Mentor Funds
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Annual Report
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September 30, 1997
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Mentor Funds
Annual Report
Table of Contents
September 30, 1997
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Page
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Message from the Chairman and President.................................................. 1
Managers' Commentaries
Growth Portfolio....................................................................... 3
Perpetual Global Portfolio............................................................. 6
Capital Growth Portfolio............................................................... 10
Strategy Portfolio..................................................................... 12
Income and Growth Portfolio............................................................ 15
Municipal Income Portfolio............................................................. 18
Quality Income & Short-Duration Income Portfolios...................................... 21
Portfolios of Investments
Growth Portfolio....................................................................... 25
Perpetual Global Portfolio............................................................. 29
Capital Growth Portfolio............................................................... 38
Strategy Portfolio..................................................................... 40
Income and Growth Portfolio............................................................ 45
Municipal Income Portfolio............................................................. 49
Quality Income Portfolio............................................................... 54
Short-Duration Income Portfolio........................................................ 58
Statements of Assets and Liabilities..................................................... 60
Statements of Operations................................................................. 62
Statements of Changes in Net Assets...................................................... 64
Financial Highlights..................................................................... 67
Notes to Financial Statements............................................................ 78
Independent Auditors' Report............................................................. 97
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 the Annual Report for the year ended September
30, 1997 for your investment in Mentor Funds. This fund family 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 is available to investors through Mentor Investment Group in
both mutual funds and separately-invested portfolios.
Mentor Investment Group
CHART SHOWING INVESTMENTS RANGING FROM LOW RISK AND LOW RETURN TO HIGH RISK AND
HIGH RETURN. AS LISTED BELOW:
CASH
ACTIVE FIXED INCOME
BALANCED
TACTICAL ASSET ALLOCATION
LARGE-CAPITALIZATION QUALITY GROWTH
GLOBAL/INTERNATIONAL EQUITY GROWTH
SAMLL/MID-CAPITALIZATION GROWTH
* Mentor Investment Advisors, LLC/dba Mentor Investment Group, LLC
1
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Mentor Funds
Message from the Chairman and President (continued)
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Three new mutual funds have been introduced by our firm over the past year: the
Mentor Perpetual International Portfolio for individual investors, which
provides a further opportunity to invest with the award-winning manager of our
Global fund; and two new money-market funds targeted to institutional investors
(minimum initial investment, $500,000) -- the Mentor Institutional Money Market
Portfolio and the Mentor Institutional U.S. Government Money Market Portfolio.
Your consultant will have all the details.
You may wish to ask your consultant about Mentor WISDOM.(sm) It is an asset
allocation service especially developed for the Mentor family of funds. It may
help you determine your personal risk/reward profile and identify a Model
Portfolio of Mentor funds that appears best suited to fulfill your investment
needs. With Mentor WISDOM(sm) you also receive comprehensive semi-annual reports
on the performance and composition of your investments.
In the commentaries that follow the management teams present their perspectives
on the markets and their strategies for investing your assets. Performance
information for each Portfolio, relative to the appropriate index, is also
included in the reports.
Please review the information carefully. Should you have questions, please
contact your consultant or call us directly at (800)382-0016. We welcome your
communications. On behalf of all of us at Mentor Investment Group, we thank you
for your investment in Mentor.
Sincerely,
/s/Daniel J. Ludeman /s/Paul F. Costello
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Daniel J. Ludeman Paul F. Costello
Chairman President
[LOGO]
The Mentor Mission
To provide professional investment management services through a firm that is
second to none in the quality of its investment process, the skill and training
of its professionals, and the commitment, shared by all its associates, to
deliver the highest level of service and ethical behavior to clients.
For more information and a prospectus for the funds, please call us,
(800)382-0016, or contact your consultant. The prospectus contains complete
information about fees, sales charges, and expenses. Please read it carefully
before investing or sending money.
2
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Mentor Growth Portfolio
Managers' Commentary: The Small/Mid-Capitalization Management Team
September 30, 1997
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The year ended September 30, 1997 was clearly one of extremes, both positive and
negative, for small-capitalization companies. When we last reported to you in
the Semi-Annual Report for the period ended March 31, 1997, the small-cap market
was in the midst of a significant downturn. At that point the Russell 2000 Index
had a total return of -0.24% over the prior six months, as compared to a total
return of 11.24% for the S&P 500 Index.* Since then, however, the Russell 2000
Index has recouped much of its underperformance relative to the larger-
capitalization companies in the S&P 500 Index, returning 33.51% for the six
months ended September 30, relative to 26.26% for the S&P 500. The performance
of the Mentor Growth Portfolio has been better than that of the Russell 2000
Index over the six-month period, the result, we believe, of the strong
fundamentals of the companies we hold.
The strong recent performance of our companies seems to indicate that investors
have begun to realize the value in small-cap stocks. A probable explanation for
the change in sentiment regarding smaller companies is the superior earnings
growth of these companies relative to larger companies, and the relatively lower
price/earnings multiple that the market had put on small-cap stocks. When a
company is able to consistently grow earnings at a high rate, one would expect
the market to pay up for this earnings growth. That, however, had not been the
case for much of the year, as the market instead favored highly liquid, large-
capitalization stocks. As a result, the P/E multiples on the largest companies
in the S&P 500 rose to historically high levels. The relative P/E multiple on
small-cap stocks, however, remained quite low.
The gap in earnings growth rates between smaller and larger companies has been
widening since the end of 1996, as large companies have faced slowing earnings
growth rates while smaller companies continue to maintain or increase their
growth. For example, the forward 12 months earnings growth estimate for the
Mentor Growth Portfolio is 47%, as compared to 30% for the Russell 2000 and 7%
for the S&P 500.** It is our belief that the ability to purchase high-growth
companies at relatively inexpensive price/earnings ratios eventually caught the
market's attention. We believe that the small-cap market may be in the early
stages of a cycle of outperformance relative to larger companies -- as earnings
growth, valuation, and sentiment currently appear to favor smaller companies.
We have always endeavored to purchase rapidly growing small and mid-cap stocks
operating in niche markets, and we believe that the performance of the Mentor
Growth Portfolio verifies our process. For the second quarter, 91% of our
companies reported earnings that were in line with or above the expectations of
the market, and as the third
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Mentor Growth Portfolio (continued)
Managers' Commentary
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quarter earnings report period gets underway, earnings continue to look strong.
Given the current valuations of our holdings, we believe that there is
substantial room for continued appreciation of our stocks. While there is never
certainty as to what the future will bring, we are extremely comfortable holding
our portfolio of companies going into the next fiscal year.
The objective of the Mentor Growth Portfolio is to continue to seek long-term
growth of capital through investments in smaller companies' stocks.
Thank you for your continuing support.
* 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. For a definition of the Russell
2000, see notes to Performance Comparison at right.
** Source: Indata
Performance Comparison
Comparison of change in value of a hypothetical $10,000 investment in
Mentor Growth Portfolio Class A and the Russell 2000.
[GRAPH PLOT POINTS]
Class A Russell 2,000
6/5/95 9,425 10,000
6/30/95 9,859 10,518
9/30/95 11,251 11,557
9/30/96 14,640 13,076
9/30/97 18,418 17,416
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception++
Class A 18.56% 30.05%
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 9/30/97.
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Mentor Growth Portfolio (continued)
Managers' Commentary
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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~.
[GRAPH PLOT POINTS]
Class B Russell 2000~
9/30/87 10,000 10,000
12/31/87 7,475 7,093.97
12/31/88 8,737 8,859.93
12/31/89 10,252 10,835.34
12/31/90 9,096 8,289.97
12/31/91 13,667 12,107.64
12/31/92 15,796 14,336.85
12/31/93 18,260 17,047.50
12/31/94 17,443 16,736.97
9/30/95 23,042 21,041.03
9/30/96 29,535 23,804.37
9/30/97 36,817 31,705.64
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year 5-Year 10-Year
Class B 20.66% 21.29% 13.92%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000
Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 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 five-year period following the date of
purchase. The ending value of the Class B Shares reflects a redemption fee of
4.00% on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
5
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Mentor Perpetual Global Portfolio
Managers' Commentary: The Global/International Management Team
September 30, 1997
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Overall world equity markets made good gains in the year ended September 30,
1997. The Morgan Stanley Capital Institutional (MSCI) Index rose by 22.4% and
the Morgan Stanley Capital Europe Australia and Far East (EAFE) Index by 10.5%.
However, the world for investors can be split in two with the major markets of
the western hemisphere -- the United States, Europe and Latin America -- showing
good gains, while those in the eastern hemisphere mainly delivered losses.
United States
The "Goldilocks" scenario of sustained economic growth coupled with an absence
of inflationary pressures powered stocks higher on Wall Street. Corporate
profitability remained robust, stock buy-backs were commonplace, and merger and
acquisition activity was at a high level. Flows into stock mutual funds were
healthy, and late in the period European institutions, which had largely ignored
Wall Street's party in the "90s, became net buyers of stocks. Against this
background, a warning by Fed Chairman Greenspan against "irrational exuberance"
in markets in December and a 25-basis-point hike in the Fed funds rate in March
caused no more than temporary setbacks to stock prices. Overall the S&P
Composite rose by 37.8%.
Europe
The major European markets were all strong. Economies began to emerge from a
sustained period of sluggish growth, particularly as exports were boosted by the
relative weakness of European currencies against the dollar. However, despite
better rates of growth, central banks kept monetary policy loose as unemployment
remained at levels not seen since the 1930s. Bond markets received a further
boost as investors became convinced that European Monetary Union was nearly
certain to commence in January 1999. Throughout the region bond yields converged
on German rates, traditionally the lowest on the continent with the exception of
Switzerland's, because of the Bundesbank's success in holding inflation down.
Yield convergence sparked spectacular rises in the equity markets of
traditionally high inflation -- high interest rate countries, with the FT World
Spanish Index rising by 52.7% in dollar terms, for instance. Overall, the FT
World ex-UK Index moved ahead by 32.4%.
United Kingdom
Unlike the rest of Europe the UK did not enjoy low or falling interest rates.
With the UK staying out of the initial round of EMU, the Bank of England was
able to respond to a strong domestic economy by pushing up rates. This rise in
rates helped propel sterling higher, and so caused exports to sag, another
contrast with the Continent. Even so, the UK for the first time in the post-war
period was the high growth, low inflation economy of Europe. Investors were not
frightened away by an incoming Labor government, as it promised to be as
pro-business as its Conservative predecessor. Against this background, in dollar
terms the FT All Share Index was up 30.4%.
Japan
Although the stock market and the currency rallied in the middle of the period,
the past 12 months were once again, disappointing for investors in Japan.
Domestic institutions dumped stocks in favor of bonds, with the yield on the
long bond falling to 1.72% -- possibly the lowest yield seen on a major bond
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Mentor Perpetual Global Portfolio (continued)
Managers' Commentary
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market for more than 400 years -- and overwhelmed foreign buying of stocks.
Economic recovery ran out of steam; indeed the decline in Gross Domestic Product
(GDP) in the second quarter of 1997 was the second biggest decline in quarterly
output in the postwar period. Having pledged itself to deficit reduction and
having already brought money rates down to little above zero, the government had
apparently run out of options to cope with renewed recession. The outlook for
corporate profits, outside selected export industries, deteriorated, and the
potential for a number of collapses in the banking and insurance sector never
receded. Not surprisingly, then, the Tokyo Stock Exchange "Topix" Index slumped
by 21.3% in dollar terms; the Nikkei OTC Average Price Index achieved an even
greater fall of 47.0%.
Asia (ex. Japan)
During the past 12 months the Asian dream turned into a nightmare. The FT World
Pacific Basin Index fell by 15.8% in dollar terms, but behind that were
collapses in a number of stock markets widely favored by foreign investors. The
Bangkok SET Index fell by 65.3%, the Kuala Lumpur Composite Index by 44.5%, the
Jakarta SE Index by 32.3% and the Manila Composite Index by 50.4%, all in dollar
terms. For these countries, as well as elsewhere in much of Asia, disappointing
export growth brought a slowdown to economic growth and balance of payments
problems. This left their currencies vulnerable to spectacular attacks, and
unsuccessful attempts by central banks to maintain exchange rates led to
collapses in both currencies and stock markets. Moreover, the slowdown in growth
rates made it apparent that after years of capital investment to GDP, ratios
generally exceeding 25%, and in some cases 40%, there was considerable over
capacity in manufacturing and real estate. Since much of this investment had
been financed in US dollars rather than local currencies, servicing borrowings
became a major problem for Asian corporates and the strength of Asian banks was
seriously undermined. It is estimated that in Thailand, the most extreme case so
far, as much as 35% of bank loans might be bad. The one major exception to this
gloomy scenario was Hong Kong. The change-over in sovereignty from the UK to
China transpired without problems. Even more importantly, the Hong Kong dollar
peg to the U.S. dollar was not seriously challenged so that Hong Kong continued
to enjoy Chinese growth rates coupled with American interest sales.
Consequently, the Hang Seng Index rose by 26.4%.
Latin America
The contrast with Asia could hardly be greater. These markets rewarded
investors, with the IFC Mexico Index up 51.7%, the IFC Argentina Index up 44.4%,
and the IFC Brazil Index up 57.3%, so that the overall IFC Latin American Index
rose by 45.2%, all in dollars. Balance of payments problems receded as exports
grew healthy, and there was little pressure on currencies. Governments were
successful in getting public sector expenditure under control, and in reducing
inflation rates to less than 10% per annum in contrast to the 10% per month more
typically experienced in the past. With stocks generally trading on P/Es
relatively low by international standards, Latin America offered investors the
promise which Asia had offered in the past -- superior growth
7
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Mentor Perpetual Global Portfolio (continued)
Managers' Commentary
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at discount valuations -- and so foreign capital flowed into these markets.
Outlook
Large questions, and risks, loom for investors over the next 12 months. Will the
American "Goldilocks" meet at least one bear? Can the European move to monetary
union be sustained? Will the Japanese economy fall back into interminable
recession? Will other Asian economies and stock markets simply free-fall?
Without ignoring these risks, we wish to be relatively optimistic. Given the
already rich valuation of American shares, a correction or series of corrections
on Wall Street is likely, but a prolonged bear market is not. High valuations
alone should not deter investment. After all, if valuations are the highest in
memory, economic conditions are the best in memory as well. Moreover, there seem
to be self-correcting mechanisms which will prevent stock market corrections
from being too deep or too sustained. Should the economy accelerate the Fed will
surely hike rates, but just as surely corporate profits growth will be picking
up, as well. In contrast should the economy de-accelerate, the pressure on the
Fed to do something will disappear. The markets biggest worry in recent months
has been the timing of the next rate hike. With inflationary pressure virtually
nil and real yields already very high, the stock markets' preoccupation could
become just how far rates will fall.
In Europe progress toward EMU seems unstoppable. Probably the maximum political
danger to monetary union has passed as stronger growth will lessen the human
cost in terms of unemployment. However, some tightening of monetary policy can
be expected to occur, especially as the Bundesbank will not want the EMU to be
considered a "soft" currency. The damage to stock markets caused by rising rates
will be minimized by a wave of cross-border M&A activity which has already
commenced as European companies jockey for position before January 1999.
In the UK the pressure for rising rates has already peaked as the signs mount
that the economy is beginning to slow. With the new Labor government adopting a
friendlier position towards the EMU, a shadowing of European rates is likely to
occur, giving a second leg to the UK equity bull market, particularly as British
stocks are attractively valued by international standards.
Japan will probably not fall into prolonged recession, although a period of
lackluster growth is certain. While a tightening in fiscal policy will have a
contractionary influence, it should be more than offset by an uptick in consumer
expenditure, especially as the huge amount of personal sector savings now earns
virtually no return, and by continued buoyancy in exports.
Asian stock markets remain problematic. After many years of economic and stock
market boom, it would be wrong to expect a bust of only a few months. The
magnitude of the burden of corporate bankruptcy and the consequent need for
financial sector reconstruction can not be overcome quickly. However, as
virtually everything has been sold down, there are bargains to be had already in
sound companies amidst all the wreckage. In contrast, the Latin American story
looks compelling. Although a history of disappointing performance cautions
investors
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Mentor Perpetual Global Portfolio (continued)
Managers' Commentary
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against complacency, the mix of sound government policy, strong profits growth
and appealing stock price valuations promises high returns, for once, in these
high risk markets.
The objective of the Mentor Perpetual Global Portfolio continues to be to seek
long-term growth of capital through global investing.
Performance Comparison
[GRAPH PLOT POINTS]
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
9/30/97 17,258 15,200 15,668
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception++
Class A Shares 14.60% 12.76%
Class B Shares 16.74% 13.23%
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.*
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 U.S.,
Europe, Canada, Australia, New Zealand, and the Far East. The average company
in the index has a market capitalization of about $3.5 billion. This is a
total return index with gross dividends reinvested. MSCI World Index is not
adjusted to reflect reinvestment of dividends on securities in the index, and
is not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class A and Class B
Shares from the date of commencement of operations on 3/29/94 through
9/30/97.
~ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class B Shares. A contingent deferred sales charge will be imposed,
if applicable, on Class B Shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to
1.00% of amounts redeemed during the five-year period following the date of
purchase. Class B Shares are charged a redemption fee of 4.00% on any
redemption less than one year from the purchase date. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
9
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Mentor Capital Growth Portfolio
Managers' Commentary: The Large Capitalization Quality Growth Management Team
September 30, 1997
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Simply amazing! There is really no other way to describe this historic bull
market. It has confounded virtually all of its observers. After a 37% return in
1995, and 23% in 1996, the S&P 500 has already gained more than 30% this year.*
And who knows what lies ahead? With the fourth quarter already off to a strong
start, it looks as though many more records will be broken before year-end.
Mentor Capital Growth Portfolio shareholders have benefited from this rising
tide of domestic equity valuations. For the 12-month period ended September 30,
1997 the Mentor Capital Growth A shares returned 34.78% while the B shares
returned 33.88%.**
More than the magnitude of its rise, the most incredible characteristic of the
1990s bull market has been its persistence. Since bottoming in the fall of 1990,
the S&P 500 has gained better than 20% annually without a single 10% decline.
The S&P 500 returned 7.5% in the just-finished third quarter, its eleventh
consecutive quarterly advance, and a period in which its average quarterly gain
has been 7.4%. This is clearly becoming the Cal Ripken of bull markets. These
yet-unfinished performances are unlikely to be repeated in our lifetimes, if
ever again.
The first two years of this bull market were supported mostly by falling
inflation and interest rates. The last five years have been driven by strong
corporate earnings growth and the absence of any resurgence in inflation. Over
the past five years corporate earnings, as measured by the companies in the S&P
500, have grown 18% annually. During this same period S&P 500 stock prices have
also compounded at 18%. As long as inflation remains low and corporate earnings
continue to expand at a double-digit rate, the stock market is likely to remain
strong.
The majority of this tremendous growth in corporate earnings is due to profit
margin expansion, not revenue growth. Low inflation and intense competition have
kept revenue trends below normal in the 1990s. In fact, annual revenue growth,
again as measured by the companies in the S&P 500, has been less than 5% during
this decade. How have companies, on average, managed to turn such modest revenue
growth into such powerful earnings growth? The answer can be found mostly in
three popular strategies to boost profitability.
The first is the huge write-offs of assets that have become so commonplace in
the past decade. This elimination of previous investments that did not pan out
has resulted in one-time reductions in ongoing expenses, particularly
depreciation and amortization. Secondly, corporations have benefited from lower
interest costs. The pay-down of debt by many companies that became
over-leveraged in the 1980s, combined with generally lower interest rates in the
1990s, has resulted in a much lower interest burden. Finally, skillful tax
planning by many multinational corporations has lowered their overall tax rates.
These three strategies account for most of the profit margin expansion, with the
remainder due to very low inflation in input costs and improving productivity.
We all know that earnings growth cannot continue to outpace revenue growth by
more than 10% indefinitely. At some point
10
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Mentor Capital Growth Portfolio (continued)
Managers' Commentary
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corporations will exhaust the major profit margin opportunities. Our portfolio
appears well positioned for that eventuality. Although our current holdings have
grown their earnings at 16% annually over the past five years, slightly less
than the S&P 500, their revenue growth rate has been considerably higher at 12%.
Their average dividend growth has also been significantly higher than the S&P
500 during this period, 13% versus 4.3%. Revenue growth and dividend growth are
more stable and dependable measures of long-term value growth than swings in
profit margins and earnings. We believe that the superior consistency of our
typical holding's growth may work in our favor when the winds inevitably shift
in a less favorable direction.+
The objective of the Capital Growth Portfolio is to continue to seek long-term
growth of capital through investments in a diversified portfolio of high-quality
common stocks.
* The Standard and 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.
** See notes to Performance Comparison.
+ While the management team will endeavor to invest the Portfolio according to
their proprietary process, there is no guarantee of investment success.
Performance Comparison
[GRAPH PLOT POINTS]
A Shares B Shares S&P 500
4/29/92 9,450 10,000 10,000
9/30/92 9,524 10,061 10,215
9/30/93 10,306 10,818 11,543
9/30/94 10,165 10,601 11,965
9/30/95 12,216 12,443 15,521
9/30/96 15,185 15,532 18,680
9/30/97 20,467 20,928 26,236
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception+++
Class A Shares 27.04% 14.11%
Class B Shares 29.88% 14.58%
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.~
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses,
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares of rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Capital Growth Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
9/30/97.
11
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Mentor Strategy Portfolio
Managers' Commentary: The Tactical Asset Allocation Management Team
September 30, 1997
- --------------------------------------------------------------------------------
In early September we made the third asset allocation shift of the past fiscal
year in the Mentor Strategy Portfolio. It established our current asset class
weightings at 62% stocks, 23% bonds, and 15% cash. It was a move that brought us
back in line with the Portfolio's weightings at the beginning of the 12-month
period, which were 67% stocks, 23% bonds, and 10% cash. Although the beginning
and ending points were similar, the road in between was anything but straight
and contained a few bumps along the way.
One thing that we did during this period that we have consistently done since
the inception of the Portfolio was to let our strategy be driven by our asset
allocation model. The model has been developed over the past 30 years through
extensive back-testing of an extremely broad array of economic, financial,
trading, and market data. Although continually refined, it will always remain
the core of our methodology.
The defining moment of the period occurred in early February when our asset
allocation model guided us to a more conservative asset mix than at any other
time in the preceding five years. For February and most of March we maintained a
45%, 45%, and 10% blend of stocks, bonds, and cash, respectively. On March 24
our model turned even more bearish, leading us to implement a 35% stocks, 35%
bonds, and 30% cash mix. We maintained that blend for the subsequent five
months, until our model turned bullish again on September 2.
The conservative asset allocation stance for the February-through-August period
was primarily the result of two factors: The deteriorating condition of our
monetary composite, and the extreme over-valuation of the S&P 500 according to
our valuation composite.* Our experience has shown that when both of these
factors are in negative territory-and, absent an extraordinary external
force-the stock market is vulnerable to a significant correction.
