the price of the portfolio securities, if any,
may partially or completely offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain
that such a market will develop. Although a Portfolio generally will purchase
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option or at any particular time. In the event no such
market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that a Portfolio would
have to exercise the options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One
risk arises because of the imperfect correlation between movements in the
prices of the futures contracts and options and movements in the underlying
securities or index or movements in the prices of a Portfolio's securities
which are the subject of a hedge. A Portfolio's Adviser will, however, attempt
to reduce this risk by purchasing and selling, to the extent possible, futures
contracts and related options on securities and indexes the movements of which
will, in its judgment, correlate closely with movements in the prices of the
underlying securities or index and the securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for hedging
purposes is also subject to its Adviser's ability to predict correctly
movements in the direction of the market. It is possible that, where a
Portfolio has purchased puts on futures contracts to hedge its portfolio
against a decline in the market, the securities or index on which the puts are
purchased may increase in value and the value of securities held in the
portfolio may decline. If this occurred, the Portfolio would lose money on the
puts and also experience a decline in value in its portfolio securities. In
addition, the prices of futures, for a number of reasons, may not correlate
perfectly with movements in the underlying securities or index due to certain
market distortions. First, all participants in the futures market are subject
to margin deposit requirements. Such requirements may cause investors to close
futures contracts through offsetting transactions which could distort the
normal relationship between the
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underlying security or index and futures markets. Second, the margin
requirements in the futures markets are less onerous than margin requirements
in the securities markets in general, and as a result the futures markets may
attract more speculators than the securities markets do. Increased
participation by speculators in the futures markets may also cause temporary
price distortions. Due to the possibility of price distortion, even a correct
forecast of general market trends by a Portfolio's Adviser may still not result
in a successful hedging transaction over a short time period.
OTHER RISKS. Portfolios will incur brokerage fees in connection with their
futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while a Portfolio may
benefit from the use of futures and related options, unanticipated changes in
interest rates or stock price movements may result in a poorer overall
performance for the Portfolio than if it had not entered into any futures
contracts or options transactions. Moreover, in the event of an imperfect
correlation between the futures position and the portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss.
FORWARD COMMITMENTS
A Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if the Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or if the Portfolio enters into offsetting contracts for
the forward sale of other securities it owns. Forward commitments may be
considered securities in themselves, and involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date, which risk
is in addition to the risk of decline in the value of the Portfolio's other
assets. Where such purchases are made through dealers, the Portfolios rely on
the dealer to consummate the sale. The dealer's failure to do so may result in
the loss to the Portfolio of an advantageous yield or price. Although a
Portfolio will generally enter into forward commitments with the intention of
acquiring securities for its portfolio or for delivery pursuant to options
contracts it has entered into, a Portfolio may dispose of a commitment prior to
settlement if its Adviser deems it appropriate to do so. A Portfolio may
realize short-term profits or losses upon the sale of forward commitments.
REPURCHASE AGREEMENTS
A Portfolio may enter into repurchase agreements. A repurchase agreement
is a contract under which the Portfolio acquires a security subject to the
obligation of the seller to repurchase and the Portfolio to resell such
security at a fixed time and price (representing the Portfolio's cost plus
interest). It is the Trust's present intention to enter into repurchase
agreements only with member banks of the Federal Reserve System and securities
dealers meeting certain criteria as to creditworthiness and financial condition
established by the Trustees of the Trust and only with respect to obligations
of the U.S. government or its agencies or instrumentalities or other high
quality short term debt obligations. Repurchase agreements may also be viewed
as loans made by a Portfolio which are collateralized by the securities subject
to repurchase. A Portfolio's Adviser will monitor such transactions to ensure
that the value of the underlying securities will be at least equal at all times
to the total amount of the repurchase obligation, including the interest
factor. If the seller defaults, a Portfolio could realize a loss on the sale of
the underlying security to the extent that the proceeds of sale including
accrued interest are less than the resale price provided in the agreement
including interest. In addition, if the seller should be involved
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in bankruptcy or insolvency proceedings, a Portfolio may incur delay and costs
in selling the underlying security or may suffer a loss of principal and
interest if a Portfolio is treated as an unsecured creditor and required to
return the underlying collateral to the seller's estate.
LOANS OF PORTFOLIO SECURITIES
A Portfolio may lend its portfolio securities, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) a Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Trustee may establish) of the total
assets of the Portfolio. In addition, it is anticipated that a Portfolio may
share with the borrower some of the income received on the collateral for the
loan or that it will be paid a premium for the loan. The risks in lending
portfolio securities, as with other extensions of credit, consist of possible
delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower, a
Portfolio retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by a Portfolio if
the holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. A Portfolio will not lend portfolio
securities to borrowers affiliated with the Portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS; OTHER MORTGAGE-RELATED SECURITIES
Collateralized mortgage obligations or "CMOs" are debt obligations or
pass-through certificates collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the Government National Mortgage Association, ("GNMA"), the Federal
National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage
Corporation ("FHLMC"), but they also may be collateralized by whole loans or
private pass-through certificates (such collateral collectively hereinafter
referred to as "Mortgage Assets"). CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans.
In a CMO, a series of bonds or certificates is generally issued in
multiple classes. Each class of CMOs is issued at a specific fixed or floating
rate coupon and has a stated maturity or final distribution date. Principal
prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on most classes of the CMOs on a monthly,
quarterly, or semi-annual basis. The principal of and interest on the mortgage
assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In a CMO, payments of principal, including any principal
prepayments, on the mortgage assets are applied to the classes of the series in
a pre-determined sequence.
RESIDUAL INTERESTS. Residual interests are derivative mortgage securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans. The cash flow generated by the
mortgage assets underlying a series of mortgage securities is applied first to
make required payments of principal of and interest on the mortgage securities
and second to pay the related administrative expenses of the issuer. The
residual generally represents the right to any excess cash flow remaining after
making the foregoing payments. Each payment of such excess cash flow to a
holder of the related residual represents income
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and/or a return of capital. The amount of residual cash flow resulting from a
series of mortgage securities will depend on, among other things, the
characteristics of the mortgage assets, the coupon rate of each class of the
mortgage securities, prevailing interest rates, the amount of administrative
expenses, and the prepayment experience on the mortgage assets. In particular,
the yield to maturity on residual interests may be extremely sensitive to
prepayments on the related underlying mortgage assets in the same manner as an
interest-only class of stripped mortgage-backed securities. In addition, if a
series of mortgage securities includes a class that bears interest at an
adjustable rate, the yield to maturity on the related residual interest may
also be extremely sensitive to changes in the level of the index upon which
interest rate adjustments are based. In certain circumstances, there may be
little or no excess cash flow payable to residual holders. The Portfolio may
fail to recoup fully its initial investment in a residual.
Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The
residual interest market has only recently developed and residuals currently
may not have the liquidity of other more established securities trading in
other markets. Residuals may be subject to certain restrictions on
transferability.
FOREIGN SECURITIES
A Portfolio may invest in foreign securities and in certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks.
Investments in foreign securities may involve considerations different
from investments in domestic securities. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign brokerage commissions and custodian
fees are generally higher than in the United States. Investments in foreign
securities can involve other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets and imposition of withholding taxes on dividend or
interest payments. It may be more difficult to obtain and enforce a judgment
against a foreign issuer. In addition, foreign investments may be affected
favorably or unfavorably by changes in currency exchange rates, exchange
control regulations, foreign withholding taxes and restrictions or prohibitions
on the repatriation of foreign currencies. A Portfolio may incur costs in
connection with conversion between currencies.
In determining whether to invest in securities of foreign issuers, the
Adviser of a Portfolio seeking current income will consider the likely impact
of foreign taxes on the net yield available to the Portfolio and its
shareholders. Income received by a Portfolio from sources within foreign
countries may be reduced by withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. It is impossible to determine the effective
rate of foreign tax in advance since the amount of a Portfolio's assets to be
invested in various countries is not known, and tax laws and their
interpretations may change from time to time and may change without advance
notice. Any such taxes paid by a Portfolio will reduce its net income available
for distribution to shareholders.
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FOREIGN CURRENCY TRANSACTIONS
Except as otherwise described in the relevant Prospectus, a Portfolio may
engage without limit in currency exchange transactions, including foreign
currency forward and futures contracts, to protect against uncertainty in the
level of future foreign currency exchange rates. In addition, a Portfolio may
purchase and sell call and put options on foreign currency futures contracts
and on foreign currencies for hedging purposes.
A Portfolio may engage in both "transaction hedging" and "position
hedging". When a Portfolio engages in transaction hedging, it enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its securities. A Portfolio will engage in transaction hedging when it desires
to "lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging a Portfolio will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
A Portfolio may purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with transaction hedging. A
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes, a Portfolio may purchase exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives a Portfolio
the right to assume a short position in the futures contract until expiration
of the option. A put option on currency gives a Portfolio the right to sell a
currency at an exercise price until the expiration of the option. A call option
on a futures contract gives a Portfolio the right to assume a long position in
the futures contract until the expiration of the option. A call option on
currency gives a Portfolio the right to purchase a currency at the exercise
price until the expiration of the option. A Portfolio will engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of its Adviser, the
pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations.
When a Portfolio engages in position hedging, it enters into foreign
currency exchange transactions to protect against a decline in the values of
the foreign currencies in which securities held by the Portfolio are
denominated or are quoted in their principle trading markets or an increase in
the value of currency for securities which a Portfolio expects to purchase. In
connection with position hedging, a Portfolio may purchase put or call options
on foreign currency and foreign currency futures contracts and buy or sell
forward contracts and foreign currency futures contracts. A Portfolio may also
purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of a
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security
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or securities being hedged is less than the amount of foreign currency a
Portfolio is obligated to deliver and if a decision is made to sell the
security or securities and make delivery of the foreign currency. Conversely,
it may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the security or securities of a Portfolio if the
market value of such security or securities exceeds the amount of foreign
currency the Portfolio is obligated to deliver.
To offset some of the costs to a Portfolio of hedging against fluctuations
in currency exchange rates, the Portfolio may write covered call options on
those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract as agreed by the parties, at a price set at the time of the
contract. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are designed by
and traded on exchanges regulated by the CFTC, such as the New York Mercantile
Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may be
closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although a Portfolio will normally
purchase or sell foreign currency futures contracts and related options only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board
of trade will exist for any particular contract or option or at any particular
time. In such event,
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it may not be possible to close a futures or related option position and, in
the event of adverse price movements, a Portfolio would continue to be required
to make daily cash payments of variation margin on its futures positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Such options will be purchased or written only when a
Portfolio's Adviser believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary market will exist
for a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the U.S. options markets.
SETTLEMENT PROCEDURES. Settlement procedures relating to investments in
foreign securities and to foreign currency exchange transactions may be more
complex than settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not present in
domestic investments. For example, settlement of transactions involving foreign
securities or foreign currency may occur within a foreign country, and the
Portfolio may be required to accept or make delivery of the underlying
securities or currency in conformity with any applicable U.S. or foreign
restrictions or regulations, and may be required to pay any fees, taxes or
charges associated with such delivery. Such investments may also involve the
risk that an entity involved in the settlement may not meet its obligations.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a feefor currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should a Portfolio desire
to resell that currency to the dealer.
ZERO-COUPON SECURITIES
Zero-coupon securities in which a Portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities usually trade at a deep discount from their
face or par value and are subject to
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greater market value fluctuations from changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. As a result, the net asset value of shares of a Portfolio investing
in zero-coupon securities may fluctuate over a greater range than shares of
other mutual funds investing in securities making current distributions of
interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by
the U.S. Treasury or other short-term debt obligations, and longer-term bonds
or notes and their unmatured interest coupons which have been separated by
their holder, typically a custodian bank or investment brokerage firm. A number
of securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under
the STRIPS program, a Portfolio will be able to have its beneficial ownership
of U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The principal
or corpus is sold at a deep discount because the buyer receives only the right
to receive a future fixed payment on the security and does not receive any
rights to periodic cash interest payments. Once stripped or separated, the
corpus and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Portfolios may engage in when-issued and delayed delivery
transactions. These transactions are arrangements in which a Portfolio
purchases securities with payment and delivery scheduled for a future time. A
Portfolio engages in when-issued and delayed delivery transactions only for the
purpose of acquiring securities consistent with its investment objective and
policies, not for investment leverage, but a Portfolio may sell such securities
prior to settlement date if such a sale is considered to be advisable. No
income accrues to a Portfolio on securities in connection with such
transactions prior to the date the Portfolio actually takes delivery of
securities. In when-issued and delayed delivery transactions, a Portfolio
relies on the seller to complete the transaction. The seller's failure to
complete the transaction may cause a Portfolio to miss a price or yield
considered to be advantageous.
These transactions are made to secure what is considered to be an
advantageous price or yield for a Portfolio. Settlement dates may be a month or
more after entering into these transactions, and the market values of
21
<PAGE>
the securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred. However, liquid
assets of a Portfolio sufficient to make payment for the securities to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
BANK INSTRUMENTS
A Portfolio may invest in the instruments of banks and savings and loans
whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances. However, the
above-mentioned instruments are not necessarily guaranteed by those
organizations. In addition to domestic bank obligations, such as certificates
of deposit, demand and time deposits, savings shares, and bankers' acceptances,
a Portfolio may invest in: Eurodollar Certificates of Deposit ("ECDs") issued
by foreign branches of U.S. or foreign banks; Eurodollar Time Deposits
("ETDs"), which are U.S. dollar-denominated deposits in foreign branches of
U.S. or foreign banks; Canadian Time Deposits, which are U.S.
dollar-denominated deposits issued by branches of major Canadian banks located
in the U.S.; and Yankee Certificates of Deposit ("Yankee CDS"), which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches of foreign
banks and held in the U.S.
DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Portfolio may enter into dollar rolls, in which the Portfolio sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-related securities, the mortgage-related securities that are purchased
typically will be of the same type and will have the same or similar interest
rate and maturity as those sold, but will be supported by different pools of
mortgages. The Portfolio forgoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but it is compensated by the
difference between the current sales price and the price for the future
purchase as well as by any interest earned on the proceeds of the securities
sold. A Portfolio could also be compensated through the receipt of fee income.
A Portfolio may also enter into reverse repurchase agreements in which the
Portfolio sells securities and agrees to repurchase them at a mutually agreed
date and price. Generally, the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
it will be able to keep the interest income associated with those portfolio
securities. Such transactions are advantageous if the interest cost to the
Portfolio of the reverse repurchase transaction is less than the cost of
otherwise obtaining the cash.
Dollar rolls and reverse repurchase agreements may be viewed as a
borrowing by the Portfolio, secured by the security which is the subject of the
agreement. In addition to the general risks involved in leveraging, dollar
rolls and reverse repurchase agreements involve the risk that, in the event of
the bankruptcy or insolvency of the Portfolio's counterparty, the Portfolio
would be unable to recover the security which is the subject of the agreement,
the amount of cash or other property transferred by the counterparty to the
Portfolio under the agreement prior to such insolvency or bankruptcy is less
than the value of the security subject to the agreement, or the Portfolio may
be delayed or prevented, due to such insolvency or bankruptcy, from using such
cash or property or may be required to return it to the counterparty or its
trustee or receiver.
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<PAGE>
CONVERTIBLE SECURITIES
A Portfolio may invest in convertible securities. Convertible securities
are fixed income securities which may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for a
variety of investment strategies.
A Portfolio will exchange or convert the convertible securities held in
its portfolio into shares of the underlying common stock when, in its Adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Portfolio in achieving its investment objectives. Otherwise, the
Portfolio may hold or trade convertible securities. In selecting convertible
securities for the Portfolio, the Portfolio's Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Portfolio's Adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and practices.
WARRANTS
A Portfolio may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the
market value of the optioned common stock at issuance) valid for a specific
period of time. Warrants may have a life ranging from less than a year to
twenty years or may be perpetual. However, most warrants have expiration dates
after which they are worthless. In addition, if the market price of the common
stock does not exceed the warrant's exercise price during the life of the
warrant, the warrant will expire as worthless. Warrants have no voting rights,
pay no dividends, and have no rights with respect to the assets of the
corporation issuing them. The percentage increase or decrease in the market
price of the warrant may tend to be greater than the percentage increase or
decrease in the market price of the optioned common stock. Warrants acquired in
units or attached to securities may be deemed to be without value for purposes
of a Portfolio's policy.
SWAPS, CAPS, FLOORS AND COLLARS
A Portfolio may enter into interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. A Portfolio expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. A Portfolio would use these transactions as hedges and not as
speculative investments and would not sell interest rate caps or floors where
it does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by
a Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the
values of
23
<PAGE>
the reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that
a specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. A Portfolio will not
enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from another nationally recognized
securities rating organization or is determined to be of equivalent credit
quality by the Portfolio's Adviser. If there is a default by the counterparty,
a Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
LOWER-RATED SECURITIES
A Portfolio may invest in lower-rated fixed-income securities (commonly
known as "junk bonds") to the extent described in the relevant Prospectus. The
lower ratings of certain securities held by a Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a Portfolio may be unable at times to establish the fair value of
such securities. The rating assigned to a security by Moody's Investors
Service, Inc. or Standard & Poor's (or by any other nationally recognized
securities rating organization) does not reflect an assessment of the
volatility of the security's market value or the liquidity of an investment in
the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Portfolio's assets. Conversely, during periods of rising interest rates, the
value of the Portfolio's assets will generally decline. In addition, the values
of such securities are also affected by changes in general economic conditions
and business conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. Changes in the value
of portfolio securities generally will not affect cash income derived from such
securities, but will affect the Portfolio's net asset value. A Portfolio will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although its Adviser will monitor the
investment to determine whether its retention will assist in meeting the
Portfolio's investment objective.
24
<PAGE>
The amount of information about the financial condition of an issuer of
tax exempt securities may not be as extensive as that which is made available
by corporations whose securities are publicly traded. Therefore, to the extent
a Portfolio invests in tax exempt securities in the lower rating categories,
the achievement of the Portfolio's goals is more dependent on its Adviser's
investment analysis than would be the case if the Portfolio were investing in
securities in the higher rating categories.
INDEXED SECURITIES
A Portfolio may invest in indexed securities, the values of which are
linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). Most indexed securities have maturities
of three years or less.
Indexed securities differ from other types of debt securities in which a
Portfolio may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or
the currency exchange rates between two currencies (neither of which need be
the currency in which the instrument is denominated). The reference instrument
need not be related to the terms of the indexed security. For example, the
principal amount of a U.S. dollar denominated indexed security may vary based
on the exchange rate of two foreign currencies. An indexed security may be
positively or negatively indexed; that is, its value may increase or decrease
if the value of the reference instrument increases. Further, the change in the
principal amount payable or the interest rate of an indexed security may be a
multiple of the percentage change (positive or negative) in the value of the
underlying reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities
may be more volatile than the reference instruments underlying indexed
securities.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio is exposed is difficult to hedge or to hedge against the dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Portfolio's securities denominated in linked
currencies. For example, if a Portfolio's Adviser considers that the Austrian
schilling is linked to the German deutschmark (the "D-mark"), the Portfolio
holds securities denominated in schillings and the Adviser believes that the
value of schillings will decline against the U.S. dollar, the Adviser may enter
into a contract to sell D-marks and buy dollars.
EURODOLLAR INSTRUMENTS
A Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"),
25
<PAGE>
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. A
Portfolio might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed-income
instruments are linked.
SEGREGATION OF ASSETS
A Portfolio may at times segregate assets in respect of certain
transactions in which the Portfolio enters into a commitment to pay money or
deliver securities at some future date (such as futures contracts or reverse
repurchase agreements, to the extent not used for leverage). Any such
segregated account will be maintained by the Trust's custodian and may contain
cash, U.S. government securities, liquid high grade debt obligations, or other
appropriate assets.
26
<PAGE>
MANAGEMENT OF THE TRUST
The following table provides biographical information with respect to each
Trustee and officer of the Trust. Each Trustee who is an "interested person" of
the Trust, as defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- -------------- ---------------------------------------------------------------
<S> <C> <C>
Daniel J. Ludeman* Chairman Chairman and Chief Executive Officer Mentor Investment
c/o Mentor Funds and Trustee Group, Inc.; Managing Director of Wheat First Butcher
901 E. Byrd Street Singer, Inc. Director, Wheat, First Securities, Inc.; Chairman
Richmond, VA 23219 and Director Mentor Income Fund, Inc., and America's
Utility Fund, Inc.; Chairman and Trustee, Cash Resource
Trust, Mentor Variable Investment Portfolios and Mentor
Institutional Trust.
Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corporation; Trustee, Cash Resource
P.O. Box 18156 Trust, Mentor Variable Investment Portfolios and Mentor
Richmond, Virginia 23226 Institutional Trust; Director, Mentor Income Fund, Inc. and
America's Utility Fund, Inc.; formerly, Chairman and Chief
Executive Officer, Hamilton Beach/Proctor-Silex, Inc.
Thomas F. Keller Trustee R.J. Reynolds Industries Professor of Business Adminis-
Fuqua School of Business tration and Former Dean of Fuqua School of Business, Duke
Duke University University; Director of LADD Furniture, Inc., Wendy's
Durham, NC 27706 International, Inc., American Business Products, Inc., Dimon,
Inc., and Biogen, Inc.; Director of Nations Balanced Target
Maturity Fund, Inc., Nations Government Income Term Trust
2003, Inc., Nations Government Income Term Trust 2004,
Inc., Hatteras Income Securities, Inc., Nations Institutional
Reserves, Nations Fund Trust, Nations Fund, Inc., Nations
Fund Portfolios, Inc., and Nations LifeGoal Funds, Inc.
Trustee, Cash Resource Trust, Mentor Variable Investment
Portfolios and Mentor Institutional Trust; Director, Mentor
Income Fund, Inc. and America's Utility Fund, Inc.
Louis W. Moelchert, Jr. Trustee Vice President for Investments, University of Richmond;
University of Richmond Trustee, Cash Resource Trust, Mentor Variable Investment
Richmond, VA 23173 Portfolios and Mentor Institutional Trust; Director, Mentor
Income Fund, Inc. and America's Utility Fund, Inc.
Troy A. Peery, Jr. Trustee President, Heilig-Meyers Company; Trustee, Cash Resource
Heilig-Meyers Company Trust, Mentor Variable Investment Portfolios and Mentor
2235 Staples Mill Road Institutional Trust; Director, Mentor Income Fund, Inc. and
Richmond, Virginia 23230 America's Utility Fund, Inc.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ---------------------- -------------- -------------------------------------------------------------
<S> <C> <C>
Peter J. Quinn, Jr.* Trustee Formerly, President, Mentor Distributors, Inc.; Managing
c/o Mentor Funds Director, Mentor Investment Group, LLC, and Wheat First
901 E. Byrd Street Butcher Singer, Inc.; formerly, Senior Vice President/
Richmond, VA 23219 Director of Mutual Funds, Wheat First Butcher Singer, Inc.;
Trustee, Cash Resource Trust, Mentor Variable Investment
Portfolios and Mentor Institutional Trust; Director, Mentor
Income Fund, Inc. and America's Utility Fund, Inc.
Arch T. Allen, III Trustee Attorney at law, Raleigh, North Carolina; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; formerly, Vice
Chancellor for Development and University Relations,
University of North Carolina at Chapel Hill.
Weston E. Edwards Trustee President, Weston Edwards & Associates; Trustee Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; Founder and
Chairman, The Housing Roundtable; formerly, President,
Smart Mortgage Access, Inc.
Jerry R. Barrentine Trustee President, J.R. Barretine & Associates; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 Inc. and America's Utility Fund, Inc.; formerly, Executive
Vice President and Chief Financial Officer, Barclays/
American Mortgage Director Corporation; Managing Partner,
Barrentine Lott & Associates.
J. Garnett Nelson Trustee Consultant, Mid-Atlantic Holdings, LLC; Trustee, Cash
c/o Mentor Funds Resource Trust, Mentor Variable Investment Portfolios and
901 E. Byrd Street Mentor Institutional Trust; Director, Mentor Income Fund,
Richmond, VA 23219 Inc., America's Utility Fund, Inc., GE Investment Funds,
Inc., and Lawyers Title Corporation; Member, Investment
Advisory Committee, Virginia Retirement System; formerly,
Senior Vice President, The Life Insurance Company of
Virginia.
Paul F. Costello President Managing Director, Wheat First Butcher Singer, Inc. and
c/o Mentor Funds Mentor Investment Group, LLC; President, Cash Resource
901 E. Byrd Street Trust, Mentor Income Fund, Inc., Mentor Institutional Trust,
Richmond, VA 23219 Mentor Variable Investment Portfolios and America's Utility
Fund, Inc.; Director, Mentor Perpetual Advisors, LLC.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD
NAME AND ADDRESS WITH A FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------- -------------- ------------------------------------------------------------
<S> <C> <C>
Terry L. Perkins Treasurer Senior Vice President, Mentor Investment Group, LLC;
c/o Mentor Funds Treasurer, Mentor Institutional Trust, Cash Resource Trust,
901 E. Byrd Street Mentor Variable Investment Portfolios, Mentor Income Fund,
Richmond, VA 23219 Inc., America's Utility Fund, Inc.; formerly, Treasurer and
Comptroller, Ryland Capital Management, Inc.
Michael Wade Assistant Vice President, Mentor Investment Group, LLC Assistant
c/o Mentor Funds Treasurer Treasurer, Mentor Income Fund, Inc., Cash Resource Trust,
901 E. Byrd Street Mentor Institutional Trust, Mentor Variable Investment
Richmond, VA 23219 Portfolios and America's Utility Fund; formerly, Senior
Accountant, Wheat First Butcher Singer, Inc., Audit Senior,
BDO Seidman.
Geoffrey B. Sale Secretary Associate Vice President Mentor Investment Group, LLC;
c/o Mentor Funds Secretary, Cash Resource Trust, Mentor Institutional Trust,
901 E. Byrd Street Mentor Variable Investment Portfolios; Clerk, America's
Richmond, VA 23219 Utility Fund, Inc., Mentor Income Fund, Inc.
</TABLE>
The table below shows the fees paid to each Trustee by the Trust for the
1998 fiscal year and the fees paid to each Trustee by all funds in the Mentor
family (including the Trust) during the 1997 calendar year.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM ALL
FROM THE TRUST COMPLEX FUNDS (27 FUNDS)
(FISCAL YEAR END 1998) (CALENDAR YEAR 1997)
------------------------ ----------------------------
<S> <C> <C>
Daniel J. Ludeman ............... $ 0 $ 0
Arnold H. Dreyfuss .............. $5,808 $32,000
Thomas F. Keller ................ $4,859 $32,000
Louis W. Moelchert, Jr. ......... $5,606 $32,000
J. Garnett Nelson ............... $5,393 $40,000
Troy A. Peery, Jr. .............. $5,405 $32,000
Peter J. Quinn, Jr. ............. $ 0 $ 0
Jerry R. Barrentine ............. $5,660 $40,000
Weston E. Edwards ............... $5,479 $42,000
Arch T. Allen III ............... $5,399 $35,000
</TABLE>
- ----------
The Trustees do not receive pension or retirement benefits from the Trust.
The Declaration of Trust of the Trust provides that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its Shareholders by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of his or her duties. The
Trust, at its expense, provides liability insurance for the benefit of its
Trustees and officers.
29
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of November 2, 1998, the officers and Trustees of the Trust owned as a
group less than 1% of the outstanding shares of any class of the Balanced
Portfolio. To the knowledge of the Trust, no person owned of record or
beneficially more than 5% of the outstanding shares of any class of the
Portfolios as of that date, except as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO HOLDER PERCENTAGE OWNERSHIP
- --------------------------------- ------------------------------- ---------------------
<S> <C> <C>
Short Duration-Income Portfolio Partnership Healthplan of Cal 7.60%
Class A Attn: Marion R. Schales CFO
421 Executive Ct North Ste #A
Suisun City, CA 94585-4019
Short Duration-Income Portfolio EVEREN Clearing Corp. 5.91%
Class A A/C 1902-3741
Calaveras County Water Dist
111 East Kilbourn Avenue
Milwaukee, WI 53202-6611
</TABLE>
30
<PAGE>
INVESTMENT ADVISORY SERVICES
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as investment
adviser to each Portfolio other than the Global Portfolio. Van Kampen
Management, Inc. ("Van Kampen") serves as sub-adviser to the Municipal Income
Portfolio and the High Income Portfolio; Wellington Management Company, LLP
("Wellington Management") serves as sub-adviser to the Income and Growth
Portfolio. Each of these sub-advisers has complete discretion to purchase and
sell portfolio securities for its respective Portfolio consistent with the
particular Portfolio's investment objective, restrictions, and policies. Mentor
Perpetual Advisors, LLC ("Mentor Perpetual") serves as investment adviser to
the Global Portfolio.
Mentor Advisors is a wholly owned subsidiary of Mentor Investment Group,
LLC, ("Mentor Investment Group") which is a subsidiary of Wheat First Butcher
Singer, Inc. ("WFBS"). Mentor Perpetual is owned equally by Mentor Advisors and
Perpetual plc, a diversified financial services holding company. EVEREN Capital
Corporation has a 20% ownership in Mentor Investment Group and may acquire
additional ownership based principally on the amount of Mentor Investment
Group's revenues derived from assets attributable to clients of EVEREN
Securities, Inc. and its affiliates.
On October 31, 1996, Commonwealth Investment Counsel, Inc., the investment
adviser to the Short-Duration Income and Balanced Portfolios, was reorganized
as Mentor Investment Advisors, LLC. Also on October 31, 1996, each of
Commonwealth Advisors, Inc., the investment adviser to the Capital Growth,
Income and Growth, Municipal Income, and Quality Income Portfolios, Charter
Asset Management, Inc., the investment adviser to the Growth Portfolio, and
Wellesley Advisors, Inc., the investment adviser to the Strategy Portfolio,
transferred its rights and obligations under its respective advisory contract
with the Trust to Mentor Investment Advisors, LLC. In addition, Mentor
Investment Group, Inc. and Mentor Distributors, Inc. were reorganized as Mentor
Investment Group, LLC and Mentor Distributors, LLC, respectively.
On October 29, 1996, shareholders of the Municipal Income Portfolio
approved a new sub-advisory agreement with Van Kampen which became a subsidiary
of Morgan Stanley Group, Inc.
Subject to the general oversight of the Trustees, each investment adviser
and/or sub-adviser manages the applicable Portfolio in accordance with the
stated policies of that Portfolio and of the Trust. Each makes investment
decisions for the Portfolio and places the purchase and sale orders for
portfolio transactions. The investment advisers and sub-advisers bear all their
expenses in connection with the performance of their services (except as may be
approved from time to time by the Trustees) and pay the salaries of all
officers and employees who are employed by them and the Trust.
Each Portfolio's investment adviser and/or sub-adviser provides the Trust
with investment officers who are authorized to execute purchases and sales of
securities. Investment decisions for the Trust and for the other investment
advisory clients of the investment advisers and sub-advisers and their
affiliates are made with a view to achieving their respective investment
objectives. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price
and allocated between such clients in a manner which in
31
<PAGE>
the investment adviser's or sub-adviser's opinion is equitable to each and in
accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of securities for one or more clients
will have an adverse effect on other clients. In the case of short-term
investments, the Treasury area of Mentor Investment Group handles purchases and
sales under guidelines approved by investment officers of the Trust. Each
investment adviser and sub-adviser employs professional staffs of portfolio
managers who draw upon a variety of resources for research information for the
Trust.
Expenses incurred in the operation of a Portfolio or otherwise allocated
to a Portfolio, including but not limited to taxes, interest, brokerage fees
and commissions, compensation paid under a Portfolio's 12b-1 plan and the
Shareholder Service Plan, fees to Trustees who are not officers, directors,
stockholders, or employees of Wheat, First Securities, Inc. and its
subsidiaries, SEC fees and related expenses, state Blue Sky qualification fees,
charges of the custodian and transfer and dividend disbursing agents, outside
auditing, accounting, and legal services, charges for the printing of
prospectuses and statements of additional information for regulatory purposes
or for distribution, and certain costs incurred by Mentor Investment Group in
responding to shareholder inquiries as approved by the Trustees from time to
time, to shareholders, certain shareholder report charges and charges relating
to corporate matters are borne by the Portfolio.
Under the applicable Management Contract with the Trust in respect of each
Portfolio, subject to such policies as the Trustees may determine, Mentor
Advisors or Mentor Perpetual, as the case may be, at its expense, furnishes
continuously an investment program for the Portfolio and makes investment
decisions on behalf of the Portfolio. Mentor Advisors or Mentor Perpetual, as
the case may be, may place portfolio transactions with broker-dealers which
furnish Mentor Advisors or Mentor Perpetual, without cost to it, certain
research, statistical and quotation services of value to Mentor Advisors or
Mentor Perpetual and their affiliates in advising the Portfolio and other
clients. In so doing, Mentor Advisors or Mentor Perpetual may cause a Portfolio
to pay greater brokerage commissions than it might otherwise pay.
Each Management Contract provides that Mentor Advisors or Mentor
Perpetual, as the case may be, shall not be subject to any liability to a
Portfolio or to any shareholder of a Portfolio for any act or omission in the
course of or connected with rendering services to a Portfolio in the absence of
its willful misfeasance, bad faith, gross negligence, or reckless disregard of
its duties.
Each of the Management Contracts is subject to annual approval (beginning
in 2000) by (i) the Trustees or (ii) vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the affected Portfolio, provided
that in either event the continuance is also approved by a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust or the investment adviser in question, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Management
Contracts are terminable without penalty, on not more than sixty days' notice
and not less than thirty days' notice, by the Trustees, by vote of the holders
of a majority of the affected Portfolio's shares, or by the applicable
investment adviser. Each terminates automatically in the event of its
assignment (as defined in the 1940 Act).
MANAGEMENT FEES
The investment adviser of each Portfolio receives an annual management fee
from such Portfolio (which is described in the relevant Prospectus). The
investment adviser pays a portion of that fee to any sub-adviser to the
Portfolio.
32
<PAGE>
The Portfolios paid investment advisory fees in the amounts and for the
periods indicated below (amounts shown reflect fee waivers where applicable):
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio ........................ $4,204,377 $3,238,498 $2,313,470
Capital Growth Portfolio ................ 2,153,467 1,063,903 728,536
Income and Growth Portfolio ............. 1,638,729 947,267 575,647
Global Portfolio ........................ 1,612,495 998,592 368,592
Quality Income Portfolio ................ 821,411 449,325 278,216
Municipal Income Portfolio .............. 557,332 370,232 344,784
Short-Duration Income Portfolio ......... 323,574 129,833 54,833
Balanced Portfolio ...................... 31,721 8,854 6,790
</TABLE>
The investment advisers of the following Portfolios waived investment
advisory fees in the following amounts for the periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Quality Income Portfolio ................ $204,530 $123,214 $217,329
Short-Duration Income Portfolio ......... 180,523 55,521 83,567
Balanced Portfolio ...................... -- 20,072 18,976
High Income Portfolio ................... 175,891 -- --
</TABLE>
The investment advisers of the following Portfolios paid sub-advisory fees
to the Portfolios' sub-advisers in the following amounts for the periods
indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Income and Growth Portfolio ......... $575,028 $373,115 $236,071
Municipal Income Portfolio .......... 216,114 153,577 172,392
</TABLE>
ADMINISTRATIVE SERVICES
Mentor Investment Group, LLC serves as administrator to each of the
Portfolios pursuant to an Administration Agreement.
Pursuant to the Administration Agreement, Mentor Investment Group provides
continuous business management services to the Portfolios and, subject to the
general oversight of the Trustees, manages all of the business and affairs of
the Portfolios subject to the provisions of the Trust's Declaration of Trust,
By-laws and the 1940 Act, and other policies and instructions the Trustees may
from time to time establish. Mentor Investment Group pays the compensation of
all officers and executive employees of the Trust (except those employed by or
serving at the request of an investment adviser or sub-adviser) and makes
available to the Trust the services of its directors, officers, and employees
as elected by the Trustees or officers of the Trust. In addition, Mentor
33
<PAGE>
Investment Group provides all clerical services relating to the Portfolios'
business. As compensation for its services, Mentor Investment Group receives a
fee from each Portfolio calculated daily at the annual rate of .10% of a
Portfolio's average daily net assets.
The Administration Agreement must be approved at least annually with
respect to each Portfolio by a vote of a majority of the Trustees who are not
interested persons of Mentor Investment Group or the Trust. The Agreement may
be terminated at any time without penalty on 30 days notice by Mentor
Investment Group, or immediately in respect of any Portfolio upon notice by the
Trustees or by vote of a majority of the outstanding voting securities of that
Portfolio. The Agreement terminates automatically in the event of any
assignment (as defined in the 1940 Act).
The Portfolios paid administrative service fees in the following amounts
for the periods indicated below (amounts shown reflect fee waivers where
applicable):
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio .................... $600,625 $462,643 $330,496
Capital Growth Portfolio ............ 269,183 132,988 91,067
Income and Growth Portfolio ......... 218,497 126,302 76,753
Global Portfolio .................... 153,750 92,753 33,508
Quality Income Portfolio ............ 174,343 95,423 82,591
Municipal Income Portfolio .......... 92,888 61,705 57,464
High Income Portfolio ............... 24,979 -- --
</TABLE>
The administrators waived administrative fees in the amounts and for the
periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Short-Duration Income Portfolio ......... $101,237 37,151 $27,680
Balanced Portfolio ...................... 8,127 -- --
</TABLE>
The Portfolios also provided direct reimbursement to Mentor for certain
legal and compliance administration, investor relation and operation costs not
covered under the Investment Management Agreement. These direct reimbursements
were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio ........................ $26,735 17,457 23,289
Capital Growth Portfolio ................ 12,494 5,036 5,901
Income and Growth Portfolio ............. 10,079 4,851 5,210
Global Portfolio ........................ 6,902 3,672 2,752
Quality Income Portfolio ................ 7,964 3,617 5,005
Municipal Income Portfolio .............. 4,318 2,293 3,465
Short-Duration Income Portfolio ......... 5,085 1,443 1,842
</TABLE>
34
<PAGE>
SHAREHOLDER SERVICING PLAN
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan")
with Mentor Distributors, LLC with respect to the Class A and Class B shares of
each Portfolio. Pursuant to the Service Plan, financial institutions will enter
into shareholder service agreements to provide administrative support services
to their customers who from time to time may be record or beneficial owners of
shares of one or more Portfolios. In return for providing these support
services, a financial institution may receive payments from one or more
Portfolios at a rate not exceeding .25% of the average daily net assets of the
Class A or Class B shares of the particular Portfolio or Portfolios owned by
the financial institution's customers for whom it is the holder of record or
with whom it has a servicing relationship. The Service Plan is designed to
stimulate financial institutions to render administrative support services to
the Portfolios and their shareholders. These administrative support services
include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding the Portfolios;
assisting clients in changing dividend options, account designations and
addresses; and providing such other services as the Portfolios reasonably
request.
In addition to receiving payments under the Service Plan, financial
institutions may be compensated by the investment adviser, a sub-adviser,
and/or Mentor Investment Group, or affiliates thereof, for providing
administrative support services to holders of Class A or Class B shares of the
Portfolios. These payments will be made directly by the investment adviser, a
sub-adviser, and/or Mentor Investment Group or affiliates, as applicable, and
will not be made from the assets of any of the Portfolios.
SHAREHOLDER SERVICES FEES
During fiscal year 1998, the Portfolios incurred shareholder service fees
in respect of Class A and Class B shares under the Service Plan as follows
(amounts shown reflect fee waivers where applicable):
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- -------------
<S> <C> <C>
Growth Portfolio ......................... $255,596 $1,233,864
Capital Growth Portfolio ................. 283,728 389,229
Income and Growth Portfolio .............. 222,501 323,741
Global Portfolio ......................... 146,546 237,827
Quality Income Portfolio ................. 195,196 232,278
Municipal Income Portfolio ............... 108,151 124,069
Short-Duration Income Portfolio .......... 160,078 91,969
Balanced Portfolio ....................... 3,517 6,695
High Income Portfolio .................... 28,187 34,631
</TABLE>
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<PAGE>
BROKERAGE TRANSACTIONS
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by a Portfolio of
negotiated brokerage commissions. Such commissions vary among different
brokers. A particular broker may charge different commissions according to such
factors as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets,
but the price paid by the Trust usually includes an undisclosed dealer
commission or mark-up. In underwritten offerings, the price paid by the Trust
includes a disclosed, fixed commission or discount retained by the underwriter
or dealer. It is anticipated that most purchases and sales of securities by
funds investing primarily in certain fixed-income securities will be with the
issuer or with underwriters of or dealers in those securities, acting as
principal. Accordingly, those funds would not ordinarily pay significant
brokerage commissions with respect to securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, each investment adviser or sub-adviser may receive brokerage and
research services and other similar services from many broker-dealers with
which such investment adviser or sub- adviser places a Portfolio's portfolio
transactions and from third parties with which these broker-dealers have
arrangements. These services include such matters as general economic and
market reviews, industry and company reviews, evaluations of investments,
recommendations as to the purchase and sale of investments, newspapers,
magazines, pricing services, quotation services, news services and personal
computers utilized by the investment adviser's or sub-adviser's managers and
analysts. Where the services referred to above are not used exclusively by the
investment adviser or sub-adviser for research purposes, the investment adviser
or sub-adviser, based upon its own allocations of expected use, bears that
portion of the cost of these services which directly relates to its
non-research use. Some of these services are of value to the investment adviser
or sub-adviser and its affiliates in advising various of its clients (including
the Portfolios), although not all of these services are necessarily useful and
of value in managing all or any of the Portfolios. The management fee paid by a
Portfolio is not reduced because its investment adviser or sub-adviser or any
of their affiliates receive these services even though the investment adviser
or sub-adviser might otherwise be required to purchase some of these services
for cash.
A Portfolio's investment adviser or sub-adviser, as the case may be,
places all orders for the purchase and sale of portfolio investments for the
Portfolio and buys and sells investments for the Portfolio through a
substantial number of brokers and dealers. The investment adviser or sub-
adviser seeks the best overall terms available for the Portfolio, except to the
extent the investment adviser or sub-adviser may be permitted to pay higher
brokerage commissions as described below. In doing so, the investment adviser
or sub-adviser, having in mind the Portfolio's best interests, considers all
factors it deems relevant, including, by way of illustration, price, the size
of the transaction, the nature of the market for the security or other
investment, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions.
36
<PAGE>
As permitted by Section 28(e) of the 1934 Act, and by the advisory and
sub-advisory agreements, a Portfolio's investment adviser or sub-adviser may
cause the Portfolio to pay a broker-dealer which provides "brokerage and
research services" (as defined in the 1934 Act) to that adviser an amount of
disclosed commission for effecting securities transactions on stock exchanges
and other transactions for the Portfolio on an agency basis in excess of the
commission which another broker-dealer would have charged for effecting that
transaction. The investment adviser's or sub-adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Trustees may adopt from time to time. It is the position of the staff of
the Securities and Exchange Commission that Section 28(e) does not apply to the
payment of such greater commissions in "principal" transactions. Accordingly,
each investment adviser and sub-adviser will use its best efforts to obtain the
best overall terms available with respect to such transactions, as described
above.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to such other policies as the Trustees may
determine, an investment adviser or sub-adviser may consider sales of shares of
a Portfolio (and, if permitted by law, of the other funds in the Mentor family)
as a factor in the selection of broker-dealers to execute portfolio
transactions for a Portfolio.
The Trustees have determined that portfolio transactions for the Trust may
be effected through Wheat, First Securities, Inc. ("Wheat"), First Union
Brokerage Services ("FUBS"), and EVEREN Securities, Inc. ("EVEREN"),
broker-dealers affiliated with Mentor Advisors and Mentor Perpetual. The
Trustees have adopted certain policies incorporating the standards of Rule
17e-l issued by the SEC under the 1940 Act which requires, among other things,
that the commissions paid to Wheat, FUBS, and EVEREN must be reasonable and
fair compared to the commissions, fees, or other remuneration received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time. Wheat, FUBS, and EVEREN will not
participate in brokerage commissions given by a Portfolio to other brokers or
dealers. Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. A Portfolio will in no event effect
principal transactions with Wheat, FUBS, and EVEREN in over-the-counter
securities in which Wheat, FUBS, or EVEREN makes a market.
Under rules adopted by the SEC, Wheat, FUBS, and EVEREN may not execute
transactions for a Portfolio on the floor of any national securities exchange,
but may effect transactions for a Portfolio by transmitting orders for
execution and arranging for the performance of this function by members of the
exchange not associated with them. Wheat, FUBS, and EVEREN will be required to
pay fees charged to those persons performing the floor brokerage elements out
of the brokerage compensation they receive from a Portfolio. The Trust has been
advised by Wheat that on most transactions, the floor brokerage generally
constitutes from 5% and 10% of the total commissions paid.
37
<PAGE>
BROKERAGE COMMISSIONS
The Portfolios paid brokerage commissions on brokerage transactions in the
following aggregate amounts for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio ........................ $2,620,649 $1,482,817 $1,864,300
Capital Growth Portfolio ................ 920,105 275,151 299,554
Income and Growth Portfolio ............. 183,991 302,628 146,323
Global Portfolio ........................ 1,272,077 838,045 359,217
Quality Income Portfolio ................ -- 900 24,990
Municipal Income Portfolio .............. 18,968 5,044 2,422
Short-Duration Income Portfolio ......... -- -- 1,560
Balanced Portfolio ...................... 12,356 4,752 7,385
</TABLE>
The following table shows brokerage commissions paid by each of the
Portfolios to Wheat for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio .................... $148,289 $101,434 $72,923
Capital Growth Portfolio ............ 104,188 29,226 54,642
Income and Growth Portfolio ......... 73,192 101,434 52,534
Balanced Portfolio .................. 193 50 --
</TABLE>
The following table shows brokerage commissions paid by each of the
Portfolios to EVEREN for the period indicated.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1998 1997
------------- ------------
<S> <C> <C>
Growth Portfolio ................. $20,738 $2,331
Capital Growth Portfolio ......... 63,266 9,793
Balanced Portfolio ............... 2,023 --
</TABLE>
The brokerage commissions paid to Wheat for fiscal year 1998 amounted to
the following percentages of the aggregate brokerage commissions and brokerage
transactions paid by each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF AGGREGATE
PERCENT OF AGGREGATE DOLLAR AMOUNT OF
COMMISSIONS BROKERAGE TRANSACTIONS
---------------------- -----------------------
<S> <C> <C>
Growth Portfolio .................... 5.66% 5.19%
Capital Growth Portfolio ............ 11.32% 14.26%
Income and Growth Portfolio ......... 39.78% 29.39%
Balanced Portfolio .................. 1.56% 0.32%
</TABLE>
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<PAGE>
The brokerage commissions paid to EVEREN for fiscal year 1998 amounted to
the following percentages of the aggregate brokerage commissions and brokerage
transactions paid by each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF AGGREGATE
PERCENT OF AGGREGATE DOLLAR AMOUNT OF
COMMISSIONS BROKERAGE TRANSACTIONS
---------------------- -----------------------
<S> <C> <C>
Growth Portfolio ................. 0.79% 0.71%
Capital Growth Portfolio ......... 6.88% 6.29%
Balanced Portfolio ............... 16.37% 3.89%
</TABLE>
HOW TO BUY SHARES
Except under certain circumstances described in the Trust's or an
individual Portfolio's prospectus, Class A shares of the Portfolios are sold at
their net asset value plus an applicable sales charge on days the New York
Stock Exchange is open for business. Class B shares of the Portfolios and
Institutional Shares of the Portfolios are sold at their net asset value with
no sales charge on days the New York Stock Exchange is open for business. The
procedure for purchasing Class A, Class B, and Institutional Shares of the
Portfolios is explained in the relevant Prospectus under the section entitled
"How to Buy Shares."
DISTRIBUTION
Each of the Portfolios makes payments to Mentor Distributors, LLC in
accordance with its respective Distribution Plan adopted in respect of Class B
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
During fiscal year 1998, the Portfolios paid the following 12b-1 fees in
respect of Class B shares to Mentor Distributors as shown below:
<TABLE>
<S> <C>
Growth Portfolio ........................ $3,638,580
Capital Growth Portfolio ................ 1,227,717
Balanced Portfolio ...................... 30,319
Income and Growth Portfolio ............. 986,604
Global Portfolio ........................ 734,020
Quality Income Portfolio ................ 467,042
Municipal Income Portfolio .............. 257,381
Short-Duration Income Portfolio ......... 133,476
High Income Portfolio ................... 68,461
</TABLE>
During fiscal year 1998, 12b-1 fees of $29,451 of the number above were
waived in respect of Class B shares of the Balanced Portfolio.
39
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
During fiscal year 1998, Mentor Distributors received the following
contingent deferred sales charges with respect to Class B shares:
<TABLE>
<S> <C>
Growth Portfolio ........................ $500,690
Capital Growth Portfolio ................ 132,159
Income and Growth Portfolio ............. 163,091
Global Portfolio ........................ 179,805
Quality Income Portfolio ................ 137,341
Municipal Income Portfolio .............. 26,436
Short-Duration Income Portfolio ......... 90,668
High Income Portfolio ................... 17,592
</TABLE>
UNDERWRITING COMMISSIONS
The following table shows the approximate amount of underwriting
commissions retained by Mentor Distributors (and any predecessor) in respect of
Class A and Class B shares for each Portfolio for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Growth Portfolio ........................ $231,016 $116,796 38,398
Capital Growth Portfolio ................ 320,353 63,786 $10,477
Income and Growth Portfolio ............. 169,108 59,230 15,762
Global Portfolio ........................ 113,331 66,416 23,038
Quality Income Portfolio ................ 104,891 37,516 9,062
Municipal Income Portfolio .............. 80,007 21,433 4,110
Short-Duration Income Portfolio ......... 4,833 867 186
High Income Portfolio ................... 56,138 -- --
</TABLE>
DETERMINING NET ASSET VALUE
A Portfolio determines the net asset value per share of each class once
each day the New York Exchange (the "Exchange") is open as of the close of
regular trading on the Exchange. Currently, the Exchange is closed Saturdays,
Sundays and the following holidays: New Year's Day, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Thanksgiving and Christmas.
Securities for which market quotations are readily available are valued at
prices which, in the opinion of a Portfolio's investment adviser or
sub-adviser, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sale price or, if
no sales are reported (as in the case of some securities traded
over-the-counter), the last reported bid price, except that certain U.S.
Government securities are stated at the mean between the last reported bid and
asked prices. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost, which approximates market value. All other
40
<PAGE>
securities and assets are valued at their fair value following procedures
approved by the Trustees. Liabilities are deducted from the total, and the
resulting amount is divided by the number of shares of the class outstanding.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. These investments are stated at fair
value on the basis of valuations furnished by pricing services approved by the
Trustees, which determine valuations for normal, institutional- size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders.
If any securities held by a Portfolio are restricted as to resale, the
Portfolio's investment adviser or sub-adviser determines their fair values. The
fair value of such securities is generally determined as the amount which a
Portfolio could reasonably expect to realize from an orderly disposition of
such securities over a reasonable period of time. The valuation procedures
applied in any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Portfolio in connection with
such disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities and any available analysts' reports
regarding the issuer.
In the case of certain fixed-income securities, including certain less
common mortgage-backed securities, market quotations are not readily available
to the Portfolios on a daily basis, and pricing services may not provide price
quotations. In such cases, the Portfolio's investment adviser or sub-adviser is
typically able to obtain dealer quotations for each of the securities on at
least a weekly basis. On any day when it is not practicable for the investment
adviser or sub- adviser to obtain an actual dealer quotation for a security,
the investment adviser or sub-adviser may reprice the securities based on
changes in the value of a U.S. Treasury security of comparable duration. When
the next dealer quotation is obtained, the investment adviser or sub-adviser
compares the dealer quote against the price obtained by it using its U.S.
Treasury-spread calculation, and makes any necessary adjustments to its
calculation methodology. The investment adviser or sub-adviser attempts to
obtain dealer quotes for each security at least weekly, and on any day when
there has been an unusual occurrence affecting the securities which, in the
investment adviser or sub-adviser's view, makes pricing the securities on the
basis of U.S. Treasuries unlikely to provide a fair value of the securities.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset
value of a class of shares are computed as of such times. Also, because of the
amount of time required to collect and process trading information as to large
numbers of securities issues, the values of certain securities (such as
convertible bonds, U.S. Government securities, and tax-exempt securities) are
determined based on market quotations collected earlier in the day at the
latest practicable time prior to the close of the Exchange. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the Exchange which will not be reflected in the computation of net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value
following procedures approved by the Trustees.
41
<PAGE>
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading generally or in
a particular country or countries may not take place on all business days in
New York. Furthermore, trading takes place in Japanese markets on certain
Saturdays and in various foreign markets on days which are not business days in
New York and on which net asset value is not calculated. A Portfolio calculates
net asset value per share of each class, and therefore effects sales,
redemptions and repurchases of its shares, as of the close of the Exchange once
on each day on which the Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when a classes' net asset value is calculated, such
securities will be valued at fair value as determined in good faith by
procedures approved as required by the Trustees.
REDEMPTIONS IN KIND
Although each Portfolio intends to redeem Class A, Class B and
Institutional Shares in cash, it reserves the right under certain circumstances
to pay the redemption price in whole or in part by a distribution of securities
from its investment portfolio. Redemptions in kind will be made in conformity
with applicable SEC rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner that the
Trustees determine to be fair and equitable. The Trust has elected to be
governed by Rule 18f-1 of the 1940 Act, under which a Portfolio is obligated to
redeem shares for any one shareholder in cash only up to the lesser of $250,000
or 1% of the respective classes' net asset value during any 90-day period.
TAXES
Each Portfolio intends to qualify each year and elect to be taxed as a
regulated investment company under Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal
income tax on any of its net investment income or net realized capital gains
that are distributed to shareholders. A Portfolio will not under present law be
subject to any excise or income taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other dispositions of stock, securities, or foreign currencies, and other
income (including but not limited to gains from options, futures, or forward
contracts) derived with respect to its business of investing in such stock,
securities, or currencies; and (b) diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of
its total assets consists of cash and cash items, U.S. Government Securities,
securities of other regulated investment companies, and other securities
limited generally with respect to any one issuer to not more than 5% of the
value of its total assets and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than those of the U.S. Government
or other regulated investment companies) of any issuer or of two or more
issuers which the Portfolio controls and which are engaged in the same,
similar, or related trades or
42
<PAGE>
businesses. In order to receive the favorable tax treatment accorded regulated
investment companies and their shareholders, moreover, a Portfolio must in
general distribute at least 90% of the sum of its taxable net investment
income, its net tax-exempt income, and the excess, if any, of net short-term
capital gains over net long-term capital losses for such year.
If a Portfolio failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Portfolio would be
subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax-exempt income
and net long-term capital gains, would be taxable to shareholders as ordinary
income. In addition, a Portfolio could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial distributions
before requalifying as a regulated investment company that is accorded special
tax treatment.
If a Portfolio fails to distribute in a calendar year substantially all of
its taxable ordinary income for such year and substantially all of its capital
gain net income for the one-year period ending October 31, plus any retained
amount from the prior year, the Portfolio will be subject to a 4% excise tax on
the undistributed amounts. A dividend paid to shareholders by a Portfolio in
January of a year generally is deemed to have been paid by the Portfolio on
December 31 of the preceding year, if the dividend was declared and payable to
shareholders of record on a date in October, November or December of that
preceding year. Each Portfolio intends generally to make distributions
sufficient to avoid imposition of the 4% excise tax.
Distributions from a Portfolio (other than exempt-interest dividends, as
discussed below) will be taxable to shareholders as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Distributions of net capital gain (that is, the excess of net gains from
capital assets held by the Portfolio for more than one year over net losses
from capital assets held for not more than one year) that are designed as
capital gain dividends will be taxable to shareholders as long-term capital
gain, which is generally taxable to individuals at a 20% rate.
Dividends and distributions on a Portfolio's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Portfolio's realized income and gains, even though such dividends and
distributions may economically represent a return of a particular shareholder's
investment. Such distributions are likely to occur in respect of shares
purchased at a time when a Portfolio's net asset value reflects gains that are
either unrealized, or realized but not distributed. Such realized gains may be
required to be distributed even when a Portfolio's net asset value also
reflects unrealized losses.
EXEMPT-INTEREST DIVIDENDS. A Portfolio will be qualified to pay
exempt-interest dividends to its shareholders only if, at the close of each
quarter of the Portfolio's taxable year, at least 50% of the total value of the
Portfolio's assets consists of obligations the interest on which is exempt from
federal income tax. Distributions that a Portfolio properly designates as
exempt-interest dividends are treated by shareholders as interest excludable
from their gross income for federal income tax purposes but may be taxable for
federal alternative minimum tax purposes and for state and local purposes. If a
Portfolio intends to be qualified to pay exempt-interest dividends, the
Portfolio may be limited in its ability to enter into taxable transactions
involving forward commitments, or repurchase agreements, financial futures, and
options contracts on financial futures, tax-exempt bond indices, and other
assets.
Part or all of the interest on indebtedness, if any, incurred or continued
by a shareholder to purchase or carry shares of a Portfolio paying
exempt-interest dividends is not deductible. The portion of interest that is
not
43
<PAGE>
deductible is equal to the total interest paid or accrued on the indebtedness,
multiplied by the percentage of a Portfolio's total distributions (not
including distributions from net capital gain) paid to the shareholder that are
exempt-interest dividends. Under rules used by the Internal Revenue Service for
determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
A Portfolio which is qualified to pay exempt-interest dividends will
inform investors within 60 days of the Portfolio's fiscal year-end of the
percentage of its income distributions designated as tax-exempt. The percentage
is applied uniformly to all distributions made during the year. The percentage
of income designated as tax-exempt for any particular distribution may be
substantially different from the percentage of the Portfolio's income that was
tax-exempt during the period covered by the distribution.
HEDGING TRANSACTIONS. If a Portfolio engages in hedging transactions,
including hedging transactions in options, futures contracts, and straddles, or
other similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to the Portfolio, defer losses
to the Portfolio, cause adjustments in the holding periods of the Portfolio's
securities, or convert short-term capital losses into long-term capital losses.
These rules could therefore affect the amount, timing and character of
distributions to shareholders. Each Portfolio will endeavor to make any
available elections pertaining to such transactions in a manner believed to be
in the best interests of the Portfolio.
RETURN OF CAPITAL DISTRIBUTIONS. If a Portfolio makes a distribution to
you in excess of its current and accumulated "earnings and profits" allocable
to such distribution, the excess distribution will be treated as a return of
capital to the extent of your tax basis in your shares, and thereafter as
capital gain. A return of capital is not taxable, but it reduces your tax basis
in your shares, thus reducing any loss or increasing any gain on a subsequent
taxable disposition by you or your shares.
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. A Portfolio's investment in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Portfolio to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, a Portfolio may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
FOREIGN CURRENCY-DENOMINATED SECURITIES AND RELATED HEDGING TRANSACTIONS.
A Portfolio's transactions in foreign currencies, foreign currency-denominated
debt securities and certain foreign currency options, futures contracts, and
forward contacts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value
of the foreign currency concerned.
Certain of a Portfolio's transactions, if any, in foreign currencies or
foreign currency-denominated instruments are likely to produce a difference
between its book income and its taxable income. If a Portfolio's book
44
<PAGE>
income exceeds its taxable income, the distribution (if any) of such excess
will be treated as a dividend to the extent of the Portfolio's remaining
earnings and profits (including earnings and profits arising from tax-exempt
income), and thereafter as a return of capital or as gain from the sale or
exchange of a capital asset, as the case may be. If a Portfolio's book income
is less than its taxable income, the Portfolio could be required to make
distributions exceeding book income to qualify as a regulated investment
company that is accorded special tax treatment.
FOREIGN TAX CREDIT. If more than 50% of a Portfolio's assets at year end
consists of the stock or securities of foreign corporations, the Portfolio may
elect to permit shareholders to claim a credit or deduction on their income tax
returns for their pro rata portion of qualified taxes paid by the Portfolio to
foreign countries in respect of foreign securities the Portfolio has held for
at least the minimum period, if any, specified in the Code. In such a case,
shareholders will include in gross income from foreign sources their pro rata
shares of such taxes. A shareholder's ability to claim a foreign tax credit or
deduction in respect of foreign taxes paid by the Portfolio may be subject to
certain limitations imposed by the Code, as a result of which a shareholder may
not get a full credit or deduction for the amount of such taxes. Shareholders
who do not itemize on their federal income tax returns may claim a credit (but
no deduction) for such foreign taxes.
PASSIVE FOREIGN INVESTMENT COMPANIES. Investment by a Portfolio in certain
"passive foreign investment companies" ("PFICs") could subject the Portfolio to
a U.S. federal income tax (including interest charges) on distributions
received from the company or on proceeds received from the disposition of
shares in the company, which tax cannot be eliminated by making distributions
to Portfolio shareholders. However, the Portfolio in certain circumstances, may
elect to treat a passive foreign investment company as a "qualified electing
fund," in which case the Portfolio will be required to include its share of the
company's income and net capital gain in income annually, regardless of whether
it receives any distribution from the company. The Portfolio also may make an
election to mark the gains (and to a limited extent losses) in such holdings
"to the market" as though it had sold and repurchased its holdings in those
PFICs on the last day of the Portfolio's taxable year. Such gains and losses
are treated as ordinary income and loss, as are gains on disposition of the
stock and losses on disposition of the stock is to the extent of previous
inclusions in income. The qualified electing fund and mark-to-market elections
may have the effect of accelerating the recognition of income (without the
receipt of cash) and increasing the amount required to be distributed for the
Portfolio to avoid taxation. Making either of these elections therefore may
require a Portfolio to liquidate other investments (including when it is not
advantageous to do so) to meet its distribution requirement, which also may
accelerate the recognition of gain and affect a Portfolio's total return.
SALE OR REDEMPTION OF SHARES. The sale, exchange or redemption of
Portfolio shares may give rise to a gain or loss. In general, any gain realized
upon a taxable disposition of shares held for more than one year will be taxed
as long-term capital gain. Such gain is, in the case of an individual,
generally taxed at a 20% rate. However, if a shareholder sells shares at a loss
within six months of purchase, any loss will be disallowed for federal income
tax purposes to the extent of any exempt-interest dividends received on such
shares. In addition, any loss (not already disallowed as provided in the
preceding sentence) realized upon a taxable disposition of shares held for six
months or less will be treated as long-term, rather than short-term, capital
loss to the extent of any long-term capital gain distributions received by the
shareholder with respect to the shares. All or a portion of any loss realized
upon a taxable disposition of Portfolio shares will be disallowed if other
Portfolio shares
45
<PAGE>
are purchased within 30 days before or after the disposition. In such a case,
the basis of the newly purchased shares will be adjusted to reflect the
disallowed loss.
SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS. Special tax rules apply to
investments through defined contribution plans and other tax-qualified plans.
Shareholders should consult their tax adviser to determine the suitability of
shares of a Portfolio as an investment through such plans and the precise
effect of an investment on their particular tax situation.
BACKUP WITHHOLDING. A Portfolio generally is required to withhold and
remit to the U.S. Treasury 31% of the taxable dividends and other distributions
(including in redemption of Portfolio shares) paid to any individual
shareholder who fails to furnish the Portfolio with a correct taxpayer
identification number (TIN), who has under- reported dividend or interest
income, or who fails to certify to the Portfolio that he or she is not subject
to such withholding. Shareholders who fail to furnish their current TIN are
subject to a penalty of $50 for each such failure unless the failure is due to
reasonable cause and not wilful neglect. An individual's taxpayer
identification number is his or her social security number.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and regulations. The Code and regulations are subject to change by legislative
or administrative actions. Dividends, distributions, and redemption proceeds
also may be subject to state, local, foreign and other taxes. Shareholders are
urged to consult their tax advisers regarding specific questions as to federal,
state, local or foreign taxes. The foregoing discussion relates solely to U.S.
federal income tax law. Non-U.S. investors should consult their tax advisers
concerning the tax consequences of ownership of shares of the Portfolio,
including the possibility that distributions may be subject to a 30% United
States withholding tax (or a reduced rate of withholding provided by treaty).
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, are the Trust's independent accountants, providing audit services, tax
return review and other tax consulting services.
CUSTODIAN
Investors Fiduciary Trust Company, located at 127 West 10th Street, Kansas
City, Missouri, is the custodian of each Portfolio, except that State Street
Bank & Trust Company, P.O. Box 8602, Boston, Massachusetts serves as custodian
to the Global Portfolio and as the foreign custodian to each of the other
Portfolios in respect of foreign assets. A custodian's responsibilities include
generally safeguarding and controlling a Portfolio's cash and securities,
handling the receipt and delivery of securities, and collecting interest and
dividends on a Portfolio's investments.
46
<PAGE>
PERFORMANCE INFORMATION
(SHOWN THROUGH SEPTEMBER 30, 1998)
The table below shows the average annual total return of Class A shares
and Class B shares for the one-, five- and ten-year periods (or for the life of
a class if shorter)**:
<TABLE>
<CAPTION>
SINCE INCEPTION
CLASS A SHARES 1 YEAR 5 YEARS OR 10 YEARS
- ------------------------------------------ ------------ ----------- ----------------
<S> <C> <C> <C>
Growth Portfolio* ........................ -26.57% N/A 11.47%
Capital Growth Portfolio ................. 4.34% 15.75% 13.57%
Balanced Portfolio ....................... N/A N/A -5.78%
Income and Growth Portfolio .............. -0.29% 12.62% 12.84%
Global Portfolio ......................... -10.44% N/A 8.50%
Quality Income Portfolio ................. 4.71% 5.31% 5.51%
Municipal Income Portfolio ............... 3.12% 4.53% 6.79%
Short-Duration Income Portfolio* ......... 5.89% N/A 5.94%
High Income Portfolio .................... N/A N/A -11.19%
</TABLE>
<TABLE>
<CAPTION>
SINCE INCEPTION
CLASS B SHARES 1 YEAR 5 YEARS OR 10 YEARS
- ------------------------------------------ ------------ --------- ----------------
<S> <C> <C> <C>
Growth Portfolio* ........................ -25.53% 9.87% 8.19%
Capital Growth Portfolio ................. 5.86% 16.17% 13.84%
Balanced Portfolio ....................... 8.75% N/A 17.69%
Income and Growth Portfolio .............. 1.22% 12.67% 14.70%
Global Portfolio ......................... -9.23% N/A 8.89%
Quality Income Portfolio ................. 5.46% 5.65% 7.14%
Municipal Income Portfolio ............... 3.70% 4.85% 6.90%
Short-Duration Income Portfolio* ......... 2.68% N/A 5.52%
High Income Portfolio .................... N/A N/A -7.86%
</TABLE>
<TABLE>
<CAPTION>
SINCE INCEPTION
CLASS Y SHARES 1 YEAR 5 YEARS OR 10 YEARS
- ------------------------------------------ -------- --------- ----------------
<S> <C> <C> <C>
Growth Portfolio* ........................ N/A N/A -18.36%
Capital Growth Portfolio ................. N/A N/A 10.56%
Balanced Portfolio* ...................... N/A N/A 0.00%
Income and Growth Portfolio .............. N/A N/A 7.29%
Global Portfolio ......................... N/A N/A 1.60%
Quality Income Portfolio ................. N/A N/A 8.94%
Municipal Income Portfolio ............... N/A N/A 7.51%
Short-Duration Income Portfolio* ......... N/A N/A 6.64%
High Income Portfolio .................... N/A N/A N/A
</TABLE>
- ----------
* Prior to May 30, 1995, the Balanced, Growth, and Short-Duration Income
Portfolios only offered one class of shares. Total return information prior
to this date is shown under the Class B share table. As a result, the
annual total return information beyond the one-year period shown above for
the Balanced, Growth, and
47
<PAGE>
Short-Duration Income Portfolios reflects various sales charges currently
not applicable to the Portfolios. The Balanced, Growth, and Short-Duration
Portfolios are the successors to Mentor Balanced Fund, Mentor Growth Fund,
and Mentor Short-Duration Income Fund, respectively, each of which was
previously a series of shares of beneficial interest of Mentor Series Trust.
For fiscal 1994, none of these Funds bore a front-end sales charge, but each
of them was subject to a maximum contingent deferred sales charge of 5%.
** No Institutional Shares were outstanding for these periods.
Total return for the one-, five-, and ten-year periods for each class of
shares of a Portfolio (or for the life of a class, if shorter) is determined by
calculating the actual dollar amount of investment return on a $1,000
investment in shares of that class at the beginning of the period, and then
calculating the annual compounded rate of return which would produce that
amount. Total return for a period of one year is equal to the actual return of
the particular class of a Portfolio during that period. Total return
calculations assume deduction of a classes' maximum front-end or contingent
deferred sales charge, if any, and reinvestment of all distributions at net
asset value on their respective reinvestment dates.
All data are based on past performance and do not predict future results.
YIELD AND TAX-EQUIVALENT YIELD
The thirty-day yield for Class A shares and Class B shares of certain of
the Portfolios for the period ending September 30, 1998, was as follows*:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- ----------
<S> <C> <C>
Quality Income Portfolio ................. 4.59% 4.32%
Municipal Income Portfolio ............... 3.99% 3.69%
Short-Duration Income Portfolio .......... 4.81% 4.57%
High Income Portfolio .................... 10.37% 10.36%
</TABLE>
The tax-equivalent yield for the Municipal Income Portfolio for the
thirty-day period ended September 30.
<TABLE>
<S> <C>
Class A ............... 6.61%
Class B ............... 6.11%
</TABLE>
- ----------
* No Institutional Shares were outstanding for these periods.
Yield for each class is presented for a specified thirty-day period (the
"base period"). Yield is based on the amount determined by (i) calculating the
aggregate amount of dividends and interest earned by a class of shares of a
Portfolio during the base period less expenses accrued for that period, and
(ii) dividing that amount by the product of (A) the average daily number of
shares of the class outstanding during the base period and entitled to receive
dividends and (B) the net asset value per share of the class on the last day of
the base period. The result is annualized on a compounding basis to determine
the yield. For this calculation, interest earned on debt obligations held by a
Portfolio is generally calculated using the yield to maturity (or first
expected call date) of such obligations based on their market values (or, in
the case of receivables-backed securities such as GNMA's, based on costs).
Dividends on equity securities are accrued daily at their stated dividend
rates.
48
<PAGE>
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment in a
Portfolio, the performance will be reduced for those shareholders paying those
fees.
The tax-equivalent yield for Class A shares of the Municipal Income
Portfolio for the thirty-day period ending September 30, 1998, was 6.61%. The
tax-equivalent yield for that Portfolio's Class B shares was 6.11% for the same
period. The tax-equivalent yield for all classes of shares of the Municipal
Income Portfolio is calculated similarly to the yield, but is adjusted to
reflect the taxable yield that the Portfolio would have had to earn to equal
its actual yield, assuming a 39.6% tax rate (the maximum effective federal rate
for individuals) and assuming that income is 100% tax-exempt.
The Municipal Income Portfolio may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal bonds in
the Portfolio's investment portfolio generally remains free from federal
regular income tax but may be subject to state and local taxes. (Some portion
of the Portfolio's income may be subject to federal alternative minimum tax and
state and local taxes.) Capital gains, if any, are subject to federal, state
and local tax.
At times, a Portfolio's investment adviser or sub-adviser may reduce its
compensation or assume expenses of the Portfolio in order to reduce the
Portfolio's expenses. Any such fee reduction or assumption of expenses would
increase a classes' yield and total return during the period of the fee
reduction or assumption of expenses.
Total return may be presented for other periods or without giving effect
to any contingent deferred sales charge. Any quotation of total return or yield
not reflecting the front-end or contingent deferred sales charge would be
reduced if such sales charges were reflected.
EQUIVALENT YIELDS: TAX-EXEMPT VERSUS TAXABLE SECURITIES
FOR THE MUNICIPAL INCOME PORTFOLIO
The table below shows the effect of the tax status of tax-exempt
securities on the effective yield received by their individual holders under
the federal income tax laws currently in effect for 1998. It gives the
approximate yield a taxable security must earn at various income levels to
produce after-tax yields equivalent to those of tax-exempt securities yielding
from 2.0% to 10.0%.
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<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO --
FEDERAL TAXABLE EQUIVALENT YIELD TABLE-1998 RATES
<TABLE>
<CAPTION>
EFFECTIVE
FEDERAL FEDERAL FEDERAL
TAXPAYER TAXABLE TAX TAX
YEAR STATUS INCOME BRACKET RATE
- -------- ---------- ------------------ ----------- ----------
<S> <C> <C> <C> <C>
1998 MARRIED $ 0-42,350 15.00% 15.00%
$ 42,351-102,300 28.00% 28.00%
$102,301-124,500 31.00% 31.00%
$124,501-155,950 31.00% 31.93%
$155,951-278,450 36.00% 37.08%
OVER $278,450 39.60% 40.79%
1998 SINGLE $ 0-25,350 15.00% 15.00%
$ 25,351-61,400 28.00% 28.00%
$ 61,401-124,500 31.00% 31.00%
$124,501-128,500 31.00% 31.93%
128,101-278,450 36.00% 37.08%
OVER $278,450 39.60% 40.79%
<CAPTION>
TAX-FREE YIELD
----------------------------------------------------------------------------------------------------
2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
YEAR
- -------- TAXABLE EQUIVALENT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
2.94% 4.41% 5.88% 7.35% 8.81% 10.28% 11.75% 13.22% 14.69%
3.18% 4.77% 6.36% 7.95% 9.54% 11.13% 12.71% 14.30% 15.89%
3.38% 5.07% 6.76% 8.44% 10.13% 11.82% 13.51% 15.20% 16.89%
1998 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
2.94% 4.41% 5.88% 7.35% 8.81% 10.28% 11.75% 13.22% 14.69%
3.18% 4.77% 6.36% 7.95% 9.54% 11.13% 12.71% 14.30% 15.89%
3.38% 5.07% 6.76% 8.44% 10.13% 11.82% 13.51% 15.20% 16.89%
</TABLE>
- ---------
Note: This tables reflects the following:
1 Taxable Income, as reflected in the above table, equals Federal adjusted
gross income (AGI), less personal exemptions and itemized deductions.
However, certain itemized deductions are reduced by the lesser of (i) three
percent of the amount of the taxpayer's AGI over $124,500, or (ii) 80
percent of the amount of such itemized deductions otherwise allowable. The
effect of the three percent phase out on all itemized deductions and not
just those deductions subject to the phase out is reflected above in the
combined Federal and state tax rates through the use of higher effective
Federal tax rates. In addition, the effect of the 80 percent cap on overall
percent cap on overall itemized deductions is not reflected on this tables.
Federal income tax rules also provide that personal exemptions are phased
out at a rate of two percent for each $2,500 (or fraction thereof) of AGI in
excess of $186,800 for married taxpayers filing a joint tax return and
$124,500 for single taxpayers. The effect of the phase out of personal
exemmptions is not reflected in the above table.
2 The effect of state income taxes are not considered in the above table. Such
consideration would increase the taxable equivalent yield to the extent that
the municipal obligations are issued by the taxpayer's state o f residence.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the table.
4 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determinig yields. Instead, the tax rates used
are the highest marginal tax rates applicable to the income levcels
indicated within each bracket.
5 Interest earned on all municipal obligations may cause certain investors to
be subject to tax on a portion of their Social Security an/dor railroad
retirement benefits. The effect of this provision is not included in the
above table.
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<PAGE>
MEMBERS OF INVESTMENT MANAGEMENT TEAMS
The following persons are investment personnel of the Portfolio's
investment advisers, as indicated.
MENTOR INVESTMENT ADVISORS, LLC
LARGE CAPITALIZATION QUALITY EQUITY GROWTH
JOHN G. DAVENPORT, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Davenport has 12 years of investment management experience. He joined the
firm after leading equity research at the investment management firm of Lowe,
Brockenbrough, & Tattersall, Inc. Mr. Davenport graduated from the University
of Richmond and has an MBA from the University of Virginia.
RICHARD H. SKEPPSTROM II -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Skeppstrom has 7 years of investment management experience. Before joining
the firm he was a global portfolio analyst for Saudi International Bank
Portfolio Advisors. Mr. Skeppstrom began his career as a pension and benefit
analyst at Johnson & Higgins of Virginia. He has earned both an undergraduate
degree and an MBA from the University of Virginia.
CHRISTOPHER W. RUSBULDT, CFA -- VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Rusbuldt joined the firm in 1995 and has 7 years' investment experience.
Previously, he was an equity research analyst for Wheat First Butcher Singer.
He began his career as a banker in the corporate group at NationsBank. Mr.
Rusbuldt is a graduate of the University of Virginia.
RICHARD L. RICE -- VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Rice has 22 years' experience in the securities industry. Before joining
Mentor, he was a partner in Parata Analytics Research. Prior responsibilities
include research for Signet Asset Management, senior research analyst for
Capitoline Investment Services, and positions in research at Atlanta
Corporation and Southwest Banking, Inc. Mr. Rice is a graduate of the
University of Florida and has completed graduate work at Georgia State
University.
STEVEN A. CERTO -- VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Certo joined the firm in 1997, from the equity research department of Wheat
First Butcher Singer where he was a research analyst following the software
industry. Mr. Certo served five years as an intelligence officer in the US
Navy. His professional background also includes a year as an investment
representative for Edward Jones and Co. He is a graduate of Iona College and is
a level III candidate in the CFA program.
ACTIVE FIXED-INCOME
P. MICHAEL JONES, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Jones has 12 years of investment management experience. He is the manager
of Mentor Short-Duration Income Portfolio and Mentor Quality Income Portfolio,
as well as Mentor Income Fund, a $120 million closed-end bond fund. Mr. Jones
is responsible for the design and implementation of the fixed-income group's
proprietary analytical system. He has worked as an investment manager at Ryland
Capital Management, Alliance Capital Management, and Central Fidelity Bank. Mr.
Jones earned an undergraduate degree from the College of William and Mary, and
an MBA from the Wharton School of the University of Pennsylvania.
DENNIS F. CLARY, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Clary joined Mentor in 1998 and has over 20 years of investment management
experience. Prior to joining Mentor's Fixed Income Team, he worked for three
years as a Vice President and Senior Portfolio Manager for
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First America Investment Corporation. He previously was employed for four years
as a Vice President and Portfolio Manager at CSI Asset Management, Inc. and
prior to that for four years in a similar role by Investment & Capital
Management Corporation. Mr. Clary received his BA and MBA degrees from Ohio
State University.
TIMOTHY ANDERSON, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Anderson has 8 years of investment management experience. He joined Mentor
in June, 1998. Prior to joining Mentor's Fixed-Income Team, he worked for two
years as a Senior Fixed Income Analyst at Investment Advisors, Inc. Previous to
that he was employed for five years as a Senior Investment Analyst at St. Paul
Fire & Marine Insurance Company and for two years as an Analyst for Duff &
Phelps Credit Rating Company. He received a BS degree from DePaul University
and an MBA degree from the University of Chicago.
TODD C. KUIMJIAN -- PORTFOLIO MANAGER
Mr. Kuimjian has 4 years of investment management experience. He joined the
Fixed-Income Team in January, 1997, initially as a Research Analyst and later
as a Portfolio Manager. Prior to joining the Fixed-Income Team, Mr. Kuimjian
served Mentor as an investment accountant/systems analyst and later as a senior
investment administrator within Mentor's investment services group. Mr.
Kuimjian is a Certified Public Accountant and received his BS degree from
Virginia Polytechnic Institute.
SMALL CAPITALIZATION EQUITY GROWTH
THEODORE W. PRICE, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Price has 30 years of investment management experience. Prior to
establishing the small/mid cap. management style, Mr. Price served for 10 years
as vice chairman and portfolio manager of the investment management subsidiary
of Wheat First Butcher Singer. In 1985, he established the equity retail mutual
fund, Mentor Growth Portfolio, which today represents nearly $600 million in
assets. He is a member of the Richmond Society of Financial Analysts. Mr. Price
earned both BA and MBA degrees from the University of Virginia.
LINDA A. ZIGLAR, CFA -- MANAGING DIRECTOR, PORTFOLIO MANAGER
Ms. Ziglar has 19 years investment management experience. Ms. Ziglar joined the
firm in 1991 after serving seven years as vice president of Federal Investment
Counseling and Federated Research Corporation in Pittsburgh. While at
Federated, Ms. Ziglar shared responsibility for the management of more than
$300 million in mutual fund and separate account assets. She is a member of the
Richmond Society of Financial Analysts, the Financial Analysts Federation, and
a former officer of the Pittsburgh Society of Financial Analysts. Ms. Ziglar is
a summa cum laude, Phi Beta Kappa graduate of Randolph-Macon Woman's College.
She earned an MBA from the University of Pittsburgh.
JEFFREY S. DRUMMOND, CFA -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Drummond joined the firm in 1993 after five years in investment strategy at
Wheat First Butcher Singer. While working with Wheat's chief investment
strategist, he shared responsibility for the management of the Strategic
Sectors Portfolio. He is a member of the Richmond Society of Financial
Analysts. Mr. Drummond graduated cum laude from the University of Richmond.
CASH MANAGEMENT
R. PRESTON NUTTALL, CFA -- MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER
Mr. Nuttall has more than 30 years of investment management experience. Prior
to Mentor Advisors, he led
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short-term fixed-income management for fifteen years at Capitoline Investment
Services, Inc. He has his undergraduate degree in economics from the University
of Richmond and his graduate degree in finance from the Wharton School at the
University of Pennsylvania.
HUBERT R. WHITE III -- SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Mr. White has 12 years of investment management experience. Prior to joining
Mentor Advisors, he served for five years as portfolio manager with Capitoline
Investment Services. He has his undergraduate degree in business from the
University of Richmond.
GREGORY S. KAPLAN -- ASSOCIATE VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Kaplan brings over 6 years of analytical and investment experience to
Mentor. Prior to joining the firm, Mr. Kaplan served for four years as a credit
specialist analyzing commercial credit for NationsBank. He began his career in
the Investment Services division of Prudential Insurance. Mr. Kaplan is a
graduate of Rutgers University and earned his MBS from the Pamplin College of
Business at Virginia Polytechnic Institute and State University.
MENTOR PERPETUAL ADVISORS, LLC
MARTIN ARBIB -- CHAIRMAN, PERPETUAL PORTFOLIO MANAGEMENT
Mr. Arbib is chairman and founder of Perpetual, a partner in the Mentor
Perpetual Advisors joint venture, where he currently leads investment
management. A chartered Accountant, he has 22 years' investment management
experience.
BOB YERBURY -- CHIEF INVESTMENT OFFICER
Mr. Yerbury has 24 years' investment management experience, with over 21 years'
experience in North American stock markets, and has been part of the Perpetual
team for 13 years. Before joining Perpetual, he was a portfolio manager with
Equity & Law Assurance Company. Mr. Yerbury is a graduate of Cambridge
University.
STEPHEN WHITTAKER -- UK TEAM LEADER
Mr. Whittaker joined Perpetual eight years ago and has 16 years' investment
management experience. Prior to joining Perpetual, he was responsible for UK
equity funds for the Save & Prosper Group. He began his fund management career
with Rowe & Pitman after graduation from Manchester University.
MARGARET RODDAN -- EUROPE TEAM LEADER
Ms. Roddan has 11 years of investment management experience, three years with
Perpetual. She joined Perpetual from Mercury Asset Management, where she shared
responsibility for management of continental European equity holdings. She
began her career with the National Provident Institution. Ms. Roddan is a
graduate of the Investment Management Program at the London Business School.
She studied finance at City University and is a graduate of Bristol University.
SCOTT MCGLASHAN -- FAR EAST TEAM LEADER
Mr. McGlashan has 19 years' management experience, 13 years specializing in the
Far East, and 11 years' tenure at Perpetual. He is a graduate of Yale and
Cambridge University.
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KATHRYN LANGRIDGE -- SOUTHEAST ASIA TEAM LEADER
Ms. Langridge shares responsibility with Mr. McGlashan for Far East equity
investments. Before joining Perpetual in 1990, she spent eight years in Hong
Kong with the investment firm of Jardine Fleming. She specializes in equity
investments in the non-Japanese stock markets of the Far East. Ms. Langridge is
a graduate of Cambridge University.
IAN BRADY -- AMERICAN TEAM LEADER
Mr. Brady is head of the North American team at Perpetual. He has 12 years'
investment management experience. Before joining Perpetual in 1997, he worked
for Britannia Investment Management, Legal & General and Standard Life. He is a
graduate of Aberdeen and Strathclyde Universities.
PERFORMANCE COMPARISONS
The performance of a Portfolio depends upon such variables as: portfolio
quality; average portfolio maturity; type of instruments in which the
particular Portfolio is invested; changes in the expenses of a particular
Portfolio and class of shares; and various other factors.
The performance of each Portfolio fluctuates on a daily basis largely
because net earnings and net asset value per share of each class fluctuate
daily. Both net earnings and net asset value per share are factors in the
computation of yield and total return for each class of the Portfolios.
