Mentor Balanced Portfolio
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Semi-Annual Report
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March 31, 1998
[Logo]
<PAGE>
Mentor Balanced Portfolio
Managers' Commentary: The Balanced Management Team
March 31, 1998
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Equity Overview
The S&P 500 gained 17.2% during the six-month period ended March 31, 1998, with
the first quarter of this year marking the index's thirteenth consecutive
quarterly gain.* The period of the 1990's now represents the second 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. Many
speculators are driving the prices of certain "hype" stocks to extraordinary
levels. For example, 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.
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.
Fixed-Income Overview
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%. The Federal Reserve continued to leave the federal funds rate
(the rate member banks charge each other on inter-bank loans) 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.
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
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<PAGE>
Mentor Balanced Portfolio
Managers' Commentary: The Balanced Management Team
March 31, 1998
- --------------------------------------------------------------------------------
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.
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 US 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 Balanced Portfolio**
Our objective is to manage the equity portion of the Mentor Balanced Portfolio
to continue in line with or better than our peers and the S&P 500.* 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 particulary
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.
As expected, the turmoil in emerging Asian markets and Japan has been positive
for U.S. fixed-income markets, particulary 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 the fixed-income investments of the Mentor Balanced Portfolio to
take advantage of 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 predictablity of corporate earnings would be a widening of speads.
This 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 spread product sufficiently attractive to cause us to reverse course
and selectively raise non-treasury allocations. At period-end we lengthened the
duration of the fixed-income portion of the Balanced Portfolio by a modest
amount, and sold our international holdings, replacing them with domestic
issues.
* 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.
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Mentor Balanced Portfolio
Managers' Commentary: The Balanced Management Team
March 31, 1998
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[GRAPH]
<TABLE>
<CAPTION>
Mentor Balanced Portfolio Mentor Balanced Portfolio* S&P and Lehman Brothers Aggregate Bond Index**
<S> <C>
6/21/94 $10,000 $10,000 $10,000
6/30/94 9,872 9,782 10,000
12/31/94 10,108 9,610 10,336
6/30/95 11,561 11,161 12,054
9/30/95 12,085 11,685 12,723
9/30/96 14,260 13,960 14,506
9/30/97 18,042 17,842 18,496
3/31/98 20,552 20,352 20,742
</TABLE>
* Includes maximum Contingent Deferred Sales Charge (CDSC) of 5%. **This
Index represents asset allocation of 60% S&P 500 Stocks and 40% Lehman Brothers
Government/Corporate Bonds. The Standard & Poor's (S&P) 500 Index 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. The Lehman Brothers Government/Corporate Bond
index is commonly used to compare performance of income-oriented portfolios and
include treasuries, agencies, and publicly-issued, fixed-rate, non-convertible,
investment-grade, dollar-denominated debt. Investors cannot invest in the Index.
Average Annual Return as of 3/31/98 Without Sales Charges
1-Year Since Inception***
34.72% 20.90%
Average Annual Return as of 3/31/98 Without Sales Charges
1-Year Since Inception***
29.72% 20.58%
***For the period from June 21, 1994 (commencement of operations) to March
31, 1998
Performance Information for the Mentor Balanced Portfolio
This graph compared the investment performance of the Portfolio from its
inception date to the index that is most representative of the fund's
portfolio. The graph reflects the performance of a hypothetical $10,000
investment in the Portfolio from the date the Portfolio started through March
31, 1998. Return does not reflect taxes payable (if any) on distributions.
In comparing the performance of the Portfolio to an index, keep in mind that
market indexes do not take into account brokerage commissions that would be
incurred if you purchased the individual securities that make up the index.
They also do not include taxes payable on dividends and interest payments, or
operating expenses necessary to maintain a portfolio investing in the index.
The performance data quoted in this report is historical and does not guarantee
future investment results. Your investment return and principal value will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.
Performance is as of March 31, 1998 and includes change in share price and
reinvestment of dividends and capital gains. The maximum contingent deferred
sales charge (CDSC) is 5% for the Balanced Portfolio.