For three weeks the signal appeared to be perfectly on mark, as our increased
cash position helped to buffer some of the 9% decline in the S&P 500. But before
we had a chance to uncork the champagne, the market reversed course and set off
on an upside tear, not stopping until early August with the Dow Jones Industrial
average at 8254. Clearly we were missing something.
Based upon our studies and real-life experience, the market was being fueled by
something that was pushing it up despite the highest valuation in U.S. history.
As we intensely examined the flow of funds into the market we were eventually
able to discern that the over-riding big buyers of stocks were large
corporations either buying out their competition, or buying back their own
shares. This was an external force, present to a far greater extent than ever
before in financial history, that was propelling the market to unprecedented
levels.
Recognizing the existence of this external force allowed us to modify the
momentum leg of our model. And in early September with this condition still in
place after the August market sell-off, our model turned more optimistic for the
first time since February.
12
<PAGE>
Mentor Strategy Portfolio (continued)
Managers' Commentary
- --------------------------------------------------------------------------------
During the period we conducted extensive back-testing of our sector studies as a
result of the new capital gains tax legislation. With the top rate cut to 20%,
but with the required holding period increased to 18 months, it becomes much
more important to concentrate on new purchases that have the greatest chance of
remaining in positive trends for this longer life cycle. We have adjusted our
new purchase criteria to accommodate this goal. We now give heavier weighting to
a sector discipline that is aimed at catching sectors earlier in their bullish
life cycle.
In the past, difficult times have reinvigorated our efforts. Times like these
provide us with opportunities to test and strengthen our investment disciplines.
The enhancements we have made in our asset allocation model, sector studies, and
stock-selection methodology may put us in an even stronger position to assist
you in meeting your long-term financial goals.**
The objective of the Strategy Portfolio is to continue to seek long-term growth
of capital through tactical asset allocation.
Thank you for your continuing support.
* 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
entirely managed and incurs expenses.
** While the management team will endeavor to invest the Portfolio according to
their proprietary process, there is no guarantee of investment success.
13
<PAGE>
Mentor Strategy Portfolio (continued)
Managers' Commentary
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class A Shares and the S&P 500~.
[GRAPH PLOT POINTS]
Class A S&P 500~
6/5/95 9,425 10,000
6/30/95 9,695 10,235
9/30/95 10,554 10,890
9/30/96 12,747 13,291
9/30/97 14,273 18,668
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception**
Class A 5.51% 16.55%
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 9/30/97.
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class B Shares and the S&P 500~.
[GRAPH PLOT POINTS]
Class B S&P 500
10/29/93 10,000 10,000
12/31/93 10,160 10,024
12/31/94 9,798 10,157
9/30/95 12,175 13,180
9/30/96 14,125 15,860
9/30/97 15,838 22,275
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception+
Class B 7.19% 12.42%
*** Represents a hypothetical investment of $10,000 in Mentor Strategy Portfolio
Class B Shares. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to
1.00% of amounts redeemed during the five-year period following the date of
purchase. The ending value of the Class B Shares reflects a redemption fee
of 4.00% on any redemption less than one year from the purchase date. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
+ Reflects operations of Mentor Strategy Portfolio Class B from the date of
commencement of operations on 10/29/93 through 9/30/97.
14
<PAGE>
Mentor Income and Growth Portfolio
Managers' Commentary: The Balanced Management Team
September 30, 1997
- --------------------------------------------------------------------------------
Review of Markets
On the heels of stellar stock market returns in 1995 and the first half of 1996,
the U.S. equity market, as measured by the S&P 500, provided a return of 40.4%
for the 12-month period ending September 30, 1997.* With the economic backdrop
remaining favorable, the stock market continued its remarkable run by
registering its 11th consecutive quarter of price appreciation, a feat matched
only once since 1927. By comparison the bond market provided relatively modest
returns as a combination of tight monetary policy and continued concerns over
economic growth and inflation consumed the market.
Portfolio Performance
For the 12-month period ending September 30, 1997, the Mentor Income and Growth
Portfolio returned 22.11% for the A shares, and 21.24% for the B shares.**
Market Outlook
The US economic outlook remains favorable, with growth expected to remain in the
2.5-3.0% range. Continued job growth and moderate real wage gains should more
than offset the adverse impact of high debt burdens and allow further increases
in consumer spending. Demand for products and services in the U.S. continues to
grow and corporations remain well positioned with high productivity levels and
strong cash flow and profitability. Growth outside of the U.S. also appears
favorable. While the outlook in Japan and the Pacific Rim countries has
softened, the European economic recovery appears to be on better footing.
Some economic forecasters had thought that the Federal Reserve might tighten
monetary policy for a second time this year in response to the relatively high
level of economic growth. It appears, however, that the economy is demonstrating
an ability to grow without inflationary pressures. We believe that the Federal
Reserve will not raise interest rates as long as the inflationary outlook
remains benign. While equity market valuations remain at the high end of
historical levels, this combination of better-than-expected growth, strong
profits, and lower-than-anticipated inflation should continue to fuel the stock
market.
Portfolio Strategy+
As of September 30, 1997, the asset allocation of the Portfolio was 56% equity,
42% bonds, and 4% cash. While we have modestly increased the equity exposure in
recent months, it remains at the lower end of the expected range. This weighting
reflects our view that while the economic fundamentals remain strong, current
valuations in the equity market leave little room for error.
Equity Strategy
Our overweighted position in the financial sector continues to be a positive
contributor to performance. Last year, we shifted our focus to some lesser known
regional players as valuations of the large multinational banks rose. We
continue to increase our exposure to the healthcare sector and are focusing our
efforts largely on the pharmaceutical industry. We have been using recent
pull-backs in the industry to increase positions.
15
<PAGE>
Mentor Income and Growth Portfolio (continued)
Managers' Commentary
- --------------------------------------------------------------------------------
Despite high equity valuations, economic fundamentals continue to appear
promising and we believe it is still possible to find companies with favorable
long-term outlooks and undervalued stocks. In many of these cases investors must
be willing to face some near-term uncertainty and to be patient to capture the
long-term rewards.
Fixed Income Strategy
We remain convinced that inflation is the key to the performance of the bond
market. With the rate of inflation currently running at an annual rate of less
than 2.0%, and the yields of long-term treasury bonds at 6.4%, we believe the
bond market has room to run. As a result, we expect to maintain our longer-than-
market duration in anticipation of lower rates.
We have decreased our mortgage commitment by allocating new cash to the
corporate and treasury sectors. Mortgages appear less attractive, particularly
if we are correct in our belief that interest rates will fall further and
refinancing activity will increase as a result. We are adding selectively to our
corporate positions, but the bulk of the Portfolio remains committed to US
treasury securities.
The objective of the Income and Growth Portfolio is to continue to seek
long-term conservative growth of capital and income by investing in a portfolio
of undervalued stocks and investment-grade bonds.
* 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
entirely managed and incurs expenses.
** See notes to Performance Comparison, page 17.
+ While the management team will endeavor to invest the Portfolio according to
their proprietary process, there is no guarantee of investment success.
16
<PAGE>
Mentor Income and Growth Portfolio (continued)
Managers' Commentary
- --------------------------------------------------------------------------------
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.+
[GRAPH PLOT POINTS]
A Shares B Shares LAGG/S&P 500
5/24/93 9,425 10,133 10,000
9/30/93 9,909 10,506 10,353
9/30/94 10,578 11,239 10,446
9/30/95 12,402 12,614 12,879
9/30/96 14,802 15,140 14,686
9/30/97 18,076 18,499 18,723
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception++
Class A Shares 15.09% 14.59%
Class B Shares 17.24% 15.13%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
*** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+ The Standard & Poor's Index (S&P 500) is an unmanaged, market-value-weighted
index of 500 widely held domestic common stocks. An unmanaged index does not
reflect expenses and may not correspond to the performance of a managed
portfolio in which expenses are incurred. The Lehman Brothers Aggregate
Index is made up of the Government/Corporate Index, the Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. The Lehman Brothers
Aggregate Bond Index and S&P 500 are adjusted to reflect reinvestment of
interest and dividends on securities in the indexes. The Lehman Brothers
Aggregate Bond Index and S&P 500 are not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. This index represents an asset allocation of 60%
S&P 500 stocks and 40% Lehman Brothers Aggregate Bond Index.
++ Reflects operations of Mentor Income and Growth Portfolio Class A and Class
B Shares from the date of commencement of operations on 5/24/93 through
9/30/97.
17
<PAGE>
Mentor Municipal Income Portfolio
Managers' Commentary: The Tax-Exempt Management Team
September 30, 1997
- --------------------------------------------------------------------------------
Economic Factors
During the 12-month period ending September 30, 1997, economic stability and
growth continued to characterize the U.S. economic environment. After solid
performance in the latter half of 1996, the economy in the first quarter of 1997
accelerated at its fastest pace since 1987. Consumer confidence was (and
continues to be) at its highest reading in 27 years, and unemployment fell to
4.8%, the lowest level since 1973.
Despite this vigorous pace of economic growth, we have seen few signs of
inflation. Wholesale prices continued to fall and, at the consumer level, prices
rose by a mere 2.2% during the 12 months through September. The strength of the
dollar has also helped curb inflation by making imported goods less costly.
The bond market responded positively during most of this period. The rally that
began in May 1996 continued through year-end 1996. The situation reversed in
early 1997. With the economy picking up speed and warning remarks by Fed
Chairman Alan Greenspan about tighter monetary policy, inflationary fears were
re-ignited, and interest rates began to rise. When the Fed raised short-term
rates by a modest 0.25% in March, interest rates peaked and then began to
decline in April as inflationary fears again abated.
After the rate hike, interest rates once again continued to decrease through the
second and third quarter of 1997. Overall, during the reporting period,
tax-exempt interest rates were significantly lower. On September 30, 1997,
30-year AAA-rated securities yielded 5.1%, compared to 5.61% a year ago. By
comparison, the 30-year treasury bond yielded 6.40% on September 30, versus the
6.92% yield a year earlier. The ratio of municipals to treasury yields dropped
slightly, from 81.1% to 80%, but remained at an attractive level.
Additional Factors
The trend that continues to have the greatest effect on the municipal market is
the number of new issues that are insured. Year-to-date through September, over
51% of volume issued has been AAA-rated due to insurance. This has created a
scarcity of lower-rated securities and has drastically narrowed the credit
quality spreads. BBB-rated securities, which traditionally have yielded 100-150
basis points over AAA-rated securities, are narrower than we have ever seen. As
an example, a California issue priced on 9/25/97 offered AAA-insured bonds due
2029 at a yield of 5.49%, and BBB-rated securities with the same maturity at a
yield of 5.69%, a spread of only 20 basis points.
On the political side, the much-awaited 1997 tax bill included the expected
capital gains cuts, but had little impact on the municipal market. A very slight
negative was the lack of action taken regarding alternative minimum tax (AMT).
For some time analysts have been predicting that many more individuals could
have to pay AMT in the future unless the AMT exemption amounts were raised.
Unfortunately, proposals to reduce the impact of the individual AMT were not
included in the final law.
18
<PAGE>
Mentor Municipal Income Portfolio (continued)
Managers' Commentary
- --------------------------------------------------------------------------------
Management Strategy*
We will continue to employ the same strategies that we applied over the past 12
months to manage the Portfolio:
o We typically attempt to maintain a barbell structure by rating. This
means that we attempt to weight the majority of the Portfolio equally
in both AAA-rated and BBB-rated holdings. This structure helps balance
the Portfolio's volatility to interest rate movements. Over the past
year, however, the Portfolio was weighted toward more quality, with 50%
of assets AAA-rated and 26% BBB-rated or non-rated. Particularly over
the past two quarters, we have focused our acquisitions on AAA-rated
securities given the tight credit spreads.
o We adjust the duration of the Portfolio based on our interest rate
outlook. Duration, which is expressed in years, is a measurement of a
fund's volatility to interest rate movements. Funds with shorter
durations tend to perform better relative to funds with longer
durations when interest rates rise. Funds with longer durations tend to
outperform when interest rates decline. On September 30, 1997 the
duration of your Portfolio stood at 8.05 years compared to the Lehman
Brothers Municipal Index duration of 7.81 years.**
o We maintain a high concentration in the healthcare sector, given our
research expertise in this industry. At the end of the period 18% of
assets were healthcare-related. The hospital sector was the
best-performing revenue bond sector for the month, quarter, and
year-to-date according to Lehman's September municipal indexes report,
returning 1.43%, 3.69%, and 7.86%, respectively. The strong performance
in this sector is no surprise because of the continuing
debt-restructuring associated with mergers, acquisitions, and
consolidations. In addition, hospitals continue to improve their
financial positions, which has led to a high number of rating upgrades.
The positive trend shows no sign of slowing, as evidenced by strong
hospital bond issuance volume and above-average ratings upgrades in the
third quarter.
o We continue to trade conservatively, identifying securities that we
believe will outperform within a sector, and which can be purchased at
attractive prices, rather than focusing on market timing.
Outlook
The economy continues to be moderately strong, with inflation remaining minimal.
Growth is broad-based, coming from all sectors of the economy. It is led by a
still strong consumer, a production sector chugging along to keep up with
vibrant demand, an export sector that is undeterred by the ever-strengthening
dollar, and a government sector which has not slowed spending. Inflation news
remains friendly. The string of seven consecutive negative producer price index
(PPI) readings was finally broken, but year-over-year readings are among the
lowest on record. The core consumer price index (CPI) similarly registers a
downward trend.
The Federal Reserve Board has refrained from any action since the tightening
move in March 1997. Against a backdrop of continued growth
19
<PAGE>
Mentor Municipal Income Portfolio (continued)
Managers' Commentary
- --------------------------------------------------------------------------------
and low employment, there is some fear that the economy is running out of slack.
Thus, the Fed is biased to tighten again. We do not believe, however, that they
will act until inflation is more of a reality. Although it is possible that they
may take some action prior to the end of the year, we feel this is more of a
probability in February 1998. As such, our outlook for the remainder of the year
is neutral with a longer-term slightly bullish view. We expect the 30-year
treasury, currently at a 6.44% yield, to trade in a 6.125%-to- 6.75% range, with
long municipals at a ratio of 78-80% of taxable yields.
The objective of the Municipal Income Portfolio is to continue to seek high
current income exempt from federal taxes.
* While the management team will endeavor to invest the Portfolio in accordance
with these strategies, there is no guarantee of investment success.
** 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 SEC requires to
be reflected in the Portfolio's performance.
Performance Comparison
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Municipal Income Portfolio Class A and Class B Shares and Lehman Municipal Bond
Index.
[GRAPH PLOT POINTS]
A Shares B Shares Lehman Municipal Bond Index~
4/29/92 9,525 10,000 10,000
9/30/92 10,034 10,528 10,561
9/30/93 11,637 12,134 11,906
9/30/94 11,101 11,511 11,616
9/30/95 12,151 12,348 12,916
9/30/96 12,935 13,184 13,818
9/30/97 14,085 14,291 14,933
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception***
Class A 3.71% 6.52%
Class B 4.33% 6.80%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class A Shares, after deducting the maximum sales charge of 4.75%
($10,000 investment minus $475 sales charge = $9,525). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
*** Reflects operations of Mentor Municipal Income Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
9/30/97.
20
<PAGE>
Mentor Quality Income Portfolio
Mentor Short-Duration Income Portfolio
Managers' Commentary: The Fixed-Income Management Team
September 30, 1997
- --------------------------------------------------------------------------------
Market Conditions
During the 12-month period ending September 30, 1997 the yield curve flattened.
While yields of three-month and six-month treasury bills were largely unchanged,
yields of treasury notes and bonds with maturities of one year and greater were
lower by 0.25% to 0.60%. Generally speaking, the greater the maturity of the
security, the larger the decrease in its yield. Two and 10-year treasuries
closed the period at 5.78% and 6.11%, respectively, down 0.32% and 0.59%
respectively from the beginning of the period. Rates trended lower in three of
the four quarters comprising the 12-month period ending September 30, with the
sole exception of the first quarter of 1997. The first three months of the year
comprised the period leading up to the Federal Reserve's increase in the federal
funds rate (the rate member banks charge each other on inter-bank loans) by
0.25% in late March.
As noted, only once during the 12-month period did the Federal Reserve deem it
necessary to alter the level of the short-term fed funds rate, and then only
modestly. Otherwise the monetary authorities remained on the sidelines, content
to let the economy move unencumbered on a low-inflation and moderate-growth
progression. Annualized GDP (gross domestic product), the most comprehensive
measure of overall domestic economic growth, grew at annualized rates of 4.3%,
4.9%, and 3.3% for the fourth quarter of 1996, the first quarter of 1997, and
the second quarter of 1997 respectively.
Despite continued steady economic growth, inflation at both the wholesale and
retail levels has remained consistently benign. In seven of the 12 monthly
periods during the fiscal year ending September 30, the PPI (producer price
index) actually declined. The CPI-core (consumer price index minus the volatile
food and energy components), viewed by many as the most reliable and significant
of the inflation measures, only once during the period experienced a monthly
increase of as much as 0.3%. Given the lack of current measurable inflationary
pressures, longer-term fixed-income buyers have been willing to forgo the higher
yields they would demand in an environment of inflationary expectation. As a
result, in this moderate growth and low inflation environment, rates payable on
fixed-income securities have eased from levels of a year ago.
Performance*
For the 12-month period ending September 30, the Mentor Quality Income Portfolio
A shares outperformed the Merrill Lynch 7-Year Treasury Index benchmark by
0.28%. Mentor Quality Income Portfolio A shares returned 9.86% and the B shares
9.29% for the period, compared to 9.58% for the Merrill Lynch seven-year
treasury index. The Mentor Short-Duration Income Portfolio A shares and B shares
returned 7.33% and 6.96% respectively for the 12-month period, compared to 7.61%
for the Merrill Lynch 3-Year Treasury Index.
Since the Federal Reserve intervened to raise the federal funds rate in late
March, we have maintained a duration in both the Quality Income Portfolio and
the Short-Duration Income Portfolio within 10% of their respective benchmarks.
Our sense has been that despite the continued good inflationary news, an
increasingly tight job market will eventually lead to pricing pressures. At no
point during
21
<PAGE>
Mentor Quality Income Portfolio
Mentor Short-Duration Income Portfolio (continued)
Managers' Commentary
- --------------------------------------------------------------------------------
the 12-month period ending September 30, did the unemployment level exceed 5.4%.
In fact, during the last half of the period the unemployment rate never
surpassed 5.0%. These are levels that as recently as a few years ago were
considered below "full employment." The good current inflation news has been
tempered by tight underlying labor market conditions, raising concerns regarding
the long-term sustainability of low prices. We are not convinced that rates will
trend strongly in either direction.
At the period's end both the Quality Income and Short-Duration Income Portfolios
maintained durations approximately 5% shorter than their respective Merrill
Lynch Treasury Index benchmarks. The Quality Income Portfolio was relatively
underweighted in the five-year sector of the yield curve when compared to its
benchmark, while the Short-Duration Portfolio was relatively underweighted in
the three-year sector of the curve.
Market Outlook
Many market participants have recently stated, "Things are different this time."
It is true that we are experiencing more growth than the economy could have
historically withstood without an accompanying increase in inflation. We
continue to believe, however, that some caution is warranted. As Federal Reserve
chairman Alan Greenspan said in his recent testimony before the House budget
committee, "This is clearly an evolutionary, not a revolutionary process." We
believe that the current combination of economic growth and job creation, if
sustained, will eventually lead to inflationary pressures. Renewed concern about
inflation will lead to higher interest rates, either through Fed action or a
belief that the Fed should act.
Although interest rates spiked upward due to Greenspan's recent comments before
the House, we actually took great comfort from his statements. The overall tone
of Greenspan's testimony suggests that he is increasingly uncomfortable with
current conditions in the economy. While that discomfort may lead to higher
interest rates in the short run, it also ensures that the downward spiral in
inflation we have witnessed over the past decade will continue. As a result, we
are extremely cautious about the short end of the yield curve, where Fed
tightenings have the greatest impact, but are increasingly bullish about the
prospects for longer-term interest rates.**
The objective of the Quality Income Portfolio is to continue to seek high
current income through investing in a diversified portfolio of high-quality
intermediate and long-term bonds. The objective of the Short-Duration Income
Portfolio is to continue to seek current income and preservation of capital.
* The Merrill Lynch 7-Year and 3-Year Treasury Indexes are adjusted to reflect
reinvestment of interest on securities in the indexes. The Merrill Lynch
7-Year and 3-Year Treasury Indexes are not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. Investors cannot invest in the Indexes. See notes to
Performance Comparison, page 23.
** While the management team will endeavor to invest the Portfolios according to
their proprietary process, there is no guarantee of investment success.
22
<PAGE>
Mentor Quality Income Portfolio
Mentor Short-Duration Income Portfolio (continued)
Managers' Commentary
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Quality Income Portfolio Class A and Class B Shares and the Merrill Lynch 7-Year
Treasury Index~.
[GRAPH PLOT POINTS]
Merrill Lynch
A Shares B Shares 7-Year Treasury Index
4/29/93 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
9/30/97 12,833 12,982 15,246
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception+++
Class A Shares 4.67% 4.71%
Class B Shares 5.29% 4.99%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. The Merrill Lynch 7-Year Treasury
Index is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class A Shares, after deducting the maximum sales charge of 4.75%
($10,000 investment minus $475 sales charge = $9,525). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Quality Income Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
9/30/97.
23
<PAGE>
Mentor Quality Income Portfolio
Mentor Short-Duration Income Portfolio (continued)
Managers' Commentary
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class A Shares and the Merrill Lynch 3-Year
Treasury~.
[GRAPH PLOT POINTS]
Class A 3-Year Treasury
6/16/95 9,900 10,000
6/30/95 9,946 10,062
9/30/95 9,931 10,139
9/30/96 10,532 11,038
9/30/97 11,304 11,571
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception**
Class A 6.23% 5.49%
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class B Shares and Merrill Lynch 3-year
Treasury~.
[GRAPH PLOT POINTS]
Class B 3-Year Treasury
4/29/94 10,000 10,000
12/31/94 10,093 10,075
9/30/95 10,623 11,051
9/30/96 11,225 11,709
9/30/97 12,125 12,600
Average Annual Returns as of 9/30/97
Including Sales Charges
1-Year Since Inception++
Class B 2.96% 5.78%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. It is not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. The Portfolio invests in securities other than
Treasuries.
* Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class A Shares, after deducting the maximum sales charge of
1.00% ($10,000 investment minus $100 sales charges = $9,900. The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class A from
the date of issuance on 6/16/95 through 9/30/97.
+ Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The ending value of the Class B shares reflects a
redemption fee of 4.00% on any redemption less than one year from the
purchase date. The Class B Shares' performance assumes the reinvestment of
all dividends and distributions.
++ Reflects operations of Mentor Short-Duration Income Portfolio Class B Shares
from the date of commencement of operations on 4/29/94 through 9/30/97.
