Mentor Funds
----------------------
Semi-Annual Report
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March 31, 1998
[MENTOR INVESTMENT GROUP LOGO]
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Mentor Funds
Semi-Annual Report
Table of Contents
March 31, 1998
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Page
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Message from the Chairman and President .................. 1
Growth Portfolio ......................................... 3
Perpetual Global Portfolio ............................... 13
Capital Growth Portfolio ................................. 26
Strategy Portfolio ....................................... 33
Income and Growth Portfolio .............................. 41
Municipal Income Portfolio ............................... 51
Quality Income & Short-Duration Income Portfolios ........ 61
Notes to Financial Statements ............................ 77
Shareholder Information .................................. Inside back cover
<PAGE>
Mentor Funds
Message from the Chairman and President
March 31, 1998
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To Our Shareholders:
It is our privilege to provide you with the Semi-Annual Report for the six
months ended March 31, 1998 for Mentor Funds.
During the period covered by this report, the bulls continued to charge on.
The strong gains registered by the leading domestic stock averages over this
time may be considered close to astonishing. The S&P 500 gained 17.2% during the
six months.* In the first three months of 1998 the S&P 500 gained almost 14%,
climbing 5% in the final month of the quarter alone. It was the Index's
thirteenth consecutive quarterly gain. Equally remarkable, the 1990s have
witnessed the strongest bull market since the exponential advance of the 1920s.
In the commentaries that follow, the management teams present their perspectives
on the markets and their strategies for investing your assets. Performance
information for each Portfolio, relative to the appropriate index, is also
included in the reports.
Mentor Investment Group**
[GRAPH OMITTED]
Seven Investment Styles
*The Standard & Poor's (S&P) 500 Index, a proxy for the performance of larger
capitalization companies, is an unmanaged, market-value-weighted index of 500
widely held domestic common stocks. An unmanaged index does not reflect
expenses and may not correspond to the performance of a managed portfolio in
which expenses are incurred. You cannot invest in the S&P 500.
** Mentor Investment Advisors, LLC/dba Mentor Investment Group, LLC
1
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Mentor Funds
Message from the Chairman and President
March 31, 1998 (continued)
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The Mentor fund family is sponsored by Mentor Investment Group, where we provide
diversified investment services to corporations, foundations, endowments,
municipalities, public funds, and individual investors. We offer a wide variety
of investment styles through mutual funds, variable annuities, and
separately-invested portfolios.
Please review the information carefully. Should you have questions, please
contact your consultant or call us directly at (800)382-0016.
We welcome your communications. Thank you for your investment in Mentor Funds.
Sincerely,
/s/Daniel J. Ludeman /s/ Paul F. Costello
- -------------------- --------------------
Daniel J. Ludeman Paul F. Costello
Chairman President
[MENTOR INVESTMENT GROUP LOGO]
The Mentor Mission
To provide professional investment management services through a firm that is
second to none in the quality of its investment process, the skill and
training of its professionals, and the commitment, shared by all its
associates, to deliver the highest level of service and ethical behavior to
clients.
For more information and a prospectus for the funds, please call us,
(800)382-0016, or contact your consultant. The prospectus contains complete
information about fees, sales charges, and expenses. Please read it carefully
before investing or sending money.
2
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Mentor Growth Portfolio
Managers' Commentary: The Small/Mid-Capitalization Management Team
March 31, 1998
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Performance*
Mentor Growth Portfolio performance for the six-month period ended March 31,
1998 was modestly better than other small-capitalization growth stocks, as
represented by the Russell 2000 Index, but lagged behind that of
larger-capitalization companies.
October, 1997 - March, 1998
Mentor Growth Portfolio
(A share) 6.42%
Russell 2000 6.37%
The financial results of the companies held by the Portfolio continued to be
excellent during the period - both absolutely and relative to most other
companies. Despite these very strong absolute and relative financial results, a
sizable difference between small-and large-cap. growth company performance
continues.
October, 1997 - March, 1998
Mentor Growth Portfolio
(A share) 6.42%
S&P 500** 17.22%
The report that follows looks at issues that may account for recent small-cap.
underperformance.
Investor perception
We are the first to admit that small companies are inherently riskier than
larger ones because they are characterized by newer product lines, generally
less-seasoned management, and fewer shares of outstanding stock. Small companies
on average, however, grow their earnings at much higher rates than larger
companies. The market is currently assigning comparable price/earnings multiples
to large-cap. stocks and small-cap. stocks despite the higher earnings growth
rates for small-cap. companies. Even on a risk-adjusted basis, similar
valuations seem to us very hard to justify.
The companies in our Portfolio have compounded their earnings over the past year
at better than 40%. The 1998 outlook for our companies, according to I/B/E/S
estimates, continues to be for earnings growth in excess of 40%, with a
three-year estimated earnings growth rate of more than 26%.*** For this, on
average, our companies have been accorded a P/E ratio of 25x estimated 1998
earnings, or a 40% discount to their expected growth rate. The S&P 500**, a
proxy for larger- capitalization companies, grew its earnings at 9.3% in 1997,
is expected to grow its earnings at 6.8% in the coming year, and at 6% over the
next three years. Despite this lower earnings-growth rate, the S&P 500 currently
sells at an average P/E of 25x estimated 1998 earnings, a 360% premium to its
1998 expected growth rate.
The effect of Asian collapse
In the fall of 1997, many investors, alarmed by what they had heard of the
growing problems in Asian economies, began to concentrate their investments in
larger companies, perceiving them to be safer than smaller ones. Small-cap.
growth funds, which ordinarily have sizable portions of their portfolios
concentrated in high-tech companies, suffered during the final quarter of 1997.
Anticipating the potential for negative investor psychology in response to
trauma in the Far East, we reduced our weighting in technology from 25% at
mid-year to 14% in late December. We offset this
* See notes to Performance Comparison, page 4.
** The Standard & Poor's Index (S&P 500), a proxy for the performance of
larger capitalization companies, is an unmanaged, market-value-weighted
index of 500 widely held domestic common stocks. An unmanaged index does
not reflect expenses and may not correspond to the performance of a
managed portfolio in which expenses are incurred. You cannot invest in
the S&P 500.
*** I/B/E/S is the Institutional Broker's Estimate System.
3
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Mentor Growth Portfolio
Managers' Commentary: The Small/Mid-Capitalization Management Team
March 31, 1998
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reduction with an increase in our weighting of specialty retailing, healthcare,
and miscellaneous growth companies. As it turned out, many of these companies,
especially the specialty retailers, actually found their costs benefiting from
the turmoil as import prices fell. Late in the first quarter we selectively
increased our technology exposure, anticipating that the bottom for many of
these companies may have been reached.
Limited analytical coverage
Small-cap. growth companies are generally sparsely followed by Wall Street
analysts, a fact that we view as a major positive. Many of these smaller
companies will become the Intels, Microsofts, and Home Depots of the future. At
this point in their corporate lives, as relatively undiscovered companies, high
growth can be bought at a major discount in P/E terms. As these companies grow,
become better known and better followed, we believe that in many cases they will
attract a greater analytical following and be accorded better valuations.
Our conclusion
Certainly, young companies growing at 40% to 50% or more, should be valued
differently than larger seasoned growth companies. While risks will always be
associated with owning small-cap. growth companies, past records of earnings
successes for the companies in our Portfolio, combined with the comparatively
full valuations of many larger-capitalization companies, argue that the present
may be a particularly opportune time to own a small/mid-capitalization growth
portfolio like ours.+
+ While the managers will endeavor to invest the Portfolio in accordance with
their proprietary process, there is no guarantee of investment success.
Performance Comparison
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class A and the Russell 2000.-
[GRAPH]
Class A Russell 2,000
------- -------------
6/5/95 9,425 10,000
6/30/95 9,859 10,518
9/30/95 11,251 11,557
9/30/96 14,640 13,076
9/30/97 18,418 17,416
3/31/98 19,601 18,525
Average Annual Returns as of 3/31/98
Including Sales Charges
1-Year Since Inception+++
Class A 41.66% 26.92%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
- The Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
++ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000
investment minus $575 sales charge = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Growth Portfolio Class A Shares from the
date of issuance on 6/5/95 through 3/31/98.
4
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Mentor Growth Portfolio
March 31, 1998
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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]
Class B Russell 2000-
------- -------------
9/30/87 10,000 10,000.00
12/31/87 7,475 7,093.97
12/31/88 8,737 8,859.93
12/31/89 10,252 10,835.34
12/31/90 9,096 8,289.97
12/31/91 13,667 12,107.64
12/31/92 15,796 14,336.85
12/31/93 18,260 17,047.50
12/31/94 17,443 16,736.97
9/30/95 23,042 21,041.03
9/30/96 29,535 23,804.37
9/30/97 36,817 31,705.64
3/31/98 39,015 33,725.00
Average Annual Returns as of 3/31/98
Including Sales Charges
1-Year 5-Year 10-Year
------ ------ -------
Class B 45.00% 18.83% 16.63%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000
Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
+ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class B Shares. A contingent deferred sales charge will be imposed, if
applicable, on Class B Shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to
1.00% of amounts redeemed during the five-year period following the date of
purchase. The ending value of the Class B Shares reflects a redemption fee of
4.00% on any redemption less than one year from the purchase date. The Class
B Shares' performance assumes the reinvestment of all dividends and
distributions.
5
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Mentor Growth Portfolio
March 31, 1998
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Performance Comparison
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class Y and the Russell 2000.~
[GRAPH]
Class Y Russell 2,000
------- -------------
11/19/97 10,000 10,000
11/30/97 10,000 9,935
12/31/97 10,021 10,109
1/31/97 9,811 9,949
2/28/97 10,628 10,685
3/31/97 11,314 11,126
Total Returns as of 3/31/98
1-Year Since Inception++
------ -----------------
Class Y n/a 13.14%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
+ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class Y Shares. These shares are not subject to any sales or contingent
deferred sales charges. The Class Y Shares' performance assumes the
reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Growth Portfolio Class Y Shares from the date
of issuance on 11/19/97 through 3/31/98.
6
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Mentor Growth Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
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Shares Market Value
Common Stocks - 91.08%
Capital Goods &
Construction - 3.23%
Brookdale Living Communities 2,088 $5,272,200
Denali, Inc. 148,200 2,672,400
PRI Automation, Inc. * 97,950 2,565,066
Superior Services, Inc. * 141,000 4,397,438
Waste Industries, Inc. * 95,750 1,885,078
World Access, Inc. 141,100 4,585,750
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21,377,932
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Consumer Cyclical - 12.98%
A.C. Morre Arts & Crafts, Inc. 196,150 3,775,888
Cadmus Communications
Corporation 193,250 4,589,688
Chancellor Media
Corporation* 197,200 9,046,550
Clear Channel Communications 50,650 4,963,700
Dollar General Corporation 236,744 9,159,024
Dollar Tree Stores, Inc. * 113,200 6,013,750
Family Dollar Stores 174,450 6,629,100
Heftel Broadcasting
Corporation-Class A * 88,700 3,969,325
Keystone Automotive
Industries, Inc. * 272,500 6,505,938
Media Arts Group, Inc. 228,200 4,506,950
Optek Technology, Inc. 58,300 1,493,938
Pillowtex Corporation 100,050 4,846,172
Rental Service Corporation * 209,850 4,879,013
Servico, Inc. * 188,650 3,985,231
Stage Stores, Inc. * 92,100 4,754,663
Suburban Lodges of America * 195,150 3,098,006
Travel Services
International, Inc. 113,700 3,780,525
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85,997,461
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Consumer Staples - 3.62%
Rexall Sundown, Inc. * 190,500 6,488,906
Richfood Holdings, Inc. 274,725 8,791,200
US Foodservice 127,400 4,689,913
Whole Foods Market, Inc. * 57,250 3,993,188
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23,963,207
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Energy - 6.84%
American Oilfield
Divers, Inc. * 239,500 3,457,781
Basin Exploration, Inc. 166,200 3,427,875
BJ Services Company * 131,700 4,798,819
Coach USA, Inc. * 121,250 5,274,375
Core Laboratories, Inc. * 442,700 10,790,813
Global Industries, Ltd. * 228,350 4,652,631
Shares Market Value
Common Stocks (continued)
Energy (continued)
Precision Drilling
Corporation* 76,600 $1,618,175
Pride International, Inc. * 191,750 4,578,013
St. Mary Land & Exploration
Company 84,150 3,216,108
Tuboscope, Inc. * 185,600 3,526,400
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45,340,990
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Financial - 8.06%
Amresco, Inc. 223,900 7,332,725
Anthracite Capital, Inc. 182,500 2,737,500
Concord EFS, Inc. * 234,211 8,094,918
Cost Plus, Inc. 105,850 3,364,045
Friedman Billings Ramsey
Group* 132,050 2,211,838
Markel Corporation * 66,360 11,476,133
National Commerce
Bancorporation 274,192 11,687,434
PMT Services, Inc. * 363,200 6,514,872
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53,419,465
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Health - 21.25%
American Oncology
Resources* 287,350 4,382,088
Assisted Living
Concepts, Inc. * 132,600 2,867,475
Atria Communities, Inc. * 190,800 3,672,900
Centennial Healthcare
Company* 104,400 2,623,050
Curative Health
Services, Inc. * 170,150 5,668,122
Dentsply International, Inc. 100,800 3,143,700
ESC Medical Systems * 51,900 1,822,988
Express Scripts, Inc. -
Class A * 77,300 6,553,591
Health Management
Associates, Inc. * 229,641 6,573,474
Henry Schein, Inc. * 100,250 4,160,375
Mecon, Inc. 184,600 2,030,600
Medquist, Inc. * 210,775 7,759,155
Molecular Devices
Corporation 226,000 4,350,500
Monarch Dental
Corporation * 113,000 1,935,125
National Surgery
Centers, Inc.* 247,425 6,324,802
NCS Healthcare, Inc. -
Class A* 131,350 4,400,225
Omnicare, Inc. 174,060 6,897,128
7
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Mentor Growth Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
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Shares Market Value
Common Stocks (continued)
Health (continued)
Parexel International
Corporation * 63,400 $ 1,981,250
Pediatric Services
of America, Inc.* 174,250 3,724,594
Pediatrix Medical
Group, Inc. * 75,800 3,524,700
Performance Food Group * 98,600 2,033,625
Pharmerica 254,000 3,778,250
PhyCor, Inc. * 123,735 2,791,771
PMR Corporation 136,400 2,148,300
Priority Healthcare
Corporation- Class B 120,700 2,157,513
Province Healthcare Company 137,800 3,617,250
PSS World Medical, Inc. 247,600 5,818,600
QuadraMed Corporation * 107,000 3,571,125
Quorum Health Group * 158,575 5,332,084
Respironics, Inc. * 132,768 3,841,974
Rural/Metro Corporation * 124,000 4,076,500
Serologicals Corporation * 284,150 8,027,238
United Payors & United
Providers, Inc. 114,300 3,786,188
Wesley Jessen Visioncare, Inc. 165,200 5,430,950
-----------
140,807,210
-----------
Technology - 14.13%
Advanced Fibre
Communication* 63,400 2,306,175
Ansoft Corporation 176,700 2,484,844
Applied Microsystems
Corporation * 160,400 1,223,050
Aspect Development, Inc. * 49,000 2,688,875
Atmi, Inc. * 150,950 4,566,238
Benchmark Electronics, Inc. * 250,440 5,963,603
Billing Information Concepts * 182,400 4,731,000
Black Box Corporation * 90,600 3,340,875
CerProbe Corporation 246,700 5,119,025
CSG Systems
International, Inc.* 64,100 2,900,525
Galileo Technology, Ltd. 70,700 1,997,275
Medialink Worldwide, Inc. * 180,000 3,690,000
Medirisk, Inc. 113,000 2,401,250
Natural Microsystems
Corporation 86,800 3,439,450
Network Appliance, Inc. * 83,900 2,978,450
Ontrack Data International * 155,250 2,522,813
Osteotech, Inc. 59,300 1,534,388
PairGain Technologies, Inc. * 130,800 3,139,200
Parlex Corporation * 191,200 3,393,800
Shares Market Value
Common Stocks (continued)
Technology (continued)
PMC-Sierra, Inc. * 114,800 $ 4,362,400
Premiere Technologies, Inc. * 158,300 5,481,138
Qlogic Corporation * 103,200 3,663,600
SCB Computer
Technology, Inc.* 230,525 5,302,075
Segue Software, Inc. 211,300 2,746,900
Select Appointments Holding- 188,100 4,749,525
Sipex Corporation 106,350 3,509,550
Speedfam International, Inc. 133,700 3,451,131
-----------
93,687,155
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Transportation - 5.59%
Atlantic Coast Airlines, Inc. 22,800 1,094,400
Carey International, Inc. 51,050 1,193,294
Comair Holdings, Inc. 206,375 5,468,938
Covenant Transport, Inc. -
Class A* 204,150 4,472,161
Hunt (JB) Transportation
Services, Inc. 158,500 4,507,344
Mesaba Holdings, Inc. * 236,750 7,442,828
MotivePower Industries, Inc. 215,700 5,958,713
M.S. Carriers, Inc. * 89,850 3,043,669
US Xpress Enterprises -
Class A* 187,500 3,890,625
-----------
37,071,972
-----------
Utilities - 0.66%
ITC DeltaCom 135,850 4,364,181
-----------
Miscellaneous - 14.72%
ABR Information Services * 130,500 3,670,313
AccuStaff, Inc. * 179,985 6,209,483
AHL Services, Inc. * 261,050 8,516,756
C&D Technologies, Inc. 75,300 3,920,306
Central Garden & Pet
Company* 198,600 7,757,813
Fairfield Communities, Inc. * 449,700 9,921,506
First Consulting Group 5,000 103,125
Gulf Island Fabrication, Inc. 144,650 2,676,025
Indus International 324,000 3,321,000
Kulicke & Soffa Industries 186,400 4,054,200
Meta Group, Inc. * 80,900 2,791,050
Outdoor Systems, Inc. * 373,893 13,109,623
Pentacon, Inc. 159,500 2,235,531
Rock of Ages Corporation 129,800 2,287,725
SCP Pool Corporation * 151,750 3,414,375
Silverleaf Resorts, Inc. * 141,450 3,403,641
8
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Mentor Growth Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares or
Principal
Amont Market Value
Common Stocks (continued)
Miscellaneous (continued)
SmarTalk Teleservices 74,900 $ 2,392,119
Source Services Corporation * 164,450 4,542,931
StaffMark, Inc. * 119,400 4,895,400
Sunrise Assisted Living, Inc. * 75,800 3,392,050
Universal Outdoor Holdings * 76,950 4,963,275
------------
97,578,247
------------
Total Common Stocks
(cost $409,221,289) 603,607,820
------------
Short-Term Investment - 10.03%
Repurchase Agreement
Goldman Sachs & Company
Dated 3/31/98, 6.05%, due 4/01/98
collateralized by $67,189,926 Federal
Home Loan Mortgage Corporation, 7.00%,
11/01/27, market value 67,966,809
(cost $66,503,537) $66,503,537 66,503,537
------------
Total Investments (cost
$ 480,161,097)-101.11% 670,111,357
------------
Other Assets less Liabilities - (1.11%) (7,371,076)
------------
Net Assets - 100.00% $662,740,281
============
* Non-income producing.
- American Depository Receipts.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $257,834,464 and $260,860,412, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $480,161,099. Net unrealized appreciation aggregated
$189,950,260, of which $200,136,099, related to appreciated investment
securities and $10,185,839, related to depreciated investment securities.
See notes to financial statements.
9
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Mentor Growth Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $603,607,820
Repurchase agreements 66,503,537
------------
Total investments
(cost $480,161,097) 670,111,357
------------
Collateral for securities
loaned (Note 2) 166,799,324
Receivables
Investments sold 3,496,076
Fund shares sold 1,966,551
Dividends and interest 67,687
Deferred expenses (Note 2) 74,328
------------
Total assets 842,515,323
------------
Liabilities
Payables
Investments purchased $12,104,661
Securities loaned (Note 2) 166,799,324
Fund shares redeemed 548,332
Accrued expenses and other
liabilities 322,725
-----------
Total liabilities 179,775,042
------------
Net Assets $662,740,281
============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 442,057,181
Accumulated net investment
loss (3,807,996)
Accumulated net realized
gain on investment
transactions 34,540,836
Net unrealized appreciation
of investments 189,950,260
-------------
Net Assets $662,740,281
=============
Net Asset Value per Share
Class A Shares $ 19.94
Class B Shares $ 19.43
Class Y Shares $ 19.94
Offering Price per Share
Class A Shares $ 21.16(a)
Class B Shares $ 19.43
Class Y Shares $ 19.94
Shares Outstanding
Class A Shares 6,163,342
Class B Shares 27,789,313
Class Y Shares 56
-------------
Total Shares Outstanding 33,952,711
=============
(a) Computation of offering price: 100/94.25 of net asset value.
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends $ 255,959
Interest 1,666,143
-----------
Total investment
income (Note 2) 1,922,102
Expenses
Management fee (Note 3) $2,094,633
Distribution fee (Note 3) 1,836,172
Shareholder service fee (Note 5) 748,083
Transfer agent fee (Note 3) 375,694
Administration fee (Note 4) 299,233
Shareholder reports and postage
expenses 68,725
Registration expenses 61,857
Custodian and accounting
fees (Note 3) 40,079
Legal fees 10,680
Directors' fees and expenses 8,267
Audit fees 5,811
Organizational expenses 4,251
Miscellaneous 176,613
----------
Total expenses 5,730,098
-----------
Net investment loss (3,807,996)
-----------
Realized and unrealized gain on
investments
Net realized gain on
investments (Note 2) 41,861,678
Change in unrealized appreciation
on investments (310,799)
----------
Net gain on investments 41,550,879
-----------
Net increase in net assets resulting
from operations $37,742,883
===========
See notes to financial statements.
10
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Mentor Growth Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98 Year Ended
(Unaudited) 9/30/97
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment loss $ (3,807,996) $ (6,118,383)
Net realized gain on investments 41,861,678 35,210,825
Change in unrealized appreciation on investments (310,799) 90,598,141
-------------- -------------
Increase in net assets resulting from operations 37,742,883 119,690,583
-------------- -------------
Distributions to Shareholders
From net realized gain on investments
Class A (6,598,992) (5,768,516)
Class B (31,311,147) (52,589,913)
Class Y (10) -
-------------- -------------
Total distributions to shareholders (37,910,149) (58,358,429)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 116,398,878 168,560,541
Reinvested distributions 36,935,409 57,233,448
Cost of shares redeemed (101,689,379) (87,713,664)
-------------- -------------
Change in net assets resulting from capital share transactions 51,644,908 138,080,325
-------------- -------------
Increase in net assets 51,477,642 199,412,479
Net Assets
Beginning of period 611,262,639 411,850,160
-------------- -------------
End of period (including accumulated undistributed net investment income
(loss) of ($3,807,996) and $0, respectively) $ 662,740,281 $ 611,262,639
============== =============
</TABLE>
See notes to financial statements.
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months Year Year Period
Ended 3/31/98 Ended Ended Ended
(Unaudited) 9/30/97 9/30/96 9/30/95(b)
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 19.94 $ 18.47 $ 16.08 $ 13.37
--------- ---------- -------- ----------
Income from investment operations
Net investment loss (0.08) (0.17) (0.10) (0.01)
Net realized and unrealized gain on investments 1.27 4.19 4.23 2.72
----------- ---------- --------- -----------
Total from investment operations 1.19 4.02 4.13 2.71
----------- ---------- --------- -----------
Less distributions
From net realized capital gains (1.19) (2.55) (1.74) --
----------- ---------- --------- -----------
Total distributions (1.19) (2.55) (1.74) --
----------- ---------- --------- -----------
Net asset value, end of period $ 19.94 $ 19.94 $ 18.47 $ 16.08
=========== ========== ========= ===========
Total Return* 6.42% 25.81% 29.15% 20.27%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 122,893 $105,033 $ 40,272 $ 20,368
Ratio of expenses to average net assets 1.28% (a) 1.28% 1.28% 1.36% (a)
Ratio of net investment loss to average net assets (0.65%)(a) (0.67%) (0.39%) (0.65%)(a)
Portfolio turnover rate 46% 77% 105% 70%
Average commission rate on portfolio transactions $ 0.0617 $ 0.0651 $ 0.0602
</TABLE>
(a) Annualized.
(b) For the period from June 5, 1995 (initial offering of Class A Shares) to
September 30, 1995. * Total return does not reflect sales commissions and is not
annualized.
See notes to financial statements.
11
<PAGE>
Mentor Growth Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Six Months Year Year
Ended 3/31/98 Ended Ended
(Unaudited) 9/30/97 9/30/96
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 19.53 $ 18.29 $ 16.05
---------- --------- ----------
Income from investment operations
Net investment loss (0.12) (0.22) (0.17)
Net realized and unrealized gain (loss) on
investments 1.21 4.01 4.15
------------ --------- ----------
Total from investment operations 1.09 3.79 3.98
------------ --------- ----------
Less distributions
From net realized capital gain (1.19) (2.55) (1.74)
In excess of net realized capital gain -- -- --
------------ --------- ----------
Total distributions (1.19) (2.55) (1.74)
------------ --------- ----------
Net asset value, end of period $ 19.43 $ 19.53 $ 18.29
============ ========= ==========
Total Return* 5.97% 24.66% 28.18%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 539,846 $506,230 $ 371,578
Ratio of expenses to average net assets 2.02% (a) 2.03% 2.03%
Ratio of net investment loss to average net assets (1.39%)(a) (1.42%) (1.13%)
Portfolio turnover rate 46% 77% 105%
Average commission rate on portfolio transactions $ 0.0617 $ 0.0651 $ 0.0602
<CAPTION>
Period Year Year
Ended Ended Ended
9/30/95 (c) 12/31/94 12/31/93
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 12.15 $ 13.78 $ 12.81
----------- -------- --------
Income from investment operations
Net investment loss (0.13) (0.15) (0.08)
Net realized and unrealized gain (loss) on
investments 4.03 (0.47) 2.07
------------ -------- --------
Total from investment operations 3.90 (0.62) 1.99
------------ -------- --------
Less distributions
From net realized capital gain -- (1.00) (1.02)
In excess of net realized capital gain -- (0.01) --
------------ -------- --------
Total distributions -- (1.01) (1.02)
------------ -------- --------
Net asset value, end of period $ 16.05 $ 12.15 $ 13.78
============ ======== ========
Total Return* 32.10% (4.48%) 15.60%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 246,326 $ 190,126 $ 186,978
Ratio of expenses to average net assets 2.08% (a) 2.01% 2.02%
Ratio of net investment loss to average net assets (1.20%)(a) (1.20%) (1.12%)
Portfolio turnover rate 70% 77% 64%
Average commission rate on portfolio transactions
</TABLE>
Class Y Shares
Period
Ended 3/31/98 (d)
(Unaudited)
Per Share Operating Performance
Net asset value, beginning of period $ 18.03
---------
Income from investment operations
Net investment loss (0.05)
Net realized and unrealized gain on investments 2.15
-----------
Total from investment operations 2.10
-----------
Less distributions
From net realized capital gain (0.19)
-----------
Total distributions (0.19)
-----------
Net asset value, end of period $ 19.94
===========
Total Return* 13.14 %
Ratios / Supplemental Data
Net assets, end of period $ 1,112
Ratio of expenses to average net assets 1.03% (a)
Ratio of net investment loss to average net assets (0.82%)(a)
Portfolio turnover rate 46%
Average commission rate on portfolio transactions $ 0.0617
(a) Annualized.
(c) For the period from January 1, 1995 to September 30, 1995.
(d) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998.
* Total return does not reflect sales commissions and is not annualized.
See notes to financial statements.
12
<PAGE>
Mentor Perpetual Global Portfolio
Managers' Commentary: The Global/International Management Team
March 31, 1998
- --------------------------------------------------------------------------------
LOOKING BACK*
Over the six-month period ended March 31, 1998, world markets continued to move
ahead with the Morgan Stanley Capital International (MSCI) World Gross Index
rising by 11.7% in U.S. dollar terms. Over the same period the MSCI Europe
Australia and Far East (EAFE) Index advanced 5.9% despite turmoil in global
emerging markets.
USA
The period began with a sharp correction to the U.S. equity market during
October 1997, in response to the travails of Asian equity and currency markets.
This correction was followed promptly by a recovery during November and December
1997, a recovery that continued into the new year and accelerated during
January. At the same time the U.S. domestic economy continued in robust good
health. Despite falling unemployment, a tightening labor market, rising real
disposable incomes, and strong consumer expenditure, the U.S. Federal Reserve
took the view that these potentially inflationary pressures would be effectively
offset by the disinflationary effects of the collapse of Asia currencies and
economies. Consequently interest rate policy remained on hold throughout the
period. During the first quarter of 1998, positive bond markets, sustained low
inflation, and strong money flows kept the U.S. equity market buoyant, although
market volatility increased in response to investor anxiety over possible
earnings disappointments.