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Mentor Balanced Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
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Shares Market Value
Common Stocks - 55.86%
Basic Materials - 7.75%
Bemis Company 1,800 $ 81,225
Emerson Electric Company 1,250 81,484
Morton International, Inc. 2,400 78,750
Sonoco Products Company 2,200 88,138
---------
329,597
---------
Capital Goods & Construction - 6.27%
AlliedSignal, Inc. 2,050 86,100
W.W. Grainger, Inc. 875 89,961
Illinois Tool Works 1,400 90,650
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266,711
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Consumer Cyclical - 7.93%
Automatic Data Processing 1,275 86,780
Federated Department Stores * 1,500 77,719
Interpublic Group Companies, Inc. 1,380 85,733
Newell Company 1,800 87,188
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337,420
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Consumer Staples - 6.56%
McDonald's Corporation 1,650 99,000
Sherwin-Williams Company 2,620 93,010
Sysco Corporation 3,400 87,125
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279,135
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Financial - 13.62%
American Express Company 935 85,845
Banc One Corporation 1,451 91,771
Federal National Mortgage
Association 1,340 84,755
General Re Corporation 400 88,250
NationsBank Corporation 1,090 79,502
Norwest Corporation 2,000 83,125
UNUM Corporation 1,200 66,225
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579,473
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Health - 4.14%
Johnson & Johnson 1,200 87,975
Schering-Plough 1,080 88,223
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176,198
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Technology - 7.64%
Computer Sciences Corporation 1,560 85,800
Chancellor Media Corporation -
Class A * 1,750 80,281
WorldCom, Inc. * 2,000 86,125
Sun Microsystems, Inc. * 1,750 73,008
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325,214
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Transportation & Services - 1.95%
Werner Enterprises, Inc. 3,250 82,875
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Total Common Stocks
(cost $1,663,773) 2,376,623
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Principal
Amount Market Value
Fixed Income Securities - 31.45%
U.S. Government Securities and
Agencies - 21.20%
Federal National Mortgage
Association, 6.64%, 07/02/07 $130,000 $ 136,636
Federal Home Loan Bank, 5.59%,
1/13/03 105,000 104,310
Government National Mortgage
Association, 6.50% - 7.38%,
5/15/09 - 11/20/22 291,968 297,842
U.S. Treasury Notes, 6.00% -
6.75%, 4/30/00 - 2/15/26 105,000 106,964
U.S. Treasury Bonds, 6.88% -
7.50%, 2/15/23 - 8/15/25 220,000 255,998
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Total U.S. Government Securities
and Agencies (cost $864,670) 901,750
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Corporate Bonds - 10.25%
CS First Boston, 7.18%,
2/25/18, CMO 25,000 25,251
Ford Motor Credit, 7.20%, 6/15/07 45,000 47,713
Key Auto Finance Trust Series
1997-2 Class A3, 6.10%,
11/15/00 50,000 50,093
Merrill Lynch, 6.64%, 9/19/02 45,000 45,975
NationsBank Corporation, 7.50%,
9/15/06 35,000 37,562
Norwest Corporation, 6.80%,
5/15/02 60,000 61,541
PNC Student Loan Trust, 6.73%,
1/25/07 75,000 76,904
Travelers Group, 8.63%, 2/01/07 40,000 45,951
Union Acceptance Corporation,
6.48%, 5/10/04 45,000 45,352
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Total Corporate Bonds
(cost $425,855) 436,342
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Total Fixed Income Securities
(cost $1,816,972) 1,338,092
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Short-Term Investment
Repurchase Agreement - 12.37%
Goldman Sachs & Company Dated
03/31/98, 6.05%, due 04/01/98,
collateralized by $532,328
Federal Home Loan Mortgage
Corporation, 7.00%, 11/01/27,
market value $538,482,
(cost $526,447) 526,447 526,447
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Total Investments
(cost $3,480,745)- 99.69% 4,241,162
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Other Assets less Liabilities - 0.31% 13,143
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Net Assets - 100.00% $4,254,305
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<PAGE>
Mentor Balanced Portfolio
Portfolio of Investments
March 31, 1998 (Unaudited)
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* Non-income producing.
CMO Collateralized Mortgage Obligations
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $1,573,639 and $2,277,180, respectively.
Income Tax Information
At March 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $3,480,745. Net unrealized appreciation aggregated
$760,417, of which $766,587, related to appreciated investment securities and
$6,170, related to depreciated investment securities.
