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MENTOR FUNDS
ANNUAL REPORT
SEPTEMBER 30, 1996
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MENTOR FUNDS
TABLE OF CONTENTS
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Message from the Chairman and President.................................................. 1
Manager's Commentary
Growth Portfolio....................................................................... 3
Perpetual Global Portfolio............................................................. 7
Capital Growth Portfolio............................................................... 11
Strategy Portfolio..................................................................... 14
Income and Growth Portfolio............................................................ 17
Municipal Income Portfolio............................................................. 20
Quality Income & Short-Duration Income Portfolios...................................... 24
Portfolios of Investments
Growth Portfolio....................................................................... 28
Perpetual Global Portfolio............................................................. 33
Capital Growth Portfolio............................................................... 42
Strategy Portfolio..................................................................... 44
Income and Growth Portfolio............................................................ 47
Municipal Income Portfolio............................................................. 53
Quality Income Portfolio............................................................... 57
Short-Duration Income Portfolio........................................................ 60
Statements of Assets and Liabilities..................................................... 62
Statements of Operations................................................................. 64
Statements of Changes in Net Assets...................................................... 66
Financial Highlights..................................................................... 69
Notes to Financial Statements............................................................ 80
Auditor's Report......................................................................... 96
Shareholder Information.................................................................. Inside back cover
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MENTOR FUNDS
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
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TO OUR SHAREHOLDERS:
It is our privilege to send you Mentor Funds' Annual Report for the year ended
September 30, 1996.
Mentor Funds is sponsored by Mentor Investment Group, a firm that provides
diversified investment services to a broad range of investors including:
corporations, foundations, endowments, municipalities, public funds, and
individual investors. A wide variety of investment styles are available to
investors through Mentor Funds and its separately-invested portfolios. The
Annual Report that follows represents eight Portfolios of Mentor Funds.
MENTOR FUNDS
[Graph]
Growth Portfolio--a small-to-mid-capitalization growth fund
Perpetual Global Portfolio--a global growth fund
Capital Growth Portfolio--a large-capitalization, quality growth fund
Strategy Portfolio--a tactical asset allocation high total return fund
Income and Growth Portfolio--a balanced fund
Municipal Income Portfolio--a tax-free bond fund
Quality Income Portfolio--an intermediate-term bond fund
Short-Duration Income Portfolio--a short-term bond fund
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MENTOR FUNDS
MESSAGE FROM THE CHAIRMAN AND PRESIDENT (CONTINUED)
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Mentor Funds is designed to give you flexibility in seeking to fulfill a broad
range of investment objectives. To help identify the combination of Mentor Funds
that seek to meet your investment objectives, ask your Financial Consultant
about WISDOM. It is an asset allocation program especially developed for Mentor
Funds. It is designed to assist investors in determining personal risk/reward
profiles, and suggests where to distribute specific investments among the
Portfolios of Mentor Funds.
In the commentaries that follow, the management teams of Mentor Funds present
their perspectives on the markets and their strategies for investing your
assets. Performance information for each Portfolio, relative to the appropriate
index, is also included in the reports.
Please review the information carefully. Should you have questions, please call
your Financial Consultant, or call us directly, (800)382-0016. We welcome your
communications.
On behalf of all of us at Mentor Investment Group, we thank you
for your investment in Mentor Funds.
Sincerely,
/s/ Daniel J. Ludeman /s/ Paul F. Costello
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Daniel J. Ludeman Paul F. Costello
CHAIRMAN AND CEO PRESIDENT
[LOGO]
THE MENTOR MISSION
OUR MISSION IS TO PROVIDE PROFESSIONAL INVESTMENT MANAGEMENT SERVICES THROUGH A
FIRM THAT IS SECOND TO NONE IN THE QUALITY OF ITS INVESTMENT PROCESS, THE SKILL
AND TRAINING OF ITS PROFESSIONALS, AND THE COMMITMENT, SHARED BY ALL ITS
ASSOCIATES, TO DELIVER THE HIGHEST LEVEL OF SERVICE AND ETHICAL BEHAVIOR TO
CLIENTS.
FOR MORE INFORMATION AND A PROSPECTUS FOR MENTOR FUNDS, PLEASE CALL US,
(800)382-0016, OR CONTACT YOUR FINANCIAL CONSULTANT. THE PROSPECTUS CONTAINS
COMPLETE INFORMATION REGARDING FEES, SALES CHARGES, AND EXPENSES. PLEASE READ IT
CAREFULLY BEFORE INVESTING OR SENDING MONEY.
2
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MANAGERS' COMMENTARY
MENTOR GROWTH PORTFOLIO
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Performance for Mentor Growth Portfolio for the year ended September 30, 1996 is
indicated below.
12 MONTHS ENDING 9/30/96*
TOTAL RETURN MENTOR GROWTH A SHARES
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Mentor Growth 29.15%
Russell 2000 Index 13.13%
S&P Mid-Cap. 14.00%
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Since inception in 1985, Mentor Growth Portfolio has maintained an emphasis on
investments in small-to-mid-cap. growth companies (with market capitalizations
of between $100 million and $3 billion). We search out and invest in rapidly-
growing companies with earnings growth rates not yet fully reflected in their
price/earnings multiples.
In our most recent letter to shareholders we noted that beginning in the third
quarter of 1995 small-to-mid-cap. companies began to outperform larger
capitalization stocks. This situation has continued through September 1996, with
a brief interruption from June to late July, and we are encouraged that interest
in companies, such as the ones in which the Growth Portfolio invests, appears
far from peaking.
In the comments that follow, we discuss several aspects of small-to-mid-cap.
investing.
PERFORMANCE
Investors tend to gravitate to the best-performing stock groups, and over the
last year, small-cap. and mid-cap. growth companies have performed particularly
well. In part such performance is a result of accelerating earnings growth.
Small companies are often able to produce high rates of earnings growth by
operating in niche markets. These markets tend to grow very rapidly, often
regardless of the growth of the economy. Large companies, on the other hand,
with their higher revenue bases, find it increasingly difficult to achieve this
kind of above-average earnings growth.
PRICE/EARNING MULTIPLES
Equities achieve price performance principally from two sources: Earnings growth
and price/earnings multiple expansion. Consequently one of the most important
factors in searching out good investments in growth companies is to find those
with P/Es that are in line with or below their earnings growth rates. Although
P/Es for all classes of stocks have risen over the past year, many of the stocks
in our portfolio continue to trade at P/Es well below our target of 1x their
growth rate.
For companies held by the Portfolio, trailing 12-month earnings growth rates
average 38%, and forward 12-month earnings growth rates (estimated by I/B/E/S)**
are projected at 39%. Average price/earnings ratios for these stocks are only
26x estimated 1997 earnings. This significant discount in the Portfolio's P/E
ratio, when compared to its projected earnings growth rate, is indicative of the
potential value that we feel may reside within the stocks comprising the
Portfolio. By comparison, the S&P 500's*** forward 12-month price/earnings
multiple of 19x is well over twice its projected 12-month earnings growth rate
of 7%.
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MANAGERS' COMMENTARY
MENTOR GROWTH PORTFOLIO (CONTINUED)
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FLOW OF FUNDS
There has been a relatively high flow of investment funds into all equity funds
over the past 12 months and, with the exception of a brief respite in June and
July, these flows continue to be strong. Smaller-cap. funds have benefited from
a sizable portion of these flows. Through August 1996, small-cap. funds had
received inflows of over $41 billion.**** Industry sources indicate that the
fourth quarter may see another $20 billion invested in this market sector. At
the same time, following the market correction of this past summer, many
managers have been slow to reinvest funds raised, resulting in cash levels
substantially higher at the end of September than they were at the market peak
in May. As the market moves higher, pressures to invest these funds will
intensify, creating the potential for significant price moves in small- and
mid-cap. stocks.
THE ECONOMY
The slow but steady growth of the GDP over the past year has been good for
growth companies in general and particularly good for smaller growth companies.
Niche companies serving rapidly growing markets, such as those in the Growth
Portfolio, have stood out in their ability to produce exceptional earnings
results. With the economic outlook for the coming year predicted to be a
continuation of this slow economic growth/low inflation environment, we believe
that small growth companies may continue to perform well. Please remember that
historically, small-to-mid-size companies have grown faster than larger ones,
and smaller companies generally exhibit greater price volatility than larger
companies.
We greatly appreciate the support of our many shareholders and look forward to
serving you in the coming year.
Sincerely,
The Small/Mid-Capitalization
Growth Management Team
* RETURN FIGURES DO NOT INCLUDE SALES CHARGES. SEE ACCOMPANYING TABLE WITH
AVERAGE ANNUAL TOTAL RETURNS. THE RUSSELL 2000 IS COMPOSED OF THE 2,000
SMALLEST STOCKS IN THE RUSSELL 3000 INDEX, A COMPOSITE OF THE 3000 LARGEST
U.S. COMPANIES BY MARKET CAPITALIZATION, AND REPRESENTS APPROXIMATELY 7% OF
THE U.S. EQUITY MARKET. AN UNMANAGED INDEX DOES NOT REFLECT EXPENSES AND
MAY NOT CORRESPOND TO THE PERFORMANCE OF THE PORTFOLIO, WHICH INCURS
EXPENSES. INVESTORS CANNOT INVEST IN THE RUSSELL 2000. THE S&P MID-CAP 400
STOCK PRICE INDEX MEASURES THE PERFORMANCE OF THE MID-RANGE SECTOR OF THE
U.S. STOCK MARKET. THE INDEX IS BASED ON 400 STOCKS CHOSEN ON THE BASIS OF
MARKET SIZE (MEDIUM MARKET CAPITALIZATION OF ABOUT $885 MILLION), LIQUIDITY
AND INDUSTRY GROUP REPRESENTATION. IT IS A MARKET-VALUE WEIGHTED INDEX
(SHARE PRICE MULTIPLIED BY NUMBER OF SHARES OUTSTANDING). THE MID-CAP INDEX
WAS INTRODUCED ON JUNE 19, 1991.
** I/B/E/S IS INSTITUTIONAL BROKERS ESTIMATE SYSTEM, A TABULATOR AND PROVIDER
OF INSTITUTIONAL EARNINGS ESTIMATES AND ECONOMIC FORECASTS TO THE
INVESTMENT COMMUNITY.
*** THE STANDARD & POOR'S 500 (S&P 500) INDEX IS AN UNMANAGED INDEX OF 500
WIDELY-HELD COMPANIES AND IS REGARDED BY INVESTORS TO BE REPRESENTATIVE OF
THE STOCK MARKET IN GENERAL. AN UNMANAGED INDEX DOES NOT REFLECT EXPENSES
AND MAY NOT CORRESPOND TO THE PERFORMANCE OF THE PORTFOLIO, WHICH INCURS
EXPENSES. INVESTORS CANNOT INVEST IN THE S&P 500.
**** SOURCE: INVESTMENT COMPANY INSTITUTE
WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE
WITH A SMALL-CAP TO MID CAP EQUITY INVESTMENT PROCESS, THERE ARE NO GUARANTEES
THAT THEY WILL BE SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE
COMPARABLE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER
REINVESTING ALL DISTRIBUTIONS.
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MANAGERS' COMMENTARY
MENTOR GROWTH PORTFOLIO (CONTINUED)
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PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class A and the Russell 2000.~
[Performance Graph]
Class A Russell 2,000~
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6/5/95 $ 9,425 $10,000
6/30/95 9,859 10,518
9/30/95 11,251 11,557
9/30/96 14,640+ 13,076
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception++
Class A 21.73% 33.35%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000
Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
+ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000
investment minus $575 sales charge = $9,425). The Class A Shares' performance
assumes the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Growth Portfolio Class A Shares from the date
of issuance on 6/5/95 through 9/30/96.
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MANAGERS' COMMENTARY
MENTOR GROWTH PORTFOLIO (CONTINUED)
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PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class B Shares and the Russell 2000.~
[Performance Graph]
Class B Russell 2,000~
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9/30/86 $10,000 $10,000
12/31/86 10,121 10,061
12/31/87 9,120 9,178
12/31/88 10,658 11,464
12/31/89 12,507 13,326
12/31/90 11,096 10,725
12/31/91 16,673 15,663
12/31/92 19,270 18,549
12/31/93 22,277 22,055
12/31/94 21,279 21,654
12/31/95 29,668 27,222
9/30/96 36,031+ 30,797~
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year 5-Year 10-Year
Class B 24.18% 18.17% 13.68%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000
Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
+ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class B Shares. A contingent deferred sales charge will be imposed, if
applicable, on Class B Shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to 1.00%
of amounts redeemed during the six-year period following the date of purchase.
The ending value of the Class B Shares reflects a redemption fee of 4.00% on
any redemption less than one year from the purchase date. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
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MANAGERS' COMMENTARY
MENTOR PERPETUAL GLOBAL PORTFOLIO
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Over the 12-month period ended September 30, 1996 the Mentor Perpetual Global
Portfolio achieved a total return, prior to sales charges, of 18.40% for A
shares and 17.39% for B shares, compared with a rise of 14.20% for the MSCI
World Index,* expressed in US dollars. The market value of the Portfolio
increased from $19.05 million to $55.0 million over the same period.
Asset allocation weightings based on total investments held at September 30,
1996, were as follow: 31.25% US, 29.95% Europe, 14.73% Japan, 15.28% Asia, 2.27%
Latin America, and 6.03% cash.
REVIEW OF THE MARKETS
Most of the world's markets produced satisfactory returns over the 12-month
period. US equities and a number of leading European exchanges reached record
levels, while most Asian and Latin American markets made gains in dollar terms,
as well.
Japan was a notable exception -- although the market rose over the period,
virtually all these gains were lost to dollar investors through the weakness of
the yen.
UNITED STATES
The economic environment remained very favorable for equities. Economic growth
remained at the higher end of expectations, and inflation stayed low. Although
the bond market was unsettled from time to time by fears that the Fed would
tighten policy, the Fed held a steady course, so interest rates stayed low.
Corporate profits continued to grow at a satisfactory rate as companies found
ways to widen margins even where sales growth was lackluster. The flow of funds
into stock mutual funds was enormous in most months, corporate share buy-back
programs were widespread, and takeover and merger activity expanded -- all
factors helping to push stock prices higher. Over the 12-month period the S&P
500 Index provided a total return of 20.70%.
EUROPE
Although near-recessionary conditions prevailed in most economies except the
United Kingdom, the major markets were buoyant. For example, in US dollar terms
the German DAX 30 Index rose by 13.12%, the French CAC 40 Index by 13.46%, the
Italian BCI Index by 9.03%, the Swiss SBC General Index by 20.45% and the
British FT All Share Index by 10.82%. Moves to meet Maastricht Treaty conditions
for the European Monetary Union made continental bond yields converge on German
rates, which were in any case declining as the Bundesbank responded to growing
deflationary pressures within Germany and its main trading partners. The benefit
of falling bond yields on equity valuations more than countered the negative
impact of disappointing profits. Switzerland is outside the European Union, but
here the central bank was forced to bring interest rates down to exceptionally
low levels to ease upward pressure on the currency, as speculators switched from
Deutschemarks to Swiss francs. As a consequence, stocks soared. Britain remains
on the fringes of the European Monetary Union, but, unlike most of Europe, the
British economy was strong and corporate profits were rising. Moreover, like the
United States, inflation remained subdued and interest rates low.
7
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MANAGERS' COMMENTARY
MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED)
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JAPAN
The market made good gains until the end of June, before suffering a setback
which saw the erosion of part of the advance. Moreover, the weakness of the yen
meant that to dollar investors the market was flat over the year with the Tokyo
Topix Index rising by only 0.24%. Despite economic recovery and a rebound in
non-financial corporate profits, foreigners were the only consistent net buyers
during the period. Private investors remained largely indifferent to the market;
while banks, needing to realize stock market profits to offset losses caused by
bad debts, and insurance companies, faced with a massive outflow of funds, were
effectively forced sellers of shares.
ASIA
Asian markets were mixed over the period. The largest, Hong Kong, was strong,
particularly late in the period as sentiment became more positive about the
future course of US rates. With its currency pegged to the dollar, Hong Kong's
monetary policy is effectively set by the Fed. In US dollar terms the Hang Seng
Index rose by 23.36% over the year. Malaysia was strong, too, with the Kuala
Lumpur Composite Index rising by 13.64% in dollar terms. Malaysian composite
profit growth was strong, and improvements in the current account lessened
pressure on the currency and interest rates. In contrast, corporate profits
slumped in Thailand, and the current account deteriorated, causing the Bank of
Thailand to increase interest rates to protect the baht. In dollar terms the
Bangkok SET Index fell by 16.21%, one of the weaker performances among world
markets. Singapore was weak as the heat went out of the global electronics
industry, which is particularly important to the island economy. Over the year
the Straits Time Index rose by only 3.63% dollar-adjusted.
LATIN AMERICA
Continued positive foreign flows were evidence that "the tequila hangover",
caused by the devaluation of the Mexican peso in December 1994, had finally worn
off. However, investor confidence remained somewhat fragile, and so the IFC
Latin American Index made a dollar gain of only 7.49%.
MARKETS' OUTLOOK
After several years of global stock market leadership, Wall Street may well pass
the baton to other major markets in the 12 months to come. Some slowdown in the
economy is likely to emerge and cause corporate profit growth to falter,
especially as the scope for productivity gains may be largely exhausted.
Moreover, although inflationary pressures are likely to remain subdued, the Fed,
having been reluctant to increase rates, may prove reluctant to decrease them as
the economy initially slows. Even so, stock valuations are not so stretched that
a bear market appears imminent.
In contrast, European markets should enjoy the benefits of rising corporate
profits and falling rates at the same time. European corporations are, at last,
facing up to the need to restructure in an environment of sluggish domestic
growth and an increasingly competitive global marketplace. Meanwhile, central
banks continue to strive to bring down interest rates in order to combat
deflationary pressures and crisis-level unemployment.
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MANAGERS' COMMENTARY
MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED)
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Asian stock markets also seem positioned to do well. Most markets remain below
January 1994 peaks. Stock prices have perhaps been the victim of too much
economic success. Rates of growth sustained at too high a level have created
inflation and balance of payments problems. Moreover, with so many investment
opportunities available in the real economies of Asia, surplus funds from local
sources that might otherwise flow into stock markets have been in short supply.
With most Asian economies decelerating somewhat, these problems will ease. After
more than two years of relative underperformance, stock price valuations again
appear to represent a good value by international standards.
The outlook for Japan is more problematical. At the beginning of the year,
investors were offered the unusually favorable combination of record low
interest rates, near-record levels of economic growth, and a powerful recovery
in corporate profits after several years of decline. And yet, local investors
did not buy. With economic recovery and corporate profits now visibly losing
momentum, it is difficult to imagine the circumstances in the months to come
which will result in the Japanese buying their own market. Although the stock
market now trades at little more than half the peak levels of December 1989, it
may have further yet to fall.
Please remember that investments outside the U.S. are subject to currency
fluctuations, political and social instability, differing securities
regulations, and different accounting standards.
All statistics are sourced from Datastream. Datastream is a subsidiary of the
Primark Corporation, a $650 million provider of global financial and technology
solutions (NYSE:PMK). Other Primark companies include: Disclosure Incorporated,
a leading supplier of Securities and Exchange Commission filings and financial
data on over 28,000 companies around the world; Worldscope/Disclosure Partners,
which distributes comparable financial data on more than 12,800 companies in
almost 50 countries; I/B/E/S, a premier source of analyst earnings per share
forecast; Vastek, which develops investment software to manage and analyze
portfolios; and TASC (The Analytical Sciences Corporation), a global provider of
information technology applications.
Sincerely,
The Mentor Perpetual Global/International
Growth Management Team
* THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX IS AN ARITHMETIC
AVERAGE WEIGHTED BY MARKET VALUE, OF THE PERFORMANCE OF APPROXIMATELY 1450
SECURITIES LISTED ON THE STOCK EXCHANGES OF 20 COUNTRIES INCLUDING THE USA,
EUROPE, CANADA, AUSTRALIA, NEW ZEALAND, AND THE FAR EAST. THE AVERAGE COMPANY
IN THE INDEX HAS A MARKET CAPITALIZATION OF ABOUT $3.5 BILLION. THIS IS A
TOTAL RETURN INDEX WITH GROSS DIVIDENDS REINVESTED. MSCI WORLD INDEX IS NOT
ADJUSTED TO REFLECT SALES LOADS, EXPENSES, OR OTHER FEES THAT THE SEC REQUIRES
TO BE REFLECTED IN THE PORTFOLIO'S PERFORMANCE. YOU CANNOT INVEST IN INDEXES.
THE PERFORMANCE OF COUNTRIES AND UNMANAGED INDEXES DOES NOT REFLECT EXPENSES
AND MAY NOT CORRESPOND TO THE PERFORMANCE OF MENTOR PERPETUAL GLOBAL
PORTFOLIO, WHICH IS ACTIVELY MANAGED AND INCURS EXPENSES.
WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE
WITH A GLOBAL EQUITY INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT THEY WILL
BE SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL
DIVIDENDS.
9
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MANAGERS' COMMENTARY
MENTOR PERPETUAL GLOBAL PORTFOLIO (CONTINUED)
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PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual Global Portfolio Class A and Class B Shares and the Morgan Stanley
Capital International (MSCI)
World Index.*
[Performance Graph]
Morgan Stanley Capital World* A Shares B Shares
----------------------------- -------- --------
3/24/94 $10,000 $ 9,996 $10,000
9/30/94 10,545 9,982 9,487
9/30/95 12,124 10,655 10,587
9/30/96 13,846* 12,501+ 12,677~
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception++
Class A Shares 11.58% 9.30%
Class B Shares 13.39% 9.91%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* The Morgan Stanley Capital International (MSCI) World Index is an arithmetic
average weighted by market value, of the performance of approximately 1450
securities listed on the stock exchanges of 20 countries including the USA,
Europe, Canada, Australia, New Zealand, and the Far East. The average
company in the index has a market capitalization of about $3.5 billion. This
is a total return index with gross dividends reinvested. MSCI World Index is
not adjusted to reflect reinvestment of dividends on securities in the
index, and is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class A and Class B
Shares from the date of initial public investment on 3/29/94 through
9/30/96.
~ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
10
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MANAGERS' COMMENTARY
MENTOR CAPITAL GROWTH PORTFOLIO
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The S&P 500* continued its advance in the past 12 months, providing a total
return including dividends of 20.7%. Through September 30, 1996, this index has
shown positive returns for nine consecutive quarters. This persistent advance is
remarkable, considering how far stocks have risen since the last market low in
1990. Key to these gains has been continued positive earnings growth. Earnings
grew at double-digit rates in each year from 1992 through 1995. It now appears
as if earnings will grow approximately 7% in 1996 -- not as strong as previous
years, but enough to keep the stock market moving ahead.
The deceleration in S&P 500 earnings growth from 20% a year ago to 7% today has
been very positive for our equity performance. We have been saying all along
that our RELATIVE performance would sharply improve when earnings growth for the
broader market slowed. This has definitely been the case in the past year. Our
core equity holdings have continued to produce double-digit earnings growth
during this period. As a result, our performance over the past year is solidly
ahead of the S&P 500 and well ahead of our mutual fund peers as ranked by Lipper
Analytical Services.** We expect more of the same to come. The corporate
earnings cycle that has been so strong for the past five years is clearly
weakening. The key to superior performance will be sustained earnings growth and
high financial quality. These characteristics are the hallmarks of our equity
discipline.