United Kingdom
As with the USA, Asian travails prompted a correction to the U.K. equity market
at the start of the period in October 1997. Despite a quarter-point rise in U.K.
interest rates in November - the fifth such rise in six months - the equity
market began a strong rally in December. The rally continued into the new year
and on throughout the first quarter of 1997. The equity market was supported by
strong interest from U.S. institutions, acquisitive U.S. corporations seeking
English-language footholds in the new unified European market, and strong new
money flows.
The Bank of England Monetary Policy Committee (MPC) faced a difficult task in
deciding U.K. interest-rate policy, given the conflicting demands of strong wage
growth, mixed data on consumer expenditure, and a manufacturing sector driven to
the brink of recession by the seemingly relentless strength of British sterling.
Rates were kept unchanged at both the February and March meetings of the MPC.
Europe
Following an autumn correction, European equity markets bounced back strongly in
December 1997, and continued to move ahead during the first quarter of 1998.
Among the peripheral countries of Europe, domestic economies were boosted by
European Monetary Unit (EMU)-driven falls in interest rates and, in France, the
first signs of a broader-based domestic-led recovery began to appear. In core
Europe, with unemployment remaining stubbornly high and inflation very subdued,
interest rates continued at historic low levels. EMU-driven cross-border mergers
and acquisitions, corporate restructuring, low interest rates, a positive
liquidity situation and a populace increasingly keen to enter into equity
investment all provided support for equity markets that reached record highs
toward the end of the period.
Japan
Concerns over the effect of low-cost Asian competition on Japanese
manufacturers, and of failed Asian corporate borrowers on Japan's already
13
<PAGE>
Mentor Perpetual Global Portfolio
Managers' Commentary: The Global/International Management Team
March 31, 1998
- --------------------------------------------------------------------------------
beleagured banking system, led to dismal equity market performance during the
final quarter of 1997. The equity market rallied strongly during January 1998,
on hopes of successful action by the government to stimulate the domestic
economy. This optimism, however, gave way to an air of resigned gloom as the
government once more proved incapable of revitalizing an economy slipping into
recession.
Asia
At the beginning of the period revelations of South Korea's foreign debt
obligations, followed by Indonesia's hostile reaction to proposed International
Monetary Fund (IMF) reforms, led to a collapse of confidence in Asian equity
markets and currencies. Since mid-January, markets and currencies have bounced
back from their oversold lows. Despite unhappiness at the austerity involved in
reform programs, South Korea and Thailand have made valuable initial progress.
Indonesia, however, balked at IMF demands, and remains a focus of concern.
Despite massive currency depreciation, exports remain below their levels of a
year ago, hampered by lack of finance and by the weakness of the region's
principal trading partner, Japan. Asian equity markets are now discounting much
of what is likely to prove a long road back to international credibility, and
further progress in 1998 is likely to be modest.
Latin American
Strong performance by the world's principal equity markets has side-lined Latin
American markets, which appear destined, for the time being, to remain hostage
to the fortunes of Asia's equity markets.
LOOKING AHEAD** USA
Liquidity, momentum, and investor enthusiasm may well carry markets higher, but
a pause for reflection may be due. Despite some very extended price/ earnings
ratios and Asian travails, the overall picture is not bleak. Healthy consumer
demand co-exists with subdued inflation, and interest rates that appear likely
to remain stable, or to fall. Modest progress appears possible, although
increased volatility seems likely.
U.K.
A range of data suggests that economic growth is slowing: wage rises and
consumer expenditure appear to be abating, sterling strength is squeezing the
profitability of U.K. manufacturers, and this year will see the full effect of
last year's increases in taxes and interest rates. The MPC has again kept
interest rates on hold and, although a further rise is possible, we believe U.K.
interest rates should trend downward during 1998. The gilts market remains firm,
merger and acquisition activity is still on the agenda, and institutional cash
flow continues strong -- all providing support for the U.K. equity market. We
believe potential exists for further modest progress from present levels,
although it is unlikely to be at the brisk pace seen during the opening months
of 1998.
Europe
Signs of domestic recovery are appearing in core economies, but unemployment
remains high, and inflation low, and we do not expect core interest rates to
rise for the time being
Investor enthusiasm and strong inflows of new money may propel markets higher
still, but signs of overheating in some of the more speculative areas are
already appearing. Longer term, fundamental
14
<PAGE>
Mentor Perpetual Global Portfolio
Managers' Commentary: The Global/International Management Team
March 31, 1998
- --------------------------------------------------------------------------------
economic issues will need to be resolved, with full integration likely to be an
extended process. Both increasing volatility and divergence of returns between
the various equity markets of the region seems likely.
Latin America
Latin America offers attractive fundamentals, with broadly positive economic
statistics across the region and no evidence of capital flight. It seems almost
inevitable, however, that the region will respond to Asian developments for the
foreseeable future. Latin American equity markets will continue to find it
difficult to attract significant foreign investment flows while the main equity
markets of the world are performing so strongly.
Japan
Japan's new fiscal year has begun with a sharp fall in the equity market, dire
warnings from the chairman of Sony and the governor of the Bank of Japan, and a
downgrading of "the environment for the Japanese economy" that precipitated
further weakening of the yen. The latest economic stimulus package, despite the
promise of $4 billion yen in tax cuts, has failed to excite investors, any more
than massive intervention by the Bank of Japan has succeeded in providing
anything other than a transient strengthening of the yen. Poor corporate results
and gloomy sentiment may well carry the market significantly lower in the short
term, but the sheer scale of the economic problems facing Japan suggests that
both the government and corporate Japan will be propelled into effective action
to stimulate economic growth and focus on shareholder value. We will continue to
remain patient in looking for the appropriate buying opportunity.
Asia (excluding Japan)
Although countries such as Thailand and South Korea have made some progress in
instituting IMF reforms, the hoped-for boom in exports has failed to materialize
because of a lack of trade finance and the weak economy of the region's
principal trading partner, Japan.
Despite a new agreement between the IMF and Indonesia, the second $3-billion
tranche of the IMF rescue support package to Indonesia has yet to be released,
and the commitment of president Suharto's regime to reform of the country's
system of "crony capitalism" remains in doubt. The stability of Indonesia
remains a concern to the region.
Following their bounce-back in the early months of 1998, Asian equity markets
appear now to be discounting much of what may well prove to be a long road to
recovery.
* See notes to Performance Comparison page 16.
The MSCI EAFE Index with gross dividends reinvested is an unmanaged index
of approximately 1,119 securities issued by companies listed on the
European, Australian, and Far Eastern stock exchanges. It contains no
U.S. equities and is therefore a broadly diversified proxy for
international performance.
** While the managers will endeavor to invest the Portfolio in accordance with
their proprietary process, there is no guarantee of investment success.
15
<PAGE>
Mentor Perpetual Global Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual Global Portfolio Class A and Class B Shares and the Morgan Stanley
Capital International (MSCI) World Index.*
[GRAPH]
<TABLE>
<CAPTION>
3/24/94 9/30/94 9/30/95 9/30/96 9/30/97 3/31/98
------- ------- ------- ------- ------- -------
<S> <C>
Morgan Stanley 10,000 10,545 12,124 13,846 17,258 19,278
A Shares 9,425 9,982 10,655 12,501 15,200 16,795
B Shares 10,000 9,487 10,587 12,677 15,668 17,152
</TABLE>
Average Annual Returns as of 3/31/98
Including Sales Charges
1-Year Since Inception++
------- -----------------
Class A 22.15% 13.81%
Class B 24.66% 20.46%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
* The Morgan Stanley Capital International (MSCI) World Index is an arithmetic
average, weighted by market value, of the performance of approximately 1,450
securities listed on the stock exchanges of 20 countries including the U.S.,
Europe, Canada, Australia, New Zealand, and the Far East. The average
company in the index has a market capitalization of about $3.5 billion. This
is a total return index with gross dividends reinvested. MSCI World Index is
not adjusted to reflect reinvestment of dividends on securities in the
index, and is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class A and Class
B Shares from the date of commencement of operations on 3/29/94 through
3/31/98.
- Represents a hypothetical investment of $10,000 in Mentor Perpetual
Global Portfolio Class B Shares. A contingent deferred sales charge
will be imposed, if applicable, on Class B Shares at rates ranging from a
maximum of 4.00% of amounts redeemed during the first year following
the date of purchase to 1.00% of amounts redeemed during the five-year
period following the date of purchase. Class B Shares are charged a
redemption fee of 4.00% on any redemption less than one year from the
purchase date. The Class B Shares' performance assumes the
reinvestment of all dividends and distributions.
16
<PAGE>
Mentor Perpetual Global Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual Global Portfolio Class Y Share and the Morgan Stanley Capital
International (MSCI) World Index.*
[GRAPH]
<TABLE>
<CAPTION>
11/19/97 11/30/97 12/31/97 1/31/98 2/28/98 3/31/98
-------- -------- -------- ------- ------- -------
<S> <C>
Morgan Stanley 10,000 10,178 10,304 10,592 11,311 11,790
Y Shares 10,000 10,000 10,278 10,359 11,192 11,832
</TABLE>
Total Returns as of 3/31/98
1-Year Since Inception++
------ -----------------
Class Y Shares n/a 18.32%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
* The Morgan Stanley Capital International (MSCI) World Index is an arithmetic
average, weighted by market value, of the performance of approximately 1,450
securities listed on the stock exchanges of 20 countries including the U.S.,
Europe, Canada, Australia, New Zealand, and the Far East. The average
company in the index has a market capitalization of about $3.5 billion. This
is a total return index with gross dividends reinvested. MSCI World Index is
not adjusted to reflect reinvestment of dividends on securities in the
index, and is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 3/31/98.
17
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares Market Value
Common Stocks - 96.67%
Argentina - 0.26%
Banco Frances del Rio de la
Plata SA~ 2,500 $ 75,313
Banco Rio de la Plata SA~ 5,620 70,250
Perez Company SA~ 7,037 95,298
Siderar~ 2,100 84,519
Telefonica de Argentina SA~ 2,270 86,402
----------
411,782
----------
Brazil - 0.63%
Cemig Energetic~ (a) 1,855 90,217
Companhia Cervejaria Brahma~ 5,300 82,150
Companhia Vale do Rio Doce~ 3,650 86,993
Compania Paulista de
Forca e Luz 550,000 74,494
Electrobras - Centrais Eletricas
Brasileiras SA 3,500 86,804
Electropaulo
Metropolitana - Electricidade
de Sao Paulo SA 390,000 65,858
Petroleo Brasileiro SA~ 3,150 74,799
Telecomonicacoes
Brasileiras SA~ 2,200 285,588
Telecomunicacoes de Rio de
Janeiro SA 610,000 86,108
Telecomunicacoes de Sao
Paulo SA 240,000 77,045
----------
1,010,056
----------
Chile - 0.16%
Chilectra SA~ 3,450 93,065
Embotelladora Andina SA~* 3,400 78,200
Telecomunicaciones de Chile~ 3,300 90,956
----------
262,221
----------
China - 0.19%
Heilongjiang Electric Power
Company 120,000 90,480
Huaneng Power International,
Inc. - Class A~* 900 211,500
----------
301,980
----------
Croatia - 0.19%
Pliva d.d. # 11,000 195,250
Zagrebacka Banka d.d. * 3,500 104,650
----------
299,900
----------
Finland - 0.99%
Huhtamaki 8,470 460,605
Nokia Oyj - Class A 10,455 1,123,121
----------
1,583,726
----------
France - 6.90%
Accor SA 2,500 642,424
Atos SA 3,930 654,206
Axa 16,000 1,649,778
Compagnie Financiere de
Paribas~ 10,500 1,064,000
Shares Market Value
Common Stocks (continued)
France (continued)
Elf Aquitaine SA 12,000 $1,312,323
Entrelec * 12,000 655,127
Genset SA~ 15,000 435,000
Groupe SEB SA 2,180 322,728
ISIS * 5,460 607,990
Pinault - Printemps -
Redoute SA 1,200 928,970
Schneider SA 20,000 1,541,818
Total - Class B 10,000 1,202,424
----------
11,016,788
----------
Germany - 2.23%
Allianz AG 7,600 1,176,144
Hochtief AG 7,650 311,805
Porsche AG 300 670,654
Viag AG 2,540 1,398,241
----------
3,556,844
----------
Great Britain - 14.09%
Abbey National 18,250 351,383
Arcadia Group 30,000 232,302
BAA PLC 52,250 510,881
Barclays PLC 18,500 553,499
Bass PLC 53,571 1,027,862
BAT Industries PLC 57,000 572,594
British Aerospace PLC 30,000 986,970
British Airways 47,500 481,138
British Biotech * 150,000 172,657
Burmah Castrol 25,000 507,296
Centrica * 195,500 369,867
Commercial Union 50,000 973,576
Debenhams PLC 60,000 371,181
Diageo PLC 20,040 235,199
Emap 25,000 470,883
Enterprise Oil 75,000 664,887
Glaxo Wellcome 30,000 796,608
Granada Group 60,000 1,078,384
Great Universal Stores 33,000 411,062
III Group 30,000 299,105
Imperial Chemical
Industries PLC 21,000 371,985
London Sumatra 96,000 30,104
Medeva 80,000 222,340
National Westminster 57,250 1,048,287
PowerGen PLC 44,000 609,963
Prudential Corporation 57,000 835,987
Rank Group PLC 61,750 416,900
Reckitt & Colman PLC 35,000 645,172
Rolls-Royce 200,000 931,720
Scotia Holdings * 49,000 136,870
Shell Transport & Trading
Company 25,000 183,330
Smith Group 37,500 349,632
SmithKline Beecham PLC 95,000 1,189,722
Stakis PLC 410,000 813,434
18
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares Market Value
Common Stocks (continued)
Great Britain (continued)
Standard Chartered 57,500 $ 832,730
Tesco 85,000 849,598
United Utilities 67,500 1,000,720
UTD News & Media 70,000 952,816
----------
22,488,644
----------
Greece - 0.05%
Ergo Bank SA 1,000 71,652
----------
Hong Kong - 6.26%
Asia Satellite 80,000 157,446
Bank of East Asia 245,000 509,053
Beijing Enterprises Holdings
Limited 40,000 102,985
CDL Hotels International 218,533 81,692
Cheung Kong 50,000 354,897
China Foods Holdings * 240,000 92,144
China Overseas Land &
Investment 1,000,000 267,787
China Telecom * 210,000 425,491
Citic Pacific, Limited 120,000 424,329
CLP Holdings * 100,000 503,310
Elec & Eltek International
Company, Limited 390,000 111,987
First Tractor Company 500,000 341,993
GZI Transport - Warrants 60,000 1,069
GZI Transport, Limited 500,000 180,675
Hang Seng Bank, Limited 40,000 391,033
HKR International, Limited 480,000 331,410
Hong Kong & China Gas 80,000 134,216
Hong Kong Electric 80,000 274,627
Hong Kong Telecom 100,386 207,283
HSBC Holdings PLC 86,506 2,639,405
Hutchison Whampoa, Limited 72,000 506,408
National Mutual Asia, Limited 240,000 198,227
New World Development 284,951 1,005,770
Road King Infrastructure,
Limited 323,544 288,107
Shanghai Industrial Holding,
Limited 80,000 327,281
Union Bank of Hong Kong,
Limited 100,000 132,926
----------
9,991,551
----------
Hungary - 0.51%
Magyar Olaj-es Gazipari Rt # 5,200 159,380
Matav Rt~ 12,000 373,500
OTP Bank Sp # 3,000 152,250
Richter Gedeon Rt # 1,300 135,850
----------
820,980
----------
India - 0.45%
BSES Limited #* 4,000 72,200
Hindalco Industries, Limited # 8,000 142,000
India Cements # 20,000 30,000
Shares Market Value
Common Stocks (continued)
India (continued)
Indian Opportunities Fund
Limited * 11,000 $ 100,430
Mahanagar Telephone Nigam
Limited #* 2,000 32,900
Tata Electric # 1,500 345,000
----------
722,530
----------
Indonesia - 0.08%
PT Bat Indonesia 36,000 122,775
----------
Italy - 4.75%
Assicurazioni Generali 51,040 1,575,205
IOI Corporation Berhad 76,000 76,503
Istituto Mobiliare Italiano 76,000 1,235,365
Telecom Italia SPA 200,000 236,161
Telecom Italia Mobile 227,900 1,225,854
Telecom Italia Spatial * 271,000 3,235,142
----------
7,584,230
----------
Ireland - 2.64%
Bank of Ireland 119,465 2,358,168
CRH PLC 80,000 1,205,460
Elan Corporation PLC * 10,000 646,250
----------
4,209,878
----------
Japan - 8.55%
Aoyamma Trading Company,
Limited 62,000 1,489,769
Daiwa Securities * 125,000 915,149
Fuji Electric Company, Limited 420,000 1,441,261
Kirin Brewery Company,
Limited 160,000 1,429,698
Kyocera Corporation 26,000 1,366,623
Nippon Steel Corporation * 800,000 1,285,527
Nippon Telegraph & Telephone
Corporation * 170 1,416,933
Sumitomo Marine & Fire 245,000 1,515,900
Tokyo Electric Power 75,000 1,419,185
Toyoda Auto Loom Works,
Limited 70,000 1,369,626
----------
13,649,671
----------
Korea - 0.12%
Atlantis Korean Smaller
Companies * 20,000 135,400
CITC Seoul Excel * 2 6,500
Korea Europe Fund * 18 24,975
LG Electronics # 6,400 13,600
Samsung Electronics # (a) 403 10,931
----------
191,406
----------
Malaysia - 0.45%
Boustead Holdings Berhad 84,000 84,918
Magnum Corporation Berhad 660,000 562,623
Nanyang Press Berhad 60,000 63,934
RHB Sakura Merchant Bankers 2,400 1,836
----------
713,311
----------
19
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares Market Value
Common Stocks (continued)
Mexico - 0.66%
ALFA SA 12,700 $ 71,818
Cemex SA~* 14,500 91,791
Cifra SA~* 5,834 106,436
DESC SA~ 2,402 73,862
Empresas La Moderna SA~ 3,600 71,550
Fomento Economico Mexicano~ 11,000 79,421
Grupo Fin Bancomer~* 5,800 69,020
Grupo Carso SA~ 6,200 76,865
Grupo Televisa #* 2,100 77,069
Kimberly-Clark de Mexico SA~ 3,180 81,885
Panamerican Beverages -
Class A * 1,970 79,046
Telefono de Mexico SA~ 3,050 171,944
----------
1,050,707
----------
Netherlands - 2.79%
Baan Company NV * 23,000 1,101,262
Ispat International NV * 36,500 1,051,747
Oce NV 4,200 604,711
Royal Dutch Petroleum
Company 12,748 722,422
Vendex International NV 15,325 971,497
----------
4,451,639
----------
Peru - 0.07%
Telefonica del Peru SA~ 5,000 107,813
----------
Philippines - 0.19%
Benpres 27,200 102,680
Benpres Holdings #* 68,000 204,000
----------
306,680
----------
Poland - 0.24%
Big Bank Gdanski SA # 9,500 198,788
Elecktrim SA 300,000 190,803
----------
389,591
----------
Singapore - 1.03%
ACMA Limited - Warrants 7,500 1,301
City Developments, Limited 50,000 246,206
Development Bank of Singapore 15,600 96,476
Elec & Eltek International
Company, Limited 22,000 130,900
GP Batteries International,
Limited 90,000 295,448
Jardine Strategic 40,000 109,600
Jardine Strategic - Warrants 3,125 31
Keppel Corporation, Limited 31,000 93,317
Marco Polo Developments,
Limited 60,000 77,299
Overseas Chinese Bank * 20,000 112,728
Overseas Union Bank, Limited 100,000 390,214
Singapore Technologies
Engineering, Limited * 108,794 96,376
United Overseas Land - Warrants 2,000 387
----------
1,650,283
----------
Shares Market Value
Common Stocks (continued)
Spain - 3.00%
Centros Comerciales
Continente, SA 43,160 $1,021,131
Gas Natural SDG, SA 14,230 889,318
Prosegur CIA de Seguridad SA 116,895 1,505,822
Telefonica de Espana 17,000 750,207
Viscofan Envolturas
Celulosicas, SA 14,960 620,114
----------
4,786,592
----------
Sweden - 3.08%
Astra AB - Class A 90,000 1,854,396
BPA AB 265,000 734,640
Celsius AB - Class B 30,000 618,132
Svenska Handelsbanken -
Class A 36,860 1,703,072
----------
4,910,240
----------
Switzerland - 3.66%
Credit Suisse Group 6,000 1,202,010
Jelmoli Holding AG 480 578,541
Nestle SA 625 1,195,852
Novartis 485 859,490
Schwetz Bankgesellschaft -
Class B 705 1,153,043
Zurich Versicherungs - Gesellschaft 1,465 851,604
----------
5,840,540
----------
Taiwan - 0.24%
Formosa Growth Fund * 5,000 108,125
Taiwan Semiconductor~ 2,000 52,563
Taipei Fund * 20 220,250
----------
380,938
----------
Thailand - 0.05%
Bangkok Bank 32,200 84,285
----------
United States - 32.09%
American Express Company 5,000 459,063
American Home Products
Company 10,000 953,750
AT&T Corporation 8,000 525,000
Banc One Corporation * 12,400 784,300
BankAmerica Corporation 6,100 504,013
Bell Atlantic Corporation 9,000 922,500
Boeing Company 10,000 521,250
Borders Group, Inc. * 30,000 1,021,875
Carnival Corporation - Class A 10,000 697,500
CBS Corporation 22,000 746,625
Chancellor Media
Corporation - Class A * 26,000 1,192,750
Chase Manhattan Corporation 7,500 1,011,563
Chevron Corporation 10,000 803,125
Circuit City Stores 11,500 491,625
Clear Channel Communications 10,000 980,000
Columbia/HCA Healthcare 27,900 899,775
Comcast Corporation - Class A 25,000 882,813
20
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares Market Value
Common Stocks (continued)
United States (continued)
Computer Association
International 14,000 $ 808,500
Crane Company 22,000 1,166,000
Crompton & Knowles 30,000 868,125
Demasz 5,000 82,100
El Paso Natural Gas
Corporation 14,000 987,875
EMC Corporation * 30,000 1,134,375
Federal National Mortgage
Association 23,000 506,000
Ford Motor Company 15,000 972,188
Fort James Corporation 20,000 916,250
Golden State Bancorporation * 20,000 763,750
Group Maintenance America * 16,000 271,000
Hasbro, Inc. 26,000 918,125
HealthSouth Corporation * 40,000 1,122,500
Hilton Hotels Corporation 20,000 637,500
Ingersoll-Rand 27,000 1,294,313
Intel 10,000 780,625
International Business Machines 7,000 727,125
Kimberly-Clark Corporation 8,000 401,000
La Quinta Inns, Inc. 50,000 1,050,000
Maytag Corporation 10,000 478,125
McDermott International, Inc. 13,000 537,063
Mead Corporation 14,310 512,477
Meyer (Fred), Inc. * 13,000 600,438
Microsoft Corporation * 5,000 447,500
Mirage Resorts, Inc. 10,000 243,125
Newmont 8,800 276,368
Ocular Sciences * 2,500 79,688
Omnicare, Inc. 15,000 594,375
Philip Morris Companies, Inc. 35,000 1,459,063
Phillips Petroleum Corporation 7,100 354,556
Progressive Corporation 8,000 1,077,500
Provident Companies, Inc. 12,900 442,631
Providian Financial Corporation 8,000 459,500
Sovereign Bancorporation 60,000 1,091,250
Sprint Corporation 16,000 1,083,000
St. Paul Companies, Inc. 8,000 713,000
Staples, Inc.* 36,250 1,304,297
Sunbeam Corporation 20,000 881,250
Shares or
Principal
Amount Market Value
Common Stocks (continued)
United States (continued)
Sybron International
Corporation * 27,000 $ 705,375
Tele-Communications
International * 32,000 995,000
Time Warner, Inc. 17,500 1,260,000
Travelers Group 18,000 792,000
U.S. Food Services 30,000 1,104,375
U.S. Industries, Inc. 37,500 1,127,344
Wal-Mart Stores 15,000 762,188
Washington Mutual 5,000 358,594
Westpoint Stevens,
Inc. - Class A * 16,000 458,000
Weyerhaeuser Company 14,500 819,250
Williams Companies, Inc. 12,500 400,000
WorldCom, Inc. * 23,000 990,438
------------
51,212,648
------------
Venezuela - 0.07%
Compania Anonima Nacional
Telefonos~ 2,500 104,531
------------
Total Common Stocks
(cost $129,732,140) 154,286,412
------------
Corporate Bonds - 0.06%
Malaysia
Telekom Malaysia Berhad,
4.00%, 10/3/04~ (9/22/94,
$70,000) (a) (b) $ 70,000 57,575
------------
Great Britian
Scotia Holdings, 8.50%,
3/26/02 19,000 31,334
------------
Total Corporate Bonds
(cost $89,000) 88,909
------------
Total Long-Term Investments
(cost $129,821,140) 154,375,321
------------
Short-Term
Investment - 5.56%
Repurchase Agreement
Goldman Sachs & Company
Dated 03/31/98, 6.05%, due
04/01/98, collateralized by
Federal Home Loan
Mortgage Corporation,
$8,973,100 7.00%,
11/01/27, market value
$ 9,076,852 (cost
$ 8,881,546) 8,881,546 8,881,546
------------
Total Investments (cost
$ 138,702,686)-102.29% 163,256,867
------------
Other Assets less
Liabilities - (2.29%) (3,651,255)
------------
Net Assets - 100.00% $159,605,612
============
21
<PAGE>
Mentor Perpetual Global Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
* Non-income producing.
# Global Depository Receipts.
~ American Depository Receipts.
@ International Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4 (2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) All or a portion of these securities are restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses
after the title of the restricted securities.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $101,655,736 and $101,900,315, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $138,702,686. Net unrealized appreciation aggregated
$24,554,181, of which $28,319,427, related to appreciated investment securities
and $3,765,246, related to depreciated investment securities.
See notes to financial statements.
22
<PAGE>
Mentor Perpetual Global Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $ 154,375,321
Repurchase agreements 8,881,546
-------------
Total investments
(cost $138,702,686) 163,256,867
-------------
Receivables
Collateral for securities
loaned (Note 2) 5,780,650
Investments sold 2,127,048
Fund shares sold 910,731
Dividends and interest 481,160
Deferred expenses (Note 2) 9,655
-------------
Total assets 172,566,111
-------------
Liabilities
Payables
Investments purchased $6,829,816
Securities loaned (Note 2) 5,780,650
Fund shares redeemed 206,344
Unrealized depreciation on
forward foreign currency
exchange contracts (Note 6) 16,509
Accrued expenses and other
liabilities 127,180
----------
Total liabilities 12,960,499
-------------
Net Assets $ 159,605,612
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 129,223,015
Accumulated net investment loss (766,032)
Accumulated net realized gain
on investment transactions 6,594,196
Net unrealized appreciation of
investments and foreign
currency related transactions 24,554,433
-------------
Net Assets $ 159,605,612
=============
Net Asset Value per Share
Class A Shares $ 22.01
Class B Shares $ 21.24
Class Y Shares $ 22.01
Offering Price per Share
Class A Shares $ 23.35
Class B Shares $ 21.24
Class Y Shares $ 22.01
Shares Outstanding
Class A Shares 2,593,624
Class B Shares 4,826,678
Class Y Shares 53
-------------
Total Shares Outstanding 7,420,355
=============
(a) Computation of offering price: 100/94.25 of net asset value.
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends (b) $ 801,733
Interest 150,826
------------
Total investment
income (Note 2) 952,559
Expenses
Management fee (Note 3) $ 730,095
Distribution fee (Note 3) 331,080
Shareholder service fee (Note 5) 173,174
Custodian and accounting fees
(Note 3) 104,899
Transfer agent fee (Note 3) 104,545
Administration fee (Note 4) 69,270
Shareholder reports and postage
expenses 20,121
Registration expenses 18,666
Organizational expenses 5,518
Legal fees 2,503
Directors' fees and expenses 1,943
Audit fees 1,362
Miscellaneous 57,458
---------
Total expenses 1,620,634
------------
Net investment loss (668,075)
------------
Realized and unrealized gain on
investments and foreign currency
transactions
Net realized gain on investments
and foreign currency related
transactions (Note 2) 7,971,794
Change in unrealized appreciation
on investments and foreign
currency related transactions 7,359,204
---------
Net gain on investments and
foreign currency related
transactions 15,330,998
------------
Net increase in net assets resulting
from operations $ 14,662,923
============
(b) Net of withholding taxes of $83,339.
See notes to financial statements.