Independent statistical agencies measure a Portfolio's investment
performance and publish comparative information showing how a Portfolio, and
other investment companies, performed in specified time periods. Agencies whose
reports are commonly used for such comparisons are set forth below. From time
to time, a Portfolio may distribute these comparisons to its shareholders or to
potential investors. The agencies listed below measure performance based on
their own criteria rather than on the standardized performance measures
described in the preceding section.
Lipper Analytical Services, Inc., ranks funds in various fund categories
by making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specified period of time.
From time to time, a Portfolio will quote its Lipper ranking in advertising and
sales literature.
Morningstar, Inc. distributes mutual fund ratings twice a month. The
ratings are divided into five groups: highest, above average, neutral, below
average, and lowest. They represent a Portfolio's historical risk/reward ratio
relative to other funds with similar objectives. The performance factor is a
weighted-average assessment of the Portfolio's 3-year, 5-year, and 10-year
total return performance (if available) reflecting deduction of expenses and
sales charges. Performance is adjusted using quantitative techniques to reflect
the risk profile of the Portfolio. The ratings are derived from a purely
quantitative system that does not utilize the subjective criteria customarily
employed by rating agencies such as Standard & Poor's Corporation and Moody's
Investor Service, Inc.
Weisenberger's Management Results publishes mutual fund rankings and is
distributed monthly. The rankings are based entirely on total return calculated
by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and
10-year performance. Mutual funds are ranked in general categories (e.g.,
international bond, international equity, municipal bond, and maximum capital
gain). Weisenberger rankings do not reflect deduction of sales charges or fees.
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A Portfolio's shares also may be compared to the following indices:
Dow Jones Industrial Average ("DJIA") is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by Dow Jones & Company, it is cited as a
principal indicator of market conditions.
Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of funds
whose portfolios are invested primarily in common stocks. In addition, the
Standard & Poor's listed on its index. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated, in the Standard &
Poor's figures.
Consumer Price Index is generally considered to be a measure of inflation.
CDA Mutual Fund Growth Index is a weighted performance average of other
mutual funds with growth of capital objectives.
Lipper Growth Fund Index is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.
Lehman Brothers Government/Corporate (total) Index is comprised of
approximately 5,000 issues, which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine years. Tracked
by Shearson Lehman Brothers Inc., the index calculates total returns for one
month, three month, twelve month and ten year periods and year-to-date.
Lehman Brothers Government Index is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or any
agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.
Russell Growth 1000 (Russell 1000 Index) is a broadly diversified index
consisting of approximately 1,000 common stocks of companies with market values
between $20 million and $300 million that can be used to compare the total
returns of funds whose portfolios are invested primarily in growth common
stocks.
Lehman Brothers Aggregate Bond Index is a total return index measuring
both the capital price changes and income provided by the underlying universe
of securities, weighted by market value outstanding. The Aggregate Bond Index
is comprised of the Shearson Lehman Government Bond Index, Corporate Bond
Index, Mortgage-Backed Securities Index, and Yankee Bond Index. These indices
include: U.S. Treasury obligations, including bonds and notes; U.S. agency
obligations, including those of the Federal Farm Credit Bank, Federal Land
Bank, and the Bank for Cooperatives; foreign obligations; and U.S.
investment-grade corporate debt and mortgage-backed obligations. All corporate
debt included in the Aggregate Bond Index has a minimum S&P rating of BBB, a
minimum Moody's rating of Baa, or a minimum Fitch rating of BBB.
Salomon Brothers Mortgage-Backed Securities Index-15 Years includes the
average of all 15-year mortgage securities, which include Federal Home Loan
Mortgage Corporation (Freddie Mac), Federal National Mortgage Association
(Fannie Mae), and Government National Mortgage Association (Ginnie Mae).
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Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the long-term, investment-grade tax-exempt bond market. Returns
and attributes for the Index are calculated semi-monthly using approximately
29,000 municipal bonds, which are priced by Muller Data Corporation.
From time to time, certain of the Portfolios that invest in foreign
securities may advertise the performance of their classes of shares compared to
similar funds or portfolios using certain indices, reporting services, and
financial publications. These may include the following: Morgan Stanley Capital
International World Index, The Morgan Stanley Capital International EAFE
(Europe, Australia, Far East) index, J.P. Morgan Global Traded Bond Index,
Salomon Brothers World Government Bond Index, and the Standard & Poor's 500
Composite Stock Price Index (S&P 500). A Portfolio also may compare its
performance to the performance of unmanaged stock and bond indices, including
the total returns of foreign government bond markets in various countries. All
index returns are translated into U.S. dollars. The total return calculation
for these unmanaged indices may assume the reinvestment of dividends and any
distributions, if applicable, may include withholding taxes, and generally do
not reflect deductions for administrative and management costs.
Investors may use such indices or reporting services in addition to the
Trust or an individual Portfolio's prospectus to obtain a more complete view of
a particular Portfolio's performance before investing. Of course, when
comparing a Portfolio's performance to any index, conditions such as
composition of the index and prevailing market conditions should be considered
in assessing the significance of such comparisons. When comparing portfolios
using reporting services, or total return and yield, investors should take into
consideration any relevant differences in portfolios, such as permitted
portfolio compositions and methods used to value portfolio securities and
compute net asset value.
Advertisements and other sales literature for a Portfolio may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in a
Portfolio based on monthly reinvestment of dividends over a specified period of
time.
From time to time the Portfolios may advertise their performance, using
charts, graphs, and descriptions, compared to federally insured bank products,
including certificates of deposit and time deposits, and to monthly market
funds using the Lipper Analytical Service money market instruments average.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
Independent publications may also evaluate a Portfolio's performance.
Certain of those publications are listed below, at the request of Mentor
Distributors, which bears full responsibility for their use and the
descriptions appearing below. From time to time any or all of the Portfolios
may distribute evaluations by or excerpts from these publications to its
shareholders or to potential investors. The following illustrates the types of
information provided by these publications.
Business Week publishes mutual fund rankings in its Investment Figures of
the Week column. The rankings are based on 4-week and 52-week total return
reflecting changes in net asset value and the reinvestment of all
distributions. They do not reflect deduction of any sales charges. Funds are
not categorized; they compete in a large universe of over 2,000 funds. The
source for rankings is data generated by Morningstar, Inc.
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Investor's Business Daily publishes mutual fund rankings on a daily basis.
The rankings are depicted as the top 25 funds in a given category. The
categories are based loosely on the type of fund, e.g., growth funds, balanced
funds, U.S. government funds, GNMA funds, growth and income funds, corporate
bond funds, etc. Performance periods for sector equity funds can vary from 4
weeks to 39 weeks; performance periods for other fund groups vary from 1 year
to 3 years. Total return performance reflects changes in net asset value and
reinvestment of dividends and capital gains. The rankings are based strictly on
total return. They do not reflect deduction of any sales charges Performance
grades are conferred from A+ to E. An A+ rating means that the fund has
performed within the top 5% of a general universe of over 2000 funds; an A
rating denotes the top 10%; an A- is given to the top 15%, etc.
Barron's periodically publishes mutual fund rankings. The rankings are
based on total return performance provided by Lipper Analytical Services. The
Lipper total return data reflects changes in net asset value and reinvestment
of distributions, but does not reflect deduction of any sales charges. The
performance periods vary from short-term intervals (current quarter or
year-to-date, for example) to long-term periods (five-year or ten-year
performance, for example). Barron's classifies the funds using the Lipper
mutual fund categories, such as Capital Appreciation Funds, Growth Funds, U.S.
Government Funds, Equity Income Funds, Global Funds, etc. Occasionally,
Barron's modifies the Lipper information by ranking the funds in asset classes.
"Large funds" may be those with assets in excess of $25 million; "small funds"
may be those with less than $25 million in assets.
The Wall Street Journal publishes its Mutual Fund Scorecard on a daily
basis. Each Scorecard is a ranking of the top-15 funds in a given Lipper
Analytical Services category. Lipper provides the rankings based on its total
return data reflecting changes in net asset value and reinvestment of
distributions and not reflecting any sales charges. The Scorecard portrays
4-week, year-to-date, one-year and 5-year performance; however, the ranking is
based on the one-year results. The rankings for any given category appear
approximately once per month.
Fortune magazine periodically publishes mutual fund rankings that have
been compiled for the magazine by Morningstar, Inc. Funds are placed in stock
or bond fund categories (for example, aggressive growth stock funds, growth
stock funds, small company stock funds, junk bond funds, Treasury bond funds
etc.), with the top-10 stock funds and the top-5 bond funds appearing in the
rankings. The rankings are based on 3-year annualized total return reflecting
changes in net asset value and reinvestment of distributions and not reflecting
sales charges. Performance is adjusted using quantitative techniques to reflect
the risk profile of the fund.
Money magazine periodically publishes mutual fund rankings on a database
of funds tracked for performance by Lipper Analytical Services. The funds are
placed in 23 stock or bond fund categories and analyzed for five-year risk
adjusted return. Total return reflects changes in net asset value and
reinvestment of all dividends and capital gains distributions and does not
reflect deduction of any sales charges. Grades are conferred (from A to E): the
top 20% in each category receive an A, the next 20% a B, etc. To be ranked, a
fund must be at least one year old, accept a minimum investment of $25,000 or
less and have had assets of at least $25 million as of a given date.
Financial World publishes its monthly Independent Appraisals of Mutual
Funds, a survey of approximately 1000 mutual funds. Funds are categorized as to
type, e.g., balanced funds, corporate bond funds, global bond funds, growth and
income funds, U.S. government bond funds, etc. To compete, funds must be over
one year old, have over $1 million in assets, require a maximum of $10,000
initial investment, and should be available in at least 10 states in the United
States. The funds receive a composite past performance rating, which weighs
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the intermediate- and long-term past performance of each fund versus its
category, as well as taking into account its risk, reward to risk, and fees. An
A+ rated fund is one of the best, while a D- rated fund is one of the worst.
The source for Financial World rating is Schabacker investment management in
Rockville, Maryland.
Forbes magazine periodically publishes mutual fund ratings based on
performance over at least two bull and bear market cycles. The funds are
categorized by type, including stock and balanced funds, taxable bond funds,
municipal bond funds, etc. Data sources include Lipper Analytical Services and
CDA Investment Technologies. The ratings are based strictly on performance at
net asset value over the given cycles. Funds performing in the top 5% receive
an A+ rating; the top 15% receive an A rating; and so on until the bottom 5%
receive an F rating. Each fund exhibits two ratings, one for performance in
"up" markets and another for performance in "down" markets.
Kiplinger's Personal Finance Magazine (formerly Changing Times),
periodically publishes rankings of mutual funds based on one-, three- and
five-year total return performance reflecting changes in net asset value and
reinvestment of dividends and capital gains and not reflecting deduction of any
sales charges. Funds are ranked by tenths: a rank of 1 means that a fund was
among the highest 10% in total return for the period; a rank of 10 denotes the
bottom 10%. Funds compete in categories of similar funds -- aggressive growth
funds, growth and income funds, sector funds, corporate bond funds, global
governmental bond funds, mortgage-backed securities funds, etc. Kiplinger's
also provides a risk-adjusted grade in both rising and falling markets. Funds
are graded against others with the same objective. The average weekly total
return over two years is calculated. Performance is adjusted using quantitative
techniques to reflect the risk profile of the fund.
U.S. News and World Report periodically publishes mutual fund rankings
based on an overall performance index (OPI) devised by Kanon Bloch Carre & Co.,
a Boston research firm. Over 2000 funds are tracked and divided into 10 equity,
taxable bond and tax-free bond categories. Funds compete within the 10 groups
and three broad categories. The OPI is a number from 0-100 that measures the
relative performance of funds at least three years old over the last 1, 3, 5
and 10 years and the last six bear markets. Total return reflects changes in
net asset value and the reinvestment of any dividends and capital gains
distributions and does not reflect deduction of any sales charges. Results for
the longer periods receive the most weight.
The 100 Best Mutual Funds You Can Buy authored by Gordon K. Williamson.
The author's list of funds is divided into 12 equity and bond fund categories,
and the 100 funds are determined by applying four criteria. First, equity funds
whose current management teams have been in place for less than five years are
eliminated. (The standard for bond funds is three years.) Second, the author
excludes any fund that ranks in the bottom 20 percent of its category's risk
level. Risk is determined by analyzing how many months over the past three
years the fund has underperformed a bank CD or a U.S. Treasury bill. Third, a
fund must have demonstrated strong results for current three-year and five-year
performance. Fourth, the fund must either possess, in Mr. Williamson's
judgment, "excellent" risk-adjusted return or "superior" return with low levels
of risk. Each of the 100 funds is ranked in five categories: total return,
risk/volatility, management, current income and expenses. The rankings follow a
five-point system: zero designates "poor"; one point means "fair"; two points
denote "good"; three points qualify as a "very good"; four points rank as
"superior"; and five points mean "excellent."
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SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of a Portfolio's property for all loss and expense of any
shareholder held personally liable for the obligations of a Portfolio. Thus the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Portfolio would be unable to
meet its obligations.
59
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
EVERGREEN NATIONAL MUNICIPAL BOND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
April 1, 1999
Evergreen High Grade Municipal Bond Fund ("High Grade")
Evergreen Short-Intermediate Municipal Fund ("Short-Intermediate")
Evergreen Municipal Bond Fund ("Municipal")
Each Fund is a series of an open-end management investment company known as
Evergreen Municipal Trust (the "Trust").
This Statement of Additional Information ("SAI") pertains to all classes of
shares of the Funds listed above. It is not a prospectus but should be read in
conjunction with the prospectuses of the Funds dated April 1, 1999.The Funds are
offered through two separate prospectuses: one offering Class A , Class B and
Class C shares of each Fund (except that Short-Intermediate does not offer Class
C) and one offering Class Y shares of each Fund. You may obtain either of these
prospectuses from Evergreen Distributor, Inc.
TABLE OF CONTENTS
INVESTMENT POLICIES
Fundamental Investment Policies
Additional Information on Securities and Investment Practices
MANAGEMENT OF THE TRUST
PRINCIPAL HOLDERS OF FUND SHARES
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisors
Investment Advisory Agreements
Distributor
Distribution Plans and Agreements
Additional Service Providers
BROKERAGE
Selection of Brokers
Brokerage Commissions
General Brokerage Policies
TRUST ORGANIZATION
Form of Organization
Description of Shares
Voting Rights
Limitation of Trustees' Liability
PURCHASE, REDEMPTION AND PRICING OF SHARES
How the Funds Offer Shares to the Public
Contingent Deferred Sales Charge
Sales Charge Waivers or Reduction Exchanges
Calculation of Net Asset Value Per Share ("NAV")
Valuation of Portfolio Securities
Shareholder Services
PRINCIPAL UNDERWRITER
ADDITIONAL TAX INFORMATION
Requirements for Qualification as a Regulated Investment Company
Taxes on Distributions
Taxes on the Sale or Exchange of Fund Shares
Other Tax Considerations
EXPENSES
PERFORMANCE
METHOD OF COMPUTING OFFERING PRICE FOR CLASS A SHARES
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
APPENDIX A
INVESTMENT POLICIES
FUNDAMENTAL INVESTMENT POLICIES
Each Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the"1940
Act"). Where necessary, an explanation beneath a fundamental policy describes a
Fund's practices with respect to that policy, as allowed by current law.
If the law governing a policy changes, the Fund's practices may change
accordingly without a shareholder vote. Unless otherwise stated, all references
to the assets of a Fund are in terms of current market value.
1. Diversification
Each Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
Further Explanation of Diversification Policy:
To remain classified as a diversified investment company under the 1940 Act,
each Fund must conform with the following: With respect to 75% of its total
assets, a diversified investment company may not invest more than 5% of its
total assets, determined at market or other fair value at the time of purchase,
in the securities of any one issuer, or invest in more than 10% of the
outstanding voting securities of any one issuer, determined at the time of
purchase. These limitations do not apply to investments in securities issued or
guaranteed by the United States ("U.S.") government or its agencies or
instrumentalities.
2. Concentration
Each Fund may not concentrate its investments in the securities of issuers
primarily engaged in any particular industry (other than securities that are
issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
Further Explanation of Concentration Policy:
Each Fund may not invest more than 25% of its total assets, taken at market
value, in the securities of issuers primarily engaged in any particular industry
(other than securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities).
3. Issuing Senior Securities
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
4. Borrowing
Each Fund may not borrow money, except to the extent permitted by applicable
law.
Further Explanation of Borrowing Policy:
Each Fund may borrow from banks in an amount up to 33 1/3% of its total assets,
taken at market value. Each Fund may also borrow up to an additional 5% of its
total assets from banks or others. Each Fund may borrow only as a temporary
measure for extraordinary or emergency purposes such as the redemption of Fund
shares. A Fund will not purchase securities while outstanding borrowings exceed
5% of its total assets except to exercise prior commitments and to exercise
subscription rights (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 33 1/3% of its total assets (including
the amount borrowed). Each Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities. Each
Fund may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
5. Underwriting
tc \l4 " Each Fund may not underwrite securities of other issuers, except
insofar as each Fund may be deemed to be an underwriter in connection with the
disposition of its portfolio securities.
6. Real Estate
Each Fund may not purchase or sell real estate, except that, to the extent
permitted by applicable law, each Fund may invest in (a) securities that are
directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
7. Commodities
Each Fund may not purchase or sell commodities or contracts on commodities,
except to the extent that each Fund may engage in financial futures contracts
and related options and currency contracts and related options and may otherwise
do so in accordance with applicable law and without registering as a commodity
pool operator under the Commodity Exchange Act.
8. Lending
Each Fund may not make loans to other persons, except that each Fund may lend
its portfolio securities in accordance with applicable law. The acquisition of
investment securities or other investment instruments shall not be deemed to be
the making of a loan.
Further Explanation of Lending Policy:
To generate income and offset expenses, each Fund may lend portfolio
securities to broker-dealers and other financial institutions in an amount up to
33 1/3% of its total assets, taken at market value. While securities are on
loan, the borrower will pay each Fund any income accruing on the security. Each
Fund may invest any collateral it receives in additional portfolio securities,
such as U.S. Treasury notes, certificates of deposit, other high-grade,
short-term obligations or interest bearing cash equivalents. Gains or losses in
the market value of a security lent will affect each Fund and its shareholders.
When a Fund lends its securities, it will require the borrower to give the Fund
collateral in cash or government securities. Each Fund will require collateral
in an amount equal to at least 100% of the current market value of the
securities lent, including accrued interest. Each Fund has the right to call a
loan and obtain the securities lent any time on notice of not more than five
business days. Each Fund may pay reasonable fees in connection with such loans.
9. Investment in Federally Tax Exempt Securities
Each Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for funds with the words tax exempt, tax free or municipal in their names.
ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES
The investment objective of each Fund and a description of the securities in
which each Fund may invest is set forth in the Funds' prospectuses. The
following expands upon the discussion in the prospectuses regarding certain
investments of each Fund.
Municipal Bonds
The Funds may invest in municipal bonds of any state, territory or
possession of the U.S. including the District of Columbia. The Funds may also
invest in municipal bonds of any political subdivision, agency or
instrumentality (e.g., counties, cities, towns, villages, districts,
authorities) of the U.S. or its possessions. Municipal bonds are debt
instruments issued by or for a state or local government to support its general
financial needs or to pay for special projects such as airports, bridges,
highways, public transit, schools, hospitals, housing and water and sewer works.
Municipal bonds may also be issued to refinance public debt.
Municipal bonds are mainly divided between "general obligation" and
"revenue" bonds. General obligation bonds are backed by the full faith and
credit of governmental issuers with the power to tax. They are repaid from the
issuer's general revenues. Payment, however, may be dependent upon
legislative approval and may be subject to limitations on the issuer's taxing
power. Enforcement of payments due under general obligation bonds varies
according to the law applicable to the issuer. In contrast, revenue bonds are
supported only by the revenues generated by the project or facility.
The Funds may also invest in industrial development bonds. Such bonds
are usually revenue bonds issued to pay for facilities with a public purpose
operated by private corporations. The credit quality of industrial development
bonds is usually directly related to the credit standing of the owner or user of
the facilities. To qualify as a municipal bond, the interest paid on an
industrial development
bond must qualify as fully exempt from federal income tax. However, the
interest paid on an industrial development bond may be subject to the federal
Alternative Minimum Tax.
The yields on municipal bonds depend on such factors as market
conditions, the financial condition of the issuer and the issue's size, maturity
date and rating. Municipal bonds are rated by Standard & Poor's Ratings Service
("S&P"), Moody's Investors Service ("Moody's") and Fitch IBCA, Inc. ("Fitch").
Such ratings, however, are opinions, not absolute standards of quality.
Municipal bonds with the same maturity, interest rate and rating may have
different yields, while municipal bonds with the same maturity and interest
rate, but different ratings, may have the same yield. Once purchased by a Fund,
a municipal bond may cease to be rated or receive a new rating below the minimum
required for purchase by a Fund. Neither event would require a Fund to sell the
bond, but a Fund's investment advisor (the "Advisor") would consider such events
in determining whether a Fund should continue to hold it.
The ability of a Fund to achieve its investment objective depends upon the
continuing ability of issuers of municipal bonds to pay interest and principal
when due. Municipal bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors. Such
laws extend the time for payment of principal and/or interest, and may otherwise
restrict a Fund's ability to enforce its rights in the event of default. Since
there is generally less information available on the financial condition of
municipal bond issuers compared to other domestic issuers of securities, a
Fund's Advisor may lack sufficient knowledge of an issue's weaknesses. Other
influences, such as litigation, may also materially affect the ability of an
issuer to pay principal and interest when due. In addition, the market for
municipal bonds is often thin and can be temporarily affected by large purchases
and sales, including those by a Fund.
From time to time, Congress has considered restricting or eliminating
the federal income tax exemption for interest on municipal bonds. Such actions
could materially affect the availability of municipal bonds and the value of
those already owned by a Fund. If such legislation were passed, the
Trust's Board of Trustees may recommend changes in a Fund's investment
objectives and policies or dissolution of a Fund.
U.S. Government Securities
Each Fund may invest in securities issued or guaranteed by U.S. government
agencies or instrumentalities.
These securities are backed by (1) the discretionary authority of the U.S.
government to purchase certain obligations of agencies or instrumentalities or
(2) the credit of the agency or instrumentality issuing the obligations.
Some government agencies and instrumentalities may not receive financial
support from the U.S. government. Examples of such agencies are:
(i) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association.
Securities Issued by the Government National Mortgage Association ("GNMA")
The Funds may invest in securities issued by the GNMA, a corporation
wholly-owned by the U.S. government. GNMA securities or "certificates" represent
ownership in a pool of underlying mortgages. The timely payment of principal and
interest due on these securities is guaranteed.
Unlike conventional bonds, the principal on GNMA certificates is not paid at
maturity but over the life of the security in scheduled monthly payments. While
mortgages pooled in a GNMA certificate may have maturities of up to 30 years,
the certificate itself will have a shorter average maturity and less principal
volatility than a comparable 30-year bond.
The market value and interest yield of GNMA certificates can vary due not only
to market fluctuations, but also to early prepayments of mortgages within the
pool. Since prepayment rates vary widely, it is impossible to accurately predict
the average maturity of a GNMA pool. In addition to the guaranteed principal
payments, GNMA certificates may also make unscheduled principal payments
resulting from prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available from
other types of U.S. government securities, they may be less effective as a means
of locking in attractive long- term rates because of the prepayment feature. For
instance, when interest rates decline, prepayments are likely to increase as the
holders of the underlying mortgages seek refinancing. As a result, the value of
a GNMA certificate is not likely to rise as much as the value of a comparable
debt security would in response to the same decline. In addition, these
prepayments can cause the price of a GNMA certificate originally purchased at a
premium to decline in price compared to its par value, which may result in a
loss.
Virgin Islands, Guam and Puerto Rico
Each Fund may invest in obligations of the governments of the Virgin Islands,
Guam and Puerto Rico. Each Fund does not presently intend to invest more than
(a) 10% of its net assets in the obligations of each of the Virgin Islands and
Guam or (b) 25% of its net assets in the obligations of Puerto Rico.
Accordingly, a Fund may be adversely affected by local political and economic
conditions and developments within the Virgin Islands, Guam and Puerto Rico
affecting the issuers of such obligations.
When-Issued, Delayed-Delivery and Forward Commitment Transactions
The Funds may purchase securities on a when-issued or delayed-delivery basis and
may purchase or sell securities on a forward commitment basis. Settlement of
such transactions normally occurs within a month or more after the purchase or
sale commitment is made.
The Funds may purchase securities under such conditions only with the intention
of actually acquiring them, but may enter into a separate agreement to sell the
securities before the settlement date. Since the value of securities purchased
may fluctuate prior to settlement, a Fund may be required to pay more at
settlement than the security is worth. In addition, the purchaser is not
entitled to any of the interest earned prior to settlement.
Upon making a commitment to purchase a security on a when-issued,
delayed-delivery or forward commitment basis, a Fund will hold liquid assets
worth at least the equivalent of the amount due. The liquid assets will be
monitored on a daily basis and adjusted as necessary to maintain the necessary
value.
Purchases made under such conditions are a form of leveraging and may involve
the risk that yields secured at the time of commitment may be lower than
otherwise available by the time settlement takes place, causing an unrealized
loss to a Fund. In addition, when a Fund engages in such purchases, it relies on
the other party to consummate the sale. If the other party fails to perform its
obligations, a Fund may miss the opportunity to obtain a security at a favorable
price or yield.
Repurchase Agreements
The Funds may enter into repurchase agreements with entities that are registered
as U.S. government securities dealers, including member banks of the Federal
Reserve System having at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by the Advisor to
be creditworthy. In a repurchase agreement, a Fund obtains a security and
simultaneously commits to return the security to the seller at a set price
(including principal and interest) within a period of time usually not exceeding
seven days. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or maturity of the
underlying security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value of the underlying security.
The Funds' custodian or a third party will take possession of the securities
subject to repurchase agreements, and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the securities
from a Fund, the Fund could receive less than the repurchase price on any sale
of such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by a Fund might
be delayed pending court action. Each Fund's Advisor believes that under the
regular procedures normally in effect for custody of a Fund's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of such
securities. The Funds will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker-dealers, which are
deemed by the Advisor to be creditworthy pursuant to guidelines established by
the Board of Trustees.
Reverse Repurchase Agreements
As described herein, the Funds may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, a Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
Options
Each Fund may buy or sell (i.e., write) put and call options on securities it
holds or intends to acquire. Each Fund may also buy and sell options on
financial futures contracts. Each Fund will use options as a hedge against
decreases or increases in the value of securities it holds or intends to
acquire. Each Fund may purchase put and call options for the purpose of
offsetting previously written put and call options of the same series.
Each Fund may write only covered options. With regard to a call option, this
means that the Fund will own, for the life of the option, the securities subject
to the call option. A Fund will cover put options by holding, in a segregated
account, liquid assets having a value equal to or greater than the price of
securities subject to the put option. If the Fund is unable to effect a closing
purchase transaction with respect to the covered options it has sold, it will
not be able to sell the underlying securities or dispose of assets held in a
segregated account until the options expire or are exercised.
Futures Transactions
Each Fund may enter into financial futures contracts and write options on such
contracts. Each Fund intends to enter into such contracts and related options
for hedging purposes. A Fund will enter into futures contracts on securities or
index-based futures contracts in order to hedge against changes in interest or
exchange rates or securities prices. A futures contract on securities is an
agreement to buy or sell securities at a specified price during a designated
month. A futures contract on a securities index does not involve the actual
delivery of securities, but merely requires the payment of a cash settlement
based on changes in the securities index. The Fund does not make payment or
deliver securities upon entering into a futures contract. Instead, it puts down
a margin deposit, which is adjusted to reflect changes in the value of the
contract and which continues until the contract is terminated.
Each Fund may sell or purchase futures contracts. When a futures contract is
sold by a Fund, the value of the contract will tend to rise when the value of
the underlying securities declines and to fall when the value of such securities
increases. Thus, the Fund would sell futures contracts in order to offset a
possible decline in the value of its securities. If a futures contract is
purchased by the Fund, the value of the contract will tend to rise when the
value of the underlying securities increases and to fall when the value of such
securities declines. Each Fund intends to purchase futures contracts in order to
establish what is believed by the Advisor to be a favorable price and rate of
return for securities the Fund intends to purchase.
Each Fund also intends to purchase put and call options on futures contracts for
hedging purposes. A put option purchased by a Fund would give it the right to
assume a position as the seller of a futures contract. A call option purchased
by a Fund would give it the right to assume a position as the purchaser of a
futures contract. The purchase of an option on a futures contract requires the
Fund to pay a premium. In exchange for the premium, the Fund becomes entitled to
exercise the benefits, if any, provided by the futures contract, but is not
required to take any action under the contract. If the option cannot be
exercised profitably before it expires, the Fund's loss will be limited to the
amount of the premium and any transaction costs.
Each Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. A Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that the Fund will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If the Fund is not
able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the contract and to complete the
contract according to its terms, in which case it would continue to bear market
risk on the transaction.
Although futures and options transactions are intended to enable a Fund to
manage market, interest rate or exchange rate risk, unanticipated changes in
interest rates or market prices could result in poorer performance than if it
had not entered into these transactions. Even if the Advisor correctly predicts
interest rate movements, a hedge could be unsuccessful if changes in the value
of the Fund's futures position did not correspond to changes in the value of its
investments. This lack of correlation between the Fund's futures and securities
positions may be caused by differences between the futures and securities
markets or by differences between the securities underlying the Fund's futures
position and the securities held by or to be purchased for the Fund. Each Fund's
Advisor will attempt to minimize these risks through careful selection and
monitoring of the Fund's futures and options positions.
Each Fund does not intend to use futures transactions for speculation or
leverage. Each Fund has the ability to write options on futures, but currently
intends to write such options only to close out options purchased by the Fund.
Each Fund will not change these policies without supplementing the information
in the prospectuses and SAI.
Each Fund will not maintain open positions in futures contracts it has sold or
call options it has written on futures contracts if, in the aggregate, the value
of the open positions (marked to market) exceeds the current market value of its
securities portfolio plus or minus the unrealized gain or loss on those open
positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, the Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or receive money
upon the purchase or sale of a futures contract. Rather, the Fund is required to
deposit an amount of "initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract initial margin does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day, the Fund pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market". Variation margin
does not represent a borrowing or loan by the Fund but is instead a settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions. The Fund is also required to deposit
and maintain margin when it writes call options on futures contracts.
Foreign Securities (Municipal only)
The Fund may invest in foreign securities or U.S. securities traded in foreign
markets. In addition to securities issued by foreign companies, permissible
investments may also consist of obligations of foreign branches of U.S. banks
and of foreign banks, including European certificates of deposit, European time
deposits, Canadian time deposits and Yankee certificates of deposit. The Fund
may also invest in Canadian commercial paper and Europaper. These instruments
may subject the Fund to investment risks that differ in some respects from those
related to investments in obligations of U.S. issuers. Such risks include the
possibility of adverse political and economic developments; imposition of
withholding taxes on interest or other income; seizure, nationalization, or
expropriation of foreign deposits; establishment of exchange controls or
taxation at the source; greater fluctuations in value due to changes in exchange
rates, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. Such
investments may also entail higher custodial fees and sales commissions than
domestic investments. Foreign issuers of securities or obligations are often
subject to accounting treatment and engage in business practices different from
those respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.
Foreign Currency Transactions (Municipal only)
As one way of managing exchange rate risk, the Fund may enter into forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). The exchange rate for the transaction (the amount of
currency the Fund will deliver and receive when the contract is completed) is
fixed when the Fund enters into the contract. The Fund usually will enter into
these contracts to stabilize the U.S. dollar value of a security it has agreed
to buy or sell. The Fund intends to use these contracts to hedge the U.S. dollar
value of a security it already owns, particularly if the Fund expects a decrease
in the value of the currency in which the foreign security is denominated.
Although the Fund will attempt to benefit from using forward contracts, the
success of its hedging strategy will depend on the investment advisor's ability
to predict accurately the future exchange rates between foreign currencies and
the U.S. dollar. The value of the Fund's investments denominated in foreign
currencies will depend on the relative strengths of those currencies and the
U.S. dollar, and the Fund may be affected favorably or unfavorably by changes in
the exchange rates or exchange control regulations between foreign currencies
and the U.S. dollar. Changes in foreign currency exchange rates also may affect
the value of dividends and interest earned, gains and losses realized on the
sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund. The Fund may also purchase and sell
options related to foreign currencies in connection with hedging strategies.
Below Investment Grade Bonds
Each Fund may invest up to 20% of its assets in lower rated bonds but will not
invest in bonds rated below B. (For more information about bond ratings, see
Appendix A.) Bonds rated below BBB by S&P or Fitch or below Baa by Moody's,
commonly known as "junk bonds," offer high yield, but also high risk. While
investments in junk bonds provide opportunities to maximize return over time,
they are considered predominantly speculative with respect to the ability of the
issuer to meet principal and interest payments. Investors should be aware of the
following risks:
(1) The lower ratings of junk bonds reflect a greater possibility that
adverse changes in the financial condition of the issuer or in general economic
conditions, or both, or an unanticipated rise in interest rates may impair the
ability of the issuer to make payments of interest and principal, especially if
the issuer is highly leveraged. Such issuer's ability to meet its debt
obligations may also be adversely affected by the issuer's inability to meet
specific forecasts or the unavailability of additional financing.
Also, an economic downturn or an increase in interest rates may increase the
potential for default by the issuers of these securities.
(2) The value of junk bonds may be more susceptible to real or
perceived adverse economic or political events than is the case for higher
quality municipal bonds.
(3) The value of junk bonds, like that of other fixed income
securities, fluctuates in response to changes in interest rates, generally
rising when interest rates decline and falling when interest rates rise. For
example, if interest rates increase after a fixed income security is purchased,
the security, if sold prior to maturity, may return less than its cost. The
prices of junk bonds, however, are generally less sensitive to interest rate
changes than the prices of higher-rated bonds, but are more sensitive to news
about an issuer or the economy which is, or investors perceive as, negative.
(4) The secondary market for junk bonds may be less liquid at certain
times than the secondary market for higher quality bonds, which may adversely
effect (a) the bond's market price, (b) a Fund's ability to sell the bond, and
(c) a Fund's ability to obtain accurate market quotations for purposes of
valuing its assets.
Illiquid and Restricted Securities
Each Fund may not invest more than 15% of its net assets in securities that are
illiquid. A security is illiquid when a Fund cannot dispose of it in the
ordinary course of business within seven days at approximately the value at
which the Fund has the investment on its books.
Each Fund may invest in "restricted" securities, i.e., securities subject to
restrictions on resale under federal securities laws. Rule 144A under the
Securities Act of 1933 ("Rule 144A") allows certain restricted securities to be
traded freely among qualified institutional investors. Since Rule 144A
securities may have limited markets, the Board of Trustees will determine
whether such securities should be considered illiquid for the purpose of
determining a Fund's compliance with the limit on illiquid securities indicated
above. In determining the liquidity of Rule 144A securities, the Trustees will
consider: (1) the frequency of trades and quotes for the security; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades.
Investment in Other Investment Companies
Each Fund may purchase the shares of other investment companies to the extent
permitted under the 1940 Act. Currently, each Fund may not: (1) own more than 3%
of the outstanding voting stock of another investment company; (2) invest more
than 5% of its assets in any single investment company; and (3) invest more than
10% of its assets in investment companies. However, each Fund may invest all of
its investable assets in securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies
and limitations as the Fund.
Short Sales
Each Fund may not make short sales of securities or maintain a short
position unless, at all times when a short position is open, it owns an equal
amount of such securities or of securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short. Each Fund may
effect a short sale in connection with an underwriting in which a Fund is the
participant.
MANAGEMENT OF THE TRUST
Set forth below are the Trustees and officers of the Trust and their
principal occupations and some of their affiliations over the last five years.
Unless otherwise indicated, the address for each Trustee and officer is 200
Berkeley Street, Boston, Massachusetts 02116. Each Trustee is also a Trustee of
each of the other Trusts in the Evergreen fund complex.
Name Position with Trust Principal Occupations for Last Five Year
Laurence B. Ashkin
(DOB: 2/2/28)
Trustee
Real estate developer and construction consultant;
and President of Centrum Equities and Centrum Properties, Inc.
Charles A. Austin III
(DOB: 10/23/34)
Trustee
Investment Counselor to Appleton Partners, Inc.;
former Director, Executive Vice President and
Treasurer, State Street Research & Management
Company (investment advice); Director, The
Andover Companies (Insurance); and Trustee,
Arthritis Foundation of New England.
K. Dun Gifford
(DOB: 10/12/38)
Trustee
Trustee, Treasurer and Chairman of the Finance Committee, Cambridge College;
Chairman Emeritus and Director, American Institute of Food and Wine; Chairman
and President, Oldways Preservation and Exchange Trust (education); former
Chairman of the Board, Director, and Executive Vice President, The London
Harness Company; former Managing Partner, Roscommon Capital Corp.; former Chief
Executive Officer, Gifford Gifts of Fine Foods; and former Chairman, Gifford,
Drescher & Associates (environmental consulting).
James S. Howell
(DOB: 8/13/24)
Chairman of the
Board of Trustees
Former Chairman of the Distribution Foundation for
the Carolinas; and former Vice President of Lance
Inc. (food manufacturing).
Leroy Keith, Jr.
(DOB: 2/14/39)
Trustee
Chairman of the Board and Chief Executive Officer, Carson Products Company;
Director of Phoenix Total Return Fund and Equifax, Inc.; Trustee of Phoenix
Series Fund, Phoenix Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund;
and former President, Morehouse College.
Gerald M. McDonnell
(DOB: 7/14/39)
Trustee
Sales Representative with Nucor-Yamoto, Inc.
(steel producer).
Thomas L. McVerry
(DOB: 8/2/39)
Trustee
Former Vice President and Director of Rexham Corporation (manufacturing); and
former Director of Carolina Cooperative Federal Credit Union.
William Walt Pettit
(DOB: 8/26/55)
Trustee
Partner in the law firm of William Walt Pettit, P.A.
David M. Richardson
(DOB: 9/14/41)
Trustee
Vice Chair and former Executive Vice President,
DHR International, Inc. (executive recruitment);
former Senior Vice President, Boyden International
Inc. (executive recruitment); and Director,
Commerce and Industry Association of New
Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
Russell A. Salton, III MD
(DOB: 6/2/47)
Trustee
Medical Director, U.S. Health Care/Aetna Health
Services; former Managed Health Care Consultant;
and former President, Primary Physician Care.
Michael S. Scofield
(DOB: 2/20/43)
Trustee
Attorney, Law Offices of Michael S. Scofield.
Richard J. Shima
(DOB: 8/11/39)
Trustee
Former Chairman, Environmental Warranty, Inc. (insurance agency); Executive
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Hartford Hospital, Old State House
Association, Middlesex Mutual Assurance Company, and Enhance Financial Services,
Inc.; Chairman, Board of Trustees, Hartford Graduate Center; Trustee, Greater
Hartford YMCA; former Director, Vice Chairman and Chief Investment Officer, The
Travelers Corporation; former Trustee, Kingswood-Oxford School; and former
Managing Director and Consultant, Russell Miller, Inc.
William J. Tomko*
(DOB:8/30/58)
President and
Treasurer
Senior Vice President and Operations Executive,
BISYS Fund Services.
Nimish S. Bhatt*
(DOB: 6/6/63)
Vice President and
Assistant Treasurer
Vice President, Tax, BISYS Fund Services; former Assistant Vice President,
Evergreen Asset Management Corp./First Union Bank; former Senior Tax
Consulting/Acting Manager, Investment Companies Group, Price Waterhouse LLP, NY.
Bryan Haft*
(DOB: 1/23/65)
Team Leader, Fund Administration, BISYS Fund
Services.
Michael H. Koonce
(DOB: 4/20/60)
Vice President
Secretary
Senior Vice President and Assistant General
Counsel, First Union Corporation; former Senior
Vice President and General Counsel, Colonial
Management Associates, Inc.
*Address: BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219-8001
Trustee Compensation
Listed below is the Trustee compensation for the fiscal year ended May 31,
1998. The Trustees do not receive pension or retirement benefits from the
Funds.
Trustee Aggregate Total Compensation
Compensation from from Trust and Fund
Trust Complex Paid to Trustee
Laurence B. Ashkin $6,901 $70,370
Charles A. Austin, III $6,725 $52,343
K. Dun Gifford $6,253 $49,231
James S. Howell $8,725 $104,002
Leroy Keith Jr. $6,529 $50,711
Gerald M. McDonnell $7,919 $87,149
Thomas L. McVerry $7,899 $91,037
William Walt Pettit $7,041 $78,845
David M. Richardson $6,604 $50,886
Russell A. Salton, III $7,434 $87,502
Michael S. Scofield $7,901 $90,266
Richard J. Shima $6,702 $65,844
Robert J. Jeffries* $1,300 $20,932
Foster Bam* $4,904 $49,987
*Former Trustee; retired as of December 31, 1997
**Certain Trustees have elected to defer all or part of their total compensation
for the twelve months ended May 31, 1998. The amounts listed below will be
payable in later years to the respective Trustees:
Austin $4,763
McVerry $90,742
Howell $74,036
Salton $87,025
Petit $78,625
McDonnell $86,183
Scofield $28,593
PRINCIPAL HOLDERS OF FUND SHARES
As of the date of this SAI, the officers and Trustees of the Trust owned
as a group less than 1% of the outstanding shares of any class of each Fund.
Set forth below is information with respect to each person who, to each Fund's
knowledge, owned beneficially or of record more than 5% of the outstanding
shares of any class of each fund as of February 28, 1999.
Evergreen High Grade Municipal Bond Fund
Class A
Heather Agency, Inc. 7.66%
FBO Alletta Laird Downs Ttee FBO
Alletta Laird Downs Trust
Dtd 3-29-89
P.O. Box 3666
Wilimington, DE 19807
Evergreen High Grade Municipal Bond Fund
Class Y
First Union National Bank 32.69%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG - 1151
301 S. Tryon Street
Charlotte, NC 28202-1910
First Union National Bank 11.19%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG - 1151
301 S. Tryon Street
Charlotte, NC 28202-1910
Charles Schwab & Co. Inc. 5.80%
Special Custody Account FBO
Exclusive Benefit of Customers
Reinvest Account Attn Mutual Fd
101 Montgomery Street
San Franciso, CA 94104-4122
Evergreen Short-Intermediate Municipal Fund
Class A
Joseph Romano 25.42%
2164 Troon Road
Houston, TX 77019-6325
First Union Brokerage Services 15.95%
Haywood D. Cochrane, Jr.
21 Castlewood Court
Nashville, TN 37215
Raymond James & Assoc. Inc. 7.16%
Mario Michael Moscone Rev Tr
U/A dtd
382 Cranbrook Court
Bloomfield Hills, MI 48304
Fubs & Co. FEBO 5.58%
Anthony M. Truscello Sr and
Carolyn A. Truscello
878 Taylor Drive
Folcroft, PA 19032-1523
5.58%
Evergreen Short-Intermediate Municipal Fund
Class B
Fubs & Co. FEBO 7.11%
Carl R. Nodine and
Linda F. Nodine
P.O. Box 210086
Nashville, TN 37221-0086
MLPF&S for the sole 6.75%
benefit of its customers
Attn: Fund Administration #97H95
4800 Deer Lake Dr. E. 2nd Fl.
Jacksonville, FL 32246-6484
Fubs & Co. FEBO 5.39%
Shirley L. Roberts
2770 S. Garden Drive
210 Bldg. 21
Lake Worth, FL 33461-6280
Arthur I. Roe, Jr. 5.10%
TOD Gail A. Strickland
P.O. Box 510
Arcadia, FL 34266
Evergreen Short-Intermediate Municipal Fund
Class Y
First Union National Bank/EB/INT 81.27%
Cash Account
Attn Trust Operations Fund Group
401 S. Tryon St., 3rd Fl.
CMG 1151
Charlotte, NC 28202-1911
Municipal Bond Fund Class A
MLPF&S For the Sole Benefit 11.47%
of its Customers
Attn: Fund Admin #97TU1
4800 Deer Lake Dr. E 2nd Fl
Jacksonville, FL 32246-6484
Municipal Bond Fund Class B
MLPF&S For the Sole Benefit 20.92%
of its Customers
Attn: Fund Admin #98309
4800 Deer Lake Dr. E 2nd Fl
Jacksonville, FL 32246-6484
Municipal Bond Fund Class C
MLPF&S For the Sole Benefit 40.79%
of its Customers
Attn: Fund Admin #97TU2
4800 Deer Lake Dr. E 2nd Fl
Jacksonville, FL 32246-6484
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORS
Each Fund's Advisor is a subsidiary of First Union Corporation ("First Union"),
a bank holding company headquartered at 301 South College Street, Charlotte,
North Carolina 28288-0630. First Union and its subsidiaries provide a broad
range of financial services to individuals and businesses througout the United
States.
The Advisor to High Grade is the Evergreen Investment Management ("EIM")
(formerly known as the Capital Management Group), a division of First Union
National Bank ("FUNB), 201South College Street, Charlotte, North Carolina
28288-0630. EIM is entitled to receive from High Grade an annual fee equal to
0.50% of the Fund's average daily net assets.
The Advisor to Short-Intermediate is Evergreen Asset Management Corp. ("EAMC"),
2500 Westchester Avenue, Purchase, New York 10577. EAMC is entitled to receive
from Short-Intermediate an annual fee equal to 0.50% of the Fund's average daily
net assets. Lieber and Company, 2500 Westchester Avenue, Purchase, New York
10577, a First Union subsidiary, is the Fund's subadvisor. Lieber and Company is
reimbursed by EAMC for the direct and indirect costs of providing subadvisory
services to the Fund.
The Advisor to Municipal is Evergreen Investment Management Company ("EIMC"),
200 Berkeley Street, Boston, MA 02116. EIMC is entitled to receive an annual fee
equal to 2.0% of Municipal's gross dividend and interest income plus a
percentage of the aggregate net asset value of Fund shares, as follows: 0.50% of
the first $100 million, plus 0.45% of the next $100 million, plus 0.40% of the
next $100 million, plus 0.35% of the next $100 million, plus 0.30% of the next
$100 million, plus 0.25% of amounts over $500 million.
INVESTMENT ADVISORY AGREEMENTS
On behalf of each of its Funds, the Trust has entered into an investment
advisory agreement with each Advisor (the "Advisory Agreements"). Under the
Advisory Agreements, and subject to the supervision of the Trust's Board of
Trustees, each Advisor furnishes to the appropriate Fund investment advisory,
management and administrative services, office facilities, and equipment in
connection with its services for managing the investment and reinvestment of the
Fund's assets. The Advisor pays for all of the expenses incurred in connection
with the provision of its services. Each Fund pays for all charges and expenses,
other than those specifically referred to as being borne by the Advisor,
including, but not limited to: (1) custodian charges and expenses; (2)
bookkeeping and auditors' charges and expenses; (3) transfer agent charges and
expenses; (4) fees and expenses of Independent Trustees (Trustees who are not
interested persons of a Fund as defined in the 1940 Act); (5) brokerage
commissions, brokers' fees and expenses; (6) issue and transfer taxes; (7) costs
and expenses under the Distribution Plan (as applicable); (8) taxes and trust
fees payable to governmental agencies; (9) the cost of share certificates; (10)
fees and expenses of the registration and qualification of such Fund and its
shares with the Securities and Exchange Commission ("SEC") or under state or
other securities laws; (11) expenses of preparing, printing and mailing
prospectuses, SAIs, notices, reports and proxy materials to shareholders of such
Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges and
expenses of legal counsel for such Fund and for the Independent Trustees of the
Trust on matters relating to such Fund; (14) charges and expenses of filing
annual and other reports with the SEC and other authorities; and (15) all
extraordinary charges and expenses of such Fund. (See also the section entitled
Financial Information")
Each Advisory Agreement continues in effect for two years from its effective
date and, thereafter, from year to year only if approved at least annually by
the Board of Trustees of the Trust or by a vote of a majority of each Fund's
outstanding shares. In either case, the terms of the Advisory Agreement and
continuance thereof must be approved by the vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreements may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees or by a
vote of a majority of outstanding shares. Each Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
Transactions Among Advisory Affiliates
The Trust has adopted procedures pursuant to Rule 17a-7 under the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit a Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union is an Advisor. The Rule 17a-7 Procedures also allow the Funds to buy or
sell securities from other advisory clients for whom a subsidiary of First Union
is an Advisor. The Funds may engage in such transactions if they are equitable
to each participant and consistent with each participant's investment objective.
DISTRIBUTOR
Evergreen Distributor, Inc. (the "Distributor") markets the Funds through
broker-dealers and other financial representatives. Its address is 125 W. 55th
Street, New York, NY 10019.
DISTRIBUTION PLANS AND AGREEMENTS
Distribution fees are accrued daily and paid monthly on Class A, Class B and
Class C shares and are charged as class expenses, as accrued. The distribution
fees attributable to the Class B and Class C shares are designed to permit an
investor to purchase such shares through broker-dealers without the assessment
of a front-end sales charge, while at the same time permitting the Distributor
to compensate broker-dealers in connection with the sale of such shares. In this
regard, the purpose and function of the combined contingent deferred sales
charge and distribution services fee on the Class B shares are the same as those
of the front-end sales charge and distribution fee with respect to the Class A
shares in that in each case the sales charge and/or distribution fee provide for
the financing of the distribution of the Fund's shares.
The National Association of Securities Dealers, Inc. ("NASD") limits the amount
that a mutual fund may pay annually in distribution costs for sale of its shares
and shareholder service fees. The NASD limits annual expenditures to 1.00% of
the aggregate average daily net asset value of its shares, of which 0.75% may be
used to pay such distribution costs and 0.25% may be used to pay shareholder
services fees. The NASD also limits the aggregate amount that a Fund may pay for
such distribution costs to 6.25% of gross share sales since the inception of the
distribution plan, plus interest at the prime rate plus 1.00% on such amounts
remaining unpaid from time to time.
Under the Rule 12b-1 Distribution Plans that have been adopted by each Fund with
respect to each of its Class A and Class B shares and, as applicable, Class C
shares (each a "Plan" and collectively, the "Plans"), the Treasurer of each Fund
reports the amounts expended under the Plans and the purposes for which such
expenditures were made to the Trustees of the Trust for their review on a
quarterly basis. Also, each Plan provides that the selection and nomination of
the Independent Trustees are committed to the discretion of such Independent
Trustees then in office.
Each Advisor may from time to time from its own funds or such other resources as
may be permitted by rules of the SEC make payments for distribution services to
the Distributor; the latter may in turn pay part or all of such compensation to
brokers or other persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for successive
twelve-month periods provided, however, that such continuance is specifically
approved at least annually by the Trustees of the Trust or by vote of the
holders of a majority of the outstanding voting securities of that class and, in
either case, by a majority of the Independent Trustees of the Trust who have no
direct or indirect financial interest in the operation of the Plan or any
agreement related thereto.
The Plans permit the payment of fees to brokers and others for distribution and
shareholder- related administrative service and to broker-dealers, depository
institutions, financial intermediaries and administrators for administrative
services as to Class A, Class B and Class C shares (as applicable). The Plans
are designed to (i) stimulate brokers to provide distribution and administrative
support services to each Fund and holders of such Class A, Class B and Class C
shares and (ii) stimulate administrators to render administrative support
services to a Fund and holders of such Class A, Class B and Class C shares. The
administrative services are provided by a representative who has knowledge of
the shareholder's particular circumstances and goals, and include, but are not
limited to, providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding such
Class A, Class B and Class C shares; assisting clients in changing dividend
options, account designations, and addresses; and providing such other services
as a Fund reasonably requests for its Class A, Class B and Class C shares, as
applicable.
FUNB or its affiliates may finance the payments made by the Distributor to
compensate broker/dealers or other persons for distributing shares of a Fund.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by a
Fund to the Distributor with respect to that class or classes, and (ii) a Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution service fees in respect of shares of such class or classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be approved
by a vote of the Trustees of the Trust or the holders of a Fund's outstanding
voting securities, voting separately by class, and in either case, by a majority
of the Independent Trustees, cast in person at a meeting called for the purpose
of voting on such approval; and any Plan or Distribution Agreement may not be
amended in order to increase materially the costs that a particular class of
shares of a Fund may bear pursuant to the Plan or Distribution Agreement without
the approval of a majority of the holders of the outstanding voting shares of
the class affected. Any Plan or Distribution Agreement may be terminated (i) by
a Fund without penalty at any time by a majority vote of the holders of the
outstanding voting securities of the Fund, voting separately by class or by a
majority vote of the Independent Trustees, or (ii) by the Distributor. To
terminate any Distribution Agreement, any party must give the other parties 60
days' written notice; to terminate a Plan only, a Fund need give no notice to
the Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment. (See also the section entitled "Financial
Information.")
ADDITIONAL SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS"), 200 Berkeley Street, Boston,
Massachusetts 02116- 5034, serves as administrator to High Grade, subject to the
supervision and control of the Trust's Board of Trustees. EIS provides the Fund
with facilities, equipment and personnel and is entitled to receive a fee based
on the aggregate average daily net assets of the Funds at a rate based on the
total assets of all mutual funds administered by EIS for which any affiliate of
FUNB serves as Advisor, as follows: 0.050% of the first $7 billion, plus 0.035%
of the next $3 billion, plus 0.030% of the next $5 billion, plus 0.020% of the
next $10 billion, plus 0.015% of the next $5 billion, plus 0.010% of amounts
over $30 billion.
Transfer Agent
Evergreen Service Company ("ESC") a subsidiary of First Union, is the Funds'
transfer agent. The transfer agent issues and redeems shares, pays dividends and
performs other duties in connection with the maintenance of shareholder
accounts. The transfer agent's address is 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
Independent Auditors
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110
audits the financial statements of High Grade and Short-Intermediate. KPMG Peat
Marwick LLP, 99 High Street, Boston, Massachusetts 02110 audits the financial
statements of Municipal.
Custodian
State Street Bank and Trust Company is the Funds' custodian. The bank keeps
custody of each Fund's securities and cash and performs other related duties.
The custodian's address is P.O. Box 9021, Boston, Massachusetts 02205-9827.
Legal Counsel
Sullivan & Worcester LLP provides legal advice to the Funds. Its address is 1025
Connecticut Avenue, N.W., Washington, D.C. 20036.
BROKERAGE
Selection of Brokers
In effecting transactions in portfolio securities for a Fund, each
Advisor seeks the best execution of orders at the most favorable prices. Each
Advisor determines whether a broker has provided a Fund with best execution and
price in the execution of a securities transaction by evaluating, among other
things, the broker's ability to execute large or potentially difficult
transactions, and the financial strength and stability of the broker.
Brokerage Commissions
Each Fund expects to buy and sell its fixed-income securities through
principal transactions, that is, directly from the issuer or from an underwriter
or market maker for the securities. Generally, a Fund will not pay brokerage
commissions for such purchases. Usually, when a Fund buys a security from an
underwriter, the purchase price will include an underwriting commission or
concession. The purchase price for securities bought from dealers serving as
market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When a Fund executes transactions in the over-the-counter market, it
will deal with primary market makers unless more favorable prices are otherwise
obtainable.
General Brokerage Policies
Each Advisor makes investment decisions for a Fund independently from
those of its other clients. It may frequently develop, however, that an Advisor
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, an Advisor will
allocate the transactions according to a formula that is equitable to each of
its clients. Although, in some cases, this system could have a detrimental
effect on the price or volume of a Fund's securities, each Fund believes that in
other cases its ability to participate in volume transactions will produce
better executions. In order to take advantage of the availability of lower
purchase prices, the Funds may occasionally participate in group bidding for the
direct purchase from an issuer of certain securities.
The Board of Trustees periodically reviews each Fund's brokerage policy. Because
of the possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the Board of Trustees may change,
modify or eliminate any of the foregoing practices.
TRUST ORGANIZATION
Form of Organization
Each Fund is a series of an open-end management investment company known as
"Evergreen Municipal Trust" (the "Trust"). The Trust was formed as a Delaware
business trust on September 18, 1997 pursuant to an Agreement and Declaration of
Trust (the "Declaration of Trust"). A copy of the Declaration of Trust is on
file at the SEC as an exhibit to the Trust's Registration Statement, of which
this SAI is a part. This summary is qualified in its entirety by reference to
the Declaration of Trust.
Descriptoin of Shares
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest of series and classes of shares. Each share of
each Fund represents an equal proportionate interest with each other share of
that series and/or class. Upon liquidation, shares are entitled to a pro rata
share of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
Voting Rights
Under the terms of the Declaration of Trust, the Trust is not required to hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matters, each share is entitled to one vote for each dollar of
net asset value applicable to such share. Shares generally vote together as one
class on all matters. Classes of shares of each Fund have equal voting rights.
No amendment may be made to the Declaration of Trust that adversely affects any
class of shares without the approval of a majority of the votes applicable to
the shares of that class. Shares have non-cumulative voting rights, which means
that the holders of more than 50% of the votes applicable to shares voting for
the election of Trustees can elect 100% of the Trustees to be elected at a
meeting and, in such event, the holders of the remaining shares voting will not
be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time, the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Limitation Of Trustees' Liability
The Declaration of Trust provides that a Trustee will not be liable for errors
of judgment or mistakes of fact or law, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties involved in the conduct of his office.
PURCHASE, REDEMPTION AND PRICING OF SHARES
How the Funds Offer Shares to the Public
You may buy shares of a Fund through the Distributor, broker-dealers
that have entered into special agreements with the Distributor or certain other
financial institutions. Each Fund offers three or four classes of shares that
differ primarily with respect to sales charges and distribution fees. Depending
upon the class of shares, you will pay an initial sales charge when you buy a
Fund's shares, a contingent deferred sales charge (a "CDSC") when you redeem a
Fund's shares or no sales charges at all.
Class A Shares
With certain exceptions, when you purchase Class A shares you will pay a maximum
sales charge of 3.25% for Short-Intermediate, 4.75% for the other Funds. (The
prospectus contains a complete table of applicable sales charges and a
discussion of sales charge reductions or waivers that may apply to purchases.
See also the section in this SAI entitled "Method of Computing Offering Price
for Class A Shares." If you purchase Class A shares in the amount of $1 million
or more, without an initial sales charge, the Funds will charge a CDSC of 1.00%
if you redeem during the month of your purchase and the 12-month period
following the month of your purchase (see "Contingent Deferred Sales Charge"
below).
Class B Shares
The Funds offer Class B shares at net asset value without an initial sales
charge. With certain exceptions, however, the Funds will charge a CDSC on shares
you redeem within 72 months after the month of your purchase, in accordance with
the following schedule:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase.......................... 5.00%
Second twelve-month period following the month of purchase......... 4.00%
Third twelve-month period following the month of purchase............ 3.00%
Fourth twelve-month period following the month of purchase......... 3.00%
Fifth twelve-month period following the month of purchase.............. 2.00%
Sixth twelve-month period following the month of purchase............ 1.00%
Thereafter........................................................ 0.00%
Class B shares that have been outstanding for seven years after the month of
purchase will automatically convert to Class A shares without imposition of a
front-end sales charge or exchange fee.
(Conversion of Class B shares represented by stock certificates will require
the return of the stock certificate to ESC).
Class C Shares (High Grade and Municipal only)
Class C shares are available only through broker-dealers who have entered into
special distribution agreements with the Distributor. The Funds offer Class C
shares at net asset value without an initial sales charge. With certain
exceptions, however, the Funds will charge a CDSC of 1.00% on shares you redeem
within 12-months after the month of your purchase. (See "Contingent Deferred
Sales Charge" below).
Class Y Shares
Class Y shares are not offered to the general public and are available only to
(1) persons who at or prior to December 31, 1994 owned shares in a mutual fund
advised by EAMC, (2) certain institutional investors and (3) investment advisory
clients of FUNB affiliates. Class Y shares are offered at net asset value
without a front-end or back-end sales charge and do not bear any Rule 12b-1
distribution expenses.
CONTINGENT DEFERRED SALES CHARGE
The Funds charge a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plans and Agreements," above). If
imposed, the Funds deduct the CDSC from the redemption proceeds you would
otherwise receive. The CDSC is a percentage of the lesser of (1) the net asset
value of the shares at the time of redemption or (2) the shareholder's original
net cost for such shares. If a shareholder requests a redemption, the Fund will
seek to minimize the CDSC the shareholder is required to pay by first redeeming
shares not subject to a CDSC and, thereafter, redeeming shares held the longest.
The CDSC on any redemption is, to the extent permitted by the NASD, paid to the
Distributor or its predecessor.
SALES CHARGE WAIVERS OR REDUCTIONS
Reducing Class A Front-end Loads
With a larger purchase, there are several ways that you can combine multiple
purchases of Class A shares in Evergreen funds and take advantage of lower sales
charges.
Combined Purchases
You can reduce your sales charge by combining purchases of Class A shares of
multiple Evergreen funds. For example, if you invested $75,000 in each of two
different Evergreen funds, you would pay a sales charge based on a $150,000
purchase (i.e., 3.75% of the offering price, rather than 4.75%).
Rights of Accumulation
You can reduce your sales charge by adding the value of Class A shares of
Evergreen funds you already own to the amount of your next Class A investment.
For example, if you hold Class A shares valued at $99,999 and purchase an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75%, rather than 4.75%.
Letter of Intent
You can, by completing the "Letter of Intent" section of the application,
purchase Class A shares over a 13-month period and receive the same sales charge
as if you had invested all the money at once. All purchases of Class A shares of
an Evergreen fund during the period will qualify as Letter of Intent purchases.
Waiver of Initial Sales Charges
The Funds may sell their shares at net asset value without an initial sales
charge to:
1. purchasers of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax sheltered annuity or
TSA plan sponsored by an organization having 100 or more eligible employees (a
"Qualifying Plan") or a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust departments
and registered investment advisors;
4. investment advisors, consultants or financial planners who place
trades for their own accounts or the accounts of their clients and who charge
such clients a management, consulting, advisory or other fee;
5. clients of investment advisors or financial planners who place
trades for their own accounts if the accounts are linked to a master account of
such investment advisors or financial planners on the books of the broker-dealer
through whom shares are purchased;
6. institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with a Fund by the broker-dealer;
7. employees of FUNB, its affiliates, the Distributor, any
broker-dealer with whom the Distributor, has entered into an agreement to sell
shares of the Funds, and members of the immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the Evergreen
funds, the Distributor or their affiliates and the immediate families of such
persons; or
9. a bank or trust company in a single account in the name of such bank
or trust company as trustee if the initial investment in or any Evergreen fund
made pursuant to this waiver is at least $500,000 and any commission paid at the
time of such purchase is not more than 1% of the amount invested.
With respect to items 8 and 9 above, each Fund will only sell shares to
these parties upon the purchasers' written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by a Fund. The Funds will not charge any
CDSC on redemptions by such purchasers.
Waiver of CDSCs
The Funds do not impose a CDSC when the shares you are redeeming represent:
1. an increase in the share value above the net cost of such shares;
2. certain shares for which a Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions;
3. shares that are in the accounts of a shareholder who has died or
become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit plan
qualified under the Employee Retirement Income Security Act of 1974 ("ERISA");
5.an automatic withdrawal from the ERISA plan of a shareholder who is
a least 592 years old;
6. shares in an account that a Fund has closed because the account has
an aggregate net asset value of less than $1,000;
7. an automatic withdrawal under a Systematic Withdrawal Plan of up to
1.0% per month of your initial account balance;
8.a withdrawal consisting of loan proceeds to a retirement plan
participant;
9.a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan that
purchased Class C shares (this waiver is not available in the event a Qualifying
Plan, as a whole, redeems substantially all of its assets).
EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of any
other Evergreen fund, as described under the section entitled "Exchanges" in a
Fund's prospectus. Before you make an exchange, you should read the prospectus
of the Evergreen fund into which you want to exchange. The Trust's Board of
Trustees reserves the right to discontinue, alter or limit the exchange
privilege at any time.
CALCULATION OF NET ASSET VALUE PER SHARE ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as described in
the prospectuses. A Fund will not compute its NAV on the day the following legal
holidays are observed: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The NAV of each Fund is calculated by dividing the value of a Fund's net assets
attributable to that class by all of the shares issued for that class.
VALUATION OF PORTFOLIO SECURITIES
Current values for a Fund's portfolio securities are determined as
follows:
(1) An independent pricing service values each Fund's municipal bonds
at fair value using a variety of factors which may include yield, liquidity,
interest rate risk, credit quality, coupon, maturity and type of issue.
(2) Short-term investments with remaining maturities of 60 days or less
are carried at amortized cost, which approximates market value.
(3) Short-term investments maturing in more than 60 days for which
market quotations are readily available are valued at current market value.
(4) Securities for which valuations are not available from an
independent pricing service, including restricted securities, are valued at fair
value according to procedures established by the Trust's Board of Trustees.
SHAREHOLDER SERVICES
As described in the prospectuses, a shareholder may elect to receive
dividends and capital gains distributions in cash instead of shares. However,
ESC will automatically convert a shareholder's distribution option so that the
shareholder reinvests all dividends and distributions in additional shares when
it learns that the postal or other delivery service is unable to deliver checks
or transaction confirmations to the shareholder's address of record. The Funds
will hold the returned distribution or redemption proceeds in a non-interest
bearing account in the shareholder's name until the shareholder updates his or
her address. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
PRINCIPAL UNDERWRITER
The Distributor is the principal underwriter for the Trust and with
respect to each class of each Fund. The Trust has entered into a Principal
Underwriting Agreement ("Underwriting Agreement") with the Distributor with
respect to each class of each Fund. The Distributor is a subsidiary of The BISYS
Group, Inc.
The Distributor, as agent, has agreed to use its best efforts to find
purchasers for the shares. The Distributor may retain and employ representatives
to promote distribution of the shares and may obtain orders from broker-dealers,
and others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that the Distributor will bear the expense of preparing,
printing, and distributing advertising and sales literature and prospectuses
used by it.
All subscriptions and sales of shares by the Distributor are at the
public offering price of the shares, which is determined in accordance with the
provisions of the Trust's Declaration of Trust, By-Laws, current prospectuses
and SAI. All orders are subject to acceptance by the Trust and the Trust
reserves the right, in its sole discretion, to reject any order received. Under
the Underwriting Agreement, the Trust is not liable to anyone for failure to
accept any order.
The Distributor has agreed that it will, in all respects, duly comply
with all state and federal laws applicable to the sale of the shares. The
Distributor has also agreed that it will indemnify and hold harmless the Trust
and each person who has been, is, or may be a Trustee or officer of the Trust
against expenses reasonably incurred by any of them in connection with any
claim, action, suit, or proceeding to which any of them may be a party that
arises out of or is alleged to arise out of any misrepresentation or omission to
state a material fact on the part of the Distributor or any other person for
whose acts the Distributor is responsible or is alleged to be responsible,
unless such misrepresentation or omission was made in reliance upon written
information furnished by the Trust.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Trust's Independent Trustees, and (ii) by vote of a majority of
the Trust's Trustees, in each case, cast in person at a meeting called for that
purpose.
The Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement.
The Underwriting Agreement will terminate automatically upon its "assignment,"
as that term is defined in the 1940 Act.
From time to time, if, in the Distributor's judgment, it could benefit
the sales of shares, the Distributor may provide to selected broker-dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software, and data files.
ADDITIONAL TAX INFORMATION
REQUIREMENTS FOR QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund has qualified and intends to continue to qualify for and elect the
tax treatment applicable to a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code ("the Code"). (Such qualification does
not involve supervision of management or investment practices or policies by the
Internal Revenue Service.) In order to qualify as a RIC, a Fund must, among
other things, (i) derive at least 90% of its gross income from dividends,
interest, payments with respect to proceeds from securities loans, gains from
the sale or other disposition of securities or foreign currencies and other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities; and (ii) diversify its
holdings so that, at the end of each quarter of its taxable year, (a) at least
50% of the market value of the Fund's total assets is represented by cash, U.S.
government securities and other securities limited in respect of any one issuer,
to an amount not greater than 5% of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. government securities and securities of other regulated investment
companies). By so qualifying, a Fund is not subject to federal income tax if it
timely distributes its investment company taxable income and any net realized
capital gains. A 4% nondeductible excise tax will be imposed on a Fund to the
extent it does not meet certain distribution requirements by the end of each
calendar year. Each Fund anticipates meeting such distribution requirements.
TAXES ON DISTRIBUTIONS
Distributions out of taxable income or capital gains will be taxable to
shareholders whether made in shares or in cash. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of a Fund on the reinvestment date.
To calculate ordinary income for federal income tax purposes,
shareholders must generally include dividends paid by a Fund from its investment
company taxable income (net investment income plus net realized short-term
capital gains, if any).
From time to time, a Fund will distribute the excess of its net
long-term capital gains over its short-term capital losses to shareholders. For
federal tax purposes, shareholders must include such distributions when
calculating their long-term capital gains. Each Fund will inform its
shareholders of the portion, if any, of a long-term capital gain distribution
which is subject to tax at the maximum 28% rate and the portion, if any, of a
long term capital gain distribution which is subject to tax at the maximum 20%
rate. Distributions of long-term capital gains are taxable as such to a
shareholder, no matter how long the shareholder has held the shares.
Distributions by a Fund reduce its NAV. A distribution that reduces a
Fund's NAV below a shareholder's cost basis is taxable as described above,
although from an investment standpoint, it is a return of capital. In
particular, if a shareholder buys Fund shares just before a Fund makes a
distribution, when the Fund makes the distribution the shareholder will receive
what is in effect a return of capital. Nevertheless, the shareholder must pay
taxes on the distribution. Therefore, shareholders should carefully consider the
tax consequences of buying Fund shares just before a distribution.
Each Fund expects that substantially all of its dividends will be
"exempt-interest dividends," which should be treated as excludable from federal
gross income. In order to pay exempt-interest dividends, at least 50% of the
value of a Fund's assets must consist of federally tax-exempt obligations at the
close of each quarter. An exempt-interest respect to its net federally
excludable municipal obligation interest and designated as an exempt-interest
dividend in a written notice mailed to each shareholder not later than 60 days
after the close of its taxable year. The percentage of the total dividends paid
by a Fund with respect to any taxable year that qualifies as exempt-interest
dividends will be the same for all shareholders of the Fund receiving dividends
with respect to such year. If a shareholder receives an exempt-interest dividend
with respect to any share and such share has been held for six months or less,
any loss on the sale or exchange of such share will be disallowed to the extent
of the exempt-interest dividend amount.
Any shareholder of a Fund who may be a "substantial user" of a facility
financed with an issue of tax-exempt obligations or a "related person" to such a
user should consult his tax advisor concerning his qualification to receive
exempt-interest dividends should the Fund hold obligations financing such
facility.
Under regulations to be promulgated, to the extent attributable to
interest paid on certain private activity bonds, a Fund's exempt-interest
dividends, while otherwise tax-exempt, will be treated as a tax preference item
for alternative minimum tax purposes. Corporate shareholders should also be
aware that the receipt of exempt-interest dividends could subject them to
Alternative Minimum Tax under the provisions of Section 56(g) of the Code
(relating to "adjusted current earnings").
Under particularly unusual circumstances, such as when a Fund is in a
prolonged defensive investment position, it is possible that no portion of a
Fund's distributions of income to its shareholders for a fiscal year would be
exempt from federal income tax. The Funds do not presently anticipate, however,
that such unusual circumstances will occur.
Each Fund intends to distribute its net capital gains as capital gains
dividends. Shareholders should treat such dividends as long-term capital gains.
Each Fund will designate capital gains distributions as such by a written notice
mailed to each shareholder no later than 60 days after the close of the Fund's
taxable year. If a shareholder receives a capital gain dividend and holds his
shares for six months or less, then any allowable loss on disposition of such
shares will be treated as a long-term capital loss to the extent of such capital
gain dividend.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of a Fund will not be deductible for federal income tax
purposes to the extent of the portion of the interest expense relating to
exempt-interest dividends. Such portion is determined by multiplying the total
amount of interest paid or accrued on the indebtedness by a fraction, the
numerator of which is the exempt-interest dividends received by a shareholder in
his taxable year and the denominator of which is the sum of the exempt-interest
dividends and the taxable distributions out of the Fund's investment income and
long-term capital gains received by the shareholder.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
Upon a sale or exchange of Fund shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. A shareholder
must treat such gains or losses as a capital gain or loss if the shareholder
held the shares as capital assets. Capital gain on assets held for more than
twelve months is generally subject to a maximum federal income tax rate of 20%
for an individual.
Generally, the Code will not allow a shareholder to realize a loss on shares he
or she has sold or exchanged and replaced within a sixty-one-day period
beginning thirty days before and ending thirty days after he or she sold or
exchanged the shares. The Code will not allow a shareholder to realize a loss on
the sale of Fund shares held by the shareholder for six months or less to the
extent the shareholder received exempt-interest dividends on such shares.
Moreover, the Code will treat a shareholder's loss on shares held for six months
or less as a long-term capital loss to the extent the shareholder received
distributions of net capital gains on such shares.
Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisors about the applicability of the backup withholding provisions.
OTHER TAX CONSIDERATIONS
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisors regarding specific questions relating to federal,
state and local tax consequences of investing in shares of a Fund. Each
shareholder who is not a U.S. person should consult his or her tax advisor
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
EXPENSES
The table below shows the total dollar amounts paid by each Fund for services
rendered during the fiscal periods specified. For more information on specific
expenses, see "Investment Advisory and Other Services," "Distribution Plans and
Agreements," "Principal Underwriter" and "Purchase, Redemption and Pricing of
Shares."
Investment Advisory Fees
tc \l3 "Investment Advisory Fees
Below are the investment advisory fees paid by each Fund for each fiscal year or
period indicated. For more information, see "Investment Advisors" and A
Investment Advisory Agreements" under "Investment Advisory and Other Services"
above.
Year and Fund Advisory Fee Waiver
1998
High Grade (a) $542,365 0
Short-Intermediate (a) $622,594 $45,432
Municipal (b) $2,410,469 0
1997
High Grade (c) $399,929 $64,199
Short-Intermediate (c) $248,564 $60,003
Municipal (d) $6,029,348 0
1996
High Grade (e) $575,456 $228,548
Short-Intermediate(e) $287,149 $140,581
Municipal (f) $6,642,609 0
(a) Year ended 5/31/98
(b) Five months ended 5/31/98
(c) Nine months ended 5/31/97
(d) Year ended 12/31/97
(e) Year ended 8/31/96
(f) Year ended 12/31/96
12b-1 Fees
Below are the 12b-1 fees paid by each Fund for its respective fiscal year or
period ended 5/31/98. For more information, see "Distribution Plans and
Agreements" under "Investment Advisory and Other Services" above.
Fund
Class A Class B Class C
Distribution Service Distribution Service Distribution Service
Fees Fees Fees Fees Fees Fees
High Grade
$127,730 0 $243,971 $81,324 N/A N/A
Short-
Intermediate
$5,615 0 $47,636 $15,878 N/A N/A
Municipal
$1,157,033 0 $421,288 $284,060 $20,909 $6,970
Underwriting Commissions
Below are the total underwriting commissions paid and underwriting commissions
retained for each fiscal year or period indicated. For more information, see
"Principal Underwriter" above.
Year and Fund Total Underwriting Underwriting
Commissions Commissions Retained
1998
High Grade (a) $2,497,757 $107,759
Short-Intermediate (a) $2,384,015 $18,533
Municipal (b) $1,137,406 $45,491
1997
High Grade (c) $46,714 $6,389
Short-Intermediate (c) $26,752 $3,820
Municipal (d) $1,208,779 $27,849
1996
High Grade (e) $73,014 $9,050
Short-Intermediate(e) $33,816 $8,464
Municipal (f) $2,402,158 $632,014
(a) Year ended 5/31/98
(b) Five months ended 5/31/98
(c) Nine months ended 5/31/97
(d) Year ended 12/31/97
(e) Year ended 8/31/96
(f) Year ended 12/31/96
Brokerage Comissions Paid
Each Fund paid no brokerage commissions during its respective fiscal year or
period ended 1998, 1997 or 1996. For more information, see "Brokerage" above.
PERFORMANCE
Total Return
Total return quotations for a class of shares of a Fund as they may appear from
time to time in advertisements are calculated by finding the average annual
compounded rates of return over one, five and ten year periods, or the time
periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. All dividends and
distributions are added to the initial investment, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
The annual total returns for each class of shares of the Funds (including
applicable sales charges) as of November 30, 1998 are as follows:
Fund One Year Five Years Ten Years or Inception
Since Inception Date
High Grade (1) 2.28% 4.85% 6.54% 2/21/92
Class A
Class B 1.59% 4.80% 6.68% 1/11/93
Class Y 7.66% 6.13% 7.50% 2/28/94
Short-)
Intermediate(2
Class A 1.73% 3.19% 4.43% 1/5/95
Class B (0.91) 2.83% 4.43% 1/5/95
Class Y 5.13% 3.95% 4.99% 7/17/91*
Municipal(3)
Class A 1.37% 4.44% 6.96% 1/20/98
Class B 0.79% 4.76% 6.96% 1/19/78
Class C 4.65% 4.67% 6.54% 1/26/98
(1) Historical performance shown for Classes B and Y prior to their inception is
based on the performance of Class A, the original class offered. These
historical returns for Classes B and Y have not been adjusted to reflect the
effect of each class' 12b-1 fees. These fees for Classes A and B are .25% and
1.00%, respectively. Class Y does not pay a 12b-1 fee. If these fees had been
reflected, returns for Class B would have been lower while returns for Class Y
would have been higher.
(2) Historical performance shown for Classes A and B prior to their inception is
based on the performance of Class Y, the original class offered. These
historical returns for Classes A and B have not been adjusted to reflect the
effect of each class' 12b-1 fees. These fees for Classes A and B are .10% and
1.00 %, respectively. Class Y does not pay a 12b-1 fee. If these fees had been
reflected, returns would have been lower.
(3) Historical performance shown for Classes A and C prior to their
inception is based on the performance of Class B, the original class offered.
The historical returns for Class A have been adjusted to eliminate the effect of
the higher 12b-1 fees applicable to Class B. The 12b-1 fees for Classes A, B and
C are .25%, 1.00%, and 1.00%, respectively. If these fees had not been
eliminated, returns would have been lower.
* Performance calculated since 11/18/91, prior to which Class Y shares of
Short-Intermediate were shares of a money market fund.
Current and Tax Equivalent Yields
Current yield quotations as they may appear from time to time in advertisements
will consist of a quotation based on a 30-day period ended on the date of the
most recent balance sheet of a Fund, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the base period. Such yield will include income from
sources other than municipal obligations, if any. Tax equivalent yield is, in
general, the current yield divided by a factor equal to one minus a stated
income tax rate and reflects the yield a taxable investment would have to
achieve in order to equal on an after-tax basis a tax-exempt yield. For the
30-day period ended November 30, 1998, the current and tax-equivalent yields of
the Funds are shown below. Any given yield or total return quotation should not
be considered representative of the Fund's yield or total return for any future
period.
30-day Yield Tax Equivalent Yield
Fund
Federal Class A Class B Class C Class Y Class A Class B Class C Class Y
Tax Rate(1)
High Grade
39.6% 4.28% 3.52% N/A 4.54% 7.09% 5.83% N/A 7.52%
Short-
Intermediate
39.6% 3.80% 2.92% N/A 3.92% 6.29% 4.83% N/A 6.49%
Municipal
39.6% 4.50% 3.75% 3.74% N/A 7.45% 6.21% 6.19% N/A
(1) Assumed for purposes of this chart. Your tax may vary.
METHOD OF COMPUTING OFFERING PRICE
FOR CLASS A SHARES
Class A shares are sold at the NAV plus a sales charge. Below is an example of
the method of computing the offering price of the Class A shares of each Fund.
The example assumes a purchase aggregating less than $50,000 based upon the NAV
of each Fund's Class A shares as of November 30, 1998. For more information, see
"Purchase, Redemption and Pricing of Shares" above.
Fund Net Asset Value Maximum Per Offering Price Per
Share Sales Charge Share
High Grade $11.26 4.75% $11.82
Short-
Intermediate $10.19 3.25% $10.53
Municipal $7.62 4.75% $8.00
FINANCIAL STATEMENTS
The audited financial statements and the independent auditors' reports thereon
are hereby incorporated by reference to the Funds' Annual Report dated May 31,
1998. In addition, the unaudited financial statements are hereby incorporated by
reference to the Fund's Semiannual Report dated November 30, 1998. This
Semiannual Report is available and may be obtained without charge by writing to
ESC, P.O. Box 2121, Boston, Massachusetts 02106-2121, or by calling ESC
toll-free at 1- 800-343-2898.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectuses or required by law, each
Fund reserves the right to change the terms of the offer stated in its
prospectuses without shareholder approval, including the right to impose or
change fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in a Fund's
prospectuses, SAI or in supplemental sales literature issued by such Fund or the
Distributor, and no person is entitled to rely on any information or
representation not contained therein.
Each Fund's prospectuses and SAI omit certain information contained in
the Trust's registration statement, which you may obtain for a fee from the SEC
in Washington, D.C.
Appendix A
BOND RATINGS
Each Fund relies on ratings provided by independent rating services to help
determine the credit quality of bonds and other obligations a Fund intends to
purchase or already owns. A rating is an opinion of an issuer's ability to pay
interest and/or principal when due. Ratings reflect an issuer's overall
financial strength and whether it can meet its financial commitments under
various economic conditions.
The principal rating services, commonly used by the Funds and investors
generally, are Standard & Poor's Ratings Services (S&P) and Moody's Investors
Service (Moody's). A Fund may also rely on ratings provided by Fitch IBCA, Inc.
(Fitch). Rating systems are similar among the different services. As an example,
the chart below compares basic ratings for long-term bonds. The "Credit Quality"
terms in the chart are for quick reference only. Following the chart are the
specific definitions each service provides for its ratings.
COMPARISON OF LONG-TERM BOND RATINGS
MOODY'S S&P FITCH Credit Quality
Aaa AAA AAA Excellent Quality (lowest risk)
Aa AA AA Almost Excellent Quality (very low risk)
A A A Good Quality (low risk)
Baa BBB BBB Satisfactory Quality (some risk)
Ba BB BB Questionable Quality (definite risk)
B B B Low Quality (high risk)
Caa/Ca/C CCC/CC/C CCC/CC/C In or Near Default
______ D DDD/DD/D In Default
LONG-TERM BOND RATINGS
Moody's Long-Term Bond Ratings
Aaa Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the Aaa securities.
A Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds rated Ba are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa Bonds rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
Ca Bonds rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C Bonds rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody"s applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC, CC, and
C are regarded as having significant speculative characteristics. BB indicates
the least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments.
This capacity is highly unlikely to be adversely affected by foreseeable
events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. DD designates lower recovery
potential and D the lowest.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC.
SHORT-TERM RATINGS
Moody's Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidence by many of the following characteristics.
- -- Leading market positions in well-established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
- -- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Moody's Short-Term Loan Ratings
MIG 1 This designation denotes best quality. There is strong protection by
established cash flows, superior liquidity support, or demonstrated broad-based
access to the market for refinancing.
MIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3 This designation denotes favorable quality. Liquidity and cash-flow
protection may be narrow and market access for refinancing is likely to be less
well established.
SG This designation denotes speculative quality. Debt instruments in this
category may lack margins of protection.
S&P Commercial Paper Ratings
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated B are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated D is in payment default. The D rating category is used when
interest payments of principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
S&P Short-Term Obligation Ratings
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
Fitch Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added A+@ to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
A-8
Mentor Funds
---------------
Annual Report
---------------
September 30, 1998
[Mentor Logo]
<PAGE>
MENTOR FUNDS
ANNUAL REPORT
TABLE OF CONTENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
------------------
<S> <C>
Message from the Chairman and President ................. 1
Growth Portfolio ........................................ 3
Global Portfolio ........................................ 14
Capital Growth Portfolio ................................ 28
Strategy Portfolio ...................................... 35
Income and Growth Portfolio ............................. 44
Balanced Portfolio ...................................... 54
Municipal Income Portfolio .............................. 63
Quality Income & Short-Duration Income Portfolios ....... 73
High Income Portfolio ................................... 88
Notes to Financial Statements ........................... 97
Shareholder Information ................................. Inside back cover
</TABLE>
<PAGE>
MENTOR FUNDS
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
On behalf of all the associates at the Mentor Investment Group, we would like
to take this opportunity to thank you for your investment in the Mentor Family
of Funds. This Annual Report reaffirms our commitment to our shareholders and
details the financial performance of the Mentor Family of Funds for the period
ended September 30, 1998.
Founded in 1970, Mentor Investment Group is an investment advisory firm with
more than $13 billion under management. We pride ourselves on a strong heritage
of providing quality service and a variety of investment choices that help meet
our shareholders' financial objectives by offering mutual funds and
separately-invested portfolios.
In the commentaries that follow, Mentor's investment teams present insightful
perspectives on the markets and strategies that shaped their investment
decisions for the past fiscal year.