Observers of Wall Street have noticed a significant historical tendency for
stock analysts to be overly optimistic in their earnings forecasts. Actual
results come in below original expectations more often than not. Because
analysts tend to extrapolate the recent past, they are overly optimistic at a
peak in the corporate earnings cycle. We believe that we are approaching such a
peak. As a result, forecasts today must be viewed with a high level of
skepticism. The earnings forecast tracking service, I/B/E/S, recently wrote,
"Odds are that analysts' 1997 earnings projections for the S&P 500 will not be
attained. The current 1997 projection is for growth of 13.4%. We at I/B/E/S are
expecting S&P 500 earnings growth in 1997 of 8% to 10%, but our historical data
suggest that even this forecast may be optimistic."***
If I/B/E/S is right, and we think they are, the key to superior performance from
here on should be owning stocks with high financial quality and predictable
earnings growth. By investing in stocks with high financial quality and above-
average earnings growth consistency, we seek to continue to perform well in a
more difficult earnings growth environment.
U.S. stocks have now enjoyed a remarkably persistent six-year advance. This
market strength is due to improved corporate profitability and very moderate
inflation. In our opinion, while the current level of the S&P 500 clearly
reflects this positive environment, these stocks are not dramatically overvalued
by
11
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MANAGERS' COMMENTARY
MENTOR CAPITAL GROWTH PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
historical standards. However, we are unlikely to see similar returns over the
next six years. Investors need to maintain reasonable expectations and expect
more volatility. The Capital Growth Portfolio appears to be well-positioned to
provide attractive returns, even in a less spectacular stock market.
Sincerely,
The Large-Capitalization Quality
Growth Management Team
* THE STANDARD & POOR'S INDEX (S&P 500) IS AN UNMANAGED, MARKET-VALUE WEIGHTED
INDEX OF 500 WIDELY HELD COMMON STOCKS. AN UNMANAGED INDEX DOES NOT REFLECT
EXPENSES AND MAY NOT CORRESPOND TO THE PERFORMANCE OF THE PORTFOLIO, WHICH
IS ACTIVELY MANAGED AND INCURS EXPENSES. INVESTORS CANNOT INVEST IN THE S&P
500 INDEX.
** LIPPER ANALYTICAL SERVICES, AN INDEPENDENT RATING COMPANY, GROUPS FUNDS BY
INVESTMENT OBJECTIVES AND CALCULATES PERFORMANCE FIGURES FOR EACH GROUP.
PERFORMANCE DOES NOT INCLUDE SALES CHARGES AND DOES INCLUDE REINVESTMENT OF
ALL DISTRIBUTIONS. FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 1996 THE
CAPITAL GROWTH PORTFOLIO'S A SHARE PERFORMANCE IS RANKED 51ST OUT OF A PEER
GROUP OF 632 FUNDS. THE FUNDS IN THE PEER GROUP ARE DEFINED AS THOSE WHICH
NORMALLY INVEST IN COMPANIES WHOSE LONG-TERM EARNINGS ARE EXPECTED TO GROW
SIGNIFICANTLY FASTER THAN THE EARNINGS OF THE STOCKS REPRESENTED IN THE
MAJOR UNMANAGED STOCK INDICES.
*** I/B/E/S U.S. COMMENTS, AUGUST 28, 1996. INSTITUTIONAL BROKERS ESTIMATE
SYSTEM (I/B/E/S) IS A TABULATOR AND PROVIDER OF INSTITUTIONAL EARNINGS
ESTIMATES AND ECONOMIC FORECASTS TO THE INVESTMENT COMMUNITY.
WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE
WITH A LARGE-CAP. GROWTH EQUITY INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT
THEY WILL BE SUCCESSFUL. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
INVESTMENT RETURN AND PRINCIPAL VALUE FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE
FIGURES REFLECT REINVESTMENT OF DIVIDENDS.
12
<PAGE>
MANAGERS' COMMENTARY
MENTOR CAPITAL GROWTH PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Capital Growth Portfolio Class A and Class B Shares and the S&P 500.~
[Performance Graph]
A Shares B Shares S&P 500
-------------- -------- --------
4/29/92 $ 9,450 $10,000 $10,000
9/30/92 9,524 10,061 10,215
9/30/93 10,306 10,818 11,543
9/30/94 10,165 10,601 11,965
9/30/95 12,216 12,443 15,521
9/30/96 15,185++ 15,532+ 18,680~
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception+++
Class A Shares 17.45% 9.89%
Class B Shares 19.64% 10.46%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities in
the index. The S&P 500 is not adjusted to reflect sales loads, expenses, or
other fees that the SEC requires to be reflected in the Portfolio's
performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares of rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Capital Growth Portfolio Class A and Class B
Shares from the date of initial public investment on 4/29/92 through
9/30/96.
13
<PAGE>
MANAGERS' COMMENTARY
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
Small-cap., mid-cap., large-cap., blue-chip, international, gold, bonds,
aggressive, defensive....where are your investments headed? This is a question
that has long perplexed investors. Because of the difficulty of answering that
question, the largest brokerage firms in the country began making their dynamic
asset allocation results public in 1989 -- to show the public their ability in
advising clients regarding that age-old question. We were delighted, because our
career had been spent analyzing market conditions, and dissecting the different
cycles of the market.
It became obvious to us -- early in our career -- that when you look at the
annual performance numbers, the new fad in style at the time experienced the
best performance numbers for that season. And just as the headlines were
spotlighting the funds with the best performance numbers for that season, and
causing a rush of new investors into the "hot" fund, the fad was about to go out
of style. The performance leader of one time period became the laggard of the
next -- leaving the hapless newcomer very discouraged and unhappy.
Our goal is to be a fund for all seasons, gradually shifting our investment
focus based upon the results of our asset allocation model.* Our methodology is
targeted at locating the new fad early in the move, allowing us to shift our
asset mix to take advantage of the changing tides. With the growing popularity
of this proven model, in the fall of 1993, we were fortunate to be asked to
provide investment management for your mutual fund -- the Mentor Strategy
Portfolio. This was a very trying time to begin a fund, because for a fund that
can freely reallocate its assets among bonds, stocks, or cash, the true mettle
of the process was about to be challenged. The bond market was on the verge of
entering the weakest 12-months performance in the previous 100 years. However,
we weathered that storm successfully and continue to keep our eyes focused
firmly on enhancing shareholder value through the strict application of our
tactical asset allocation methodology. The Lipper rankings have certainly
validated our results, with your fund placing in the top quartile of performance
among asset allocation funds tracked by Lipper.**
When reviewing the 12-month period ended September 30, 1996 it becomes
immediately apparent that our portfolio was structured differently during the
first eight months of the period (10/1/95 - 5/31/96) than it was in the last
four months (6/1/96 - 9/30/96). For the first eight months our model suggested
that assets be fully invested in the stock market. In May, 1996, when bond
yields had moved up dramatically from the 6% level of the previous February to
7.19%, our model directed us that the time had come for bond exposure. As a
result, we then implemented and continued to
14
<PAGE>
MANAGERS' COMMENTARY
MENTOR STRATEGY PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
maintain through fiscal year-end a 23% exposure to long-term government
(treasury) strips that are showing strong performance results for your
portfolio.
There have also been shifting tides regarding the type of stocks favored by the
market. The last 15 months has seen some of the best performance from
smaller-cap. growth issues for the last decade. Our discipline, designed to
shift with the emerging trends, has us weighted toward small-cap. stocks.
Historically, small-to-mid-size companies have grown faster than larger ones,
and smaller companies generally exhibit greater price volatility than larger
companies. Our median market cap. is now a very low $816 million, giving your
portfolio its current small-cap growth personality. We anticipate one last
consolidation in stocks as 1996 comes to a close, ending in time for the normal
year-end seasonally strong period. We expect to be investing the bulk of our
currently increased cash reserves into small-cap., high-growth stocks.
So thank you once again for your confidence in us. We hope to be with you in
many different changing investment seasons.
Sincerely,
The Tactical Asset Allocation
Management Team
* WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN
ACCORDANCE WITH A TACTICAL ASSET ALLOCATION PROCESS, THERE ARE NO GUARANTEES
THAT THEY WILL BE SUCCESSFUL.
** LIPPER ANALYTICAL SERVICES, AN INDEPENDENT RATING COMPANY, GROUPS FUNDS BY
INVESTMENT OBJECTIVE AND CALCULATES PERFORMANCE FIGURES FOR EACH GROUP.
PERFORMANCE DOES NOT INCLUDE SALES CHARGES AND DOES INCLUDE REINVESTMENT OF
ALL DISTRIBUTIONS. THE STRATEGY PORTFOLIO'S A SHARE PERFORMANCE IS RANKED 8TH
OUT OF A PEER GROUP OF 178 FUNDS FOR THE TWELVE-MONTH PERIOD ENDED 9/30/96.
THE FUNDS ARE DEFINED AS THOSE WHICH ALLOCATE INVESTMENTS ACROSS VARIOUS
ASSET CLASSES, INCLUDING BOTH DOMESTIC COMMON STOCKS, BONDS, AND MONEY-MARKET
INSTRUMENTS, WITH A FOCUS ON TOTAL RETURN. THE STRATEGY PORTFOLIO'S A SHARES
WERE INTRODUCED 6/95.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES
REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL DISTRIBUTIONS.
15
<PAGE>
MANAGERS' COMMENTARY
MENTOR STRATEGY PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class A Shares and the S&P 500.~
[Performance Graph]
Class A S&P 500~
------- --------
6/5/95 $ 9,425 $10,000
6/30/95 9,695 10,235
9/30/95 10,554 10,890
9/30/96 12,747* 13,291~
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception**
Class A 12.50% 20.14%
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE FIGURES
REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL DISTRIBUTIONS.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
* Represents a hypothetical investment of $10,000 in Mentor Strategy Portfolio
Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000
investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Strategy Portfolio Class A from the date of
issuance on 6/5/95 through 9/30/96.
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class B Shares and the S&P 500.
[Performance Graph]
Class B S&P 500
------- ---------
10/29/93 $10,000 $10,000
12/31/93 10,160 10,024
12/31/94 9,798 10,157
9/30/95 12,175 13,180
9/30/96 14,125*** 15,860~
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception+
Class B 14.48% 12.51%
*** Represents a hypothetical investment of $10,000 in Mentor Strategy Portfolio
Class B Shares. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to
1.00% of amounts redeemed during the six-year period following the date of
purchase. The ending value of the Class B Shares reflects a redemption fee
of 4.00% on any redemption less than one year from the purchase date. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
+ Reflects operations of Mentor Strategy Portfolio Class B from the date of
issuance on 10/29/93 through 9/30/96.
16
<PAGE>
MANAGERS' COMMENTARY
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
REVIEW OF MARKETS
Investors have profited from excellent returns in the previous twelve months as
both the stock and bond markets continued their march ahead. Equity markets have
made relatively steady progress going back into early 1995. The equity market
has benefited from a steady cash flow from retail investors and better than
expected profit growth driven by solid consumer spending. Bonds on the other
hand have plodded along during the last 12 months, with only a short downturn
during the second quarter as a burst in economic activity moved rates higher.
MARKET CONDITIONS
For the 12-month period ended September 30, 1996, the Portfolio returned, prior
to sales charges, 19.13% for A shares, and 18.26% for B shares. During the last
12 months the equity portion of the Portfolio benefited from exposure to
defense/aerospace companies and an underweighting in utilities, as this sector
lagged the overall market. Our bond exposure also benefited from our neutral
interest rate stance for most of the year. The equity and fixed-income portions
of the portfolio have combined to provide above-average returns compared to
their respective benchmarks (S&P 500, which returned 20.7% for the 12 months,
and Lehman Brothers Aggregate which returned 4.9% for the 12 months).*
MARKET OUTLOOK
Recent developments reinforce our confidence that major economies will grow at
moderate rates, with generally small rises in inflation. In the U.S., external
demand should replace domestic demand as a growth source. The economies of
France, Germany, and Japan have strengthened after weak periods. The UK is
emerging from a mid-cycle pause, due to the end of a year-long inventory
over-hang and renewed consumer confidence. By contrast, most smaller East Asian
economies slowed in the second quarter, due to restrictive monetary policies
and/or weak export demand.
In the U.S., economic growth is moderating after an unexpectedly strong second
quarter. We expect the government to report third quarter growth at a 1.5%-2.0%
annual rate, versus the second quarter's 4.7%. Consumer spending, capital
investment, and export growth have all slowed. Slower growth and a lack of price
inflation enabled the Federal Reserve to hold policy -- and short-term interest
rates -- steady. As external demand improves, offsetting slower domestic demand,
the trade deficit should begin to narrow.
The Consumer Price Index may rise slightly, from an average 3% this year to 3.2%
in 1997, mainly due to food and energy. These two volatile categories seem
likely to significantly boost near-term inflation reports. Unit labor costs are
expected to rise modestly in the year ahead, as wages and salaries grow, and
productivity growth slows. This will likely
17
<PAGE>
MANAGERS' COMMENTARY
MENTOR INCOME AND GROWTH PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
pressure corporate profit margins, rather than boost consumer prices.
PORTFOLIO STRATEGY
We maintain the Portfolio's significant holdings in commercial aerospace
suppliers, even as this sector has begun to be recognized. The domestic airlines
are in a position to spend on refurbishing and replacing their aging fleets,
which should provide the next leg to the cycle. The strong order progress to
date has been almost exclusively from international carriers.
The apparel sector has lagged the retail improvement, but should increase.
Retail inventory per square foot is down substantially, which will lead to a
reorder cycle regardless of end-use sales.
Despite attractive prices, we continue to be cautious on the technology sector
in general as demand slows and supply accelerates. However, certain areas are
beginning to show value, particularly software, where new supply is contained
and barriers to entry are higher.
Two emerging areas of interest are trucking and non-pharmaceutical health care.
Both are among the poorest performers over the last two years.
We continued to take profits in the energy sector as it rallied. The surge in US
natural gas prices has unfolded as anticipated, while oil prices have been
stronger than expected. A global surge in drilling will eventually drive down
product prices.
The stock market rally has continued in 1996, leaving few sectors undervalued.
While broad valuations remain high, we are still finding an abundance of new
ideas on a company-specific basis, and are doing even less industry-oriented
investing than usual.
The fixed income portion of the Portfolio is neutral with respect to the
direction of interest rates. Rather, we have chosen to emphasize those sectors
of the fixed-income market, particularly mortgage-backed securities, which offer
attractive yield levels. If we are right, and the market's uncertainty causes a
rather aimless direction in rates for some period of time, then the higher
yielding sectors will provide the best total returns. We expect to continue to
add to both the Portfolio's mortgage and corporate holdings and to look for an
opportunity to assume a more aggressive position with respect to the general
direction of interest rates.
Thank you for your continued support.
Sincerely,
Paul D. Kaplan
FIXED-INCOME PORTFOLIO MANAGER
Arnold C. Schneider, CFA
EQUITY PORTFOLIO MANAGER
18
<PAGE>
MANAGERS' COMMENTARY
MENTOR INCOME AND GROWTH PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
* THE STANDARD & POOR'S INDEX (S&P 500) IS AN UNMANAGED, MARKET-VALUE WEIGHTED
INDEX OF 500 WIDELY HELD COMMON STOCKS. AN UNMANAGED INDEX DOES NOT REFLECT
EXPENSES AND MAY NOT CORRESPOND TO THE PERFORMANCE OF THE PORTFOLIO, WHICH IS
ACTIVELY MANAGED AND INCURS EXPENSES. THE LEHMAN AGGREGATE INDEX IS MADE UP OF
THE GOVERNMENT/CORPORATE INDEX, THE MORTGAGE-BACKED SECURITIES INDEX, AND THE
ASSET-BACKED SECURITIES INDEX. INVESTORS CANNOT INVEST IN THESE INDEXES.
WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE
WITH A BALANCED INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT THEY WILL BE
SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL
DISTRIBUTIONS.
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Income & Growth Portfolio Class A and Class B Shares, the S&P 500 and the Lehman
Brothers Aggregate Bond Index.+
[Performance Graph]
A Shares B Shares LAGG/S&P 500
-------- -------- ------------
5/24/93 $ 9,425 $10,133 $10,000
9/30/93 9,909 10,506 10,353
9/30/94 10,578 11,239 10,446
9/30/95 12,402 12,614 12,879
9/30/96 14,802*** 15,140** 14,686+
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception++
Class A Shares 12.25% 12.35%
Class B Shares 14.26% 13.11%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
*** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+ The Standard & Poor's Index (S&P 500) is an unmanaged, market-value-weighted
index of 500 widely held domestic common stocks. An unmanaged index does not
reflect expenses and may not correspond to the performance of a managed
portfolio in which expenses are incurred. The Lehman Brothers Aggregate
Index is made up of the Government/Corporate Index, the Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. The Lehman Brothers
Aggregate Bond Index and S&P 500 are adjusted to reflect reinvestment of
interest and dividends on securities in the indexes. The Lehman Brothers
Aggregate Bond Index and S&P 500 are not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. This index represents an asset allocation of 60%
S&P 500 stocks and 40% Lehman Brothers Aggregate Bond Index. Investors
cannot invest in an index.
++ Reflects operations of Mentor Income and Growth Portfolio Class A and Class
B Shares from the date of initial public investment on 5/24/93 through
9/30/96.
19
<PAGE>
MANAGERS' COMMENTARY
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
MARKET REVIEW
Over the one-year period ended September 30, 1996, the municipal yield curve
flattened, with 30-year triple-A rated securities yielding 5.61%, down 20 basis
points (0.20%) from September 30, 1995, compared with 10-year and shorter
yields, which increased an average of 18 basis points (0.18%). Taxable yields
during the same period increased approximately 42 basis points (0.42%) on five-
year securities and up to 55 basis points (0.55%) in the longer maturity ranges.
The major period of volatility was encountered during the first quarter of 1996,
when the market experienced a seven-point sell-off. Yields increased sharply
during February and March, and have since traded in the 40-basis point (0.40%)
range.
Municipals out-performed treasuries throughout most of the period as indicated
by the decreasing yield ratio of 30-year triple-A rated tax-exempts to
treasuries, from a very high 91.5% at December 31, 1995 to 81% at September 30,
1996.
Supply and demand fundamentals had the greatest impact on the tax-exempt market.
While year-to-date primary volume is above original estimates, the outstanding
supply of municipal bonds continues to shrink. Combined with the
disproportionately large amount of retail cash flowing into the market -- as a
result of redemptions, maturities and coupon payments -- demand continues to
outpace the declining supply.
PORTFOLIO REVIEW AND PERFORMANCE
The Portfolio performed strongly during the one-year period ended September 30,
1996 with class A shares, returning 6.46%, prior to sales charges, compared to
the 230-member Lipper peer group average return of 5.61% and the Lehman
Municipal Bond Index return of 6.04%.* The strong performance of the Portfolio
can be attributed to several factors. First, compared to the peer group, the
Portfolio has a neutral duration of 7.64 years, relatively unchanged throughout
the period.** Funds with longer durations tend to perform better when interest
rates decline, but underperform significantly in rising interest rate
environments. The neutral 7.64-year duration allows the Portfolio to balance
dividend considerations while minimizing volatility.
Second, the Portfolio is barbelled by rating, with 40% of assets triple-A-rated
and 36% triple-B rated/non-rated. This structure minimizes volatility and
maximizes performance because quality securities perform better as interest
rates decline, while the triple-B/non-rated sectors (which trade based on their
20
<PAGE>
MANAGERS' COMMENTARY
MENTOR MUNICIPAL INCOME PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
credit-worthiness) are less sensitive to interest-rate fluctuations, and perform
better in bearish markets. Finally, the Portfolio has exposure to 13 sectors,
the two largest of which are single-family housing (21% of assets), and health
care (16% of assets). Over the one-year period ended September 30, 1996, these
two sectors had the highest average returns of 7.02% and 8.11%, respectively.
The most significant sector shift during the period was a 5% decrease in higher
education exposure and a 5% increase in single-family housing exposure. From a
rating distribution standpoint, the credit quality of the Portfolio shifted
slightly higher.
OUTLOOK AND STRATEGY
For the remainder of the year, we anticipate a volatile market, due to an
uncertain economy and the national election. Factors affecting market levels
will be the amount of supply and demand, election results, and economic strength
and inflation.
Looking forward, any acceleration in inflation is likely to be modest, and the
Fed will probably not raise interest rates significantly, if at all, which
suggests a limited upward potential for tax-exempt yields in the coming months.
If interest rates remain at their current levels, supply should not deviate much
from projected levels (the variable being the amount of unanticipated refunding
issues that would come to market if rates dropped significantly). Much of the
disproportionately large amount of cash that has been available for reinvestment
in the tax-exempt market was invested in money-market funds, as noted by the
growth in short-term funds experienced in July and August. With interest rates
at levels which attract the retail investor, households are now beginning to
extend maturity, in an attempt to maximize their yield. The retail market is
beginning to show other signs of bullish behavior; for example, there has
recently been strong individual investor demand for zero coupon bonds.
Liquidity and call protection will continue to be important in the Portfolio. We
expect that the most highly demanded securities will be long discounts and
insured bonds. This demand for highly liquid insured paper should be partially
offset by the increased supply of triple-A rated issues coming to market, which
has dramatically increased on an annual basis (approximately 26% of total supply
was insured in 1990, versus 48% year-to-date, 1996). This increase in "quality"
securities, however, will continue to keep the supply of lower investment-grade
paper at a minimum, likely resulting in the spread between triple-A
21
<PAGE>
MANAGERS' COMMENTARY
MENTOR MUNICIPAL INCOME PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
and triple-B paper remaining at current relatively narrow levels.
We do not expect to make any significant structural changes in the Portfolio.
Duration will likely be maintained close to the current level, or lengthened
slightly. The Portfolio has an average acquisition yield of 7.24% and an average
weighted coupon of 6.92%, both significantly above current market levels. As
such, to offset any volatile market movement, duration may be adjusted through
the use of futures positions, rather than the exchange of Portfolio securities.
Sincerely,
David C. Johnson
PORTFOLIO MANAGER
* THE LEHMAN MUNICIPAL BOND INDEX IS ADJUSTED TO REFLECT REINVESTMENT OF
INTEREST ON SECURITIES IN THE INDEX. IT IS NOT ADJUSTED TO REFLECT SALES
LOADS, EXPENSES, OR OTHER FEES THAT THE SEC REQUIRES TO BE REFLECTED IN THE
PORTFOLIO'S PERFORMANCE. LIPPER ANALYTICAL SERVICES, AN INDEPENDENT RATING
COMPANY, GROUPS FUNDS BY INVESTMENT OBJECTIVE AND CALCULATES PERFORMANCE
FIGURES FOR EACH GROUP. PERFORMANCE DOES NOT INCLUDE SALES CHARGES AND DOES
INCLUDE REINVESTMENT OF ALL DISTRIBUTIONS. THE MUNICIPAL INCOME PORTFOLIO'S A
SHARE PERFORMANCE IS RANKED 48TH OUT OF A PEER GROUP OF 230 FUNDS. THE FUNDS
ARE DEFINED AS THOSE THAT INVEST AT LEAST 65% OF ASSETS IN MUNICIPAL DEBT
ISSUES IN THE TOP FOUR CREDIT RATINGS. FOR THE 3-YEAR PERIOD ENDED 9/30/96
THE MUNICIPAL INCOME PORTFOLIO'S A SHARE PERFORMANCE WAS RANKED IN QUARTILE
3, BEING 87TH OUT OF A PEER GROUP OF 154 FUNDS. THE PORTFOLIO'S CLASS A
SHARES WERE INTRODUCED 4/92.