23
<PAGE>
Mentor Perpetual Global Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98 Year Ended
(Unaudited) 9/30/97
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment loss $ (668,075) $ (416,666)
Net realized gain on investments and foreign currency related transactions 7,971,794 6,084,166
Change in unrealized appreciation on investments and foreign currency related 7,359,204 13,678,454
transactions ------------ -------------
Increase in net assets resulting from operations 14,662,923 19,345,954
------------ -------------
Distributions to Shareholders
From net realized gain on investments
Class A (2,383,513) (476,590)
Class B (4,554,255) (1,576,577)
Class Y (8) -
--------------- -------------
Total distributions to shareholders (6,937,776) (2,053,167)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 26,964,248 74,523,622
Reinvested distributions 6,732,714 2,007,927
Shares redeemed (17,402,093) (13,467,704)
-------------- -------------
Change in net assets resulting from capital share transactions 16,294,869 63,063,845
-------------- -------------
Increase in net assets 24,020,016 80,356,632
Net Assets
Beginning of period 135,585,596 55,228,964
-------------- -------------
End of period (including accumulated undistributed net investment
loss of $766,032 and $97,957, respectively) $ 159,605,612 $ 135,585,596
============== =============
</TABLE>
See notes to financial statements.
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 20.94 $ 17.86
---------- --------
Income from investment operations
Net investment income (loss) (0.06) 0.04
Net realized and unrealized gain on investments 2.15 3.67
------------ --------
Total from investment operations 2.09 3.71
------------ --------
Less distributions
From net realized capital gain (1.02) (0.63)
------------ ----------
Total distributions (1.02) (0.63)
------------ ----------
Net asset value, end of period $ 22.01 $ 20.94
============ ==========
Total Return* 10.49 % 21.59 %
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 57,092 $ 46,556
Ratio of expenses to average net assets 1.83% (a) 1.89%
Ratio of expenses to average net asset excluding waiver 1.83% (a) 1.89%
Ratio of net investment income (loss) to average net assets (0.48%)(a) 0.07%
Portfolio turnover rate 75% 128%
Average commission rate on portfolio transactions $ 0.0259 $ 0.0319
<CAPTION>
Year Year Year
Ended Ended Ended
9/30/96 9/30/95 9/30/94 (b)
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 15.88 $ 14.23 $ 14.18
-------- -------- ----------
Income from investment operations
Net investment income (loss) (0.04) 0.05 (0.01)
Net realized and unrealized gain on investments 2.82 1.60 0.06
--------- -------- ---------
Total from investment operations 2.78 1.65 0.05
--------- -------- ---------
Less distributions
From net realized capital gain (0.80) - -
--------- -------- ---------
Total distributions (0.80) - -
--------- -------- ---------
Net asset value, end of period $ 17.86 $ 15.88 $ 14.23
========= ======== ========
Total Return* 18.40% 11.60% 0.35%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 13,098 $ 6,854 $ 8,882
Ratio of expenses to average net assets 1.95% 2.06% 2.09% (a)
Ratio of expenses to average net asset excluding waiver 1.95% 2.11% 3.18% (a)
Ratio of net investment income (loss) to average net assets (0.21%) 0.26% (0.10%)(a)
Portfolio turnover rate 130% 155% 2%
Average commission rate on portfolio transactions $ 0.0320
</TABLE>
(a) Annualized.
(b) For the period from March 29, 1994 (commencement of operations), to
September 30, 1994.
* Total return does not reflect sales commissions and is
not annualized.
See notes to financial statements.
24
<PAGE>
Mentor Perpetual Global Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 20.32 $ 17.46
---------- --------
Income from investment operations
Net investment loss (0.11) (0.02)
Net realized and unrealized gain on investments 2.05 3.51
------------ ---------
Total from investment operations 1.94 3.49
------------ ---------
Less distributions
From net realized capital gain (1.02) (0.63)
------------ ---------
Total distributions (1.02) (0.63)
------------ ---------
Net asset value, end of period $ 21.24 $ 20.32
============ =========
Total Return* 10.11% 20.74%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 102,513 $ 89,030
Ratio of expenses to average net assets 2.57% (a) 2.64%
Ratio of expenses to average net asset excluding waiver 2.57% (a) 2.64%
Ratio of net investment loss to average net assets (1.22%)(a) (0.68%)
Portfolio turnover rate 75% 128%
Average commission rate on portfolio transactions $ 0.0259 $ 0.0319
<CAPTION>
Year Year Year
Ended Ended Ended
9/30/96 9/30/95 9/30/94 (c)
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 15.67 $ 14.15 $ 14.18
-------- -------- -----------
Income from investment operations
Net investment loss (0.05) (0.05) (0.04)
Net realized and unrealized gain on investments 2.64 1.57 0.01
--------- -------- -----------
Total from investment operations 2.59 1.52 (0.03)
--------- -------- -----------
Less distributions
From net realized capital gain (0.80) - -
--------- -------- -----------
Total distributions (0.80) - -
--------- -------- -----------
Net asset value, end of period $ 17.46 $ 15.67 $ 14.15
========= ======== ===========
Total Return* 17.39% 10.74% (0.21%)
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 42,131 $ 12,667 $ 7,987
Ratio of expenses to average net assets 2.70% 2.72% 2.79%)(a)
Ratio of expenses to average net asset excluding waiver 2.70% 2.79% 3.93%)(a)
Ratio of net investment loss to average net assets (0.91%) (0.40%) (0.82%)(a)
Portfolio turnover rate 130% 155% 2%
Average commission rate on portfolio transactions $ 0.0320
</TABLE>
Class Y Shares
Period
Ended 3/31/98 (d)
(Unaudited)
Per Share Operating Performance
Net asset value, beginning of period $ 18.60
---------
Income from investment operations
Net investment loss (0.06)
Net realized and unrealized gain on investments 3.62
-----------
Total from investment operations 3.56
-----------
Less distributions
From net realized capital gain (0.15)
-----------
Total distributions (0.15)
-----------
Net asset value, end of period $ 22.01
===========
Total Return* 18.32%
Ratios / Supplemental Data
Net assets, end of period $ 1,175
Ratio of expenses to average net assets 1.64% (a)
Ratio of expenses to average net asset excluding waiver 1.64% (a)
Ratio of net investment loss to average net assets (0.56%)(a)
Portfolio turnover rate 75%
Average commission rate on portfolio transactions $ 0.0259
(a) Annualized.
(c) For the period from March 29, 1994 (commencement of operations) to September
30, 1994.
(d) For the period from November 19, 1997 (initial offering of Class Y
Shares) to March 31, 1998.
* Total return does not reflect sales commissions and is not annualized.
See notes to financial statements.
25
<PAGE>
Mentor Capital Growth Portfolio
Managers' Commentary: The Large-Capitalization Quality Growth Management Team
March 31, 1998
- --------------------------------------------------------------------------------
Economic Overview
The S&P 500 gained 17.2% during the six-month period ended March 31, 1998.* The
first quarter of this year alone marked the index's thirteenth consecutive
quarterly gain. The 1990s marked the best bull market of this century next to
the meteoric market rise of the 1920s. Compared with its long-term average
annual return of 11%, the S&P 500 has provided an annualized return of nearly
19% since this move began in September 1990.
As always after such extended runs, the stock market is starting to appear more
speculative. Investors pouring money into the market have combined with price
momentum in a self-perpetuating cycle: rising prices attract more money, which
in turn pushes prices higher. Certain stocks are moving up dramatically on no
substantive news and valuation is an increasingly less important consideration.
More games are being played in the market today than in a long while. Bidding up
stocks after stock-split announcements has evolved into a huge force despite the
fact that these events are devoid of any intrinsic value. This phenomenon is
equivalent to paying more than $100 for two $50s. Of course, none of the
practitioners sees it so simply. Each understandably has much more elaborate
stock-split theories. Many of these same speculators are driving the prices of
certain "hype" stocks to extraordinary levels. Some internet companies are
trading at more than 100 times next year's estimated earnings - assuming
earnings are even expected. These emerging internet businesses are experiencing
tremendous revenue growth, but an equal amount of profit uncertainty. They do,
however, have price momentum and enthralling stories, qualities that currently
outweigh more fundamental considerations such as valuation and risk.
The speculative forces have not confined themselves to trading games and
emerging technologies. In fact, these forces have reached the bluest of the blue
chip stocks. Coca-Cola, Gillette, Microsoft, Lucent, and Pfizer are currently
trading at 50 or more times their earnings, with many more not far below these
levels. The last time select blue chip stocks traded at these multiples was
during the "one-decision" era in the early 1970s. The painful aftermath of that
episode compelled investors later to decry it as blatantly speculative and
emblematic of the herd mentality that dominates market extremes. The latest
edition of a popular financial magazine has three columnists each aggressively
recommending purchase of these mega-blue chips, based on money flow arguments -
that is, the money has no place else to go. Amazingly, each of the columnists
was there during the last 1950s debacle.
Twenty-five years must bury a lot of memories.
In its inevitable, irresistible way, the stock market is doling out plenty of
hanging rope. Our best guess is that it is not over yet. The momentum and the
money flows are truly extraordinary. If history is a reliable guide, the
speculation could get much more intense.
The Capital Growth Portfolio**
Our fund has performed relatively well over the past three years as the market
has skyrocketed; our returns have generally been in line with or better
* See notes to Performance Comparison, page 27.
** While the management team will endeavor to invest the Portfolio according
to their proprietary process, there is no guarantee of investment success.
26
<PAGE>
Mentor Capital Growth Portfolio
Managers' Commentary: The Large-Capitalization Quality Growth Management Team
March 31, 1998
- --------------------------------------------------------------------------------
than our peers and the S&P 500. Most importantly, we believe that we have done
so with meaningfully less risk. The volatility of our returns has been
considerably less than the S&P 500 and the average growth manager. We attempt to
control portfolio risk through the careful selection of financially strong
companies that have developed leading competitive positions in attractive
industries and trade at reasonable valuations relative to the S&P 500. This
disciplined quality-growth-at-a-reasonable-price approach makes us particularly
averse to speculation. While we are feeling increasingly out of sync with the
prevailing mood, our objective view positions us well for the time when the
market environment becomes less forgiving. We will not be immune to the next
downturn, but we will not look back feeling foolish.
Performance Comparison
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Capital Growth Portfolio Class A and Class B Shares and the S&P 500.~
[GRAPH]
A Shares B Shares S&P 500
-------- ------- ---------
4/29/92 $ 9,450 $10,000 $10,000
9/30/92 9,524 10,061 10,215
9/30/93 10,306 10,818 11,543
9/30/94 10,165 10,601 11,965
9/30/95 12,216 12,443 15,521
9/30/96 15,185 15,532 18,680
9/30/97 20,467 20,928 26,236
3/31/98 24,647 25,100 30,753
Average Annual Returns as of 3/31/98
Including Sales Charges
1-Year Since Inception+++
------ ------------------
Class A 39.03% 16.44%
Class B 42.49% 30.97%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses,
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares of rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Capital Growth Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
3/31/98.
27
<PAGE>
Mentor Capital Growth Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Capital Growth Portfolio Class Y Shares and the S&P 500.~
[GRAPH]
Y-Shares S&P 500
-------- -------
11/19/97 $10,000 $10,000
11/30/97 10,000 10,462
12/31/97 10,300 10,642
1/31/98 10,430 10,760
2.28/98 11,336 11,536
3/31/98 11,835 12,127
Total Returns as of 3/31/98
1-Year Since Inception++
------ -----------------
Class Y Shares n/a 18.35%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses,
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Capital Growth Portfolio Class Y from the
date of issuance on 11/19/97 through 3/31/98.
28
<PAGE>
Mentor Capital Growth Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares Market Value
Common Stocks - 93.05%
Basic Materials - 9.83%
Bemis Company, Inc. 212,900 $9,607,113
Morton International, Inc. 268,400 8,806,875
Sonoco Products Company 228,550 9,156,284
----------
27,570,272
----------
Capital Goods
& Construction - 9.75%
AlliedSignal, Inc. 210,000 8,820,000
Illinois Tool Works 145,000 9,388,750
W.W. Grainger, Inc. 88,800 9,129,750
----------
27,338,500
----------
Consumer Cyclical - 13.20%
Chancellor Media
Corporation * 211,000 9,679,625
Federated Department
Stores * 173,000 8,963,563
Interpublic Group Company 143,650 8,924,256
Newell Company 195,100 9,450,156
----------
37,017,600
----------
Consumer Staples - 13.17%
Bristol Myers Squibb
Company 84,500 8,814,405
McDonald's Corporation 152,700 9,162,000
Sherwin Williams Company 264,800 9,400,400
Sysco Corporation 373,300 9,565,813
----------
36,942,618
----------
Financial - 21.89%
American Express Company 95,100 8,731,369
Banc One Corporation 145,069 9,175,616
Federal National Mortgage
Association 115,000 7,273,750
General RE Corporation 40,800 9,001,500
NationsBank Corporation 131,800 9,613,163
Norwest Corporation 204,100 8,482,906
UNUM Corporation 165,200 9,116,975
----------
61,395,279
----------
Health - 6.41%
Johnson & Johnson 123,100 9,024,768
Schering - Plough
Corporation 109,400 8,936,613
----------
17,961,381
----------
Technology - 15.98%
Automatic Data Processing 138,000 9,392,625
Computer Sciences
Corporation 170,000 9,350,000
Emerson Electric Company 129,400 8,435,263
Sun Microsystems, Inc. * 203,000 8,468,904
WorldCom, Inc. 213,000 9,172,313
----------
44,819,105
----------
Shares or
Principal
Amount Market Value
Common Stocks (continued)
Transportation & Services - 2.82%
Werner Enterprises, Inc. 309,650 $ 7,896,075
------------
Total Common Stocks (cost
$ 201,812,749) 260,940,830
------------
Short-Term Investment - 5.98%
Repurchase Agreement
Goldman Sachs & Company
Dated 03/31/98, 6.05%, due
04/01/98, collateralized by
$16,927,622 Federal Home Loan
Mortgage Corporation, 7.00%,
11/01/27, market value
$17,123,347 (cost $16,754,689) $16,754,689 16,754,689
------------
Total Investments
(cost $218,567,438)-99.03% 277,695,519
------------
Other Assets less Liabilities-0.97% 2,720,271
------------
Net Assets - 100.00% $280,415,790
============
* Non-income producing.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $174,400,038 and $127,187,867, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $218,567,438. Net unrealized appreciation aggregated
$59,128,081, of which $59,530,633, related to appreciated investment securities
and $402,552, related to depreciated investment securities.
See notes to financial statements.
29
<PAGE>
Mentor Capital Growth Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $ 260,940,830
Repurchase agreements 16,754,689
-------------
Total investments
(cost $218,567,438) 277,695,519
Collateral for securities
loaned (Note 2) 11,292,506
Receivables
Investments sold 1,460,701
Fund shares sold 2,599,801
Dividends and interest 121,495
-------------
Total assets 293,170,022
-------------
Liabilities
Payables
Investments purchased $ 266,859
Securities loaned (Note 2) 11,292,506
Fund shares redeemed 1,090,799
Accrued expenses and other
liabilities 104,068
----------
Total liabilities 12,754,232
-------------
Net Assets $ 280,415,790
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 201,914,130
Accumulated net investment
loss (487,548)
Accumulated net realized gain
on investment transactions 19,861,127
Net unrealized appreciation of
investments 59,128,081
-------------
Net Assets $ 280,415,790
=============
Net Asset Value per Share
Class A Shares $ 24.68
Class B Shares $ 23.69
Class Y Shares $ 24.68
Offering Price per Share
Class A Shares $ 26.19(a)
Class B Shares $ 23.69
Class Y Shares $ 24.68
Shares Outstanding
Class A Shares 4,336,580
Class B Shares 7,318,348
Class Y Shares 49
-------------
Total Shares Outstanding 11,654,977
=============
(a) Computation of offering price: 100/94.25 of net asset value.
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends $ 1,259,710
Interest 304,029
------------
Total investment income
(Note 2) 1,563,739
Expenses
Management fee (Note 3) $ 856,388
Distribution fee (Note 3) 497,929
Shareholder service fee (Note 5) 267,621
Transfer agent fee (Note 3) 141,033
Administration fee (Note 4) 107,048
Shareholder reports and postage
expenses 25,758
Registration expenses 22,151
Custodian and accounting
fees (Note 3) 16,603
Legal fees 3,751
Directors' fees and expenses 2,953
Audit fees 2,048
Miscellaneous 85,059
----------
Total expenses 2,028,342
------------
Net investment income (464,603)
------------
Realized and unrealized gain on
investments
Net realized gain on
investments (Note 2) 22,513,626
Change in unrealized appreciation
on investments 20,391,057
----------
Net gain on investments 42,904,683
------------
Net increase in net assets resulting
from operations $ 42,440,080
============
See notes to financial statements.
30
<PAGE>
Mentor Capital Growth Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98 Year Ended
(Unaudited) 9/30/97
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment income (loss) $ (464,603) $ 55,807
Net realized gain on investments 22,513,626 14,469,617
Change in unrealized appreciation on investments 20,391,057 24,877,344
------------- -------------
Increase in net assets resulting from operations 42,440,080 39,402,768
------------- -------------
Distributions to Shareholders
From net investment income
Class A (29,703) -
Class B (52,910) -
From net realized gain on investments
Class A (5,934,345) (4,657,749)
Class B (10,485,734) (10,198,967)
Class Y (12) -
------------- -------------
Total distributions to shareholders (16,502,704) (14,856,716)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 88,774,399 61,493,267
Reinvested distributions 16,089,695 14,535,885
Shares redeemed (29,675,188) (21,387,389)
------------- -------------
Change in net assets resulting from capital share transactions 75,188,906 54,641,763
------------- -------------
Increase in net assets 101,126,282 79,187,815
Net Assets
Beginning of period 179,289,508 100,101,693
------------- -------------
End of period (including accumulated undistributed net investment income
(loss) of ($487,548) and $59,668, respectively) $ 280,415,790 $ 179,289,508
============= =============
</TABLE>
See notes to financial statements.
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 22.42 $ 19.36
-------- ---------
Income from investment operations
Net investment income (loss) (0.06) (0.02)
Net realized and unrealized gain (loss) on investments 4.26 5.87
---------- ----------
Total from investment operations 4.20 5.85
---------- ----------
Less distributions
From net investment income -- --
From net realized capital gain (1.94) (2.79)
---------- ----------
Total distributions (1.94) (2.79)
---------- ----------
Net asset value, end of period $ 24.68 $ 22.42
========== ==========
Total Return* 20.43% 34.78%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $107,031 $ 65,703
Ratio of expenses to average net assets 1.40%(a) 1.41%
Ratio of expenses to average net asset excluding waiver 1.40%(a) 1.41%
Ratio of net investment income (loss) to average net assets 0.03%(a) 0.53%
Portfolio turnover rate 61% 64%
Average commission rate on portfolio transactions $ 0.0689 $ 0.0697
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 16.02 $ 14.88 $ 15.26 $ 14.21
--------- -------- -------- --------
Income from investment operations
Net investment income (loss) 0.11 0.02 0.09 0.14
Net realized and unrealized gain (loss) on investments 3.73 2.91 (0.30) 1.02
--------- -------- -------- --------
Total from investment operations 3.84 2.93 (0.21) 1.16
--------- -------- -------- --------
Less distributions
From net investment income -- -- (0.04) (0.11)
From net realized capital gain (0.50) (1.79) (0.13) --
---------- -------- -------- --------
Total distributions (0.50) (1.79) (0.17) (0.11)
---------- -------- -------- --------
Net asset value, end of period $ 19.36 $ 16.02 $ 14.88 $ 15.26
========== ======== ======== ========
Total Return* 24.63% 20.18% (1.37%) 8.21%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $31,889 $ 29,582 $ 21,181 $31,360
Ratio of expenses to average net assets 1.43% 1.87% 1.70% 1.49%
Ratio of expenses to average net asset excluding waiver 1.43% 1.87% 1.70% 1.59%
Ratio of net investment income (loss) to average net assets 0.51% 0.27% 0.53% 0.96%
Portfolio turnover rate 98% 157% 149% 192%
Average commission rate on portfolio transactions $0.0688
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
See notes to financial statements.
31
<PAGE>
Mentor Capital Growth Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
Per Share Operating Performance
Net asset value, beginning of period $ 21.68 $ 18.92
--------- ----------
Income from investment operations
Net investment income (loss) (0.03) --
Net realized and unrealized gain
(loss) on investments 3.98 5.55
----------- ----------
Total from investment operations 3.95 5.55
----------- ----------
Less distributions
Dividends from net investment
income -- --
Distributions in excess of net
investment income -- --
Distributions from net realized
capital gain (1.94) (2.79)
----------- ----------
Total distributions (1.94) (2.79)
----------- ----------
Net asset value, end of period $ 23.69 $ 21.68
=========== ==========
Total Return* 19.93% 33.88%
Ratios / Supplemental Data
Net assets, end of period (in
thousands) $ 173,384 $113,587
Ratio of expenses to average net assets 2.14%(a) 2.16%
Ratio of expenses to average net asset
excluding waiver 2.14% (a) 2.16%
Ratio of net investment income (loss)
to average net assets (0.71%)(a) (0.22%)
Portfolio turnover rate 61% 64%
Average commission rate on portfolio
transactions $ 0.0689 $0.0697
<TABLE>
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 15.79 $ 14.80 $ 15.23 $ 14.22
-------- -------- -------- --------
Income from investment operations
Net investment income (loss) (0.04) 0.25 (0.04) 0.05
Net realized and unrealized gain
(loss) on investments 3.67 2.53 (0.26) 1.02
--------- -------- -------- --------
Total from investment operations 3.63 2.78 (0.30) 1.07
--------- -------- -------- --------
Less distributions
Dividends from net investment
income -- -- -- (0.05)
Distributions in excess of net
investment income -- -- -- (0.01)
Distributions from net realized
capital gain (0.50) (1.79) (0.13) --
--------- -------- -------- --------
Total distributions (0.50) (1.79) (0.13) (0.06)
--------- -------- -------- --------
Net asset value, end of period $ 18.92 $ 15.79 $ 14.80 $ 15.23
========= ======== ======== ========
Total Return* 23.64% 19.26% (2.00%) 7.52%
Ratios / Supplemental Data
Net assets, end of period (in
thousands) $68,213 $ 57,648 $ 41,106 $ 57,030
Ratio of expenses to average net assets 2.18% 2.56% 2.46% 2.24%
Ratio of expenses to average net asset
excluding waiver 2.18% 2.56% 2.46% 2.34%
Ratio of net investment income (loss)
to average net assets (0.24%) (0.41%) (0.22%) 0.21%
Portfolio turnover rate 98% 157% 149% 192%
Average commission rate on portfolio
transactions $0.0688
</TABLE>
Class Y Shares
Period Months
Ended 3/31/98 (b)
(Unaudited)
Per Share Operating Performance
Net asset value, beginning of period $ 20.89
--------
Income from investment operations
Net investment income 0.01
Net realized and unrealized gain on
investments 4.03
--------
Total from investment operations 4.04
--------
Less distributions
From net realized capital gain (0.25)
---------
Total distributions (0.25)
---------
Net asset value, end of period $ 24.68
=========
Total Return* 18.35%
Ratios / Supplemental Data
Net assets, end of period $ 1,200
Ratio of expenses to average net assets 1.16%(a)
Ratio of expenses to average net asset
excluding waiver 1.16%(a)
Ratio of net investment income to
average net assets 0.00%(a)
Portfolio turnover rate 61%
Average commission rate on portfolio
transactions $ 0.0689
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998. * Total return does not reflect sales commissions and is not
annualized.
See notes to financial statements.
32
<PAGE>
Mentor Strategy Portfolio
Managers' Commentary: The Tactical Asset Allocation Team
March 31, 1998
- --------------------------------------------------------------------------------
The Asset Allocation Process*
Our asset allocation process has had a long history of analyzing historical
relationships and comparing them to current conditions to determine what mixture
of stocks, bonds, and cash may be the most profitable for the coming one to two
years.
In May, 1996 our model began to indicate that bonds should be added to the
Strategy Portfolio. As the stock market continued to soar, and bond yields
remained dormant, the model stressed that stocks have rarely been more
over-valued, relative to bonds, or even to Treasury bills. As a result, our most
recent allocation, initially assumed in December, 1997, is an unusually heavy
weighting of 32% bonds, supplementing 15% cash reserves. That produces, of
course, a 53% weighting for stocks.
The Stock Market
We now find the S&P 500 with a price/earnings ratio of 28x trailing 12-month
earnings, the highest in U.S. history.** In December, 1997, we would never have
believed that the S&P 500 would be up at all, much less the 14% of the first
quarter. Now we find that in the wake of the Asian Pacific crisis, and obvious
profit problems in basic industry and technology companies, analysts are
predicting that first-quarter earnings will be down 0.4%. The Commerce
Department just released statistics to show that earnings for all domestic
companies have actually been down 2% in the most recent year. And despite all
this, large-cap. stocks continue to soar. Historical relationships have, at
least temporarily, been rendered useless.
Deviations from normal historical relationships, though not as dramatic as
today, have occurred from time to time in the past, and have always eventually
returned to norm. Each of these periods of abnormality has raised speculation
that the stock market has entered a new paradigm. Never has there been as heavy
a barrage of large-cap. mergers, acquisitions, and stock buy-backs as the market
is experiencing today. The tumult in much of the Asian Pacific and Eastern
European countries is causing huge amounts of investment dollars from those
arenas to seek a safe haven, like the U.S. It is impossible to tell when these
conditions will return to normal.
The Portfolio
Despite good performance in the equity segment of our Portfolio, the overall
performance of our Portfolio has been greatly diminished by our low 53%
commitment to stocks. We continue, however, to believe that investors must use
the lessons of history to guide their investment decisions, even though relative
performance can suffer during these abnormal periods.
There are signs that temporarily this bull market is finally seeing upside
resistance, and that the huge excess corporate cash involved in the merger,
acquisition, and stock buy-backs will be negatively affected in the next few
months. If that is the case, and if second quarter earnings do prove as
disappointing as we expect, today's defensive strategy will prove to be very
comforting.
* While the managers will endeavor to invest the Portfolio according to
their porprietary process, there is no guarantee of investment success.
** See notes to Performance Comparison, page 33.
33
<PAGE>
Mentor Strategy Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
[GRAPH]
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class A Shares and the S&P 500.~
Class A S&P 500~
-------- --------
6/5/95 $ 9,425 $10,000
6/30/95 9,695 10,235
9/30/95 10,554 10,890
9/30/96 12,747 13,291
9/30/97 14,273 18,668
3/31/98 14,913 21,882
Average Annual Returns as of 3/31/98
Including Sales Charges
1-Year Since Inception**
------ -----------------
Class A 17.13% 15.21%
Past performance does not guarantee future comparable results. Investment return
and principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Performance figures
represent change in investment value after reinvesting all distributions.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
* Represents a hypothetical investment of $10,000 in Mentor Strategy
Portfolio Class A Shares, after deducting the maximum sales charge of
5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations of Mentor Strategy Portfolio Class A from the date of
issuance on 6/5/95 through 3/31/98.
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class B Shares and the S&P 500.~
[GRAPH]
Class B S&P 500
------- -------
10/29/93 $10,000 $10,000
12/31/93 10,160 10,024
12/31/94 9,798 10,157
9/30/95 12,175 13,180
9/30/96 14,125 15,860
9/30/97 15,838 22,275
3/31/98 16,589 26,111
Average Annual Returns as of 3/31/98
Including Sales Charges
1-Year Since Inception+
------ ----------------
Class b 19.35% 12.11%
*** Represents a hypothetical investment of $10,000 in Mentor Strategy
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period
following the date of purchase. The ending value of the Class B Shares
reflects a redemption fee of 4.00% on any redemption less than one year
from the purchase date. The Class B Shares' performance assumes the
reinvestment of all dividends and distributions.
+ Reflects operations of Mentor Strategy Portfolio Class B from the date of
commencement of operations on 10/29/93 through 3/31/98.
34
<PAGE>
Mentor Strategy Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
[GRAPH]
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class Y Shares and the S&P 500.~
Class Y S&P 500~
-------- --------
11/19/97 $10,000 $10,000
11/30/97 10,000 10,462
12/31/97 10,060 10,642
1/31/98 9,980 10,760
2/28/98 10,400 11,536
3/31/98 10,707 12,127
Total Returns as of 3/31/98
1-Year Since Inception**
------ -----------------
Class Y n/a 7.07%
Past performance does not guarantee future comparable results. Investment return
and principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Performance figures
represent change in investment value after reinvesting all distributions.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
* Represents a hypothetical investment of $10,000 in Mentor Strategy
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Strategy Portfolio Class Y from the date of
issuance on 11/19/97 through 3/31/98.