During this year, Mentor capitalized on its ability to bring products to new
market to serve the needs of our investors. Specifically, two funds were
introduced to our retail investors. The Mentor Balanced Portfolio is designed
to help investors seek capital growth and current income through investment in
fixed income and equity securities. The Mentor High Income Portfolio was
developed to seek high current income as well as capital appreciation by
tapping the potential of high yield bonds.
MENTOR INVESTMENT GROUP*
[Graph]
Six Investment Styles
Small-Capitalization Growth
Global/International Growth Equity
Large-Capitalization Quality Growth
Balanced Management
Active Fixed Income
Cash Management
* Mentor Investment Advisors, LLC is a wholly-owned subsidiary of Mentor
Investment Group, LLC
1
<PAGE>
MENTOR FUNDS
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
SEPTEMBER 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
With a commitment to excellence in investing, Mentor meets the challenges of
product expansion by focusing on clarity, simplicity, and efficiency. Our
investment teams operate with these priorities:
FOCUS -- In most money management companies, each investment manager has
multiple responsibilities. At Mentor, our investment managers are singularly
focused on enhancing the value of the portfolios. This means that you can be
assured of a consistent, proven approach to developing a winning financial
strategy.
OPPORTUNITIES -- By offering six different management styles, portfolio
diversification is simplified. By offering multiple styles, Mentor gives
investors the tools for long-term investment success through diversification
and accommodation of changing investment needs.
SERVICE -- To help serve our shareholders, Mentor has a dedicated Investor
Relations Center. Our Relationship Coordinators are professionally trained and
licensed to serve clients' needs.
TECHNOLOGY -- Abreast of the most advanced technology and using the latest
analytical tools, our investment managers have the ability to survey the
financial markets and make informed decisions about the best place to invest.
We at Mentor are honored to be a partner in the management of your financial
assets. Mentor Investment Group provides diversified investment styles and
services to over one million shareholders. We serve individuals, corporations,
endowments, foundations, public funds, and municipalities. To learn more about
Mentor, please contact your consultant or us at (800) 382-0016.
We look forward to making the Mentor formula work for you and to a mutually
beneficial relationship.
Sincerely,
/s/ Daniel Ludeman /s/ Paul F. Costello
Daniel J. Ludeman Paul F. Costello
CHAIRMAN PRESIDENT
[Mentor 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
<PAGE>
MENTOR GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The 12 months ended September 30, 1998 were particularly difficult ones for
small-cap. managers. The Mentor Growth Portfolio suffered along with most
managers. The problems began late in the third quarter of 1997 as the Far East
economic situation began to deteriorate and investors worried about the
eventual impact of this on the U.S. economy. Fear in the financial markets
often leads to a flight to perceived or real safety and investors fled
small-caps for bonds and large-cap. stocks. Proof of this lay in the Russell
2000's negative 3.4% return in the fourth quarter of 1997 versus the S&P 500's
2.9% gain.
In the first and second quarters of 1998 the relative performance of small-caps
remained much the same as the final quarter of 1997. Small-cap. growth stocks,
in spite of very strong earnings results continued to under perform their
large-cap. brethren. By mid-year 1998 the forward P/E of the Mentor Growth
Portfolio (based on the next 12 months earnings) for only the second time in
its history, was at a discount to the P/E of the S&P 500.
In the third quarter of 1998, matters seemed to come to a head as small-caps as
represented by the Russell 2000 were down 16.2% year-to-date and 19% for the
trailing 12 months. The S&P 500 return for the trailing 12-month period was
9.1%, emphasizing the disparate market returns. It is particularly interesting
to review where the strength in the market was on a capitalization basis as
shown below.
<TABLE>
<CAPTION>
AVERAGE YTD NUMBER
BY CAPITALIZATION DECLINE (1/1/98-9/30/98) OF ISSUES
- --------------------- -------------------------- ----------
<S> <C> <C>
$250 million (28.6%) 5,757
$250-2 Billion (25.1%) 1,905
$2-5 Billion (19.3%) 372
$5-20 Billion (8.9%) 316
>$20 Billion 2.06% 138
</TABLE>
What is interesting from these numbers is the fact that the only group that
seemed to attract much buying interest was the very small group of stocks over
$20 billion in market capitalization. The vast predominance of stocks under $2
billion in capitalization were hammered in performance terms.
The flight to perceived investment safety, as illustrated above and caused
largely by the worry over the Asian (and later Russian and South American)
economic contagion, continued to impact small-caps despite the fact that this
sector of the world would have little if any influence on the profit prospects
of small-cap. stocks whose operations are mainly domestic. It is also
interesting to note that as Mentor Growth Portfolio's small-caps stocks were
being penalized by the market, these same companies were reporting superb
earnings results for the second quarter. 84% of the Portfolio's holdings
reported earnings that were in line with or better that the consensus
expectation. Growth rates for earnings averaged 35% over the year ago period.
These results followed on the heels of more than 85% positive or as expected
earnings results in the first quarter and earnings growth rates exceeding 30%.
In view of the unusual deterioration of small-cap. stock prices, it may be
helpful to examine these recent events within a broader historical context.
History has illustrated time and again, that small-cap. stocks tend to discount
economic events by as much as six to nine months. The economic and market
events of 1989 to 1991 were a case in point.
The last time small-cap. valuations suffered as they have this year was the
crash of 1990. Small-caps under performed larger companies throughout the
latter part of 1989 and then through the bulk of
3
<PAGE>
MENTOR GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
1990. This was a period leading up to a recession, which officially began in
the third quarter of 1990 and lasted through the first quarter of 1991. A
recession is simple to identify in hindsight but extremely difficult to predict
or identify definitively at the time it is taking place. The only hint of
slowing economic growth that we had in 1990 was from late summer conversations
with a number of our companies where management expressed concerns that
business trends were slowing from the robust levels earlier in the year.
What makes the above review interesting is the action of our portfolio during
that period. The Mentor Growth Portfolio declined by nearly 30% from September
through the end of October of 1990, the period marking the beginning of the
1990 recession. In late October and early November the stocks in the Portfolio
bottomed out and began what would become a very strong upward move. Between
October 1990 and August 1991, the Portfolio gained over 74%, easily erasing the
declines of the previous year. This upward trend continued until mid-1994,
rewarding patient holders with excellent returns.
During 1998, we have remarked periodically that the spread between the
performance of large and small companies may be forecasting a coming economic
slowdown. This type of flight to the perceived quality of large-capitalization
stocks is often associated with such times. And for the first time since the
economic expansion of the 1990s began, a small group of economic forecasters
are suggesting the possibility of negative economic growth or recession.
With the third quarter now over and earnings about to be reported for our
companies, we are guardedly optimistic about the pending results. There are
many companies in the portfolio that we know will report very good earnings,
and there are a smaller number that we suspect will not meet analysts'
estimates. However, we also believe that with the P/E of the Portfolio
currently at less than 13 times estimated 1999 earnings results, much of a
pending slowdown in earnings growth expectations is already reflected in our
stocks. It does seem likely that the 30% growth rate in earnings which is
projected for our companies will contract somewhat as analysts become less
enthusiastic over the next year, much as happened as we entered the
recessionary period of 1990 and 1991. However, particularly when compared to
the anemic 2% growth in earnings presently projected for the S&P 500, we
continue to believe that small-caps. represent a compelling value. We believe
that on the whole, the companies in the Portfolio are excellent ones and as the
unknowns of a possible recession become better recognized, the market will once
again recognize the outstanding investment characteristics of these companies.
November 1998
4
<PAGE>
MENTOR GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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 9425 10000
9/30/95 11251 11557
9/30/96 14640 13076
9/30/97 18418 17416
9/30/98 14352 14103
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception+++
Class A (26.57%) 11.47%
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 9/30/98.
5
<PAGE>
MENTOR GROWTH PORTFOLIO
SEPTEMBER 30, 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
9/30/88 10000 10000
12/31/88 8737 8860
12/31/89 10252 10835
12/31/90 9096 8290
12/31/91 13667 12108
12/31/92 15796 14337
12/31/93 18260 17048
12/31/94 17443 16737
9/30/95 23042 21041
9/30/96 29535 23804
9/30/97 36817 31706
9/30/98 32972 28788
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year 10-Year
Class B (25.53%) 9.87% 8.19%
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 value of the Class B Shares reflects a redemption fee in
effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
6
<PAGE>
MENTOR GROWTH PORTFOLIO
SEPTEMBER 30, 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 Shares Russell 2,000
11/19/97 10000 10000
12/31/97 10021 10109
3/31/98 11314 11126
6/30/98 10713 10607
9/30/98 8301 8470
Total Returns as of 9/30/98
1-Year Since Inception++
Class Y n/a (18.36%)
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 9/30/98.
7
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 84.17%
CAPITAL GOODS & CONSTRUCTION - 3.67%
Conrad Industries, Inc. * 225,700 $ 1,495,262
Denali, Inc. * 180,950 2,442,825
Motivepower Industries, Inc. * 282,500 6,603,437
Pentacon, Inc. * 159,500 1,016,813
Rental Service Corporation * 237,900 4,282,200
Waste Industries, Inc. * 95,750 1,986,812
-----------
17,827,349
-----------
CONSUMER CYCLICAL - 14.81%
Cadmus Communications
Corporation 192,900 3,761,550
Central Garden & Pet
Company * 237,200 4,388,200
Chancellor Media
Corporation * 110,950 3,702,956
Chattem, Inc. 121,100 3,307,544
Clear Channel
Communications 113,712 5,401,320
Dollar General Corporation 105,116 2,798,720
Dollar Tree Stores, Inc. * 136,575 4,276,505
Fairfield Communities, Inc. * 239,450 2,394,500
Family Dollar Stores 348,900 5,495,175
Galey & Lord, Inc. * 171,700 2,049,669
Keystone Automotive
Industries, Inc. * 303,300 5,990,175
Lamar Advertising Company * 111,300 3,116,400
Mail Well Holdings, Inc. * 76,300 653,319
Media Arts Group, Inc. * 190,300 1,736,487
Metro Networks, Inc. * 75,600 2,768,850
Outdoor Systems, Inc. * 469,589 9,156,986
Papa John's
International, Inc. * 112,500 3,712,500
SCP Pool Corporation * 253,075 3,289,975
Suburban Lodges of America * 195,150 1,305,066
Travel Services
International, Inc. * 198,250 2,688,766
-----------
71,994,663
-----------
CONSUMER STAPLES - 5.70%
Celestial Seasonings, Inc. * 154,800 2,341,350
Natrol, Inc. * 171,900 1,525,612
Omega Protein Corporation * 158,000 878,875
Rexall Sundown, Inc. * 196,700 3,036,556
Richfood Holdings, Inc. 274,725 4,223,897
Twinlab Corporation * 117,000 2,998,125
US Foodservice * 151,100 6,289,537
Wild Oats Markets, Inc. * 112,300 3,046,137
Whole Foods Market, Inc. * 80,050 3,372,106
-----------
27,712,195
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ENERGY - 2.14%
Core Laboratories N.V. * 340,500 $ 5,873,625
Global Industries, Limited * 265,850 3,073,891
Unifab International, Inc. * 140,000 1,470,000
-----------
10,417,516
-----------
FINANCIAL - 7.28%
Concord EFS, Inc. * 351,316 9,068,344
Hibernia Corporation -
Class A 196,000 2,829,750
Markel Corporation * 66,360 10,119,900
National Commerce
Bancorporation 424,834 7,009,761
NOVA Corporation * 208,423 6,395,965
-----------
35,423,720
-----------
HEALTH - 19.18%
American Dental
Partners, Inc. * 68,600 591,675
Assisted Living
Concepts, Inc. * 132,600 1,881,262
Brookdale Living
Communities * 213,800 4,489,800
Curative Health
Services, Inc. * 185,450 5,679,406
Express Scripts, Inc. -
Class A * 77,300 6,357,925
Health Management
Associates, Inc. * 310,061 5,658,613
Henry Schein, Inc. * 120,250 4,178,687
Mecon, Inc. * 184,600 1,384,500
Medquist, Inc. * 217,050 6,864,206
Molecular Devices
Corporation * 232,000 3,973,000
Monarch Dental
Corporation * 113,000 1,490,187
NCS Healthcare, Inc. -
Class A * 131,350 2,315,044
Omnicare, Inc. 140,660 4,958,265
Osteotech, Inc. * 190,450 5,046,925
Pharmaceutical Product
Development * 117,450 3,288,600
Priority Healthcare
Corporation - Class B * 120,700 2,761,013
Province Healthcare
Company * 222,700 7,585,719
QuadraMed Corporation * 201,400 4,053,175
Serologicals Corporation * 376,050 9,448,256
Sunrise Assisted Living, Inc. * 175,200 6,011,550
United Payors &
Providers, Inc. * 171,450 3,343,275
Wesley Jessen Visioncare, Inc. * 90,000 1,912,500
-----------
93,273,583
-----------
</TABLE>
8
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY - 18.23%
ADE Corporation * 246,400 $2,402,400
Applied Micro Circuits * 135,100 2,009,612
Aspect Development, Inc. * 54,050 2,128,219
ATMI, Inc. * 147,950 2,052,806
Benchmark Electronics, Inc. * 289,440 6,602,850
Billing Concepts
Corporation * 214,350 3,000,900
Black Box Corporation * 111,350 2,700,237
C&D Technologies, Inc. 150,600 3,595,575
Carrier Access Corporation * 30,100 538,037
Cerprobe Corporation 278,800 3,066,800
CSG Systems
International, Inc. * 119,600 5,292,300
Cumulus Media - Class A * 220,550 1,791,969
E.spire Communications, Inc. * 196,600 1,769,400
FORE Systems, Inc. * 196,400 3,265,150
Genesis Microchip, Inc. * 25,000 235,937
ICG Communications * 167,500 2,826,562
ITC DeltaCom * 209,100 4,338,825
Medialink Worldwide, Inc. * 180,000 3,015,000
Network Appliance, Inc. * 37,100 1,878,187
Optek Technology, Inc. * 222,900 3,956,475
Parlex Corporation * 219,950 2,020,791
PCD, Inc. * 216,200 2,702,500
Powerwave Technologies,
Inc. * 158,300 1,345,550
PRI Automation, Inc. * 238,800 2,985,000
RF Micro Devices, Inc. * 163,400 2,961,625
SCB Computer
Technology, Inc. * 498,150 3,860,663
Segue Software, Inc. * 223,000 3,679,500
Sipex Corporation * 239,500 6,077,313
Speedfam International, Inc. * 236,700 2,544,525
World Access, Inc. 197,750 4,004,438
----------
88,649,146
----------
TRANSPORTATION - 6.05%
Atlantic Coast Airlines, Inc. * 222,750 5,206,781
Carey International, Inc. * 107,850 1,617,750
Coach USA, Inc. * 180,350 4,452,391
Comair Holdings, Inc. 190,225 5,468,969
Covenant Transport, Inc. -
Class A * 217,700 2,476,338
Hunt (JB) Transportation
Services, Inc. 86,850 1,259,325
Mesaba Holdings, Inc. 379,775 5,506,738
M.S. Carriers, Inc. * 89,850 1,785,769
US Xpress Enterprises -
Class A * 135,650 1,661,713
----------
29,435,774
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MISCELLANEOUS - 7.11%
ABR Information
Services, Inc. * 130,500 $ 1,786,219
AccuStaff, Inc. * 145,635 2,120,810
AHL Services, Inc. * 261,050 8,549,388
Butler International, Inc. * 150,600 3,002,588
Gulf Island Fabrication, Inc. * 184,350 3,133,950
Kulicke & Soffa Industries,
Inc. 186,400 2,493,100
Meta Group, Inc. * 76,750 2,508,766
NFO Worldwide, Inc. * 188,750 1,875,703
Rock of Ages Corporation * 129,800 1,444,025
Romac International, Inc. * 186,667 3,360,006
Select Appointments
Holding~ 133,850 2,325,644
StaffMark, Inc. * 106,850 1,950,013
------------
34,550,212
------------
TOTAL COMMON STOCKS
(COST $392,590,559) 409,284,158
------------
SHORT-TERM INVESTMENT - 14.75%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$72,638,658 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$73,365,044 (cost
$71,719,983) $71,719,983 71,719,983
------------
TOTAL INVESTMENTS
(COST $464,310,542)-98.92% 481,004,141
OTHER ASSETS LESS LIABILITIES - 1.08% 5,256,518
------------
NET ASSETS - 100.00% $486,260,659
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
9
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $476,835,969 and $493,255,955, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $465,111,603. Net unrealized appreciation aggregated
$15,892,538, of which $88,762,155, related to appreciated investment securities
and $72,869,617, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $409,284,158
Repurchase agreements 71,719,983
------------
Total investments
(cost $464,310,542) 481,004,141
Collateral for securities
loaned (Note 2) 115,219,699
Receivables
Investments sold 9,099,966
Fund shares sold 958,924
Dividends and interest 60,844
Other 74,079
------------
TOTAL ASSETS 606,417,653
------------
LIABILITIES
Payables
Investments purchased $ 1,944,829
Securities loaned (Note 2) 115,219,699
Fund shares redeemed 2,791,991
Accrued expenses and other
liabilities 200,475
-----------
TOTAL LIABILITIES 120,156,994
------------
NET ASSETS $486,260,659
============
Net Assets represented by: (Note 2)
Additional paid-in capital $451,922,136
Accumulated undistributed
net investment income -
Accumulated net realized
gain on investment
transactions 17,644,924
Net unrealized appreciation
of investments 16,693,599
------------
NET ASSETS $486,260,659
============
NET ASSET VALUE PER SHARE
Class A Shares $ 14.60
Class B Shares $ 14.18
Class Y Shares $ 14.63
OFFERING PRICE PER SHARE
Class A Shares $ 15.49 (a)
Class B Shares $ 14.18
Class Y Shares $ 14.63
SHARES OUTSTANDING
Class A Shares 5,323,225
Class B Shares 27,027,617
Class Y Shares 1,732,865
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 524,466
Interest 3,725,963
-------------
TOTAL INVESTMENT
INCOME (NOTE 2) 4,250,429
EXPENSES
Management fee (Note 4) $ 4,204,377
Distribution fee (Note 5) 3,638,580
Shareholder service fee
(Note 5) 1,489,460
Transfer agent fee 800,563
Administration fee (Note 4) 600,625
Shareholder reports and
postage expenses 142,288
Registration expenses 130,378
Custodian and accounting fees 84,516
Legal fees 22,254
Directors' fees and expenses 17,864
Audit fees 12,320
Organizational expenses 8,526
Miscellaneous 61,523
------------
Total expenses 11,213,274
-------------
NET INVESTMENT LOSS (6,962,845)
-------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on
investments (Note 2) 37,565,972
Change in unrealized
appreciation on investments (173,567,460)
------------
NET LOSS ON INVESTMENTS (136,001,488)
-------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(142,964,333)
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment loss $ (6,962,845) $ (6,118,383)
Net realized gain on investments 37,565,972 35,210,825
Change in unrealized appreciation on investments (173,567,460) 90,598,141
-------------- -------------
Increase (decrease) in net assets resulting from operations (142,964,333) 119,690,583
-------------- -------------
Distributions to Shareholders
From net realized gain on investments
Class A (6,599,466) (5,768,516)
Class B (31,307,757) (52,589,913)
Class Y (10) -
-------------- -------------
Total distributions to shareholders (37,907,233) (58,358,429)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 313,753,597 168,560,541
Reinvested distributions 36,935,409 57,233,448
Cost of shares redeemed (294,819,420) (87,713,664)
-------------- -------------
Change in net assets resulting from capital share transactions 55,869,586 138,080,325
-------------- -------------
Increase (decrease) in net assets (125,001,980) 199,412,479
Net Assets
Beginning of year 611,262,639 411,850,160
-------------- -------------
End of year $ 486,260,659 $ 611,262,639
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (b)
<S> <C> <C> <C> <C>
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 (0.12) ( 0.17) (0.10) ( 0.01)
Net realized and unrealized gain (loss) on investments (4.03) 4.19 4.23 2.72
-------- --------- -------- ----------
Total from investment operations (4.15) 4.02 4.13 2.71
-------- --------- -------- ----------
Less distributions
From capital gains (1.19) (2.55) (1.74) -
-------- --------- -------- ----------
Net asset value, end of period $ 14.60 $ 19.94 $ 18.47 $ 16.08
======== ========= ======== ==========
TOTAL RETURN* (22.08%) 25.81% 29.15% 20.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 77,720 $ 105,033 $ 40,272 $ 20,368
Ratio of expenses to average net assets 1.26% 1.28% 1.28% 1.36% (a)
Ratio of net investment loss to average net assets (0.56%) (0.67%) (0.39%) (0.65%)(a)
Portfolio turnover rate 88% 77% 105% 70%
Average commission rate on portfolio transactions $ 0.0658 $ 0.0651 $ 0.0602
</TABLE>
(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.
12
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.53 $ 18.29 $ 16.05
-------- --------- ---------
Income from investment operations
Net investment loss (0.23) (0.22) (0.17)
Net realized and unrealized gain (loss) on
investments (3.93) 4.01 4.15
-------- --------- ---------
Total from investment operations (4.16) 3.79 3.98
-------- --------- ---------
Less distributions
From capital gains (1.19) (2.55) (1.74)
-------- --------- ---------
Net asset value, end of period $ 14.18 $ 19.53 $ 18.29
======== ========= =========
TOTAL RETURN* (22.62%) 24.66% 28.18%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 383,188 $ 506,230 $ 371,578
Ratio of expenses to average net assets 2.01% 2.03% 2.03%
Ratio of net investment loss to average net assets (1.30%) (1.42%) (1.13%)
Portfolio turnover rate 88% 77% 105%
Average commission rate on portfolio transactions $ 0.0658 $ 0.0651 $ 0.0602
<CAPTION>
PERIOD YEAR YEAR
ENDED ENDED ENDED
9/30/95 (b) 12/31/94 12/31/93
<S> <C> <C> <C>
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 capital gains -- (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
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (c)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.12
---------
Income from investment operations
Net investment loss (0.02)
Net realized and unrealized loss on investments (3.28)
-----------
Total from investment operations (3.30)
-----------
Less distributions
From capital gains (0.19)
-----------
Net asset value, end of period $ 14.63
===========
TOTAL RETURN* (18.36%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 25,353
Ratio of expenses to average net assets 1.01% (a)
Ratio of net investment loss to average net assets (0.04%)(a)
Portfolio turnover rate 88%
Average commission rate on portfolio transactions $ 0.0658
</TABLE>
(a) Annualized.
(b) For the period from January 1, 1995 to September 30, 1995.
(c) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
MARKETS REVIEW
The 12-month period ended September 30, 1998 marked a turbulent period for
world markets. For the period the Mentor Perpetual Global Portfolio A shares
returned (4.97%) while the B shares returned (5.65%), exclusive of sales
charges. This compares favorably to the (7.57%) average return for its Lipper
Global Funds peer group. This performance placed both share classes in the 2nd
quartile of that Lipper category. The Portfolio's Morgan Stanley World Index
benchmark returned 0.51% for the period due to its overweighting in Japan as
compared to most managers, including Mentor.
UNITED STATES
The year began with the U.S. enjoying healthy economic growth, subdued
inflation and rising corporate profits. The market began to run out of steam,
however, during the second quarter of 1998 as investors became somewhat nervous
about the effect of the Asian economic collapse on U.S. corporate earnings
growth and concerns that the strength of the domestic economy might provoke
tightening by the Federal Reserve. Mid- and small-cap. stocks fell increasingly
out of favor, despite their higher expected growth rates, and significantly
trailed their larger counterparts. A significant factor behind this phenomenon
was the increasing nervousness of U.S. retail investors who sought reassurance
by buying very large, well-known companies. Despite this, we remain reluctant
to buy the mega-cap. stocks where valuations bear no rational relationship to
current or foreseeable earnings.
The Federal Reserve, through its chairman, has already voiced its concern over
the possible effects of international turmoil on financial markets and the U.S.
economy. Interest rates have already been cut twice by 25 basis points,
liquidity is being injected into U.S. money markets, and there are strong
expectations of more rate cuts to come. As always, the question for investors
is what exactly has been priced into the market. Intense focus on a very small
range of very large companies has largely obscured the fact that most stocks
have already experienced a substantial bear market. For much of the U.S. equity
market, the gloomy prognostications of economic slowdown and earnings
stagnation have largely been discounted. Indeed, relative to the market as a
whole, small- and mid-cap. stocks stand at historically low valuations, raising
the possibility that sharp reductions in interest rates and massive increases
in money supply could herald a rerun of the 1989-1992 bull-run in this sector.
UNITED KINGDOM
In common with equity markets worldwide, the U.K. sharply corrected early in
the fourth quarter of 1997. However, in November, despite an unexpected 0.25%
rise in interest rates, the market rallied and continued to move forward
strongly through the end of the first quarter 1998. In June, the Monetary
Policy Committee (MPC) surprised many by raising interest rates a further 0.25%
to 7.5%. Almost coincidentally, stronger than expected numbers for inflation,
average earnings growth, and retail spending prompted fears of yet another rise
in U.K. interest rates. In common with other world equity markets, the U.K. has
seen recent indiscriminate declines and opinion appears to have shifted towards
expectation of a hard landing -- or technical recession -- later in 1998. The
corporate sector today enjoys robust financial strength and any downturn is
unlikely to be as severe as the stock market is suggesting. With growing
international pressure for cuts in Western interest rates, coupled with
weakening domestic economic data and recent downward revisions to wages growth,
future interest
14
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
rate cuts seem likely. With venture capitalists and directors already taking
active advantage of current low valuations among small- and mid-cap. stocks,
with U.K. interest rates set to fall farther, and with weaker sterling
providing support to exports and protection against imports, we find ourselves
more positive than the consensus about prospects for the U.K. equity market.
CONTINENTAL EUROPE
Early in the fourth quarter of 1997, Asia's deepening travails provoked
corrections to European markets. However, a strong bounce in December 1997
extended into a rally that continued well into the first quarter of 1998. By
the end of the first quarter, equity markets, supported by cross-border mergers
and acquisitions, corporate restructuring, low interest rates, and strong
mutual funds inflows, had reached new record highs. Despite sharp corrections
in April and June on concerns over renewed turmoil in Asia and a possible rise
in core European interest rates, European equity markets generally continued
their strong upward progress throughout the second quarter. However, in the
final weeks of the third quarter, European markets, already uneasy over growing
signs of a downturn in exports and hesitancy in Germany's economic recovery,
fell prey to the same global issues affecting other Western equity markets and
corrected sharply.
It seems increasingly likely that the EMU's interest rate will be set at a
fairly low level. Lower interest rates among Europe's peripheral countries will
provide added support for their economies and equity markets. We expect the
recent extreme market volatility to continue as the leverage that has built up
in markets unwinds. This outlook is clouded by the as yet unquantifiable
effects of international financial turmoil and the credit crunch resulting from
extreme risk aversion within international capital markets. The disorderly
markets and indiscriminate selling of recent months has introduced a number of
significant valuation anomalies, and suggests that investment on the basis of
fundamental analysis should be rewarded once order and a measure of calm
returns to the market place.
JAPAN
In October 1997, the collapse of Asian currencies and equity markets provoked a
sharp correction in the Japanese equity market. In January 1998, the market
rallied strongly on hopes of successful action by the government to stimulate
the domestic economy. However, as the first quarter of 1998 progressed,
optimism gave way to resigned gloom as the government once more proved
incapable of revitalizing an economy that was slipping back into recession, and
the equity market drifted resignedly downward.
For some time, economic statistics have been universally and unremittingly
dire. The manufacturing sector has been shedding labor for the last five years,
and this has now spread to the service sector. Production, productivity and
real wages are all declining steeply, capacity utilization has fallen off a
cliff, and wholesale prices are collapsing. The recent dramatic strengthening
of the yen relative to the U.S. dollar, however, coupled with an unexpected
political consensus, has provided the government with a window of opportunity.
They can create massive new liquidity as part of the vital rehabilitation of a
banking system which is suffocating under a mountain of unrepayable loans to
failed property companies and bankrupt Asian corporations. Recession is forcing
corporate restructuring, and a new focus on shareholder value is sowing the
seeds of Japan's next bull market. However, shorter term, this
15
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
is likely to mean higher unemployment, further depressing consumer confidence
and deepening the severity of Japan's economic contraction.
ASIA
Asian markets plunged during October 1997, as currencies throughout the region
buckled, revealing extreme levels of government and corporate foreign debt. At
the same time, investor confidence was further undermined by ineffective,
inappropriate, and occasionally ill-considered responses by regional
governments. From mid-January, markets and currencies bounced dramatically from
their oversold lows and, despite unhappiness at the austerity involved, South
Korea and Thailand made valuable initial progress in implementing IMF reform
programs. However, in April 1998, increasing unrest in Indonesia and the
prospect of serious political and economic instability sparked renewed
region-wide concerns. Regional currencies and equity markets sank throughout
the remainder of the second quarter. A rapidly escalating financial crisis in
Russia, followed by effective default on its sovereign debt, triggered a
massive worldwide flight to quality and profound risk aversion. Investor
confidence in emerging markets, already weak, evaporated, and Asia's equity
markets sank to new lows.
Little real progress has been made in restructuring the region's commercial,
financial, or legal infrastructure. Regionally, any progress in achieving
long-lasting and soundly-based economic recovery remains severely hampered by a
mountainous burden of foreign debt. Although there appears to be a growing
acceptance amongst G-7 banks and politicians that, faced with a choice between
forgiveness or default, the former is likely to prove more rewarding, actual
implementation is likely to prove both difficult and protracted. In the
meantime, the potential for further civil unrest and political uncertainty
suggest that markets are likely to remain volatile and that, at present levels,
optimism has already been discounted and further upside potential -- at least
in the medium term -- is limited.
LATIN AMERICA
In October 1997, the collapse of Asian currencies and equity markets triggered
dramatic declines in Latin American equity markets, with investors particularly
concerned over possible devaluation of the Brazilian currency. Prompt action by
the Brazilian authorities in raising interest rates to punitively high levels,
and instituting government spending reforms resulted in a successful defense of
the currency. Brazil's privatization program remained on course, and fading
concerns over the stability of the currency allowed the government to wind down
interest rates gradually, although these remained at high levels. In April
1998, renewed turmoil in Asia triggered affected investor confidence in
emerging markets worldwide, and Latin America's equity markets sank throughout
the remainder of the second quarter.
A brief rally in Asia fed through to Latin American equity markets but, in the
closing months of the period under review, financial disarray in Russia, and
fears over worldwide contagion, effectively destroyed the last vestiges of
investor confidence in emerging markets. The ensuing `flight to quality' sent
Latin American equity markets tumbling past their earlier New Year lows.
The region continues to suffer from investor concern over fiscal imbalances,
with deficits in both government expenditure and trade accounts. The latter
have, in part, been due to weak commodity prices, but much has been the product
of strong
16
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
domestic growth that has sucked in imports. The re-election of President
Cardoso has raised hopes that, together with support from international lending
institutions, Brazil's government will be able to institute the fiscal reforms
necessary to restore confidence in the country's currency. This could provide
something of a role model for other Latin American countries, such as
Argentina, Chile and Mexico, also experiencing trade deficits and fiscal
imbalances.
November 1998
17
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
SEPTEMBER 30, 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]
Morgan Stanley A Shares B Shares
3/29/94 10000 9425 10000
9/30/94 10546 9982 9487
9/30/95 12125 10655 10587
9/30/96 13846 12501 12677
9/30/97 17256 15200 15668
9/30/98 17344 14445 14580
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception++
Class A (10.44%) 8.50%
Class B (9.23%) 8.89%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* MSCI World Index is an arithmetic average, weighted by market value, of the
performance of approximately 1,450 securities listed on the stock
exchanges of 20 countries including the U.S., Europe, Canada, Australia,
New Zealand, and the Far East. The average company in the index has a
market capitalization of about $3.5 billion. This is a total return index
with gross dividends reinvested. MSCI World Index is not adjusted to
reflect reinvestment of dividends on securities in the index, and is not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class 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.
~ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period
following the date of purchase. The value of the Class B Shares reflects a
redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
++ 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
9/30/98.
18
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
SEPTEMBER 30, 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]
MSCI World Inc Class Y Shares
11/19/97 10000 10000
12/31/97 10278 10304
3/31/98 11832 11791
6/30/98 11714 12041
9/30/98 10187 10608
Total Returns as of 9/30/98
1-Year Since Inception++
Class Y Shares n/a 1.60%
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.
* 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 9/30/98.
19
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 88.49%
ARGENTINA - 0.10%
Perez Company SA~ 4,437 $ 36,609
Telecom Argentina SA~ 2,100 62,344
Telefonica de Argentina SA~ 2,020 59,464
----------
158,417
----------
AUSTRIA - 0.34%
Bank Austria AG 14,000 535,988
----------
BELGIUM - 1.18%
Cofinimmo 7,576 920,068
Fortis AG 1,550 382,327
G.I.B. Group SA 11,200 557,400
----------
1,859,795
----------
BRAZIL - 0.33%
Cemig CIA Energetic~ (a) 1,700 37,593
CIA Brasil Petro Ipiranga 4,900,000 31,374
Companhia Cervejaria
Brahma- 3,500 27,344
Companhia Vale do Rio Doce~ 2,450 35,140
Compania Paulista de Forca e
Luz 370,000 30,589
Electrobras - Centrais Eletricas
Brasileiras SA 2,930 32,507
Electropaulo Metropolitana -
Electricidade de Sao Paulo SA 690,000 35,443
Pao de Acucar# 2,630,000 34,611
Petroleo Brasileiro SA~ 2,520 25,833
Telecomonicacoes
Brasileiras SA~ 2,030 142,988
Telecomunicacoes de Sao
Paulo SA 240,000 34,824
Telecomunicacoes de
Minas Gerais 1,130,000 40,037
Telerj Celular SA* 240,000 10,326
----------
518,609
----------
CHILE - 0.09%
Chilectra SA~ 3,450 56,411
Embotelladora Andina SA~* 1,200 16,500
Enersis SA~ 1,500 30,563
Telecomunicaciones de Chile~ 1,700 32,513
----------
135,987
----------
CHINA - 0.25%
Heilongjiang Electric Power
Company 180,000 66,600
Huaneng Power International,
Inc. - Class A~* 15,000 153,750
Yanzhou Coal Mining
Company 1,000,000 174,216
----------
394,566
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINLAND - 1.49%
Huhtamaki 7,472 $ 230,812
Metra Oyj - Class B 38,220 744,472
Nokia Oyj - Class A 17,410 1,383,894
----------
2,359,178
----------
FRANCE - 7.04%
Accor SA 5,000 1,049,463
Atos SA 5,230 931,443
Axa 10,940 1,002,522
Casino Guichard Perrachn 7,350 741,814
Compagnie de Saint - Gobain 3,250 431,352
Colas 1,730 329,121
Comptoirs Modernes 1,320 825,280
Elf Aquitaine SA 10,400 1,283,721
Entrelec 12,000 531,609
Genset SA~* 30,000 772,500
ISIS 5,460 370,626
SEB SA 1,270 98,821
Serp Recyclage 3,039 295,317
Societe Generale D'Enterprises 12,610 471,909
Total SA - Class B 8,450 1,065,664
Vivendi 4,760 948,922
----------
11,150,084
----------
GERMANY - 5.41%
Allianz AG 3,785 1,172,150
Ava Allg Handels Der Verbrau 3,400 1,384,887
Porsche AG 805 1,408,009
Prosieben Media AG 12,650 697,116
Sauer, Inc. 34,050 270,272
Siemens AG 13,850 757,438
Veba AG 35,920 1,864,742
Viag AG 1,550 1,014,331
----------
8,568,945
----------
GREAT BRITAIN - 10.50%
Abbey National PLC 31,250 538,886
Allied Zurich PLC* 28,500 291,247
Arcadia Group 55,700 228,062
Arriva PLC 35,000 223,582
Asda Group 108,000 313,762
BAA PLC 32,250 327,925
Barclays PLC 26,000 422,733
Bass PLC 23,571 285,127
BAT Industries PLC 32,500 244,054
Britannic Assurance PLC 15,000 322,885
British Aerospace PLC 81,000 488,189
British Airways PLC 34,500 213,208
British Biotech PLC* 150,000 89,832
</TABLE>
20
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GREAT BRITAIN (CONTINUED)
British Petroleum
Company PLC 24,000 $ 366,565
Burmah Castrol PLC 25,000 353,806
Celltech PLC* 25,000 112,555
Centrica PLC* 149,500 288,282
Debenhams PLC 40,000 226,640
Dixons Group 16,000 163,507
Emap PLC 25,000 397,554
Enterprise Oil PLC 75,000 506,499
Glaxo Wellcome PLC 31,000 912,727
Granada Group PLC 36,000 470,032
Great Universal Stores PLC 22,000 245,379
Greenalls Group PLC 40,000 197,078
House of Fraser 50,000 70,506
Iceland Group PLC 31,250 101,169
III Group PLC 30,000 257,136
Imperial Chemical
Industries PLC 30,000 236,239
Inchcape PLC 90,000 177,370
Lloyds TSB Group PLC 54,000 603,212
Medeva PLC 80,000 125,043
Meggitt PLC 50,000 113,830
National Westminster Bank 28,250 377,963
Northern Foods PLC 73,400 223,218
PowerGen PLC 44,000 653,348
Prudential Corporation PLC 33,000 479,639
Rank Group PLC 61,750 251,784
Reckitt & Colman PLC 13,300 198,506
Reuters Group PLC 32,000 268,298
Rolls-Royce PLC 138,000 478,875
Sainsbury (J.) PLC 51,000 489,119
Scotia Holdings * 30,000 50,968
Signet Group 312,500 136,712
Smith (H.W.) Group PLC 33,750 280,104
SmithKline Beecham PLC 47,000 518,630
Spirax-Sarco Engineering PLC 30,000 221,203
Stakis PLC 260,000 375,468
Standard Chartered 51,500 366,389
Tate & Lyle PLC 35,282 195,412
Tesco PLC 112,400 332,274
Trinity PLC 35,000 241,421
United Assurance Group PLC 23,000 229,180
United News & Media PLC 35,000 331,210
----------
16,614,342
----------
GREECE - 0.00%
Heilenic Telecommunication
organization SA 122 2,926
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HONG KONG - 1.84%
Cheung Kong 20,000 $ 92,657
China Foods Holdings,
Limited * 575,000 143,954
China Telecom * 40,000 62,976
Citic Pacific, Limited 70,000 122,855
Elec & Eltek International
Company, Limited 735,000 132,791
First Tractor Company 305,000 78,720
GZI Transport, Limited -
Warrants 60,000 77
GZI Transport, Limited 484,000 101,185
HKR International, Limited 840,000 260,163
Hong Kong Electric 35,000 120,370
Hong Kong & China Gas 100,000 122,596
HSBC Holdings PLC 33,454 613,683
Hung Hing Printing Group 238,000 79,088
Hutchison Whampoa, Limited 48,000 252,729
National Mutual Asia, Limited 280,000 136,405
New World Development 130,951 175,750
Road King Infrastructure,
Limited 464,544 254,783
Swire Pacific,
Limited - Class A 50,000 157,440
----------
2,908,222
----------
INDIA - 0.34%
BSES, Limited #* 8,000 103,000
Hindalco Industries, Limited # 5,000 54,500
Indian Opportunity Fund,
Limited* 11,000 93,390
Mahanagar Telephone Nigam,
Limited #* 2,000 22,700
Tata Electric # 1,500 262,500
----------
536,090
----------
INDONESIA - 0.06%
Bat Indonesia 36,000 50,131
Gudang Garam 80,000 42,804
----------
92,935
----------
IRELAND - 2.05%
Bank of Ireland 72,465 1,289,008
CRH PLC 80,000 1,007,138
Elan Corporation PLC~ * 13,250 954,828
----------
3,250,974
----------
ITALY - 4.77%
Assicurazioni Generali 15,020 488,729
ENI SPA 192,000 1,177,350
Finmeccanica SPA 192,030 159,526
Grupo Editoriale L'Espresso 174,000 1,370,618
Ina SPA 185,000 470,809
</TABLE>
21
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ITALY (CONTINUED)
Istituto Mobiliare Italiano 76,000 $1,003,908
Rinascente SPA 90,850 797,108
Telecom Italia Mobile 105,500 614,966
Telecom Italia SPA 185,000 1,275,108
Telecom Moblit 61,000 196,267
----------
7,554,389
----------
JAPAN - 8.87%
Asahi Glass Company, Limited 275,000 1,327,239
Daiwa House Industry
Company, Limited 170,000 1,541,499
Kirin Brewery Company,
Limited 160,000 1,277,660
Kokusai Securities Company,
Limited 200,000 1,396,709
Mitsui Chemicals, Inc. 500,000 1,429,616
Nippon Steel Corporation 880,000 1,261,280
Sony Music Entertainment,
Inc. 40,000 1,310,420
Sumitomo Warehouse 360,000 1,376,819
Tokyo Electric Power
Company 75,000 1,431,444
Tokio Marine & Fire
Insurance 190,000 1,695,064
----------
14,047,750
----------
KOREA - 0.08%
Atlantis Korean Smaller
Companies * 20,000 100,200
CITC Seoul Excel * 2 3,700
LG Electronics # 6,400 8,000
Samsung Electronics # (a) 475 7,030
----------
118,930
----------
MALAYSIA - 0.08%
Boustead Holdings Berhad (c) 84,000 46,802
IOI Corporation (c) 100,000 37,319
Nanyang Press Berhad (c) 60,000 48,568
----------
132,689
----------
MEXICO - 0.31%
Cemex SA~* 5,600 27,368
Cifra SA 34,500 41,982
Coca-Cola Femsa SA~ 2,900 35,344
Corporacion Geo SA* 9,600 17,881
DESC SA~ 2,002 27,528
Empresas La Moderna SA~ 1,800 43,030
Grupo Carso SA~ 7,800 46,539
Grupo Televisa #* 1,400 26,928
Kimberly-Clark de Mexico SA~ 2,680 35,845
Panamerican
Beverages - Class A * 2,000 35,625
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEXICO (CONTINUED)
Telefonos de Mexico SA 3,500 $ 154,875
----------
492,945
----------
NETHERLANDS - 1.14%
Baan Company NV * 23,000 595,117
Royal Dutch Petroleum 12,748 633,285
Vendex International NV 15,325 569,960
Vendex International NV -
Coupon 15,325 2,036
----------
1,800,398
----------
PERU - 0.01%
Telefonica del Peru SA~ 2,500 30,625
----------
PHILIPPINES - 0.13%
Benpres Holdings #* 68,000 187,000
Benpres Holdings - Rights 27,200 27,336
----------
214,336
----------
PORTUGAL - 1.38%
BPI SGPS SA 28,060 773,990
Cimpor Cimentos de Portugal 15,000 418,391
Elec de Portugal 29,600 681,196
Jeronimo Martins 9,050 306,623
----------
2,180,200
----------
SINGAPORE - 0.72%
City Developments, Limited 30,000 65,700
GP Batteries International,
Limited 190,000 245,161
Marco Polo Developments,
Limited 120,000 62,504
Overseas Chinese Bank * 80,287 201,490
Overseas Union Bank, Limited 80,000 114,117
Singapore Airlines, Limited 20,000 109,500
Singapore Press Holdings 10,000 82,865
United Overseas Bank 87,000 253,353
----------
1,134,690
----------
SPAIN - 6.22%
Acciona SA 5,000 1,252,952
Argentaria Corp Bancaria de
Espana SA 45,143 898,946
Baron de Ley* 30,000 1,015,050
Centros Comerciales
Continente, SA 50,560 1,286,587
Gas Natural SDG SA 11,600 821,767
Prosegur CIA de Seguridad SA 116,895 1,450,218
Tabacalera SA 64,000 1,405,280
Telefonica SA 24,745 903,529
Viscofan Envolturas
Celulosicas SA 29,960 779,279
</TABLE>
22
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SPAIN (CONTINUED)
Viscofan Envolturas
Celulosicas SA - Warrants 29,960 $ 38,647
---------
9,852,255
---------
SWEDEN - 1.88%
BPA AB 265,000 673,829
Celsius AB - Class B 56,360 1,060,489
ForeningsSparbanken AB 54,040 1,236,692
---------
2,971,010
---------
SWITZERLAND - 4.19%
Jelmoli Holding AG 880 1,026,295
Nestle SA 790 1,575,994
Novartis AG 1,056 1,697,402
Roche Holding
AG - Genussshein 152 1,640,565
UBS AG* 3,525 689,424
---------
6,629,680
---------
TAIWAN - 0.20%
Formosa Growth Fund * 5,000 88,125
Taipei Fund * 20 161,000
Taiwan Semiconductor~ 5,900 75,228
---------
324,353
---------
THAILAND - 0.08%
Cogenaration PLC 67,000 30,493
Electricity Generating Public
Company 40,000 95,575
---------
126,068
---------
UNITED STATES - 27.41%
AccuStaff, Inc. * 25,000 364,063
American Home Products
Company 14,000 733,250
American Tower
Corporation * 10,000 255,000
Anadarko Petroleum
Corporation 12,000 471,750
Anheuser-Busch Companies,
Inc. 11,000 594,000
Associates First Capital 19,100 1,246,275
Aurora Foods, Inc.* 9,800 134,750
BankBoston Corporation* 10,800 356,400
Baxter International, Inc. 14,500 862,750
Bell Atlantic Corporation 18,900 915,469
Borders Group, Inc. * 18,000 400,500
Bristol-Myers Squibb
Company* 9,700 1,007,588
Burlington Northern 16,500 528,000
Cardinal Health, Inc. 5,800 598,850
Chase Manhattan Corporation 11,700 506,025
Chevron Corporation 10,000 840,625
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
Columbia/HCA Healthcare
Corporation 27,900 $ 559,744
Comcast Corporation - Class A 15,000 704,063
Compaq Computer
Corporation 24,500 774,813
CompUSA, Inc. 7,600 131,576
Conseco, Inc. 20,600 629,588
Consolidated Stores
Corporation* 15,000 294,375
Duke Energy Corporation 7,700 509,644
El Paso Energy Corporation 20,000 648,750
EMC Corporation* 15,000 857,813
Federal National Mortgage
Association 6,300 404,775
HealthSouth Corporation * 50,000 528,125
Intel Corporation 19,600 1,680,700
International Business
Machines, Inc. 11,000 1,408,000
Lilly (Eli) & Company 9,000 704,813
Lockheed Martin Corporation 6,100 614,956
Mail-Well Holdings* 19,600 167,825
MBNA Corporation 29,200 835,850
McDonald's Corporation 9,000 537,188
MCI WorldCom, Inc. 29,000 1,417,375
Medicis Pharmaceutical* 22,000 871,750
Meditrust Corporation 27,654 471,846
Microsoft Corporation * 5,000 550,313
NationsBank Corporation 15,500 829,250
Newbridge Networks
Corporation 24,500 439,469
Newcourt Credit Group, Inc. 11,000 287,375
Nextel Communications, Inc. 11,000 222,063
Ocular Sciences * 5,000 105,000
Omnicare, Inc. 15,000 528,750
Pfizer, Inc. 8,200 868,688
Philip Morris Companies, Inc. 15,000 690,938
Phillips Petroleum Company 7,100 320,388
Provident Companies, Inc. 20,000 675,000
Ralston-Purina Group 12,400 362,700
Republic Services, Inc.* 9,000 175,500
SBC Communications, Inc. 28,800 1,279,800
Staples, Inc.* 53,150 1,561,281
Stewart Enterprises 22,000 368,500
Sun Microsystems, Inc.* 9,000 448,313
Sybron International
Corporation * 25,000 478,125
Tele-Communications
International * 16,000 626,000
Texaco, Inc. 15,000 940,313
Texas Instruments, Inc. 7,500 395,625
</TABLE>
23
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
3Com Corporation* 10,000 $ 300,625
Time Warner, Inc. 17,500 1,532,340
Travelers Group, Inc. 12,500 468,750
Travelers Property and
Casualty Corporation 18,000 574,875
Tyco International, Ltd. 10,000 552,500
U.S. Foodservice* 29,600 1,232,100
Viacom Industries,
Inc. - Class A 20,000 1,150,000
Westpoint Stevens,
Inc. - Class A * 16,000 488,000
Williams Companies, Inc. 12,500 359,375
-----------
43,380,820
-----------
TOTAL COMMON STOCKS
(COST $148,319,820) 140,078,196
-----------
CORPORATE BONDS - 0.29%
GREAT BRITIAN
Scotia Holdings, 8.50%,
3/26/02 $ 19,000 23,403
-----------
KOREA
Republic of Korea, 8.88%,
4/15/08 208,000 177,450
-----------
MALAYSIA
Telekom Malaysia Berhad,
4.00%, 10/03/04 ~ (9/22/94,
$70,000) (a) (b) 70,000 37,800
-----------
THAILAND
PTTEP International, Limited,
7.63%, 10/01/06 300,000 223,500
-----------
TOTAL CORPORATE BONDS
(COST $461,458) 462,153
-----------
140,540,349
-----------
SHORT-TERM
INVESTMENT - 10.07%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
Federal National Mortgage
Association, $16,141,372
6.00%, 8/01/13, market
value $16,302,785
(cost $15,936,519) 15,936,519 15,936,519
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
<S> <C>
TOTAL INVESTMENTS
(COST $164,717,797)-98.85% $156,476,868
OTHER ASSETS LESS
LIABILITIES - 1.15% 1,812,839
------------
NET ASSETS - 100.00% $158,289,707
============
</TABLE>
* Non-income producing.
# Global Depository Receipts.
~ 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.
(b) All or a portion of these securities are restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses
after the title of the restricted securities.
(c) These securities are considered illiquid due to a one year moratorium on
the repatriation of assets from Malaysia.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $248,291,695 and $235,288,192, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $165,477,184. Net unrealized depreciation aggregated
$9,000,316, of which $11,442,631, related to appreciated investment securities
and $20,442,947, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $ 140,540,349
Repurchase agreements 15,936,519
-------------
Total investments
(cost $164,717,797) 156,476,868
Receivables
Collateral for securities
loaned (Note 2) 12,707,641
Investments sold 6,315,010
Fund shares sold 354,472
Dividends and interest 443,615
Unrealized appreciation on
forward foreign currency
exchange contracts (Note 6) 617
Deferred expenses (Note 2) 5,424
-------------
TOTAL ASSETS 176,303,647
-------------
LIABILITIES
Payables
Investments purchased $ 2,697,553
Securities loaned (Note 2) 12,707,641
Fund shares redeemed 2,446,454
Unrealized depreciation on
forward foreign currency
exchange contracts
(Note 6) 35,060
Accrued expenses and other
liabilities 127,232
-----------
TOTAL LIABILITIES 18,013,940
-------------
NET ASSETS $ 158,289,707
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 153,975,854
Accumulated undistributed
net investment income 3,616
Accumulated net realized
gain on investment
transactions 12,574,725
Net unrealized depreciation
of investments and foreign
currency related
transactions (8,264,488)
-------------
NET ASSETS $ 158,289,707
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 18.92
Class B Shares $ 18.21
Class Y Shares $ 18.96
OFFERING PRICE PER SHARE
Class A Shares $ 20.07(a)
Class B Shares $ 18.21
Class Y Shares $ 18.96
SHARES OUTSTANDING
Class A Shares 3,118,915
Class B Shares 5,452,526
Class Y Shares 53
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 2,176,556
Interest 499,605
------------
TOTAL INVESTMENT
INCOME (NOTE 2) 2,676,161
EXPENSES
Management fee (Note 4) $ 1,612,495
Distribution fee (Note 5) 734,020
Shareholder service fee (Note 5) 384,373
Transfer agent fee 220,815
Custodian and accounting fees 188,561
Administration fee (Note 4) 153,750
Registration expenses 67,081
Shareholder reports and postage
expenses 36,249
Organizational expenses 11,067
Legal fees 4,542
Directors' fees and expenses 3,591
Audit fees 3,143
Miscellaneous 14,317
-----------
Total expenses 3,434,004
------------
NET INVESTMENT LOSS (757,843)
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS
Net realized gain on investments
and foreign currency related
transactions (Note 2) 14,799,387
Change in unrealized
appreciation (depreciation) on
investments and foreign
currency related transactions (25,459,714)
-----------
NET LOSS ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS (10,660,327)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(11,418,170)
============
</TABLE>
(b) Net of withholding taxes of $206,565.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment loss $ (757,843) $ (416,666)
Net realized gain on investments and foreign currency related transactions 14,799,387 6,084,166
Change in unrealized appreciation (depreciation) on investments (25,459,714) 13,678,454
------------- -------------
Increase (decrease) in net assets resulting from operations (11,418,170) 19,345,954
------------- -------------
Distributions to Shareholders
From net realized gain on investments
Class A (2,382,830) (476,590)
Class B (4,553,653) (1,576,577)
Class Y (8) --
--------------- -------------
Total distributions to shareholders (6,936,491) (2,053,167)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 78,893,773 74,523,622
Reinvested distributions 6,732,722 2,007,927
Shares redeemed (44,567,723) (13,467,704)
-------------- -------------
Change in net assets resulting from capital share transactions 41,058,772 63,063,845
-------------- -------------
Increase in net assets 22,704,111 80,356,632
Net Assets
Beginning of year 135,585,596 55,228,964
-------------- -------------
End of year (including accumulated undistributed net investment
income (loss) of $3,616 and ($97,957), respectively) $158,289,707 $ 135,585,596
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
9/30/98 9/30/97
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 20.94 $ 17.86
--------- ---------
Income from investment operations
Net investment income (loss) (0.03) 0.04
Net realized and unrealized gain (loss) on investments (0.97) 3.67
--------- ---------
Total from investment operations (1.00) 3.71
--------- ---------
Less distributions
From capital gains (1.02) (0.63)
--------- ----------
Net asset value, end of period $ 18.92 $ 20.94
========= ==========
TOTAL RETURN* (4.97%) 21.59%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 59,012 $ 46,556
Ratio of expenses to average net assets 1.75% 1.89%
Ratio of expenses to average net assets excluding waiver 1.75% 1.89%
Ratio of net investment income (loss) to average net assets (0.01%) 0.07%
Portfolio turnover rate 162% 128%
Average commission rate on portfolio transactions $ 0.0188 $ 0.0319
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 (C)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.88 $ 14.23 $ 14.18
-------- -------- -----------
Income from investment operations
Net investment income (loss) (0.04) 0.05 (0.01)
Net realized and unrealized gain (loss) on investments 2.82 1.60 0.06
--------- -------- ------------
Total from investment operations 2.78 1.65 0.05
--------- -------- ------------
Less distributions
From capital gains (0.80) -- --
--------- --------- ------------
Net asset value, end of period $ 17.86 $ 15.88 $ 14.23
========= ========= ============
TOTAL RETURN* 18.40% 11.60% 0.35%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 13,098 $ 6,854 $ 8,882
Ratio of expenses to average net assets 1.95% 2.06% 2.09% (a)
Ratio of expenses to average net assets 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
</TABLE>
(a) Annualized.
(c) For the period from March 29, 1994 (commencement of operations), to
September 30, 1994.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
9/30/98 9/30/97
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 20.32 $ 17.46
--------- --------
Income from investment operations
Net investment loss (0.12) (0.02)
Net realized and unrealized gain (loss) on investments (0.97) 3.51
--------- ---------
Total from investment operations (1.09) 3.49
--------- ---------
Less distributions
From capital gains (1.02) (0.63)
--------- ---------
Net asset value, end of period $ 18.21 $ 20.32
========= =========
TOTAL RETURN* (5.65%) 20.74%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 99,277 $ 89,030
Ratio of expenses to average net assets 2.50% 2.64%
Ratio of expenses to average net assets excluding waiver 2.51% 2.64%
Ratio of net investment loss to average net assets (0.77%) (0.68%)
Portfolio turnover rate 162% 128%
Average commission rate on portfolio transactions $ 0.0188 $ 0.0319
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 (d)
<S> <C> <C> <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 (loss) on investments 2.64 1.57 0.01
--------- -------- ------------
Total from investment operations 2.59 1.52 (0.03)
--------- -------- ------------
Less distributions
From capital gains (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 assets 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
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED
9/30/98 (e)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.81
---------
Income from investment operations
Net investment income 0.00 (f)
Net realized and unrealized gain on investments 0.30
---------
Total from investment operations 0.30
---------
Less distributions
From capital gains (0.15)
-----------
Net asset value, end of period $ 18.96
===========
TOTAL RETURN* 1.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.50% (a)
Ratio of net investment loss to average net assets (0.02%)(a)
Portfolio turnover rate 162%
Average commission rate on portfolio transactions $ 0.0188
</TABLE>
(a) Annualized.
(d) For the period from March 29, 1994 (commencement of operations) to
September 30, 1994.
(e) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
(f) Income is less than $0.005 per share.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION QUALITY GROWTH MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The S&P 500 declined approximately 10% in the third quarter of 1998 after a
remarkable string of 14 consecutive quarterly gains that began in the first
quarter of 1995. This year we have been more emphatically cautioning that the
stock market would have to adjust to considerably lower corporate earnings
prospects, and this transition would likely result in increased volatility and
lower returns than experienced over the past several years. Clearly this
scenario is unfolding in full force. Over the past 12 months the market has
been extremely volatile while the total return on the S&P 500 has been just 9%.
Earnings estimates for a broad range of companies are being sharply reduced. It
is now quite possible, in fact likely in our opinion, that the earnings of the
S&P 500 will decline in the second half of this year and in 1999.
These trends present a significant change from the strong, better-than-expected
earnings growth that has been a key pillar supporting the bull market since
1990, one of the best on record by almost any measure. But this change was
inevitable. It is part of the natural cyclical patterns of the economy,
corporate profitability, and the stock market. Supply and demand forces will
always cycle around each other at uneven rates with their crisscross
progressions being amplified by credit expansions and contractions. The 16%
compound annual earnings growth of the S&P 500 between 1991 and 1997 was
certainly not sustainable, particularly in an economy showing only 4-5% nominal
growth. After nearly perfect growth conditions during much of the 1990's,
corporate profitability is coming under pressure as global excess capacity is
chasing falling demand. And as should be expected at this point, lenders are
sharply curtailing credit and thereby reinforcing these developing pressures.
The most obvious target of blame for current concerns is the Asian crisis and
its ripples. However, we would still be facing some type of similar
macro-pressures even if Asia's problems had never surfaced. There will always
be countervailing forces to slow abnormally high growth.
The current retrenchment may be different from other recent ones as a matter of
degree. The prolonged expansion seems to have created an unusually high level
of complacency regarding the expected returns from risky assets - stocks,
venture capital, high-yield bonds, etc. Now this extreme complacency is coming
home to roost. Less certain investors are increasingly disengaging from riskier
assets. The resulting price declines are trapping traders who left themselves
too little room to maneuver. The incredibly telling recent downfall of a large
hedge fund illustrates the depth of this problem. Hordes of so-called
sophisticated investors and institutions blindly poured money into this highly
leveraged speculative scheme. Of course, we all know about the initial
disastrous consequences. Amazingly, it involved some of the financial markets'
most respected participants. It is a very ominous event that appears far from
being resolved. There is an undeterminably large amount of unstable money in
the global financial markets beyond the case of this large hedge fund. These
players are being squeezed out one after another as liquidity in almost all
risky asset classes contracts. This ongoing purging should keep volatility
historically high with the possibility of inflicting more serious damage to the
global economy than already seen.
Reacting to these developments the stock market is taking on more and more of a
panicked feel. There is now a strong preference for the apparently "safest"
sectors such as electric utility, regional
28
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION QUALITY GROWTH MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
telephone, large integrated energy, and domestic food stocks. These "defensive"
stocks have meaningfully outperformed the broader market. Our relative
performance has suffered because we have almost no exposure to these sectors,
since they do not meet our requirements of above average, consistent earnings
growth. This flight-to-safety is typical at this point in the cycle and its
primary motivation is fear. And why not? The Asian problems are developing into
a full-blown global crisis. Global financial liquidity has all but evaporated.
Analysts are repeatedly slashing earnings projections. Many companies that were
once considered infallible such as Coca-Cola, Disney, Gillette, and Procter &
Gamble have issued earnings warnings. Imagine what could happen if individual
investors start bailing out of mutual funds. And at a time when the world needs
strong leadership, the political situations in several key nations are a mess.
Obviously there is a lot to fear.
Fear and greed are a long-term investor's best asset and worst threat. These
emotions are an asset when they belong to others and a threat when they are
your own. Anyone operating in the stock market should know this truism well.
But the majority cannot adhere to it. It is exceedingly difficult for both
individual and institutional investors to look through an emotionally charged
volatile market and focus on the fundamentals. To us, fundamental analysis does
not mean trying to figure out cyclical swings in the economy and markets over
the next year. It means concentrating on longer-term business qualities. We
know that consistently implementing a well-defined investment discipline
through the ups and downs of an entire cycle is the best way to ensure
long-term success. We are well aware that current conditions in the economy and
stock market could worsen. You need to be too. There is no way to predict the
ultimate extent of the pressures now unfolding, and we will not pretend to try.
We approach our portfolio no differently today than we did a year ago. We focus
on a diversified group of companies with excellent operating records and
leading competitive positions. We are biased toward companies with
above-average business predictability. We have thoroughly analyzed their
results and prospects. We own them at prices we believe offer attractive
relative values. It is a very simple approach. Not an easy one, but a
straightforward one. We will at times be wrong in our analysis, but we will
strive to be as objective as possible. Of course we expect to be right more
often than not. We will not alter this approach just because those around us
are becoming more complacent or fearful. Over the long-term cyclical swings
wash out and business fundamentals prevail.
November 1998
29
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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 9450 10000 10000
9/30/92 9524 10061 10215
9/30/93 10306 10818 11543
9/30/94 10165 10601 11965
9/30/95 12216 12443 15521
9/30/96 15185 15532 18680
9/30/97 20467 20928 26236
9/30/98 22660 22767 28608
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year Since Inception+++
Class A 4.34% 15.75% 13.57%
Class B 5.86% 16.17% 13.84%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares of rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period
following the date of purchase. The value of the Class B Shares reflects a
redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class A Shares, after deducting the maximum sales charge of
5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
+++ Reflects operations of Mentor Capital Growth Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
9/30/98.
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 10000 10000
12/31/97 10300 10643
3/31/98 11835 12127
6/30/98 12285 12528
9/30/98 10895 11281
Total Returns as of 9/30/98
1-Year Since Inception++
Class Y Shares n/a 10.56%
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 9/30/98.
30
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 97.19%
BASIC MATERIALS - 2.72%
Bemis Company, Inc. 265,400 $9,305,587
----------
CAPITAL GOODS &
CONSTRUCTION - 9.68%
Emerson Electric Company 191,000 11,889,750
Illinois Tool Works 223,700 12,191,650
W.W. Grainger, Inc. 214,300 9,027,387
----------
33,108,787
----------
CONSUMER CYCLICAL - 14.08%
Chancellor Media Corporation * 213,000 7,108,875
Clear Channel Communications 157,750 7,493,125
Gannett, Inc. 194,000 10,391,125
Interpublic Group Companies 210,800 11,370,025
Newell Company 255,650 11,775,878
----------
48,139,028
----------
CONSUMER STAPLES - 10.75%
Philip Morris Companies, Inc. 260,000 11,976,250
Sherwin-Williams Company 546,600 11,820,225
Sysco Corporation 549,500 12,947,594
----------
36,744,069
----------
FINANCIAL - 20.44%
Ahmanson HF & Company 210,500 11,682,750
American Express Company 139,500 10,828,687
Federal National Mortgage
Association 171,600 11,025,300
NationsBank Corporation 199,150 10,654,525
Norwest Corporation 346,200 12,398,288
SouthTrust Corporation 32,700 1,142,456
UNUM Corporation 244,100 12,128,719
----------
69,860,725
----------
HEALTH - 14.79%
Bristol-Myers Squibb Company 128,250 13,321,969
HealthSouth Corporation 1,281,000 13,530,563
Johnson & Johnson 153,600 12,019,200
Tenet Healthcare Corporation 407,000 11,701,250
----------
50,572,982
----------
TECHNOLOGY - 18.41%
Automatic Data Processing 162,750 12,165,563
Computer Associates
International, Inc. 362,300 13,405,100
Computer Sciences Corporation 226,900 12,366,050
MCI WorldCom, Inc. 254,750 12,450,906
Sun Microsystems, Inc. * 251,850 12,545,278
----------
62,932,897
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION & SERVICES - 2.04%
Werner Enterprises, Inc. 443,312 $ 6,982,164
-------------
MISCELLANEOUS - 4.28%
Tyco International Limited 264,600 14,619,150
-------------
TOTAL COMMON STOCKS
(COST $325,801,368) 332,265,389
-------------
SHORT-TERM INVESTMENT - 5.06%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$17,523,355 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$17,698,589
(cost $17,301,645) $ 17,301,645 17,301,645
-------------
TOTAL INVESTMENTS
(COST $343,103,013)-102.25% 349,567,034
OTHER ASSETS LESS
LIABILITIES - (2.25%) (7,698,090)
-------------
NET ASSETS - 100.00% $ 341,868,944
=============
</TABLE>
* Non-income producing.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $411,684,003 and $263,413,957, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $343,119,643. Net unrealized appreciation aggregated
$6,447,391, of which $28,966,561, related to appreciated investment securities
and $22,519,170, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $332,265,389
Repurchase agreements 17,301,645
------------
Total investments
(cost $343,103,013) 349,567,034
Collateral for securities loaned
(Note 2) 15,562,984
Receivables
Fund shares sold 3,633,968
Dividends and interest 315,098
------------
TOTAL ASSETS 369,079,084
------------
LIABILITIES
Payables
Investments purchased $10,840,843
Securities loaned (Note 2) 15,562,984
Fund shares redeemed 755,755
Accrued expenses and other
liabilities 50,558
-----------
TOTAL LIABILITIES 27,210,140
------------
NET ASSETS $341,868,944
============
Net Assets represented by: (Note 2)
Additional paid-in capital $298,264,898
Accumulated undistributed
net investment income -
Accumulated net realized
gain on investment
transactions 37,140,025
Net unrealized appreciation
of investments 6,464,021
------------
NET ASSETS $341,868,944
============
NET ASSET VALUE PER SHARE
Class A Shares $ 22.71
Class B Shares $ 21.72
Class Y Shares $ 22.74
OFFERING PRICE PER SHARE
Class A Shares $ 24.09 (a)
Class B Shares $ 21.72
Class Y Shares $ 22.74
SHARES OUTSTANDING
Class A Shares 6,391,508
Class B Shares 9,059,483
Class Y Shares 49
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 2,936,795
Interest 804,494
------------
TOTAL INVESTMENT INCOME
(NOTE 2) 3,741,289
EXPENSES
Management fee (Note 4) $ 2,153,467
Distribution fee (Note 5) 1,227,717
Shareholder service fee (Note 5) 672,957
Transfer agent fee 324,574
Administration fee (Note 4) 269,183
Shareholder reports and postage
expenses 57,979
Registration expenses 52,663
Custodian and accounting fees 37,488
Legal fees 8,462
Directors' fees and expenses 6,830
Audit fees 4,556
Miscellaneous 25,373
-----------
Total expenses 4,841,249
------------
NET INVESTMENT LOSS (1,099,960)
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on investments
(Note 2) 45,438,253
Change in unrealized
appreciation on investments (32,273,002)
-----------
NET GAIN ON INVESTMENTS 13,165,251
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 12,065,291
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income (loss) $ (1,099,960) $ 55,807
Net realized gain on investments 45,438,253 14,469,617
Change in unrealized appreciation on investments (32,273,002) 24,877,344
------------- -------------
Increase in net assets resulting from operations 12,065,291 39,402,768
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A (29,728) -
Class B (52,910) -
From net realized gain on investments
Class A (5,934,313) (4,657,749)
Class B (10,484,517) (10,198,967)
Class Y (12) -
------------- -------------
Total distributions to shareholders (16,501,480) (14,856,716)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 220,347,637 61,493,267
Reinvested distributions 16,089,732 14,535,885
Shares redeemed (69,421,744) (21,387,389)
------------- -------------
Change in net assets resulting from capital share transactions 167,015,625 54,641,763
------------- -------------
Increase in net assets 162,579,436 79,187,815
Net Assets
Beginning of year 179,289,508 100,101,693
------------- -------------
End of year (including accumulated undistributed net investment
income of $0 and $59,668, respectively) $ 341,868,944 $ 179,289,508
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26
--------- --------- --------- -------- --------
Income from investment operations
Net investment income (loss) (0.10) (0.02) 0.11 0.02 0.09
Net realized and unrealized gain (loss) on
investments 2.34 5.87 3.73 2.91 (0.30)
---------- ---------- --------- -------- --------
Total from investment operations 2.24 5.85 3.84 2.93 (0.21)
---------- ---------- --------- -------- --------
Less distributions
From net investment income (0.01) - - - (0.04)
From capital gains (1.94) (2.79) (0.50) (1.79) (0.13)
---------- ---------- ---------- -------- --------
Total distributions (1.95) (2.79) (0.50) (1.79) (0.17)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88
========== ========== ========== ======== ========
TOTAL RETURN* 10.72% 34.78% 24.63% 20.18% (1.37%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $145,117 $ 65,703 $ 31,889 $ 29,582 $ 21,181
Ratio of expenses to average net assets 1.34% 1.41% 1.43% 1.87% 1.70%
Ratio of net investment income to average net assets 0.06% 0.53% 0.51% 0.27% 0.53%
Portfolio turnover rate 104% 64% 98% 157% 149%
Average commission rate on portfolio transactions $ 0.0692 $ 0.0697 $ 0.0688
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23
---------- ---------- -------- -------- --------
Income from investment operations
Net investment income (loss) (0.08) - (0.04) 0.25 (0.04)
Net realized and unrealized gain (loss) on investments 2.07 5.55 3.67 2.53 (0.26)
---------- ---------- --------- -------- --------
Total from investment operations 1.99 5.55 3.63 2.78 (0.30)
---------- ---------- --------- -------- --------
Less distributions
From net investment income (0.01) - - - -
From capital gains (1.94) (2.79) (0.50) (1.79) (0.13)
---------- ---------- --------- -------- --------
Total distributions (1.95) (2.79) (0.50) (1.79) (0.13)
---------- ---------- --------- -------- --------
Net asset value, end of year $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80
========== ========== ========= ======== ========
TOTAL RETURN* 9.86% 33.88% 23.64% 19.26% (2.00%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 196,751 $ 113,587 $ 68,213 $ 57,648 $ 41,106
Ratio of expenses to average net assets 2.09% 2.16% 2.18% 2.56% 2.46%
Ratio of net investment loss to average net assets (0.70%) (0.22%) (0.24%) (0.41%) (0.22%)
Portfolio turnover rate 104% 64% 98% 157% 149%
Average commission rate on portfolio transactions $ 0.0692 $ 0.0697 $ 0.0688
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 20.81
--------
Income from investment operations
Net investment income 0.02
Net realized and unrealized gain on investments 2.16
--------
Total from investment operations 2.18
--------
Less distributions
From capital gains (0.25)
----------
Net asset value, end of period $ 22.74
==========
TOTAL RETURN* 10.56%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.09% (a)
Ratio of net investment income to average net assets 0.38% (a)
Portfolio turnover rate 104%
Average commission rate on portfolio transactions $ 0.0692
</TABLE>
(a) Annualized.
(b) Reflects operations for the period from November 19, 1997 (initial offering
of Class Y shares) to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
MENTOR STRATEGY PORTFOLIO
MANAGERS' COMMENTARY: THE MENTOR STRATEGY TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The Mentor Strategy Portfolio has historically been managed according to a
top-down tactical asset allocation investment methodology that relies on
periodic and sometimes aggressive asset allocation shifts between stocks,
bonds, and cash. During the 12-month period ended September 30, 1998 there were
a number of significant changes affecting the Strategy Portfolio. Don Hays, the
chief investment manager of the Portfolio, announced that he would be reducing
his workload and would consequently have less time available to devote to the
Strategy Portfolio. While Don continued to maintain involvement in asset
allocation decision making, responsibility for stock and bond selection within
the Portfolio was assumed by Mentor's Large Capitalization Quality Growth
Equity and Active Fixed-Income teams.
At the November 12, 1998 Mentor Strategy Portfolio Shareholders Meeting a Plan
of Reorganization was adopted by shareholders vote under which the Mentor
Strategy Portfolio was merged into the Mentor Balanced Portfolio. The Mentor
Balanced Portfolio is a mutual fund managed by the same Mentor Large
Capitalization Quality Growth Equity and Active Fixed-Income teams that
currently manage the Strategy Portfolio. The Mentor Balanced Portfolio employs
the same stock and bond selection criteria currently used in the Strategy
Portfolio. It does, however, maintain relatively stable asset allocation blends
rather than employ significant tactical allocation shifts among asset classes.
MARKET OVERVIEW
The first three quarters of the fiscal year ended September 30, 1998 culminated
an unprecedented trend of 14 consecutive quarterly gains for the S&P 500. The
July-September period, however, saw a dramatic departure from this trend, with
the S&P 500 declining 10%. Despite poor equity returns, U.S. government
fixed-income markets were extremely strong. In fact the July-September period
marked one of the few times in recent years that bonds significantly
outperformed stocks. However, the broad rally in treasury bonds was not shared
by more credit-sensitive fixed-income sectors, as investors aggressively
shifted assets into low risk instruments only.
EQUITY REVIEW AND OUTLOOK
For some time we have been emphatically cautioning that the stock market would
have to adjust to considerably lower corporate earnings prospects, and this
transition would likely result in increased volatility and lower returns than
experienced over the past several years. Finally this scenario is unfolding in
full force. Earnings estimates for a broad range of companies are being sharply
reduced. It is now quite possible, in fact likely in our opinion, that the
earnings of the S&P 500 will decline in the second half of this year and in
1999.
These trends present a significant change from the strong, better-than-expected
earnings growth that has been a key pillar supporting the bull market since
1990, one of the best on record by almost any measure. But this change was
inevitable. It is part of the natural cyclical patterns of the economy,
corporate profitability, and the stock market. After nearly perfect growth
conditions during much of the 1990's, corporate profitability is coming under
pressure as global excess capacity is chasing falling demand. And as should be
expected at this point, lenders are sharply curtailing credit and thereby
reinforcing these developing pressures.
35
<PAGE>
MENTOR STRATEGY PORTFOLIO
MANAGERS' COMMENTARY: THE MENTOR STRATEGY TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Fear and greed are a long-term investor's best asset and worst threat. It is
exceedingly difficult for both individual and institutional investors to look
through an emotionally charged volatile market and focus on the fundamentals.
To us, fundamental analysis does not mean trying to figure out cyclical swings
in the economy and markets over the next year. It means concentrating on
longer-term business qualities. We know that consistently implementing a
well-defined investment discipline through the ups and downs of an entire cycle
is the best way to ensure long-term success. We focus on a diversified group of
companies with excellent operating records and leading competitive positions.
We are biased toward companies with above-average business predictability. We
have thoroughly analyzed their results and prospects. We own them at prices we
believe offer attractive relative values. It is a very simple approach. Not an
easy one, but a straightforward one. We will at times be wrong in our analysis,
but we will strive to be as objective as possible. Of course we expect to be
right more often than not. We will not alter this approach just because those
around us are becoming more complacent or fearful. Over the long-term cyclical
swings wash out and business fundamentals prevail.
FIXED INCOME REVIEW AND OUTLOOK
On the fixed-income side, our short-term strategy in this tumultuous
environment has been to tilt portfolio durations somewhat long relative to our
benchmarks, as well as more heavily weight sector allocations toward treasury
securities. Given our long-term confidence in the U.S. economy we are waiting
for an opportunity to aggressively move into domestic spread sectors. Prior to
such a move, we will have to be convinced that these markets have stabilized.
In our opinion such stabilization will require the Fed to continue to move
forcefully to further ease credit conditions.
The primary risk we see to our outlook is timing. The U.S. economy has
tremendous forward momentum and the current yield curve is already pricing in
an aggressive Fed ease. Should events unfold more slowly than the market hopes,
the bond market could encounter some short-term turbulence. We would view these
sell-offs as short term in nature and would utilize the higher yield levels to
extend our duration further.
CURRENT PORTFOLIO POSITIONING
At year end the asset allocation mix in the Mentor Strategy Portfolio was 52%
stocks, 42% bonds, and 6% cash. This compares to 62% stocks, 23% bonds, and 15%
cash on September 30, 1997. This time a year ago the equity holdings were
largely small capitalization whereas today they are large capitalization growth
companies. The fixed-income portfolio today targets the Lehman Brothers
Aggregate Bond Index as its benchmark. This is a more conservative posture than
the fixed-income investments at the beginning of the fiscal year which were
primarily in long-term, and hence more volatile, treasury securities. We
believe that each of these changes positions us appropriately for what we
anticipate to be continued market volatility in the months ahead.
November 1998
36
<PAGE>
MENTOR STRATEGY PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class A Shares and the S&P 500.~
[GRAPH]
Class A S&P 500
6/5/95 9425 10000
9/30/95 10554 10890
9/30/96 12747 13291
9/30/97 14273 18668
9/30/98 14318 20356
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception**
Class A (5.47%) 11.41%
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE
FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL
DISTRIBUTIONS.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
* Represents a hypothetical investment of $10,000 in Mentor Strategy Portfolio
Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations of Mentor Strategy Portfolio Class A from the date of
issuance on 6/5/95 through 9/30/98.
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 10000 10000
12/31/94 9798 10157
9/30/95 12175 13180
9/30/96 14125 15860
9/30/97 15838 22275
9/30/98 15864 24290
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception+
Class B (3.74%) 9.81%
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.
*** 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 value of the Class B Shares reflects
a redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
+ Reflects operations of Mentor Strategy Portfolio Class B from the date of
commencement of operations on 10/29/93 through 9/30/98.
37
<PAGE>
MENTOR STRATEGY PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class Y Shares and the S&P 500.~
[GRAPH]
Class Y S&P 500
11/19/97 10000 10000
12/31/97 10060 10760
3/31/98 10707 12249
6/30/98 11027 12394
9/30/98 10294 11281
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 2.87%
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 9/30/98.
38
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 52.08%
CAPITAL GOODS &
CONSTRUCTION - 5.59%
Emerson Electric Company 75,100 $ 4,674,975
Illinois Tool Works 78,000 4,251,000
W.W. Grainger, Inc. 86,900 3,660,662
------------
12,586,637
------------
COMMERCIAL SERVICES - 0.88%
Omnicom Group 43,800 1,971,000
------------
CONSUMER CYCLICAL - 8.43%
Chancellor Media
Corporation * 47,000 1,568,625
Clear Channel
Communications 41,600 1,976,000
Gannett, Inc. 42,600 2,281,763
General Motors Corporation 19,100 1,044,531
Interpublic Group Company 54,600 2,944,987
Newell Company 90,200 4,154,837
Time Warner 25,800 2,259,113
Tribune Company 35,300 1,776,031
Walt Disney Company 39,000 987,188
------------
18,993,075
------------
CONSUMER STAPLES - 4.38%
Philip Morris Companies, Inc. 61,400 2,828,238
Sherwin-Williams Company 133,200 2,880,450
Sysco Corporation 176,000 4,147,000
------------
9,855,688
------------
ENERGY - 0.43%
Williams Companies 33,500 963,125
------------
FINANCIAL - 11.48%
Ahmanson HF & Company 25,500 1,415,250
Charter One Financial, Inc. 97,873 2,410,113
Dime Bancorp, Inc. 61,700 1,561,781
M & T Bank Corporation 2,901 1,337,361
Marsh & McLennan
Companies, Inc. 14,700 731,325
North Fork Bancorp 111,750 2,235,000
Northern Trust Corporation 35,200 2,402,400
Old Republic International
Corporation 92,550 2,082,375
Price (T. Rowe) & Associates,
Inc. 70,000 2,056,250
Torchmark Corporation 52,000 1,868,750
Travelers Group, Inc. 45,300 1,698,750
UNUM Corporation 77,000 3,825,937
U S Bancorp 62,700 2,229,769
------------
25,855,061
------------
HEALTH - 6.81%
Bristol-Myers Squibb Company 37,600 3,905,700
HealthSouth Corporation * 188,700 1,993,144
Johnson & Johnson 62,600 4,898,450
Tenet Healthcare Corporation 158,000 4,542,500
------------
15,339,794
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL - 1.27%
Safeway, Inc. * 61,600 $ 2,856,700
------------
TECHNOLOGY - 10.42%
Automatic Data Processing 60,100 4,492,475
Computer Associates
International, Inc. 22,600 836,200
Computer Sciences
Corporation 69,500 3,787,750
GTE Corporation 31,400 1,727,000
MCI WorldCom, Inc. 90,000 4,398,750
Sprint Corporation 23,900 1,720,800
Sun Microsystems, Inc. * 103,500 5,155,594
U S West, Inc. 25,905 1,358,393
------------
23,476,962
------------
TRANSPORTATION - 0.70%
Werner Enterprises, Inc. 100,000 1,575,000
------------
MISCELLANEOUS - 1.69%
Tyco International Limited 69,100 3,817,775
------------
TOTAL COMMON STOCKS
(COST $119,416,670) 117,290,817
------------
U.S. GOVERNMENT SECURITIES - 41.72%
U.S. Treasury Bond, 5.50%,
1/31/03 (a) $12,000,000 12,531,120
U.S. Treasury Bond, 6.50%,
11/15/26 68,323,000 81,437,600
------------
TOTAL U.S. GOVERNMENT
SECURITIES
(COST $78,253,007) 93,968,720
------------
211,259,537
------------
SHORT-TERM INVESTMENT - 6.03%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$13,769,132 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$13,906,823,
(cost $13,594,355) 13,594,355 13,594,355
------------
TOTAL INVESTMENTS
(COST $211,264,032)-99.83% 224,853,892
OTHER ASSETS LESS
LIABILITIES - 0.17% 379,555
------------
NET ASSETS - 100.00% $225,233,447
============
</TABLE>
* Non-income producing.
(a) A portion of this security is pledged as collateral for open futures
contracts.
39
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $196,774,571 and $286,670,918, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $211,280,993. Net unrealized appreciation aggregated
$13,572,899, of which $25,354,232, related to appreciated investment securities
and $11,781,333, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $ 211,259,537
Repurchase agreements 13,594,355
-------------
Total investments
(cost $211,264,032) 224,853,892
Collateral for securities
loaned (Note 2) 60,165,776
Receivables
Fund shares sold 61,401
Dividends and interest 1,908,750
Deferred expenses (Note 2) 5,034
-------------
TOTAL ASSETS 286,994,853
-------------
LIABILITIES
Payables
Securities loaned (Note 2) $ 60,165,776
Fund shares redeemed 502,685
Variation margin 1,032,188
Accrued expenses and other
liabilities 60,757
------------
TOTAL LIABILITIES 61,761,406
-------------
NET ASSETS $ 225,233,447
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 192,886,301
Accumulated undistributed
net investment income 2,163,583
Accumulated net realized
gain on investment
transactions 20,465,541
Net unrealized appreciation
of investments and open
futures contracts 9,718,022
-------------
NET ASSETS $ 225,233,447
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.41
Class B Shares $ 14.97
Class Y Shares $ 15.43
OFFERING PRICE PER SHARE
Class A Shares $ 16.35(a)
Class B Shares $ 14.97
Class Y Shares $ 15.43
SHARES OUTSTANDING
Class A Shares 1,602,162
Class B Shares 13,393,973
Class Y Shares 67
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 1,264,309
Interest 7,295,963
-----------
TOTAL INVESTMENT INCOME
(NOTE 2) 8,560,272
EXPENSES
Management fee (Note 4) $ 2,420,122
Distribution fee (Note 5) 1,875,172
Shareholder service fee (Note 5) 711,799
Transfer agent fee 375,675
Administration fee (Note 4) 284,720
Shareholder reports and postage
expenses 67,926
Custodian and accounting fees 64,615
Registration expenses 47,295
Organizational expenses 20,152
Legal fees 10,523
Directors' fees and expenses 8,296
Audit fees 5,661
Miscellaneous 29,147
-----------
Total expenses 5,921,103
-----------
NET INVESTMENT INCOME 2,639,169
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on
investments (Note 2) 24,557,938
Change in unrealized appreciation
on investments and futures
contracts (26,287,481)
-----------
NET LOSS ON INVESTMENTS (1,729,543)
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 909,626
===========
</TABLE>
(b) Net of foreign withholding taxes of $8,800.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 2,639,169 $ 5,345,384
Net realized gain on investments 24,557,938 54,534,179
Change in unrealized appreciation on investments and futures contracts (26,287,481) (24,297,952)
-------------- -------------
Increase in net assets resulting from operations 909,626 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 (6,308,309) (1,531,137)
Class B (48,272,257) (21,767,428)
-------------- -------------
Total distributions to shareholders (59,923,701) (23,298,565)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 16,612,646 71,646,650
Reinvested distributions 58,353,501 22,750,654
Shares redeemed (133,155,402) (73,109,779)
-------------- -------------
Change in net assets resulting from capital share transactions (58,189,255) 21,287,525
-------------- -------------
Increase (decrease) in net assets (117,203,330) 33,570,571
Net Assets
Beginning of year 342,436,777 308,866,206
-------------- -------------
End of year (including accumulated undistributed net investment
income of $2,163,583 and $5,365,536, respectively) $ 225,233,447 $ 342,436,777
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (B)
<S> <C> <C> <C> <C>
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 0.40 0.31 0.08 -
Net realized and unrealized gain (loss) on investments (0.35) 1.68 2.86 1.79
---------- --------- --------- -----------
Total from investment operations 0.05 1.99 2.94 1.79
---------- --------- --------- -----------
Less distributions
From net investment income (0.29) - - -
From capital gains (2.96) (1.34) (0.22) -
---------- ---------- ---------- -----------
Total distributions (3.25) (1.34) (0.22) -
---------- ---------- ---------- -----------
Net asset value, end of period $ 15.41 $ 18.61 $ 17.96 $ 15.24
========== ========== ========== ===========
TOTAL RETURN* 0.32% 11.97% 19.36% 13.31%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 24,685 $ 40,552 $ 20,372 $ 10,503
Ratio of expenses to average net assets 1.42% 1.45% 1.42% 1.65% (a)
Ratio of net investment income (loss) to average net assets 1.59% 2.29% 0.62% (0.06%)(a)
Portfolio turnover rate 77% 192% 125% 122%
Average commission rate on portfolio transactions $ 0.0708 $ 0.0644 $ 0.0669
</TABLE>
(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.
