Mentor Funds
---------------
Annual Report
---------------
September 30, 1998
[Mentor Logo]
<PAGE>
MENTOR FUNDS
ANNUAL REPORT
TABLE OF CONTENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
------------------
<S> <C>
Message from the Chairman and President ................. 1
Growth Portfolio ........................................ 3
Global Portfolio ........................................ 14
Capital Growth Portfolio ................................ 28
Strategy Portfolio ...................................... 35
Income and Growth Portfolio ............................. 44
Balanced Portfolio ...................................... 54
Municipal Income Portfolio .............................. 63
Quality Income & Short-Duration Income Portfolios ....... 73
High Income Portfolio ................................... 88
Notes to Financial Statements ........................... 97
Shareholder Information ................................. Inside back cover
</TABLE>
<PAGE>
MENTOR FUNDS
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
On behalf of all the associates at the Mentor Investment Group, we would like
to take this opportunity to thank you for your investment in the Mentor Family
of Funds. This Annual Report reaffirms our commitment to our shareholders and
details the financial performance of the Mentor Family of Funds for the period
ended September 30, 1998.
Founded in 1970, Mentor Investment Group is an investment advisory firm with
more than $13 billion under management. We pride ourselves on a strong heritage
of providing quality service and a variety of investment choices that help meet
our shareholders' financial objectives by offering mutual funds and
separately-invested portfolios.
In the commentaries that follow, Mentor's investment teams present insightful
perspectives on the markets and strategies that shaped their investment
decisions for the past fiscal year.
During this year, Mentor capitalized on its ability to bring products to new
market to serve the needs of our investors. Specifically, two funds were
introduced to our retail investors. The Mentor Balanced Portfolio is designed
to help investors seek capital growth and current income through investment in
fixed income and equity securities. The Mentor High Income Portfolio was
developed to seek high current income as well as capital appreciation by
tapping the potential of high yield bonds.
MENTOR INVESTMENT GROUP*
[Graph]
Six Investment Styles
Small-Capitalization Growth
Global/International Growth Equity
Large-Capitalization Quality Growth
Balanced Management
Active Fixed Income
Cash Management
* Mentor Investment Advisors, LLC is a wholly-owned subsidiary of Mentor
Investment Group, LLC
1
<PAGE>
MENTOR FUNDS
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
SEPTEMBER 30, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
With a commitment to excellence in investing, Mentor meets the challenges of
product expansion by focusing on clarity, simplicity, and efficiency. Our
investment teams operate with these priorities:
FOCUS -- In most money management companies, each investment manager has
multiple responsibilities. At Mentor, our investment managers are singularly
focused on enhancing the value of the portfolios. This means that you can be
assured of a consistent, proven approach to developing a winning financial
strategy.
OPPORTUNITIES -- By offering six different management styles, portfolio
diversification is simplified. By offering multiple styles, Mentor gives
investors the tools for long-term investment success through diversification
and accommodation of changing investment needs.
SERVICE -- To help serve our shareholders, Mentor has a dedicated Investor
Relations Center. Our Relationship Coordinators are professionally trained and
licensed to serve clients' needs.
TECHNOLOGY -- Abreast of the most advanced technology and using the latest
analytical tools, our investment managers have the ability to survey the
financial markets and make informed decisions about the best place to invest.
We at Mentor are honored to be a partner in the management of your financial
assets. Mentor Investment Group provides diversified investment styles and
services to over one million shareholders. We serve individuals, corporations,
endowments, foundations, public funds, and municipalities. To learn more about
Mentor, please contact your consultant or us at (800) 382-0016.
We look forward to making the Mentor formula work for you and to a mutually
beneficial relationship.
Sincerely,
/s/ Daniel Ludeman /s/ Paul F. Costello
Daniel J. Ludeman Paul F. Costello
CHAIRMAN PRESIDENT
[Mentor Logo]
THE MENTOR MISSION
TO PROVIDE PROFESSIONAL INVESTMENT MANAGEMENT SERVICES THROUGH A FIRM THAT
IS SECOND TO NONE IN THE QUALITY OF ITS INVESTMENT PROCESS, THE SKILL AND
TRAINING OF ITS PROFESSIONALS, AND THE COMMITMENT, SHARED BY ALL ITS
ASSOCIATES, TO DELIVER THE HIGHEST LEVEL OF SERVICE AND ETHICAL BEHAVIOR TO
CLIENTS.
FOR MORE INFORMATION AND A PROSPECTUS FOR THE FUNDS, PLEASE CALL US,
(800)382-0016, OR CONTACT YOUR CONSULTANT. THE PROSPECTUS CONTAINS COMPLETE
INFORMATION ABOUT FEES, SALES CHARGES, AND EXPENSES. PLEASE READ IT CAREFULLY
BEFORE INVESTING OR SENDING MONEY.
2
<PAGE>
MENTOR GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The 12 months ended September 30, 1998 were particularly difficult ones for
small-cap. managers. The Mentor Growth Portfolio suffered along with most
managers. The problems began late in the third quarter of 1997 as the Far East
economic situation began to deteriorate and investors worried about the
eventual impact of this on the U.S. economy. Fear in the financial markets
often leads to a flight to perceived or real safety and investors fled
small-caps for bonds and large-cap. stocks. Proof of this lay in the Russell
2000's negative 3.4% return in the fourth quarter of 1997 versus the S&P 500's
2.9% gain.
In the first and second quarters of 1998 the relative performance of small-caps
remained much the same as the final quarter of 1997. Small-cap. growth stocks,
in spite of very strong earnings results continued to under perform their
large-cap. brethren. By mid-year 1998 the forward P/E of the Mentor Growth
Portfolio (based on the next 12 months earnings) for only the second time in
its history, was at a discount to the P/E of the S&P 500.
In the third quarter of 1998, matters seemed to come to a head as small-caps as
represented by the Russell 2000 were down 16.2% year-to-date and 19% for the
trailing 12 months. The S&P 500 return for the trailing 12-month period was
9.1%, emphasizing the disparate market returns. It is particularly interesting
to review where the strength in the market was on a capitalization basis as
shown below.
<TABLE>
<CAPTION>
AVERAGE YTD NUMBER
BY CAPITALIZATION DECLINE (1/1/98-9/30/98) OF ISSUES
- --------------------- -------------------------- ----------
<S> <C> <C>
$250 million (28.6%) 5,757
$250-2 Billion (25.1%) 1,905
$2-5 Billion (19.3%) 372
$5-20 Billion (8.9%) 316
>$20 Billion 2.06% 138
</TABLE>
What is interesting from these numbers is the fact that the only group that
seemed to attract much buying interest was the very small group of stocks over
$20 billion in market capitalization. The vast predominance of stocks under $2
billion in capitalization were hammered in performance terms.
The flight to perceived investment safety, as illustrated above and caused
largely by the worry over the Asian (and later Russian and South American)
economic contagion, continued to impact small-caps despite the fact that this
sector of the world would have little if any influence on the profit prospects
of small-cap. stocks whose operations are mainly domestic. It is also
interesting to note that as Mentor Growth Portfolio's small-caps stocks were
being penalized by the market, these same companies were reporting superb
earnings results for the second quarter. 84% of the Portfolio's holdings
reported earnings that were in line with or better that the consensus
expectation. Growth rates for earnings averaged 35% over the year ago period.
These results followed on the heels of more than 85% positive or as expected
earnings results in the first quarter and earnings growth rates exceeding 30%.
In view of the unusual deterioration of small-cap. stock prices, it may be
helpful to examine these recent events within a broader historical context.
History has illustrated time and again, that small-cap. stocks tend to discount
economic events by as much as six to nine months. The economic and market
events of 1989 to 1991 were a case in point.
The last time small-cap. valuations suffered as they have this year was the
crash of 1990. Small-caps under performed larger companies throughout the
latter part of 1989 and then through the bulk of
3
<PAGE>
MENTOR GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
1990. This was a period leading up to a recession, which officially began in
the third quarter of 1990 and lasted through the first quarter of 1991. A
recession is simple to identify in hindsight but extremely difficult to predict
or identify definitively at the time it is taking place. The only hint of
slowing economic growth that we had in 1990 was from late summer conversations
with a number of our companies where management expressed concerns that
business trends were slowing from the robust levels earlier in the year.
What makes the above review interesting is the action of our portfolio during
that period. The Mentor Growth Portfolio declined by nearly 30% from September
through the end of October of 1990, the period marking the beginning of the
1990 recession. In late October and early November the stocks in the Portfolio
bottomed out and began what would become a very strong upward move. Between
October 1990 and August 1991, the Portfolio gained over 74%, easily erasing the
declines of the previous year. This upward trend continued until mid-1994,
rewarding patient holders with excellent returns.
During 1998, we have remarked periodically that the spread between the
performance of large and small companies may be forecasting a coming economic
slowdown. This type of flight to the perceived quality of large-capitalization
stocks is often associated with such times. And for the first time since the
economic expansion of the 1990s began, a small group of economic forecasters
are suggesting the possibility of negative economic growth or recession.
With the third quarter now over and earnings about to be reported for our
companies, we are guardedly optimistic about the pending results. There are
many companies in the portfolio that we know will report very good earnings,
and there are a smaller number that we suspect will not meet analysts'
estimates. However, we also believe that with the P/E of the Portfolio
currently at less than 13 times estimated 1999 earnings results, much of a
pending slowdown in earnings growth expectations is already reflected in our
stocks. It does seem likely that the 30% growth rate in earnings which is
projected for our companies will contract somewhat as analysts become less
enthusiastic over the next year, much as happened as we entered the
recessionary period of 1990 and 1991. However, particularly when compared to
the anemic 2% growth in earnings presently projected for the S&P 500, we
continue to believe that small-caps. represent a compelling value. We believe
that on the whole, the companies in the Portfolio are excellent ones and as the
unknowns of a possible recession become better recognized, the market will once
again recognize the outstanding investment characteristics of these companies.
November 1998
4
<PAGE>
MENTOR GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class A and the Russell 2000.~
[GRAPH]
Class A Russell 2,000
6/5/95 9425 10000
9/30/95 11251 11557
9/30/96 14640 13076
9/30/97 18418 17416
9/30/98 14352 14103
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception+++
Class A (26.57%) 11.47%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
++ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000
investment minus $575 sales charge = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Growth Portfolio Class A Shares from the date
of issuance on 6/5/95 through 9/30/98.
5
<PAGE>
MENTOR GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class B Shares and the Russell 2000.~
[GRAPH]
Class B Russell 2000
9/30/88 10000 10000
12/31/88 8737 8860
12/31/89 10252 10835
12/31/90 9096 8290
12/31/91 13667 12108
12/31/92 15796 14337
12/31/93 18260 17048
12/31/94 17443 16737
9/30/95 23042 21041
9/30/96 29535 23804
9/30/97 36817 31706
9/30/98 32972 28788
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year 10-Year
Class B (25.53%) 9.87% 8.19%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000
Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
+ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class B Shares. A contingent deferred sales charge will be imposed, if
applicable, on Class B Shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to
1.00% of amounts redeemed during the five-year period following the date of
purchase. The value of the Class B Shares reflects a redemption fee in
effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
6
<PAGE>
MENTOR GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class Y and the Russell 2000.~
[GRAPH]
Class Y Shares Russell 2,000
11/19/97 10000 10000
12/31/97 10021 10109
3/31/98 11314 11126
6/30/98 10713 10607
9/30/98 8301 8470
Total Returns as of 9/30/98
1-Year Since Inception++
Class Y n/a (18.36%)
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
+ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class Y Shares. These shares are not subject to any sales or contingent
deferred sales charges. The Class Y Shares' performance assumes the
reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Growth Portfolio Class Y Shares from the date
of issuance on 11/19/97 through 9/30/98.
7
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 84.17%
CAPITAL GOODS & CONSTRUCTION - 3.67%
Conrad Industries, Inc. * 225,700 $ 1,495,262
Denali, Inc. * 180,950 2,442,825
Motivepower Industries, Inc. * 282,500 6,603,437
Pentacon, Inc. * 159,500 1,016,813
Rental Service Corporation * 237,900 4,282,200
Waste Industries, Inc. * 95,750 1,986,812
-----------
17,827,349
-----------
CONSUMER CYCLICAL - 14.81%
Cadmus Communications
Corporation 192,900 3,761,550
Central Garden & Pet
Company * 237,200 4,388,200
Chancellor Media
Corporation * 110,950 3,702,956
Chattem, Inc. 121,100 3,307,544
Clear Channel
Communications 113,712 5,401,320
Dollar General Corporation 105,116 2,798,720
Dollar Tree Stores, Inc. * 136,575 4,276,505
Fairfield Communities, Inc. * 239,450 2,394,500
Family Dollar Stores 348,900 5,495,175
Galey & Lord, Inc. * 171,700 2,049,669
Keystone Automotive
Industries, Inc. * 303,300 5,990,175
Lamar Advertising Company * 111,300 3,116,400
Mail Well Holdings, Inc. * 76,300 653,319
Media Arts Group, Inc. * 190,300 1,736,487
Metro Networks, Inc. * 75,600 2,768,850
Outdoor Systems, Inc. * 469,589 9,156,986
Papa John's
International, Inc. * 112,500 3,712,500
SCP Pool Corporation * 253,075 3,289,975
Suburban Lodges of America * 195,150 1,305,066
Travel Services
International, Inc. * 198,250 2,688,766
-----------
71,994,663
-----------
CONSUMER STAPLES - 5.70%
Celestial Seasonings, Inc. * 154,800 2,341,350
Natrol, Inc. * 171,900 1,525,612
Omega Protein Corporation * 158,000 878,875
Rexall Sundown, Inc. * 196,700 3,036,556
Richfood Holdings, Inc. 274,725 4,223,897
Twinlab Corporation * 117,000 2,998,125
US Foodservice * 151,100 6,289,537
Wild Oats Markets, Inc. * 112,300 3,046,137
Whole Foods Market, Inc. * 80,050 3,372,106
-----------
27,712,195
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ENERGY - 2.14%
Core Laboratories N.V. * 340,500 $ 5,873,625
Global Industries, Limited * 265,850 3,073,891
Unifab International, Inc. * 140,000 1,470,000
-----------
10,417,516
-----------
FINANCIAL - 7.28%
Concord EFS, Inc. * 351,316 9,068,344
Hibernia Corporation -
Class A 196,000 2,829,750
Markel Corporation * 66,360 10,119,900
National Commerce
Bancorporation 424,834 7,009,761
NOVA Corporation * 208,423 6,395,965
-----------
35,423,720
-----------
HEALTH - 19.18%
American Dental
Partners, Inc. * 68,600 591,675
Assisted Living
Concepts, Inc. * 132,600 1,881,262
Brookdale Living
Communities * 213,800 4,489,800
Curative Health
Services, Inc. * 185,450 5,679,406
Express Scripts, Inc. -
Class A * 77,300 6,357,925
Health Management
Associates, Inc. * 310,061 5,658,613
Henry Schein, Inc. * 120,250 4,178,687
Mecon, Inc. * 184,600 1,384,500
Medquist, Inc. * 217,050 6,864,206
Molecular Devices
Corporation * 232,000 3,973,000
Monarch Dental
Corporation * 113,000 1,490,187
NCS Healthcare, Inc. -
Class A * 131,350 2,315,044
Omnicare, Inc. 140,660 4,958,265
Osteotech, Inc. * 190,450 5,046,925
Pharmaceutical Product
Development * 117,450 3,288,600
Priority Healthcare
Corporation - Class B * 120,700 2,761,013
Province Healthcare
Company * 222,700 7,585,719
QuadraMed Corporation * 201,400 4,053,175
Serologicals Corporation * 376,050 9,448,256
Sunrise Assisted Living, Inc. * 175,200 6,011,550
United Payors &
Providers, Inc. * 171,450 3,343,275
Wesley Jessen Visioncare, Inc. * 90,000 1,912,500
-----------
93,273,583
-----------
</TABLE>
8
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY - 18.23%
ADE Corporation * 246,400 $2,402,400
Applied Micro Circuits * 135,100 2,009,612
Aspect Development, Inc. * 54,050 2,128,219
ATMI, Inc. * 147,950 2,052,806
Benchmark Electronics, Inc. * 289,440 6,602,850
Billing Concepts
Corporation * 214,350 3,000,900
Black Box Corporation * 111,350 2,700,237
C&D Technologies, Inc. 150,600 3,595,575
Carrier Access Corporation * 30,100 538,037
Cerprobe Corporation 278,800 3,066,800
CSG Systems
International, Inc. * 119,600 5,292,300
Cumulus Media - Class A * 220,550 1,791,969
E.spire Communications, Inc. * 196,600 1,769,400
FORE Systems, Inc. * 196,400 3,265,150
Genesis Microchip, Inc. * 25,000 235,937
ICG Communications * 167,500 2,826,562
ITC DeltaCom * 209,100 4,338,825
Medialink Worldwide, Inc. * 180,000 3,015,000
Network Appliance, Inc. * 37,100 1,878,187
Optek Technology, Inc. * 222,900 3,956,475
Parlex Corporation * 219,950 2,020,791
PCD, Inc. * 216,200 2,702,500
Powerwave Technologies,
Inc. * 158,300 1,345,550
PRI Automation, Inc. * 238,800 2,985,000
RF Micro Devices, Inc. * 163,400 2,961,625
SCB Computer
Technology, Inc. * 498,150 3,860,663
Segue Software, Inc. * 223,000 3,679,500
Sipex Corporation * 239,500 6,077,313
Speedfam International, Inc. * 236,700 2,544,525
World Access, Inc. 197,750 4,004,438
----------
88,649,146
----------
TRANSPORTATION - 6.05%
Atlantic Coast Airlines, Inc. * 222,750 5,206,781
Carey International, Inc. * 107,850 1,617,750
Coach USA, Inc. * 180,350 4,452,391
Comair Holdings, Inc. 190,225 5,468,969
Covenant Transport, Inc. -
Class A * 217,700 2,476,338
Hunt (JB) Transportation
Services, Inc. 86,850 1,259,325
Mesaba Holdings, Inc. 379,775 5,506,738
M.S. Carriers, Inc. * 89,850 1,785,769
US Xpress Enterprises -
Class A * 135,650 1,661,713
----------
29,435,774
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MISCELLANEOUS - 7.11%
ABR Information
Services, Inc. * 130,500 $ 1,786,219
AccuStaff, Inc. * 145,635 2,120,810
AHL Services, Inc. * 261,050 8,549,388
Butler International, Inc. * 150,600 3,002,588
Gulf Island Fabrication, Inc. * 184,350 3,133,950
Kulicke & Soffa Industries,
Inc. 186,400 2,493,100
Meta Group, Inc. * 76,750 2,508,766
NFO Worldwide, Inc. * 188,750 1,875,703
Rock of Ages Corporation * 129,800 1,444,025
Romac International, Inc. * 186,667 3,360,006
Select Appointments
Holding~ 133,850 2,325,644
StaffMark, Inc. * 106,850 1,950,013
------------
34,550,212
------------
TOTAL COMMON STOCKS
(COST $392,590,559) 409,284,158
------------
SHORT-TERM INVESTMENT - 14.75%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$72,638,658 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$73,365,044 (cost
$71,719,983) $71,719,983 71,719,983
------------
TOTAL INVESTMENTS
(COST $464,310,542)-98.92% 481,004,141
OTHER ASSETS LESS LIABILITIES - 1.08% 5,256,518
------------
NET ASSETS - 100.00% $486,260,659
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
9
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $476,835,969 and $493,255,955, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $465,111,603. Net unrealized appreciation aggregated
$15,892,538, of which $88,762,155, related to appreciated investment securities
and $72,869,617, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $409,284,158
Repurchase agreements 71,719,983
------------
Total investments
(cost $464,310,542) 481,004,141
Collateral for securities
loaned (Note 2) 115,219,699
Receivables
Investments sold 9,099,966
Fund shares sold 958,924
Dividends and interest 60,844
Other 74,079
------------
TOTAL ASSETS 606,417,653
------------
LIABILITIES
Payables
Investments purchased $ 1,944,829
Securities loaned (Note 2) 115,219,699
Fund shares redeemed 2,791,991
Accrued expenses and other
liabilities 200,475
-----------
TOTAL LIABILITIES 120,156,994
------------
NET ASSETS $486,260,659
============
Net Assets represented by: (Note 2)
Additional paid-in capital $451,922,136
Accumulated undistributed
net investment income -
Accumulated net realized
gain on investment
transactions 17,644,924
Net unrealized appreciation
of investments 16,693,599
------------
NET ASSETS $486,260,659
============
NET ASSET VALUE PER SHARE
Class A Shares $ 14.60
Class B Shares $ 14.18
Class Y Shares $ 14.63
OFFERING PRICE PER SHARE
Class A Shares $ 15.49 (a)
Class B Shares $ 14.18
Class Y Shares $ 14.63
SHARES OUTSTANDING
Class A Shares 5,323,225
Class B Shares 27,027,617
Class Y Shares 1,732,865
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 524,466
Interest 3,725,963
-------------
TOTAL INVESTMENT
INCOME (NOTE 2) 4,250,429
EXPENSES
Management fee (Note 4) $ 4,204,377
Distribution fee (Note 5) 3,638,580
Shareholder service fee
(Note 5) 1,489,460
Transfer agent fee 800,563
Administration fee (Note 4) 600,625
Shareholder reports and
postage expenses 142,288
Registration expenses 130,378
Custodian and accounting fees 84,516
Legal fees 22,254
Directors' fees and expenses 17,864
Audit fees 12,320
Organizational expenses 8,526
Miscellaneous 61,523
------------
Total expenses 11,213,274
-------------
NET INVESTMENT LOSS (6,962,845)
-------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on
investments (Note 2) 37,565,972
Change in unrealized
appreciation on investments (173,567,460)
------------
NET LOSS ON INVESTMENTS (136,001,488)
-------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(142,964,333)
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment loss $ (6,962,845) $ (6,118,383)
Net realized gain on investments 37,565,972 35,210,825
Change in unrealized appreciation on investments (173,567,460) 90,598,141
-------------- -------------
Increase (decrease) in net assets resulting from operations (142,964,333) 119,690,583
-------------- -------------
Distributions to Shareholders
From net realized gain on investments
Class A (6,599,466) (5,768,516)
Class B (31,307,757) (52,589,913)
Class Y (10) -
-------------- -------------
Total distributions to shareholders (37,907,233) (58,358,429)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 313,753,597 168,560,541
Reinvested distributions 36,935,409 57,233,448
Cost of shares redeemed (294,819,420) (87,713,664)
-------------- -------------
Change in net assets resulting from capital share transactions 55,869,586 138,080,325
-------------- -------------
Increase (decrease) in net assets (125,001,980) 199,412,479
Net Assets
Beginning of year 611,262,639 411,850,160
-------------- -------------
End of year $ 486,260,659 $ 611,262,639
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (b)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.94 $ 18.47 $ 16.08 $ 13.37
------- --------- ------- ---------
Income from investment operations
Net investment loss (0.12) ( 0.17) (0.10) ( 0.01)
Net realized and unrealized gain (loss) on investments (4.03) 4.19 4.23 2.72
-------- --------- -------- ----------
Total from investment operations (4.15) 4.02 4.13 2.71
-------- --------- -------- ----------
Less distributions
From capital gains (1.19) (2.55) (1.74) -
-------- --------- -------- ----------
Net asset value, end of period $ 14.60 $ 19.94 $ 18.47 $ 16.08
======== ========= ======== ==========
TOTAL RETURN* (22.08%) 25.81% 29.15% 20.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 77,720 $ 105,033 $ 40,272 $ 20,368
Ratio of expenses to average net assets 1.26% 1.28% 1.28% 1.36% (a)
Ratio of net investment loss to average net assets (0.56%) (0.67%) (0.39%) (0.65%)(a)
Portfolio turnover rate 88% 77% 105% 70%
Average commission rate on portfolio transactions $ 0.0658 $ 0.0651 $ 0.0602
</TABLE>
(a) Annualized.
(b) For the period from June 5, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.53 $ 18.29 $ 16.05
-------- --------- ---------
Income from investment operations
Net investment loss (0.23) (0.22) (0.17)
Net realized and unrealized gain (loss) on
investments (3.93) 4.01 4.15
-------- --------- ---------
Total from investment operations (4.16) 3.79 3.98
-------- --------- ---------
Less distributions
From capital gains (1.19) (2.55) (1.74)
-------- --------- ---------
Net asset value, end of period $ 14.18 $ 19.53 $ 18.29
======== ========= =========
TOTAL RETURN* (22.62%) 24.66% 28.18%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 383,188 $ 506,230 $ 371,578
Ratio of expenses to average net assets 2.01% 2.03% 2.03%
Ratio of net investment loss to average net assets (1.30%) (1.42%) (1.13%)
Portfolio turnover rate 88% 77% 105%
Average commission rate on portfolio transactions $ 0.0658 $ 0.0651 $ 0.0602
<CAPTION>
PERIOD YEAR YEAR
ENDED ENDED ENDED
9/30/95 (b) 12/31/94 12/31/93
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.15 $ 13.78 $ 12.81
---------- ------- -------
Income from investment operations
Net investment loss (0.13) (0.15) (0.08)
Net realized and unrealized gain (loss) on
investments 4.03 (0.47) 2.07
----------- ------- -------
Total from investment operations 3.90 (0.62) 1.99
----------- ------- -------
Less distributions
From capital gains -- (1.01) (1.02)
----------- ------- -------
Net asset value, end of period $ 16.05 $ 12.15 $ 13.78
=========== ======= =======
TOTAL RETURN* 32.10% (4.48%) 15.60%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 246,326 $190,126 $186,978
Ratio of expenses to average net assets 2.08% (a) 2.01% 2.02%
Ratio of net investment loss to average net assets (1.20%)(a) (1.20%) (1.12%)
Portfolio turnover rate 70% 77% 64%
Average commission rate on portfolio transactions
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (c)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.12
---------
Income from investment operations
Net investment loss (0.02)
Net realized and unrealized loss on investments (3.28)
-----------
Total from investment operations (3.30)
-----------
Less distributions
From capital gains (0.19)
-----------
Net asset value, end of period $ 14.63
===========
TOTAL RETURN* (18.36%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 25,353
Ratio of expenses to average net assets 1.01% (a)
Ratio of net investment loss to average net assets (0.04%)(a)
Portfolio turnover rate 88%
Average commission rate on portfolio transactions $ 0.0658
</TABLE>
(a) Annualized.