** DURATION MEASURES RISK BY INDICATING HOW SENSITIVE THE VALUE OF THE PORTFOLIO
IS TO CHANGES IN INTEREST RATES. A PORTFOLIO DURATION OF 1 WOULD INDICATE
THAT A 1% INCREASE IN INTEREST RATES SHOULD CAUSE THE VALUE OF THE PORTFOLIO
TO DECREASE BY 1% WHILE A PORTFOLIO DURATION OF 2 WOULD SUGGEST THAT A 1%
INCREASE IN INTEREST RATES SHOULD CAUSE THE VALUE OF THE PORTFOLIO TO
DECREASE BY 2%.
WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE
WITH A TAX-EXEMPT FIXED-INCOME INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT
THEY WILL BE SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE
RESULTS. INVESTMENTS RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING
ALL DISTRIBUTIONS.
22
<PAGE>
MANAGERS' COMMENTARY
MENTOR MUNICIPAL INCOME PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Municipal Income Portfolio Class A and Class B Shares and Lehman Municipal Bond
Index.~
[Performance Graph]
A Shares B Shares Lehman Municipal Bond Index~
-------- -------- ----------------------------
4/29/92 $ 9,525 $10,000 $10,000
9/30/92 10,034 10,528 10,561
9/30/93 11,637 12,134 11,906
9/30/94 11,101 11,511 11,616
9/30/95 12,151 12,348 12,916
9/30/96 12,935++ 13,184+ 13,818~
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception***
Class A 1.42% 5.99%
Class B 1.87% 6.45%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class A Shares, after deducting the maximum sales charge of 4.75%
($10,000 investment minus $475 sales charge = $9,525). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
*** Reflects operations of Mentor Municipal Income Portfolio Class A and Class B
Shares from the date of initial public investment on 4/29/92 through
9/30/96.
23
<PAGE>
MANAGERS' COMMENTARY
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
MARKET CONDITIONS
The 12-month period ended September 30, 1996 saw a significant shift in the
shape of the yield curve. While one-year yields were unchanged at 5.68%,
interest rates in the money-market sector (maturities of less than one year)
were lower by 0.30-0.40%. However, for maturities of greater than one year the
opposite was the case. Two and 10-year treasuries closed the period at 6.09% and
6.70%, up 0.24% and 0.52% respectively from the beginning of the period.
This steepening of the yield curve reflects several factors. First, during the
period the Federal Reserve chose to lower the short-term federal funds rate (the
rate member banks charge each other for overnight loans) by a total of 0.50%.
This monetary easing coupled with other factors created the environment for
accelerating economic growth for most of the period. This is reflected by the
steady increase from fourth quarter 1995 GDP (gross domestic product) growth of
- -0.3% to first quarter 1996 growth of 2.0% to second quarter 1996 growth of
4.7%. This strong economic acceleration has caused increased concerns that an
overheating economy will rekindle inflation, eventually forcing the Fed to
reverse course and raise rates. Despite current modest increases in core
inflation, as reflected in benign producer and consumer price statistics,
longer-term fixed-income buyers have demanded higher yields to compensate for
expectations of future inflation.
PERFORMANCE
For the 12-month period ended September 30, 1996, the Mentor Quality Income
Portfolio A shares outperformed its Merrill Lynch seven-year Treasury Index
benchmark by 0.32%. Mentor Quality Income Portfolio A shares returned, prior to
sales charges, 4.09% and the B shares returned 3.57% for the period, compared to
3.77% for the Merrill Lynch seven-year Treasury Index.* The Mentor
Short-Duration Income Portfolio A shares and B shares returned, prior to sales
charges, 4.80% and 4.53% respectively for the 12-month period, compared to 5.28%
for the Merrill Lynch three-year Treasury Index.**
The return of the Mentor Quality Income Portfolio during the past 12 months was
strengthened by the significant outperformance of several of its asset classes,
including high-grade adjustable rate mortgages, home equity loans, and mezzanine
products. The benefits of participation in those sectors was partially offset by
our duration extension this spring.*** That decision hurt our relative
performance as the market declined due to concerns about the potential
inflationary impact of the strong economy. The shorter end of the market offers
fewer opportunities to participate in the asset classes that enhanced the
performance of the Quality Income Portfolio, which explains the relatively
weaker performance of the Short-Duration Income Portfolio.
24
<PAGE>
MANAGERS' COMMENTARY
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
MARKET OUTLOOK
The fixed-income markets have displayed high levels of volatility during the
course of the last 12 months, particularly as strong economic statistics have
raised concerns of Federal Reserve tightening. Indications are that third-
quarter growth saw a significant deceleration from second quarter levels, likely
to be in the 2-3% range. To date, the Fed has chosen not to raise rates, but the
next Open Market Committee meeting in mid-November will be the first opportunity
it will have to address the issue, absent concerns of influencing the
Presidential election. Despite the fact the Fed is likely to retain the
tightening bias reflected in the notes of its August meeting, there seems little
likelihood that they will act to modify interest-rate levels in the near term.
We continue to remain optimistic regarding the long-term prospects for
fixed-income markets, assuming that efforts at continued deficit reduction and
government downsizing remain on track. We anticipate continuing in a market-
neutral posture relative to our benchmarks until the fall elections give us a
better indication of the political and fiscal direction likely over the next two
to four years.
Sincerely,
The Active Fixed-Income Management Team
* THE MERRILL LYNCH 7-YEAR TREASURY INDEX IS ADJUSTED TO REFLECT REINVESTMENT
OF INTEREST ON SECURITIES IN THE INDEX. THE MERRILL LYNCH 7-YEAR TREASURY
INDEX IS NOT ADJUSTED TO REFLECT SALES LOADS, EXPENSES, OR OTHER FEES THAT
THE SEC REQUIRES TO BE REFLECTED IN THE PORTFOLIO'S PERFORMANCE.
** THE MERRILL LYNCH 3-YEAR TREASURY INDEX IS ADJUSTED TO REFLECT REINVESTMENT
OF INTEREST ON SECURITIES IN THE INDEX. THE MERRILL LYNCH 3-YEAR TREASURY
INDEX IS NOT ADJUSTED TO REFLECT SALES LOADS, EXPENSES, OR OTHER FEES THAT
THE SEC REQUIRES TO BE REFLECTED IN THE PORTFOLIO'S PERFORMANCE.
*** DURATION MEASURES RISK BY INDICATING HOW SENSITIVE THE VALUE OF THE
PORTFOLIO IS TO CHANGES IN INTEREST RATES. A PORTFOLIO DURATION OF 1 WOULD
INDICATE THAT A 1% INCREASE IN INTEREST RATES SHOULD CAUSE THE VALUE OF THE
PORTFOLIO TO DECREASE BY 1% WHILE A PORTFOLIO DURATION OF 2 WOULD SUGGEST
THAT A 1% INCREASE IN INTEREST RATES SHOULD CAUSE THE VALUE OF THE PORTFOLIO
TO DECREASE BY 2%.
WHILE THE PORTFOLIO MANAGERS WILL ENDEAVOR TO MANAGE THE PORTFOLIO IN ACCORDANCE
WITH AN ACTIVE FIXED-INCOME INVESTMENT PROCESS, THERE ARE NO GUARANTEES THAT
THEY WILL BE SUCCESSFUL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PERFORMANCE FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING
ALL DISTRIBUTIONS.
25
<PAGE>
MANAGERS' COMMENTARY
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Quality Income Portfolio Class A and Class B Shares and the Merrill Lynch 7-Year
Treasury Index.~
[Performance Graph]
A Shares B Shares Merrill Lynch 7-Year Treasury Index
-------- -------- -----------------------------------
4/29/92 $ 9,525 $10,000 $10,000
9/30/92 9,846 10,324 11,052
9/30/93 10,378 10,827 12,380
9/30/94 10,036 10,406 11,705
9/30/95 11,222 11,354 13,496
9/30/96 11,681++ 11,879+ 14,020~
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception+++
Class A Shares (0.83%) 3.58%
Class B Shares (0.31%) 4.03%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. The Merrill Lynch 7-Year Treasury
Index is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class A Shares, after deducting the maximum sales charge of 4.75%
($10,000 investment minus $475 sales charge = $9,525). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Quality Income Portfolio Class A and Class B
Shares from the date of initial public investment on 4/29/92 through
9/30/96.
26
<PAGE>
MANAGERS' COMMENTARY
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class A Shares and the Merrill Lynch 3-Year
Treasury.
[Performance Graph]
Class A 3-Year Treasury
------- ---------------
6/16/95 $ 9,900 $10,000
6/30/95 9,946 10,062
9/30/95 9,931 10,139
9/30/96 10,532* 11,038~
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception**
Class A 3.73% 4.08%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Merrill Lynch 3-Year Treasury is adjusted to reflect reinvestment of
interest on securities in the index. The Merrill Lynch 3-Year Treasury Index
is not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance. The Portfolio
invests in securities other than Treasuries.
* Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class A Shares, after deducting the maximum sales charge of
1.00% ($10,000 investment minus $100 sales charges = $9,900. The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class A from
the date of issuance on 6/16/95 through 9/30/96.
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class B Shares and Merrill Lynch 3-year
Treasury.~
[Performance Graph]
Class B 3-Year Treasury
------- ---------------
4/29/94 $10,000 $10,000
12/31/94 10,093 10,075
9/30/95 10,623 11,051
9/30/96 11,225+ 11,709~
Average Annual Returns as of 9/30/96
Including Sales Charges
1-Year Since Inception++
Class B 0.59% 4.87%
+ Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The ending value of the Class B shares reflects a
redemption fee of 4.00% on any redemption less than one year from the
purchase date. The Class B Shares' performance assumes the reinvestment of
all dividends and distributions.
++ Reflects operations of Mentor Short-Duration Income Portfolio Class B Shares
from the date of initial public investment on 4/29/94 through 9/30/96.
27
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 88.30%
- -------------------------------------------------------------------------------------------------------------------------
BASIC MATERIALS 1.23%
Blount International, Inc.-Class A 82,800 $ 2,784,150
Tetra Tech, Inc.* 124,650 2,290,444
- -------------------------------------------------------------------------------------------------------------------------
5,074,594
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION 1.50%
Diamond Home Services, Inc.* 70,300 2,038,700
LSI Industries, Inc. 134,750 2,156,000
Superior Services, Inc.* 123,800 1,980,800
- -------------------------------------------------------------------------------------------------------------------------
6,175,500
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL 17.54%
American Pad & Paper Company* 125,100 2,658,375
Applebees International, Inc. 61,850 1,639,025
Applied Graphics Technologies* 243,700 3,625,037
Cadmus Communications Corporation 90,600 1,517,550
Casa Ole Restaurants, Inc.* 139,100 1,790,912
Clayton Homes, Inc. 185,425 4,079,350
Clear Channel Communications* 19,200 1,699,200
Consolidated Products Company* 142,525 2,743,606
Corporate Express, Inc.* 80,750 3,139,156
Dollar General Corporation 188,526 5,867,871
Express Scripts, Inc.-Class A* 67,400 2,443,250
Fastenal Company 81,300 4,024,350
Friedman's, Inc.-Class A* 188,700 3,538,125
Gtech Holdings Corporation* 52,400 1,683,350
Keystone Automotive Industries, Inc.* 123,550 1,513,488
Paxar Corporation* 207,612 3,399,647
Regal Cinemas, Inc.* 147,393 3,684,825
Renaissance Communications* 70,800 2,495,700
Rental Service Corporation* 110,100 2,380,912
Rio Hotels & Casinos, Inc.* 94,850 1,493,887
Scientific Games Holding* 91,000 1,899,625
Sinclair Broadcasting Group, Inc.* 78,050 3,112,243
Southern Energy Homes, Inc.* 346,550 5,544,800
Speedway Motorsports, Inc.* 66,000 1,732,500
StudioPlus Hotels, Inc.* 116,300 1,918,950
Watsco, Inc. 128,725 2,622,772
- -------------------------------------------------------------------------------------------------------------------------
72,248,506
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES 1.73%
Richfood Holdings, Inc. 190,800 $ 7,107,300
- -------------------------------------------------------------------------------------------------------------------------
ENERGY 4.75%
Coach USA, Inc.* 89,350 2,390,113
Core Laboratories, Inc.* 188,050 2,961,788
Maverick Tube Corporation* 212,100 2,969,400
Nuevo Energy Company* 169,050 6,867,656
Trico Marine Services, Inc.* 90,600 2,763,300
Tuboscope Vetco International Corporation* 103,950 1,624,219
- -------------------------------------------------------------------------------------------------------------------------
19,576,476
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL 3.79%
Concord EFS, Inc.* 71,812 1,849,159
Jayhawk Acceptance Corporation* 220,900 3,120,213
Markel Corporation* 74,910 6,367,350
National Commerce Bancorp 130,296 4,267,194
- -------------------------------------------------------------------------------------------------------------------------
15,603,916
- -------------------------------------------------------------------------------------------------------------------------
HEALTH 29.09%
Atria Communities, Inc.* 166,900 2,086,250
Clintrials Research, Inc.* 84,250 3,433,188
CompDent Corporation* 62,350 2,353,712
Dentsply International, Inc. 90,750 4,038,375
Emcare Holdings, Inc.* 157,000 4,239,000
Fairfield Communities, Inc.* 164,850 3,070,331
First Commonwealth, Inc.* 81,550 1,814,488
FPA Medical Management, Inc.* 146,300 3,858,662
Genesis Health Ventures, Inc.* 82,000 2,306,250
Gulf South Medical Supplies, Inc.* 129,500 3,334,625
HCIA, Inc.* 69,600 4,176,000
Health Management Associates, Inc.* 226,625 5,637,297
Henry Schein, Inc.* 32,100 1,235,850
Home Health Corporation of America* 164,200 1,970,400
Idexx Laboratories, Inc.* 47,350 2,142,587
Invacare Corporation 32,400 907,200
Manor Care, Inc. 84,950 3,259,956
Matria Healthcare, Inc.* 226,800 1,615,950
Mecon, Inc.* 126,000 3,150,000
</TABLE>
29
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
HEALTH (CONTINUED)
Meridian Diagnostics, Inc. 218,550 $ 2,923,106
Molecular Devices Corporation* 154,300 1,620,150
Multicare Companies, Inc.* 229,150 4,984,013
National Dentex Corporation* 72,900 1,394,213
National Surgery Centers, Inc.* 181,450 5,080,600
Omnicare, Inc. 177,300 5,407,650
Parexel International Corporation* 72,400 4,561,200
Pediatric Services of America, Inc.* 150,650 2,787,025
Phycor, Inc.* 138,150 5,258,334
Physician Sales & Services, Inc.* 120,600 2,834,100
Physicians Resource Group, Inc.* 86,350 2,040,019
Raytel Medical Corporation* 214,500 2,895,750
Renal Treatment Centers* 176,500 5,868,625
Respironics, Inc.* 123,600 2,997,300
Rural/Metro Corporation* 85,200 3,109,800
Serologicals Corporation* 76,100 2,644,475
Sofamor/Danek Group, Inc.* 111,900 3,454,912
United Dental Care, Inc.* 43,300 1,564,213
Vencor, Inc.* 116,525 3,757,931
- -------------------------------------------------------------------------------------------------------------------------
119,813,537
- -------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY 21.78%
ACC Corporation* 93,700 4,427,325
Applied Microsystems Corporation* 101,450 2,143,131
Ascend Communications, Inc.* 32,400 2,142,450
Aspect Development, Inc.* 77,950 2,650,300
Benchmark Electronics, Inc.* 61,350 1,840,500
Billing Information Concepts* 75,600 1,682,100
Boston Communications Group* 96,400 1,566,500
Business Objects~* 76,100 1,464,925
Checkmate Electronics, Inc.* 105,300 1,579,500
Chips & Technologies, Inc.* 75,000 1,021,875
Cisco Systems, Inc.* 42,800 2,656,275
Danka Business Systems 66,950 2,661,263
Dataworks Corporation* 133,200 3,463,200
Envoy Corporation* 75,850 2,939,188
Frontier Corporation 94,950 2,528,044
Harbinger Corporation* 71,300 1,782,500
</TABLE>
30
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY (CONTINUED)
Indus Group* 201,300 $ 4,026,000
Industri-Matematik International Corporation* 171,300 2,119,838
Intelligroup, Inc.* 126,500 1,755,187
Intercel, Inc.* 138,550 2,909,550
Linear Technology Corporation 46,000 1,696,250
Micros Systems, Inc.* 132,300 3,902,850
National Education Corporation* 172,400 3,297,150
National Techteam, Inc.* 79,150 2,146,944
Naturla Microsystems Corporation* 40,000 1,925,000
Novadigm, Inc.* 141,200 847,200
Palmer Wireless, Inc.* 25,350 448,378
Precision Response Corporation* 103,050 3,967,425
Rational Software Corporation* 66,400 2,265,900
SDL, Inc.* 69,325 1,421,163
Symmetricom, Inc.* 125,000 1,890,625
Systemsoft Corporation* 63,100 2,161,175
TechForce Corporation* 150,050 1,106,619
Triquint Semiconductor, Inc.* 161,000 3,743,250
U.S. Long Distance Corporation* 168,350 1,504,628
Uniphase Corporation* 88,400 3,734,900
Verilink Corporation* 99,500 2,437,750
Worldcom, Inc.* 180,774 3,864,044
- -------------------------------------------------------------------------------------------------------------------------
89,720,902
- -------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION 0.43%
Mesaba Holdings, Inc. 162,550 1,767,731
- -------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS 6.46%
ABR Information Services* 58,075 4,181,400
Barrett Business Services, Inc.* 100,600 1,609,600
Career Horizons, Inc.* 200,250 7,784,719
Childtime Learning Centers* 46,300 474,575
Outdoor Systems, Inc.* 82,150 3,861,050
Source Services Corporation* 128,100 2,273,775
Ultrak, Inc.* 126,500 3,478,750
Universal Outdoor Holdings* 81,600 2,937,600
- -------------------------------------------------------------------------------------------------------------------------
26,601,469
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $264,027,013) 363,689,931
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT 12.63%
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/96, 5.78%, due 10/01/96
collateralized by $53,737,665
Federal National Mortgage Association
7.50%, 4/01/26, (cost $52,004,489) $52,004,489 $ 52,004,489
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $316,031,502) 100.93% 415,694,420
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES (0.93%) (3,844,260)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $411,850,160
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Securities not currently producing income.
~ American Depository Receipts.