42
<PAGE>
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.29 $ 17.79 $ 15.21
-------- --------- ----------
Income from investment operations
Net investment income (loss) 0.16 0.26 (0.03)
Net realized and unrealized gain (loss) on
investments (0.23) 1.58 2.83
--------- --------- ----------
Total from investment operations (0.07) 1.84 2.80
--------- --------- ----------
Less distributions
From net investment income (0.29) - -
From capital gains (2.96) (1.34) (0.22)
--------- ---------- ----------
Total distributions (3.25) (1.34) (0.22)
--------- ---------- ----------
Net asset value, end of period $ 14.97 $ 18.29 $ 17.79
========= ========== ==========
TOTAL RETURN* (0.46%) 11.19% 18.48%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 200,547 $ 301,885 $ 288,494
Ratio of expenses to average net assets 2.17% 2.20% 2.19%
Ratio of net investment income (loss) to average
net assets 0.84% 1.54% (0.19%)
Portfolio turnover rate 77% 192% 125%
Average commission rate on portfolio transactions $ 0.0708 $ 0.0644 $ 0.0669
<CAPTION>
PERIOD
PERIOD ENDED YEAR ENDED ENDED
9/30/95 (c) 12/31/94 12/31/93 (d)
<S> <C> <C> <C>
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 capital gains - - -
---------- -------- ---------
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
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED 9/30/98 (e)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.01
--------
Income from investment operations
Net investment income 0.25
Net realized and unrealized gain on investments 0.18
--------
Total from investment operations 0.43
--------
Less distributions
From capital gains (0.01)
----------
Net asset value, end of period $ 15.43
==========
TOTAL RETURN* 2.87%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.17% (a)
Ratio of net investment income to average net assets 2.18% (a)
Portfolio turnover rate 77%
Average commission rate on portfolio transactions $ 0.0708
</TABLE>
(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 September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
REVIEW OF MARKETS
Investors who had come to expect double-digit positive returns were brought
back to earth over the last 12 months -- and most especially in the quarter
just ended. The S&P 500 rose 9% in the 12 month period ending September 30,
1998, but that positive return masks two factors: the pain inflicted by a
(9.9%) result in the third calendar quarter and the performance dominance of
the largest stocks in that index. Over the year, we have experienced a
significant disparity throughout sectors of the market: large-capitalization
growth stocks rose 11.1%, while their large-cap. value brethren returned a
meager 3.6%. In marked contrast, small stocks returned (19%) during the past 12
months. Bond investors, on the other hand, were well rewarded during the
period, due in large part to stunning declines in longer-term yields. For the
period the Lehman Brothers Aggregate Index returned 11.5%.
PORTFOLIO PERFORMANCE
For the 12 month period ended September 30, 1998, the Mentor Income and Growth
Portfolio returned 5.81% for the A shares and 5.01% for the B shares, exclusive
of sales charges, compared to 3.26% for the Lipper Balanced Average. The
Portfolio's performance over all relevant time periods places it in the first
or second quartile of its competitive peer group as ranked by Lipper Analytical
Services.
MARKET OUTLOOK
Perhaps the most important question at present is whether the U.S. economy will
continue to grow, or if the economic problems in many of the emerging markets
and Japan will result in a domestic recession. We believe the odds still favor
expansion. Importantly, the Federal Reserve has taken note of world events and
very low levels of domestic inflation and has chosen to ease monetary policy.
Given the benign rate of inflation, there is plenty of room for the Fed to
lower rates further. Also, with the Federal government running a large budget
surplus, there is some room to adopt a more stimulative fiscal policy. Finally,
the consumer normally leads the economy either into or out of a recession, and
at present, the fundamentals for consumer spending remain quite healthy.
Nevertheless, the risk of a recession is certainly higher than it was at any
time in the last twelve months. Declines in exports and corporate profit
pressures could lead to layoffs, and significantly impinge on consumer
confidence and spending plans.
PORTFOLIO STRATEGY
As of September 30, 1998, the Portfolio's asset allocation was 59% equity, 41%
bonds and 0% cash. Our concerns about equity valuations, and consequently, our
underweighting of stocks in the Portfolio, proved painful for most of the last
12 months, but provided "shelter from the storm" for shareholders in the
quarter just ended. We are considering increasing the Portfolio's equity
weighting slightly over the next several months due to attractive buying
opportunities in a number of stocks.
EQUITY STRATEGY
The market correction we have experienced is painful, but holds a silver
lining. We are beginning to see a growing list of stocks selling at valuation
levels that would have attracted our attention anytime in the last 10 years.
These valuations become even more attractive in light of the lowest levels of
inflation and interest rates since the first half of the 1960's. In the present
environment, we
44
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
will be focusing on attractively valued stocks of companies that have strong
industry positions, healthy cash flows, and sound balance sheets. We will
prefer, but not limit ourselves to, companies with a below-average exposure to
foreign markets.
FIXED INCOME STRATEGY
The 30-year Treasury bond is rapidly achieving the lowest yield levels since
the government began issuing these securities in 1977. Short- and
intermediate-term yields have not fallen to their 1993 lows, but are getting
close. There is little question that the Treasury market is assuming a
substantially weaker U.S. economy and a period of monetary ease from the
Federal Reserve. In our view, both of these are likely to come to pass.
Based upon this outlook, we are retaining a portfolio duration longer than
benchmark, because we believe that interest rates can fall modestly from
current levels, although long-term rates are unlikely to fall much from here.
During the prior year, we have gradually increased the Portfolio's modest
exposure to corporate bonds and have been noticeably underweight in
mortgage-backed securities. We anticipate adding to our holdings of high
quality non-Treasury sectors over the coming months.
November 1998
45
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Income and Growth Portfolio Class A and Class B Shares, the S&P 500 and the
Lehman Brothers Aggregate Bond Index.+
[GRAPH]
Class Class
A Shares B Shares LAGG/S&P 500
5/24/93 9425 10133 10000
9/30/93 9909 10506 10353
9/30/94 10578 11239 10446
9/30/95 12402 12614 12879
9/30/96 14802 15140 14686
9/30/97 18076 18499 18723
9/30/98 19126 19302 20692
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year Since Inception++
Class A (0.29%) 12.62% 12.84%
Class B 1.22% 12.67% 14.70%
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. The value of the Class B Shares reflects a
redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
*** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class A Shares, after deducting the maximum sales charge of
5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
+ 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
9/30/98.
46
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Income and Growth Portfolio Class Y Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
[GRAPH]
Class
Y Shares LAGG/S&P 500
11/19/97 10000 10000
12/31/97 10217 10435
3/31/98 10860 11374
6/30/98 10796 11706
9/30/98 10660 11211
Total Returns as of 9/30/98
1-Year Since Inception++
Class Y n/a 7.29%
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 on 11/19/97 through 9/30/98.
47
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 58.78%
BASIC MATERIALS - 4.46%
AlliedSignal, Inc. 92,300 $ 3,265,113
Aluminum Company of America 24,000 1,704,000
British Steel PLC~ 137,000 2,491,687
Westvaco Corporation 68,300 1,639,200
Willamette Industries, Inc. 60,000 1,721,250
-----------
10,821,250
-----------
CAPITAL GOODS & CONSTRUCTION - 4.46%
Caterpillar, Inc. 50,000 2,228,125
Cooper Industries, Inc. 47,500 1,935,625
Cooper Tire & Rubber 125,000 2,250,000
Hubbell, Inc. 65,000 2,307,500
Thomas & Betts Corporation 55,000 2,093,438
-----------
10,814,688
-----------
COMMERCIAL SERVICES - 3.17%
Foster Wheeler Corporation 111,200 1,529,000
Supervalu, Inc. 91,300 2,128,431
Wallace Computer Services, Inc. 225,300 4,041,319
-----------
7,698,750
-----------
CONSUMER CYCLICAL - 3.99%
American Stores Company 58,900 1,895,844
Ford Motor Company 75,500 3,543,781
Maytag Corporation 28,900 1,379,975
Sears Roebuck & Company 65,000 2,872,188
-----------
9,691,788
-----------
CONSUMER STAPLES - 7.94%
American Home Products
Corporation 53,200 2,786,350
Baxter International, Inc. 62,000 3,689,000
Dimon Incorporated 280,000 2,957,500
Hormel Foods Corporation 136,400 3,691,325
Kimberly-Clark Corporation 72,000 2,916,000
Philip Morris Companies, Inc. 70,000 3,224,375
-----------
19,264,550
-----------
ENERGY - 6.52%
Amoco Corporation 23,200 1,249,900
Baker Hughes, Inc. 89,800 1,880,187
Chevron Corporation 26,400 2,219,250
Phillips Petroleum Company 22,000 992,750
Repsol SA~ 50,000 2,109,375
Total SA~ 37,700 2,368,031
Unocal Corporation 65,800 2,385,250
USX-Marathon Group, Inc. 74,000 2,622,375
-----------
15,827,118
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL - 10.96%
Ace Limited 73,700 $ 2,211,000
Citicorp 36,600 3,401,513
Federal National Mortgage
Association 78,600 5,050,050
First Union Corporation (b) 43,200 2,211,300
Jefferson-Pilot Corporation 33,750 2,041,875
Spieker Properties, Inc. 65,000 2,388,750
US Bancorp 99,000 3,520,687
Wachovia Corporation 39,000 3,324,750
Wilmington Trust Corporation 46,900 2,438,800
-----------
26,588,725
-----------
HEALTH - 4.61%
Abbott Laboratories 43,900 1,906,906
Columbia HCA Healthcare
Corporation 150,000 3,009,375
Johnson & Johnson 41,000 3,208,250
Pharmacia & UpJohn 61,000 3,061,438
-----------
11,185,969
-----------
TECHNOLOGY - 4.63%
Amp, Inc. 45,700 1,633,775
International Business Machines
Corporation 32,700 4,185,600
Lockheed Martin Corporation 21,700 2,187,631
Xerox Corporation 38,000 3,220,500
-----------
11,227,506
-----------
TRANSPORTATION &
SERVICES - 1.58%
KLM Royal Dutch Air * 43,428 1,074,826
Union Pacific Corporation 65,000 2,770,625
-----------
3,845,451
-----------
UTILITIES - 6.46%
Bell Atlantic Corporation 78,900 3,821,719
BellSouth Corporation 33,000 2,483,250
DPL, Inc. 95,000 1,864,375
DQE, Inc. 43,000 1,660,875
Pinnacle West Capital 41,700 1,868,681
SBC Communications, Inc. 89,200 3,963,825
-----------
15,662,725
-----------
TOTAL COMMON STOCKS
(COST $137,623,841) 142,628,520
-----------
</TABLE>
48
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 13.43%
INDUSTRIAL - 6.03%
Aluminum Company of
America, 5.75%, 2/01/01 $ 250,000 $ 254,350
Archer-Daniels-Midland, 6.75%,
12/15/27 2,000,000 2,078,040
Computer Associates
International, 6.50%,
4/15/08 (a) 1,000,000 997,900
Gap, Inc., 6.90%, 9/15/07 1,000,000 1,114,180
Gillette Company, 5.75%,
10/15/05 250,000 260,167
Hershey Foods Corporation,
7.20%, 8/15/27 1,000,000 1,119,310
ICI Wilmington, Inc., 6.95%,
9/15/04 1,000,000 1,065,060
Mead Corporation, 7.35%,
3/01/17 750,000 814,223
Praxair, Inc., 6.15%, 4/15/03 1,000,000 1,027,020
Rockwell International
Corporation, 6.70%, 1/15/28 1,500,000 1,589,775
Scripps (E.W.) Company,
6.38%, 10/15/02 1,000,000 1,037,830
Tenneco, Inc., 7.50%, 4/15/07 500,000 548,365
Williams Company, Inc., 6.50%,
11/15/02 1,000,000 1,032,510
Zeneca Wilmington, 7.00%,
11/15/23 1,500,000 1,688,745
-----------
14,627,475
-----------
FINANCIAL - 5.08%
Allmerica Financial Corporation,
7.63%, 10/15/25 1,130,000 1,252,729
Allstate Corporation, 6.75%,
5/15/18 1,000,000 1,028,290
American General Finance.,
5.88%, 7/01/00 250,000 252,987
Associates Corporation of North
America, 5.25%, 3/30/00 250,000 250,645
BankAmerica Corporation,
7.88%, 12/01/02 1,000,000 1,092,980
Bank One Texas, 6.25%,
2/15/08 1,000,000 1,043,010
Chase Manhattan Corporation,
7.75%, 11/01/99 250,000 255,697
Comerica Bank, 7.13%,
12/01/13 250,000 267,703
Finova Capital Corporation,
6.39%, 10/08/02 1,000,000 1,036,390
First National Bank of Boston,
8.00%, 9/15/04 250,000 277,367
Fleet Financial Group, 6.88%,
1/15/28 1,000,000 1,029,320
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
FINANCIAL (CONTINUED)
Great Western Financial,
6.38%, 7/01/00 $ 250,000 $ 254,623
Heller Financial, 6.38%,
11/10/00 1,000,000 1,026,960
Home Savings of Americas,
6.00%, 11/01/00 250,000 253,330
MBIA, Inc., 7.00%, 12/15/25 1,000,000 1,063,240
NationsBank Corporation,
7.80%, 9/15/16 1,000,000 1,134,400
Security Benefits Life Company,
8.75%, 5/15/16 (a) 500,000 549,375
Toronto Dominion Bank,
6.13%, 11/01/08 250,000 260,930
-----------
12,329,976
-----------
UTILITIES - 2.32%
Florida Power & Light
Company, 5.38%, 4/01/00 250,000 251,090
New York Telephone, 6.00%,
4/15/08 1,000,000 1,052,340
Northern Natural Gas, 6.75%,
9/15/08 2,000,000 2,096,000
Pacific Gas & Electric Company,
5.93%, 10/08/03 250,000 262,700
Philadelphia Electric Company,
7.50%, 1/15/99 100,000 100,835
Southwestern Public Service
Company, 6.88%, 12/01/99 250,000 255,188
System Energy Resources,
7.71%, 8/01/01 500,000 525,535
Union Electric Company,
6.75%, 10/15/99 250,000 254,688
US West Capital Funding Inc.,
6.88%, 7/15/28 785,000 833,489
-----------
5,631,865
-----------
TOTAL CORPORATE BONDS
(COST $31,414,967) 32,589,316
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 27.27%
Government National Mortgage
Association 6.50% - 7.00%,
1/15/24 - 6/15/28 8,509,957 8,721,623
U.S. Treasury Bonds, 7.25%,
5/15/16 4,110,000 5,103,469
U.S. Treasury Notes, 5.63% -
7.50%, 11/15/99 - 10/15/06 48,550,000 52,331,514
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $61,636,227) 66,156,606
-----------
241,374,442
-----------
</TABLE>
49
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT - 0.18%
REPURCHASE AGREEMENT
Paribas Corporation
Dated 9/30/98, 5.54%, due
10/01/98, collateralized by
$368,000 U.S. Treasury Note,
7.88%, 11/13/04, market
value $435,735
(cost $435,000) $435,000 $ 435,000
------------
TOTAL INVESTMENTS
(COST $231,110,035)-99.66% 241,809,442
OTHER ASSETS LESS
LIABILITIES - 0.34% 831,534
------------
NET ASSETS - 100.00% $242,640,976
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under rule 144A or securities offered pursuant to section 4(2) of the
Securities Act of 1933, as amended. These securites have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) At September 30, 1998, the Portfolio owned 43,200 shares of common stock of
First Union Corporation at a cost of $1,599,696 and market value of
$2,211,300. These shares were purchased by the Portfolio prior to the
acquisition of Wheat First Union by First Union.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $159,489,535 and $86,643,249, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $231,143,009. Net unrealized appreciation aggregated
$10,666,433, of which $24,490,485, related to appreciated investment securities
and $13,824,052, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $ 241,374,442
Repurchase agreements 435,000
-------------
Total investments
(cost $231,110,035) 241,809,442
Collateral for securities
loaned (Note 2) 40,344,784
Receivables
Fund shares sold 290,524
Dividends and interest 1,702,285
Other 500
-------------
TOTAL ASSETS 284,147,535
-------------
LIABILITIES
Payables
Investments purchased $ 662,932
Securities loaned (Note 2) 40,344,784
Fund shares redeemed 426,881
Accrued expenses and other
liabilities 71,962
----------
TOTAL LIABILITIES 41,506,559
-------------
NET ASSETS $ 242,640,976
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 221,635,180
Accumulated undistributed
net investment income 91,952
Accumulated net realized
gain on investment
transactions 10,214,437
Net unrealized appreciation
of investments 10,699,407
-------------
NET ASSETS $ 242,640,976
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 19.54
Class B Shares $ 19.53
Class Y Shares $ 19.54
OFFERING PRICE PER SHARE
Class A Shares $ 20.73(a)
Class B Shares $ 19.53
Class Y Shares $ 19.54
SHARES OUTSTANDING
Class A Shares 5,055,017
Class B Shares 7,364,927
Class Y Shares 55
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 2,856,521
Interest 5,943,480
------------
TOTAL INVESTMENT INCOME
(NOTE 2) 8,800,001
EXPENSES
Management fee (Note 4) $1,638,729
Distribution fee (Note 5) 986,604
Shareholder service fee
(Note 5) 546,242
Transfer agent fee 292,933
Administration fee (Note 4) 218,497
Registration expenses 50,615
Custodian and accounting
fees 48,726
Shareholder reports and
postage expenses 43,522
Legal fees 7,495
Directors' fees and expenses 5,917
Audit fees 4,195
Miscellaneous 26,008
-----------
Total expenses 3,869,483
------------
NET INVESTMENT INCOME 4,930,518
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on
investments (Note 2) 10,845,766
Change in unrealized
appreciation on
investments (5,423,416)
-----------
NET GAIN ON INVESTMENTS 5,422,350
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 10,352,868
============
</TABLE>
(b) Net of foreign withholding taxes of $50,731.
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 4,930,518 $ 2,672,361
Net realized gain on investments 10,845,766 15,016,540
Change in unrealized appreciation on investments (5,423,416) 6,704,657
------------ -------------
Increase in net assets resulting from operations 10,352,868 24,393,558
------------ -------------
Distributions to Shareholders
From net investment income
Class A (2,350,498) (1,097,197)
Class B (2,488,039) (1,691,306)
Class Y (29) -
From net realized gain on investments
Class A (5,325,307) (2,474,556)
Class B (8,807,307) (6,846,186)
Class Y (1) -
-------------- -------------
Total distributions to shareholders (18,971,181) (12,109,245)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 101,090,596 74,239,398
Reinvested distributions 17,902,342 11,495,496
Shares redeemed (39,059,107) (17,451,330)
-------------- -------------
Change in net assets resulting from capital share transactions 79,933,831 68,283,564
-------------- -------------
Increase in net assets 71,315,518 80,567,877
Net Assets
Beginning of year 171,325,458 90,757,581
-------------- -------------
End of year (including accumulated undistributed net investment
income of $91,952 and $0, respectively) $242,640,976 $ 171,325,458
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 20.60 $ 19.16 $ 17.13 $ 15.27 $ 14.88
--------- --------- --------- -------- --------
Income from investment operations
Net investment income 0.51 0.44 0.37 0.40 0.31
Net realized and unrealized gain on investments 0.60 3.39 2.75 2.14 0.64
--------- --------- --------- -------- --------
Total from investment operations 1.11 3.83 3.12 2.54 0.95
--------- --------- --------- -------- --------
Less distributions
From net investment income (0.51) (0.47) (0.35) (0.43) (0.30)
From capital gains (1.66) (1.92) (0.74) (0.25) (0.26)
---------- ---------- ---------- -------- --------
Total distributions (2.17) (2.39) (1.09) (0.68) (0.56)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 19.54 $ 20.60 $ 19.16 $ 17.13 $ 15.27
========== ========== ========== ======== ========
TOTAL RETURN* 5.81% 22.11% 19.13% 17.24% 6.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 98,794 $ 63,509 $ 24,210 $ 19,888 $ 17,773
Ratio of expenses to average net assets 1.32% 1.35% 1.36% 1.69% 1.75%
Ratio of net investment income to average net assets 2.70% 2.63% 2.08% 2.53% 2.20%
Portfolio turnover rate 40% 75% 72% 62% 78%
Average commission rate on portfolio transactions $ 0.0540 $ 0.0515 $ 0.0492
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91
--------- --------- --------- -------- --------
Income from investment operations
Net investment income 0.37 0.34 0.23 0.28 0.21
Net realized and unrealized gain on investments 0.59 3.35 2.76 2.14 0.61
--------- --------- --------- -------- --------
Total from investment operations 0.96 3.69 2.99 2.42 0.82
--------- --------- --------- -------- --------
Less distributions
From net investment income (0.36) (0.36) (0.21) (0.31) (0.19)
From capital gains (1.66) (1.92) (0.74) (0.25) (0.26)
---------- ---------- ---------- -------- --------
Total distributions (2.02) (2.28) (0.95) (0.56) (0.45)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28
========== ========== ========== ======== ========
TOTAL RETURN* 5.01% 21.24% 18.26% 16.32% 5.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $143,846 $ 107,816 $ 66,548 $ 46,678 $ 43,219
Ratio of expenses to average net assets 2.07% 2.10% 2.13% 2.43% 2.44%
Ratio of net investment income to average net assets 1.95% 1.87% 1.32% 1.78% 1.51%
Portfolio turnover rate 40% 75% 72% 62% 78%
Average commission rate on portfolio transactions $ 0.0540 $ 0.0515 $ 0.0492
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (C)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.75
--------
Income from investment operations
Net investment income 0.54
Net realized and unrealized gain on investments 0.82
--------
Total from investment operations 1.36
--------
Less distributions
From net investment income (0.54)
From capital gains (0.03)
----------
Total distributions (0.57)
----------
Net asset value, end of period $ 19.54
==========
TOTAL RETURN* 7.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.07% (a)
Ratio of net investment income to average net assets 3.15% (a)
Portfolio turnover rate 40%
Average commission rate on portfolio transactions $ 0.0540
</TABLE>
(a) Annualized.
(c) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
53
<PAGE>
MENTOR BALANCED PORTFOLIO
MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The Mentor Balanced Portfolio, which has been in existence since 1994, became
available to investors in multiple retail mutual fund share classes for the
first time in September. This commentary, therefore, marks the first
opportunity for the managers of the Portfolio to provide their market
perspective to many of our new shareholders.
At quarter end the asset allocation mix in the Mentor Balanced Portfolio was
58% stocks, 41% bonds, and 1% cash.
MARKET OVERVIEW
The first three quarters of 1998 culminated an unprecedented trend of 14
consecutive quarterly gains for the S&P 500. The July-September period,
however, saw a dramatic departure from this trend, with the S&P 500 declining
10%. Despite poor equity returns, U.S. government fixed-income markets were
extremely strong. In fact, the July-September period marked one of the few
times in recent years that bonds significantly outperformed stocks. However,
the broad rally in treasury bonds was not shared by more credit-sensitive
fixed-income sectors, as investors aggressively shifted assets into low risk
instruments only.
EQUITY REVIEW AND OUTLOOK
For some time we have been emphatically cautioning that the stock market would
have to adjust to considerably lower corporate earnings prospects, and this
transition would likely result in increased volatility and lower returns than
experienced over the past several years. Finally, this scenario is unfolding in
full force. Earnings estimates for a broad range of companies are being sharply
reduced. It is now quite possible, in fact likely in our opinion, that the
earnings of the S&P 500 will continue to decline during the remainder of this
year and 1999.
These trends present a significant change from the strong, better-than-expected
earnings growth that has been a key pillar supporting the bull market since
1990, one of the best on record by almost any measure. But this change was
inevitable. It is part of the natural cyclical patterns of the economy,
corporate profitability, and the stock market. After nearly perfect growth
conditions during much of the 1990's, corporate profitability is coming under
pressure as global excess capacity is chasing falling demand. And as should be
expected at this point, lenders are sharply curtailing credit and thereby
reinforcing these developing pressures.
Fear and greed are a long-term investor's best asset and worst threat. It is
exceedingly difficult for both individual and institutional investors to look
through an emotionally charged volatile market and focus on the fundamentals.
To us, fundamental analysis does not mean trying to figure out cyclical swings
in the economy and markets over the next year. It means concentrating on
longer-term business qualities. We know that consistently implementing a
well-defined investment discipline through the ups and downs of an entire cycle
is the best way to ensure long-term success. We focus on a diversified group of
companies with excellent operating records and leading competitive positions.
We are biased toward companies with above-average business predictability. We
have thoroughly analyzed their results and prospects. We own them at prices we
believe offer attractive relative values. It is a very simple approach. Not an
easy one, but a straightforward one. We will at times be wrong in our analysis,
but we will strive to be as objective as possible. Of course, we expect to be
right more
54
<PAGE>
MENTOR BALANCED PORTFOLIO
MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
often than not. We will not alter this approach just because those around us
are becoming more complacent or fearful. Over the long-term, cyclical swings
wash out and business fundamentals prevail.
FIXED INCOME REVIEW AND OUTLOOK
On the fixed-income side, our short-term strategy in this tumultuous
environment has been to tilt portfolio durations somewhat long relative to our
benchmarks, as well as more heavily weight sector allocations toward treasury
securities. Given our long-term confidence in the U.S. economy, we are waiting
for an opportunity to aggressively move into domestic spread sectors. Prior to
such a move, we will have to be convinced that these markets have stabilized.
In our opinion such stabilization will require the Fed to continue to move
forcefully to further ease credit conditions.
The primary risk we see to our outlook is timing. The U.S. economy has
tremendous forward momentum and the current yield curve is already pricing in
an aggressive Fed ease. Should events unfold more slowly than the market hopes,
the bond market could encounter some short-term turbulence. We would view these
sell-offs as short term in nature and would utilize the higher yield levels to
extend our duration further.
November 1998
55
<PAGE>
MENTOR BALANCED PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Balanced Portfolio Class A Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
[GRAPH]
9/16/98 9/30/98
Class A 9,422 9,433
LAGG/S&P 500 10,000 10,464
Total Returns as of 9/30/98
1-Year Since Inception++
Class n/a (5.78%)
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 Balanced
Portfolio Class A Shares after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charge). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+ 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 Balanced Portfolio Class A Shares from the
date of issuance on 9/16/98 through 9/30/98.
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Balanced Portfolio Class Y Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
[GRAPH]
9/16/98 9/30/98
Class Y 10,000 10,000
LAGG/S&P 500 10,000 10,464
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 0.00%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
** Represents a hypothetical investment of $10,000 in Mentor Balanced
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
*** Reflects operations of Mentor Balanced Portfolio Class Y Shares from the
date of issuance on 9/16/98 through 9/30/98.
56
<PAGE>
MENTOR BALANCED PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Balanced Portfolio Class B Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
[GRAPH]
S&P 500 and
Class B Class B* Lehman Brothers
Aggregate Bond Index
6/21/94 10000 10000 10000
12/31/94 10108 9610 10336
6/30/95 11561 11161 12054
9/30/95 12085 11685 12723
9/30/96 14260 13960 14506
9/30/97 18042 17842 18496
9/30/98 20181 19760 20446
Average Annual Return as of 9/30/98 Average Annual Return as of 9/30/98
Without Sales Charges Including Sales Charges
1-Year Since Inception++ 1-Year Since Inception++
Class B 11.86% 17.83% Class B 8.75% 17.69%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ Represents a hypothetical investment of $10,000 in Mentor Balanced Portfolio
Class B Shares. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to
1.00% of amounts redeemed during the five-year period following the date
of purchase. The value of Class B Shares reflects a redemption fee in
effect at the end of each of the stated periods. Prior to September 16,
1998, contingent deferred sales charges of 5.00% were waived. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
+ 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 Balanced Portfolio Class B Shares from the
date of commencement of operations on 6/21/94 through 9/30/98.
* Includes maximum Contingent Deferred Sales Charge (CDSC) of 5%.
57
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 51.46%
BASIC MATERIALS - 1.89%
Emerson Electric Company 3,890 $ 242,152
---------
CAPITAL GOODS & CONSTRUCTION - 5.56%
Bemis Company 6,245 218,966
Illinois Tool Works 4,635 252,607
W. W. Grainger, Inc. 5,730 241,377
---------
712,950
---------
CONSUMER CYCLICAL - 8.42%
Chancellor Media Corporation -
Class A * 5,245 175,052
Clear Channel Communications * 4,445 211,137
Gannett Company 4,105 219,874
Interpublic Group Companies, Inc. 4,335 233,819
Newell Company 5,220 240,446
---------
1,080,328
---------
CONSUMER STAPLES - 5.52%
Philip Morris Companies, Inc. 4,840 222,942
Sherwin-Williams Company 11,285 244,038
Sysco Corporation 10,235 241,162
---------
708,142
---------
FINANCIAL - 10.84%
Ahmanson (HF) & Company 3,950 219,225
American Express Company 2,860 222,007
Federal National Mortgage Association 3,510 225,517
NationsBank Corporation 2,990 159,965
Norwest Corporation 4,495 160,977
UNUM Corporation 4,720 234,525
SouthTrust Corporation 4,800 167,700
---------
1,389,916
---------
HEALTH - 6.95%
Bristol-Myers Squibb Company 2,345 243,587
HealthSouth Corporation * 18,340 193,716
Johnson & Johnson 2,805 219,492
Tenet Healthcare Corporation * 8,170 234,888
---------
891,683
---------
TECHNOLOGY - 9.20%
Automatic Data Processing 3,190 238,452
Computer Associates International, Inc. 6,770 250,490
Computer Sciences Corporation 4,145 225,903
MCI WorldCom, Inc. * 4,685 228,980
Sun Microsystems, Inc. * 4,725 235,364
---------
1,179,189
---------
TRANSPORTATION & SERVICES - 1.16%
Werner Enterprises, Inc. 9,472 149,184
---------
MISCELLANEOUS - 1.92%
Tyco International, Inc. 4,445 245,586
---------
TOTAL COMMON STOCKS
(COST $6,531,760) 6,599,130
---------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
FIXED INCOME SECURITIES - 36.99%
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 34.26%
Federal National Mortgage
Association, MTN, 6.64%,
7/02/07 $ 130,000 $ 145,240
Government National
Mortgage Association, MBS,
6.50%, 5/15/09 102,065 104,453
7.00%, 8/15/28 ARM 84,047 86,674
Government National
Mortgage Association II,
ARM,
6.88%, 4/20/22 71,868 73,307
7.00%, 11/20/22 - 8/15/28 78,240 79,458
U.S. Treasury Bonds, 6.00% -
7.50%, 2/15/23 - 2/15/26 725,000 910,182
U.S. Treasury Notes, 5.63% -
6.75%, 4/30/00 - 5/15/08 2,790,000 2,995,171
---------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $4,274,484) 4,394,485
---------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 1.22%
AFG Receivables Trust, 6.65%,
10/15/02 32,527 32,782
CS First Boston, 7.18%,
2/25/18 25,000 26,800
Key Auto Finance Trust Series
1997-2 Class A3, 6.10%,
11/15/00 50,000 50,172
Union Acceptance Corporation,
6.48%, 5/10/04 45,000 46,240
---------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $152,201) 155,994
---------
CORPORATE BONDS - 1.51%
Ford Motor Credit Company,
7.20%, 6/15/07 45,000 50,256
Norwest Corporation, 6.80%,
5/15/02 60,000 63,625
PNC Student Loan Trust I,
6.73%, 1/25/07, ARM 75,000 79,726
---------
TOTAL CORPORATE BONDS
(COST $181,746) 193,607
---------
TOTAL FIXED INCOME SECURITIES
(COST $4,608,431) 4,744,086
---------
</TABLE>
58
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT
REPURCHASE AGREEMENT - 0.98%
Goldman Sachs & Company
Dated 09/30/98, 5.60%, due
10/01/98, collateralized by
$127,262 Federal National
Mortgage Association,
6.00%, 08/01/13, market
value $128,534
(cost $125,344) $125,344 $ 125,344
-----------
TOTAL INVESTMENTS
(COST $11,265,535)-89.43% 11,468,560
OTHER ASSETS LESS
LIABILITIES - 10.57% 1,352,413
-----------
NET ASSETS - 100.00% $12,820,973
===========
</TABLE>
* Non-income producing.
ARM - Adjustable Rate Mortgage
MBS - Mortgage Backed Securities
MTN - Medium Term Note
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $11,028,839 and $3,760,750, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $11,265,535. Net unrealized appreciation aggregated
$203,025, of which $449,651, related to appreciated investment securities and
$246,626, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value
(Note 2)
Investment securities $ 11,343,216
Repurchase agreements 125,344
------------
Total investments
(cost $11,265,535) 11,468,560
Collateral for securities loaned
(Note 2) 2,639,420
Cash 477,253
Receivables
Investments sold 90,763
Fund shares sold 3,356,473
Dividends and interest 68,997
------------
TOTAL ASSETS 18,101,466
------------
LIABILITIES
Investments purchased $ 2,537,038
Securities loaned (Note 2) 2,639,420
Fund shares redeemed 100,000
Accrued expenses and other
liabilities 4,035
-----------
TOTAL LIABILITIES 5,280,493
------------
NET ASSETS $12,820,973
============
Net Assets represented by:
(Note 2)
Additional paid-in capital $ 12,530,663
Accumulated undistributed net
investment income 18,259
Accumulated net realized gain
on investment transactions 69,026
Net unrealized appreciation of
investments 203,025
------------
NET ASSETS $ 12,820,973
============
NET ASSET VALUE PER SHARE
Class A Shares $ 13.69
Class B Shares $ 13.69
Class Y Shares $ 13.69
OFFERING PRICE PER SHARE
Class A Shares $ 14.53(a)
Class B Shares $ 13.69
Class Y Shares $ 13.69
SHARES OUTSTANDING
Class A Shares 258,246
Class B Shares 412,394
Class Y Shares 266,111
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 29,221
Interest 104,135
--------
Total investment income
(Note 2) 133,356
--------
EXPENSES
Management fee (Note 4) $ 31,721
Distribution fee (Note 5) 30,319
Shareholder service fee (Note 5) 10,212
Administration fee (Note 4) 4,219
Custodian and accounting fees 5,842
Registration expenses 2,363
Shareholder reports and postage
expenses 2,043
Legal fees 115
Directors' fees and expenses 60
Audit fees 59
Miscellaneous 465
--------
Total expenses 87,418
Deduct
Waiver of distribution fee (Note 5) (29,451)
Waiver of management fee
(Note 4) (20,856)
Waiver of shareholder servicing
fee (Note 5) (9,738)
Waiver of administration fee
(Note 4) (4,219)
--------
NET EXPENSES 23,154
--------
NET INVESTMENT INCOME 110,202
--------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on investments
(Note 2) 822,291
Change in unrealized appreciation
on investments (583,942)
--------
NET GAIN ON INVESTMENTS 238,349
--------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $348,551
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 110,202 $ 107,324
Net realized gain on investments 822,291 408,111
Change in unrealized appreciation on investments (583,942) 397,175
------------ -----------
Increase in net assets resulting from operations 348,551 912,610
------------ -----------
Distributions to Shareholders
From net investment income (159,807) (108,705)
From net realized gain on investments (1,140,442) (449,369)
------------ -----------
Total distributions to shareholders (1,300,249) (558,074)
------------ -----------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 9,280,672 108,705
Reinvested distributions 1,300,249 449,370
Shares redeemed (910,125) (636,137)
------------ -----------
Change in net assets resulting from capital share transactions 9,670,796 (78,062)
------------ -----------
Increase in net assets 8,719,098 276,474
Net Assets
Beginning of period 4,101,875 3,825,401
------------ -----------
End of period (including accumulated undistributed net investement
income of $18,259 and $67,864, respectively) $ 12,820,973 $ 4,101,875
============ ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69
--------
Income from investment operations
Net investment income 0.00**
Net realized and unrealized gain (loss) on
investments 0.00**
----------
Total from investment operations 0.00**
----------
Net asset value, end of period $ 13.69
==========
TOTAL RETURN* 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,534
Ratio of expenses to average net assets 1.35% (a)
Ratio of net investment income to average net
assets 1.52% (a)
Portfolio turnover rate 89%
Average commission rate on portfolio
transactions $ 0.0687
</TABLE>
(a) Annualized.
(b) For the period from September 16, 1998 (initial offering of Class A) to
September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
** Income for the period was less than $0.005 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES (F)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 17.61 $ 16.28 $ 14.85
--------- --------- ---------
Income from investment operations
Net investment income 0.45 0.43 0.42
Net realized and unrealized gain (loss) on
investments 1.43 3.35 2.09
--------- --------- ---------
Total from investment operations 1.88 3.78 2.51
--------- --------- ---------
Less distributions
From net investment income (0.71) (0.43) (0.48)
From net realized capital gain (5.09) (2.02) (0.60)
---------- ---------- ----------
Total distributions (5.80) (2.45) (1.08)
---------- ---------- ----------
Net asset value, end of period $ 13.69 $ 17.61 $ 16.28
========== ========== ==========
TOTAL RETURN* 11.86% 26.09% 18.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 5,645 $ 4,102 $ 3,825
Ratio of expenses to average net assets 0.52% 0.50% 0.50%
Ratio of expenses to average net assets excluding
waiver 2.12% 2.13% 2.06%
Ratio of net investment income to average net assets 2.63% 2.78% 2.83%
Portfolio turnover rate 89% 80% 103%
Average commission rate on portfolio transactions $ 0.0687 $ 0.0696 $ 0.0694
<CAPTION>
PERIOD ENDED PERIOD ENDED
9/30/95 (c) 12/31/94 (d)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.44 $ 12.50
----------- -----------
Income from investment operations
Net investment income 0.36 0.22
Net realized and unrealized gain (loss) on
investments 2.08 (0.09)
----------- -----------
Total from investment operations 2.44 0.13
----------- -----------
Less distributions
From net investment income (0.03) (0.19)
From net realized capital gain -- --
----------- -----------
Total distributions (0.03) (0.19)
----------- -----------
Net asset value, end of period $ 14.85 $ 12.44
=========== ===========
TOTAL RETURN* 19.28% 1.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,210 $ 2,911
Ratio of expenses to average net assets 0.50% (a) 0.50% (a)
Ratio of expenses to average net assets excluding
waiver 2.12% (a) 2.72% (a)
Ratio of net investment income to average net assets 3.26% (a) 3.32% (a)
Portfolio turnover rate 65% 71%
Average commission rate on portfolio transactions
</TABLE>
CLASS Y SHARES (f)
<TABLE>
<CAPTION>
PERIOD
ENDED 9/30/98 (e)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69
--------
Income from investment operations
Net investment income 0.01
Net realized and unrealized loss on investments (0.01)
---------
Total from investment operations 0.00
---------
Net asset value, end of period $ 13.69
=========
TOTAL RETURN* 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,642
Ratio of expenses to average net assets 1.10%(a)
Ratio of net investment income to average net assets 2.31%(a)
Portfolio turnover rate 89%
Average commission rate on portfolio transactions $ 0.0687
</TABLE>
(a) Annualized.
(c) For the period from January 1, 1995 to September 30, 1995.
(d) For the period from June 21, 1994 (commencement of operations) to December
31, 1994.
(e) For the period from September 16, 1998 (initial offering of Class Y) to
September 30, 1998.
(f) Prior to September 16, 1998, all shareholders of the Balanced Portfolio
were Class B shareholders. On September 16, 1998, shares of Class B were
converted to Class Y shares.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE TAX-EXEMPT MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
ECONOMIC FACTORS
Unlike many countries in the world, the U.S. economy was strong throughout the
reporting period, characterized by record low unemployment, good growth and low
inflation. Driving economic growth in recent months has been the strength in
the housing market, which benefited from strong employment and low interest
rates. Housing starts in July 1998 reached an all-time high, 17% above the same
period a year ago. While the housing market has been largely insulated from the
overseas financial crises, the manufacturing sector has begun to show signs of
a slowdown. In April, the National Association of Purchasing Management Index
slipped from 54.8 to 52.9. This Index, which compares the changes in various
market areas on a month to month basis, is a widely recognized measure of
manufacturing activity. By June, the Index fell to 49.6, below the 50% level
that marks the difference between growth and contraction.
The news that manufacturing activity was slowing down was welcomed by the
Federal Reserve. In part, this eliminated the need for the Fed to raise
interest rates to head off inflation, which was the market's concern through
the July meeting. In early August, the Fed concluded that the risks of
inflation were evenly balanced against the risks of recession. By September,
however, it appeared that recession was more of a concern given the declines in
the Japanese stock market, the financial collapse of Russia, and the large
drops in the U.S. stock market. As a result the Fed lowered the Fed Funds
target by 25 basis points to 5.25% in late September.
The Fed is in the difficult position of having to set U.S. policy based on
international factors. With the prices of gold and oil recovering from their
lows, the disinflationary effects of declining commodity prices may be coming
to an end. Continued low inflation appears to be fostering higher wage demands.
If world financial markets can be stabilized, the Fed could find that the
balance of risks might shift just as quickly back toward inflation.
MARKET REVIEW
While we saw several periods of volatility during the past 12 months, overall
the market rallied, with U.S. Treasuries strongly outperforming the municipal
market. The 30-year Treasury, which began the reporting period yielding 6.40%,
ended 143 basis point lower at 4.97%. 30-year AAA-rated general obligation
municipals yielded 5.17% one year ago, dropping to 4.78% one year later.
The divergent paths taken by the treasury and municipal markets can be
primarily attributed to the impact of the Asian financial crisis. As problems
in Asia have continued and the U.S. dollar has risen relative to Asian
currencies, demand for treasuries has increased. This "flight to quality" has
driven the yield on the long bond down to the lowest levels seen since the
government began issuing the 30-year bond in 1977. At the same time, surpluses
of the federal government have caused a reduction in issuance resulting in
fewer bonds to meet strong demand.
Technical conditions have been exactly the opposite in the tax-exempt market,
with lukewarm retail demand due to low absolute yields and a strong increase in
supply from a year ago. Although new issue volume has slowed somewhat in the
past couple of months, year-to-date issuance is 37% over the comparable period
a year ago. In addition to encouraging the number of refunding issues (up
63
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE TAX-EXEMPT MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
59%), the low interest rate environment has also boosted new money issues which
are up 20% year to date. As has been the trend in recent years, over 51% of new
securities were issued with bond insurance, and yield spreads between quality
and lower rated bonds remained tight.
Since municipal prices did not rise as sharply as taxable securities during the
period, tax-exempt yields are now very attractive relative to treasuries. At
the end of the reporting period, the Bond Buyer Revenue Bond Index yielded
5.17% or 104% of 30-year treasuries, even before taking into consideration any
tax advantage. The Revenue Bond Index consists of 25 revenue bonds with a
30-year maturity and an average rating of A1. The bonds that comprise this
index are very similar to those we purchase for your Portfolio.
MANAGEMENT STRATEGY
Our outlook during most of the reporting period was positive, and we maintained
duration slightly long relative to our benchmark to allow the fund to take full
advantage of the rally. At the end of the fiscal year, the duration of the
portfolio was 7.82 years compared to the Lehman Municipal Bond Index duration
of 7.55 years.
The high percentage of new issues that came to market insured continued to
create a scarcity of lower-rated higher-yielding offerings. This resulted in
continued tight yield spreads between AAA-rated and lower quality paper. While
we did add a number of non-rated or lower-rated securities to the portfolio, we
concentrated more on insured offerings as we felt they offered more attractive
relative yields. The lower quality securities we selectively added helped
maximize the portfolio's dividend paying ability.
We kept the portfolio well diversified by industry, increasing our positions in
the healthcare and industrial revenue sectors, which traditionally have
performed slightly stronger than other sectors in the Revenue Bond Index. At
the end of the reporting period, our exposure to healthcare stood at 21% of
assets, with industrial revenue the second largest sector at 13% of assets. Our
research expertise in these two areas allows us to find value in individual
issues.
OUTLOOK
The Federal Reserve's recent 25 basis point interest rate cut and the slowing
down of the U.S. economy are likely to sustain the low interest rate
environment, which is favorable for the bond markets. It appears that we will
see a record year of municipal issuance as the low absolute yields spark
further refundings as well as new money issues.
We are satisfied with the current structure of the portfolio and do not expect
to make any major changes over the next few months unless credit spreads widen
between AAA-rated and lower-rated issues. If that occurs, we would redeploy
some assets toward higher-yielding securities to strengthen the portfolio's
dividend. We also continue to closely monitor those securities that are
vulnerable to calls and to extend the call protection of the portfolio.
Combined with the recent declines in the equity market, the very attractive
ratio of municipal yields to taxable yields could turn investor focus from
stocks to the fixed-income market.
November 1998
64
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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 9525 10000 10000
9/30/92 10034 10528 10561
9/30/93 11637 12134 11906
9/30/94 11101 11511 11616
9/30/95 12151 12348 12916
9/30/96 12935 13184 13818
9/30/97 14085 14291 14933
9/30/98 15245 15289 16232
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year Since Inception*
Class A 3.12% 4.53% 6.79%
Class B 3.70% 4.85% 6.90%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The value of Class B Shares reflects a redemption
fee in effect at the end of each stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class A Shares, after deducting the maximum sales charge of
4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
* Reflects operations of Mentor Municipal Income Portfolio Class A and Class
B Shares from the date of commencement of operations on 4/29/92 through
9/30/98.
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Municipal Income Portfolio Class Y Shares and Lehman Municipal Bond Index.-
[GRAPH]
Y Shares Lehman Municipal
Bond Index
11/19/97 10000 10000
12/31/97 10147 10206
3/31/98 10263 10323
6/30/98 10410 10480
9/30/98 10689 10802
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 7.51%
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 9/30/98.
65
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES - 99.42%
ARIZONA - 1.56%
Pima County Arizona IDA,
7.25%, 7/15/10 (c) $1,550,000 $ 1,733,830
-------------
ARKANSAS - 1.12%
Pulaski County Health
Facilities, 5.00%, 12/01/28 1,250,000 1,248,950
-------------
CALIFORNIA - 10.51%
California State Water Reserve
Center, 4.75%, 12/01/29 3,500,000 3,427,270
California Statewide
Community Development
Authority, 5.63%, 10/01/34 2,070,000 2,132,514
Carson Improvement Board Act
1915, Special Assessment
District 92, 7.38%, 9/02/22 700,000 770,392
East Bay Municipal Utility
District, 4.75%, 6/01/21 1,915,000 1,887,424
Orange County Community
Facilities District, Series A,
7.35%, 8/15/18 (c) 300,000 346,779
San Francisco City & County
Airport, 6.30%, 5/01/25 1,000,000 1,101,250
University of California
Revenues, 4.75%, 9/01/16 2,000,000 2,012,240
-------------
11,677,869
-------------
COLORADO - 3.36%
Colorado Housing Authority,
7.00%, 11/01/24 525,000 560,873
Denver City & County Airport
Revenue, 7.75% - 8.50%,
11/15/13 - 11/15/23 2,700,000 3,167,089
-------------
3,727,962
-------------
CONNECTICUT - 0.99%
Connecticut State Development
Authority, 6.15%, 4/01/35 1,000,000 1,104,860
-------------
DISTRICT OF COLUMBIA - 0.80%
Metropolitan Washington,
General Airport Revenue,
Series A, 6.63%, 10/01/19 (c) 800,000 884,496
-------------
FLORIDA - 2.54%
Hillsborough County, 6.25%,
12/01/34 1,250,000 1,396,750
Sarasota County Health
Facilities Authority Revenue,
10.00%, 7/01/22 1,160,000 1,418,831
-------------
2,815,581
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
GEORGIA - 2.92%
Fulton County Georgia
Housing Authority
Multifamily, Housing
Revenue, 6.38%, 2/01/08 $ 520,000 $ 528,346
George Smith World Congress
Center, 5.50%, 7/01/20 1,500,000 1,509,345
Monroe County Development
Authority PCRB, 6.75%,
1/01/10 1,000,000 1,205,240
-------------
3,242,931
-------------
ILLINOIS - 9.53%
Broadview Tax Increment
Revenue, 8.25%, 7/01/13 1,000,000 1,145,030
Chicago Capital Appreciation,
(effective yield-1.99%) (a),
7/01/16 2,000,000 718,080
Chicago Heights Residential
Mortgage, (effective
yield-3.29%) (a), 6/01/09 3,465,000 1,655,300
Illinois Health Facilities
Authority Revenue, 5.50% -
9.50%, 11/15/19 - 10/01/22 2,250,000 2,527,477
Illinois Educational Facilities
Authority Revenue, 6.00%,
10/01/24 1,000,000 1,042,200
Kane County School District
No. 129, 5.50%, 2/01/11 2,000,000 2,167,620
Metropolitan Pier &
Exposition, (effective
yield-1.39%) (a), 6/15/21 1,950,000 644,962
Saint Clair County Public
Building, (effective
yield-1.99%) (a), 12/01/16 1,650,000 690,789
-------------
10,591,458
-------------
INDIANA - 0.36%
Indiana Transportation Finance
Authority, Series A, (effective
yield-1.92%) (a), 6/01/17 1,000,000 403,560
-------------
IOWA - 0.61%
Student Loan Liquidity
Corporation, Student Loan
Revenue, Series C, 6.95%,
3/01/06 (c) 625,000 674,525
-------------
</TABLE>
66
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
KENTUCKY - 4.58%
Jefferson County Hospital
Revenue, 8.70%,
10/01/08 (b) $ 500,000 $ 599,375
Kenton County Airport Board
Revenue, OID, 7.50%,
2/01/20 1,400,000 1,546,342
Warren County Hospital
Facility Revenue Bowling
4.88%, 4/01/27 3,000,000 2,945,580
----------
5,091,297
----------
LOUISIANA - 3.38%
Louisiana Public Facilities
Authority Revenue, Dillard
University-Louisiana, 5.00%,
2/01/28 2,750,000 2,755,720
Louisiana State University &
Agriculture and Mechanical
College, University Revenues,
5.00%, 10/01/30 1,000,000 1,001,340
----------
3,757,060
----------
MAINE - 0.86%
Maine State Housing Authority,
Series C, 6.88%, 11/15/23 885,000 956,030
----------
MASSACHUSETTS - 1.92%
Massachusetts State Health and
Education, 6.00%, 10/01/23 1,000,000 1,018,850
Massachusetts State Health and
Educational Facilities
Authority, OID Revenue
Bonds, Series A, 6.88%,
4/01/22 1,000,000 1,119,950
----------
2,138,800
----------
MICHIGAN - 4.93%
Detroit Michigan Water Supply
Systems, 5.00%, 7/01/27 1,000,000 1,000,310
Grand Traverse County
Hospital, 5.00%, 7/01/28 2,500,000 2,486,375
Michigan State Hospital
Financial Authority Revenue,
5.00%, 5/15/28 2,000,000 1,995,280
----------
5,481,965
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
NEBRASKA - 1.22%
Nebraska Investment Finance
Authority, SFM, 9.42%,
9/15/24 (b) $ 300,000 $ 339,375
Nebraska Public Gas Agency
Gas supply System, 5.00%,
4/01/00 1,000,000 1,017,810
----------
1,357,185
----------
NEVADA - 2.26%
Clark County, 5.90%, 10/01/30 2,000,000 2,050,800
Henderson Local Improvement
District, Special Assessment,
Series A, 8.50%, 11/01/12 440,000 458,876
----------
2,509,676
----------
NEW JERSEY - 2.10%
East Orange County Board of
Education, Participation
Notes, (effective
yield-1.67%) (a), 2/01/20 1,000,000 365,000
New Jersey State Housing &
Mortgage Finance, 5.40%,
11/01/28 1,170,000 1,209,406
Union Utilities Authority,
5.00%, 6/15/28 750,000 757,568
----------
2,331,974
----------
NEW MEXICO - 0.92%
Santa Fe Educational Facilities
Revenue Bonds, 5.50%
3/01/24 1,000,000 1,020,210
----------
NEW YORK - 4.93%
Clifton Springs Hospital
Refunding & Improvement,
8.00%, 1/01/20 700,000 786,947
Metropolitan Transportation
Authority, 4.75%, 7/01/19 1,000,000 962,240
New York City Municipal
Water Facility, 5.13%,
6/15/21 1,000,000 1,008,300
New York, Series H, 7.20%,
2/01/13 1,500,000 1,680,946
New York State Dormitory
Authority Revenue Hospital,
5.20%, 2/15/14 1,000,000 1,034,250
----------
5,472,683
----------
</TABLE>
67
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
NORTH CAROLINA - 2.12%
Cumberland County, 5.00%,
12/01/24 $1,250,000 $1,253,875
North Carolina Eastern
Municipal Power Agency
Systems Revenue, 5.70%,
1/01/13 1,000,000 1,097,700
----------
2,351,575
----------
NORTH DAKOTA - 0.91%
Devils Lake Health Care,
6.10%, 10/01/23 1,000,000 1,012,690
----------
OHIO - 1.91%
Batavia Local School District
Reference, 5.63%,12/01/22 1,000,000 1,121,040
Cuyahoga County Health Care
Facilities, 5.50%, 12/01/28 1,000,000 1,001,990
----------
2,123,030
----------
OKLAHOMA - 0.50%
Oklahoma City, Industrial and
Cultural Facilities Trust,
6.75%, 9/15/17 540,000 551,993
----------
PENNSYLVANIA - 6.39%
Beaver County Hospital
Authority Revenue, 5.00%,
5/15/28 1,000,000 997,640
Delaware IDA, 6.20%, 7/01/19 2,000,000 2,191,040
Pennsylvania Economic
Development, 6.40%,
1/01/09 500,000 534,620
Philadelphia Gas Works
Revenue, 5.00%, 7/01/28 2,250,000 2,250,698
Philadelphia Hospital and
Higher Education Facilities,
6.50%, 11/15/08 1,000,000 1,121,430
----------
7,095,428
----------
RHODE ISLAND - 0.31%
West Warwick, Series A, GO
Bonds, 7.30%, 7/15/08 310,000 348,372
----------
SOUTH CAROLINA - 1.81%
Cayce South Carolina
Waterworks & Sewage
Revenue, 5.00%, 7/01/20 2,000,000 2,006,740
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
TENNESSEE - 3.73%
Memphis Shelby County
Airport Authority Special
Facilities Revenue Refunding,
7.88%, 9/01/09 $1,500,000 $1,675,485
Metropolitan Government
Nashville & Davidson
County, 4.75% - 5.00%,
1/01/22 - 10/01/28 2,500,000 2,472,795
----------
4,148,280
----------
TEXAS - 9.94%
Abilene Health Facilities
Development Corporation,
5.90%, 11/15/25 1,000,000 1,002,500
Alliance Airport Authority,
6.38%, 4/01/21 2,000,000 2,192,620
Brazos Higher Education
Authority Student Loan
Revenue, 7.10%, 11/01/04 416,000 472,410
Brazos River Authority
Revenue, 4.90%, 10/01/15 2,000,000 2,054,760
Dallas Fort Worth International
Airport Facility Revenue
Bonds, 7.25%, 11/01/30 1,000,000 1,112,260
Edinburg Consolidated School
District Public Facilities,
5.00%, 8/15/19 1,500,000 1,516,815
Lufkin Health Memorial East
Texas, 5.70%, 2/15/28 1,000,000 1,025,010
Rockwall Independent School
District, OID, 5.55%,
8/15/22 2,450,000 689,822
Texas State Department of
Housing and Community
Affairs Refunding, Series C,
9.74%, 7/02/24 (b) 750,000 973,125
----------
11,039,322
----------
UTAH - 3.40%
Bountiful Hospital Revenue,
9.50%, 12/15/18 230,000 281,237
Intermountain Power Agency
Power Supply, 5.00%,
7/01/19 2,500,000 2,472,225
Utah State Housing Finance
Agency, SFM, 7.20%,
1/01/27 945,000 1,025,108
----------
3,778,570
----------
</TABLE>
68
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
WEST VIRGINIA - 3.61%
Harrison County, 6.75%,
8/01/24 $2,000,000 $ 2,271,020
West Virginia State Hospital
Finance Authority Revenue,
8.80%, 1/01/18 (b) 1,500,000 1,742,445
------------
4,013,465
------------
WISCONSIN - 3.39%
Southeast Wisconsin
Professional Baseball, 5.50%,
12/15/26 2,000,000 2,229,960
Wisconsin State Health &
Educational Facility
Authority Revenues, 5.50%,
2/15/28 1,500,000 1,537,530
------------
3,767,490
------------
TOTAL LONG-TERM MUNICIPAL
SECURITIES
(COST $102,611,970) 110,459,857
------------
SHORT-TERM MUNICIPAL
SECURITIES - 2.16%
CALIFORNIA - 0.45%
California PCRB Series A,
VRDN, 3.65%, 2/28/08 500,000 500,000
------------
NEVADA - 0.54%
Reno Nevada Hospital
Revenue, VRDN, 4.10%,
5/15/23 600,000 600,000
------------
NEW YORK - 0.54%
City of New York VRDN,
4.25%, 8/01/16 200,000 200,000
New York City GO Bonds,
VRDN, 3.95%, 8/15/19 200,000 200,000
New York State Energy
Residential Housing &
Development, VRDN,
4.10%, 7/01/15 200,000 200,000
------------
600,000
------------
TEXAS - 0.45%
North Central Texas Health
Facility, Presbyterian Medical
Center, VRDN, 4.10%,
12/01/15 500,000 500,000
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM MUNICIPAL
SECURITIES (CONTINUED)
WASHINGTON - 0.18%
Washington Health Care,
Sisters of Providence, Series I,
VRDN, 4.05%, 10/01/05 $ 200,000 $ 200,000
------------
TOTAL SHORT-TERM MUNICIPAL
SECURITIES (COST $2,400,000) 2,400,000
------------
TOTAL INVESTMENTS
(COST $105,011,970)-101.58% 112,859,857
OTHER ASSETS LESS
LIABILITIES - (1.58%) (1,750,720)
------------
NET ASSETS - 100.00% $111,109,137
============
</TABLE>
INVESTMENT ABBREVIATIONS
GO - General Obligation
IDA - Industrial Development Authority
OID - Original Issue Discount
PCRB - Pollution Control Revenue Bond
SFM - Single Family Mortgage
VRDN - Variable Rate Demand Note
(a) Effective yield is the yield as calculated at time of purchase at which the
bond accretes on an annual basis until its maturity date.
(b) Represents inverse floating rate securities.
(c) A portion of this security is held as collateral for open futures
contracts.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $91,099,135 and $56,728,625, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $105,011,970. Net unrealized appreciation aggregated
$7,847,887, of which $7,847,887 is related to appreciated investment
securities.
SEE NOTES TO FINANCIAL STATEMENTS.
69
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value
(cost $105,011,970) (Note 2) $112,859,857
Cash 84,254
Receivables
Investments sold 985,674
Fund shares sold 870,855
Interest 1,685,891
-------------
TOTAL ASSETS 116,486,531
-------------
LIABILITIES
Payables
Investments purchased $4,840,799
Fund shares redeemed 60,067
Dividends 349,921
Variation margin (Note 2) 90,000
Accrued expenses and other
liabilities 36,607
----------
TOTAL LIABILITIES 5,377,394
-------------
NET ASSETS $111,109,137
=============
Net Assets represented by:
(Note 2)
Additional paid-in capital $105,840,947
Accumulated distributions in
excess of net investment
income (349,922)
Accumulated net realized loss
on investment transactions (2,004,046)
Net unrealized appreciation of
investments and open futures
contracts 7,622,158
-------------
NET ASSETS $111,109,137
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.99
Class B Shares $ 15.94
Class Y Shares $ 16.00
OFFERING PRICE PER SHARE
Class A Shares $ 16.79(a)
Class B Shares $ 15.94
Class Y Shares $ 16.00
SHARES OUTSTANDING
Class A Shares 3,237,676
Class B Shares 3,722,547
Class Y Shares 67
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $ 5,400,238
EXPENSES
Management fee (Note 4) $ 557,332
Distribution fee (Note 5) 257,381
Shareholder service fee (Note 5) 232,220
Transfer agent fee 102,171
Administration fee (Note 4) 92,888
Registration expenses 53,355
Custodian and accounting fees 26,161
Shareholder reports and postage
expenses 8,237
Legal fees 2,878
Directors' fees and expenses 2,275
Audit fees 1,991
Miscellaneous 9,070
---------
Total expenses 1,345,959
-----------
NET INVESTMENT INCOME 4,054,279
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, FUTURES AND
OPTIONS CONTRACTS
Net realized loss on investments,
futures and options contracts
(Note 2) (41,138)
Change in unrealized appreciation
on investments 3,077,428
---------
NET GAIN ON INVESTMENTS, FUTURES
AND OPTIONS CONTRACTS 3,036,290
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 7,090,569
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
70
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 4,054,279 $ 2,950,727
Net realized gain (loss) on investments, futures and options contracts (41,138) 548,498
Change in unrealized appreciation on investments 3,077,428 1,603,630
------------- -------------
Increase in net assets resulting from operations 7,090,569 5,102,855
------------- -------------
Distributions to Shareholders
From net investment income
Class A (1,979,908) (1,179,998)
Class B (2,308,071) (1,981,316)
Class Y (43) --
From net realized gain on investments
Class A -- (39,820)
Class B -- (66,849)
------------- -------------
Total distributions to shareholders (4,288,022) (3,267,983)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 45,477,369 25,738,018
Reinvested distributions 2,625,084 1,904,347
Shares redeemed (13,461,719) (10,560,419)
------------- -------------
Change in net assets resulting from capital share transactions 34,640,734 17,081,946
------------- -------------
Increase in net assets 37,443,281 18,916,818
Net Assets
Beginning of year 73,665,856 54,749,038
------------- -------------
End of year (including accumulated distributions in excess of net
investment income of ($349,922) and ($300,191), respectively) $ 111,109,137 $ 73,665,856
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05
------- ------- ------- ------- -------
Income from investment operations
Net investment income 0.66 0.81 0.82 0.81 0.82
Net realized and unrealized gain
(loss) on investments 0.59 0.49 0.12 0.51 (1.54)
------- ------- ------- ------- -------
Total from investment operations 1.25 1.30 0.94 1.32 (0.72)
------- ------- ------- ------- -------
Less distributions
From net investment income (0.76) (0.81) (0.82) (0.82) (0.81)
From capital gains -- (0.03) -- - (0.10)
------- ------- ------- ------- -------
Total distributions (0.76) (0.84) (0.82) (0.82) (0.91)
------- ------- ------- ------- -------
Net asset value, end of year $ 15.99 $ 15.50 $ 15.04 $ 14.92 $ 14.42
======= ======= ======= ======= =======
TOTAL RETURN* 8.24% 8.89% 6.46% 9.46% (4.83%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $51,757 $29,394 $17,558 $20,460 $25,056
Ratio of expenses to average net assets 1.17% 1.22% 1.24% 1.43% 1.24%
Ratio of expenses to average net assets excluding waiver 1.17% 1.22% 1.24% 1.43% 1.33%
Ratio of net investment income to average net assets 4.63% 5.09% 5.47% 5.56% 5.43%
Portfolio turnover rate 62% 59% 46% 43% 87%
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
71
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06
------- ------- ------- ------- -------
Income from investment operations
Net investment income 1.30 0.71 0.75 0.74 0.74
Net realized and unrealized gain
(loss) on investments ( 0.14) 0.52 0.11 0.52 ( 1.54)
------- ------- ------- ------- -------
Total from investment operations 1.16 1.23 0.86 1.26 ( 0.80)
------- ------- ------- ------- -------
Less distributions
From net investment income ( 0.71) ( 0.71) ( 0.76) ( 0.74) ( 0.73)
From capital gains -- ( 0.08) -- ( 0.10)
------- ------- ------- -------
Total distributions ( 0.71) ( 0.79) ( 0.76) ( 0.74) ( 0.83)
------- ------- ------- ------- -------
Net asset value, end of year $ 15.94 $ 15.49 $ 15.05 $ 14.95 $ 14.43
======= ======= ======= ======= =======
TOTAL RETURN* 7.70% 8.33% 5.87% 9.01% ( 5.34%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $59,351 $44,272 $37,191 $39,493 $46,157
Ratio of expenses to average net assets 1.67% 1.72% 1.74% 1.92% 1.74%
Ratio of expenses to average net assets excluding waiver 1.67% 1.72% 1.74% 1.92% 1.86%
Ratio of net investment income to average net assets 4.13% 4.60% 4.95% 5.07% 4.93%
Portfolio turnover rate 62% 59% 46% 43% 87%
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.51
--------
Income from investment operations
Net investment income 1.39
Net realized and unrealized loss on investments (0.23)
--------
Total from investment operations 1.16
--------
Less distributions
From net investment income (0.67)
--------
Net asset value, end of period $ 16.00
========
TOTAL RETURN* 7.51%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 0.92%(a)
Ratio of net investment income to average net assets 5.66%(a)
Portfolio turnover rate 62%
</TABLE>
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
72
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
MARKET CONDITIONS
The 12-month period ending September 30, 1998 saw a dramatic decline in the
level of interest rates across the yield curve. At quarter end, long-term
interest rates were at levels not seen since the 1960s. The 30-year Treasury
ended the quarter yielding under 5%, at 4.97%, a full 1.44% below its level at
the beginning of the period. Two-year Treasury yields saw an even more
substantial decline, falling 1.51% to 4.27% over the course of the period.
On September 29th, the Federal Reserve initiated its first monetary
intervention in over two years, a 0.25% reduction in the Federal Funds rate.
And at the end of September, the short-to-intermediate portion of the yield
curve was actually inverted, as 6-month Treasury Bills were yielding more than
5-year Treasury Bonds. This implied market expectations of future monetary
easing by the Federal Reserve, continued benign domestic inflation, and a
slowing economy.
In the past few months the market has grown increasingly concerned that a
global deflationary spiral could unfold. The IMF policy prescription of
currency devaluation coupled with tight monetary and fiscal policies appears to
be making economic conditions even worse for Korea, Indonesia, Russia, etc. The
large debt burdens and faltering growth rates of the economies under IMF
supervision have raised the specter of wide scale defaults despite IMF
intervention. Russia's August announcement that it would simultaneously devalue
the ruble and unilaterally reschedule the repayment terms of its debt brought
this fear home to many global investors. As the implicit guarantee of the IMF
loses its credibility, the emerging markets that had been relatively healthy
are being put under increasing pressure. Concerns about the credit quality of
these nations have elevated interest rates in these economies to the point
where a slowdown in economic growth is becoming inevitable. Such a global
slowdown cannot help but put significant downward pressure on U.S. growth and
inflation rates.
The U.S. has not been immune to global credit quality anxiety. The yield spread
between treasury rates and high-quality corporate bonds, a traditional measure
of credit concerns within the economy, ballooned toward quarter end to levels
not seen since the last recession. The high-yield market has come under even
more stress as investors abandon markets with any hint of credit risk. The
underperformance of spread sectors has caused leveraged investors, such as
hedge funds and real estate investment trusts, to come under severe funding
pressure. As lenders call their loans or demand more collateral, these
leveraged investors are left with few alternatives but to sell assets into an
already depressed market. These forced asset liquidations have further
depressed prices in corporate bonds and mortgage-backed securities, and in many
instances trading activity has all but ceased in many market sectors.
PERFORMANCE
For the 12-month period ending September 30, 1998, the Mentor Quality Income
Portfolio A shares returned 9.95% and the B shares 9.46%, compared to 8.30% for
its Lipper U.S. Mortgage peer group. The Mentor Short-Duration Income Portfolio
A and B shares returned 6.87% and 6.68%, respectively, exclusive of sales
charges for the 12-month period, compared to 8.04% for its Lipper
Short-Intermediate Investment Grade peer group. The period saw massive
outperformance of treasury markets as compared to corporate bonds,
73
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
mortgage-backed, asset-backed, and all other spread product securities. This
resulted in our trailing the Merrill Lynch 7-year Treasury and 3-year Treasury
Index benchmarks, which returned 15.78% and 10.03% respectively for the
12-month period.
MARKET OUTLOOK
Economic growth is almost certain to slow in the upcoming year, as the impact
of slower growth overseas and distressed domestic credit markets takes effect.
We do not, however, anticipate a recession for 1999. The United States has
ample policy alternatives to fight any slowing in the domestic economy. As
inflation has fallen, real interest rates (the nominal interest rate minus
inflation) implied by the Fed Funds rate has risen appreciably. Assuming that
the turmoil overseas will place continued downward pressure on inflation rates,
the Fed could lower Fed Funds by over 150 basis points (1.50%) and still
maintain a real interest rate higher than the historical average. Unlike Japan,
the U.S. has a healthy, well-capitalized banking system and therefore any
easing in monetary conditions will help stimulate demand. For the first time in
many decades, the current budget surplus means that an expansionary fiscal
policy could be implemented without necessarily driving up real interest rates
and therefore crowding out private investment.
Given sufficient aggressive action on the part of the Fed, a recession can be
avoided. With an easing Fed and declining inflation, the backdrop for bonds
remains positive. The market could see rates last observed in the 1950s.
Furthermore, as the Fed provides liquidity to the currently distressed credit
markets, corporate bonds and mortgage-backed securities have the potential for
significant outperformance in the upcoming year.
THE PORTFOLIOS
Our short-term strategy in this tumultuous environment has been to tilt
portfolio durations somewhat long relative to our benchmarks, as well as
weighting sector allocations more heavily toward treasury securities. Given our
long-term confidence in the U.S. economy we are waiting for an opportunity to
aggressively move into domestic spread sectors. Prior to such a move, we will
have to be convinced that these markets have stabilized. In our opinion such
stabilization will require the Fed to continue to move forcefully to further
ease credit conditions.
The primary risk we see to our outlook is timing. The U.S. economy has
tremendous forward momentum and the current yield curve is already pricing in
an aggressive Fed ease. Should events unfold more slowly than the market hopes,
the bond market could encounter some short-term turbulence. We would view these
sell-offs as short term in nature and would utilize the higher yield levels to
extend our duration further.
November 1998
74
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
SEPTEMBER 30, 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]
A Shares B Shares Merrill Lynch
7-Year Treasury
Index
4/29/92 9525 10000 10000
9/30/92 9846 10324 11041
9/30/93 10378 10827 12345
9/30/94 10036 10406 11721
9/30/95 11222 11585 13533
9/30/96 11681 11999 14043
9/30/97 12833 13113 15388
9/30/98 14110 14071 17815
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year Since Inception+++
Class A 4.71% 5.31% 5.51%
Class B 5.46% 5.65% 7.14%
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 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. The value of Class B Shares reflects a redemption
fee in effect at the end of each of the stated periods. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ 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
9/30/98.
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 Treasury
Index
11/19/97 10000 10000
12/31/97 10038 10142
3/31/98 10144 10311
6/30/98 10378 10562
9/30/98 10869 11364
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 8.94%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* 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 9/30/98.
75
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
SEPTEMBER 30, 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.~
[GRAPH]
Class A 3-Year Treasury
6/16/95 9900 10000
9/30/95 9931 10139
9/30/96 10532 11038
9/30/97 11304 11571
9/30/98 12093 12732
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception**
Class A 5.89% 5.94%
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class B Shares and Merrill Lynch 3-year
Treasury.~
[GRAPH]
Class B 3-Year Treasury
4/29/94 10000 10000
12/31/94 10093 10075
9/30/95 10623 ` 11051
9/30/96 11225 11709
9/30/97 12125 12600
9/30/98 12945 13053
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception++
Class B 2.68% 5.52%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The 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 9/30/98.
+ 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 value of Class B Shares reflects a
redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Reflects operations of Mentor Short-Duration Income Portfolio Class B Shares
from the date of commencement of operations on 4/29/94 through 9/30/98.
76
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
SEPTEMBER 30, 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.~
[GRAPH]
Class Y 3-Year Treasury
11/19/97 10000 10000
12/31/97 10032 10081
3/31/98 10167 10239
6/30/98 10317 10413
9/30/98 10638 10875
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 6.64%
~ 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 9/30/98.
77
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM INVESTMENTS - 143.47%
PREFERRED STOCK - 2.11%
Home Ownership Funding
Corporation (cost
$3,939,796) $4,350,000 $ 4,373,725
-----------
ASSET-BACKED SECURITIES - 7.61%
Advanta Mortgage Loan
Trust, Series 1993-4,
5.55%, 3/25/10 - 1/25/25 1,960,695 1,985,118
AFG Receivables Trust,
7.00%, 2/15/03 (a) 1,250,918 1,260,091
CS First Boston, Series
1996-2 A6, 7.18%, 2/25/18 6,500,000 6,968,124
Equifax Credit Corporation,
Series 1994-1 B, 5.75%,
3/15/09 1,504,448 1,509,739
Fifth Third Bank Auto
Grantor Trust, 6.20%,
9/15/01 702,998 706,572
NASCOR, Series 1997-18,
6.75%, 12/25/27 2,587,927 2,697,132
Old Stone Credit Corporation
Home Equity Trust, Series
1993-1 B1, 6.00%, 3/15/08 624,707 630,054
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $14,997,748) 15,756,830
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 102.27%
Federal Home Loan
Mortgage Corporation
6.50%, Series 1647B,
11/15/08, REMIC 3,263,696 3,263,696
6.00%, Series 1693Z,
3/15/09, REMIC 6,116,037 6,218,120
6.50%, Series 26C, 7/25/18 7,000,000 7,241,864
Federal National Mortgage
Association 6.50%,
5/18/28 2,992,041 2,977,081
6.00% - 6.50%, 9/25/08 -
8/01/28 68,855,587 69,140,559
Government National
Mortgage Association
7.00%, 12/15/08 2,974,460 3,094,571
6.00% - 7.00%, 3/15/28 -
8/15/28 44,411,497 45,459,522
Government National
Mortgage Association II
4.50% - 7.00%, 4/20/22 -
1/20/28 7,152,832 7,209,007
U.S. Treasury Bonds, 6.13%,
11/15/27 8,600,000 9,909,178
U.S. Treasury Notes, 5.38% -
5.63% 7/31/00 - 5/15/08 53,650,000 57,369,396
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $205,742,125) 211,882,994
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 11.63%
Capital One Bank, 7.15% -
7.20%, 7/19/99 - 9/15/06 $4,750,000 $ 4,948,018
Ford Capital, 9.88%, 5/15/02 2,525,000 2,929,000
Lehman Brothers Holdings,
8.50%, 5/01/07 3,000,000 3,345,159
Lehman Brothers, Inc.,
7.50%, 8/01/26 3,500,000 3,635,943
ReliaStar Financial
Corporation, 6.63%,
9/15/03 5,000,000 5,259,300
Salomon, Inc., 7.30%,
5/15/02 2,000,000 2,140,834
United Dominion Realty,
7.07%, 11/15/06 1,700,000 1,827,512
-----------
TOTAL CORPORATE BONDS
(COST $23,143,699) 24,085,766
-----------
MISCELLANEOUS - 0.97%
CSC Holdings, Inc., 7.25%,
7/15/08 1,000,000 1,007,239
Playtex Family Production
Corporation, 9.00%,
12/15/03 1,000,000 1,007,685
-----------
TOTAL MISCELLANEOUS
(COST $2,024,403) 2,014,924
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 14.75%
Chase Mortgage Finance
Corporation, Series
1993-L2 M, 7.00%,
10/25/24 2,958,977 3,113,602
Equifax Credit Corporation,
Series 1998-2, 6.16%,
4/15/08 2,370,000 2,407,761
General Electric Capital
Mortgage Services, Inc.,
Series 1993-18 B1, 6.00%,
2/25/09 1,924,384 1,946,511
General Electric Capital
Mortgage Services, Inc.,
Series 1998-11, 6.50% -
7.00%, 1/25/13 - 1/25/28 4,607,307 4,786,961
Key Auto Finance Trust,
6.15%, 10/15/01 1,500,000 1,513,112
NASCOR, Series 1996-2
Class M, 7.00%, 9/25/11 1,751,689 1,855,812
Prudential Home, Series
1995-5 B1, 7.25%,
9/25/25 (a) 1,453,140 1,515,504
Prudential Home, Series
1995-5 M, 7.25%, 9/25/25 2,562,369 2,667,547
Prudential Home, Series
1995-7 M, 7.00%,
11/25/25 2,813,484 2,959,016
</TABLE>
78
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Prudential Home, Series
1996-4 M, 6.50%, 4/25/26 $5,172,223 $ 5,342,964
Prudential Home, Series
1996-8 M, 6.75%, 6/25/26 2,340,523 2,448,236
------------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(COST $28,983,412) 30,557,026
------------
RESIDUAL INTERESTS (A) - 4.13%
Capital Mortgage Funding I,
Inc., 1998-1, 1/22/27 43,831 689,073
General Mortgage Securities
II, Inc., 1995-1, 1998,
6/25/20 14,918 419,119
General Mortgage Securities
II, Inc., 1995-4, 1998,
6/25/23 8,768 397,338
General Mortgage Securities
II, Inc., 1997-4, 1998,
5/20/22 11,724 506,284
General Mortgage Securities
II, Inc., 1997-5, 1998,
7/20/23 23,164 735,034
National Mortgage Funding I,
Inc., 1995-4, 1998, 3/20/21 7,182 127,547
National Mortgage Funding I,
Inc., 1997-6, 9/20/21 32,943 640,712
National Mortgage Funding I,
Inc., 1997-7, 7/20/22 35,133 648,314
National Mortgage Funding I,
Inc., 1997-9, 10/20/24 25,739 632,940
National Mortgage Funding I,
Inc., 1997-10, 10/20/24 34,246 475,067
National Mortgage Funding I,
Inc., 1998-1, 10/20/22 17,335 440,254
National Mortgage Funding I,
Inc., 1998-2, 10/20/23 19,397 462,999
National Mortgage Funding I,
Inc., 1998-3, 11/20/23 19,847 469,598
National Mortgage Funding I,
Inc., 1998-5, 11/25/22 7,274 381,156
National Mortgage Funding I,
Inc., 1998-8, 5/20/24 34,593 498,670
National Mortgage Funding I,
Inc., 1998-9, 11/20/22 28,893 502,352
National Mortgage Funding I,
Inc., 1998-10, 1/20/23 17,413 540,932
------------
TOTAL RESIDUAL INTERESTS
(COST $9,933,404) 8,567,389
------------
297,238,654
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT - 0.67%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$1,417,776 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$1,431,511
(cost $1,399,604) $1,399,604 $ 1,399,604
---------- ------------
TOTAL INVESTMENTS
(COST $290,164,191) -144.14%
$298,638,258
OTHER ASSETS LESS
LIABILITIES - (44.14%) (91,456,993)
------------
NET ASSETS - 100.00% $207,181,265
============
</TABLE>
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.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $426,685,104 and $225,275,749, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $290,164,191. Net unrealized appreciation aggregated
$8,474,067, of which $9,931,057, related to appreciated investment securities
and $1,456,990, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
79
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $297,238,654
Repurchase agreements 1,399,604
------------
Total investments
(cost $290,164,191) 298,638,258
Collateral for securities
loaned (Note 2) 1,605,500
Cash 118,918
Receivables
Fund shares sold 1,324,653
Dividends and interest 2,790,157
Other assets 35,189
------------
TOTAL ASSETS 304,512,675
------------
LIABILITIES
Payables
Securities loaned (Note 2) $ 1,605,500
Reverse repurchase
agreement 94,533,000
Fund shares redeemed 101,673
Dividends 923,573
Accrued expenses and other
liabilities 167,664
-----------
TOTAL LIABILITIES 97,331,410
------------
NET ASSETS $207,181,265
============
Net Assets represented by: (Note 2)
Additional paid-in capital $213,925,048
Accumulated distributions
in excess of net
investment income (923,573)
Accumulated net realized
loss on investment
transactions (14,294,277)
Net unrealized appreciation
of investments 8,474,067
------------
NET ASSETS $207,181,265
============
NET ASSET VALUE PER SHARE
Class A Shares $ 13.61
Class B Shares $ 13.61
Class Y Shares $ 13.69
OFFERING PRICE PER SHARE
Class A Shares $ 14.29(a)
Class B Shares $ 13.61
Class Y Shares $ 13.69
SHARES OUTSTANDING
Class A Shares 6,927,132
Class B Shares 8,297,359
Class Y Shares 80
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (b) (Note 2) $ 11,610,166
EXPENSES
Management fee (Note 4) $ 1,025,941
Distribution fee (Note 5) 467,042
Shareholder service fee
(Note 5) 427,474
Transfer agent fee 212,090
Administration fee (Note 4) 174,343
Registration expenses 84,362
Custodian and accounting fees 34,008
Shareholder reports and
postage expenses 24,577
Legal fees 5,369
Directors' fees and expenses 4,244
Audit fees 3,715
Miscellaneous 16,925
-----------
Total expenses 2,480,090
Deduct
Waiver of management fee
(Note 4) (204,530)
------------
NET INVESTMENT INCOME 9,334,606
------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND
INTEREST-RATE SWAP CONTRACTS
Net realized gain on
investments and
interest-rate swap contracts
(Note 2) 713,191
Change in unrealized
appreciation on investments 6,558,180
-----------
NET GAIN ON INVESTMENTS AND
INTEREST-RATE SWAP CONTRACTS 7,271,371
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 16,605,977
============
</TABLE>
(b) Net of interest expense of $1,961,350 ($921,496 related to interest-
rate swaps and $1,039,854 related to borrowings).
SEE NOTES TO FINANCIAL STATEMENTS.
80
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 9,334,606 $ 6,390,445
Net realized gain on investments and interest-rate swap contracts 713,191 222,072
Change in unrealized appreciation on investments 6,558,180 2,224,113
------------- -------------
Increase in net assets resulting from operations 16,605,977 8,836,630
------------- -------------
Distributions to Shareholders
From net investment income
Class A (4,831,082) (2,180,277)
Class B (5,431,749) (4,210,168)
Class Y (51) -
In excess of net investment income
Class A - (150,441)
Class B - (212,242)
------------- -------------
Total distributions to shareholders (10,262,882) (6,753,128)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 106,644,051 63,942,122
Reinvested distributions 6,677,759 4,044,282
Shares redeemed (40,705,601) (21,179,174)
------------- -------------
Change in net assets resulting from capital share transactions 72,616,209 46,807,230
------------- -------------
Increase in net assets 78,959,304 48,890,732
Net Assets
Beginning of year 128,221,961 79,331,229
------------- -------------
End of year (including accumulated distributions in excess of net
investment income of ($923,573) and ($390,590), respectively) $ 207,181,265 $ 128,221,961
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.18 $ 12.91 $ 13.29 $ 12.75 $ 14.04
-------- -------- -------- -------- --------
Income from investment operations
Net investment income 0.79 0.97 0.89 0.84 0.84
Net realized and unrealized gain (loss) on
investments 0.47 0.26 (0.37) 0.61 (1.30)
-------- -------- -------- -------- --------
Total from investment operations 1.26 1.23 0.52 1.45 (0.46)
-------- -------- -------- -------- --------
Less distributions
From net investment income (0.83) (0.96) (0.90) (0.91) (0.83)
-------- -------- -------- -------- --------
Net asset value, end of year $ 13.61 $ 13.18 $ 12.91 $ 13.29 $ 12.75
======== ======== ======== ======== ========
TOTAL RETURN* 9.95% 9.86% 4.09% 11.82% (3.39%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 94,279 $ 53,176 $ 21,092 $ 24,472 $ 30,142
Ratio of expenses to average net assets 1.05% 1.05% 1.05% 1.32% 1.38%
Ratio of expenses to average net assets excluding
waiver 1.18% 1.18% 1.31% 1.36% 1.39%
Ratio of net investment income to average net assets 5.73% 7.01% 6.84% 6.73% 6.33%
Portfolio turnover rate 114% 100% 254% 368% 455%
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
81
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.18 $ 12.93 $ 13.31 $ 12.76 $ 14.06
-------- -------- -------- -------- --------
Income from investment operations
Net investment income 0.72 0.86 0.84 0.79 0.82
Net realized and unrealized gain (loss) on
investments 0.48 0.30 (0.38) 0.61 (1.37)
-------- -------- -------- -------- --------
Total from investment operations 1.20 1.16 0.46 1.40 (0.55)
-------- -------- -------- -------- --------
Less distributions
From net investment income (0.77) (0.91) (0.84) (0.85) (0.75)
--------- -------- -------- -------- --------
Net asset value, end of year $ 13.61 $ 13.18 $ 12.93 $ 13.31 $ 12.76
========= ======== ======== ======== ========
TOTAL RETURN* 9.46% 9.29% 3.57% 11.33% (3.97%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 112,901 $75,046 $ 58,239 $ 62,155 $ 77,888
Ratio of expenses to average net assets 1.55% 1.55% 1.55% 1.74% 1.88%
Ratio of expenses to average net assets excluding
waiver 1.67% 1.68% 1.81% 1.79% 1.90%
Ratio of net investment income to average net assets 5.22% 6.51% 6.36% 6.24% 6.21%
Portfolio turnover rate 114% 100% 254% 368% 455%
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.20
----------
Income from investment operations
Net investment income 0.78
Net realized and unrealized gain on investments 0.39
----------
Total from investment operations 1.17
----------
Less distributions
From net investment income (0.68)
----------
Net asset value, end of period $ 13.69
==========
TOTAL RETURN* 8.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 0.80% (a)
Ratio of expenses to average net assets exluding waiver 0.93% (a)
Ratio of net investment income to average net assets 7.09% (a)
Portfolio turnover rate 114%
</TABLE>
(a) Annualized.