24
<PAGE>
Mentor Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Common Stocks 92.45%
- -------------------------------------------------------------------------------------------------------------------------
Basic Materials 0.77%
NS Group, Inc. 144,800 $ 4,687,900
- -------------------------------------------------------------------------------------------------------------------------
Capital Goods & Construction 1.62%
Motivepower Industries* 167,800 4,362,800
Superior Services, Inc.* 141,000 4,018,500
Waste Industries, Inc.* 63,250 1,514,047
- -------------------------------------------------------------------------------------------------------------------------
9,895,347
- -------------------------------------------------------------------------------------------------------------------------
Consumer Cyclical 15.04%
Applebees International, Inc. 73,400 1,835,000
Applied Graphics Technologies* 56,350 3,169,688
Cadmus Communications Corporation 250,950 5,144,475
Central Garden & Pet Company* 140,600 4,323,450
Chancelor Media Corporation* 129,300 6,804,413
Clayton Homes, Inc. 268,384 4,981,878
Clear Channel Communications* 55,850 3,623,269
Corporate Express, Inc.* 210,450 4,445,756
Dollar General Corporation 189,395 6,451,267
Family Dollar Stores 135,950 3,101,359
Gtech Holdings Corporation* 51,250 1,752,109
Heftel Broadcasting Corporation - Class A* 44,350 3,359,512
Keystone Automotive Industries, Inc.* 197,800 4,178,525
Paxar Corporation* 394,998 7,776,523
Regal Cinemas, Inc.* 172,462 4,634,916
Rental Service Corporation* 209,850 4,708,509
Southern Energy Homes, Inc.* 363,175 3,836,036
Stage Stores, Inc.* 92,100 3,971,812
Suburban Lodges of America* 195,150 5,147,081
Universal Outdoor Holdings, Inc.* 103,900 3,896,250
Watsco, Inc. 153,375 4,792,969
- -------------------------------------------------------------------------------------------------------------------------
91,934,797
- -------------------------------------------------------------------------------------------------------------------------
Consumer Staples 3.74%
Fine Host Corporation* 119,400 4,626,750
JP Food Services, Inc.* 89,400 2,816,100
Performance Food Group* 175,300 4,470,150
Rexall Sundown, Inc.* 84,400 3,850,750
Richfood Holdings, Inc. 274,725 7,125,680
- -------------------------------------------------------------------------------------------------------------------------
22,889,430
- -------------------------------------------------------------------------------------------------------------------------
Energy 9.39%
American Oilfield Divers, Inc.* 239,500 3,697,281
BJ Services Company* 85,650 6,359,512
Core Laboratories Inc.* 251,700 8,809,500
Global Industries, Ltd.* 77,650 3,096,294
</TABLE>
25
<PAGE>
Mentor Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------------------------------------------
Energy (continued)
Mary Land & Exploration Company 84,150 $ 3,818,306
Maverick Tube Corporation* 239,500 9,879,375
Patterson Energy, Inc.* 111,350 5,831,956
Precision Drilling Corporation* 38,300 2,446,412
Pride International, Inc.* 224,300 7,626,200
Tuboscope, Inc.* 185,600 5,823,200
- -------------------------------------------------------------------------------------------------------------------------
57,388,036
- -------------------------------------------------------------------------------------------------------------------------
Financial 4.59%
Amresco, Inc.* 162,600 6,036,525
Concord EFS, Inc.* 117,361 3,168,747
Markel Corporation* 72,060 11,349,450
National Commerce Bancorporation 274,192 7,471,732
- -------------------------------------------------------------------------------------------------------------------------
28,026,454
- -------------------------------------------------------------------------------------------------------------------------
Health 21.11%
Assisted Living Concepts* 170,600 2,729,600
Atria Communities, Inc.* 190,800 3,434,400
Capstone Pharmacy Services* 324,200 3,910,663
Centennial Healthcare Company* 104,400 2,401,200
Curative Health Services, Inc.* 112,800 3,510,900
Dentsply International, Inc. 77,450 4,337,200
Dura Pharmaceuticals* 133,150 5,808,669
Express Scripts, Inc. - Class A* 77,300 4,164,538
FPA Medical Management, Inc.* 163,100 5,606,562
Genesis Health Venture* 91,900 3,578,356
Health Management Associates, Inc.* 170,694 5,398,198
Henry Schein, Inc.* 99,750 3,566,062
Integrated Health Services, Inc. 120,100 4,015,844
Molecular Devices Corporation* 215,000 4,703,125
Monarch Dental Corporation* 4,300 92,450
National Surgery Centers, Inc.* 224,325 4,879,069
NCS Healthcare, Inc. - Class A* 108,800 2,774,400
Omnicare, Inc. 174,060 5,656,950
Parexel International Corporation* 83,500 3,298,250
Pediatric Services of America, Inc.* 174,250 4,073,094
Pediatrix Medical Group, Inc.* 113,000 4,986,125
Phycor, Inc.* 121,435 3,529,204
Physician Sales and Services, Inc.* 133,300 2,599,350
Quorum Health Group* 199,875 4,884,445
Raytel Medical Corporation* 248,350 3,601,075
Renal Treatment Center, Inc.* 235,730 8,383,148
Rural/Metro Corporation* 99,750 3,042,375
Serologicals Corporation* 284,150 6,464,413
Sofamor Danek Group, Inc.* 97,870 5,590,824
</TABLE>
26
<PAGE>
Mentor Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------------------------------------------
Health (continued)
Vencor, Inc.* 101,455 $ 4,185,018
Wesley Jessen Visioncare, Inc.* 136,200 3,847,650
- -------------------------------------------------------------------------------------------------------------------------
129,053,157
- -------------------------------------------------------------------------------------------------------------------------
Technology 23.07%
ACC Corporation* 97,250 3,197,094
ADE Corporation* 82,500 3,310,312
Advanced Technology* 96,150 3,533,513
Applied Materials, Inc.* 39,800 3,790,950
Applied Microsystems Corporation* 222,450 2,335,725
Aspect Development, Inc.* 49,000 2,012,063
Atmel Corporation* 170,300 6,205,306
Benchmark Electronics, Inc.* 156,340 4,406,834
Benchmarq Microelectronics* 122,450 2,724,513
Billing Information Concepts* 124,350 4,352,250
Cerprobe Corporation* 139,500 3,504,938
Danka Business Systems 104,950 4,670,275
Daou Systems, Inc.* 132,500 4,140,625
Galileo Technology, Ltd.* 85,700 2,828,100
HPR, Inc.* 169,550 3,708,906
Indus Group* 297,300 4,756,800
Industri-Matematik International Corporation* 70,850 1,735,825
Intelligroup, Inc.* 114,550 2,462,825
LCI International, Inc.* 120,000 3,195,000
Linear Technology Corporation 55,650 3,825,937
Maxim Integrated Products, Inc.* 62,900 4,493,419
Medialink Worldwide, Inc.* 130,400 2,102,700
Microchip Technology, Inc.* 109,800 4,958,156
Micros Systems, Inc.* 73,050 3,652,500
Microtouch Systems, Inc.* 152,000 4,237,000
Network Appliance, Inc.* 64,200 3,482,850
Ontrack Data International* 133,500 3,103,875
Pairgain Technologies* 157,500 4,488,750
PRI Automation, Inc.* 52,900 3,094,650
Qlogic Corporation* 105,500 4,417,813
SCB Computer Technology, Inc.* 169,625 3,562,125
Sipex Corporation* 160,700 5,102,225
Software Artistry, Inc.* 162,500 2,183,594
Spectran Corporation* 45,500 648,375
Triquint Semiconductor, Inc.* 86,200 3,140,913
US Long Distance Corporation* 198,100 3,974,381
Viasoft, Inc.* 35,100 1,737,450
Viisage Technology, Inc.* 182,450 2,052,563
World Access, Inc.* 139,150 4,522,375
Worldcom, Inc.* 151,159 5,347,250
- -------------------------------------------------------------------------------------------------------------------------
141,000,755
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Mentor Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Shares or
Principal
Percent of Net Assets Amount Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- -------------------------------------------------------------------------------------------------------------------------
Transportation 4.79%
American Freightways* 202,850 $ 3,854,150
Coach USA, Inc.* 121,250 3,645,078
Comair Holdings, Inc. 161,550 4,341,656
Heartland Express, Inc.* 201,150 5,556,769
Hunt (JB) Transportation Services, Inc. 155,650 2,422,303
Mesaba Holdings, Inc.* 236,750 4,897,766
US Xpress Enterprises - Class A* 229,250 4,585,000
- -------------------------------------------------------------------------------------------------------------------------
29,302,722
- -------------------------------------------------------------------------------------------------------------------------
Miscellaneous 8.33%
ABR Information Services* 175,500 4,848,187
Abacus Direct Corporation* 60,950 1,958,019
Accustaff, Inc.* 179,985 5,669,528
AHL Services, Inc.* 179,100 3,268,575
Fairfield Communities, Inc.* 281,700 10,581,356
Medquist, Inc.* 248,175 5,801,091
Outdoor Systems, Inc.* 249,262 6,543,127
Power One, Inc.* 26,200 366,800
Source Services Corporation* 147,400 4,385,150
Silverleaf Resorts, Inc.* 128,300 2,934,863
Staffmark, Inc.* 119,400 4,552,125
- -------------------------------------------------------------------------------------------------------------------------
50,908,821
- -------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (cost $374,826,360) 565,087,419
- -------------------------------------------------------------------------------------------------------------------------
Short-Term Investment 7.68%
- -------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company
Dated 9/30/97, 6.25%, due 10/1/97
collateralized by $48,054,003 Federal Home Loan
Mortgage Corporation 7.00%, 6/02/26,
market value $47,963,902 (cost $46,972,557) $46,972,557 46,972,557
- -------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $421,798,917) 100.13% 612,059,976
- -------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities (0.13%) (797,337)
- -------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $611,262,639
=========================================================================================================================
</TABLE>
* Non-income producing.
See notes to financial statements.
28
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------
Common Stocks 101.25%
- --------------------------------------------------------------------------------------------------------------------------
Argentina 0.59%
Banco Galacia~ 6,600 $ 195,525
Perez Company~ 10,837 174,074
Siderar~* 5,000 222,042
Telecom Argentina~ 6,600 200,887
- --------------------------------------------------------------------------------------------------------------------------
792,528
- --------------------------------------------------------------------------------------------------------------------------
Brazil 1.90%
CIA Energ~ 8,600 214,297
Cemig CIA Energetic~ (a) 6,675 366,779
Centrais Eletrobras~ 12,000 333,522
Forca Luz Paulcon* 1,000,000 177,920
Klabin Fabicadora~* 16,600 146,972
Light Servicos* 440,000 185,474
PAO De Acucar#* 5,620 125,165
Petrol Brasilei~* 6,900 193,985
Telebras~* 3,450 444,188
Telesp Tel Paulopret* 920,000 281,204
Vale Rio Doce~ 4,400 107,632
- --------------------------------------------------------------------------------------------------------------------------
2,577,138
- --------------------------------------------------------------------------------------------------------------------------
Chile 0.44%
Banco BHIF~ 5,300 107,325
Chilectra~ 6,250 197,297
Enersis~ 3,800 140,838
Santa Isabel~ 6,300 146,869
- --------------------------------------------------------------------------------------------------------------------------
592,329
- --------------------------------------------------------------------------------------------------------------------------
China 0.22%
Heilongjiang* 120,000 108,000
Huaneng Power International, Inc. - Class A~* 8,000 194,000
- --------------------------------------------------------------------------------------------------------------------------
302,000
- --------------------------------------------------------------------------------------------------------------------------
Finland 1.42%
Huhtamaki OY 10,900 430,086
Nokia OY - Class A 15,700 1,498,075
- --------------------------------------------------------------------------------------------------------------------------
1,928,161
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- --------------------------------------------------------------------------------------------------------------------------
France 2.57%
Atos* 5,000 $ 542,285
Carbone Lorraine 1,070 307,295
Entrelec* 12,000 512,890
Generale Des Eeux 3,290 387,948
Generale Des Eeux - Warrants* 3,290 1,779
Genset~* 15,000 316,875
Lafarge Coppee 4,720 346,700
Pin-Printemps 1,200 564,179
Total - Class B 4,400 504,713
- --------------------------------------------------------------------------------------------------------------------------
3,484,664
- --------------------------------------------------------------------------------------------------------------------------
Germany 2.41%
Allianz AG 3,800 921,271
Porsche AG 450 781,277
Preussag* 2,550 716,170
Viag AG 1,900 852,709
- --------------------------------------------------------------------------------------------------------------------------
3,271,427
- --------------------------------------------------------------------------------------------------------------------------
Great Britain 12.75%
Abbey National PLC 18,250 281,214
BAA PLC 52,250 507,364
Bass* 60,000 809,758
BAT Industries PLC 57,000 499,657
Barclays PLC 13,500 364,936
British Aerospace PLC 30,000 805,641
British Airways 47,500 520,285
British Biotech* 150,000 381,390
British Telecom 71,250 471,017
Burmah Castrol 25,000 446,973
Centrica* 270,500 406,114
Commercial Union 50,000 649,372
Enterprise Oil* 75,000 820,292
Glaxo Wellcome 29,400 661,856
Granada Group* 60,000 848,502
Grand Metropolitan 47,500 453,955
Great Universal Stores 40,000 445,883
Medeva 80,000 269,919
National Westminster 52,250 789,936
Powergen* 50,000 617,892
Prudential Corporation PLC 57,000 635,384
Rank Organisation PLC 61,750 364,353
Reckitt & Colman 30,000 460,816
</TABLE>
30
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- --------------------------------------------------------------------------------------------------------------------------
Great Britain (continued)
Rolls Royce 90,000 $ 371,946
Royal Sun Alliance 40,000 380,018
Scotia Holdings* 30,000 215,516
Smithkline Beecham* 95,000 922,480
Standard Chartered 47,500 649,877
Stakis 410,000 681,740
Tesco PLC 95,000 721,574
United Utilities* 67,500 835,245
- --------------------------------------------------------------------------------------------------------------------------
17,290,905
- --------------------------------------------------------------------------------------------------------------------------
Hong Kong 6.63%
Asia Satellite 30,000 83,355
CDL Hotels International 418,533 151,446
Cheung Kong Holdings 120,000 1,349,186
China Aerospace* 90,000 59,899
China Light and Power 100,000 550,530
China Pharmaceutical* 550,000 127,229
Citic Pacific Limited 60,000 340,398
Dah Sing Financial 24,000 100,801
Elec & Eltek International 500,000 214,849
First Tractor Company* 200,000 164,125
Giordano International 472,000 304,988
GZI Transport - Warrants* 60,000 6,901
GZI Transport* 200,000 88,524
Henderson Land Development 16,000 137,503
Hon Kwok Land Investment 396,000 139,455
Hong Kong and China* 23,000 47,409
Hong Kong Electric 80,000 297,751
Hong Kong Telecom, Ltd. 163,386 369,508
HSBC Holdings PLC 34,183 1,144,145
Hutchison Whampoa, Ltd. 100,000 985,397
Hysan Development - Warrants* 700 197
Kwong Sang Hong 600,000 286,896
LAI Sun Hotels-Warrants* 40,140 2,049
National Mutual Asia 200,000 214,526
New World Development 84,486 510,978
Road King Infrastructure 200,000 173,171
Sun Hung Kai Properties 12,000 141,122
Swire Pacific Limited - Class A 40,000 306,281
Television Broadcast, Ltd. 44,000 155,803
USI Holdings, Ltd. 313,000 92,023
Wharf Holdings 120,000 441,975
- --------------------------------------------------------------------------------------------------------------------------
8,988,420
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- --------------------------------------------------------------------------------------------------------------------------
India 0.45%
BSES Limited#* 4,000 $ 83,000
India Cement#* 20,000 65,000
Indian Opportunity Fund* 11,000 106,480
Tata Electric Cies#* 1,200 360,000
- --------------------------------------------------------------------------------------------------------------------------
614,480
- --------------------------------------------------------------------------------------------------------------------------
Indonesia 0.32%
Bat Indonesia* 16,000 146,789
Bank Dagang - Warrants 50,000 2,905
Citra Marga Local 120,000 36,697
PT London Sumatra 96,000 117,431
PT Daya Guna Samudera* 42,000 70,000
Telekomunikasi Thoser - Class B 50,000 55,428
- --------------------------------------------------------------------------------------------------------------------------
429,250
- --------------------------------------------------------------------------------------------------------------------------
Italy 2.14%
Assicurazioni Generali 54,000 1,222,890
Eni SPA* 115,000 725,866
Seat SPA* 52,000 19,506
Telecom Itialia Spatial* 4,150 27,712
Telecom Itialia Mobile 227,900 906,492
- --------------------------------------------------------------------------------------------------------------------------
2,902,466
- --------------------------------------------------------------------------------------------------------------------------
Ireland 1.28%
Bank of Ireland 99,465 1,237,202
Elan Corporation PLC 10,000 500,625
- --------------------------------------------------------------------------------------------------------------------------
1,737,827
- --------------------------------------------------------------------------------------------------------------------------
Japan 12.79%
Chugai Pharmaceutical 160,000 1,382,462
Daiwa Securities* 215,000 1,321,812
East Japan Railway 270 1,269,638
Fuji Electric Company 375,000 1,140,282
House Food Industrial* 80,000 1,362,522
Japan Tobacco 170 1,326,216
Mycal Corporation 120,000 1,335,937
Nintendo Company* 14,000 1,314,336
ROHM Company 12,000 1,415,694
Tokyo Electric Power 68,000 1,310,680
Tokio Marine & Fire* 125,000 1,505,836
Toyoda Auto Loom 70,000 1,395,755
UNI - Charm Corporation 40,000 1,259,502
- --------------------------------------------------------------------------------------------------------------------------
17,340,672
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- --------------------------------------------------------------------------------------------------------------------------
Korea 0.27%
Atlantis Korean* 20,000 $ 132,400
CITC Seoul Exel@* 2 14,500
Housing and Commercial Bank* 7,000 132,125
Korea-Europe Fund@* 18 39,375
LG Electronics# 6,400 30,560
Samsung Electronics#(a) 403 21,435
- --------------------------------------------------------------------------------------------------------------------------
370,395
- --------------------------------------------------------------------------------------------------------------------------
Malaysia 0.51%
ACP Industries 20,000 27,106
ACP Industries-Warrants* 12,000 4,509
Berjaya Capital* 120,000 82,058
Boustead Holdings 84,000 133,251
Genting Berhad 20,000 62,221
Leader University Holdings* 36,000 28,831
Magnum Corporation 110,000 96,566
Malaysian Assurance 11,000 29,647
Nanyang Press* 60,000 121,978
PowerTek Berhad* 28,000 37,431
Public Finance 12,000 8,501
RHB Sakura Merchant* 2,400 2,299
Suremax Group* 28,000 62,098
- --------------------------------------------------------------------------------------------------------------------------
696,496
- --------------------------------------------------------------------------------------------------------------------------
Mexico 1.51%
Bufete Industrial~* 7,700 145,338
Cemex SA~* 14,500 172,309
CIFRA SA~ 100,000 228,500
DESC~ 6,262 261,439
Empresas ICA~ 7,700 135,231
Empress La Modern~* 8,360 182,875
Fomento Economic~ 38,400 330,882
Grupo Carso SA~ 11,700 188,390
Kimberly Clark Mexico~ 6,980 177,990
Panamerica Beverages - Class A 5,800 226,562
- --------------------------------------------------------------------------------------------------------------------------
2,049,516
- --------------------------------------------------------------------------------------------------------------------------
Netherlands 7.16%
BAAN Company* 25,000 1,807,123
Kon Hoogovens* 15,900 1,032,394
ING Groep NV 19,771 910,271
Oce NV 6,200 786,712
</TABLE>
33
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- --------------------------------------------------------------------------------------------------------------------------
Netherlands (continued)
Philips Electronics* 18,700 $ 1,586,278
Royal Dutch Petroleum 12,748 715,357
Unilever PLC 43,100 1,261,806
Vendex International 15,325 910,916
VNU-Ver Ned Uitgevers 30,000 698,166
- --------------------------------------------------------------------------------------------------------------------------
9,709,023
- --------------------------------------------------------------------------------------------------------------------------
Norway 0.38%
Orkla A/S - Class A 5,770 512,910
- --------------------------------------------------------------------------------------------------------------------------
Peru 0.12%
CPT Telefonica Del Peru~ 6,700 158,288
- --------------------------------------------------------------------------------------------------------------------------
Philippines 0.23%
Benpres Holdings#* 68,000 309,400
- --------------------------------------------------------------------------------------------------------------------------
Singapore 1.02%
ACMA Limited - Warrants 7,500 2,355
City Developments 48,000 310,893
Development Bank Singapore* 20,000 204,121
Elek & Eltek International* 20,000 176,000
GP Batteries International 80,000 248,086
Jardine Strategic* 20,000 78,400
Jardine Strategic - Warrants* 3,125 1,968
Overseas Union Bank 12,000 53,385
Singapore Press Holdings 16,000 235,525
Sing Tech Shipbuilding* 38,000 69,859
UTD Overseas -Warrants* 2,000 785
- --------------------------------------------------------------------------------------------------------------------------
1,381,377
- --------------------------------------------------------------------------------------------------------------------------
Spain 2.30%
BCO Central Hispans* 28,900 1,209,749
Continente Cent 12,500 271,283
Corporacion Financiera 1,555 173,649
Prosegur Seguridad Company* 89,285 1,100,840
Viscofan Envolturas Celulos 14,960 363,370
- --------------------------------------------------------------------------------------------------------------------------
3,118,891
- --------------------------------------------------------------------------------------------------------------------------
Sweden 3.55%
Astra AB - Class A 70,000 1,294,584
Celsius Industriar AB - Class B 30,000 540,951
</TABLE>
34
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- --------------------------------------------------------------------------------------------------------------------------
Sweden (continued)
Electrolux AB - Class B 2,230 $ 174,688
Ericsson - Class B* 25,000 1,203,764
Skandinaviska - Class A 8,110 98,563
Svenska Handels Bank - Class A 36,860 1,280,605
Trygg Hansa - Class B* 8,960 224,887
- --------------------------------------------------------------------------------------------------------------------------
4,818,042
- --------------------------------------------------------------------------------------------------------------------------
Switzerland 4.20%
Credit Suisse Group 6,000 813,244
Nestle SA 1,100 1,537,231
Novartis* 930 1,430,522
Roche Holding AG 78 694,051
Saurer AG 555 441,397
Sulzer AG 180 137,320
Zurich Versiche 1,465 639,659
- --------------------------------------------------------------------------------------------------------------------------
5,693,424
- --------------------------------------------------------------------------------------------------------------------------
Taiwan 0.28%
Formosa Growth Fund* 5,000 118,125
Taipei Fund@* 20 253,000
- --------------------------------------------------------------------------------------------------------------------------
371,125
- --------------------------------------------------------------------------------------------------------------------------
Thailand 0.09%
Bangkok Bank* 7,000 36,173
Banpu Coal Company* 8,000 83,129
- --------------------------------------------------------------------------------------------------------------------------
119,302
- --------------------------------------------------------------------------------------------------------------------------
United States 33.47%
American Stores Company 20,000 487,500
American Express Company 15,000 1,228,125
Amresco, Inc.* 30,000 1,113,750
BMC Industries, Inc. 25,000 795,312
Banc One Corporation* 17,000 948,812
Borders Group, Inc.* 30,000 825,000
Cardinal Health, Inc. 15,000 1,065,000
Carnival Corporation - Class A 20,000 925,000
Champion International Corporation 15,000 914,062
Chancelor Media Corporation* 18,000 947,250
Clear Channel Communications* 15,000 973,125
Cooper Cameron* 15,000 1,077,188
</TABLE>
35
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- --------------------------------------------------------------------------------------------------------------------------
United States (continued)
Crane Company 22,000 $ 904,750
Crompton & Knowles* 30,000 796,875
Digital Equipment Corporation* 30,000 1,299,375
El Paso Natural Gas Corporation 14,000 847,875
Embo Tellandora Andia* 8,600 221,450
EMC Corporation* 20,000 1,167,500
First Chicago NBD Corporation* 12,500 940,625
Halliburton Company* 18,000 936,000
Healthsouth Corporation* 40,000 1,067,500
Heilig Meyers Company 50,000 768,750
Household International, Inc. 10,000 1,131,875
JP Food Services, Inc.* 30,000 945,000
La Quinta Inns, Inc. 45,000 1,060,312
Lilly (ELI) & Company 8,000 965,500
Maytag Corporation* 25,000 853,125
McDermott International, Inc. 20,000 730,000
McDermott, J Ray* 20,000 980,000
Mead Corporation 12,000 867,000
Merck & Company, Inc. 10,000 999,375
Microsoft Corporation* 7,000 926,187
Mirage Resorts, Inc.* 35,000 1,054,376
Omnicare, Inc. 30,000 975,000
Philip Morris Companies, Inc.* 25,000 1,039,063
Pier 1 Imports 42,500 762,344
Pioneer Natural Recources Company* 25,000 1,046,876
SCI Systems, Inc.* 20,000 991,250
Safeway, Inc. 20,000 1,087,500
Samsonite Corporation* 20,000 877,500
Staples, Inc.* 37,500 1,035,938
Sybron International Corporation* 20,000 858,750
TJX Companies* 30,000 916,876
Travelers, Inc.* 15,000 1,023,750
U.S. Industries, Inc. 37,500 1,087,500
Westinghouse Electric Corporation 35,000 947,187
Westpoint Stevens, Inc.- Class A* 25,000 1,031,250
Williams Companies, Inc.* 20,000 936,250
- --------------------------------------------------------------------------------------------------------------------------
45,380,608
- --------------------------------------------------------------------------------------------------------------------------
Venezuela 0.25%
CIA Anonima Nacional Telefonos~ 7,300 333,975
- --------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost $120,086,319) 137,275,039
==========================================================================================================================
</TABLE>
36
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 0.04%
- --------------------------------------------------------------------------------------------------------------------------
Malaysia
Telekom Malaysia Berhad, 4.00%, 10/3/04~
(9/22/94, $70,000) (a) (b) $ 70,000 $ 59,237
- --------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $70,000) 59,237
- --------------------------------------------------------------------------------------------------------------------------
Total Long-Term Investments (cost $120,156,319) 137,334,276
- --------------------------------------------------------------------------------------------------------------------------
Short-Term Investment 1.13%
- --------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company
Dated 9/30/97, 6.25%, due 10/01/97, collateralized
by Federal Home Loan Mortgage Corporation,
$1,568,452, 7.00%, 6/02/26, market value $1,565,511 (cost
$1,532,874) 1,532,874 1,532,874
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $121,689,193) 102.42% 138,867,150
- --------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities (2.42%) (3,281,554)
- --------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $135,585,596
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing.