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 93.35%
- --------------------------------------------------------------------------------------------------------------------------
ARGENTINA 0.35%
Perez Company~ 9,718 $ 121,475
YPF Associadad~ 3,100 70,913
- --------------------------------------------------------------------------------------------------------------------------
192,388
- --------------------------------------------------------------------------------------------------------------------------
BRAZIL 0.94%
Brazil Fund 3,400 74,375
Cemig CIA Energetic~(b) 3,000 89,614
Telebras~ 3,400 266,900
Vale Do Rio Doche~ 4,400 87,263
- --------------------------------------------------------------------------------------------------------------------------
518,152
- --------------------------------------------------------------------------------------------------------------------------
CHILE 0.17%
Chile Fund 4,100 94,300
- --------------------------------------------------------------------------------------------------------------------------
CHINA 0.09%
Guanshen Railway 130,000 49,387
- --------------------------------------------------------------------------------------------------------------------------
DENMARK 0.95%
Danisco A/S 5,700 328,213
Sophus Berendsen 1,675 200,052
- --------------------------------------------------------------------------------------------------------------------------
528,265
- --------------------------------------------------------------------------------------------------------------------------
FINLAND 1.32%
Cultor OY 7,200 385,027
Huhtamaki 9,100 343,035
- --------------------------------------------------------------------------------------------------------------------------
728,062
- --------------------------------------------------------------------------------------------------------------------------
FRANCE 4.74%
AXA 5,030 301,383
Axime (Ex Segin)* 3,000 299,779
Cardif SA 2,090 294,651
Cetelem 1,500 323,018
Comptoirs Modernes 770 365,034
Credit Local France 3,900 332,313
Generale Des Eeux 1,600 173,826
Television Franchise 2,500 277,412
Union Financiere France 2,300 248,983
- --------------------------------------------------------------------------------------------------------------------------
2,616,399
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
GERMANY 1.56%
BASF AG 7,000 $ 218,499
Daimler Benz* 3,000 164,760
SGL Carbon 1,800 210,105
Veba AG 5,100 267,282
- --------------------------------------------------------------------------------------------------------------------------
860,646
- --------------------------------------------------------------------------------------------------------------------------
GREAT BRITAIN 10.31%
B.A.T. Industries, PLC 35,000 233,179
Barclays, PLC 20,000 294,048
British Aerospace PLC 16,000 264,674
British Gas PLC 70,500 220,219
British Telecom 75,000 418,642
Glaxo Wellcome 23,000 360,663
Grand Metro 25,000 186,520
Inchcape PLC 35,000 148,786
Land Securities 10,000 109,133
Lucasvarity 85,000 338,711
Medeva 80,000 320,039
Prudential Corporation PLC 60,000 422,283
Rank Organisation PLC 15,000 100,521
Rolls Royce 90,000 337,497
Safeway 35,000 180,022
Scotia Holdings 30,000 270,092
Standard Chartered 17,500 190,845
Sun Alliance Group PLC 50,000 317,456
Tate & Lyle PLC 20,000 146,398
Tesco PLC 30,000 142,562
Transport Development Group 45,000 131,758
Unigate 20,000 130,740
Unilever PLC 20,000 427,919
- --------------------------------------------------------------------------------------------------------------------------
5,692,707
- --------------------------------------------------------------------------------------------------------------------------
HONG KONG 7.47%
CDL Hotels International 320,000 173,801
Cheung Kong Holdings 36,000 276,995
China Light & Power 40,000 186,215
China O/Seas Land 310,000 105,231
Chinese Estates 74,000 66,986
Citic Pacific Limited 16,000 72,417
</TABLE>
34
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
HONG KONG (CONTINUED)
Dah Sing Financial 20,000 $ 70,348
Goldlion Holdings 100,000 84,702
Henderson China 45,056 102,546
Henderson Land Development 30,000 257,015
Hong Kong Electric 80,000 258,632
Hong Kong Telecom, Ltd.~ 120,200 217,613
HSBC Holdings PLC 24,361 452,063
Hutchison Whampoa, Ltd. 62,000 416,915
Hysan Development-Warrants* 700 326
International Bank of East Asia 320,000 193,457
JCG Holdings 154,000 138,407
Liu Chong Hing Investment 50,000 49,463
National Mutual Asia 120,000 105,522
New World Development 64,000 336,014
Shanghai Industrial 32,000 73,451
Sun Hung Kai Property 20,000 212,725
Swire Pacific Limited-"A" 16,000 143,282
Television Broadcast, Ltd. 16,000 59,485
Wing Hang Bank 20,000 75,003
- --------------------------------------------------------------------------------------------------------------------------
4,128,614
- --------------------------------------------------------------------------------------------------------------------------
INDIA 0.51%
BSES Limited GDR 4,000 69,000
Indian Opportunity 11,000 97,570
India Cement GDR 20,000 80,000
Tata Elec Cies GDR 100 36,750
- --------------------------------------------------------------------------------------------------------------------------
283,320
- --------------------------------------------------------------------------------------------------------------------------
INDONESIA 0.27%
Citra Marga Local 120,000 81,367
PT Daya Gune Samudera 42,000 35,395
PT Indonesia Satellite A~ 800 26,400
Sorini (Sorbitol) 9,000 5,812
- --------------------------------------------------------------------------------------------------------------------------
148,974
- --------------------------------------------------------------------------------------------------------------------------
ITALY 0.46%
Telecom Itialia Mobile 114,000 252,977
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
JAPAN 14.73%
Aiwa 11,000 $ 217,323
Chugai Pharm 5,000 48,045
Chugai Pharm-Warrants* 40 36,500
Eiden Sakakiya 7,000 85,492
Fujisawa Pharm 13,000 123,748
Futaba 6,000 269,409
Heiwa Corporation 10,000 198,464
Hitachi Construction 6,000 68,969
Hibiya Engineering 27,000 303,085
Kansai Paint 9,000 42,432
Kikkoman 30,000 233,038
Kirin Beverage 15,000 219,568
Kokusai Securities 3,000 40,411
Komatsu Seiren 18,000 156,796
Kurimoto 15,000 164,339
Kyocera Corporation-Warrants* 30 36,750
Makita Corporation 15,000 219,568
Max Co 9,000 176,193
Mos Foods 7,000 150,869
Nichiha 13,000 253,334
Nippon Telegraph & Telephone 32 235,643
Ono Pharmaceutical 8,000 260,788
Raito Kogyo 9,000 154,371
Sagami Chain 12,000 224,148
Sankura Bank, Ltd. 19,000 189,394
Santen Pharmaceutical 13,000 283,687
Sanyo Shinpan Finance Company 3,700 225,944
Sodick Company 10,000 104,171
Sumitomo Bank 24,000 443,985
Sumitomo Marine Fire 35,000 275,964
Sumitomo Realty & Development 19,000 146,397
Takuma 20,000 256,836
Takara Standard 22,000 215,347
Toagosei 42,000 196,507
Toho Company 1,000 166,135
Tokushu Paper 17,000 157,245
Tokyo Denpa Company 6,000 234,386
Tokyo Electric Power 5,000 121,234
Toyo Exterior 9,000 187,508
Tsudakoma 20,000 125,544
</TABLE>
36
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
JAPAN (CONTINUED)
Uniden 13,000 $ 243,994
Victor Company of Japan 18,000 224,687
Yokohama Reito 15,000 193,974
York-Benimaru 6,000 225,226
- --------------------------------------------------------------------------------------------------------------------------
8,137,448
- --------------------------------------------------------------------------------------------------------------------------
KOREA 0.26%
CITC Seoul Exel IDR 2 21,300
Korea-Europe Fund IDR 18 62,550
LG Electronics GDR 6,400 38,560
Samsung Electronics GDR (b) 397 20,168
- --------------------------------------------------------------------------------------------------------------------------
142,578
- --------------------------------------------------------------------------------------------------------------------------
MALAYSIA 2.38%
Affin Holdings Berhad 65,000 150,409
Boustead Holdings 12,000 25,135
Cahya Mata Sarawak BHD 15,000 106,523
Commerce Asset Holdings 8,000 49,791
DCB Holdings 36,000 123,519
IOI Properties 32,000 101,496
Kian Joo Can Factory 24,000 132,136
Larut Consolidated 60,000 92,400
Magnum Corporation 110,000 186,954
MBM Resources 20,000 43,886
Metacorp 20,000 57,451
Renong Berhad 40,000 61,281
Resorts World 16,000 90,644
Sime Daarby Berhad 16,000 52,982
UMW Holdings Berhad 10,000 38,500
- --------------------------------------------------------------------------------------------------------------------------
1,313,107
- --------------------------------------------------------------------------------------------------------------------------
MEXICO 0.98%
Cemex~ 7,800 64,108
CIFRA~ 50,000 71,500
Empresas ICA SA~ 5,000 72,500
Empress La Modern~ 3,400 65,025
Grupo Financiero Bancomer~ (b) 11,000 107,305
</TABLE>
37
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
MEXICO (CONTINUED)
Mexico Fund 4,300 $ 68,263
Telefonos de Mexico-Class L~ 2,800 89,950
- --------------------------------------------------------------------------------------------------------------------------
538,651
- --------------------------------------------------------------------------------------------------------------------------
NETHERLANDS 5.51%
ABN-Amro Holdings 6,100 338,473
Aegon NV 7,200 355,727
DSM 2,200 216,102
Fortis Amev NV 10,300 307,741
ING Groep NV 7,000 218,558
Oce-Van Der Grinten 3,200 349,693
Polygram NV 5,600 313,676
Royal Dutch Petroleum 1,400 218,967
VNU-Ver Ned Uitgev V 21,000 411,331
Wolters Kluwer 2,480 312,193
- --------------------------------------------------------------------------------------------------------------------------
3,042,461
- --------------------------------------------------------------------------------------------------------------------------
PHILIPPINES 0.50%
Benpres Holdings GDR 8,000 60,000
Empire East Land 117,000 61,881
Filinvest Land 75,000 27,158
Hi Cement Placing 79,730 26,590
Pilipino Telephone 74,300 101,955
- --------------------------------------------------------------------------------------------------------------------------
277,584
- --------------------------------------------------------------------------------------------------------------------------
SINGAPORE 1.18%
ACMA Limited 30,000 71,591
ACMA Limited-Warrants* 7,500 5,167
Development Bank Singapore 4,000 49,148
Fraser & Neave 4,000 41,193
Jardine Strategic Holding 20,000 63,600
Jardine Strategic-Warrants* 3,125 844
Keppel Bank 40,000 109,091
Sembawang Corporation 12,000 56,250
Singapore Press Holdings 10,000 182,528
Straits Trading Company 8,000 19,205
UTD Overseas 32,000 50,455
UTD Overseas-Warrants* 2,000 1,417
- --------------------------------------------------------------------------------------------------------------------------
650,489
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
SPAIN 1.20%
Corporacion Financiera 3,700 $ 308,165
Tabacalera SA 2,700 115,171
Viscofan Envolturas Celulos 16,000 241,613
- --------------------------------------------------------------------------------------------------------------------------
664,949
- --------------------------------------------------------------------------------------------------------------------------
SWEDEN 1.50%
Asea AB 3,140 331,576
Securitas AB B-Free 16,200 391,012
Volvo 5,000 107,483
- --------------------------------------------------------------------------------------------------------------------------
830,071
- --------------------------------------------------------------------------------------------------------------------------
SWITZERLAND 2.23%
Elektrowatt 620 243,748
Roche Holding AG 27 198,840
Sandoz AG Basel 282 338,670
Sulzer AG 360 211,579
Swissair* 290 238,429
- --------------------------------------------------------------------------------------------------------------------------
1,231,266
- --------------------------------------------------------------------------------------------------------------------------
TAIWAN 0.44%
Formosa Growth Fund 5,000 72,500
Taipei Fund IDR 20 169,500
- --------------------------------------------------------------------------------------------------------------------------
242,000
- --------------------------------------------------------------------------------------------------------------------------
THAILAND 2.05%
Banpu Coal 4,000 87,480
CMIC Finance & SEC Public Company 24,000 58,058
Cogeneration PLC 12,000 48,145
Dhana Siam Finance & SEC 40,000 188,805
First Bangkok City Bank 120,000 186,445
Krung Thai Bank 62,000 265,822
Loxley Public Company 5,000 48,775
Nation Multimedia Group 14,000 44,055
PTT Exploration 4,000 59,159
Telecomasia 30,000 60,772
Thai Military Bank, Ltd. 9,000 32,038
Thai Telephone 30,000 51,331
- --------------------------------------------------------------------------------------------------------------------------
1,130,885
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
UNITED STATES 31.25%
Abacus Direct Corporation 25,000 $ 525,000
AGCO Corporation 20,000 510,000
American Home Products Corporation 9,000 573,750
AMR Corporation* 6,000 477,750
Avnet, Inc. 12,000 582,000
BMC Industries 25,000 715,625
Chesapeake Energy 15,000 939,375
Colgate Palmolive 6,000 521,250
Columbia Gas Systems 10,000 560,000
Columbia HCA Healthcare 9,000 511,875
Diamond Offshore 8,040 442,200
Fisher Scientific 15,000 618,750
Geotek Communications 40,000 335,000
Home Depot, Inc. 12,000 682,500
Household International 7,000 575,750
IMC Global, Inc. 12,000 469,500
Inbrand Corporation 15,000 427,500
Lear Corporation 15,000 495,000
Lockheed Martin Corporation 6,000 540,750
Micro Warehouse, Inc. 18,000 463,500
Microsoft Corporation 4,000 527,500
National Processing 30,000 585,000
National Semiconductor 25,000 503,125
Oak Industries* 17,000 565,250
Oryx Energy* 30,000 532,500
Outdoor Systems, Inc. 10,000 470,000
Price/Costco, Inc. 20,000 410,000
Reynolds & Reynolds Company-Class A 18,000 470,250
Shoney's, Inc.* 50,000 456,250
Staples, Inc. 20,000 443,750
Structural Dynamics 22,000 525,250
Sybron International Corporation 14,000 406,000
Wind River Systems 9,000 398,250
- --------------------------------------------------------------------------------------------------------------------------
17,260,200
- --------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $48,040,789) 51,555,880
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE BOND 0.13%
- --------------------------------------------------------------------------------------------------------------------------
MALAYSIA
Telekom Malaysia Berhad, 4.00%, 10/3/04~
(9/22/94, $70,000) (a) (b) $ 70,000 $ 71,925
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT 6.03%
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/96, 5.78%, due 10/1/96,
collateralized by Federal National Mortgage Association,
$3,439,693 7.50%, 4/01/26,
(cost $3,327,930) 3,327,930 3,327,930
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $51,438,719) 99.51% 54,955,735
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES 0.49% 273,229
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $55,228,964
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing.
~ American Depository Receipts.
(a) All or a portion of these securities are restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses
after the title of the restricted securities.
(b) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4 (2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 93.90%
- --------------------------------------------------------------------------------------------------------------------------
BASIC MATERIALS 12.09%
Bemis Company, Inc. 89,000 $ 3,014,875
Morton International, Inc. 75,000 2,981,250
Nalco Chemical Company 85,500 3,099,375
Sonoco Products Company 109,350 3,007,125
- --------------------------------------------------------------------------------------------------------------------------
12,102,625
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION 9.00%
Pall Corporation 113,000 3,192,250
W.W. Grainger, Inc. 38,700 2,718,675
York International Corporation 64,000 3,096,000
- --------------------------------------------------------------------------------------------------------------------------
9,006,925
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL 14.46%
Interpublic Group Company 66,500 3,142,125
Carnival Corporation-Class A 106,000 3,286,000
Mattel, Inc. 104,000 2,691,000
Newell Company 95,500 2,865,000
Olsten Corporation 100,250 2,493,719
- --------------------------------------------------------------------------------------------------------------------------
14,477,844
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES 12.30%
Avon Products 58,300 2,893,138
CPC International, Inc. 43,000 3,219,625
Sherwin Williams Company 63,700 2,954,087
Sysco Corporation 96,400 3,241,450
- --------------------------------------------------------------------------------------------------------------------------
12,308,300
- --------------------------------------------------------------------------------------------------------------------------
ENERGY 2.53%
Schlumberger, Ltd. 30,000 2,535,000
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL 13.48%
American Express Company 64,000 2,960,000
Banc One Corporation 75,900 3,111,900
Federal National Mortgage Association 62,200 2,169,225
First Union Center 39,600 2,643,300
United Asset Management Corporation 110,400 2,608,200
- --------------------------------------------------------------------------------------------------------------------------
13,492,625
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares or
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
HEALTH 7.42%
Johnson & Johnson 47,800 $ 2,449,750
Pfizer, Inc. 24,000 1,899,000
Schering -- Plough 50,000 3,075,000
- --------------------------------------------------------------------------------------------------------------------------
7,423,750
- --------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY 10.03%
AMP, Inc. 68,500 2,654,375
Electronic Data Systems 51,500 3,160,813
Intel Corporation 25,500 2,433,656
Linear Technology Company 48,600 1,792,125
- --------------------------------------------------------------------------------------------------------------------------
10,040,969
- --------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION & SERVICES 2.66%
Werner Enterprises, Inc. 166,450 2,663,200
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES 2.84%
Ameritech Corporation 27,000 1,420,875
GTE Corporation 37,000 1,424,500
- --------------------------------------------------------------------------------------------------------------------------
2,845,375
- --------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS 7.09%
S & P 500-Depository Receipt 68,000 4,666,500
Tyco International, Ltd. 56,400 2,432,250
- --------------------------------------------------------------------------------------------------------------------------
7,098,750
- --------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $80,135,684) 93,995,363
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT 6.23%
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/96, 5.78%, due 10/01/96,
collateralized by $6,440,215
Federal National Mortgage Association,
7.5%, 04/01/26, (cost $6,231,774) $6,231,774 6,231,774
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $86,367,458) 100.13% 100,227,137
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES (0.13%) (125,444)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $100,101,693
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 55.17%
- -------------------------------------------------------------------------------------------------------------------------
BASIC MATERIALS 2.02%
Praxair, Inc. 70,200 $ 3,018,600
RMI Titanium Company* 74,000 1,868,500
Uranium Resources, Inc.* 103,000 1,339,000
- -------------------------------------------------------------------------------------------------------------------------
6,226,100
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION 3.96%
JLG Industries 192,000 3,600,000
Hirsch International Corporation-Class A* 68,750 1,271,875
Miller Industries, Inc.* 29,800 1,177,100
Shaw Group* 148,000 5,143,000
Sinter Metals, Inc.-Class A* 52,000 1,040,000
- -------------------------------------------------------------------------------------------------------------------------
12,231,975
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 8.86%
Cintas Corporation 26,200 1,467,200
Concord EFS, Inc.* 200,500 5,162,875
Correctional Services Corporation* 110,500 1,560,813
Corrections Corporation of America* 86,000 2,687,500
Equifax, Inc. 122,200 3,223,025
Omnicom Group, Inc. 71,500 3,342,625
Paychex, Inc. 92,305 5,353,690
Sitel Corporation* 28,600 1,272,700
United Waste Systems* 95,000 3,301,250
- -------------------------------------------------------------------------------------------------------------------------
27,371,678
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL 6.75%
Cavalier Homes, Inc. 93,700 1,733,450
Clear Channel Communications* 72,000 6,372,000
Gentex Corporation* 94,000 2,138,500
HFS, Inc.* 54,000 3,611,250
Oakwood Homes 61,800 1,699,500
Redman Industries, Inc.* 74,200 2,077,600
Regal Cinemas, Inc.* 37,800 945,000
Watsco, Inc. 71,250 1,451,719
West Marine, Inc.* 25,000 825,000
- -------------------------------------------------------------------------------------------------------------------------
20,854,019
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES 3.58%
Gillette Company 46,000 $ 3,317,750
Rexall Sundown, Inc.* 115,050 4,199,325
Richfood Holdings, Inc. 95,000 3,538,750
- -------------------------------------------------------------------------------------------------------------------------
11,055,825
- -------------------------------------------------------------------------------------------------------------------------
ENERGY 9.01%
BJ Services Company* 78,500 2,845,625
CalEnergy, Inc.* 112,000 3,570,000
Chevron Corporation 48,400 3,031,050
Forcenergy Gas Exploration, Inc.* 132,000 3,267,000
Helmerich & Payne 38,700 1,688,288
Imperial Oil, Limited 34,400 1,462,000
Panenergy Corporation 84,900 2,939,662
Ranger Oil, Limited 177,500 1,331,250
Smith International, Inc.* 123,000 4,320,375
Swift Energy Company* 140,500 3,372,000
- -------------------------------------------------------------------------------------------------------------------------
27,827,250
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL 5.07%
AAMES Financial Corporation 26,000 1,309,750
Cityscape Financial Corporation* 83,000 2,199,500
North Fork Bancorporation 111,000 3,496,500
Safeguard Scientifics, Inc.* 54,200 2,161,225
Synovus Financial Corporation 130,800 3,400,800
U.S. Bancorp 78,000 3,081,000
- -------------------------------------------------------------------------------------------------------------------------
15,648,775
- -------------------------------------------------------------------------------------------------------------------------
HEALTH 3.26%
Renal Treatment Centers, Inc.* 64,400 2,141,300
Service Corporation International 131,200 3,968,800
U.S. Surgical Corporation 93,000 3,952,500
- -------------------------------------------------------------------------------------------------------------------------
10,062,600
- -------------------------------------------------------------------------------------------------------------------------
RETAIL 3.01%
Federated Department Stores* 84,000 2,814,000
Just For Feet* 32,300 1,619,037
Rent-Way, Inc.* 95,000 1,199,375
Safeway, Inc.* 86,000 3,665,750
- -------------------------------------------------------------------------------------------------------------------------
9,298,162
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares or
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY 7.29%
ACC Corporation* 93,900 $ 4,436,775
Aspen Technology, Inc.* 41,600 2,818,400
Benchmark Electronics, Inc.* 29,300 879,000
Computer Task Group 38,000 1,182,750
Datastream Systems, Inc.* 50,000 1,512,500
HCIA, Inc.* 16,000 960,000
MDL Information Systems, Inc.* 54,000 1,707,750
Parametric Technology Corporation* 100,000 4,937,500
Radisys Corporation* 53,400 2,643,300
VeriFone, Inc.* 32,000 1,432,000
- -------------------------------------------------------------------------------------------------------------------------
22,509,975
- -------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION 2.36%
Air Express International Corporation 102,000 2,881,500
Wisconsin Central Transportation Corporation* 123,000 4,412,625
- -------------------------------------------------------------------------------------------------------------------------
7,294,125
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $112,944,592) 170,380,484
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES AND AGENCIES 23.16%
- -------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note-PO Strip, 7.34%, 8/15/20 $154,000,000 28,194,320
U.S. Treasury Note-PO Strip, 7.44%, 8/15/21 253,000,000 43,346,490
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES
(COST $68,673,247) 71,540,810
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT 21.31%
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/96, 5.78%, due 10/01/96,
collateralized by $68,027,459
Federal National Mortgage Association,
7.50%, 04/01/26 (cost $65,833,005) 65,833,005 65,833,005
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $247,450,844) 99.64% 307,754,299
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES 0.36% 1,111,907
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $308,866,206
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
PO - Principal Only Security
* Securities not currently producing income.
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 56.84%
- --------------------------------------------------------------------------------------------------------------------------
BASIC MATERIALS 8.61%
Aluminum Company of America 26,400 $ 1,557,600
Chirex Incorporated* 17,100 222,300
Hexcel Corporation* 66,200 1,282,625
IMC Global, Inc. 18,000 704,250
Precision Castparts Corporation 12,700 615,950
Quaker Chemical Corporation 25,000 371,875
Rhone Poulenc SA-Class A~ 28,534 798,952
Titanium Metals Corporation* 6,900 200,100
Tremont Corporation* 15,000 511,875
Witco Corporation 15,000 493,125
W.R. Grace & Company 20,000 1,050,000
- --------------------------------------------------------------------------------------------------------------------------
7,808,652
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION 5.58%
Albany International Corporation-Class A 27,000 583,875
Aviall, Inc. 60,000 487,500
BE Aerospace, Inc.* 42,700 880,688
Browning-Ferris Industries 15,000 375,000
Curtiss-Wright Corporation 9,700 528,650
Lone Star Technologies, Inc.* 25,100 367,088
Sequa Corporation-Class A* 18,100 807,712
Standard Pacific Corporation 77,200 443,900
WMX Technologies, Inc. 17,800 585,175
- --------------------------------------------------------------------------------------------------------------------------
5,059,588
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL 8.40%
Barry R.G.* 18,750 250,781
Blair Corporation 17,300 371,950
Brinker International, Inc.* 30,000 510,000
Darden Restaurants, Inc. 35,000 301,875
Deluxe Corporation 19,000 717,250
Fruit Of The Loom, Inc.* 20,000 620,000
Goodrich BF 17,400 785,175
Hasbro, Inc. 5,800 215,325
Hills Stores Company* 27,549 196,286
Kellwood Company 33,000 548,625
Kmart Corporation 60,000 615,000
Payless Shoesource, Inc.* 20,000 672,500
Polaroid Corporation 15,000 660,000
Tyco Toys, Inc.* 125,000 718,750
Valassis Communications* 28,300 442,188
- --------------------------------------------------------------------------------------------------------------------------
7,625,705
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES 4.00%
Chiquita Brands International 33,600 $ 411,600
Dimon Incorporated 17,000 325,125
International Multifoods Corporation 30,000 487,500
Interstate Bakeries Corporaton 20,200 737,300
Schweitzer-Mauduit International, Inc. 13,800 462,300
Universal Corporation 47,000 1,198,500
- --------------------------------------------------------------------------------------------------------------------------
3,622,325
- --------------------------------------------------------------------------------------------------------------------------
ENERGY 8.48%
Amerada Hess Corporation 18,000 951,750
Anderson Exploration* 18,216 183,191
Ashland Oil, Inc. 13,300 528,675
Burlington Resources, Inc. 19,200 852,000
Giant Industries, Inc. 42,600 612,375
Mitchell Energy-Class A 25,000 471,875
Noble Drilling Corporation* 34,500 521,812
Oryx Energy* 44,700 793,425
Patina Oil & Gas Corporation* 37,879 265,153
Patina Oil & Gas-Warrants* 18,939 18,939
Rowan Companies, Inc.* 60,000 1,117,500
Tosco Corporation 14,000 768,250
U.S.X. Marathon Group, Inc. 28,300 611,988
- --------------------------------------------------------------------------------------------------------------------------
7,696,933
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL 4.91%
California Federal Bank* 25,556 594,177
CIGNA Corporation 12,100 1,450,488
Danielson Holding Company* 76,000 418,000
Highlands Insurance Group* 30,000 600,000
Lehman Brothers Holding, Inc. 24,840 633,420
Old Republic International Corporation 16,500 408,375
Paul Revere Corporation 13,000 354,250
- --------------------------------------------------------------------------------------------------------------------------
4,458,710
- --------------------------------------------------------------------------------------------------------------------------
HEALTH 1.10%
Fresenius Medical Care 20,260 471,045
Novacare, Inc.* 56,000 525,000
- --------------------------------------------------------------------------------------------------------------------------
996,045
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY 3.19%
Advanced Fibre Company* 200 $ 5,000
Alcatel Alsthom~ 50,378 850,129
Compuware Corporation* 10,000 457,500
Elsag Baily Process Auto NV* 25,000 534,375
International Business Machines Corporation 5,000 622,500
Qualcomm, Inc.* 10,000 425,000
- --------------------------------------------------------------------------------------------------------------------------
2,894,504
- --------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION & SERVICES 4.19%
AMR Corporation* 9,164 729,683
Bergesen Dyas-Class A~ 20,000 424,514
Boeing Company 6,000 567,000
Canadian Pacific, Ltd. 23,500 543,438
Halter Marine Group* 3,500 41,125
Nordic American Tanker Ship-Warrants* 20,000 95,000
OMI Corporation* 55,900 398,288
Overseas Shipholding Group 25,000 412,500
Roadway Express, Inc. 40,000 595,000
- --------------------------------------------------------------------------------------------------------------------------
3,806,548
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES 3.21%
B.C.E., Inc. 25,400 1,085,850
Enserch Corporation 4,800 100,200
Niagara Mohawk Power 120,700 965,600
Petroleum Heat & Power 108,566 759,962
- --------------------------------------------------------------------------------------------------------------------------
2,911,612
- --------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS 1.60%
Bradley Real Estate 7,546 122,622
Catellus Development Corporation* 30,000 296,250
Koger Equity, Inc.* 27,500 429,688
Newhall Land & Farming Company~ 36,100 609,187
- --------------------------------------------------------------------------------------------------------------------------
1,457,747
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares or
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES 3.57%
CAE, Inc. 75,000 $ 575,293
Cameco Corporation 12,000 590,597
Far East Levingston 180,000 850,142
Onex Corporation 23,400 243,042
St. Lawrence Cement, Inc. 45,000 298,932
Technip SA* 7,500 685,396
- --------------------------------------------------------------------------------------------------------------------------
3,243,402
- --------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $42,362,092) 51,581,771
- --------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS 2.21%
- --------------------------------------------------------------------------------------------------------------------------
BASIC MATERIALS 0.66%
Cooper Industries 29,000 594,500
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION 0.41%
Elsag Bailey Process Auto NV (a) 9,300 378,975
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL 1.13%
Glendale Federal Bank 21,700 1,022,613
- --------------------------------------------------------------------------------------------------------------------------
RETAIL 0.01%
Intertan, Inc.* 1,200 7,650
- --------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (COST $1,385,599) 2,003,738
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 5.61%
- --------------------------------------------------------------------------------------------------------------------------
BASIC MATERIALS 0.26%
Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 239,395
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION 0.11%
Lockheed Corporation, 6.75%, 3/15/03 100,000 98,287
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL 0.20%
Sears Roebuck Company, 9.25%, 4/15/98 175,000 182,740
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES 0.25%
Gillette Company, 5.75%, 10/15/05 $ 250,000 $ 227,892
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL 2.93%
American General Finance Corporation,
5.88%, 7/01/00 250,000 242,642
Associates Corporation of North America,
5.25%, 3/30/00 250,000 238,995
Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 257,758
Comerica Bank, 7.13%, 12/01/13 250,000 232,285
Dean Witter Discover, 6.25%, 3/15/00 100,000 98,480
First National Bank of Boston, 8.00%, 9/15/04 250,000 260,835
Ford Motor Credit, 8.88%, 6/15/99 100,000 105,552
Great Western Financial, 6.38%, 7/01/00 250,000 246,625
Home Savings of Americas, 6.00%, 11/01/00 250,000 241,848
Security Benefits Life Company, 8.75%, 5/15/16 (a) 500,000 510,800
Toronto Dominion Bank, 6.13%, 11/01/08 250,000 225,985
- --------------------------------------------------------------------------------------------------------------------------
2,661,805
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES 1.86%
Duke Power Company, 7.00%, 6/01/00 100,000 101,092
Florida Power & Light Company, 5.38%, 4/01/00 250,000 238,972
Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 233,045
Philadelphia Electric Company, 7.50%, 1/15/99 100,000 101,968
Southwestern Public Service Company, 6.88%, 12/01/99 250,000 251,723
System Energy Resources, 7.71%, 8/01/01 500,000 507,345
Union Electric Company, 6.75%, 10/15/99 250,000 250,463
- --------------------------------------------------------------------------------------------------------------------------
1,684,608
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $5,275,855) 5,094,727
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES AND AGENCIES 23.95%
- --------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association
6.50%-7.00%, 9/15/23-2/15/26 5,393,155 5,155,657
U.S. Treasury Bond, 7.25%, 5/15/16 2,500,000 2,554,975
U.S. Treasury Notes, 5.13%-6.50%,
3/31/98-8/15/05 14,250,000 14,027,505
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES
(COST $21,976,652) 21,738,137
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT 10.25%
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Lehman Brothers, Inc.