(b) For the period from January 1, 1995 to September 30, 1995.
(c) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
MARKETS REVIEW
The 12-month period ended September 30, 1998 marked a turbulent period for
world markets. For the period the Mentor Perpetual Global Portfolio A shares
returned (4.97%) while the B shares returned (5.65%), exclusive of sales
charges. This compares favorably to the (7.57%) average return for its Lipper
Global Funds peer group. This performance placed both share classes in the 2nd
quartile of that Lipper category. The Portfolio's Morgan Stanley World Index
benchmark returned 0.51% for the period due to its overweighting in Japan as
compared to most managers, including Mentor.
UNITED STATES
The year began with the U.S. enjoying healthy economic growth, subdued
inflation and rising corporate profits. The market began to run out of steam,
however, during the second quarter of 1998 as investors became somewhat nervous
about the effect of the Asian economic collapse on U.S. corporate earnings
growth and concerns that the strength of the domestic economy might provoke
tightening by the Federal Reserve. Mid- and small-cap. stocks fell increasingly
out of favor, despite their higher expected growth rates, and significantly
trailed their larger counterparts. A significant factor behind this phenomenon
was the increasing nervousness of U.S. retail investors who sought reassurance
by buying very large, well-known companies. Despite this, we remain reluctant
to buy the mega-cap. stocks where valuations bear no rational relationship to
current or foreseeable earnings.
The Federal Reserve, through its chairman, has already voiced its concern over
the possible effects of international turmoil on financial markets and the U.S.
economy. Interest rates have already been cut twice by 25 basis points,
liquidity is being injected into U.S. money markets, and there are strong
expectations of more rate cuts to come. As always, the question for investors
is what exactly has been priced into the market. Intense focus on a very small
range of very large companies has largely obscured the fact that most stocks
have already experienced a substantial bear market. For much of the U.S. equity
market, the gloomy prognostications of economic slowdown and earnings
stagnation have largely been discounted. Indeed, relative to the market as a
whole, small- and mid-cap. stocks stand at historically low valuations, raising
the possibility that sharp reductions in interest rates and massive increases
in money supply could herald a rerun of the 1989-1992 bull-run in this sector.
UNITED KINGDOM
In common with equity markets worldwide, the U.K. sharply corrected early in
the fourth quarter of 1997. However, in November, despite an unexpected 0.25%
rise in interest rates, the market rallied and continued to move forward
strongly through the end of the first quarter 1998. In June, the Monetary
Policy Committee (MPC) surprised many by raising interest rates a further 0.25%
to 7.5%. Almost coincidentally, stronger than expected numbers for inflation,
average earnings growth, and retail spending prompted fears of yet another rise
in U.K. interest rates. In common with other world equity markets, the U.K. has
seen recent indiscriminate declines and opinion appears to have shifted towards
expectation of a hard landing -- or technical recession -- later in 1998. The
corporate sector today enjoys robust financial strength and any downturn is
unlikely to be as severe as the stock market is suggesting. With growing
international pressure for cuts in Western interest rates, coupled with
weakening domestic economic data and recent downward revisions to wages growth,
future interest
14
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
rate cuts seem likely. With venture capitalists and directors already taking
active advantage of current low valuations among small- and mid-cap. stocks,
with U.K. interest rates set to fall farther, and with weaker sterling
providing support to exports and protection against imports, we find ourselves
more positive than the consensus about prospects for the U.K. equity market.
CONTINENTAL EUROPE
Early in the fourth quarter of 1997, Asia's deepening travails provoked
corrections to European markets. However, a strong bounce in December 1997
extended into a rally that continued well into the first quarter of 1998. By
the end of the first quarter, equity markets, supported by cross-border mergers
and acquisitions, corporate restructuring, low interest rates, and strong
mutual funds inflows, had reached new record highs. Despite sharp corrections
in April and June on concerns over renewed turmoil in Asia and a possible rise
in core European interest rates, European equity markets generally continued
their strong upward progress throughout the second quarter. However, in the
final weeks of the third quarter, European markets, already uneasy over growing
signs of a downturn in exports and hesitancy in Germany's economic recovery,
fell prey to the same global issues affecting other Western equity markets and
corrected sharply.
It seems increasingly likely that the EMU's interest rate will be set at a
fairly low level. Lower interest rates among Europe's peripheral countries will
provide added support for their economies and equity markets. We expect the
recent extreme market volatility to continue as the leverage that has built up
in markets unwinds. This outlook is clouded by the as yet unquantifiable
effects of international financial turmoil and the credit crunch resulting from
extreme risk aversion within international capital markets. The disorderly
markets and indiscriminate selling of recent months has introduced a number of
significant valuation anomalies, and suggests that investment on the basis of
fundamental analysis should be rewarded once order and a measure of calm
returns to the market place.
JAPAN
In October 1997, the collapse of Asian currencies and equity markets provoked a
sharp correction in the Japanese equity market. In January 1998, the market
rallied strongly on hopes of successful action by the government to stimulate
the domestic economy. However, as the first quarter of 1998 progressed,
optimism gave way to resigned gloom as the government once more proved
incapable of revitalizing an economy that was slipping back into recession, and
the equity market drifted resignedly downward.
For some time, economic statistics have been universally and unremittingly
dire. The manufacturing sector has been shedding labor for the last five years,
and this has now spread to the service sector. Production, productivity and
real wages are all declining steeply, capacity utilization has fallen off a
cliff, and wholesale prices are collapsing. The recent dramatic strengthening
of the yen relative to the U.S. dollar, however, coupled with an unexpected
political consensus, has provided the government with a window of opportunity.
They can create massive new liquidity as part of the vital rehabilitation of a
banking system which is suffocating under a mountain of unrepayable loans to
failed property companies and bankrupt Asian corporations. Recession is forcing
corporate restructuring, and a new focus on shareholder value is sowing the
seeds of Japan's next bull market. However, shorter term, this
15
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
is likely to mean higher unemployment, further depressing consumer confidence
and deepening the severity of Japan's economic contraction.
ASIA
Asian markets plunged during October 1997, as currencies throughout the region
buckled, revealing extreme levels of government and corporate foreign debt. At
the same time, investor confidence was further undermined by ineffective,
inappropriate, and occasionally ill-considered responses by regional
governments. From mid-January, markets and currencies bounced dramatically from
their oversold lows and, despite unhappiness at the austerity involved, South
Korea and Thailand made valuable initial progress in implementing IMF reform
programs. However, in April 1998, increasing unrest in Indonesia and the
prospect of serious political and economic instability sparked renewed
region-wide concerns. Regional currencies and equity markets sank throughout
the remainder of the second quarter. A rapidly escalating financial crisis in
Russia, followed by effective default on its sovereign debt, triggered a
massive worldwide flight to quality and profound risk aversion. Investor
confidence in emerging markets, already weak, evaporated, and Asia's equity
markets sank to new lows.
Little real progress has been made in restructuring the region's commercial,
financial, or legal infrastructure. Regionally, any progress in achieving
long-lasting and soundly-based economic recovery remains severely hampered by a
mountainous burden of foreign debt. Although there appears to be a growing
acceptance amongst G-7 banks and politicians that, faced with a choice between
forgiveness or default, the former is likely to prove more rewarding, actual
implementation is likely to prove both difficult and protracted. In the
meantime, the potential for further civil unrest and political uncertainty
suggest that markets are likely to remain volatile and that, at present levels,
optimism has already been discounted and further upside potential -- at least
in the medium term -- is limited.
LATIN AMERICA
In October 1997, the collapse of Asian currencies and equity markets triggered
dramatic declines in Latin American equity markets, with investors particularly
concerned over possible devaluation of the Brazilian currency. Prompt action by
the Brazilian authorities in raising interest rates to punitively high levels,
and instituting government spending reforms resulted in a successful defense of
the currency. Brazil's privatization program remained on course, and fading
concerns over the stability of the currency allowed the government to wind down
interest rates gradually, although these remained at high levels. In April
1998, renewed turmoil in Asia triggered affected investor confidence in
emerging markets worldwide, and Latin America's equity markets sank throughout
the remainder of the second quarter.
A brief rally in Asia fed through to Latin American equity markets but, in the
closing months of the period under review, financial disarray in Russia, and
fears over worldwide contagion, effectively destroyed the last vestiges of
investor confidence in emerging markets. The ensuing `flight to quality' sent
Latin American equity markets tumbling past their earlier New Year lows.
The region continues to suffer from investor concern over fiscal imbalances,
with deficits in both government expenditure and trade accounts. The latter
have, in part, been due to weak commodity prices, but much has been the product
of strong
16
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
domestic growth that has sucked in imports. The re-election of President
Cardoso has raised hopes that, together with support from international lending
institutions, Brazil's government will be able to institute the fiscal reforms
necessary to restore confidence in the country's currency. This could provide
something of a role model for other Latin American countries, such as
Argentina, Chile and Mexico, also experiencing trade deficits and fiscal
imbalances.
November 1998
17
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual Global Portfolio Class A and Class B Shares and the Morgan Stanley
Capital International (MSCI) World Index.*
[GRAPH]
Morgan Stanley A Shares B Shares
3/29/94 10000 9425 10000
9/30/94 10546 9982 9487
9/30/95 12125 10655 10587
9/30/96 13846 12501 12677
9/30/97 17256 15200 15668
9/30/98 17344 14445 14580
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception++
Class A (10.44%) 8.50%
Class B (9.23%) 8.89%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* MSCI World Index is an arithmetic average, weighted by market value, of the
performance of approximately 1,450 securities listed on the stock
exchanges of 20 countries including the U.S., Europe, Canada, Australia,
New Zealand, and the Far East. The average company in the index has a
market capitalization of about $3.5 billion. This is a total return index
with gross dividends reinvested. MSCI World Index is not adjusted to
reflect reinvestment of dividends on securities in the index, and is not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class A Shares, after deducting the maximum sales charge of
5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
~ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period
following the date of purchase. The value of the Class B Shares reflects a
redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class A and Class B
Shares from the date of commencement of operations on 3/29/94 through
9/30/98.
18
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual Global Portfolio Class Y Share and the Morgan Stanley Capital
International (MSCI) World Index.*
[GRAPH]
MSCI World Inc Class Y Shares
11/19/97 10000 10000
12/31/97 10278 10304
3/31/98 11832 11791
6/30/98 11714 12041
9/30/98 10187 10608
Total Returns as of 9/30/98
1-Year Since Inception++
Class Y Shares n/a 1.60%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* MSCI World Index is an arithmetic average, weighted by market value, of the
performance of approximately 1,450 securities listed on the stock
exchanges of 20 countries including the U.S., Europe, Canada, Australia,
New Zealand, and the Far East. The average company in the index has a
market capitalization of about $3.5 billion. This is a total return index
with gross dividends reinvested. MSCI World Index is not adjusted to
reflect reinvestment of dividends on securities in the index, and is not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class Y Shares from
the date of issuance on 11/19/97 through 9/30/98.
19
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 88.49%
ARGENTINA - 0.10%
Perez Company SA~ 4,437 $ 36,609
Telecom Argentina SA~ 2,100 62,344
Telefonica de Argentina SA~ 2,020 59,464
----------
158,417
----------
AUSTRIA - 0.34%
Bank Austria AG 14,000 535,988
----------
BELGIUM - 1.18%
Cofinimmo 7,576 920,068
Fortis AG 1,550 382,327
G.I.B. Group SA 11,200 557,400
----------
1,859,795
----------
BRAZIL - 0.33%
Cemig CIA Energetic~ (a) 1,700 37,593
CIA Brasil Petro Ipiranga 4,900,000 31,374
Companhia Cervejaria
Brahma- 3,500 27,344
Companhia Vale do Rio Doce~ 2,450 35,140
Compania Paulista de Forca e
Luz 370,000 30,589
Electrobras - Centrais Eletricas
Brasileiras SA 2,930 32,507
Electropaulo Metropolitana -
Electricidade de Sao Paulo SA 690,000 35,443
Pao de Acucar# 2,630,000 34,611
Petroleo Brasileiro SA~ 2,520 25,833
Telecomonicacoes
Brasileiras SA~ 2,030 142,988
Telecomunicacoes de Sao
Paulo SA 240,000 34,824
Telecomunicacoes de
Minas Gerais 1,130,000 40,037
Telerj Celular SA* 240,000 10,326
----------
518,609
----------
CHILE - 0.09%
Chilectra SA~ 3,450 56,411
Embotelladora Andina SA~* 1,200 16,500
Enersis SA~ 1,500 30,563
Telecomunicaciones de Chile~ 1,700 32,513
----------
135,987
----------
CHINA - 0.25%
Heilongjiang Electric Power
Company 180,000 66,600
Huaneng Power International,
Inc. - Class A~* 15,000 153,750
Yanzhou Coal Mining
Company 1,000,000 174,216
----------
394,566
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINLAND - 1.49%
Huhtamaki 7,472 $ 230,812
Metra Oyj - Class B 38,220 744,472
Nokia Oyj - Class A 17,410 1,383,894
----------
2,359,178
----------
FRANCE - 7.04%
Accor SA 5,000 1,049,463
Atos SA 5,230 931,443
Axa 10,940 1,002,522
Casino Guichard Perrachn 7,350 741,814
Compagnie de Saint - Gobain 3,250 431,352
Colas 1,730 329,121
Comptoirs Modernes 1,320 825,280
Elf Aquitaine SA 10,400 1,283,721
Entrelec 12,000 531,609
Genset SA~* 30,000 772,500
ISIS 5,460 370,626
SEB SA 1,270 98,821
Serp Recyclage 3,039 295,317
Societe Generale D'Enterprises 12,610 471,909
Total SA - Class B 8,450 1,065,664
Vivendi 4,760 948,922
----------
11,150,084
----------
GERMANY - 5.41%
Allianz AG 3,785 1,172,150
Ava Allg Handels Der Verbrau 3,400 1,384,887
Porsche AG 805 1,408,009
Prosieben Media AG 12,650 697,116
Sauer, Inc. 34,050 270,272
Siemens AG 13,850 757,438
Veba AG 35,920 1,864,742
Viag AG 1,550 1,014,331
----------
8,568,945
----------
GREAT BRITAIN - 10.50%
Abbey National PLC 31,250 538,886
Allied Zurich PLC* 28,500 291,247
Arcadia Group 55,700 228,062
Arriva PLC 35,000 223,582
Asda Group 108,000 313,762
BAA PLC 32,250 327,925
Barclays PLC 26,000 422,733
Bass PLC 23,571 285,127
BAT Industries PLC 32,500 244,054
Britannic Assurance PLC 15,000 322,885
British Aerospace PLC 81,000 488,189
British Airways PLC 34,500 213,208
British Biotech PLC* 150,000 89,832
</TABLE>
20
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GREAT BRITAIN (CONTINUED)
British Petroleum
Company PLC 24,000 $ 366,565
Burmah Castrol PLC 25,000 353,806
Celltech PLC* 25,000 112,555
Centrica PLC* 149,500 288,282
Debenhams PLC 40,000 226,640
Dixons Group 16,000 163,507
Emap PLC 25,000 397,554
Enterprise Oil PLC 75,000 506,499
Glaxo Wellcome PLC 31,000 912,727
Granada Group PLC 36,000 470,032
Great Universal Stores PLC 22,000 245,379
Greenalls Group PLC 40,000 197,078
House of Fraser 50,000 70,506
Iceland Group PLC 31,250 101,169
III Group PLC 30,000 257,136
Imperial Chemical
Industries PLC 30,000 236,239
Inchcape PLC 90,000 177,370
Lloyds TSB Group PLC 54,000 603,212
Medeva PLC 80,000 125,043
Meggitt PLC 50,000 113,830
National Westminster Bank 28,250 377,963
Northern Foods PLC 73,400 223,218
PowerGen PLC 44,000 653,348
Prudential Corporation PLC 33,000 479,639
Rank Group PLC 61,750 251,784
Reckitt & Colman PLC 13,300 198,506
Reuters Group PLC 32,000 268,298
Rolls-Royce PLC 138,000 478,875
Sainsbury (J.) PLC 51,000 489,119
Scotia Holdings * 30,000 50,968
Signet Group 312,500 136,712
Smith (H.W.) Group PLC 33,750 280,104
SmithKline Beecham PLC 47,000 518,630
Spirax-Sarco Engineering PLC 30,000 221,203
Stakis PLC 260,000 375,468
Standard Chartered 51,500 366,389
Tate & Lyle PLC 35,282 195,412
Tesco PLC 112,400 332,274
Trinity PLC 35,000 241,421
United Assurance Group PLC 23,000 229,180
United News & Media PLC 35,000 331,210
----------
16,614,342
----------
GREECE - 0.00%
Heilenic Telecommunication
organization SA 122 2,926
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HONG KONG - 1.84%
Cheung Kong 20,000 $ 92,657
China Foods Holdings,
Limited * 575,000 143,954
China Telecom * 40,000 62,976
Citic Pacific, Limited 70,000 122,855
Elec & Eltek International
Company, Limited 735,000 132,791
First Tractor Company 305,000 78,720
GZI Transport, Limited -
Warrants 60,000 77
GZI Transport, Limited 484,000 101,185
HKR International, Limited 840,000 260,163
Hong Kong Electric 35,000 120,370
Hong Kong & China Gas 100,000 122,596
HSBC Holdings PLC 33,454 613,683
Hung Hing Printing Group 238,000 79,088
Hutchison Whampoa, Limited 48,000 252,729
National Mutual Asia, Limited 280,000 136,405
New World Development 130,951 175,750
Road King Infrastructure,
Limited 464,544 254,783
Swire Pacific,
Limited - Class A 50,000 157,440
----------
2,908,222
----------
INDIA - 0.34%
BSES, Limited #* 8,000 103,000
Hindalco Industries, Limited # 5,000 54,500
Indian Opportunity Fund,
Limited* 11,000 93,390
Mahanagar Telephone Nigam,
Limited #* 2,000 22,700
Tata Electric # 1,500 262,500
----------
536,090
----------
INDONESIA - 0.06%
Bat Indonesia 36,000 50,131
Gudang Garam 80,000 42,804
----------
92,935
----------
IRELAND - 2.05%
Bank of Ireland 72,465 1,289,008
CRH PLC 80,000 1,007,138
Elan Corporation PLC~ * 13,250 954,828
----------
3,250,974
----------
ITALY - 4.77%
Assicurazioni Generali 15,020 488,729
ENI SPA 192,000 1,177,350
Finmeccanica SPA 192,030 159,526
Grupo Editoriale L'Espresso 174,000 1,370,618
Ina SPA 185,000 470,809
</TABLE>
21
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ITALY (CONTINUED)
Istituto Mobiliare Italiano 76,000 $1,003,908
Rinascente SPA 90,850 797,108
Telecom Italia Mobile 105,500 614,966
Telecom Italia SPA 185,000 1,275,108
Telecom Moblit 61,000 196,267
----------
7,554,389
----------
JAPAN - 8.87%
Asahi Glass Company, Limited 275,000 1,327,239
Daiwa House Industry
Company, Limited 170,000 1,541,499
Kirin Brewery Company,
Limited 160,000 1,277,660
Kokusai Securities Company,
Limited 200,000 1,396,709
Mitsui Chemicals, Inc. 500,000 1,429,616
Nippon Steel Corporation 880,000 1,261,280
Sony Music Entertainment,
Inc. 40,000 1,310,420
Sumitomo Warehouse 360,000 1,376,819
Tokyo Electric Power
Company 75,000 1,431,444
Tokio Marine & Fire
Insurance 190,000 1,695,064
----------
14,047,750
----------
KOREA - 0.08%
Atlantis Korean Smaller
Companies * 20,000 100,200
CITC Seoul Excel * 2 3,700
LG Electronics # 6,400 8,000
Samsung Electronics # (a) 475 7,030
----------
118,930
----------
MALAYSIA - 0.08%
Boustead Holdings Berhad (c) 84,000 46,802
IOI Corporation (c) 100,000 37,319
Nanyang Press Berhad (c) 60,000 48,568
----------
132,689
----------
MEXICO - 0.31%
Cemex SA~* 5,600 27,368
Cifra SA 34,500 41,982
Coca-Cola Femsa SA~ 2,900 35,344
Corporacion Geo SA* 9,600 17,881
DESC SA~ 2,002 27,528
Empresas La Moderna SA~ 1,800 43,030
Grupo Carso SA~ 7,800 46,539
Grupo Televisa #* 1,400 26,928
Kimberly-Clark de Mexico SA~ 2,680 35,845
Panamerican
Beverages - Class A * 2,000 35,625
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEXICO (CONTINUED)
Telefonos de Mexico SA 3,500 $ 154,875
----------
492,945
----------
NETHERLANDS - 1.14%
Baan Company NV * 23,000 595,117
Royal Dutch Petroleum 12,748 633,285
Vendex International NV 15,325 569,960
Vendex International NV -
Coupon 15,325 2,036
----------
1,800,398
----------
PERU - 0.01%
Telefonica del Peru SA~ 2,500 30,625
----------
PHILIPPINES - 0.13%
Benpres Holdings #* 68,000 187,000
Benpres Holdings - Rights 27,200 27,336
----------
214,336
----------
PORTUGAL - 1.38%
BPI SGPS SA 28,060 773,990
Cimpor Cimentos de Portugal 15,000 418,391
Elec de Portugal 29,600 681,196
Jeronimo Martins 9,050 306,623
----------
2,180,200
----------
SINGAPORE - 0.72%
City Developments, Limited 30,000 65,700
GP Batteries International,
Limited 190,000 245,161
Marco Polo Developments,
Limited 120,000 62,504
Overseas Chinese Bank * 80,287 201,490
Overseas Union Bank, Limited 80,000 114,117
Singapore Airlines, Limited 20,000 109,500
Singapore Press Holdings 10,000 82,865
United Overseas Bank 87,000 253,353
----------
1,134,690
----------
SPAIN - 6.22%
Acciona SA 5,000 1,252,952
Argentaria Corp Bancaria de
Espana SA 45,143 898,946
Baron de Ley* 30,000 1,015,050
Centros Comerciales
Continente, SA 50,560 1,286,587
Gas Natural SDG SA 11,600 821,767
Prosegur CIA de Seguridad SA 116,895 1,450,218
Tabacalera SA 64,000 1,405,280
Telefonica SA 24,745 903,529
Viscofan Envolturas
Celulosicas SA 29,960 779,279
</TABLE>
22
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SPAIN (CONTINUED)
Viscofan Envolturas
Celulosicas SA - Warrants 29,960 $ 38,647
---------
9,852,255
---------
SWEDEN - 1.88%
BPA AB 265,000 673,829
Celsius AB - Class B 56,360 1,060,489
ForeningsSparbanken AB 54,040 1,236,692
---------
2,971,010
---------
SWITZERLAND - 4.19%
Jelmoli Holding AG 880 1,026,295
Nestle SA 790 1,575,994
Novartis AG 1,056 1,697,402
Roche Holding
AG - Genussshein 152 1,640,565
UBS AG* 3,525 689,424
---------
6,629,680
---------
TAIWAN - 0.20%
Formosa Growth Fund * 5,000 88,125
Taipei Fund * 20 161,000
Taiwan Semiconductor~ 5,900 75,228
---------
324,353
---------
THAILAND - 0.08%
Cogenaration PLC 67,000 30,493
Electricity Generating Public
Company 40,000 95,575
---------
126,068
---------
UNITED STATES - 27.41%
AccuStaff, Inc. * 25,000 364,063
American Home Products
Company 14,000 733,250
American Tower
Corporation * 10,000 255,000
Anadarko Petroleum
Corporation 12,000 471,750
Anheuser-Busch Companies,
Inc. 11,000 594,000
Associates First Capital 19,100 1,246,275
Aurora Foods, Inc.* 9,800 134,750
BankBoston Corporation* 10,800 356,400
Baxter International, Inc. 14,500 862,750
Bell Atlantic Corporation 18,900 915,469
Borders Group, Inc. * 18,000 400,500
Bristol-Myers Squibb
Company* 9,700 1,007,588
Burlington Northern 16,500 528,000
Cardinal Health, Inc. 5,800 598,850
Chase Manhattan Corporation 11,700 506,025
Chevron Corporation 10,000 840,625
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
Columbia/HCA Healthcare
Corporation 27,900 $ 559,744
Comcast Corporation - Class A 15,000 704,063
Compaq Computer
Corporation 24,500 774,813
CompUSA, Inc. 7,600 131,576
Conseco, Inc. 20,600 629,588
Consolidated Stores
Corporation* 15,000 294,375
Duke Energy Corporation 7,700 509,644
El Paso Energy Corporation 20,000 648,750
EMC Corporation* 15,000 857,813
Federal National Mortgage
Association 6,300 404,775
HealthSouth Corporation * 50,000 528,125
Intel Corporation 19,600 1,680,700
International Business
Machines, Inc. 11,000 1,408,000
Lilly (Eli) & Company 9,000 704,813
Lockheed Martin Corporation 6,100 614,956
Mail-Well Holdings* 19,600 167,825
MBNA Corporation 29,200 835,850
McDonald's Corporation 9,000 537,188
MCI WorldCom, Inc. 29,000 1,417,375
Medicis Pharmaceutical* 22,000 871,750
Meditrust Corporation 27,654 471,846
Microsoft Corporation * 5,000 550,313
NationsBank Corporation 15,500 829,250
Newbridge Networks
Corporation 24,500 439,469
Newcourt Credit Group, Inc. 11,000 287,375
Nextel Communications, Inc. 11,000 222,063
Ocular Sciences * 5,000 105,000
Omnicare, Inc. 15,000 528,750
Pfizer, Inc. 8,200 868,688
Philip Morris Companies, Inc. 15,000 690,938
Phillips Petroleum Company 7,100 320,388
Provident Companies, Inc. 20,000 675,000
Ralston-Purina Group 12,400 362,700
Republic Services, Inc.* 9,000 175,500
SBC Communications, Inc. 28,800 1,279,800
Staples, Inc.* 53,150 1,561,281
Stewart Enterprises 22,000 368,500
Sun Microsystems, Inc.* 9,000 448,313
Sybron International
Corporation * 25,000 478,125
Tele-Communications
International * 16,000 626,000
Texaco, Inc. 15,000 940,313
Texas Instruments, Inc. 7,500 395,625
</TABLE>
23
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
3Com Corporation* 10,000 $ 300,625
Time Warner, Inc. 17,500 1,532,340
Travelers Group, Inc. 12,500 468,750
Travelers Property and
Casualty Corporation 18,000 574,875
Tyco International, Ltd. 10,000 552,500
U.S. Foodservice* 29,600 1,232,100
Viacom Industries,
Inc. - Class A 20,000 1,150,000
Westpoint Stevens,
Inc. - Class A * 16,000 488,000
Williams Companies, Inc. 12,500 359,375
-----------
43,380,820
-----------
TOTAL COMMON STOCKS
(COST $148,319,820) 140,078,196
-----------
CORPORATE BONDS - 0.29%
GREAT BRITIAN
Scotia Holdings, 8.50%,
3/26/02 $ 19,000 23,403
-----------
KOREA
Republic of Korea, 8.88%,
4/15/08 208,000 177,450
-----------
MALAYSIA
Telekom Malaysia Berhad,
4.00%, 10/03/04 ~ (9/22/94,
$70,000) (a) (b) 70,000 37,800
-----------
THAILAND
PTTEP International, Limited,
7.63%, 10/01/06 300,000 223,500
-----------
TOTAL CORPORATE BONDS
(COST $461,458) 462,153
-----------
140,540,349
-----------
SHORT-TERM
INVESTMENT - 10.07%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
Federal National Mortgage
Association, $16,141,372
6.00%, 8/01/13, market
value $16,302,785
(cost $15,936,519) 15,936,519 15,936,519
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
<S> <C>
TOTAL INVESTMENTS
(COST $164,717,797)-98.85% $156,476,868
OTHER ASSETS LESS
LIABILITIES - 1.15% 1,812,839
------------
NET ASSETS - 100.00% $158,289,707
============
</TABLE>
* Non-income producing.