35
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares Market Value
Common Stocks - 54.58%
Basic Materials - 1.02%
Southdown, Inc. 34,250 $ 2,386,796
United Stationers, Inc. 8,500 525,406
------------
2,912,202
------------
Capital Goods &
Construction - 2.22%
Applied Power, Inc.-
Class A 12,600 485,100
Centex Corporation 27,800 1,059,875
Clayton Homes 41,300 836,325
Kuhlman Corporation 35,400 1,723,537
Oakwood Homes 21,200 776,450
Paccar, Inc. 24,100 1,435,456
------------
6,316,743
------------
Commercial Services - 1.34%
Comdisco, Inc. 40,500 1,766,813
Omnicom Group, Inc. 43,800 2,061,338
------------
3,828,151
------------
Consumer Cyclical - 7.21%
Best Buy Company, Inc. * 9,800 652,925
Bowne & Company 31,100 1,286,762
Chrysler Corporation 19,200 798,000
Ford Motor Company 13,600 881,450
General Motors
Corporation 11,000 741,813
Jacor Communications, Inc. * 37,300 2,200,700
McGraw-Hill Companies 9,100 692,169
Royal Caribbean Cruises,
Limited 26,400 1,849,650
Sinclair Broadcast Group * 47,800 2,754,475
Time Warner 25,800 1,857,600
Tribune Company 35,300 2,488,650
Walt Disney Company 13,000 1,387,750
Young Broadcasting * 59,900 2,995,000
------------
20,586,944
------------
Consumer Staples - 1.35%
Express Scripts - Class A * 38,000 3,221,687
Sysco Corporation 24,400 625,250
3,846,937
------------
Energy - 0.98%
TransCanada Pipelines,
Limited 36,400 859,950
Westcoast Energy 34,800 852,600
Williams Companies 33,500 1,072,000
------------
2,784,550
------------
Financial - 9.92%
Associated Banc-Corporation 32,000 1,726,000
Charter One Financial, Inc. 46,606 3,105,125
Dime Bancorp, Inc. 61,700 1,854,856
Shares Market Value
Common Stocks (continued)
Financial (continued)
First Republic Bancorp, Inc. 46,300 $ 1,666,800
Marsh & McLennan
Companies, Inc. 9,800 855,663
North Fork Bancorp 74,500 2,877,563
Northern Trust Corporation 35,200 2,631,200
Old Republic International
Corporation 61,700 2,734,081
Onbancorp, Inc. 23,400 1,620,450
Price (T. Rowe) &
Associates, Inc. 35,000 2,463,125
Synovus Financial
Corporation 38,200 1,418,175
Travelers Group, Inc. 45,300 2,718,000
U.S. Bancorp 20,900 2,607,275
------------
28,278,313
------------
Health - 3.76%
Health Management
Association - Class A * 55,350 1,584,394
McKesson Corporation 58,400 3,372,600
Paragon Health Network 54,333 1,079,868
Sunrise Assisted Living * 40,800 1,825,800
Watson Pharmacueticals * 79,100 2,847,600
------------
10,710,262
------------
Retail - 7.83%
American Eagle Outfitters * 65,100 2,864,400
Costco Companies, Inc. * 91,000 4,857,125
Family Dollar Stores, Inc. 85,750 3,258,500
Federated Department
Stores * 71,700 3,714,956
G & K Services - Class A 6,800 298,350
Gap, Inc. 27,825 1,252,125
Linens 'n Things, Inc. * 25,300 1,389,919
Safeway, Inc. * 61,600 2,275,350
TJX Companies, Inc. 53,200 2,407,300
------------
22,318,025
------------
Technology - 11.67%
AFC Cable System, Inc. * 54,500 2,118,688
Affiliated Computer Services-
Class A * 35,300 1,171,519
Airtouch Communications * 122,500 5,994,844
Applied Graphics
Technology * 41,800 2,011,656
AT&T Corporation 22,800 1,496,250
BCE, Inc. 35,600 1,486,300
CACI International * 54,500 1,199,000
Computer Task Group 14,400 593,100
Dell Computer
Corporation * 37,000 2,504,437
EMC Corporation * 28,400 1,073,875
36
<PAGE>
Mentor Strategy Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares Market Value
Common Stocks (continued)
Technology (continued)
ICG Communications * 38,000 $1,415,500
Intelligroup, Inc. * 70,200 1,136,362
Kellstrom Industries, Inc. * 128,900 3,246,669
Mobile Telecom Technical
Corporation * 63,000 1,409,625
OfficeMax * 30,800 550,550
Sprint Corporation 23,900 1,617,731
Telefonica de Espana 11,900 1,573,775
Torchmark 58,600 2,684,613
----------
33,284,494
----------
Transportation - 2.69%
Airborne Freight
Corporation 57,000 2,144,625
Alaska Airgroup 30,800 1,668,975
American Classic Voyages
Company 30,900 710,700
AMR Corporation 9,300 1,331,644
Continental Airlines -
Class B * 30,900 1,817,306
----------
7,673,250
----------
Utilities - 2.51%
Conectiv, Inc. - Class A 2,412 81,707
Duke Energy Corporation 7,300 434,806
FPL Group, Inc. 7,100 456,175
GTE Corporation 23,700 1,419,038
Illinova Corporation 13,800 416,587
IPALCO Enterprises, Inc. 9,800 441,613
New York State
Electric & Gas 11,500 458,562
NIPSCO Industries 16,000 448,000
U.S. West Communications
Group 24,600 1,346,850
U.S. West Media Group * 47,800 1,661,050
----------
7,164,388
----------
Miscellaneous - 2.08%
Carlisle Companies, Inc. 33,400 1,640,775
Delia'S, Inc. * 45,800 1,099,200
Lennar Corporation 39,962 1,376,191
Rent Way, Inc. * 49,100 1,166,125
Tyco International Limited 12,000 655,500
----------
5,937,791
----------
Principal
Amount Market Value
Common Stocks (continued)
Total Common Stocks
(cost $112,521,982) $ 155,642,050
-------------
U.S. Government Securities 33.20%
U.S. Treasury Note, 5.50%,
1/31/03 $ 12,000,000 11,912,160
U.S. Treasury Bond, 6.50%,
11/15/26 77,523,000 82,736,422
-------------
Total U.S. Government
Securities (cost
$ 87,088,991) 94,648,582
-------------
Short-Term Investment - 11.08%
Repurchase Agreement
Goldman Sachs & Company
Dated 03/31/98, 6.05%, due
04/01/98, collateralized by
$31,908,279 Federal Home Loan
Mortgage Corporation, 7.00%,
11/01/27, market value $32,227,218,
(cost $31,581,849) 31,581,849 31,581,849
-------------
Total Investments (cost
$ 231,192,822)-98.86% 281,872,481
-------------
Other Assets less Liabilities - 1.14% 3,251,380
-------------
Net Assets - 100.00% $ 285,123,861
=============
* Non-income producing.
(a) American Depository Receipts.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $88,381,538 and $144,726,891, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $231,192,822. Net unrealized appreciation aggregated
$50,679,659, of which $50,806,778, related to appreciated investment securities
and $127,119, related to depreciated investment securities.
See notes to financial statements.
37
<PAGE>
Mentor Strategy Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $ 250,290,632
Repurchase agreements 31,581,849
-------------
Total investments (cost
$231,192,822) 281,872,481
-------------
Collateral for securities
loaned (Note 2) 54,376,329
Receivables
Investments sold 1,797,664
Fund shares sold 272,519
Dividends and interest 2,126,104
Deferred expenses (Note 2) 15,138
-------------
Total assets 340,460,235
-------------
Liabilities
Payables
Securities loaned (Note 2) $54,376,329
Fund shares redeemed 811,048
Accrued expenses and other
liabilities 148,997
-----------
Total liabilities 55,336,374
-------------
Net Assets $ 285,123,861
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 238,532,347
Accumulated net investment
income 1,104,109
Accumulated net realized loss on
investment transactions (5,192,254)
Net unrealized appreciation of
investments 50,679,659
-------------
Net Assets $ 285,123,861
=============
Net Asset Value per Share
Class A Shares $ 16.05
Class B Shares $ 15.65
Class Y Shares $ 16.05
Offering Price per Share
Class A Shares $ 17.03(a)
Class B Shares $ 15.65
Class Y Shares $ 16.05
Shares Outstanding
Class A Shares 2,157,686
Class B Shares 16,006,748
Class Y Shares 67
-------------
Total Shares Outstanding 18,164,501
=============
(a) Computation of offering price: 100/94.25 of net asset value.
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends $ 622,780
Interest 3,720,968
------------
Total investment income
(Note 2) 4,343,748
Expenses
Management fee (Note 3) $1,317,072
Distribution fee (Note 3) 1,020,717
Shareholder service fee (Note 5) 387,373
Transfer agent fee (Note 3) 231,465
Administration fee (Note 4) 154,950
Shareholder reports and postage
expenses 40,040
Custodian and accounting
fees (Note 3) 39,628
Registration expenses 28,555
Organizational expenses 10,048
Legal fees 6,270
Directors' fees and expenses 5,216
Audit fees 3,466
Miscellaneous 17,240
----------
Total expenses 3,262,040
------------
Net investment income 1,081,708
------------
Realized and unrealized gain (loss)
on investments
Net realized loss on
investments (Note 2) (5,098,824)
Change in unrealized appreciation
on investments 14,674,155
----------
Net gain on investments 9,575,331
------------
Net increase in net assets resulting
from operations $ 10,657,039
============
See notes to financial statements.
38
<
<PAGE>
Mentor Strategy Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98 Year Ended
(Unaudited) 9/30/97
<S> <C> <C>
Net Increase (Decrease) in Net Assets
Operations
Net investment income $ 1,081,708 $ 5,345,384
Net realized gain (loss) on investments (5,098,824) 54,534,179
Change in unrealized appreciation on investments 14,674,155 (24,297,952)
------------- -------------
Increase in net assets resulting from operations 10,657,039 35,581,611
------------- -------------
Distributions to Shareholders
From net investment income
Class A (617,602) -
Class B (4,725,533) -
From net realized gain on investments
Class A (6,308,214) (1,531,137)
Class B (48,259,012) (21,767,428)
------------- -------------
Total distributions to shareholders (59,910,361) (23,298,565)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 10,114,698 71,646,650
Reinvested distributions 58,353,503 22,750,654
Shares redeemed (76,527,795) (73,109,779)
------------- -------------
Change in net assets resulting from capital share transactions (8,059,594) 21,287,525
------------- -------------
Increase (decrease) in net assets (57,312,916) 33,570,571
Net Assets
Beginning of period 342,436,777 308,866,206
------------- -------------
End of period (including accumulated undistributed net investement
income of $1,104,109 and $5,365,536, respectively) $ 285,123,861 $ 342,436,777
============= =============
</TABLE>
See notes to financial statements.
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months Year Year Period
Ended 3/31/98 Ended Ended Ended
(Unaudited) 9/30/97 9/30/96 9/30/95 (b)
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 18.61 $ 17.96 $ 15.24 $ 13.45
-------- --------- --------- ----------
Income from investment operations
Net investment income 0.13 0.31 0.08 --
Net realized and unrealized gain on investments 0.56 1.68 2.86 1.79
-------- --------- --------- -----------
Total from investment operations 0.69 1.99 2.94 1.79
-------- --------- --------- -----------
Less distributions
From net investment income (0.29) -- -- --
In excess of net investment income
From net realized capital gain (2.96) (1.34) (0.22) --
-------- ---------- ---------- -----------
Total distributions (3.25) (1.34) (0.22) --
-------- ---------- ---------- -----------
Net asset value, end of period $ 16.05 $ 18.61 $ 17.96 $ 15.24
======== ========== ========== ===========
Total Return* 4.48% 11.97 19.36 % 13.31%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $34,627 $ 40,552 $ 20,372 $ 10,503
Ratio of expenses to average net assets 1.45%(a) 1.45 % 1.42 % 1.65% (a)
Ratio of net investment income (loss) to average net assets 1.36%(a) 2.29 % 0.62 % (0.06%)(a)
Portfolio turnover rate 32% 192% 125% 122%
Average commission rate on portfolio transactions $0.0659 $ 0.0644 $ 0.0669
</TABLE>
(a) Annualized.
(b) For the period from June 5, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commisions and is not
annualized.
See notes to financial statements.
39
<PAGE>
Mentor Strategy Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Six Months Year Year
Ended 3/31/98 Ended Ended
(Unaudited) 9/30/97 9/30/96
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 18.29 $ 17.79 $ 15.21
-------- --------- ----------
Income from investment operations
Net investment income (loss) 0.05 0.26 (0.03)
Net realized and unrealized gain (loss)
on investments 0.56 1.58 2.83
-------- --------- ----------
Total from investment operations 0.61 1.84 2.80
-------- --------- ----------
Less distributions
From net investment income (0.29) -- --
From net realized capital gain (2.96) (1.34) (0.22)
---------- ---------- ----------
Total distributions (3.25) (1.34) (0.22)
---------- ---------- ----------
Net asset value, end of period $ 15.65 $ 18.29 $ 17.79
========== ========== ==========
Total Return* 4.06% 11.19% 18.48 %
Ratios / Supplemental Data
Net assets, end of period (in thousands) $250,496 $301,885 $288,494
Ratio of expenses to average net assets 2.20%(a) 2.20% 2.19 %
Ratio of net investment income (loss) to
average net assets 0.61%(a) 1.54% (0.19)%
Portfolio turnover rate 32% 192% 125%
Average commission rate on portfolio
transactions $ 0.0659 $ 0.0644 $ 0.0669
<CAPTION>
Period Year Period
Ended Ended Ended
9/30/95 (c) 12/31/94 12/31/93(d)
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 12.24 $ 12.70 $ 12.50
---------- -------- ----------
Income from investment operations
Net investment income (loss) -- (0.06) --
Net realized and unrealized gain (loss)
on investments 2.97 (0.40) 0.20
---------- -------- ----------
Total from investment operations 2.97 (0.46) 0.20
---------- -------- ----------
Less distributions
From net investment income -- -- --
From net realized capital gain -- -- --
---------- -------- ----------
Total distributions -- -- --
---------- -------- ----------
Net asset value, end of period $ 15.21 $ 12.24 $ 12.70
========== ======== ==========
Total Return* 24.26% (3.61)% 1.60%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 224,643 $ 179,274 $ 122,177
Ratio of expenses to average net assets 2.31%(a) 2.19% 2.06%(a)
Ratio of net investment income (loss) to
average net assets 0.02%(a) (0.54)% 0.08%(a)
Portfolio turnover rate 122% 143% 0%
Average commission rate on portfolio
transactions
</TABLE>
Class Y Shares
<TABLE>
<CAPTION>
Period
Ended 3/31/98 (e)
(Unaudited)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 15.01
--------
Income from investment operations
Net investment income 0.10
Net realized and unrealized gain on
investments 0.95
--------
Total from investment operations 1.05
--------
Less distributions
From net realized capital gain ( 0.01)
---------
Net asset value, end of period $ 16.05
=========
Total Return* 7.07 %
Ratios / Supplemental Data
Net assets, end of period $ 1,070
Ratio of expenses to average net assets 1.20 %(a)
Ratio of net investment income (loss) to
average net assets 1.89 %(a)
Portfolio turnover rate 32%
Average commission rate on portfolio
transactions $ 0.0659
</TABLE>
(a) Annualized.
(c) For the period from January 1, 1995 to September 30, 1995. (d) For the
period from October 29, 1993 (commencement of operations) to December 31, 1993.
(e) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998. * Total return does not reflect sales commissions and is not
annualized.
See notes to financial statements.
<PAGE>
Mentor Income and Growth Portfolio
Managers' Commentary: The Income and Growth Management Team
March 31, 1998
- --------------------------------------------------------------------------------
Review of Markets*
The S&P 500 completed its thirteenth consecutive quarter of price appreciation
and posted a strong total return of 17.2% for the six-month period ending March
31, 1998. Since the end of 1994, the index has appreciated 140% on a principal
basis. The primary drivers of this appreciation have been a significant decline
in interest rates and a 30% increase in companies' reported profits. If we look
at the last three quarters of 1997 in sequence, however, reported earnings
display a deteriorating trend: +3.1%, +0.9%, and -8.8%, respectively.** With
regard to the fixed-income markets, the first half of the period was marked by
strong performance in the bond market. During the most recent three months (the
second half of the period addressed in this report) interest rates were
virtually unchanged. This stability was true of all yields along the treasury
yield curve and marked a period which was devoid of profound changes in the
economic fundamentals which drive bond markets.
Portfolio Performance*
For the six-month period ending March 31, 1998, the Mentor Income & Growth
Portfolio returned 7.95% for the A shares and 7.52% for the B shares.
Market Outlook
Economic activity remains strong and GDP (gross domestic product) growth for the
first quarter should exceed the expectations that were in place at year-end.
Lower interest rates set off another round of mortgage refinancings that has
boosted housing activity and consumer durable spending. Economic expansion
continues to appear favorable. Low unemployment, upward pressure on wages,
declining energy prices, and low interest rates should keep the economy growing.
The pace of activity should moderate, however, from the very strong rate of the
past couple of quarters, the result of a further deterioration in foreign trade.
In addition, it is expected that the strong growth of spending on technology and
capital goods should begin to slow. On balance, we are somewhat more optimistic
about economic growth than we were last quarter, and currently estimate GDP
growth for 1998 of 2.5%.
Despite the strength of the economy, the outlook for inflation continues to
improve. Primarily because of the recent sharp drop in oil prices, we are once
again revising our inflation forecast downward to 1.1%. The strong dollar and
the potential threat of Asian imports also continue to dampen inflationary
pressures. Some important areas of the economy, however, are exhibiting upward
price pressures, with labor and real estate being the most notable examples.
Given the positive outlook for inflation and the emerging surplus in the Federal
budget, interest rates are likely to be stable and have the potential to move
down modestly.
Portfolio Strategy+
As of March 31, 1998, the asset allocation of the Portfolio was 57% equity, 40%
bonds, and 3% cash. We modestly increased equity exposure during the most recent
six-month period; however, it remains at the lower end of the expected range. We
feel that given the performance of the equity market and the possibility of a
slowing in earnings growth, conservative equity commitment is appropriate. The
current ratio is still healthy and reflects our underlying view that declining
interest rates will help to offset the drag of slowing earnings growth.
Equity Strategy
The Portfolio continues to be most heavily weighted in the industrial &
commercial, finance, and
41
<PAGE>
Mentor Income and Growth Portfolio
Managers' Commentary: The Income and Growth Management Team
March 31, 1998
- --------------------------------------------------------------------------------
healthcare sectors. During the quarter we continued to increase the weighting of
the industrial sector by investing in two new companies and adding to some
existing positions. In addition, we modestly reduced the Portfolio's exposure to
the finance sector, because of continued strong stock performance.
Given that profit margins are at the levels of historical peaks and that
companies are finding it difficult to raise prices because of competitive
conditions, wage pressures could negatively affect profit margins and profit
comparisons could become more difficult. A growing list of restructuring
announcements would confirm this difficulty. Therefore, with the market selling
at 28x trailing 12-month earnings, and a fairly flat profit outlook, we believe
further progress in the stock market may be dependent on lower interest rates.
Fixed-Income Strategy
As we look further into 1998, we remain convinced that inflation is under
control and probably declining, and that as a result, interest rates are still
too high. We felt this way before the financial and economic problems in Asia
became well known, and those developments simply make the case stronger. We
therefore expect to retain the Portfolio's longer-than-benchmark duration in
anticipation of lower short-term interest rates from the Federal Reserve and
declining long-term rates in response to persistently low inflation. Frankly,
the U.S. economy will need to slow before interest-rate declines can continue,
but we expect a decline later in 1998.
Although the corporate bond market does not offer substantial value, we also see
little danger to the corporate market in the upcoming environment. Therefore we
will continue to add corporate bonds when there is sufficient additional yield
to justify positions. Mortgages are fairly valued, and again we believe that
capturing the additional yield makes sense, so we expect to raise our mortgage
commitment a moderate degree.
* See notes to Performance Comparison, page 42.
** Source: I/B/E/S. The Institutional Broker's Estimate System.
+ While the management team will endeavor to invest the Portfolio
according to their proprietary process, there is no guarantee of
investment success.
42
<PAGE>
Mentor Income and Growth Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Income & Growth Portfolio Class A and Class B Shares, the S&P 500 and the Lehman
Brothers Aggregate Bond Index.+
A Shares B Shares LAGG/S&P 500
-------- -------- ------------
5/24/93 9,425 10,133 10,000
9/30/93 9,909 10,506 10,353
9/30/94 10,578 11,239 10,446
9/30/95 12,402 12,614 12,879
9/30/96 14,802 15,140 14,686
9/30/97 18,076 18,499 18,723
3/31/98 19,512 19,897 21,001
Average Annual Returns as of 3/31/98
Including Sales Charges
1-Year Since Inception++
------- -----------------
Class A 17.12% 14.73%
Class B 19.38% 18.78%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
*** Represents a hypothetical investment of $10,000 in Mentor Income and
Growth Portfolio Class A Shares, after deducting the maximum sales charge
of 5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class
A Shares' performance assumes the reinvestment of all dividends and
distributions.
+ The Standard & Poor's Index (S&P 500) is an unmanaged,
market-value-weighted index of 500 widely held domestic common stocks. An
unmanaged index does not reflect expenses and may not correspond to the
performance of a managed portfolio in which expenses are incurred. The
Lehman Brothers Aggregate Index is made up of the Government/Corporate
Index, the Mortgage-Backed Securities Index, and the Asset-Backed
Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are
adjusted to reflect reinvestment of interest and dividends on securities in
the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance. This index
represents an asset allocation of 60% S&P 500 stocks and 40% Lehman
Brothers Aggregate Bond Index.
++ Reflects operations of Mentor Income and Growth Portfolio Class A and Class
B Shares from the date of commencement of operations on 5/24/93 through
3/31/98.
43
<PAGE>
Mentor Income and Growth Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Income & Growth Portfolio Class Y Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
[GRAPH]
Y-Shares LAGG/S&P 500
---------- ------------
11/19/97 $10,000 $10,000
11/30/97 10,000 10,296
12/31/97 10,217 10,443
1/31/98 10,281 10,566
2/28/98 10,584 11,020
3/31/98 10,860 11,374
Total Returns as of 3/31/98
1-Year Since Inception++
------ -----------------
Class Y n/a 8.60%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
*** Represents a hypothetical investment of $10,000 in Mentor Income and
Growth Portfolio Class Y Shares. These shares are not subject to any sales
or contingent deferred sales charges. The Class Y Shares' performance
assumes the reinvestment of all dividends and distributions.
+ The Standard & Poor's Index (S&P 500) is an unmanaged,
market-value-weighted index of 500 widely held domestic common stocks. An
unmanaged index does not reflect expenses and may not correspond to the
performance of a managed portfolio in which expenses are incurred. The
Lehman Brothers Aggregate Index is made up of the Government/Corporate
Index, the Mortgage-Backed Securities Index, and the Asset-Backed
Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are
adjusted to reflect reinvestment of interest and dividends on securities in
the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance. This index
represents an asset allocation of 60% S&P 500 stocks and 40% Lehman
Brothers Aggregate Bond Index.
++ Reflects operations of Mentor Income and Growth Portfolio Class Y Shares
from the date of issuance operations on 11/19/97 through 3/31/98.
44
<PAGE>
Mentor Income and Growth Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares Market Value
Common Stocks - 55.64%
Basic Materials - 4.04%
Aluminum Company of
America 24,000 $1,651,500
British Steel PLC~ 98,600 2,391,050
duPont (E.I.) de Nemours 25,400 1,727,200
Westvaco Corporation 42,000 1,291,500
Willamette Industries, Inc. 60,000 2,253,750
----------
9,315,000
----------
Capital Goods &
Construction - 4.41%
Caterpillar, Inc. 25,500 1,404,094
Cooper Industries, Inc. 33,000 1,961,436
General Signal Corporation 16,800 785,400
Honeywell, Inc. 25,000 2,067,188
Thomas & Betts Corporation 36,600 2,342,400
Waste Management, Inc. 51,800 1,596,088
----------
10,156,606
----------
Commercial Services - 5.31%
Fluor Corporation 64,000 3,184,000
Foster Wheeler Corporation 100,000 3,056,250
Supervalu, Inc. 30,500 1,422,063
Wallace Computer Services,
Inc. 132,000 4,570,500
----------
12,232,813
----------
Consumer Cyclical - 5.61%
American Stores Company 112,200 2,917,200
Ford Motor Company 76,000 4,925,750
Maytag Corporation 42,400 2,027,250
Sears, Roebuck & Company 53,000 3,044,188
----------
12,914,388
----------
Consumer Staples - 6.49%
American Home Products
Corporation 22,900 2,184,086
Baxter International, Inc. 62,000 3,417,750
Dimon Incorporated 190,900 3,185,644
Hormel Foods Corporation 28,200 1,094,513
Kimberly-Clark Corporation 58,700 2,942,338
Philip Morris Companies, Inc. 50,900 2,121,894
----------
14,946,225
----------
Energy - 4.55%
Amoco Corporation 29,700 2,565,338
Norsk Hydro AS~ 24,900 1,245,000
Phillips Petroleum Company 22,000 1,098,625
Repsol SA~ 35,000 1,780,625
Total SA 22,000 1,321,375
Unocal Corporation 36,000 1,392,750
USX-Marathon Group, Inc. 29,000 1,091,125
----------
10,494,838
----------
Shares Market Value
Common Stocks - (continued)
Financial - 10.33%
Allstate Corporation 28,200 $ 2,592,648
Citicorp 32,500 4,615,000
Federal National Mortgage
Association 60,000 3,795,000
First Union Corporation 43,200 2,451,600
Jefferson-Pilot Corporation 22,500 2,001,094
Spieker Properties, Inc. 28,000 1,155,000
U.S. Bancorp 33,000 4,116,750
Wachovia Corporation 19,000 1,611,438
Wilmington Trust
Corporation 22,000 1,460,250
-----------
23,798,780
-----------
Health - 5.10%
Abbot Laboratories 35,000 2,635,937
Columbia HCA Healthcare
Corporation 86,200 2,779,950
Johnson & Johnson 25,000 1,832,813
Pharmacia & UpJohn 61,000 2,668,750
Rhone-Poulenc SA - Class A~ 36,633 1,845,387
-----------
11,762,837
-----------
Technology - 3.68%
Alltel Corporation 15,100 659,681
International Business
Machines Corporation 26,000 2,700,750
Lockheed Martin Corporation 22,200 2,497,500
Phelps Dodge Corporation 12,300 794,119
Xerox Corporation 17,200 1,831,063
-----------
8,483,113
-----------
Transportation &
Services - 2.29%
Canadian Pacific, Limited 32,700 964,650
KLM Royal Dutch Air 40,000 1,625,000
Union Pacific Corporation 48,000 2,697,000
-----------
5,286,650
-----------
Utilities - 3.83%
BellSouth Corporation 33,000 2,229,561
DPL, Inc. 65,999 1,286,981
DQE, Inc. 32,000 1,192,000
Pinnacle West Capital 41,700 1,853,044
SBC Communications, Inc. 52,000 2,268,500
-----------
8,830,086
-----------
Total Common Stocks
(cost $104,186,491) 128,221,336
-----------
45
<PAGE>
Mentor Income and Growth Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Principal
Amount Market Value
Corporate Bonds - 6.79%
Industrial - 1.84%
Aluminum Company of
America, 5.75%, 2/01/01 $ 250,000 $ 248,185
Gillette Company, 5.75%,
10/15/05 250,000 244,773
ICI Wilmington, 6.95%,
9/15/04 1,000,000 1,026,010
Scripps (E.W.) Company,
6.375%, 10/15/02 1,000,000 1,009,540
Sears, Roebuck & Company,
9.25%, 4/15/98 175,000 175,315
Tenneco, Inc., 7.50%, 4/15/07 500,000 532,610
Williams Company, Inc.,
6.50%, 11/15/02 1,000,000 1,005,970
------------
4,242,403
------------
Financial - 4.25%
American General Finance
Corporation, 5.88%,
7/01/00 250,000 249,272
Associates Corporation of
North America, 5.25%,
3/30/00 250,000 246,853
BankAmerica Corporation,
7.88%, 12/01/02 1,000,000 1,067,900
Bank One Texas, 6.25%,
2/15/08 1,000,000 989,760
Chase Manhattan
Corporation, 7.75%,
11/01/99 250,000 256,828
Comerica Bank, 7.13%,
12/01/13 250,000 254,538
Finova Capital Corporation,
6.39%, 10/08/02 1,000,000 1,003,900
First National Bank of
Boston, 8.00%, 9/15/04 250,000 270,303
Fleet Financial Group, 6.88%,
1/15/28 1,000,000 990,250
Great Western Financial,
6.38%, 7/01/00 250,000 251,083
Heller Financial, 6.38%,
11/10/00 1,000,000 1,002,520
Home Savings of Americas,
6.00%, 11/01/00 250,000 249,273
MBIA, Inc., 7.00%, 12/15/25 1,000,000 1,036,470
NationsBank Corporation,
7.80%, 9/15/16 1,000,000 1,113,200
Security Benefits Life
Company, 8.75%,
5/15/16 (a) 500,000 559,375
Toronto Dominion Bank,
6.13%, 11/01/08 250,000 243,243
------------
9,784,768
------------
Principal
Amount Market Value
Corporate Bonds (continued)
Utilities - 0.70%
Florida Power & Light
Company, 5.38%, 4/01/00 $ 250,000 $ 247,934
Pacific Gas & Electric
Company, 5.93%, 10/08/03 250,000 248,148
Philadelphia Electric
Company, 7.50%, 1/15/99 100,000 101,402
Southwestern Public Service
Company, 6.88%, 12/01/99 250,000 254,440
System Energy Resources,
7.71%, 8/01/01 500,000 517,515
Union Electric Company,
6.75%, 10/15/99 250,000 253,265
------------
1,622,704
------------
Total Corporate Bonds
(cost $15,548,961) 15,649,875
------------
Government Securities
and Agencies - 34.21%
Government National
Mortgage Association
7.00%, 1/15/24-7/15/24 3,796,406 3,846,071
U.S. Treasury Bonds, 6.25%-
7.25%, 5/15/16-8/15/23 17,725,000 19,166,902
U.S. Treasury Notes, 5.00%-
7.50%, 2/15/99-10/15/06 54,550,000 55,802,978
------------
Total U.S. Government
Securities and Agencies
(cost $76,549,975) 78,815,951
------------
Short-Term Investment - 1.80%
Repurchase Agreement
Paine Webber, Inc.