~ American Depository Receipts.
# Global Depository Receipts.
@ International Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
(b) All or a portion of these securities are restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses
after the title of the restricted securities.
See notes to financial statements.
37
<PAGE>
Mentor Capital Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Common Stocks 95.30%
- -------------------------------------------------------------------------------------------------------------------------
Basic Materials 13.45%
Bemis Company, Inc. 132,700 $ 5,938,325
Morton International, Inc. 172,400 6,120,200
Nalco Chemical Company 150,100 6,013,381
Sonoco Products Company 167,550 5,686,228
Steel Dynamics* 15,000 352,500
- -------------------------------------------------------------------------------------------------------------------------
24,110,634
- -------------------------------------------------------------------------------------------------------------------------
Capital Goods & Construction 2.99%
W.W. Grainger, Inc. 60,300 5,366,700
- -------------------------------------------------------------------------------------------------------------------------
Consumer Cyclical 22.64%
Carnival Corporation - Class A 127,500 5,896,875
Chancelor Media Corporation* 120,000 6,315,000
Federated Department Stores* 138,000 5,951,250
Interpublic Group Company 112,950 5,795,747
Mirage Resorts, Inc.* 182,970 5,511,971
Mattel, Inc. 153,600 5,088,000
Newell Company 151,000 6,040,000
- -------------------------------------------------------------------------------------------------------------------------
40,598,843
- -------------------------------------------------------------------------------------------------------------------------
Consumer Staples 19.42%
Avon Products 90,000 5,580,000
CPC International, Inc. 63,650 5,895,581
McDonald's Corporation 133,200 6,343,650
Philip Morris Companies, Inc. 130,000 5,403,125
Sherwin Williams Company 191,600 5,640,225
Sysco Corporation 161,000 5,946,938
- -------------------------------------------------------------------------------------------------------------------------
34,809,519
- -------------------------------------------------------------------------------------------------------------------------
Energy 2.80%
Schlumberger, Ltd. 59,600 5,017,575
- -------------------------------------------------------------------------------------------------------------------------
Financial 14.72%
American Express Company 62,600 5,125,375
Banc One Corporation 93,400 5,212,888
Federal National Mortgage Association 113,000 5,311,000
General RE Corporation 28,000 5,558,000
Norwest Corporation 84,500 5,175,625
- -------------------------------------------------------------------------------------------------------------------------
26,382,888
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
Mentor Capital Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Shares or
Principal
Percent of Net Assets Amount Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- -------------------------------------------------------------------------------------------------------------------------
Health 3.69%
Schering-Plough 128,400 $ 6,612,600
- -------------------------------------------------------------------------------------------------------------------------
Technology 9.57%
Computer Sciences Corporation* 84,000 5,943,000
First Data Corporation 142,000 5,333,875
Intel Corporation 63,800 5,889,538
- -------------------------------------------------------------------------------------------------------------------------
17,166,413
- -------------------------------------------------------------------------------------------------------------------------
Transportation & Services 3.12%
Werner Enterprises, Inc. 230,650 5,593,262
- -------------------------------------------------------------------------------------------------------------------------
Miscellaneous 2.90%
S&P 500 - Depository Receipt 55,000 5,197,500
- -------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (cost $132,118,911) 170,855,934
- -------------------------------------------------------------------------------------------------------------------------
Short-Term Investment 4.65%
- -------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company
Dated 9/30/97, 6.25%, due 10/01/97,
collateralized by $8,536,401 Federal Home Loan
Mortgage Corporation, 7.00%, 6/02/26,
market value $8,520,396 (cost $8,344,113) $ 8,344,113 8,344,113
- -------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $140,463,024) 99.95% 179,200,047
- -------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities 0.05% 89,461
- -------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $179,289,508
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing.
See notes to financial statements.
39
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Common Stocks 63.94%
- -------------------------------------------------------------------------------------------------------------------------
Basic Materials 2.66%
AK Steel Holding Corporation 45,000 $ 1,918,125
Lone Star Technologies* 56,400 2,943,375
Southdown, Inc. 34,250 1,870,906
Steel Dynamics* 68,900 1,619,150
Weyerhaeuser Company 12,900 765,937
- -------------------------------------------------------------------------------------------------------------------------
9,117,493
- -------------------------------------------------------------------------------------------------------------------------
Capital Goods & Construction 4.38%
Applied Power, Inc. - Class A 12,600 793,012
Caterpillar, Inc. 7,900 426,106
Cognex Corporation* 61,100 2,008,663
Kuhlman Corporation 35,400 1,274,400
Maverick Tube Corporation* 44,000 1,815,000
Owens-Illinois, Inc.* 17,000 576,938
Paccar, Inc. 32,100 1,797,600
Parker-Hannifin Corporation 53,300 2,398,500
Pentair, Inc. 30,500 1,124,688
Robbins & Myers, Inc. 35,500 1,366,750
Roper Industries, Inc. 41,500 1,400,625
- -------------------------------------------------------------------------------------------------------------------------
14,982,282
- -------------------------------------------------------------------------------------------------------------------------
Commercial Services 3.10%
Bowne & Company, Inc. 62,300 2,188,287
Catellus Development* 41,500 861,125
Comdisco, Inc. 60,400 1,966,775
Devry, Inc.* 24,000 717,000
Fairfield Communities, Inc.* 49,100 1,844,319
Omnicom Group 21,900 1,593,225
Wabash National Corporation 49,800 1,441,087
- -------------------------------------------------------------------------------------------------------------------------
10,611,818
- -------------------------------------------------------------------------------------------------------------------------
Consumer Cyclical 3.86%
Centex Corporation 15,800 922,325
Jacor Communications, Inc.* 49,700 2,196,119
Leggett & Platt, Inc. 29,400 1,310,137
Pacific Greystone Company* 104,800 2,082,900
Sinclair Broadcast Group* 47,800 1,929,925
Tribune Company 35,300 1,881,931
Unifi, Inc. 20,800 851,500
Young Broadcasting* 59,900 2,051,575
- -------------------------------------------------------------------------------------------------------------------------
13,226,412
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------------------------------------------
Consumer Staples 0.71%
Interstate Bakeries Corporation 13,200 $ 905,025
Morningstar Group, Inc. 24,450 1,051,350
Smithfield Foods, Inc.* 16,200 486,000
- -------------------------------------------------------------------------------------------------------------------------
2,442,375
- -------------------------------------------------------------------------------------------------------------------------
Energy 2.32%
Halliburton Company 50,100 2,605,200
Oceaneering International, Inc.* 88,500 2,107,406
Smith International, Inc.* 11,000 854,563
Veritas DGC, Inc.* 56,000 2,383,500
- -------------------------------------------------------------------------------------------------------------------------
7,950,669
- -------------------------------------------------------------------------------------------------------------------------
Financial 9.74%
American States Financial Corporation 31,800 1,494,600
Bankamerica Corporation 40,000 2,932,500
Bankers Trust New York Corporation 9,130 1,118,425
Dime Bancorp, Inc. 45,700 956,844
First Republic Bancorp, Inc.* 46,300 1,238,525
Marsh & McLennan Companies, Inc. 6,500 498,062
Merrill Lynch & Company, Inc. 14,000 1,038,625
NAC RE Corporation 40,600 2,085,825
North Fork Bancorp 74,500 2,160,500
Northern Trust Corporation 30,000 1,773,750
Old Republic International Corporation 61,700 2,406,300
Onbancorp, Inc. 11,700 669,825
Pacific Century Financial Corporation 25,700 1,386,194
Price (T. Rowe) & Associates, Inc. 35,000 2,353,750
RCSB Financial, Inc. 35,800 1,951,100
Synovus Financial Corporation 99,900 2,147,850
Torchmark Corporation 58,600 2,300,050
Travelers Group, Inc. 30,200 2,061,150
U S Bancorp 15,100 1,457,150
Westamerica Bancorporation 15,200 1,326,200
- -------------------------------------------------------------------------------------------------------------------------
33,357,225
- -------------------------------------------------------------------------------------------------------------------------
Health 5.93%
Express Scripts, Inc. - Class A* 38,000 2,047,250
Grancare, Inc.* 103,000 1,216,688
Health Management Association - Class A* 36,900 1,166,962
Mariner Health Group* 87,000 1,370,250
McKesson Corporation* 29,200 2,976,575
</TABLE>
41
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------------------------------------------
Health (continued)
Sun Healthcare Group, Inc.* 55,800 $ 1,147,388
Sunrise Assisted Living* 94,900 3,428,263
Warner-Lambert Company 25,500 3,440,906
Watson Pharmacueticals* 59,000 3,525,250
- -------------------------------------------------------------------------------------------------------------------------
20,319,532
- -------------------------------------------------------------------------------------------------------------------------
Retail 8.33%
Abercrombie & Fitch Company* 36,400 955,500
American Eagle Outfitters* 40,400 1,121,100
Bombay Company, Inc.* 118,000 907,125
Costco Companies, Inc.* 91,000 3,423,875
Dayton-Hudson Corporation 40,500 2,427,469
Dollar General Corporation 44,750 1,524,297
Family Dollar Stores, Inc. 68,550 1,563,797
Fingerhut Companies, Inc.* 158,000 3,555,000
Furniture Brands International, Inc.* 46,500 877,687
Gap, Inc. 21,000 1,051,313
Goody's Family Clothing, Inc.* 59,000 1,902,750
Linens 'N Things, Inc.* 25,300 858,618
Pacific Sunwear of California, Inc.* 26,000 1,066,000
Rent Way, Inc.* 49,100 1,037,238
Safeway, Inc.* 17,600 957,000
TJX Companies, Inc. 71,000 2,169,938
Williams Sonoma, Inc.* 73,100 3,125,025
- -------------------------------------------------------------------------------------------------------------------------
28,523,732
- -------------------------------------------------------------------------------------------------------------------------
Technology 19.02%
ADE Corporation* 32,000 1,284,000
AFC Cable System, Inc.* 43,600 1,547,800
Airtouch Communications* 122,500 4,341,094
Applied Graphics Technology* 61,200 3,442,500
BE Aerospace, Inc.* 66,300 2,386,800
Benchmarq Microelectronics, Inc.* 82,000 1,824,500
Cellstar Corporation* 102,900 4,784,850
Computer Task Group 19,200 805,200
Cree Research, Inc.* 149,300 2,818,038
Daisytek International Corporation* 17,700 774,375
Dell Computer Corporation* 18,500 1,791,031
EMC Corporation* 14,200 828,925
Excel Technology, Inc.* 85,700 1,049,825
General Scanning, Inc.* 66,700 2,321,994
International Business Machines 4,500 476,718
Kellstrom Industries, Inc.* 128,900 2,658,563
</TABLE>
42
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------------------------------------------
Technology (continued)
Level One Communications* 29,250 $ 1,177,313
Lockheed Martin Corporation 29,400 3,134,775
Micrel, Inc.* 72,000 3,046,500
National Semiconductor* 73,700 3,021,700
Pinnacle Systems, Inc.* 117,800 3,445,650
Plexus Corporation* 87,900 3,087,487
PRI Automation, Inc.* 25,300 1,480,050
Sanmina Corporation* 30,700 2,657,469
Silicon Graphics, Inc.* 66,900 1,756,125
Smart Modular Technology* 18,900 1,568,700
Speedfam International, Inc.* 24,500 1,479,187
Stanford Telecommunications, Inc.* 25,300 553,438
United States Cellular* 66,000 2,433,750
Vitesse Semiconductor* 54,800 2,716,025
Xerox Corporation 5,100 429,356
- -------------------------------------------------------------------------------------------------------------------------
65,123,738
- -------------------------------------------------------------------------------------------------------------------------
Transportation 2.84%
Airborne Freight Corporation 33,300 2,016,731
Allied Holdings, Inc.* 67,400 1,449,100
Arkansas Best Corporation* 111,000 1,255,687
Caliber Systems, Inc. 26,400 1,432,200
CNF Transportation, Inc. 33,200 1,446,275
US Freightways Corporation 63,600 2,138,550
- -------------------------------------------------------------------------------------------------------------------------
9,738,543
- -------------------------------------------------------------------------------------------------------------------------
Miscellaneous 1.05%
Carlisle Companies, Inc. 33,400 1,484,213
Manitowoc Company, Inc. 39,900 1,423,931
Tyco International Ltd. 8,000 656,500
- -------------------------------------------------------------------------------------------------------------------------
3,564,644
- -------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (cost $185,922,699) 218,958,463
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Asset Amount Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 22.80%
- -------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond, 6.50%, 11/15/26 $77,523,000 $ 78,074,188
- -------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Securities (cost $75,104,449) 78,074,188
- -------------------------------------------------------------------------------------------------------------------------
Short-Term Investment 11.03%
- -------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company
Dated 9/30/97, 6.25%, due 10/01/97,
collateralized by $38,632,858 Federal Home Loan
Mortgage Corporation, 7.00%, 6/02/26,
market value $38,560,421, (cost $37,762,777) 37,762,777 37,762,777
- -------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $298,789,925) 97.77% 334,795,428
- -------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities 2.23% 7,641,349
- -------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $342,436,777
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing.
See notes to financial statements.
44
<PAGE>
Mentor Income and Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Common Stocks 55.30%
- -------------------------------------------------------------------------------------------------------------------------
Basic Materials 5.46%
Aluminum Company of America 17,800 $ 1,459,600
Dow Chemical 15,000 1,360,313
Du Pont (E.I.) de Nemours 18,200 1,120,437
Lubrizol Corporation 20,000 840,000
Phelps Dodge Corporation 21,700 1,684,463
Westvaco Corporation 42,000 1,514,625
Willamette Industries, Inc. 36,000 1,377,000
- -------------------------------------------------------------------------------------------------------------------------
9,356,438
- -------------------------------------------------------------------------------------------------------------------------
Capital Goods & Construction 2.48%
Caterpillar, Inc. 18,000 970,875
Cooper Industries, Inc. 20,000 1,081,250
Honeywell, Inc. 19,000 1,276,562
Textron, Inc. 14,200 923,000
- -------------------------------------------------------------------------------------------------------------------------
4,251,687
- -------------------------------------------------------------------------------------------------------------------------
Commercial Services 6.04%
Fluor Corporation 53,000 2,842,125
Foster Wheeler Corporation 60,000 2,636,250
Supervalu, Inc. 44,000 1,727,000
Wallace Computer Services, Inc. 85,000 3,134,375
- -------------------------------------------------------------------------------------------------------------------------
10,339,750
- -------------------------------------------------------------------------------------------------------------------------
Consumer Cyclical 5.26%
American Stores Company 56,600 1,379,625
Eastman Kodak Company 25,800 1,675,388
Ford Motor Company 76,000 3,439,000
Maytag Corporation 32,000 1,092,000
Sears Roebuck & Company 25,000 1,423,437
- -------------------------------------------------------------------------------------------------------------------------
9,009,450
- -------------------------------------------------------------------------------------------------------------------------
Consumer Staples 5.02%
Baxter International, Inc. 36,000 1,881,000
Dimon Incorporated 96,300 2,407,500
Kimberly-Clark Corporation 50,000 2,446,875
Philip Morris Companies, Inc. 45,000 1,870,313
- -------------------------------------------------------------------------------------------------------------------------
8,605,688
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
Mentor Income and Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------------------------------------------
Energy 3.95%
Amoco Corporation 12,900 $ 1,243,238
Norsk Hydro As~ 17,000 1,016,813
Phillips Petroleum Company 17,200 887,950
Repsol SA~ 21,200 919,550
Total SA~ 20,000 1,146,250
Unocal Corporation 36,000 1,557,000
- -------------------------------------------------------------------------------------------------------------------------
6,770,801
- -------------------------------------------------------------------------------------------------------------------------
Financial 12.04%
Allstate Corporation 43,000 3,456,125
Citicorp 25,000 3,348,437
Federal National Mortgage Association 50,000 2,350,000
First Union Corporation 43,200 2,162,700
Jefferson-Pilot Corporation 22,000 1,738,000
Mercantile Bankshare 36,000 1,170,000
U S Bancorp 33,000 3,184,500
Wachovia Corporation 28,000 2,016,000
Wilmington Trust Corporation 22,000 1,201,750
- -------------------------------------------------------------------------------------------------------------------------
20,627,512
- -------------------------------------------------------------------------------------------------------------------------
Health 4.79%
Abbott Laboratories 22,000 1,406,625
Bristol Myers Squibb Company 12,500 1,034,375
Columbia HCA Healthcare 37,000 1,063,750
Johnson & Johnson 18,000 1,037,250
Pharmacia & UpJohn 60,000 2,190,000
Rhone-Poulenc S.A. - Class A~ 36,633 1,481,347
- -------------------------------------------------------------------------------------------------------------------------
8,213,347
- -------------------------------------------------------------------------------------------------------------------------
Technology 3.06%
International Business Machines Corporation 24,000 2,542,500
Seagate Technology* 25,000 903,125
Xerox Corporation 21,300 1,793,194
- -------------------------------------------------------------------------------------------------------------------------
5,238,819
- -------------------------------------------------------------------------------------------------------------------------
Transportation & Services 3.36%
Canadian Pacific, Ltd. 60,100 1,776,706
KLM Royal Dutch Air 35,500 1,218,093
Union Pacific Corporation 44,000 2,755,500
- -------------------------------------------------------------------------------------------------------------------------
5,750,299
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
Mentor Income and Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Shares or
Principal
Percent of Net Assets Amount Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Common Stocks (continued)
- -------------------------------------------------------------------------------------------------------------------------
Utilities 3.84%
Bellsouth Corporation 27,000 $ 1,248,750
DPL, Inc. 40,000 980,000
DQE, Inc. 29,000 978,750
Pinnacle West Capital 53,000 1,782,125
SBC Communications, Inc. 26,000 1,595,750
- -------------------------------------------------------------------------------------------------------------------------
6,585,375
- -------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (cost $79,727,006) 94,749,166
- -------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 3.96%
- -------------------------------------------------------------------------------------------------------------------------
Industrial 1.35%
Aluminum Company of America, 5.75%, 2/01/01 $ 250,000 245,737
Gillette Company, 5.75%, 10/15/05 250,000 239,150
ICI Wilmington, 6.95%, 9/15/04 1,000,000 1,016,730
Lockheed Corporation, 6.75%, 3/15/03 100,000 101,131
Sears Roebuck Company, 9.25%, 4/15/98 175,000 178,470
Tenneco, Inc., 7.50%, 4/15/07 500,000 523,675
- -------------------------------------------------------------------------------------------------------------------------
2,304,893
- -------------------------------------------------------------------------------------------------------------------------
Financial 1.61%
American General Finance Corporation, 5.88%, 7/01/00 250,000 247,785
Associates Corporation of North America, 5.25%, 3/30/00 250,000 244,853
Chase Manhattan Corporation, 7.75%, 11/01/99 250,000 258,082
Comerica Bank, 7.13%, 12/01/13 250,000 247,868
Dean Witter Discover, 6.25%, 3/15/00 100,000 100,309
First National Bank of Boston, 8.00%, 9/15/04 250,000 268,020
Ford Motor Credit, 8.88%, 6/15/99 100,000 104,604
Great Western Financial, 6.38%, 7/01/00 250,000 250,580
Home Savings of Americas, 6.00%, 11/01/00 250,000 247,890
Security Benefit Life Company, 8.75%, 5/15/16 (a) 500,000 547,500
Toronto Dominion Bank, 6.13%, 11/01/08 250,000 236,890
- -------------------------------------------------------------------------------------------------------------------------
2,754,381
- -------------------------------------------------------------------------------------------------------------------------
Utilities 1.00%
Duke Energy Corporation, 7.00%, 6/01/00 100,000 102,120
Florida Power & Light Company, 5.38%, 4/01/00 250,000 246,010
Pacific Gas & Electric Company, 5.93%, 10/08/03 250,000 242,138
Philadelphia Electric Company, 7.50%, 1/15/99 100,000 102,075
</TABLE>
47
<PAGE>
Mentor Income and Growth Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Corporate Bonds (continued)
- -------------------------------------------------------------------------------------------------------------------------
Utilities (continued)
Southwestern Public Service Company, 6.88%, 12/01/99 $ 250,000 $ 254,475
System Energy Resources, 7.71%, 8/01/01 500,000 518,045
Union Electric Company, 6.75%, 10/15/99 250,000 253,237
- -------------------------------------------------------------------------------------------------------------------------
1,718,100
- -------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (cost $6,773,835) 6,777,374
- -------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities and Agencies 35.94%
- -------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association
6.50% - 7.00%, 9/15/23 - 2/15/26 2,174,084 2,134,125
U.S. Treasury Bonds, 6.25% - 7.25%,
5/15/16 - 8/15/23 11,200,000 11,864,963
U.S. Treasury Notes, 5.00% - 6.50%,
4/30/98 - 10/15/06 47,550,000 47,580,345
- -------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Securities and Agencies
(cost $60,482,143) 61,579,433
- -------------------------------------------------------------------------------------------------------------------------
Short-Term Investment 3.74%
- -------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
Paine Webber, Inc.