# Global Depository Receipts.
~ American Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4 (2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) All or a portion of these securities are restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses
after the title of the restricted securities.
(c) These securities are considered illiquid due to a one year moratorium on
the repatriation of assets from Malaysia.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $248,291,695 and $235,288,192, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $165,477,184. Net unrealized depreciation aggregated
$9,000,316, of which $11,442,631, related to appreciated investment securities
and $20,442,947, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $ 140,540,349
Repurchase agreements 15,936,519
-------------
Total investments
(cost $164,717,797) 156,476,868
Receivables
Collateral for securities
loaned (Note 2) 12,707,641
Investments sold 6,315,010
Fund shares sold 354,472
Dividends and interest 443,615
Unrealized appreciation on
forward foreign currency
exchange contracts (Note 6) 617
Deferred expenses (Note 2) 5,424
-------------
TOTAL ASSETS 176,303,647
-------------
LIABILITIES
Payables
Investments purchased $ 2,697,553
Securities loaned (Note 2) 12,707,641
Fund shares redeemed 2,446,454
Unrealized depreciation on
forward foreign currency
exchange contracts
(Note 6) 35,060
Accrued expenses and other
liabilities 127,232
-----------
TOTAL LIABILITIES 18,013,940
-------------
NET ASSETS $ 158,289,707
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 153,975,854
Accumulated undistributed
net investment income 3,616
Accumulated net realized
gain on investment
transactions 12,574,725
Net unrealized depreciation
of investments and foreign
currency related
transactions (8,264,488)
-------------
NET ASSETS $ 158,289,707
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 18.92
Class B Shares $ 18.21
Class Y Shares $ 18.96
OFFERING PRICE PER SHARE
Class A Shares $ 20.07(a)
Class B Shares $ 18.21
Class Y Shares $ 18.96
SHARES OUTSTANDING
Class A Shares 3,118,915
Class B Shares 5,452,526
Class Y Shares 53
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 2,176,556
Interest 499,605
------------
TOTAL INVESTMENT
INCOME (NOTE 2) 2,676,161
EXPENSES
Management fee (Note 4) $ 1,612,495
Distribution fee (Note 5) 734,020
Shareholder service fee (Note 5) 384,373
Transfer agent fee 220,815
Custodian and accounting fees 188,561
Administration fee (Note 4) 153,750
Registration expenses 67,081
Shareholder reports and postage
expenses 36,249
Organizational expenses 11,067
Legal fees 4,542
Directors' fees and expenses 3,591
Audit fees 3,143
Miscellaneous 14,317
-----------
Total expenses 3,434,004
------------
NET INVESTMENT LOSS (757,843)
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS
Net realized gain on investments
and foreign currency related
transactions (Note 2) 14,799,387
Change in unrealized
appreciation (depreciation) on
investments and foreign
currency related transactions (25,459,714)
-----------
NET LOSS ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS (10,660,327)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(11,418,170)
============
</TABLE>
(b) Net of withholding taxes of $206,565.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment loss $ (757,843) $ (416,666)
Net realized gain on investments and foreign currency related transactions 14,799,387 6,084,166
Change in unrealized appreciation (depreciation) on investments (25,459,714) 13,678,454
------------- -------------
Increase (decrease) in net assets resulting from operations (11,418,170) 19,345,954
------------- -------------
Distributions to Shareholders
From net realized gain on investments
Class A (2,382,830) (476,590)
Class B (4,553,653) (1,576,577)
Class Y (8) --
--------------- -------------
Total distributions to shareholders (6,936,491) (2,053,167)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 78,893,773 74,523,622
Reinvested distributions 6,732,722 2,007,927
Shares redeemed (44,567,723) (13,467,704)
-------------- -------------
Change in net assets resulting from capital share transactions 41,058,772 63,063,845
-------------- -------------
Increase in net assets 22,704,111 80,356,632
Net Assets
Beginning of year 135,585,596 55,228,964
-------------- -------------
End of year (including accumulated undistributed net investment
income (loss) of $3,616 and ($97,957), respectively) $158,289,707 $ 135,585,596
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
9/30/98 9/30/97
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 20.94 $ 17.86
--------- ---------
Income from investment operations
Net investment income (loss) (0.03) 0.04
Net realized and unrealized gain (loss) on investments (0.97) 3.67
--------- ---------
Total from investment operations (1.00) 3.71
--------- ---------
Less distributions
From capital gains (1.02) (0.63)
--------- ----------
Net asset value, end of period $ 18.92 $ 20.94
========= ==========
TOTAL RETURN* (4.97%) 21.59%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 59,012 $ 46,556
Ratio of expenses to average net assets 1.75% 1.89%
Ratio of expenses to average net assets excluding waiver 1.75% 1.89%
Ratio of net investment income (loss) to average net assets (0.01%) 0.07%
Portfolio turnover rate 162% 128%
Average commission rate on portfolio transactions $ 0.0188 $ 0.0319
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 (C)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.88 $ 14.23 $ 14.18
-------- -------- -----------
Income from investment operations
Net investment income (loss) (0.04) 0.05 (0.01)
Net realized and unrealized gain (loss) on investments 2.82 1.60 0.06
--------- -------- ------------
Total from investment operations 2.78 1.65 0.05
--------- -------- ------------
Less distributions
From capital gains (0.80) -- --
--------- --------- ------------
Net asset value, end of period $ 17.86 $ 15.88 $ 14.23
========= ========= ============
TOTAL RETURN* 18.40% 11.60% 0.35%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 13,098 $ 6,854 $ 8,882
Ratio of expenses to average net assets 1.95% 2.06% 2.09% (a)
Ratio of expenses to average net assets excluding waiver 1.95% 2.11% 3.18% (a)
Ratio of net investment income (loss) to average net assets (0.21%) 0.26% (0.10%)(a)
Portfolio turnover rate 130% 155% 2%
Average commission rate on portfolio transactions $ 0.0320
</TABLE>
(a) Annualized.
(c) For the period from March 29, 1994 (commencement of operations), to
September 30, 1994.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
9/30/98 9/30/97
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 20.32 $ 17.46
--------- --------
Income from investment operations
Net investment loss (0.12) (0.02)
Net realized and unrealized gain (loss) on investments (0.97) 3.51
--------- ---------
Total from investment operations (1.09) 3.49
--------- ---------
Less distributions
From capital gains (1.02) (0.63)
--------- ---------
Net asset value, end of period $ 18.21 $ 20.32
========= =========
TOTAL RETURN* (5.65%) 20.74%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 99,277 $ 89,030
Ratio of expenses to average net assets 2.50% 2.64%
Ratio of expenses to average net assets excluding waiver 2.51% 2.64%
Ratio of net investment loss to average net assets (0.77%) (0.68%)
Portfolio turnover rate 162% 128%
Average commission rate on portfolio transactions $ 0.0188 $ 0.0319
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
9/30/96 9/30/95 9/30/94 (d)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.67 $ 14.15 $ 14.18
-------- -------- -----------
Income from investment operations
Net investment loss (0.05) (0.05) (0.04)
Net realized and unrealized gain (loss) on investments 2.64 1.57 0.01
--------- -------- ------------
Total from investment operations 2.59 1.52 (0.03)
--------- -------- ------------
Less distributions
From capital gains (0.80) -- --
--------- -------- ------------
Net asset value, end of period $ 17.46 $ 15.67 $ 14.15
========= ======== ============
TOTAL RETURN* 17.39% 10.74% (0.21%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 42,131 $ 12,667 $ 7,987
Ratio of expenses to average net assets 2.70% 2.72% 2.79% (a)
Ratio of expenses to average net assets excluding waiver 2.70% 2.79% 3.93% (a)
Ratio of net investment loss to average net assets (0.91%) (0.40%) (0.82%)(a)
Portfolio turnover rate 130% 155% 2%
Average commission rate on portfolio transactions $ 0.0320
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED
9/30/98 (e)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.81
---------
Income from investment operations
Net investment income 0.00 (f)
Net realized and unrealized gain on investments 0.30
---------
Total from investment operations 0.30
---------
Less distributions
From capital gains (0.15)
-----------
Net asset value, end of period $ 18.96
===========
TOTAL RETURN* 1.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.50% (a)
Ratio of net investment loss to average net assets (0.02%)(a)
Portfolio turnover rate 162%
Average commission rate on portfolio transactions $ 0.0188
</TABLE>
(a) Annualized.
(d) For the period from March 29, 1994 (commencement of operations) to
September 30, 1994.
(e) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
(f) Income is less than $0.005 per share.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION QUALITY GROWTH MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The S&P 500 declined approximately 10% in the third quarter of 1998 after a
remarkable string of 14 consecutive quarterly gains that began in the first
quarter of 1995. This year we have been more emphatically cautioning that the
stock market would have to adjust to considerably lower corporate earnings
prospects, and this transition would likely result in increased volatility and
lower returns than experienced over the past several years. Clearly this
scenario is unfolding in full force. Over the past 12 months the market has
been extremely volatile while the total return on the S&P 500 has been just 9%.
Earnings estimates for a broad range of companies are being sharply reduced. It
is now quite possible, in fact likely in our opinion, that the earnings of the
S&P 500 will decline in the second half of this year and in 1999.
These trends present a significant change from the strong, better-than-expected
earnings growth that has been a key pillar supporting the bull market since
1990, one of the best on record by almost any measure. But this change was
inevitable. It is part of the natural cyclical patterns of the economy,
corporate profitability, and the stock market. Supply and demand forces will
always cycle around each other at uneven rates with their crisscross
progressions being amplified by credit expansions and contractions. The 16%
compound annual earnings growth of the S&P 500 between 1991 and 1997 was
certainly not sustainable, particularly in an economy showing only 4-5% nominal
growth. After nearly perfect growth conditions during much of the 1990's,
corporate profitability is coming under pressure as global excess capacity is
chasing falling demand. And as should be expected at this point, lenders are
sharply curtailing credit and thereby reinforcing these developing pressures.
The most obvious target of blame for current concerns is the Asian crisis and
its ripples. However, we would still be facing some type of similar
macro-pressures even if Asia's problems had never surfaced. There will always
be countervailing forces to slow abnormally high growth.
The current retrenchment may be different from other recent ones as a matter of
degree. The prolonged expansion seems to have created an unusually high level
of complacency regarding the expected returns from risky assets - stocks,
venture capital, high-yield bonds, etc. Now this extreme complacency is coming
home to roost. Less certain investors are increasingly disengaging from riskier
assets. The resulting price declines are trapping traders who left themselves
too little room to maneuver. The incredibly telling recent downfall of a large
hedge fund illustrates the depth of this problem. Hordes of so-called
sophisticated investors and institutions blindly poured money into this highly
leveraged speculative scheme. Of course, we all know about the initial
disastrous consequences. Amazingly, it involved some of the financial markets'
most respected participants. It is a very ominous event that appears far from
being resolved. There is an undeterminably large amount of unstable money in
the global financial markets beyond the case of this large hedge fund. These
players are being squeezed out one after another as liquidity in almost all
risky asset classes contracts. This ongoing purging should keep volatility
historically high with the possibility of inflicting more serious damage to the
global economy than already seen.
Reacting to these developments the stock market is taking on more and more of a
panicked feel. There is now a strong preference for the apparently "safest"
sectors such as electric utility, regional
28
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION QUALITY GROWTH MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
telephone, large integrated energy, and domestic food stocks. These "defensive"
stocks have meaningfully outperformed the broader market. Our relative
performance has suffered because we have almost no exposure to these sectors,
since they do not meet our requirements of above average, consistent earnings
growth. This flight-to-safety is typical at this point in the cycle and its
primary motivation is fear. And why not? The Asian problems are developing into
a full-blown global crisis. Global financial liquidity has all but evaporated.
Analysts are repeatedly slashing earnings projections. Many companies that were
once considered infallible such as Coca-Cola, Disney, Gillette, and Procter &
Gamble have issued earnings warnings. Imagine what could happen if individual
investors start bailing out of mutual funds. And at a time when the world needs
strong leadership, the political situations in several key nations are a mess.
Obviously there is a lot to fear.
Fear and greed are a long-term investor's best asset and worst threat. These
emotions are an asset when they belong to others and a threat when they are
your own. Anyone operating in the stock market should know this truism well.
But the majority cannot adhere to it. It is exceedingly difficult for both
individual and institutional investors to look through an emotionally charged
volatile market and focus on the fundamentals. To us, fundamental analysis does
not mean trying to figure out cyclical swings in the economy and markets over
the next year. It means concentrating on longer-term business qualities. We
know that consistently implementing a well-defined investment discipline
through the ups and downs of an entire cycle is the best way to ensure
long-term success. We are well aware that current conditions in the economy and
stock market could worsen. You need to be too. There is no way to predict the
ultimate extent of the pressures now unfolding, and we will not pretend to try.
We approach our portfolio no differently today than we did a year ago. We focus
on a diversified group of companies with excellent operating records and
leading competitive positions. We are biased toward companies with
above-average business predictability. We have thoroughly analyzed their
results and prospects. We own them at prices we believe offer attractive
relative values. It is a very simple approach. Not an easy one, but a
straightforward one. We will at times be wrong in our analysis, but we will
strive to be as objective as possible. Of course we expect to be right more
often than not. We will not alter this approach just because those around us
are becoming more complacent or fearful. Over the long-term cyclical swings
wash out and business fundamentals prevail.
November 1998
29
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Capital Growth Portfolio Class A and Class B Shares and the S&P 500.~
[GRAPH]
A Shares B Shares S&P 500
4/29/92 9450 10000 10000
9/30/92 9524 10061 10215
9/30/93 10306 10818 11543
9/30/94 10165 10601 11965
9/30/95 12216 12443 15521
9/30/96 15185 15532 18680
9/30/97 20467 20928 26236
9/30/98 22660 22767 28608
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year Since Inception+++
Class A 4.34% 15.75% 13.57%
Class B 5.86% 16.17% 13.84%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares of rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period
following the date of purchase. The value of the Class B Shares reflects a
redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class A Shares, after deducting the maximum sales charge of
5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
+++ Reflects operations of Mentor Capital Growth Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
9/30/98.
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Capital Growth Portfolio Class Y Shares and the S&P 500.~
[GRAPH]
Y Shares S&P 500
11/19/97 10000 10000
12/31/97 10300 10643
3/31/98 11835 12127
6/30/98 12285 12528
9/30/98 10895 11281
Total Returns as of 9/30/98
1-Year Since Inception++
Class Y Shares n/a 10.56%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads,
expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Capital Growth Portfolio Class Y from the date
of issuance on 11/19/97 through 9/30/98.
30
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 97.19%
BASIC MATERIALS - 2.72%
Bemis Company, Inc. 265,400 $9,305,587
----------
CAPITAL GOODS &
CONSTRUCTION - 9.68%
Emerson Electric Company 191,000 11,889,750
Illinois Tool Works 223,700 12,191,650
W.W. Grainger, Inc. 214,300 9,027,387
----------
33,108,787
----------
CONSUMER CYCLICAL - 14.08%
Chancellor Media Corporation * 213,000 7,108,875
Clear Channel Communications 157,750 7,493,125
Gannett, Inc. 194,000 10,391,125
Interpublic Group Companies 210,800 11,370,025
Newell Company 255,650 11,775,878
----------
48,139,028
----------
CONSUMER STAPLES - 10.75%
Philip Morris Companies, Inc. 260,000 11,976,250
Sherwin-Williams Company 546,600 11,820,225
Sysco Corporation 549,500 12,947,594
----------
36,744,069
----------
FINANCIAL - 20.44%
Ahmanson HF & Company 210,500 11,682,750
American Express Company 139,500 10,828,687
Federal National Mortgage
Association 171,600 11,025,300
NationsBank Corporation 199,150 10,654,525
Norwest Corporation 346,200 12,398,288
SouthTrust Corporation 32,700 1,142,456
UNUM Corporation 244,100 12,128,719
----------
69,860,725
----------
HEALTH - 14.79%
Bristol-Myers Squibb Company 128,250 13,321,969
HealthSouth Corporation 1,281,000 13,530,563
Johnson & Johnson 153,600 12,019,200
Tenet Healthcare Corporation 407,000 11,701,250
----------
50,572,982
----------
TECHNOLOGY - 18.41%
Automatic Data Processing 162,750 12,165,563
Computer Associates
International, Inc. 362,300 13,405,100
Computer Sciences Corporation 226,900 12,366,050
MCI WorldCom, Inc. 254,750 12,450,906
Sun Microsystems, Inc. * 251,850 12,545,278
----------
62,932,897
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION & SERVICES - 2.04%
Werner Enterprises, Inc. 443,312 $ 6,982,164
-------------
MISCELLANEOUS - 4.28%
Tyco International Limited 264,600 14,619,150
-------------
TOTAL COMMON STOCKS
(COST $325,801,368) 332,265,389
-------------
SHORT-TERM INVESTMENT - 5.06%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$17,523,355 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$17,698,589
(cost $17,301,645) $ 17,301,645 17,301,645
-------------
TOTAL INVESTMENTS
(COST $343,103,013)-102.25% 349,567,034
OTHER ASSETS LESS
LIABILITIES - (2.25%) (7,698,090)
-------------
NET ASSETS - 100.00% $ 341,868,944
=============
</TABLE>
* Non-income producing.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $411,684,003 and $263,413,957, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $343,119,643. Net unrealized appreciation aggregated
$6,447,391, of which $28,966,561, related to appreciated investment securities
and $22,519,170, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $332,265,389
Repurchase agreements 17,301,645
------------
Total investments
(cost $343,103,013) 349,567,034
Collateral for securities loaned
(Note 2) 15,562,984
Receivables
Fund shares sold 3,633,968
Dividends and interest 315,098
------------
TOTAL ASSETS 369,079,084
------------
LIABILITIES
Payables
Investments purchased $10,840,843
Securities loaned (Note 2) 15,562,984
Fund shares redeemed 755,755
Accrued expenses and other
liabilities 50,558
-----------
TOTAL LIABILITIES 27,210,140
------------
NET ASSETS $341,868,944
============
Net Assets represented by: (Note 2)
Additional paid-in capital $298,264,898
Accumulated undistributed
net investment income -
Accumulated net realized
gain on investment
transactions 37,140,025
Net unrealized appreciation
of investments 6,464,021
------------
NET ASSETS $341,868,944
============
NET ASSET VALUE PER SHARE
Class A Shares $ 22.71
Class B Shares $ 21.72
Class Y Shares $ 22.74
OFFERING PRICE PER SHARE
Class A Shares $ 24.09 (a)
Class B Shares $ 21.72
Class Y Shares $ 22.74
SHARES OUTSTANDING
Class A Shares 6,391,508
Class B Shares 9,059,483
Class Y Shares 49
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 2,936,795
Interest 804,494
------------
TOTAL INVESTMENT INCOME
(NOTE 2) 3,741,289
EXPENSES
Management fee (Note 4) $ 2,153,467
Distribution fee (Note 5) 1,227,717
Shareholder service fee (Note 5) 672,957
Transfer agent fee 324,574
Administration fee (Note 4) 269,183
Shareholder reports and postage
expenses 57,979
Registration expenses 52,663
Custodian and accounting fees 37,488
Legal fees 8,462
Directors' fees and expenses 6,830
Audit fees 4,556
Miscellaneous 25,373
-----------
Total expenses 4,841,249
------------
NET INVESTMENT LOSS (1,099,960)
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on investments
(Note 2) 45,438,253
Change in unrealized
appreciation on investments (32,273,002)
-----------
NET GAIN ON INVESTMENTS 13,165,251
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 12,065,291
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income (loss) $ (1,099,960) $ 55,807
Net realized gain on investments 45,438,253 14,469,617
Change in unrealized appreciation on investments (32,273,002) 24,877,344
------------- -------------
Increase in net assets resulting from operations 12,065,291 39,402,768
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A (29,728) -
Class B (52,910) -
From net realized gain on investments
Class A (5,934,313) (4,657,749)
Class B (10,484,517) (10,198,967)
Class Y (12) -
------------- -------------
Total distributions to shareholders (16,501,480) (14,856,716)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 220,347,637 61,493,267
Reinvested distributions 16,089,732 14,535,885
Shares redeemed (69,421,744) (21,387,389)
------------- -------------
Change in net assets resulting from capital share transactions 167,015,625 54,641,763
------------- -------------
Increase in net assets 162,579,436 79,187,815
Net Assets
Beginning of year 179,289,508 100,101,693
------------- -------------
End of year (including accumulated undistributed net investment
income of $0 and $59,668, respectively) $ 341,868,944 $ 179,289,508
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26
--------- --------- --------- -------- --------
Income from investment operations
Net investment income (loss) (0.10) (0.02) 0.11 0.02 0.09
Net realized and unrealized gain (loss) on
investments 2.34 5.87 3.73 2.91 (0.30)
---------- ---------- --------- -------- --------
Total from investment operations 2.24 5.85 3.84 2.93 (0.21)
---------- ---------- --------- -------- --------
Less distributions
From net investment income (0.01) - - - (0.04)
From capital gains (1.94) (2.79) (0.50) (1.79) (0.13)
---------- ---------- ---------- -------- --------
Total distributions (1.95) (2.79) (0.50) (1.79) (0.17)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88
========== ========== ========== ======== ========
TOTAL RETURN* 10.72% 34.78% 24.63% 20.18% (1.37%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $145,117 $ 65,703 $ 31,889 $ 29,582 $ 21,181
Ratio of expenses to average net assets 1.34% 1.41% 1.43% 1.87% 1.70%
Ratio of net investment income to average net assets 0.06% 0.53% 0.51% 0.27% 0.53%
Portfolio turnover rate 104% 64% 98% 157% 149%
Average commission rate on portfolio transactions $ 0.0692 $ 0.0697 $ 0.0688
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23
---------- ---------- -------- -------- --------
Income from investment operations
Net investment income (loss) (0.08) - (0.04) 0.25 (0.04)
Net realized and unrealized gain (loss) on investments 2.07 5.55 3.67 2.53 (0.26)
---------- ---------- --------- -------- --------
Total from investment operations 1.99 5.55 3.63 2.78 (0.30)
---------- ---------- --------- -------- --------
Less distributions
From net investment income (0.01) - - - -
From capital gains (1.94) (2.79) (0.50) (1.79) (0.13)
---------- ---------- --------- -------- --------
Total distributions (1.95) (2.79) (0.50) (1.79) (0.13)
---------- ---------- --------- -------- --------
Net asset value, end of year $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80
========== ========== ========= ======== ========
TOTAL RETURN* 9.86% 33.88% 23.64% 19.26% (2.00%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 196,751 $ 113,587 $ 68,213 $ 57,648 $ 41,106
Ratio of expenses to average net assets 2.09% 2.16% 2.18% 2.56% 2.46%
Ratio of net investment loss to average net assets (0.70%) (0.22%) (0.24%) (0.41%) (0.22%)
Portfolio turnover rate 104% 64% 98% 157% 149%
Average commission rate on portfolio transactions $ 0.0692 $ 0.0697 $ 0.0688
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 20.81
--------
Income from investment operations
Net investment income 0.02
Net realized and unrealized gain on investments 2.16
--------
Total from investment operations 2.18
--------
Less distributions
From capital gains (0.25)
----------
Net asset value, end of period $ 22.74
==========
TOTAL RETURN* 10.56%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.09% (a)
Ratio of net investment income to average net assets 0.38% (a)
Portfolio turnover rate 104%
Average commission rate on portfolio transactions $ 0.0692
</TABLE>
(a) Annualized.