(b) for the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
82
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
ASSET-BACKED SECURITIES - 12.18%
Advanta Home Equity Loan,
6.15%, 10/25/09 $ 766,206 $ 780,265
Advanta Mortgage Loan
Trust 1993-3 A3, 4.75% -
5.55%, 2/25/10 - 3/25/10 948,868 947,007
AFC Home Equity Loan
Trust, 6.60%, 2/25/27 1,499,955 1,514,193
AFG Receivables Trust,
6.20% - 7.05%, 9/15/00 -
2/15/03 (a) 3,098,596 3,116,978
CS First Boston 1996-2,
6.32% - 7.18%, 2/25/18 5,428,834 5,722,852
Equifax Credit Corporation
1994-1B, 5.75%, 3/15/09 478,313 479,995
Fifth Third Auto Grantor
Trust, 6.20%, 9/15/01 351,859 353,648
Old Stone Credit
Corporation, 6.20%,
6/15/08 274,327 277,455
Olympic Automobiles
Receivables Trust, 6.85% -
7.35%, 6/15/01 - 10/15/01 1,431,929 1,440,041
Union Acceptance
Corporation, 6.45% -
6.70%, 6/08/03 - 5/10/04 3,211,430 3,274,164
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $17,569,230) 17,906,598
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 74.00%
Federal National Mortgage
Association
6.00%, 5/01/13, ARM 13,278,924 13,415,870
10.00%, 6/01/05, MBS 188,066 197,098
Government National
Mortgage Association
7.00%, 12/15/08 1,123,686 1,169,061
6.50%, 3/15/28 2,940,243 3,003,643
7.00%, 8/15/28 9,991,943 10,304,191
Government National
Mortgage Association II
4.50%, 10/20/27 - 1/20/28 6,599,445 6,581,813
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
U.S. GOVERNMENT SECURITIES
AND AGENCIES (CONTINUED)
Government National
Mortgage Association II
7.00%, 7/20/22 - 9/20/23 $9,244,030 $ 9,411,333
U.S. Treasury Notes,
5.38% - 6.63%, 7/31/00 -
5/15/08 61,950,000 64,731,078
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $107,576,668) 108,814,087
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 3.68%
Equifax Credit Corporation,
6.16%, 4/15/08 1,362,750 1,384,463
Key Auto Finance Trust,
6.15%, 10/15/01 4,000,000 4,034,964
-----------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(COST $5,359,496) 5,419,427
-----------
CORPORATE BONDS - 16.63%
Association Corporation NA,
7.88%, 9/30/01 1,000,000 1,077,892
Capital One Bank, 7.15% -
7.20%, 7/19/99 - 9/15/06 2,500,000 2,577,034
Dayton Hudson Company,
6.63%, 3/01/03 2,000,000 2,121,698
Ford Capital, 9.88%,
5/15/02 2,525,000 2,929,000
General Motors Acceptance
Corporation, 5.63% -
6.88%, 2/01/99 - 7/15/01 2,750,000 2,854,932
Lehman Brothers, 6.20% -
6.63%, 11/15/00 - 1/15/02 3,750,000 3,799,689
Playtex Family Production
Corporation, 9.00%,
12/15/03 1,000,000 1,007,685
Salomon Incorporated,
5.50% - 7.30%, 1/15/99 -
5/15/02 3,750,000 3,935,117
The Money Store, 6.28%,
12/15/22 4,000,000 4,143,804
-----------
TOTAL CORPORATE BONDS
(COST $23,808,616) 24,446,851
-----------
</TABLE>
83
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
RESIDUAL INTERESTS (A) - 1.57%
General Mortgage Securities
II, Inc., 1997-4, 1998,
5/20/22 $ 3,908 $ 167,785
National Mortgage Funding,
Inc., 1998-7, 7/20/23 49,685 674,478
National Mortgage Funding,
Inc., 1998-6, 1/20/23 53,627 706,457
National Mortgage Funding,
Inc., 1998-8, 5/20/24 23,062 332,447
National Mortgage Funding,
Inc., 1997-9, 11/20/24 17,159 421,960
------------
TOTAL RESIDUAL INTERESTS
(COST $2,666,160) 2,303,127
------------
SHORT-TERM INVESTMENTS - 2.88%
VARIABLE RATE DEMAND NOTE
Hilander Finance, LLC,
5.70%, 12/01/25 1,850,000 1,850,000
------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%,
due 10/01/98,
collateralized by
$2,422,945 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$2,446,418 2,391,457 2,391,457
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $4,241,457) 4,241,457
------------
TOTAL INVESTMENTS (COST
$161,221,627)-110.94% 163,131,547
OTHER ASSETS LESS LIABILITIES - (10.94%) (16,087,108)
------------
NET ASSETS - 100.00% $147,044,439
============
</TABLE>
INVESTMENT ABBREVIATIONS
ARM - Adjustable Rate Mortgage
MBS - Mortgage Backed Securities
(a) These are securities that may be resold to "qualified institutional
buyers" under rule 144A or securities offered pursuant to section 4(2) of
the Securities Act of 1933, as amended. These securites have been
determined to be liquid under guidelines established by the Board of
Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $296,888,520 and $175,441,302, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $161,223,032. Net unrealized appreciation aggregated
$1,908,515 of which $2,467,650, related to appreciated investment securities
and $559,135, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
84
<PAGE>
SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $160,740,090
Repurchase agreements 2,391,457
------------
Total investments (cost
$161,221,627) 163,131,547
Receivables
Fund shares sold 4,126,138
Dividends and interest 1,260,809
Deferred expenses (Note 2) 25,241
------------
TOTAL ASSETS 168,543,735
------------
LIABILITIES
Payables
Reverse repurchase
agreement $ 18,555,000
Fund shares redeemed 2,139,010
Dividends 544,779
Accrued expenses and other
liabilities 260,507
------------
TOTAL LIABILITIES 21,499,296
------------
NET ASSETS $147,044,439
============
Net Assets represented by:
(Note 2)
Additional paid-in capital $145,502,924
Accumulated distributions in
excess of net investment
income (512,293)
Accumulated net realized
gain on investment
transactions 143,888
Net unrealized appreciation
of investments and
interest-rate swap contracts 1,909,920
------------
NET ASSETS $147,044,439
============
NET ASSET VALUE PER SHARE
Class A Shares $ 12.74
Class B Shares $ 12.75
Class Y Shares $ 12.79
OFFERING PRICE PER SHARE
Class A Shares $ 12.87(a)
Class B Shares $ 12.75
Class Y Shares $ 12.79
SHARES OUTSTANDING
Class A Shares 7,313,315
Class B Shares 4,228,466
Class Y Shares 83
</TABLE>
(a) Computation of offering price: 100/99 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (b) (Note 2) $ 6,170,420
EXPENSES
Management fee (Note 4) $ 504,097
Shareholder service fee (Note 5) 252,047
Transfer agent fee 148,709
Distribution fee (Note 5) 133,476
Administration fee (Note 4) 101,237
Registration expenses 74,882
Custodian and accounting fees 26,595
Shareholder reports and postage
expenses 14,335
Miscellaneous 12,548
Organizational expenses 7,337
Legal fees 3,980
Directors' fees and expenses 3,147
Audit fees 2,754
---------
Total expenses 1,285,144
Deduct
Waiver of administration fee
(Note 4) (101,237)
Waiver of management fee
(Note 4) (180,523)
-----------
NET INVESTMENT INCOME 5,167,036
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND INTEREST-RATE
SWAP CONTRACTS
Net realized gain on investments
and interest-rate swap contracts
(Note 2) 325,954
Change in unrealized appreciation
on investments 1,608,387
---------
NET GAIN ON INVESTMENTS 1,934,341
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 7,101,377
===========
</TABLE>
(b) Net of interest expenses of $588,099 ($283,529 related to interest-rate
swaps and $304,570 related to borrowings).
SEE NOTES TO FINANCIAL STATEMENTS.
85
<PAGE>
SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 5,167,036 $ 2,155,953
Net realized gain on investments 325,954 7,748
Change in unrealized appreciation on investments 1,608,387 386,023
------------- -------------
Increase in net assets resulting from operations 7,101,377 2,549,724
------------- -------------
Distributions to Shareholders
From net investment income
Class A (3,203,099) (763,890)
Class B (2,394,223) (1,415,914)
Class Y (49) --
------------- -------------
Total distributions to shareholders (5,597,371) (2,179,804)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 169,053,248 39,889,219
Reinvested distributions 4,352,285 1,755,339
Shares redeemed (82,572,822) (19,273,346)
------------- -------------
Change in net assets resulting from capital share transactions 90,832,711 22,371,212
------------- -------------
Increase in net assets 92,336,717 22,741,132
Net Assets
Beginning of year 54,707,722 31,966,590
------------- -------------
End of year (including accumulated distributions in excess of
net investment income of ($512,293) and ($95,798), respectively) $ 147,044,439 $ 54,707,722
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (c)
<S> <C> <C> <C> <C>
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 0.70 0.77 0.82 0.22
Net realized and unrealized gain (loss) on investments 0.15 0.12 (0.23) (0.03)
-------- -------- --------- ----------
Total from investment operations 0.85 0.89 0.59 0.19
-------- -------- --------- ----------
Less distributions
From net investment income (0.73) (0.77) (0.77) (0.25)
-------- -------- --------- ----------
Net asset value, end of period $ 12.74 $ 12.62 $ 12.50 $ 12.68
======== ======== ========= ==========
TOTAL RETURN* 6.98% 7.33% 4.80% 1.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 93,135 $ 27,619 $ 7,450 $ 1,002
Ratio of expenses to average net assets 0.86% 0.86% 0.86% 0.71% (a)
Ratio of expenses to average net assets excluding waiver 1.14% 1.12% 1.26% 1.00% (a)
Ratio of net investment income to average net assets 5.24% 6.00% 5.90% 4.10% (a)
Portfolio turnover rate 171% 75% 411% 126%
</TABLE>
(a) Annualized.
(c) For the period from June 16, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
86
<PAGE>
SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.62 $ 12.50 $ 12.67
-------- -------- --------
Income from investment operations
Net investment income 0.66 0.73 0.73
Net realized and unrealized gain (loss) on
investments 0.16 0.12 (0.17)
-------- -------- ---------
Total from investment operations 0.82 0.85 0.56
-------- -------- ---------
Less distributions
From net investment income (0.69) (0.73) (0.73)
--------- --------- ---------
Net asset value, end of period $ 12.75 $ 12.62 $ 12.50
========= ========= =========
TOTAL RETURN* 6.68% 6.96% 4.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 53,908 $ 27,089 $ 24,517
Ratio of expenses to average net assets 1.16% 1.16% 1.16%
Ratio of expenses to average net assets excluding
waiver 1.44% 1.42% 1.56%
Ratio of net investment income to average net assets 4.94% 5.70% 5.60%
Portfolio turnover rate 171% 75% 411%
<CAPTION>
PERIOD PERIOD
ENDED ENDED
9/30/95 (d) 12/31/94 (e)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.18 $ 12.50
----------- -----------
Income from investment operations
Net investment income 0.59 0.41
Net realized and unrealized gain (loss) on
investments 0.52 (0.29)
----------- -----------
Total from investment operations 1.11 0.12
----------- -----------
Less distributions
From net investment income (0.62) (0.44)
----------- -----------
Net asset value, end of period $ 12.67 $ 12.18
=========== ===========
TOTAL RETURN* 9.22% 0.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 19,871 $ 17,144
Ratio of expenses to average net assets 1.20% (a) 1.29% (a)
Ratio of expenses to average net assets excluding
waiver 1.70%(a) 1.29% (a)
Ratio of net investment income to average net assets 5.04%(a) 4.90% (a)
Portfolio turnover rate 126% 166%
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED
9/30/98 (f)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.57
----------
Income from investment operations
Net investment income 0.67
Net realized and unrealized gain on investments 0.16
----------
Total from investment operations 0.83
----------
Less distributions
From net investment income ( 0.61)
----------
Net asset value, end of period $ 12.79
==========
TOTAL RETURN* 6.64%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 0.61% (a)
Ratio of expenses to average net assets excluding waiver 0.87% (a)
Ratio of net investment income to average net assets 6.10% (a)
Portfolio turnover rate 171%
</TABLE>
(a) Annualized.
(d) For the period from January 1, 1995 to September 30, 1995.
(e) For the period from April 29, 1994 (commencement of operations) to December
31, 1994.
(f) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
87
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE HIGH INCOME MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The Mentor High Income Portfolio was launched in June 1998. This commentary,
therefore, marks the first opportunity for the managers of the Portfolio to
provide their market perspective to shareholders. The third quarter of 1998, in
addition to marking the first full quarter of performance for the fund, also
was a period of unusual volatility for high-yield markets.
ECONOMIC FACTORS
After years of steady economic growth and fairly consistent stock market
appreciation, equity markets tumbled in the final weeks of the summer in
response to a downward spiral in global economies. Earlier in the year, the
U.S. economy was expanding at a robust pace, with gross domestic product (GDP)
growth measuring 5.4% in the first quarter alone. Despite the generally solid
pace of economic activity, inflation remained benign. Falling commodity prices
and a strong dollar were helping to offset the inflationary implications of a
tight labor market and active consumer spending.
By the third quarter of 1998, U.S. financial markets were coming under
increasing stress as repercussions from the Asian crisis spread to other areas
of the globe. During this period, Russia abandoned its currency peg versus the
dollar and defaulted on its sovereign debt. Other markets, particularly Latin
America, came under increasing pressure as market participants attempted to
avoid additional international risks.
International developments finally began to meaningfully impact domestic
markets early in the third quarter. Starting with the Russian devaluation,
highly leveraged hedge funds began to incur substantial losses. Many hedge fund
participants had levered portfolios for greater returns, so the unwinding of
those positions drove yield spreads wider. A flight to quality drove long-term
Treasury yields down to levels not seen in 30 years.
In response to these deteriorating conditions the Federal Reserve reduced its
target Fed Funds rate by 25 basis points to 5.25%. Market participants had
anticipated greater credit easing and the third quarter closed amid unusually
high volatility.
CORPORATE HIGH-YIELD FACTORS
During the third quarter, 10-year Treasury yields declined by 108 basis points,
to a 4.40% yield. This strength in Treasuries, however, was not shared by other
fixed-income sectors. In fact, the investment landscape for all spread products
changed dramatically in the third quarter of 1998. A major flight-to-quality
dramatically expanded risk premiums for non-Treasury securities. The degree of
this shift is demonstrated by the 1281 basis point (12.81%) underperformance of
the Merrill Lynch High Yield Master Index versus 10-year Treasuries during the
July-September time period. High-yield spreads widened from 350 to 575 basis
points over comparable maturity Treasuries. The spread on the Chase Securities
High Yield Index expanded to 666 basis points, its highest level since January
of 1992.
Asset performance for the third quarter was closely tied to credit quality. As
risk exposure increased, returns decreased dramatically. While the 10-year
Treasury returned 9.22% for the July through September time period, the Chase
High Yield Index lost 5.79%, the S&P 500 posted a loss of 9.95%, and the EMBI
(Emerging Markets Brady Index) lost 11.57%.
New issuance of high-yield securities has declined markedly in these
deteriorating conditions. In the
88
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE HIGH INCOME MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
quarter ended September 30, total issuance was at $20.4 billion, compared with
$56.3 billion raised in the second quarter of this year, and $37.4 billion in
the third quarter of 1997. Outflows of $1.9 billion from high-yield mutual
funds in August reversed somewhat in September, with overall cash inflows of
$259 million into high-yield funds.
MANAGEMENT STRATEGY
We invested initial proceeds into a broadly diversified cross-section of the
high-yield universe, with 77% of holdings rated B, 13.4% rated BB, and 1.1%
rated BBB. At the end of September, the Portfolio still held 15.7% of its
assets in cash, as full investment with deteriorating market conditions was
imprudent. The greatest industry concentration lies in the telecommunications
area, with a 19% exposure.
OUTLOOK
Spreads have widened in high-yield markets due to heavy new issuance and fears
of default. Default fears, however, seem premature given Moody's recently
reported trailing 12-month default rate of 2.62%, down slightly from 2.69% in
August. That number can be expected to increase during the fourth quarter,
however, since four high-yield issuers have already defaulted during the month
of October.
Given the market's current unsettled state in the wake of August's dramatic
sell-off, we expect spreads to remain at these wide levels through the end of
the year. The equity market's recent volatility makes it unlikely that spreads
will narrow meaningfully until the level of next year's economic growth becomes
clearer.
November 1998
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor High
Income Portfolio Class A and Class B Shares and the Merrill Lynch High Yield
Master II Bond Index.~
[GRAPH]
A Shares B Shares Merrill Lynch
High Yield
Master II
Bond Index
6/23/98 9525 10000 10000
7/31/98 9614 10081 10349
8/31/98 8904 9332 10586
9/30/98 8882 9305 10567
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception+++
Class A n/a (11.19%)
Class B n/a (7.86%)
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Merrill Lynch High Yield Master II Bond Index provides a broad-based
measure of the performance of the non-investment grade U.S. domestic bond
market. The index currently captures close to $200 billion of the
outstanding debt of domestic market issuers rated below investment grade
but not in default.
+ Represents a hypothetical investment of $10,000 in Mentor High Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The Class B Shares reflects a redemption fee in
effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Represents a hypothetical investment of $10,000 in Mentor High Income
Portfolio Class A Shares, after deducting the maximum sales charge of
4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
+++ Reflects operations of Mentor High Income Portfolio Class A and Class B
Shares from the date of commencement of operations on 6/23/98 through
9/30/98.
89
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 79.65%
CONSUMER DISTRIBUTION - 7.13%
Aurora Foods, Inc. Senior
Subordinated Notes,
Series D, 9.88%, 2/15/07 $ 1,000,000 $ 1,075,000
Big 5 Corporation Senior
Notes, Series B, 10.88%,
11/15/07 1,000,000 955,000
CHS Electronics, Inc. Senior
Notes, 9.88%, 4/15/05 1,000,000 925,000
Del Monte Foods Company
Senior Discount Notes,
12.50%, 12/15/07 (a) 1,500,000 870,000
Disco S.A. Notes, 9.88%,
5/15/08 (a) 1,000,000 675,000
Musicland Group, Inc. Senior
Subordinated Notes-B,
9.88%, 3/15/08 1,500,000 1,432,500
Pantry, Inc. Senior Notes,
12.50%, 11/15/00 1,148,000 1,202,530
Pantry, Inc. Senior
Subordinated Notes,
10.25%, 10/15/07 1,000,000 980,000
------------
8,115,030
------------
CONSUMER DURABLES - 9.48%
Aetna Industries, Inc. Senior
Notes, 11.88%, 10/01/06 1,500,000 1,530,000
Cluett American Corporation
Senior Subordinated Notes,
10.13%, 5/15/08 (a) 1,000,000 920,000
Consoltex Group Senior
Notes, 11.00%, 10/01/03 200,000 208,000
Decora Industries, Inc.
Secured Notes, 11.00%,
5/01/05 (a) 1,000,000 907,500
Derby Cycle Corporation
Senior Notes, 10.00%,
5/15/08 (a) 1,000,000 930,000
Galey & Lord, Inc. Senior
Subordinated Notes,
9.13%, 3/01/08 1,500,000 1,316,250
MCII Holdings Senior
Secured Discount Notes,
15.00%, 11/15/02 1,000,000 825,000
Outsourcing Services Group
Senior Subordinated Notes,
10.88%, 3/01/06 (a) 1,150,000 1,092,500
Oxford Automotive, Inc.,
10.13%, 6/15/07 1,000,000 965,000
Talon Automotive Group
Senior Subordinated Notes,
9.63%, 5/01/08 (a) 1,000,000 935,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES (CONTINUED)
Venture Holdings Trust
Senior Notes-B, 9.50%,
7/01/05 $ 1,175,000 $ 1,151,500
------------
10,780,750
------------
CONSUMER SERVICES - 14.23%
Americredit Corporation,
9.25%, 2/01/04 (a) 1,000,000 965,000
Argosy Gaming Company,
13.25%, 6/01/04 (a) 1,500,000 1,597,500
Booth Creek Ski Holdings
Senior Notes-B, 12.50%,
3/15/07 1,000,000 985,000
Capstar Broadcasting Senior
Discount Notes, 12.75%,
2/01/09 (a) 1,000,000 755,000
Carrols Corporation Senior
Notes, 11.50%, 8/15/03 1,000,000 1,045,000
Diamond Cable
Communications Senior
Discount Notes, 11.75%,
12/15/05 1,500,000 1,207,500
Globo Communicacoes
Senior Notes, 10.63%,
12/05/08 (a) 1,000,000 520,000
Grupo Televisa S.A. Senior
Discount Notes-Euro,
13.25%, 5/15/08 1,000,000 695,000
Hollywood Casino
Corporation Senior Notes,
12.75%, 11/01/03 1,000,000 1,045,000
Interep National Radio Sales,
10.00%, 7/01/08 (a) 1,000,000 980,000
Isles of Capri Casinos,
12.50%, 8/01/03 1,000,000 1,085,000
La Petite Academy LPA
Holdings-B, 10.00%,
5/15/08 1,250,000 1,212,500
Majestic Star Casino, LLC,
12.75%, 5/15/03 1,500,000 1,556,250
Northland Cable Television
Senior Subordinated Notes,
10.25%, 11/15/07 1,000,000 1,060,000
Silver Cinemas, Inc. Senior
Subordinated Notes,
10.50%, 4/15/05 (a) 1,000,000 955,000
Young American Corporation
Senior Subordinated Notes,
11.63%, 2/15/06 (a) 1,000,000 530,000
------------
16,193,750
------------
</TABLE>
90
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
ENERGY - 8.14%
Abraxas Petroleum Senior
Notes, Series D, 11.50%,
11/01/04 $ 1,000,000 $ 780,000
Dawson Production Services,
Inc. Senior Notes, 9.38%,
2/01/07 1,000,000 1,002,500
Gothic Production
Corporation, 11.13%,
5/01/05 1,000,000 760,000
Houston Exploration
Company Senior
Subordinated Notes-B,
8.63%, 1/01/08 1,000,000 960,000
Hurricane Hydrocarbons
Senior Notes, 11.75%,
11/01/04 (a) 1,000,000 560,000
Moll Industries Senior
Subordinated Notes,
10.50%, 7/01/08 (a) 1,100,000 1,023,000
Ocean Energy, Inc. Senior
Subordinated Notes-B,
8.88%, 7/15/07 1,000,000 1,010,000
Tesoro Petroleum
Corporation Senior
Subordinated Notes,
9.00%, 7/01/08 (a) 1,000,000 967,500
Universal Compression, Inc.
Senior Discount Notes,
9.88%, 2/15/08 (a) 2,000,000 1,190,000
Vintage Petroleum Senior
Subordinated Notes,
8.63%, 2/01/09 1,000,000 1,010,000
------------
9,263,000
------------
HEALTH CARE - 0.97%
Mariner Post-Acute Network
Senior Subordinated Notes,
10.50%, 11/01/07 1,500,000 832,500
Vencor, Inc. Senior
Subordinated Notes,
9.88%, 5/01/05 (a) 350,000 276,500
------------
1,109,000
------------
PRODUCER MANUFACTURING - 8.22%
Anthony Crane Rentals,
10.38%, 8/01/08 (a) 1,000,000 940,000
Compass Aerospace
Corporation, 10.13%,
4/15/05 (a) 1,000,000 985,000
Del Webb Corporation Senior
Subordinated Debentures,
9.38%, 5/01/09 750,000 720,000
Dine S.A. de C.V., 8.75%,
10/15/07 (a) 1,000,000 720,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
PRODUCER MANUFACTURING (CONTINUED)
Hydrochemical Industrial
Service Senior Subordinated
Notes-B, 10.38%, 8/01/07 $ 1,000,000 $ 940,000
Kevco, Inc. Senior
Subordinated Notes,
10.38%, 12/01/07 1,000,000 955,000
Outboard Marine
Corporation, 10.75%,
6/01/08 (a) 1,000,000 945,000
Schuler Homes Senior Notes,
9.00%, 4/15/08 (a) 750,000 701,250
Tekni-Plex, Inc. Senior
Subordinated Notes-B,
11.25%, 4/01/07 500,000 522,500
Terex Corporation Senior
Subordinated Notes,
8.88%, 4/01/08 (a) 1,000,000 932,500
W. R. Carpenter North
America Senior
Subordinated Notes,
10.63%, 6/15/07 1,000,000 985,000
------------
9,346,250
------------
RAW MATERIALS/PRODUCTS INDUSTRIES - 4.28%
Acetex Corporation Senior
Notes, 9.75%, 10/01/03 900,000 859,500
Anchor Lamina, Inc. Senior
Subordinated Notes,
9.88%, 2/01/08 800,000 656,000
GS Technologies Operation,
Inc. Senior Notes, 12.25%,
10/01/05 875,000 748,125
Hylsa S.A. de C.V. Bonds,
9.25%, 9/15/07 (a) 1,000,000 685,000
Pioneer Americas Acquisition
Senior Notes, 9.25%,
6/15/07 1,500,000 1,230,000
Vicap S.A.Guaranteed Notes,
11.38%, 5/15/07 (a) 1,000,000 685,000
------------
4,863,625
------------
TECHNOLOGY - 3.10%
Advanced Micro Devices
Senior Notes, 11.00%,
8/01/03 2,000,000 2,030,000
DecisionOne Holdings
Discount Notes, 11.50%,
8/01/08 1,500,000 562,500
Dictaphone Corporation
Senior Subordinated Notes,
11.75%, 8/01/05 1,000,000 930,000
------------
3,522,500
------------
</TABLE>
91
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TRANSPORTATION - 4.02%
Atlas Air, Inc. Senior Notes,
10.75%, 8/01/05 $ 1,000,000 $ 985,000
American Communication
Lines, LLC Bonds, 10.25%,
6/30/08 (a) 1,000,000 990,000
Cenargo International
PLC-1st Mortgage, 9.75%,
6/15/08 (a) 1,000,000 820,000
Greyhound Lines Senior
Notes, 11.50%, 4/15/07 1,250,000 1,337,500
Pegasus Shipping Hellas
Notes-A, 11.88%, 11/15/04 500,000 435,000
-----------
4,567,500
-----------
UTILITIES - 20.08%
American Cellular
Corporation Senior Notes,
10.50%, 5/15/08 (a) 500,000 487,500
Cathay International Limited
Senior Notes, 13.00%,
4/15/08 (a) 1,000,000 600,000
CIA Transporte Energia
Notes, 9.25%, 4/01/08 (a) 1,000,000 760,000
Clearnet Communications
Senior Discount Notes,
14.75%, 12/15/05 1,500,000 1,248,750
Comcast Cellular Holdings
Senior Notes, 9.50%,
5/01/07 1,000,000 1,030,000
Crown Castle International
Corporation Senior
Discount Notes, 10.63%,
11/15/07 750,000 453,750
e.spire Communications, Inc.
Senior Discount Notes,
12.75% - 13.75%,
4/01/06 - 7/15/07 1,050,000 985,000
Esprit Telecommunications
Group PLC Senior Notes,
11.50%, 10.88% - 11.50%,
12/15/07 - 6/15/08 (a) 1,000,000 922,500
ICG Holdings, Inc. Discount
Notes, 11.63% - 13.50%,
9/15/05 - 3/15/07 1,500,000 1,103,750
Intermedia Communications
Senior Discount Notes,
8.60%, 6/01/08 525,000 527,625
Intermedia Communications
of Florida, 12.50%,
5/15/06 600,000 492,000
McLeodusa, Inc. Senior
Discount Notes, 10.50%,
3/01/07 1,250,000 912,500
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
MetroNet Communications
Senior Discount Notes,
9.95%, 6/15/08 (a) $ 1,500,000 $ 832,500
Microcell Telecommuni-
cations Senior Discount
Notes-B, 14.00%, 6/01/06 1,000,000 715,000
Millicom International
Cellular Senior Discount
Notes, 13.50%, 6/01/06 1,250,000 793,750
MJD Communications, Inc.,
9.50%, 5/01/08 (a) 750,000 753,750
Netia Holdings Senior
Discount Notes-B, 11.25%,
11/01/07 1,500,000 660,000
Optel Inc. Senior Notes,
11.50%, 7/01/08 (a) 500,000 470,000
Pinnacle Holdings, Inc. Senior
Discount Notes, 10.00%,
3/15/08 (a) 750,000 401,250
Price Communications
Wireless, Inc. Senior
Subordinated Notes,
11.75%, 7/15/07 1,000,000 1,035,000
Primus Telecommunications
Group Strips, 11.75%,
8/01/04 1,000,000 945,000
PSINet, Inc. Senior Notes,
Series B, 10.00%, 2/15/05 1,000,000 1,005,000
Rogers Cantel,
Inc.Debentures, 9.38%,
6/01/08 1,000,000 1,020,000
Satelites Mexicanos Senior
Notes, 10.13%,
11/01/04 (a) 1,000,000 685,000
SBA Communications
Corporation Senior
Discount Notes, 12.00%,
3/01/08 (a) 1,000,000 520,000
</TABLE>
92
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
Spectrasite Holdings, Inc.
Senior Discount Notes,
12.00%, 7/15/08 (a) $1,000,000 $ 480,000
Sprint Spectrum Senior Notes,
11.00%, 8/15/06 1,000,000 1,140,000
Startec Global
Communications Units,
12.00%, 5/15/08 (a) 1,000,000 870,000
Verio, Inc. Senior Notes,
10.38%, 4/01/05 (a) 1,000,000 995,000
------------
22,844,625
------------
TOTAL CORPORATE BONDS
(COST $99,855,713) 90,606,030
------------
FOREIGN GOVERNMENT - 0.75%
Republic of Korea Bond,
8.88%, 4/15/08 (cost
$938,803) 1,000,000 855,000
------------
PREFERRED STOCK - 0.80%
Rural Cellular Corporation
(cost $900,000) 10,000 910,000
------------
92,371,030
------------
SHORT TERM
INVESTMENT - 14.24%
U.S. Government Agency
Federal Home Loan Bank
5.00%, 10/01/98
(cost $16,195,000) 16,195,000 16,195,000
------------
TOTAL INVESTMENTS
(COST $117,889,516)-95.44% 108,566,030
OTHER ASSETS LESS
LIABILITIES - 4.56% 5,190,110
------------
NET ASSETS - 100.00% $113,756,140
============
</TABLE>
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $107,457,273 and $5,763,938, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $117,889,516. Net unrealized depreciation aggregated
$9,323,486, of which $286,135, related to appreciated investment securities and
$9,609,621, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
93
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (cost
$117,889,516)(Note 2)
Investment securities $108,566,030
Cash 2,492,668
Receivables
Investments sold 485,622
Fund shares sold 3,115,774
Dividends and interest 2,576,302
Deferred expenses (Note 2) 17,486
------------
TOTAL ASSETS 117,253,882
------------
LIABILITIES
Payables
Investments purchased $ 2,981,590
Fund shares redeemed 110,985
Dividends 371,873
Accrued expenses and other
liabilities 33,294
-----------
TOTAL LIABILITIES 3,497,742
------------
NET ASSETS $113,756,140
============
Net Assets represented by: (Note 2)
Additional paid-in capital $123,540,215
Accumulated distributions
in excess of net
investment income (371,874)
Accumulated net realized
loss on investment
transactions (88,715)
Net unrealized depreciation
of investments (9,323,486)
------------
NET ASSETS $113,756,140
============
NET ASSET VALUE PER SHARE
Class A Shares $ 10.92
Class B Shares $ 10.91
OFFERING PRICE PER SHARE
Class A Shares $ 11.46(a)
Class B Shares $ 10.91
SHARES OUTSTANDING
Class A Shares 4,658,188
Class B Shares 5,762,202
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
(b) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 1998 (b)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $ 2,037,403
EXPENSES
Management fee (Note 4) $ 175,891
Distribution fee (Note 5) 68,461
Shareholder service fee
(Note 5) 62,818
Administration fee (Note 4) 24,979
Transfer agent fee 23,292
Custodian and accounting fees 16,350
Registration expenses 11,840
Shareholder reports and
postage expenses 3,449
Legal fees 753
Directors' fees and expenses 596
Audit fees 521
Miscellaneous 6,164
----------
Total expenses 395,114
Deduct
Waiver of management fee
(Note 4) (175,891)
------------
NET INVESTMENT INCOME 1,818,180
------------
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized loss on
investments (88,715)
Change in unrealized
depreciation on investments (9,323,486)
----------
NET LOSS ON INVESTMENTS (9,412,201)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (7,594,021)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
94
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 1,818,180
Net realized loss on investments (88,715)
Change in unrealized depreciation on investments (9,323,486)
-------------
Decrease in net assets resulting from operations (7,594,021)
-------------
Distributions to Shareholders
From net investment income
Class A (1,040,534)
Class B (1,178,956)
In excess of net investment income
Class A -
Class B -
-------------
Total distributions to shareholders (2,219,490)
-------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 126,286,107
Reinvested distributions 1,281,553
Shares redeemed (3,998,009)
-------------
Change in net assets resulting from capital share transactions 123,569,651
-------------
Increase in net assets 113,756,140
Net Assets
Beginning of period -
-------------
End of period (including accumulated distributions in excess
of net investment income of ($371,874) ) $ 113,756,140
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.00
----------
Income from investment operations
Net investment income 0.24
Net realized and unrealized loss on investments (1.04)
----------
Total from investment operations (0.80)
----------
Less distributions
From net investment income (0.28)
----------
Net asset value, end of period $ 10.92
==========
TOTAL RETURN* (6.75%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 50,887
Ratio of expenses to average net assets 0.60% (a)
Ratio of expenses to average net asset excluding waiver 1.30% (a)
Ratio of net investment income to average net assets 7.36% (a)
Portfolio turnover rate 27%
</TABLE>
(a) Annualized.
(b) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
95
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (c)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.00
----------
Income from investment operations
Net investment income 0.22
Net realized and unrealized loss on investments ( 1.05)
----------
Total from investment operations ( 0.83)
----------
Less distributions
From net investment income ( 0.26)
----------
Net asset value, end of period $ 10.91
==========
TOTAL RETURN* ( 6.95%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 62,869
Ratio of expenses to average net assets 1.10% (a)
Ratio of expenses to average net asset excluding waiver 1.80% (a)
Ratio of net investment income to average net assets 6.87% (a)
Portfolio turnover rate 27%
</TABLE>
(a) Annualized.
(c) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
96
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
NOTE 1: ORGANIZATION
Mentor Funds is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. Mentor Funds consists of
twelve separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1998, as
follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Balanced Portfolio
("Balanced Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor High Income Portfolio
("High Income Portfolio")
Mentor U.S. Government Money Market Portfolio ("Government Portfolio")
Mentor 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 Money Market Portfolio and the U.S.
Government Money Market Portfolio.
Mentor Funds currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% (4.75% for the Quality Income
Portfolio, Municipal Income Portfolio and High Income Portfolio and 1% for
Short-Duration Income Portfolio) payable at the time of purchase. Class B
shares are sold subject to a contingent deferred sales charge payable upon
redemption which decreases depending on when shares were purchased and how long
they have been held. Class Y shares are sold to institutions and high net-worth
individual investors and are not subject to any sales or contingent deferred
sales charges.
During the year, the Balanced Portfolio added two classes of shares designated
as Class A and Class Y and designated its existing class of shares as Class B.
Shareholders of the Balanced Portfolio who on September 16, 1998, held Class B
shares had such shares converted to Class Y shares having an aggregate value
equal to that of the shareholder's Class B shares prior to the conversion.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios in the preparation of their financial statements.
The policies are in conformity with generally accepted accounting principles
which require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates,
any such differences are expected to be immaterial to the net assets of the
Portfolios.
(a) Valuation of Securities - Listed securities held by the Growth Portfolio,
Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and
Growth Portfolio, and Balanced Portfolio traded on national stock exchanges and
over-the-counter securities quoted on the NASDAQ National Market
97
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
System are valued at the last reported sales price or, lacking any sales, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange determined by the
advisor of the Portfolios as the primary market. Securities traded in the
over-the-counter market, other than those quoted on the NASDAQ National Market
System, are valued at the last available bid price. Short-term investments with
remaining maturities of 60 days or less are carried at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith under
procedures established by the Board of Trustees.
U.S. Government obligations held by the Income and Growth Portfolio, Balanced
Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio, and High
Income Portfolio are valued at the mean between the over-the-counter bid and
asked prices as furnished by an independent pricing service. Listed corporate
bonds, other fixed income securities, mortgage backed securities, mortgage
related, asset-backed and other related securities are valued at the prices
provided by an independent pricing service. Security valuations not available
from an independent pricing service are provided by dealers approved by the
Portfolios' Board of Trustees. In determining value, the pricing services use
information with respect to transactions in such securities, market
transactions in comparable securities, various relationships between
securities, and yield to maturity.
Municipal bonds, held by the Municipal Income Portfolio, are valued at fair
value. An independent pricing service values the Portfolio's municipal bonds
taking into consideration yield, stability, risk, quality, coupon, maturity,
type of issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities. The pricing service does not rely exclusively on quoted prices.
Short-term investments with remaining maturities of 60 days or less shall be
their amortized cost value unless the particular circumstances of the security
indicate otherwise.
Foreign currency amounts are translated into United States dollars as follows:
market value of investments, other assets and liabilities at the daily rate of
exchange, purchases and sales of investments, income and expenses at the rate
of exchange prevailing on the respective dates of such transactions. Net
unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
Net realized foreign currency gains and losses include foreign currency gains
and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of the Portfolio and
the amount actually received. The portion of investment gains and losses
related to foreign currency fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date is included in realized
gains and losses on security transactions.
(b) Repurchase Agreements -- It is the policy of Mentor Funds to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by Mentor Funds to monitor, on a daily basis, the market value of
each repurchase agreement's
98
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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' advisor to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Borrowings -- Each of the Portfolios (except for the Growth Portfolio,
Strategy Portfolio and Municipal Income Portfolio) may, under certain
circumstances, borrow money directly or through dollar-roll and reverse
repurchase agreements (arrangements in which the Portfolio sells a security for
a percentage of its market value with an agreement to buy it back on a set
date). Each Portfolio may borrow up to one-third of the value of its net
assets.
The average daily balance of reverse repurchase agreements outstanding for
Quality Income Portfolio during the year ended September 30, 1998, was
approximately $16,388,088 or $1.24 per share based on average shares
outstanding during the period at a weighted average interest rate of 5.16%. The
maximum amount of borrowings outstanding for any day during the period was
$71,061,218 (including accrued interest), as of September 17, 1998, at an
interest rate of 5.52% and was 26.09% of total assets at that date.
The average daily balance of reverse repurchase agreements outstanding for
Short-Duration Income Portfolio during the year ended September 30, 1998, was
approximately $6,026,021 or $0.72 per share based on average shares outstanding
during the period at a weighted average interest rate of 5.55%. The maximum
amount of borrowings outstanding for any day during the period was $35,037,791
(including accrued interest), as of September 3, 1998, at an interest rate of
5.55% and was 18.35% of total assets at that date.
(d) Portfolio Securities Loaned -- Each of the Portfolios (except for Municipal
Income Portfolio) is authorized by the Board of Trustees to participate in
securities lending transactions.
The Portfolios may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolios
continue to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolios record an asset and obligation for the market value
of that collateral. Cash received as collateral may be reinvested, in which
case that security is recorded as an asset of the Portfolio. Variations in the
market value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At September 30, 1998, certain Portfolios had loaned securities to brokers
which were collateralized by cash, U.S. Treasury securities and letters of
credit. Cash collateral at September 30, 1998 was reinvested in U.S. Treasury
and high quality money market instruments. Income from securities lending
activities amounted to $283,424, $50,923, $25,753, $88,906, $47,564, $702, and
$46,419, for the Growth Portfolio, Global Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio and Quality
Income Portfolio, respectively for the year ended September 30, 1998.
99
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Among the risks to a Portfolio from securities lending are that the borrower
may not provide additional collateral when required or return the securities
when due. At September 30, 1998, the value of the securities on loan and the
value of the related collateral were as follows:
<TABLE>
<CAPTION>
SECURITIES CASH SECURITIES TRI-PARTY
PORTFOLIO ON LOAN COLLATERAL COLLATERAL COLLATERAL
- ------------------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Growth $106,657,061 $115,219,699 $771,567 $ -
Global 11,714,972 12,707,641 - -
Capital Growth 14,483,537 15,562,984 - -
Strategy 58,005,353 60,165,776 215,110 -
Income and Growth 47,343,071 40,344,784 6,360 7,911,321
Balanced 2,544,039 2,639,420 - 39,456
Quality Income 3,244,448 1,605,500 - 1,687,662
- ------------------- ------------ ------------ -------- ---------
</TABLE>
(e) 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-backed securities issued by GNMA, FNMA,
and FHLMC. In a dollar-roll transaction, a Portfolio sells a mortgage-backed
security to a financial institution, such as a bank or broker/dealer, and
simultaneously agrees to repurchase a substantially similar (i.e., same type,
coupon, and maturity) security from the institution at a later date at an
agreed upon price. The mortgage-backed securities that are repurchased will
bear the same interest rate as those sold, but generally will be collateralized
by different pools of mortgages with different prepayment histories.
(f) Security Transactions and Investment Income -- Security transactions for
the Portfolios are accounted for on trade date. Dividend income is recorded on
the ex-dividend date. Interest income is recorded on the accrual basis.
Interest income (except for Municipal Income Portfolio) includes interest and
discount earned (net of premium) on short-term obligations, and interest earned
on all other debt securities including original issue discount as required by
the Internal Revenue Code. Dividends to shareholders and capital gain
distributions, if any, are recorded on the ex-dividend date.
Interest income for the Municipal Income Portfolio includes interest earned net
of premium, and original issue discount as required by the Internal Revenue
Code.
(g) Federal Income Taxes -- No provision for federal income taxes has been made
since it is each Portfolio's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to
distribute to its shareholders within the allowable time limit substantially
all taxable income and realized capital gains.
Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends
to meet certain requirements of the Internal Revenue Code applicable to
regulated investment companies which will enable the Portfolio to pay
tax-exempt interest dividends. The portion of such interest, if any, earned on
private purpose municipal bonds issued after August 7, 1986, may by considered
a tax preference item to shareholders.
100
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
At September 30, 1998, capital loss carryforwards for federal tax purposes were
as follows:
<TABLE>
<CAPTION>
MUNICIPAL QUALITY
EXPIRES INCOME PORTFOLIO INCOME PORTFOLIO
- ----------- ------------------ -----------------
<S> <C> <C>
9/30/2001 $ - $ 244,512
9/30/2002 - 3,678,547
9/30/2003 317,478 7,326,035
9/30/2004 1,616,817 1,708,773
9/30/2005 - 1,325,149
9/30/2006 295,480 -
---------- -----------
$2,229,775 $14,283,016
========== ===========
</TABLE>
Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise relieve the Portfolios of
any liability for federal tax.
(h) When-Issued and Delayed Delivery Transactions -- The Portfolios may engage
in when-issued or delayed delivery transactions. To the extent the Portfolios
engage in such transactions, they will do so for the purpose of acquiring
portfolio securities consistent with their investment objectives and policies
and not for the purpose of investment leverage. The Portfolios will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Portfolios will maintain security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily, and begin earning interest on the
settlement date.
(i) Futures Contracts -- In order to gain exposure to or protect against
declines in security values, the Portfolios may buy and sell futures contracts.
The Portfolios may also buy or write put or call options on futures contracts.
The Portfolios may sell futures contracts to hedge against declines in the
value of portfolios securities. The Portfolios may also purchase futures
contracts to gain exposure to market changes as it may be more efficient or
cost effective than actually buying securities. The Portfolios will segregate
assets to cover its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolios are required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolios each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolios recognize a realized gain or loss when the
contract is closed. For the year ended September 30, 1998, Strategy Portfolio,
Municipal Income Portfolio and Short-Duration Income Portfolio had realized
losses of $1,950,741, $923,251, and $88,910, respectively, on closed futures
contracts.
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities. At September 30, 1998, Strategy Portfolio and Municipal
Income Portfolio had open positions in the following futures contracts:
101
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
NUMBER OF NOTIONAL UNREALIZED
PORTFOLIO CONTRACTS POSITION CONTRACTS EXPIRATION VALUE DEPRECIATION
- ------------------ ----------- ---------- ------------------ ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Strategy 734 Short U.S. Long Bond Dec-98 $73,400,000 ($3,871,838)
Municipal Income 90 Short Muni Bond Future Dec-98 $ 9,000,000 ($ 225,729)
- ------------------ --- ---------- ------------------ ------ ----------- ----------
</TABLE>
(j) Options - In order to produce incremental earnings or protect against
changes in the value of portfolio securities, the Portfolios may buy and sell
put and call options, write covered call options on portfolio securities and
write cash-secured put options.
The Portfolios generally purchase put options or write covered call options to
hedge against adverse movements in the value of portfolio holdings. The
Portfolios may also use options for speculative purposes, although they do not
employ options for this at the present time. The Portfolios will segregate
assets to cover their obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Portfolios will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a
written put option, or the cost of the security for a purchased put or call
option is adjusted by the amount of premium received or paid. For the year
ended September 30, 1998, Municipal Income Portfolio had a net realized gain of
$10,940 on closed option contracts.
The risk in writing a call option is that the Portfolios give up the
opportunity for profit if the market price of the security increases and the
option is exercised. The risk in writing a put option is that the Portfolio may
incur a loss if the market price of the security decreases and the option is
exercised. The risk in buying an option is that the Portfolio pays a premium
whether or not the option is exercised or the counterparty is unwilling or
unable to perform. The Portfolio also has the additional risk of not being able
to enter into a closing transaction if a liquid secondary market does not
exist. The Portfolio may also write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of the
counterparty. Activity in written options for the Municipal Income Portfolio
for the year ended September 30, 1998, was as follows:
<TABLE>
<CAPTION>
PREMIUM
RECEIVED FACE VALUE
------------ ---------------
<S> <C> <C>
Options outstanding at
September 30, 1997 $ 36,693 $ 10,000,000
Options written 53,274 21,000,000
Options closed (49,292) (20,000,000)
Options expired (40,675) (11,000,000)
- ----------------------- -------- ------------
Options outstanding at
September 30, 1998 $ - $ -
- ----------------------- -------- ------------
</TABLE>
(k) Residual Interests - A derivative security is any investment that derives
its value from an underlying security, asset, or market index. Quality Income
Portfolio and Short-Duration Income Portfolio invest in mortgage security
residual interests ("residuals") which are considered derivative securities.
The Portfolios' investments in residuals have been primarily in securities
issued by proprietary mortgage trusts. While these entities have been highly
leveraged, often having indebtedness of up to 95% of their total value, the
Portfolios have not incurred any indebtedness in the course of making these
residual investments; nor have the Portfolios' assets been
102
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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.
(l) Interest-Rate Swap - An interest-rate swap is a contract between two
parties on a specified principal amount (referred to as the notional principal)
for a specified period. In the most common instance, a swap involves the
exchange of streams of variable and fixed-rate interest payments. During the
term of the swap, changes in the value of the swap are recognized as unrealized
gains or losses by marking-to-market the value of the swap. When the swap is
terminated, the Fund will record a realized gain or loss. At September 30,
1998, there were no open interest rate swap agreements.
(m) Deferred Expenses - Costs incurred by the Portfolios in connection with
their initial share registration and organization costs were deferred by the
Portfolios and are being amortized on a straight-line basis over a five-year
period.
(n) Distributions - Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for net operating losses, certain futures and deferral
of wash sales and equalization deficits.
The Growth Portfolio, Capital Growth Portfolio and Strategy Portfolio also
utilized earnings and profits distributed to shareholders on redemption of
shares as a part of the distributions for income tax purposes.
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly to all shareholders invested
in Municipal Income Portfolio, Quality Income Portfolio, Short-Duration Income
Portfolio and High Income Portfolio. Dividends are declared and paid annually
to all shareholders invested in the Growth Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Global Portfolio and Balanced Portfolio. Dividends are
declared and paid quarterly to all shareholders invested in Income and Growth
Portfolio. Dividends will be reinvested in additional shares of the same class
and Portfolio on payment dates at the ex-dividend date net asset value without
a sales charge unless cash payments are requested by shareholders in writing to
Mentor Investment Group, LLC. Dividends of all Portfolios are paid to
shareholders of record on the record date. Capital gains realized by each
Portfolio, if any, are paid annually.
NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment
advisor, 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%; Balanced
Portfolio, 0.75%; Municipal Income Portfolio, 0.60%; Quality Income Portfolio,
0.60%; Short-Duration Income Portfolio, 0.50%; and High Income Portfolio,
0.70%.
Mentor Advisors pays Van Kampen American Capital Management, Inc., the
sub-advisor to Municipal Income Portfolio, an annual fee expressed as a
percentage of the Portfolio's average net assets as
103
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
follows: 0.25% of the first $60 million of the Portfolio's average net assets
and 0.20% of the Portfolio's average net assets over $60 million.
For the period from October 1, 1997 to June 30, 1998, Wellington Management
Company, LLC, the sub-advisor to the Income and Growth Portfolio, received from
the Investment Advisor an annual fee expressed as a percentage of that
Portfolio's assets as follows: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.275% on the next $150 million of the
Portfolio's average net assets, 0.225% of the next $300 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's net assets over
$500 million. Effective July 1, 1998, the sub-advisor to the Income and Growth
Portfolio received the following fees: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.250% on the next $150 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's average net
assets over $150 million.
Van Kampen American Capital Management, Inc., the sub-advisor to the High
Income Portfolio receives from the Investment Advisor an annual fee of 0.20% of
the Portfolio's average daily net assets.
No performance or incentive fees are paid to the sub-advisors. Under certain
Sub-Advisory Agreements, the particular sub-advisor may, from time to time,
voluntarily waive some or all of its sub-advisory fee charged to the Investment
Advisor and may terminate any such voluntary waiver at any time in its sole
discretion.
The Global Portfolio has entered into an Investment Advisory Agreement with
Mentor Perpetual Advisors, LLC ("Mentor Perpetual"). Mentor Perpetual is owned
equally by Mentor and Perpetual PLC, a diversified financial services holding
company. Under this agreement, Mentor Perpetual's management fee is accrued
daily and paid monthly at an annual rate of 1.10% applied to the average daily
net assets of the Portfolio up to and including $75 million and 1.00% of its
average daily net assets in excess of $75 million.
For the year ended September 30, 1998, Mentor Advisors and sub-advisors, earned
and voluntarily waived the following management fees:
<TABLE>
<CAPTION>
MANAGEMENT
MANAGEMENT FEE SUB ADVISOR
FEE VOLUNTARILY FEE
PORTFOLIO EARNED WAIVED EARNED/(WAIVED)
- ----------------------- ------------ ------------- ----------------
<S> <C> <C> <C>
Growth $4,204,377 $ - $ -
Global 1,612,495 - -
Capital Growth 2,153,467 - -
Strategy 2,420,122 - -
Income and Growth 1,638,729 - 575,028
Balanced 31,721 - 20,856
Municipal Income 557,332 - 216,114
Quality Income 1,025,941 204,530 -
Short-Duration Income 504,097 180,523 -
High Income 175,891 175,891 (51,279)
- ----------------------- ---------- ------- -------
</TABLE>
Administrative personnel and services are provided by Mentor, under an
Administration Agreement, at an annual rate of 0.10% of the average daily net
assets of each Portfolio. For the year ended September 30, 1998, Mentor earned
the following administration fees:
<TABLE>
<CAPTION>
ADMINISTRATION
ADMINISTRATION FEE VOLUNTARILY
PORTFOLIO FEE EARNED WAIVED
- ----------------------- ---------------- ----------------
<S> <C> <C>
Growth $600,625 $ -
Global 153,750 -
Capital Growth 269,183 -
Strategy 284,720 -
Income and Growth 218,497 -
Balanced 4,219 4,219
Municipal Income 92,888 -
Quality Income 174,343 -
Short-Duration Income 101,237 101,237
High Income 24,979 -
- ----------------------- -------- -------
</TABLE>
104
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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 year ended
September 30, 1998, these direct reimbursements were as follows:
<TABLE>
<CAPTION>
DIRECT
PORTFOLIO REIMBURSEMENTS
- ----------------------- ---------------
<S> <C>
Growth $26,735
Global 6,902
Capital Growth 12,494
Strategy 12,317
Income and Growth 10,079
Municipal Income 4,318
Quality Income 7,964
Short-Duration Income 5,085
- ----------------------- -------
</TABLE>
NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The Class B shares of the Portfolios have adopted a Distribution Plan (the
Plan) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a
Distribution Agreement between the Portfolios and Mentor Distributors, LLC
("Mentor Distributors") a wholly-owned subsidiary of BYSIS Fund Services, Inc.,
Mentor Distributors was appointed distributor of the Portfolios. To compensate
Mentor Distributors for the services it provides and for the expenses it incurs
under the Distribution Agreement, the Portfolios pay a distribution fee, which
is accrued daily and paid monthly at the annual rate of 0.75% of the
Portfolios' average daily net assets for the Growth Portfolio, Capital Growth
Portfolio, Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio
and Global Portfolio, 0.50% of the average daily net assets of the Quality
Income Portfolio, High Income Portfolio and Municipal Income Portfolio, and
0.30% of the average daily net assets for the Short-Duration Income Portfolio.
Mentor Distributors may select financial institutions, such as investment
dealers and banks to provide sales support services as agents for their clients
or customers who beneficially own Class B shares of the Portfolios. Financial
institutions will receive fees from Mentor Distributors based upon Class B
shares owned by their clients or customers.
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
Mentor Distributors with respect to Class A and Class B shares of each
Portfolio. Under the Service Plan, financial institutions will enter into
shareholder service agreements with the Portfolios to provide administrative
support services to their customers who from time to time may be owners of
record or beneficial owners of Class A or Class B shares of one or more
Portfolios. In return for providing these support services, a financial
institution may receive payments from one or more Portfolios at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B
shares of the particular Portfolio or Portfolios beneficially owned by the
financial institution's customers for whom it is holder of record or with whom
it has a servicing relationship.
105
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Presently, the Portfolios' class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.
Under the Distribution Plan, shareholder service fees are charged in Class A
and B and distribution fees are charged to Class B. For the year ended
September 30, 1998, distribution fees and shareholder servicing fees were as
follows:
<TABLE>
<CAPTION>
CLASS B CLASS B SHAREHOLDER SERVICE FEE
DISTRIBUTION DISTRIBUTION --------------------------- SHAREHOLDER SERVICE
PORTFOLIO FEE FEE WAVIED CLASS A CLASS B FEE WAIVED
- ----------------------- -------------- -------------- ----------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
Growth $3,638,580 $ -- $255,596 $1,233,864 $ --
Global 734,020 -- 146,546 237,827 --
Capital Growth 1,227,717 -- 283,728 389,229 --
Strategy 1,875,172 -- 77,994 633,805 --
Income and Growth 986,604 -- 222,501 323,741 --
Balanced 30,319 29,451 3,517 6,695 9,738
Municipal Income 257,381 -- 108,151 124,069 --
Quality Income 467,042 -- 195,196 232,278 --
Short-Duration Income 133,476 -- 160,078 91,969 --
High Income 68,461 -- 28,187 34,631 --
- ----------------------- ---------- ------- -------- ---------- ------
</TABLE>
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
September 30, 1998, Global Portfolio had outstanding forward contracts as set
forth below.
<TABLE>
<CAPTION>
CONTRACTS NET UNREALIZED
TO DELIVER/ IN EXCHANGE APPRECIATION/
SETTLEMENT DATE RECEIVE VALUE FOR (DEPRECIATION)
- ----------------------------- ------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
PURCHASES
10/01/98 British Pound 34,560 $ 58,716 $ 58,925 $ (209)
10/01/98 British Pound 19,415 32,985 33,102 (117)
SALES
10/01/98 British Pound 32,471 55,166 55,362 196
10/02/98 British Pound 33,054 56,156 56,356 200
10/02/98 British Pound 36,586 62,159 62,380 221
10/30/98 French Franc 3,859,918 689,505 685,598 (3,907)
3/18/99 Hong Kong Dollar 7,928,000 1,006,040 1,000,000 (6,040)
11/30/98 Singapore Dollar 885,000 524,787 500,000 (24,787)
- -------- ------------------ --------- --------- ---------- ---------
</TABLE>
106
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 12,016,618 $ 210,103,016 5,018,131 $ 82,270,375
Shares issued upon reinvestment of distributions 346,751 6,474,795 369,088 5,744,163
Shares redeemed (12,306,743) (213,035,017) (2,301,180) (37,823,031)
----------- -------------- ---------- -------------
Change in net assets from capital share transactions 56,626 $ 3,542,794 3,086,039 $ 50,191,507
=========== ============== ========== =============
CLASS B:
Shares sold 4,138,131 $ 73,047,883 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 (4,698,527) (80,890,251) (3,140,076) (49,890,633)
----------- -------------- ---------- -------------
Change in net assets from capital share transactions 1,107,060 $ 22,618,236 5,600,406 $ 87,888,818
=========== ============== ========== =============
CLASS Y: (a)
Shares sold 1,786,672 $ 30,602,698 - -
Shares issued upon reinvestment of distributions 1 10 - -
Shares redeemed (53,808) (894,152) - -
----------- -------------- ---------- -------------
Change in net assets from capital share transactions 1,732,865 $ 29,708,556 - -
=========== ============== ========== =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR PERPETUAL GLOBAL PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- ------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,057,945 $ 42,154,809 1,732,413 $ 32,107,036
Shares issued upon reinvestment of distributions 113,726 2,255,270 26,897 463,738
Shares redeemed (1,275,534) (25,637,616) (270,161) (5,115,471)
---------- ------------- --------- ------------
Change in net assets from capital share transactions 896,137 $ 18,772,463 1,489,149 $ 27,455,303
========== ============= ========= ============
CLASS B:
Shares sold 1,821,588 $ 36,737,964 2,325,365 $ 42,416,589
Shares issued upon reinvestment of distributions 232,932 4,477,444 91,695 1,544,189
Shares redeemed (983,971) (18,930,107) (447,724) (8,352,236)
---------- ------------- --------- ------------
Change in net assets from capital share transactions 1,070,549 $ 22,285,301 1,969,336 $ 35,608,542
========== ============= ========= ============
CLASS Y: (a)
Shares sold 53 $ 1,000 - -
Shares issued upon reinvestment of distributions - 8 - -
Shares redeemed - - - -
---------- ------------- --------- ------------
Change in net assets from capital share transactions 53 $ 1,008 - -
========== ============= ========= ============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
107
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR CAPITAL GROWTH PORTFOLIO
--------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
--------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 5,110,051 $ 121,415,173 1,422,449 $ 28,161,248
Shares issued upon reinvestment of distributions 278,288 5,833,664 264,769 4,552,490
Shares redeemed (1,926,775) (45,709,577) (404,403) (7,959,184)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 3,461,564 $ 81,539,260 1,282,815 $ 24,754,554
========== ============= ========= =============
CLASS B:
Shares sold 4,375,173 $ 98,931,464 1,749,992 $ 33,332,019
Shares issued upon reinvestment of distributions 507,715 10,256,056 596,606 9,983,395
Shares redeemed (1,063,324) (23,712,167) (711,342) (13,428,205)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 3,819,564 $ 85,475,353 1,635,256 $ 29,887,209
========== ============= ========= =============
CLASS Y: (a)
Shares sold 48 $ 1,000 - -
Shares issued upon reinvestment of distributions 1 12 - -
Shares redeemed - - -
---------- ------------- --------- -------------
Change in net assets from capital share transactions 49 $ 1,012 - -
========== ============= ========= =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR STRATEGY PORTFOLIO
------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
--------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 508,748 $ 7,933,524 1,695,322 $ 28,517,096
Shares issued upon reinvestment of distributions 444,548 6,836,196 91,017 1,513,610
Shares redeemed (1,529,689) (24,220,890) (742,169) (12,677,413)
---------- ------------- --------- -------------
Change in net assets from capital share transactions (576,393) ($ 9,451,170) 1,044,170 $ 17,353,293
========== ============= ========= =============
CLASS B:
Shares sold 564,916 $ 8,678,121 2,587,894 $ 43,129,553
Shares issued upon reinvestment of distributions 3,423,558 51,517,305 1,291,000 21,237,045
Shares redeemed (7,097,154) (108,934,512) (3,591,125) (60,432,366)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions (3,108,680) ($ 48,739,086) 287,769 $ 3,934,232
========== ============= ========== =============
CLASS Y: (a)
Shares sold 67 $ 1,001 - -
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 67 $ 1,001 - -
========== ============= ========== =============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
108
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR INCOME AND GROWTH PORTFOLIO
---------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,515,923 $ 49,323,113 1,945,245 $ 37,552,063
Shares issued upon reinvestment of distributions 371,373 7,153,831 179,904 3,303,336
Shares redeemed (915,370) (18,005,450) (305,497) (5,925,176)
--------- ------------- --------- -------------
Change in net assets from capital share transactions 1,971,926 $ 38,471,494 1,819,652 $ 34,930,223
========= ============= ========= =============
CLASS B:
Shares sold 2,642,784 $ 51,766,483 1,913,241 $ 36,687,335
Shares issued upon reinvestment of distributions 559,471 10,748,481 450,665 8,192,160
Shares redeemed (1,074,795) (21,053,657) (596,371) (11,526,154)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 2,127,460 $ 41,461,307 1,767,535 $ 33,353,341
========== ============= ========= =============
CLASS Y: (a)
Shares sold 53 $ 1,000 - -
Shares issued upon reinvestment of distributions 2 30 - -
Shares redeemed - - - -
---------- ------------- --------- -------------
Change in net assets from capital share transactions 55 $ 1,030 - -
========== ============= ========= =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR BALANCED PORTFOLIO
-------------------------------------------------------------
PERIOD ENDED YEAR ENDED
9/30/98 9/30/97
------------------------------ ----------------------------
SHARES DOLLARS SHARES DOLLARS
------------ --------------- ------------ -------------
<S> <C> <C> <C> <C>
CLASS A: (b)
Shares sold 258,246 $ 3,577,935 - $ -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
------- ------------ ----------- ----------
Change in net assets from capital share transactions 258,246 $ 3,577,935 - $ -
======= ============ ========== ==========
CLASS B:
Shares sold 412,403 $ 5,702,737 - $ -
Shares issued upon reinvestment of distributions 88,886 1,300,249 37,773 558,075
Shares redeemed (48,378) (810,125) (39,915) (636,137)
Conversion of Class B Shares to Class Y Shares (273,416) (3,350,117) - -
-------- ------------ ------- ----------
Change in net assets from capital share transactions 179,495 $ 2,842,744 (2,142) $ (78,062)
======== ============ ======= ==========
CLASS Y: (b)
Shares sold - $ - - $ -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed (7,305) (100,000) - -
Conversion of Class B Shares to Class Y Shares 273,416 3,350,117 - -
-------- ------------ ------- ----------
Change in net assets from capital share transactions 266,111 $ 3,250,117 - $ -
======== ============ ======= ==========
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
(b) For the period from September 16, 1998 (initial offering of Class A and
Class Y Shares) to September 30, 1998.
109
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR MUNICIPAL INCOME PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
-------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 1,688,990 $ 26,509,509 901,683 $ 13,789,961
Shares issued upon reinvestment of distributions 75,715 1,188,701 41,778 635,539
Shares redeemed (423,337) (6,641,364) (214,874) (3,272,170)
--------- ------------ -------- ------------
Change in net assets from capital share transactions 1,341,368 $ 21,056,846 728,587 $ 11,153,330
========= ============ ======== ============
CLASS B:
Shares sold 1,208,341 $ 18,966,860 782,655 $ 11,948,057
Shares issued upon reinvestment of distributions 91,662 1,436,340 83,433 1,268,808
Shares redeemed (436,001) (6,820,355) (478,013) (7,288,249)
--------- ------------ -------- ------------
Change in net assets from capital share transactions 864,002 $ 13,582,845 388,075 $ 5,928,616
========= ============ ======== ============
CLASS Y: (a)
Shares sold 64 $ 1,000 - -
Shares issued upon reinvestment of distributions 3 43 - -
Shares redeemed - - - -
--------- ------------ -------- ------------
Change in net assets from capital share transactions 67 $ 1,043 - -
========= ============ ======== ============
</TABLE>
<TABLE>
<CAPTION>
MENTOR QUALITY INCOME PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- ---------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 4,256,782 $ 56,191,423 2,838,801 $ 37,052,906
Shares issued upon reinvestment of distributions 233,015 3,077,659 91,837 1,196,422
Shares redeemed (1,597,720) (21,178,895) (529,521) (6,928,329)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 2,892,077 $ 38,090,187 2,401,117 $ 31,320,999
========== ============= ========= =============
CLASS B:
Shares sold 3,811,046 $ 50,451,628 2,058,671 $ 26,889,217
Shares issued upon reinvestment of distributions 272,551 3,600,049 218,332 2,847,859
Shares redeemed (1,478,885) (19,526,706) (1,089,318) (14,250,845)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 2,604,712 $ 34,524,971 1,187,685 $ 15,486,231
========== ============= ========== =============
CLASS Y: (a)
Shares sold 76 $ 1,000 - -
Shares issued upon reinvestment of distributions 4 51 - -
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 80 $ 1,051 - -
========== ============= ========== =============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
110
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR SHORT-DURATION INCOME PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
--------------------------------- ----------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 9,921,692 $124,978,729 2,047,670 $ 25,768,187
Shares issued upon reinvestment of distributions 200,895 2,525,409 49,602 623,647
Shares redeemed (4,997,458) (62,897,886) (505,078) (6,351,983)
---------- ------------ --------- -------------
Change in net assets from capital share transactions 5,125,129 $64,606,252 1,592,194 $ 20,039,851
========== ============ ========= =============
CLASS B:
Shares sold 3,500,465 $44,073,519 1,121,483 $ 14,121,033
Shares issued upon reinvestment of distributions 145,226 1,826,827 89,996 1,131,691
Shares redeemed (1,563,684) (19,674,936) (1,027,042) (12,921,363)
---------- ------------ ---------- -------------
Change in net assets from capital share transactions 2,082,007 $26,225,410 184,437 $ 2,331,361
========== ============ ========== =============
CLASS Y: (a)
Shares sold 79 $ 1,000 - -
Shares issued upon reinvestment of distributions 4 49 - -
Shares redeemed - - - -
---------- ------------ ---------- -------------
Change in net assets from capital share transactions 83 $ 1,049 - -
========== ============ ========== =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR HIGH INCOME PORTFOLIO
------------------------------
PERIOD ENDED
9/30/98 (C)
------------------------------
SHARES DOLLARS
------------- --------------
<S> <C> <C>
CLASS A:
Shares sold 4,775,208 $ 56,602,255
Shares issued upon reinvestment of distributions 51,541 580,207
Shares redeemed (168,561) (1,889,222)
--------- ------------
Change in net assets from capital share transactions 4,658,188 $ 55,293,240
========= ============
CLASS B:
Shares sold 5,890,307 $ 69,683,852
Shares issued upon reinvestment of distributions 62,441 701,346
Shares redeemed (190,546) (2,108,787)
--------- ------------
Change in net assets from capital share transactions 5,762,202 $ 68,276,411
========= ============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
(c) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
NOTE 8: SUBSEQUENT EVENT
Effective November 16, 1998, the Balanced Portfolio acquired substantially all
the assets and assumed the liabilities of the Strategy Portfolio in exchange
for Class A, Class B and Class Y shares of the Balanced Portfolio. The
acquisition was accomplished by a tax-free exchange of the respective shares of
the Balanced Portfolio for the net assets of the Strategy Portfolio. The net
assets acquired amounted to $222,601,303. The aggregate net assets of the
Balanced Portfolio immediately after the acquisition were $255,551,169.
111
<PAGE>
MENTOR FUNDS
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE TRUSTEES AND SHAREHOLDERS
MENTOR FUNDS
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments of Growth Portfolio, Global Portfolio,
Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio,
Balanced Portfolio, Municipal Income Portfolio, Quality Income Portfolio,
Short-Duration Income Portfolio and High Income Portfolio, portfolios of Mentor
Funds as of September 30, 1998 and the related statements of operations for the
year or period then ended, the statements of changes in net assets for each of
the years or periods in the two-year period then ended and the financial
highlights for each of the years or periods in the five-year period ended
September 30, 1998 as described more fully in each of the financial highlights
of each of the funds. These financial statements and financial highlights are
the responsibility of the Funds' management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy
Portfolio, Income and Growth Portfolio, Balanced Portfolio, Municipal Income
Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio and High
Income Portfolio, portfolios of Mentor Funds as of September 30, 1998, the
results of their operations for the year or period then ended, the changes in
their net assets for each of the years or periods in the two-year period then
ended, and the financial highlights for each of the years or periods in the
five-year period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
November 20, 1998
112
<PAGE>
MENTOR FUNDS
ADDITIONAL INFORMATION
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
YEAR 2000 (UNAUDITED)
The Portfolios receive services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer software to distinguish the year 2000 from
the year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolios from this problem.
FEDERAL TAX STATUS OF DIVIDENDS DECLARED (UNAUDITED)
Long-term capital gain dividends paid during the period are presented below.
For federal income tax purposes, dividends from short-term capital gains are
classified as ordinary income. All net investment income dividends were
ordinary income, except for Municipal Income Portfolio that paid exempt income
dividends. The percentage of qualifying dividends eligible for the corporate
dividends received deduction are also listed below for the applicable
Portfolios.
<TABLE>
<CAPTION>
LONG-TERM TAX-EXEMPT
CAPITAL GAIN INCOME QUALIFYING
PORTFOLIO DIVIDENDS DIVIDENDS DIVIDENDS
- ----------------------- -------------- ------------ -----------
<S> <C> <C> <C>
Growth $37,907,233 $ - -
Global 3,028,816 - -
Capital Growth 9,208,016 - 21.04%
Strategy 41,130,602 - 9.69%
Income and Growth 8,656,201 - 37.12%
Municipal Income - 3,949,481 -
Balanced 893,299 - 11.33%
High Income - - -
Quality Income - - -
Short-Duration Income - - -
- ----------------------- ----------- ---------- -----
</TABLE>
Shareholders of Mentor Strategy Portfolio (the "Strategy Portfolio") considered
and acted upon the proposal listed below at a special meeting of shareholders
held on Thursday November 12, 1998. In addition, below the proposal are the
results of that vote.
1. To approve or disapprove an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of Strategy Portfolio to Mentor
Balanced Portfolio (the "Balanced Portfolio") in exchange for shares of
the Balanced Portfolio and the assumption by the Balanced Portfolio of all
of the liabilities of the Strategy Portfolio, and the distribution of such
shares to the shareholders of the Strategy Portfolio in complete
liquidation of the Strategy Portfolio:
<TABLE>
<S> <C>
Affirmative 7,281,296
Against 313,087
Abstain 331,983
</TABLE>
113
<PAGE>
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
Chairman
Eskimo Pie Corporation
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.
<PAGE>
[Mentor Logo] ----------------------
BULK RATE
U.S. POSTAGE
PAID
RIVERFRONT PLAZA MENTOR
901 EAST BYRD STREET ----------------------
RICHMOND, VIRGINIA 23219
(800) 382-0016
1998 MENTOR DISTRIBUTORS, LLC
MK835
Mentor Funds
----------------------
Semi-Annual Report
----------------------
March 31, 1999
[MENTOR INVESTMENT GROUP LOGO]
<PAGE>
MENTOR FUNDS
SEMI-ANNUAL REPORT
TABLE OF CONTENTS
MARCH 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Message from the Chairman and President .................. 1
Growth Portfolio ......................................... 2
Perpetual Global Portfolio ............................... 12
Capital Growth Portfolio ................................. 25
Income and Growth Portfolio .............................. 33
Balanced Portfolio ....................................... 43
Municipal Income Portfolio ............................... 53
Quality Income & Short-Duration Income Portfolios ........ 64
High Income Portfolio .................................... 81
Notes to Financial Statements ............................ 90
Shareholder Information .................................. Inside back cover
</TABLE>
<PAGE>
MENTOR FUNDS
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
MARCH 31, 1999
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
On behalf of all the associates at Mentor Investment Group, we would like to
take this opportunity to thank you for your investment in the Mentor Family of
Funds. This Semi-Annual Report reaffirms our commitment to our shareholders and
details the financial performance of these investments for the period ended
March 31, 1999.
Founded in 1970, Mentor Investment Group is an investment advisory firm with
more than $16 billion under management. We pride ourselves on a strong heritage
of providing quality service and a variety of investment choices that help meet
our shareholders' financial objectives by offering mutual funds and
separately-invested portfolios.
In the commentary that follows, Mentor's investment team presents an insightful
perspective on the markets and strategies that shaped their investment decisions
for the past fiscal year. Our investment teams operate with these priorities:
FOCUS -- In most money management companies, each investment manager has
multiple responsibilities. At Mentor, our investment managers are singularly
focused on enhancing the value of the portfolios. This means that you can be
assured of a consistent, proven approach to developing a winning financial
strategy.
OPPORTUNITIES -- By offering multiple management styles, portfolio
diversification is simplified. Mentor gives investors the tools for long-term
investment success through diversification and accommodation of changing
investment needs.
SERVICE -- To help serve our shareholders, Mentor has a fully dedicated
Investor Relations Center. Our Relationship Coordinators are professionally
trained and licensed to serve clients' needs.
TECHNOLOGY -- Abreast of the most advanced technology and using the latest
analytical tools, our investment managers have the ability to survey the
financial markets and make informed decisions about where the best place is to
invest.
We at Mentor are honored to be a partner in the management of your financial
assets. Mentor Investment Group provides diversified investment styles and
services to over one million shareholders. We serve individuals, corporations,
endowments, foundations, public funds, and municipalities. To learn more about
Mentor, please contact your consultant or us at (800) 382-0016.
We look forward to making the Mentor formula work for you, and to a mutually
beneficial relationship.
Sincerely,
/s/ Daniel J. Ludeman /s/ Paul F. Costello
Daniel J. Ludeman Paul F. Costello
CHAIRMAN PRESIDENT
[MENTOR INVESTMENT GROUP GRAPHIC]
THE MENTOR MISSION
TO PROVIDE PROFESSIONAL INVESTMENT MANAGEMENT SERVICES THROUGH A FIRM THAT IS
SECOND TO NONE IN THE QUALITY OF ITS INVESTMENT PROCESS, THE SKILL AND
TRAINING OF ITS PROFESSIONALS, AND THE COMMITMENT, SHARED BY ALL ITS
ASSOCIATES, TO DELIVER THE HIGHEST LEVEL OF SERVICE AND ETHICAL BEHAVIOR TO
CLIENTS.
FOR MORE INFORMATION AND A PROSPECTUS FOR THE FUNDS, PLEASE CALL US,
(800)382-0016, OR CONTACT YOUR CONSULTANT. THE PROSPECTUS CONTAINS COMPLETE
INFORMATION ABOUT FEES, SALES CHARGES, AND EXPENSES. PLEASE READ IT CAREFULLY
BEFORE INVESTING OR SENDING MONEY.
1
<PAGE>
MENTOR GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
After an extremely strong fourth quarter of 1998, the first quarter of 1999 was
one of the most difficult we have encountered in the nearly 15 years of the
Small-Capitalization Growth Portfolio's existence. Not difficult in terms of
company fundamentals, but rather in terms of market psychology. It seemed
throughout the quarter that positive investment returns could only be achieved
by buying the largest companies or by purchasing companies with ".com" after
their names. The latter, of course, typically have no earnings streams at all.
The market largely ignored our small-cap growth companies whose unit sales grew
at double-digit rates and whose real earnings growth ranged from 25% and higher.
The narrowness of the market has been mentioned often in the financial press
recently, but a few facts and figures may be illustrative. The Russell 2000
Index has a total market capitalization of roughly $1 trillion dollars. This
seems like a fairly sizeable amount of money until one realizes that the sum of
the market capitalizations of the three largest companies in the Standard and
Poor's 500 index, Microsoft, General Electric and Wal-Mart, exceed that amount!
In fact, the 30 largest companies in the S&P 500 represent a third of the
capitalization of the 8,000 public companies. The narrowness of the market has
not been confined to size alone, although this was a very important factor in
performance in the first quarter. During the quarter, 56% of all industries in
the Russell 2000 saw market values decline by more than 10%. Indeed, 65% of all
industries underperformed the index itself. Strange as it may seem, companies in
the Russell 2000 losing money or having no income appreciated on average over
10% during the quarter while those companies with net income declined in value.
MANAGEMENT STRATEGY
We continue to believe that the company and industry diversification in our
Portfolio makes great sense. We own over 125 rapidly growing companies with
average market capitalizations of $950 million. Technology and healthcare
companies figure heavily in the make up of the Portfolio with a combined
weighting of over 40% of the assets. Consumer oriented industries such as
broadcasting and retailing are also important holdings of the Portfolio and are
sectors in which we believe earnings growth will be particularly strong this
year. We are adding to our telecommunication holdings, believing that unit
growth, particularly among the long distance and broadband companies, will be
very strong. We are reducing our weighting in the transportation industries due
to the fact that energy prices seem to have found a bottom, and at the same time
we are investigating the potential for new investments in the energy sector.
PERFORMANCE REVIEW
For the six-month period ending March 31, 1999 the Mentor Growth Portfolio A
shares returned 4.99%. The shift in investor psychology regarding
small-capitalization equities can be seen by comparing the 22.87% return for the
Portfolio in the September-December period and the -14.55% decline for the
January-March period. Over the course of the first quarter we have seen the
Portfolio's P/E multiple contract by 20%. For the six months we trailed the
10.00% return of our Russell 2000 index benchmark. This was due in part to our
lack of Internet exposure as these companies do not meet our earnings growth
requirements. Despite the first quarter decline, we
2
<PAGE>
MENTOR GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
are seeing some of the best fundamentals for our companies in some time. Fourth
quarter earnings growth was in excess of 40% over the previous year and positive
earnings surprises outnumbered negatives ones by nearly five to one. With its
earnings expected to grow in excess of 30%, the Portfolio is selling at 19 times
estimated 1999 earnings. Compare this to the S&P 500, which saw its earnings
contract 2% in the final quarter of the year, whose earnings growth is expected
to be in the single digits this year, and much is selling at a record level of
32 times those estimated earnings.
MARKET OUTLOOK
We do not believe that the present polarization of the market can continue
indefinitely. Several times in the past similar market conditions have evolved
in which a very small number of companies drove performance. This has typically
led to severe P/E compression among many of the smaller growth companies and
eventually to very strong outperformance by these same companies.
The longest period of underperformance of small-caps relative to large-caps was
six years and occurred during the Great Depression. Although the Portfolio has
underperformed large-caps since the second half of 1996, small-cap growth stocks
in general have now underperformed for over four years. At present, the top 50
stocks in the S&P 500 are selling at twice their long-term growth rates.
Companies in the Growth Portfolio are selling at roughly 60% of their long-term
growth rates. We remain convinced that over time, valuations revert to the mean
and earnings ultimately drive stock prices.
We believe that the present situation presents one of the more extraordinary
periods of small cap undervaluation in market history. We are unaware of any
time over the past 40 years when smaller companies have sold at greater
discounts to larger-cap stocks than at the present. We suspect that when one
looks back a few years from now, it will be clear that 1999 marked a historic
low point in small-cap valuations, particularly relative to larger-cap issues.
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class A and the Russell 2000.~
Class A Russell 2,000
6/5/95 9425 10000
9/30/95 11251 11557
9/30/96 14640 13076
9/30/97 18418 17416
9/30/98 14352 14103
3/31/99 15068 15514
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception+++
Class A (27.56%) 11.32%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
++ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000
investment minus $575 sales charge = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Growth Portfolio Class A Shares from the
date of issuance on 6/5/95 through 3/31/99.
3
<PAGE>
MENTOR GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class B Shares and the Russell 2000.-
Class B Russell 2000~
9/30/88 10000 10000
12/31/88 8737 8859.93
12/31/89 10252 10835.34
12/31/90 9096 8289.97
12/31/91 13667 12107.64
12/31/92 15796 14336.85
12/31/93 18260 17047.50
12/31/94 17443 16736.97
9/30/95 23042 21041.03
9/30/96 29535 23804.37
9/30/97 36817 31705.64
9/30/98 32972 28788
3/31/99 46963 31667
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year 10-Year
Class B (26.58%) 10.67% 12.20%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
+ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class B Shares. A contingent deferred sales charge will be imposed, if
applicable, on Class B Shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to
1.00% of amounts redeemed during the five-year period following the date of
purchase. The value of the Class B Shares reflects a redemption fee in
effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
4
<PAGE>
MENTOR GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class Y and the Russell 2000.~
Class Y Russell 2000~
11/19/97 10000 10000
12/31/97 10021 10109
3/31/98 11314 11126
6/30/98 10500 10580
9/30/98 8301 8470
3/31/99 8721 9318
Total Returns as of 3/31/99
1-Year Since Inception++
Class Y (22.92%) (10.67%)
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
+ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class Y Shares. These shares are not subject to any sales or contingent
deferred sales charges. The Class Y Shares' performance assumes the
reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Growth Portfolio Class Y Shares from the date
of issuance on 11/19/97 through 3/31/99.