Dated 9/30/97, 6.03%, Due 10/01/97, collateralized by
$6,275,000, U.S. Treasury Note, 6.50%, 5/31/02, market
value $6,532,163
(cost $6,396,000) 6,396,000 6,396,000
- -------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $153,378,984) 98.94% 169,501,973
- -------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities 1.06% 1,823,485
- -------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $171,325,458
- -------------------------------------------------------------------------------------------------------------------------
</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.
48
<PAGE>
Mentor Municipal Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Municipal Securities 97.36%
- ------------------------------------------------------------------------------------------------------------------------
Arizona 2.53%
Pima County Arizona IDA, 7.25%, 7/15/10 $1,660,000 $ 1,861,972
- ------------------------------------------------------------------------------------------------------------------------
California 12.11%
Carson Improvement Board Act 1915, Special Assessment District
92, 7.38%, 9/02/22 710,000 772,998
California State Water Reserve Center, 4.75%, 12/01/29 3,500,000 3,149,440
East Bay Municipal Utility District, 4.75%, 6/01/21 1,915,000 1,754,446
Orange County Community Facilities District, Series A, 7.35%,
8/15/18 300,000 348,096
San Francisco City & County Airport, 6.30%, 5/01/25 1,000,000 1,057,270
University of California, Revenue Bonds, 4.75%, 9/01/16 2,000,000 1,842,560
- ------------------------------------------------------------------------------------------------------------------------
8,924,810
- ------------------------------------------------------------------------------------------------------------------------
Colorado 6.46%
Colorado Housing Authority, 7.00%, 11/01/24 575,000 609,098
Denver City & County Airport Revenue, 5.25% - 8.50%, 11/15/13 -
11/15/23 3,700,000 4,150,781
- ------------------------------------------------------------------------------------------------------------------------
4,759,879
- ------------------------------------------------------------------------------------------------------------------------
Connecticut 1.42%
Connecticut State Development Authority, 6.15%, 4/01/35 1,000,000 1,047,750
- ------------------------------------------------------------------------------------------------------------------------
District of Columbia 1.89%
Metropolitan Pier & Exposition, (effective yield - 1.30%) (a),
6/15/21 1,950,000 526,461
Metropolitan Washington, General Airport Revenue, Series A,
6.63%, 10/01/19 800,000 871,824
- ------------------------------------------------------------------------------------------------------------------------
1,398,285
- ------------------------------------------------------------------------------------------------------------------------
Florida 6.42%
Florida State Municipal Power Agency, 5.10%, 10/01/25 2,000,000 1,916,660
Hillsborough County, 6.25%, 12/01/34 1,250,000 1,363,788
Sarasota County Health Facilities Authority Revenue, 10.00%,
7/01/22** 1,170,000 1,455,269
- ------------------------------------------------------------------------------------------------------------------------
4,735,717
- ------------------------------------------------------------------------------------------------------------------------
Georgia 1.58%
Monroe County Development Authority PCRB, 6.75%, 1/01/10 1,000,000 1,161,290
- ------------------------------------------------------------------------------------------------------------------------
Illinois 8.74%
Broadview Tax Increment Revenue, 8.25%, 7/01/13** 1,000,000 1,118,750
</TABLE>
49
<PAGE>
Mentor Municipal Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Long-Term Municipal Securities (continued)
- ------------------------------------------------------------------------------------------------------------------------
Illinois (continued)
Chicago Heights Residential Mortgage, (effective yield - 3.06%)
(a), 6/01/09 $3,465,000 $ 1,527,268
Chicago Capital Appreciation, (effective yield - 1.74%) (a),
7/01/16 2,000,000 652,340
Illinois Health Facilities Authority Revenue, 9.50%, 10/01/22** 1,250,000 1,550,400
llinois Educational Facilities Authority Revenue, 6.00%,10/1/24 1,000,000 1,008,290
Saint Clair County Public Building, (effective yield - 1.87%)
(a), 12/01/16 1,650,000 585,338
- ------------------------------------------------------------------------------------------------------------------------
6,442,386
- ------------------------------------------------------------------------------------------------------------------------
Indiana 0.47%
Indiana Transportation Finance Authority, Series A, (effective
yield - 1.80%) (a), 6/01/17 1,000,000 342,650
- ------------------------------------------------------------------------------------------------------------------------
Iowa 0.92%
Student Loan Liquidity Corporation, Student Loan Revenue, Series
C, 6.95%, 3/01/06 625,000 677,619
- ------------------------------------------------------------------------------------------------------------------------
Kentucky 2.90%
Jefferson County Hospital Revenue, 8.50%*, 10/01/08 500,000 591,875
Kenton County Airport Board Revenue, OID, 7.50%, 2/01/20 1,400,000 1,546,986
- ------------------------------------------------------------------------------------------------------------------------
2,138,861
- ------------------------------------------------------------------------------------------------------------------------
Maine 1.45%
Maine State Housing Authority, Series C, 6.88%, 11/15/23 1,000,000 1,064,510
- ------------------------------------------------------------------------------------------------------------------------
Massachusetts 4.06%
Massachusetts State Health and Educational Facilities Authority,
OID Revenue Bonds, Series A, 6.88%, 4/01/22 1,000,000 1,104,650
Massachusetts State Health and Education, 6.00%, 10/01/23 1,000,000 960,020
Massachusetts State Turnpike Authority, 5.00%, 1/01/37 1,000,000 925,840
- ------------------------------------------------------------------------------------------------------------------------
2,990,510
- ------------------------------------------------------------------------------------------------------------------------
Michigan 1.28%
Detroit Michigan Water Supply Systems, 5.00%, 7/01/27 1,000,000 943,840
- ------------------------------------------------------------------------------------------------------------------------
Missouri 1.30%
Saint Louis Airport Revenue, 5.25%, 7/01/27 1,000,000 956,460
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
Mentor Municipal Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Long-Term Municipal Securities (continued)
- ------------------------------------------------------------------------------------------------------------------------
Nebraska 0.53%
Nebraska Investment Finance Authority, SFM, 9.31%*, 9/15/24 $ 350,000 $ 387,188
- ------------------------------------------------------------------------------------------------------------------------
Nevada 2.39%
Henderson Local Improvement District, Special Assessment, Series
A, 8.50%, 11/01/12 480,000 502,574
Nevada Housing Division, 5.65%, 4/01/15 1,255,000 1,256,054
- ------------------------------------------------------------------------------------------------------------------------
1,758,628
- ------------------------------------------------------------------------------------------------------------------------
New York 13.58%
Clifton Springs Hospital Refunding & Improvement, 8.00%, 1/01/20 775,000 833,660
Herkimer County, IDA, 8.00%, 1/01/09 1,000,000 1,011,270
Metropolitan Transportation Authority, 4.75%, 7/01/19 1,000,000 892,630
New York City, Series H, 7.20%, 2/01/13 1,500,000 1,669,122
New York City Municipal Water Facility, 5.13%, 6/15/21 1,000,000 954,390
New York State Dormitory Authority Revenue, 5.25%, 2/15/18 2,800,000 2,751,700
Port Authority New York & New Jersey, 5.38%, 1/15/32 1,915,000 1,892,652
- ------------------------------------------------------------------------------------------------------------------------
10,005,424
- ------------------------------------------------------------------------------------------------------------------------
North Carolina 1.41%
North Carolina Eastern Municipal Power Agency Systems Revenue,
5.70%, 1/01/13 1,000,000 1,042,270
- ------------------------------------------------------------------------------------------------------------------------
Oklahoma 1.40%
Oklahoma City, Industrial and Cultural Facilities Trust, 6.75%,
9/15/17 1,000,000 1,030,080
- ------------------------------------------------------------------------------------------------------------------------
Pennsylvania 2.20%
Pennsylvania Economic Development, 6.40%, 1/01/09 500,000 515,435
Philadelphia Hospital and Higher Education Facilities, 6.50%,
11/15/08 1,000,000 1,105,130
- ------------------------------------------------------------------------------------------------------------------------
1,620,565
- ------------------------------------------------------------------------------------------------------------------------
Rhode Island 0.52%
West Warwick, Series A, GO Bonds, 6.80% - 7.30%, 7/15/98 -
7/15/08 355,000 384,871
- ------------------------------------------------------------------------------------------------------------------------
Tennessee 6.24%
Memphis Shelby County Airport Authority Special Facilities
Revenue Refunding, 7.88%, 9/01/09 1,500,000 1,688,655
Tennessee Housing Development Agency, 7.38%, 7/01/23 2,750,000 2,907,657
- ------------------------------------------------------------------------------------------------------------------------
4,596,312
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
Mentor Municipal Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Long-Term Municipal Securities (continued)
- ------------------------------------------------------------------------------------------------------------------------
Texas 7.87%
Brazos Higher Education Authority Student Loan Revenue, 7.10%,
11/01/04 $ 445,000 $ 483,706
Dallas Fort Worth International Airport Facility Revenue Bonds,
7.25%, 11/01/30** 1,000,000 1,110,680
Lower County River Authority, 6.38%, 4/01/27 1,000,000 1,058,540
North Central Texas Health Facility Development Corp Series B,
5.13%, 2/15/22 1,000,000 953,790
Tarrant County Texas Health Facilities, 5.25%, 2/15/22 1,315,000 1,276,221
Texas State Department of Housing and Community Affairs
Refunding, Series C, 9.36%*, 7/02/24 750,000 911,250
- ------------------------------------------------------------------------------------------------------------------------
5,794,187
- ------------------------------------------------------------------------------------------------------------------------
Utah 2.46%
Bountiful Hospital Revenue, 9.50%, 12/15/18 235,000 271,387
Utah State Housing Finance Agency, SFM, 7.20%, 1/01/27 1,440,000 1,541,088
- ------------------------------------------------------------------------------------------------------------------------
1,812,475
- ------------------------------------------------------------------------------------------------------------------------
West Virginia 5.23%
Harrison County, 6.75%, 8/01/24 2,000,000 2,224,000
West Virginia State Hospital Finance Authority Revenue, 8.10%*,
1/01/18 1,500,000 1,627,995
- ------------------------------------------------------------------------------------------------------------------------
3,851,995
- ------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Securities (cost $67,160,550) 71,730,534
- ------------------------------------------------------------------------------------------------------------------------
Short-Term Municipal Securities 4.62%
- ------------------------------------------------------------------------------------------------------------------------
Georgia 0.27%
Burke County PCRB, 4.00%, 7/01/24 200,000 200,000
- ------------------------------------------------------------------------------------------------------------------------
South Carolina 3.67%
Charleston County South Carolina, 4.00%, 1/01/07 1,900,000 1,900,000
South Carolina Job Economic Development, 3.85%, 7/01/22 800,000 800,000
- ------------------------------------------------------------------------------------------------------------------------
2,700,000
- ------------------------------------------------------------------------------------------------------------------------
Tennessee 0.41%
Sullivan County PCRB, 4.00%, 10/01/16 300,000 300,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
Mentor Municipal Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Virginia 0.27%
Peninsula Port Authority, 4.00%, 7/01/16 $ 200,000 $ 200,000
- ------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Securities (cost $3,400,000) 3,400,000
- ------------------------------------------------------------------------------------------------------------------------
Put Options Purchased 0.02%
U.S. Long Bond Futures Option, Strike Price of $110, expiration
of 12/97 (cost $75,807) 12,500
- ------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $70,636,357) 102.00% 75,143,034
- ------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities (2.00%) (1,477,178 )
- ------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $73,665,856
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment Abbreviations
GO -- General Obligation
IDA -- Industrial Development Authority
OID -- Original Issue Discount
PCRB -- Pollution Control Revenue Bond
SFM -- Single Family Mortgage
(a) Effective yield is the yield as calculated at time of purchase at which the
bond accretes on an annual basis until its maturity date.
* Represents inverse floating rate securities.
** Certain of these securities are used as collateral for options written
contracts.
See notes to financial statements.
53
<PAGE>
Mentor Quality Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Long-Term Investments 94.53%
- -------------------------------------------------------------------------------------------------------------------------
Preferred Stock 3.29%
Home Ownership Funding Corporation
(cost $4,227,774) $ 4,350,000 $ 4,220,035
- -------------------------------------------------------------------------------------------------------------------------
Asset-Backed Securities 9.04%
Advanta Mortgage Loan Trust, Series 1993-4,
5.55%, 3/25/10 - 1/25/25 2,585,222 2,470,897
AFG Receivables Trust
7.00%, 2/15/03 2,000,000 1,999,330
CS First Boston, Series 1996-2 A6
7.18%, 2/25/18 2,500,000 2,532,175
Equifax Credit Corporation, Series 1994-1 B
5.75%, 3/15/09 2,241,259 2,178,770
Fifth Third Auto Grantor Trust
6.20%, 9/15/01 1,507,698 1,510,015
Old Stone Credit Corporation Home Equity Trust,
Series 1993-1 B1, 6.00%, 3/15/08 916,770 900,755
- -------------------------------------------------------------------------------------------------------------------------
Total Asset-Backed Securities (cost $11,461,453) 11,591,942
- -------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities and Agencies 28.47%
Federal Home Loan Mortgage Corporation
6.50%, Series 1422, 2/15/07, REMIC 4,408,039 4,334,341
6.50%, Series 1647B, 11/15/08, REMIC 4,241,194 4,161,795
7.50%, 11/01/11, MBS 3,185,578 3,261,793
Federal National Mortgage Association
6.50%, 9/25/08, ARM 2,335,000 2,291,074
Government National Mortgage Association
7.00%, 12/15/08, MBS 3,668,788 3,718,228
7.38%, 4/20/22, ARM 1,011,290 1,041,870
6.88%, 12/20/22, ARM 3,234,063 3,319,915
5.00%, 1/20/27, ARM 3,492,273 3,481,091
6.00%, 4/20/27, ARM 1,619,467 1,635,435
U.S. Treasury Notes, 6.13% - 6.63%, 3/31/02 - 8/15/07 9,100,000 9,254,689
- -------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Securities and Agencies
(cost $36,097,518) 36,500,231
- -------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 29.26%
- -------------------------------------------------------------------------------------------------------------------------
Financial 10.00%
Capital One Bank, 7.15% - 7.20%, 7/19/99 - 9/15/06 4,750,000 4,808,847
Lehman Brothers, Inc., 7.50%, 8/01/26 3,500,000 3,675,332
</TABLE>
54
<PAGE>
Mentor Quality Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Corporate Bonds (continued)
Financial (continued)
Nationsbank Corporation, 7.50%, 9/15/06 $ 1,500,000 $ 1,571,687
Salomon, Inc., 7.65%, 6/27/05 1,000,000 1,041,451
United Dominion Realty, 7.07%, 11/15/06 1,700,000 1,727,719
- -------------------------------------------------------------------------------------------------------------------------
12,825,036
- -------------------------------------------------------------------------------------------------------------------------
Health 13.85%
Carolina Medi-Plan, Inc., 5.64%, 6/01/22 13,000,000 13,000,000
Barton Health Care, LLC, 5.70%, 2/15/25 4,755,000 4,755,000
- -------------------------------------------------------------------------------------------------------------------------
17,755,000
- -------------------------------------------------------------------------------------------------------------------------
Technology 4.42%
Phillips Electronics, 7.20%, 6/01/26 5,500,000 5,668,245
- -------------------------------------------------------------------------------------------------------------------------
Utilities 0.99%
Mississippi Power & Light, 8.80%, 4/01/05 1,250,000 1,267,949
- -------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (cost $36,908,917) 37,516,230
- -------------------------------------------------------------------------------------------------------------------------
Miscellaneous 4.68%
Allegheny County Industrial Development
5.75%, 7/01/27 (cost $6,000,000) 6,000,000 6,000,000
- -------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations 11.76%
Chase Mortgage Finance Corporation,
Series 1993-L2 M, 7.00%, 10/25/24 3,006,192 2,992,827
General Electric Capital Mortgage Services, Inc.,
Series 1993-18 B1, 6.00%, 2/25/09 (a) 2,056,436 1,962,726
NASCOR, Series 1996-2 Class M
7.00%, 9/25/11 1,836,780 1,852,003
Prudential Home, Series 1995-5,
7.25%, 9/25/25 (a) 4,061,780 4,080,678
Prudential Home, Series 1996-4,
6.50%, 4/25/26 4,343,477 4,188,072
- -------------------------------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations
(cost $14,640,102) 15,076,306
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
Mentor Quality Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Residual Interests 8.03%
Capital Mortgage Funding I, Inc., 1997-5, 5/20/24 $ 49,967 $ 773,831
Capital Mortgage Funding I, Inc., 1997-6, 12/01/26 23,618 788,889
Capital Mortgage Funding I, Inc., 1997-7, 5/20/26 35,177 943,761
Capital Mortgage Funding I, Inc., 1997-13, 11/20/22 38,678 694,118
Capital Mortgage Funding I, Inc., 1997-20, 1/20/23 24,348 798,446
General Mortgage Securities II, Inc., 1995-1, 1996, 6/25/20 23,461 580,508
General Mortgage Securities II, Inc., 1995-4, 1996, 6/25/23 12,990 505,038
General Mortgage Securities II, Inc., 1996-1, 11/25/22 12,721 542,504
General Mortgage Securities II, Inc., 1997-4, 5/20/22 17,204 704,007
General Mortgage Securities II, Inc., 1997-5, 7/20/23 17,107 492,001
National Mortgage Funding I, Inc., 1995-4, 1996, 3/20/21 11,228 191,428
National Mortgage Funding I, Inc., 1995-5, 1996, 3/25/22 3,001 326,588
National Mortgage Funding I, Inc., 1995-7, 1996, 8/01/25 27,777 632,538
National Mortgage Funding I, Inc., 1995-8, 1996, 8/25/22 45,000 781,028
National Mortgage Funding I, Inc., 1995-9, 1996, 11/19/25 33,919 560,702
National Mortgage Funding I, Inc., 1997-6, 9/20/21 45,000 983,060
- -------------------------------------------------------------------------------------------------------------------------
Total Residual Interests (cost $10,450,450) 10,298,447
- -------------------------------------------------------------------------------------------------------------------------
Total Long-Term Investments (cost $119,786,214) 121,203,191
- -------------------------------------------------------------------------------------------------------------------------
Short-Term Investment 2.33%
- -------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company
Dated 9/30/97, 6.25%, due 10/01/97,
collateralized by $3,042,077 Federal Home Loan
Mortgage Corporation, 7.00%, 6/02/26,
market value $3,036,373 (cost $2,973,595) 2,973,595 2,973,595
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
Mentor Quality Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Market Value
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $122,759,809) 96.86% $124,176,786
- -------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities 3.14% 4,045,175
- -------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $128,221,961
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment abbreviations
ARM - Adjustable Rate Mortgage
MBS - Mortgage-Backed Security
REMIC - Real Estate Mortgage Investment Conduit
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
See notes to financial statements.
57
<PAGE>
Mentor Short-Duration Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Asset-Backed Securities 21.15%
Advanta Home Equity Loan 6.15%, 10/25/09 $ 728,536 $ 717,085
Advanta Mortgage Loan Trust 1993-4, 4.75% - 5.55%, 2/25/10 - 3/25/10 1,553,001 1,504,769
AFC Home Equity Loan Trust, 6.60%, 2/25/27 1,499,955 1,493,120
AFG Receivables Trust, 6.45% - 7.05%, 9/15/00 - 2/15/03 2,893,531 2,892,466
Equifax Credit Corporation 1994-1B, 5.75%, 3/15/09 712,569 692,702
Fifth Third Auto Grantor Trust, 6.20%, 9/15/01 754,621 755,781
General Motors Acceptance Corporation, 6.30%, 6/15/99 101,824 102,138
Old Stone Credit Corporation, 6.20%, 6/15/08 396,344 391,002
Olympic Automobiles Receivables Trust, 6.85% - 7.35%, 6/15/01 -
10/15/01 2,097,228 2,116,866
Union Acceptance Corporation, 6.45%, 7/08/03 902,678 904,887
- ---------------------------------------------------------------------------------------------------------------------------
Total Asset-Backed Securities (cost $11,516,841) 11,570,816
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities and Agencies 53.67%
Federal National Mortgage Association
10.00%, 6/01/05, MBS 327,530 344,272
Government National Mortgage Association
7.00%, 12/15/08, MBS 1,385,988 1,404,666
7.13%, 7/20/22, ARM 4,617,240 4,755,674
5.50%, 11/20/26 - 12/20/26, ARM 5,576,904 5,630,018
5.00%, 1/20/27, ARM 3,572,561 3,561,122
6.00%, 4/20/27, ARM 2,591,147 2,616,695
U.S. Treasury Notes, 6.00% - 6.63%, 8/15/00 - 3/31/02 10,900,000 11,052,561
- ---------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Securities and Agencies (cost $29,131,722) 29,365,008
- ---------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligation 0.66%
Ryland Acceptance Corporation, 9.63%, 9/25/17 (cost $354,900) (a) 359,264 364,414
- ---------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 10.14%
Capital One Bank, 7.15% - 7.20%, 7/19/99 - 9/15/06 2,500,000 2,532,093
Hilander Finance, LLC, 5.70%, 12/01/25 2,000,000 2,000,000
Mississippi Power & Light, 8.80%, 4/01/05 1,000,000 1,014,359
- ---------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (cost $5,507,714) 5,546,452
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
Mentor Short-Duration Income Portfolio
Portfolio of Investments
September 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Residual Interests 2.18%
Capital Mortgage Funding I, Inc., 1997-5, 5/20/24 $ 33,311 $ 515,538
Capital Mortgage Funding I, Inc., 1997-6, 12/01/26 9,185 306,529
General Mortgage Securities II, Inc., 1997-4, 5/20/22 5,735 234,513
National Mortgage Funding, Inc., 1996-4, 10/25/21 2,978 134,185
- ---------------------------------------------------------------------------------------------------------------------------
Total Residual Interests (cost $1,278,616) 1,190,765
- ---------------------------------------------------------------------------------------------------------------------------
Short-Term Investment 6.55%
- ---------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company
Dated 9/30/97, 6.25%, due 10/01/97, collateralized by $3,664,147
Federal Home Loan Mortgage Corporation, 7.00%, 6/02/26, market
value $3,657,277 (cost $3,581,099) 3,581,099 3,581,099
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $51,370,892) 94.35% 51,618,554
- ---------------------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities 5.65% 3,089,168
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets 100.00% $54,707,722
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment Abbreviations
ARM -- Adjustable Rate Mortgage
MBS -- Mortgage Backed Securities
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
See notes to financial statements.