See notes to financial statements.
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Mentor Balanced Portfolio
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Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
Assets
Investments, at market value (Note 2)
Investment securities $3,714,715
Repurchase agreements 526,447
-----------
Total investments (cost $3,480,745) 4,241,162
Collateral for securities loaned (Note 2) 907,004
Dividends and interest receivable 17,261
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Total assets 5,165,427
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Liabilities
Securities loaned (Note 2) $907,004
Accrued expenses and other liabilities 4,118
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Total liabilities 911,122
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Net Assets $4,254,305
===========
Net Assets represented by: (Note 2)
Additional paid-in capital $3,013,991
Accumulated undistributed net
investment income 28,214
Accumulated net realized gain on
investment transactions 451,683
Net unrealized appreciation of
investments 760,417
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Net Assets $4,254,305
===========
Shares Outstanding 243,683
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Net Asset Value and Offering Price per
Share $ 17.46
===========
See notes to financial statements.
Statement of Operations
Six Months Ended March 31, 1998 (Unaudited)
Investment income
Dividends $ 15,637
Interest net of premium 47,667
---------
Total investment income (Note 2) 63,304
---------
Expenses
Management fee (Note 3) $15,306
Distribution fee (Note 3) 15,306
Shareholder service fee (Note 5) 5,102
Custodian and accounting fees (Note 3) 3,822
Administration fee (Note 4) 2,046
Registration expenses 278
Shareholder reports and postage
expenses 93
Legal fees 69
Audit fees 38
Directors' fees and expenses 57
Miscellaneous 190
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Total expenses 42,307
---------
Deduct
Waiver of distribution fee (Note 3) 15,306
Waiver of management fee (Note 3) 10,086
Waiver of shareholder servicing fee
(Note 4) 5,102
Waiver of administration fee (Note 3) 2,046
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Net expenses 9,767
---------
Net investment income 53,537
---------
Realized and unrealized gain (loss) on
investments
Net realized gain on
investments (Note 2) 505,443
Change in unrealized appreciation on
investments (26,550)
-------
Net gain on investments 478,893
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Net increase in net assets resulting from
operations $ 532,430
=========
See notes to financial statements.
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Mentor Balanced Portfolio
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Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 3/31/98 Year Ended
Unaudited 9/30/97
<S> <C>
Net Increase in Net Assets
Operations
Net investment income $ 53,537 $ 107,324
Net realized gain on investments 505,443 408,111
Change in unrealized appreciation on investments (26,550) 397,175
---------- ----------
Increase in net assets resulting from operations 532,430 912,610
---------- ----------
Distributions to Shareholders
From net investment income (93,188) (108,705)
From net realized gain on investments (440,937) (449,369)
---------- ----------
Total distributions to shareholders (534,125) (558,074)
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Capital Share Transactions (Note 7)
Proceeds from sale of shares -- 108,705
Reinvested distributions 534,125 449,370
Shares redeemed (380,000) (636,137)
---------- ----------
Change in net assets resulting from capital share transactions 154,125 (78,062)
---------- ----------
Increase in net assets 152,430 276,474
Net Assets
Beginning of period 4,101,875 3,825,401
---------- ----------
End of period (including accumulated undistributed net investement
income of $28,214 and $67,864, respectively) $4,254,305 $4,101,875
========== ==========
</TABLE>
See notes to financial statements.