(b) Reflects operations for the period from November 19, 1997 (initial offering
of Class Y shares) to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
MENTOR STRATEGY PORTFOLIO
MANAGERS' COMMENTARY: THE MENTOR STRATEGY TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The Mentor Strategy Portfolio has historically been managed according to a
top-down tactical asset allocation investment methodology that relies on
periodic and sometimes aggressive asset allocation shifts between stocks,
bonds, and cash. During the 12-month period ended September 30, 1998 there were
a number of significant changes affecting the Strategy Portfolio. Don Hays, the
chief investment manager of the Portfolio, announced that he would be reducing
his workload and would consequently have less time available to devote to the
Strategy Portfolio. While Don continued to maintain involvement in asset
allocation decision making, responsibility for stock and bond selection within
the Portfolio was assumed by Mentor's Large Capitalization Quality Growth
Equity and Active Fixed-Income teams.
At the November 12, 1998 Mentor Strategy Portfolio Shareholders Meeting a Plan
of Reorganization was adopted by shareholders vote under which the Mentor
Strategy Portfolio was merged into the Mentor Balanced Portfolio. The Mentor
Balanced Portfolio is a mutual fund managed by the same Mentor Large
Capitalization Quality Growth Equity and Active Fixed-Income teams that
currently manage the Strategy Portfolio. The Mentor Balanced Portfolio employs
the same stock and bond selection criteria currently used in the Strategy
Portfolio. It does, however, maintain relatively stable asset allocation blends
rather than employ significant tactical allocation shifts among asset classes.
MARKET OVERVIEW
The first three quarters of the fiscal year ended September 30, 1998 culminated
an unprecedented trend of 14 consecutive quarterly gains for the S&P 500. The
July-September period, however, saw a dramatic departure from this trend, with
the S&P 500 declining 10%. Despite poor equity returns, U.S. government
fixed-income markets were extremely strong. In fact the July-September period
marked one of the few times in recent years that bonds significantly
outperformed stocks. However, the broad rally in treasury bonds was not shared
by more credit-sensitive fixed-income sectors, as investors aggressively
shifted assets into low risk instruments only.
EQUITY REVIEW AND OUTLOOK
For some time we have been emphatically cautioning that the stock market would
have to adjust to considerably lower corporate earnings prospects, and this
transition would likely result in increased volatility and lower returns than
experienced over the past several years. Finally this scenario is unfolding in
full force. Earnings estimates for a broad range of companies are being sharply
reduced. It is now quite possible, in fact likely in our opinion, that the
earnings of the S&P 500 will decline in the second half of this year and in
1999.
These trends present a significant change from the strong, better-than-expected
earnings growth that has been a key pillar supporting the bull market since
1990, one of the best on record by almost any measure. But this change was
inevitable. It is part of the natural cyclical patterns of the economy,
corporate profitability, and the stock market. After nearly perfect growth
conditions during much of the 1990's, corporate profitability is coming under
pressure as global excess capacity is chasing falling demand. And as should be
expected at this point, lenders are sharply curtailing credit and thereby
reinforcing these developing pressures.
35
<PAGE>
MENTOR STRATEGY PORTFOLIO
MANAGERS' COMMENTARY: THE MENTOR STRATEGY TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Fear and greed are a long-term investor's best asset and worst threat. It is
exceedingly difficult for both individual and institutional investors to look
through an emotionally charged volatile market and focus on the fundamentals.
To us, fundamental analysis does not mean trying to figure out cyclical swings
in the economy and markets over the next year. It means concentrating on
longer-term business qualities. We know that consistently implementing a
well-defined investment discipline through the ups and downs of an entire cycle
is the best way to ensure long-term success. We focus on a diversified group of
companies with excellent operating records and leading competitive positions.
We are biased toward companies with above-average business predictability. We
have thoroughly analyzed their results and prospects. We own them at prices we
believe offer attractive relative values. It is a very simple approach. Not an
easy one, but a straightforward one. We will at times be wrong in our analysis,
but we will strive to be as objective as possible. Of course we expect to be
right more often than not. We will not alter this approach just because those
around us are becoming more complacent or fearful. Over the long-term cyclical
swings wash out and business fundamentals prevail.
FIXED INCOME REVIEW AND OUTLOOK
On the fixed-income side, our short-term strategy in this tumultuous
environment has been to tilt portfolio durations somewhat long relative to our
benchmarks, as well as more heavily weight sector allocations toward treasury
securities. Given our long-term confidence in the U.S. economy we are waiting
for an opportunity to aggressively move into domestic spread sectors. Prior to
such a move, we will have to be convinced that these markets have stabilized.
In our opinion such stabilization will require the Fed to continue to move
forcefully to further ease credit conditions.
The primary risk we see to our outlook is timing. The U.S. economy has
tremendous forward momentum and the current yield curve is already pricing in
an aggressive Fed ease. Should events unfold more slowly than the market hopes,
the bond market could encounter some short-term turbulence. We would view these
sell-offs as short term in nature and would utilize the higher yield levels to
extend our duration further.
CURRENT PORTFOLIO POSITIONING
At year end the asset allocation mix in the Mentor Strategy Portfolio was 52%
stocks, 42% bonds, and 6% cash. This compares to 62% stocks, 23% bonds, and 15%
cash on September 30, 1997. This time a year ago the equity holdings were
largely small capitalization whereas today they are large capitalization growth
companies. The fixed-income portfolio today targets the Lehman Brothers
Aggregate Bond Index as its benchmark. This is a more conservative posture than
the fixed-income investments at the beginning of the fiscal year which were
primarily in long-term, and hence more volatile, treasury securities. We
believe that each of these changes positions us appropriately for what we
anticipate to be continued market volatility in the months ahead.
November 1998
36
<PAGE>
MENTOR STRATEGY PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class A Shares and the S&P 500.~
[GRAPH]
Class A S&P 500
6/5/95 9425 10000
9/30/95 10554 10890
9/30/96 12747 13291
9/30/97 14273 18668
9/30/98 14318 20356
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception**
Class A (5.47%) 11.41%
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE
FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL
DISTRIBUTIONS.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
* Represents a hypothetical investment of $10,000 in Mentor Strategy Portfolio
Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations of Mentor Strategy Portfolio Class A from the date of
issuance on 6/5/95 through 9/30/98.
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class B Shares and the S&P 500.~
[GRAPH]
Class B S&P 500
10/29/93 10000 10000
12/31/94 9798 10157
9/30/95 12175 13180
9/30/96 14125 15860
9/30/97 15838 22275
9/30/98 15864 24290
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception+
Class B (3.74%) 9.81%
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE
FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL
DISTRIBUTIONS.
*** Represents a hypothetical investment of $10,000 in Mentor Strategy
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period
following the date of purchase. The value of the Class B Shares reflects
a redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
+ Reflects operations of Mentor Strategy Portfolio Class B from the date of
commencement of operations on 10/29/93 through 9/30/98.
37
<PAGE>
MENTOR STRATEGY PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change of value of hypothetical $10,000 investment in Mentor
Strategy Portfolio Class Y Shares and the S&P 500.~
[GRAPH]
Class Y S&P 500
11/19/97 10000 10000
12/31/97 10060 10760
3/31/98 10707 12249
6/30/98 11027 12394
9/30/98 10294 11281
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 2.87%
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE COMPARABLE RESULTS. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE
FIGURES REPRESENT CHANGE IN INVESTMENT VALUE AFTER REINVESTING ALL
DISTRIBUTIONS.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
* Represents a hypothetical investment of $10,000 in Mentor Strategy Portfolio
Class Y Shares. These shares are not subject to any sales or contingent
deferred sales charges. The Class Y Shares' performance assumes the
reinvestment of all dividends and distributions.
** Reflects operations of Mentor Strategy Portfolio Class Y from the date of
issuance on 11/19/97 through 9/30/98.
38
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 52.08%
CAPITAL GOODS &
CONSTRUCTION - 5.59%
Emerson Electric Company 75,100 $ 4,674,975
Illinois Tool Works 78,000 4,251,000
W.W. Grainger, Inc. 86,900 3,660,662
------------
12,586,637
------------
COMMERCIAL SERVICES - 0.88%
Omnicom Group 43,800 1,971,000
------------
CONSUMER CYCLICAL - 8.43%
Chancellor Media
Corporation * 47,000 1,568,625
Clear Channel
Communications 41,600 1,976,000
Gannett, Inc. 42,600 2,281,763
General Motors Corporation 19,100 1,044,531
Interpublic Group Company 54,600 2,944,987
Newell Company 90,200 4,154,837
Time Warner 25,800 2,259,113
Tribune Company 35,300 1,776,031
Walt Disney Company 39,000 987,188
------------
18,993,075
------------
CONSUMER STAPLES - 4.38%
Philip Morris Companies, Inc. 61,400 2,828,238
Sherwin-Williams Company 133,200 2,880,450
Sysco Corporation 176,000 4,147,000
------------
9,855,688
------------
ENERGY - 0.43%
Williams Companies 33,500 963,125
------------
FINANCIAL - 11.48%
Ahmanson HF & Company 25,500 1,415,250
Charter One Financial, Inc. 97,873 2,410,113
Dime Bancorp, Inc. 61,700 1,561,781
M & T Bank Corporation 2,901 1,337,361
Marsh & McLennan
Companies, Inc. 14,700 731,325
North Fork Bancorp 111,750 2,235,000
Northern Trust Corporation 35,200 2,402,400
Old Republic International
Corporation 92,550 2,082,375
Price (T. Rowe) & Associates,
Inc. 70,000 2,056,250
Torchmark Corporation 52,000 1,868,750
Travelers Group, Inc. 45,300 1,698,750
UNUM Corporation 77,000 3,825,937
U S Bancorp 62,700 2,229,769
------------
25,855,061
------------
HEALTH - 6.81%
Bristol-Myers Squibb Company 37,600 3,905,700
HealthSouth Corporation * 188,700 1,993,144
Johnson & Johnson 62,600 4,898,450
Tenet Healthcare Corporation 158,000 4,542,500
------------
15,339,794
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL - 1.27%
Safeway, Inc. * 61,600 $ 2,856,700
------------
TECHNOLOGY - 10.42%
Automatic Data Processing 60,100 4,492,475
Computer Associates
International, Inc. 22,600 836,200
Computer Sciences
Corporation 69,500 3,787,750
GTE Corporation 31,400 1,727,000
MCI WorldCom, Inc. 90,000 4,398,750
Sprint Corporation 23,900 1,720,800
Sun Microsystems, Inc. * 103,500 5,155,594
U S West, Inc. 25,905 1,358,393
------------
23,476,962
------------
TRANSPORTATION - 0.70%
Werner Enterprises, Inc. 100,000 1,575,000
------------
MISCELLANEOUS - 1.69%
Tyco International Limited 69,100 3,817,775
------------
TOTAL COMMON STOCKS
(COST $119,416,670) 117,290,817
------------
U.S. GOVERNMENT SECURITIES - 41.72%
U.S. Treasury Bond, 5.50%,
1/31/03 (a) $12,000,000 12,531,120
U.S. Treasury Bond, 6.50%,
11/15/26 68,323,000 81,437,600
------------
TOTAL U.S. GOVERNMENT
SECURITIES
(COST $78,253,007) 93,968,720
------------
211,259,537
------------
SHORT-TERM INVESTMENT - 6.03%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$13,769,132 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$13,906,823,
(cost $13,594,355) 13,594,355 13,594,355
------------
TOTAL INVESTMENTS
(COST $211,264,032)-99.83% 224,853,892
OTHER ASSETS LESS
LIABILITIES - 0.17% 379,555
------------
NET ASSETS - 100.00% $225,233,447
============
</TABLE>
* Non-income producing.
(a) A portion of this security is pledged as collateral for open futures
contracts.
39
<PAGE>
MENTOR STRATEGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $196,774,571 and $286,670,918, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $211,280,993. Net unrealized appreciation aggregated
$13,572,899, of which $25,354,232, related to appreciated investment securities
and $11,781,333, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $ 211,259,537
Repurchase agreements 13,594,355
-------------
Total investments
(cost $211,264,032) 224,853,892
Collateral for securities
loaned (Note 2) 60,165,776
Receivables
Fund shares sold 61,401
Dividends and interest 1,908,750
Deferred expenses (Note 2) 5,034
-------------
TOTAL ASSETS 286,994,853
-------------
LIABILITIES
Payables
Securities loaned (Note 2) $ 60,165,776
Fund shares redeemed 502,685
Variation margin 1,032,188
Accrued expenses and other
liabilities 60,757
------------
TOTAL LIABILITIES 61,761,406
-------------
NET ASSETS $ 225,233,447
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 192,886,301
Accumulated undistributed
net investment income 2,163,583
Accumulated net realized
gain on investment
transactions 20,465,541
Net unrealized appreciation
of investments and open
futures contracts 9,718,022
-------------
NET ASSETS $ 225,233,447
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.41
Class B Shares $ 14.97
Class Y Shares $ 15.43
OFFERING PRICE PER SHARE
Class A Shares $ 16.35(a)
Class B Shares $ 14.97
Class Y Shares $ 15.43
SHARES OUTSTANDING
Class A Shares 1,602,162
Class B Shares 13,393,973
Class Y Shares 67
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 1,264,309
Interest 7,295,963
-----------
TOTAL INVESTMENT INCOME
(NOTE 2) 8,560,272
EXPENSES
Management fee (Note 4) $ 2,420,122
Distribution fee (Note 5) 1,875,172
Shareholder service fee (Note 5) 711,799
Transfer agent fee 375,675
Administration fee (Note 4) 284,720
Shareholder reports and postage
expenses 67,926
Custodian and accounting fees 64,615
Registration expenses 47,295
Organizational expenses 20,152
Legal fees 10,523
Directors' fees and expenses 8,296
Audit fees 5,661
Miscellaneous 29,147
-----------
Total expenses 5,921,103
-----------
NET INVESTMENT INCOME 2,639,169
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on
investments (Note 2) 24,557,938
Change in unrealized appreciation
on investments and futures
contracts (26,287,481)
-----------
NET LOSS ON INVESTMENTS (1,729,543)
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 909,626
===========
</TABLE>
(b) Net of foreign withholding taxes of $8,800.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 2,639,169 $ 5,345,384
Net realized gain on investments 24,557,938 54,534,179
Change in unrealized appreciation on investments and futures contracts (26,287,481) (24,297,952)
-------------- -------------
Increase in net assets resulting from operations 909,626 35,581,611
-------------- -------------
Distributions to Shareholders
From net investment income
Class A (617,602) -
Class B (4,725,533) -
From net realized gain on investments
Class A (6,308,309) (1,531,137)
Class B (48,272,257) (21,767,428)
-------------- -------------
Total distributions to shareholders (59,923,701) (23,298,565)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 16,612,646 71,646,650
Reinvested distributions 58,353,501 22,750,654
Shares redeemed (133,155,402) (73,109,779)
-------------- -------------
Change in net assets resulting from capital share transactions (58,189,255) 21,287,525
-------------- -------------
Increase (decrease) in net assets (117,203,330) 33,570,571
Net Assets
Beginning of year 342,436,777 308,866,206
-------------- -------------
End of year (including accumulated undistributed net investment
income of $2,163,583 and $5,365,536, respectively) $ 225,233,447 $ 342,436,777
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (B)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.61 $ 17.96 $ 15.24 $ 13.45
--------- --------- --------- ----------
Income from investment operations
Net investment income 0.40 0.31 0.08 -
Net realized and unrealized gain (loss) on investments (0.35) 1.68 2.86 1.79
---------- --------- --------- -----------
Total from investment operations 0.05 1.99 2.94 1.79
---------- --------- --------- -----------
Less distributions
From net investment income (0.29) - - -
From capital gains (2.96) (1.34) (0.22) -
---------- ---------- ---------- -----------
Total distributions (3.25) (1.34) (0.22) -
---------- ---------- ---------- -----------
Net asset value, end of period $ 15.41 $ 18.61 $ 17.96 $ 15.24
========== ========== ========== ===========
TOTAL RETURN* 0.32% 11.97% 19.36% 13.31%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 24,685 $ 40,552 $ 20,372 $ 10,503
Ratio of expenses to average net assets 1.42% 1.45% 1.42% 1.65% (a)
Ratio of net investment income (loss) to average net assets 1.59% 2.29% 0.62% (0.06%)(a)
Portfolio turnover rate 77% 192% 125% 122%
Average commission rate on portfolio transactions $ 0.0708 $ 0.0644 $ 0.0669
</TABLE>
(a) Annualized.
(b) For the period from June 5, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
MENTOR STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.29 $ 17.79 $ 15.21
-------- --------- ----------
Income from investment operations
Net investment income (loss) 0.16 0.26 (0.03)
Net realized and unrealized gain (loss) on
investments (0.23) 1.58 2.83
--------- --------- ----------
Total from investment operations (0.07) 1.84 2.80
--------- --------- ----------
Less distributions
From net investment income (0.29) - -
From capital gains (2.96) (1.34) (0.22)
--------- ---------- ----------
Total distributions (3.25) (1.34) (0.22)
--------- ---------- ----------
Net asset value, end of period $ 14.97 $ 18.29 $ 17.79
========= ========== ==========
TOTAL RETURN* (0.46%) 11.19% 18.48%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 200,547 $ 301,885 $ 288,494
Ratio of expenses to average net assets 2.17% 2.20% 2.19%
Ratio of net investment income (loss) to average
net assets 0.84% 1.54% (0.19%)
Portfolio turnover rate 77% 192% 125%
Average commission rate on portfolio transactions $ 0.0708 $ 0.0644 $ 0.0669
<CAPTION>
PERIOD
PERIOD ENDED YEAR ENDED ENDED
9/30/95 (c) 12/31/94 12/31/93 (d)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.24 $ 12.70 $ 12.50
---------- -------- ---------
Income from investment operations
Net investment income (loss) - ( 0.06) -
Net realized and unrealized gain (loss) on
investments 2.97 ( 0.40) 0.20
---------- -------- ---------
Total from investment operations 2.97 ( 0.46) 0.20
---------- -------- ---------
Less distributions
From net investment income - - -
From capital gains - - -
---------- -------- ---------
Total distributions - - -
---------- -------- ---------
Net asset value, end of period $ 15.21 $ 12.24 $ 12.70
========== ======== =========
TOTAL RETURN* 24.26% (3.61%) 1.60%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 224,643 $179,274 $ 122,177
Ratio of expenses to average net assets 2.31%(a) 2.19% 2.06%(a)
Ratio of net investment income (loss) to average
net assets 0.02%(a) (0.54%) 0.08%(a)
Portfolio turnover rate 122% 143% 0%
Average commission rate on portfolio transactions
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED 9/30/98 (e)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.01
--------
Income from investment operations
Net investment income 0.25
Net realized and unrealized gain on investments 0.18
--------
Total from investment operations 0.43
--------
Less distributions
From capital gains (0.01)
----------
Net asset value, end of period $ 15.43
==========
TOTAL RETURN* 2.87%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.17% (a)
Ratio of net investment income to average net assets 2.18% (a)
Portfolio turnover rate 77%
Average commission rate on portfolio transactions $ 0.0708
</TABLE>
(a) Annualized.
(c) For the period from January 1, 1995 to September 30, 1995.
(d) For the period from October 29, 1993 (commencement of operations) to
December 31, 1993.
(e) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
REVIEW OF MARKETS
Investors who had come to expect double-digit positive returns were brought
back to earth over the last 12 months -- and most especially in the quarter
just ended. The S&P 500 rose 9% in the 12 month period ending September 30,
1998, but that positive return masks two factors: the pain inflicted by a
(9.9%) result in the third calendar quarter and the performance dominance of
the largest stocks in that index. Over the year, we have experienced a
significant disparity throughout sectors of the market: large-capitalization
growth stocks rose 11.1%, while their large-cap. value brethren returned a
meager 3.6%. In marked contrast, small stocks returned (19%) during the past 12
months. Bond investors, on the other hand, were well rewarded during the
period, due in large part to stunning declines in longer-term yields. For the
period the Lehman Brothers Aggregate Index returned 11.5%.
PORTFOLIO PERFORMANCE
For the 12 month period ended September 30, 1998, the Mentor Income and Growth
Portfolio returned 5.81% for the A shares and 5.01% for the B shares, exclusive
of sales charges, compared to 3.26% for the Lipper Balanced Average. The
Portfolio's performance over all relevant time periods places it in the first
or second quartile of its competitive peer group as ranked by Lipper Analytical
Services.
MARKET OUTLOOK
Perhaps the most important question at present is whether the U.S. economy will
continue to grow, or if the economic problems in many of the emerging markets
and Japan will result in a domestic recession. We believe the odds still favor
expansion. Importantly, the Federal Reserve has taken note of world events and
very low levels of domestic inflation and has chosen to ease monetary policy.
Given the benign rate of inflation, there is plenty of room for the Fed to
lower rates further. Also, with the Federal government running a large budget
surplus, there is some room to adopt a more stimulative fiscal policy. Finally,
the consumer normally leads the economy either into or out of a recession, and
at present, the fundamentals for consumer spending remain quite healthy.
Nevertheless, the risk of a recession is certainly higher than it was at any
time in the last twelve months. Declines in exports and corporate profit
pressures could lead to layoffs, and significantly impinge on consumer
confidence and spending plans.
PORTFOLIO STRATEGY
As of September 30, 1998, the Portfolio's asset allocation was 59% equity, 41%
bonds and 0% cash. Our concerns about equity valuations, and consequently, our
underweighting of stocks in the Portfolio, proved painful for most of the last
12 months, but provided "shelter from the storm" for shareholders in the
quarter just ended. We are considering increasing the Portfolio's equity
weighting slightly over the next several months due to attractive buying
opportunities in a number of stocks.
EQUITY STRATEGY
The market correction we have experienced is painful, but holds a silver
lining. We are beginning to see a growing list of stocks selling at valuation
levels that would have attracted our attention anytime in the last 10 years.
These valuations become even more attractive in light of the lowest levels of
inflation and interest rates since the first half of the 1960's. In the present
environment, we
44
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
will be focusing on attractively valued stocks of companies that have strong
industry positions, healthy cash flows, and sound balance sheets. We will
prefer, but not limit ourselves to, companies with a below-average exposure to
foreign markets.
FIXED INCOME STRATEGY
The 30-year Treasury bond is rapidly achieving the lowest yield levels since
the government began issuing these securities in 1977. Short- and
intermediate-term yields have not fallen to their 1993 lows, but are getting
close. There is little question that the Treasury market is assuming a
substantially weaker U.S. economy and a period of monetary ease from the
Federal Reserve. In our view, both of these are likely to come to pass.
Based upon this outlook, we are retaining a portfolio duration longer than
benchmark, because we believe that interest rates can fall modestly from
current levels, although long-term rates are unlikely to fall much from here.
During the prior year, we have gradually increased the Portfolio's modest
exposure to corporate bonds and have been noticeably underweight in
mortgage-backed securities. We anticipate adding to our holdings of high
quality non-Treasury sectors over the coming months.