Dated 3/31/98, 5.90%, Due
04/01/98, collateralized by
$4,310,000 U.S. Treasury
Bills, 5.10%, 9/17/98,
market value $4,210,795
(cost $4,121,000) 4,121,000 4,121,000
------------
Total Investments (cost
$ 200,406,427)-98.44% 226,808,162
------------
Other Assets less
Liabilities - 1.56% 3,595,869
------------
Net Assets - 100.00% $230,404,031
============
~ American Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under rule 144A or securities offered pursuant to section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
46
<PAGE>
Mentor Income and Growth Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $78,283,164 and $32,017,116, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $200,406,428. Net unrealized appreciation aggregated
$26,401,735, of which $27,785,964, related to appreciated investment securities
and $1,384,229, related to depreciated investment securities.
See notes to financial statements.
47
<PAGE>
Mentor Income and Growth Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $ 222,687,162
Repurchase agreements 4,121,000
-------------
Total investments
(cost $200,406,427) 226,808,162
-------------
Collateral for securities
loaned (Note 2) 44,064,557
Receivables
Investments sold 1,175,672
Fund shares sold 1,112,668
Dividends and interest 1,602,788
Other 2,774
-------------
Total assets 274,766,621
-------------
Liabilities
Payables
Investments purchased $ 29,648
Securities loaned (Note 2) 44,064,557
Fund shares redeemed 184,534
Accrued expenses and other
liabilities 83,851
----------
Total liabilities 44,362,590
-------------
Net Assets $ 230,404,031
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 201,139,557
Accumulated net investment
income 29,400
Accumulated net realized gain
(loss) on investment
transactions 2,833,339
Net unrealized appreciation of
investments 26,401,735
-------------
Net Assets $ 230,404,031
=============
Net Asset Value per Share
Class A Shares $ 20.22
Class B Shares $ 20.20
Class Y Shares $ 20.46
Offering Price per Share
Class A Shares $ 21.45(a)
Class B Shares $ 20.20
Class Y Shares $ 20.46
Shares Outstanding
Class A Shares 4,497,871
Class B Shares 6,902,326
Class Y Shares 53
-------------
Total Shares Outstanding 11,400,250
=============
(a) Computation of offering price: 100/94.25 of net asset value.
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends (b) $ 1,142,622
Interest 2,662,499
------------
Total investment income
(Note 2) 3,805,121
Expenses
Management fee (Note 3) $ 734,692
Distribution fee (Note 3) 445,217
Shareholder service fee
(Note 5) 244,896
Transfer agent fee (Note 3) 130,077
Administration fee (Note 4) 97,959
Registration expenses 22,394
Custodian and accounting
fees (Note 3) 22,275
Shareholder reports and
postage expenses 19,840
Legal fees 3,416
Directors' fees and expenses 2,671
Audit fees 1,862
Organizational expenses 800
Miscellaneous 61,767
----------
Total expenses 1,787,866
------------
Net investment income 2,017,255
------------
Realized and unrealized gain
on investments
Net realized gain on
investments (Note 2) 3,466,384
Change in unrealized
appreciation on investments 10,278,911
----------
Net gain on investments 13,745,295
------------
Net increase in net assets
resulting from operations $ 15,762,550
============
(b) Net of withholding taxes of $5,567.
See notes to financial statements.
48
<PAGE>
Mentor Income and Growth Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98 Year Ended
(Unaudited) 9/30/97
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment income $ 2,017,255 $ 2,672,361
Net realized gain on investments 3,466,384 15,016,540
Change in unrealized appreciation on investments 10,278,911 6,704,657
------------- -------------
Increase in net assets resulting from operations 15,762,550 24,393,558
------------- -------------
Distributions to Shareholders
From net investment income
Class A (963,522) (1,054,162)
Class B (1,024,333) (1,618,199)
In excess of net investment income
Class A - (43,035)
Class B - (73,107)
From net realized gain on investments
Class A (5,326,213) (2,474,556)
Class B (8,808,116) (6,846,186)
------------- -------------
Total distributions to shareholders (16,122,184) (12,109,245)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 61,088,504 74,239,398
Reinvested distributions 15,276,494 11,495,496
Shares redeemed (16,926,791) (17,451,330)
------------- -------------
Change in net assets resulting from capital share transactions 59,438,207 68,283,564
------------- -------------
Increase in net assets 59,078,573 80,567,877
Net Assets
Beginning of period 171,325,458 90,757,581
------------- -------------
End of period (including accumulated undistributed net investment
income of $29,400 and $0, respectively) $ 230,404,031 $ 171,325,458
============= =============
</TABLE>
See notes to financial statements.
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 20.60 $ 19.16
-------- ---------
Income from investment operations
Net investment income 0.25 0.44
Net realized and unrealized gain on investments 1.25 3.39
-------- ---------
Total from investment operations 1.50 3.83
-------- ---------
Less distributions
From net investment income (0.22) (0.45)
In excess of net investment income - (0.02)
From net realized capital gain (1.66) (1.92)
---------- ----------
Total distributions (1.88) (2.39)
---------- ----------
Net asset value, end of period $ 20.22 $ 20.60
========== ==========
Total Return* 7.95% 22.11%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 90,961 $63,509
Ratio of expenses to average net assets 1.35%(a) 1.35%
Ratio of expenses to average net asset excluding
waiver 1.35%(a) 1.35%
Ratio of net investment income to average net assets 2.47%(a) 2.63%
Portfolio turnover rate 17% 75%
Average commission rate on portfolio transactions $ 0.0549 $0.0515
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93 (c)
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 17.13 $ 15.27 $ 14.88 $ 14.14
--------- -------- -------- ----------
Income from investment operations
Net investment income 0.37 0.40 0.31 0.09
Net realized and unrealized gain on investments 2.75 2.14 0.64 0.73
--------- -------- -------- ----------
Total from investment operations 3.12 2.54 0.95 0.82
--------- -------- -------- ----------
Less distributions
From net investment income (0.35) (0.40) (0.30) (0.08)
In excess of net investment income - (0.03) - -
From net realized capital gain (0.74) (0.25) (0.26) -
---------- -------- -------- ----------
Total distributions (1.09) (0.68) (0.56) (0.08)
---------- -------- -------- ----------
Net asset value, end of period $ 19.16 $ 17.13 $ 15.27 $ 14.88
========== ======== ======== ==========
Total Return* 19.13% 17.24% 6.54% 5.54%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $24,210 $ 19,888 $ 17,773 $ 9,849
Ratio of expenses to average net assets 1.36% 1.69% 1.75% 1.56%(a)
Ratio of expenses to average net asset excluding
waiver 1.36% 1.69% 1.75% 1.94%(a)
Ratio of net investment income to average net assets 2.08% 2.53% 2.20% 2.35%(a)
Portfolio turnover rate 72% 62% 78% 13%
Average commission rate on portfolio transactions $0.0492
</TABLE>
(a) Annualized.
(c) For the period from May 24, 1993 (commencement of operations), to September
30, 1993.
* Total return does not reflect sales commissions and is not
annualized.
See notes to financial statements.
49
<PAGE>
Mentor Income and Growth Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
Per Share Operating Performance
Net asset value, beginning of period $ 20.59 $ 19.18
-------- --------
Income from investment operations
Net investment income 0.14 0.34
Net realized and unrealized gain on
investments 1.29 3.35
-------- --------
Total from investment operations 1.43 3.69
-------- --------
Less distributions
From net investment income (0.16) (0.34)
In excess of net investment income - (0.02)
From net realized capital gain (1.66) (1.92)
--------- ---------
Total distributions (1.82) (2.28)
--------- ---------
Net asset value, end of period $ 20.20 $ 20.59
========= =========
Total Return* 7.52% 21.24%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $139,442 $107,816
Ratio of expenses to average net assets 2.09%(a) 2.10%
Ratio of expenses to average net asset excluding
waiver 2.09%(a) 2.10%
Ratio of net investment income to average net
assets 1.73%(a) 1.87%
Portfolio turnover rate 17% 75%
Average commission rate on portfolio
transactions $ 0.0549 $ 0.0515
<TABLE>
<CAPTION>
Year Year Year Period
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93 (d)
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 17.14 $ 15.28 $ 14.91 $ 14.14
-------- ------- ------- ---------
Income from investment operations
Net investment income 0.23 0.28 0.21 0.05
Net realized and unrealized gain on
investments 2.76 2.14 0.61 0.77
-------- ------- ------- ---------
Total from investment operations 2.99 2.42 0.82 0.82
-------- ------- ------- ---------
Less distributions
From net investment income (0.21) (0.28) (0.19) (0.05)
In excess of net investment income - (0.03) - -
From net realized capital gain (0.74) (0.25) (0.26) -
--------- ------- ------- ---------
Total distributions (0.95) (0.56) (0.45) (0.05)
--------- ------- ------- ---------
Net asset value, end of period $ 19.18 $ 17.14 $ 15.28 $ 14.91
========= ======= ======= =========
Total Return* 18.26% 16.32% 5.66% 5.54%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 66,548 $ 46,678 $ 43,219 $ 18,127
Ratio of expenses to average net assets 2.13% 2.43% 2.44% 2.31%(a)
Ratio of expenses to average net asset excluding
waiver 2.13% 2.43% 2.44% 2.69%(a)
Ratio of net investment income to average net
assets 1.32% 1.78% 1.51% 1.60%
Portfolio turnover rate 72% 62% 78% 13%
Average commission rate on portfolio
transactions $ 0.0492
</TABLE>
Class Y Shares
Period
Ended 3/31/98 (e)
(Unaudited)
Per Share Operating Performance
Net asset value, beginning of period $ 18.75
--------
Income from investment operations
Net investment income 0.25
Net realized and unrealized gain on investments 1.49
--------
Total from investment operations 1.74
--------
Less distributions
From net realized capital gain (0.03)
---------
Total distributions (0.03)
---------
Net asset value, end of period $ 20.46
=========
Total Return* 8.60%
Ratios / Supplemental Data
Net assets, end of period $ 1,093
Ratio of expenses to average net assets 1.10%(a)
Ratio of expenses to average net asset excluding
waiver 1.10%(a)
Ratio of net investment income to average net
assets 3.26%(a)
Portfolio turnover rate 17%
Average commission rate on portfolio transactions $ 0.0549
(a) Annualized.
(d) For the period from May 24, 1993 (commencement of operations), to September
30, 1993.
(e) For the period from November 19, 1997 (initial offering of Class Y
Shares) to March 31, 1998. * Total return does not reflect sales commissions
and is not annualized.
See notes to financial statements.
50
<PAGE>
Mentor Municipal Income Portfolio
Managers' Commentary: The Tax-Exempt Management Team
March 31, 1998
- --------------------------------------------------------------------------------
Economic Factors
The U.S. economy continues to be nearly ideal. Growth is strong, unemployment is
low, the dollar is rising against currencies around the world, and the national
budget is headed for surplus. Despite this persistent growth trend, inflation
not only remains low, but also is currently on a declining trend. While a 3%
inflation rate had been anticipated, a 1 to 1.5% inflation rate is now a
possibility for the year.
Looking forward, however, market watchers remain alert for signs of surging
prices. One cause of concern is the extremely tight labor market. The percentage
of Americans unemployed fell to a 24-year low of 4.6% in February as the economy
added more jobs than expected and wages rose. To date, however, increased
productivity has allowed us to withstand the higher labor costs, a scenario that
cannot continue indefinitely.
The Federal Reserve Board left monetary policy unchanged over the six-month
reporting period. In addition to signs that the economy was slowing modestly
from its breakneck pace of early 1997, the Fed was concerned about the effect
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. With nearly all Asian currencies at depressed levels, an
increase in U.S. rates would force monetary authorities in Asia to choose
between allowing their currencies to decline further, or to matching the U.S.
rate increase, thereby slowing their already sluggish economies.
As the reporting period began, there were strong concerns about the effect of
Asia's financial crisis on the U.S. economy. Over the past few months, there has
been little evidence that the Asian crisis has significantly affected the U.S.
economy. GDP (gross domestic product) grew at a rate of 3.9% in the fourth
quarter, and jobs remained abundant. Corporate profits, while slightly
decelerating from the strong pace of a year earlier, still remain healthy. Going
forward, however, we do expect further deceleration, although on a much milder
level than originally anticipated.
Market Review
Although we saw some volatility in March, the market rallied over the six-month
reporting period. Thirty-year treasury yields decreased 47 basis points (0.47%),
from 6.40% on September 30 to 5.93% on March 31. As is typical in market
rallies, tax-exempt yields also decreased, but municipals did not perform as
strongly as the taxable market. Generic general obligation triple A-rated
insured municipal yields declined 12 basis points (0.12%), ending the period at
5.05%.
Consistent with the trend over the past few years, insured issuance remained
high, totaling more than 50% of volume being brought to the market. This trend
creates a scarcity of lower-rated, higher- yielding offerings, and causes the
spread in basis points between quality securities and lower-rated paper to
narrow. The demand for higher yielding securities and the scarcity of these
issues kept credits spreads extremely tight.
Municipal yields continue to look very attractive when compared to taxable
yields. The Bond Buyer Revenue Bond Index is composed of 25 revenue bonds with
an average rating of single-A and an average maturity of 30 years. This index,
which is representative of the bonds we typically purchase for the funds,
yielded 5.42% at the end of the reporting period. The ratio of this index to
30-year treasury yields was 91%, compared to more historical levels of 78-80%
51
<PAGE>
Mentor Municipal Income Portfolio
Managers' Commentary: The Tax-Exempt Management Team
March 31, 1998
- --------------------------------------------------------------------------------
Management Strategy*
Over the six months, we employed the following strategies to manage the
municipal Portfolio:
[] We adjusted the duration of the Portfolio based on our interest-rate
outlook. Duration, which is expressed in years, is a measurement of a
mutual fund's volatility to interest-rate movements. Funds with shorter
durations tend to perform better when interest rates rise, while funds
with longer durations tend to outperform when interest rates decline. At
the end of the reporting period, the duration of the Portfolio stood at
7.86 years, compared to the benchmark 7.72 years. This neutral duration
relative to the benchmark allowed the Portfolio to perform well as
interest rates whipsawed during the first quarter of 1998.**
[] We increased our concentration in the healthcare sector to 21% of
assets, given our research expertise in this industry as well as the
strong performance of this sector. The healthcare sector continues to do
well, in part because of the continuing debt-restructuring associated
with mergers, acquisitions and consolidations. Also, hospitals continue
to improve their financial positions, which has led to a high number of
rating upgrades.
[] When looking for acquisitions, we take advantage of the new issue market
and look for value in state, coupon, rating and sector yield spread
swaps. For example, the majority of purchases made during the reporting
period were triple A-rated, given the high relative value of quality
offerings, versus lower-yielding securities. As a result, almost 56% of
assets were triple A-rated at the end of the reporting period. If we see
credit spreads begin to widen, we will redeploy some assets to
lower-rating categories.
[] We continue to trade conservatively, maintaining a strong core position
in the Portfolio. Close to 50% of assets have coupons exceeding 6%, for
example. These bonds help maintain the Portfolio's dividend-paying
ability and, given the significant embedded profits, would create
capital gains if sold.
Outlook
The fixed-income market remains caught between two conflicting forces. The
recession in Asia is still likely to exert at least a mild drag on U.S. economic
growth. Conversely, the domestic economy is thriving on low unemployment, rising
wages and record high consumer confidence.
Although the domestic economy has escaped serious harm from the Asian financial
crisis so far, in the months ahead we would anticipate a shrinking export market
and falling import prices, providing some difficult competition. Such a scenario
would have a positive effect on the price of fixed-income securities. Consumers
continue to be flush with cash, however, and are in a spending mood, thus
providing further fuel to an economy that is already straining against the
ceiling of sustainable growth. We expect that uncertainties over the eventual
resolution of this conflict will result in mild upward pressure on long-term
interest rates in the near term. Supply and demand fundamentals in the
tax-exempt market might also put some pressure on municipals, unless demand
continues to keep up with record levels of supply.
52
<PAGE>
Mentor Municipal Income Portfolio
Managers' Commentary: The Tax-Exempt Management Team
March 31, 1998
- --------------------------------------------------------------------------------
Regarding municipal yields, we believe they will remain near current levels
through at least the middle of the summer. This will depend not only on the
general economy and the taxable market, but also on fundamental tax-exempt
supply and demand levels. In February, long-term municipal interest rates hit
25-year lows, causing heavy refunding supply.
It appears that 1998 will continue to be a push/pull between heavy supply if
rates are low or lighter issuance if rates back-up. Given what we have seen to
date this year, the market appears to be in a solid position of equilibrium,
with strong demand to accommodate record municipal supply.
The Portfolio performed strongly over the past six months, and we seek to
position it to do well in the future. We appreciate your confidence in our
management team.
* While the managers seek to invest the Portfolio according to their
proprietary process, there is no guarantee of investment success. ** See
notes to Performance Comparison, this page.
Performance Comparison
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Municipal Income Portfolio Class A and Class B Shares and Lehman Municipal Bond
Index.~
[GRAPH]
A Shares B Shares Lehman Municipal Bond Index
-------- -------- --------------------------
4/29/92 $ 9,525 $10,000 $10,000
9/30/92 10,034 10,528 10,561
9/30/93 11,637 12,134 11,906
9/30/94 11,101 11,511 11,616
9/30/95 12,151 12,348 12,916
9/30/96 12,935 13,184 13,818
9/30/97 14,085 14,291 14,933
3/31/98 14,648 14,835 15,513
Average Annual Returns as of 3/31/98
Including Sales Charges
1-Year Since Inception***
------ ------------------
Class A 5.18% 6.66%
Class B 5.82% 7.02%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class A Shares, after deducting the maximum sales charge of 4.75%
($10,000 investment minus $475 sales charge = $9,525). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
*** Reflects operations of Mentor Municipal Income Portfolio Class A and Class
B Shares from the date of commencement of operations on 4/29/92 through
3/31/98.
53
<PAGE>
Mentor Municipal Income Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
[GRAPH]
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Municipal Income Portfolio Class Y Shares and Lehman Municipal Bond Index.~
Y Shares Lehman Municipal Bond Index
--------- ---------------------------
11/19/97 $10,000 $10,000
11/30/97 10,000 10,058
12/31/97 10,147 10,205
1/31/98 10,212 10,310
2/28/98 10,250 10,313
3/31/98 10,263 10,323
Total Returns as of 3/31/98
1-Year Since Inception***
------ ------------------
Class Y n/a 2.63%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
*** Reflects operations of Mentor Municipal Income Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 3/31/98.
54
<PAGE>
Mentor Municipal Income Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
<S> <C> <C>
Long-Term Municipal
Securities - 101.56 %
Arizona - 1.84%
Pima County Arizona IDA,
7.25%, 7/15/10** $1,550,000 $1,731,877
----------
California - 11.97%
Carson Improvement Board Act
1915, Special Assessment
District 92, 7.38%, 9/02/22 710,000 777,436
California State Water Reserve
Center, 4.75%, 12/01/29 3,500,000 3,266,760
California Statewide
Communities Development
Authority, 5.63%, 10/01/34 2,070,000 2,098,877
East Bay Municipal Utility
District, 4.75%, 6/01/21 1,915,000 1,804,524
Orange County Community
Facilities District, Series A,
7.35%, 8/15/18** 300,000 344,256
San Francisco City & County
Airport, 6.30%, 5/01/25 1,000,000 1,078,090
University of California
Revenue Bonds, 4.75%,
9/01/16 2,000,000 1,916,960
----------
11,286,903
----------
Colorado - 6.30%
Colorado Housing Authority,
7.00%, 11/01/24 560,000 596,534
Colorado Springs County
School District, 5.00%,
12/01/17 1,250,000 1,223,875
Denver City & County Airport
Revenue, 7.75% - 8.50%
11/15/13 - 11/15/23 2,700,000 3,147,446
East 470 Highway Authority,
5.00%, 9/01/26 1,000,000 966,120
----------
5,933,975
----------
Connecticut - 1.15%
Connecticut State Development
Authority, 6.15%, 4/01/35 1,000,000 1,079,440
----------
District of Columbia - 0.93%
Metropolitan Washington,
General Airport Revenue,
Series A, 6.63%, 10/01/19** 800,000 879,248
----------
Florida - 2.98%
Hillsborough County, 6.25%,
12/01/34 1,250,000 1,374,250
Sarasota County Health
Facilities Authority Revenue,
10.00%, 7/01/22** 1,170,000 1,438,691
----------
2,812,941
----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Market Value
<S> <C> <C>
Long-Term Municipal
Securities (continued)
Georgia - 3.35%
Fulton County Georgia
Multiple Family Housing
Revenue, 6.38%, 2/01/08 $ 520,000 $ 519,943
George Smith World Congress
Center, 5.50%, 7/01/20 1,500,000 1,467,570
Monroe County Development
Authority PCRB, 6.75%,
1/01/10 1,000,000 1,170,040
----------
3,157,553
----------
Illinois - 9.83%
Broadview Tax Increment
Revenue, 8.25%, 7/01/13 1,000,000 1,138,330
Chicago Heights Residential
Mortgage, (effective yield -
3.21%) (a), 6/01/09 3,465,000 1,595,840
Chicago Capital Appreciation,
(effective yield - 1.74%) (a),
7/01/16 2,000,000 679,540
Illinois Health Facilities
Authority Revenue, 9.50%,
10/01/22 1,250,000 1,534,600
lllinois Educational Facilities
Authority Revenue,
6.00%,10/01/24 1,000,000 1,023,370
Kane County Illinois School
District Number 129, 5.50%,
2/01/11 2,000,000 2,094,200
Metropolitan Pier & Exposition
Authority (effective yield -
1.37%) (a), 6/15/21 1,950,000 580,145
Saint Clair County Public
Building, (effective yield -
1.94%) (a), 12/01/16 1,650,000 628,287
----------
9,274,312
----------
Indiana - 0.39%
Indiana Transportation Finance
Authority, Series A, (effective
yield - 1.87%) (a), 6/01/17 1,000,000 366,240
----------
Iowa - 0.72%
Student Loan Liquidity
Corporation, Student Loan
Revenue, Series C, 6.95%,
3/01/06** 625,000 678,363
----------
Kentucky - 5.29%
Jefferson County Hospital
Revenue, 8.90%*, 10/01/08 500,000 596,875
Kenton County Airport Board
Revenue, OID, 7.50%,
2/01/20 1,400,000 1,553,874
</TABLE>
55
<PAGE>
Mentor Municipal Income Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Principal
Amount Market Value
Long-Term Municipal
Securities (continued)
Kentucky (continued)
Warren County Kentucky
Hospital Facilities Revenue
4.88%, 4/01/27 $3,000,000 $2,837,670
----------
4,988,419
----------
Louisiana - 3.07%
Louisiana Public Facilities
Authority Revenue, 5.00%,
2/01/28 3,000,000 2,896,140
----------
Maine - 1.14%
Maine State Housing Authority,
Series C, 6.88%, 11/15/23 1,000,000 1,070,690
----------
Massachusetts - 3.28%
Brockton State Massachuetts,
5.00%, 4/01/17 100,000 970,181
Massachusetts State Health and
Educational Facilities
Authority, OID Revenue
Bonds, Series A, 6.88%,
4/01/22 1,000,000 1,115,870
Massachusetts State Health and
Education, 6.00%, 10/01/23 1,000,000 1,004,490
----------
3,090,541
----------
Michigan - 3.07%
Detroit Michigan Water Supply
Systems, 5.00%, 7/01/27 1,000,000 967,110
Michigan State Hospital
Financial Authority Revenue,
5.00%, 5/15/28 2,000,000 1,921,720
----------
2,888,830
----------
Montana - 1.02%
Montana State Health Facilities
Authority Revenue, 5.00%,
12/01/24 1,000,000 964,270
----------
Nebraska - 0.42%
Nebraska Investment Finance
Authority, SFM, 9.39%*,
9/15/24 350,000 391,125
----------
Nevada - 2.69%
Clark County Nevada
Industrial Development
Revenue, 5.90%, 10/01/30 2,000,000 2,052,340
Henderson Local Improvement
District, Special Assessment,
Series A, 8.50%, 11/01/12 460,000 480,631
----------
2,532,971
----------
New Jersey - 1.26%
New Jersey State Housing &
Mortgage Finance Agency
Multi- Family Housing
Revenue, 5.40%, 11/01/28 1,170,000 1,191,130
----------
Principal
Amount Market Value
Long-Term Municipal
Securities (continued)
New Mexico - 1.05%
Santa Fe Educational Facilities
Revenue, 5.50%, 3/01/24 $1,000,000 $ 986,360
----------
New York - 9.75%
Clifton Springs Hospital
Refunding & Improvement,
8.00%, 1/01/20 700,000 773,682
Herkimer County, IDA, 8.00%,
1/01/09 1,000,000 1,046,410
Metropolitan Transportation
Authority, 4.75%, 7/01/19 1,000,000 921,910
New York City, Series H,
7.20%, 2/01/13 1,500,000 1,675,056
New York City Municipal
Water Facility, 5.13%,
6/15/21 1,000,000 979,320
New York State Dormitory
Authority Revenue, 5.25%,
2/15/18 2,800,000 2,802,128
New York State Dormitory
Authority Revenue Hospitals,
5.20%, 2/15/14 1,000,000 990,350
----------
9,188,856
----------
North Carolina - 1.13%
North Carolina Eastern
Municipal Power Agency
Systems Revenue, 5.70%,
1/01/13 1,000,000 1,061,000
----------
Ohio - 3.22%
Batavia Ohio Local School
District, 5.63%, 12/01/22 1,000,000 1,080,510
Mahoning County Ohio
Hospital Facilities, 5.00%,
11/15/25 1,000,000 970,790
Oak Hills Ohio Local School
District, 5.13%, 12/01/25 1,000,000 987,540
----------
3,038,840
----------
Oklahoma - 0.59%
Oklahoma City Industrial and
Cultural Facilities Trust,
6.75%, 9/15/17 540,000 554,234
----------
Pennsylvania - 4.05%
Delaware County Pennsylvania
IDA, 6.20%, 7/01/19 2,000,000 2,167,600
Pennsylvania Economic
Development, 6.40%,
1/01/09 500,000 530,945
56
<PAGE>
Mentor Municipal Income Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
<S> <C> <C>
Long-Term Municipal
Securities (continued)
Pennsylvania (continued)
Philadelphia Hospital and
Higher Education Facilities,
6.50%, 11/15/08 $1,000,000 $ 1,118,010
-----------
3,816,555
-----------
Rhode Island - 0.42%
West Warwick, Series A, GO
Bonds, 6.80% - 7.30%,
7/15/98 - 7/15/08 355,000 391,453
-----------
Tennessee - 6.88%
Memphis Shelby County
Airport Authority Special
Facilities Revenue Refunding,
7.88%, 9/01/09 1,500,000 1,685,640
Metropolitan Government
Nashville & Davidson
County Hospital, 4.75%,
11/01/18 2,000,000 1,887,000
Tennessee Housing
Development Agency,
7.38%, 7/01/23 2,750,000 2,908,510
-----------
6,481,150
-----------
Texas - 7.87%
Alliance Airport Authority,
6.38%, 4/01/21 2,000,000 2,163,620
Brazos Higher Education
Authority Student Loan
Revenue, 7.10%, 11/01/04 416,000 454,480
Dallas Fort Worth International
Airport Facility Revenue
Bonds, 7.25%, 11/01/30 1,000,000 1,120,160
Edinburg Texas County School
District, 5.00%, 8/15/19 1,500,000 1,455,825
Tarrant County Texas Health
Facilities, 5.25%, 2/15/22 1,315,000 1,307,833
Texas State Department of
Housing and Community
Affairs Refunding, Series C,
9.78%*, 7/02/24 750,000 918,750
-----------
7,420,668
-----------
Utah - 1.75%
Bountiful Hospital Revenue,
9.50%, 12/15/18 230,000 276,209
Utah State Housing Finance
Agency, SFM, 7.20%,
1/01/27 1,275,000 1,370,689
-----------
1,646,898
-----------
West Virginia - 4.15%
Harrison County, 6.75%,
8/01/24 2,000,000 2,242,600
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Market Value
<S> <C> <C>
Long-Term Municipal
Securities (continued)
West Virginia (continued)
West Virginia State Hospital
Finance Authority Revenue,
8.90%*, 1/01/18 $1,500,000 $ 1,664,190
-----------
3,906,790
-----------
Total Long-Term Municipal
Securities (cost $90,305,365) 95,707,771
-----------
Total Investments (cost
$ 90,305,365)-101.56% 95,707,771
-----------
Other Assets less Liabilities - (1.56%)
(1,465,586)
-----------
Net Assets - 100.00% $94,242,185
===========
</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 futures contracts.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $40,194,581 and $17,582,412, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $90,305,365. Net unrealized appreciation aggregated
$5,402,406, of which $5,511,783, related to appreciated investment securities
and $109,377, related to depreciated investment securities.