5
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 93.84%
CAPITAL GOODS & CONSTRUCTION - 4.48%
Aviation Sales Company 98,250 $4,372,125
Communications Holdings, Inc. 62,700 2,899,875
Conrad Industries, Inc. 226,700 821,787
Denali, Inc. * 205,250 1,821,594
MotivePower Industries, Inc. 326,950 8,214,619
Rental Service Corporation * 222,700 3,897,250
----------
22,027,250
----------
CONSUMER CYCLICAL - 17.37%
Avis Rent A Car * 244,700 6,775,131
Cadmus Communications
Corporation 265,500 3,816,562
Carey International, Inc. * 170,100 2,764,125
Chancellor Media
Corporation * 64,750 3,051,344
Chattem, Inc. 175,450 5,482,812
Citadel Communications
Corporation * 77,750 2,585,188
Clear Channel Communications 45,662 3,062,208
Cox Radio, Inc. - Class A * 103,400 5,299,250
Cumulus Media - Class A * 312,300 3,669,525
Dollar General Corporation 42,716 1,452,344
Dollar Tree Stores, Inc. * 155,425 4,808,461
Entercom Communications
Corporation * 151,800 5,369,925
Family Dollar Stores 469,800 10,805,400
Lamar Advertising Company * 144,900 4,917,544
Media Arts Group, Inc. * 108,700 978,300
Papa John's International, Inc.* 165,900 7,320,337
SCP Pool Corporation * 330,075 4,621,050
SkyWest, Inc. 149,000 4,302,375
The Men's Wearhouse, Inc. 146,400 4,218,150
----------
85,300,031
----------
CONSUMER STAPLES - 4.17%
Bindley Western Industries 62,650 1,789,441
Celestial Seasonings, Inc. 103,250 2,232,781
Natrol, Inc. * 105,800 641,413
Parexel International
Corporation 129,500 2,679,031
Richfood Holdings, Inc. 188,675 4,068,305
US Foodservice * 126,500 5,882,250
Wild Oats Markets, Inc. 118,050 3,202,106
----------
20,495,327
----------
ENERGY - 2.87%
Core Laboratories N.V. 252,200 4,429,263
Global Industries, Limited 378,250 3,829,781
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ENERGY (CONTINUED)
Hanover Compressor
Company * 221,250 $5,863,125
----------
14,122,169
----------
FINANCIAL - 8.47%
CCB Financial Corporation 81,550 4,408,797
Commerce Bancorp, Inc. 92,350 3,809,438
Concord EFS, Inc. 111,716 3,079,172
Markel Corporation 55,760 10,050,740
National Commerce Bancorp 418,184 9,539,822
NOVA Corporation * 270,622 7,103,828
Pinnacle Holdings, Inc. 189,950 2,872,994
U.S. Trust Corporation 10,450 775,259
----------
41,640,050
----------
HEALTH - 18.11%
Biomatrix, Inc. * 41,600 3,244,800
Brookdale Living
Communities * 299,400 5,164,650
CareMatrix Corporation * 180,750 3,434,250
Chirex, Inc. * 93,000 2,278,500
Express Scripts, Inc. - Class A * 122,950 10,566,016
Health Management Associates,
Inc. * 78,961 962,337
Henry Schein, Inc. * 87,150 2,200,537
Mecon, Inc. * 235,400 1,647,800
Medquist, Inc. * 235,150 7,054,500
Molecular Devices
Corporation * 206,000 5,562,000
NCS Healthcare, Inc. -
Class A * 256,250 3,075,000
Omnicare, Inc. 254,010 4,842,066
Pharmaceutical Product
Development * 180,700 6,064,744
Priority Healthcare
Corporation - Class A * 28,067 1,270,032
Priority Healthcare
Corporation - Class B * 161,100 7,289,775
Province Healthcare
Company * 392,000 7,252,000
PSS World Medical, Inc. * 229,000 2,018,062
QuadraMed Corporation * 166,950 1,272,994
Serologicals Corporation * 288,050 3,906,678
Sunrise Assisted Living, Inc. * 51,750 2,357,859
United Payors & Providers, Inc. 219,900 5,071,444
Wesley Jessen Visioncare, Inc. * 90,000 2,480,625
----------
89,016,669
----------
</TABLE>
6
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY - 23.44%
ADE Corporation * 262,600 $2,494,700
Applied Micro Circuits * 89,700 3,834,675
ATMI, Inc. * 114,750 2,295,000
Axent Technologies, Inc. * 62,250 1,497,890
BEA Systems, Inc. * 101,600 1,587,500
Benchmark Electronics, Inc. * 245,940 7,378,200
Black Box Corporation * 54,400 1,686,400
C&D Technologies, Inc. 102,100 2,539,738
Cerprobe Corporation 418,900 5,340,975
Check Point Software
Technology * 33,250 1,429,750
Concord Communications,
Inc. * 38,400 2,188,800
Condor Technology Solutions * 115,000 1,092,500
CSG Systems International,
Inc. * 118,400 4,669,400
Digital Microwave
Corporation * 388,400 3,252,850
Galileo Technology Limited * 177,300 5,186,025
International Integration, Inc. * 10,000 320,000
ITC DeltaCom * 359,550 7,842,684
Medialink Worldwide, Inc. * 234,250 2,957,406
Metro Networks, Inc. * 95,350 5,244,250
Mylex Corporation * 149,750 973,375
Network Appliance, Inc. * 90,750 4,594,219
Optek Technology, Inc. * 66,400 975,250
P-Com, Inc. * 503,350 3,838,044
Parlex Corporation * 279,900 2,659,050
PCD, Inc. * 244,300 2,213,969
Peerless Systems * 379,450 3,225,325
Peregrine Systems, Inc. * 66,500 2,219,437
Photronics, Inc. * 190,700 3,551,787
Powerwave Technologies, Inc. * 181,400 5,147,225
PRI Automation, Inc. * 129,550 2,720,550
Remedy Corporation * 139,900 1,958,600
Research In Motion * 253,800 2,664,900
SCB Computer Technology,
Inc. 514,300 2,346,494
Segue Software, Inc. * 116,600 1,122,275
Sensormatic Electronics
Corporation 368,050 3,496,475
SIPEX Corporation * 113,950 1,488,472
Smith-Gardner & Associates * 80,000 1,130,000
Speedfam International, Inc. * 98,850 1,186,200
Vantive Corporation * 180,900 2,182,106
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY (CONTINUED)
Winstar Communications,
Inc. * 73,500 $ 2,671,266
-----------
115,203,762
------------
TRANSPORTATION - 5.42%
Atlantic Coast Airlines, Inc. * 236,650 6,655,781
Coach USA, Inc. * 182,650 5,022,875
Covenant Transport, Inc. -
Class A * 218,700 3,253,162
Mesaba Holdings, Inc. 491,175 6,584,815
M.S. Carriers, Inc. * 144,900 3,830,794
US Xpress Enterprises -
Class A * 110,750 1,287,469
------------
26,634,896
------------
MISCELLANEOUS - 9.51%
ABR Information Services,
Inc. * 194,950 3,387,256
Action Performance
Companies, Inc. * 114,800 3,429,650
AHL Services, Inc. * 281,300 5,766,650
Butler International, Inc. 181,550 3,335,981
Copart, Inc. * 245,050 5,084,788
Corporate Executive Board 41,100 1,073,738
Dendrite International, Inc. * 115,400 2,574,862
Global Vacation Group, Inc. * 106,000 1,258,750
Gulf Island Fabrication, Inc. 78,450 823,725
Imax Corporation * 44,400 865,800
Kulicke & Soffa Industries, Inc. 107,750 2,707,219
Outdoor Systems, Inc. * 336,489 10,094,670
Rent-Way, Inc. * 119,500 2,868,000
Select Appointments - 130,550 3,484,053
------------
46,755,142
------------
TOTAL COMMON STOCKS
(COST $414,597,391) 461,195,296
------------
</TABLE>
7
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT - 5.84%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%,
due 4/01/99, collateralized
by $28,512,021 Federal
Home Loan Mortgage
Corporation, 7.50%,
11/01/27, market value
$ 9,296,102 (cost
$28,692,449) $28,692,449 $ 28,692,449
------------
TOTAL INVESTMENTS (COST
$ 443,289,840)-99.68% 489,887,745
OTHER ASSETS LESS LIABILITIES - 0.32% 1,588,809
------------
NET ASSETS - 100.00% $491,476,554
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $281,329,944 and $258,350,078, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $443,289,840. Net unrealized appreciation aggregated
$46,597,905, of which $89,157,037 related to appreciated investment securities
and $42,559,132 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $461,195,296
Repurchase agreements 28,692,449
------------
Total investments
(cost $443,289,840) 489,887,745
Collateral for securities
loaned (Note 2) 83,131,779
Receivables
Investments sold 3,366,115
Fund shares sold 1,440,088
Dividends and interest 114,547
------------
TOTAL ASSETS 577,940,274
------------
LIABILITIES
Payables
Investments purchased $1,746,758
Securities loaned (Note 2) 83,131,779
Fund shares redeemed 1,399,468
Accrued expenses and other
liabilities 185,715
----------
TOTAL LIABILITIES 86,463,720
------------
NET ASSETS $491,476,554
============
Net Assets represented by:
(Note 2)
Additional paid-in capital $450,296,488
Accumulated undistributed
net investment loss (3,050,768)
Accumulated net realized loss
on investment transactions (2,367,071)
Net unrealized appreciation
of investments 46,597,905
------------
NET ASSETS $491,476,554
============
NET ASSET VALUE PER SHARE
Class A Shares $ 14.74
Class B Shares $ 14.24
Class Y Shares $ 14.78
OFFERING PRICE PER SHARE
Class A Shares $ 15.64
Class B Shares $ 14.24
Class Y Shares $ 14.78
SHARES OUTSTANDING
Class A Shares 6,608,296
Class B Shares 25,411,548
Class Y Shares 2,178,068
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 312,809
Interest 1,530,633
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 1,843,442
EXPENSES
Management fee (Note 4) $1,879,581
Distribution fee (Note 5) 1,518,365
Shareholder service fee (Note 5) 631,890
Transfer agent fee 379,384
Administration fee (Note 4) 268,512
Shareholder reports and
postage expenses 72,800
Custodian and accounting fees 60,193
Registration expenses 46,425
Legal fees 11,955
Audit fees 8,405
Directors' fees and expenses 6,209
Miscellaneous 10,491
----------
Total expenses 4,894,210
-----------
NET INVESTMENT LOSS (3,050,768)
-----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized loss on
investments (Note 2) (973,034)
Change in unrealized
appreciation (depreciation)
on investments 29,904,306
----------
NET GAIN ON INVESTMENTS 28,931,272
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $25,880,504
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment loss $ (3,050,768) $ (6,962,845)
Net realized gain (loss) on investments (973,034) 37,565,972
Change in unrealized appreciation (depreciation) on investments 29,904,306 (173,567,460)
-------------- --------------
Increase (decrease) in net assets resulting from operations 25,880,504 (142,964,333)
-------------- --------------
Distributions to Shareholders
From net realized gain on investments
Class A (2,988,326) (6,599,466)
Class B (15,034,514) (31,307,757)
Class Y (1,016,636) (10)
-------------- --------------
Total distributions to shareholders (19,039,476) (37,907,233)
-------------- --------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 351,383,493 313,753,597
Reinvested distributions 18,495,506 36,935,409
Cost of shares redeemed (371,504,132) (294,819,420)
-------------- --------------
Change in net assets resulting from capital share transactions (1,625,133) 55,869,586
-------------- --------------
Increase (decrease) in net assets 5,215,895 (125,001,980)
Net Assets
Beginning of period 486,260,659 611,262,639
-------------- --------------
End of period (including accumulated undistributed net investment income
(loss) of ($3,050,768) and $0, respectively) $ 491,476,554 $ 486,260,659
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.60 $ 19.94
-------- --------
Income from investment operations
Net investment loss (0.10) (0.12)
Net realized and unrealized gain (loss) on investments 0.80 (4.03)
-------- --------
Total from investment operations 0.70 (4.15)
-------- --------
Less distributions
From capital gains (0.56) (1.19)
-------- ---------
Net asset value, end of period $ 14.74 $ 14.60
======== ========
TOTAL RETURN* 4.99% (22.08%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 97,406 $ 77,720
Ratio of expenses to average net assets 1.27%(a) 1.26%
Ratio of net investment loss
to average net assets (0.57%)(a) (0.56%)
Portfolio turnover rate 52% 88%
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 (b)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.47 $ 16.08 $ 13.37
-------- -------- -----------
Income from investment operations
Net investment loss (0.17) (0.10) (0.01)
Net realized and unrealized gain (loss) on investments 4.19 4.23 2.72
-------- -------- ------------
Total from investment operations 4.02 4.13 2.71
-------- -------- ------------
Less distributions
From capital gains (2.55) (1.74) --
-------- -------- ------------
Net asset value, end of period $ 19.94 $ 18.47 $ 16.08
======== ======== ============
TOTAL RETURN* 25.81% 29.15% 20.27%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $105,033 $ 40,272 $ 20,368
Ratio of expenses to average net assets 1.28% 1.28% 1.36% (a)
Ratio of net investment loss
to average net assets (0.67%) (0.39%) (0.65%)(a)
Portfolio turnover rate 77% 105% 70%
</TABLE>
(a) Annualized.
(b) For the period from June 5, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.18 $ 19.53
----------- --------
Income from investment operations
Net investment loss (0.11) (0.23)
Net realized and unrealized gain
(loss) on investments 0.73 (3.93)
----------- --------
Total from investment operations 0.62 (4.16)
----------- --------
Less distributions
From capital gains (0.56) (1.19)
----------- --------
Net asset value, end of period $ 14.24 $ 14.18
=========== ========
TOTAL RETURN* 4.56% (22.62%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 361,878 $383,188
Ratio of expenses to average net assets 2.02% (a) 2.01%
Ratio of net investment loss
to average net assets (1.32%)(a) (1.30%)
Portfolio turnover rate 52% 88%
<CAPTION>
YEAR YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 (b) 12/31/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.29 $ 16.05 $ 12.15 $ 13.78
-------- -------- ----------- --------
Income from investment operations
Net investment loss (0.22) (0.17) (0.13) (0.15)
Net realized and unrealized gain
(loss) on investments 4.01 4.15 4.03 (0.47)
-------- -------- ----------- --------
Total from investment operations 3.79 3.98 3.90 (0.62)
-------- -------- ----------- --------
Less distributions
From capital gains (2.55) (1.74) -- (1.01)
-------- -------- ----------- --------
Net asset value, end of period $ 19.53 $ 18.29 $ 16.05 $ 12.15
======== ======== =========== ========
TOTAL RETURN* 24.66% 28.18% 32.10% (4.48%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $506,230 $ 371,578 $ 246,326 $190,126
Ratio of expenses to average net assets 2.03% 2.03% 2.08% (a) 2.01%
Ratio of net investment loss
to average net assets (1.42%) (1.13%) (1.20%)(a) (1.20%)
Portfolio turnover rate 77% 105% 70% 77%
</TABLE>
(a) Annualized.
(b) For the period from January 1, 1995 to September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/3/99 ENDED
(UNAUDITED) 9/30/98 (c)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.63 $ 18.12
---------- ----------
Income from investment operations
Net investment loss (0.01) (0.02)
Net realized and unrealized gain
(loss) on investments 0.72 (3.28)
----------- ----------
Total from investment operations 0.71 (3.30)
----------- ----------
Less distributions
From capital gains (0.56) (0.19)
----------- ----------
Net asset value, end of period $ 14.78 $ 14.63
=========== ==========
TOTAL RETURN* 5.05% 18.36%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 32,193 $ 25,353
Ratio of expenses to average net assets 1.02% (a) 1.01% (a)
Ratio of net investment loss
to average net assets (0.33%)(a) (0.04%)(a)
Portfolio turnover rate 52% 88%
</TABLE>
(a) Annualized.
(c) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
UK
During the period ending March 31, we initiated a process of judiciously
building exposure to the mid- and small-cap sectors of the U.K. market. This
strategy was aimed at taking advantage of the substantial valuation disparities
existing between large companies and much of the rest of the market. During the
fourth quarter of 1998 we also began a process of selective investment in
cyclical stocks. Considerations such as wage growth, employment outlook, and
greatly reduced home ownership costs suggested to us that the gloom surrounding
many consumer cyclical stocks had been overdone. We also continued to build an
exposure to selected commodity-related and economically sensitive stocks with
international activities. At period-end, we maintained our relatively positive
view of the domestic consumer market, causing us to add selectively to property,
house construction, and building materials companies.
During the six-month period we reduced our exposure to telecom stocks, feeling
that stock valuations did not fully reflect the likely negative impact on future
earnings of increasingly aggressive price competition. We also profitably
disposed of the Portfolio's major pharmaceutical holdings, taking advantage of
what we perceived as overly generous valuations.
U.S.
The intense focus on a very narrow range of ultra-large companies continued
throughout the six-month period ending March 31, with the first quarter of 1999
being the worst quarter of the last two decades in terms of market breadth.
Everything fundamentally now points to a broadenng out of the market. Among some
of the very large caps there has been a modest change in leadership away from
technology stocks towards cyclicals and commodity-related stocks. We currently
maintain an overweight position at the cyclical/commodity end of the market, and
an underweight position in technology.
A recent survey by Ibbotson of the 8,000 largest U.S. companies indicated that,
over the past year, only 1750 had seen their share price actually rise, and the
median fall was 26%. The implication of this is that, while we might see a
flattening of the S&P trajectory, there are still a lot of companies that
represent very good value. Given the added support of growing money supply, we
are relatively optimistic about the prospects for share prices generally.
EUROPE
Investments in Europe continue to focus on the peripheral states, such as
Ireland, Portugal and Spain, where low interest rates are supporting already
buoyant economies. During the first quarter of 1999, we began a shift towards
commodity-related and more cyclical stocks, in line with our view that the
global economic outlook is improving more rapidly than anticipated. Recently
this move on our part has begun to be echoed by European equity markets. We
continue to maintain an underweight position in telecommunication stocks, which
hurt our performance early in the year but has helped us more recently.
JAPAN
In Japan, early indicators of economic recovery were beginning to appear in the
final quarter of 1998. There were also very encouraging signs of genuine
corporate restructuring that offered the
12
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
prospect of significantly improved earnings in the years to come. We began to
increase the exposure of the Portfolio to Japan during the last quarter of 1998,
building to its present significantly overweight position. The Portfolio
benefited from both the Japanese equity market's strong rally and our holdings'
outperformance within that market. It should, however, be noted that our
Japanese weighting still represents a relatively modest portion of the overall
Portfolio's holdings.
ASIA
In Asia, the perception increasingly took hold that the worst of the regions'
difficulties were behind it, with interest rates declining, debt service costs
falling, the regional consumer beginning to spend again, and exports to the rest
of the world starting to pick up. Worries over possible devaluation of the
Chinese rnminbi were increasingly replaced by optimism over possible membership
in the World Trade Organisation. We began the period under review slightly
overweight in this region, and maintained this weighting as the regions' markets
picked up.
LATIN AMERICA
In Brazil the economic outlook has improved. The IMF released a further $9
billion in aid, part of which can be used for foreign exchange intervention, and
Congress passed a key element of the fiscal reform package. Better than expected
figures for inflation have enabled the Central Bank to cut rates more quickly
than expected. Each of these developments was positively received by the market.
The privatization program is set to continue with further issues in the next few
months. In short, the market has come a long way since the real's devaluation in
January. We have consequently adopted a slightly overweight position in Brazil.
MANAGEMENT STRATEGY
The principal asset allocation shift during the six months ending March 31, 1999
was to modestly reduce the Portfolio's exposure to Europe and the UK, and
increase its weighting in Japan. This increased weighting to Japan positioned
the Portfolio to benefit from the combination of a strong rally in the Japanese
equity market and a firm yen during the first quarter of 1999. Additionally, our
Japanese stock selection, with its focus on companies likely to be able to both
implement and benefit from the new found zeal for restructuring and cost
cutting, further enhanced returns.
PERFORMANCE REVIEW
The performance impact of our allocation to sectors sensitive to economic
cyclicality proved increasingly positive as the period progressed. For the
six-month period ending March 31, 1999 the Mentor Global Portfolio A shares
returned 21.52%. This compares to 25.66% for our Morgan Stanley World Index
benchmark. Realistically speaking, given the World Index's large allocation to
U.S. equities, outperformance by the Global Portfolio versus its index is likely
only once non-U.S. markets begin to outperform domestic markets.
MARKET OUTLOOK
Although commodity prices, particularly those for oil, have firmed, and
inflation in the U.S. and parts of Continental Europe have risen modestly,
worldwide excess capacity and global competition should continue to restrain the
prices of manufactured goods. The outlook for global interest rates, therefore,
remains relatively positive.
The US economy continues robust, and while retail price inflation has ticked up
it still remains relatively
13
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
benign. The Federal Reserve appears to have readjusted its views of the linkage
between tight labor markets and inflationary pressures. In the UK, despite the
continued challenge of sterling strength for manufacturers, there are increasing
signs of renewed buoyancy in the domestic economy. Japan appears to be bottoming
out, even if with glacial slowness. Asia is experiencing lower interest rates,
falling debt service costs, a return of consumer expenditure, and a modest
upturn in exports. In Europe, domestic demand remains buoyant, particularly in
the periphery, and the gloom surrounding the steep decline in exports and
depressed German business confidence may have been overdone. The general
improvement in the outlook for the global economy has encouraged a recent shift
of investment emphasis in all major equity markets towards economically cyclical
and commodity-related stocks.
In the light of this assessment, and barring any unforeseen shocks to global
financial markets, we remain optimistic that 1999 will continue to provide
positive investment opportunities.
14
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual Global Portfolio Class A and Class B Shares and the Morgan Stanley
Capital International (MSCI) World Index.*
Morgan Stanley A Shares B Shares
3/29/94 10000 9425 10000
9/30/94 10546 9982 9487
9/30/95 12125 10655 10587
9/30/96 13846 12501 12677
9/30/97 17256 15200 15668
9/30/98 17344 14445 14580
3/31/99 21794 17554 17715
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception++
Class A (1.48%) 11.93% 11.89%
Class B 2.90% 12.38% 12.35%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* MSCI World Index is an arithmetic average, weighted by market value, of the
performance of approximately 1,450 securities listed on the stock exchanges
of 20 countries including the U.S., Europe, Canada, Australia, New Zealand,
and the Far East. The average company in the index has a market
capitalization of about $3.5 billion. This is a total return index with
gross dividends reinvested. MSCI World Index is not adjusted to reflect
reinvestment of dividends on securities in the index, and is not adjusted to
reflect sales loads, expenses, or other fees that the SEC requires to be
reflected in the Portfolio's performance.
~ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period following
the date of purchase. The value of the Class B Shares reflects a redemption
fee in effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class A and Class
B Shares from the date of commencement of operations on 3/29/94 through
3/31/99.
15
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual Global Portfolio Class Y Share and the Morgan Stanley Capital
International (MSCI) World Index.*
MSCI World Index Class Y Shares
11/19/97 10000 10000
12/31/97 10304 10278
3/31/98 11790 11832
6/30/98 12050 11600
9/30/98 10608 10187
3/31/99 13329 12410
Total Returns as of 3/31/99
1-Year Since Inception++
Class Y Shares 4.89% 16.91%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* MSCI World Index is an arithmetic average, weighted by market value, of the
performance of approximately 1,450 securities listed on the stock exchanges
of 20 countries including the U.S., Europe, Canada, Australia, New Zealand,
and the Far East. The average company in the index has a market
capitalization of about $3.5 billion. This is a total return index with
gross dividends reinvested. MSCI World Index is not adjusted to reflect
reinvestment of dividends on securities in the index, and is not adjusted to
reflect sales loads, expenses, or other fees that the SEC requires to be
reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 3/31/99.
16
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
PREFERRED STOCK - 0.04%
BRAZIL - 0.04%
Embratel Participacoes SA
(cost $76,209) 4,700,000 $ 78,379
----------
COMMON STOCKS - 96.93%
ARGENTINA - 0.09%
Perez Company SA~ 6,637 61,994
Telecom Argentina SA~ 2,100 57,619
Telefonica de Argentina SA~ 2,020 61,105
----------
180,718
----------
BELGIUM - 0.08%
Cofinimmo 1,366 168,065
----------
BRAZIL - 0.29%
CIA Paranaense Energy~ 8,500 63,750
Companhia Energetica 1,700 37,914
Electrobras - Centrais Eletricas
Brasileiras SA 2,200,000 46,181
Forca Paulista 740,000 53,504
Petroleo Brasileiro SA~ 560,000 78,008
Tele Centro Sul Participacoes
SA~ 1,100 50,806
Tele Norte Leste Participacoes
SA-* 3,800 58,425
Telecomonicacoes Brasileiras
SA~ 920 74,175
Telerj Celular SA * 980,000 36,114
Telesp Participacoes SA~* 2,000 41,250
Vale do Rio Doche- 3,650 53,205
----------
593,332
----------
CANADA - 0.58%
Canadian Natural
Resources * 27,500 473,824
MacMillan Bloedel 17,100 188,678
Newbridge Networks
Corporation * 4,000 124,000
Northern Telecom 6,100 378,962
----------
1,165,464
----------
CHILE - 0.11%
Banco Santiago SA~ 1,600 28,200
Chilectra SA- 3,450 74,587
Cia de Telecomunicaciones de
Chile SA~ 1,700 40,056
Enersis SA~ 3,000 80,438
----------
223,281
----------
CHINA - 0.20%
First Tractor 305,000 57,857
Huaneng Power
International, Inc. -
Class A~* 8,000 79,500
Pohang Iron & Steel~ 7,500 134,062
Yanzhou Coal Mining
Company - Class H 800,000 133,173
----------
404,592
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
CROATIA - 0.13%
Zagrebacka Banka 27,000 $ 260,550
----------
CZECH REPUBLIC - 0.14%
Ceske Radiokomunikace * 8,100 277,627
----------
ESTONIA - 0.24%
Eesti Telekom # 21,700 479,027
----------
FINLAND - 2.68%
Hansabank * 18,000 104,903
Huhtamaki 15,332 546,053
Metra Oyj - Class B 47,770 964,093
Nokia Oyj - Class A 15,508 2,495,488
Upm-Kymmene Oyj 47,670 1,317,065
----------
5,427,602
----------
FRANCE - 8.22%
Accor SA 3,500 868,796
Alstom SA 22,640 671,941
Atos SA 14,100 1,293,481
Axa 7,520 996,640
BQE Paribas 4,280 477,624
Casino Guichard-Perrachon 8,800 780,686
Coflexip 7,770 545,075
Colas 1,730 334,585
Compagnie de Saint - Gobain 10,645 1,688,827
Elf Aquitaine SA 8,200 1,113,311
Entrelec 10,892 410,844
Imetal 5,130 592,411
ISIS 5,460 357,687
Sanofi SA 6,111 1,028,866
Schneider 17,436 964,412
Serp Recyclage 3,039 459,178
Societe Generale D'Enterprises 12,610 593,367
Total SA - Class B 15,050 1,853,294
Usinor SA 49,160 647,439
Vivendi 3,883 955,067
----------
16,633,531
----------
GERMANY - 3.58%
AVA Allgemeine Handelsge~
sellschaft der Verbraucher AG 2,420 901,066
Daimler-Chrysler Benz 14,193 1,234,614
Deutsche Lufthansa 44,250 976,627
Metro AG 4,400 279,224
Porsche AG 655 1,615,286
Siemens AG 9,241 606,380
Veba AG 31,100 1,636,278
----------
7,249,475
----------
GREAT BRITAIN - 14.50%
Abbey National PLC 44,550 924,254
Allied Zurich PLC * 20,951 282,174
Arcadia Group PLC 55,700 186,311
Arriva PLC 35,000 219,192
Asda Group 158,000 387,138
BAA PLC 34,250 380,404
</TABLE>
17
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GREAT BRITAIN (CONTINUED)
Barclays PLC 36,500 $1,059,672
Bass PLC 35,571 482,520
BBA Group PLC 25,397 173,176
BG PLC 42,000 247,966
Blue Circle Industries 46,333 269,627
Britannic Assurance PLC 19,000 296,785
British Aerospace PLC 97,000 646,956
British Airways PLC 62,500 434,988
British-American Tobacco PLC 62,500 519,366
British Biotech PLC * 150,000 41,106
Burmah Castrol PLC 25,000 381,037
Canary Wharf Group 16,000 85,500
Carlton Communications 13,500 132,422
Celltech PLC* 25,000 161,805
Centrica PLC* 100,000 176,514
Chelsfield PLC 29,000 136,738
Coats Viyella 90,000 63,835
Debenhams PLC 44,000 335,844
Dixons Group 13,500 283,776
Emap PLC 35,200 690,555
Enterprise Oil PLC 75,000 430,102
Express Dairies PLC 48,000 88,209
Fairview Holdings 89,300 174,181
Frogmore Estates PLC 35,000 234,143
Gallaher Group PLC 40,000 234,385
Garban PLC 14,800 57,855
Glaxo Wellcome PLC 1,286 42,974
Granada Group PLC 36,000 735,846
Great Universal Stores PLC 18,000 196,293
Greenalls Group PLC 60,000 323,045
HSBC Holdings PLC 58,454 1,853,295
Iceland Group PLC 50,750 209,840
III Group PLC 51,000 514,647
Imperial Chemical Industries
PLC 40,000 356,574
Inchcape PLC 90,000 206,014
Ladbroke Group 145,412 651,645
Land Securities 16,000 211,365
Lloyds TSB Group PLC 86,000 1,310,072
Medeva PLC 80,000 159,266
Meggitt PLC 75,000 226,688
National Westminster Bank 47,250 1,096,805
Next PLC 38,626 438,658
Northern Foods PLC 93,400 167,122
Nycomed Amersham PLC 54,500 469,799
Powderject Pharmaceuticals 31,559 460,402
PowerGen PLC 26,000 286,888
Prudential Corporation PLC 45,250 592,662
Railtrack Group PLC 6,000 137,149
Rank Group PLC 61,750 225,212
Reckitt & Colman PLC 17,300 186,707
Reuters Group PLC 30,000 438,383
Rio Tinto 25,000 348,595
Rolls-Royce PLC 161,000 687,111
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GREAT BRITAIN (CONTINUED)
Sainsbury (J.) PLC 65,000 $ 400,783
Scotia Holdings * 30,000 49,569
Scottish Power PLC 22,000 192,392
Securicor PLC 39,050 348,106
Shell 85,000 573,771
Signet Group 528,500 408,932
Smith (H.W.) Group PLC 44,750 479,350
Smiths Industries PLC 23,000 336,650
Spirax-Sarco Engineering PLC 31,000 245,862
Standard Chartered 63,500 901,297
Sun Life & Provin Holdings 32,330 266,834
Tate & Lyle PLC 35,282 235,745
Telewest Communications * 48,500 211,091
Tesco PLC 134,400 359,102
TI Group PLC 27,000 174,858
Trinity PLC 39,000 330,686
United Assurance Group PLC 43,000 304,297
United News & Media PLC 48,000 454,971
United Utilities 19,000 228,944
Wolseley 12,622 95,324
----------
29,350,157
----------
GREECE - 0.19%
Alpha Credit Bank 2,600 172,817
Chipita 6,000 218,579
----------
391,396
----------
HONG KONG - 1.43%
Aeon Credit Services 608,000 109,058
Axa China Region, Limited 433,000 304,524
Cafe de Coral Holdings, Limited 450,000 126,302
Cheung Kong 40,000 304,544
Dah Sing Financial Group 100,000 246,474
Henderson Investment, Limited 200,000 124,527
HKR International, Limited 640,000 394,358
Hong Kong Telecom 108,000 213,301
Hung Hing Printing Group 181,000 60,143
Hutchison Whampoa, Limited 48,000 377,841
New World Development 133,218 262,162
Road King Infrastructure,
Limited 432,544 253,964
Swire Pacific, Limited - Class A 24,000 111,494
Wheelock & Company, Limited 3,000 2,333
----------
2,891,025
----------
INDIA - 0.14%
BSES Limited #* 8,000 78,000
Hindalco Industries, Limited # 5,000 61,125
Indian Opportunity Fund,
Limited * 11,000 118,250
Mahanagar Telephone Nigam,
Limited #* 2,000 20,200
----------
277,575
----------
INDONESIA - 0.15%
Bat Indonesia 36,000 74,913
</TABLE>
18
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INDONESIA (CONTINUED)
PT Hajaya Mandala Sampoerna 200,000 $ 164,162
PT Indofoods Sukses Mak 114,000 71,168
----------
310,243
----------
IRELAND - 2.18%
Bank of Ireland 72,465 1,509,816
CRH PLC 83,100 1,427,984
Elan Corporation PLC~* 13,250 924,187
Irish Permanent 36,580 551,341
----------
4,413,328
----------
ITALY - 3.14%
Assicurazioni Generali 15,020 601,403
Finmeccanica SPA 882,030 889,103
Grupo Editoriale L'Espresso 111,550 1,252,060
Ina SPA 304,000 918,658
Rinascente SPA 90,850 708,901
Telecom Italia Mobile 146,600 985,698
Telecom Italia SPA 94,800 1,006,759
----------
6,362,582
----------
JAPAN - 13.75%
Asahi Bank 450,000 2,369,119
Asahi Glass Company, Limited 360,000 2,607,927
Chugai Pharmaceuticals 240,000 2,765,615
DDI Corporation 550 2,594,449
Funai Electric Company,
Limited 24,000 2,213,705
Kokusai Securities Company,
Limited 220,000 2,464,726
Nichiei Company 27,000 2,413,090
Nippon Steel Corporation 1,250,000 2,558,649
Ricoh Company, Limited 270,000 2,813,377
Shin-Etsu Chemical 100,000 2,619,719
Teijin, Limited 600,000 2,415,870
----------
27,836,246
----------
KOREA - 0.23%
Atlantic Korean Company 20,000 211,400
CITC Seoul Exel @ * 2 8,750
LG Electronics # 6,400 18,400
Samsung Electric # (a) 501 21,029
Samsung Electronics #(a) 13,500 209,250
----------
468,829
----------
LUXEMBOURG - 0.24%
Benpres Holdings (a)* 95,200 251,600
Quilmes Industries SA 2,100 19,819
Tata Electric Companies 1,500 209,400
----------
480,819
----------
MALAYSIA - 0.08%
Boustead Holdings Berhad (c) 84,000 65,432
IOI Corporation (c) 100,000 49,474
Nanyang Press Berhad (c) 60,000 46,106
----------
161,012
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEXICO - 0.41%
Carso Global Telecom 7,000 $ 36,287
Cemex SA-* 5,600 47,029
Cifra SA- 71,500 110,705
DESC SA- 3,002 80,116
Fomento Economico~ 2,000 61,875
Grupo Carso SA- 6,700 54,579
Grupo Continental SA~ 15,000 42,227
Grupo Fin Bancomer 154,000 51,603
Grupo Televisa #* 1,400 43,925
Kimberly-Clark de Mexico SA~ 2,680 48,562
Telefonos de Mexico
SA - Class L~ 3,890 254,795
----------
831,703
----------
NETHERLANDS - 2.62%
Akzo Nobel 33,060 1,223,824
ING Groep NV 29,030 1,599,429
Royal Dutch Petroleum 32,738 1,740,125
Vendex International NV 30,325 731,477
----------
5,294,855
----------
PHILIPPINES - 0.06%
Bank of the Philippines Island 47,000 117,652
----------
PORTUGAL - 0.80%
BPI SGPS SA 28,060 852,488
Cimpor Cimentos de Portugal 13,920 389,100
Jeronimo Martins 12,066 428,871
----------
1,670,459
----------
SINGAPORE - 0.84%
DBS Land 100,000 147,655
GP Batteries International,
Limited 190,000 278,344
Hong Leong Finance 100,000 163,289
Marco Polo Developments,
Limited 60,000 75,738
Overseas Chinese Bank * 30,287 205,187
Overseas Chinese Bank ~
Warrants * 300,000 203,243
Overseas Union Bank, Limited 50,000 176,607
United Overseas Bank 73,000 456,514
----------
1,706,577
----------
SPAIN - 4.46%
Argentaria Corp Bancaria de
Espana SA 24,109 579,197
Autopistas Cesa 17,390 222,778
Baron de Ley * 30,000 1,102,454
Centros Comerciales Continente
SA 40,460 1,124,848
Dragados & Construcciones SA 18,700 613,532
Endesa SA 50,450 1,272,998
Prosegur CIA de Seguridad SA 116,895 1,267,897
Tabacalera SA 65,280 1,322,411
Telefonica SA 26,626 1,129,042
</TABLE>
19
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SPAIN (CONTINUED)
Viscofan Envolturas Celulosicas
SA - Warrants 29,960 $ 396,419
---------
9,031,576
---------
SWEDEN - 1.97%
BPA AB 265,000 746,361
Celsius AB - Class B 51,760 848,288
Ericsson LM - Class B 38,920 944,970
ForeningsSparbanken AB 45,740 1,074,465
Kinnevik AB 19,927 381,011
---------
3,995,095
---------
SWITZERLAND - 1.80%
Jelmoli Holding AG 785 744,538
Novartis AG 896 1,453,284
UBS AG * 4,565 1,433,983
---------
3,631,805
---------
TAIWAN - 0.20%
Formosa Growth Fund * 5,000 83,125
Taipei Fund * 20 159,500
Taiwan Semiconductor~ 5,900 134,778
---------
377,403
---------
THAILAND - 0.08%
Electricity Generating Public
Company 40,000 79,819
Thai Airways - Alien
Marketing * 50,000 75,163
---------
154,982
---------
TURKEY - 0.26%
Akbank 5,000,000 160,836
Haci Omer Sabanci~ 42,000 248,850
Turkiye IS Bankasi 2,700,000 117,612
---------
527,298
---------
UNITED STATES - 31.02%
Alcoa, Inc. 28,800 1,186,200
AlliedSignal, Inc. 16,000 787,000
Allstate Corporation 21,000 778,312
Anadarko Petroleum
Corporation 12,000 453,000
Anheuser-Busch Companies,
Inc. 7,000 533,312
Arden Realty Group, Inc. 25,000 556,250
Associates First Capital
Corporation 21,200 954,000
AT&T Corporation 10,878 868,200
Aurora Foods, Inc. * 9,800 160,475
Avon Products 14,500 682,406
BankAmerica Corporation 13,300 939,312
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
BankBoston Corporation * 18,000 $ 779,625
Bell Atlantic Corporation 5,300 273,944
Bethlehem Steel Corporation 57,000 470,727
Bristol-Myers Squibb
Company * 9,400 604,538
Cardinal Health, Inc. 8,700 574,200
Case Corporation 16,000 406,000
Chancellor Media
Corporation * 12,000 565,500
Chase Manhattan Corporation 4,700 382,169
Chevron Corporation 7,000 619,063
Citigroup, Inc. 20,700 1,322,213
Columbia/HCA Healthcare
Corporation 39,100 740,456
Compuware Corporation * 14,000 334,250
Conseco, Inc. 39,100 1,207,212
Dayton-Hudson Corporation 15,000 999,375
El Paso Energy Corporation 20,000 653,750
Enron Corporation 11,000 706,750
Federal National Mortgage
Association 10,300 713,275
Federated Department Stores,
Inc. * 37,000 1,484,625
General Electric Company 32,800 3,628,500
Global Telesystems Group,
Inc. * 5,900 330,031
Halliburton Company 17,500 673,750
HealthSouth Corporation * 65,400 690,735
Hewlett-Packard 30,600 2,075,062
Home Depot, Inc. 22,200 1,381,950
Honeywell, Inc. 10,000 758,125
Household International 15,000 684,375
Infinity Broadcasting * 15,000 386,250
Intel Corporation 6,700 798,138
International Business
Machines, Inc. 5,400 957,150
Johnson & Johnson 8,500 796,344
Lilly (Eli) & Company 6,000 509,250
Mail-Well Holdings* 19,600 262,150
MBNA Corporation 11,800 281,725
McDonald's Corporation 18,000 815,625
MCI WorldCom, Inc. * 13,400 1,186,738
McKesson HBOC, Inc. 9,000 594,000
Mead Corporation 51,000 1,568,250
Merck & Company, Inc. 9,000 721,688
Microsoft Corporation * 20,500 1,837,312
</TABLE>
20
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
Monsanto 15,500 $ 712,031
Motorola, Inc. 14,300 1,047,475
Noble Affiliates, Inc. 11,000 319,000
Ocular Sciences, Inc. * 5,000 143,438
Pharmacia & Upjohn 15,000 935,625
Philip Morris Companies, Inc. 28,000 985,250
Platinum Technology
International * 49,800 1,269,900
Procter & Gamble Company 8,500 832,469
Provident Companies, Inc. 20,000 691,250
Republic Services, Inc. * 19,000 307,562
SBC Communications, Inc. 6,200 292,175
Sears Roebuck & Company 7,700 347,944
Smurfit-Stone Container
Corporation * 27,400 529,162
Stewart Enterprises 37,000 594,312
Suiza Foods Corporation * 10,100 340,244
Sybron International
Corporation * 25,000 625,000
Symantec Corporation * 11,000 186,312
Texaco, Inc. 13,000 737,750
Time Warner, Inc. 10,000 710,625
Tosco Corporation 12,800 317,600
Travelers Property and
Casualty - Class A 9,000 321,750
Tyco International Limited 15,000 1,076,250
U.S. Foodservice * 29,600 1,376,400
Wal-Mart Stores, Inc. 14,100 1,299,844
Warner-Lambert Company 15,000 992,812
Washington Mutual, Inc. 38,500 1,573,688
Waste Management, Inc. 33,800 1,499,875
Wells Fargo Company 23,500 823,969
Xerox Corporation 4,500 240,187
-----------
62,803,186
-----------
TOTAL COMMON STOCKS
(COST $184,297,637) 196,149,066
-----------
CORPORATE BONDS - 0.19%
GREAT BRITIAN - 0.01%
Scotia Holdings, 8.50%,
3/26/02 $19,000 18,530
-----------
MALAYSIA - 0.03%
Telekom Malaysia Berhad,
4.00%, 10/03/04-(a)(b) 70,000 58,625
-----------
THAILAND - 0.15%
PTTEP International, Limited,
7.63%, 10/01/06 300,000 280,500
-----------
TOTAL CORPORATE BONDS
(COST $311,140) 357,655
-----------
TOTAL LONG-TERM
INVESTMENTS
(COST $184,684,986) 196,585,101
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM
INVESTMENT - 1.63%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%, due
4/01/99, collateralized by
Federal National Mortgage
Association $3,312,248,
7.50%, 11/01/27, market
value $3,403,335 (cost
$3,333,062) $3,333,062 $ 3,333,062
------------
TOTAL INVESTMENTS (COST
$188,574,104)-98.75% 199,918,163
OTHER ASSETS LESS
LIABILITIES - 1.25% 2,528,545
------------
NET ASSETS - 100.00% $202,446,708
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
# Global Depoistory Receipts.
@ International Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) All or a portion of these securities are restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses
after the title of the restricted securities.
(c) These securities are considered illiquid due to a one year moratorium on
the repatriation of assets from Malaysia.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $162,300,760 and $140,685,888, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $188,574,104. Net unrealized appreciation aggregated
$11,344,059, of which $22,716,961 related to appreciated investment securities
and $11,372,902 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $196,585,101
Repurchase agreements 3,333,062
------------
Total investments
(cost $188,574,104) 199,918,163
Receivables
Collateral for securities
loaned (Note 2) 38,767,594
Investments sold 4,458,626
Fund shares sold 1,228,840
Dividends and interest 1,030,879
Unrealized appreciation on
forward foreign currency
exchange contracts (Note 6) 1,140
------------
TOTAL ASSETS 245,405,242
------------
LIABILITIES
Payables
Investments purchased $ 3,776,771
Securities loaned (Note 2) 38,767,594
Fund shares redeemed 261,608
Unrealized depreciation on
forward foreign currency
exchange contracts
(Note 6) 2,596
Accrued expenses and other
liabilities 149,965
----------
TOTAL LIABILITIES 42,958,534
------------
NET ASSETS $202,446,708
============
Net Assets represented by: (Note 2)
Additional paid-in capital $177,809,623
Accumulated undistributed
net investment loss (350,537)
Accumulated net realized
gain on investment
transactions 13,606,911
Net unrealized appreciation
of investments and foreign
currency related
transactions 11,380,711
------------
NET ASSETS $202,446,708
============
NET ASSET VALUE PER SHARE
Class A Shares $ 21.19
Class B Shares $ 20.25
Class Y Shares $ 21.27
OFFERING PRICE PER SHARE
Class A Shares $ 22.48(a)
Class B Shares $ 20.25
Class Y Shares $ 21.27
SHARES OUTSTANDING
Class A Shares 3,998,046
Class B Shares 5,812,536
Class Y Shares 58
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 1,405,493
Interest 256,459
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 1,661,952
EXPENSES
Management fee (Note 4) $ 945,039
Distribution fee (Note 5) 416,023
Shareholder service fee (Note 5) 226,909
Transfer agent fee 146,975
Custodian and accounting fees 122,065
Administration fee (Note 4) 90,764
Registration expenses 26,761
Shareholder reports and postage
expenses 26,262
Legal fees 4,063
Audit fees 2,856
Organizational expenses 2,712
Directors' fees and expenses 2,110
Miscellaneous 3,565
----------
Total expenses 2,016,104
-----------
NET INVESTMENT LOSS (354,152)
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN
CURRENCY RELATED TRANSACTIONS
Net realized gain on investments
and foreign currency related
transactions (Note 2) 14,279,955
Change in unrealized appreciation
(depreciation) on investments
and foreign currency related
transactions 19,653,366
----------
NET GAIN ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS 33,933,321
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $33,579,169
===========
</TABLE>
(b) Net of withholding taxes of $117,672.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment loss $ (354,152) $ (757,843)
Net realized gain on investments 14,279,955 14,799,387
Change in unrealized appreciation (depreciation) on investments 19,653,366 (25,459,714)
------------- -------------
Increase (decrease) in net assets resulting from operations 33,579,169 (11,418,170)
------------- -------------
Distributions to Shareholders
From net realized gain on investments
Class A (4,794,385) (2,382,830)
Class B (8,453,299) (4,553,653)
Class Y (85) (8)
------------- ---------------
Total distributions to shareholders (13,247,769) (6,936,491)
------------- --------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 58,623,898 78,893,773
Reinvested distributions 12,654,682 6,732,722
Shares redeemed (47,452,979) (44,567,723)
------------- --------------
Change in net assets resulting from capital share transactions 23,825,601 41,058,772
------------- --------------
Increase in net assets 44,157,001 22,704,111
Net Assets
Beginning of period 158,289,707 135,585,596
------------- --------------
End of period (including accumulated undistributed net investment income
(loss) of ($350,537) and $3,616, respectively) $ 202,446,708 $158,289,707
============= ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED 3/31/99 ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.92 $ 20.94 $ 17.86
----------- -------- --------
Income from investment operations
Net investment income (loss) (0.04) (0.03) 0.04
Net realized and unrealized gain (loss) on investments 3.90 (0.97) 3.67
----------- -------- --------
Total from investment operations 3.86 (1.00) 3.71
----------- -------- --------
Less distributions
From capital gains (1.59) (1.02) (0.63)
----------- -------- --------
Net asset value, end of period $ 21.19 $ 18.92 $ 20.94
=========== ======== ========
TOTAL RETURN* 21.52% (4.97%) 21.59%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 84,733 $ 59,012 $ 46,556
Ratio of expenses to average net assets 1.76% (a) 1.75% 1.89%
Ratio of expenses to average net asset excluding waiver 1.76% (a) 1.75% 1.89%
Ratio of net investment income (loss) to average net assets (0.07%)(a) (0.01%) 0.07%
Portfolio turnover rate 80% 162% 128%
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 (c)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.88 $ 14.23 $ 14.18
-------- -------- ----------
Income from investment operations
Net investment income (loss) (0.04) 0.05 (0.01)
Net realized and unrealized gain (loss) on investments 2.82 1.60 0.06
-------- -------- -----------
Total from investment operations 2.78 1.65 0.05
-------- -------- -----------
Less distributions
From capital gains (0.80) -- --
-------- --------- -----------
Net asset value, end of period $ 17.86 $ 15.88 $ 14.23
======== ========= ===========
TOTAL RETURN* 18.40% 11.60% 0.35%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 13,098 $ 6,854 $ 8,882
Ratio of expenses to average net assets 1.95% 2.06% 2.09% (a)
Ratio of expenses to average net asset excluding waiver 1.95% 2.11% 3.18% (a)
Ratio of net investment income (loss) to average net assets (0.21%) 0.26% (0.10%) (a)
Portfolio turnover rate 130% 155% 2%
</TABLE>
(a) Annualized.
(c) For the period from March 29, 1994 (commencement of operations), to
September 30, 1994.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.21 $ 20.32
----------- --------
Income from investment operations
Net investment loss (0.06) (0.12)
Net realized and unrealized gain (loss) on
investments 3.69 (0.97)
----------- --------
Total from investment operations 3.63 (1.09)
----------- --------
Less distributions
From capital gains (1.59) (1.02)
----------- --------
Net asset value, end of period $ 20.25 $ 18.21
=========== ========
TOTAL RETURN* 21.20% (5.65%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 117,713 $ 99,277
Ratio of expenses to average net assets 2.51% (a) 2.51%
Ratio of expenses to average net asset excluding
waiver 2.51% (a) 2.51%
Ratio of net investment loss to average net assets (0.68%)(a) (0.77%)
Portfolio turnover rate 80% 162%
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94 (d)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 17.46 $ 15.67 $ 14.15 $ 14.18
-------- -------- -------- -----------
Income from investment operations
Net investment loss (0.02) (0.05) (0.05) (0.04)
Net realized and unrealized gain (loss) on
investments 3.51 2.64 1.57 0.01
-------- -------- -------- ------------
Total from investment operations 3.49 2.59 1.52 (0.03)
-------- -------- -------- ------------
Less distributions
From capital gains (0.63) (0.80) -- --
-------- -------- -------- ------------
Net asset value, end of period $ 20.32 $ 17.46 $ 15.67 $ 14.15
======== ======== ======== ============
TOTAL RETURN* 20.74% 17.39% 10.74% (0.21%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 89,030 $ 42,131 $ 12,667 $ 7,987
Ratio of expenses to average net assets 2.64% 2.70% 2.72% 2.79% (a)
Ratio of expenses to average net asset excluding
waiver 2.64% 2.70% 2.79% 3.93% (a)
Ratio of net investment loss to average net assets (0.68%) (0.91%) (0.40%) (0.82%)(a)
Portfolio turnover rate 128% 130% 155% 2%
</TABLE>
(a) Annualized.
(d) For the period from March 29, 1994 (commencement of operations) to
September 30, 1994.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (e)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.96 $ 18.81
--------- ---------
Income from investment operations
Net investment income -- --
Net realized and unrealized gain on investments 3.90 0.30
---------- ----------
Total from investment operations 3.90 0.30
---------- ----------
Less distributions
From capital gains ( 1.59) ( 0.15)
---------- ----------
Net asset value, end of period $ 21.27 $ 18.96
========== ==========
TOTAL RETURN 21.83% 1.60%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 1.50% (a) 1.50% (a)
Ratio of net investment loss to average net assets (0.07%)(a) (0.02%)(a)
Portfolio turnover rate 80% 162%
</TABLE>
(a) Annualized.
(e) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
(f) Income is less than $0.005 per share.
* Total return doesnot reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION GROWTH MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
It is now becoming increasingly apparent that the stock market may be evolving
into a once-in-a-lifetime event, one to be written and talked about long after
we are all gone. What was once a great bull market powered by strong earnings
and declining inflation expectations has become an emotionally-charged
environment where fundamental considerations are giving way to price momentum
and speculation on a historic scale.
As we have commented on repeatedly, most of the market's action has narrowed to
a fairly limited group of stocks, the mega-sized blue chip growth stocks and
Internet concepts, both of which have been in the spotlight for quite a while.
This narrowness can be illustrated innumerable ways. The number of stocks
reaching new highs is extremely low despite repeated records by the major
indexes. On the day the Dow Jones Industrial Average first closed above 10,000
only 44 New York Stock Exchange stocks hit new highs and 88 made new lows. While
the S&P 500 has returned 18% over the past twelve months, about 60% of the
stocks in the index have actually DECLINED over the same period and the largest
50 stocks in the index are up an average 47%. It is starkly clear that the
recent record breaking advances are riding on a select group.
There is no doubt many of today's most popular mega-cap stocks have shown
fantastic earnings growth. But in most cases these stocks have now far outpaced
their earnings as price momentum has become the driving force. The largest five
stocks in the NASDAQ composite gained an average 110% over the last 12 months
and now trade at an average 67 times trailing earnings. This valuation level
implies very little perceived risk to these companies' outlooks, despite the
inherently volatile nature of this sector. Naturally, the higher these stocks'
valuations rise, the more people seem to consider valuation irrelevant. Several
thoughtful observers including Warren Buffett, Bill Gates, and Alan Greenspan
have warned about these valuations, but most consider their rhetoric out-of-
date.
The performances, and particularly the valuations, of most Internet stocks are
beyond adequate description. We never imagined we would see this level of
speculation. Companies that were conceptualized less than two years ago and
organized less than one year ago have since gone public with multi-billion
dollar market values on minuscule revenues, income losses, and vague plans.
The enticement of apparently easy gains in the obvious stocks that continue to
go up without pause is incredible, but we know temptation is a deadly investment
platform. Many people chasing today's most popular stocks decry the notion of
temptation. They say they are buying these stocks with an eye toward the
long-term, and this view obviates short-term valuation concerns. We believe the
truth is precisely the opposite, that current demand is proportional to recent
gains, and it's the long-term view that often crystallizes the level of
speculation. For instance, if we assume the stock of America Online appreciates
20% a year over the next 10 years, a rate probably well below virtually all
current owners' expectations, and its shares outstanding increase by 5% a year
due to employee options, then it will have a market value exceeding $1.9
TRILLION. Assuming at that size the market will have priced the stock at a lower
but arguably extreme P/E ratio of 50 then America Online will need net income of
$39 billion, all in just ten years.
25
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION GROWTH MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
By comparison, Microsoft currently has net income of $6.6 billion. It may
happen, but it certainly seems a stretch.
MANAGEMENT STRATEGY
Fortunately, we know that long-term investment success is founded on consistent
execution of a sound fundamental discipline, not popularity contests. In fact,
we are increasingly comfortable with our current holdings. These are substantial
companies and their results are generally tracking our expectations including
average estimated earnings growth of 14-15% this quarter and year. These stocks
trade at an average P/E ratio of 21.5 times estimated 1999 earnings-per-share,
about 20% below the S&P 500's valuation, despite our belief that their outlooks
are better than average.
PERFORMANCE REVIEW
Our "quality-growth-at-a-reasonable-price" investment philosophy and strategy
are clearly out of sync with prevailing sentiment. After a few excellent years,
our recent returns have slipped behind the S&P 500. This under-performance
mostly reflects our lack of exposure to today's most popular stocks, not
fundamental disappointments in our holdings. For the six-month period ending
March 31, 1999 the Mentor Capital Growth A shares returned 19.63%, compared to
27.34% for the S&P 500.
MARKET OUTLOOK
We have no idea how the stock market will progress over the remainder of the
year. The economy appears to be in remarkably good shape with solid growth and
low inflation likely to continue. If market momentum continues along current
lines our performance will continue to compare poorly to the major averages. In
fact, it is very possible that current trends may grow even more extreme. At
some point the speculative excess building today will be quashed. We have no
idea when or what the catalyst may be, but it will certainly seem obvious when
we look back. Between now and then the market could experience some significant
volatility. Our singular goal is to get through this highly unusual period with
our discipline intact, as we know most others will not.
26
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Capital Growth Portfolio Class A and Class B Shares and the S&P 500.~
Class A Shares Class B Shares S&P 550
4/29/92 9450 10000 10000
9/30/92 9524 10061 10215
9/30/93 10306 10818 11543
9/30/94 10165 10601 11965
9/30/95 12216 12443 15521
9/30/96 15185 15532 18680
9/30/97 20467 20928 26236
9/30/98 22660 22767 28608
3/31/99 27116 27129 36430
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception+++
Class A 3.67% 20.91% 15.49%
Class B 8.01% 21.42% 15.64%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses,
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares of rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period following
the date of purchase. The value of the Class B Shares reflects a redemption
fee in effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Capital Growth Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
3/31/99.
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Capital Growth Portfolio Class Y Shares and the S&P 500.~
Class Y Shares S&P 500
11/19/97 10000 10000
12/31/97 10300 10643
3/31/98 11835 12127
6/30/98 12200 12450
9/30/98 10895 11281
3/31/99 13055 14366
Total Returns as of 3/31/99
1-Year Since Inception++
Class Y Shares 10.32% 22.87%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses,
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Capital Growth Portfolio Class Y from the
date of issuance on 11/19/97 through 3/31/99.
27
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 95.00%
BASIC MATERIALS - 4.88%
Bemis, Inc. 172,784 $ 5,367,103
Sherwin-Williams Company 736,600 20,716,875
-----------
26,083,978
-----------
CAPITAL GOODS & CONSTRUCTION - 9.45%
Emerson Electric Company 358,600 18,983,388
Illinois Tool Works 331,700 20,523,938
W. W. Grainger, Inc. 256,300 11,036,918
-----------
50,544,244
-----------
CONSUMER CYCLICAL - 13.32%
Chancellor Media
Corporation * 379,750 17,895,719
Interpublic Group
Companies, Inc. 252,800 19,686,800
Newell Rubbermaid, Inc. 501,419 23,817,383
Royal Caribbean Cruises,
Limited 252,600 9,851,400
-----------
71,251,302
-----------
CONSUMER STAPLES - 8.17%
Bristol-Myers Squibb
Company 341,500 21,962,719
Sysco Corporation 826,500 21,747,281
-----------
43,710,000
-----------
FINANCIAL - 16.74%
American Express Company 156,500 18,388,750
Federal National Mortgage
Association 219,600 15,207,300
SouthTrust Corporation 481,500 17,965,969
Washington Mutual, Inc. 483,640 19,768,785
Wells Fargo Company 519,800 18,225,487
-----------
89,556,291
-----------
HEALTH - 7.86%
Johnson & Johnson 240,600 22,541,212
Tenet Healthcare Corporation 1,031,000 19,524,563
-----------
42,065,775
-----------
TECHNOLOGY - 22.45%
Automatic Data Processing 515,000 21,308,125
Computer Sciences
Corporation 339,150 18,716,841
MCI WorldCom, Inc. 185,750 16,450,484
Sun Microsystems, Inc.* 183,350 22,907,291
SunGard Data Systems, Inc.* 550,000 22,000,000
Xerox Corporation 350,000 18,681,250
-----------
120,063,991
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION & SERVICES - 1.31%
Werner Enterprises, Inc. 446,312 $ 7,029,414
------------
UTILITY - 2.67%
MediaOne Group* 225,000 14,287,500
------------
MISCELLANEOUS - 8.15%
Tyco International Limited 295,600 21,209,300
UNUM Corporation 471,100 22,406,694
------------
43,615,994
------------
TOTAL COMMON STOCKS (COST
$451,750,680) 508,208,489
------------
SHORT-TERM INVESTMENT - 3.32%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%,
due 4/01/99 collateralized
by $28,720,000 Federal
Home Loan Mortgage
Corporation, 7.50%,
11/01/27, market value
$18,147,748 (cost
$17,773,445) $17,773,445 17,773,445
------------
TOTAL INVESTMENTS
(COST $469,524,125)-98.32% 525,981,934
OTHER ASSETS LESS LIABILITIES - 1.68% 8,960,759
------------
NET ASSETS - 100.00% $534,942,693
============
</TABLE>
* Non-income producing.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $289,346,132 and $182,295,844, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $469,524,125. Net unrealized appreciation aggregated
$56,457,809, of which $71,039,062 related to appreciated investment securities
and $14,581,253 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $508,208,489
Repurchase agreements 17,773,445
------------
Total investments
(cost $469,524,125) 525,981,934
Collateral for securities loaned
(Note 2) 22,282,979
Receivables
Investments sold 8,481,730
Fund shares sold 1,910,950
Dividends and interest 452,073
------------
TOTAL ASSETS 559,109,666
------------
LIABILITIES
Payables
Investments purchased $1,095,869
Securities loaned (Note 2) 22,282,979
Fund shares redeemed 703,600
Accrued expenses and other
liabilities 84,525
----------
TOTAL LIABILITIES 24,166,973
------------
NET ASSETS $534,942,693
============
Net Assets represented by: (Note 2)
Additional paid-in capital $463,096,410
Accumulated undistributed net
investment loss (1,003,192)
Accumulated net realized gain
on investment transactions 16,391,666
Net unrealized appreciation of
investments 56,457,809
------------
NET ASSETS $534,942,693
============
NET ASSET VALUE PER SHARE
Class A Shares $ 24.27
Class B Shares $ 22.95
Class Y Shares $ 24.34
OFFERING PRICE PER SHARE
Class A Shares $ 25.75(a)
Class B Shares $ 22.95
Class Y Shares $ 24.34
SHARES OUTSTANDING
Class A Shares 11,553,848
Class B Shares 11,088,831
Class Y Shares 54
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 2,337,247
Interest 607,297
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 2,944,544
EXPENSES
Management fee (Note 4) $1,796,157
Distribution fee (Note 5) 881,368
Shareholder service fee (Note 5) 561,297
Transfer agent fee 323,963
Administration fee (Note 4) 224,520
Shareholder reports and postage
expenses 56,547
Custodian and accounting fees 38,746
Registration expenses 32,333
Legal fees 10,583
Audit fees 7,440
Directors' fees and expenses 5,496
Miscellaneous 9,286
----------
Total expenses 3,947,736
-----------
NET INVESTMENT LOSS (1,003,192)
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments
(Note 2) 18,899,025
Change in unrealized appreciation
(depreciation) on investments 49,993,788
----------
NET GAIN ON INVESTMENTS 68,892,813
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $67,889,621
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment loss $ (1,003,192) $ (1,099,960)
Net realized gain on investments 18,899,025 45,438,253
Change in unrealized appreciation (depreciation) on investments 49,993,788 (32,273,002)
------------- -------------
Increase in net assets resulting from operations 67,889,621 12,065,291
------------- -------------
Distributions to Shareholders
From net investment income
Class A -- (29,728)
Class B -- (52,910)
From net realized gain on investments
Class A (16,354,928) (5,934,313)
Class B (23,292,331) (10,484,517)
Class Y (124) (12)
------------- -------------
Total distributions to shareholders (39,647,383) (16,501,480)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 202,131,046 220,347,636
Reinvested distributions 38,811,637 16,089,732
Shares redeemed (76,111,172) (69,421,743)
------------- -------------
Change in net assets resulting from capital share transactions 164,831,511 167,015,625
------------- -------------
Increase in net assets 193,073,749 162,579,436
Net Assets
Beginning of period 341,868,944 179,289,508
------------- -------------
End of period (including accumulated undistributed net investment income
(loss) of ($1,003,192) and $0, respectively) $ 534,942,693 $ 341,868,944
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR YEAR YEAR YEAR
ENDED 3/31/99 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26
--------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income (loss) (0.08) (0.10) (0.02) 0.11 0.02 0.09
Net realized and unrealized gain (loss) on
investments 4.19 2.34 5.87 3.73 2.91 (0.30)
---------- -------- ------- ------- ------- -------
Total from investment operations 4.11 2.24 5.85 3.84 2.93 (0.21)
---------- -------- ------- ------- ------- -------
Less distributions
From net investment loss - (0.01) - - - (0.04)
From net realized capital loss (2.55) (1.94) (2.79) (0.50) (1.79) (0.13)
---------- -------- ------- ------- ------- -------
Total distributions (2.55) (1.95) (2.79) (0.50) (1.79) (0.17)
---------- -------- ------- ------- ------- -------
Net asset value, end of year $ 24.27 $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88
========== ======== ======= ======= ======= =======
TOTAL RETURN* 19.66% 10.72% 34.78% 24.63% 20.18% (1.37%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 280,401 $145,117 $65,703 $31,889 $29,582 $ 21,181
Ratio of expenses to average net assets 1.36% (a) 1.34% 1.41% 1.43% 1.87% 1.70%
Ratio of net investment income (loss) to
average net assets (0.05%)(a) 0.06% 0.53% 0.51% 0.27% 0.53%
Portfolio turnover rate 42% 104% 64% 98% 157% 149%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR YEAR YEAR YEAR
ENDED 3/31/99 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23
--------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income (loss) (0.06) (0.08) - (0.04) 0.25 (0.04)
Net realized and unrealized gain (loss) on
investments 3.84 2.07 5.55 3.67 2.53 (0.26)
---------- ------- ------- ------- ------- -------
Total from investment operations 3.78 1.99 5.55 3.63 2.78 (0.30)
---------- ------- ------- ------- ------- -------
Less distributions
From net investment loss - (0.01) - - - -
From capital loss (2.55) (1.94) (2.79) (0.50) (1.79) (0.13)
---------- ------- ------- ------- ------- -------
Total distributions (2.55) (1.95) (2.79) (0.50) (1.79) (0.13)
---------- ------- ------- ------- ------- -------
Net asset value, end of year $ 22.95 $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80
========== ======= ======= ======= ======= =======
TOTAL RETURN* 18.97% 9.86% 33.88% 23.64% 19.26% (2.00%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 254,541 $196,751 $113,587 $68,213 $57,648 $41,106
Ratio of expenses to average net assets 2.11% (a) 2.09% 2.16% 2.18% 2.56% 2.46%
Ratio of net investment loss to average net
assets (0.80%)(a) (0.70%) (0.22%) (0.24%) (0.41%) (0.22%)
Portfolio turnover rate 42% 104% 64% 98% 157% 149%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (b)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 22.74 $ 20.81
--------- --------
Income from investment operations
Net investment income 0.16 0.02
Net realized and unrealized gain on investments 1.44 2.16
--------- --------
Total from investment operations 1.60 2.18
--------- --------
Less distributions
From net realized capital gain - (0.25)
--------- --------
Total distributions - (0.25)
--------- --------
Net asset value, end of period $ 24.34 $ 22.74
========= ========
TOTAL RETURN* 19.83% 10.56%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 1.09%(a) 1.09%(a)
Ratio of net investment income to average net assets ( 0.04%)(a) 0.38%(a)
Portfolio turnover rate 42% 104%
</TABLE>
(a) Annualized.
(b) Reflects operations for the period from November 19, 1997 (initial offering
of Class Y shares) to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
A number of milestones have been reached so far in 1999. The Dow Jones
Industrial Average exceeded 10,000 for the first time. The Senate refused to
oust President Clinton from office. The US economy continued its robust growth,
with few signs of inflation. After four years of consecutive 20% plus returns,
the stock market has gotten off to another good start, with the S&P500 returning
5.0% in the first quarter. The trends at play in 1998 continued to prevail, with
a narrow group of stocks led by large-capitalization growth stocks, dominating
the market. Large-capitalization technology issues, especially Internet-related
companies, and capital markets-oriented financial stocks provided the
leadership. Growth continued to outperform value.
Interest rates rose again during the first quarter of 1999 as the bond market
realigned yields in response to a somewhat stronger worldwide economic
environment. Following three easing moves by the Federal Reserve in 1998, the
bond market had established a yield curve that clearly envisioned further
aggressive easing by the Fed. The Fed has now stated that global economic and
financial situations have, for the moment, stabilized and that further lowering
of the short rate is not warranted. With little immediate hope of further
actions by the Fed to lower short-term yields, focus has moved to the strength
of the US economy. The strong economy and generally rising interest rates have
permitted both corporate and mortgage sectors to perform well. Corporate bonds
have been supported by the fact that the robust US economy means that corporate
balance sheets are strong and can easily support the current ratings of their
debt. Rising interest rates mean lower refinancing volume, a clear benefit for
mortgage-backed securities.
PORTFOLIO PERFORMANCE
For the six month period ended March 31, 1999, the Mentor Income & Growth
Portfolio A shares returned 5.73% compared to 15.74% for its 60%S&P500/40%Lehman
Brothers Aggregate Bond Index benchmark. Our value investment bias and
consequent lack of exposure to the very large growth stocks, especially in the
technology sector (with the exception of our large holding in IBM) was a major
cause of our shortfall in performance. The recent disparity between growth and
value investment performance can be seen by the difference in returns of the
Russell 1000 Growth Index, up 34.8% over the past six months, and the Russell
1000 Value Index up 18.3%.
EQUITY OUTLOOK AND STRATEGY
While still ten months short of the mark, it appears the US economy will set a
record for the longest expansion in the post-World War II era. At this stage of
the cycle, the economy is in far better shape than it was during the record
expansion of the 1960's. Inflation remains low, productivity is high,
manufacturing labor costs continue to decline, and capacity utilization is below
normal levels. The strength in the economy over the next few quarters is likely
to be greater than many are now expecting. We have increased our estimate of
real GDP growth to 3.5% for 1999.
If world economic activity improves as we think it will, the market could
broaden and reduce the significant dispersion in valuations. The Portfolio is
broadly diversified and well positioned to take advantage of the change when it
occurs. Two sectors that should be beneficiaries are industrial cyclicals and
materials. Increased shipments on lean cost structures should enable industrial
companies to show strong earnings gains. Improved demand
33
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
for materials could result in a quick upward move in the price for certain
commodities that would benefit the stock prices of the producers. The very
recent performance of energy-related equities is an example of the sharp and
rapid rally that can occur when a commodity price moves up from a very depressed
level.
FIXED INCOME OUTLOOK AND STRATEGY
The bond market is clearly in uncharted waters. Not in recent memory has rapid
economic growth this late in an economic expansion been accompanied by stable
and even falling inflation. We believe that the economy will continue to grow at
a reasonably rapid pace, though not as rapid as that of 1998. Furthermore,
inflation should remain low, most likely between one and two percent. The Fed
will not move toward either higher or lower rates during 1999, and as a result
bond yields will move around within the context of a Fed Funds Rate stable at
4.75%. As a result, both mortgage-backed securities and corporate bonds will in
all likelihood provide better total returns than Treasury securities. We
therefore expect to permit the Portfolio's duration to drift downward and to
de-emphasize Treasury securities in favor of the corporate and mortgage-backed
sectors.
34
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Income and Growth Portfolio Class A and Class B Shares, the S&P 500 and the
Lehman Brothers Aggregate Bond Index.+
Class A Shares Class B Shares LAGG/S&P 500
5/24/93 9425 10133 10000
9/30/93 9909 10506 10353
9/30/94 10578 11239 10446
9/30/95 12402 12614 12879
9/30/96 14802 15140 14686
9/30/97 18076 18499 18723
9/30/98 19126 19302 20692
3/31/99 20068 20192 23979
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception++
Class A (2.31%) 13.58% 12.75%
Class B 1.95% 14.09% 13.09%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
+ The Standard & Poor's Index (S&P 500) is an unmanaged,
market-value-weighted index of 500 widely held domestic common stocks. An
unmanaged index does not reflect expenses and may not correspond to the
performance of a managed portfolio in which expenses are incurred. The
Lehman Brothers Aggregate Index is made up of the Government/Corporate
Index, the Mortgage-Backed Securities Index, and the Asset-Backed
Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are
adjusted to reflect reinvestment of interest and dividends on securities in
the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance. This index
represents an asset allocation of 60% S&P 500 stocks and 40% Lehman
Brothers Aggregate Bond Index.
** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period following
the date of purchase. The value of the Class B Shares reflects a redemption
fee in effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
*** Represents a hypothetical investment of $10,000 in Mentor Income and
Growth Portfolio Class A Shares, after deducting the maximum sales charge
of 5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class
A Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Reflects operations of Mentor Income and Growth Portfolio Class A and Class
B Shares from the date of commencement of operations on 5/24/93 through
3/31/99.
35
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Income and Growth Portfolio Class Y Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
Class Y Shares LAGG/S&P 500
11/19/97 10000 10000
12/31/97 10217 10443
3/31/98 10860 11374
6/30/98 10750 11800
9/30/98 10660 11211
3/31/99 11289 12987
Total Returns as of 3/31/99
1-Year Since Inception++
Class Y 3.95% 9.82%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
+ The Standard & Poor's Index (S&P 500) is an unmanaged,
market-value-weighted index of 500 widely held domestic common stocks. An
unmanaged index does not reflect expenses and may not correspond to the
performance of a managed portfolio in which expenses are incurred. The
Lehman Brothers Aggregate Index is made up of the Government/Corporate
Index, the Mortgage-Backed Securities Index, and the Asset-Backed
Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are
adjusted to reflect reinvestment of interest and dividends on securities in
the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance. This index
represents an asset allocation of 60% S&P 500 stocks and 40% Lehman
Brothers Aggregate Bond Index.
*** Represents a hypothetical investment of $10,000 in Mentor Income and
Growth Portfolio Class Y Shares. These shares are not subject to any sales
or contingent deferred sales charges. The Class Y Shares' performance
assumes the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Income and Growth Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 3/31/99.
36
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 56.10%
BASIC MATERIALS - 4.99%
Air Products & Chemicals,
Inc. 98,900 $3,387,325
Alcoa, Inc. 48,000 1,977,000
AlliedSignal, Inc. 92,300 4,540,006
British Steel PLC- 108,900 2,198,419
Westvaco Corporation 68,300 1,434,300
----------
13,537,050
----------
CAPITAL GOODS & CONSTRUCTION - 4.73%
Caterpillar, Inc. 48,000 2,205,000
Cooper Industries, Inc. 47,500 2,024,687
Cooper Tire & Rubber 125,000 2,296,875
Hubbell, Inc. - Class B 89,400 3,576,000
Thomas & Betts Corporation 72,400 2,719,525
----------
12,822,087
----------
COMMERCIAL SERVICES - 2.95%
Supervalu, Inc. 143,900 2,967,938
Wallace Computer Services,
Inc. 254,500 5,042,281
----------
8,010,219
----------
CONSUMER CYCLICAL - 4.54%
AvalonBay Communities, Inc. 51,000 1,612,875
Delphi Automotive Systems 130,000 2,307,500
Ford Motor Company 74,000 4,199,500
Maytag Corporation 28,900 1,744,838
Premark International, Inc. 74,100 2,440,668
----------
12,305,381
----------
CONSUMER STAPLES - 6.33%
American Home Products
Corporation 36,100 2,355,525
Baxter International, Inc. 54,300 3,583,800
Bestfoods 49,700 2,336,158
Dimon, Inc. 228,100 869,631
Hormel Foods Corporation 118,100 4,207,312
Kimberly-Clark Corporation 28,600 1,371,013
Philip Morris Companies, Inc. 70,000 2,463,125
----------
17,186,564
----------
ENERGY - 7.01%
Baker Hughes, Inc. 193,100 4,694,744
Chevron Corporation 26,400 2,334,750
Phillips Petroleum Company 37,900 1,790,775
Repsol SA- 50,000 2,562,500
Total SA- 39,500 2,409,500
Unocal Corporation 65,800 2,422,262
USX-Marathon Group, Inc. 102,100 2,807,750
----------
19,022,281
----------
FINANCIAL - 11.74%
ACE Limited 119,300 3,720,669
CIT Group, Inc. - A 77,900 2,380,819
Citigroup, Inc. 71,900 4,592,612
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL (CONTINUED)
Federal National Mortgage
Association 58,900 $ 4,078,825
Jefferson Pilot Corporation 26,850 1,819,088
Spieker Properties, Inc. 65,000 2,291,250
U. S. Bancorp 163,800 5,579,976
UnionBanCal Corporation 56,100 1,910,906
Wachovia Corporation 39,000 3,166,312
Wilmington Trust
Corporation 40,700 2,324,988
-----------
31,865,445
-----------
HEALTH - 4.49%
Abbott Laboratories 41,000 1,919,312
Columbia/HCA Healthcare
Corporation 213,600 4,045,050
Johnson & Johnson 25,700 2,407,769
Pharmacia & Upjohn 61,000 3,804,875
-----------
12,177,006
-----------
TECHNOLOGY - 3.55%
Alcatel Alsthom SA- 75,500 1,722,344
International Business
Machines Corporation 21,800 3,864,050
Xerox Corporation 76,000 4,056,500
-----------
9,642,894
-----------
TRANSPORTATION & SERVICES - 1.28%
Union Pacific Corporation 65,000 3,473,438
-----------
UTILITIES - 4.49%
Bell Atlantic Corporation 67,700 3,499,244
DPL, Inc. 95,000 1,567,500
DQE, Inc. 43,000 1,650,125
Pinnacle West Capital 60,400 2,197,050
SBC Communications, Inc. 69,300 3,265,762
-----------
12,179,681
-----------
TOTAL COMMON STOCKS
(COST $139,059,876) 152,222,046
-----------
CORPORATE BONDS - 14.71%
INDUSTRIAL - 7.15%
Aluminum Company of
America, 5.75%, 2/01/01 $ 250,000 250,790
Archer-Daniels-Midland,
6.75%, 12/15/27 2,000,000 2,018,700
AT&T Corporation, 6.00%,
3/15/09 1,500,000 1,492,305
Computer Associates
International, 6.50%,
4/15/08 (a) 1,000,000 969,040
</TABLE>
37
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
INDUSTRIAL (CONTINUED)
Computer Science, 6.25%,
3/15/09 $1,275,000 $1,279,488
Gap, Inc., 6.90%, 9/15/07 1,000,000 1,056,980
Gillette Company, 5.75%,
10/15/05 250,000 247,218
Hershey Foods Corporation,
7.20%, 8/15/27 1,000,000 1,069,470
ICI Wilmington, Inc., 6.95%,
9/15/04 1,000,000 1,005,280
International Business
Machines Corporation,
5.50%, 1/15/09 1,500,000 1,448,175
Lucent Technologies, 6.45%,
3/15/29 1,250,000 1,222,337
Mead Corporation, 7.35%,
3/01/17 750,000 772,935
Praxair, Inc., 6.15%, 4/15/03 1,000,000 990,980
Rockwell International
Corporation, 6.70%,
1/15/28 1,500,000 1,477,260
Scripps (E. W.) Company,
6.38%, 10/15/02 1,000,000 1,014,300
Tenneco, Inc, 7.50%, 4/15/07 500,000 518,045
Williams Companies, Inc.,
6.50%, 11/15/02 1,000,000 1,008,170
Zeneca Wilmington, 7.00%,
11/15/23 1,500,000 1,562,100
----------
19,403,573
----------
FINANCIAL - 4.90%
Allmerica Financial
Corporation, 7.63%,
10/15/25 1,130,000 1,179,664
Allstate Corporation, 6.75%,
5/15/18 1,000,000 1,000,270
American General Finance,
5.88%, 7/01/00 250,000 250,942
Associates Corporation of
North America, 5.25%,
3/30/00 250,000 249,898
Bank One Texas, 6.25%,
2/15/08 1,000,000 996,690
BankAmerica Corporation,
7.88%, 12/01/02 1,000,000 1,063,990
Chase Manhattan
Corporation, 7.75%,
11/01/99 250,000 253,490
Comerica Bank, 7.13%,
12/01/13 250,000 250,702
Finova Capital Corporation,
6.39%, 10/08/02 1,000,000 1,008,440
First National Bank of
Boston, 8.00%, 9/15/04 250,000 270,345
Fleet Financial Group, 6.88%,
1/15/28 1,000,000 994,300
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
FINANCIAL (CONTINUED)
Great Western Financial,
6.38%, 7/01/00 $ 250,000 $ 252,265
Heller Financial, 6.38%,
11/10/00 1,000,000 1,009,980
Home Savings of America,
6.00%, 11/01/00 250,000 251,200
Key Bank, NA, 5.80%,
4/01/04 1,375,000 1,369,252
MBIA Inc., 7.00%, 12/15/25 1,000,000 1,007,760
NationsBank Corporation,
7.80%, 9/15/16 1,000,000 1,099,800
Security Benefits Life
Company, 8.75%,
5/15/16 (a) 500,000 524,375
Toronto Dominion Bank,
6.13%, 11/01/08 250,000 245,828
----------
13,279,191
----------
UTILITIES - 2.66%
Duke Energy Corporation,
6.00%, 12/01/28 1,000,000 915,100
Florida Power & Light,
5.38%, 4/01/00 250,000 249,992
National Fuel Gas Company,
6.00%, 3/01/09 1,000,000 983,780
New York Telephone, 6.00%,
4/15/08 1,000,000 995,920
Northern Natural Gas,
6.75%, 9/15/08 (a) 2,000,000 2,011,540
Pacific Gas & Electric
Company, 5.93%, 10/08/03 250,000 249,465
Southwestern Public Service
Company, 6.88%, 12/01/99 250,000 252,748
System Energy Resources,
7.71%, 8/01/01 500,000 517,120
Union Electric Company,
6.75%, 10/15/99 250,000 252,353
U.S. West Capital Funding,
Inc., 6.88%, 7/15/28 785,000 796,280
----------
7,224,298
----------
TOTAL CORPORATE BONDS
(COST $40,147,348) 39,907,062
----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 26.58%
Government National
Mortgage Association
7.00%, 1/15/24 - 7/15/24 3,239,198 3,293,413
6.50%, 4/15/28 - 6/15/28 4,849,197 4,827,958
6.00%, 12/15/28 5,032,131 4,889,018
U.S. Treasury Bond,
6.25%, 8/15/23 3,000,000 3,134,130
U.S. Treasury Notes
5.63%, 11/30/00 10,400,000 10,504,312
6.25%, 6/30/02 12,000,000 12,385,200
</TABLE>
38
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
U.S. GOVERNMENT SECURITIES
AND AGENCIES (CONTINUED)
U.S. Treasury Notes
6.38%, 8/15/02 $3,000,000 $ 3,110,160
7.50%, 2/15/05 3,000,000 3,323,040
6.50%, 8/15/05 - 10/15/06 14,000,000 14,870,960
6.13%, 12/31/01 - 8/15/07 11,350,000 11,774,273
------------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $72,234,297) 72,112,464
------------
SHORT-TERM INVESTMENT - 1.33%
REPURCHASE AGREEMENT
Paine Webber, Inc.
Dated 3/31/99, 4.90% due
4/01/99, collateralized by
$2,700,000 (original face
value) U.S. Treasury Bond,
9.25%, 2/15/14, market
value $3,657,656
(cost $3,619,000) 3,619,000 3,619,000
------------
TOTAL INVESTMENTS
(COST $255,060,521)-98.72% 267,860,572
OTHER ASSETS LESS
LIABILITIES - 1.28% 3,485,013
------------
NET ASSETS - 100.00% $271,345,585
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $88,104,642 and $74,687,844, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $255,060,521. Net unrealized appreciation aggregated
$12,800,051, of which $24,402,582 related toappreciated investment securities
and $11,602,531 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $264,241,572
Repurchase agreements 3,619,000
------------
Total investments
(cost $255,060,521) 267,860,572
Collateral for securities loaned
(Note 2) 57,206,916
Receivables
Investments sold 2,260,145
Fund shares sold 1,054,367
Dividends and interest 1,788,988
------------
TOTAL ASSETS 330,170,988
------------
LIABILITIES
Payables
Investments purchased $ 852,634
Securities loaned (Note 2) 57,206,916
Fund shares redeemed 668,713
Accrued expenses and other
liabilities 97,140
----------
TOTAL LIABILITIES 58,825,403
------------
NET ASSETS $271,345,585
============
Net Assets represented by: (Note 2)
Additional paid-in capital $252,240,342
Accumulated undistributed
net investment income 38,706
Accumulated net realized
gain on investment
transactions 6,266,485
Net unrealized appreciation
of investments 12,800,052
------------
NET ASSETS $271,345,585
============
NET ASSET VALUE PER SHARE
Class A Shares $ 19.42
Class B Shares $ 19.40
Class Y Shares $ 19.69
OFFERING PRICE PER SHARE
Class A Shares $ 20.60(a)
Class B Shares $ 19.40
Class Y Shares $ 19.69
SHARES OUTSTANDING
Class A Shares 6,112,024
Class B Shares 7,869,390
Class Y Shares 58
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 1,797,684
Interest 3,300,603
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 5,098,287
EXPENSES
Management fee (Note 3) $ 984,781
Distribution fee (Note 3) 571,335
Shareholder service fee (Note 5) 328,259
Transfer agent fee (Note 3) 197,877
Administration fee (Note 4) 131,304
Custodian and accounting fees
(Note 3) 33,039
Shareholder reports and
postage expenses 30,827
Registration expenses 29,662
Legal fees 6,223
Audit fees 4,375
Directors' fees and expenses 3,232
Miscellaneous 5,462
---------
Total expenses 2,326,376
-----------
NET INVESTMENT INCOME 2,771,911
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on
investments (Note 2) 8,229,407
Change in unrealized
appreciation (depreciation)
on investments 2,100,645
---------
NET GAIN ON INVESTMENTS 10,330,052
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $13,101,963
===========
</TABLE>
(b) Net of withholding taxes of $18,656.