Dated 9/30/96, 5.70%, Due 10/01/96,
collateralized by $9,531,000,
U.S. Treasury Bond,
4.93%, 10/31/96 (cost $9,302,000) $ 9,302,000 $ 9,302,000
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $80,302,197) 98.86% 89,720,373
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES 1.14% 1,037,208
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $90,757,581
- --------------------------------------------------------------------------------------------------------------------------
</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.
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL SECURITIES 99.01%
- ------------------------------------------------------------------------------------------------------------------------
ARIZONA 3.36%
Pima County Arizona IDA, 7.25%, 7/15/10 $1,665,000 $ 1,840,591
- ------------------------------------------------------------------------------------------------------------------------
CALIFORNIA 3.92%
Carson Improvement Board Act 1915,
Special Assessment District 92, 7.38%, 9/02/22 720,000 757,865
Orange County Community Facilities District, Series A, 7.35%,
8/15/18 300,000 347,718
San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,041,950
- ------------------------------------------------------------------------------------------------------------------------
2,147,533
- ------------------------------------------------------------------------------------------------------------------------
COLORADO 6.87%
Colorado Housing Authority, 7.00%, 11/01/24 605,000 628,341
Denver City & County Airport Revenue, 7.75%-8.50%,
11/15/13-11/15/23 2,700,000 3,133,234
- ------------------------------------------------------------------------------------------------------------------------
3,761,575
- ------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA 1.55%
Metropolitan Washington, General Airport Revenue,
Series A, 6.63%, 10/01/19 800,000 852,048
- ------------------------------------------------------------------------------------------------------------------------
FLORIDA 5.10%
Hillsborough County, 6.25%, 12/01/34 1,250,000 1,309,763
Sarasota County, Health Facilities Authority Revenue, 10.00%,
7/01/22 1,180,000 1,484,251
- ------------------------------------------------------------------------------------------------------------------------
2,794,014
- ------------------------------------------------------------------------------------------------------------------------
GEORGIA 3.88%
Cobb County Development Authority Revenue Bonds, Series 92A,
8.00%, 6/01/22 1,000,000 1,015,000
Monroe County Development Authority PCR, 6.75%, 1/01/10 1,000,000 1,111,440
- ------------------------------------------------------------------------------------------------------------------------
2,126,440
- ------------------------------------------------------------------------------------------------------------------------
ILLINOIS 8.46%
Broadview Tax Increment Revenue, 8.25%, 7/01/13 1,000,000 1,088,190
Chicago Heights Residential Mortgage,
(effective yield-2.85%) (a), 6/01/09 3,465,000 1,410,740
Chicago, Capital Appreciation,
(effective yield-1.74%) (a), 7/01/16 2,000,000 569,840
Illinois Health Facilities Authority Revenue, 9.50%, 10/01/22 1,250,000 1,564,237
- ------------------------------------------------------------------------------------------------------------------------
4,633,007
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
INDIANA 0.54%
Indiana Transportation Finance Authority, Series A, (effective
yield-1.70%) (a), 6/01/17 $1,000,000 $ 293,010
- ------------------------------------------------------------------------------------------------------------------------
IOWA 1.23%
Student Loan Liquidity Corporation, Student Loan Revenue, Series
C, 6.95%, 3/01/06 625,000 671,831
- ------------------------------------------------------------------------------------------------------------------------
KENTUCKY 3.78%
Jefferson County, Hospital Revenue, 8.85%*, 10/01/08 500,000 565,625
Kenton County Airport Board Revenue, OID, 7.50%, 2/01/20 1,400,000 1,501,458
- ------------------------------------------------------------------------------------------------------------------------
2,067,083
- ------------------------------------------------------------------------------------------------------------------------
MAINE 1.90%
Maine State Housing Authority, Series C, 6.88%, 11/15/23 1,000,000 1,037,700
- ------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS 3.53%
Massachusetts State Health and Educational Facilities Authority,
OID Revenue Bonds, Series A, 6.00%, 10/01/23 1,000,000 833,870
Massachusetts State Health and Education, 6.88%, 4/01/22 1,000,000 1,100,660
- ------------------------------------------------------------------------------------------------------------------------
1,934,530
- ------------------------------------------------------------------------------------------------------------------------
MICHIGAN 1.10%
Romulus Community Schools, Refunding,
(effective yield-1.42%) (a), 5/01/20 2,385,000 599,637
- ------------------------------------------------------------------------------------------------------------------------
NEBRASKA 0.67%
Nebraska Finance Authority, SFM, 9.27%*, 9/15/24 350,000 365,750
- ------------------------------------------------------------------------------------------------------------------------
NEVADA 0.96%
Henderson Local Improvement District, Special Assessment, Series
A, 8.50%, 11/01/12 500,000 524,995
- ------------------------------------------------------------------------------------------------------------------------
NEW YORK 21.47%
Clifton Springs Hospital Refunding & Improvement, 8.00%, 1/01/20 855,000 872,331
Herkimer County, IDA, 8.00%, 1/01/09 1,000,000 975,650
Metropolitan Transportation Authority, 4.75%, 7/01/19 1,000,000 828,040
New York City, Series H, 7.20%, 2/01/13 1,500,000 1,609,830
New York State Dorm Authority, 5.50%, 7/01/16 5,000,000 4,919,700
New York State Mortgage Agency, 6.15%, 10/01/17 2,500,000 2,548,900
- ------------------------------------------------------------------------------------------------------------------------
11,754,451
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net Principal
Assets Amount Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
NORTH DAKOTA 1.97%
Ward County, Healthcare Facilities, 8.88%, 11/15/24 $1,000,000 $ 1,080,480
- ------------------------------------------------------------------------------------------------------------------------
OKLAHOMA 1.88%
Oklahoma City, Industrial and Cultural Facilities Trust, 6.75%,
9/15/17 1,000,000 1,026,640
- ------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA 2.82%
Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 492,240
Philadelphia Hospital and Higher Education Facilities, 6.50%,
11/15/08 1,000,000 1,050,030
- ------------------------------------------------------------------------------------------------------------------------
1,542,270
- ------------------------------------------------------------------------------------------------------------------------
RHODE ISLAND 0.77%
West Warwick, Series A, GO Bonds, 6.80%-7.30%, 7/15/98-7/15/08 395,000 421,576
- ------------------------------------------------------------------------------------------------------------------------
TENNESSEE 8.29%
Memphis Shelby County Airport Authority Special Facilities Revenue
Refunding, 7.88%, 9/01/09 1,500,000 1,673,310
Tennessee Housing, 7.38%, 7/01/23 2,750,000 2,865,748
- ------------------------------------------------------------------------------------------------------------------------
4,539,058
- ------------------------------------------------------------------------------------------------------------------------
TEXAS 4.59%
Brazos Higher Education Authority Student Loan Revenue, 7.10%,
11/01/04 550,000 606,034
Dallas-Fort Worth International Airport Facility Revenue Bonds,
7.25%, 11/01/30 1,000,000 1,065,060
Texas State Department of Housing and Community Affairs Refunding,
Series C, 9.85%*, 7/02/24 750,000 840,000
- ------------------------------------------------------------------------------------------------------------------------
2,511,094
- ------------------------------------------------------------------------------------------------------------------------
UTAH 3.59%
Bountiful Hospital Revenue, 9.50%, 12/15/18 240,000 264,487
Utah State Housing Finance Commission, 7.20%, 1/01/27 1,630,000 1,703,024
- ------------------------------------------------------------------------------------------------------------------------
1,967,511
- ------------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA 6.78%
Harrison County, 6.75%, 8/01/24 2,000,000 2,185,380
West Virginia State Hospital Finance Authority Revenue, 8.48%*,
1/01/18 1,500,000 1,529,190
- ------------------------------------------------------------------------------------------------------------------------
3,714,570
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM MUNICIPAL SECURITIES (COST $51,266,294) 54,207,394
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net
Assets Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL INVESTMENTS (COST $51,266,294) 99.01% $54,207,394
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES 0.99% 541,644
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $54,749,038
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ABBREVIATIONS
<TABLE>
<S> <C>
GO - General Obligation PCR - Pollution Control Revenue
IDA - Industrial Development Authority SFM - Single Family Mortgage
OID - Original Issue Discount
</TABLE>
* Represents inverse floating rate securities.
(a) Effective yield is the yield as calculated at time of purchase at which the
bond accretes on an annual basis until its maturity date.
SEE NOTES TO FINANCIAL STATEMENTS.
56
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 100.09%
- ------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES 13.02%
Advanta Mortgage Loan Trust, Series 1993-4,
5.55%, 3/25/10-1/25/25 $ 3,301,256 $ 3,074,200
Equifax Credit Corporation, Series 1994-1,B
5.75%, 3/15/09 3,031,444 2,917,531
Fifth Third Auto Grantor Trust 6.20%, 9/15/01 2,653,538 2,649,407
Old Stone Credit Corporation Home Equity Trust,
Series 1993-1 B1, 6.00%, 3/15/08 1,356,995 1,320,021
World Omni, Series 1993-B, 5.05%, 8/15/99 (b) 373,717 369,611
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES (COST $10,382,856) 10,330,770
- ------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES AND AGENCIES 42.91%
Federal Home Loan Mortgage Corporation
6.50%, Series 1647B, 11/15/08 - REMIC, CMO* 4,259,188 3,995,395
7.50%, 9/17/11 (a) 6,500,000 6,517,251
6.00%, Series 48 H, 7/15/20 - REMIC, CMO 3,500,000 3,062,007
Government National Mortgage Association
7.00%, 12/15/08-9/20/22* 10,097,915 10,072,328
8.00%, 6/17/26, TBA (a) 3,300,000 3,332,713
7.00%, 10/17/26, TBA (a) 6,000,000 5,749,890
U.S. Treasury Note-PO Strip, 5/15/21 7,500,000 1,307,925
- ------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES
(COST $34,051,083) 34,037,509
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 25.15%
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL 20.39%
Capital One Bank, 7.15%-7.20%, 7/19/99-9/15/06 4,750,000 4,786,204
Developers Diversified Realty, 6.58%-7.63%,
5/15/00-2/06/01* 2,750,000 2,733,704
Lehman Brothers, Inc., 7.50%, 8/01/26 2,000,000 2,013,058
Nationsbank, 7.50%, 9/15/06 1,500,000 1,514,457
Salomon, Inc., 6.00%, 1/12/98* 3,000,000 2,975,190
Sunamerica, Inc., 7.34%, 8/30/05* 1,200,000 1,183,643
Travelers, Inc., 6.88%, 6/01/25* 1,000,000 974,118
- ------------------------------------------------------------------------------------------------------------------------
16,180,374
- ------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY 3.15%
Phillips Electronics, 7.20%, 6/01/26 2,500,000 2,496,093
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES 1.61%
Mississippi Power & Light, 8.80%, 4/01/05* $ 1,250,000 $ 1,278,556
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $19,825,752) 19,955,023
- ------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS 11.08%
Chase Mortgage Finance Corporation,
Series 1993-L2 M, 7.00%, 10/25/2 3,049,878 2,862,033
General Electric Capital Mortgage Services, Inc.,
Series 1993-18 B1, 6.00%, 2/25/09 2,189,212 2,015,658
Prudential Home, Series 1995-5, 7.25%, 9/25/25 4,103,834 3,914,409
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $8,974,599) 8,792,100
- ------------------------------------------------------------------------------------------------------------------------
RESIDUAL INTERESTS 7.93%
General Mortgage Securities II, Inc., 1995-1, 6/25/20 30,725 711,083
General Mortgage Securities II, Inc., 1995-4, 6/25/23 16,730 580,564
General Mortgage Securities II, Inc., 1996-1, 11/25/22 16,749 650,567
National Mortgage Funding I, Inc., 1995-1, 4/28/25 25,599 442,830
National Mortgage Funding I, Inc., 1995-4, 3/20/21 14,171 220,518
National Mortgage Funding I, Inc., 1995-5, 3/25/22 9,018 534,696
National Mortgage Funding I, Inc., 1995-7, 9/17/25 39,671 966,635
National Mortgage Funding I, Inc., 1995-8, 8/25/22 45,000 761,310
National Mortgage Funding I, Inc., 1995-9, 11/19/25 42,588 679,954
National Mortgage Funding I, Inc., 1996-3, 2/17/26 23,343 738,131
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RESIDUAL INTERESTS (COST $6,475,626) 6,286,288
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM INVESTMENTS (COST $79,709,916) 79,401,690
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT 19.42%
- ------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/96, 5.78%, due 10/01/96,
collateralized by $15,918,267
Federal National Mortgage Association,
7.50%, 4/01/26 (cost $15,404,136) 15,404,136 15,404,136
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Percent of Net Assets Market Value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $95,114,052) 119.51% $94,805,826
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES (19.51%) (15,474,597 )
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $79,331,229
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ABBREVIATIONS
CMO - Collateralized Mortgage Obligation
PO - Principal Only Security
REMIC - Real Estate Mortgage Investment Conduit
TBA - To Be Announced
(a) At September 30, 1996, the cost of securities purchased on a when-issued
basis totaled $15,552,760.
(b) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
* At September 30, 1996, $15,595,000 principal amount of these securities has
been segregated for a commitment to purchase when-issued securities.
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES 36.68%
Advanta Mortgage Loan Trust 1993-4, 4.75%-5.55% 2/25/10-3/25/10 $2,287,765 $ 2,180,893
AFC Home Equity Loan, 6.60%, 2/25/27 1,499,955 1,456,568
Equifax Credit Corporation 1994-1B, 5.75%, 3/15/09 963,794 927,578
Fifth Third Auto Grantor Trust, 6.20%, 9/15/01 1,328,128 1,326,061
General Motors Acceptance Corporation, 6.30%, 6/15/99 254,502 254,505
Old Stone Credit Corporation, 6.20%, 6/15/08 559,383 546,747
Olympic Automobiles Receivables Trust, 6.85%- 7.35%,
6/15/01-10/15/01 3,524,642 3,557,808
Union Acceptance Corporation, 6.45%, 7/08/03 1,324,393 1,324,005
World Omni 1993 B, 5.05%, 8/15/99 (b) 151,506 149,842
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES (COST $11,732,069) 11,724,007
- ------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES AND AGENCIES 30.01%
Federal Home Loan Mortgage Corporation
6.50%, 5/15/08, CMO* 2,322,657 2,200,608
7.50%, 4/16/26, MBS, TBA (a) 2,800,000 2,807,431
Federal National Mortgage Association
10.00%, 6/01/05, MBS 445,462 466,379
Government National Mortgage Association
7.00%, 12/15/08, MBS* 2,897,091 2,876,036
7.00%, 9/20/22, ARM 1,230,226 1,246,075
- ------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES
(COST $9,682,181) 9,596,529
- ------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATION 1.31%
Ryland Acceptance Corporation, 9.63%,
9/25/17 (cost $413,133) 419,778 419,193
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 16.50%
Capital One Bank, 7.15%-7.20%, 7/19/99-9/15/06 2,500,000 2,517,656
Developers Diversified Realty, 6.58%, 2/06/01 750,000 724,375
Mississippi Power & Light, 8.80%, 4/01/05 1,000,000 1,022,845
Salomon, Inc., 8.62%, 2/17/97 1,000,000 1,009,141
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $5,247,846) 5,274,017
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RESIDUAL INTERESTS 1.96%
General Mortgage Securities II, Inc., 1996-3, 6/20/25 $ 13,960 $ 223,478
National Mortgage Funding, Inc., 1996-4, 10/25/21 5,630 204,491
National Mortgage Funding, Inc., 1996-6, 5/22/26 14,923 198,628
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RESIDUAL INTERESTS (COST $649,604) 626,597
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT 22.82%
- ------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/96, 5.78%, due 10/01/96,
collateralized by $7,537,663
Federal National Mortgage Association,
7.50%, 4/01/26 (cost $7,294,053) 7,294,053 7,294,053
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $35,018,886) 109.28% 34,934,396
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES (9.28%) (2,967,806 )
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $31,966,590
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ABBREVIATIONS
ARM - Adjustable Rate Mortgage
CMO - Collateralized Mortgage Obligations
MBS - Mortgage Backed Securities
TBA - To Be Announced
(a) At September 30, 1996, the cost of securities purchased on a when-issued
basis totaled $2,798,906.
(b) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
* At September 30, 1996, $3,030,000 principal amount of these securities has
been segregated for a commitment to purchase when-issued securities.
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
MENTOR FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Mentor Mentor
Mentor Perpetual Capital
Growth Global Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at market value * (Note 2)
Investment securities $363,689,931 $51,627,805 $ 93,995,363
Repurchase agreements 52,004,489 3,327,930 6,231,774
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investments 415,694,420 54,955,735 100,227,137
- ----------------------------------------------------------------------------------------------------------------------------------
Cash - - -
Receivables
Investments sold 4,441,279 1,376,197 -
Fund shares sold 1,625,128 887,129 180,798
Dividends and interest 64,822 108,226 93,131
Closed forward foreign currency contracts - 444 -
Deferred expenses (Note 2) 19,058 27,558 18,000
Other assets - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 421,844,707 57,355,289 100,519,066
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payables
Investments purchased 9,602,057 2,085,235 256,000
Dollar roll agreement - - -
Fund shares redeemed 200,159 19,254 97,424
Dividends - - -
Forward foreign currency exchange
contracts held (Note 8) - 1,629 -
Accrued expenses and other liabilities 192,331 20,207 63,949
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,994,547 2,126,325 417,373
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $411,850,160 $55,228,964 $100,101,693
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets represented by: (Note 2)
Additional paid-in capital $258,480,220 $49,783,985 $ 72,087,322
Accumulated net investment income - (96,740) 11,836
Accumulated distributions in excess of net
investment income - - -
Accumulated net realized gain (loss) on
investment transactions 53,707,022 2,024,947 14,142,856
Net unrealized appreciation (depreciation) of investments
and foreign currency related transactions 99,662,918 3,516,772 13,859,679
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $411,850,160 $55,228,964 $100,101,693
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
Class A Shares $18.47 $17.86 $19.36
Class B Shares $18.29 $17.46 $18.92
OFFERING PRICE PER SHARE
Class A Shares $19.60(a) $18.95(a) $20.54(a)
Class B shares $18.29 $17.46 $18.92
SHARES OUTSTANDING
Class A Shares 2,180,561 733,629 1,647,133
Class B Shares 20,320,150 2,412,641 3,604,659
- ----------------------------------------------------------------------------------------------------------------------------------
Total Shares Outstanding 22,500,711 3,146,270 5,251,792
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Investments at cost are $316,031,502, $51,438,719, $86,367,458,
$247,450,844, $80,302,197, $51,266,294, $95,114,052 and $35,018,886,
respectively.
(a) Computation of offering price: 100/94.25 of net asset value.
(b) Computation of offering price: 100/95.25 of net asset value.