See notes to financial statements.
57
<PAGE>
Mentor Municipal Income Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
<TABLE>
<S> <C> <C>
Assets
Investments, at market value
(cost $90,305,365) (Note 2) $ 95,707,771
Cash 891,671
Receivables
Fund shares sold 282,882
Dividends and interest 1,412,653
------------
Total assets 98,294,977
------------
Liabilities
Payables
Investments purchased $3,635,148
Dividends 349,504
Variation margin (Note 2) 61,875
Accrued expenses and other
liabilities 6,265
----------
Total liabilities 4,052,792
------------
Net Assets $ 94,242,185
============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 90,859,171
Accumulated distributions in
excess of net investment
income (429,768)
Accumulated net realized loss on
investment transactions (1,633,483)
Net unrealized appreciation of
investments 5,446,265
------------
$ 94,242,185
============
Net Assets
Net Asset Value per Share
Class A Shares $ 15.73
Class B Shares $ 15.70
Class Y Shares $ 16.01
Offering Price per Share
Class A Shares $ 16.51(a)
Class B Shares $ 15.70
Class Y Shares $ 16.01
Shares Outstanding
Class A Shares 2,667,228
Class B Shares 3,331,177
Class Y Shares 65
------------
Total Shares Outstanding 5,998,470
============
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
See notes to financial statements.
Statements of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Interest (Note 2) $ 2,505,933
-----------
Expenses
Management fee (Note 3) $254,793
Distribution fee (Note 3) 120,112
Shareholder service fee (Note 5) 106,163
Transfer agent fee (Note 3) 54,551
Administration fee (Note 4) 42,465
Custodian and accounting fees
(Note 3) 14,072
Registration expenses 9,245
Shareholder reports and postage
expenses 5,858
Legal fees 1,743
Directors' fees and expenses 1,348
Audit fees 948
Miscellaneous 14,153
--------
Total expenses 625,451
-----------
Net investment income 1,880,482
-----------
Realized and unrealized gain on
investments, Futures and Options
contracts
Net realized gain on investments,
futures and options contracts
(Note 2) 329,425
Change in unrealized appreciation
on investments 901,535
--------
Net gain on investments, futures and
options contracts 1,230,960
-----------
Net increase in net assets resulting
from operations $ 3,111,442
===========
See notes to financial statements.
58
<PAGE>
Mentor Municipal Income Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98 Year Ended
(Unaudited) 9/30/97
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment income $ 1,880,482 $ 2,950,727
Net realized gain on investments, futures and options contracts 329,425 548,498
Change in unrealized appreciation on investments 901,535 1,603,630
------------ -------------
Increase in net assets resulting from operations 3,111,442 5,102,855
------------ -------------
Distributions to Shareholders
From net investment income
Class A (902,300) (1,179,998)
Class B (1,107,759) (1,981,316)
From net realized gain on investments
Class A - (39,820)
Class B - (66,849)
------------ -------------
Total distributions to shareholders (2,010,059) (3,267,983)
------------ -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 23,755,397 25,738,018
Reinvested distributions 1,296,794 1,904,347
Shares redeemed (5,577,245) (10,560,419)
------------ -------------
Change in net assets resulting from capital share transactions 19,474,946 17,081,946
------------ -------------
Increase in net assets 20,576,329 18,916,818
Net Assets
Beginning of period 73,665,856 54,749,038
------------ -------------
End of period (including accumulated distributions in excess of net
investment income of $429,768 and $300,191, respectively) $ 94,242,185 $ 73,665,856
============ =============
</TABLE>
See notes to financial statements.
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 15.50 $ 15.04
----------- --------
Income from investment operations
Net investment income 0.39 0.81
Net realized and unrealized gain (loss) on investments 0.23 0.49
----------- --------
Total from investment operations 0.62 1.30
----------- --------
Less distributions
From net investment income (0.39) (0.81)
In excess of net investment income - -
From net realized capital gain - (0.03)
----------- --------
Total distributions (0.39) (0.84)
----------- --------
Net asset value, end of period $ 15.73 $ 15.50
=========== ========
Total Return* 4.00% 8.89%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 41,947 $ 29,394
Ratio of expenses to average net assets 1.17%(a) 1.22%
Ratio of expenses to average net asset excluding waiver 1.17%(a) 1.22%
Ratio of net investment income to average net assets 4.64%(a) 5.09%
Portfolio turnover rate 21% 59%
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 14.92 $ 14.42 $ 16.05 $ 14.76
-------- -------- -------- --------
Income from investment operations
Net investment income 0.82 0.81 0.82 0.92
Net realized and unrealized gain (loss) on investments 0.12 0.51 (1.54) 1.32
-------- -------- -------- --------
Total from investment operations 0.94 1.32 (0.72) 2.24
-------- -------- -------- --------
Less distributions
From net investment income (0.82) (0.82) (0.81) (0.92)
In excess of net investment income - - - (0.03)
From net realized capital gain - - (0.10) -
-------- -------- -------- --------
Total distributions (0.82) (0.82) (0.91) (0.95)
-------- -------- -------- --------
Net asset value, end of period $ 15.04 $ 14.92 $ 14.42 16.05
======== ======== ======== ========
Total Return* 6.46% 9.46% (4.83%) 16.00%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 17,558 $ 20,460 $25,056 $ 29,245
Ratio of expenses to average net assets 1.24% 1.43% 1.24% 0.71%
Ratio of expenses to average net asset excluding waiver 1.24% 1.43% 1.33% 1.39%
Ratio of net investment income to average net assets 5.47% 5.56% 5.43% 5.92%
Portfolio turnover rate 46% 43% 87% 88%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
See notes to financial statements.
59
<PAGE>
Mentor Municipal Income Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 15.49 $ 15.05
---------- --------
Income from investment operations
Net investment income 0.34 0.71
Net realized and unrealized gain (loss) on investments 0.23 0.52
---------- --------
Total from investment operations 0.57 1.23
---------- --------
Less distributions
From net investment income ( 0.36) ( 0.71)
In excess of net investment income - -
From net realized capital gain - ( 0.08)
---------- ---------
Total distributions ( 0.36) ( 0.79)
---------- ---------
Net asset value, end of period $ 15.70 $ 15.49
========== =========
Total Return* 3.78% 8.33%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 52,294 $ 44,272
Ratio of expenses to average net assets 1.66%(a) 1.72%
Ratio of expenses to average net asset excluding waiver 1.66%(a) 1.72%
Ratio of net investment income (loss) to average net assets 4.15%(a) 4.60%
Portfolio turnover rate 21% 59%
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 14.95 $ 14.43 $ 16.06 $ 14.78
-------- -------- --------- --------
Income from investment operations
Net investment income 0.75 0.74 0.74 0.82
Net realized and unrealized gain (loss) on investments 0.11 0.52 ( 1.54) 1.32
-------- -------- --------- --------
Total from investment operations 0.86 1.26 ( 0.80) 2.14
-------- -------- --------- --------
Less distributions
From net investment income ( 0.76) ( 0.74) ( 0.73) ( 0.82)
In excess of net investment income - - - ( 0.04)
From net realized capital gain - - ( 0.10) -
--------- --------- --------- ---------
Total distributions ( 0.76) ( 0.74) ( 0.83) ( 0.86)
--------- --------- --------- ---------
Net asset value, end of period $ 15.05 $ 14.95 $ 14.43 $ 16.06
========= ========= ========= =========
Total Return* 5.87% 9.01% ( 5.34%) 15.27%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 37,191 $ 39,493 $ 46,157 $ 50,976
Ratio of expenses to average net assets 1.74% 1.92% 1.74% 1.21%
Ratio of expenses to average net asset excluding waiver 1.74% 1.92% 1.86% 1.89%
Ratio of net investment income (loss) to average net assets 4.95% 5.07% 4.93% 5.42%
Portfolio turnover rate 46% 43% 87% 88%
</TABLE>
Class Y Shares
Period
Ended 3/31/98 (b)
(Unaudited)
Per Share Operating Performance
Net asset value, beginning of period $ 15.55
---------
Income from investment operations
Net investment income 0.37
Net realized and unrealized gain on investments 0.09
---------
Total from investment operations 0.46
---------
Net asset value, end of period $ 16.01
=========
Total Return* 2.63%
Ratios / Supplemental Data
Net assets, end of period $ 1,032
Ratio of expenses to average net assets 0.97%(a)
Ratio of expenses to average net asset excluding waiver 0.97%(a)
Ratio of net investment income to average net assets 6.02%(a)
Portfolio turnover rate 21%
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998. * Total return does not reflect sales commissions and is
not annualized.
See notes to financial statements.
60
<PAGE>
Mentor Quality Income Portfolio
Mentor Short-Duration Income Portfolio
Managers' Commentary: The Fixed-Income Management Team
March 31, 1998
- --------------------------------------------------------------------------------
Market Conditions
The six-month period ending March 31, 1998 saw a flattening of the yield curve,
continuing the trend that characterized fixed-income markets for much of 1997.
The yield differential between three-month treasury bills and 30-year treasury
bonds, which stood at 1.31% on September 30, 1997, narrowed 0.50% to close the
period at 0.81%. Two-and 10-year treasuries closed the period at 5.56% and
5.65%, respectively, down 0.22% and 0.46% from the beginning of the period. The
Federal Reserve continued to leave the federal funds rate (the rate member banks
charge each other on inter-bank loans and the primary way in which the Fed
influences short-term interest rates) unchanged, continuing the neutral monetary
stance that it has maintained since its last tightening in March of 1997.
The attractive combination of low-inflation and strong-growth, which has
characterized the domestic economy in recent years, remains firmly intact.
Annualized GDP (gross domestic product), the most comprehensive measure of
overall domestic economic growth, increased at a rate of 3.7% for the fourth
quarter of 1997. This increase comes on the heels of comparable increases of
3.3% and 3.1% during the second and third quarters of 1997, respectively.
Despite continued steady economic growth, inflation at both the wholesale and
retail levels remains remarkably subdued. At no time during the past year has
the monthly CPI (consumer price index) increase exceeded 0.2%. The PPI (producer
price index) readings have been even weaker. During each of the last five months
PPI numbers have been negative, resulting in a year-to-date annualized producer
price growth rate of negative 4.2%. That negative rate points to an emerging
deflationary environment for basic industrial commodities like oil and metals.
And amazingly, these falling prices are occurring in a period of the lowest
unemployment rates of the past 30 years. In fact, the 4.6% to 4.7% unemployment
rates of the first quarter represent levels that were viewed well below "full
employment" only a few years ago.
As expected, the turmoil in emerging Asian markets and Japan has been positive
for U.S. fixed-income markets, particularly the highest quality sectors such as
U.S. treasuries. The current low interest-rate environment has made mortgage
refinancing particularly attractive for homeowners. As a result, we reconfigured
our Portfolios to provide protection from the increased likelihood of mortgage
prepayments. It was our belief that increased prepayment pressure would
inevitably negatively affect the relative attractiveness of mortgage-backed
bonds. Likewise we felt that the Asian crisis would negatively affect the
earnings of U.S. multi-national corporations that rely on exports to those
countries. The likely consequence of this lack of predictability of corporate
earnings would be a widening of spreads. This anticipated widening of spreads
versus treasuries did in fact occur in both the mortgage and corporate markets.
By quarter-end, however, widened spreads made high-grade mortgage and corporate
product sufficiently attractive to cause us to reverse course and selectively
raise non-treasury allocations within our Portfolios.
61
<PAGE>
Mentor Quality Income Portfolio
Mentor Short-Duration Income Portfolio
Managers' Commentary: The Fixed-Income Management Team
March 31, 1998
- --------------------------------------------------------------------------------
Performance*
For the six-month period ending March 31, 1998, the Mentor Quality Income
Portfolio A shares returned 2.76% and the B shares 2.53%, compared to 5.05% for
the Merrill Lynch 7-Year Treasury Index. The Mentor Short-Duration Income
Portfolio A shares and B shares returned 2.39% and 2.22% respectively for the
six-month period, compared to 3.60% for the Merrill Lynch 3-Year Treasury Index.
The Portfolios**
At period-end we maintained a portfolio duration approximately 5% longer than
our Merrill Lynch 3-year and 7-year Treasury Index benchmarks. This represents a
modest lengthening from the beginning of the period when both the Quality Income
and Short-Duration Income Portfolios had durations approximately 5% shorter than
their respective benchmarks. This lengthening occurred in response to the
continued crisis in Asia, which in our view significantly improved the prospects
for lower interest rates. During the period we also sold our international bond
positions, replacing them with domestic holdings.
Market Outlook
The outlook going forward is little changed from what it appeared to be at the
beginning of the year. Prospects for continued low inflation remain good. The
likely long-term consequence is that long rates, which are more sensitive to
inflation than they are to economic growth, are likely to continue to decline
over the course of the year.
The wild card continues to be the ultimate effect of Pacific Rim dislocations on
the rate of U.S. domestic growth. So far at least, the impact seems more modest
than might have been expected. Although declining exports and surging imports
are depressing U.S. growth rates, this effect has been more than offset by
accelerating domestic consumption expenditures driven by the lower rate
environment. It seems clear, however, that the crisis has prevented inflationary
pressures from emerging in the U.S. economy, as exhibited by year-to-date
inflation trends. That in turn should continue to provide an attractive backdrop
for lower interest rates.
* The Merrill Lynch 7-Year and 3-Year Treasury Indexes are adjusted to
reflect reinvestment of interest on securities in the indexes. The Merrill
Lynch 7-Year and 3-Year Treasury Indexes are not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Portfolios' performance. Investors cannot invest in the Indexes. See notes
to Performance Comparison, pages
** While the management team will endeavor to invest the Portfolios according
to their proprietary process, there is no guarantee of investment success.
62
<PAGE>
Mentor Quality Income Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Quality Income Portfolio Class A and Class B Shares and the Merrill Lynch 7-Year
Treasury Index.~
[GRAPH]
[plot points missing]
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. The Merrill Lynch 7-Year Treasury
Index is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. Class B Shares are charged a redemption fee of 4.00%
on any redemption less than one year from the purchase date. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class A Shares, after deducting the maximum sales charge of 4.75%
($10,000 investment minus $475 sales charge = $9,525). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Quality Income Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
3/31/98.
Performance Comparison
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Quality Income Portfolio Class Y Shares and the Merrill Lynch 7-Year Treasury
Index.~
[GRAPH]
Y-Shares Merrill Lynch 7-Year
-------- --------------------
11/28/97 $10,000 $10,000
11/30/97 10,000 10,031
12/31/97 10,038 10,142
1/31/97 10,197 10,329
2/28/98 10,151 10,287
3/31/98 10,144 10,310
Total Returns as of 3/31/98
1-Year Since Inception**
------ ----------------
Class Y n/a 1.44%
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
* Represents a hypothetical investment of $10,000 in Mentor Quality
Income Portfolio Class Y Shares. These shares are not subject to any
sales or contingent deferred sales charges. The Class Y Shares'
performance assumes the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Quality Income Portfolio Class Y Shares from
the date of issuance on 11/19/97 through 3/31/98.
63
<PAGE>
Mentor Short-Duration Income Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class A Shares and the Merrill Lynch 3-Year
Treasury.~
Class A 3-Year Treasury
------- ---------------
6/16/95 $ 9,900 $10,000
6/30/95 9,946 10,062
9/30/95 9,931 10,139
9/30/96 10,532 11,038
9/30/97 11,304 11,571
3/31/98 11,574 11,988
Average Annual Returns as of 3/31/98
Including Sales Charges
1-Year Since Inception**
------ -----------------
Class A 5.98% 5.37%
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class B Shares and Merrill Lynch 3-year
Treasury.~
Class B 3-Year Treasury
------- ----------------
4/29/94 $10,000 $10,000
12/31/94 10,093 10,075
9/30/95 10,623 11,051
9/30/96 11,225 11,709
9/30/97 12,125 12,600
3/31/98 12,398 13,053
Past performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
~ The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. It is not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. The Portfolio invests in securities other than
Treasuries.
* Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class A Shares, after deducting the maximum sales charge of
1.00% ($10,000 investment minus $100 sales charges = $9,900. The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class A from
the date of issuance on 6/16/95 through 3/31/98.
+ Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable on Class B Shares at rates ranging from a maximum of
4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The ending value of the Class B shares reflects a
redemption fee of 4.00% on any redemption less than one year from the
purchase date. The Class B Shares' performance assumes the reinvestment of
all dividends and distributions.
++ Reflects operations of Mentor Short-Duration Income Portfolio Class B
Shares from the date of commencement of operations on 4/29/94 through
3/31/98.
64
<PAGE>
Mentor Short-Duration Income Portfolio
March 31, 1998
- --------------------------------------------------------------------------------
Performance Comparison
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class Y Shares and the Merrill Lynch 3-Year
Treasury.~
[plot points missimg]
~ The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. It is not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. The Portfolio invests in securities other than
Treasuries.
* Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class Y Shares. These shares are not subject to any sales
or contingent deferred sales charges. The Class Y Shares' performance
assumes the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class Y from
the date of issuance on 11/19/97 through 3/31/98.
65
<PAGE>
Mentor Quality Income Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Principal
Amount Market Value
Long-Term Investments - 117.55%
Preferred Stock - 2.42%
Home Ownership Funding
Corporation (cost
$ 4,082,562) $4,350,000 $ 4,177,853
-----------
Asset-Backed Securities - 5.81%
Advanta Mortgage Loan
Trust, Series 1993-4,
5.55%, 3/25/10 - 1/25/25 2,288,803 2,206,680
AFG Receivables Trust
7.00%, 2/15/03 1,621,016 1,621,955
CS First Boston, Series
1996-2 A6 7.18%, 2/25/18 2,500,000 2,525,093
Equifax Credit Corporation,
Series 1994-1 B 5.75%,
3/15/09 1,884,967 1,844,692
Fifth Third Auto Grantor
Trust 6.20%, 9/15/01 1,076,041 1,078,040
Old Stone Credit
Corporation Home Equity
Trust, Series 1993-1 B1,
6.00%, 3/15/08 751,628 741,605
-----------
Total Asset-Backed Securities
(cost $9,873,741) 10,018,065
-----------
U.S. Government Securities
and Agencies - 66.08%
Federal Home Loan
Mortgage Corporation
6.50%, Series 1647 B,
11/15/08 4,097,545 4,066,485
6.00%, Series 1693 Z,
3/15/09 5,935,721 5,643,951
6.50%, Series 26 C, 7/25/18 7,000,000 6,927,354
Federal National Mortgage
Association 6.00% -
7.00%, 5/25/98 - 5/25/28,
ARM 82,539,256 80,744,761
Government National
Mortgage Association
4.50% - 7.38%, 12/20/22
- 3/15/28, ARM 12,775,457 12,767,001
7.00%, 12/15/08, MBS 3,355,666 3,418,548
U.S. Treasury Strip, 8.00%,
11/15/21 1,500,000 359,009
-----------
Total U.S. Government
Securities and Agencies
(cost $114,132,513) 113,927,109
-----------
Principal
Amount Market Value
Corporate Bonds - 19.21%
Financial - 14.09%
Capital One Bank, 7.15% -
7.20%, 7/19/99 - 9/15/06 $4,750,000 $ 4,836,664
Ford Motor Credit, 6.55%,
9/10/02 2,500,000 2,544,630
Lehman Brothers, Inc.,
7.50% - 8.50%, 5/01/07 -
8/01/26 6,500,000 7,122,530
NationsBank Corporation,
7.50%, 9/15/06 1,500,000 1,609,788
Reliastar Financial
Corporation, 6.63%,
9/15/03 5,000,000 5,032,585
Salomon, Inc., 7.30% -
7.65%, 5/15/02-6/27/05 3,000,000 3,150,716
-----------
24,296,913
-----------
Technology - 3.39%
Philips Electronics, 7.20%,
6/01/26 5,500,000 5,838,828
-----------
Utilities - 0.73%
Mississippi Power & Light,
8.80%, 4/01/05 1,250,000 1,252,268
-----------
Other - 1.00%
United Dominion Realty
Trust, 7.07%, 11/15/06 1,700,000 1,729,965
-----------
Total Corporate Bonds
(cost $32,028,876) 33,117,974
-----------
Miscellaneous - 6.12%
Allegheny County Industrial
Development 5.75%,
7/01/27 (cost $6,000,000) 6,000,000 6,000,000
Barton Health Care, LLC,
5.75%, 2/15/25
(cost $4,555,000) 4,555,000 4,555,000
-----------
10,555,000
-----------
Collateralized Mortgage
Obligations - 11.67%
Chase Mortgage Finance
Corporation, Series
1993-L2 M, 7.00%,
10/25/24 2,982,896 3,008,895
General Electric Capital
Mortgage Services, Inc.,
Series 1993-18 B1, 6.00%,
2/25/09 (a) 1,996,656 1,928,157
66
<PAGE>
Mentor Quality Income Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
<S> <C> <C>
Collateralized Mortgage
Obligations (continued)
General Electric Capital
Mortgage Services, Inc.,
Series 1998-01 &
1998-03, 6.75% - 7.00%,
1/25/13 - 1/25/28 $3,488,530 $ 3,504,620
Key Auto Finance Trust,
6.15%, 10/15/01 1,500,000 1,504,250
NASCOR, Series 1996-2
Class M, 7.00%, 9/25/11 1,795,232 1,813,059
Prudential Home, Series
1995-5, 7.25%,
9/25/25 (a) 4,039,081 4,119,334
Prudential Home, Series
1996-4, 6.50%, 4/25/26 4,319,881 4,247,778
------------
Total Collateralized
Mortgage Obligations
(cost $19,570,344) 20,126,093
------------
Residual Interests (b) - 6.24%
Capital Mortgage Funding I,
Inc. 1997-5, 5/20/24 42,522 692,178
Capital Mortgage Funding I,
Inc. 1997-13, 11/20/22 34,665 639,153
Capital Mortgage Funding I,
Inc. 1997-20, 1/20/23 21,173 708,372
Capital Mortgage Funding I,
Inc. 1998-1, 12/20/27 44,878 705,693
General Mortgage Securities
II, Inc., 1995-1, 1997,
6/25/20 18,923 494,390
General Mortgage Securities
II, Inc., 1995-4, 1997,
6/25/23 11,379 458,540
General Mortgage Securities
II, Inc., 1997-4, 5/20/22 14,809 599,759
General Mortgage Securities
II, Inc., 1997-5, 7/20/23 29,020 891,660
National Mortgage Funding,
Inc., 1995-4, 1997,
3/20/21 9,669 172,188
National Mortgage Funding,
Inc., 1997-6, 9/20/21 41,157 877,955
National Mortgage Funding,
Inc., 1997-7, 7/20/22 40,968 834,374
National Mortgage Funding,
Inc., 1997-9, 11/20/24 30,935 836,598
National Mortgage Funding,
Inc., 1997-10, 10/20/24 41,214 584,924
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Market Value
<S> <C> <C>
Residual Interests (b) (continued)
National Mortgage Funding,
Inc., 1998-1, 1/01/90 $ 21,532 $ 577,753
National Mortgage Funding,
Inc., 1998-2, 1/01/90 23,791 604,583
National Mortgage Funding,
Inc., 1998-3, 11/20/23 23,872 595,394
National Mortgage Funding,
Inc., 1998-5, 11/25/22 10,594 478,894
------------
Total Residual Interests
(cost $10,950,306) 10,752,408
------------
Total Long-Term
Investments
(cost $201,193,342) 202,674,502
------------
Short-Term Investment - 20.34%
Repurchase Agreement
Goldman Sachs & Company
Dated 3/31/98, 6.05%, due 4/01/98,
collateralized by $35,404,190 Federal
Home Loan Mortgage Corporation, 7.00%,
11/01/27, market value $35,813,551
(cost $35,042,919) 35,042,919 35,042,919
------------
Total Investments (cost
$ 236,236,261)-137.89% 237,717,421
------------
Other Assets less
Liabilities - (37.89%) (65,317,377)
------------
Net Assets - 100.00% $172,400,044
============
</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.
(b) All or a portion of these securities are illiquid securities, and are
valued using market quotations where readily available. In the absence of
market quotations, the securities are valued based upon their fair value
determined under procedures approved by the Board of Trustees.
67
<PAGE>
Mentor Quality Income Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $255,996,215 and $153,710,236, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $236,236,261. Net unrealized appreciation aggregated
$1,481,160, of which $2,381,193, related to appreciated investment securities
and $900,033, related to depreciated investment securities.
At September 30, 1997, Quality Income Portfolio for federal income tax purposes,
had a capital loss carryforward of approximately $14,860,000. Pursuant to the
Internal Revenue Code, such capital loss carryforwards expire as follows:
$820,000 in 2001, $3,680,000 in 2002, $7,320,000 in 2003, $1,710,000 in 2004 and
$1,330,000 in 2005.
Such capital loss carryforward will reduce the Portfolio's taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise relieve the Portfolio's of
any liability for federal tax.
See notes to financial statements.
68
<PAGE>
Mentor Quality Income Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $ 202,674,502
Repurchase agreements 35,042,919
-------------
Total investments (cost
$ 236,236,261) 237,717,421
-------------
Collateral for securities loaned
(Note 2) 236,600
Receivables
Fund shares sold 1,114,372
Dividends and interest 1,468,733
Other 22,572
-------------
Total assets 240,559,698
-------------
Liabilities
Payables
Investments purchased $67,019,948
Securities loaned (Note 2) 236,600
Fund shares redeemed 96,013
Dividends 801,228
Accrued expenses and other liabilities 5,865
-----------
Total liabilities 68,159,654
-----------
Net Assets $ 172,400,044
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 186,938,544
Accumulated distributions in
excess of net investment income (915,556)
Accumulated net realized loss on
investment transactions (15,104,104)
Net unrealized appreciation of
investments 1,481,160
-------------
Net Assets $ 172,400,044
=============
Net Asset Value per Share
Class A Shares $ 13.11
Class B Shares $ 13.11
Class Y Shares $ 13.42
Offering Price per Share
Class A Shares $ 13.76(a)
Class B Shares $ 13.11
Class Y Shares $ 13.42
Shares Outstanding
Class A Shares 5,840,172
Class B Shares 7,304,559
Class Y Shares 76
-------------
Total Shares Outstanding 13,144,807
=============
(a) Computation of offering price: 100/95.25 of net asset value.
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Interest (b) (Note 2) $5,380,502
----------
Expenses
Management fee (Note 3) $467,022
Distribution fee (Note 3) 215,035
Shareholder service fee (Note 5) 194,591
Transfer agent fee (Note 3) 95,515
Administration fee (Note 4) 77,837
Registration expenses 14,882
Shareholder reports and postage
expenses 11,983
Custodian and accounting
fees (Note 3) 11,092
Legal fees 2,673
Directors' fees and expenses 2,307
Audit fees 1,256
Miscellaneous 7,363
--------
Total expenses 1,101,556
----------
Deduct
Waiver of management fee (Note 4) (56,110)
----------
Net investment income 4,335,056
----------
Realized and unrealized loss on
investments and interest-rate swap
contracts
Net realized loss on investments and
interest-rate swap contracts
(Note 2) (5,167)
Change in unrealized appreciation
on investments (434,728)
--------
Net loss on investments and
interest-rate swap contracts (439,895)
----------
Net increase in net assets resulting
from operations $3,895,161
==========
b) Net of interest expenses of $1,013,609 ($917,460 related to
interest-rate swap and $96,149 related to borrowings).
See notes to financial statements.