59
<PAGE>
Mentor Funds
Statements of Assets and Liabilities
September 30, 1997
<TABLE>
<CAPTION>
Perpetual Capital
Growth Global Growth
Portfolio Portfolio Portfolio
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------
Assets
Investments, at market value* (Note 2)
Investment securities $565,087,419 $137,334,276 $170,855,934
Repurchase agreements 46,972,557 1,532,874 8,344,113
- --------------------------------------------------------------------------------------------------------------------------
Total Investments 612,059,976 138,867,150 179,200,047
- --------------------------------------------------------------------------------------------------------------------------
Cash - - -
Collateral for securities loaned (Note 2) - 5,218,096 21,952,614
Receivables
Investments sold 1,963,514 2,678,887 871,621
Fund shares sold 2,210,306 1,548,535 1,394,109
Dividends and interest 60,357 449,140 74,020
Unrealized appreciation on forward foreign currency exchange
contracts (Note 8) - 15,414 -
Variation margin (Note 2) - - -
Unrealized appreciation on interest rate swap (Note 2) - - -
Deferred expenses (Note 2) - 16,491 -
Other assets - 100 -
- --------------------------------------------------------------------------------------------------------------------------
Total assets 616,294,153 148,793,813 203,492,411
- --------------------------------------------------------------------------------------------------------------------------
Liabilities
Payables
Investments purchased 2,977,227 7,719,499 2,041,541
Securities loaned (Note 2) - 5,218,096 21,952,614
Fund shares redeemed 1,797,506 149,001 149,086
Dividends - - -
Written options, at value (Note 2) - - -
Unrealized depreciation on forward foreign currency exchange
contracts (Note 8) - 738 -
Accrued expenses and other liabilities 256,781 120,883 59,662
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,031,514 13,208,217 24,202,903
- --------------------------------------------------------------------------------------------------------------------------
Net Assets $611,262,639 $135,585,596 $179,289,508
- --------------------------------------------------------------------------------------------------------------------------
Net Assets represented by: (Note 2)
Additional paid-in capital $390,412,273 $112,928,149 $126,725,224
Accumulated net investment income (loss) - (97,957) 59,668
Accumulated distributions in excess of net
investment income - - -
Accumulated net realized gain (loss) on investment transactions 30,589,307 5,560,178 13,767,593
Net unrealized appreciation of investments and foreign currency
related transactions 190,261,059 17,195,226 38,737,023
- --------------------------------------------------------------------------------------------------------------------------
Net Assets $611,262,639 $135,585,596 $179,289,508
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value per Share
Class A Shares $19.94 $20.94 $22.42
Class B Shares $19.53 $20.32 $21.68
Offering Price per Share
Class A Shares $21.16(a) $22.22(a) $23.79(a)
Class B shares $19.53 $20.32 $21.68
Shares Outstanding
Class A Shares 5,266,599 2,222,778 2,929,944
Class B Shares 25,920,557 4,381,977 5,239,919
- --------------------------------------------------------------------------------------------------------------------------
Total Shares Outstanding 31,187,156 6,604,755 8,169,863
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Investments at cost $421,798,917, $121,689,193, $140,463,024, $298,789,925,
$153,378,984, $70,636,357, $122,759,809, and $51,370,892, respectively.
(a) Computation of offering price: 100/94.25 of net asset value.
(b) Computation of offering price: 100/95.25 of net asset value.
(c) Computation of offering price: 100/99 of net asset value.
See notes to financial statements.
60
<PAGE>
<TABLE>
<CAPTION>
Income and Municipal Quality Short-Duration
Strategy Growth Income Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C>
- --------------------------------------------------------------------------------
$297,032,651 $163,105,973 $75,143,034 $121,203,191 $ 48,037,455
37,762,777 6,396,000 - 2,973,595 3,581,099
- --------------------------------------------------------------------------------
334,795,428 169,501,973 75,143,034 124,176,786 51,618,554
- --------------------------------------------------------------------------------
1,074,415 3,806 97,949 - -
28,628,733 39,343,705 - 9,079,500 -
8,200,210 - - - -
209,713 1,831,764 775,314 4,128,293 2,999,109
1,991,073 1,150,644 1,143,833 1,410,609 310,103
- - - - -
- - 8,594 - -
- - - 498,910 53,872
25,186 - - - 23,933
- - - 20,826 -
- --------------------------------------------------------------------------------
374,924,758 211,831,892 77,168,724 139,314,924 55,005,571
- --------------------------------------------------------------------------------
3,127,838 781,564 3,145,121 982,563 -
28,628,733 39,343,705 - 9,079,500 -
560,728 313,441 25,647 152,005 51,048
- - 300,191 680,980 226,307
- - 4,687 - -
- - - - -
170,682 67,724 27,222 197,915 20,494
- --------------------------------------------------------------------------------
32,487,981 40,506,434 3,502,868 11,092,963 297,849
- --------------------------------------------------------------------------------
$342,436,777 $171,325,458 $73,665,856 $128,221,961 $ 54,707,722
- --------------------------------------------------------------------------------
$246,591,941 $141,701,349 $71,384,225 $141,795,601 $ 54,677,550
5,365,536 - - - -
- - (300,191) (390,590) (95,798)
54,473,797 13,501,286 (1,962,908) (15,098,937) (175,563)
36,005,503 16,122,823 4,544,730 1,915,887 301,533
- --------------------------------------------------------------------------------
$342,436,777 $171,325,458 $73,665,856 $128,221,961 $ 54,707,722
- --------------------------------------------------------------------------------
$18.61 $20.60 $15.50 $13.18 $12.62
$18.29 $20.59 $15.49 $13.18 $12.62
$19.75(a) $21.86(a) $16.27(b) $13.84() $12.75(c)
$18.29 $20.59 $15.49 $13.18 $12.62
2,178,555 3,083,091 1,896,308 4,035,055 2,188,186
16,502,653 5,237,467 2,858,545 5,692,647 2,146,459
- --------------------------------------------------------------------------------
18,681,208 8,320,558 4,754,853 9,727,702 4,334,645
- --------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
Mentor Funds
Statements of Operations
Year Ended September 30, 1997
<TABLE>
<CAPTION>
Perpetual Capital
Growth Global Growth
Portfolio Portfolio Portfolio
<S> <C>
- --------------------------------------------------------------------------------------------------------------------
Investment income
Interest* $ 2,343,851 $ 315,899 $ 788,057
Dividends (Net of withholding taxes)** 452,604 1,510,622 1,798,248
- --------------------------------------------------------------------------------------------------------------------
Total investment income (Note 2) 2,796,455 1,826,521 2,586,305
- --------------------------------------------------------------------------------------------------------------------
Expenses
Management fee (Note 4) 3,238,498 998,592 1,063,903
Distribution fees (Note 5) 2,989,388 481,581 656,743
Shareholder services fees (Note 5) 1,156,606 231,883 332,470
Transfer agent fee 607,750 163,056 185,877
Administration fee (Note 4) 462,643 92,753 132,988
Shareholder reports and postage expense 145,434 40,112 43,168
Registration expenses 114,919 27,915 25,098
Custodian and accounting fees 77,271 171,535 27,949
Legal and audit fees 32,201 7,237 9,316
Organizational expenses - 11,067 -
Directors' fees and expenses 9,929 2,231 2,873
Miscellaneous 80,199 15,225 50,113
- --------------------------------------------------------------------------------------------------------------------
Total expenses 8,914,838 2,243,187 2,530,498
- --------------------------------------------------------------------------------------------------------------------
Deduct
Waiver of administration fee (Note 4) - - -
Waiver of management fee (Note 4) - - -
- --------------------------------------------------------------------------------------------------------------------
Net expenses 8,914,838 2,243,187 2,530,498
- --------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (6,118,383) (416,666) 55,807
- --------------------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on
Investments, Futures and Options contracts
Net realized gain on investments, futures and options
contracts (Note 2) 35,210,825 6,084,166 14,469,617
Change in unrealized appreciation
(depreciation) on investments 90,598,141 13,678,454 24,877,344
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
futures contracts 125,808,966 19,762,620 39,346,961
- --------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $119,690,583 $19,345,954 $39,402,768
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Net of interest expenses of $288,240 (related to interest rate swap) and
$139,953 ($59,232 on borrowings and $80,721 on interest rate swap) for the
Quality Income Portfolio and Short-Duration Income Portfolio, respectively.
** Withholding taxes were $3,634, $172,450, $17,677 and $18,839 for the Growth
Portfolio, Perpetual Global Portfolio, Strategy Portfolio, and Income and
Growth Portfolio, respectively for the year ended September 30, 1997.
See notes to financial statements.
62
<PAGE>
<TABLE>
<CAPTION>
Income and Municipal Quality Short-Duration
Strategy Growth Income Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C>
- -----------------------------------------------------------------------------
$ 11,122,465 $ 3,543,752 $3,904,665 $7,714,065 $2,553,037
1,232,215 1,485,284 - - -
- -----------------------------------------------------------------------------
12,354,680 5,029,036 3,904,665 7,714,065 2,553,037
- -----------------------------------------------------------------------------
2,807,549 947,267 370,232 572,539 185,354
2,224,816 645,243 197,295 317,465 73,558
825,750 315,756 154,263 238,558 92,677
457,475 179,872 88,610 137,695 50,057
330,300 126,302 61,705 95,423 37,151
103,681 33,744 12,025 24,709 8,029
79,039 27,351 12,131 16,273 9,552
76,377 40,396 22,628 20,060 16,866
24,663 8,899 5,268 7,066 2,690
20,151 - - - 7,336
7,605 2,744 1,624 2,179 829
51,890 29,101 28,157 14,867 5,657
- -----------------------------------------------------------------------------
7,009,296 2,356,675 953,938 1,446,834 489,756
- -----------------------------------------------------------------------------
- - - - 37,151
- - - 123,214 55,521
- -----------------------------------------------------------------------------
7,009,296 2,356,675 953,938 1,323,620 397,084
- -----------------------------------------------------------------------------
5,345,384 2,672,361 2,950,727 6,390,445 2,155,953
- -----------------------------------------------------------------------------
54,534,179 15,016,540 548,498 222,072 7,748
)
(24,297,952 6,704,657 1,603,630 2,224,113 386,023
- -----------------------------------------------------------------------------
30,236,227 21,721,197 2,152,128 2,446,185 393,771
- -----------------------------------------------------------------------------
35,581,611
$ $24,393,558 $5,102,855 $8,836,630 $2,549,724
- -----------------------------------------------------------------------------
</TABLE>
63
<PAGE>
Mentor Funds
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Growth Portfolio Perpetual Global Portfolio
------------------------------ -----------------------------
Year Year Year Year
Ended Ended Ended Ended
9/30/97 9/30/96 9/30/97 9/30/96
<S> <C>
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ (6,118,383) $ (3,564,174) $ (416,666) $ (246,968)
Net realized gain (loss) on investments and
futures contracts 35,210,825 63,686,744 6,084,166 2,247,124
Change in unrealized appreciation
(depreciation) on investments 90,598,141 22,942,450 13,678,454 2,553,849
- --------------------------------------------------------------------------------------------------------------------
Increase in net assets resulting from
operations 119,690,583 83,065,020 19,345,954 4,554,005
- --------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
Net investment income
Class A - - - -
Class B - - - -
Distributions in excess of net investment
income
Class A - - - -
Class B - - - -
Net realized gain on investments
Class A (5,768,516) (2,238,213) (476,590) (338,447)
Class B (52,589,913) (27,048,016) (1,576,577) (688,165)
- --------------------------------------------------------------------------------------------------------------------
Distributions to shareholders (58,358,429) (29,286,229) (2,053,167) (1,026,612)
- --------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 9)
Change in net assets resulting from capital
share transactions 138,080,325 91,376,945 63,063,845 32,180,438
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 199,412,479 145,155,736 80,356,632 35,707,831
Net Assets
Beginning of year 411,850,160 266,694,424 55,228,964 19,521,133
- --------------------------------------------------------------------------------------------------------------------
End of year $611,262,639 $411,850,160 $135,585,596 $55,228,964
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
64
<PAGE>
<TABLE>
<CAPTION>
Capital Growth Income and Growth Portfolio Municipal Income
Portfolio Strategy Portfolio Portfolio
- ----------------------------- ----------------------------- ---------------------------- ---------------------------
Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
$ 55,807 $ 7,974 $ 5,345,384 $ (396,451) $ 2,672,361 $ 1,183,705 $ 2,950,727 $ 2,945,818
14,469,617 16,294,346 54,534,179 24,144,971 15,016,540 8,390,313 548,498 149,379
24,877,344 3,307,505 (24,297,952) 22,559,071 6,704,657 3,327,836 1,603,630 320,865
- --------------------------------------------------------------------------------------------------------------------------------
39,402,768 19,609,825 35,581,611 46,307,591 24,393,558 12,901,854 5,102,855 3,416,062
- --------------------------------------------------------------------------------------------------------------------------------
- - - - (1,054,162) (431,692) (1,179,998) (1,063,836)
- - - - (1,618,199) (655,745) (1,981,316) (1,919,043)
- - - - (43,035) - - -
- - - - (73,107) - - -
(4,657,749) (871,361) (1,531,137) (224,749) (2,474,556) (857,221) (39,820) -
(10,198,967) (1,783,019) (21,767,428) (3,506,588) (6,846,186) (2,018,269) (66,849) -
- --------------------------------------------------------------------------------------------------------------------------------
(14,856,716) (2,654,380) (23,298,565) (3,731,337) (12,109,245) (3,962,927) (3,267,983) (2,982,879)
- --------------------------------------------------------------------------------------------------------------------------------
54,641,763 (4,083,713) 21,287,525 31,148,786 68,283,564 15,252,843 17,081,946 (5,637,324)
- --------------------------------------------------------------------------------------------------------------------------------
79,187,815 12,871,732 33,570,571 73,725,040 80,567,877 24,191,770 18,916,818 (5,204,141)
100,101,693 87,229,961 308,866,206 235,141,166 90,757,581 66,565,811 54,749,038 59,953,179
- --------------------------------------------------------------------------------------------------------------------------------
$179,289,508 $100,101,693 $342,436,777 $308,866,206 $171,325,458 $90,757,581 $73,665,856 $54,749,038
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
Mentor Funds
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Short-Duration
Quality Income Portfolio Income Portfolio
-------------------------- -------------------------
Year Year Year Year
Ended Ended Ended Ended
9/30/97 9/30/96 9/30/97 9/30/96
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 6,390,445 $ 5,381,252 $ 2,155,953 $ 1,563,529
Net realized gain (loss) on investments and futures contracts 222,072 (1,415,843) 7,748 (113,895)
Change in unrealized appreciation (depreciation) of investments 2,224,113 (937,621) 386,023 (364,509)
- ------------------------------------------------------------------------------------------------------------------------
Increase in net assets resulting from operations 8,836,630 3,027,788 2,549,724 1,085,125
- ------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
Net investment income
Class A (2,180,277) (1,580,519) (751,850) (243,822)
Class B (4,210,168) (3,800,733) (1,404,103) (1,354,465)
Distributions in excess of net investment income
Class A (150,441) (6,680) (12,040) -
Class B (212,242) (16,065) (11,811) -
Net realized gain on investments
Class A - - - -
Class B - - - -
- ------------------------------------------------------------------------------------------------------------------------
Net decrease from distributions (6,753,128) (5,403,997) (2,179,804) (1,598,287)
- ------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (Note 9)
Change in net assets resulting from capital share transactions 46,807,230 (4,919,453) 22,371,212 11,607,207
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 48,890,732 (7,295,662) 22,741,132 11,094,045
Net Assets
Beginning of year 79,331,229 86,626,891 31,966,590 20,872,545
- ------------------------------------------------------------------------------------------------------------------------
End of year $128,221,961 $79,331,229 $54,707,722 $31,966,590
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
66
<PAGE>
Mentor Funds
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Growth Portfolio Perpetual Global Portfolio
------------------------------- -------------------------------------------------------
Year Year Period Year Year Year Period
Ended Ended Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95* 9/30/97 9/30/96 9/30/95 9/30/94(b)
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of period $ 18.47 $ 16.08 $ 13.37 $ 17.86 $ 15.88 $14.23 $14.18
Income from investment operations
Net investment income (loss) (0.17) (0.10) (0.01 ) 0.04 (0.04) 0.05 (0.01)
Net realized and unrealized gain
(loss) on investments 4.19 4.23 2.72 3.67 2.82 1.60 0.06
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.02 4.13 2.71 3.71 2.78 1.65 0.05
Less distributions
Distributions from net investment
income - - - - - - -
Distributions in excess of net
investment income - - - - - - -
Distributions from capital gains (2.55) (1.74) - (0.63) (0.80) - -
Distributions in excess of capital
gain - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.55) (1.74) - (0.63) (0.80) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.94 $ 18.47 $ 16.08 $ 20.94 $ 17.86 $15.88 $14.23
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 25.81% 29.15% 20.27 % 21.59% 18.40% 11.60 % 0.35%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $105,033 $40,272 $20,368 $46,556 $13,098 $6,854 $8,882
Ratio of expenses to average net
assets 1.28% 1.28% 1.36 %(a) 1.89% 1.95% 2.06 % 2.09%(a)
Ratio of expenses to average net
assets excluding waiver 1.28% 1.28% 1.36 %(a) 1.89% 1.95% 2.11 % 3.18%(a)
Ratio of net investment income
(loss) to average net assets (0.67%) (0.39%) (0.65 %)(a) 0.07% (0.21%) 0.26 % (0.10%)(a)
Portfolio turnover rate 77% 105% 70 % 128% 130% 155 % 2%
Average commission rate on portfolio
transactions $ 0.0651 $0.0602 $0.0319 $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.
67
<PAGE>
Mentor Funds
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Capital Growth Portfolio
-------------------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of period $ 19.36 $ 16.02 $ 14.88 $ 15.26 $ 14.21
Income from investment operations
Net investment income (loss) (0.02) 0.11 0.02 0.09 0.14
Net realized and unrealized gain (loss) on
investments 5.87 3.73 2.91 (0.30 ) 1.02
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.85 3.84 2.93 (0.21 ) 1.16
Less distributions
Distributions from net investment income - - - (0.04 ) (0.11 )
Distributions in excess of net investment
income - - - - -
Distributions from capital gains (2.79) (0.50) (1.79) (0.13 ) -
Distributions in excess of capital gains - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.79) (0.50) (1.79) (0.17 ) (0.11 )
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26
- ------------------------------------------------------------------------------------------------------------------------------
Total Return 34.78% 24.63% 20.18% (1.37%) 8.21%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $65,703 $31,889 $29,582 $21,181 $31,360
Ratio of expenses to average net assets 1.41% 1.43% 1.87% 1.70% 1.49%
Ratio of expenses to average net assets
excluding waiver 1.41% 1.43% 1.87% 1.70% 1.59%
Ratio of net investment income (loss) to average
net assets 0.53% 0.51% 0.27% 0.53% 0.96%
Portfolio turnover rate 64% 98% 157% 149% 192%
Average commission rate on portfolio
transactions $0.0697 $0.0688
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from June 5, 1995 (initial offering of Class A Shares) to
September 30, 1995.
(a) Annualized.
(c) Reflects operations for the period from May 24, 1993 (commencement of
operations), to September 30, 1993.
See notes to financial statements.
68
<PAGE>
<TABLE>
<CAPTION>
Strategy Portfolio Income and Growth Portfolio
- -------------------------------------- ------------------------------------------------------------------------------
Year Year Period Year Year Year Year Period
Ended Ended Ended Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95* 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93(c)
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
$ 17.96 $ 15.24 $ 13.45 $ 19.16 $ 17.13 $ 15.27 $ 14.88 $14.14
0.31 0.08 - 0.44 0.37 0.40 0.31 0.09
1.68 2.86 1.79 3.39 2.75 2.14 0.64 0.73
- -------------------------------------------------------------------------------------------------------------------------
1.99 2.94 1.79 3.83 3.12 2.54 0.95 0.82
- - - (0.45) (0.35) (0.40) (0.30) (0.08)
- - - (0.02) - (0.03) - -
(1.34) (0.22) - (1.92) (0.74) (0.25) (0.26) -
- - - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
(1.34) (0.22) - (2.39) (1.09) (0.68) (0.56) (0.08)
- -------------------------------------------------------------------------------------------------------------------------
$ 18.61 $ 17.96 $ 15.24 $ 20.60 $ 19.16 $ 17.13 $ 15.27 $14.88
- -------------------------------------------------------------------------------------------------------------------------
11.97% 19.36% 13.31 % 22.11% 19.13% 17.24% 6.54% 5.54%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
$40,552 $20,372 $10,503 $63,509 $24,210 $19,888 $17,773 $9,849
1.45% 1.42% 1.65 %(a) 1.35% 1.36% 1.69% 1.75% 1.56%(a)
1.45% 1.42% 1.65 %(a) 1.35% 1.36% 1.69% 1.75% 1.94%(a)
2.29% 0.62% (0.06 %)(a) 2.63% 2.08% 2.53% 2.20% 2.35%(a)
192% 125% 122 % 75% 72% 62% 78% 13%
$0.0644 $0.0669 $0.0515 $0.0492
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
Mentor Funds
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Municipal Income Portfolio
---------------------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of period $ 15.04 $ 14.92 $ 14.42 $ 16.05 $ 14.76
Income from investment operations
Net investment income (loss) 0.81 0.82 0.81 0.82 0.92
Net realized and unrealized gain (loss) on
investments 0.49 0.12 0.51 (1.54) 1.32
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.30 0.94 1.32 (0.72) 2.24
Less distributions
Distributions from net investment income (0.81) (0.82) (0.82) (0.81) (0.92)
Distributions in excess of net investment
income - - - - (0.03)
Distributions from capital gains (0.03) - - (0.10) -
Distributions in excess of
capital gain - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.84) (0.82) (0.82) (0.91) (0.95)
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of Period $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05
- ------------------------------------------------------------------------------------------------------------------------------
Total Return 8.89% 6.46% 9.46% (4.83%) 16.00%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $29,394 $17,558 $20,460 $25,056 $29,245
Ratio of expenses to average
net assets 1.22% 1.24% 1.43% 1.24% 0.71%
Ratio of expenses to average
net assets excluding waiver 1.22% 1.24% 1.43% 1.33% 1.39%
Ratio of net investment income
to average net assets 5.09% 5.47% 5.56% 5.43% 5.92%
Portfolio turnover rate 59% 46% 43% 87% 88%
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.