November 1998
45
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Income and Growth Portfolio Class A and Class B Shares, the S&P 500 and the
Lehman Brothers Aggregate Bond Index.+
[GRAPH]
Class Class
A Shares B Shares LAGG/S&P 500
5/24/93 9425 10133 10000
9/30/93 9909 10506 10353
9/30/94 10578 11239 10446
9/30/95 12402 12614 12879
9/30/96 14802 15140 14686
9/30/97 18076 18499 18723
9/30/98 19126 19302 20692
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year Since Inception++
Class A (0.29%) 12.62% 12.84%
Class B 1.22% 12.67% 14.70%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the five-year period
following the date of purchase. The value of the Class B Shares reflects a
redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
*** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class A Shares, after deducting the maximum sales charge of
5.75% ($10,000 investment minus $575 sales charges = $9,425). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
+ The Standard & Poor's Index (S&P 500) is an unmanaged,
market-value-weighted index of 500 widely held domestic common stocks. An
unmanaged index does not reflect expenses and may not correspond to the
performance of a managed portfolio in which expenses are incurred. The
Lehman Brothers Aggregate Index is made up of the Government/Corporate
Index, the Mortgage-Backed Securities Index, and the Asset-Backed
Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are
adjusted to reflect reinvestment of interest and dividends on securities
in the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance. This index
represents an asset allocation of 60% S&P 500 stocks and 40% Lehman
Brothers Aggregate Bond Index.
++ Reflects operations of Mentor Income and Growth Portfolio Class A and Class
B Shares from the date of commencement of operations on 5/24/93 through
9/30/98.
46
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Income and Growth Portfolio Class Y Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
[GRAPH]
Class
Y Shares LAGG/S&P 500
11/19/97 10000 10000
12/31/97 10217 10435
3/31/98 10860 11374
6/30/98 10796 11706
9/30/98 10660 11211
Total Returns as of 9/30/98
1-Year Since Inception++
Class Y n/a 7.29%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*** Represents a hypothetical investment of $10,000 in Mentor Income and Growth
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance
assumes the reinvestment of all dividends and distributions.
+ The Standard & Poor's Index (S&P 500) is an unmanaged,
market-value-weighted index of 500 widely held domestic common stocks. An
unmanaged index does not reflect expenses and may not correspond to the
performance of a managed portfolio in which expenses are incurred. The
Lehman Brothers Aggregate Index is made up of the Government/Corporate
Index, the Mortgage-Backed Securities Index, and the Asset-Backed
Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are
adjusted to reflect reinvestment of interest and dividends on securities
in the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance. This index
represents an asset allocation of 60% S&P 500 stocks and 40% Lehman
Brothers Aggregate Bond Index.
++ Reflects operations of Mentor Income and Growth Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 9/30/98.
47
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 58.78%
BASIC MATERIALS - 4.46%
AlliedSignal, Inc. 92,300 $ 3,265,113
Aluminum Company of America 24,000 1,704,000
British Steel PLC~ 137,000 2,491,687
Westvaco Corporation 68,300 1,639,200
Willamette Industries, Inc. 60,000 1,721,250
-----------
10,821,250
-----------
CAPITAL GOODS & CONSTRUCTION - 4.46%
Caterpillar, Inc. 50,000 2,228,125
Cooper Industries, Inc. 47,500 1,935,625
Cooper Tire & Rubber 125,000 2,250,000
Hubbell, Inc. 65,000 2,307,500
Thomas & Betts Corporation 55,000 2,093,438
-----------
10,814,688
-----------
COMMERCIAL SERVICES - 3.17%
Foster Wheeler Corporation 111,200 1,529,000
Supervalu, Inc. 91,300 2,128,431
Wallace Computer Services, Inc. 225,300 4,041,319
-----------
7,698,750
-----------
CONSUMER CYCLICAL - 3.99%
American Stores Company 58,900 1,895,844
Ford Motor Company 75,500 3,543,781
Maytag Corporation 28,900 1,379,975
Sears Roebuck & Company 65,000 2,872,188
-----------
9,691,788
-----------
CONSUMER STAPLES - 7.94%
American Home Products
Corporation 53,200 2,786,350
Baxter International, Inc. 62,000 3,689,000
Dimon Incorporated 280,000 2,957,500
Hormel Foods Corporation 136,400 3,691,325
Kimberly-Clark Corporation 72,000 2,916,000
Philip Morris Companies, Inc. 70,000 3,224,375
-----------
19,264,550
-----------
ENERGY - 6.52%
Amoco Corporation 23,200 1,249,900
Baker Hughes, Inc. 89,800 1,880,187
Chevron Corporation 26,400 2,219,250
Phillips Petroleum Company 22,000 992,750
Repsol SA~ 50,000 2,109,375
Total SA~ 37,700 2,368,031
Unocal Corporation 65,800 2,385,250
USX-Marathon Group, Inc. 74,000 2,622,375
-----------
15,827,118
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL - 10.96%
Ace Limited 73,700 $ 2,211,000
Citicorp 36,600 3,401,513
Federal National Mortgage
Association 78,600 5,050,050
First Union Corporation (b) 43,200 2,211,300
Jefferson-Pilot Corporation 33,750 2,041,875
Spieker Properties, Inc. 65,000 2,388,750
US Bancorp 99,000 3,520,687
Wachovia Corporation 39,000 3,324,750
Wilmington Trust Corporation 46,900 2,438,800
-----------
26,588,725
-----------
HEALTH - 4.61%
Abbott Laboratories 43,900 1,906,906
Columbia HCA Healthcare
Corporation 150,000 3,009,375
Johnson & Johnson 41,000 3,208,250
Pharmacia & UpJohn 61,000 3,061,438
-----------
11,185,969
-----------
TECHNOLOGY - 4.63%
Amp, Inc. 45,700 1,633,775
International Business Machines
Corporation 32,700 4,185,600
Lockheed Martin Corporation 21,700 2,187,631
Xerox Corporation 38,000 3,220,500
-----------
11,227,506
-----------
TRANSPORTATION &
SERVICES - 1.58%
KLM Royal Dutch Air * 43,428 1,074,826
Union Pacific Corporation 65,000 2,770,625
-----------
3,845,451
-----------
UTILITIES - 6.46%
Bell Atlantic Corporation 78,900 3,821,719
BellSouth Corporation 33,000 2,483,250
DPL, Inc. 95,000 1,864,375
DQE, Inc. 43,000 1,660,875
Pinnacle West Capital 41,700 1,868,681
SBC Communications, Inc. 89,200 3,963,825
-----------
15,662,725
-----------
TOTAL COMMON STOCKS
(COST $137,623,841) 142,628,520
-----------
</TABLE>
48
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 13.43%
INDUSTRIAL - 6.03%
Aluminum Company of
America, 5.75%, 2/01/01 $ 250,000 $ 254,350
Archer-Daniels-Midland, 6.75%,
12/15/27 2,000,000 2,078,040
Computer Associates
International, 6.50%,
4/15/08 (a) 1,000,000 997,900
Gap, Inc., 6.90%, 9/15/07 1,000,000 1,114,180
Gillette Company, 5.75%,
10/15/05 250,000 260,167
Hershey Foods Corporation,
7.20%, 8/15/27 1,000,000 1,119,310
ICI Wilmington, Inc., 6.95%,
9/15/04 1,000,000 1,065,060
Mead Corporation, 7.35%,
3/01/17 750,000 814,223
Praxair, Inc., 6.15%, 4/15/03 1,000,000 1,027,020
Rockwell International
Corporation, 6.70%, 1/15/28 1,500,000 1,589,775
Scripps (E.W.) Company,
6.38%, 10/15/02 1,000,000 1,037,830
Tenneco, Inc., 7.50%, 4/15/07 500,000 548,365
Williams Company, Inc., 6.50%,
11/15/02 1,000,000 1,032,510
Zeneca Wilmington, 7.00%,
11/15/23 1,500,000 1,688,745
-----------
14,627,475
-----------
FINANCIAL - 5.08%
Allmerica Financial Corporation,
7.63%, 10/15/25 1,130,000 1,252,729
Allstate Corporation, 6.75%,
5/15/18 1,000,000 1,028,290
American General Finance.,
5.88%, 7/01/00 250,000 252,987
Associates Corporation of North
America, 5.25%, 3/30/00 250,000 250,645
BankAmerica Corporation,
7.88%, 12/01/02 1,000,000 1,092,980
Bank One Texas, 6.25%,
2/15/08 1,000,000 1,043,010
Chase Manhattan Corporation,
7.75%, 11/01/99 250,000 255,697
Comerica Bank, 7.13%,
12/01/13 250,000 267,703
Finova Capital Corporation,
6.39%, 10/08/02 1,000,000 1,036,390
First National Bank of Boston,
8.00%, 9/15/04 250,000 277,367
Fleet Financial Group, 6.88%,
1/15/28 1,000,000 1,029,320
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
FINANCIAL (CONTINUED)
Great Western Financial,
6.38%, 7/01/00 $ 250,000 $ 254,623
Heller Financial, 6.38%,
11/10/00 1,000,000 1,026,960
Home Savings of Americas,
6.00%, 11/01/00 250,000 253,330
MBIA, Inc., 7.00%, 12/15/25 1,000,000 1,063,240
NationsBank Corporation,
7.80%, 9/15/16 1,000,000 1,134,400
Security Benefits Life Company,
8.75%, 5/15/16 (a) 500,000 549,375
Toronto Dominion Bank,
6.13%, 11/01/08 250,000 260,930
-----------
12,329,976
-----------
UTILITIES - 2.32%
Florida Power & Light
Company, 5.38%, 4/01/00 250,000 251,090
New York Telephone, 6.00%,
4/15/08 1,000,000 1,052,340
Northern Natural Gas, 6.75%,
9/15/08 2,000,000 2,096,000
Pacific Gas & Electric Company,
5.93%, 10/08/03 250,000 262,700
Philadelphia Electric Company,
7.50%, 1/15/99 100,000 100,835
Southwestern Public Service
Company, 6.88%, 12/01/99 250,000 255,188
System Energy Resources,
7.71%, 8/01/01 500,000 525,535
Union Electric Company,
6.75%, 10/15/99 250,000 254,688
US West Capital Funding Inc.,
6.88%, 7/15/28 785,000 833,489
-----------
5,631,865
-----------
TOTAL CORPORATE BONDS
(COST $31,414,967) 32,589,316
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 27.27%
Government National Mortgage
Association 6.50% - 7.00%,
1/15/24 - 6/15/28 8,509,957 8,721,623
U.S. Treasury Bonds, 7.25%,
5/15/16 4,110,000 5,103,469
U.S. Treasury Notes, 5.63% -
7.50%, 11/15/99 - 10/15/06 48,550,000 52,331,514
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $61,636,227) 66,156,606
-----------
241,374,442
-----------
</TABLE>
49
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT - 0.18%
REPURCHASE AGREEMENT
Paribas Corporation
Dated 9/30/98, 5.54%, due
10/01/98, collateralized by
$368,000 U.S. Treasury Note,
7.88%, 11/13/04, market
value $435,735
(cost $435,000) $435,000 $ 435,000
------------
TOTAL INVESTMENTS
(COST $231,110,035)-99.66% 241,809,442
OTHER ASSETS LESS
LIABILITIES - 0.34% 831,534
------------
NET ASSETS - 100.00% $242,640,976
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under rule 144A or securities offered pursuant to section 4(2) of the
Securities Act of 1933, as amended. These securites have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) At September 30, 1998, the Portfolio owned 43,200 shares of common stock of
First Union Corporation at a cost of $1,599,696 and market value of
$2,211,300. These shares were purchased by the Portfolio prior to the
acquisition of Wheat First Union by First Union.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $159,489,535 and $86,643,249, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $231,143,009. Net unrealized appreciation aggregated
$10,666,433, of which $24,490,485, related to appreciated investment securities
and $13,824,052, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $ 241,374,442
Repurchase agreements 435,000
-------------
Total investments
(cost $231,110,035) 241,809,442
Collateral for securities
loaned (Note 2) 40,344,784
Receivables
Fund shares sold 290,524
Dividends and interest 1,702,285
Other 500
-------------
TOTAL ASSETS 284,147,535
-------------
LIABILITIES
Payables
Investments purchased $ 662,932
Securities loaned (Note 2) 40,344,784
Fund shares redeemed 426,881
Accrued expenses and other
liabilities 71,962
----------
TOTAL LIABILITIES 41,506,559
-------------
NET ASSETS $ 242,640,976
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 221,635,180
Accumulated undistributed
net investment income 91,952
Accumulated net realized
gain on investment
transactions 10,214,437
Net unrealized appreciation
of investments 10,699,407
-------------
NET ASSETS $ 242,640,976
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 19.54
Class B Shares $ 19.53
Class Y Shares $ 19.54
OFFERING PRICE PER SHARE
Class A Shares $ 20.73(a)
Class B Shares $ 19.53
Class Y Shares $ 19.54
SHARES OUTSTANDING
Class A Shares 5,055,017
Class B Shares 7,364,927
Class Y Shares 55
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 2,856,521
Interest 5,943,480
------------
TOTAL INVESTMENT INCOME
(NOTE 2) 8,800,001
EXPENSES
Management fee (Note 4) $1,638,729
Distribution fee (Note 5) 986,604
Shareholder service fee
(Note 5) 546,242
Transfer agent fee 292,933
Administration fee (Note 4) 218,497
Registration expenses 50,615
Custodian and accounting
fees 48,726
Shareholder reports and
postage expenses 43,522
Legal fees 7,495
Directors' fees and expenses 5,917
Audit fees 4,195
Miscellaneous 26,008
-----------
Total expenses 3,869,483
------------
NET INVESTMENT INCOME 4,930,518
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on
investments (Note 2) 10,845,766
Change in unrealized
appreciation on
investments (5,423,416)
-----------
NET GAIN ON INVESTMENTS 5,422,350
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 10,352,868
============
</TABLE>
(b) Net of foreign withholding taxes of $50,731.
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 4,930,518 $ 2,672,361
Net realized gain on investments 10,845,766 15,016,540
Change in unrealized appreciation on investments (5,423,416) 6,704,657
------------ -------------
Increase in net assets resulting from operations 10,352,868 24,393,558
------------ -------------
Distributions to Shareholders
From net investment income
Class A (2,350,498) (1,097,197)
Class B (2,488,039) (1,691,306)
Class Y (29) -
From net realized gain on investments
Class A (5,325,307) (2,474,556)
Class B (8,807,307) (6,846,186)
Class Y (1) -
-------------- -------------
Total distributions to shareholders (18,971,181) (12,109,245)
-------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 101,090,596 74,239,398
Reinvested distributions 17,902,342 11,495,496
Shares redeemed (39,059,107) (17,451,330)
-------------- -------------
Change in net assets resulting from capital share transactions 79,933,831 68,283,564
-------------- -------------
Increase in net assets 71,315,518 80,567,877
Net Assets
Beginning of year 171,325,458 90,757,581
-------------- -------------
End of year (including accumulated undistributed net investment
income of $91,952 and $0, respectively) $242,640,976 $ 171,325,458
============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 20.60 $ 19.16 $ 17.13 $ 15.27 $ 14.88
--------- --------- --------- -------- --------
Income from investment operations
Net investment income 0.51 0.44 0.37 0.40 0.31
Net realized and unrealized gain on investments 0.60 3.39 2.75 2.14 0.64
--------- --------- --------- -------- --------
Total from investment operations 1.11 3.83 3.12 2.54 0.95
--------- --------- --------- -------- --------
Less distributions
From net investment income (0.51) (0.47) (0.35) (0.43) (0.30)
From capital gains (1.66) (1.92) (0.74) (0.25) (0.26)
---------- ---------- ---------- -------- --------
Total distributions (2.17) (2.39) (1.09) (0.68) (0.56)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 19.54 $ 20.60 $ 19.16 $ 17.13 $ 15.27
========== ========== ========== ======== ========
TOTAL RETURN* 5.81% 22.11% 19.13% 17.24% 6.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 98,794 $ 63,509 $ 24,210 $ 19,888 $ 17,773
Ratio of expenses to average net assets 1.32% 1.35% 1.36% 1.69% 1.75%
Ratio of net investment income to average net assets 2.70% 2.63% 2.08% 2.53% 2.20%
Portfolio turnover rate 40% 75% 72% 62% 78%
Average commission rate on portfolio transactions $ 0.0540 $ 0.0515 $ 0.0492
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91
--------- --------- --------- -------- --------
Income from investment operations
Net investment income 0.37 0.34 0.23 0.28 0.21
Net realized and unrealized gain on investments 0.59 3.35 2.76 2.14 0.61
--------- --------- --------- -------- --------
Total from investment operations 0.96 3.69 2.99 2.42 0.82
--------- --------- --------- -------- --------
Less distributions
From net investment income (0.36) (0.36) (0.21) (0.31) (0.19)
From capital gains (1.66) (1.92) (0.74) (0.25) (0.26)
---------- ---------- ---------- -------- --------
Total distributions (2.02) (2.28) (0.95) (0.56) (0.45)
---------- ---------- ---------- -------- --------
Net asset value, end of year $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28
========== ========== ========== ======== ========
TOTAL RETURN* 5.01% 21.24% 18.26% 16.32% 5.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $143,846 $ 107,816 $ 66,548 $ 46,678 $ 43,219
Ratio of expenses to average net assets 2.07% 2.10% 2.13% 2.43% 2.44%
Ratio of net investment income to average net assets 1.95% 1.87% 1.32% 1.78% 1.51%
Portfolio turnover rate 40% 75% 72% 62% 78%
Average commission rate on portfolio transactions $ 0.0540 $ 0.0515 $ 0.0492
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (C)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.75
--------
Income from investment operations
Net investment income 0.54
Net realized and unrealized gain on investments 0.82
--------
Total from investment operations 1.36
--------
Less distributions
From net investment income (0.54)
From capital gains (0.03)
----------
Total distributions (0.57)
----------
Net asset value, end of period $ 19.54
==========
TOTAL RETURN* 7.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 1.07% (a)
Ratio of net investment income to average net assets 3.15% (a)
Portfolio turnover rate 40%
Average commission rate on portfolio transactions $ 0.0540
</TABLE>
(a) Annualized.
(c) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
53
<PAGE>
MENTOR BALANCED PORTFOLIO
MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The Mentor Balanced Portfolio, which has been in existence since 1994, became
available to investors in multiple retail mutual fund share classes for the
first time in September. This commentary, therefore, marks the first
opportunity for the managers of the Portfolio to provide their market
perspective to many of our new shareholders.
At quarter end the asset allocation mix in the Mentor Balanced Portfolio was
58% stocks, 41% bonds, and 1% cash.
MARKET OVERVIEW
The first three quarters of 1998 culminated an unprecedented trend of 14
consecutive quarterly gains for the S&P 500. The July-September period,
however, saw a dramatic departure from this trend, with the S&P 500 declining
10%. Despite poor equity returns, U.S. government fixed-income markets were
extremely strong. In fact, the July-September period marked one of the few
times in recent years that bonds significantly outperformed stocks. However,
the broad rally in treasury bonds was not shared by more credit-sensitive
fixed-income sectors, as investors aggressively shifted assets into low risk
instruments only.
EQUITY REVIEW AND OUTLOOK
For some time we have been emphatically cautioning that the stock market would
have to adjust to considerably lower corporate earnings prospects, and this
transition would likely result in increased volatility and lower returns than
experienced over the past several years. Finally, this scenario is unfolding in
full force. Earnings estimates for a broad range of companies are being sharply
reduced. It is now quite possible, in fact likely in our opinion, that the
earnings of the S&P 500 will continue to decline during the remainder of this
year and 1999.
These trends present a significant change from the strong, better-than-expected
earnings growth that has been a key pillar supporting the bull market since
1990, one of the best on record by almost any measure. But this change was
inevitable. It is part of the natural cyclical patterns of the economy,
corporate profitability, and the stock market. After nearly perfect growth
conditions during much of the 1990's, corporate profitability is coming under
pressure as global excess capacity is chasing falling demand. And as should be
expected at this point, lenders are sharply curtailing credit and thereby
reinforcing these developing pressures.
Fear and greed are a long-term investor's best asset and worst threat. It is
exceedingly difficult for both individual and institutional investors to look
through an emotionally charged volatile market and focus on the fundamentals.
To us, fundamental analysis does not mean trying to figure out cyclical swings
in the economy and markets over the next year. It means concentrating on
longer-term business qualities. We know that consistently implementing a
well-defined investment discipline through the ups and downs of an entire cycle
is the best way to ensure long-term success. We focus on a diversified group of
companies with excellent operating records and leading competitive positions.
We are biased toward companies with above-average business predictability. We
have thoroughly analyzed their results and prospects. We own them at prices we
believe offer attractive relative values. It is a very simple approach. Not an
easy one, but a straightforward one. We will at times be wrong in our analysis,
but we will strive to be as objective as possible. Of course, we expect to be
right more
54
<PAGE>
MENTOR BALANCED PORTFOLIO
MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
often than not. We will not alter this approach just because those around us
are becoming more complacent or fearful. Over the long-term, cyclical swings
wash out and business fundamentals prevail.
FIXED INCOME REVIEW AND OUTLOOK
On the fixed-income side, our short-term strategy in this tumultuous
environment has been to tilt portfolio durations somewhat long relative to our
benchmarks, as well as more heavily weight sector allocations toward treasury
securities. Given our long-term confidence in the U.S. economy, we are waiting
for an opportunity to aggressively move into domestic spread sectors. Prior to
such a move, we will have to be convinced that these markets have stabilized.
In our opinion such stabilization will require the Fed to continue to move
forcefully to further ease credit conditions.
The primary risk we see to our outlook is timing. The U.S. economy has
tremendous forward momentum and the current yield curve is already pricing in
an aggressive Fed ease. Should events unfold more slowly than the market hopes,
the bond market could encounter some short-term turbulence. We would view these
sell-offs as short term in nature and would utilize the higher yield levels to
extend our duration further.
November 1998
55
<PAGE>
MENTOR BALANCED PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Balanced Portfolio Class A Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
[GRAPH]
9/16/98 9/30/98
Class A 9,422 9,433
LAGG/S&P 500 10,000 10,464
Total Returns as of 9/30/98
1-Year Since Inception++
Class n/a (5.78%)
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in Mentor Balanced
Portfolio Class A Shares after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charge). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+ The Standard & Poor's Index (S&P 500) is an unmanaged,
market-value-weighted index of 500 widely held domestic common stocks. An
unmanaged index does not reflect expenses and may not correspond to the
performance of a managed portfolio in which expenses are incurred. The
Lehman Brothers Aggregate Index is made up of the Government/Corporate
Index, the Mortgage-Backed Securities Index, and the Asset-Backed
Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are
adjusted to reflect reinvestment of interest and dividends on securities
in the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance. This index
represents an asset allocation of 60% S&P 500 stocks and 40% Lehman
Brothers Aggregate Bond Index.
++ Reflects operations of Mentor Balanced Portfolio Class A Shares from the
date of issuance on 9/16/98 through 9/30/98.
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Balanced Portfolio Class Y Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
[GRAPH]
9/16/98 9/30/98
Class Y 10,000 10,000
LAGG/S&P 500 10,000 10,464
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 0.00%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
** Represents a hypothetical investment of $10,000 in Mentor Balanced
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
*** Reflects operations of Mentor Balanced Portfolio Class Y Shares from the
date of issuance on 9/16/98 through 9/30/98.
56
<PAGE>
MENTOR BALANCED PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Balanced Portfolio Class B Shares, the S&P 500 and the Lehman Brothers
Aggregate Bond Index.+
[GRAPH]
S&P 500 and
Class B Class B* Lehman Brothers
Aggregate Bond Index
6/21/94 10000 10000 10000
12/31/94 10108 9610 10336
6/30/95 11561 11161 12054
9/30/95 12085 11685 12723
9/30/96 14260 13960 14506
9/30/97 18042 17842 18496
9/30/98 20181 19760 20446
Average Annual Return as of 9/30/98 Average Annual Return as of 9/30/98
Without Sales Charges Including Sales Charges
1-Year Since Inception++ 1-Year Since Inception++
Class B 11.86% 17.83% Class B 8.75% 17.69%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ Represents a hypothetical investment of $10,000 in Mentor Balanced Portfolio
Class B Shares. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares at rates ranging from a maximum of 4.00% of
amounts redeemed during the first year following the date of purchase to
1.00% of amounts redeemed during the five-year period following the date
of purchase. The value of Class B Shares reflects a redemption fee in
effect at the end of each of the stated periods. Prior to September 16,
1998, contingent deferred sales charges of 5.00% were waived. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
+ The Standard & Poor's Index (S&P 500) is an unmanaged, market-
value-weighted index of 500 widely held domestic common stocks. An
unmanaged index does not reflect expenses and may not correspond to the
performance of a managed portfolio in which expenses are incurred. The
Lehman Brothers Aggregate Index is made up of the Government/Corporate
Index, the Mortgage-Backed Securities Index, and the Asset-Backed
Securities Index. The Lehman Brothers Aggregate Bond Index and S&P 500 are
adjusted to reflect reinvestment of interest and dividends on securities
in the indexes. The Lehman Brothers Aggregate Bond Index and S&P 500 are
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance. This index
represents an asset allocation of 60% S&P 500 stocks and 40% Lehman
Brothers Aggregate Bond Index.
++ Reflects operations of Mentor Balanced Portfolio Class B Shares from the
date of commencement of operations on 6/21/94 through 9/30/98.
* Includes maximum Contingent Deferred Sales Charge (CDSC) of 5%.