Financial Highlights
<TABLE>
<CAPTION>
Six Months Year
Ended 3/31/98 Ended
(Unaudited) 9/30/97
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 17.61 $ 16.28
-------- ---------
Income from investment operations
Net investment income 0.32 0.43
Net realized and unrealized gain (loss) on investments 1.88 3.35
-------- ---------
Total from investment operations 2.20 3.78
-------- ---------
Less distributions
From net investment income (0.41) (0.43)
From net realized capital gain (1.94) (2.02)
---------- ----------
Total distributions (2.35) (2.45)
---------- ----------
Net asset value, end of period $ 17.46 $ 17.61
========== ==========
Total Return 13.91% 26.09%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 4,254 $ 4,102
Ratio of expenses to average net assets 0.50%(a) 0.50%
Ratio of expenses to average net assets excluding waiver 2.08%(a) 2.13%
Ratio of net investment income to average net assets 2.64%(a) 2.78%
Portfolio turnover rate 41% 80%
Average commission rate on portfolio transactions $ 0.0684 $ 0.0696
<CAPTION>
Year Period Period
Ended Ended Ended
9/30/96 9/30/95 (b) 12/31/94 (c)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 14.85 $ 12.44 $ 12.50
--------- ---------- ----------
Income from investment operations
Net investment income 0.42 0.36 0.22
Net realized and unrealized gain (loss) on investments 2.09 2.08 (0.09)
--------- ---------- ----------
Total from investment operations 2.51 2.44 0.13
--------- ---------- ----------
Less distributions
From net investment income (0.48) (0.03) (0.19)
From net realized capital gain (0.60) -- --
---------- ---------- ----------
Total distributions (1.08) (0.03) (0.19)
---------- ---------- ----------
Net asset value, end of period $ 16.28 $ 14.85 $ 12.44
========== ========== ==========
Total Return 18.00% 19.28% 1.00%
Ratios/Supplemental Data
Net assets, end of period (in thousands) $ 3,825 $ 3,210 $ 2,911
Ratio of expenses to average net assets 0.50% 0.50%(a) 0.50%(a)
Ratio of expenses to average net assets excluding waiver 2.06% 2.12%(a) 2.72%(a)
Ratio of net investment income to average net assets 2.83% 3.26%(a) 3.32%(a)
Portfolio turnover rate 103% 65% 71%
Average commission rate on portfolio transactions $ 0.0694
</TABLE>
(a) Annualized.
(b) For the period from January 1, 1995 to September 30, 1995.
(c) For the period from June 21, 1994 (commencement of operations) to December
31, 1994.
See notes to financial statements.
7
<PAGE>
Mentor Balanced Portfolio
Notes to Financial Statements
March 31, 1998 (Unaudited)
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Note 1: Organization
The 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 Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Strategy Portfolio
("Strategy Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor Balanced Portfolio
("Balanced Portfolio")
Mentor Institutional U.S. Government Money Market Portfolio
("Government Portfolio")
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.
The financial statements included in this report are for the Balanced Portfolio
only (hereinafter referred to as the "Portfolio"). The Balanced Portfolio
invests in common stocks and fixed income securities.
Shares of the Portfolio are sold without an initial sales charge, although a
contingent deferred sales charge may be imposed if shares are redeemed within 5
years of purchase. Shares of the Portfolio are not currently being offered to
the public.
Note 2: Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Portfolio 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 Portfolio and
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 Portfolio as the
primary market. Securities traded in the over-the-counter market, other than
those quoted on the NASDAQ National Market System, are valued at the last
available bid price. Short-term investments with remaining maturities of 60
days or less are carried at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith under procedures Notes to Financial
Statements (continued) established by and under the general supervision of the
Board of Trustees.
8
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Mentor Balanced Portfolio
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
U.S. Government obligations held by the 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 dealers use information with respect to transactions
in such securities, market transactions in comparable securities, various
relationships between securities, and yield to maturity.
(b) Repurchase Agreements - It is the policy of the Portfolio 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.
The Portfolio will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Portfolio's advisor to be creditworthy pursuant to guidelines established
by the Portfolio's Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly, the
Portfolio could receive less than the repurchase price on the sale of
collateral securities.
(c) Portfolio Securities Loaned - The Portfolio is authorized by the Board of
Trustees to participate in securities lending transactions.
The Portfolio may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolio
continues 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 Portfolio records 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, the Portfolio had loaned securities to brokers which were
collateralized by cash and securities. Income from securities lending
activities amounted to $212 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 market value of the securities on loan and the related cash and
securities collaterals were as follows:
Securities Cash Securities
on Loan Collateral Collateral
- -------------- ------------ -----------
$ 919,058 $907,004 $25,730
(d) Security Transactions and Investment Income - Security transactions for the
Portfolio are accounted for on a trade date basis. Dividend income is recorded
on the ex-dividend date and interest is recorded on the accrual basis. Interest
income includes
9
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Mentor Balanced Portfolio
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
interest and discount earned (net of premium) on short term obligations, and
interest earned on all other debt securities including original issue discounts
as required by the Internal Revenue Code. Realized and unrealized gains and
losses on investment security transactions are calculated on an identified cost
basis.