(c) Computation of offering price: 100/99 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
<TABLE>
<CAPTION>
Mentor Mentor
Mentor Income and Municipal
Strategy Growth Income
Portfolio Portfolio Portfolio
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at market value * (Note 2)
Investment securities $241,921,294 $80,418,373 $54,207,394
Repurchase agreements 65,833,005 9,302,000 -
- -----------------------------------------------------------------------------------------------------------------------
Total Investments 307,754,299 89,720,373 54,207,394
- -----------------------------------------------------------------------------------------------------------------------
Cash 764 447 -
Receivables
Investments sold 596,250 9,126 -
Fund shares sold 962,296 1,059,199 88,333
Dividends and interest 89,400 429,407 872,064
Closed forward foreign currency contracts - - -
Deferred expenses (Note 2) 45,337 - -
Other assets - - -
- -----------------------------------------------------------------------------------------------------------------------
Total assets 309,448,346 91,218,552 55,167,791
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payables
Investments purchased - 49,900 -
Dollar roll agreement - - -
Fund shares redeemed 444,817 86,935 138,109
Dividends - - 237,075
Forward foreign currency exchange
contracts held (Note 8) - - -
Accrued expenses and other liabilities 137,323 324,136 43,569
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 582,140 460,971 418,753
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS $308,866,206 $90,757,581 $54,749,038
- -----------------------------------------------------------------------------------------------------------------------
Net Assets represented by: (Note 2)
Additional paid-in capital $225,524,569 $73,417,788 $54,408,948
Accumulated net investment income - 98,562 -
Accumulated distributions in excess of net
investment income - - (89,604)
Accumulated net realized gain (loss) on
investment transactions 23,038,182 7,823,065 (2,511,406)
Net unrealized appreciation (depreciation) of investments
and foreign currency related transactions 60,303,455 9,418,166 2,941,100
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS $308,866,206 $90,757,581 $54,749,038
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
Class A Shares $17.96 $19.16 $15.04
Class B Shares $17.79 $19.18 $15.05
OFFERING PRICE PER SHARE
Class A Shares $19.06(a) $20.33(a) $15.79(b)
Class B shares $17.79 $19.18 $15.05
SHARES OUTSTANDING
Class A Shares 1,134,383 1,263,439 1,169,466
Class B Shares 16,214,886 3,469,932 2,468,725
- -----------------------------------------------------------------------------------------------------------------------
Total Shares Outstanding 17,349,269 4,733,371 3,638,191
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Mentor
Quality Short-Duration
Income Income
Portfolio Portfolio
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at market value * (Note 2)
Investment securities $79,401,690 $ 27,640,343
Repurchase agreements 15,404,136 7,294,053
- -----------------------------------------------------------------------------------------------------------------
Total Investments 94,805,826 34,934,396
- -----------------------------------------------------------------------------------------------------------------
Cash 67,381 19,011
Receivables
Investments sold - -
Fund shares sold 111,616 114,516
Dividends and interest 764,606 200,675
Closed forward foreign currency contracts - -
Deferred expenses (Note 2) - 31,269
Other assets 8,120 -
- -----------------------------------------------------------------------------------------------------------------
Total assets 95,757,549 35,299,867
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES
Payables
Investments purchased 9,046,666 2,801,750
Dollar roll agreement 6,506,094 -
Fund shares redeemed 372,664 373,170
Dividends 458,127 147,268
Forward foreign currency exchange
contracts held (Note 8) - -
Accrued expenses and other liabilities 42,769 11,089
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 16,426,320 3,333,277
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS $79,331,229 $ 31,966,590
- -----------------------------------------------------------------------------------------------------------------
Net Assets represented by: (Note 2)
Additional paid-in capital $94,833,231 $ 32,295,594
Accumulated net investment income - -
Accumulated distributions in excess of net
investment income (111,276) (95,733)
Accumulated net realized gain (loss) on
investment transactions (15,082,500) (148,781)
Net unrealized appreciation (depreciation) of investments
and foreign currency related transactions (308,226) (84,490)
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS $79,331,229 $ 31,966,590
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
Class A Shares $12.91 $12.50
Class B Shares $12.93 $12.50
OFFERING PRICE PER SHARE
Class A Shares $13.55(b) $12.63 (c)
Class B shares $12.93 $12.50
SHARES OUTSTANDING
Class A Shares 1,633,938 595,992
Class B Shares 4,504,962 1,962,022
- -----------------------------------------------------------------------------------------------------------------
Total Shares Outstanding 6,138,900 2,558,014
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
63
MENTOR FUNDS
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Mentor Mentor
Mentor Perpetual Capital
Growth Global Growth
Portfolio Portfolio Portfolio
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest $ 2,364,361 $ 132,950 $ 221,224
Dividends (Net of withholding taxes)*** 642,265 474,933 1,552,160
- -------------------------------------------------------------------------------------------------------------------
Total investment income (Note 2) 3,006,626 607,883 1,773,384
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fee (Note 4) 2,313,470 368,592 728,536
Distribution fees (Note 5) 2,260,899 183,636 458,606
Shareholder services fees (Note 5) 826,239 83,771 227,668
Transfer agent fee 417,843 45,295 126,606
Administration fee (Note 4) 330,496 33,508 91,067
Registration expenses 126,424 9,288 20,554
Shareholder reports and postage expenses 119,543 18,583 39,158
Custodian and accounting fees 84,681 80,604 26,605
Legal and audit fees 37,713 8,650 23,559
Directors' fees and expenses 9,857 996 2,732
Organizational expenses 8,550 11,097 3,862
Miscellaneous 35,085 10,831 16,457
- -------------------------------------------------------------------------------------------------------------------
Total expenses 6,570,800 854,851 1,765,410
- -------------------------------------------------------------------------------------------------------------------
Deduct
Waiver of administration fee (Note 4) - - -
Waiver of management fee (Note 4) - - -
- -------------------------------------------------------------------------------------------------------------------
NET EXPENSES 6,570,800 854,851 1,765,410
- -------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (3,564,174) (246,968) 7,974
- -------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES CONTRACTS
Net realized gain (loss) on investments
and futures contracts (Note 2) 63,686,744 2,247,124 16,294,346
Change in unrealized appreciation (depreciation) 22,942,450 2,553,849 3,307,505
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and futures contracts 86,629,194 4,800,973 19,601,851
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $83,065,020 $4,554,005 $19,609,825
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
** Net of interest expense $38,793 for the Mentor Short-Duration Income
Portfolio.
*** Withholding taxes were $2,014, $51,311, $4,820 and $23,319 for the Mentor
Growth Portfolio, Mentor Perpetual Global Portfolio, Mentor Strategy
Portfolio, and Mentor Income and Growth Portfolio, respectively for the year
ended September 30, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
64
<PAGE>
<TABLE>
<CAPTION>
Mentor Mentor Mentor Mentor
Mentor Income and Municipal Quality Short-Duration
Strategy Growth Income Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest $ 3,888,338 $ 1,797,747 $3,850,534 $ 6,546,848 $1,872,241**
Dividends (Net of withholding taxes)*** 1,528,175 857,844 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment income (Note 2) 5,416,513 2,655,591 3,850,534 6,546,848 1,872,241
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fee (Note 4) 2,287,369 575,647 344,784 495,545 138,400
Distribution fees (Note 5) 1,910,928 411,096 190,043 298,041 70,827
Shareholder services fees (Note 5) 672,756 191,882 143,660 206,477 69,200
Transfer agent fee 316,931 99,286 63,210 145,276 70,180
Administration fee (Note 4) 269,102 76,753 57,464 82,591 27,680
Registration expenses 108,021 20,713 38,453 37,079 7,412
Shareholder reports and postage expenses 94,506 32,871 32,588 30,044 9,383
Custodian and accounting fees 76,182 36,677 16,047 37,170 12,579
Legal and audit fees 29,550 23,033 12,590 27,714 3,894
Directors' fees and expenses 7,726 2,648 2,529 3,683 1,011
Organizational expenses 20,207 - - - 6,432
Miscellaneous 19,686 1,280 3,348 19,305 2,961
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 5,812,964 1,471,886 904,716 1,382,925 419,959
- ------------------------------------------------------------------------------------------------------------------------------------
Deduct
Waiver of administration fee (Note 4) - - - - 27,680
Waiver of management fee (Note 4) - - - 217,329 83,567
- ------------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES 5,812,964 1,471,886 904,716 1,165,596 308,712
- ------------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (396,451) 1,183,705 2,945,818 5,381,252 1,563,529
- ------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES CONTRACTS
Net realized gain (loss) on investments
and futures contracts (Note 2) 24,144,971 8,390,313 149,379 (1,415,843) (113,895)
Change in unrealized appreciation (depreciation) 22,559,071 3,327,836 320,865 (937,621) (364,509)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and futures contracts 46,704,042 11,718,149 470,244 (2,353,464) (478,404)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $46,307,591 $12,901,854 $3,416,062 $ 3,027,788 $1,085,125
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
MENTOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Mentor Perpetual Global
Mentor Growth Portfolio Portfolio
---------------------------- --------------------------
Year Period Year Year
Ended Ended Ended Ended
9/30/96 9/30/95* 9/30/96 9/30/95
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (3,564,174) $ (1,966,059) $ (246,968) $ (16,767)
Net realized gain (loss) on investments and futures
contracts 63,686,744 24,885,052 2,247,124 862,461
Change in unrealized appreciation (depreciation) 22,942,450 38,888,234 2,553,849 942,613
- ------------------------------------------------------------------------------------------------------------------------
Increase in net assets from operations 83,065,020 61,807,227 4,554,005 1,788,307
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A - - - -
Class B - - - -
Distributions in excess of net investment income
Class A - - - -
Class B - - - -
Net realized gain on investments
Class A (2,238,213) - (338,447) -
Class B (27,048,016) - (688,165) -
- ------------------------------------------------------------------------------------------------------------------------
Net decrease from distributions (29,286,229) - (1,026,612) -
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 9)
Change in net assets from portfolio share transactions 91,376,945 14,761,239 32,180,438 863,287
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 145,155,736 76,568,466 35,707,831 2,651,594
NET ASSETS
Beginning of period 266,694,424 190,125,958 19,521,133 16,869,539
- ------------------------------------------------------------------------------------------------------------------------
End of period $411,850,160 $266,694,424 $55,228,964 $19,521,133
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
66
<PAGE>
<TABLE>
<CAPTION>
Mentor Capital Growth
Portfolio Mentor Strategy Portfolio
---------------------------- -----------------------------
Year Year Year Period
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/96 9/30/95*
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 7,974 $ (107,886) $ (396,451) $ 32,564
Net realized gain (loss) on investments and futures
contracts 16,294,346 5,567,739 24,144,971 13,062,170
Change in unrealized appreciation (depreciation) 3,307,505 8,926,628 22,559,071 30,325,565
- --------------------------------------------------------------------------------------------------------------------------------
Increase in net assets from operations 19,609,825 14,386,481 46,307,591 43,420,299
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A - - - -
Class B - - - -
Distributions in excess of net investment income
Class A - - - -
Class B - - - -
Net realized gain on investments
Class A (871,361) (2,027,725) (224,749) -
Class B (1,783,019) (4,095,792) (3,506,588) -
- --------------------------------------------------------------------------------------------------------------------------------
Net decrease from distributions (2,654,380) (6,123,517) (3,731,337) -
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 9)
Change in net assets from portfolio share transactions (4,083,713 16,680,084 31,148,786 12,447,061
- --------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 12,871,732 24,943,048 73,725,040 55,867,360
NET ASSETS
Beginning of period 87,229,961 62,286,913 235,141,166 179,273,806
- --------------------------------------------------------------------------------------------------------------------------------
End of period $100,101,693 $87,229,961 $308,866,206 $235,141,166
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Income and Growth Mentor Municipal Income
Portfolio Portfolio
--------------------------- -----------------------------
Year Year Year Year
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/96 9/30/95
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 1,183,705 $ 1,236,537 $ 2,945,818 $ 3,337,904
Net realized gain (loss) on investments and futures
contracts 8,390,313 2,495,422 149,379 (2,056,061)
Change in unrealized appreciation (depreciation) 3,327,836 5,833,996 320,865 4,099,300
- ---------------------------------------------------------------------------------------------------------------------------
Increase in net assets from operations 12,901,854 9,565,955 3,416,062 5,381,143
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A (431,692) (464,855) (1,063,836) (1,233,641)
Class B (655,745) (771,682) (1,919,043) (2,106,334)
Distributions in excess of net investment income
Class A - (38,935) - -
Class B - (64,635) - -
Net realized gain on investments
Class A (857,221) (298,324) - -
Class B (2,018,269) (712,920) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net decrease from distributions (3,962,927) (2,351,351) (2,982,879) (3,339,975)
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 9)
Change in net assets from portfolio share transactions 15,252,843 (1,640,309) (5,637,324) (13,301,743)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 24,191,770 5,574,295 (5,204,141) (11,260,575)
NET ASSETS
Beginning of period 66,565,811 60,991,516 59,953,179 71,213,754
- ---------------------------------------------------------------------------------------------------------------------------
End of period $90,757,581 $66,565,811 $ 54,749,038 $ 59,953,179
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
MENTOR FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Mentor Quality Income Mentor Short-Duration
Portfolio Income Portfolio
---------------------------- ---------------------------
Year Year Year Period
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/96 9/30/95*
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income loss $ 5,381,252 $ 5,884,441 $ 1,563,529 $ 820,190
Net realized gain (loss) on
investments and futures contracts (1,415,843) (1,948,938) (113,895) 258,876
Change in unrealized appreciation
(depreciation) (937,621) 5,945,462 (364,509) 423,995
- --------------------------------------------------------------------------------------------------------
Increase in net assets from
operations 3,027,788 9,880,965 1,085,125 1,503,061
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A (1,580,519) (1,780,925) (243,822) (7,777)
Class B (3,800,733) (4,084,639) (1,354,465) (812,803)
Distributions in excess of net
investment income
Class A (6,680) (130,142) - (2,635)
Class B (16,065) (298,487) - (39,850)
Net realized gain on investments
Class A - - - -
Class B - - - -
- --------------------------------------------------------------------------------------------------------
Net decrease from distributions (5,403,997) (6,294,193) (1,598,287) (863,065)
- --------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 9)
Change in net assets from
portfolio share transactions (4,919,453) (24,989,530) 11,607,207 3,088,707
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (7,295,662) (21,402,758) 11,094,045 3,728,703
NET ASSETS
Beginning of period 86,626,891 108,029,649 20,872,545 17,143,842
- --------------------------------------------------------------------------------------------------------
End of period $ 79,331,229 $86,626,891 $31,966,590 $20,872,545
- --------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
68
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Mentor Growth
Portfolio Mentor Perpetual Global Portfolio
-------------------- ----------------------------------------------
Year Period Year Year Period
Ended Ended Ended Ended Ended
9/30/96 9/30/95* 9/30/96 9/30/95 9/30/94(b)
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.08 $ 13.37 $ 15.88 $ 14.23 $14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.10) (0.01) (0.04) 0.05 (0.01)
Net realized and unrealized gain (loss)
on investments 4.23 2.72 2.82 1.60 0.06
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.13 2.71 2.78 1.65 0.05
LESS DISTRIBUTIONS
Dividends from net investment income - - - - -
Distributions in excess of net investment income - - - - -
Distributions from capital gains (1.74) - (0.80) - -
Distributions in excess of capital gains - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.74) - (0.80) - -
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.47 $ 16.08 $ 17.86 $ 15.88 $14.23
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 29.15% 20.27% 18.40% 11.60% 0.35%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $40,272 $ 20,368 $13,098 $ 6,854 $8,882
Ratio of expenses to average net assets 1.28% 1.36%(a) 1.95% 2.06% 2.09%(a)
Ratio of expenses to average net asset excluding waiver 1.28% 1.36%(a) 1.95% 2.11% 3.18%(a)
Ratio of net investment income (loss) to average net
assets (0.39%) (0.65%)(a) (0.21%) 0.26% (0.10%)(a)
Portfolio turnover rate 105% 70% 130% 155% 2%
Average commission rate on portfolio transactions $0.0602 $0.0320
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from June 5, 1995 (initial offering of Class A shares) to
September 30, 1995.
(a) Annualized.
(b) Reflects operations for the period from March 29, 1994 (commencement of
operations), to September 30, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
69
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Mentor Capital Growth Portfolio
-------------------------------------------------------------------
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c)
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.02 $ 14.88 $ 15.26 $ 14.21 $ 14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.11 0.02 0.09 0.14 0.08
Net realized and unrealized gain (loss) on investments 3.73 2.91 (0.30) 1.02 0.03
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.84 2.93 (0.21) 1.16 0.11
LESS DISTRIBUTIONS
Dividends from net investment income - - (0.04) (0.11) (0.08)
Distributions in excess of net investment income - - - - -
Distributions from capital gains (0.50 ) (1.79) (0.13) - -
Distributions in excess of capital gains - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.50) (1.79) (0.17) (0.11) (0.08)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.36 $ 16.02 $ 14.88 $ 15.26 $ 14.21
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 24.63% 20.18% (1.37%) 8.21% 0.78%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $31,889 $29,582 $21,181 $31,360 $20,864
Ratio of expenses to average net assets 1.43% 1.87% 1.70% 1.49% 1.14%(a)
Ratio of expenses to average net asset excluding waiver 1.43% 1.87% 1.70% 1.59% 1.43%(a)
Ratio of net investment income (loss) to average net assets 0.51% 0.27% 0.53% 0.96% 1.54%(a)
Portfolio turnover rate 98% 157% 149% 192% 61%
Average commission rate on portfolio transactions $0.0688
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from June 5, 1995 (initial offering of Class A shares) to
September 30, 1995
** Reflects net investment income (loss) which was under $0.01 per share.
(a) Annualized.
(c) Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992
(d) Reflects operations for the period from May 24, 1993 (commencement of
operations), to September 30, 1993.
SEE NOTES TO FINANCIAL STATEMENTS.
70
<PAGE>
<TABLE>
<CAPTION>
Mentor Strategy Portfolio
-------------------------------
Year Period
Ended Ended
9/30/96 9/30/95*
<S> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.24 $ 13.45
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.08 -**
Net realized and unrealized gain (loss) on investments 2.86 1.79
- -------------------------------------------------------------------------------------------------
Total from investment operations 2.94 1.79
LESS DISTRIBUTIONS
Dividends from net investment income - -
Distributions in excess of net investment income - -
Distributions from capital gains (0.22 ) -
Distributions in excess of capital gains - -
- -------------------------------------------------------------------------------------------------
Total distributions (0.22 ) -
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.96 $ 15.24
- -------------------------------------------------------------------------------------------------
Total Return 19.36% 13.31%
- -------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $20,372 $ 10,503
Ratio of expenses to average net assets 1.42% 1.65%(a)
Ratio of expenses to average net asset excluding waiver 1.42 1.65%(a)
Ratio of net investment income (loss) to average net assets 0.62 (0.06%)(a)
Portfolio turnover rate 125% 122%
Average commission rate on portfolio transactions $0.0669
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Income and Growth Portfolio
---------------------------------------------------
Year Year Year Period
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93(d)
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.13 $ 15.27 $ 14.88 $14.14
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.37 0.40 0.31 0.09
Net realized and unrealized gain (loss) on investments 2.75 2.14 0.64 0.73
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.12 2.54 0.95 0.82
LESS DISTRIBUTIONS
Dividends from net investment income (0.35) (0.40) (0.30) (0.08)
Distributions in excess of net investment income - (0.03) - -
Distributions from capital gains (0.74) (0.25) (0.26) -
Distributions in excess of capital gains - - - -
- -------------------------------------------------------------------------------------------------------------------
Total distributions (1.09) (0.68) (0.56) (0.08)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.16 $ 17.13 $ 15.27 $14.88
- -------------------------------------------------------------------------------------------------------------------
Total Return 19.13% 17.24% 6.54% 5.54%
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $24,210 $19,888 $17,773 $9,849
Ratio of expenses to average net assets 1.36% 1.69% 1.75% 1.56%(a)
Ratio of expenses to average net asset excluding waiver 1.36% 1.69% 1.75% 1.94%(a)
Ratio of net investment income (loss) to average net assets 2.08% 2.53% 2.20% 2.35%(a)
Portfolio turnover rate 72% 62% 78% 13%
Average commission rate on portfolio transactions $0.0492
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Mentor Municipal Income Portfolio
---------------------------------------------------------------------
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c)
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.92 $ 14.42 $ 16.05 $ 14.76 $ 14.29
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.82 0.81 0.82 0.92 0.32
Net realized and unrealized gain (loss) on
investments 0.12 0.51 (1.54) 1.32 0.47
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.94 1.32 (0.72) 2.24 0.79
LESS DISTRIBUTIONS
Dividends from net investment income (0.82) (0.82) (0.81) (0.92) (0.32)
Distributions in excess of net investment
income - - - (0.03) -
Distributions from capital gains - - (0.10) - -
Distributions in excess of capital gains - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (0.82) (0.82) (0.91) (0.95) (0.32)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76
- -------------------------------------------------------------------------------------------------------------------------
Total Return 6.46% 9.46% (4.83%) 16.00% 5.34%
- -------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $17,558 $20,460 $25,056 $29,245 $ 18,801
Ratio of expenses to average net assets 1.24% 1.43% 1.24% 0.71% 0.00%(a)
Ratio of expenses to average net asset excluding
waiver 1.24% 1.43% 1.33% 1.39% 1.26%(a)
Ratio of net investment income (loss) to average
net assets 5.47% 5.56% 5.43% 5.92% 6.21%(a)
Portfolio turnover rate 46% 43% 87% 88% 0%
Average commission rate on portfolio transactions
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from June 16, 1995 (initial offering of Class A shares) to
September 30, 1995.
(a) Annualized.
(c) Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
SEE NOTES TO FINANCIAL STATEMENTS.