See notes to financial statements.
70
<PAGE>
<TABLE>
<CAPTION>
Short-Duration
Quality Income Portfolio Income Portfolio
- --------------------------------------------------------------- ------------------------------------------------
Year Year Year Year Year Year Year Period
Ended Ended Ended Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/97 9/30/96 9/30/95*
<S> <C>
- --------------------------------------------------------------------------------------------------------------------
$ 12.91 $ 13.29 $ 12.75 $ 14.04 $ 14.39 $ 12.50 $12.68 $12.74
0.97 0.89 0.84 0.84 1.06 0.77 0.82 0.22
0.26 (0.37) 0.61 (1.30) (0.31) 0.12 (0.23 ) (0.03)
- --------------------------------------------------------------------------------------------------------------------
1.23 0.52 1.45 (0.46) 0.75 0.89 0.59 0.19
(0.90) (0.89) (0.85) (0.83) (1.06) (0.76) (0.77 ) (0.22)
)
(0.06 (0.01) (0.06) - (0.04) (0.01) - (0.03)
- - - - - - - -
- - - - - - - -
- --------------------------------------------------------------------------------------------------------------------
(0.96) (0.90) (0.91) (0.83) (1.10) (0.77) (0.77 ) (0.25)
- --------------------------------------------------------------------------------------------------------------------
$ 13.18 $ 12.91 $ 13.29 $ 12.75 $ 14.04 $ 12.62 $12.50 $12.68
- --------------------------------------------------------------------------------------------------------------------
9.86% 4.09% 11.82% (3.39%) 5.41% 7.33% 4.80 % 1.51%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
$53,176 $21,092 $24,472 $30,142 $47,780 $27,619 $7,450 $1,002
1.05% 1.05% 1.32% 1.38% 1.04% 0.86% 0.86 % 0.71%(a)
1.18% 1.31% 1.36% 1.39% 1.22% 1.12% 1.26 % 1.00%(a)
7.01% 6.84% 6.73% 6.33% 7.31% 6.00% 5.90 % 4.10%(a)
100% 254% 368% 455% 102% 75% 411 % 126%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
Mentor Funds
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Growth Portfolio
----------------------------------------------------------------------------
Year Year Period Year Year
Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95* 12/31/94 12/31/93
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of period $ 18.29 $ 16.05 $ 12.15 $ 13.78 $ 12.81
Income from investment operations
Net investment income (loss) (0.22) (0.17) (0.13) (0.15) (0.08)
Net realized and unrealized gain
(loss) on investments 4.01 4.15 4.03 (0.47) 2.07
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.79 3.98 3.90 (0.62) 1.99
Less distributions
Distributions from net investment income - - - - -
Distributions in excess of net investment
income - - - - -
Distributions from capital gains (2.55) (1.74) - (1.00) (1.02)
Distributions in excess of
capital gains - - - (0.01) -
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (2.55) (1.74) - (1.01) (1.02)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.53 $ 18.29 $ 16.05 $ 12.15 $ 13.78
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 24.66% 28.18% 32.10% (4.48%) 15.60%
- -----------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $506,230 $371,578 $246,326 $190,126 $186,978
Ratio of expenses to average net assets 2.03% 2.03% 2.08%(a) 2.01% 2.02%
Ratio of expenses to average net assets
excluding waiver 2.03% 2.03% 2.08%(a) 2.01% 2.02%
Ratio of net investment income (loss) to
average net assets (1.42%) (1.13%) (1.20%)(a) (1.20%) (1.12%)
Portfolio turnover rate 77% 105% 70% 77% 64%
Average commission rate on portfolio
transactions $ 0.0651 $ 0.0602
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
(d) Reflects operations for the period from March 29, 1994 (commencement of
operations), to September 30, 1994.
See notes to financial statements.
72
<PAGE>
<TABLE>
<CAPTION>
Perpetual Global Portfolio Capital Growth Portfolio
- ---------------------------------------------- --------------------------------------------------------------------
Year Year Year Period Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94(d) 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------
$ 17.46 $ 15.67 $ 14.15 $14.18 $ 18.92 $ 15.79 $ 14.80 $ 15.23 $ 14.22
(0.02) (0.05) (0.05) (0.04) - (0.04) 0.25 (0.04) 0.05
3.51 2.64 1.57 0.01 5.55 3.67 2.53 (0.26) 1.02
- -----------------------------------------------------------------------------------------------------------------------
3.49 2.59 1.52 (0.03) 5.55 3.63 2.78 (0.30) 1.07
- - - - - - - - (0.05)
- - - - - - - - (0.01)
(0.63) (0.80) - - (2.79) (0.50) (1.79) (0.13) -
- - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------
(0.63) (0.80) - - (2.79) (0.50) (1.79) (0.13) (0.06)
- -----------------------------------------------------------------------------------------------------------------------
$ 20.32 $ 17.46 $ 15.67 $14.15 $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23
- -----------------------------------------------------------------------------------------------------------------------
20.74% 17.39% 10.74% (0.21%) 33.88% 23.64% 19.26% (2.00%) 7.52%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
$89,030 $42,131 $12,667 $7,987 $113,587 $68,213 $57,648 $41,106 $57,030
2.64% 2.70% 2.72% 2.79%(a) 2.16% 2.18% 2.56% 2.46% 2.24%
2.64% 2.70% 2.79% 3.93%(a) 2.16% 2.18% 2.56% 2.46% 2.34%
(0.68%) (0.91%) (0.40%) (0.82%)(a) (0.22%) (0.24%) (0.41%) (0.22%) 0.21%
128% 130% 155% 2% 64% 98% 157% 149% 192%
$0.0319 $0.0320 $ 0.0697 $0.0688
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
Mentor Funds
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Strategy Portfolio
-------------------------------------------------------------------------------
Year Year Period Year Period
Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95* 12/31/94 12/31/93(e)
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of period $ 17.79 $ 15.21 $ 12.24 $ 12.70 $ 12.50
Income from investment operations
Net investment income (loss) 0.26 (0.03) - (0.06) -
Net realized and unrealized gain (loss) on
investments 1.58 2.83 2.97 (0.40) 0.20
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.84 2.80 2.97 (0.46) 0.20
Less distributions
Distributions from net investment income - - - - -
Distributions in excess of net investment
income - - - - -
Distributions from capital gains (1.34) (0.22) - - -
Distributions in excess of
capital gains - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.34) (0.22) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 18.29 $ 17.79 $ 15.21 $ 12.24 $ 12.70
- ------------------------------------------------------------------------------------------------------------------------------
Total Return 11.19% 18.48% 24.26% (3.61%) 1.60%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $301,885 $288,494 $224,643 $179,274 $ 122,177
Ratio of expenses to average net assets 2.20% 2.19% 2.31%(a) 2.19% 2.06%(a)
Ratio of expenses to average net assets
excluding waiver 2.20% 2.19% 2.31%(a) 2.19% 2.06%(a)
Ratio of net investment income (loss) to
average net assets 1.54% (0.19%) 0.02%(a) (0.54%) 0.08%(a)
Portfolio turnover rate 192% 125% 122% 143% 0%
Average commission rate on portfolio
transactions $ 0.0644 $ 0.0669
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
(e) Reflects operations for the period of October 29, 1993 (commencement of
operations), to December 31, 1993.
(f) Reflects operations for the period from May 24, 1993 (commencement of
operations), to September 30, 1993.
See notes to financial statements.
74
<PAGE>
<TABLE>
<CAPTION>
Income and Growth Portfolio Municipal Income Portfolio
- ----------------------------------------------------------- -------------------------------------------------------------------
Year Year Year Year Period Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93(f) 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
$ 19.18 $ 17.14 $ 15.28 $ 14.91 $ 14.14 $ 15.05 $ 14.95 $ 14.43 $ 16.06 $ 14.78
0.34 0.23 0.28 0.21 0.05 0.71 0.75 0.74 0.74 0.82
3.35 2.76 2.14 0.61 0.77 0.52 0.11 0.52 (1.54) 1.32
- -----------------------------------------------------------------------------------------------------------------------------------
3.69 2.99 2.42 0.82 0.82 1.23 0.86 1.26 (0.80) 2.14
(0.34) (0.21) (0.28) (0.19) (0.05) (0.71) (0.76) (0.74) (0.73) (0.82)
(0.02) - (0.03) - - - - - - (0.04)
(1.92) (0.74) (0.25) (0.26) - (0.08) - - (0.10) -
- - - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
(2.28) (0.95) (0.56) (0.45) (0.05) (0.79) (0.76) (0.74) (0.83) (0.86)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91 $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06
- -----------------------------------------------------------------------------------------------------------------------------------
21.24% 18.26% 16.32% 5.66% 5.54% 8.33% 5.87% 9.01% (5.34%) 15.27%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
$107,816 $66,548 $46,678 $43,219 $ 18,127 $44,272 $37,191 $39,493 $46,157 $50,976
2.10% 2.13% 2.43% 2.44% 2.31%(a) 1.72% 1.74% 1.92% 1.74% 1.21%
2.10% 2.13% 2.43% 2.44% 2.69%(a) 1.72% 1.74% 1.92% 1.86% 1.89%
1.87% 1.32% 1.78% 1.51% 1.60%(a) 4.60% 4.95% 5.07% 4.93% 5.42%
75% 72% 62% 78% 13% 59% 46% 43% 87% 88%
$0.0515 $0.0492
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
Mentor Funds
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Quality Income Portfolio
------------------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of period $ 12.93 $ 13.31 $ 12.76 $ 14.06 $ 14.40
Income from investment operations
Net investment income (loss) 0.86 0.84 0.79 0.82 0.99
Net realized and unrealized gain (loss) on
investments 0.30 (0.38) 0.61 (1.37) (0.31)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.16 0.46 1.40 (0.55) 0.68
Less distributions
Distributions from net investment income (0.87) (0.84) (0.79) (0.75) (0.99)
Distributions in excess of net investment income (0.04) - (0.06) - (0.03)
Distributions from capital gains - - - - -
Distributions in excess of capital gains - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.91) (0.84) (0.85) (0.75) (1.02)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 13.18 $ 12.93 $ 13.31 $ 12.76 $ 14.06
- -------------------------------------------------------------------------------------------------------------------------------
Total Return 9.29% 3.57% 11.33% (3.97%) 4.86%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $75,046 $58,239 $62,155 $77,888 $127,346
Ratio of expenses to average net assets 1.55% 1.55% 1.74% 1.88% 1.54%
Ratio of expenses to average net assets excluding
waiver 1.68% 1.81% 1.79% 1.90% 1.72%
Ratio of net investment income (loss)
to average net assets 6.51% 6.36% 6.24% 6.21% 6.81%
Portfolio turnover rate 100% 254% 368% 455% 102%
Average commission rate on portfolio transactions
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
76
<PAGE>
Mentor Funds
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Short-Duration Income Portfolio
------------------------------------------------------------------
Year Year Period Period
Ended Ended Ended Ended
9/30/97 9/30/96 9/30/95* 12/31/94(g)
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of period $ 12.50 $ 12.67 $ 12.18 $ 12.50
Income from investment operations
Net investment income (loss) 0.73 0.73 0.59 0.41
Net realized and unrealized gain (loss) on investments 0.12 (0.17) 0.52 (0.29)
- --------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.85 0.56 1.11 0.12
Less distributions
Distributions from net investment income (0.72) (0.73) (0.59 ) (0.41)
Distributions in excess of net investment income (0.01) - (0.03 ) (0.03)
Distributions from capital gains - - - -
Distributions in excess of capital gains - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.73) (0.73) (0.62 ) (0.44)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.62 $ 12.50 $ 12.67 $ 12.18
- --------------------------------------------------------------------------------------------------------------------------------
Total Return 6.96% 4.53% 9.22% 0.95%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $27,089 $24,517 $19,871 $17,144
Ratio of expenses to average net assets 1.16% 1.16% 1.20%(a) 1.29%(a)
Ratio of expenses to average net assets excluding waiver 1.42% 1.56% 1.70%(a) 1.29%(a)
Ratio of net investment income (loss)
to average net assets 5.70% 5.60% 5.04%(a) 4.90%(a)
Portfolio turnover rate 75% 411% 126% 166%
Average commission rate on portfolio transactions
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from January 1, 1995 to September 30, 1995.
(a) Annualized.
(g) Reflects operations for the period from April 29, 1994 (commencement of
operations), to December 31, 1994.
See notes to financial statements.
77
<PAGE>
Mentor Funds
Notes to Financial Statements
September 30, 1997
Note 1: Organization
Mentor Funds is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. Mentor Funds consists of ten
separate Portfolios (hereinafter each individually referred to as a "Portfolio"
or collectively as the "Portfolios") at
September 30, 1997, as follows:
Mentor Growth Portfolio
("Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Strategy Portfolio
("Strategy Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor Balanced Portfolio
("Balanced Portfolio")
Mentor Institutional U.S. Government Money Market Portfolio
("Government Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
These financial statements do not include the Balanced Portfolio and the
Government Portfolio. The Balanced Portfolio is not currently being offered to
new investors.
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 Municipal Income
Portfolio and Quality Income Portfolio and 1% for Short-Duration Income
Portfolio) payable at the time of purchase. Class B shares are sold subject to a
contingent deferred sales charge payable upon redemption which decreases
depending on when shares were purchased and how long they have been held.
Note 2: Significant Accounting Policies The following is a summary of
significant accounting policies consistently followed by the Portfolios in the
preparation of their financial statements. The policies are in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect amounts reported therein. Although actual
results could differ from these estimates, any such differences are expected to
be immaterial to the net assets of the Portfolios.
(a) Valuation of Securities
Listed securities held by the Growth Portfolio, Global Portfolio, Capital Growth
Portfolio, Strategy Portfolio and Income and Growth
78
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
Portfolio traded on national securities 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 Income and Growth Portfolio, Quality
Income Portfolio and Short-Duration Income Portfolio are valued at the mean
between the over-the-counter bid and asked prices as furnished by an independent
pricing service. Listed corporate bonds, other fixed income securities, mortgage
backed securities, mortgage related, asset-backed and other related securities
are valued at the prices provided by an independent pricing service. Security
valuations not available from an independent pricing service are provided by
dealers approved by the Portfolios' Board of Trustees. In determining value, the
pricing services use information with respect to transactions in such
securities, market transactions in comparable securities, various relationships
between securities, and yield to maturity.
Municipal bonds, held by the Municipal Income Portfolio, are valued at fair
value. An independent pricing service values the Portfolio's municipal bonds
taking into consideration yield, stability, risk, quality, coupon, maturity,
type of issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities. The pricing service does not rely exclusively on quoted prices. 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 U.S. 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
79
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
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' Board of Trustees. Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, Mentor Funds could receive less than the repurchase price on the
sale of collateral securities.
(c) Borrowings
Each of the Portfolios (except for the Growth Portfolio, Strategy Portfolio and
Municipal Income Portfolio) may, under certain circumstances, borrow money
directly or through dollar-roll and reverse repurchase agreements (arrangements
in which the Portfolio sells a security for a percentage of its market value
with an agreement to buy it back on a set date). Each Portfolio may borrow up to
one-third of the value of its net assets.
The average daily balance of reverse repurchase agreements outstanding for
Short-Duration Income Portfolio during the year ended September 30, 1997, was
$4,479,545 or $1.48 per share based on average shares outstanding during the
period at a weighted average interest rate of 5.41%. The maximum amount of
borrowings outstanding for any day during the period was $7,007,350 (including
accrued interest), as of January 28, 1997, at an interest rate of 5.40% and was
22.21% of total assets.
(d) Portfolio Securities Loaned
Each of the Portfolios (except for Municipal Income Portfolio) is authorized by
the Board of Trustees to participate in securities lending transactions.
The Portfolios may receive fees for participating in securities lending
transactions. During the period that a security is out on
80
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
loan, Portfolios continue to receive interest or dividends on the securities
loaned. The Portfolios receive collateral in an amount at least equal to, at all
times, the fair value of the securities loaned plus interest. When cash is
received as collateral, the Portfolios record an asset and obligation for the
market value of that collateral. Cash received as collateral may be reinvested,
in which case that security is recorded as an asset of the Portfolios. As of
September 30, 1997, cash collateral was reinvested in U.S. Treasury securities
and money market funds. Variations in the market value of the securities loaned
occurring during the term of the loan are reflected in the value of the
Portfolios.
At September 30, 1997, certain Portfolios had loaned securities to brokers which
were collateralized by cash, U.S. Treasury securities and letters of credits.
Income from securities lending activities amounted to $6,105, $25,544, $7,032,
and $160 for the Global Portfolio, Strategy Portfolio, Income and Growth
Portfolio and Quality Income Portfolio, respectively, for the year ended
September 30, 1997. The risks to the Portfolio from securities lending are that
the borrower may not provide additional collateral when required or return the
securities when due. As of September 30, 1997, the value of the securities on
loan and the value of the related collateral were as follows:
Letter of
Securities Cash Securities Credit
Portfolio on Loan Collateral Collateral Collateral
- --------------------------------------------------------------------------------
Global $ 5,628,581 $ 5,218,096 $ 1,228,339 $312,925
Capital Growth 21,114,772 21,952,614
Strategy 78,120,702 28,628,733 53,110,646
Income and Growth 42,126,111 39,343,705 4,396,034
Quality Income 8,748,341 9,079,500
- --------------------------------------------------------------------------------
(e) Dollar-Roll Transactions
Each of the Portfolios (except for the Growth Portfolio, Strategy Portfolio and
Municipal Income Portfolio) 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 and credit histories.
81
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
(f) Security Transactions and Investment Income
Security transactions for the Portfolios are accounted for on trade date.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis. Interest income (except for Municipal Income Portfolio)
includes interest and discount earned (net of premium) on short-term
obligations, and interest earned on all other debt securities including original
issue discount as required by the Internal Revenue Code. Discounts and premiums
on securities purchased are amortized over the lives of the respective
securities. Dividends to shareholders and capital gain distributions, if any,
are recorded on the ex-dividend date.
Interest income for the Municipal Income Portfolio includes interest earned net
of premium, and original issue discount as required by the Internal Revenue
Code.
(g) Federal Income Taxes
No provision for federal income taxes has been made since it is each Portfolio's
policy to comply with the provisions applicable to regulated investment
companies under the Internal Revenue Code and to distribute to its shareholders
within the allowable time limit substantially all taxable income and realized
capital gains.
Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends to
meet certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Portfolio to pay tax-exempt interest
dividends. The portion of such interest, if any, earned on private purpose
municipal bonds issued after August 7, 1986, may by considered a tax preference
item to shareholders.
At September 30, 1997, Quality income Portfolio for federal tax purposes, had a
capital loss carryforward of approximately $14,860,000. Pursuant to the Internal
Revenue Code, such capital loss carryforwards expire as follows: $820,000 in
2001, $3,680,000 in 2002, $7,320,000 in 2003, $1,710,000 in 2004 and $1,330,000
in 2005.
At September 30, 1997, Short-Duration Income Portfolio for federal tax purposes,
had a capital loss carryforward of approximately $106,000. Pursuant to the
Internal Revenue Code, such capital loss carryforward will expire in 2005.
At September 30, 1997, Municipal Income Portfolio for federal tax purposes, had
a capital loss carryforward of approximately $1,930,000. Pursuant to the
Internal Revenue Code, such capital loss carryforwards expire as
82
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
follows: $320,000 in 2003 and $1,610,000 in 2004.
Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise relieve the Portfolios of
any liability for federal tax.
(h) When-Issued and Delayed Delivery Transactions
The Portfolios may engage in when-issued or delayed delivery transactions. To
the extent the Portfolios engage in such transactions, they will do so for the
purpose of acquiring portfolio securities consistent with their investment
objectives and policies and not for the purpose of investment leverage. The
Portfolios will record a when-issued security and the related liability on the
trade date. Until the securities are received and paid for, the Portfolios will
maintain security positions such that sufficient liquid assets will be available
to make payment for the securities purchased. Securities purchased on a
when-issued or delayed delivery basis are marked to market daily from the trade
date and begin earning interest on the settlement date.
(i) 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 portfolio 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 their 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, 1997, the Municipal Income
Portfolio had realized losses of $49,049 on closed futures contracts.
83
<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. At September 30, 1997, the Municipal Income Portfolio had
an open position in the following futures contracts:
Net
Number of Contract Unrealized
Contracts Contracts Expiration Value Appreciation
- ----------------------------------------------------------------
25 U.S. Long Bond 12/97 $2,500,000 $6,048
- ----------------------------------------------------------------
(j) Options
In order to produce incremental earnings or protect against changes in the value
of portfolio securities, Municipal Income Portfolio, 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.
Option 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, 1997, Municipal Income Portfolio had realized losses of $9,025 on closed
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. Activity in written options for the Municipal Income
84
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
Portfolio for the year ended September 30, 1997 was as follows:
Face Value
Premium of Contracts
- -------------------------------------------------------
Options outstanding at
September 30, 1996 - -
Options written $36,693 $ 10,000,000
Options exercised - -
Options expired - -
Options closed - -
- -------------------------------------------------------
Options outstanding at
September 30, 1997 $36,693 $ 10,000,000
- -------------------------------------------------------
Net unrealized appreciation on put options written for the year ended September
30, 1997 was $32,005.
(k) Residual Interests
Quality Income Portfolio and Short-Duration Income Portfolio invest in mortgage
security residual interests ("residuals") which are considered derivative
securities. A derivative security is any investment that derives its value from
an underlying security, asset, or market index. The Portfolios' investment in
residuals have been primarily in securities issued by proprietary mortgage
trusts. While these entities have been highly leveraged, often having
indebtedness of up to 95% of their total value, the Portfolios have not incurred
any indebtedness in the course of making these residual investments; nor have
the Portfolios' assets been pledged to secure the indebtedness of the issuing
structure or the Portfolios' investment in the residuals. In consideration of
the risk associated with investment in residual securities, it is the
Portfolios' policy to limit their exposure at the time of purchase to no more
than 20% of their total assets. The Portfolios will continue to invest in
residual securities because, in the opinion of the Investment Manager, these
investments can play a key role in fulfilling the Portfolios' objective of
achieving high monthly income through providing a means of economic leverage.