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 2,771,911 $ 4,930,518
Net realized gain on investments 8,229,407 10,845,766
Change in unrealized appreciation (depreciation) on investments 2,100,645 (5,423,416)
------------- -------------
Increase in net assets resulting from operations 13,101,963 10,352,868
------------- -------------
Distributions to Shareholders
From net investment income
Class A (1,406,404) (2,350,498)
Class B (1,418,753) (2,488,039)
Class Y -- (29)
From net realized gain on investments
Class A (4,931,050) (5,325,307)
Class B (7,246,255) (8,807,307)
Class Y (54) (1)
------------- ---------------
Total distributions to shareholders (15,002,516) (18,971,181)
------------- --------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 40,262,800 101,090,596
Reinvested distributions 14,251,560 17,902,342
Shares redeemed (23,909,198) (39,059,107)
------------- --------------
Change in net assets resulting from capital share transactions 30,605,162 79,933,831
------------- --------------
Increase in net assets 28,704,609 71,315,518
Net Assets
Beginning of period 242,640,976 171,325,458
------------- --------------
End of period (including accumulated undistributed net investment income
of $38,706 and $91,952, respectively) $ 271,345,585 $242,640,976
============= ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.54 $ 20.60
--------- -------
Income from investment operations
Net investment income 0.24 0.51
Net realized and unrealized gain on investments 0.86 0.60
--------- -------
Total from investment operations 1.10 1.11
--------- -------
Less distributions
From net investment income (0.24) (0.51)
From net realized capital gain (0.98) (1.66)
--------- -------
Total distributions (1.22) (2.17)
--------- -------
Net asset value, end of period $ 19.42 $ 19.54
========= =======
TOTAL RETURN* 5.73% 5.81%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 118,711 $98,794
Ratio of expenses to average net assets 1.34%(a) 1.32%
Ratio of net investment income to average net assets 2.54%(a) 2.70%
Portfolio turnover rate 28% 40%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.16 $ 17.13 $ 15.27 $ 14.88
------- ------- ------- -------
Income from investment operations
Net investment income 0.44 0.37 0.40 0.31
Net realized and unrealized gain on investments 3.39 2.75 2.14 0.64
------- ------- ------- -------
Total from investment operations 3.83 3.12 2.54 0.95
------- ------- ------- -------
Less distributions
From net investment income (0.47) (0.35) (0.43) (0.30)
From net realized capital gain (1.92) (0.74) (0.25) (0.26)
------- ------- ------- -------
Total distributions (2.39) (1.09) (0.68) (0.56)
------- ------- ------- -------
Net asset value, end of period $ 20.60 $ 19.16 $ 17.13 $ 15.27
======= ======= ======= =======
TOTAL RETURN* 22.11% 19.13% 17.24% 6.54%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $63,509 $24,210 $19,888 $17,773
Ratio of expenses to average net assets 1.35% 1.36% 1.69% 1.75%
Ratio of net investment income to average net assets 2.63% 2.08% 2.53% 2.20%
Portfolio turnover rate 75% 72% 62% 78%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
3/31/99 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91
-------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income 0.17 0.37 0.34 0.23 0.28 0.21
Net realized and unrealized gain on
investments 0.86 0.59 3.35 2.76 2.14 0.61
-------- ------- ------- ------- ------- -------
Total from investment operations 1.03 0.96 3.69 2.99 2.42 0.82
-------- ------- ------- ------- ------- -------
Less distributions
From net investment income (0.18) (0.36) (0.36) (0.21) (0.31) (0.19)
From net realized capital gain (0.98) (1.66) (1.92) (0.74) (0.25) (0.26)
-------- -------- -------- ------- ------- -------
Total distributions (1.16) (2.02) (2.28) (0.95) (0.56) (0.45)
-------- -------- -------- ------- ------- -------
Net asset value, end of period $ 19.40 $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28
======== ======== ======== ======= ======= =======
TOTAL RETURN 5.36% 5.01% 21.24% 18.26% 16.32% 5.66%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $152,634 $143,846 $107,816 $66,548 $46,678 $43,219
Ratio of expenses to average net assets 2.08%(a) 2.07% 2.10% 2.13% 2.43% 2.44%
Ratio of net investment income to
average net assets 1.79%(a) 1.95% 1.87% 1.32% 1.78% 1.51%
Portfolio turnover rate 28% 40% 75% 72% 62% 78%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
3/31/99 PERIOD ENDED
(UNAUDITED) 9/30/98 (c)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.54 $ 18.75
-------- --------
Income from investment operations
Net investment income 0.24 0.54
Net realized and unrealized gain on investments 0.89 0.82
-------- --------
Total from investment operations 1.13 1.36
-------- --------
Less distributions
From net investment income -- (0.54)
From net realized capital gain (0.98) (0.03)
-------- --------
Total distributions (0.98) (0.57)
-------- --------
Net asset value, end of period $ 19.69 $ 19.54
======== ========
TOTAL RETURN 5.89% 7.29%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 1
Ratio of expenses to average net assets 1.07%(a) 1.07%(a)
Ratio of net investment income to average net assets 2.54%(a) 3.15%(a)
Portfolio turnover rate 28% 40%
</TABLE>
(a) Annualized.
(c) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
MENTOR BALANCED PORTFOLIO
MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
What was once a great bull market powered by strong earnings and declining
inflation expectations has become an emotionally-charged environment where
fundamental considerations are giving way to price momentum and speculation on a
historic scale. As we have commented on repeatedly, most of the "action" has
narrowed to a fairly limited group of stocks -- the mega-sized blue chip growth
stocks and Internet concepts, both of which have been in the spotlight for quite
a while. While the S&P 500 has returned 18% over the past twelve months, about
60% of the stocks in the index have actually DECLINED over the same period and
the largest 50 stocks in the index are up an average 47%. Several thoughtful
observers including Warren Buffett, Bill Gates, and Alan Greenspan have warned
about these valuations, but most consider their rhetoric out-of-date.
The performances, and particularly the valuations, of most Internet stocks are
beyond adequate description. We never imagined we would see this level of
speculation. Companies that were conceptualized less than two years ago and
organized less than one year ago have since gone public with multi-billion
dollar market values on minuscule revenues, income losses, and vague plans. The
enticement of apparently easy gains in the obvious stocks that continue to go up
without pause is incredible, but we know temptation is a deadly investment
platform.
Treasury rates increased sharply during the six-month period ending March 31,
1999, with the 2-year note climbing 71 basis points (0.71%) to 4.98% and the
long bond rising 66 basis points (0.66%) to 5.62%. The market sold off in
reaction to much stronger than anticipated economic growth during both the final
quarter of 1998 and the first quarter of 1999. Indeed, economic growth in the
final quarter of 1998 surged more than 6.0% on an annualized basis. Despite
turmoil in financial markets and in Brazil, the much-anticipated slowdown in
U.S. economic growth has yet to materialize and the economy has continued its
robust growth into 1999.
MANAGEMENT STRATEGY
We are increasingly comfortable with our current holdings. Our equity
investments are substantial companies with average estimated earnings growth of
14-15% this quarter and year. These stocks trade at an average P/E ratio of 21.5
times estimated 1999 earnings-per-share, about 20% below the S&P 500's
valuation, despite our belief that their outlooks are better than average.
During the first quarter economic data has painted an ever-clearer picture of a
robust U.S. economy. Consequently, we have cut back on the duration of our
fixed-income holdings to approximately neutral levels and sector allocations
have been tilted toward spread product. Mortgage-backed securities have been
particularly emphasized given their high yield and strong performance potential
in a stable to rising rate environment. The stronger economic growth also
prompted us to increase allocation to lower rated corporate bonds, including
high yield securities.
PERFORMANCE DISCUSSION
For the six-month period ending March 31, 1999 the Mentor Balanced Portfolio A
shares returned 11.93% compared to 15.74% for our 60% S&P500/40% Lehman Brothers
Aggregate Bond Index benchmark. Our "quality-growth-at-a- reasonable-price"
equity investment philosophy and
43
<PAGE>
MENTOR BALANCED PORTFOLIO
MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
strategy are clearly out of sync with prevailing sentiment. Our recent
under-performance mostly reflects lack of exposure to today's most popular
stocks, not fundamental disappointments in our holdings. Our asset allocation
weighting between stocks, bonds, and cash remains a conservative 52%, 46%, and
2%.
MARKET OUTLOOK
We have no idea how the stock market will progress over the remainder of the
year. The economy appears to be in remarkably good shape with solid growth and
low inflation likely to continue. It is very possible that current trends may
grow even more extreme. At some point the speculative excess building today will
be quashed. We have no idea when or what the catalyst may be, but it will
certainly seem obvious when we look back. Between now and then the market could
experience some significant volatility. Our singular goal is to get through this
highly unusual period with our discipline intact, as we know most others will
not.
Our long-term fixed-income market outlook is for continued declines in inflation
and therefore continued lower interest rates. This optimism is fueled by
structural economic changes such as the Internet that offer the potential to
substantially increase economic efficiency and reduce costs. In addition,
slowing global economic growth and excess manufacturing capacity will continue
to moderate price levels and therefore interest rates. As the summer wears on,
we expect that stumbling growth in Europe and Latin America will exert
significant pressure on the U.S. economy. This pressure on domestic economic
growth and global inflation should allow bond prices to rally. We anticipate
reducing our exposure to mortgages and corporate bonds at that time and
aggressively extending portfolio durations.
44
<PAGE>
MENTOR BALANCED PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Balanced Portfolio Class A, Class B and Class Y Shares, the S&P 500 and the
Lehman Brothers Aggregate Bond Index.+
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class Y Shares S&P 500
<S> <C> <C> <C> <C>
6/21/94 10000 10000 10000 10000
12/31/94 9182 10108 9182 10335
6/30/95 10503 11561 10503 12055
9/30/95 10978 12085 10978 12723
9/30/96 12954 14260 12954 14505
9/30/97 16396 18048 16396 18499
9/30/98 18340 20181 18340 20462
3/31/99 20527 22429 20461 23683
</TABLE>
Average Annual Returns as of 3/31/99
Without Sales Charges
1-Year Since Inception+++
Class B 9.62% 18.54%
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception+++
Class A 3.56% 14.81%
Class B 6.15% 18.43%
Average Annual Returns as of 3/31/99
Without Sales Charges
1-Year Since Inception+++
Class Y 9.55% 18.52%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
+ The Standard & Poor's Index (S&P 500) is an unmanaged, market-
value-weighted index of 500 widely held domestic common stocks. An unmanaged
index does not reflect expenses and may not correspond to the performance of
a managed portfolio in which expenses are incurred. The Lehman Brothers
Aggregate Index is made up of the Government/Corporate Index, the
Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. The
Lehman Brothers Aggregate Bond Index and S&P 500 are adjusted to reflect
reinvestment of interest and dividends on securities in the indexes. The
Lehman Brothers Aggregate Bond Index and S&P 500 are not adjusted to reflect
sales loads, expenses, or other fees that the SEC requires to be reflected
in the Portfolio's performance. This index represents an asset allocation of
60% S&P 500 stocks and 40% Lehman Brothers Aggregate Bond Index.
~ Represents a hypothetical investment of $10,000 in Mentor Balanced Portfolio
Class B Shares. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to
1.00% of amounts redeemed during the five-year period following the date of
purchase. The value of Class B Shares reflects a redemption fee in effect at
the end of each of the stated periods. Prior to September 16, 1998,
contingent deferred sales charges of 5.00% were waived. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
* Represents a hypothetical investment of $10,000 in Mentor Balanced Portfolio
Class A Shares after deducting the maximum sales charge of 5.75% ($10,000
investment minus $575 sales charge). The Class A Shares' performance assumes
the reinvestment of all dividends and distributions.
** Represents a hypothetical investment of $10,000 in Mentor Balanced
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred slaes charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Balanced Portfolio Class A, Class B and Class
Y Shares from the date of commencement of operations on 6/21/94 through
3/31/99.
45
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 51.78%
BASIC MATERIALS - 2.76%
Bemis Company 91,062 $2,828,614
Sherwin-Williams Company 234,985 6,608,953
----------
9,437,567
----------
CAPITAL GOODS & CONSTRUCTION - 5.33%
Emerson Electric Company 116,190 6,150,808
Illinois Tool Works 109,135 6,752,728
W. W. Grainger, Inc. 122,530 5,276,448
----------
18,179,984
----------
CONSUMER CYCLICAL - 7.76%
Chancellor Media
Corporation - Class A * 129,600 6,107,400
Interpublic Group
Companies, Inc. 87,335 6,801,213
Newell-Rubbermaid, Inc. 159,594 7,580,730
Royal Caribbean Cruises
Limited 91,900 3,584,100
The Walt Disney Company 39,000 1,213,875
Tribune Company 18,300 1,197,506
----------
26,484,824
----------
CONSUMER STAPLES - 1.86%
Sysco Corporation 240,935 6,339,602
----------
FINANCIAL - 9.00%
American Express Company 36,860 4,331,050
Charter One Financial, Inc. 97,872 2,826,054
Citigroup, Inc. 45,300 2,893,537
Federal National Mortgage
Association 52,910 3,664,018
M & T Bank Corporation 2,901 1,389,579
Marsh & McLennan 14,700 1,090,556
North Fork Bancorporation 111,750 2,360,719
SouthTrust Corporation 141,500 5,279,719
Washington Mutual, Inc. 70,880 2,897,220
Wells Fargo Company 113,495 3,979,418
----------
30,711,870
----------
HEALTH - 5.95%
Bristol-Myers Squibb
Company 108,890 7,002,988
Johnson & Johnson 80,205 7,514,206
Tenet Healthcare
Corporation * 304,970 5,775,369
----------
20,292,563
----------
TECHNOLOGY - 11.89%
Automatic Data Processing 167,800 6,942,725
Computer Sciences
Corporation * 107,645 5,940,658
MCI WorldCom, Inc. * 54,585 4,834,184
Sun Microsystems, Inc. * 74,925 9,360,942
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY (CONTINUED)
SunGard Data Systems,
Inc.* 184,100 $ 7,364,000
Xerox Corporation 114,650 6,119,444
-----------
40,561,953
-----------
TRANSPORTATION & SERVICES - 0.80%
Werner Enterprises, Inc. 174,272 2,744,784
-----------
UTILITIES - 1.69%
MediaOne Group * 91,000 5,778,500
-----------
MISCELLANEOUS - 4.74%
Omnicom Group, Inc. 24,800 1,982,450
Tyco International, Inc. 104,145 7,472,404
UNUM Corporation 141,620 6,735,801
-----------
16,190,655
-----------
TOTAL COMMON STOCKS
(COST $161,484,581) 176,722,302
-----------
FIXED INCOME
SECURITIES - 40.04%
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 32.05%
Federal Home Loan Bank
4.97%, 2/01/01 $2,000,000 1,989,272
Federal National Mortgage
Association
4.63% - 6.64%,
10/15/01 - 7/02/07 1,480,000 1,463,992
Government National
Mortgage Association
6.50%, 5/15/09 89,637 91,121
U.S. Treasury Notes
4.75% - 6.63%,
2/28/02 - 11/15/08 21,992,000 22,144,232
U.S. Treasury Bonds
4.25% - 7.50%,
11/15/03 - 8/15/28 78,098,000 83,682,925
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $101,957,708) 109,371,542
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 0.87%
AFG Receivables Trust,
6.65%, 10/15/02 23,927 24,001
Capital One Master Trust
Series 1998-4, 5.43%,
1/15/07 125,000 122,957
CS First Boston, 7.18%,
2/25/18 25,000 25,108
Equifax Credit Corporation,
6.33%, 1/15/22 900,000 902,392
</TABLE>
46
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Key Auto Finance
Trust Series 1999-1,
5.63%, 7/15/03 $1,500,000 $ 1,500,288
Key Auto Finance
Trust Series 1997-2
6.10%, 11/15/00 29,219 29,245
PNC Student Loan Trust,
6.73%, 1/25/07 75,000 77,993
Union Acceptance
Corporation Series 97A,
6.48%, 5/10/04 45,000 45,486
Union Acceptance
Corporation
5.75%, 6/09/03 250,000 249,119
------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $2,978,346) 2,976,589
------------
CORPORATE BONDS - 7.12%
Associates Corporation,
6.25%, 11/01/08 1,500,000 1,508,504
Continental Airlines, Inc.,
7.46%, 4/01/15 1,711,944 1,818,085
Dayton Hudson Company,
6.65%, 8/01/28 1,700,000 1,660,278
Discover Series 1998-7,
5.60%, 5/15/06 125,000 123,545
Enron Corporation,
6.73%, 11/17/08 1,000,000 1,006,879
Ford Motor Credit
Company,
5.80%, 1/12/09 1,250,000 1,211,687
General Electric Capital
Corporation,
6.29%, 12/15/07 300,000 302,721
Georgia Power Company,
5.50% - 6.00%,
3/01/00 - 12/01/05 2,500,000 2,457,390
GTE California,
5.50%, 1/15/09 1,515,000 1,447,826
GTE North, Inc.,
5.65%, 11/15/08 1,500,000 1,450,421
Household Financial
Company,
5.88%, 2/01/09 800,000 768,552
IBM Corporation,
5.10%, 11/10/03 1,000,000 967,183
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
Merrill Lynch & Company,
6.00%, 2/17/09 $1,250,000 $ 1,208,559
National City Corporation,
5.75%, 2/01/09 800,000 769,479
National Rural Utilities,
5.50%, 1/15/05 1,300,000 1,271,409
Norwest Corporation,
6.80%, 5/15/02 60,000 61,747
Pepsi Bottling Holdings,
Inc., 5.63%, 2/17/09 1,800,000 1,735,674
PSI Energy, Inc.,
6.00%, 12/14/01 1,000,000 987,764
Safeway, Inc.,
5.75% - 6.50%,
11/15/00 - 11/15/08 1,650,000 1,670,989
SmithKline Beechum,
6.63%, 10/01/01 330,000 338,762
Sprint Capital Corporation,
6.13%, 11/15/08 1,450,000 1,427,457
Toyota Motor Credit,
5.63%, 11/13/03 100,000 99,215
------------
TOTAL CORPORATE BONDS
(COST $24,650,350) 24,294,126
------------
TOTAL FIXED INCOME
SECURITIES
(COST $129,586,404) 136,642,257
------------
SHORT-TERM
INVESTMENT - 6.14%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%,
due 4/01/99, collateralized
by $33,830,000 Federal Home
Loan Mortgage Corporation,
7.50%, 11/01/27, market
value $21,376,682
(cost $20,936,014) 20,936,014 20,936,014
------------
TOTAL INVESTMENTS
(COST $312,006,999)-97.96% 334,300,573
OTHER ASSETS LESS
LIABILITIES - 2.04% 6,992,993
------------
NET ASSETS - 100.00% $341,293,566
============
</TABLE>
* Non-income producing.
47
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $350,988,737 and $74,148,245, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $312,006,999. Net unrealized appreciation aggregated
$22,293,574, of which $30,714,052 related to appreciated investment securities
and $8,420,478 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $313,364,559
Repurchase agreements 20,936,014
------------
Total investments
(cost $312,006,999) 334,300,573
Collateral for securities loaned
(Note 2) 87,189,594
Receivables
Investments sold 1,002,666
Fund shares sold 4,851,369
Dividends and interest 2,689,063
Variation margin (Note 2) 366,563
Other 2,495
Prepaid expense 140,000
------------
TOTAL ASSETS 430,542,323
------------
LIABILITIES
Investments purchased $1,514,077
Securities loaned (Note 2) 87,189,594
Fund shares redeemed 535,285
Accrued expenses and other
liabilities 9,801
----------
TOTAL LIABILITIES 89,248,757
------------
NET ASSETS $341,293,566
============
Net Assets represented by: (Note 2)
Additional paid-in capital $312,761,476
Accumulated undistributed
net investment loss (210,671)
Accumulated net realized
gain on investment
transactions 3,689,030
Net unrealized appreciation
of investments 25,053,731
------------
NET ASSETS $341,293,566
============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.17
Class B Shares $ 15.16
Class Y Shares $ 15.16
OFFERING PRICE PER SHARE
Class A Shares $ 16.10(a)
Class B Shares $ 15.16
Class Y Shares $ 15.16
SHARES OUTSTANDING
Class A Shares 7,538,584
Class B Shares 14,958,738
Class Y Shares 13,189
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 810,724
Interest net of premium 2,879,894
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 3,690,618
EXPENSES
Management fee (Note 4) $ 871,032
Distribution fee (Note 5) 631,992
Shareholder service fee (Note 5) 288,984
Transfer agent fee 169,791
Administration fee (Note 4) 116,138
Registration expenses 55,851
Shareholder reports and postage
expenses 52,503
Custodian and accounting fees 39,139
Legal fees 5,855
Audit fees 4,116
Directors' fees and expenses 3,041
Miscellaneous 5,139
----------
Total expenses 2,243,581
-----------
NET INVESTMENT INCOME 1,447,037
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on investments
(Note 2) 4,564,399
Change in unrealized appreciation
(depreciation) on investments 24,850,706
----------
NET GAIN ON INVESTMENTS 29,415,105
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $30,862,142
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 1,447,037 $ 110,202
Net realized gain on investments 4,564,399 822,291
Change in unrealized appreciation (depreciation) on investments 24,850,706 (583,942)
------------- ------------
Increase in net assets resulting from operations 30,862,142 348,551
------------- ------------
Distributions to Shareholders
From net investment income
Class A (630,596) --
Class B (1,044,583) --
Class Y (788) (159,807)
From net realized gain on investments
Class A (207,511) --
Class B (736,229) --
Class Y (655) (1,140,442)
------------- ------------
Total distributions to shareholders (2,620,362) (1,300,249)
------------- ------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 327,679,217 9,280,672
Reinvested distributions 2,518,683 1,300,249
Shares redeemed (29,967,087) (910,125)
------------- ------------
Change in net assets resulting from capital share transactions 300,230,813 9,670,796
------------- ------------
Increase in net assets 328,472,593 8,719,098
Net Assets
Beginning of period 12,820,973 4,101,875
------------- ------------
End of period (including accumulated undistributed net investement income
of ($210,671) and $18,259, respectively) $ 341,293,566 $ 12,820,973
============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS A SHARES (B)
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED 3/31/99 ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69 $ 17.61 $ 16.28
--------- ------- -------
Income from investment operations
Net investment income 0.04 0.47 0.43
Net realized and unrealized gain (loss) on investments 1.59 1.41 3.35
--------- ------- -------
Total from investment operations 1.63 1.88 3.78
--------- ------- -------
Less distributions
From net investment income ( 0.10) ( 0.71) ( 0.43)
From net realized capital gain ( 0.05) ( 5.09) ( 2.02)
--------- -------- --------
Total distributions ( 0.15) ( 5.80) ( 2.45)
--------- -------- --------
Net asset value, end of period $ 15.17 $ 13.69 $ 17.61
========= ======== ========
TOTAL RETURN* 11.93% 11.86% 26.09%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 114,384 $ 3,534 $ 4,102
Ratio of expenses to average net assets 1.37%(a) 0.36% 0.50%
Ratio of expenses to average net assets excluding waiver 1.37%(a) 1.56% 2.13%
Ratio of net investment income to average net assets 1.75%(a) 1.99% 2.78%
Portfolio turnover rate 35% 89% 80%
<CAPTION>
YEAR PERIOD PERIOD
ENDED ENDED ENDED
9/30/96 9/30/95 (C) 12/31/94 (D)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.85 $ 12.44 $ 12.50
------- --------- ---------
Income from investment operations
Net investment income 0.42 0.36 0.22
Net realized and unrealized gain (loss) on investments 2.09 2.08 ( 0.09)
------- --------- ---------
Total from investment operations 2.51 2.44 0.13
------- --------- ---------
Less distributions
From net investment income ( 0.48) ( 0.03) ( 0.19)
From net realized capital gain ( 0.60) -- --
-------- --------- ---------
Total distributions ( 1.08) ( 0.03) ( 0.19)
-------- --------- ---------
Net asset value, end of period $ 16.28 $ 14.85 $ 12.44
======== ========= =========
TOTAL RETURN* 18.00% 19.28% 1.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,825 $ 3,210 $ 2,911
Ratio of expenses to average net assets 0.50% 0.50%(a) 0.50%(a)
Ratio of expenses to average net assets excluding waiver 2.06% 2.12%(a) 2.72%(a)
Ratio of net investment income to average net assets 2.83% 3.26%(a) 3.32%(a)
Portfolio turnover rate 103% 65% 71%
</TABLE>
(a) Annualized.
(b) Prior to September 16, 1998, all shareholders of the Balanced Portfolio were
Class A shareholders. On September 16, 1998, shares of Class A were converted to
Class Y shares.
(c) For the period from January 1, 1995 to September 30, 1995.
(d) For the period from June 21, 1994 (commencement of operations) to December
31, 1994.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (E)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69 $ 13.69
-------- --------
Income from investment operations
Net investment income 0.06 --
Net realized and unrealized gain on investments 1.53 --
-------- --------
Total from investment operations 1.59 --
-------- --------
Less distributions
From net investment income ( 0.07) --
From net realized capital gain ( 0.05) --
-------- --------
Total distributions ( 0.12) --
-------- --------
Net asset value, end of period $ 15.16 $ 13.69
======== ========
TOTAL RETURN* 11.63% 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $226,710 $ 5,645
Ratio of expenses to average net assets 2.12%(a) 1.50%(a)
Ratio of expenses to average net assets excluding waiver 2.12%(a) 1.50%(a)
Ratio of net investment income to average net assets 0.99%(a) 0.42%(a)
Portfolio turnover rate 35% 89%
</TABLE>
(a) Annualized.
(e) For the period from September 16, 1998 (initial offering of Class B) to
September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS Y SHARES (G)
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (F)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69 $ 13.69
-------- ---------
Income from investment operations
Net investment income 0.97 0.01
Net realized and unrealized gain (loss) on investments 0.61 ( 0.01)
-------- ---------
Total from investment operations 1.58 --
-------- ---------
Less distributions
From net investment income ( 0.06) --
From net realized capital gain ( 0.05) --
-------- ---------
Total distributions ( 0.11) --
-------- ---------
Net asset value, end of period $ 15.16 $ 13.69
======== =========
TOTAL RETURN* 11.57% 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 200 $ 3,642
Ratio of expenses to average net assets 1.12%(a) 1.10% (a)
Ratio of net investment income to average net assets 1.75%(a) 2.32% (a)
Portfolio turnover rate 35% 89%
</TABLE>
(a) Annualized.
(f) For the period from September 16, 1998 (initial offering of Class Y) to
September 30, 1998.
(g) Prior to September 16, 1998, all shareholders of the Balanced Portfolio were
Class A shareholders. On September 16, 1998, shares of Class A were converted to
Class Y shares.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMSNTS.
52
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE MUNICIPAL INCOME PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
Although most of the financial markets experienced significant volatility over
the six-month period ending March 31, 1999 the municipal market remained
relatively stable. For the majority of the six months, long-term municipal bond
yields stayed within a range of 5.20 to 5.40 percent, even as the Federal
Reserve cut interest rates and the 30-year U.S. Treasury bond reached its lowest
yield on record. In large part, this stability in tax-exempt rates can be
attributed to the municipal market's isolation from turbulence abroad. Concerns
about the financial conditions in Asia and Latin America hurt the stock and
high-yield bond markets last fall, but had little effect on municipals.
The positive domestic economic and market conditions encouraged more
municipalities to take advantage of low interest rates and issue new bonds. In
1998, we experienced the second-highest level of municipal issuance in history.
Although the volume of municipal debt increased, the credit quality of most
issuers was not compromised -- in fact, it improved as the positive economic
environment led to stronger balance sheets. As a result, we saw a larger number
of issuers financing special growth and expansion projects, as opposed to using
municipal bonds to finance their regular operations.
The proportion of higher-yielding municipal bonds also increased during the
period as the percentage of insured bonds declined slightly. Because bond
insurers tightened their underwriting criteria, more issuers came to market
without insurance. As a result, these bonds offered higher yields to compensate
investors for the increased credit risk. This benefited the Portfolio because it
allowed our experienced research staff to seek out those higher-yielding bonds
that we felt had strong underlying quality.
Toward the end of 1998, the yields on 30-year insured municipal bonds and
comparable U.S. Treasury bonds were equal -- something that rarely occurs.
Typically, investment-grade municipal bonds offer about 80 to 90 percent as much
yield as comparable Treasury bonds because their interest payments are exempt
from federal income taxes. However, as Treasury yields fell and municipal yields
remained stable during the reporting period, the yield difference between the
two types of bonds compressed and municipal yields became very attractive. Early
in 1999, investors realized the tremendous opportunities available in the
municipal market, and demand for municipals began to increase. In conjunction
with a recent slowdown in supply, this boost in municipal demand pushed the
municipal-to-Treasury yield ratio back to more traditional but still attractive
levels.
MANAGEMENT STRATEGY
During the reporting period, we focused on the insured sector of the market,
increasing our exposure to triple-A rated securities by nearly five percent.
Although the percentage of insured issuance dropped slightly, we found a good
selection of securities from which to choose. We also selectively purchased
several positions of non-rated and lower-rated securities that help support the
Portfolio's dividend.
Regarding specific sector exposure, we have become more cautious with respect to
health care and the electric utility industries. Although many health care bonds
remain attractive, the challenges imposed by managed care and changing Medicare
53
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE MUNICIPAL INCOME PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
reimbursement policies have put financial pressures on an increasing number of
medical facilities. Due to deregulation as well as problems at specific utility
plants, this sector is also experiencing some weakness. As a result, we are
modestly decreasing our exposure to both sectors.
Many purchases were bonds with maturities in the intermediate range of the yield
curve as we felt they offered the most value compared to other maturity ranges.
By purchasing securities in the 10 to 20 year maturity range rather than longer
term securities, we were able to add almost as much yield with significantly
less volatility.
We also looked for areas of the municipal marketplace where a heavy issuance
caused bond prices to be temporarily reduced. For example, smaller states often
do not have enough instate demand to absorb a large volume of new bond issuance
immediately. We took advantage of those situations to purchase bonds at what we
felt were below-market prices and then sold them when prices had risen.
PERFORMANCE REVIEW
For the six-month period ending March 31, 1999 the Mentor Municipal Income
Portfolio A shares returned 0.52% compared to 1.49% for its Lehman Brothers
Municipal Bond Index benchmark.
MARKET OUTLOOK
Strong economic performance continues to bolster the credit conditions of
municipal issuers -- a trend we expect to continue. As we mentioned earlier,
economic strength has made issuers more likely to issue debt for special
projects rather than for general operating financing. We believe that as long as
municipalities remain economically healthy, this situation is likely to
continue.
Although insured debt has been increasing in recent years, we have started to
see a reversal of this trend, as municipal bond insurers have become more
cautious. If, as anticipated, this caution continues, credit spreads may widen
as the proportion of higher-yielding uninsured bonds increases.
Inflation remains low, so we don't foresee any significant increase in interest
rates in the near term -- a favorable situation for bond prices. Because we
don't expect interest rates to rise in the near term, we believe the supply of
municipal debt will be lower than last year's, helping to restore the price
relationship between municipals and Treasuries to more traditional levels.
Finally, we see the potential for changes in traditional economic activity
toward the end of the year because of investor concerns about the Year 2000
computer problem. These temporary concerns, however, may result in attractive
investment opportunities that our research staff can explore to uncover value.
54
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Municipal Income Portfolio Class A and Class B Shares and Lehman Municipal Bond
Index.-
[GRAPH]
<TABLE>
<CAPTION>
4/29/92 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99
<S> <C>
Class A Shares(double dagger) 9,525 10,034 11,637 11,101 12,151 12,935 14,085 15,245 15,324
Class B Shares(dagger) 10,000 10,528 12,134 11,511 12,348 13,184 14,291 15,289 15,338
Lehman Municipal Bond Index~ 10,000 10,561 11,906 11,616 12,916 13,818 14,933 16,232 16,475
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception*
Class A (0.33%) 5.89% 6.36%
Class B 3.10% 6.38% 6.58%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The value of Class B Shares reflects a redemption fee
in effect at the end of each stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class A Shares, after deducting the maximum sales charge of 4.75%
($10,000 investment minus $475 sales charge = $9,525). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
* Reflects operations of Mentor Municipal Income Portfolio Class A and Class
B Shares from the date of commencement of operations on 4/29/92 through
3/31/99.
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Municipal Income Portfolio Class Y Shares and Lehman Municipal Bond Index.-
[GRAPH]
<TABLE>
<CAPTION>
11/19/97 12/31/97 3/31/98 6/30/98 9/30/98 3/31/99
<S> <C>
Class Y Shares(triple dagger) 10,000 10,147 10,263 10,390 10,689 10,763
Lehman Municipal Bond Index~ 10,000 10,206 10,323 10,490 10,802 10,963
</TABLE>
Total Returns as of 3/31/99
1-Year Since Inception*
Class Y 4.87% 6.00%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
- The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Municipal Income Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 3/31/99.
55
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES - 98.38%
ALABAMA - 6.15%
Birmingham, Alabama Water
& Sewer Revenue, 4.75%,
1/01/29 $1,000,000 $ 930,030
Montgomery, Alabama Special
Care Facilities, 5.00%,
11/15/25 7,500,000 7,221,000
----------
8,151,030
----------
ARIZONA - 1.20%
Pima County, Arizona IDA,
7.25%, 7/15/10 1,430,000 1,582,939
----------
CALIFORNIA - 6.44%
Alameda Corridor
Transportation, (effective
yield-1.00%) (a), 10/01/30 2,000,000 389,360
California Statewide
Community Development
Authority, 5.63%, 10/01/34 2,070,000 2,125,662
Carson Improvement Board
Act 1915, Special
Assessment District 1992,
7.38%, 9/02/22 700,000 758,835
East Bay Municipal Utility
District, 4.75%, 6/01/21 1,915,000 1,840,009
Orange County Community
Facilities District Series A,
7.35%, 8/15/18 300,000 341,706
San Francisco City & County
Airport, 6.30%, 5/01/25 1,000,000 1,101,110
University of California
Revenue, 4.75%, 9/01/16 2,000,000 1,977,740
----------
8,534,422
----------
COLORADO - 2.61%
Colorado Housing Authority,
7.00%, 11/01/24 475,000 514,083
Denver City & County Airport
Revenue, 7.75% - 8.50%,
11/15/13 - 11/15/23 2,555,000 2,938,480
----------
3,452,563
----------
CONNECTICUT - 0.82%
Connecticut State
Development Authority,
6.15%, 4/01/35 1,000,000 1,085,430
----------
DISTRICT OF COLUMBIA - 0.66%
Metropolitan Washington,
General Airport Revenue
Series A, 6.63%, 10/01/19 800,000 876,784
----------
FLORIDA - 3.95%
Governmental Utilities
Authority Utility Revenue,
5.00%, 10/01/29 2,453,900 2,453,865
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
FLORIDA (CONTINUED)
Hillsborough County, 6.25%,
12/01/34 $1,250,000 $1,381,988
Sarasota County Health
Facilities Authority Revenue,
10.00%, 7/01/22 1,160,000 1,391,768
----------
5,227,621
----------
GEORGIA - 4.11%
Fulton County Georgia
Housing Authority, Housing
Revenue, 6.38%, 2/01/08 520,000 525,184
Fulton County Georgia Water
& Sewer Revenue, 4.75%,
1/01/28 2,350,000 2,224,769
George Smith World Congress
Center, 5.50%, 7/01/20 1,500,000 1,507,695
Monroe County Development
Authority PCRB, 6.75%,
1/01/10 1,000,000 1,174,600
----------
5,432,248
----------
ILLINOIS - 10.83%
Broadview Tax Increment
Revenue, 8.25%, 7/01/13 1,000,000 1,127,790
Chicago Capital Appreciation,
(effective yield-2.09%) (a),
7/01/16) 2,000,000 766,520
Chicago Heights Residential
Mortgage, (effective
yield-3.42%) (a), 6/01/09 3,175,000 1,558,989
Chicago School Reform Board
Series A, 5.50%, 12/01/26 2,000,000 2,125,480
Chicago State University
Revenue, 5.50%, 12/01/23 1,000,000 1,060,800
Illinois Development Finance
Authority Revenue, 5.70%,
1/01/18 1,680,000 1,822,951
Illinois Health Facilities
Authority Revenue,
5.50% - 9.50%, 11/15/19 -
10/01/22 2,250,000 2,456,200
Kane County School District
No. 129, 5.50%, 2/01/11 2,000,000 2,121,120
Metropolitan Pier &
Exposition, (effective
yield-1.44%) (a), 6/15/21 1,950,000 616,434
Saint Clair County Public
Building, (effective
yield-2.06%) (a), 12/01/16 1,650,000 670,807
----------
14,327,091
----------
</TABLE>
56
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
INDIANA - 2.55%
Fort Wayne, Indiana Hospital
Authority Revenue, 4.75%,
11/15/28 $3,250,000 $2,986,425
Indiana Transportation
Finance Authority Series A,
(effective yield-1.99%) (a),
6/01/17 1,000,000 394,230
----------
3,380,655
----------
IOWA - 0.50%
Student Loan Liquidity
Corporation, Student Loan
Revenue Series C, 6.95%,
3/01/06 625,000 664,888
----------
KANSAS - 0.74%
Wyandotte County Kansas
City Utility Revenue,
4.30%, 9/01/10 1,000,000 981,650
----------
KENTUCKY - 1.60%
Jefferson County Hospital
Revenue, 8.92%,
10/01/08 (b) 500,000 590,625
Kenton County Airport Board
Revenue, 7.50%, 2/01/20 1,400,000 1,524,936
----------
2,115,561
----------
LOUISIANA - 4.90%
Louisiana Public Facilities
Authority Revenue, Dillard
University-Louisiana,
5.00%, 2/01/28 2,750,000 2,690,215
Louisiana State University &
Agriculture and Mechanical
College, University
Revenues, 5.00%, 10/01/30 1,000,000 972,950
New Orleans, Louisiana,
4.75%, 12/01/26 3,000,000 2,821,740
----------
6,484,905
----------
MAINE - 0.72%
Maine State Housing
Authority Series C, 6.88%,
11/15/23 885,000 959,676
----------
MARYLAND - 0.67%
Baltimore Series B, 4.25%,
10/01/09 900,000 891,360
----------
MASSACHUSETTS - 1.59%
Massachusetts State Health
and Education, 6.00%,
10/01/23 1,000,000 997,450
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
MASSACHUSETTS (CONTINUED)
Massachusetts State Health
and Educational Facilities
Authority, OID Revenue
Bonds Series A, 6.88%,
4/01/22 $1,000,000 $1,106,840
----------
2,104,290
----------
MICHIGAN - 0.69%
Michigan State Hospital
Financial Authority
Revenue, 5.25%, 8/15/28 1,000,000 909,730
----------
MINNESOTA - 0.38%
Dakota County Housing &
Redevelopment Authority
Multifamily Housing
Revenue, 6.25%, 5/01/29 500,000 500,000
----------
MISSISSIPPI - 0.75%
Municipal Facility Authority
Natural Gas Project, 4.13%,
1/01/07 1,000,000 989,160
----------
MISSOURI - 1.47%
Missouri State Health &
Educational Facilities
Revenue, 5.00%, 5/15/28 1,000,000 960,690
Ozarks Tech Community
College Project, 5.00%,
3/01/19 1,000,000 986,920
----------
1,947,610
----------
NEBRASKA - 1.75%
Nebraska Investment Finance
Authority, SFM, 9.42%,
9/15/24 (b) 280,000 312,200
Nebraska Public Gas Agency,
Gas Supply System, 5.00%,
4/01/00 1,000,000 1,014,520
Omaha Nebraska Airport
Authority Revenue, 4.20%,
1/01/07 1,000,000 992,310
----------
2,319,030
----------
NEVADA - 1.87%
Clark County, 5.90%,
10/01/30 2,000,000 2,042,840
Henderson Local Improvement
District, Special Assessment
Series A, 8.50%, 11/01/12 415,000 439,755
----------
2,482,595
----------
</TABLE>
57
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
NEW JERSEY - 1.77%
East Orange County Board of
Education, (effective
rate-1.75%) (a) 2/01/20 $1,000,000 $ 348,810
New Jersey Economic
Development Authority
Revenue, 6.00%, 5/15/28 1,000,000 978,380
Ocean County Utilities
Authority, 4.00%, 1/01/08 1,040,000 1,022,975
---------
2,350,165
---------
NEW MEXICO - 1.87%
New Mexico State Hospital
Equipment Lane Council,
5.50%, 6/01/28 1,500,000 1,469,985
Santa Fe Educational Facilities
Revenue, 5.50%, 3/01/24 1,000,000 1,001,000
---------
2,470,985
---------
NEW YORK - 5.56%
Clifton Springs Hospital
Refunding & Improvement,
8.00%, 1/01/20 625,000 685,462
Metropolitan Transportation
Authority, 4.75%, 7/01/19 1,000,000 935,070
New York State Dormitory
Authority Revenue Hospital,
WYCKOFF, 5.20%,
2/15/14 1,000,000 1,013,790
New York Series H, 7.20%,
2/01/13 1,500,000 1,656,973
New York Series F - Ambac
TCRS, 5.25%, 8/01/14 2,000,000 2,074,340
Suffolk County Industrial
Development Agency
4.25%, 2/01/07 1,000,000 1,002,270
---------
7,367,905
---------
NORTH CAROLINA - 1.91%
North Carolina Eastern
Municipal Power Agency
Systems Revenue, 5.70%,
1/01/13 1,000,000 1,077,170
Sampson Area Development
Corporation, 4.70%,
6/01/14 1,500,000 1,455,565
---------
2,532,735
---------
NORTH DAKOTA - 0.74%
Devils Lake Health Care,
6.10%, 10/01/23 1,000,000 983,160
---------
OHIO - 3.91%
Batavia Local School District
Reference, 5.63%, 12/01/22 1,000,000 1,080,980
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
OHIO (CONTINUED)
Canton, Ohio Pension
Reference, 4.75%, 12/01/18 $1,000,000 $ 973,140
Cleveland, Ohio, 4.50%,
10/01/12 1,015,000 996,364
Cuyahoga County Health Care
Facilities, 5.50%, 12/01/28 1,000,000 985,530
Ohio University General
Receipts, 4.60%, 12/01/11 1,145,000 1,142,859
---------
5,178,873
---------
OKLAHOMA - 0.41%
Oklahoma City Industrial and
Cultural Facilities Trust,
6.75%, 9/15/17 540,000 546,804
---------
PENNSYLVANIA - 1.28%
Pennsylvania Economic
Development, 6.40%,
1/01/09 500,000 524,605
Philadelphia Hospital and
Higher Education Facilities,
6.50%, 11/15/08 1,075,000 1,171,008
---------
1,695,613
---------
RHODE ISLAND - 0.26%
West Warwick, Series A, GO
Bonds, 7.30%, 7/15/08 310,000 345,002
---------
TENNESSEE - 3.62%
Chattanooga, Tennessee
Health Educational &
Housing Facility, 5.00%,
12/01/28 1,500,000 1,440,555
Memphis Shelby County
Airport Authority Special
Facilities Revenue
Refunding, 7.88%, 9/01/09 1,500,000 1,654,485
Metropolitan Government,
Nashville & Davidson
County, 4.75% - 5.00%,
1/01/22 - 10/01/28 250,000 244,900
Municipal Energy
Corporation, Tennessee Gas,
4.13%, 3/01/09 1,500,000 1,455,930
---------
4,795,870
---------
TEXAS - 9.06%
Abilene Health Facilities
Development Corporation,
5.90%, 11/15/25 1,000,000 966,740
Alliance Airport Authority,
6.38%, 4/01/21 2,000,000 2,161,280
Brazos Higher Education
Authority Student Loan
Revenue, 7.10%, 11/01/04 416,000 465,462
</TABLE>
58
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
TEXAS (CONTINUED)
Brazos River Authority
Revenue, 4.90%, 10/01/15 $2,000,000 $ 2,016,940
Dallas Fort Worth
International Airport
Facility Revenue Bonds,
7.25%, 11/01/30 1,000,000 1,096,770
Houston, Texas School
District, 4.75%, 2/15/26 1,500,000 1,412,085
Lufkin Health Memorial East
Texas, 5.70%, 2/15/28 1,000,000 994,730
Matagorda County Revenue,
5.13%, 11/01/28 2,000,000 1,978,860
Texas State Department of
Housing and Community
Affairs Refunding, Series C,
10.12%, 7/02/24 (b) 750,000 907,500
-----------
12,000,367
-----------
UTAH - 2.53%
Bountiful Hospital Revenue,
9.50%, 12/15/18 230,000 294,633
Intermountain Power Agency
Power Supply, 5.00%,
7/01/19 2,500,000 2,463,800
Utah State Housing Finance
Agency, 7.20%, 1/01/27 585,000 596,998
-----------
3,355,431
-----------
WASHINGTON - 1.41%
Central Puget Sound Water
Regional Transportation,
4.75%, 2/01/28 2,000,000 1,869,000
-----------
WEST VIRGINIA - 2.96%
Harrison County, 6.75%,
8/01/24 2,000,000 2,244,180
West Virginia State Hospital
Finance Authority Revenue,
9.70%, 1/01/18 (b) 1,500,000 1,681,005
-----------
3,925,185
-----------
WISCONSIN - 4.14%
Southeast Wisconsin
Professional Baseball,
5.50%, 12/15/26 2,000,000 2,141,080
Wisconsin State Health &
Educational Facility
Authority Revenues, 4.75%
- 5.50%, 2/15/28 - 6/01/28 3,500,000 3,342,325
-----------
5,483,405
-----------
TOTAL LONG-TERM MUNICIPAL
SECURITIES (COST
$ 125,609,460) 130,301,738
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM MUNICIPAL
SECURITIES - 5.21%
MISSOURI - 1.13%
Kansas City, Missouri
Individual Development,
5.00%, 10/15/14 (c) $1,500,000 $ 1,500,000
------------
NEW YORK - 1.66%
New York State Energy
Research &
Development, 5.00%,
7/01/15 (c) 1,700,000 1,700,000
City of New York A-7,
5.00%, 10/01/22 (c) 500,000 500,000
------------
2,200,000
------------
TEXAS - 1.74%
Harris County, Texas
Health Facilities, 5.00%,
2/15/27 (c) 2,300,000 2,300,000
------------
WASHINGTON - 0.68%
Washington Health Care,
Sisters of Providence
Series I, 4.05%,
10/01/05 (c) 900,000 900,000
------------
TOTAL SHORT-TERM
MUNICIPAL SECURITIES (COST
$ 6,900,000) 6,900,000
------------
TOTAL INVESTMENTS (COST
$ 132,509,460)-103.59% 137,201,738
OTHER ASSETS LESS
LIABILITIES - (3.59%) (4,751,557)
------------
NET ASSETS - 100.00% $132,450,181
============
</TABLE>
INVESTMENT ABBREVIATIONS
GO - General Obligation
IDA - Industrial Development Authority
OID - Original Issue Discount
PCRB - Pollution Control Revenue Bond
SFM - Single Family Mortgage
VRDN - Variable Rate Demand Note
(a) Effective yield is the yield as calculated at time of purchase at which the
bond accretes on an annual basis until its maturity date.
(b) Represents inverse floating rate securities.
(c) Floating Rate Securities - The rates shown are the effective rates at
March 31, 1999.
* Certain of these securities are used as collateral for options written
contracts.
59
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $90,312,688 and $68,279,000, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $132,509,460. Net unrealized depreciation aggregated
$4,692,278, of which $5,127,601 related to appreciated investment securities and
$435,323 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value
(cost $132,509,460) (Note 2) $137,201,738
Cash 62,828
Receivables
Fund shares sold 1,859,153
Dividends and interest 2,036,819
Variation margin (Note 2) 60,938
------------
TOTAL ASSETS 141,221,476
------------
LIABILITIES
Payables
Investments purchased $7,967,465
Fund shares redeemed 317,601
Dividends 420,673
Accrued expenses and other
liabilities 65,556
----------
TOTAL LIABILITIES 8,771,295
------------
NET ASSETS $132,450,181
============
Net Assets represented by: (Note 2)
Additional paid-in capital $129,086,452
Accumulated distributions in
excess of net investment
income (329,232)
Accumulated net realized loss
on investment transactions (1,046,267)
Net unrealized appreciation
of investments 4,739,228
------------
NET ASSETS $132,450,181
============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.73
Class B Shares $ 15.69
Class Y Shares $ 16.11
OFFERING PRICE PER SHARE
Class A Shares $ 16.51(a)
Class B Shares $ 15.69
Class Y Shares $ 16.11
SHARES OUTSTANDING
Class A Shares 4,558,605
Class B Shares 3,869,243
Class Y Shares 67
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $3,296,816
----------
EXPENSES
Management fee (Note 4) $ 360,928
Shareholder service fee (Note 5) 150,385
Distribution fee (Note 5) 150,302
Administration fee (Note 4) 60,155
Transfer agent fee 53,330
Registration expenses 23,924
Custodian and accounting fees 21,040
Shareholder reports and postage
expenses 11,834
Legal fees 2,909
Audit fees 2,045
Directors' fees and expenses 1,511
Miscellaneous 2,553
----------
Total expenses 840,916
----------
NET INVESTMENT INCOME 2,455,900
----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, FUTURES AND
OPTIONS CONTRACTS
Net realized gain on investments,
futures and options contracts
(Note 2) 957,780
Change in unrealized appreciation
(depreciation) on investments (2,882,930)
----------
NET LOSS ON INVESTMENTS, FUTURES
AND OPTIONS CONTRACTS (1,925,150)
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 530,750
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 2,455,900 $ 4,054,279
Net realized gain (loss) on investments, futures and options contracts 957,780 (41,138)
Change in unrealized appreciation (depreciation) on investments (2,882,930) 3,077,428
------------ -------------
Increase in net assets resulting from operations 530,750 7,090,569
------------ -------------
Distributions to Shareholders
From net investment income
Class A (1,293,015) (1,979,908)
Class B (1,142,196) (2,308,071)
Class Y -- (43)
------------ -------------
Total distributions to shareholders (2,435,211) (4,288,022)
------------ -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 30,176,197 45,477,369
Reinvested distributions 1,362,987 2,625,084
Shares redeemed (8,293,679) (13,461,719)
------------ -------------
Change in net assets resulting from capital share transactions 23,245,505 34,640,734
------------ -------------
Increase in net assets 21,341,044 37,443,281
Net Assets
Beginning of period 111,109,137 73,665,856
------------ -------------
End of period (including accumulated distributions in excess of net
investment income of ($329,232) and ($349,922), respectively) $132,450,181 $ 111,109,137
============ =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.99 $ 15.50
--------- -------
Income from investment operations
Net investment income 0.35 0.66
Net realized and unrealized gain (loss) on investments ( 0.27) 0.59
--------- -------
Total from investment operations 0.08 1.25
--------- -------
Less distributions
From net investment income ( 0.34) ( 0.76)
From net realized capital gain -- --
--------- -------
Total distributions ( 0.34) ( 0.76)
--------- -------
Net asset value, end of year $ 15.73 $ 15.99
========= =======
TOTAL RETURN* 0.52% 8.24%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 71,724 $51,757
Ratio of expenses to average net assets 1.14%(a) 1.17%
Ratio of expenses to average net asset excluding waiver 1.14%(a) 1.17%
Ratio of net investment income to average net assets 4.33%(a) 4.63%
Portfolio turnover rate 56% 62%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.04 $ 14.92 $ 14.42 $ 16.05
------- ------- ------- -------
Income from investment operations
Net investment income 0.81 0.82 0.81 0.82
Net realized and unrealized gain (loss) on investments 0.49 0.12 0.51 ( 1.54)
------- ------- ------- -------
Total from investment operations 1.30 0.94 1.32 ( 0.72)
------- ------- ------- -------
Less distributions
From net investment income ( 0.81) ( 0.82) ( 0.82) ( 0.81)
From net realized capital gain ( 0.03) -- -- ( 0.10)
------- ------- ------- -------
Total distributions ( 0.84) ( 0.82) ( 0.82) ( 0.91)
------- ------- ------- -------
Net asset value, end of year $ 15.50 $ 15.04 $ 14.92 $ 14.42
======= ======= ======= =======
TOTAL RETURN* 8.89% 6.46% 9.46% ( 4.83%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $29,394 $17,558 $20,460 $25,056
Ratio of expenses to average net assets 1.22% 1.24% 1.43% 1.24%
Ratio of expenses to average net asset excluding waiver 1.22% 1.24% 1.43% 1.33%
Ratio of net investment income to average net assets 5.09% 5.47% 5.56% 5.43%
Portfolio turnover rate 59% 46% 43% 87%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized. See
notes to financial statements.
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.94 $ 15.49
--------- -------
Income from investment operations
Net investment income 0.31 1.30
Net realized and unrealized gain (loss) on investments ( 0.26) ( 0.14)
--------- -------
Total from investment operations 0.05 1.16
--------- -------
Less distributions
From net investment income ( 0.30) ( 0.71)
From net realized capital gain -- --
--------- -------
Total distributions ( 0.30) ( 0.71)
--------- -------
Net asset value, end of year $ 15.69 $ 15.94
========= =======
TOTAL RETURN* 0.32% 7.70%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 60,725 $59,351
Ratio of expenses to average net assets 1.65%(a) 1.67%
Ratio of expenses to average net asset excluding waiver 1.65%(a) 1.67%
Ratio of net investment income to average net assets 3.83%(a) 4.13%
Portfolio turnover rate 56% 62%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.05 $ 14.95 $ 14.43 $ 16.06
------- ------- ------- -------
Income from investment operations
Net investment income 0.71 0.75 0.74 0.74
Net realized and unrealized gain (loss) on investments 0.52 0.11 0.52 ( 1.54)
------- ------- ------- -------
Total from investment operations 1.23 0.86 1.26 ( 0.80)
------- ------- ------- -------
Less distributions
From net investment income ( 0.71) ( 0.76) ( 0.74) ( 0.73)
From net realized capital gain ( 0.08) -- -- ( 0.10)
------- ------- ------- -------
Total distributions ( 0.79) ( 0.76) ( 0.74) ( 0.83)
------- ------- ------- -------
Net asset value, end of year $ 15.49 $ 15.05 $ 14.95 $ 14.43
======= ======= ======= =======
TOTAL RETURN* 8.33% 5.87% 9.01% ( 5.34%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $44,272 $37,191 $39,493 $46,157
Ratio of expenses to average net assets 1.72% 1.74% 1.92% 1.74%
Ratio of expenses to average net asset excluding waiver 1.72% 1.74% 1.92% 1.86%
Ratio of net investment income to average net assets 4.60% 4.95% 5.07% 4.93%
Portfolio turnover rate 59% 46% 43% 87%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
3/31/99 ENDED
(UNAUDITED) 9/30/98 (B)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.00 $ 15.51
-------- --------
Income from investment operations
Net investment income 0.35 1.39
Net realized and unrealized loss on investments ( 0.24) ( 0.23)
-------- --------
Total from investment operations 0.11 1.16
-------- --------
Less distributions
From net investment income -- ( 0.67)
-------- --------
Net asset value, end of period $ 16.11 $ 16.00
======== ========
TOTAL RETURN* 0.69% 7.51%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 0.92%(a) 0.92%(a)
Ratio of net investment income to average net assets 4.33%(a) 5.66%(a)
Portfolio turnover rate 56% 62%
</TABLE>
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
63
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
The six-month period ending March 31, 1999 was not kind to the bond market.
Treasury rates increased sharply, with the 2-year note climbing 71 basis points
to 4.98% and the long bond rising 66 basis points to 5.62%. The market sold off
in reaction to much stronger than anticipated economic growth during both the
final quarter of 1998 and the first quarter of 1999.
In early October of 1998, the stock market was weak, world markets were in
turmoil and fears of global deflation were rampant. The crisis in world
financial markets was prompted by Russia's default on its debt obligations, and
was exacerbated by the bankruptcy of the highly leveraged investment firm Long
Term Capital Management. Over the ensuing three-month period the Federal Reserve
lowered the Federal Funds rate 0.75% in response to these alarming market
conditions.
Economists expected U.S. economic growth in 1999 to be significantly depressed
by the severe shock that financial markets experienced during September and
October. These forecasts for slower growth garnered support in early January
when the Brazilian government was forced to devalue their currency, the real.
The sudden drop in the value of the real implied that Brazil would suffer a
fairly deep recession in 1999. In addition, the lower currency value has made
American exports too expensive for Brazilian markets.
Despite turmoil in financial markets and in Brazil, the much-anticipated
slowdown in U.S. economic growth has yet to materialize. Indeed, economic growth
in the final quarter of 1998 surged more than 6.0% on an annualized basis.
Economic indicators for the first quarter of 1999 suggest that the economy has
continued its robust growth into 1999. Some market observers are beginning to
question the aggressiveness with which the Federal Reserve reacted to the market
crisis in late 1998. These economists have gone so far as to suggest that the
Fed should reverse course and raise rates in response to a potentially
overheating American economy. The fear that the Federal Reserve may move to
increase short-term borrowing rates prompted the bond market's severe price
declines and interest rate increases during the first quarter of 1999.
MANAGEMENT STRATEGY
Portfolio durations were 5% to 10% longer than their benchmark indices at the
beginning of 1999. This long duration tilt led to strong relative performance
early in January as the bond market responded to the Brazilian devaluation.
However, as economic data painted an ever-clearer picture of a robust U.S.
economy, portfolio durations were cut back to approximately neutral levels.
Sector allocations were heavily tilted toward spread product. Mortgage backed
securities were particularly emphasized given their high yield and strong
performance potential in a stable to rising rate environment. The stronger
economic growth prompted an increased allocation to lower-rated corporate bonds,
including high yield securities. Portfolio weightings in high yield were
increased from roughly 5% to 10%.
PERFORMANCE REVIEW
Portfolio performance during the six-month period ending March 31, 1999 was
superior to index objectives. Our mortgage overweight and our lower-rated
corporate bond investments allowed our portfolios to outpace indices comprised
of treasury obligations. For the period the Mentor
64
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
Quality Income A share returned -1.16% compared to -2.76% for the Merrill Lynch
7-Year Treasury Index. The Mentor Short-Duration Income Portfolio A shares
returned 0.83% for the period compared to 0.44% for the Merrill Lynch 3-Year
Treasury Index.
MARKET OUTLOOK
Our long-term market outlook is for continued declines in inflation and
therefore continued lower interest rates. This optimism is fueled by structural
economic changes such as the Internet that offer the potential to substantially
increase economic efficiency and reduce costs. In addition, the increasing
productivity of the U.S. labor force suggests that the economy can grow faster
than previously thought without generating inflationary pressures. However,
short-term prospects for the bond market are less clear.
The long-term picture for bonds has continued to improve in recent months.
Brazil's currency devaluation has made their products extremely price
competitive with U.S. made products. Since Brazil is the dominant economy in
Latin America, their devaluation implies falling growth rates for every economy
within the region. Lower growth in Latin America has coincided with slow growth
in Europe. The introduction of a single currency across much of Europe, the
euro, has yet to ignite economic growth in the region. Indeed, the newly created
European central bank has repeatedly revised down its growth estimates for 1999,
and is currently forecasting growth of little more than 2% for the year.
Despite the good news for bonds overseas, domestic U.S. conditions continue to
put upward pressure on interest rates. The U.S. economy has repeatedly defied
predictions of an imminent slowdown. With unemployment as of March hitting 4.2%,
inflation fears are mounting. Despite these fears, most broad measures of
inflation have continued to trend downward. This combination of robust economic
growth and benign inflation is almost unprecedented. As a result, the Federal
Reserve is examining whether old models of the growth and inflation trade-off
accurately describe the new American economy.
Although the Federal Reserve is considering whether or not the U.S. has entered
a new economic era, market participants are understandably reluctant to gamble
on such theoretical notions. Without some evidence of slowing economic growth,
the bond market is likely to at best trade within a fairly narrow range around
current interest rate levels and at worst could continue to decline somewhat.
Given that no signs of a slacking in economic activity are yet apparent, we are
anticipating a range-bound market in the weeks and months ahead. In such an
environment our overweight position in mortgage backed securities and
lower-rated corporate bonds should continue to perform well.
As the summer wears on, we expect that stumbling growth in Europe and Latin
America will exert pressure on the U.S. economy. This pressure on domestic
economic growth and global inflation should allow the rally in bond prices to
continue. We anticipate significantly reducing our exposure to mortgages and
corporate bonds at that time and extending portfolio durations.
65
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Quality Income Portfolio Class A and Class B Shares and the Merrill Lynch 7-Year
Treasury Index.-
[GRAPH]
<TABLE>
<CAPTION>
4/29/92 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99
<S> <C>
Class A Shares(dagger) 9,525 9,846 10,378 10,036 11,222 11,681 12,833 14,110 13,861
Class B Shares(double dagger) 10,000 10,324 10,827 10,406 11,585 11,999 13,113 14,071 13,946
Merrill Lynch 7-Year Treasury Index~ 10,000 11,041 12,345 11,721 13,533 14,043 15,388 17,815 17,324
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception(triple dagger)
Class A 0.76% 5.69% 4.92%
Class B 4.21% 6.18% 5.13%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
- The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. The Merrill Lynch 7-Year Treasury
Index is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class A Shares, after deducting the maximum sales charge of 4.75%
($10,000 investment minus $475 sales charge = $9,525). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The value of Class B Shares reflects a redemption fee
in effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Quality Income Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
3/31/99.
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Quality Income Portfolio Class Y Shares and the Merrill Lynch 7-Year Treasury
Index.-
[GRAPH]
<TABLE>
<CAPTION>
11/19/97 12/31/97 3/31/98 6/30/98 9/30/98 3/31/99
<S> <C>
Class Y Shares* 10,000 10,038 10,144 10,378 10,869 10,758
Merrill Lynch 7-Year Treasury Index~ 10,000 10,142 10,311 10,562 11,364 11,050
</TABLE>
Total Returns as of 3/31/99
1-Year Since Inception**
Class Y 6.06% 5.69%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
- The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvesment
of interest on securities in the index. Ther Merrill Lynch 7-year Treasury
Index is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requries to be reflect in the Portfolio's performance.
* Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Quality Income Portfolio Class Y Shares from
the date of issuance on 11/19/97 through 3/31/99.
66
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class A Shares and the Merrill Lynch 3-Year
Treasury Index.-
[GRAPH]
<TABLE>
<CAPTION>
6/16/95 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99
<S> <C>
Class A Shares* 9,900 9,931 10,532 11,304 12,093 12,194
Merrill Lynch 3-Year Treasury Index~ 10,000 10,139 11,038 11,571 12,732 12,788
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception**
Class A 4.28% 5.37%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
- The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. It is not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. The Portfolio invests in securities other than
Treasuries.
* Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class A Shares, after deducting the maximum sales charge of
1.00% ($10,000 investment minus $100 sales charges = $9,900. The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class A from
the date of issuance on 6/16/95 through 3/31/99.
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class B Shares and Merrill Lynch 3-year
Treasury Index.-
[GRAPH]
<TABLE>
<CAPTION>
4/29/94 12/31/94 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99
<S> <C>
Class B Shares(dagger) 10,000 10,093 10,623 11,225 12,125 12,945 13,043
Merrill Lynch 3-Year Treasury Index~ 10,000 10,075 11,051 11,709 12,600 13,053 13,924
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception(double dagger)
Class B 4.12% 5.87%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
- The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. It is not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. The Portfolio invests in securities other than
Treasuries.
+ Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The value of Class B Shares reflects a redemption fee
in effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Short-Duration Income Portfolio Class B
Shares from the date of commencement of operations on 4/29/94 through
3/31/99.
67
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class Y Shares and the Merrill Lynch 3-Year
Treasury Index.-
[GRAPH]
<TABLE>
<CAPTION>
11/19/97 12/31/97 3/31/98 6/30/98 9/30/98 3/31/99
<S> <C>
Class Y Shares* 10,000 10,032 10,167 10,317 10,638 10,746
Merrill Lynch 3-Year Treasury Index~ 10,000 10,081 10,239 10,413 10,875 10,923
</TABLE>
Total Returns as of 3/31/99
1-Year Since Inception**
Class Y 5.70% 5.61%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
- The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. It is not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. The Portfolio invests in securities other than
Treasuries.
* Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class Y Shares. These shares are not subject to any sales
or contingent deferred sales charges. The Class Y Shares' performance
assumes the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class Y from
the date of issuance on 11/19/97 through 3/31/99.
68
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
LONG-TERM INVESTMENTS - 134.54%
PREFERRED STOCK - 1.84%
Home Ownership, Inc.,
12/30/26 (cost $3,796,225) $4,350,000 $ 4,075,438
-----------
ASSET-BACKED SECURITIES - 20.93%
Advanta Mortgage Loan Trust
Series 1993-4 AZ, 5.55%,
3/25/10 693,663 682,548
Advanta Mortgage Loan Trust
Series 1993-3 A5, 5.55%,
1/25/25 990,524 962,672
AFG Receivables Trust Series
1997-B C, 7.00%, 2/15/03 941,241 943,079
Capital One Master Trust
Series 1998-4 A, 5.43%,
1/15/07 2,535,000 2,493,557
CS First Boston Mortgage
Series 1996-2 A6, 7.18%,
2/25/18 6,500,000 6,528,190
Discover Card Master Trust
Series 1998-7 A, 5.60%,
5/15/06 3,005,000 2,970,016
Equifax Credit Corporation of
America
Series 1998-2 A6F, 6.16%,
4/15/08 2,370,000 2,371,822
Series 1994-1 B, 5.75%,
3/15/09 1,253,328 1,251,187
Series 1999-1 A6F, 6.20%,
9/20/09 5,250,000 5,217,834
Series 1998-2 A4F, 6.33%,
1/15/22 1,800,000 1,804,784
Fifth Third Auto Grantor
Trust Series 1996-A A,
6.20%, 9/15/01 435,617 436,476
First USA Credit Card Master
Trust, 1998-9 A, 5.28%,
9/18/06 2,700,000 2,652,729
General Electric Capital
Mortgage, - 6.27%, Series
1999-HE1 A7, 4/25/29 4,000,000 3,961,951
Green Tree Home Equity,
Series 1999-A A5, 6.13%,
2/15/19 3,900,000 3,896,482
J.C. Penney Master Credit
Card Trust, Series 1998-E
A, 5.50%, 6/15/07 4,000,000 3,931,427
Key Auto Finance Trust Series
1997-2 A4, 6.15%,
10/15/01 1,500,000 1,505,792
Old Stone Credit Corporation,
Series 93-1 B1, 6.00%,
3/15/08 520,913 521,875
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
ASSET-BACKED SECURITIES (CONTINUED)
Saxon Asset Securities Series
1999-1 AF6, 6.35%,
2/25/29 $4,000,000 $ 4,012,999
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $24,821,467) 46,145,420
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES -- 69.94%
Federal Home Loan Mortgage
Association
Series 26 C, 6.50%, 7/25/18 7,000,000 7,032,774
Series 1693 Z, 6.00%,
3/15/09, REMIC 6,301,827 6,138,331
Series 1647 B, 6.50%,
11/15/08, REMIC 2,201,275 2,204,038
Federal National Mortgage
Association Series 1993-181
O, 6.50%, 9/25/08 2,335,000 2,333,916
6.00% - 6.50%, 1/01/00 20,500,000 20,175,313
6.00%, 12/01/13 3,479,988 3,456,991
Series 1998-24 JZ, 6.50%,
5/18/28 2,028,936 2,008,577
Government National
Mortgage Association I
6.00% - 6.50%, 3/15/28 -
1/15/29 ARM 39,414,072 38,749,338
6.00% - 7.00%,
12/15/08 - 3/15/29 67,400,000 69,309,762
Government National
Mortgage Association II
6.13% - 6.88%, 4/20/22 -
12/20/22, ARM 2,765,717 2,820,511
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES (COST
$ 154,747,659) 154,229,551
-----------
CORPORATE BONDS - 19.95% FINANCIAL - 6.28% Capital One Bank, 7.15% -
7.20%, 7/19/99 -
9/15/06 4,750,000 4,780,917
CIT Group, Inc. 5.91%,
11/23/05 3,000,000 2,937,333
Ford Capital, 9.88%, 5/15/02 2,525,000 2,813,162
Household Financial
Company, 5.88%, 2/01/09 1,300,000 1,248,897
Salomon, Inc., 7.30%, 5/15/02 2,000,000 2,078,222
-----------
13,858,531
-----------
INDUSTRIAL - 13.27%
Adelphia Communications,
9.88%, 3/01/05 625,000 678,125
</TABLE>
69
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
INDUSTRIAL (CONTINUED)
Capstar Broadcasting, 9.25%,
7/01/07 $ 700,000 $ 740,250
Century Communications,
9.50%, 8/15/00 1,400,000 1,441,774
Chancellor Media
Corporation, 9.00%,
10/01/08 800,000 856,000
Charter Communications,
8.63%, 4/01/09 (a) 1,200,000 1,227,000
Clearnet Communications,
12/15/05 550,000 504,625
Comcast Cellular, 9.50%,
5/01/07 1,750,000 1,986,250
CSC Holdings, Inc., 9.88%,
5/15/06 750,000 819,375
Enron Corporation, 6.73%,
11/17/08 4,000,000 4,027,516
JCAC, Inc., 10.13%, 6/15/06 750,000 823,125
Jitney-Jingle Stores, 12.00%,
3/01/06 1,500,000 1,668,750
Lenfest Communications,
7.63%, 2/15/08 530,000 540,600
McLeodUSA, Inc., 9.25%,
7/15/07 1,400,000 1,466,500
Metromedia Fiber, 10.00%,
11/15/08 1,120,000 1,201,200
Microcell Telecomm, 14.00%,
6/01/06 420,000 343,350
Nextel Communications,
10.65%, 9/15/07 750,000 551,250
PSINet, Inc., 10.00%,
2/15/05 785,000 828,175
Randall's Food Marketings,
9.38%, 7/01/07 1,145,000 1,242,325
RBF Finance, 11.38%,
3/15/09 (a) 250,000 263,750
Rogers Cablesystems,
9.63% - 10.00%,
8/01/02 - 3/15/05 1,600,000 1,762,000
Rogers Cantel, 8.80%,
10/01/07 1,250,000 1,306,250
Safeway, Inc., 6.50%,
11/15/08 2,000,000 2,028,692
Sprint Capital Corporation,
6.13%, 11/15/08 3,000,000 2,953,358
-----------
29,260,240
-----------
UTILITY - 0.40%
CMS Energy Corporation,
6.75%, 1/15/04 900,000 885,600
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TOTAL CORPORATE BONDS
(COST $46,813,941) $44,004,371
-----------
MISCELLANEOUS - 0.47%
Platex Family Production
Corporation
8.88%, 7/15/04 (cost
$ 1,050,599) $1,000,000 1,035,000
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 17.71%
BA Mortgage Securities B1,
6.50%, 7/25/13 420,848 411,549
BA Mortgage Securities M,
6.50%, 7/25/13 649,696 642,073
Chase Mortgage Finance
Corporation
Series 1993-C B1, 7.00%,
10/25/24 2,854,534 2,858,996
General Electric Capital
Mortgage
Series 1993-18 B1, 6.00%,
2/25/09 1,827,816 1,769,918
Series 1998-13 M, 6.50%,
6/25/13 1,122,946 1,111,956
Series 1998-01 M, 6.75%,
1/25/13 716,397 715,215
Series 1998-03 M, 7.00%,
1/25/28 2,713,700 2,713,145
Norwest Asset Securities
Corporation
Series 1996-2 M, 7.00%,
9/25/11 1,706,660 1,713,853
Series 1997-18 B1, 6.75%,
12/25/27 2,574,548 2,529,457
Series 1998-22 B1, 6.25%,
9/25/28 2,146,841 2,069,647
Series 1998-22 B2, 6.25%,
9/25/28 3,109,938 2,968,642
NationsBanc Montgomery
Funding Corporation
Series 1998-5 M, 6.00%,
11/25/13 2,089,024 1,997,678
Series 1998-5 B1, 6.00,
11/25/13 974,520 919,168
Series 1998-4 B2, 6.25%,
10/25/28 2,583,242 2,428,918
Prudential Homes
Series 1996-4 B1, 6.50%,
4/25/26 871,544 848,835
Series 1996-4 M, 6.50%,
4/25/26 4,269,598 4,191,860
</TABLE>
70
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Prudential Homes
Series 1996-8 M, 6.75%,
6/25/26 $2,326,163 $ 2,312,068
Series 1995-7 M, 7.00%,
11/25/25 2,795,735 2,807,699
Series 1995-5 B1, 7.25%,
9/25/25 (a) 1,444,123 1,455,785
Series 1995-5 M, 7.25%,
9/25/25 2,546,471 2,584,484
------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS (COST
$ 57,268,043) 39,050,946
------------
RESIDUAL INTERESTS - 3.70%
Capital Mortgage Funding
1999-1, 10/20/22 14,088 410,616
Capital Mortgage Funding
1999-2, 10/20/23 15,369 422,935
Capital Mortgage Funding
1999-3, 11/20/23 15,928 432,212
Capital Mortgage Funding
1998-1, 1999, 1/22/27 40,016 671,630
General Mortgage Securities II
1995-1, 1998, 6/25/20 9,057 304,207
General Mortgage Securities II
1998-5, 9/20/21 28,489 628,261
General Mortgage Securities II
1997-4 1998, 5/20/22 9,802 438,928
General Mortgage Securities II
1998-6, 7/20/22 30,853 648,487
General Mortgage Securities II
1995-4, 1998, 6/25/23 6,267 339,970
General Mortgage Securities II
1997-5 1998, 7/20/23 18,194 641,663
General Mortgage Securities II
1999-1, 8/20/24 40,000 658,476
General Mortgage Securities II
1998-1, 10/20/24 21,132 590,657
General Mortgage Securities II
1998-2, 10/20/24 27,670 434,402
National Mortgage Funding
1995-4, 1998, 3/20/21 5,019 102,273
National Mortgage Funding
1998-9, 11/20/22 24,128 460,073
National Mortgage Funding
1998-10, 1/20/23 13,573 503,279
National Mortgage Funding
1998-8, 5/20/24 28,801 480,355
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
RESIDUAL INTERESTS (CONTINUED)
TOTAL RESIDUAL INTERESTS (COST
$ 8,635,785) 8,168,424
------------
TOTAL LONG-TERM INVESTMENTS
(COST $297,133,719) $296,709,150
------------
SHORT-TERM INVESTMENT - 0.21%
REPURCHASE AGREEMENT
Goldman Sachs & Company Dated 3/31/99, 4.95%, due 4/01/99, collateralized by
$445,241 Federal Home Loan Mortgage Corporation, 7.50%, 11/01/27, market
value $457,485 (cost $447,914) $ 447,914 447,914
------------
TOTAL INVESTMENTS
(COST $297,581,633)-
134.75% 297,157,064
OTHER ASSETS LESS LIABILITIES -
(34.75%) (76,639,834)
------------
NET ASSETS - 100.00% $220,517,230
============
</TABLE>
INVESTMENT ABBREVIATIONS
ARM -- Adjustable Rate Mortgage
REMIC -- Real Estate Mortgage Investment Conduit
(a)These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $384,867,076 and $357,935,935, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $297,581,633. Net unrealized depreciation aggregated
$424,569, of which $2,019,646 related to appreciated investment securities and
$2,444,215 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
71
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
ASSET-BACKED SECURITIES - 11.60%
Advanta Home Equity Loan,
6.15%, 10/25/09 $ 617,283 $ 616,032
Advanta Mortgage Loan
Trust, 5.05%, 3/25/10 277,581 273,134
Advanta Mortgage Loan
Trust 1993-3 A3,
4.75%, 2/25/10 402,385 397,700
AFC Home Equity Loan
Trust, 6.60%, 2/25/27 1,395,483 1,394,227
AFG Receivables Trust,
6.45%, 9/15/00 (a) 145,295 145,295
7.05%, 4/15/01 (a) 239,677 239,889
7.00%, 2/15/03 (a) 705,931 707,309
AFG Receivables Trust
1997 A, 6.35%, 10/15/02 1,036,846 1,041,669
AFG Receivables Trust
1997 B, 6.20%, 2/15/2003 94,118 94,114
Capital One Master Trust
1998-4, 5.43%, 1/15/07 2,000,000 1,967,303
CS First Boston 1996-2,
6.39%, 2/25/18 675,598 673,292
7.18%, 2/25/18 4,000,000 4,017,347
Equifax Credit Corporation
1994-1 B, 5.75%, 3/15/09 398,474 397,793
Fifth Third Bank Auto
Grantor Trust, 6.20%,
9/15/01 218,032 218,462
MMCA Automobile Trust
1999-1, 5.50%, 7/15/05 3,000,000 2,993,466
Old Stone Credit Corporation
1993-2, 6.20%, 6/15/08 230,854 231,783
Olympic Automobiles
Receivables Trust 1994-B
A2, 6.85%, 6/15/01 388,097 388,097
Olympic Automobiles
Receivables Trust,
7.35%, 10/15/01 605,458 607,451
Perpetual Savings Bank
1990-1, 7.17%, 3/01/20 2,319,946 2,311,340
Union Acceptance
Corporation Auto Trust
1997 A,
6.48%, 5/10/04 430,000 434,644
Union Acceptance
Corporation,
6,70%, 6/08/03 2,020,000 2,036,827
6.45%, 7/09/03 593,504 597,274
Union Acceptance
Corporation 1998-D A3,
5.75%, 6/09/03 2,400,000 2,391,536
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $24,212,755) 24,175,984
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 49.00%
Federal National Mortgage
Association
10.00%, 6/01/05 MBS $ 136,411 $ 141,174
6.00%, 11/01/13 - 4/01/14 37,051,196 36,750,156
9.00%, 5/01/14 ARM 4,580,657 4,626,474
7.00%, 12/15/08 ARM 24,470,286 24,844,881
6.00%, 11/15/13 1,985,917 1,977,229
6.00%, 12/15/13 -
1/15/14 ARM 7,787,433 7,753,363
6.63%, 7/20/22 3,101,843 3,173,415
6.50%, 3/15/28 ARM 2,879,888 2,866,389
6.50%, 6/15/28 MBS 2,799,999 2,786,874
Government National
Mortgage Association II
7.00%, 11/20/22 2,083,124 2,124,688
6.88%, 4/20/22 5,227,054 5,347,726
6.13%, 10/20/22-12/20/22 4,084,247 4,163,533
6.63%, 9/20/23 732,024 748,693
U.S. Treasury Bonds, 4.25%,
11/15/03 5,000,000 4,834,000
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $102,541,046) 102,138,595
-----------
COLLATERALIZED MORTGAGE
OBLIGATION - 22.39%
Chase 1999-S3 B1, 6.25%,
3/25/14 401,178 387,032
Chase 1999-S3 M, 6.25%,
3/25/14 1,260,846 1,233,774
Citigroup 1992-18 A-A,
6.60%, 11/25/22 7,570,244 7,617,880
Equifax Credit Corporation,
1998-2, 6.16%, 4/15/08 1,926,750 1,928,231
1999-1 A6F, 6.20%,
9/20/09 4,750,000 4,720,897
1998-A, 6.33%, 1/15/22 1,350,000 1,353,588
First USA Credit Card Master
Trust 1998-9 1997, 5.28%,
9/18/06 2,300,000 2,259,732
Glendale Federal Bank
1990-1 A, 6.60%, 10/25/29 5,222,348 5,222,253
Green Tree Home Equity
Loan Trust 1999-4, 6.13%,
2/15/19 3,100,000 3,097,204
J.C. Penney Master Credit
Card Trust 1998-E, 5.50%,
6/15/07 3,575,000 3,513,713
Key Auto Finance Trust,
6.15%, 10/15/01 4,000,000 4,015,444
Saxon 1995-1A A1, 7.52%,
4/25/25 3,693,031 3,713,644
</TABLE>
72
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATION (CONTINUED)
Saxon Asset Securities Trust
1999-1 AF3, 6.17%, 8/25/21 $ 3,000,000 $ 2,997,277
Saxon Asset Securities Trust,
6.27%, 7/25/23 3,800,000 3,805,955
Structured Asset Securities
Corporation, 6.19%,
10/25/28 816,176 816,177
------------
TOTAL COLLATERIZED MORTGAGE
OBLIGATIONS
(COST $46,792,705) 46,682,801
------------
CORPORATE BONDS - 20.26%
Adelphia Communications,
7.50%, 1/15/04 1,000,000 996,250
Argosy Gaming Company,
13.25%, 6/01/04 (a) 1,000,000 1,132,500
Associates Corporation, NA,
7.88%, 9/30/01 1,000,000 1,051,554
Capital One Bank,
7.20%, 7/19/99 1,500,000 1,509,421
7.15%, 9/15/06 1,000,000 1,006,642
Carr-Gottstein Foods
Company, 12.00%,
11/15/05 1,500,000 1,725,000
Century Communications,
9.50%, 8/15/00 1,207,000 1,243,210
Clearnet Communications,
14.75%, 12/15/05 850,000 779,875
CMS Energy Corporation,
6.75%, 1/15/04 1,000,000 984,000
CSC Holdings, Inc., 9.88%,
5/15/06 750,000 819,375
Discover Card Master Trust I,
1998-7, 5.60%, 5/15/06 2,000,000 1,976,716
Ford Capital, 9.88%, 5/15/02 2,525,000 2,813,162
General Motors Acceptance
Corporation,
6.88%, 7/15/01 2,250,000 2,306,781
JCAC Inc., 10.13%, 6/15/06 1,250,000 1,371,875
Jitney-Jungle Stores, 12.00%,
3/01/06 1,500,000 1,668,750
Lehman, 6.20%, 1/15/02 2,000,000 1,978,146
Nextel Communications,
9.75%, 8/15/04 1,000,000 1,037,500
Playtex Products, 8.88%,
7/15/04 1,000,000 1,035,000
PSI Energy, Inc., 6.00%,
12/14/01 (a) 2,000,000 1,975,529
PSINet, Inc., 10.00%, 2/15/05 750,000 791,250
Randall's Food Marketings,
9.38%, 7/01/07 925,000 1,003,625
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
Rogers Cablesystems, 9.63%,
8/01/02 $ 1,057,000 $ 1,133,632
Rogers Cablesystems,
10.00%, 3/15/05 650,000 734,500
Salomon, Inc., 7.25%,
5/01/01 2,250,000 2,317,981
Salomon, Inc., 7.30%,
5/15/02 1,000,000 1,039,111
Shoppers Food Warehouse,
9.75%, 6/15/04 1,500,000 1,631,250
Sprint Capital Corporation,
5.70%, 11/15/03 2,155,000 2,129,921
The Money Store, 6.28%,
12/15/22 4,000,000 4,034,731
------------
TOTAL CORPORATE BONDS
(COST $42,208,731) 42,227,287
------------
RESIDUAL INTERESTS (A) - 1.29%
General Mortgage Funding II,
1997-4 1998, 5/20/22 3,267 145,339
General Mortgage Funding II,
1998-1, 10/20/24 14,088 393,771
General Mortgage Funding II,
1999-1, 8/20/24 30,000 492,850
National Mortgage Funding I,
1998-6, 1/20/23 47,266 669,012
National Mortgage Funding I,
1998-7, 7/20/23 44,360 670,734
National Mortgage Funding I,
1998-8, 5/20/24 19,201 320,236
------------
TOTAL RESIDUAL INTERESTS
(COST $2,815,666) 2,691,942
------------
SHORT-TERM
INVESTMENT - 7.93%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%,
due 4/01/99, collateralized by
$19,026,000 Federal Home Loan
Mortgage Corporation, 7.00%,
5/01/28, market value
$16,887,351
(cost $16,529,179) 16,529,179 16,529,179
------------
TOTAL INVESTMENTS
(COST $235,100,082)-112.47% 234,445,788
OTHER ASSETS LESS
LIABILITIES - (12.47%) (25,998,859)
------------
NET ASSETS - 100.00% $208,446,929
============
</TABLE>
73
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT ABBREVIATIONS
ARM - Adjustable Rate Mortgage
MBS - Mortgage Backed Securities
(a) These are securities that may be resold to "qualified institutional buyers"
under rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $447,271,432 and $361,018,924, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $235,100,082. Net unrealized depreciation aggregated
$654,294 of which $535,181 related to appreciated investment securities and
$1,189,475 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
74
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $296,709,150
Repurchase agreements 447,914
------------
Total investments
(cost $297,581,633) 297,157,064
Collateral for securities
loaned (Note 2) 341,000
Receivables
Investments sold 13,304,297
Fund shares sold 573,083
Dividends and interest 2,710,870
Other 43,892
------------
TOTAL ASSETS 314,130,206
------------
LIABILITIES
Payables
Securities loaned (Note 2) $ 341,000
Reverse repurchase
agreement 71,419,000
Investments purchased 20,334,685
Fund shares redeemed 287,986
Dividends 1,007,199
Accrued expenses and other
liabilities 223,106
----------
TOTAL LIABILITIES 93,612,976
------------
NET ASSETS $220,517,230
============
Net Assets represented by: (Note 2)
Additional paid-in capital $236,027,963
Accumulated
distributions in excess
of net investment
income (1,194,808)
Accumulated net realized
loss on investment
transactions (13,891,356)
Net unrealized
depreciation of
investments (424,569)
------------
NET ASSETS $220,517,230
============
NET ASSET VALUE PER SHARE
Class A Shares $ 13.05
Class B Shares $ 13.04
Class Y Shares $ 13.55
OFFERING PRICE PER SHARE
Class A Shares $ 13.70(a)
Class B Shares $ 13.04
Class Y Shares $ 13.55
SHARES OUTSTANDING
Class A Shares 8,450,057
Class B Shares 8,453,227
Class Y Shares 80
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (b) (Note 2) $ 7,236,750
-----------
EXPENSES
Management fee (Note 4) $ 631,092
Distribution fee (Note 5) 273,958
Shareholder service fee (Note 5) 262,954
Transfer agent fee 153,950
Administration fee (Note 4) 105,182
Registration expenses 43,688
Custodian and accounting fees 42,537
Shareholder reports and postage
expenses 31,474
Audit fees 11,021
Legal fees 7,259
Directors' fees and expenses 3,771
Miscellaneous 6,372
----------
Total expenses 1,573,258
-----------
Deduct
Waiver of management fee
(Note 4) (194,745)
-----------
NET INVESTMENT INCOME 5,858,237
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on investments
(Note 2) 402,920
Change in unrealized appreciation
(depreciation) on investments (8,898,636)
----------
NET LOSS ON INVESTMENTS (8,495,716)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $(2,637,479)
===========
</TABLE>
(b) Net of interest expense of $1,604,124 related to borrowings.
SEE NOTES TO FINANCIAL STATEMENTS.