69
<PAGE>
Mentor Quality Income Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98 Year Ended
(Unaudited) 9/30/97
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment income $ 4,335,056 $ 6,390,445
Net realized gain (loss) on investments and interest-rate swap contracts (5,167) 222,072
Change in unrealized appreciation on investments (434,728) 2,224,113
------------- -------------
Increase in net assets resulting from operations 3,895,161 8,836,630
------------- -------------
Distributions to Shareholders
From net investment income
Class A (2,252,882) (2,180,277)
Class B (2,607,138) (4,210,168)
In excess of net investment income
Class A -- (150,441)
Class B -- (212,242)
------------- -------------
Total distributions to shareholders (4,860,020) (6,753,128)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 57,130,216 63,942,122
Reinvested distributions 2,890,510 4,044,282
Shares redeemed (14,877,784) (21,179,174)
------------- -------------
Change in net assets resulting from capital share transactions 45,142,942 46,807,230
------------- -------------
Increase in net assets 44,178,083 48,890,732
Net Assets
Beginning of period 128,221,961 79,331,229
------------- -------------
End of period (including accumulated distributions in excess of net
investment income of $915,556 and $390,590, respectively) $ 172,400,044 $ 128,221,961
============= =============
</TABLE>
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 13.18 $ 12.91
---------- --------
Income from investment operations
Net investment income (loss) 0.42 0.97
Net realized and unrealized gain (loss) on investments (0.06) 0.26
---------- --------
Total from investment operations 0.36 1.23
---------- --------
Less distributions
From net investment income (0.43) (0.90)
In excess of net investment income - (0.06)
Total distributions (0.43) (0.96)
---------- --------
Net asset value, end of period $ 13.11 $ 13.18
========== ========
Total Return* 2.76% 9.86%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 76,592 $ 53,176
Ratio of expenses to average net assets 1.05%(a) 1.05%
Ratio of expenses to average net asset excluding waiver 1.12%(a) 1.18%
Ratio of net investment income (loss) to average net assets 5.75%(a) 7.01%
Portfolio turnover rate 104% 100%
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 13.29 $ 12.75 $ 14.04 $ 14.39
-------- -------- -------- --------
Income from investment operations
Net investment income (loss) 0.89 0.84 0.84 1.06
Net realized and unrealized gain (loss) on investments (0.37) 0.61 (1.30) (0.31)
-------- -------- -------- --------
Total from investment operations 0.52 1.45 (0.46) 0.75
-------- -------- -------- --------
Less distributions
From net investment income (0.89) (0.85) (0.83) (1.06)
In excess of net investment income (0.01) (0.06) - (0.04)
Total distributions (0.90) (0.91) (0.83) (1.10)
-------- -------- -------- --------
Net asset value, end of period $ 12.91 $ 13.29 $ 12.75 $ 14.04
======== ======== ======== ========
Total Return* 4.09% 11.82% (3.39%) 5.41%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 21,092 $ 24,472 $ 30,142 $ 47,780
Ratio of expenses to average net assets 1.05% 1.32% 1.38% 1.04%
Ratio of expenses to average net asset excluding waiver 1.31% 1.36% 1.39% 1.22%
Ratio of net investment income (loss) to average net assets 6.84% 6.73% 6.33% 7.31%
Portfolio turnover rate 254% 368% 455% 102%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
See notes to financial statements.
70
<PAGE>
Mentor Quality Income Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 13.18 $ 12.93
---------- --------
Income from investment operations
Net investment income 0.38 0.86
Net realized and unrealized gain (loss) on investments (0.05) 0.30
---------- --------
Total from investment operations 0.33 1.16
---------- --------
Less distributions
From net investment income (0.40) (0.87)
In excess of net investment income - (0.04)
---------- --------
Total distributions (0.40) (0.91)
---------- --------
Net asset value, end of period $ 13.11 $ 13.18
========== ========
Total Return* 2.53% 9.29%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 95,807 $ 75,046
Ratio of expenses to average net assets 1.54%(a) 1.55%
Ratio of expenses to average net asset excluding waiver 1.61%(a) 1.68%
Ratio of net investment income to average net assets 5.26%(a) 6.51%
Portfolio turnover rate 104% 100%
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 13.31 $ 12.76 $ 14.06 $ 14.40
-------- -------- -------- ---------
Income from investment operations
Net investment income 0.84 0.79 0.82 0.99
Net realized and unrealized gain (loss) on investments (0.38) 0.61 (1.37) (0.31)
-------- -------- -------- ---------
Total from investment operations 0.46 1.40 (0.55) 0.68
-------- -------- -------- ---------
Less distributions
From net investment income (0.84) (0.79) (0.75) (0.99)
In excess of net investment income - (0.06) - (0.03)
-------- -------- -------- ---------
Total distributions (0.84) (0.85) (0.75) (1.02)
-------- -------- -------- ---------
Net asset value, end of period $ 12.93 $ 1 3.31 $ 12.76 $ 14.06
======== ======== ======== =========
Total Return* 3.57% 11.33% (3.97%) 4.86%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 58,239 $ 62,155 $ 77,888 $ 127,346
Ratio of expenses to average net assets 1.55% 1.74% 1.88% 1.54%
Ratio of expenses to average net asset excluding waiver 1.81% 1.79% 1.90% 1.72%
Ratio of net investment income to average net assets 6.36% 6.24% 6.21% 6.81%
Portfolio turnover rate 254% 368% 455% 102%
</TABLE>
Class Y Shares
Period
Ended 3/31/98 (b)
(Unaudited)
Per Share Operating Performance
Net asset value, beginning of period $ 13.22
---------
Income from investment operations
Net investment income 0.39
Net realized and unrealized gain on investments (0.19)
---------
Total from investment operations 0.20
---------
Net asset value, end of period $ 13.42
=========
Total Return* 1.44%
Ratios/Supplemental Data
Net assets, end of period $ 1,017
Ratio of expenses to average net assets 0.80%(a)
Ratio of expenses to average net asset excluding waiver 0.93%(a)
Ratio of net investment income to average net assets 7.53%(a)
Portfolio turnover rate 104%
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998. * Total return does not reflect sales commissions and is
not annualized.
See notes to financial statements.
71
<PAGE>
Mentor Short-Duration Income Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
<S> <C> <C>
Asset-Backed Securities - 12.98%
Advanta Home Equity Loan,
6.15%, 10/25/09 $ 942,268 $ 934,766
Advanta Mortgage Loan
Trust 1993-3 A3, 4.75% -
5.55%, 2/25/10 - 3/25/10 1,236,213 1,210,748
AFC Home Equity Loan
Trust, 6.60%, 2/25/27 1,499,955 1,498,970
AFG Receivables Trust,
6.45% - 7.05%, 9/15/00 -
2/15/03 4,020,678 4,027,702
CS First Boston 1996-2,
6.39%, 2/25/18 1,300,000 1,293,900
Equifax Credit Corporation
1994-1B, 5.75%, 3/15/09 599,292 586,488
Fifth Third Auto Grantor
Trust, 6.20%, 9/15/01 538,572 539,573
Old Stone Credit
Corporation, 6.20%,
6/15/08 328,868 325,737
Olympic Automobiles
Receivables Trust, 6.85% -
7.35%, 6/15/01 - 10/15/01 1,997,611 2,013,460
Union Acceptance
Corporation, 6.45% -
6.48%, 7/08/03 - 5/10/04 1,403,478 1,410,721
------------
Total Asset-Backed Securities
(cost $13,766,065) 13,842,065
------------
U.S. Government Securities
and Agencies - 60.26%
Federal National Mortgage
Association 6.00%, 3/25/98
- 5/25/28, ARM 5,015,000 4,827,759
10.00%, 6/01/05, MBS 267,531 279,815
Government National
Mortgage Association
7.00%, 12/15/08, MBS 1,267,698 1,291,453
7.00%, 7/20/22 - 12/20/22,
ARM 7,907,994 8,122,351
6.88%, 10/20/22, ARM 2,903,717 2,980,204
4.50%, 10/20/27 - 1/20/28,
ARM 6,677,409 6,583,807
6.50%, 3/15/28, ARM 2,970,000 2,944,725
U.S. Treasury Notes, 5.63% -
6.63%, 11/15/00 - 11/30/02 36,550,000 37,252,094
------------
Total U.S. Government
Securities and Agencies
(cost $64,326,722) 64,282,208
------------
Collateralized Mortgage Obligation - 3.76%
Key Auto Finance
Corporation 6.15%,
10/15/01 (cost $3,996,798) 4,000,000 4,011,332
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Market Value
<S> <C> <C>
Corporate Bonds - 22.53%
Association Corporation NA,
7.88%, 9/30/01 $1,000,000 $ 1,058,187
Capital One Bank, 7.15% -
7.20%, 7/19/99 - 9/15/06 2,500,000 2,541,503
Dayton Hudson Company,
6.63%, 3/01/03 2,000,000 2,039,294
Ford Motor Credit, 6.55%,
9/10/02 2,500,000 2,544,630
General Motors Acceptance
Corporation, 5.63% -
6.88%, 2/01/99 - 7/15/01 2,750,000 2,807,241
Hilander Finance, LLC,
5.70%, 12/01/25 1,900,000 1,900,000
Lehman Brothers, 6.20% -
6.63%, 11/15/00 - 1/15/02 3,750,000 3,761,869
Merrill Lynch, 6.00%,
3/01/01 2,500,000 2,507,100
Mississippi Power & Light,
8.80%, 4/01/05 1,000,000 1,001,814
Salomon Incorporated, 5.50%
- 7.30%, 1/15/99 - 5/15/02 3,750,000 3,861,323
------------
Total Corporate Bonds
(cost $23,943,797) 24,022,961
------------
Residual Interests (b) - 1.14%
Capital Mortgage Funding I,
Inc., 1997-5, 5/20/24 28,348 461,452
General Mortgage Securities
II, Inc., 1997-4, 5/20/22 7,936 200,074
National Mortgage Funding,
Inc., 1997-9, 11/20/24 20,623 557,732
------------
Total Residual Interests (cost
$1,258,810) 1,219,258
------------
Short-Term Investment - 2.05%
Repurchase Agreement
Goldman Sachs & Company
Dated 3/31/98, 6.05%, due 4/01/98,
collateralized by $2,214,600 Federal Home
Loan Mortgage Corporation, 7.00%, 11/01/27,
market value $2,240,206
(cost $2,191,534) 2,191,534 2,191,534
------------
Total Investments (cost
$109,483,726)-102.72% 109,569,358
------------
Other Assets less Liabilities - (2.72%)
(2,903,122)
------------
Net Assets - 100.00% $106,666,236
============
</TABLE>
72
<PAGE>
Mentor Short-Duration Income Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Investment Abbreviations
ARM - Adjustable Rate Mortgage
MBS - Mortgage Backed Securities
(b) All or a portion of these securities are illiquid securities, and are
valued using market quotations where readily available. In the absence of
market quotations, the securities are valued based upon their fair value
determined under procedures approved by the Board of Trustees.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $132,720,570 and $64,947,450, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $109,483,726. Net unrealized appreciation aggregated
$85,632, of which $362,810, related to appreciated investment securities and
$277,178, related to depreciated investment securities.
See notes to financial statements.
73
<PAGE>
Mentor Short-Duration Income Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $107,377,824
Repurchase agreements 2,191,534
------------
Total investments
(cost $109,483,726) 109,569,358
Receivables
Fund shares sold 382,891
Dividends and interest 854,904
Deferred expenses (Note 2) 20,275
------------
Total assets 110,827,428
------------
Liabilities
Payables
Investments purchased $3,396,094
Fund shares redeemed 206,784
Dividends 462,390
Accrued expenses and other
liabilities 95,924
----------
Total liabilities 4,161,192
------------
Net Assets $106,666,236
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $107,219,513
Accumulated distributions in
excess of net investment income (348,093)
Accumulated net realized loss on
investment transactions (290,816)
Net unrealized appreciation of
investments 85,632
-------------
Net Assets $106,666,236
=============
Net Asset Value per Share
Class A Shares $ 12.54
Class B Shares $ 12.54
Class Y Shares $ 12.81
Offering Price per Share
Class A Shares $ 12.67(a)
Class B Shares $ 12.54
Class Y Shares $ 12.81
Shares Outstanding
Class A Shares 4,653,228
Class B Shares 3,852,088
Class Y Shares 79
-------------
Total Shares Outstanding 8,505,395
=============
(a) Computation of offering price: 100/99 of net asset value.
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Interest (b) (Note 2) $ 2,678,183
-----------
Expenses
Management fee (Note 3) $216,938
Shareholder service fee (Note 5) 108,469
Distribution fee (Note 3) 58,978
Transfer agent fee (Note 3) 38,055
Custodian and accounting fees
(Note 3) 8,432
Registration expenses 6,840
Shareholder reports and postage
expenses 4,218
Organizational expenses 3,658
Legal fees 1,174
Directors' fees and expenses 985
Audit fees 543
Administration fee (Note 4) 43,746
Miscellaneous 3,167
--------
Total expenses 495,203
-----------
Deduct
Waiver of administration fee (Note 4) (43,746)
Waiver of management fee (Note 4) (16,483)
-----------
Net investment income 2,243,209
-----------
Realized and unrealized gain on
investments and interest-rate swap
contracts
Net realized loss on investments and
interest-rate swap
contracts (Note 2) (117,746)
Change in unrealized appreciation on
investments (213,406)
--------
Net loss on investments (331,152)
-----------
Net increase in net assets resulting
from operations $ 1,912,057
===========
(b) Net of interest expenses of $437,123 ($281,897 related to interest-rate
swap and $155,225 related to borrowings).
See notes to financial statements.
74
<PAGE>
Mentor Short-Duration Income Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98 Year Ended
Unaudited 9/30/97
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment income $ 2,243,209 $ 2,155,953
Net realized gain (loss) on investments (117,746) 7,748
Change in unrealized appreciation (depreciation) on investments (213,406) 386,023
------------- -------------
Increase in net assets resulting from operations 1,912,057 2,549,724
------------- -------------
Distributions to Shareholders
From net investment income
Class A (1,399,133) (751,850)
Class B (1,096,371) (1,404,103)
In excess of net investment income
Class A -- (12,040)
Class B -- (11,811)
------------- -------------
Total distributions to shareholders (2,495,504) (2,179,804)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 76,927,793 39,889,219
Reinvested distributions 1,860,038 1,755,339
Shares redeemed (26,245,870) (19,273,346)
------------- -------------
Change in net assets resulting from capital share transactions 52,541,961 22,371,212
------------- -------------
Increase in net assets 51,958,514 22,741,132
Net Assets
Beginning of period 54,707,722 31,966,590
------------- -------------
End of period (including accumulated distributions in excess of net
investment income of $348,093 and $95,798, respectively) $ 106,666,236 $ 54,707,722
============= =============
</TABLE>
See notes to financial statements.
Financial Highlights
Class A Shares
<TABLE>
<CAPTION>
Six Months Year Year Period
Ended 3/31/98 Ended Ended Ended
(Unaudited) 9/30/97 9/30/96 9/30/95 (b)
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 12.62 $ 12.50 $ 12.68 $ 12.74
--------- -------- -------- ---------
Income from investment operations
Net investment income 0.35 0.77 0.82 0.22
Net realized and unrealized gain (loss) on investments (0.05) 0.12 (0.23) (0.03)
--------- -------- --------- ---------
Total from investment operations 0.30 0.89 0.59 0.19
Less distributions
From net investment income (0.38) (0.76) (0.77) (0.22)
In excess of net investment income - (0.01) - (0.03)
--------- -------- --------- ---------
Total distributions (0.38) (0.77) (0.77) (0.25)
--------- -------- --------- ---------
Net asset value, end of period $ 12.54 $ 12.62 $ 12.50 $ 12.68
========= ======== ========= =========
Total Return* 2.39% 7.33% 4.80% 1.51%
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 58,340 $ 27,619 $ 7,450 $ 1,002
Ratio of expenses to average net assets 0.85%(a) 0.86% 0.86% 0.71%(a)
Ratio of expenses to average net asset excluding waiver 0.99%(a) 1.12% 1.26% 1.00%(a)
Ratio of net investment income to average net assets 5.20%(a) 6.00% 5.90% 4.10%(a)
Portfolio turnover rate 74% 75% 411% 126%
</TABLE>
(a) Annualized.
(b) For the period from June 16, 1995 (initial offering of Class A Shares) to
September 30, 1995. * Total return does not reflect sales commissions and is not
annualized.
See notes to financial statements.
75
<PAGE>
Mentor Short-Duration Income Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
Class B Shares
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 12.62 $ 12.50
---------- --------
Income from investment operations
Net investment income 0.35 0.73
Net realized and unrealized gain (loss) on investments (0.07) 0.12
---------- --------
Total from investment operations 0.28 0.85
Less distributions
From net investment income (0.36) (0.72)
In excess of net investment income - (0.01)
From net realized gain - -
In excess of net realized gain - -
---------- ---------
Total distributions (0.36) (0.73)
---------- ---------
Net asset value, end of period $ 12.54 $ 12.62
========== =========
Total Return* 2.22% 6.96%
Ratios / Supplemental Data
Net assets, end of period (in thousands) 48,325 27,089
Ratio of expenses to average net assets 1.14%(a) 1.16%
Ratio of expenses to average net asset excluding waiver 1.28%(a) 1.42%
Ratio of net investment income to average net assets 4.91%(a) 5.70%
Portfolio turnover rate 74% 75%
<CAPTION>
Year Period Year
Ended Ended Ended
9/30/96 9/30/95(c) 9/30/94(d)
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 12.67 $ 12.18 $ 12.50
-------- ---------- ----------
Income from investment operations
Net investment income 0.73 0.59 0.41
Net realized and unrealized gain (loss) on investments (0.17) 0.52 (0.29)
--------- ---------- ----------
Total from investment operations 0.56 1.11 0.12
Less distributions
From net investment income (0.73) (0.59) (0.41)
In excess of net investment income - (0.03) (0.03)
From net realized gain - - -
In excess of net realized gain - - -
--------- ---------- ----------
Total distributions (0.73) (0.62) (0.44)
--------- ---------- ----------
Net asset value, end of period $ 12.50 $ 12.67 $ 12.18
========= ========== ==========
Total Return* 4.53% 9.22% 0.95%
Ratios / Supplemental Data
Net assets, end of period (in thousands) 24,517 19,871 17,144
Ratio of expenses to average net assets 1.16% 1.20%(a) 1.29%(a)
Ratio of expenses to average net asset excluding waiver 1.56% 1.70%(a) 1.29%(a)
Ratio of net investment income to average net assets 5.64% 5.04%(a) 4.90%(a)
Portfolio turnover rate 411% 126% 166%
</TABLE>
Class Y Shares
Period
Ended 3/31/98 (e)
(Unaudited)
Per Share Operating Performance
Net asset value, beginning of period $ 12.58
---------
Income from investment operations
Net investment income 0.40
Net realized and unrealized gain on investments (0.11)
---------
Total from investment operations 0.29
---------
Less distributions
From net investment income (0.06)
---------
Net asset value, end of period $ 12.81
=========
Total Return* 1.67%
=========
Ratios / Supplemental Data
Net assets, end of period $ 1,019
Ratio of expenses to average net assets 0.61%(a)
Ratio of expenses to average net asset excluding waiver 0.87%(a)
Ratio of net investment income to average net assets 6.77%(a)
Portfolio turnover rate 74%
(a) Annualized.
(c) For the period from January 1, 1995 to September 30, 1995.
(d) For the period from April 29, 1994 (commencement of operations) to
December 31, 1994.
(e) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998.
* Total return does not reflect sales commissions and is not annualized.
See notes to financial statements.
76
<PAGE>
Mentor Funds
Notes to Financial Statements
March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Note 1: Organization
Mentor Funds is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. Mentor Funds consists of eleven
separate Portfolios (hereinafter each individually referred to as a "Portfolio"
or collectively as the "Portfolios") at March 31, 1998, as follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Balanced Portfolio ("Balanced Portfolio")
Mentor U.S. Government Institutional Money Market Portfolio ("Government
Portfolio")
Mentor Institutional Money Market Portfolio
("Money Market Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
These financial statements do not include the Balanced Portfolio, Institutional
Money Market Portfolio and the U.S. Government Institutional Money Market
Portfolio. The Balanced Portfolio is not currently being offered to new
investors.
Mentor Funds currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% (4.75% for the Quality Income
Portfolio and Municipal Income Portfolio and 1% for Short-Duration Income
Portfolio) payable at the time of purchase. Class B shares are sold subject to a
contingent deferred sales charge payable upon redemption which decreases
depending on when shares were purchased and how long they have been held. Class
Y shares are sold to institutions and high net-worth individual investors and
are not subject to any sales or contingent deferred sales charges.
Note 2: Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Portfolios in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the
Portfolio.
(a) Valuation of Securities - Listed securities held by the Growth Portfolio,
Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio and
Global Portfolio traded on national stock exchanges and over-the-counter
securities quoted on the NASDAQ National Market System are valued at the last
reported sales price or, lacking any sales, at the last available bid price. In
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated by the Board of Trustees of the Portfolios as
the primary market. Securities traded in the over-the-counter market, other than
those quoted on the NASDAQ National Market System, are valued at the last
available bid price. Short-term investments with remaining maturities of
77
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
60 days or less are carried at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith under procedures established by and under
the general supervision and responsibility of the Board of Trustees.
U.S. Government obligations held by the Quality Income Portfolio, Short-Duration
Income Portfolio and Income and Growth Portfolio are valued at the mean between
the over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate bonds, other fixed income securities, mortgage backed
securities, mortgage related, asset-backed and other related securities are
valued at the prices provided by an independent pricing service. Security
valuations not available from an independent pricing service are provided by
dealers approved by the Portfolio's Board of Trustees. In determining value, the
pricing services use information with respect to transactions in such
securities, market transactions in comparable securities, various relationships
between securities, and yield to maturity.
Municipal bonds, held by the Municipal Income Portfolio, are valued at fair
value. An independent pricing service values the Portfolio's municipal bonds
taking into consideration yield, stability, risk, quality, coupon, maturity,
type of issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities. The pricing service does not rely exclusively on quoted prices. The
Board of Trustees has determined that the fair value of debt securities with
remaining maturities of 60 days or less shall be their amortized cost value
unless the particular circumstances of the security indicate otherwise.
Foreign currency amounts are translated into United States dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange, purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
(b) Repurchase Agreements - It is the policy of Mentor Funds to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system, or to have segregated within the custodian bank's
vault all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by Mentor Funds to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying securities to ensure the existence of a proper level of collateral.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Funds' adviser to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Borrowings - Each of the Portfolios (except for the Growth Portfolio,
Strategy Portfolio and Municipal Income Portfolio) may, under certain
circumstances, borrow money directly or through dollar-roll and reverse
repurchase agreements (arrangements in which the Portfolio sells a security for
a percentage of its market value with an agreement to buy it back on a
78
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
set date). Each Portfolio may borrow up to one-third of the value of its net
assets.
The average daily balance of reverse repurchase agreements outstanding for
Quality Income Portfolio and Short-Duration Income Portfolio during the six
months ended March 31, 1998, were approximately $14,466,795 and $7,136,691 or
$2.38 and $1.94 per share based on average shares outstanding during the period
at a weighted average interest rate of 3.47% and 4.30%, respectively. For
Short-Duration Income Portfolio the maximum amount of borrowings outstanding for
any day during the period was $13,001,997 (including accrued interest), as of
January 6, 1998, at an interest rate of 5.53% and was 11.73% of total assets.
For Quality Income Portfolio the maximum amount of borrowings outstanding for
any day during the period was $16,687,461 (including accrued interest), as of
October 3, 1997, at an interest rate of 3.65% and was 10.18% of total assets.
(d) Portfolio Securities Loaned
Each of the Portfolios (except for Municipal Income Portfolio) is authorized by
the Board of Trustees to participate in securities lending transactions.
The Portfolios may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolios
continue to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolios record an asset and obligation for the market value
of that collateral. Cash received as collateral may be reinvested, in which case
that security is recorded as an asset of the Portfolio. Variations in the market
value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At March 31, 1998, certain Portfolios had loaned securities to brokers which
were collateralized by cash, U.S. Treasury securities and letters of credits.
Income from securities lending activities amounted to $73,462, $16,474, $16,495,
$44,233, $21,672, and $38,271, for the Growth Portfolio, Global Portfolio,
Capital Growth Portfolio, Strategy Portfolio, Income & Growth Portfolio and
Quality Income Portfolio, respectively for the six months ended March 31, 1998.
The risks to the Portfolio from securities lending are that the borrower may not
provide additional collateral when required or return the securities when due.
At March 31, 1998, the value of the securities on loan and the value of the
related collateral were as follows:
<TABLE>
<CAPTION>
Letters of
Securities Cash Securities Credit
Portfolio On Loan Collateral Collateral Collateral
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth $169,112,776 $169,535,519 $2,708,650
Global 5,651,857 5,780,650 $1,702,755
Capital Growth 10,874,288 11,292,506
Strategy 66,714,498 54,376,329 13,758,624
Income and Growth 53,001,603 44,064,557 10,141,450
Quality Income 232,086 236,600
- ---------------------------------------------------------------------------------------
</TABLE>
(d) Dollar Roll Transactions - Each of the Portfolios (except for the Growth,
Strategy and Municipal Income Portfolios) may engage in dollar roll transactions
with respect to mortgage-related securities issued by GNMA, FNMA, and FHLMC. In
a dollar-roll transaction, a Portfolio sells a mortgage-related
79
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
security to a financial institution, such as a bank or broker/dealer, and
simultaneously agrees to repurchase a substantially similar (i.e., same type,
coupon, and maturity) security from the institution at later date at an agreed
upon price. The mortgage-related securities that are repurchased will bear the
same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories.
(e) Security Transactions and Investment Income - Security transactions for the
Portfolios are accounted for on trade date. Dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. Interest
income (except for Municipal Income Portfolio) includes interest and discount
earned (net of premium) on short-term obligations, and interest earned on all
other debt securities including original issue discount as required by the
Internal Revenue Code. Dividends to shareholders and capital gain distributions,
if any, are recorded on the ex-dividend date. Interest income for the Municipal
Income Portfolio includes interest earned net of premium, and original issue
discount as required by the Internal Revenue Code.
(f) Federal Income Taxes - No provision for federal income taxes has been made
since it is each Portfolio's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to distribute
to its shareholders within the allowable time limit substantially all taxable
income and realized capital gains.
Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends to
meet certain requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Portfolio to pay tax-exempt interest
dividends. The portion of such interest, if any, earned on private purpose
municipal bonds issued after August 7, 1986, may by considered a tax preference
item to shareholders.
At September 30, 1997, Quality income Portfolio for federal tax purposes, had a
capital loss carryforward of approximately $14,860,000. Pursuant to the Code,
such capital loss carryforwards expire as follows: $820,000 in 2001, $3,680,000
in 2002, $7,320,000 in 2003, $1,710,000 in 2004 and $1,330,000 in 2005.
At September 30, 1997, Short-Duration Income Portfolio for federal tax purposes,
had a capital loss carryforward of approximately $106,000. Pursuant to the
Internal Revenue Code, such capital loss carryforward will expire in 2005.
At September 30, 1997, Municipal Income Portfolio for federal tax purposes, had
a capital loss carryforward of approximately $1,930,000. Pursuant to the
Internal revenue Code, such capital loss carryforwards expire as follows:
$320,000 in 2003 and $1,610,000 in 2004.
Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise relieve the Portfolios of
any liability for federal tax.
(g) When-Issued and Delayed Delivery Transactions - The Portfolios may engage in
when-issued or delayed delivery transactions. To the extent the Portfolios
engage in such transactions, they will do so for the purpose of acquiring
portfolio securities consistent
80
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
with their investment objectives and policies and not for the purpose of
investment leverage. The Portfolios will record a when-issued security and the
related liability on the trade date. Until the securities are received and paid
for, the Portfolios will maintain security positions such that sufficient liquid
assets will be available to make payment for the securities purchased.
Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
(h) Futures Contracts - In order to gain exposure to or protect against declines
in security values, Quality Income Portfolio, Short-Duration Income Portfolio
and Municipal Income Portfolio may buy and sell futures contracts. The
Portfolios may also buy or write put or call options on these futures contracts.
The Portfolios generally sell futures contracts to hedge against declines in the
value of portfolios securities. The Portfolios may also purchase futures
contracts to gain exposure to market changes as it may be more efficient or cost
effective than actually buying securities. The Portfolios will segregate assets
to cover its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolios are required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolios each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolios recognize a realized gain or loss when the
contract is closed. For the six months ended March 31, 1998, the Municipal
Income Portfolio had realized losses of $70,658 on closed futures contracts.
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities. At March 31, 1998, the Municipal Income Portfolio had an
open position in the following futures contracts:
Number Net
of Contract Unrealized
Contracts Contracts Expiration Value Appreciation
- ----------- ------------------- ------------ -------------- -------------
180 U.S. 10 Year Note Jun-98 $18,000,000 $43,860
(i) Options - In order to produce incremental earnings or protect against
changes in the value of portfolio securities, Quality Income Portfolio and
Short-Duration Income Portfolio may buy and sell put and call options, write
covered call options on portfolio securities and write cash-secured put options.
The Portfolios generally purchase put options or write covered call options to
hedge against adverse movements in the value of portfolio holdings. The
Portfolios may also use options for speculative purposes, although they do not
employ options for this at the present time. The Portfolios will segregate
assets to cover their obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Portfolios will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a written
put option, or the cost of the security for a purchased put or call option is
adjusted by the amount of premium received or paid. For the six months ended
March 31, 1998, Municipal Income Portfolio had realized loss of $35,132.
81
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
The risk in writing a call option is that the Portfolios give up the opportunity
for profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Portfolio may incur a
loss if the market price of the security decreases and the option is exercised.