(l) Interest-Rate Swap
An interest-rate swap is a contract between two parties on a specified principal
amount (referred to as the notional principal) for a specified period. In the
most common instance, a swap involves the exchange of streams of variable and
fixed-rate interest payments. During the term of the swap, changes in the value
of the swap are recognized as unrealized gains or losses by marking-to-market to
reflect the market value of the swap. When the swap is terminated, the Portfolio
will record a realized gain or loss. As of September 30, 1997, Quality Income
Portfolio and Short-Duration Income Portfolio had entered into the following
interest rate swap agreements. In each agreement, the Portfolios have exchanged
fixed rates for floating rates. The terms vary among the contracts but provide
for the interest rate differential to be settled on a semi annual basis. During
the year ended
85
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
September 30, 1997, net cash payments of $153,396 by Quality Income Portfolio
and $47,522 by Short-Duration Income Portfolio, were received in connection with
the interest rate swap agreement. At September 30, 1997, the net interest
receivable for Quality Income Portfolio and Short-Duration Income Portfolio were
$109,922 and $14,928, respectively.
<TABLE>
<CAPTION>
Rate Paid Rate Received
by the by the Net
Swap Notional Portfolio Portfolio Floating Termination Unrealized
Portfolio Counter-Party Principal at 9/30/97 at 9/30/97 Rate Index Date Gain (Loss)
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Quality Income Lehman Brothers 12,000,000 3.22% 4.77% 6-Month German LIBOR 7/17/02 $ (56,976)
Lehman Brothers 6,500,000 3.20% 6.60% 3-Month Canadian 3/7/07 230,006
Bankers Acceptance
Lehman Brothers 6,500,000 3.63% 6.39% 3-Month Canadian 2/25/07 154,874
Bankers Acceptance
Lehman Brothers 1,000,000 3.17% 6.26% 3-Month Canadian 6/18/07 171,006
Bankers Acceptance -----------
$ 498,910
-----------
-----------
Short-Duration Lehman Brothers 5,000,000 3.20% 5.81% 3-Month Canadian 3/7/02 $ 65,022
Income Bankers Acceptance
Lehman Brothers 2,500,000 3.22% 4.77% 6-Month German LIBOR 7/17/02 (11,150)
-----------
$ 53,872
-----------
-----------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(m) Deferred Expenses
Costs incurred by the Portfolios in connection with their initial share
registration and organization costs were deferred by the Portfolios and are
being amortized on a straight-line basis over a five-year period.
(n) Distributions
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for net
operating losses 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 annually to
all shareholders invested in the Growth Portfolio, Strategy Portfolio, Capital
Growth 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
86
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
payments are requested by shareholders in writing to Mentor. Capital gains
realized by each Portfolio, if any, are paid at least annually.
Note 4: Investment Advisory and Management and Administration Agreements
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment
adviser, receives for its services an annual investment advisory fee not to
exceed the following percentages of the average daily net assets of the
particular Portfolio: Growth Portfolio, 0.70%; Capital Growth Portfolio, 0.80%;
Strategy Portfolio, 0.85%; Income and Growth Portfolio, 0.75%; Municipal Income
Portfolio, 0.60%; Quality Income Portfolio, 0.60%; and Short-Duration Income
Portfolio, 0.50%.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC
("Mentor") which is in turn a partially owned subsidiary of Wheat First Butcher
Singer, Inc., ("Wheat") and EVEREN Capital Corporation (see "Acquisition of
Advisor" below).
Mentor Advisors pays Van Kampen, the sub-adviser of Municipal Income Portfolio,
an annual fee expressed as a percentage of the Portfolio's average net assets as
follows: 0.25% of the first $60 million of the Portfolio's average net assets
and 0.20% of the Portfolio's average net assets over $60 million. Wellington
Management Company, the sub-adviser to the Income and Growth Portfolio, receives
from the Investment Adviser an annual fee expressed as a percentage of that
Portfolio's assets as follows: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.275% on the next $150 million of the
Portfolio's average net assets, 0.225% of the next $300 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's net assets over
$500 million. No performance or incentive fees are paid to the sub-advisers.
Under certain Sub-Advisory Agreements, the particular sub-adviser may, from time
to time, voluntarily waive some or all of its sub-advisory fee charged to the
Investment Adviser and may terminate any such voluntary waiver at any time in
its sole discretion.
The Global Portfolio has entered into an Investment Advisory Agreement with
Mentor Perpetual Advisors, L.L.C. ("Mentor Perpetual"). Mentor Perpetual is
owned equally by Mentor and Perpetual PLC, a diversified financial services
holding company. Under this agreement, Mentor Perpetual's management fee is
accrued daily and paid monthly at an annual rate of 1.10% of its average daily
net assets up to and including $75 million and 1.00% of the average daily net
assets of the Portfolio in excess of $75 million.
87
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
For the year ended September 30, 1997, Mentor Advisors and sub-advisers, earned
and voluntarily waived the following advisory fees:
Management
Management Fee Sub-Adviser
Fee Voluntarily Fee
Portfolio Earned Waived Earned
- -------------------------------------------------------------------
Growth $3,238,498 - -
Global 998,592 - -
Capital Growth 1,063,903 - -
Strategy 2,807,549 - -
Income and Growth 947,267 - $ 373,115
Municipal Income 370,232 - 153,577
Quality Income 572,539 $123,214 -
Short-Duration Income 185,354 55,521 -
- -------------------------------------------------------------------
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, 1997, Mentor earned
the following administration fees:
Administration
Administration Fee
Fee Voluntarily
Portfolio Earned Waived
- ------------------------------------------------------
Growth $462,643 -
Global 92,753 -
Capital Growth 132,988 -
Strategy 330,300 -
Income and Growth 126,302 -
Municipal Income 61,705 -
Quality Income 95,423 -
Short-Duration Income 37,151 $ 37,151
- ------------------------------------------------------
The Portfolios also provide direct reimbursement to Mentor for certain legal and
compliance administration, investor relation and operation related costs not
covered under the Investment Management Agreement. For the year ended September
30, 1997, these direct reimbursements were as follows:
Direct
Portfolio Reimbursements
- ------------------------------------------------------
Growth $ 17,457
Global 3,672
Capital Growth 5,036
Strategy 11,846
Income and Growth 4,851
Municipal Income 2,293
Quality Income 3,617
Short-Duration Income 1,443
- ------------------------------------------------------
Acquisition of Advisor
On August 20, 1997, Wheat entered into an Agreement and Plan of Merger
("Merger") with First Union Corporation ("First Union"), pursuant to which Wheat
would be merged into First Union. First Union is a bank holding company that as
of September 30, 1997 had assets of $144 billion. Upon consummation of the
Merger (expected to occur as early of December of this year), First Union will
88
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
become the owner of a majority of the beneficial interest in Mentor Advisors and
Mentor Perpetual Advisors, LLC ("Mentor Perpetual").
At a meeting held on October 14, 1997, the Trustees of Mentor Funds approved new
Investment Advisory, Sub-Advisory and Administration Agreements which will
replace the existing agreements. Each of the existing agreements will by its
terms terminate upon the consummation of the Merger, since the Merger will
constitute a change in control of Mentor Advisors and Mentor Perpetual for
purposes of the Investment Company Act of 1940, as amended ("1940 Act"). The
shareholders of each Portfolio at a meeting to be held on December 22, 1997,
will vote to approve the new Investment Advisory Agreements with Mentor Advisors
and Mentor Perpetual. Each new agreement is substantially identical to the
existing agreements it replaces, other than its effective and termination dates.
Note 5: Distribution Agreement and Other Transactions with Affiliates
The Class B shares of the Portfolios have adopted a Distribution Plan (the Plan)
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a
Distribution Agreement between the Portfolios and Mentor Distributors, LLC
("Mentor Distributors") a wholly-owned subsidiary of Mentor, Mentor Distributors
was appointed distributor of the Portfolios. To compensate Mentor Distributors
for the services it provides and for the expenses it incurs under the
Distribution Agreement, the Portfolios pay a distribution fee, which is accrued
daily and paid monthly at the annual rate of 0.75% of the Portfolios' average
daily net assets for the Growth Portfolio, Capital Growth Portfolio, Strategy
Portfolio, Income and Growth Portfolio and Global Portfolio, 0.50% of the
average daily net assets of the Quality Income Portfolio and Municipal Income
Portfolio, and 0.30% of the average daily net assets for the Short-Duration
Income Portfolio.
Mentor Distributors may select financial institutions, such as investment
dealers and banks to provide sales support services as agents for their clients
or customers who beneficially own Class B shares of the Portfolios. Financial
institutions will receive fees from Mentor Distributors based upon Class B
shares owned by their clients or customers.
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to Class A and Class B shares of each Portfolio. Under the Service Plan,
financial institutions will enter into shareholder service agreements with the
Portfolios to provide administrative support services to their customers who
from time to time may be owners of record or beneficial owners of Class
89
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
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, 1997, distribution fees and shareholder servicing
fees were as follows:
Shareholder Servicing
Distribution Fees
Portfolio Fees Class A Class B
- ----------------------------------------------------------------
Growth $2,989,388 $200,471 $956,135
Global 481,581 79,427 152,456
Capital Growth 656,743 121,929 210,541
Strategy 2,224,816 97,981 727,769
Income and Growth 645,243 117,034 198,722
Municipal Income 197,295 60,943 93,320
Quality Income 317,465 96,471 142,087
Short-Duration Income 73,558 44,783 47,894
- ----------------------------------------------------------------
Note 6: Investment Transactions
Purchases and sales of investments (excluding short-term investments), for the
year ended September 30, 1997, were as follows:
Portfolio Purchases Sales
- -------------------------------------------------------
Growth $400,857,927 $325,256,398
Global 177,473,044 111,627,678
Capital Growth 114,195,880 76,658,517
Strategy 506,972,997 485,708,182
Income and Growth 150,323,707 88,939,354
Municipal Income 49,813,517 34,704,401
Quality Income 108,740,652 84,124,021
Short-Duration Income 51,127,040 26,049,720
- -------------------------------------------------------
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
$422,370,775, for Growth Portfolio, $121,852,593 for Global Portfolio,
$140,463,024 for Capital Growth Portfolio, $298,789,925 for Strategy Portfolio,
$153,433,501, for Income and Growth Portfolio, $70,636,357 for Municipal Income
Portfolio, $122,961,885 for Quality Income Portfolio and $51,401,740 for
Short-Duration Income Portfolio at September 30, 1997. Gross unrealized
appreciation and depreciation of investments at September 30, 1997, based on
such costs were as follows:
Gross Gross Net
Unrealized Unrealized Unrealized
Portfolio Appreciation Depreciation Appreciation
- ------------------------------------------------------------------------
Growth $193,817,934 $(3,911,995 ) $189,905,939
Global 20,235,604 (3,198,431 ) 17,037,173
Capital Growth 39,374,296 (637,273 ) 38,737,023
Strategy 38,381,331 (2,375,828 ) 36,005,503
Income and Growth 16,708,325 (616,913 ) 16,091,412
Municipal Income 4,638,696 (68,713 ) 4,569,983
Quality Income 1,655,335 (440,435 ) 1,214,900
Short-Duration Income 324,723 (102,919 ) 221,804
- ------------------------------------------------------------------------
Note 8: Forward Foreign Currency Exchange Contracts
In connection with portfolio purchases and sales of securities denominated in a
foreign currency, Global Portfolio may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time Global
Portfolio may enter into contracts to hedge certain foreign currency assets.
Contracts are recorded at market value. Realized gains and losses arising from
such transactions are included in net gain (loss) on investments and forward
foreign currency exchange contracts. The Portfolio is subject to the credit risk
that the other party will not complete the obligations of the contract. At
September 30, 1997, Global Portfolio had outstanding forward contracts as set
forth below.
<TABLE>
<CAPTION>
Net Unrealized
Settlement Contracts to In Exchange Appreciation/
Date Foreign Currency Deliver/Receive Value For (Depreciation)
<S> <C>
- -----------------------------------------------------------------------------------------------------------
Purchases
10/01/97 Dutch Guilder 606,282 $ 305,401 $ 305,432 $ (31)
10/01/97 Japanese Yen 17,851,650 148,312 147,473 839
Sales
10/15/97 French Franc 20,633,550 3,494,724 3,500,000 5,276
10/01/97 German Mark 463,960 263,240 263,091 (149)
10/01/97 Japanese Yen 11,877,520 98,679 98,121 (558)
10/15/97 Swiss Franc 3,455,280 2,390,701 2,400,000 9,299
- -----------------------------------------------------------------------------------------------------------
</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 capital
shares were as follows:
<TABLE>
<CAPTION>
Year Mentor Growth Portfolio Year
Ended 9/30/97 Ended 9/30/96
Shares Dollars Shares Dollars
<S> <C>
---------------------------------------------------------
Class A:
Shares sold 5,018,130 $82,270,375 1,900,420 $31,071,851
Shares issued upon reinvestment of distributions 369,088 5,744,163 159,334 2,229,091
Shares redeemed (2,301,180) (37,823,031) (1,145,852) (19,021,763)
---------------------------------------------------------
Change in net assets from capital share
transactions 3,086,038 $50,191,507 913,902 $14,279,179
---------------------------------------------------------
Class B:
Shares sold 5,392,200 $86,290,167 4,577,893 $75,279,336
Shares issued upon reinvestment of distributions 3,348,283 51,489,284 1,885,731 26,287,441
Shares redeemed (3,140,076) (49,890,633) (1,493,872) (24,469,011)
---------------------------------------------------------
Change in net assets from capital share
transactions 5,600,407 $87,888,818 4,969,752 $77,097,766
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Perpetual Global Portfolio
Year Year
Ended 9/30/97 Ended 9/30/96
Shares Dollars Shares Dollars
<S> <C>
---------------------------------------------------------
Class A:
Shares sold 1,732,413 $32,107,036 412,686 $ 7,129,198
Shares issued upon reinvestment of distributions 26,897 463,738 21,809 331,049
Shares redeemed (270,161) (5,115,471) (132,328) (2,244,328)
---------------------------------------------------------
Change in net assets from capital share
transactions 1,489,149 $27,455,303 302,167 $ 5,215,919
---------------------------------------------------------
Class B:
Shares sold 2,325,365 $42,416,589 1,723,938 $29,034,247
Shares issued upon reinvestment of distributions 91,695 1,544,189 45,012 672,932
Shares redeemed (447,724) (8,352,236) (164,743) (2,742,660)
---------------------------------------------------------
Change in net assets from capital share
transactions 1,969,336 $35,608,542 1,604,207 $26,964,519
---------------------------------------------------------
</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 9/30/97 Ended 9/30/96
Shares Dollars Shares Dollars
<S> <C>
---------------------------------------------------------
Class A:
Shares sold 1,422,447 $28,161,248 148,975 $ 2,580,775
Shares issued upon reinvestment of distributions 264,768 4,552,490 53,208 849,718
Shares redeemed (404,404) (7,959,184) (401,455) (6,845,340)
---------------------------------------------------------
Change in net assets from capital share
transactions 1,282,811 $24,754,554 (199,272) $(3,414,847)
---------------------------------------------------------
Class B:
Shares sold 1,749,994 $33,332,019 635,818 $10,950,459
Shares issued upon reinvestment of distributions 596,608 9,983,395 111,273 1,748,109
Shares redeemed (711,342) (13,428,205) (793,484) (13,367,434)
---------------------------------------------------------
Change in net assets from capital share
transactions 1,635,260 $29,887,209 (46,393) $ (668,866)
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Mentor Strategy Portfolio Year
Ended 9/30/97 Ended 9/30/96
Shares Dollars Shares Dollars
<S> <C>
---------------------------------------------------------
Class A:
Shares sold 1,695,324 $28,517,096 625,652 $10,425,353
Shares issued upon reinvestment of distributions 91,017 1,513,610 12,905 221,980
Shares redeemed (742,169) (12,677,413) (192,977) (3,147,176)
---------------------------------------------------------
Change in net assets from capital share
transactions 1,044,172 $17,353,293 445,580 $ 7,500,157
---------------------------------------------------------
Class B:
Shares sold 2,587,892 $43,129,553 2,946,568 $48,230,745
Shares issued upon reinvestment of distributions 1,291,000 21,237,045 201,006 3,417,749
Shares redeemed (3,591,125) (60,432,366) (1,706,367) (27,999,865)
---------------------------------------------------------
Change in net assets from capital share
transactions 287,767 $ 3,934,232 1,441,207 $23,648,629
---------------------------------------------------------
</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 9/30/97 Ended 9/30/96
Shares Dollars Shares Dollars
<S> <C>
---------------------------------------------------------
Class A:
Shares sold 1,945,245 $37,552,063 193,095 $ 3,508,748
Shares issued upon reinvestment of distributions 179,904 3,303,336 69,612 1,186,199
Shares redeemed (305,497) (5,925,176) (160,516) (2,896,387)
---------------------------------------------------------
Change in net assets from capital share
transactions 1,819,652 $34,930,223 102,191 $ 1,798,560
---------------------------------------------------------
Class B:
Shares sold 1,913,241 $36,687,335 1,025,114 $18,562,371
Shares issued upon reinvestment of distributions 450,665 8,192,160 150,385 2,545,180
Shares redeemed (596,371) (11,526,154) (428,846) (7,653,268)
---------------------------------------------------------
Change in net assets from capital share
transactions 1,767,535 $33,353,341 746,653 $13,454,283
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Municipal Income Portfolio
Year Year
Ended 9/30/97 Ended 9/30/96
Shares Dollars Shares Dollars
<S> <C>
---------------------------------------------------------
Class A
Shares sold 901,683 $13,789,961 53,174 $ 797,588
Shares issued upon reinvestment of distributions 40,033 635,539 36,380 547,438
Shares redeemed (214,874) (3,272,170) (291,238) (4,349,702)
---------------------------------------------------------
Change in net assets from capital share
transactions 726,842 $11,153,330 (201,684) $(3,004,676)
---------------------------------------------------------
Class B:
Shares sold 782,655 $11,948,057 240,061 $ 3,594,252
Shares issued upon reinvestment of distributions 85,178 1,268,808 75,360 1,135,186
Shares redeemed (478,013) (7,288,249) (488,067) (7,362,086)
---------------------------------------------------------
Change in net assets from capital share
transactions 389,820 $ 5,928,616 (172,646) $(2,632,648)
---------------------------------------------------------
</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 9/30/97 Ended 9/30/96
Shares Dollars Shares Dollars
<S> <C>
---------------------------------------------------------
Class A:
Shares sold 2,838,801 $37,052,906 261,361 $ 3,431,466
Shares issued upon reinvestment of distributions 91,837 1,196,422 65,422 864,412
Shares redeemed (529,521) (6,928,329) (533,765) (6,992,390)
---------------------------------------------------------
Change in net assets from capital share
transactions 2,401,117 $31,320,999 (206,982) $(2,696,512)
---------------------------------------------------------
Class B:
Shares sold 2,058,671 $26,889,217 765,460 $10,058,721
Shares issued upon reinvestment of distributions 218,332 2,847,859 177,855 2,348,000
Shares redeemed (1,089,318) (14,250,845) (1,108,119) (14,629,662)
---------------------------------------------------------
Change in net assets from capital share
transactions 1,187,685 $15,486,231 (164,804) $(2,222,941)
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Short-Duration Income Portfolio
Year Period
Ended 9/30/97 Ended 9/30/96
Shares Dollars Shares Dollars
<S> <C>
---------------------------------------------------------
Class A:
Shares sold 2,047,670 $25,768,187 626,588 $ 7,923,068
Shares issued upon reinvestment of distributions 49,602 623,647 15,339 193,207
Shares redeemed (505,078) (6,351,983) (124,945) (1,577,491)
---------------------------------------------------------
Change in net assets from capital share
transactions 1,592,194 $20,039,851 516,982 $ 6,538,784
---------------------------------------------------------
Class B:
Shares sold 1,121,483 $14,121,033 1,146,855 $14,558,230
Shares issued upon reinvestment of distributions 89,996 1,131,691 88,449 1,119,155
Shares redeemed (1,027,042) (12,921,363) (841,749) (10,608,962)
---------------------------------------------------------
Change in net assets from capital share
transactions 184,437 $ 2,331,361 393,555 $ 5,068,423
---------------------------------------------------------
</TABLE>
95
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
Federal Tax Status of Dividends Declared (unaudited)
Long-term capital gain dividends paid during the period are presented below. For
federal income tax purposes, dividends from short-term capital gains are
classified as ordinary income. All net investment income dividends were ordinary
income, except for Municipal Income Portfolio that paid exempt income dividends.
The percentage of qualifying dividends eligible for the corporate dividends
received deduction are also listed below for the applicable Portfolios.
<TABLE>
<CAPTION>
Long-Term Tax-Exempt
Capital Gain Income Qualifying
Portfolio Dividends Dividends Dividends
<S> <C>
- ---------------------------------------------------------------------
Growth $43,402,993 - -
Global 297,522 - 8.15%
Capital Growth 6,833,049 - 29.71%
Strategy 23,298,565 - 6.11%
Income and Growth 5,823,478 - 16.59%
Municipal Income - $3,161,314 -
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</TABLE>
96
<PAGE>
Mentor Funds
Independent Auditors' Report
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The Trustees and Shareholders
Mentor Funds
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments 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 (the Funds) as of September 30, 1997, and
the related statements of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended
and the financial highlights for Class A Shares and Class B Shares for each of
the years or periods in the five-year period ended September 30, 1997 as
presented on pages 67 to 77 of this report. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1997 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, 1997, the results of their operations for the year then
ended, the changes in their net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years or periods
in the five-year period ended September 30, 1997 as presented on pages 67 to 77,
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Boston, Massachusetts
November 12, 1997
97
<PAGE>
Mentor Funds
Shareholder Information
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Trustees
Daniel J. Ludeman, Trustee & Chairman
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
Arnold H. Dreyfuss, Trustee
Former Chairman
and Chief Executive Officer
Hamilton Beach/Proctor-Silex, Inc.
Thomas F. Keller, Trustee
Former Dean, Fuqua School of Business
Duke University
Louis W. Moelchert, Jr., Trustee
Vice President for Business & Finance
University of Richmond
Stanley F. Pauley, Jr., Trustee
Chairman and Chief Executive Officer
Carpenter Company
Troy A. Peery, Jr., Trustee
President
Heilig-Meyers Company
Peter J. Quinn, Jr., Trustee
Managing Director
Mentor Investment Group, LLC
Officers
Paul F. Costello, President
Managing Director
Mentor Investment Group, LLC
Terry L. Perkins, Treasurer
Senior Vice President
Mentor Investment Group, LLC
John M. Ivan, Secretary
Managing Director
and Assistant General Counsel
Wheat First Butcher Singer, Inc.
Michael A. Wade, Assistant Treasurer
Vice President
Mentor Investment Group, LLC
This report is authorized for distribution to prospective investors only when
preceded or accompanied by a Mentor Fund Prospectus, which contains complete
information about fees, sales charges and expenses. Please read it carefully
before you invest or send money.
<PAGE>
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