(e) Federal Income Taxes - No provision for federal income taxes has been made
since it is the 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, if any.
(f) Distributions to Shareholders - Distributions from net investment income
and net realized capital gains, after offsetting capital loss carryovers are
distributed annually for the Portfolio.
Note 3: Investment Advisory and Management and Administration Agreements
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolio's investment
adviser, receives for its services an annual investment advisory fee of 0.75%
as a percentage of the average daily net assets of the Portfolio. In order to
limit the Portfolio's expenses of the Portfolio (exclusive of brokerage,
interest, taxes, deferred organization expenses, and payments under the
Portfolio's Distribution Plan) exceed an annual rate of 0.50% of the
Portfolio's average net assets. For the six months ended March 31, 1998, Mentor
Advisors earned management fees of $15,306 and voluntarily waived $10,086 of
such fees.
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC
("Mentor") which is in turn a partially owned subsidiary of Wheat First Union.
EVEREN Capital Corporation owns 20% of the outstanding interest in Mentor.
Administrative personnel and services are provided by Mentor to the Portfolio,
under an Administration Agreement, at an annual rate of 0.10% of the average
daily net assets of the Portfolio. In order to limit the Portfolio's expenses,
Mentor agreed to waive its fees for the six months ended March 31, 1998.
Note 4: Distribution Agreement and Other Transactions with Affiliates
Under a Distribution Agreement Mentor Distributors, LLC ("Mentor Distributors")
a wholly-owned subsidiary of BISYS Fund Services, Inc., was appointed
Distributor for the Portfolio. To compensate Mentor Distributors for the
services it provides and for the expenses it incurs under the Distribution
Agreement, the Portfolio has adopted a Plan of Distribution pursuant to Rule
12b-1 under the Investment Company Act of 1940, under which the Portfolio pays
a distribution fee, which is accrued daily and paid monthly at the annual rate
of 0.75% of the Portfolio's average daily net assets.
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to each Portfolio. Under the Service Plan, financial institutions will
enter into shareholder service agreements with the Portfolio to provide
administrative support services at an annual rate of 0.25% of the Portfolio's
average
10
<PAGE>
Mentor Balanced Portfolio
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
daily net assets. The total charges to be borne by the Portfolio, under the
Distribution and Shareholder Service Agreements is expected to remain at an
annual rate of 1% of the Portfolio's average daily net assets. For the six
months ended March 31, 1998 distribution and shareholder services fees were as
follows:
Shareholder
Distribution Fee Shareholder Servicing Fee
Distribution Fee Waived Servicing Fee Waived
- ------------------ ------------------ --------------- --------------
$ 15,306 $ (15,306) $5,102 $ (5,102)
Note 5: Capital Share Transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
3/31/98 9/30/97
Shares Dollars Shares Dollars
------------ ------------- ------------ -------------
<S> <C>
Shares sold - $ - - $ -
Shares issued upon reinvestment of distributions 33,848 534,125 37,773 558,075
Shares redeemed (23,064) (380,000) (39,915) (636,137)
------- ---------- ------- ----------
Change in net assets from capital share transactions 10,784 $ 154,125 (2,142) $ (78,062)
======= ========== ======= ==========
</TABLE>
Year 2000
The Portfolio receives 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 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
Portfolio from this problem.
11
<PAGE>
Mentor Balanced Portfolio
Notes to Financial Statements
(continued)
- --------------------------------------------------------------------------------
Additional Information (unaudited)
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 230,078 -
Troy A. Peery, Jr. 230,078 -
Arnold H. Dreyfuss 230,078 -
Thomas F. Keller 230,078 -
Peter J. Quinn, Jr. 230,078 -
Louis W. Moelchert, Jr. 230,078 -
Arch T. Allen, III 230,078 -
Weston E. Edwards 230,078 -
Jerry R. Barrentine 230,078 -
J. Garnett Nelson 230,078 -
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 230,078
Against -
Abstain -
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 230,078
Against -
Abstain -
12
<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>
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901 East Byrd Street
Richmond, Virginia 23219
(800) 382-0016
1998 Mentor Distributors, LLC
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED MAY LOSE VALUE