The risk in buying an option is that the Portfolio pays a premium whether or not
the option is exercised. The Portfolio also has the additional risk of not being
able to enter into a closing transaction if a liquid secondary market does not
exist. The Portfolio may also write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of the
counterparty. Activity in written options for the Municipal Income Portfolio for
the six months ended March 31, 1998, was as follows:
Premium Face Value
----------- ---------------
Options outstanding at
September 30, 1997 $ 36,693 $ 10,000,000
Options written - -
Options exercised - -
Options expired (36,693) (10,000,000)
--------- -------------
Options outstanding at
March 31, 1998 $ - $ -
--------- -------------
(j) Residual Interests - A derivative security is any investment that derives
its value from an underlying security, asset, or market index. Quality Income
Portfolio and Short-Duration Income Portfolio invest in mortgage security
residual interests ("residuals") which are considered derivative securities. The
Portfolios' investment in residuals have been primarily in securities issued by
proprietary mortgage trusts. While these entities have been highly leveraged,
often having indebtedness of up to 95% of their total value, the Portfolios have
not incurred any indebtedness in the course of making these residual
investments; nor have the Portfolios' assets been pledged to secure the
indebtedness of the issuing structure or the Portfolios' investment in the
residuals. In consideration of the risk associated with investment in residual
securities, it is the Portfolios' policy to limit their exposure at the time of
purchase to no more than 20% of their total assets. The Portfolios will continue
to invest in residual securities because, in the opinion of the Investment
Manager, these investments can play a key role in fulfilling the Portfolios'
objective of achieving high monthly income through providing a means of economic
leverage.
(k) Interest-Rate Swap - An interest-rate swap is a contract between two parties
on a specified principal amount (referred to as the notional principal) for a
specified period. In the most common instance, a swap involves the exchange of
streams of variable and fixed-rate interest payments. During the term of the
swap, changes in the value of the swap are recognized as unrealized gains or
losses by marking-to-market to reflect the market value of the swap. When the
swap is terminated, the Fund will record a realized gain or loss. As of March
31, 1998, Quality Income Portfolio had entered into the following interest rate
swap agreement. In the agreement, the Portfolio has exchanged fixed rates for
floating rates. The terms vary among the contracts but provide for the interest
rate differential to be settled on a semi annual basis. During the six months
ended March 31, 1998, net cash payments of $264,715 by Quality Income Portfolio
was received in connection with the interest rate swap agreement.
<TABLE>
<CAPTION>
Rate Paid Rate Received Net
Notional by the Fund by the Fund Floating Termination Unrealized
Portfolio Swap Counter Party Principal at 3/31/98 at 3/31/98 Rate Index Date (Loss)
- ---------------- -------------------- ------------ ------------- --------------- -------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Quality Income Lehman Brothers 11,700,000 7.56% 7.05% 3-Month Canadian 2/24/00
Bankers Acceptance $ (67,470)
=========
</TABLE>
82
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
(l) Deferred Expenses - Costs incurred by the Portfolios in connection with
their initial share registration and organization costs were deferred by the
Portfolios and are being amortized on a straight-line basis over a five-year
period.
(m) Distributions - Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses and deferral of wash sales.
Note 3: Dividends
Dividends will be declared daily and paid monthly to all shareholders invested
in Quality Income Portfolio, Short-Duration Income Portfolio and Municipal
Income Portfolio on the record date. Dividends are declared and paid
semi-annually to all shareholders invested in Capital Growth Portfolio on the
record date, dividends are declared and paid annually to all shareholders
invested in the Growth Portfolio, Strategy Portfolio and Global Portfolio on the
record date, and dividends are declared and paid quarterly to all shareholders
invested in Income and Growth Portfolio on the record date. Dividends will be
reinvested in additional shares of the same class and Portfolio on payment dates
at the ex-dividend date net asset value without a sales charge unless cash
payments are requested by shareholders in writing to Mentor. Capital gains
realized by each Portfolio, if any, are paid annually.
Note 4: Investment Advisory and Management and Administration Agreements
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment
adviser, receives for its services an annual investment advisory fee not to
exceed the following percentages of the average daily net assets of the
particular Portfolio: Growth Portfolio, 0.70%; Capital Growth Portfolio, 0.80%;
Strategy Portfolio, 0.85%; Income and Growth Portfolio, 0.75%; Municipal Income
Portfolio, 0.60%; Quality Income Portfolio, 0.60%; and Short-Duration Income
Portfolio, 0.50%.
Mentor Advisors pays the sub-adviser to Municipal Income Portfolio an annual fee
expressed as a percentage of the Portfolio's average net assets as follows:
0.25% of the first $60 million of the Portfolio's average net assets and 0.20%
of the Portfolio's average net assets over $60 million. The sub-adviser to the
Income and Growth Portfolio receives from the Investment Adviser an annual fee
expressed as a percentage of that Portfolio's assets as follows: 0.325% on the
first $50 million of the Portfolio's average net assets, 0.275% on the next $150
million of the Portfolio's average net assets, 0.225% of the next $300 million
of the Portfolio's average net assets, and 0.200% of the Portfolio's net assets
over $500 million. No performance or incentive fees are paid to the
sub-advisers. Under certain Sub-Advisory Agreements, the particular sub-adviser
may, from time to time, voluntarily waive some or all of its sub-advisory fee
charged to the Investment Adviser and may terminate any such voluntary waiver at
any time in its sole discretion.
The Global Portfolio has entered into an Investment Advisory Agreement with
Mentor Perpetual Advisors, L.L.C. ("Mentor Perpetual"). Mentor Perpetual is
owned equally by Mentor and Perpetual PLC, a diversified financial services
holding company. Under this agreement, Mentor Perpetual's management fee is
accrued daily and paid monthly at an annual rate of 1.10% applied to the average
daily net assets of the Portfolio.
83
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
For the six months ended March 31, 1998, Mentor Advisors and sub-advisers,
earned and voluntarily waived the following advisory fees:
>
Adviser Adviser Fee Sub Adviser
Fee Voluntarily Fee
Portfolio Earned Waived Earned
- ------------------- ------------- ------------- ------------
Growth $2,094,633 - -
Global 730,095 - -
Capital Growth 856,388 - -
Strategy 1,317,072 - -
Income and Growth 734,692 - $283,459
Municipal Income 254,793 - 100,311
Quality Income 467,022 $56,110 -
Short-Duration
Income 216,938 16,483 -
- ------------------- ---------- ------- --------
Administrative personnel and services are provided by Mentor, under an
Administration Agreement, at an annual rate of 0.10% of the average daily net
assets of each Portfolio. For the six months ended March 31, 1998, Mentor earned
the following administrative fees:
Administrative
Administrative Fee
Fee Voluntarily
Portfolio Earned Waived
- ----------------------- ---------------- ---------------
Growth $299,233 -
Global 69,270 -
Capital Growth 107,048 -
Strategy 154,950 -
Income and Growth 97,959 -
Municipal Income 42,465 -
Quality Income 77,837 -
Short-Duration Income 43,746 $43,746
- ----------------------- -------- -------
The Portfolios also provide direct reimbursement to Mentor for certain legal and
compliance administration, investor relation and operation related costs not
covered under the Investment Management Agreement. For the six months ended
March 31, 1998, these direct reimbursements were as follows:
Direct
Portfolio Reimbursements
- ----------------------- ---------------
[S] [C]
Growth $9,204
Global 2,156
Capital Growth 3,445
Strategy 4,587
Income and Growth 3,093
Municipal Income 1,320
Quality Income 2,429
Short-Duration Income 1,438
- ----------------------- ------
Note 5: Distribution Agreement and Other Transactions with Affiliates
The Class B shares of the Portfolios have adopted a Distribution Plan (the Plan)
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a
Distribution Agreement between the Portfolios and Mentor Distributors, LLC
("Mentor Distributors") a wholly-owned subsidiary of BISYS Fund Services, Inc.,
Mentor Distributors was appointed distributor of the Portfolios. To compensate
Mentor Distributors for the services it provides and for the expenses it incurs
under the Distribution Agreement, the Portfolios pay a distribution fee, which
is accrued daily and paid monthly at the annual rate of 0.75% of the Portfolios'
average daily net assets for the Growth Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Income and Growth Portfolio and Global Portfolio, 0.50% of
the average daily net assets of the Quality Income Portfolio and Municipal
Income Portfolio, and 0.30% of the average daily net assets for the
Short-Duration Income Portfolio.
Mentor Distributors may select financial institutions, such as investment
dealers and banks to provide sales support services as agents for their clients
or customers who beneficially own Class B shares of the Portfolios. Financial
institutions will receive fees from Mentor Distributors based upon Class B
shares owned by their clients or customers.
84
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to Class A and Class B shares of each Portfolio. Under the Service Plan,
financial institutions will enter into shareholder service agreements with the
Portfolios to provide administrative support services to their customers who
from time to time may be owners of record or beneficial owners of Class A or
Class B shares of one or more Portfolios. In return for providing these support
services, a financial institution may receive payments from one or more
Portfolios at a rate not exceeding 0.25% of the average daily net assets of the
Class A or Class B shares of the particular Portfolio or Portfolios beneficially
owned by the financial institution's customers for whom it is holder of record
or with whom it has a servicing relationship.
Presently, the Portfolios' class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan. For
the year ended March 31, 1998, distribution fees and shareholder servicing fees
were as follows:
Shareholder Servicing Fees
Distribution --------------------------
Portfolio Fees Class A Class B
- ----------------------- ------------- ------------ -----------
Growth $1,836,172 $ 138,725 $609,358
Global 331,080 61,944 111,229
Capital Growth 497,929 102,145 165,476
Strategy 1,020,717 47,044 340,330
Income and Growth 445,217 96,679 148,218
Municipal Income 120,112 47,253 58,911
Quality Income 215,035 86,833 107,759
Short-Duration Income 58,978 59,329 49,140
- ----------------------- ---------- --------- --------
Note 6: Forward Foreign Currency Exchange Contracts
In connection with portfolio purchases and sales of securities denominated in a
foreign currency, Global Portfolio may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time Global
Portfolio may enter into contracts to hedge certain foreign currency assets.
Contracts are recorded at market value. Realized gains and losses arising from
such transactions are included in net gain (loss) on investments and forward
foreign currency exchange contracts. The Portfolio is subject to the credit risk
that the other party will not complete the obligations of the contract. At March
31, 1998, Global Portfolio had outstanding forward contracts as set forth below.
<TABLE>
<CAPTION>
Contracts
to Deliver/ In Exchange Net Unrealized
Settlement Date Receive Value For (Depreciation)
- --------------------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Sales
5/19/98 Hong Kong Dollar 20,633,550 $2,577,984 $2,561,475 $ (16,509)
- --------------------------- ---------- ---------- ---------- ---------
</TABLE>
85
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
Note 7: Capital Share Transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in capital
shares were as follows:
<TABLE>
<CAPTION>
Mentor Growth Portfolio
-----------------------------------------------------------------------
Six Months Year
Ended 3/31/98 Ended 9/30/97
---------------------------------- ----------------------------------
Shares Dollar Shares Dollar
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Class A:
Shares sold 4,194,490 $ 76,668,179 5,018,131 $ 82,270,375
Shares issued upon reinvestment of distributions 346,751 6,474,795 369,088 5,744,163
Shares redeemed (3,644,498) (66,325,173) (2,301,180) (37,823,031)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 896,743 $ 16,817,801 3,086,039 $ 50,191,507
========== ============= ========== =============
Class B:
Shares sold 2,214,883 $ 39,729,701 5,392,199 $ 86,290,167
Shares issued upon reinvestment of distributions 1,667,456 30,460,604 3,348,283 51,489,284
Shares redeemed (2,013,582) (35,364,206) (3,140,076) (49,890,633)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 1,868,757 $ 34,826,099 5,600,406 $ 87,888,818
========== ============= ========== =============
Class Y: (a)
Shares sold 55 $ 1,010 - -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 55 $ 1,010 - -
========== ============= ========== =============
</TABLE>
<TABLE>
<CAPTION>
Mentor Perpetual Global Portfolio
-----------------------------------------------------------------
Six Months Year
Ended 3/31/98 Ended 9/30/97
-------------------------------- ------------------------------
Shares Dollar Shares Dollar
------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Class A:
Shares sold 603,955 $ 11,898,673 1,732,413 $ 32,107,036
Shares issued upon reinvestment of distributions 113,726 2,255,270 26,897 463,738
Shares redeemed (346,836) (6,873,466) (270,161) (5,115,471)
-------- ------------- --------- ------------
Change in net assets from capital share transactions 370,845 $ 7,280,477 1,489,149 $ 27,455,303
======== ============= ========= ============
Class B:
Shares sold 774,144 $ 15,064,569 2,325,365 $ 42,416,589
Shares issued upon reinvestment of distributions 232,932 4,477,443 91,695 1,544,189
Shares redeemed (562,374) (10,528,628) (447,724) (8,352,236)
-------- ------------- --------- ------------
Change in net assets from capital share transactions 444,702 $ 9,013,384 1,969,336 $ 35,608,542
======== ============= ========= ============
Class Y: (a)
Shares sold 53 $ 1,008 - -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
-------- ------------- --------- ------------
Change in net assets from capital share transactions 53 $ 1,008 - -
======== ============= ========= ============
</TABLE>
86
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
Note 7: Capital Share Transactions (continued)
<TABLE>
<CAPTION>
Mentor Capital Growth Portfolio
-------------------------------------------------------------------
Six Months Year
Ended 3/31/98 Ended 9/30/97
-------------------------------- --------------------------------
Shares Dollar Shares Dollar
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Class A:
Shares sold 1,955,402 $ 43,574,633 1,422,449 $ 28,161,248
Shares issued upon reinvestment of distributions 278,288 5,833,639 264,769 4,552,490
Shares redeemed (827,055) (18,520,523) (404,403) (7,959,184)
--------- ------------- --------- -------------
Change in net assets from capital share transactions 1,406,635 $ 30,887,749 1,282,815 $ 24,754,554
========= ============= ========= =============
Class B:
Shares sold 2,094,422 $ 45,198,754 1,749,992 $ 33,332,019
Shares issued upon reinvestment of distributions 507,715 10,256,056 596,606 9,983,395
Shares redeemed (523,707) (11,154,665) (711,342) (13,428,205)
--------- ------------- --------- -------------
Change in net assets from capital share transactions 2,078,430 $ 44,300,145 1,635,256 $ 29,887,209
========= ============= ========= =============
Class Y: (a)
Shares sold 49 $ 1,012 - -
Shares issued upon reinvestment of distributions - - -
Shares redeemed - - - -
--------- ------------- --------- -------------
Change in net assets from capital share transactions 49 $ 1,012 - -
========= ============= ========= =============
</TABLE>
<TABLE>
<CAPTION>
Mentor Strategy Portfolio
-----------------------------------------------------------------------
Six Months Year
Ended 3/31/98 Ended 9/30/97
---------------------------------- ----------------------------------
Shares Dollar Shares Dollar
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Class A:
Shares sold 312,205 $ 4,763,997 1,695,322 $ 28,517,096
Shares issued upon reinvestment of distributions 444,548 6,836,197 91,017 1,513,610
Shares redeemed (777,622) (12,080,086) (742,169) (12,677,413)
-------- ------------ --------- -------------
Change in net assets from capital share transactions (20,869) ($ 479,892) 1,044,170 $ 17,353,293
======== ============ ========= =============
Class B:
Shares sold 353,802 $ 5,349,702 2,587,894 $ 43,129,553
Shares issued upon reinvestment of distributions 3,423,559 51,517,305 1,291,000 21,237,045
Shares redeemed (4,273,266) (64,447,708) (3,591,125) (60,432,366)
---------- ------------ ---------- -------------
Change in net assets from capital share transactions (495,905) ($ 7,580,701) 287,769 $ 3,934,232
========== ============ ========== =============
Class Y: (a)
Shares sold 67 $ 1,001 - -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
---------- ------------ ---------- -------------
Change in net assets from capital share transactions 67 $ 1,001 - -
========== ============ ========== =============
</TABLE>
87
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
Note 7: Capital Share Transactions (continued)
<TABLE>
<CAPTION>
Mentor Income and Growth Portfolio
------------------------------------------------------------------
Six Months Year
Ended 3/31/98 Ended 9/30/97
------------------------------- --------------------------------
Shares Dollars Shares Dollars
------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Class A:
Shares sold 1,551,636 $ 29,989,933 1,945,245 $ 37,552,063
Shares issued upon reinvestment of distributions 306,756 5,887,059 179,904 3,303,336
Shares redeemed (443,613) (8,563,507) (305,497) (5,925,176)
--------- ------------ --------- -------------
Change in net assets from capital share transactions 1,414,779 $ 27,313,485 1,819,652 $ 34,930,223
========= ============ ========= =============
Class B:
Shares sold 1,607,077 $ 31,097,571 1,913,241 $ 36,687,335
Shares issued upon reinvestment of distributions 490,174 9,389,433 450,665 8,192,160
Shares redeemed (432,392) (8,363,284) (596,371) (11,526,154)
--------- ------------ --------- -------------
Change in net assets from capital share transactions 1,664,859 $ 32,123,720 1,767,535 $ 33,353,341
========= ============ ========= =============
Class Y: (a)
Shares sold 54 $ 1,002 - -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
--------- ------------ --------- -------------
Change in net assets from capital share transactions 54 $ 1,002 - -
========= ============ ========= =============
</TABLE>
<TABLE>
<CAPTION>
Mentor Municipal Income Portfolio
-----------------------------------------------------------------
Six Months Year
Ended 3/31/98 Ended 9/30/97
------------------------------- -------------------------------
Shares Dollars Shares Dollars
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Class A
Shares sold 891,254 $ 13,930,563 901,683 $ 13,789,961
Shares issued upon reinvestment of distributions 37,636 589,566 41,778 635,539
Shares redeemed (157,969) (2,462,941) (214,874) (3,272,170)
-------- ------------ -------- ------------
Change in net assets from capital share transactions 770,921 $ 12,057,188 728,587 $ 11,153,330
======== ============ ======== ============
Class B:
Shares sold 626,506 $ 9,824,135 782,655 $ 11,948,057
Shares issued upon reinvestment of distributions 45,214 707,228 83,433 1,268,808
Shares redeemed (199,088) (3,114,005) (478,013) (7,288,249)
-------- ------------ -------- ------------
Change in net assets from capital share transactions 472,632 $ 7,417,358 388,075 $ 5,928,616
======== ============ ======== ============
Class Y: (a)
Shares sold 64 $ 1,000 - -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
-------- ------------ -------- ------------
Change in net assets from capital share transactions 64 $ 1,000 - -
======== ============ ======== ============
</TABLE>
88
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
Note 7: Capital Share Transactions (continued)
<TABLE>
<CAPTION>
Mentor Quality Income Portfolio
--------------------------------------------------------------------
Six Months Year
Ended 3/31/98 Ended 9/30/97
-------------------------------- ---------------------------------
Shares Dollars Shares Dollars
------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Class A:
Shares sold 2,219,561 $ 29,373,425 2,838,801 $ 37,052,906
Shares issued upon reinvestment of distributions 89,934 1,107,080 91,837 1,196,422
Shares redeemed (504,377) (6,662,826) (529,521) (6,928,329)
--------- ------------ --------- -------------
Change in net assets from capital share transactions 1,805,118 $ 23,817,679 2,401,117 $ 31,320,999
========= ============ ========= =============
Class B:
Shares sold 2,098,737 $ 27,755,791 2,058,671 $ 26,889,217
Shares issued upon reinvestment of distributions 134,930 1,783,430 218,332 2,847,859
Shares redeemed (621,756) (8,214,958) (1,089,318) (14,250,845)
--------- ------------ ---------- -------------
Change in net assets from capital share transactions 1,611,911 $ 21,324,263 1,187,685 $ 15,486,231
========= ============ ========== =============
Class Y: (a)
Shares sold 76 $ 1,000 - -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
--------- ------------ ---------- -------------
Change in net assets from capital share transactions 76 $ 1,000 - -
========= ============ ========== =============
</TABLE>
<TABLE>
<CAPTION>
Mentor Short-Duration Income Portfolio
-----------------------------------------------------------------------
Six Months Year
Ended 3/31/98 Ended 9/30/97
---------------------------------- ----------------------------------
Shares Dollar Shares Dollar
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Class A:
Shares sold 3,937,877 $ 49,587,366 2,047,670 $ 25,768,187
Shares issued upon reinvestment of distributions 83,690 1,053,433 49,602 623,647
Shares redeemed (1,556,524) (19,574,787) (505,078) (6,351,983)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 2,465,043 $ 31,066,012 1,592,194 $ 20,039,851
========== ============= ========= =============
Class B:
Shares sold 2,171,475 $ 27,339,426 1,121,483 $ 14,121,033
Shares issued upon reinvestment of distributions 64,062 806,605 89,996 1,131,691
Shares redeemed (529,910) (6,671,082) (1,027,042) (12,921,363)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 1,705,627 $ 21,474,949 184,437 $ 2,331,361
========== ============= ========== =============
Class Y: (a)
Shares sold 80 $ 1,000 - -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 80 $ 1,000 - -
========== ============= ========== =============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to March 31, 1998.
Year 2000
The Portfolios receive services from a number of providers which rely on the
smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of computer software to distinguish the Year 2000 from
the Year 1900. Mentor Advisors is taking steps that it
89
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
believes are reasonably designed to address this potential "Year 2000" problem
and to obtain satisfactory assurances that comparable steps are being taken by
each of the Portfolio's other major service providers. There can be no
assurance, however, that these steps will be sufficient to avoid any adverse
impact on the Portfolios from this problem.
Additional Information (unaudited)
Mentor Growth Portfolio:
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 27,544,542 171,023
Troy A. Peery, Jr. 27,544,488 171,077
Arnold H. Dreyfuss 27,564,520 151,045
Thomas F. Keller 27,566,624 148,941
Peter J. Quinn, Jr. 27,561,643 153,922
Louis W. Moelchert, Jr. 27,569,404 146,161
Arch T. Allen, III 27,569,936 145,629
Weston E. Edwards 27,567,618 147,947
Jerry R. Barrentine 27,571,709 143,856
J. Garnett Nelson 27,573,524 142,041
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 27,235,755
Against 180,309
Abstain 299,501
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 27,195,722
Against 191,665
Abstain 328,178
Mentor Perpetual Global Portfolio:
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
90
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 6,098,523 2,311
Troy A. Peery, Jr. 6,036,156 64,678
Arnold H. Dreyfuss 6,037,243 63,591
Thomas F. Keller 6,048,524 52,310
Peter J. Quinn, Jr. 6,048,794 52,040
Louis W. Moelchert, Jr. 6,048,794 52,040
Arch T. Allen, III 6,048,794 52,040
Weston E. Edwards 6,048,794 52,040
Jerry R. Barrentine 6,050,235 50,599
J. Garnett Nelson 6,050,235 50,599
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 5,989,446
Against 53,948
Abstain 57,440
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 5,975,753
Against 64,034
Abstain 61,047
Mentor Capital Growth Portfolio:
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 7,397,245 93,135
Troy A. Peery, Jr. 7,395,588 94,792
Arnold H. Dreyfuss 7,404,586 85,794
Thomas F. Keller 7,404,873 85,507
Peter J. Quinn, Jr. 7,407,129 83,251
Louis W. Moelchert, Jr. 7,406,066 84,314
Arch T. Allen, III 7,406,560 83,820
Weston E. Edwards 7,406,560 83,820
Jerry R. Barrentine 7,406,560 83,820
J. Garnett Nelson 7,406,560 83,820
91
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 7,331,649
Against 71,967
Abstain 86,764
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 7,297,369
Against 72,886
Abstain 120,125
Mentor Strategy Portfolio:
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 20,152,299 171,413
Troy A. Peery, Jr. 20,152,236 171,476
Arnold H. Dreyfuss 20,156,434 167,278
Thomas F. Keller 20,159,264 164,448
Peter J. Quinn, Jr. 20,157,621 166,091
Louis W. Moelchert, Jr. 20,158,819 164,893
Arch T. Allen, III 20,159,366 164,346
Weston E. Edwards 20,159,233 164,479
Jerry R. Barrentine 20,163,690 160,022
J. Garnett Nelson 20,163,690 160,022
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 19,987,030
Against 124,613
Abstain 212,069
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 19,973,828
Against 140,299
Abstain 209,585
92
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
Mentor Income and Growth Portfolio:
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 7,985,170 106,710
Troy A. Peery, Jr. 7,986,482 105,398
Arnold H. Dreyfuss 7,992,380 99,500
Thomas F. Keller 7,992,184 99,696
Peter J. Quinn, Jr. 7,992,380 99,500
Louis W. Moelchert, Jr. 7,992,648 99,232
Arch T. Allen, III 7,992,648 99,232
Weston E. Edwards 7,992,648 99,232
Jerry R. Barrentine 7,992,648 99,232
J. Garnett Nelson 7,992,648 99,232
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 7,917,636
Against 92,036
Abstain 82,208
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 7,934,503
Against 67,845
Abstain 89,532
4. To approve a new sub-advisory agreement with Wellington Management Company,
LLP Van Kampen American Capital Management, Inc.:
Affirmative 7,921,655
Against 73,911
Abstain 96,314
Mentor Municipal Income Portfolio:
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
93
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 4,647,367 11,903
Troy A. Peery, Jr. 4,647,367 11,903
Arnold H. Dreyfuss 4,647,943 11,327
Thomas F. Keller 4,647,943 11,327
Peter J. Quinn, Jr. 4,647,943 11,327
Louis W. Moelchert, Jr. 4,647,943 11,327
Arch T. Allen, III 4,647,943 11,327
Weston E. Edwards 4,647,943 11,327
Jerry R. Barrentine 4,647,943 11,327
J. Garnett Nelson 4,647,943 11,327
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 4,586,630
Against 11,033
Abstain 61,607
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 4,597,715
Against 14,184
Abstain 47,371
4. To approve a new sub-advisory agreement with Van Kampen American Capital
Management, Inc.:
Affirmative 4,599,957
Against 16,575
Abstain 42,738
Mentor Quality Income Portfolio:
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
94
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 10,228,357 236,339
Troy A. Peery, Jr. 10,232,514 232,182
Arnold H. Dreyfuss 10,236,054 228,642
Thomas F. Keller 10,235,754 228,942
Peter J. Quinn, Jr. 10,236,184 228,512
Louis W. Moelchert, Jr. 10,236,700 227,996
Arch T. Allen, III 10,236,700 227,996
Weston E. Edwards 10,242,580 222,116
Jerry R. Barrentine 10,245,717 218,979
J. Garnett Nelson 10,245,717 218,979
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 10,053,860
Against 139,703
Abstain 271,133
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 10,064,644
Against 128,145
Abstain 271,907
4. Proposal to amend fundamental investment restrictions of the Portfolio to
permit it to borrow money to invest in additional securities.
Affirmative 6,053,769
Against 586,586
Abstain 286,481
Broker Non-vote 3,537,860
Mentor Short-Duration Income Portfolio:
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
95
<PAGE>
Mentor Funds
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
1. To elect the following Trustees:
Affirmative Withheld
[S] [C] [C]
Daniel J. Ludeman 5,233,538 1,899
Troy A. Peery, Jr. 5,223,681 11,756
Arnold H. Dreyfuss 5,223,681 11,756
Thomas F. Keller 5,223,681 11,756
Peter J. Quinn, Jr. 5,224,488 10,949
Louis W. Moelchert, Jr. 5,224,488 10,949
Arch T. Allen, III 5,224,488 10,949
Weston E. Edwards 5,224,488 10,949
Jerry R. Barrentine 5,224,488 10,949
J. Garnett Nelson 5,224,488 10,949
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First Butcher
Singer, Inc., with First Union Corporation:
Affirmative 5,164,387
Against 22,153
Abstain 48,897
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 5,171,233
Against 19,851
Abstain 44,353
96
<PAGE>
Mentor Funds
Shareholder Information
- --------------------------------------------------------------------------------
Trustees
Daniel J. Ludeman, Trustee & Chairman
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
Arch T. Allen III, Trustee
Attorney at Law
Allen & Moore, LLP
Jerry R. Barrentine, Trustee
President
J.R. Barrentine & Associates
Arnold H. Dreyfuss, Trustee
Former Chairman & Chief Executive Officer
Hamilton Beach/Proctor-Silex, Inc.
Weston E. Edwards, Trustee
President
Weston Edwards & Associates
Thomas F. Keller, Trustee
Former Dean, Fuqua School of Business
Duke University
Louis W. Moelchert, Jr., Trustee
Vice President for Business & Finance
University of Richmond
J. Garnett Nelson, Trustee
Consultant
Mid-Atlantic Holdings, LLC
Troy A. Peery, Jr., Trustee
President
Heilig-Meyers Company
Peter J. Quinn, Jr., Trustee
Managing Director
Mentor Investment Group, LLC
Officers
Paul F. Costello, President
Managing Director
Mentor Investment Group, LLC
Terry L. Perkins, Treasurer
Senior Vice President
Mentor Investment Group, LLC
Geoffrey B. Sale, Secretary
Associate Vice President
Mentor Investment Group, LLC
Michael A. Wade, Assistant Treasurer
Vice President
Mentor Investment Group, LLC
This report is authorized for distribution to prospective investors only when
preceded or accompanied by a Mentor Funds prospectus, which contains complete
information about fees, sales charges and expenses. Please read it carefully
before you invest or send money.
<PAGE>
[MENTOR INVESTMENT GROUP LOGO]
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(800) 382-0016
1998 Mentor Distributors, LLC
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