72
<PAGE>
<TABLE>
<CAPTION>
Mentor Quality Income Portfolio
--------------------------------------------------------------
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.29 $ 12.75 $ 14.04 $ 14.39 $ 14.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.89 0.84 0.84 1.06 0.44
Net realized and unrealized gain (loss) on
investments (0.37) 0.61 (1.30) (0.31 ) 0.09
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.52 1.45 (0.46) 0.75 0.53
LESS DISTRIBUTIONS
Dividends from net investment income (0.89) (0.85) (0.83) (1.06) (0.44)
Distributions in excess of net investment
income (0.01) (0.06) - (0.04) -
Distributions from capital gains - - - - -
Distributions in excess of capital gains - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (0.90 ) (0.91) (0.83) (1.10) (0.44)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.91 $ 13.29 $ 12.75 $ 14.04 $ 14.39
- ---------------------------------------------------------------------------------------------------------------------
Total Return 4.09% 11.82% (3.39)% 5.41% 3.37%
- ---------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $21,092 $24,472 $ 30,142 $47,780 $ 36,740
Ratio of expenses to average net assets 1.05% 1.32% 1.38% 1.04% 0.36%(a)
Ratio of expenses to average net asset excluding
waiver 1.31% 1.36% 1.39% 1.22% 1.21%(a)
Ratio of net investment income (loss) to average
net assets 6.84% 6.73% 6.33% 7.31% 8.00%(a)
Portfolio turnover rate 254% 368% 455% 102% 9%
Average commission rate on portfolio transactions
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Mentor
Short-Duration
Income Portfolio
------------------------
Year Period
Ended Ended
9/30/96 9/30/95*
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $12.68 $ 12.74
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.82 0.22
Net realized and unrealized gain (loss) on
investments (0.23) (0.03)
- ------------------------------------------------------------------------------
Total from investment operations 0.59 0.19
LESS DISTRIBUTIONS
Dividends from net investment income (0.77) (0.22)
Distributions in excess of net investment
income - (0.03)
Distributions from capital gains - -
Distributions in excess of capital gains - -
- ------------------------------------------------------------------------------
Total distributions (0.77) (0.25)
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.50 $ 12.68
- ------------------------------------------------------------------------------
Total Return 4.80% 1.51%
- ------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,450 $ 1,002
Ratio of expenses to average net assets 0.86% 0.71%(a)
Ratio of expenses to average net asset excluding
waiver 1.26% 1.00%(a)
Ratio of net investment income (loss) to average
net assets 5.90% 4.10%(a)
Portfolio turnover rate 411% 126%
Average commission rate on portfolio transactions
- ------------------------------------------------------------------------------
73
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Growth Portfolio
---------------------------------------------------------------
Year Period Year Year Year
Ended Ended Ended Ended Ended
9/30/96 9/30/95* 12/31/94 12/31/93 12/31/92
<S> <C>
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.05 $ 12.15 $ 13.78 $ 12.81 $ 12.16
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.17) (0.13) (0.15) (0.08) (0.06)
Net realized and unrealized gain
(loss) on investments 4.15 4.03 (0.47) 2.07 1.94
- ----------------------------------------------------------------------------------------------------------
Total from investment operations 3.98 3.90 (0.62) 1.99 1.88
LESS DISTRIBUTIONS
Dividends from net investment income - - - - -
Distributions in excess of net
investment income - - - - -
Distributions from capital gains (1.74) - (1.00) (1.02) (1.23)
Distributions in excess of capital
gains - - (0.01) - -
- ----------------------------------------------------------------------------------------------------------
Total distributions (1.74) - (1.01) (1.02) (1.23)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.29 $ 16.05 $ 12.15 $ 13.78 $ 12.81
- ----------------------------------------------------------------------------------------------------------
Total Return 28.18% 32.10% (4.48%) 15.60% 15.46%
- ----------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $371,578 $246,326 $190,126 $186,978 $136,053
Ratio of expenses to average net assets 2.03% 2.08%(a) 2.01% 2.02% 2.05%
Ratio of expenses to average net asset
excluding waiver 2.03% 2.08%(a) 2.01% 2.02% 2.05%
Ratio of net investment income (loss)
to average net assets (1.13%) (1.20%)(a) (1.20%) (1.12%) (0.76%)
Portfolio turnover rate 105% 70% 77% 64% 50%
Average commission rate on portfolio
transactions $ 0.0602
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
(b) Reflects operations for the period from March 29, 1994 (commencement of
operations), to September 30, 1994.
(c) Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
SEE NOTES TO FINANCIAL STATEMENTS.
74
<PAGE>
<TABLE>
<CAPTION>
Mentor Perpetual Global Portfolio
------------------------------------
Year Year Period
Ended Ended Ended
9/30/96 9/30/95 9/30/94(b)
<S> <C>
- ------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.67 $ 14.15 $ 14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.05 ) (0.05) (0.04)
Net realized and unrealized gain
(loss) on investments 2.64 1.57 0.01
- ------------------------------------------------------------------------------------
Total from investment operations 2.59 1.52 (0.03)
LESS DISTRIBUTIONS
Dividends from net investment income - - -
Distributions in excess of net
investment income - - -
Distributions from capital gains (0.80) - -
Distributions in excess of capital
gains - - -
- ------------------------------------------------------------------------------------
Total distributions (0.80) - -
- ------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.46 $ 15.67 $ 14.15
- ------------------------------------------------------------------------------------
Total Return 17.39% 10.74% (0.21%)
- ------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $42,131 $12,667 $ 7,987
Ratio of expenses to average net assets 2.70% 2.72% 2.79%(a)
Ratio of expenses to average net asset
excluding waiver 2.70% 2.79% 3.93%(a)
Ratio of net investment income (loss)
to average net assets (0.91%) (0.40%) (0.82%)(a)
Portfolio turnover rate 130% 155% 2%
Average commission rate on portfolio
transactions $0.0320
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Capital Growth Portfolio
------------------------------------------------------------------
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c)
<S> <C>
- ------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.79 $ 14.80 $ 15.23 $ 14.22 $ 14.18
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.04) 0.25 (0.04) 0.05 0.46
Net realized and unrealized gain
(loss) on investments 3.67 2.53 (0.26) 1.02 0.04
- ------------------------------------------------------------------------------------------------------------
Total from investment operations 3.63 2.78 (0.30) 1.07 0.50
LESS DISTRIBUTIONS
Dividends from net investment income - - - (0.05) (0.46)
Distributions in excess of net
investment income - - - (0.01) -
Distributions from capital gains (0.50) (1.79) (0.13) - -
Distributions in excess of capital
gains - - - - -
- ------------------------------------------------------------------------------------------------------------
Total distributions (0.50) (1.79) (0.13) (0.06) (0.46)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22
- ------------------------------------------------------------------------------------------------------------
Total Return 23.64% 19.26% (2.00%) 7.52% 0.61%
- ------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $68,213 $57,648 $41,106 $57,030 $ 25,468
Ratio of expenses to average net assets 2.18% 2.56% 2.46% 2.24% 1.86%(a)
Ratio of expenses to average net asset
excluding waiver 2.18% 2.56% 2.46% 2.34% 2.16%(a)
Ratio of net investment income (loss)
to average net assets (0.24%) (0.41%) (0.22%) 0.21% 0.83%(a)
Portfolio turnover rate 98% 157% 149% 192% 61%
Average commission rate on portfolio
transactions $0.0688
- ------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Strategy Portfolio
---------------------------------------------------------------
Year Period Year Period
Ended Ended Ended Ended
9/30/96 9/30/95* 12/31/94 12/31/93(d)
<S> <C>
- -------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.21 $ 12.24 $ 12.70 $ 12.50
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.03) - (0.06) -
Net realized and unrealized gain (loss)
on investments 2.83 2.97 (0.40) 0.20
- -------------------------------------------------------------------------------------------------------------
Total from investment operations 2.80 2.97 (0.46) 0.20
LESS DISTRIBUTIONS
Dividends from net investment income - - - -
Distributions in excess of net
investment income - - - -
Distributions from capital gains (0.22) - - -
Distributions in excess of capital gains - - - -
- -------------------------------------------------------------------------------------------------------------
Total distributions (0.22) - - -
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.79 $ 15.21 $ 12.24 $ 12.70
- -------------------------------------------------------------------------------------------------------------
Total Return 18.48% 24.26% (3.61%) 1.60%
- -------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 288,494 $224,643 $179,274 $ 122,177
Ratio of expenses to average net assets 2.19% 2.31%(a) 2.19% 2.06%(a)
Ratio of expenses to average net asset
excluding waiver 2.19% 2.31%(a) 2.19% 2.06%(a)
Ratio of net investment income (loss) to
average net assets (0.19%) 0.02%(a) (0.54%) 0.08%(a)
Portfolio turnover rate 125% 122% 143% 0%
Average commission rate on portfolio
transactions $ 0.0669
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
(c) Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
(d) Reflects operations for the period of October 29, 1993 (commencement of
operations), to December 31, 1993.
(e) Reflects operations for the period from May 24, 1993 (commencement of
operations), to September 30, 1993.
SEE NOTES TO FINANCIAL STATEMENTS.
76
<PAGE>
<TABLE>
<CAPTION>
Mentor Income and Growth Portfolio
--------------------------------------------------
Year Year Year Period
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93(e)
<S> <C>
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.14 $ 15.28 $ 14.91 $ 14.14
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.23 0.28 0.21 0.05
Net realized and unrealized gain (loss)
on investments 2.76 2.14 0.61 0.77
- ------------------------------------------------------------------------------------------------------
Total from investment operations 2.99 2.42 0.82 0.82
LESS DISTRIBUTIONS
Dividends from net investment income (0.21) (0.28) (0.19) (0.05)
Distributions in excess of net
investment income - (0.03) - -
Distributions from capital gains (0.74 ) (0.25) (0.26) -
Distributions in excess of capital gains - - - -
- ------------------------------------------------------------------------------------------------------
Total distributions (0.95) (0.56) (0.45) (0.05)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.18 $ 17.14 $ 15.28 $ 14.91
- ------------------------------------------------------------------------------------------------------
Total Return 18.26% 16.32% 5.66% 5.54%
- ------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $66,548 $46,678 $43,219 $18,127
Ratio of expenses to average net assets 2.13% 2.43% 2.44% 2.31%(a)
Ratio of expenses to average net asset
excluding waiver 2.13% 2.43% 2.44% 2.69%(a)
Ratio of net investment income (loss) to
average net assets 1.32% 1.78% 1.51% 1.60%(a)
Portfolio turnover rate 72% 62% 78% 13%
Average commission rate on portfolio
transactions $0.0492
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Municipal Income Portfolio
----------------------------------------------------------------
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.95 $ 14.43 $ 16.06 $ 14.78 $ 14.29
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.75 0.74 0.74 0.82 0.29
Net realized and unrealized gain (loss)
on investments 0.11 0.52 (1.54) 1.32 0.49
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 0.86 1.26 (0.80) 2.14 0.78
LESS DISTRIBUTIONS
Dividends from net investment income (0.76) (0.74) (0.73) (0.82) (0.29)
Distributions in excess of net
investment income - - - (0.04) -
Distributions from capital gains - - (0.10) - -
Distributions in excess of capital gains - - - - -
- ---------------------------------------------------------------------------------------------------------------
Total distributions (0.76) (0.74) (0.83) (0.86) (0.29)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78
- ---------------------------------------------------------------------------------------------------------------
Total Return 5.87% 9.01% (5.34%) 15.27% 5.28%
- ---------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $37,191 $39,493 $46,157 $50,976 $ 24,265
Ratio of expenses to average net assets 1.74% 1.92% 1.74% 1.21% 0.50%(a)
Ratio of expenses to average net asset
excluding waiver 1.74% 1.92% 1.86% 1.89% 1.76%(a)
Ratio of net investment income (loss) to
average net assets 4.95% 5.07% 4.93% 5.42% 5.80%(a)
Portfolio turnover rate 46% 43% 87% 88% 0%
Average commission rate on portfolio
transactions
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Quality Income Portfolio
--------------------------------------------------------------------------
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93 9/30/92(c)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.31 $ 12.76 $ 14.06 $ 14.40 $ 14.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.84 0.79 0.82 0.99 0.41
Net realized and unrealized gain (loss)
on investments (0.38) 0.61 (1.37) (0.31) 0.10
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.46 1.40 (0.55) 0.68 0.51
LESS DISTRIBUTIONS
Dividends from net investment income (0.84) (0.79) (0.75) (0.99) (0.41)
Distributions in excess of net investment
income - (0.06) - (0.03) -
Distributions from capital gains - - - - -
Distributions in excess of capital gains - - - - -
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (0.84) (0.85) (0.75) (1.02) (0.41)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.93 $ 13.31 $ 12.76 $ 14.06 $ 14.40
- ------------------------------------------------------------------------------------------------------------------------
Total Return 3.57% 11.33% (3.97%) 4.86% 3.24%
- ------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $58,239 $62,155 $77,888 $127,346 $ 65,661
Ratio of expenses to average net assets 1.55% 1.74% 1.88% 1.54% 0.83%(a)
Ratio of expenses to average net asset
excluding waiver 1.81% 1.79% 1.90% 1.72% 1.67%(a)
Ratio of net investment income (loss) to
average net assets 6.36% 6.24% 6.21% 6.81% 7.53%(a)
Portfolio turnover rate 254% 368% 455% 102% 9%
Average commission rate on portfolio
transactions
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(c) Reflects operations for the period from April 29, 1992 (commencement of
operations), to September 30, 1992.
SEE NOTES TO FINANCIAL STATEMENTS.
78
<PAGE>
MENTOR FUNDS
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Mentor Short-Duration Income Portfolio
----------------------------------------------
Year Period Period
Ended Ended Ended
9/30/96 9/30/95* 12/31/94(f)
<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 (loss) 0.72 0.59 0.41
Net realized and unrealized gain (loss) on investments (0.16) 0.52 (0.29)
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.56 1.11 0.12
LESS DISTRIBUTIONS
Dividends from net investment income (0.73) (0.59) (0.41)
Distributions in excess of net investment income - (0.03) (0.03)
Distributions from capital gains - - -
Distributions in excess of capital gains - - -
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (0.73) (0.62) (0.44)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.50 $ 12.67 $ 12.18
- --------------------------------------------------------------------------------------------------------------------------
Total Return 4.53% 9.22% 0.95%
- --------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $24,517 $19,871 $17,144
Ratio of expenses to average net assets 1.16% 1.20%(a) 1.29%(a)
Ratio of expenses to average net asset excluding waiver 1.56% 1.70%(a) 1.29%(a)
Ratio of net investment income (loss) to average net assets 5.60% 5.04%(a) 4.90%(a)
Portfolio turnover rate 411% 126% 166%
Average commission rate on portfolio transactions
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
(f) Reflects operations for the period from April 29, 1994 (commencement of
operations), to December 31, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
79
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1: ORGANIZATION
Mentor Funds (formerly Cambridge Series Trust) is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. On April 12, 1995, the name of the Trust was changed to Mentor Funds
("Mentor Funds"). On April 12, 1995, the portfolios of Mentor Series Trust were
merged into newly formed portfolios of Mentor Funds. Mentor Funds consists of
nine separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1996, as
follows:
Mentor Growth Portfolio
("Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Strategy Portfolio
("Strategy Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor Balanced Portfolio
("Balanced Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
The Balanced Portfolio is not currently being offered to new investors. These
financial statements do not include the Balanced Portfolio.
Mentor Funds currently issues two classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% (4.75% for the Quality Income
Portfolio and Municipal Income Portfolio and 1% for Short-Duration Income
Portfolio) payable at the time of purchase. Class B shares are sold subject to a
contingent deferred sales charge payable upon redemption which decreases
depending on when shares were purchased and how long they have been held.
80
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the
Portfolio.
(a) Valuation of Securities
Listed securities held by the Growth Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Income and Growth Portfolio and Global Portfolio traded on
national stock exchanges and over-the-counter securities quoted on the
NASDAQ National Market System are valued at the last reported sales price or,
lacking any sales, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by the Board of Trustees of the Portfolios as the primary market.
Securities traded in the over-the-counter market, other than those quoted on the
NASDAQ National Market System, are valued at the last available bid price.
Short-term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith under procedures established by and under the general supervision and
responsibility of the Board of Trustees.
U.S. Government obligations held by the Quality Income Portfolio, Short-Duration
Income Portfolio and Income and Growth Portfolio are valued at the mean between
the over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed income securities, mortgage backed
securities, mortgage related, asset-backed and other related securities are
valued at the prices provided by an independent pricing service. Security
valuations not available from an independent pricing service are provided by
dealers approved by the Portfolio's Board of Trustees. In determining value, the
pricing services use information with respect to transactions in such
securities, market transactions in comparable securities, various relationships
between securities, and yield to maturity.
Municipal bonds, held by the Municipal Income Portfolio, are valued at fair
value. An independent pricing service values the Portfolio's municipal bonds
taking into consideration yield, stability, risk, quality, coupon, maturity,
type of issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities. The pricing
81
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
service does not rely exclusively on quoted prices. The Board of Trustees has
determined that the fair value of debt securities with remaining maturities of
60 days or less shall be their amortized cost value unless the particular
circumstances of the security indicate otherwise.
Foreign currency amounts are translated into United States dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange, purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
(b) Repurchase Agreements
It is the policy of Mentor Funds to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book entry system,
or to have segregated within the custodian bank's vault all securities held as
collateral in support of repurchase agreement investments. Additionally,
procedures have been established by Mentor Funds to monitor, on a daily basis,
the market value of each repurchase agreement's underlying securities to ensure
the existence of a proper level of collateral.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Funds' adviser to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Borrowings
Each of the Portfolios (except for the Growth Portfolio, Strategy Portfolio and
Municipal Income Portfolio) may, under certain circumstances, borrow money
directly or through reverse repurchase agreements (arrangements in which the
Portfolio sells a security for a percentage of its market value with an
agreement to buy it back on a set date). Each Portfolio may borrow up to one-
third of the value of its net assets.
The average daily balance of reverse repurchase agreements outstanding for
Short-Duration Income Portfolio during the year ended
September 30, 1996, was approximately $1,228,251 or $0.55 per share based on
average shares outstanding during the period at a weighted average interest rate
of 5.44%. The maximum amount of borrowings outstanding for any day during the
period was $8,001,222 (including accrued interest), as of February 29, 1996, at
an interest rate of 5.50% and was 22.21% of total assets.
82
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(d) Dollar Roll Transactions
Each of the Portfolios (except for the Growth, Strategy and Municipal Income
Portfolios) may engage in dollar roll transactions with respect to
mortgage-related securities issued by GNMA, FNMA, and FHLMC. In a dollar roll
transaction, a Portfolio sells a mortgage-related security to a financial
institution, such as a bank or broker/dealer, and simultaneously agrees to
repurchase a substantially similar (i.e., same type, coupon, and maturity)
security from the institution at a later date at an agreed upon price. The
mortgage-related securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories.
(e) Security Transactions and Investment Income
Security transactions for the Portfolios are accounted for on trade date.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis. Interest income (except for Municipal Income Portfolio)
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including original
issue discount as required by the Internal Revenue Code. Dividends to
shareholders and capital gain distributions, if any, are recorded on the
ex-dividend date.
Interest income for the Municipal Income Portfolio includes interest earned net
of premium, and original issue discount as required by the Internal Revenue
Code.
(f) Federal Income Taxes
No provision for federal income taxes has been made since it is each Portfolio's
policy to comply with the provisions applicable to regulated investment
companies under the Internal Revenue Code and to distribute to its shareholders
within the allowable time limit substantially all taxable income and realized
capital gains.
Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends to
meet certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Portfolio to pay tax-exempt interest
dividends. The portion of such interest, if any, earned on private purpose
municipal bonds issued after August 7, 1986, may by considered a tax preference
item to shareholders.
At September 30, 1996, Quality Income Portfolio for federal tax purposes, had
capital loss carryforwards of approximately $13,500,000. Pursuant to the Code,
such capital loss carryforwards expire as follows: $820,000 in 2001, $3,680,000
in 2002, $7,320,000 in 2003 and $1,680,000 in 2004.
83
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
At September 30, 1996, Municipal Income Portfolio for federal tax purposes, had
capital loss carryforwards of approximately $2,510,000. Pursuant to the Internal
revenue Code, such capital loss carryforwards expire as follows: $895,000 in
2003 and $1,615,000 in 2004.
Capital loss carryforwards reduce the Portfolios' taxable income arising from
future net realized gains on investments, if any, to the extent permitted by the
Internal Revenue Code, and thus reduce the amount of the distributions to
shareholders which would otherwise relieve the Portfolios of any liability for
federal tax.
(g) When-Issued and Delayed Delivery Transactions
The Portfolios may engage in when-issued or delayed delivery transactions. To
the extent the Portfolios engage in such transactions, they will do so for the
purpose of acquiring portfolio securities consistent with their investment
objectives and policies and not for the purpose of investment leverage. The
Portfolios will record a when-issued security and the related liability on the
trade date. Until the securities are received and paid for, the Portfolios will
maintain security positions such that sufficient liquid assets will be available
to make payment for the securities purchased. Securities purchased on a
when-issued or delayed delivery basis are marked to market daily and begin
earning interest on the settlement date.
(h) Futures Contracts
In order to gain exposure to or protect against declines in security values,
Quality Income Portfolio, Short-Duration Income Portfolio and Municipal Income
Portfolio may buy and sell futures contracts. The Portfolios may also buy or
write put or call options on these futures contracts.
The Portfolios generally sell futures contracts to hedge against declines in the
value of portfolios securities. The Portfolios may also purchase futures
contracts to gain exposure to market changes as it may be more efficient or cost
effective than actually buying securities. The Portfolios will segregate assets
to cover its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolios are required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolios each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolios recognize a realized gain or loss when the
contract is closed. For the year ended September 30, 1996, Municipal Income
Portfolio, Quality Income Portfolio, and Short-Duration Income Portfolio had
realized losses of $262,489, $932,762, and $24,106 respectively on closed
futures contracts.
84
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities.
(i) Options
In order to produce incremental earnings or protect against changes in the value
of portfolio securities, Quality Income Portfolio and Short-Duration Income
Portfolio may buy and sell put and call options, write covered call options on
portfolio securities and write cash-secured put options.
The Portfolios generally purchase put options or write covered call options to
hedge against adverse movements in the value of portfolio holdings. The
Portfolios may also use options for speculative purposes, although they do not
employ options for this at the present time. The Portfolios will segregate
assets to cover their obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Portfolios will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a written
put option, or the cost of the security for a purchased put or call option is
adjusted by the amount of premium received or paid. For the year ended September
30, 1996, Municipal Income Portfolio, Quality Income Portfolio and
Short-Duration Income Portfolio had realized losses of $49,245, $82,978, and
$25,016 respectively on closed options contracts.
The risk in writing a call option is that the Portfolios give up the opportunity
for profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Portfolio may incur a
loss if the market price of the security decreases and the option is exercised.
The risk in buying an option is that the Portfolio pays a premium whether or not
the option is exercised. The Portfolio also has the additional risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist. The Portfolio may also write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of the
counterparty.
(j) Residual Interests
A derivative security is any investment that derives its value from an
underlying security, asset, or market index. Quality Income Portfolio and
Short-Duration Income Portfolio invest in mortgage security residual interests
("residuals") which are considered derivative securities. The Portfolios'
investment in residuals have been primarily in securities issued by proprietary
mortgage trusts. While these entities have been highly leveraged, often
85
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
having indebtedness of up to 95% of their total value, the Portfolios have not
incurred any indebtedness in the course of making these residual investments;
nor have the Portfolios' assets been pledged to secure the indebtedness of the
issuing structure or the Portfolios' investment in the residuals. In
consideration of the risk associated with investment in residual securities, it
is the Portfolios' policy to limit their exposure at the time of purchase to no
more than 20% of their total assets. The Portfolios will continue to invest in
residual securities because, in the opinion of the Investment Manager, these
investments can play a key role in fulfilling the Portfolios' objective of
achieving high monthly income through providing a means of economic leverage.
(k) Deferred Expenses
Costs incurred by the Portfolios in connection with their initial share
registration and organization costs were deferred by the Portfolios and are
being amortized on a straight-line basis over a five-year period.
(l) Distributions
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for net
operating losses and deferral of wash sales.
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly to all shareholders invested
in Quality Income Portfolio, Short-Duration Income Portfolio and Municipal
Income Portfolio on the record date. Dividends are declared and paid
semi-annually to all shareholders invested in Capital Growth Portfolio on the
record date, dividends are declared and paid annually to all shareholders
invested in the Growth Portfolio, Strategy Portfolio and Global Portfolio on the
record date, and dividends are declared and paid quarterly to all shareholders
invested in Income and Growth Portfolio on the record date. Dividends will be
reinvested in additional shares of the same class and Portfolio on payment dates
at the ex-dividend date net asset value without a sales charge unless cash
payments are requested by shareholders in writing to the Mentor. Capital gains
realized by each Portfolio, if any, are paid annually.
NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
Commonwealth Advisors, Inc., the Portfolios' investment adviser ("Investment
Adviser"), receives for its services an annual investment advisory fee not to
exceed the following percentages of the average daily net assets of the
respective Portfolio: Capital Growth Portfolio, 0.80%; Quality Income Portfolio,
0.60%; Municipal Income Portfolio, 0.60%; and Income and Growth Portfolio,
0.75%.
86
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The Investment Adviser pays Van Kampen, the sub-adviser to the Municipal Income
Portfolio, an annual fee of 0.30% of average daily net assets. As of September
1, 1996, the sub-adviser reduced the rate at which fees are paid to it by the
Investment Adviser to an annual rate of 0.25% of the first $60 million of
average daily net assets and 0.20% of the Portfolio's average net assets over
$60 million. Wellington, the sub-adviser to the Income and Growth Portfolio,
receives from the Investment Adviser an annual fee expressed as a percentage of
that Portfolio's average daily net assets as follows: 0.325% on the first $50
million of average net assets, 0.275% on the next $150 million, 0.225% on the
next $300 million, and 0.200% on average net assets over $500 million. No
performance or incentive fees are paid to the sub-advisers. Under certain
Sub-Advisory Agreements, the particular sub-adviser may, from time to time,
voluntarily waive some or all of its sub-advisory fee charged to the Investment
Adviser and may terminate any such voluntary waiver at any time in its sole
discretion.
The Growth Portfolio has entered into an Investment Advisory Agreement with
Charter Asset Management, Inc. ("Charter"), a wholly-owned subsidiary of Mentor
Investment Group, Inc., ("Mentor") which is a wholly-owned subsidiary of Wheat
First Butcher Singer, Inc. Under this agreement, Charter's management fee is
accrued daily and paid monthly at an annual rate of 0.70% applied to the average
daily net assets of the Portfolio.
The Strategy Portfolio has entered into an Investment Advisory Agreement with
Wellesley Advisors, Inc. ("Wellesley"), a wholly-owned subsidiary of Mentor.
Under this agreement, Wellesley's management fee is accrued daily and paid
monthly at an annual rate of 0.85% applied to the average daily net assets of
the Portfolio.
The Global Portfolio has entered into an Investment Advisory Agreement with
Mentor Perpetual Advisors, LLC ("Mentor Perpetual"). Mentor Perpetual is owned
equally by Mentor and Perpetual plc., a diversified financial services holding
company. Under this agreement, Mentor Perpetual's management fee is accrued
daily and paid monthly at an annual rate of 1.10% applied to the average daily
net assets of the Portfolio.
The Short-Duration Income Portfolio has entered into an Investment Advisory
Agreement with Commonwealth Investment Counsel, Inc. ("Commonwealth"), a
wholly-owned subsidiary of Mentor. Under this agreement,
Commonwealth's management fee is accrued daily and paid monthly at an annual
rate of 0.50% applied to the average daily net assets of the Portfolio.
Effective November 1, 1996, Commonwealth Advisors, Inc., Charter Asset
Management, Inc. and Wellesley Advisors, Inc. were reorganized into Commonwealth
Investment Counsel, Inc.,
87
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
which then became Mentor Investment Advisors, LLC ("Mentor Advisors"). Mentor
Advisors is a wholly owned subsidiary of Mentor Investment Group, LLC (formerly,
Mentor Investment Group, Inc.). Mentor Investment Group, LLC is a subsidiary of
Wheat First Butcher Singer, Inc.
Also effective November 1, 1996, EVEREN Capital Corporation, a previously
unrelated broker dealer, acquired a 20% ownership interest in Mentor Investment
Group, LLC from Wheat First Butcher Singer, Inc. As part of the acquisition
agreement, EVEREN may acquire additional ownership based principally on the
amount of Mentor Investment Group, LLC's revenues derived from clients of EVEREN
Securities, Inc. and assets attributable to its affiliates.
For the year ended September 30, 1996 the Investment Adviser and sub-advisers,
Charter, Wellesley and Commonwealth earned and voluntarily waived the following
advisory fees:
<TABLE>
<CAPTION>
Adviser
Fees
Adviser Voluntarily Sub Adviser
Portfolio Fees Waived Fees
<S> <C> <C> <C>
- --------------------------------------------------------------------
Growth $2,313,470 - -
Global 368,592 - -
Capital Growth 728,536 - -
Strategy 2,287,369 - -
Income and Growth 575,647 - $ 236,071
Municipal Income 344,784 - 172,392
Quality Income 495,545 $ 217,329 -
Short-Duration Income 138,400 83,567 -
<CAPTION>
- --------------------------------------------------------------------
</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, 1996, Mentor earned
the following administrative fees:
<TABLE>
<CAPTION>
Administrative
Administrative Fee
Fee Voluntarily
Portfolio Earned Waived
<S> <C> <C>
- -----------------------------------------------------------
Growth $330,496 -
Global 33,508 -
Capital Growth 91,067 -
Strategy 269,102 -
Income and Growth 76,753 -
Municipal Income 57,464 -
Quality Income 82,591 -
Short-Duration Income 27,680 $ 27,680
<CAPTION>
- -----------------------------------------------------------
</TABLE>
88
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Charter, Wellesley, and Commonwealth have agreed to reimburse the Portfolios for
the operating expenses (exclusive of interest, taxes, brokerage and
distributions fees, and extraordinary expenses) in excess of the most
restrictive expense limitation imposed by state securities commissions with
jurisdiction over the Portfolios. The most stringent state expense limitation
applicable to the Portfolios requires reimbursement of expenses not including
expenses under the Portfolios' Distribution Plan, in any year that such expenses
exceed 2.5% of the first $30,000,000 of average daily net assets, 2% of the next
$70,000,000 of average daily net assets, and 1.5% of the average daily net
assets over $100,000,000. During the year ended September 30, 1996, no
reimbursement from Charter, Wellesley or Commonwealth was required as a result
of such state expense limitations.
In addition, the Portfolios provide direct reimbursement to Mentor for certain
accounting, legal, blue sky and operations related costs not covered under the
Investment Management Agreement. For the year ended September 30, 1996, the
Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy
Portfolio, Income and Growth Portfolio, Municipal Income Portfolio, Quality
Income Portfolio and Short-Duration Income Portfolio paid $23,289, $2,752,
$5,901, $17,744, $5,210, $3,465, $5,005, and $1,842, respectively to Mentor for
these direct reimbursements.
NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The Class B shares of the Portfolios have adopted a Distribution Plan (the Plan)
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a
Distribution Agreement between the Portfolios and Mentor Distributors, Inc.
("Mentor Distributors") a wholly-owned subsidiary of Mentor, Mentor Distributors
was appointed distributor of the Portfolios. To compensate Mentor Distributors
for the services it provides and for the expenses it incurs under the
Distribution Agreement, the Portfolios pay a distribution fee, which is accrued
daily and paid monthly at the annual rate of 0.75% of the Portfolios' average
daily net assets for the Growth Portfolio, Capital Growth Portfolio, Strategy
Portfolio, Income and Growth Portfolio and Global Portfolio, 0.50% of the
average daily net assets of the Quality Income Portfolio and Municipal Income
Portfolio, and 0.30% of the average daily net assets for the Short-Duration
Income Portfolio.
Effective November 1, 1996, Mentor Distributors became Mentor Distributors, LLC.
Mentor Distributors may select financial institutions, such as investment
dealers and banks to provide sales support services as agents for their clients
or customers who beneficially own Class B shares of the Portfolios. Financial
institutions will receive fees from Mentor Distributors based upon
89
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Class B shares owned by their clients or customers.
Mentor Funds has adopted a Shareholder
Servicing Plan (the "Service Plan") with respect to Class A and Class B shares
of each Portfolio. Under the Service Plan, financial institutions will enter
into shareholder service agreements with the Portfolios to provide
administrative support services to their customers who from time to time may be
owners of record or beneficial owners of Class A or Class B shares of one or
more Portfolios. In return for providing these support services, a financial
institution may receive payments from one or more Portfolios at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B shares
of the particular Portfolio or Portfolios beneficially owned by the financial
institution's customers for whom it is holder of record or with whom it has a
servicing relationship.
Presently, the Portfolios' class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan. For
the year ended September 30, 1996, distribution fees and shareholder servicing
fees were as follows:
<TABLE>
<CAPTION>
Shareholder
Distribution Servicing Fees
Portfolio Fees Class A Class B
<S> <C> <C> <C>
- ---------------------------------------------------------------
Growth $2,260,899 $80,690 $745,549
Global 183,636 19,855 63,916
Capital Growth 458,606 72,458 155,210
Strategy 1,910,928 44,177 628,579
Income and Growth 411,096 51,223 140,659
Municipal Income 190,043 46,017 97,643
Quality Income 298,041 55,094 151,383
Short-Duration Income 70,827 15,971 53,229
<CAPTION>
- ---------------------------------------------------------------
</TABLE>
NOTE 6: INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term investments), for the
year ended September 30, 1996, were as follows:
<TABLE>
<CAPTION>
Portfolio Purchases Sales
<S> <C> <C>
- -------------------------------------------------------
Growth $344,812,435 $304,600,182
Global 69,752,090 40,762,570
Capital Growth 85,067,355 97,757,062
Strategy 291,829,295 286,405,905
Income and Growth 60,558,554 52,162,734
Municipal Income 25,685,173 30,665,695
Quality Income 206,317,542 199,038,469
Short-Duration Income 122,150,195 110,731,556
<CAPTION>
- -------------------------------------------------------
</TABLE>
90
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7: UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS
The cost of investments for federal income tax purposes amounted to
$316,695,993, for Growth Portfolio, $51,479,468 for Global Portfolio,
$86,381,865 for Capital Growth Portfolio, $247,450,844 for
Strategy Portfolio, $80,342,488 for Income and Growth Portfolio, $51,266,294 for
Municipal Income Portfolio, $95,245,051 for Quality Income Portfolio and
$35,036,969 for Short-Duration Income Portfolio at September 30, 1996. Gross
unrealized appreciation and depreciation of investments at September 30, 1996,
based on such costs were as follows:
<TABLE>
<CAPTION>
Net
Gross Gross Unrealized
Unrealized Unrealized Appreciation
Portfolio Appreciation Depreciation (Depreciation)
<S> <C> <C> <C>
- --------------------------------------------------------------------------
Growth $105,763,324 $(6,764,897) $ 98,998,427
Global 5,045,620 (1,569,353) 3,476,267
Capital Growth 13,999,832 (154,560) 13,845,272
Strategy 60,930,911 (627,456) 60,303,455
Income and Growth 11,910,257 (2,532,372) 9,377,885
Municipal Income 3,105,640 (164,540) 2,941,100
Quality Income 507,959 (947,184) (439,225)
Short-Duration Income 66,358 (168,931) (102,573)
- --------------------------------------------------------------------------
</TABLE>
NOTE 8: FORWARD CONTRACTS
In connection with portfolio purchases and sales of securities denominated in a
foreign currency, Global Portfolio may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time Global
Portfolio may enter into contracts to hedge certain foreign currency assets.
Contracts are recorded at market value. Realized gains and losses arising from
such transactions are included in net gain (loss) on investments and forward
foreign currency exchange contracts. The Portfolio is subject to the credit risk
that the other party will not complete the obligations of the contract. At
September 30, 1996 Global Portfolio had outstanding forward contracts as set
forth below.
<TABLE>
<CAPTION>
Net Unrealized
Contracts to In Exchange Appreciation/
Settlement Date Deliver/Receive For (Depreciation)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Purchases
10/1/96 German Mark 325,658 $212,787 $ 213,553 $ (766)
10/1/96 Italian Lira 347,398,971 226,399 228,080 (1,681)
Sales
10/1/96 Japanese Yen 18,530,650 167,229 166,411 818
- ------------------------------------------------------------------------------------------------
Net Unrealized Depreciation
on Forward Contracts $ (1,629)
- ------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
<TABLE>
<CAPTION>
Year Mentor Growth Portfolio Period
Ended 9/30/96 Ended 9/30/95
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
-----------------------------------------------------------
CLASS A*:
Shares sold 1,900,420 $ 31,071,851 1,270,059 $ 19,846,126
Shares issued upon reinvestment of distributions 159,334 2,229,091 - -
Shares redeemed (1,145,852) (19,021,763) (3,410) (53,044)
-----------------------------------------------------------
Change in net assets from capital share
transactions 913,902 $ 14,279,179 1,266,649 $ 19,793,082
-----------------------------------------------------------
CLASS B**:
Shares sold 4,577,893 $ 75,279,336 2,282,441 $ 32,813,557
Shares issued upon reinvestment of distributions 1,885,731 26,287,441 - -
Shares redeemed (1,493,872) (24,469,011) (2,585,359) (37,845,400)
-----------------------------------------------------------
Change in net assets from capital share
transactions 4,969,752 $ 77,097,766 (302,918) $ (5,031,843)
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Perpetual Global Portfolio
Year Year
Ended 9/30/96 Ended 9/30/95
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
------------------------------------------------------
CLASS A:
Shares sold 412,686 $ 7,129,198 142,470 $ 2,073,646
Shares issued upon reinvestment of distributions 21,809 331,049 -- --
Shares redeemed (132,328) (2,244,328) (335,189) (4,810,857)
------------------------------------------------------
Change in net assets from capital share
transactions 302,167 $ 5,215,919 (192,719) $(2,737,211)
------------------------------------------------------
CLASS B:
Shares sold 1,723,938 $29,034,247 417,981 $ 6,078,915
Shares issued upon reinvestment of distributions 45,012 672,932 -- --
Shares redeemed (164,743) (2,742,660) (174,218) (2,478,417)
------------------------------------------------------
Change in net assets from capital share
transactions 1,604,207 $26,964,519 243,763 $ 3,600,498
------------------------------------------------------
</TABLE>
92
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
Mentor Capital Growth Portfolio
Year Year
Ended 9/30/96 Ended 9/30/95
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
--------------------------------------------------------
CLASS A:
Shares sold 148,975 $ 2,580,775 100,226 $ 949,902
Shares issued in connection with acquisition of
Mentor/Cambridge Growth Portfolio~ - - 671,791 10,681,477
Shares issued upon reinvestment of distributions 53,208 849,718 125,218 1,954,221
Shares redeemed (401,455) (6,845,340) (473,840) (7,405,251)
--------------------------------------------------------
Change in net assets from capital share
transactions (199,272) $ (3,414,847) 423,395 $ 6,180,349
--------------------------------------------------------
CLASS B:
Shares sold 635,818 $ 10,950,459 329,014 $ 1,869,220
Shares issued in connection with acquisition of
Mentor/Cambridge Growth Portfolio~ - - 1,255,213 19,669,182
Shares issued upon reinvestment of distributions 111,273 1,748,109 256,857 3,961,731
Shares redeemed (793,484) (13,367,434) (968,058) (15,000,398)
--------------------------------------------------------
Change in net assets from capital share
transactions (46,393) $ (668,866) 873,026 $ 10,499,735
--------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Mentor Strategy PortfolioPeriod
Ended 9/30/96 Ended 9/30/95
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
-----------------------------------------------------------
CLASS A*:
Shares sold 625,652 $ 10,425,353 690,271 $ 10,122,356
Shares issued upon reinvestment of distributions 12,905 221,980 - -
Shares redeemed (192,977) (3,147,176) (1,062) (15,555)
-----------------------------------------------------------
Change in net assets from capital share
transactions 445,580 $ 7,500,157 689,209 $ 10,106,801
-----------------------------------------------------------
CLASS B**:
Shares sold 2,946,568 $ 48,230,745 2,247,821 $ 31,437,475
Shares issued upon reinvestment of distributions 201,006 3,417,749 1,708 20,979
Shares redeemed (1,706,367) (27,999,865) (2,121,049) (29,118,194)
-----------------------------------------------------------
Change in net assets from capital share
transactions 1,441,207 $ 23,648,629 128,480 $ 2,340,260
-----------------------------------------------------------
</TABLE>
93
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
Mentor Income and Growth Portfolio
Year Year
Ended 9/30/96 Ended 9/30/95
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
---------------------------------------------------------
CLASS A:
Shares sold 193,095 $ 3,508,748 255,128 $ 3,928,730
Shares issued upon reinvestment of distributions 69,612 1,186,199 49,436 741,971
Shares redeemed (160,516) (2,896,387) (307,376) (4,818,528)
---------------------------------------------------------
Change in net assets from capital share
transactions 102,191 $ 1,798,560 (2,812) $ (147,827)
---------------------------------------------------------
CLASS B:
Shares sold 1,025,114 $ 18,562,371 602,055 $ 9,529,693
Shares issued upon reinvestment of distributions 150,385 2,545,180 98,685 1,467,195
Shares redeemed (428,846) (7,653,268) (806,196) (12,489,370)
---------------------------------------------------------
Change in net assets from capital share
transactions 746,653 $ 13,454,283 (105,456) $ (1,492,482)
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Municipal Income Portfolio
Year Year
Ended 9/30/96 Ended 9/30/95
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
------------------------------------------------------
CLASS A
Shares sold 53,174 $ 797,588 71,110 $ 1,021,048
Shares issued upon reinvestment of distributions 36,380 547,438 45,425 658,265
Shares redeemed (291,238) (4,349,702) (483,463) (6,926,047)
------------------------------------------------------
Change in net assets from capital share
transactions (201,684) $(3,004,676) (366,928) $ (5,246,734)
------------------------------------------------------
CLASS B:
Shares sold 240,061 $ 3,594,252 247,851 $ 3,605,763
Shares issued upon reinvestment of distributions 75,360 1,135,186 99,198 1,439,916
Shares redeemed (488,067) (7,362,086) (903,907) (13,100,688)
------------------------------------------------------
Change in net assets from capital share
transactions (172,646) $(2,632,648) (556,858) $ (8,055,009)
------------------------------------------------------
</TABLE>
94
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
Mentor Quality Income Portfolio
Year Year
Ended 9/30/96 Ended 9/30/95
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
-----------------------------------------------------------
CLASS A:
Shares sold 261,361 $ 3,431,466 132,285 $ 1,706,716
Shares issued upon reinvestment of distributions 65,422 864,412 89,969 1,159,149
Shares redeemed (533,765) (6,992,390) (745,107) (9,570,406)
-----------------------------------------------------------
Change in net assets from capital share
transactions (206,982) $ (2,696,512) (522,853) $ (6,704,541)
-----------------------------------------------------------
CLASS B:
Shares sold 765,460 $ 10,058,721 421,513 $ 5,506,753
Shares issued upon reinvestment of distributions 177,855 2,348,000 223,602 2,883,354
Shares redeemed (1,108,119) (14,629,662) (2,078,944) (26,675,096)
-----------------------------------------------------------
Change in net assets from capital share
transactions (164,804) $ (2,222,941) (1,433,829) $(18,284,989)
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Short-Duration Income Portfolio
Year Period
Ended 9/30/96 Ended 9/30/95
Shares Dollars Shares Dollars
<S> <C> <C> <C> <C>
--------------------------------------------------------
CLASS A*:
Shares sold 626,588 $ 7,923,068 80,087 $ 1,015,595
Shares issued upon reinvestment of distributions 15,339 193,207 322 4,089
Shares redeemed (124,945) (1,577,491) (1,399) (17,786)
--------------------------------------------------------
Change in net assets from capital share
transactions 516,982 $ 6,538,784 79,010 $ 1,001,898
--------------------------------------------------------
CLASS B**:
Shares sold 1,146,855 $14,558,230 1,116,509 $14,138,694
Shares issued upon reinvestment of distributions 88,449 1,119,155 56,501 708,003
Shares redeemed (841,749) (10,608,962) (1,011,667) (12,759,888)
--------------------------------------------------------
Change in net assets from capital share
transactions 393,555 $ 5,068,423 161,343 $ 2,086,809
--------------------------------------------------------
</TABLE>
* For the period from June 5, 1995 (issuance of Class A shares) to September
30, 1995.
** For the period from January 1, 1995 to September 30, 1995.
~ On September 27, 1995, Capital Growth Portfolio acquired the net assets of
Mentor/Cambridge Growth Portfolio in exchange for Class A and Class B
shares of the Capital Growth Portfolio pursuant to a plan of reorganization
approved by the shareholders of Mentor/Cambridge Growth Portfolio on
September 21, 1995. The acquisition was accomplished by a tax free exchange
of 1,927,004 shares of the Capital Growth Portfolio for the net assets of
Mentor/Cambridge Growth Portfolio. The net assets of Mentor/Cambridge
Growth Portfolio on that date including $3,953,496 of unrealized
appreciation on investments, were combined with Capital Growth Portfolio.
The aggregate net assets of Capital Growth Portfolio and Mentor/Cambridge
Growth Portfolio immediately before the acquisition were $56,351,987 and
$30,350,659, respectively. The net assets of Capital Growth Portfolio
immediately after the acquisition were $86,702,646.
95
<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 the Growth Portfolio, Perpetual Global
Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and Growth
Portfolio, Municipal Income Portfolio, Quality Income Portfolio, and
Short-Duration Income Portfolio, portfolios of Mentor Funds (the Funds) as of
September 30, 1996 and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the years or periods
in the two-year period then ended (pages 64 to 68) and the financial highlights
for Class A Shares and Class B Shares for each of the years or periods in the
five-year period then ended (pages 69 to 79). These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities owned
as of September 30, 1996 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Growth
Portfolio, Perpetual Global Portfolio, Capital Growth Portfolio, Strategy
Portfolio, Income and Growth Portfolio, Municipal Income Portfolio, Quality
Income Portfolio, and Short-Duration Income Portfolio, portfolios of Mentor
Funds as of September 30, 1996, the results of their operations for the year
then ended, the changes in their net assets for each of the years or periods as
indicated on pages 64 to 68, and the financial highlights for each of the years
or periods as indicated on pages 69 to 79, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
--------------------------
KPMG PEAT MARWICK LLP
Boston, Massachusetts
November 8, 1996
96
<PAGE>
MENTOR FUNDS
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
TRUSTEES
DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
ARNOLD H. DREYFUSS, TRUSTEE
Former Chairman
and Chief Executive Officer
Hamilton Beach/Proctor-Silex, Inc.
THOMAS F. KELLER, TRUSTEE
Former Dean, Fuqua School of Business
Duke University
LOUIS W. MOELCHERT, JR., TRUSTEE
Vice President for Business & Finance
University of Richmond
STANLEY F. PAULEY, JR., TRUSTEE
Chairman and Chief Executive Officer
Carpenter Company
TROY A. PEERY, JR., TRUSTEE
President
Heilig-Meyers Company
PETER J. QUINN, JR., TRUSTEE
Managing Director
Mentor Investment Group, LLC
OFFICERS
PAUL F. COSTELLO, PRESIDENT
Managing Director
Mentor Investment Group, LLC
TERRY L. PERKINS, TREASURER
Senior Vice President
Mentor Investment Group, LLC
JOHN M. IVAN, SECRETARY
Managing Director
and Assistant General Counsel
Wheat First Butcher Singer, Inc.
MICHAEL A. WADE, ASSISTANT TREASURER
Vice President
Mentor Investment Group, LLC
<PAGE>
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RIVERFRONT PLAZA
901 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
1-800-382-0016
This report is authorized for
distribution to prospective
investors only when preceded or
accompanied by a Mentor Fund
Prospectus, which contains
complete information about
fees, sales charges and
expenses. Please read it
carefully before you invest or
send money.