57
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 51.46%
BASIC MATERIALS - 1.89%
Emerson Electric Company 3,890 $ 242,152
---------
CAPITAL GOODS & CONSTRUCTION - 5.56%
Bemis Company 6,245 218,966
Illinois Tool Works 4,635 252,607
W. W. Grainger, Inc. 5,730 241,377
---------
712,950
---------
CONSUMER CYCLICAL - 8.42%
Chancellor Media Corporation -
Class A * 5,245 175,052
Clear Channel Communications * 4,445 211,137
Gannett Company 4,105 219,874
Interpublic Group Companies, Inc. 4,335 233,819
Newell Company 5,220 240,446
---------
1,080,328
---------
CONSUMER STAPLES - 5.52%
Philip Morris Companies, Inc. 4,840 222,942
Sherwin-Williams Company 11,285 244,038
Sysco Corporation 10,235 241,162
---------
708,142
---------
FINANCIAL - 10.84%
Ahmanson (HF) & Company 3,950 219,225
American Express Company 2,860 222,007
Federal National Mortgage Association 3,510 225,517
NationsBank Corporation 2,990 159,965
Norwest Corporation 4,495 160,977
UNUM Corporation 4,720 234,525
SouthTrust Corporation 4,800 167,700
---------
1,389,916
---------
HEALTH - 6.95%
Bristol-Myers Squibb Company 2,345 243,587
HealthSouth Corporation * 18,340 193,716
Johnson & Johnson 2,805 219,492
Tenet Healthcare Corporation * 8,170 234,888
---------
891,683
---------
TECHNOLOGY - 9.20%
Automatic Data Processing 3,190 238,452
Computer Associates International, Inc. 6,770 250,490
Computer Sciences Corporation 4,145 225,903
MCI WorldCom, Inc. * 4,685 228,980
Sun Microsystems, Inc. * 4,725 235,364
---------
1,179,189
---------
TRANSPORTATION & SERVICES - 1.16%
Werner Enterprises, Inc. 9,472 149,184
---------
MISCELLANEOUS - 1.92%
Tyco International, Inc. 4,445 245,586
---------
TOTAL COMMON STOCKS
(COST $6,531,760) 6,599,130
---------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
FIXED INCOME SECURITIES - 36.99%
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 34.26%
Federal National Mortgage
Association, MTN, 6.64%,
7/02/07 $ 130,000 $ 145,240
Government National
Mortgage Association, MBS,
6.50%, 5/15/09 102,065 104,453
7.00%, 8/15/28 ARM 84,047 86,674
Government National
Mortgage Association II,
ARM,
6.88%, 4/20/22 71,868 73,307
7.00%, 11/20/22 - 8/15/28 78,240 79,458
U.S. Treasury Bonds, 6.00% -
7.50%, 2/15/23 - 2/15/26 725,000 910,182
U.S. Treasury Notes, 5.63% -
6.75%, 4/30/00 - 5/15/08 2,790,000 2,995,171
---------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $4,274,484) 4,394,485
---------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 1.22%
AFG Receivables Trust, 6.65%,
10/15/02 32,527 32,782
CS First Boston, 7.18%,
2/25/18 25,000 26,800
Key Auto Finance Trust Series
1997-2 Class A3, 6.10%,
11/15/00 50,000 50,172
Union Acceptance Corporation,
6.48%, 5/10/04 45,000 46,240
---------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $152,201) 155,994
---------
CORPORATE BONDS - 1.51%
Ford Motor Credit Company,
7.20%, 6/15/07 45,000 50,256
Norwest Corporation, 6.80%,
5/15/02 60,000 63,625
PNC Student Loan Trust I,
6.73%, 1/25/07, ARM 75,000 79,726
---------
TOTAL CORPORATE BONDS
(COST $181,746) 193,607
---------
TOTAL FIXED INCOME SECURITIES
(COST $4,608,431) 4,744,086
---------
</TABLE>
58
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT
REPURCHASE AGREEMENT - 0.98%
Goldman Sachs & Company
Dated 09/30/98, 5.60%, due
10/01/98, collateralized by
$127,262 Federal National
Mortgage Association,
6.00%, 08/01/13, market
value $128,534
(cost $125,344) $125,344 $ 125,344
-----------
TOTAL INVESTMENTS
(COST $11,265,535)-89.43% 11,468,560
OTHER ASSETS LESS
LIABILITIES - 10.57% 1,352,413
-----------
NET ASSETS - 100.00% $12,820,973
===========
</TABLE>
* Non-income producing.
ARM - Adjustable Rate Mortgage
MBS - Mortgage Backed Securities
MTN - Medium Term Note
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $11,028,839 and $3,760,750, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $11,265,535. Net unrealized appreciation aggregated
$203,025, of which $449,651, related to appreciated investment securities and
$246,626, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value
(Note 2)
Investment securities $ 11,343,216
Repurchase agreements 125,344
------------
Total investments
(cost $11,265,535) 11,468,560
Collateral for securities loaned
(Note 2) 2,639,420
Cash 477,253
Receivables
Investments sold 90,763
Fund shares sold 3,356,473
Dividends and interest 68,997
------------
TOTAL ASSETS 18,101,466
------------
LIABILITIES
Investments purchased $ 2,537,038
Securities loaned (Note 2) 2,639,420
Fund shares redeemed 100,000
Accrued expenses and other
liabilities 4,035
-----------
TOTAL LIABILITIES 5,280,493
------------
NET ASSETS $12,820,973
============
Net Assets represented by:
(Note 2)
Additional paid-in capital $ 12,530,663
Accumulated undistributed net
investment income 18,259
Accumulated net realized gain
on investment transactions 69,026
Net unrealized appreciation of
investments 203,025
------------
NET ASSETS $ 12,820,973
============
NET ASSET VALUE PER SHARE
Class A Shares $ 13.69
Class B Shares $ 13.69
Class Y Shares $ 13.69
OFFERING PRICE PER SHARE
Class A Shares $ 14.53(a)
Class B Shares $ 13.69
Class Y Shares $ 13.69
SHARES OUTSTANDING
Class A Shares 258,246
Class B Shares 412,394
Class Y Shares 266,111
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 29,221
Interest 104,135
--------
Total investment income
(Note 2) 133,356
--------
EXPENSES
Management fee (Note 4) $ 31,721
Distribution fee (Note 5) 30,319
Shareholder service fee (Note 5) 10,212
Administration fee (Note 4) 4,219
Custodian and accounting fees 5,842
Registration expenses 2,363
Shareholder reports and postage
expenses 2,043
Legal fees 115
Directors' fees and expenses 60
Audit fees 59
Miscellaneous 465
--------
Total expenses 87,418
Deduct
Waiver of distribution fee (Note 5) (29,451)
Waiver of management fee
(Note 4) (20,856)
Waiver of shareholder servicing
fee (Note 5) (9,738)
Waiver of administration fee
(Note 4) (4,219)
--------
NET EXPENSES 23,154
--------
NET INVESTMENT INCOME 110,202
--------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on investments
(Note 2) 822,291
Change in unrealized appreciation
on investments (583,942)
--------
NET GAIN ON INVESTMENTS 238,349
--------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $348,551
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 110,202 $ 107,324
Net realized gain on investments 822,291 408,111
Change in unrealized appreciation on investments (583,942) 397,175
------------ -----------
Increase in net assets resulting from operations 348,551 912,610
------------ -----------
Distributions to Shareholders
From net investment income (159,807) (108,705)
From net realized gain on investments (1,140,442) (449,369)
------------ -----------
Total distributions to shareholders (1,300,249) (558,074)
------------ -----------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 9,280,672 108,705
Reinvested distributions 1,300,249 449,370
Shares redeemed (910,125) (636,137)
------------ -----------
Change in net assets resulting from capital share transactions 9,670,796 (78,062)
------------ -----------
Increase in net assets 8,719,098 276,474
Net Assets
Beginning of period 4,101,875 3,825,401
------------ -----------
End of period (including accumulated undistributed net investement
income of $18,259 and $67,864, respectively) $ 12,820,973 $ 4,101,875
============ ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69
--------
Income from investment operations
Net investment income 0.00**
Net realized and unrealized gain (loss) on
investments 0.00**
----------
Total from investment operations 0.00**
----------
Net asset value, end of period $ 13.69
==========
TOTAL RETURN* 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,534
Ratio of expenses to average net assets 1.35% (a)
Ratio of net investment income to average net
assets 1.52% (a)
Portfolio turnover rate 89%
Average commission rate on portfolio
transactions $ 0.0687
</TABLE>
(a) Annualized.
(b) For the period from September 16, 1998 (initial offering of Class A) to
September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
** Income for the period was less than $0.005 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES (F)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 17.61 $ 16.28 $ 14.85
--------- --------- ---------
Income from investment operations
Net investment income 0.45 0.43 0.42
Net realized and unrealized gain (loss) on
investments 1.43 3.35 2.09
--------- --------- ---------
Total from investment operations 1.88 3.78 2.51
--------- --------- ---------
Less distributions
From net investment income (0.71) (0.43) (0.48)
From net realized capital gain (5.09) (2.02) (0.60)
---------- ---------- ----------
Total distributions (5.80) (2.45) (1.08)
---------- ---------- ----------
Net asset value, end of period $ 13.69 $ 17.61 $ 16.28
========== ========== ==========
TOTAL RETURN* 11.86% 26.09% 18.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 5,645 $ 4,102 $ 3,825
Ratio of expenses to average net assets 0.52% 0.50% 0.50%
Ratio of expenses to average net assets excluding
waiver 2.12% 2.13% 2.06%
Ratio of net investment income to average net assets 2.63% 2.78% 2.83%
Portfolio turnover rate 89% 80% 103%
Average commission rate on portfolio transactions $ 0.0687 $ 0.0696 $ 0.0694
<CAPTION>
PERIOD ENDED PERIOD ENDED
9/30/95 (c) 12/31/94 (d)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.44 $ 12.50
----------- -----------
Income from investment operations
Net investment income 0.36 0.22
Net realized and unrealized gain (loss) on
investments 2.08 (0.09)
----------- -----------
Total from investment operations 2.44 0.13
----------- -----------
Less distributions
From net investment income (0.03) (0.19)
From net realized capital gain -- --
----------- -----------
Total distributions (0.03) (0.19)
----------- -----------
Net asset value, end of period $ 14.85 $ 12.44
=========== ===========
TOTAL RETURN* 19.28% 1.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,210 $ 2,911
Ratio of expenses to average net assets 0.50% (a) 0.50% (a)
Ratio of expenses to average net assets excluding
waiver 2.12% (a) 2.72% (a)
Ratio of net investment income to average net assets 3.26% (a) 3.32% (a)
Portfolio turnover rate 65% 71%
Average commission rate on portfolio transactions
</TABLE>
CLASS Y SHARES (f)
<TABLE>
<CAPTION>
PERIOD
ENDED 9/30/98 (e)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69
--------
Income from investment operations
Net investment income 0.01
Net realized and unrealized loss on investments (0.01)
---------
Total from investment operations 0.00
---------
Net asset value, end of period $ 13.69
=========
TOTAL RETURN* 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,642
Ratio of expenses to average net assets 1.10%(a)
Ratio of net investment income to average net assets 2.31%(a)
Portfolio turnover rate 89%
Average commission rate on portfolio transactions $ 0.0687
</TABLE>
(a) Annualized.
(c) For the period from January 1, 1995 to September 30, 1995.
(d) For the period from June 21, 1994 (commencement of operations) to December
31, 1994.
(e) For the period from September 16, 1998 (initial offering of Class Y) to
September 30, 1998.
(f) Prior to September 16, 1998, all shareholders of the Balanced Portfolio
were Class B shareholders. On September 16, 1998, shares of Class B were
converted to Class Y shares.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE TAX-EXEMPT MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
ECONOMIC FACTORS
Unlike many countries in the world, the U.S. economy was strong throughout the
reporting period, characterized by record low unemployment, good growth and low
inflation. Driving economic growth in recent months has been the strength in
the housing market, which benefited from strong employment and low interest
rates. Housing starts in July 1998 reached an all-time high, 17% above the same
period a year ago. While the housing market has been largely insulated from the
overseas financial crises, the manufacturing sector has begun to show signs of
a slowdown. In April, the National Association of Purchasing Management Index
slipped from 54.8 to 52.9. This Index, which compares the changes in various
market areas on a month to month basis, is a widely recognized measure of
manufacturing activity. By June, the Index fell to 49.6, below the 50% level
that marks the difference between growth and contraction.
The news that manufacturing activity was slowing down was welcomed by the
Federal Reserve. In part, this eliminated the need for the Fed to raise
interest rates to head off inflation, which was the market's concern through
the July meeting. In early August, the Fed concluded that the risks of
inflation were evenly balanced against the risks of recession. By September,
however, it appeared that recession was more of a concern given the declines in
the Japanese stock market, the financial collapse of Russia, and the large
drops in the U.S. stock market. As a result the Fed lowered the Fed Funds
target by 25 basis points to 5.25% in late September.
The Fed is in the difficult position of having to set U.S. policy based on
international factors. With the prices of gold and oil recovering from their
lows, the disinflationary effects of declining commodity prices may be coming
to an end. Continued low inflation appears to be fostering higher wage demands.
If world financial markets can be stabilized, the Fed could find that the
balance of risks might shift just as quickly back toward inflation.
MARKET REVIEW
While we saw several periods of volatility during the past 12 months, overall
the market rallied, with U.S. Treasuries strongly outperforming the municipal
market. The 30-year Treasury, which began the reporting period yielding 6.40%,
ended 143 basis point lower at 4.97%. 30-year AAA-rated general obligation
municipals yielded 5.17% one year ago, dropping to 4.78% one year later.
The divergent paths taken by the treasury and municipal markets can be
primarily attributed to the impact of the Asian financial crisis. As problems
in Asia have continued and the U.S. dollar has risen relative to Asian
currencies, demand for treasuries has increased. This "flight to quality" has
driven the yield on the long bond down to the lowest levels seen since the
government began issuing the 30-year bond in 1977. At the same time, surpluses
of the federal government have caused a reduction in issuance resulting in
fewer bonds to meet strong demand.
Technical conditions have been exactly the opposite in the tax-exempt market,
with lukewarm retail demand due to low absolute yields and a strong increase in
supply from a year ago. Although new issue volume has slowed somewhat in the
past couple of months, year-to-date issuance is 37% over the comparable period
a year ago. In addition to encouraging the number of refunding issues (up
63
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE TAX-EXEMPT MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
59%), the low interest rate environment has also boosted new money issues which
are up 20% year to date. As has been the trend in recent years, over 51% of new
securities were issued with bond insurance, and yield spreads between quality
and lower rated bonds remained tight.
Since municipal prices did not rise as sharply as taxable securities during the
period, tax-exempt yields are now very attractive relative to treasuries. At
the end of the reporting period, the Bond Buyer Revenue Bond Index yielded
5.17% or 104% of 30-year treasuries, even before taking into consideration any
tax advantage. The Revenue Bond Index consists of 25 revenue bonds with a
30-year maturity and an average rating of A1. The bonds that comprise this
index are very similar to those we purchase for your Portfolio.
MANAGEMENT STRATEGY
Our outlook during most of the reporting period was positive, and we maintained
duration slightly long relative to our benchmark to allow the fund to take full
advantage of the rally. At the end of the fiscal year, the duration of the
portfolio was 7.82 years compared to the Lehman Municipal Bond Index duration
of 7.55 years.
The high percentage of new issues that came to market insured continued to
create a scarcity of lower-rated higher-yielding offerings. This resulted in
continued tight yield spreads between AAA-rated and lower quality paper. While
we did add a number of non-rated or lower-rated securities to the portfolio, we
concentrated more on insured offerings as we felt they offered more attractive
relative yields. The lower quality securities we selectively added helped
maximize the portfolio's dividend paying ability.
We kept the portfolio well diversified by industry, increasing our positions in
the healthcare and industrial revenue sectors, which traditionally have
performed slightly stronger than other sectors in the Revenue Bond Index. At
the end of the reporting period, our exposure to healthcare stood at 21% of
assets, with industrial revenue the second largest sector at 13% of assets. Our
research expertise in these two areas allows us to find value in individual
issues.
OUTLOOK
The Federal Reserve's recent 25 basis point interest rate cut and the slowing
down of the U.S. economy are likely to sustain the low interest rate
environment, which is favorable for the bond markets. It appears that we will
see a record year of municipal issuance as the low absolute yields spark
further refundings as well as new money issues.
We are satisfied with the current structure of the portfolio and do not expect
to make any major changes over the next few months unless credit spreads widen
between AAA-rated and lower-rated issues. If that occurs, we would redeploy
some assets toward higher-yielding securities to strengthen the portfolio's
dividend. We also continue to closely monitor those securities that are
vulnerable to calls and to extend the call protection of the portfolio.
Combined with the recent declines in the equity market, the very attractive
ratio of municipal yields to taxable yields could turn investor focus from
stocks to the fixed-income market.
November 1998
64
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Municipal Income Portfolio Class A and Class B Shares and Lehman Municipal Bond
Index.~
[GRAPH]
A Shares B Shares Lehman Municipal
Bond Index
4/29/92 9525 10000 10000
9/30/92 10034 10528 10561
9/30/93 11637 12134 11906
9/30/94 11101 11511 11616
9/30/95 12151 12348 12916
9/30/96 12935 13184 13818
9/30/97 14085 14291 14933
9/30/98 15245 15289 16232
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year Since Inception*
Class A 3.12% 4.53% 6.79%
Class B 3.70% 4.85% 6.90%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The value of Class B Shares reflects a redemption
fee in effect at the end of each stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class A Shares, after deducting the maximum sales charge of
4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
* Reflects operations of Mentor Municipal Income Portfolio Class A and Class
B Shares from the date of commencement of operations on 4/29/92 through
9/30/98.
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Municipal Income Portfolio Class Y Shares and Lehman Municipal Bond Index.-
[GRAPH]
Y Shares Lehman Municipal
Bond Index
11/19/97 10000 10000
12/31/97 10147 10206
3/31/98 10263 10323
6/30/98 10410 10480
9/30/98 10689 10802
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 7.51%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance
assumes the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Municipal Income Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 9/30/98.
65
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES - 99.42%
ARIZONA - 1.56%
Pima County Arizona IDA,
7.25%, 7/15/10 (c) $1,550,000 $ 1,733,830
-------------
ARKANSAS - 1.12%
Pulaski County Health
Facilities, 5.00%, 12/01/28 1,250,000 1,248,950
-------------
CALIFORNIA - 10.51%
California State Water Reserve
Center, 4.75%, 12/01/29 3,500,000 3,427,270
California Statewide
Community Development
Authority, 5.63%, 10/01/34 2,070,000 2,132,514
Carson Improvement Board Act
1915, Special Assessment
District 92, 7.38%, 9/02/22 700,000 770,392
East Bay Municipal Utility
District, 4.75%, 6/01/21 1,915,000 1,887,424
Orange County Community
Facilities District, Series A,
7.35%, 8/15/18 (c) 300,000 346,779
San Francisco City & County
Airport, 6.30%, 5/01/25 1,000,000 1,101,250
University of California
Revenues, 4.75%, 9/01/16 2,000,000 2,012,240
-------------
11,677,869
-------------
COLORADO - 3.36%
Colorado Housing Authority,
7.00%, 11/01/24 525,000 560,873
Denver City & County Airport
Revenue, 7.75% - 8.50%,
11/15/13 - 11/15/23 2,700,000 3,167,089
-------------
3,727,962
-------------
CONNECTICUT - 0.99%
Connecticut State Development
Authority, 6.15%, 4/01/35 1,000,000 1,104,860
-------------
DISTRICT OF COLUMBIA - 0.80%
Metropolitan Washington,
General Airport Revenue,
Series A, 6.63%, 10/01/19 (c) 800,000 884,496
-------------
FLORIDA - 2.54%
Hillsborough County, 6.25%,
12/01/34 1,250,000 1,396,750
Sarasota County Health
Facilities Authority Revenue,
10.00%, 7/01/22 1,160,000 1,418,831
-------------
2,815,581
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
GEORGIA - 2.92%
Fulton County Georgia
Housing Authority
Multifamily, Housing
Revenue, 6.38%, 2/01/08 $ 520,000 $ 528,346
George Smith World Congress
Center, 5.50%, 7/01/20 1,500,000 1,509,345
Monroe County Development
Authority PCRB, 6.75%,
1/01/10 1,000,000 1,205,240
-------------
3,242,931
-------------
ILLINOIS - 9.53%
Broadview Tax Increment
Revenue, 8.25%, 7/01/13 1,000,000 1,145,030
Chicago Capital Appreciation,
(effective yield-1.99%) (a),
7/01/16 2,000,000 718,080
Chicago Heights Residential
Mortgage, (effective
yield-3.29%) (a), 6/01/09 3,465,000 1,655,300
Illinois Health Facilities
Authority Revenue, 5.50% -
9.50%, 11/15/19 - 10/01/22 2,250,000 2,527,477
Illinois Educational Facilities
Authority Revenue, 6.00%,
10/01/24 1,000,000 1,042,200
Kane County School District
No. 129, 5.50%, 2/01/11 2,000,000 2,167,620
Metropolitan Pier &
Exposition, (effective
yield-1.39%) (a), 6/15/21 1,950,000 644,962
Saint Clair County Public
Building, (effective
yield-1.99%) (a), 12/01/16 1,650,000 690,789
-------------
10,591,458
-------------
INDIANA - 0.36%
Indiana Transportation Finance
Authority, Series A, (effective
yield-1.92%) (a), 6/01/17 1,000,000 403,560
-------------
IOWA - 0.61%
Student Loan Liquidity
Corporation, Student Loan
Revenue, Series C, 6.95%,
3/01/06 (c) 625,000 674,525
-------------
</TABLE>
66
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
KENTUCKY - 4.58%
Jefferson County Hospital
Revenue, 8.70%,
10/01/08 (b) $ 500,000 $ 599,375
Kenton County Airport Board
Revenue, OID, 7.50%,
2/01/20 1,400,000 1,546,342
Warren County Hospital
Facility Revenue Bowling
4.88%, 4/01/27 3,000,000 2,945,580
----------
5,091,297
----------
LOUISIANA - 3.38%
Louisiana Public Facilities
Authority Revenue, Dillard
University-Louisiana, 5.00%,
2/01/28 2,750,000 2,755,720
Louisiana State University &
Agriculture and Mechanical
College, University Revenues,
5.00%, 10/01/30 1,000,000 1,001,340
----------
3,757,060
----------
MAINE - 0.86%
Maine State Housing Authority,
Series C, 6.88%, 11/15/23 885,000 956,030
----------
MASSACHUSETTS - 1.92%
Massachusetts State Health and
Education, 6.00%, 10/01/23 1,000,000 1,018,850
Massachusetts State Health and
Educational Facilities
Authority, OID Revenue
Bonds, Series A, 6.88%,
4/01/22 1,000,000 1,119,950
----------
2,138,800
----------
MICHIGAN - 4.93%
Detroit Michigan Water Supply
Systems, 5.00%, 7/01/27 1,000,000 1,000,310
Grand Traverse County
Hospital, 5.00%, 7/01/28 2,500,000 2,486,375
Michigan State Hospital
Financial Authority Revenue,
5.00%, 5/15/28 2,000,000 1,995,280
----------
5,481,965
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
NEBRASKA - 1.22%
Nebraska Investment Finance
Authority, SFM, 9.42%,
9/15/24 (b) $ 300,000 $ 339,375
Nebraska Public Gas Agency
Gas supply System, 5.00%,
4/01/00 1,000,000 1,017,810
----------
1,357,185
----------
NEVADA - 2.26%
Clark County, 5.90%, 10/01/30 2,000,000 2,050,800
Henderson Local Improvement
District, Special Assessment,
Series A, 8.50%, 11/01/12 440,000 458,876
----------
2,509,676
----------
NEW JERSEY - 2.10%
East Orange County Board of
Education, Participation
Notes, (effective
yield-1.67%) (a), 2/01/20 1,000,000 365,000
New Jersey State Housing &
Mortgage Finance, 5.40%,
11/01/28 1,170,000 1,209,406
Union Utilities Authority,
5.00%, 6/15/28 750,000 757,568
----------
2,331,974
----------
NEW MEXICO - 0.92%
Santa Fe Educational Facilities
Revenue Bonds, 5.50%
3/01/24 1,000,000 1,020,210
----------
NEW YORK - 4.93%
Clifton Springs Hospital
Refunding & Improvement,
8.00%, 1/01/20 700,000 786,947
Metropolitan Transportation
Authority, 4.75%, 7/01/19 1,000,000 962,240
New York City Municipal
Water Facility, 5.13%,
6/15/21 1,000,000 1,008,300
New York, Series H, 7.20%,
2/01/13 1,500,000 1,680,946
New York State Dormitory
Authority Revenue Hospital,
5.20%, 2/15/14 1,000,000 1,034,250
----------
5,472,683
----------
</TABLE>
67
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
NORTH CAROLINA - 2.12%
Cumberland County, 5.00%,
12/01/24 $1,250,000 $1,253,875
North Carolina Eastern
Municipal Power Agency
Systems Revenue, 5.70%,
1/01/13 1,000,000 1,097,700
----------
2,351,575
----------
NORTH DAKOTA - 0.91%
Devils Lake Health Care,
6.10%, 10/01/23 1,000,000 1,012,690
----------
OHIO - 1.91%
Batavia Local School District
Reference, 5.63%,12/01/22 1,000,000 1,121,040
Cuyahoga County Health Care
Facilities, 5.50%, 12/01/28 1,000,000 1,001,990
----------
2,123,030
----------
OKLAHOMA - 0.50%
Oklahoma City, Industrial and
Cultural Facilities Trust,
6.75%, 9/15/17 540,000 551,993
----------
PENNSYLVANIA - 6.39%
Beaver County Hospital
Authority Revenue, 5.00%,
5/15/28 1,000,000 997,640
Delaware IDA, 6.20%, 7/01/19 2,000,000 2,191,040
Pennsylvania Economic
Development, 6.40%,
1/01/09 500,000 534,620
Philadelphia Gas Works
Revenue, 5.00%, 7/01/28 2,250,000 2,250,698
Philadelphia Hospital and
Higher Education Facilities,
6.50%, 11/15/08 1,000,000 1,121,430
----------
7,095,428
----------
RHODE ISLAND - 0.31%
West Warwick, Series A, GO
Bonds, 7.30%, 7/15/08 310,000 348,372
----------
SOUTH CAROLINA - 1.81%
Cayce South Carolina
Waterworks & Sewage
Revenue, 5.00%, 7/01/20 2,000,000 2,006,740
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
TENNESSEE - 3.73%
Memphis Shelby County
Airport Authority Special
Facilities Revenue Refunding,
7.88%, 9/01/09 $1,500,000 $1,675,485
Metropolitan Government
Nashville & Davidson
County, 4.75% - 5.00%,
1/01/22 - 10/01/28 2,500,000 2,472,795
----------
4,148,280
----------
TEXAS - 9.94%
Abilene Health Facilities
Development Corporation,
5.90%, 11/15/25 1,000,000 1,002,500
Alliance Airport Authority,
6.38%, 4/01/21 2,000,000 2,192,620
Brazos Higher Education
Authority Student Loan
Revenue, 7.10%, 11/01/04 416,000 472,410
Brazos River Authority
Revenue, 4.90%, 10/01/15 2,000,000 2,054,760
Dallas Fort Worth International
Airport Facility Revenue
Bonds, 7.25%, 11/01/30 1,000,000 1,112,260
Edinburg Consolidated School
District Public Facilities,
5.00%, 8/15/19 1,500,000 1,516,815
Lufkin Health Memorial East
Texas, 5.70%, 2/15/28 1,000,000 1,025,010
Rockwall Independent School
District, OID, 5.55%,
8/15/22 2,450,000 689,822
Texas State Department of
Housing and Community
Affairs Refunding, Series C,
9.74%, 7/02/24 (b) 750,000 973,125
----------
11,039,322
----------
UTAH - 3.40%
Bountiful Hospital Revenue,
9.50%, 12/15/18 230,000 281,237
Intermountain Power Agency
Power Supply, 5.00%,
7/01/19 2,500,000 2,472,225
Utah State Housing Finance
Agency, SFM, 7.20%,
1/01/27 945,000 1,025,108
----------
3,778,570
----------
</TABLE>
68
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
WEST VIRGINIA - 3.61%
Harrison County, 6.75%,
8/01/24 $2,000,000 $ 2,271,020
West Virginia State Hospital
Finance Authority Revenue,
8.80%, 1/01/18 (b) 1,500,000 1,742,445
------------
4,013,465
------------
WISCONSIN - 3.39%
Southeast Wisconsin
Professional Baseball, 5.50%,
12/15/26 2,000,000 2,229,960
Wisconsin State Health &
Educational Facility
Authority Revenues, 5.50%,
2/15/28 1,500,000 1,537,530
------------
3,767,490
------------
TOTAL LONG-TERM MUNICIPAL
SECURITIES
(COST $102,611,970) 110,459,857
------------
SHORT-TERM MUNICIPAL
SECURITIES - 2.16%
CALIFORNIA - 0.45%
California PCRB Series A,
VRDN, 3.65%, 2/28/08 500,000 500,000
------------
NEVADA - 0.54%
Reno Nevada Hospital
Revenue, VRDN, 4.10%,
5/15/23 600,000 600,000
------------
NEW YORK - 0.54%
City of New York VRDN,
4.25%, 8/01/16 200,000 200,000
New York City GO Bonds,
VRDN, 3.95%, 8/15/19 200,000 200,000
New York State Energy
Residential Housing &
Development, VRDN,
4.10%, 7/01/15 200,000 200,000
------------
600,000
------------
TEXAS - 0.45%
North Central Texas Health
Facility, Presbyterian Medical
Center, VRDN, 4.10%,
12/01/15 500,000 500,000
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM MUNICIPAL
SECURITIES (CONTINUED)
WASHINGTON - 0.18%
Washington Health Care,
Sisters of Providence, Series I,
VRDN, 4.05%, 10/01/05 $ 200,000 $ 200,000
------------
TOTAL SHORT-TERM MUNICIPAL
SECURITIES (COST $2,400,000) 2,400,000
------------
TOTAL INVESTMENTS
(COST $105,011,970)-101.58% 112,859,857
OTHER ASSETS LESS
LIABILITIES - (1.58%) (1,750,720)
------------
NET ASSETS - 100.00% $111,109,137
============
</TABLE>
INVESTMENT ABBREVIATIONS
GO - General Obligation
IDA - Industrial Development Authority
OID - Original Issue Discount
PCRB - Pollution Control Revenue Bond
SFM - Single Family Mortgage
VRDN - Variable Rate Demand Note
(a) Effective yield is the yield as calculated at time of purchase at which the
bond accretes on an annual basis until its maturity date.