75
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 5,858,237 $ 9,334,606
Net realized gain on investments 402,920 713,191
Change in unrealized appreciation (depreciation) on investments (8,898,636) 6,558,180
------------- -------------
Increase in net assets resulting from operations (2,637,479) 16,605,977
------------- -------------
Distributions to Shareholders
From net investment income
Class A (3,050,569) (4,831,082)
Class B (3,078,903) (5,431,749)
Class Y -- (51)
------------- -------------
Total distributions to shareholders (6,129,472) (10,262,882)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 51,165,151 106,644,051
Reinvested distributions 4,065,893 6,677,759
Shares redeemed (33,128,128) (40,705,601)
------------- -------------
Change in net assets resulting from capital share transactions 22,102,916 72,616,209
------------- -------------
Increase in net assets 13,335,965 78,959,304
Net Assets
Beginning of period 207,181,265 128,221,961
------------- -------------
End of period (including accumulated distributions in excess of net investment
income of ($1,194,808) and ($923,573), respectively) $ 220,517,230 $ 207,181,265
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.61 $ 13.18
--------- -------
Income from investment operations
Net investment income 0.39 0.79
Net realized and unrealized gain (loss) on
investments (0.55) 0.47
--------- -------
Total from investment operations (0.16) 1.26
--------- -------
Less distributions
From net investment income (0.40) (0.83)
--------- -------
Net asset value, end of year $ 13.05 $ 13.61
========= =======
TOTAL RETURN* (1.16%) 9.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 110,263 $94,279
Ratio of expenses to average net assets 1.05%(a) 1.05%
Ratio of expenses to average net asset excluding
waiver 1.14%(a) 1.18%
Ratio of net investment income to average net assets 5.83%(a) 5.73%
Portfolio turnover rate 121% 114%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 12.91 $ 13.29 $ 12.75 $ 14.04
------- ------- ------- -------
Income from investment operations
Net investment income 0.97 0.89 0.84 0.84
Net realized and unrealized gain (loss) on
investments 0.26 (0.37) 0.61 (1.30)
------- ------- ------- -------
Total from investment operations 1.23 0.52 1.45 (0.46)
------- ------- ------- -------
Less distributions
From net investment income (0.96) (0.90) (0.91) (0.83)
------- ------- ------- -------
Net asset value, end of year $ 13.18 $ 12.91 $ 13.29 $ 12.75
======= ======= ======= =======
TOTAL RETURN* 9.86% 4.09% 11.82% (3.39%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $53,176 $21,092 $24,472 $30,142
Ratio of expenses to average net assets 1.05% 1.05% 1.32% 1.38%
Ratio of expenses to average net asset excluding
waiver 1.18% 1.31% 1.36% 1.39%
Ratio of net investment income to average net assets 7.01% 6.84% 6.73% 6.33%
Portfolio turnover rate 100% 254% 368% 455%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
76
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.61 $ 13.18
--------- --------
Income from investment operations
Net investment income 0.35 0.72
Net realized and unrealized gain (loss) on
investments (0.55) 0.48
--------- --------
Total from investment operations (0.20) 1.20
--------- --------
Less distributions
From net investment income (0.37) (0.77)
--------- --------
Net asset value, end of year $ 13.04 $ 13.61
========= ========
TOTAL RETURN* (1.46%) 9.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 110,253 $112,901
Ratio of expenses to average net assets 1.55%(a) 1.55%
Ratio of expenses to average net asset excluding
waiver 1.74%(a) 1.67%
Ratio of net investment income to average net assets 5.33%(a) 5.22%
Portfolio turnover rate 121% 114%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 12.93 $ 13.31 $ 12.76 $ 14.06
------- ------- ------- -------
Income from investment operations
Net investment income 0.86 0.84 0.79 0.82
Net realized and unrealized gain (loss) on
investments 0.30 (0.38) 0.61 (1.37)
------- ------- ------- -------
Total from investment operations 1.16 0.46 1.40 (0.55)
------- ------- ------- -------
Less distributions
From net investment income (0.91) (0.84) (0.85) (0.75)
------- ------- ------- -------
Net asset value, end of year $ 13.18 $ 12.93 $ 13.31 $ 12.76
======= ======= ======= =======
TOTAL RETURN* 9.29% 3.57% 11.33% (3.97%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $75,046 $58,239 $62,155 $77,888
Ratio of expenses to average net assets 1.55% 1.55% 1.74% 1.88%
Ratio of expenses to average net asset excluding
waiver 1.68% 1.81% 1.79% 1.90%
Ratio of net investment income to average net assets 6.51% 6.36% 6.24% 6.21%
Portfolio turnover rate 100% 254% 368% 455%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (b)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69 $ 13.20
-------- --------
Income from investment operations
Net investment income 0.39 0.78
Net realized and unrealized gain (loss) on investments (0.53) 0.39
-------- --------
Total from investment operations (0.14) 1.17
-------- --------
Less distributions
From net investment income -- (0.68)
-------- --------
Net asset value, end of period $ 13.55 $ 13.69
======== ========
TOTAL RETURN* (1.02%) 8.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 0.80%(a) 0.80%(a)
Ratio of expenses to average net assets exluding waiver 0.99%(a) 0.93%(a)
Ratio of net investment income to average net assets 5.83%(a) 7.09%(a)
Portfolio turnover rate 121% 114%
</TABLE>
(a) Annualized.
(b) for the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
77
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $217,916,609
Repurchase agreements 16,529,179
------------
Total investments
(cost $235,100,082) 234,445,788
Cash
Receivables 30,939
Investments sold 12,842,753
Fund shares sold 6,342,238
Dividends and interest 2,078,786
Deferred expenses (Note 2) 21,970
------------
TOTAL ASSETS 255,762,474
------------
LIABILITIES
Payables
Investments purchased $16,346,132
Reverse repurchase
agreement 29,000,000
Fund shares redeemed 1,006,854
Dividends 828,582
Accrued expenses and other
liabilities 133,977
-----------
TOTAL LIABILITIES 47,315,545
------------
NET ASSETS $208,446,929
============
Net Assets represented by: (Note 2)
Additional paid-in capital $209,980,897
Accumulated distributions in
excess of net investment
income (764,158)
Accumulated net realized loss
on investment transactions (115,517)
Net unrealized depreciation
of investments (654,293)
------------
NET ASSETS $208,446,929
============
NET ASSET VALUE PER SHARE
Class A Shares $ 12.49
Class B Shares $ 12.51
Class Y Shares $ 12.92
OFFERING PRICE PER SHARE
Class A Shares $ 12.62(a)
Class B Shares $ 12.51
Class Y Shares $ 12.92
SHARES OUTSTANDING
Class A Shares 12,368,595
Class B Shares 4,310,930
Class Y Shares 83
</TABLE>
(a) Computation of offering price: 100/99 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $5,246,726
----------
EXPENSES
Management fee (Note 4) $ 439,105
Shareholder service fee (Note 5) 219,551
Administration fee (Note 4) 88,030
Distribution fee (Note 5) 82,684
Transfer agent fee 64,278
Custodian and accounting fees 25,415
Registration expenses 24,322
Organizational expenses 12,620
Shareholder reports and postage
expenses 11,143
Legal fees 3,965
Audit fees 2,788
Directors' fees and expenses 2,059
Miscellaneous 3,479
----------
Total expenses 979,439
----------
Deduct
Waiver of administration fee
(Note 4) (88,030)
Waiver of management fee
(Note 4) (52,159)
----------
NET INVESTMENT INCOME 4,407,476
----------
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS
Net realized loss on investments
(Note 2) (102,249)
Change in unrealized appreciation
(depreciation) on investments (2,564,213)
----------
NET LOSS ON INVESTMENTS (2,666,462)
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $1,741,014
==========
</TABLE>
(a) Net of interest expense of $163,166 related to borrowings.
SEE NOTES TO FINANCIAL STATEMENTS.
78
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 4,407,476 $ 5,167,036
Net realized gain (loss) on investments (102,249) 325,954
Change in unrealized appreciation (depreciation) on investments (2,564,213) 1,608,387
------------- -------------
Increase in net assets resulting from operations 1,741,014 7,101,377
------------- -------------
Distributions to Shareholders
From net investment income
Class A (3,256,831) (3,203,099)
Class B (1,402,510) (2,394,223)
Class Y -- (49)
From net realized gain on investments
Class A (110,579) --
Class B (46,577) --
------------- -------------
Total distributions to shareholders (4,816,497) (5,597,371)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 111,629,716 169,053,248
Reinvested distributions 3,456,128 4,352,285
Shares redeemed (50,607,871) (82,572,822)
------------- -------------
Change in net assets resulting from capital share transactions 64,477,973 90,832,711
------------- -------------
Increase in net assets 61,402,490 92,336,717
Net Assets
Beginning of period 147,044,439 54,707,722
------------- -------------
End of period (including accumulated distributions in excess of net investment income
of ($764,158) and ($512,293), respectively) $ 208,446,929 $ 147,044,439
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR YEAR PERIOD
ENDED 3/31/99 ENDED ENDED ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97 9/30/96 9/30/95 (c)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.74 $ 12.62 $ 12.50 $ 12.68 $ 12.74
-------- ------- ------- ------- --------
Income from investment operations
Net investment income 0.35 0.70 0.77 0.82 0.22
Net realized and unrealized gain (loss) on investments (0.25) 0.15 0.12 (0.23) (0.03)
-------- ------- ------- -------- --------
Total from investment operations 0.10 0.85 0.89 0.59 0.19
-------- ------- ------- -------- --------
Less distributions
From net investment income (0.35) (0.73) (0.77) (0.77) (0.25)
-------- ------- ------- -------- --------
Net asset value, end of period $ 12.49 $ 12.74 $ 12.62 $ 12.50 $ 12.68
======== ======= ======= ======== ========
TOTAL RETURN* 0.84% 6.98% 7.33% 4.80% 1.51%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $154,509 $93,135 $27,619 $ 7,450 $ 1,002
Ratio of expenses to average net assets 0.86%(a) 0.86% 0.86% 0.86% 0.71%(a)
Ratio of expenses to average net asset excluding waiver 1.02%(a) 1.14% 1.12% 1.26% 1.00%(a)
Ratio of net investment income to average net assets 5.10%(a) 5.24% 6.00% 5.90% 4.10%(a)
Portfolio turnover rate 186% 171% 75% 411% 126%
</TABLE>
(a) Annualized.
(c) For the period from June 16, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
79
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED 3/31/99 ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.75 $ 12.62 $ 12.50
--------- ------- -------
Income from investment operations
Net investment income 0.31 0.66 0.73
Net realized and unrealized gain (loss) on
investments (0.22) 0.16 0.12
--------- ------- -------
Total from investment operations 0.09 0.82 0.85
--------- ------- -------
Less distributions
From net investment income (0.33) (0.69) (0.73)
--------- ------- -------
Net asset value, end of period $ 12.51 $ 12.75 $ 12.62
========= ======= =======
TOTAL RETURN* 0.72% 6.68% 6.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 53,937 $53,908 $27,089
Ratio of expenses to average net assets 1.16%(a) 1.16% 1.16%
Ratio of expenses to average net asset excluding
waiver 1.32%(a) 1.44% 1.42%
Ratio of net investment income to average net assets 4.80%(a) 4.94% 5.70%
Portfolio turnover rate 186% 171% 75%
<CAPTION>
YEAR PERIOD PERIOD
ENDED ENDED ENDED
9/30/96 9/30/95 (D) 12/31/94 (e)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.67 $ 12.18 $ 12.50
------- ------- ---------
Income from investment operations
Net investment income 0.73 0.59 0.41
Net realized and unrealized gain (loss) on
investments (0.17) 0.52 (0.29)
------- ------- ---------
Total from investment operations 0.56 1.11 0.12
------- ------- ---------
Less distributions
From net investment income (0.73) (0.62) (0.44)
------- ------- ---------
Net asset value, end of period $ 12.50 $ 12.67 $ 12.18
======= ======= =========
TOTAL RETURN* 4.53% 9.22% 0.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $24,517 $19,871 $ 17,144
Ratio of expenses to average net assets 1.16% 1.20% 1.29%(a)
Ratio of expenses to average net asset excluding
waiver 1.56% 1.70% 1.29%(a)
Ratio of net investment income to average net assets 5.60% 5.04% 4.90%(a)
Portfolio turnover rate 411% 126% 166%
</TABLE>
(a) Annualized.
(d) For the period from January 1, 1995 to September 30, 1995.
(e) For the period from April 29, 1994 (commencement of operations) to
December 31, 1994.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (f)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.79 $ 12.57
-------- --------
Income from investment operations
Net investment income 0.33 0.67
Net realized and unrealized gain (loss) on investments (0.20) 0.16
-------- --------
Total from investment operations 0.13 0.83
-------- --------
Less distributions
From net investment income -- (0.61)
-------- --------
Net asset value, end of period $ 12.92 $ 12.79
======== ========
TOTAL RETURN* 1.02% 6.64%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 0.61%(a) 0.61%(a)
Ratio of expenses to average net asset excluding waiver 0.77%(a) 0.87%(a)
Ratio of net investment income to average net assets 5.10%(a) 6.10%(a)
Portfolio turnover rate 186% 171%
</TABLE>
(a) Annualized.
(f) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
80
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
COMMENTARY: THE MENTOR HIGH INCOME PORTFOLIO TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
For the six-month period ending March 31, 1999 fixed-income Treasury yields rose
across the yield curve. Two-year notes increased 71 basis points to 4.98% and
30-year rates increased 66 basis points to 5.62%. Despite the rise in Treasury
yields the quarter saw good returns for high yield. Against this rise in
interest rates, the spread between high yield debt and Treasuries declined
during the early months of 1999, dropping from 631 basis points at year-end to
579 basis points at first quarter-end, according to the Chase High Yield Index.
This leaves the spread, representing risk premium, much lower than last year's
third quarter flight to quality level, but well above historical norms.
New issuance for the first quarter of 1999 remained somewhat lower than the
first quarter of 1998. This year's new issuance of $30.1 billion compares to
$49.7 billion from last year. Inflows into the high yield market have remained
lower as well, with cash inflows of $4.3 billion for this year's first quarter,
against inflows of $8.9 billion for the same period in 1998.
MANAGEMENT STRATEGY
Significant cash flow into the Mentor High Income Portfolio increased total
assets in the Fund from approximately $207 million at the end of the fourth
quarter of 1998 to $267 million at 1999 first quarter-end. In spite of this 29%
increase in the size of Portfolio assets, we were able to continue to find many
attractive investment opportunities for the new funds. In fact, the percentage
of Portfolio assets invested in cash has actually declined from 6.6% to 6.2% so
far this year. The number of securities held increased from 152 to 167, with no
single issuer representing more than 1.5% of the total portfolio.
Over the course of the period we increased our emphasis on wider-spread paper,
thereby allowing the Portfolio to outperform as spreads compressed with
favorable economic conditions. By the end of March we had increased the single-B
component of the Portfolio to 71.2%. This increase in single-B paper serves to
make the portfolio more highly correlated to changes in the rate of growth in
gross domestic product, and less correlated to the level of Treasury yields.
We have continued to increase the Portfolio's concentration in telecommunication
and media credits, these credits have outperformed against a background of
consolidation and favorable regulatory developments. Our March 31 telecom/ media
weighting of 34.7%, however, still represents a minor underweight against the
high yield universe.
PERFORMANCE REVIEW
Corporate high yield assets performed well during the six-month period compared
to other fixed-income asset classes. This is a trend that has been in place
since the Federal Reserve lowered rates in October of last year. For the
six-month period ended March 31, 1999 the Mentor High Income Portfolio A shares
returned 6.97%, comparing favorably to a 4.64% return for its Merrill Lynch High
Yield Index benchmark.
MARKET OUTLOOK
Positive news for bonds overseas is offset by domestic U.S. conditions that
continue to put upward pressure on interest rates. The U.S. economy has
repeatedly defied predictions of an imminent slowdown. With unemployment hitting
4.2% in March, inflation fears are mounting. Despite these fears, most broad
measures of inflation have continued to trend downward.
81
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
COMMENTARY: THE MENTOR HIGH INCOME PORTFOLIO TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
Without some new evidence of slowing economic growth, the bond market seems
likely to trade within a fairly narrow range around current interest rate
levels. In such an environment, lower-rated corporate bonds should continue to
perform well.
The outlook for high yield bonds continues to look favorable. Our forecast for
continued strong domestic growth and benign inflation provides a favorable
backdrop for the high yield market. The emerging markets, which detonated last
fall's melt down, have been star performers this year after shrugging off
Brazil's currency devaluation. While the equity markets have bounced off their
early October lows to set new records, high yield spreads have only retraced
about one half of their third quarter 1998 widening. Some potential pitfalls for
our six-month outlook would include a resurgence in inflation, the continued
escalation in default rates, or another flight-to-quality move caused by some
extraneous event.
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor High
Income Portfolio Class A and Class B Shares and the Merrill Lynch High Yield
Master II Bond Index.~
[GRAPH]
<TABLE>
<CAPTION>
6/23/98 7/31/98 8/31/98 9/30/98 3/31/99
<S> <C>
Class A Shares(double dagger) 9,525 9,614 8,904 8,882 9,876
Class B Shares(dagger) 10,000 10,081 9,332 9,305 9,919
Merrill Lynch High Yield Master II Bond Index~ 10,000 10,064 9,556 9,581 10,025
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception(triple dagger)
Class A n/a (1.60%)
Class B n/a (5.82%)
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Merrill Lynch High Yield Master II Bond Index provides a broad-based
measure of the performance of the non-investment grade U.S. domestic bond
market. The index currently captures close to $200 billion of the
outstanding debt of domestic market issuers rated below investment grade
but not in default.
+ Represents a hypothetical investment of $10,000 in Mentor High Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The Class B Shares reflects a redemption fee in
effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Represents a hypothetical investment of $10,000 in Mentor High Income
Portfolio Class A Shares, after deducting the maximum sales charge of 4.75%
($10,000 investment minus $475 sales charge = $9,525). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor High Income Portfolio Class A and Class B
Shares from the date of commencement of operations on 6/23/98 through
3/31/99.
82
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 93.20%
CONSUMER
DISTRIBUTION - 13.19%
Agrilink Foods, 11.88%,
11/01/08 $2,500,000 $2,693,750
Big 5 Corporation Senior Notes,
Series B, 10.88%, 11/15/07 2,000,000 2,040,000
CHS Electronics, Inc. Senior
Notes, 9.88%, 4/15/05 2,000,000 1,640,000
Community Distributors,
10.25%, 10/15/04 1,250,000 1,156,250
Del Monte Foods Company
Senior Discount Notes,
12.50%, 12/15/07 (a) 2,625,000 1,968,750
Disco S.A. Notes, 9.13% -
9.88%, 5/15/03 - 5/15/08 (a) 2,000,000 1,808,750
Fleming Companies, Inc.,
10.50%, 12/01/04 2,300,000 2,167,750
Gruma S.A. de C.V. Senior
Notes, 7.63%, 10/15/07 2,000,000 1,780,000
Jitney-Jungle Stores, 12.00%,
3/01/06 1,500,000 1,672,500
Kmart Corporation Debentures,
7.95%, 2/01/23 2,500,000 2,525,000
Luigino's Inc. Senior
Subordinated Notes, 10.00%,
2/01/06 2,500,000 2,509,375
Musicland Group, Inc. Senior
Subordinated Notes-B,
9.88%, 3/15/08 2,500,000 2,562,500
Owens & Minor, Inc., 10.88%,
6/01/06 2,000,000 2,170,000
Packaging Corporation of
America, 9.63%, 4/01/09 1,000,000 1,027,500
Pantry, Inc. Senior Subordinated
Notes, 10.25%, 10/15/07 2,500,000 2,637,500
Pathmark Stores Senior
Subordinated Notes, 9.63%,
5/01/03 2,000,000 2,065,000
Phar-Mor, Inc. Senior Notes,
11.72%, 9/11/02 1,635,000 1,684,050
Supreme International
Corporation, 12.25%,
4/01/06 2,000,000 1,990,000
----------
36,098,675
----------
CONSUMER DURABLES - 5.79%
Aetna Industries, Inc. Senior
Notes, 11.88%, 10/01/06 1,500,000 1,567,500
Cluett American Corporation
Senior Subordinated Notes,
10.13%, 5/15/08 (a) 2,000,000 1,840,000
Consoltex Group Senior Notes,
11.00%, 10/01/03 200,000 204,000
Decora Industries, Inc. Secured
Notes, 11.00%, 5/01/05 (a) 2,000,000 1,930,000
French Fragrances, Inc. Senior
Notes, 10.38%, 5/15/07 1,500,000 1,537,500
Galey & Lord, Inc. Senior
Subordinated Notes, 9.13%,
3/01/08 2,225,000 1,724,375
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES (CONTINUED)
MCII Holdings Senior Secured
Discount Notes, 12.00%,
11/15/02 1,500,000 1,297,500
Outsourcing Services Group
Senior Subordinated Notes,
10.88%, 3/01/06 (a) 1,150,000 1,121,250
Simmons Company Senior
Subordinated Notes, 10.25%,
3/15/09 500,000 519,375
Talon Automotive Group Senior
Subordinated Notes, 9.63%,
5/01/08 (a) 1,855,000 1,632,400
Venture Holdings Trust Senior
Notes, 9.75%, 4/01/04 2,500,000 2,462,500
----------
15,836,400
----------
CONSUMER SERVICES - 25.36%
American Media Operations,
11.63%, 11/15/04 2,380,000 2,576,350
AmeriCredit Corporation,
9.25%, 2/01/04 (a) 2,000,000 1,980,000
Argosy Gaming Company,
12.00%, 6/01/01 1,000,000 1,030,000
Argosy Gaming Company,
13.25%, 6/01/04 (a) 1,500,000 1,700,625
Booth Creek Ski Holdings
Senior Notes-B, 12.50%,
3/15/07 2,250,000 2,148,750
Capstar Broadcasting Senior
Discount Notes, 12.75%,
2/01/09 (a) 1,000,000 850,000
Casino America, 12.50%,
8/01/03 1,000,000 1,150,000
Centennial Cellular Senior
Subordinated Notes, 10.75%,
12/15/08 2,350,000 2,496,875
Charter Communications,
8.63%, 4/01/09 (a) 2,000,000 2,050,000
Citadel Broadcasting Company
Senior Subordinated Notes,
9.25%, 11/15/08 400,000 431,000
ContiFinancial Corporation,
7.50%, 3/15/02 2,000,000 1,560,000
CTI Holdings S.A. Senior
Notes, 11.50%, 4/15/08 $3,000,000 $1,650,000
Diamond Cable Communi-
cations Senior Discount
Notes, 11.75%, 12/15/05 1,500,000 1,331,250
Filtronic PLC Senior Notes,
10.00%, 12/01/05 2,500,000 2,612,500
Frontiervision LP Senior
Discount Notes, 11.88%,
9/15/07 2,375,000 2,075,156
Globo Communicacoes Senior
Notes, 10.63%, 12/05/08 (a) 2,000,000 1,310,000
Group Maintenance America
Senior Subordinated Notes,
9.75%, 1/15/09 500,000 512,500
</TABLE>
83
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
Grupo Televisa S.A. Senior
Discount Notes-Euro,
13.25%, 5/15/08 $ 2,335,000 $ 1,973,075
Hermes Europe Railtel Senior
Notes, 10.38%, 1/15/09 2,500,000 2,687,500
Hollywood Casino Corporation
Senior Notes, 12.75%,
11/01/03 2,000,000 2,195,000
Hollywood Park, Inc. Senior
Subordinated Notes, 9.50%,
8/01/07 2,000,000 2,030,000
Integrated Electric Services
Senior Subordinated Notes,
9.38%, 2/01/09 1,000,000 1,023,750
Intrawest Corporation Senior
Notes, 9.75%, 8/15/08 2,000,000 2,062,500
IXC Communications, Inc.
Senior Subordinated Notes,
9.00%, 4/15/08 2,000,000 2,090,000
La Petite Academy LPA
Holdings-B, 10.00%, 5/15/08 1,250,000 1,231,250
Level 3 Communications Senior
Discount Notes, 10.50%,
12/01/08 2,000,000 1,260,000
Mail-Well Corporation Senior
Subordinated Notes, 8.75%,
12/15/08 (a) 1,000,000 1,030,000
Majestic Star Casino, LLC,
12.75%, 5/15/03 1,500,000 1,665,000
Multicanal Participacoes,
12.63%, 6/18/04 1,000,000 865,000
Northland Cable Television
Senior Subordinated Notes,
10.25%, 11/15/07 700,000 749,000
NTL Incorporated Senior
Notes, 12.38%, 10/01/08 2,000,000 1,370,000
Oxford Automotive, Inc.
10.13%, 6/15/07 2,000,000 2,070,000
Premier Graphics, Inc. Senior
Notes, 11.50%, 12/01/05 2,500,000 2,462,500
Premier Parks, Inc. Senior
Discount Notes, 10.00%,
4/01/08 3,000,000 2,111,250
Sinclair Broadcast Group Senior
Subordinated Notes, 8.75% -
9.00%, 7/15/07 - 12/15/07 2,750,000 2,811,250
Splitrock Services Inc., 11.75%,
7/15/08 2,000,000 1,910,000
Splitrock Services Inc., 11.75%,
7/15/08 - Warrants 2,000 40,000
Telewest Communication PLC
Debentures, 11.00%,
10/01/07 1,500,000 1,320,000
Triton PCS, Inc., 11.63%,
5/01/08 4,000,000 2,380,000
United International Holdings
Senior Discount Notes,
10.75%, 2/15/08 3,000,000 2,055,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
Webb Corporation Senior
Subordinated Notes, 10.25%,
2/15/10 $ 2,000,000 $ 2,030,000
Young American Corporation
Senior Subordinated Notes,
11.63%, 2/15/06 (a) 1,000,000 500,000
----------
69,387,081
----------
ENERGY - 4.47%
Canadian Forest Oil Limited,
8.75%, 9/15/07 2,500,000 2,412,500
Cross Timbers Oil Company
Senior Subordinated Notes,
8.75%-9.25%, 4/01/07-
11/01/09 2,120,000 2,054,600
Gulf Canada Resources Limited
Debentures, 9.00%, 8/15/99 1,000,000 1,012,500
Houston Exploration Company
Senior Subordinated Notes-B,
8.63%, 1/01/08 1,000,000 1,000,000
Hurricane Hydrocarbons Senior
Notes, 11.75%, 11/01/04 (a) 1,000,000 460,000
Nationsrent, Inc, 10.38%,
12/15/08 2,000,000 2,100,000
Pride International, Inc., 9.38%,
5/01/07 1,000,000 980,000
Tesoro Petroleum Corporation
Senior Subordinated Notes,
9.00%, 7/01/08 (a) 1,000,000 997,500
Universal Compression, Inc.
Senior Discount Notes,
9.88%, 2/15/08 (a) 2,000,000 1,200,000
----------
12,217,100
----------
HEALTH CARE - 4.02%
Biovail Corporation
International Senior Notes,
10.88%, 11/15/05 (a) 2,600,000 2,671,500
Columbia/HCA Healthcare,
6.91%, 6/15/05 1,000,000 922,500
King Pharmaceutical, Inc.,
10.75%, 2/15/09 2,000,000 2,070,000
Mariner Post-Acute Network
Senior Subordinated Notes,
10.50%, 11/01/07 1,500,000 270,000
Oxford Health Plans Senior
Notes, 11.00%, 5/15/05 2,500,000 2,562,500
Tenet Healthcare Corporation,
8.63%, 1/15/07 2,500,000 2,500,000
----------
10,996,500
----------
PRODUCER MANUFACTURING - 12.26%
Agriculture Minerals &
Chemicals, 10.75%, 9/30/03 3,000,000 3,030,000
Cambridge Industries, Inc.,
10.25%, 7/15/07 2,000,000 1,700,000
CMI Industries Senior
Subordinated Notes, 9.50%,
10/01/03 2,760,000 2,718,600
</TABLE>
84
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
PRODUCER MANUFACTURING (CONTINUED)
Compass Aerospace
Corporation, 10.13%,
4/15/05 (a) $ 2,250,000 $2,160,000
Delta Mills, Inc., 9.63%,
9/01/07 1,500,000 1,511,250
Dine S.A. de C.V., 8.75%,
10/15/07 (a) 1,000,000 835,000
Globe Manufacturing
Corporation Senior
Subordinated Notes, 10.00%,
8/01/08 2,250,000 1,788,750
Hayes Lemmerz International
Inc., 9.13%, 7/15/07 1,500,000 1,578,750
Hydrochemical Industrial
Service Senior Subordinated
Notes-B, 10.38%, 8/01/07 1,000,000 885,000
K&F Industries Senior
Subordinated Notes, 9.25%,
10/15/07 2,000,000 2,065,000
Muzak LLC Senior
Subordinated Notes, 9.88%,
3/15/09 2,000,000 2,035,000
Pacifica Papers, Inc. Senior
Notes, 10.00%, 3/15/09 2,000,000 2,065,000
Repap New Brunswick, 9.00%,
6/01/04 2,000,000 1,950,000
Schuler Homes Senior Notes,
9.00%, 4/15/08 (a) 750,000 723,750
Tekni-Plex, Inc. Senior
Subordinated Notes-B,
11.25%, 4/01/07 2,500,000 2,737,500
Terex Corporation Senior
Subordinated Notes, 8.88%,
4/01/08 (a) 2,000,000 1,975,000
United Industries Group Senior
Subordinated Notes, 9.88%,
4/01/09 1,750,000 1,802,500
W. R. Carpenter North America
Senior Subordinated Notes,
10.63%, 6/15/07 2,000,000 1,995,000
----------
33,556,100
----------
RAW MATERIALS/PRODUCTS
INDUSTRIES - 6.86%
Acetex Corporation Senior
Notes, 9.75%, 10/01/03 2,250,000 2,126,250
Ackerley Group, 9.00%,
1/15/09 2,000,000 2,070,000
Advanced Micro Devices Senior
Notes, 11.00%, 8/01/03 2,000,000 2,080,000
AEP Industries, 9.88%,
11/15/07 1,750,000 1,802,500
Anchor Lamina, Inc. Senior
Subordinated Notes, 9.88%,
2/01/08 800,000 746,000
GS Technologies Operation, Inc.
Senior Notes, 12.25%,
10/01/05 875,000 678,125
Hylsa S.A. de C.V. Bonds,
9.25%, 9/15/07 (a) 2,000,000 1,540,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
RAW MATERIALS/PRODUCTS
INDUSTRIES (CONTINUED)
Metromedia Fiber Network
Senior Notes, 10.00%,
11/15/08 $1,000,000 $ 1,077,500
Panolam Industries
International Senior
Subordinated Notes, 11.50%,
2/15/09 1,000,000 1,030,000
Pioneer Americas Acquisition
Senior Notes, 9.25%, 6/15/07 2,450,000 2,070,250
Ucar Global Enterprises Senior
Subordinated Notes, 12.00%,
1/15/05 1,500,000 1,601,250
Vicap S.A. Guaranteed Notes,
10.25% - 11.38%, 5/15/02 -
5/15/07 (a) 2,000,000 1,940,250
----------
18,762,125
----------
TECHNOLOGY - 3.50%
Amazon.Com, Inc., 10.00%,
5/01/08 4,000,000 2,735,000
DecisionOne Holdings Discount
Notes, 11.50%, 8/01/08 1,500,000 45,000
Dictaphone Corporation Senior
Subordinated Notes, 11.75%,
8/01/05 1,000,000 730,000
Fairchild Semiconductor Senior
Subordinated Notes, 10.38%,
10/01/07 2,500,000 2,543,750
Nextel Communications Senior
Discount Notes, 9.75% -
12.00%, 8/15/04 - 11/01/08 3,500,000 3,520,000
----------
9,573,750
----------
TRANSPORTATION - 2.37%
Atlas Air, Inc. Senior Notes,
9.38% - 10.75%, 8/01/05 -
11/15/06 2,600,000 2,683,375
American Communication
Lines, LLC Bonds, 10.25%,
6/30/08 (a) 1,000,000 1,032,500
Cenargo International PLC-1st
Mortgage, 9.75%,
6/15/08 (a) 1,000,000 900,000
Greyhound Lines Senior Notes,
11.50%, 4/15/07 1,335,000 1,541,925
Pegasus Shipping Hellas
Notes-A, 11.88%, 11/15/04 500,000 330,000
----------
6,487,800
----------
UTILITIES - 15.38%
American Cellular Corporation
Senior Notes, 10.50%,
5/15/08 (a) 500,000 523,750
Cathay International Limited
Senior Notes, 13.00%,
4/15/08 (a) 1,000,000 250,000
CIA Transporte Energia Senior
Notes, 9.25%, 4/01/08 1,155,000 1,053,938
Clearnet Communications
Senior Discount Notes,
14.75%, 12/15/2005 2,500,000 2,325,000
</TABLE>
85
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
Crown Castle International
Corporation Senior Discount
Notes, 10.63%, 11/15/07 $1,500,000 $ 1,042,500
E.Spire Communications, Inc.
Senior Discount Notes,
12.75% - 13.75%,
11/01/05 - 7/15/07 2,300,000 1,912,500
ICG Holdings, Inc. Discount
Notes, 12.50%, 5/01/06 1,770,000 1,380,600
Intermedia Communications of
Florida, 12.50%, 5/15/06 3,500,000 3,045,000
McLeodusa, Inc. Senior
Discount Notes, 10.50%,
3/01/07 2,000,000 1,612,500
MetroNet Communications
Senior Discount Notes,
9.95%, 6/15/08 (a) 1,500,000 1,166,250
Microcell Telecommunications
Senior Discount Notes-B,
14.00%, 6/01/06 2,000,000 1,650,000
Millicom International Cellular
Senior Discount Notes,
13.50%, 6/01/06 2,250,000 1,687,500
Netia Holdings Senior Discount
Notes-B, 11.25%, 11/01/07 $2,500,000 $ 1,725,000
Optel, Inc. Senior Notes,
13.00%, 2/15/05 (a) 500,000 482,500
Pinnacle Holdings, Inc. Senior
Discount Notes, 10.00%,
3/15/08 (a) 2,000,000 1,215,000
Price Communications Cellular,
11.25%, 8/15/08 750,000 727,500
Price Communications Wireless,
Inc. Senior Subordinated
Notes, 11.75%, 7/15/07 2,000,000 2,210,000
Primus Telecommunications
Group Strips, 11.25% -
11.75%, 8/01/04 - 1/15/09 1,750,000 1,811,875
PSINet, Inc. Senior Notes, Series
B, 11.50%, 11/01/08 2,000,000 2,260,000
Rogers Cantel, Inc. Debentures,
9.38%, 6/01/08 2,000,000 2,200,000
Rural Cellular Corporation,
9.63% - 11.38%, 5/15/08 -
5/15/10 1,260,577 2,350,235
Satelites Mexicanos Senior
Notes, 10.13%, 11/01/04 (a) 2,000,000 1,650,000
SBA Communications
Corporation Senior Discount
Notes, 12.00%, 3/01/08 (a) 2,000,000 1,270,000
Sprint Spectrum Senior Notes,
11.00% - 12.50%, 8/15/06 2,000,000 2,067,500
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
Startec Global Communications
Units, 12.00%, 5/15/08 (a) $ 2,000,000 $ 1,830,000
Startec Global Communications
Units, 12.00%, 5/15/08 -
Warrants (a) 2,000 500
Verio, Inc. Senior Notes,
10.38% - 11.25%, 4/01/05 -
12/01/08 2,400,000 2,629,500
------------
42,079,148
------------
TOTAL CORPORATE BONDS (COST
$257,187,903) 254,994,679
------------
SHORT TERM INVESTMENT - 6.07%
U.S. Government Agency
Federal Home Loan Bank
5.00%, 4/01/99 (cost
$16,617,000) 16,617,000 16,617,000
------------
TOTAL INVESTMENTS (COST
$ 273,804,903)-99.27% 271,611,679
OTHER ASSETS LESS
LIABILITIES - 0.73% 1,989,123
------------
NET ASSETS - 100.00% $273,600,802
============
</TABLE>
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $196,856,099 and $40,074,143, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $273,804,903. Net unrealized depreciation aggregated
$2,193,224, of which $6,150,546 related to appreciated investment securities and
$8,343,770 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
86
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $254,994,679
Repurchase agreements 16,617,000
------------
Total investments securities
(cost $273,804,903) 271,611,679
------------
Receivables
Investments sold 991,194
Fund shares sold 4,740,070
Dividends and interest 5,969,856
Deferred expenses (Note 2) 17,586
------------
TOTAL ASSETS 283,330,385
------------
LIABILITIES
Payables
Investments purchased $7,393,451
Fund shares redeemed 128,615
Dividends 2,014,498
Accrued expenses and other
liabilities 193,019
----------
TOTAL LIABILITIES 9,729,583
------------
NET ASSETS $273,600,802
============
Net Assets represented by: (Note 2)
Additional paid-in capital $280,028,597
Accumulated distributions in
excess of net investment
income (1,387,486)
Accumulated net realized loss
on investment transactions (2,847,085)
Net unrealized depreciation
of investments (2,193,224)
------------
NET ASSETS $273,600,802
============
NET ASSET VALUE PER SHARE
Class A Shares $ 11.11
Class B Shares $ 11.09
OFFERING PRICE PER SHARE
Class A Shares $ 11.66(a)
Class B Shares $ 11.09
SHARES OUTSTANDING
Class A Shares 14,968,702
Class B Shares 9,672,181
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (a) (Note 2) $ 9,734,692
-----------
EXPENSES
Management fee (Note 4) $ 683,266
Shareholder service fee (Note 5) 244,024
Distribution fee (Note 5) 216,898
Transfer agent fee 189,210
Administration fee (Note 4) 97,610
Registration expenses 62,253
Shareholder reports and postage
expenses 33,072
Custodian and accounting fees 32,590
Legal fees 9,128
Audit fees 6,417
Directors' fees and expenses 4,741
Organizational expenses 1,748
Miscellaneous 8,012
----------
Total expenses 1,588,969
-----------
Deduct
Waiver of management fee
(Note 4) (269,733)
Waiver of administration fee
(Note 4) (38,398)
-----------
NET INVESTMENT INCOME 8,453,854
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized loss on investments (2,758,369)
Change in unrealized appreciation
(depreciation) on investments 7,130,262
----------
NET GAIN ON INVESTMENTS 4,371,893
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $12,825,747
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
87
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 PERIOD ENDED
(UNAUDITED) 9/30/98 (a)
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 8,453,854 $ 1,818,180
Net realized loss on investments (2,758,369) (88,715)
Change in unrealized appreciation (depreciation) on investments 7,130,262 (9,323,486)
------------- ------------
Increase in net assets resulting from operations 12,825,747 (7,594,021)
------------- ------------
Distributions to Shareholders
From net investment income
Class A (5,362,802) (1,040,534)
Class B (4,106,664) (1,178,956)
------------- ------------
Total distributions to shareholders (9,469,466) (2,219,490)
------------- ------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 164,826,318 126,286,107
Reinvested distributions 4,363,177 1,281,553
Shares redeemed (12,701,114) (3,998,009)
------------- ------------
Change in net assets resulting from capital share transactions 156,488,381 123,569,651
------------- ------------
Increase in net assets 159,844,662 113,756,140
Net Assets
Beginning of period 113,756,140 --
------------- ------------
End of period (including accumulated distributions in excess of net investment income
of ($1,387,486) and ($371,874), respectively) $ 273,600,802 $113,756,140
============= ============
</TABLE>
(a) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (b)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.92 $ 12.00
-------- --------
Income from investment operations
Net investment income 0.91 0.24
Net realized and unrealized loss on investments (0.17) (1.04)
-------- --------
Total from investment operations 0.74 (0.80)
-------- --------
Less distributions
From net investment income (0.55) (0.28)
-------- --------
Net asset value, end of period $ 11.11 $ 10.92
======== ========
TOTAL RETURN* 6.97% (6.75%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $166,294 $ 50,887
Ratio of expenses to average net assets 1.00%(a) 0.60%(a)
Ratio of expenses to average net asset excluding waiver 1.11%(a) 1.30%(a)
Ratio of net investment income to average net assets 9.07%(a) 7.36%(a)
Portfolio turnover rate 29% 27%
</TABLE>
(a) Annualized.
(b) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
* Total return does not reflect sales commissions and is not
annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
88
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (c)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.91 $ 12.00
-------- --------
Income from investment operations
Net investment income 0.37 0.22
Net realized and unrealized gain (loss) on investments 0.33 (1.05)
-------- --------
Total from investment operations 0.70 (0.83)
-------- --------
Less distributions
From net investment income (0.52) (0.26)
-------- --------
Net asset value, end of period $ 11.09 $ 10.91
======== ========
TOTAL RETURN* 6.60% (6.95%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $107,307 $ 62,869
Ratio of expenses to average net assets 1.50%(a) 1.10%(a)
Ratio of expenses to average net asset excluding waiver 1.61%(a) 1.80%(a)
Ratio of net investment income to average net assets 8.57%(a) 6.87%(a)
Portfolio turnover rate 29% 27%
</TABLE>
(a) Annualized.
(c) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
* Total return does not reflect sales commissions and is not
annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
89
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
NOTE 1: ORGANIZATION
Mentor Funds is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. Mentor Funds consists of twelve
separate Portfolios (hereinafter each individually referred to as a "Portfolio"
or collectively as the "Portfolios") at March 31, 1999, as follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Balanced Portfolio ("Balanced Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor High Income Portfolio
("High Income Portfolio")
Mentor Money Market Portfolio
("Money Market Portfolio")
Mentor U.S. Government Money Market Portfolio ("Government Portfolio")
Mentor Tax-Exempt Money Market Portfolio ("Tax-Exempt Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
These financial statements do not include the Money Market Portfolio, Government
Portfolio and Tax-Exempt Portfolio.
Mentor Funds currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% (4.75% for the Quality Income
Portfolio, Municipal Income Portfolio and High Income Portfolio and 1% for
Short-Duration Income Portfolio) payable at the time of purchase. Class B shares
are sold subject to a contingent deferred sales charge payable upon redemption
which decreases depending on when shares were purchased and how long they have
been held. Class Y shares are sold to institutions and high net-worth individual
investors and are not subject to any sales or contingent deferred sales charges.
Effective November 16, 1998, the Balanced Portfolio acquired substantially all
the assets and assumed the liabilities of the Strategy Portfolio in exchange for
Class A, Class B and Class Y shares of the Balanced Portfolio. The acquisition
was accomplished by a tax-free exchange of the respective shares of the Balanced
Portfolio for the net assets of the Strategy Portfolio. The net assets acquired
amounted to $222,601,303. The aggregate net assets of the Balanced Portfolio
immediately after the acquisition were $255,551,169.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the
Portfolios.
(a) Valuation of Securities - Listed securities held by the Growth Portfolio,
Global Portfolio, Capital Growth Portfolio, Income and Growth Portfolio, and
90
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Balanced Portfolio traded on national stock exchanges and over-the-counter
securities quoted on the NASDAQ National Market System are valued at the last
reported sales price or, lacking any sales, at the last available bid price. In
cases where securities are traded on more than one exchange, the securities are
valued on the exchange determined by the advisor of the Portfolios as the
primary market. Securities traded in the over-the-counter market, other than
those quoted on the NASDAQ National Market System, are valued at the last
available bid price. Short-term investments with remaining maturities of 60 days
or less are carried at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith under procedures established by the Board
of Trustees.
U.S. Government obligations held by the Income and Growth Portfolio, Balanced
Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio, and High
Income Portfolio are valued at the mean between the over-the-counter bid and
asked prices as furnished by an independent pricing service. Listed corporate
bonds, other fixed income securities, mortgage-backed securities, mortgage
related, asset-backed and other related securities are valued at the prices
provided by an independent pricing service. Security valuations not available
from an independent pricing service are provided by dealers approved by the
Portfolios' Board of Trustees. In determining value, the pricing services use
information with respect to transactions in such securities, market transactions
in comparable securities, various relationships between securities, and yield to
maturity.
Municipal bonds, held by the Municipal Income Portfolio, are valued at fair
value. An independent pricing service values the Portfolio's municipal bonds
taking into consideration yield, stability, risk, quality, coupon, maturity,
type of issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities. The pricing service does not rely exclusively on quoted prices.
Short-term investments with remaining maturities of 60 days or less shall be
their amortized cost value unless the particular circumstances of the security
indicate otherwise.
Foreign currency amounts are translated into United States dollars as follows:
market value of investments, other assets and liabilities at the daily rate of
exchange, purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
Net realized foreign currency gains and losses include foreign currency gains
and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of the Portfolio and the
amount actually received. The portion of investment gains and losses related to
foreign currency fluctuations in exchange rates between the initial purchase
trade date and subsequent sale trade date is included in realized gains and
losses on security transactions.
(b) Repurchase Agreements - It is the policy of Mentor Funds to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
91
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
established by Mentor Funds to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence of a
proper level of collateral.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Funds' adviser to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Borrowings - Each of the Portfolios (except for the Growth Portfolio and
Municipal Income Portfolio) may, under certain circumstances, borrow money
directly or through dollar-roll and reverse repurchase agreements (arrangements
in which the Portfolio sells a security for a percentage of its market value
with an agreement to buy it back on a set date). Each Portfolio may borrow up to
one-third of the value of its net assets.
The average daily balance of reverse repurchase agreements outstanding for
Quality Income Portfolio during the six months ended March 31, 1999, was
approximately $19,877,322 or $1.23 per share based on average shares outstanding
during the period at a weighted average interest rate of 4.57%. The maximum
amount of borrowings outstanding for any day during the period was $83,156,353
(including accrued interest), as of February 10, 1999, at an interest rate of
4.84% and was 27.46% of total assets at that date.
The average daily balance of reverse repurchase agreements outstanding for
Short-Duration Income Portfolio during the six months ended March 31, 1999, was
approximately $7,799,523 or $0.09 per share based on average shares outstanding
during the period at a weighted average interest rate of 4.35%. The maximum
amount of borrowings outstanding for any day during the period was $22,005,806
(including accrued interest), as of January 25, 1999, at an interest rate of
4.75% and was 7.31% of total assets at that date.
(d) Portfolio Securities Loaned - Each of the Portfolios (except for Municipal
Income Portfolio) is authorized by the Board of Trustees to participate in
securities lending transactions.
The Portfolios may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolios
continue to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolios record an asset and obligation for the market value
of that collateral. Cash received as collateral may be reinvested, in which case
that security is recorded as an asset of the Portfolio. Variations in the market
value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At March 31, 1999, certain Portfolios had loaned securities to brokers which
were collateralized by cash, U.S. Treasury securities and letters of credits.
Cash collateral at March 31, 1999 was reinvested in U.S. Treasury and high
quality money market instruments. Income from securities lending activities
amounted to $233,048, $60,254, $28,592, $51,219, $65,533, and $14,285, for the
Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Income and Growth
Portfolio, Balanced Portfolio and Quality Income
92
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Portfolio, respectively for the six months ended March 31, 1999. Among the risks
to a Portfolio from securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. At March
31, 1999, the value of the securities on loan and the value of the related
collateral were as follows:
<TABLE>
<CAPTION>
SECURITIES CASH SECURITIES TRI-PARTY
PORTFOLIO ON LOAN COLLATERAL COLLATERAL COLLATERAL
- ------------------- -------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Growth $81,699,455 $83,131,779 $510,369 -
Global 37,467,506 38,767,594 - -
Capital Growth 21,805,109 22,282,979 - -
Income and Growth 64,983,143 57,206,916 - $9,826,621
Balanced 85,449,627 87,189,594 92,520 521,991
Quality Income 332,669 341,000 - -
- ------------------- ----------- ----------- -------- ----------
</TABLE>
(e) Dollar Roll Transactions - Each of the Portfolios (except for the Growth and
Municipal Income Portfolios) may engage in dollar roll transactions with respect
to mortgage-backed securities issued by GNMA, FNMA, and FHLMC. In a dollar-roll
transaction, a Portfolio sells a mortgage-backed security to a financial
institution, such as a bank or broker/dealer, and simultaneously agrees to
repurchase a substantially similar (i.e., same type, coupon, and maturity)
security from the institution at a later date at an agreed upon price. The
mortgage-backed securities that are repurchased will bear the same interest rate
as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories.
(f) Security Transactions and Investment Income - Security transactions for the
Portfolios are accounted for on trade date. Dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. Interest
income (except for Municipal Income Portfolio) includes interest and discount
earned (net of premium) on short-term obligations, and interest earned on all
other debt securities including original issue discount as required by the
Internal Revenue Code. Dividends to shareholders and capital gain distributions,
if any, are recorded on the ex-dividend date.
Interest income for the Municipal Income Portfolio includes interest earned net
of premium, and original issue discount as required by the Internal Revenue
Code.
(g) Federal Income Taxes - No provision for federal income taxes has been made
since it is each Portfolio's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains.
Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends to
meet certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Portfolio to pay tax-exempt interest
dividends. The portion of such interest, if any, earned on private purpose
municipal bonds issued after August 7, 1986,
93
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
may by considered a tax preference item to shareholders.
At September 30, 1998, capital loss carryforwards for federal tax purposes were
as follows:
<TABLE>
<CAPTION>
MUNICIPAL QUALITY
EXPIRES INCOME PORTFOLIO INCOME PORTFOLIO
- -------------- ------------------ -----------------
<S> <C> <C>
9/30/2001 $ - $ 244,512
9/30/2002 - 3,678,547
9/30/2003 317,478 7,326,035
9/30/2004 1,616,817 1,708,773
9/30/2005 - 1,325,149
9/30/2006 295,480 -
- ------------ ----------- ------------
$ 2,229,775 $ 14,283,016
- ------------ ----------- ------------
</TABLE>
Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise relieve the Portfolios of
any liability for federal tax.
(h) When-Issued and Delayed Delivery Transactions - The Portfolios may engage in
when-issued or delayed delivery transactions. To the extent the Portfolios
engage in such transactions, they will do so for the purpose of acquiring
portfolio securities consistent with their investment objectives and policies
and not for the purpose of investment leverage. The Portfolios will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Portfolios will maintain security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily, and begin earning interest on the
settlement date.
(i) Futures Contracts - In order to gain exposure to or protect against declines
in security values, the Portfolios may buy and sell futures contracts. The
Portfolios may also buy or write put or call options on futures contracts.
The Portfolios may sell futures contracts to hedge against declines in the value
of portfolios securities. The Portfolios may also purchase futures contracts to
gain exposure to market changes as it may be more efficient or cost effective
than actually buying securities. The Portfolios will segregate assets to cover
its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolios are required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolios each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolios recognize a realized gain or loss when the
contract is closed. For the six months ended March 31, 1999, Balanced Portfolio
and Municipal Income Portfolio had net realized gains of $1,366,401 and $47,700,
respectively, on closed futures contracts.
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities. At March 31, 1999, Balanced Portfolio and Municipal
Income Portfolio had open positions in the following futures contracts:
94
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
UNREALIZED
NUMBER OF NOTIONAL APPRECIATION
PORTFOLIO CONTRACTS POSITION CONTRACTS EXPIRATION VALUE (DEPRECIATION)
- ------------------ ----------- ---------- ------------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balanced 690 Short U.S. Long Bond Jun-99 $69,000,000 ($2,760,157)
Municipal Income 130 Short Muni Bond Future Jun-99 $13,000,000 ($ 41,000)
- ------------------ --- ---------- ------------------ ------ ----------- ----------
</TABLE>
(j) Options - In order to produce incremental earnings or protect against
changes in the value of portfolio securities, the Portfolios may buy and sell
put and call options, write covered call options on portfolio securities and
write cash-secured put options.
The Portfolios generally purchase put options or write covered call options to
hedge against adverse movements in the value of portfolio holdings. The
Portfolios may also use options for speculative purposes, although they do not
employ options for this at the present time. The Portfolios will segregate
assets to cover their obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Portfolios will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a written
put option, or the cost of the security for a purchased put or call option is
adjusted by the amount of premium received or paid. For the six months ended
March 31, 1999, Municipal Income Portfolio had a net realized gain of $61,690 on
closed option contracts.
The risk in writing a call option is that the Portfolios give up the opportunity
for profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Portfolio may incur a
loss if the market price of the security decreases and the option is exercised.
The risk in buying an option is that the Portfolio pays a premium whether or not
the option is exercised or the counterparty is unwilling or unable to perform.
The Portfolio also has the additional risk of not being able to enter into a
closing transaction if a liquid secondary market does not exist. The Portfolio
may also write over-the-counter options where the completion of the obligation
is dependent upon the credit standing of the counterparty. Activity in written
options for the Muncipal Income Portfolio for the six months ended March 31,
1999, was as follows:
<TABLE>
<CAPTION>
PREMIUM
RECEIVED FACE VALUE
------------ -------------
<S> <C> <C>
Options outstanding at
September 30, 1998 $ - -
Options written 110,880 200,000
Options closed (61,690) (100,000)
- ------------------------ ------- --------
Options outstanding at
March 31, 1999 $49,190 100,000
- ------------------------ ------- --------
</TABLE>
(k) Residual Interests - A derivative security is any investment that derives
its value from an underlying security, asset, or market index. Quality Income
Portfolio and Short-Duration Income Portfolio invest in mortgage security
residual interests ("residuals") which are considered derivative securities. The
Portfolios' investments in residuals have been primarily in securities issued by
proprietary mortgage trusts. While these entities have been highly leveraged,
often having indebtedness of up to 95% of their total value, the Portfolios have
not incurred any indebtedness in the course of making these residual
investments; nor have the Portfolios' assets been pledged to secure
95
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
the indebtedness of the issuing structure or the Portfolios' investment in the
residuals. In consideration of the risk associated with investment in residual
securities, it is the Portfolios' policy to limit their exposure at the time of
purchase to no more than 20% of their total assets.
(l) Interest-Rate Swap - An interest-rate swap is a contract between two parties
on a specified principal amount (referred to as the notional principal) for a
specified period. In the most common instance, a swap involves the exchange of
streams of variable and fixed-rate interest payments. During the term of the
swap, changes in the value of the swap are recognized as unrealized gains or
losses by marking-to-market the value of the swap. When the swap is terminated,
the Fund will record a realized gain or loss. At of March 31, 1999, there was no
open interest rate swap agreement.
(m) Deferred Expenses - Costs incurred by the Portfolios in connection with
their initial share registration and organization costs were deferred by the
Portfolios and are being amortized on a straight-line basis over a five-year
period.
(n) Distributions - Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses, certain futures and deferral of
wash sales and equalization deficits.
The Growth Portfolio and Capital Growth Portfolio also utilized earnings and
profits distributed to shareholders on redemption of shares as a part of the
distributions for income tax purposes.
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly to all shareholders invested
in Municipal Income Portfolio, Quality Income Portfolio, Short-Duration Income
Portfolio and High Income Portfolio. Dividends are delared and paid annually to
all shareholders invested in the Growth Portfolio, Capital Growth Portfolio,
Global Portfolio and Balanced Portfolio. Dividends are declared and paid
quarterly to all shareholders invested in Income and Growth Portfolio. Dividends
will be reinvested in additional shares of the same class and Portfolio on
payment dates at the ex-dividend date net asset value without a sales charge
unless cash payments are requested by shareholders in writing to the Mentor
Investment Group, LLC. Dividends of all Portfolios are paid to shareholders of
record on the record date. Capital gains realized by each Portfolio, if any, are
paid annually.
NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
Mentor Investment Advisors, LLC ("Mentor Advisors") is a wholly owned subsidiary
of Mentor Investment Group, LLC ("Mentor") and its affiliates. Mentor is a
subsidiary of Wheat First Butcher Singer, Inc., which in turn is a wholly owned
subsidiary of First Union Corporation ("First Union"). First Union is a leading
financial services company; First Union has announced plans to acquire EVEREN
Capital Corporation, which currently has a minority ownership interest in
Mentor.
Mentor Advisors, the Portfolios' investment adviser, receives for its services
an annual investment advisory fee not to exceed the following percentages of the
average daily net assets of the particular
96
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Portfolio: Growth Portfolio, 0.70%; Capital Growth Portfolio, 0.80%; Income and
Growth Portfolio, 0.75%; Balanced Portfolio, 0.75%; Municipal Income Portfolio,
0.60%; Quality Income Portfolio, 0.60%; Short-Duration Income Portfolio, 0.50%;
and High Income Portfolio, 0.70%.
Mentor Advisors pays Van Kampen American Capital Management, Inc., the
sub-adviser to Municipal Income Portfolio, an annual fee expressed as a
percentage of the Portfolio's average net assets as follows: 0.25% of the first
$60 million of the Portfolio's average net assets and 0.20% of the Portfolio's
average net assets over $60 million.
For the period from October 1, 1997 to June 30, 1998, Wellington Management
Company, LLC, the sub-adviser to the Income and Growth Portfolio, received from
the Investment Adviser an annual fee expressed as a percentage of that
Portfolio's assets as follows: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.275% on the next $150 million of the
Portfolio's average net assets, 0.225% of the next $300 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's net assets over
$500 million. Effective July 1, 1998, the sub-advisor to the Income and Growth
Portfolio received the following fees: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.250% on the next $150 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's average net assets
over $150 million.
Van Kampen American Capital Management, Inc., the sub-adviser to the High Income
Portfolio receives from the Investment Adviser an annual fee of 0.20% of the
Portfolio's average daily net assets.
No performance or incentive fees are paid to the sub-advisers. Under certain
Sub-Advisory Agreements, the particular sub-adviser may, from time to time,
voluntarily waive some or all of its sub-advisory fee charged to the Investment
Adviser and may terminate any such voluntary waiver at any time in its sole
discretion.
The Global Portfolio has entered into an Investment Advisory Agreement with
Mentor Perpetual Advisors, LLC ("Mentor Perpetual"). Mentor Perpetual is owned
equally by Mentor and Perpetual PLC, a diversified financial services holding
company. Under this agreement, Mentor Perpetual's management fee is accrued
daily and paid monthly at an annual rate of 1.10% applied to the average daily
net assets of the Portfolio up to and including $75 million on and 1.00% of its
average daily net assets in excess of $75 million.
For the six months ended March 31, 1999, Mentor Advisors and sub-advisers,
earned and voluntarily waived the following management fees:
<TABLE>
<CAPTION>
MANAGEMENT
MANAGEMENT FEE SUB ADVISER
FEE VOLUNTARILY FEE
PORTFOLIO EARNED WAIVED EARNED/(WAIVED)
- ------------------ ------------ ------------- ----------------
<S> <C> <C> <C>
Growth $1,879,581 - -
Global 945,039 - -
Capital Growth 1,796,157 - -
Income and
Growth 984,781 - $318,695
Balanced 871,032 - -
Municipal Income 360,928 - 135,265
Quality Income 631,092 $194,745 -
Short-Duration
Income 439,105 52,159 -
High Income 683,266 269,733 118,103
- ------------------ ---------- -------- --------
</TABLE>
Administrative personnel and services are provided by Mentor, under an
Administration Agreement, at an annual rate of 0.10% of the average daily net
assets of each Portfolio. For the six months ended
97
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
March 31, 1999, Mentor earned the following administrative fees:
<TABLE>
<CAPTION>
ADMINISTRATIVE
ADMINISTRATIVE FEE
FEE VOLUNTARILY
PORTFOLIO EARNED WAIVED
- ----------------------- ---------------- ---------------
<S> <C> <C>
Growth $268,512 -
Global 90,764 -
Capital Growth 224,520 -
Income and Growth 131,304 -
Balanced 116,138 -
Municipal Income 60,155 -
Quality Income 105,182 -
Short-Duration Income 88,030 $88,030
High Income 97,610 38,398
- ----------------------- -------- -------
</TABLE>
The Portfolios also provide direct reimbursement to Mentor for certain legal and
compliance administration, investor relation and operation related costs not
covered under the Investment Management Agreement. For the six months ended
March 31, 1999, these direct reimbursements were as follows:
<TABLE>
<CAPTION>
DIRECT
PORTFOLIO REIMBURSEMENTS
- ----------------------- ---------------
<S> <C>
Growth $16,887
Global 5,918
Capital Growth 15,307
Income and Growth 8,269
Balanced 9,752
Municipal Income 3,857
Quality Income 6,561
Short-Duration Income 6,006
- ----------------------- -------
</TABLE>
NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The Class B shares of the Portfolios have adopted a Distribution Plan (the Plan)
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a
Distribution Agreement between the Portfolios and Mentor Distributors, LLC
("Mentor Distributors") a wholly-owned subsidiary of BYSIS Fund Services, Inc.,
Mentor Distributors was appointed distributor of the Portfolios. To compensate
Mentor Distributors for the services it provides and for the expenses it incurs
under the Distribution Agreement, the Portfolios pay a distribution fee, which
is accrued daily and paid monthly at the annual rate of 0.75% of the Portfolios'
average daily net assets for the Growth Portfolio, Capital Growth Portfolio,
Income and Growth Portfolio, Balanced Portfolio and Global Portfolio, 0.50% of
the average daily net assets of the Municiap Income Portfolio, Quality Income
Portfolio and High Income Portfolio, and 0.30% of the average daily net assets
for the Short-Duration Income Portfolio.
Mentor Distributors may select financial institutions, such as investment
dealers and banks to provide sales support services as agents for their clients
or customers who beneficially own Class B shares of the Portfolios. Financial
institutions will receive fees from Mentor Distributors based upon Class B
shares owned by their clients or customers.
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
Mentor Distributors with respect to Class A and Class B shares of each
Portfolio. Under the Service Plan, financial institutions will enter into
shareholder service agreements with the Portfolios to provide administrative
support services to their customers who from time to time may be owners of
record or beneficial owners of Class A or Class B shares of one or more
Portfolios. In return for providing these support services, a financial
institution may receive payments from one or more Portfolios at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B shares
of the particular Portfolio or Portfolios beneficially owned by the financial
institution's customers for whom it is holder of record or with whom it has a
servicing relationship.
98
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Presently, the Portfolios' class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.
Under the Distribution Plan, shareholder service fees are charged in Class A and
B and distribution fees are charged to Class B. For the six months ended March
31, 1999, distribution fees and shareholder servicing fees were as follows:
<TABLE>
<CAPTION>
SHAREHOLDER SERVICING FEE
CLASS B -------------------------
PORTFOLIO DISTRIBUTION FEE CLASS A CLASS B
- ----------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Growth $1,518,365 $125,769 $506,121
Global 416,023 88,235 138,674
Capital Growth 881,368 267,508 293,790
Income and Growth 571,335 137,814 190,445
Balanced 631,992 78,320 210,664
Municipal Income 150,302 75,234 75,151
Quality Income 273,958 125,975 136,979
Short-Duration Income 82,684 150,647 68,903
High Income 216,898 135,872 108,152
- ----------------------- ---------- -------- --------
</TABLE>
NOTE 6: FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
In connection with portfolio purchases and sales of securities denominated in a
foreign currency, Global Portfolio may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time Global
Portfolio may enter into contracts to hedge certain foreign currency assets.
Contracts are recorded at market value. Realized gains and losses arising from
such transactions are included in net gain (loss) on investments and forward
foreign currency exchange contracts. The Portfolio is subject to the credit risk
that the other party will not complete the obligations of the contract. At March
31, 1999, Global Portfolio had outstanding forward contracts as set forth below.
<TABLE>
<CAPTION>
CONTRACTS NET UNREALIZED
TO DELIVER/ IN EXCHANGE APPRECIATION/
SETTLEMENT DATE RECEIVE VALUE FOR (DEPRECIATION)
- ----------------- ---------------- ---------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
PURCHASES
4/01/99 British Pound 52,800 $ 85,113 $ 85,483 $ (370)
4/01/99 British Pound 92,130 148,513 149,158 (645)
4/01/99 British Pound 2,175 3,506 3,521 (15)
4/01/99 British Pound 14,584 23,509 23,611 (102)
4/01/99 British Pound 70,256 113,253 113,745 (492)
4/01/99 British Pound 24,996 40,294 40,469 (175)
4/06/99 British Pound 15,488 24,967 25,075 (108)
4/06/99 British Pound 39,804 64,164 64,443 (279)
4/06/99 British Pound 8,419 13,571 13,630 (59)
4/30/99 Eruo 213,787 230,730 230,249 481
4/01/99 Singapore Dollar 267,060 154,638 154,281 357
4/01/99 Singapore Dollar 90,042 52,137 52,017 120
4/06/99 Turkish Lira 6,092,812,500 163,324 163,675 (351)
SALES
4/01/99 British Pound 25,808 41,602 41,784 182
- ------- ------------------ ------------- -------- -------- ------
</TABLE>
99
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
---------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
---------------------------------- ----------------------------------
SHARES DOLLAR SHARES DOLLAR
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 20,554,242 $ 317,331,063 12,016,618 $ 210,103,016
Shares issued upon reinvestment of distributions 209,824 2,939,628 346,751 6,474,795
Shares redeemed (19,478,995) (302,983,556) (12,306,743) (213,035,017)
----------- -------------- ----------- --------------
Change in net assets from capital share transactions 1,285,071 $ 17,287,135 56,626 $ 3,542,794
=========== ============== =========== ==============
CLASS B:
Shares sold 1,528,098 $ 22,897,224 4,138,130 $ 73,047,883
Shares issued upon reinvestment of distributions 1,070,622 14,539,244 1,667,456 30,460,604
Shares redeemed (4,214,789) (62,923,290) (4,698,525) (80,890,251)
----------- -------------- ----------- --------------
Change in net assets from capital share transactions (1,616,069) $ (25,486,822) 1,107,061 $ 22,618,236
=========== ============== =========== ==============
CLASS Y: (A)
Shares sold 738,165 $ 11,155,206 1,786,672 $ 30,602,698
Shares issued upon reinvestment of distributions 72,358 1,016,634 1 10
Shares redeemed (365,320) (5,597,286) (53,808) (894,152)
----------- -------------- ----------- --------------
Change in net assets from capital share transactions 445,203 $ 6,574,554 1,732,865 $ 29,708,556
=========== ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
MENTOR PERPETUAL GLOBAL PORTFOLIO
-----------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
---------------------------------- ----------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,369,455 $ 47,572,822 2,057,945 $ 42,154,809
Shares issued upon reinvestment of distributions 247,790 4,601,451 113,726 2,255,270
Shares redeemed (1,738,114) (34,619,252) (1,275,534) (25,637,616)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 879,131 $ 17,555,021 896,137 $ 18,772,463
========== ============= ========== =============
CLASS B:
Shares sold 575,905 $ 11,051,076 1,821,588 $ 36,737,964
Shares issued upon reinvestment of distributions 452,424 8,053,146 232,932 4,477,444
Shares redeemed (668,319) (12,833,727) (983,971) (18,930,107)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 360,010 $ 6,270,495 1,070,549 $ 22,285,301
========== ============= ========== =============
CLASS Y: (A)
Shares sold - $ - 53 $ 1,000
Shares issued upon reinvestment of distributions 5 85 - 8
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 5 $ 85 53 $ 1,008
========== ============= ========== =============
</TABLE>
(a) For the year ended 9/30/98 - For the period from November 19, 1997 (initial
offering of Class Y Shares) to September 30, 1998.
100
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR CAPITAL GROWTH PORTFOLIO
----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
-------------------------------- -------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 6,564,289 $ 156,453,797 5,110,051 $ 121,415,173
Shares issued upon reinvestment of distributions 741,596 16,051,578 278,288 5,833,664
Shares redeemed (2,143,545) (51,113,253) (1,926,775) (45,709,577)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 5,162,340 $ 121,392,122 3,461,564 $ 81,539,260
========== ============= ========== =============
CLASS B:
Shares sold 2,032,338 $ 45,677,249 4,375,173 $ 98,931,464
Shares issued upon reinvestment of distributions 1,106,815 22,759,934 507,715 10,256,056
Shares redeemed (1,109,805) (24,997,919) (1,063,324) (23,712,167)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 2,029,348 $ 43,439,264 3,819,564 $ 85,475,353
========== ============= ========== =============
CLASS Y: (A)
Shares sold -- $ -- 48 $ 1,000
Shares issued upon reinvestment of distributions 5 125 1 12
Shares redeemed -- -- -- --
========== ============= ========== =============
Change in net assets from capital share transactions 5 $ 125 49 $ 1,012
========== ============= ========== =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR INCOME AND GROWTH PORTFOLIO
---------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
-------------------------------- ----------------------------------
SHARES DOLLARS SHARES DOLLARS
------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 1,370,480 $ 27,029,221 2,515,923 $ 49,323,113
Shares issued upon reinvestment of distributions 307,537 5,973,032 371,373 7,153,831
Shares redeemed (621,010) (12,256,523) (915,370) (18,005,450)
--------- ------------- --------- -------------
Change in net assets from capital share transactions 1,057,007 $ 20,745,730 1,971,926 $ 38,471,494
========= ============= ========= =============
CLASS B:
Shares sold 672,499 $ 13,233,579 2,642,784 $ 51,766,483
Shares issued upon reinvestment of distributions 426,951 8,278,473 559,471 10,748,481
Shares redeemed (594,987) (11,652,675) (1,074,795) (21,053,657)
--------- ------------- ---------- -------------
Change in net assets from capital share transactions 504,463 $ 9,859,377 2,127,460 $ 41,461,307
========= ============= ========== =============
CLASS Y: (A)
Shares sold -- $ -- 53 $ 1,000
Shares issued upon reinvestment of distributions 3 55 2 30
Shares redeemed -- -- -- --
--------- ------------- ---------- -------------
Change in net assets from capital share transactions 3 $ 55 55 $ 1,030
========= ============= ========== =============
</TABLE>
(a) For the year ended 9/30/98 - For the period from November 19, 1997 (initial
offering of Class Y Shares) to September 30, 1998.
101
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR BALANCED PORTFOLIO
----------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
---------------------------------- ---------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 7,357,872* $ 113,523,480 258,246 $ 3,577,935
Shares issued upon reinvestment of distributions 53,133 797,522 88,886 1,300,249
Shares redeemed (130,667) (3,234,796) (48,369) (810,000)
Conversion of Class A Shares to Class Y Shares -- -- (273,416) (3,350,117)
--------- ------------- -------- ------------
Change in net assets from capital share transactions 7,280,338 $ 111,086,206 25,347 $ 718,067
========= ============= ======== ============
CLASS B:
Shares sold 15,954,616* $ 214,154,434 412,403 $ 5,702,737
Shares issued upon reinvestment of distributions 115,470 1,719,720 -- --
Shares redeemed (1,523,742) (23,070,275) (9) (125)
---------- ------------- ----------- ------------
Change in net assets from capital share transactions 14,546,344 $ 192,803,879 412,394 $ 5,702,612
========== ============= ========== ============
CLASS Y: (A)
Shares sold 89 $ 1,303 -- $ --
Shares issued upon reinvestment of distributions 98 1,441 -- --
Shares redeemed (253,109) (3,662,016) (7,305) (100,000)
Conversion of Class A Shares to Class Y Shares -- -- 273,416 3,350,117
---------- ------------- ---------- ------------
Change in net assets from capital share transactions (252,922) $ (3,659,272) 266,111 $ 3,250,117
========== ============= ========== ============
</TABLE>
<TABLE>
<CAPTION>
MENTOR MUNICIPAL INCOME PORTFOLIO
------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 1,504,089 $ 23,829,403 1,688,990 $ 26,509,509
Shares issued upon reinvestment of distributions 42,336 672,278 75,715 1,188,701
Shares redeemed (225,496) (3,573,184) (423,337) (6,641,364)
--------- ------------ --------- ------------
Change in net assets from capital share transactions 1,320,929 $ 20,928,497 1,341,368 $ 21,056,846
========= ============ ========= ============
CLASS B:
Shares sold 401,215 $ 6,346,794 1,208,341 $ 18,966,860
Shares issued upon reinvestment of distributions 43,605 690,709 91,662 1,436,340
Shares redeemed (298,124) (4,720,495) (436,001) (6,820,355)
--------- ------------ --------- ------------
Change in net assets from capital share transactions 146,696 $ 2,317,008 864,002 $ 13,582,845
========= ============ ========= ============
CLASS Y: (A)
Shares sold -- $ -- 64 $ 1,000
Shares issued upon reinvestment of distributions -- -- 3 43
Shares redeemed -- -- -- --
--------- ------------ --------- ------------
Change in net assets from capital share transactions -- $ -- 67 $ 1,043
========= ============ ========= ============
</TABLE>
(a)For the year ended 9/30/98 - For the period from November 19, 1997 (initial
offering of Class Y Shares) to September 30, 1998.
* Includes the following shares acquired from Strategy Portfolio in the
tax-free exchange into the Balanced Portfolio on 11/13/98:
Class A: 1,671,179 shares and Class B: 13,702,270 shares.
102
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR QUALITY INCOME PORTFOLIO
----------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
---------------------------------- ---------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,563,679 $ 33,699,152 4,256,782 $ 56,191,423
Shares issued upon reinvestment of distributions 143,437 1,900,220 233,015 3,077,659
Shares redeemed (1,184,191) (15,537,997) (1,597,720) (21,178,895)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 1,522,925 $ 20,061,375 2,892,077 $ 38,090,187
========== ============= ========== =============
CLASS B:
Shares sold 1,324,721 $ 17,465,999 3,811,046 $ 50,451,628
Shares issued upon reinvestment of distributions 163,492 2,165,673 272,551 3,600,049
Shares redeemed (1,332,345) (17,590,131) (1,478,885) (19,526,706)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 155,868 $ 2,041,541 2,604,712 $ 34,524,971
========== ============= ========== =============
CLASS Y: (A)
Shares sold -- $ -- 76 $ 1,000
Shares issued upon reinvestment of distributions -- -- 4 51
Shares redeemed -- -- -- --
---------- ------------- ---------- -------------
Change in net assets from capital share transactions -- $ -- 80 $ 1,051
========== ============= ========== =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR SHORT-DURATION INCOME PORTFOLIO
----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
-------------------------------- -------------------------------
SHARES DOLLAR SHARES DOLLAR
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 7,806,852 $ 97,941,814 9,921,692 $ 124,978,729
Shares issued upon reinvestment of distributions 183,533 2,308,531 200,895 2,525,409
Shares redeemed (2,935,105) (36,833,260) (4,997,458) (62,897,886)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 5,055,280 $ 63,417,085 5,125,129 $ 64,606,252
========== ============= ========== =============
CLASS B:
Shares sold 1,087,645 $ 13,687,902 3,500,465 $ 44,073,519
Shares issued upon reinvestment of distributions 91,026 1,147,597 145,226 1,826,827
Shares redeemed (1,096,207) (13,774,611) (1,563,684) (19,674,936)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 82,464 $ 1,060,888 2,082,007 $ 26,225,410
========== ============= ========== =============
CLASS Y: (A)
Shares sold -- $ -- 79 $ 1,000
Shares issued upon reinvestment of distributions -- -- 4 49
---------- ------------- ---------- -------------
Change in net assets from capital share transactions -- $ -- 83 $ 1,049
========== ============= ========== =============
</TABLE>
(a) For the year ended 9/30/98 - For the period from November 19, 1997 (initial
offering of Class Y Shares) to September 30, 1998.
103
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR HIGH INCOME PORTFOLIO
------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
3/31/99 9/30/1998 (B)
--------------------------------- ------------------------------
SHARES DOLLAR SHARES DOLLAR
-------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 10,801,852 $119,005,627 4,775,208 $ 56,602,255
Shares issued upon reinvestment of distributions 204,356 2,252,051 51,541 580,207
Shares redeemed (695,694) (7,699,179) (168,561) (1,889,222)
---------- ------------ --------- ------------
Change in net assets from capital share transactions 10,310,514 $113,558,499 4,658,188 $ 55,293,240
========== ============ ========= ============
CLASS B:
Shares sold 4,173,805 $ 45,820,691 5,890,307 $ 69,683,852
Shares issued upon reinvestment of distributions 192,281 2,111,126 62,441 701,346
Shares redeemed (456,107) (5,001,935) (190,546) (2,108,787)
---------- ------------ --------- ------------
Change in net assets from capital share transactions 3,909,979 $ 42,929,882 5,762,202 $ 68,276,411
========== ============ ========= ============
</TABLE>
(b) For the period from June 23, 1998 (commencement of operations) to March 31,
1999.
ADDITIONAL INFORMATION
YEAR 2000 (UNAUDITED)
The Portfolio receives services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer software to distinguish the year 2000 from
the year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the Portfolio
from this problem.
104
<PAGE>
MENTOR FUNDS
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
TRUSTEES
DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
ARCH T. ALLEN III, TRUSTEE
Attorney at Law
Allen & Moore, LLP
JERRY R. BARRENTINE, TRUSTEE
President
J.R. Barrentine & Associates
ARNOLD H. DREYFUSS, TRUSTEE
Former Chairman & Chief Executive Officer
Hamilton Beach/Proctor-Silex, Inc.
WESTON E. EDWARDS, TRUSTEE
President
Weston Edwards & Associates
THOMAS F. KELLER, TRUSTEE
Former Dean, Fuqua School of Business
Duke University
LOUIS W. MOELCHERT, JR., TRUSTEE
Vice President for Business & Finance
University of Richmond
J. GARNETT NELSON, TRUSTEE
Consultant
Mid-Atlantic Holdings, LLC
TROY A. PEERY, JR., TRUSTEE
Former President
Heilig-Meyers Company
PETER J. QUINN, JR., TRUSTEE
Managing Director
Mentor Investment Group, LLC
OFFICERS
PAUL F. COSTELLO, PRESIDENT
Managing Director
Mentor Investment Group, LLC
TERRY L. PERKINS, TREASURER AND SECRETARY
Senior Vice President
Mentor Investment Group, LLC
MICHAEL A. WADE, ASSISTANT TREASURER
Vice President
Mentor Investment Group, LLC
This report is authorized for distribution to prospective investors only when
preceded or accompanied by a Mentor Funds prospectus, which contains complete
information about fees, sales charges and expenses. Please read it carefully
before you invest or send money.
<PAGE>
[MENTOR INVESTMENT GROUP LOGO]
RIVERFRONT PLAZA
901 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
(800) 382-0016
1999 MENTOR DISTRIBUTORS, LLC
MK 364
----------
BULK RATE
U.S. POSTAGE
PAID
RICHMOND, VIRGINIA
PERMIT NO. 1209
----------
EVERGREEN MUNICIPAL TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability and
Indemnification of Trustees" under the caption "Comparative Information about
Mentor Funds and Evergreen Trust" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust. Incorporated by reference to
Evergreen Municipal Trust's Registration Statement on Form N-1A
filed on December 12, 1997, Registration No. 333-36033 ("Form
N-1A Registration Statement")
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit D to Prospectus contained in
Part A of this Registration Statement.
5. Declaration of Trust of Evergreen Municipal Trust Articles II., III.6(c),
IV.(3), IV.(8), V., VI., VII., and VIII and By-Laws Articles II., III. and VIII.
6. Form of Investment Advisory Agreement between Evergreen Investment Management
Company and Evergreen Municipal Trust. Incorporated by reference to the Form
N-1A Registration Statement.
7(a). Principal Underwriting Agreements between Evergreen Municipal Trust and
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
7(b). Form of Dealer Agreement for Class A, Class B and Class C shares used by
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
8. Form of Deferred Compensation Plan. Incorporated by reference to the Form
N-1A Registration Statement.
A-116
<PAGE>
9. Form of Custody Agreement between State Street Bank and Trust Company and
Evergreen Municipal Trust. Incorporated by reference to Form N-1A Registration
Statement.
10(a). Rule 12b-1 Distribution Plans. Incorporated by reference to the Form N-1A
Registration Statement.
10(b). Multiple Class Plan. Incorporated by reference to the
Form N-1A Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. To be filed by
amendment.
13. Not applicable.
14(a). Consent of _____________ (with respect to Evergreen Municipal Bond
Fund). To be filed by amendment.
14(b). Consent of KPMG LLP (with respect to Mentor Municipal Income Portfolio).
Filed herewith.
15. Not applicable.
16. Powers of Attorney. Incorporated by reference to the Form N-1A Registration
Statement.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
A-117
<PAGE>
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
A-118
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of New York and State
of New York, on the 12th day of July, 1999.
EVERGREEN MUNICIPAL TRUST
By: /s/Anthony J. Fischer
-----------------------
Name: Anthony J. Fischer
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities indicated on the 12th day
of July, 1999.
Signatures Title
- ---------- -----
/s/Anthony J. Fischer President and
- ------------------- Treasurer
Anthony J. Fischer
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
Gerald M. McDonnell
/s/Thomas L. McVerry* Trustee
- --------------------
A-119
<PAGE>
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Maureen E. Towle
-------------------
Attorney-in-Fact
Maureen E. Towle, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
A-120
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
July 12, 1999
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Municipal Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 18, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Evergreen Municipal Bond Fund (the "Acquiring Fund"), a series of the Trust. We
understand that the Trust is about to file a Registration Statement on Form N-14
for the purpose of registering shares of the Trust under the Securities Act of
1933, as amended (the "1933 Act"), in connection with the proposed acquisition
by the Acquiring Fund of all of the assets of Mentor Municipal Income Portfolio
(which, subject to shareholder approval, will be converted in October, 1999 into
a series of the Trust) (the "Acquired Fund"), a series of Mentor Funds, in
exchange solely for shares of the Acquiring Fund and the assumption by the
Acquiring Fund of the identified liabilities of the Acquired Fund pursuant to an
Agreement and Plan of Reorganization, the form of which is included in the Form
N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and
the District of Columbia and generally do not purport to be familiar with the
laws of the State of Delaware.
<PAGE>
Evergreen Municipal Trust
July 12, 1999
Page 2
To the extent that the conclusions based on the laws of the State of Delaware
are involved in the opinion set forth herein below, we have relied, in rendering
such opinions, upon our examination of Chapter 38 of Title 12 of the Delaware
Code Annotated, as amended, entitled "Treatment of Delaware Business Trusts"
(the "Delaware business trust law") and on our knowledge of interpretation of
analogous common law of The Commonwealth of Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on October 15, 1999, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Mentor Funds
We consent to the use of our report, dated November 20, 1998, for Mentor
Municipal Income Portfolio, a portfolio of Mentor Funds, incorporated herein by
reference and to the reference to our firm under the caption "FINANCIAL
STATEMENTS AND EXPERTS" in the Prospectus/Proxy Statement.
/s/KPMG LLP
-----------
KPMG LLP
Boston, Massachusetts
July 12, 1999
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
MENTOR MUNICIPAL INCOME PORTFOLIO,
a series of Mentor Funds
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 15, 1999
The undersigned, revoking all Proxies heretofore given, hereby appoints
Paul F. Costello, Gordon Forrester, Michael H. Koonce and Maureen E. Towle or
any of them as Proxies of the undersigned, with full power of substitution, to
vote on behalf of the undersigned all shares of Mentor Municipal Income
Portfolio, a series of Mentor Funds ("Mentor Municipal"), that the undersigned
is entitled to vote at the special meeting of shareholders of Mentor Municipal
to be held at 2:00 p.m. on Friday, October 15, 1999 at the offices of Mentor
Funds, 901 East Byrd Street, Richmond, Virginia 23219 and at any adjournments
thereof, as fully as the undersigned would be entitled to vote if personally
present.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON
THIS PROXY. If joint owners, EITHER may sign this
Proxy. When signing as attorney, executor,
administrator, trustee, guardian, or custodian for a
minor, please give your full title. When signing on
behalf of a corporation or as a partner for a
partnership, please give the full corporate or
partnership name and your title, if any.
Date , 1999
----------------------------------------
----------------------------------------
Signature(s) and Title(s), if applicable
-1-
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
OF MENTOR FUNDS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW
WITH RESPECT TO THE ACTION TO BE TAKEN ON THE FOLLOWING
PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED AS
INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE
BOARD OF TRUSTEES OF MENTOR FUNDS RECOMMENDS A VOTE FOR THE
PROPOSALS. PLEASE MARK YOUR VOTE BELOW IN BLUE OR BLACK INK. DO
NOT USE RED INK. EXAMPLE: X
1. To approve an Agreement and Plan of Conversion and Termination
whereby Mentor Municipal will be reorganized as a series of Evergreen Municipal
Trust.
---- FOR ---- AGAINST ---- ABSTAIN
2. To approve the proposed reclassification of the investment objective
of Mentor Municipal from fundamental to nonfundamental.
---- FOR ---- AGAINST ---- ABSTAIN]
3. To approve the proposed changes to Mentor Municipal's fundamental
investment restrictions.
---- FOR ---- AGAINST ---- ABSTAIN
[ ] To vote against the proposed changes to one or
more of the specific fundamental investment
restrictions, but to approve the others, fill in
the box at the left AND indicate the item
number(s) of the fundamental investment
restrictions you do not want to change on this
line:
-----------------------
4. To approve an Agreement and Plan of Reorganization whereby Evergreen
Municipal Bond Fund, a series of Evergreen Municipal Trust, will (i) acquire all
of the assets of Mentor Municipal in exchange for shares of Evergreen Municipal
Bond Fund; and (ii) assume the identified liabilities of Mentor Municipal, as
substantially described in the accompanying Prospectus/Proxy Statement.
---- FOR ---- AGAINST ---- ABSTAIN
5. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
---- FOR ---- AGAINST ---- ABSTAIN
-2-
<PAGE>
-3-
<PAGE>