(b) Represents inverse floating rate securities.
(c) A portion of this security is held as collateral for open futures
contracts.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $91,099,135 and $56,728,625, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $105,011,970. Net unrealized appreciation aggregated
$7,847,887, of which $7,847,887 is related to appreciated investment
securities.
SEE NOTES TO FINANCIAL STATEMENTS.
69
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value
(cost $105,011,970) (Note 2) $112,859,857
Cash 84,254
Receivables
Investments sold 985,674
Fund shares sold 870,855
Interest 1,685,891
-------------
TOTAL ASSETS 116,486,531
-------------
LIABILITIES
Payables
Investments purchased $4,840,799
Fund shares redeemed 60,067
Dividends 349,921
Variation margin (Note 2) 90,000
Accrued expenses and other
liabilities 36,607
----------
TOTAL LIABILITIES 5,377,394
-------------
NET ASSETS $111,109,137
=============
Net Assets represented by:
(Note 2)
Additional paid-in capital $105,840,947
Accumulated distributions in
excess of net investment
income (349,922)
Accumulated net realized loss
on investment transactions (2,004,046)
Net unrealized appreciation of
investments and open futures
contracts 7,622,158
-------------
NET ASSETS $111,109,137
=============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.99
Class B Shares $ 15.94
Class Y Shares $ 16.00
OFFERING PRICE PER SHARE
Class A Shares $ 16.79(a)
Class B Shares $ 15.94
Class Y Shares $ 16.00
SHARES OUTSTANDING
Class A Shares 3,237,676
Class B Shares 3,722,547
Class Y Shares 67
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $ 5,400,238
EXPENSES
Management fee (Note 4) $ 557,332
Distribution fee (Note 5) 257,381
Shareholder service fee (Note 5) 232,220
Transfer agent fee 102,171
Administration fee (Note 4) 92,888
Registration expenses 53,355
Custodian and accounting fees 26,161
Shareholder reports and postage
expenses 8,237
Legal fees 2,878
Directors' fees and expenses 2,275
Audit fees 1,991
Miscellaneous 9,070
---------
Total expenses 1,345,959
-----------
NET INVESTMENT INCOME 4,054,279
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, FUTURES AND
OPTIONS CONTRACTS
Net realized loss on investments,
futures and options contracts
(Note 2) (41,138)
Change in unrealized appreciation
on investments 3,077,428
---------
NET GAIN ON INVESTMENTS, FUTURES
AND OPTIONS CONTRACTS 3,036,290
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 7,090,569
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
70
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 4,054,279 $ 2,950,727
Net realized gain (loss) on investments, futures and options contracts (41,138) 548,498
Change in unrealized appreciation on investments 3,077,428 1,603,630
------------- -------------
Increase in net assets resulting from operations 7,090,569 5,102,855
------------- -------------
Distributions to Shareholders
From net investment income
Class A (1,979,908) (1,179,998)
Class B (2,308,071) (1,981,316)
Class Y (43) --
From net realized gain on investments
Class A -- (39,820)
Class B -- (66,849)
------------- -------------
Total distributions to shareholders (4,288,022) (3,267,983)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 45,477,369 25,738,018
Reinvested distributions 2,625,084 1,904,347
Shares redeemed (13,461,719) (10,560,419)
------------- -------------
Change in net assets resulting from capital share transactions 34,640,734 17,081,946
------------- -------------
Increase in net assets 37,443,281 18,916,818
Net Assets
Beginning of year 73,665,856 54,749,038
------------- -------------
End of year (including accumulated distributions in excess of net
investment income of ($349,922) and ($300,191), respectively) $ 111,109,137 $ 73,665,856
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.50 $ 15.04 $ 14.92 $ 14.42 $ 16.05
------- ------- ------- ------- -------
Income from investment operations
Net investment income 0.66 0.81 0.82 0.81 0.82
Net realized and unrealized gain
(loss) on investments 0.59 0.49 0.12 0.51 (1.54)
------- ------- ------- ------- -------
Total from investment operations 1.25 1.30 0.94 1.32 (0.72)
------- ------- ------- ------- -------
Less distributions
From net investment income (0.76) (0.81) (0.82) (0.82) (0.81)
From capital gains -- (0.03) -- - (0.10)
------- ------- ------- ------- -------
Total distributions (0.76) (0.84) (0.82) (0.82) (0.91)
------- ------- ------- ------- -------
Net asset value, end of year $ 15.99 $ 15.50 $ 15.04 $ 14.92 $ 14.42
======= ======= ======= ======= =======
TOTAL RETURN* 8.24% 8.89% 6.46% 9.46% (4.83%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $51,757 $29,394 $17,558 $20,460 $25,056
Ratio of expenses to average net assets 1.17% 1.22% 1.24% 1.43% 1.24%
Ratio of expenses to average net assets excluding waiver 1.17% 1.22% 1.24% 1.43% 1.33%
Ratio of net investment income to average net assets 4.63% 5.09% 5.47% 5.56% 5.43%
Portfolio turnover rate 62% 59% 46% 43% 87%
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
71
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.49 $ 15.05 $ 14.95 $ 14.43 $ 16.06
------- ------- ------- ------- -------
Income from investment operations
Net investment income 1.30 0.71 0.75 0.74 0.74
Net realized and unrealized gain
(loss) on investments ( 0.14) 0.52 0.11 0.52 ( 1.54)
------- ------- ------- ------- -------
Total from investment operations 1.16 1.23 0.86 1.26 ( 0.80)
------- ------- ------- ------- -------
Less distributions
From net investment income ( 0.71) ( 0.71) ( 0.76) ( 0.74) ( 0.73)
From capital gains -- ( 0.08) -- ( 0.10)
------- ------- ------- -------
Total distributions ( 0.71) ( 0.79) ( 0.76) ( 0.74) ( 0.83)
------- ------- ------- ------- -------
Net asset value, end of year $ 15.94 $ 15.49 $ 15.05 $ 14.95 $ 14.43
======= ======= ======= ======= =======
TOTAL RETURN* 7.70% 8.33% 5.87% 9.01% ( 5.34%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $59,351 $44,272 $37,191 $39,493 $46,157
Ratio of expenses to average net assets 1.67% 1.72% 1.74% 1.92% 1.74%
Ratio of expenses to average net assets excluding waiver 1.67% 1.72% 1.74% 1.92% 1.86%
Ratio of net investment income to average net assets 4.13% 4.60% 4.95% 5.07% 4.93%
Portfolio turnover rate 62% 59% 46% 43% 87%
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.51
--------
Income from investment operations
Net investment income 1.39
Net realized and unrealized loss on investments (0.23)
--------
Total from investment operations 1.16
--------
Less distributions
From net investment income (0.67)
--------
Net asset value, end of period $ 16.00
========
TOTAL RETURN* 7.51%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 0.92%(a)
Ratio of net investment income to average net assets 5.66%(a)
Portfolio turnover rate 62%
</TABLE>
(a) Annualized.
(b) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
72
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
MARKET CONDITIONS
The 12-month period ending September 30, 1998 saw a dramatic decline in the
level of interest rates across the yield curve. At quarter end, long-term
interest rates were at levels not seen since the 1960s. The 30-year Treasury
ended the quarter yielding under 5%, at 4.97%, a full 1.44% below its level at
the beginning of the period. Two-year Treasury yields saw an even more
substantial decline, falling 1.51% to 4.27% over the course of the period.
On September 29th, the Federal Reserve initiated its first monetary
intervention in over two years, a 0.25% reduction in the Federal Funds rate.
And at the end of September, the short-to-intermediate portion of the yield
curve was actually inverted, as 6-month Treasury Bills were yielding more than
5-year Treasury Bonds. This implied market expectations of future monetary
easing by the Federal Reserve, continued benign domestic inflation, and a
slowing economy.
In the past few months the market has grown increasingly concerned that a
global deflationary spiral could unfold. The IMF policy prescription of
currency devaluation coupled with tight monetary and fiscal policies appears to
be making economic conditions even worse for Korea, Indonesia, Russia, etc. The
large debt burdens and faltering growth rates of the economies under IMF
supervision have raised the specter of wide scale defaults despite IMF
intervention. Russia's August announcement that it would simultaneously devalue
the ruble and unilaterally reschedule the repayment terms of its debt brought
this fear home to many global investors. As the implicit guarantee of the IMF
loses its credibility, the emerging markets that had been relatively healthy
are being put under increasing pressure. Concerns about the credit quality of
these nations have elevated interest rates in these economies to the point
where a slowdown in economic growth is becoming inevitable. Such a global
slowdown cannot help but put significant downward pressure on U.S. growth and
inflation rates.
The U.S. has not been immune to global credit quality anxiety. The yield spread
between treasury rates and high-quality corporate bonds, a traditional measure
of credit concerns within the economy, ballooned toward quarter end to levels
not seen since the last recession. The high-yield market has come under even
more stress as investors abandon markets with any hint of credit risk. The
underperformance of spread sectors has caused leveraged investors, such as
hedge funds and real estate investment trusts, to come under severe funding
pressure. As lenders call their loans or demand more collateral, these
leveraged investors are left with few alternatives but to sell assets into an
already depressed market. These forced asset liquidations have further
depressed prices in corporate bonds and mortgage-backed securities, and in many
instances trading activity has all but ceased in many market sectors.
PERFORMANCE
For the 12-month period ending September 30, 1998, the Mentor Quality Income
Portfolio A shares returned 9.95% and the B shares 9.46%, compared to 8.30% for
its Lipper U.S. Mortgage peer group. The Mentor Short-Duration Income Portfolio
A and B shares returned 6.87% and 6.68%, respectively, exclusive of sales
charges for the 12-month period, compared to 8.04% for its Lipper
Short-Intermediate Investment Grade peer group. The period saw massive
outperformance of treasury markets as compared to corporate bonds,
73
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
mortgage-backed, asset-backed, and all other spread product securities. This
resulted in our trailing the Merrill Lynch 7-year Treasury and 3-year Treasury
Index benchmarks, which returned 15.78% and 10.03% respectively for the
12-month period.
MARKET OUTLOOK
Economic growth is almost certain to slow in the upcoming year, as the impact
of slower growth overseas and distressed domestic credit markets takes effect.
We do not, however, anticipate a recession for 1999. The United States has
ample policy alternatives to fight any slowing in the domestic economy. As
inflation has fallen, real interest rates (the nominal interest rate minus
inflation) implied by the Fed Funds rate has risen appreciably. Assuming that
the turmoil overseas will place continued downward pressure on inflation rates,
the Fed could lower Fed Funds by over 150 basis points (1.50%) and still
maintain a real interest rate higher than the historical average. Unlike Japan,
the U.S. has a healthy, well-capitalized banking system and therefore any
easing in monetary conditions will help stimulate demand. For the first time in
many decades, the current budget surplus means that an expansionary fiscal
policy could be implemented without necessarily driving up real interest rates
and therefore crowding out private investment.
Given sufficient aggressive action on the part of the Fed, a recession can be
avoided. With an easing Fed and declining inflation, the backdrop for bonds
remains positive. The market could see rates last observed in the 1950s.
Furthermore, as the Fed provides liquidity to the currently distressed credit
markets, corporate bonds and mortgage-backed securities have the potential for
significant outperformance in the upcoming year.
THE PORTFOLIOS
Our short-term strategy in this tumultuous environment has been to tilt
portfolio durations somewhat long relative to our benchmarks, as well as
weighting sector allocations more heavily toward treasury securities. Given our
long-term confidence in the U.S. economy we are waiting for an opportunity to
aggressively move into domestic spread sectors. Prior to such a move, we will
have to be convinced that these markets have stabilized. In our opinion such
stabilization will require the Fed to continue to move forcefully to further
ease credit conditions.
The primary risk we see to our outlook is timing. The U.S. economy has
tremendous forward momentum and the current yield curve is already pricing in
an aggressive Fed ease. Should events unfold more slowly than the market hopes,
the bond market could encounter some short-term turbulence. We would view these
sell-offs as short term in nature and would utilize the higher yield levels to
extend our duration further.
November 1998
74
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Quality Income Portfolio Class A and Class B Shares and the Merrill Lynch
7-Year Treasury Index.~
[GRAPH]
A Shares B Shares Merrill Lynch
7-Year Treasury
Index
4/29/92 9525 10000 10000
9/30/92 9846 10324 11041
9/30/93 10378 10827 12345
9/30/94 10036 10406 11721
9/30/95 11222 11585 13533
9/30/96 11681 11999 14043
9/30/97 12833 13113 15388
9/30/98 14110 14071 17815
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year 5-Year Since Inception+++
Class A 4.71% 5.31% 5.51%
Class B 5.46% 5.65% 7.14%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Merrill Lynch 7-Year Treasury Index is adjusted to reflect
reinvestment of interest on securities in the index. The Merrill Lynch
7-Year Treasury Index is not adjusted to reflect sales loads, expenses, or
other fees that the SEC requires to be reflected in the Portfolio's
performance.
+ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The value of Class B Shares reflects a redemption
fee in effect at the end of each of the stated periods. The Class B
Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class A Shares, after deducting the maximum sales charge of
4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
+++ Reflects operations of Mentor Quality Income Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
9/30/98.
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Quality Income Portfolio Class Y Shares and the Merrill Lynch 7-Year Treasury
Index.~
[GRAPH]
Y Shares Merrill Lynch
7-Year Treasury
Index
11/19/97 10000 10000
12/31/97 10038 10142
3/31/98 10144 10311
6/30/98 10378 10562
9/30/98 10869 11364
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 8.94%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Quality Income Portfolio Class Y Shares from
the date of issuance on 11/19/97 through 9/30/98.
75
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class A Shares and the Merrill Lynch 3-Year
Treasury.~
[GRAPH]
Class A 3-Year Treasury
6/16/95 9900 10000
9/30/95 9931 10139
9/30/96 10532 11038
9/30/97 11304 11571
9/30/98 12093 12732
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception**
Class A 5.89% 5.94%
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class B Shares and Merrill Lynch 3-year
Treasury.~
[GRAPH]
Class B 3-Year Treasury
4/29/94 10000 10000
12/31/94 10093 10075
9/30/95 10623 ` 11051
9/30/96 11225 11709
9/30/97 12125 12600
9/30/98 12945 13053
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception++
Class B 2.68% 5.52%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. It is not adjusted to reflect
sales loads, expenses, or other fees that the SEC requires to be reflected
in the Portfolio's performance. The Portfolio invests in securities other
than Treasuries.
* Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class A Shares, after deducting the maximum sales charge
of 1.00% ($10,000 investment minus $100 sales charges = $9,900. The Class
A Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class A from
the date of issuance on 6/16/95 through 9/30/98.
+ Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class B Shares. A contingent deferred sales charge will
be imposed, if applicable on Class B Shares at rates ranging from a
maximum of 4.00% of amounts redeemed during the first year following the
date of purchase to 1.00% of amounts redeemed during the six-year period
following the date of purchase. The value of Class B Shares reflects a
redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
++ Reflects operations of Mentor Short-Duration Income Portfolio Class B Shares
from the date of commencement of operations on 4/29/94 through 9/30/98.
76
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of hypothetical $10,000 purchase in Mentor
Short-Duration Income Portfolio Class Y Shares and the Merrill Lynch 3-Year
Treasury.~
[GRAPH]
Class Y 3-Year Treasury
11/19/97 10000 10000
12/31/97 10032 10081
3/31/98 10167 10239
6/30/98 10317 10413
9/30/98 10638 10875
Total Returns as of 9/30/98
1-Year Since Inception**
Class Y n/a 6.64%
~ The Merrill Lynch 3-Year Treasury Index is adjusted to reflect
reinvestment of interest on securities in the index. It is not adjusted to
reflect sales loads, expenses, or other fees that the SEC requires to be
reflected in the Portfolio's performance. The Portfolio invests in
securities other than Treasuries.
* Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class Y Shares. These shares are not subject to any sales
or contingent deferred sales charges. The Class Y Shares' performance
assumes the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class Y from
the date of issuance on 11/19/97 through 9/30/98.
77
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM INVESTMENTS - 143.47%
PREFERRED STOCK - 2.11%
Home Ownership Funding
Corporation (cost
$3,939,796) $4,350,000 $ 4,373,725
-----------
ASSET-BACKED SECURITIES - 7.61%
Advanta Mortgage Loan
Trust, Series 1993-4,
5.55%, 3/25/10 - 1/25/25 1,960,695 1,985,118
AFG Receivables Trust,
7.00%, 2/15/03 (a) 1,250,918 1,260,091
CS First Boston, Series
1996-2 A6, 7.18%, 2/25/18 6,500,000 6,968,124
Equifax Credit Corporation,
Series 1994-1 B, 5.75%,
3/15/09 1,504,448 1,509,739
Fifth Third Bank Auto
Grantor Trust, 6.20%,
9/15/01 702,998 706,572
NASCOR, Series 1997-18,
6.75%, 12/25/27 2,587,927 2,697,132
Old Stone Credit Corporation
Home Equity Trust, Series
1993-1 B1, 6.00%, 3/15/08 624,707 630,054
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $14,997,748) 15,756,830
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 102.27%
Federal Home Loan
Mortgage Corporation
6.50%, Series 1647B,
11/15/08, REMIC 3,263,696 3,263,696
6.00%, Series 1693Z,
3/15/09, REMIC 6,116,037 6,218,120
6.50%, Series 26C, 7/25/18 7,000,000 7,241,864
Federal National Mortgage
Association 6.50%,
5/18/28 2,992,041 2,977,081
6.00% - 6.50%, 9/25/08 -
8/01/28 68,855,587 69,140,559
Government National
Mortgage Association
7.00%, 12/15/08 2,974,460 3,094,571
6.00% - 7.00%, 3/15/28 -
8/15/28 44,411,497 45,459,522
Government National
Mortgage Association II
4.50% - 7.00%, 4/20/22 -
1/20/28 7,152,832 7,209,007
U.S. Treasury Bonds, 6.13%,
11/15/27 8,600,000 9,909,178
U.S. Treasury Notes, 5.38% -
5.63% 7/31/00 - 5/15/08 53,650,000 57,369,396
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $205,742,125) 211,882,994
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 11.63%
Capital One Bank, 7.15% -
7.20%, 7/19/99 - 9/15/06 $4,750,000 $ 4,948,018
Ford Capital, 9.88%, 5/15/02 2,525,000 2,929,000
Lehman Brothers Holdings,
8.50%, 5/01/07 3,000,000 3,345,159
Lehman Brothers, Inc.,
7.50%, 8/01/26 3,500,000 3,635,943
ReliaStar Financial
Corporation, 6.63%,
9/15/03 5,000,000 5,259,300
Salomon, Inc., 7.30%,
5/15/02 2,000,000 2,140,834
United Dominion Realty,
7.07%, 11/15/06 1,700,000 1,827,512
-----------
TOTAL CORPORATE BONDS
(COST $23,143,699) 24,085,766
-----------
MISCELLANEOUS - 0.97%
CSC Holdings, Inc., 7.25%,
7/15/08 1,000,000 1,007,239
Playtex Family Production
Corporation, 9.00%,
12/15/03 1,000,000 1,007,685
-----------
TOTAL MISCELLANEOUS
(COST $2,024,403) 2,014,924
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 14.75%
Chase Mortgage Finance
Corporation, Series
1993-L2 M, 7.00%,
10/25/24 2,958,977 3,113,602
Equifax Credit Corporation,
Series 1998-2, 6.16%,
4/15/08 2,370,000 2,407,761
General Electric Capital
Mortgage Services, Inc.,
Series 1993-18 B1, 6.00%,
2/25/09 1,924,384 1,946,511
General Electric Capital
Mortgage Services, Inc.,
Series 1998-11, 6.50% -
7.00%, 1/25/13 - 1/25/28 4,607,307 4,786,961
Key Auto Finance Trust,
6.15%, 10/15/01 1,500,000 1,513,112
NASCOR, Series 1996-2
Class M, 7.00%, 9/25/11 1,751,689 1,855,812
Prudential Home, Series
1995-5 B1, 7.25%,
9/25/25 (a) 1,453,140 1,515,504
Prudential Home, Series
1995-5 M, 7.25%, 9/25/25 2,562,369 2,667,547
Prudential Home, Series
1995-7 M, 7.00%,
11/25/25 2,813,484 2,959,016
</TABLE>
78
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Prudential Home, Series
1996-4 M, 6.50%, 4/25/26 $5,172,223 $ 5,342,964
Prudential Home, Series
1996-8 M, 6.75%, 6/25/26 2,340,523 2,448,236
------------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(COST $28,983,412) 30,557,026
------------
RESIDUAL INTERESTS (A) - 4.13%
Capital Mortgage Funding I,
Inc., 1998-1, 1/22/27 43,831 689,073
General Mortgage Securities
II, Inc., 1995-1, 1998,
6/25/20 14,918 419,119
General Mortgage Securities
II, Inc., 1995-4, 1998,
6/25/23 8,768 397,338
General Mortgage Securities
II, Inc., 1997-4, 1998,
5/20/22 11,724 506,284
General Mortgage Securities
II, Inc., 1997-5, 1998,
7/20/23 23,164 735,034
National Mortgage Funding I,
Inc., 1995-4, 1998, 3/20/21 7,182 127,547
National Mortgage Funding I,
Inc., 1997-6, 9/20/21 32,943 640,712
National Mortgage Funding I,
Inc., 1997-7, 7/20/22 35,133 648,314
National Mortgage Funding I,
Inc., 1997-9, 10/20/24 25,739 632,940
National Mortgage Funding I,
Inc., 1997-10, 10/20/24 34,246 475,067
National Mortgage Funding I,
Inc., 1998-1, 10/20/22 17,335 440,254
National Mortgage Funding I,
Inc., 1998-2, 10/20/23 19,397 462,999
National Mortgage Funding I,
Inc., 1998-3, 11/20/23 19,847 469,598
National Mortgage Funding I,
Inc., 1998-5, 11/25/22 7,274 381,156
National Mortgage Funding I,
Inc., 1998-8, 5/20/24 34,593 498,670
National Mortgage Funding I,
Inc., 1998-9, 11/20/22 28,893 502,352
National Mortgage Funding I,
Inc., 1998-10, 1/20/23 17,413 540,932
------------
TOTAL RESIDUAL INTERESTS
(COST $9,933,404) 8,567,389
------------
297,238,654
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT - 0.67%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%, due
10/01/98, collateralized by
$1,417,776 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$1,431,511
(cost $1,399,604) $1,399,604 $ 1,399,604
---------- ------------
TOTAL INVESTMENTS
(COST $290,164,191) -144.14%
$298,638,258
OTHER ASSETS LESS
LIABILITIES - (44.14%) (91,456,993)
------------
NET ASSETS - 100.00% $207,181,265
============
</TABLE>
INVESTMENT ABBREVIATIONS
ARM - Adjustable Rate Mortgage
MBS - Mortgage-Backed Security
REMIC - Real Estate Mortgage Investment Conduit
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4 (2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $426,685,104 and $225,275,749, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $290,164,191. Net unrealized appreciation aggregated
$8,474,067, of which $9,931,057, related to appreciated investment securities
and $1,456,990, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
79
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $297,238,654
Repurchase agreements 1,399,604
------------
Total investments
(cost $290,164,191) 298,638,258
Collateral for securities
loaned (Note 2) 1,605,500
Cash 118,918
Receivables
Fund shares sold 1,324,653
Dividends and interest 2,790,157
Other assets 35,189
------------
TOTAL ASSETS 304,512,675
------------
LIABILITIES
Payables
Securities loaned (Note 2) $ 1,605,500
Reverse repurchase
agreement 94,533,000
Fund shares redeemed 101,673
Dividends 923,573
Accrued expenses and other
liabilities 167,664
-----------
TOTAL LIABILITIES 97,331,410
------------
NET ASSETS $207,181,265
============
Net Assets represented by: (Note 2)
Additional paid-in capital $213,925,048
Accumulated distributions
in excess of net
investment income (923,573)
Accumulated net realized
loss on investment
transactions (14,294,277)
Net unrealized appreciation
of investments 8,474,067
------------
NET ASSETS $207,181,265
============
NET ASSET VALUE PER SHARE
Class A Shares $ 13.61
Class B Shares $ 13.61
Class Y Shares $ 13.69
OFFERING PRICE PER SHARE
Class A Shares $ 14.29(a)
Class B Shares $ 13.61
Class Y Shares $ 13.69
SHARES OUTSTANDING
Class A Shares 6,927,132
Class B Shares 8,297,359
Class Y Shares 80
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (b) (Note 2) $ 11,610,166
EXPENSES
Management fee (Note 4) $ 1,025,941
Distribution fee (Note 5) 467,042
Shareholder service fee
(Note 5) 427,474
Transfer agent fee 212,090
Administration fee (Note 4) 174,343
Registration expenses 84,362
Custodian and accounting fees 34,008
Shareholder reports and
postage expenses 24,577
Legal fees 5,369
Directors' fees and expenses 4,244
Audit fees 3,715
Miscellaneous 16,925
-----------
Total expenses 2,480,090
Deduct
Waiver of management fee
(Note 4) (204,530)
------------
NET INVESTMENT INCOME 9,334,606
------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND
INTEREST-RATE SWAP CONTRACTS
Net realized gain on
investments and
interest-rate swap contracts
(Note 2) 713,191
Change in unrealized
appreciation on investments 6,558,180
-----------
NET GAIN ON INVESTMENTS AND
INTEREST-RATE SWAP CONTRACTS 7,271,371
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 16,605,977
============
</TABLE>
(b) Net of interest expense of $1,961,350 ($921,496 related to interest-
rate swaps and $1,039,854 related to borrowings).
SEE NOTES TO FINANCIAL STATEMENTS.
80
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 9,334,606 $ 6,390,445
Net realized gain on investments and interest-rate swap contracts 713,191 222,072
Change in unrealized appreciation on investments 6,558,180 2,224,113
------------- -------------
Increase in net assets resulting from operations 16,605,977 8,836,630
------------- -------------
Distributions to Shareholders
From net investment income
Class A (4,831,082) (2,180,277)
Class B (5,431,749) (4,210,168)
Class Y (51) -
In excess of net investment income
Class A - (150,441)
Class B - (212,242)
------------- -------------
Total distributions to shareholders (10,262,882) (6,753,128)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 106,644,051 63,942,122
Reinvested distributions 6,677,759 4,044,282
Shares redeemed (40,705,601) (21,179,174)
------------- -------------
Change in net assets resulting from capital share transactions 72,616,209 46,807,230
------------- -------------
Increase in net assets 78,959,304 48,890,732
Net Assets
Beginning of year 128,221,961 79,331,229
------------- -------------
End of year (including accumulated distributions in excess of net
investment income of ($923,573) and ($390,590), respectively) $ 207,181,265 $ 128,221,961
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.18 $ 12.91 $ 13.29 $ 12.75 $ 14.04
-------- -------- -------- -------- --------
Income from investment operations
Net investment income 0.79 0.97 0.89 0.84 0.84
Net realized and unrealized gain (loss) on
investments 0.47 0.26 (0.37) 0.61 (1.30)
-------- -------- -------- -------- --------
Total from investment operations 1.26 1.23 0.52 1.45 (0.46)
-------- -------- -------- -------- --------
Less distributions
From net investment income (0.83) (0.96) (0.90) (0.91) (0.83)
-------- -------- -------- -------- --------
Net asset value, end of year $ 13.61 $ 13.18 $ 12.91 $ 13.29 $ 12.75
======== ======== ======== ======== ========
TOTAL RETURN* 9.95% 9.86% 4.09% 11.82% (3.39%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 94,279 $ 53,176 $ 21,092 $ 24,472 $ 30,142
Ratio of expenses to average net assets 1.05% 1.05% 1.05% 1.32% 1.38%
Ratio of expenses to average net assets excluding
waiver 1.18% 1.18% 1.31% 1.36% 1.39%
Ratio of net investment income to average net assets 5.73% 7.01% 6.84% 6.73% 6.33%
Portfolio turnover rate 114% 100% 254% 368% 455%
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
81
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.18 $ 12.93 $ 13.31 $ 12.76 $ 14.06
-------- -------- -------- -------- --------
Income from investment operations
Net investment income 0.72 0.86 0.84 0.79 0.82
Net realized and unrealized gain (loss) on
investments 0.48 0.30 (0.38) 0.61 (1.37)
-------- -------- -------- -------- --------
Total from investment operations 1.20 1.16 0.46 1.40 (0.55)
-------- -------- -------- -------- --------
Less distributions
From net investment income (0.77) (0.91) (0.84) (0.85) (0.75)
--------- -------- -------- -------- --------
Net asset value, end of year $ 13.61 $ 13.18 $ 12.93 $ 13.31 $ 12.76
========= ======== ======== ======== ========
TOTAL RETURN* 9.46% 9.29% 3.57% 11.33% (3.97%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 112,901 $75,046 $ 58,239 $ 62,155 $ 77,888
Ratio of expenses to average net assets 1.55% 1.55% 1.55% 1.74% 1.88%
Ratio of expenses to average net assets excluding
waiver 1.67% 1.68% 1.81% 1.79% 1.90%
Ratio of net investment income to average net assets 5.22% 6.51% 6.36% 6.24% 6.21%
Portfolio turnover rate 114% 100% 254% 368% 455%
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.20
----------
Income from investment operations
Net investment income 0.78
Net realized and unrealized gain on investments 0.39
----------
Total from investment operations 1.17
----------
Less distributions
From net investment income (0.68)
----------
Net asset value, end of period $ 13.69
==========
TOTAL RETURN* 8.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 0.80% (a)
Ratio of expenses to average net assets exluding waiver 0.93% (a)
Ratio of net investment income to average net assets 7.09% (a)
Portfolio turnover rate 114%
</TABLE>
(a) Annualized.
(b) for the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
82
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
ASSET-BACKED SECURITIES - 12.18%
Advanta Home Equity Loan,
6.15%, 10/25/09 $ 766,206 $ 780,265
Advanta Mortgage Loan
Trust 1993-3 A3, 4.75% -
5.55%, 2/25/10 - 3/25/10 948,868 947,007
AFC Home Equity Loan
Trust, 6.60%, 2/25/27 1,499,955 1,514,193
AFG Receivables Trust,
6.20% - 7.05%, 9/15/00 -
2/15/03 (a) 3,098,596 3,116,978
CS First Boston 1996-2,
6.32% - 7.18%, 2/25/18 5,428,834 5,722,852
Equifax Credit Corporation
1994-1B, 5.75%, 3/15/09 478,313 479,995
Fifth Third Auto Grantor
Trust, 6.20%, 9/15/01 351,859 353,648
Old Stone Credit
Corporation, 6.20%,
6/15/08 274,327 277,455
Olympic Automobiles
Receivables Trust, 6.85% -
7.35%, 6/15/01 - 10/15/01 1,431,929 1,440,041
Union Acceptance
Corporation, 6.45% -
6.70%, 6/08/03 - 5/10/04 3,211,430 3,274,164
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $17,569,230) 17,906,598
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 74.00%
Federal National Mortgage
Association
6.00%, 5/01/13, ARM 13,278,924 13,415,870
10.00%, 6/01/05, MBS 188,066 197,098
Government National
Mortgage Association
7.00%, 12/15/08 1,123,686 1,169,061
6.50%, 3/15/28 2,940,243 3,003,643
7.00%, 8/15/28 9,991,943 10,304,191
Government National
Mortgage Association II
4.50%, 10/20/27 - 1/20/28 6,599,445 6,581,813
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
U.S. GOVERNMENT SECURITIES
AND AGENCIES (CONTINUED)
Government National
Mortgage Association II
7.00%, 7/20/22 - 9/20/23 $9,244,030 $ 9,411,333
U.S. Treasury Notes,
5.38% - 6.63%, 7/31/00 -
5/15/08 61,950,000 64,731,078
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $107,576,668) 108,814,087
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 3.68%
Equifax Credit Corporation,
6.16%, 4/15/08 1,362,750 1,384,463
Key Auto Finance Trust,
6.15%, 10/15/01 4,000,000 4,034,964
-----------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(COST $5,359,496) 5,419,427
-----------
CORPORATE BONDS - 16.63%
Association Corporation NA,
7.88%, 9/30/01 1,000,000 1,077,892
Capital One Bank, 7.15% -
7.20%, 7/19/99 - 9/15/06 2,500,000 2,577,034
Dayton Hudson Company,
6.63%, 3/01/03 2,000,000 2,121,698
Ford Capital, 9.88%,
5/15/02 2,525,000 2,929,000
General Motors Acceptance
Corporation, 5.63% -
6.88%, 2/01/99 - 7/15/01 2,750,000 2,854,932
Lehman Brothers, 6.20% -
6.63%, 11/15/00 - 1/15/02 3,750,000 3,799,689
Playtex Family Production
Corporation, 9.00%,
12/15/03 1,000,000 1,007,685
Salomon Incorporated,
5.50% - 7.30%, 1/15/99 -
5/15/02 3,750,000 3,935,117
The Money Store, 6.28%,
12/15/22 4,000,000 4,143,804
-----------
TOTAL CORPORATE BONDS
(COST $23,808,616) 24,446,851
-----------
</TABLE>
83
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
RESIDUAL INTERESTS (A) - 1.57%
General Mortgage Securities
II, Inc., 1997-4, 1998,
5/20/22 $ 3,908 $ 167,785
National Mortgage Funding,
Inc., 1998-7, 7/20/23 49,685 674,478
National Mortgage Funding,
Inc., 1998-6, 1/20/23 53,627 706,457
National Mortgage Funding,
Inc., 1998-8, 5/20/24 23,062 332,447
National Mortgage Funding,
Inc., 1997-9, 11/20/24 17,159 421,960
------------
TOTAL RESIDUAL INTERESTS
(COST $2,666,160) 2,303,127
------------
SHORT-TERM INVESTMENTS - 2.88%
VARIABLE RATE DEMAND NOTE
Hilander Finance, LLC,
5.70%, 12/01/25 1,850,000 1,850,000
------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 9/30/98, 5.60%,
due 10/01/98,
collateralized by
$2,422,945 Federal
National Mortgage
Association, 6.00%,
8/01/13, market value
$2,446,418 2,391,457 2,391,457
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $4,241,457) 4,241,457
------------
TOTAL INVESTMENTS (COST
$161,221,627)-110.94% 163,131,547
OTHER ASSETS LESS LIABILITIES - (10.94%) (16,087,108)
------------
NET ASSETS - 100.00% $147,044,439
============
</TABLE>
INVESTMENT ABBREVIATIONS
ARM - Adjustable Rate Mortgage
MBS - Mortgage Backed Securities
(a) These are securities that may be resold to "qualified institutional
buyers" under rule 144A or securities offered pursuant to section 4(2) of
the Securities Act of 1933, as amended. These securites have been
determined to be liquid under guidelines established by the Board of
Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $296,888,520 and $175,441,302, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $161,223,032. Net unrealized appreciation aggregated
$1,908,515 of which $2,467,650, related to appreciated investment securities
and $559,135, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
84
<PAGE>
SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $160,740,090
Repurchase agreements 2,391,457
------------
Total investments (cost
$161,221,627) 163,131,547
Receivables
Fund shares sold 4,126,138
Dividends and interest 1,260,809
Deferred expenses (Note 2) 25,241
------------
TOTAL ASSETS 168,543,735
------------
LIABILITIES
Payables
Reverse repurchase
agreement $ 18,555,000
Fund shares redeemed 2,139,010
Dividends 544,779
Accrued expenses and other
liabilities 260,507
------------
TOTAL LIABILITIES 21,499,296
------------
NET ASSETS $147,044,439
============
Net Assets represented by:
(Note 2)
Additional paid-in capital $145,502,924
Accumulated distributions in
excess of net investment
income (512,293)
Accumulated net realized
gain on investment
transactions 143,888
Net unrealized appreciation
of investments and
interest-rate swap contracts 1,909,920
------------
NET ASSETS $147,044,439
============
NET ASSET VALUE PER SHARE
Class A Shares $ 12.74
Class B Shares $ 12.75
Class Y Shares $ 12.79
OFFERING PRICE PER SHARE
Class A Shares $ 12.87(a)
Class B Shares $ 12.75
Class Y Shares $ 12.79
SHARES OUTSTANDING
Class A Shares 7,313,315
Class B Shares 4,228,466
Class Y Shares 83
</TABLE>
(a) Computation of offering price: 100/99 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (b) (Note 2) $ 6,170,420
EXPENSES
Management fee (Note 4) $ 504,097
Shareholder service fee (Note 5) 252,047
Transfer agent fee 148,709
Distribution fee (Note 5) 133,476
Administration fee (Note 4) 101,237
Registration expenses 74,882
Custodian and accounting fees 26,595
Shareholder reports and postage
expenses 14,335
Miscellaneous 12,548
Organizational expenses 7,337
Legal fees 3,980
Directors' fees and expenses 3,147
Audit fees 2,754
---------
Total expenses 1,285,144
Deduct
Waiver of administration fee
(Note 4) (101,237)
Waiver of management fee
(Note 4) (180,523)
-----------
NET INVESTMENT INCOME 5,167,036
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND INTEREST-RATE
SWAP CONTRACTS
Net realized gain on investments
and interest-rate swap contracts
(Note 2) 325,954
Change in unrealized appreciation
on investments 1,608,387
---------
NET GAIN ON INVESTMENTS 1,934,341
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 7,101,377
===========
</TABLE>
(b) Net of interest expenses of $588,099 ($283,529 related to interest-rate
swaps and $304,570 related to borrowings).
SEE NOTES TO FINANCIAL STATEMENTS.
85
<PAGE>
SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 5,167,036 $ 2,155,953
Net realized gain on investments 325,954 7,748
Change in unrealized appreciation on investments 1,608,387 386,023
------------- -------------
Increase in net assets resulting from operations 7,101,377 2,549,724
------------- -------------
Distributions to Shareholders
From net investment income
Class A (3,203,099) (763,890)
Class B (2,394,223) (1,415,914)
Class Y (49) --
------------- -------------
Total distributions to shareholders (5,597,371) (2,179,804)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 169,053,248 39,889,219
Reinvested distributions 4,352,285 1,755,339
Shares redeemed (82,572,822) (19,273,346)
------------- -------------
Change in net assets resulting from capital share transactions 90,832,711 22,371,212
------------- -------------
Increase in net assets 92,336,717 22,741,132
Net Assets
Beginning of year 54,707,722 31,966,590
------------- -------------
End of year (including accumulated distributions in excess of
net investment income of ($512,293) and ($95,798), respectively) $ 147,044,439 $ 54,707,722
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 (c)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.62 $ 12.50 $ 12.68 $ 12.74
-------- -------- -------- ----------
Income from investment operations
Net investment income 0.70 0.77 0.82 0.22
Net realized and unrealized gain (loss) on investments 0.15 0.12 (0.23) (0.03)
-------- -------- --------- ----------
Total from investment operations 0.85 0.89 0.59 0.19
-------- -------- --------- ----------
Less distributions
From net investment income (0.73) (0.77) (0.77) (0.25)
-------- -------- --------- ----------
Net asset value, end of period $ 12.74 $ 12.62 $ 12.50 $ 12.68
======== ======== ========= ==========
TOTAL RETURN* 6.98% 7.33% 4.80% 1.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 93,135 $ 27,619 $ 7,450 $ 1,002
Ratio of expenses to average net assets 0.86% 0.86% 0.86% 0.71% (a)
Ratio of expenses to average net assets excluding waiver 1.14% 1.12% 1.26% 1.00% (a)
Ratio of net investment income to average net assets 5.24% 6.00% 5.90% 4.10% (a)
Portfolio turnover rate 171% 75% 411% 126%
</TABLE>
(a) Annualized.
(c) For the period from June 16, 1995 (initial offering of Class A Shares) to
September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
86
<PAGE>
SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.62 $ 12.50 $ 12.67
-------- -------- --------
Income from investment operations
Net investment income 0.66 0.73 0.73
Net realized and unrealized gain (loss) on
investments 0.16 0.12 (0.17)
-------- -------- ---------
Total from investment operations 0.82 0.85 0.56
-------- -------- ---------
Less distributions
From net investment income (0.69) (0.73) (0.73)
--------- --------- ---------
Net asset value, end of period $ 12.75 $ 12.62 $ 12.50
========= ========= =========
TOTAL RETURN* 6.68% 6.96% 4.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 53,908 $ 27,089 $ 24,517
Ratio of expenses to average net assets 1.16% 1.16% 1.16%
Ratio of expenses to average net assets excluding
waiver 1.44% 1.42% 1.56%
Ratio of net investment income to average net assets 4.94% 5.70% 5.60%
Portfolio turnover rate 171% 75% 411%
<CAPTION>
PERIOD PERIOD
ENDED ENDED
9/30/95 (d) 12/31/94 (e)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.18 $ 12.50
----------- -----------
Income from investment operations
Net investment income 0.59 0.41
Net realized and unrealized gain (loss) on
investments 0.52 (0.29)
----------- -----------
Total from investment operations 1.11 0.12
----------- -----------
Less distributions
From net investment income (0.62) (0.44)
----------- -----------
Net asset value, end of period $ 12.67 $ 12.18
=========== ===========
TOTAL RETURN* 9.22% 0.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 19,871 $ 17,144
Ratio of expenses to average net assets 1.20% (a) 1.29% (a)
Ratio of expenses to average net assets excluding
waiver 1.70%(a) 1.29% (a)
Ratio of net investment income to average net assets 5.04%(a) 4.90% (a)
Portfolio turnover rate 126% 166%
</TABLE>
CLASS Y SHARES
<TABLE>
<CAPTION>
PERIOD
ENDED
9/30/98 (f)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.57
----------
Income from investment operations
Net investment income 0.67
Net realized and unrealized gain on investments 0.16
----------
Total from investment operations 0.83
----------
Less distributions
From net investment income ( 0.61)
----------
Net asset value, end of period $ 12.79
==========
TOTAL RETURN* 6.64%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1
Ratio of expenses to average net assets 0.61% (a)
Ratio of expenses to average net assets excluding waiver 0.87% (a)
Ratio of net investment income to average net assets 6.10% (a)
Portfolio turnover rate 171%
</TABLE>
(a) Annualized.
(d) For the period from January 1, 1995 to September 30, 1995.
(e) For the period from April 29, 1994 (commencement of operations) to December
31, 1994.
(f) For the period from November 19, 1997 (initial offering of Class Y shares)
to September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
87
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE HIGH INCOME MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The Mentor High Income Portfolio was launched in June 1998. This commentary,
therefore, marks the first opportunity for the managers of the Portfolio to
provide their market perspective to shareholders. The third quarter of 1998, in
addition to marking the first full quarter of performance for the fund, also
was a period of unusual volatility for high-yield markets.
ECONOMIC FACTORS
After years of steady economic growth and fairly consistent stock market
appreciation, equity markets tumbled in the final weeks of the summer in
response to a downward spiral in global economies. Earlier in the year, the
U.S. economy was expanding at a robust pace, with gross domestic product (GDP)
growth measuring 5.4% in the first quarter alone. Despite the generally solid
pace of economic activity, inflation remained benign. Falling commodity prices
and a strong dollar were helping to offset the inflationary implications of a
tight labor market and active consumer spending.
By the third quarter of 1998, U.S. financial markets were coming under
increasing stress as repercussions from the Asian crisis spread to other areas
of the globe. During this period, Russia abandoned its currency peg versus the
dollar and defaulted on its sovereign debt. Other markets, particularly Latin
America, came under increasing pressure as market participants attempted to
avoid additional international risks.
International developments finally began to meaningfully impact domestic
markets early in the third quarter. Starting with the Russian devaluation,
highly leveraged hedge funds began to incur substantial losses. Many hedge fund
participants had levered portfolios for greater returns, so the unwinding of
those positions drove yield spreads wider. A flight to quality drove long-term
Treasury yields down to levels not seen in 30 years.
In response to these deteriorating conditions the Federal Reserve reduced its
target Fed Funds rate by 25 basis points to 5.25%. Market participants had
anticipated greater credit easing and the third quarter closed amid unusually
high volatility.
CORPORATE HIGH-YIELD FACTORS
During the third quarter, 10-year Treasury yields declined by 108 basis points,
to a 4.40% yield. This strength in Treasuries, however, was not shared by other
fixed-income sectors. In fact, the investment landscape for all spread products
changed dramatically in the third quarter of 1998. A major flight-to-quality
dramatically expanded risk premiums for non-Treasury securities. The degree of
this shift is demonstrated by the 1281 basis point (12.81%) underperformance of
the Merrill Lynch High Yield Master Index versus 10-year Treasuries during the
July-September time period. High-yield spreads widened from 350 to 575 basis
points over comparable maturity Treasuries. The spread on the Chase Securities
High Yield Index expanded to 666 basis points, its highest level since January
of 1992.
Asset performance for the third quarter was closely tied to credit quality. As
risk exposure increased, returns decreased dramatically. While the 10-year
Treasury returned 9.22% for the July through September time period, the Chase
High Yield Index lost 5.79%, the S&P 500 posted a loss of 9.95%, and the EMBI
(Emerging Markets Brady Index) lost 11.57%.
New issuance of high-yield securities has declined markedly in these
deteriorating conditions. In the
88
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE HIGH INCOME MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
quarter ended September 30, total issuance was at $20.4 billion, compared with
$56.3 billion raised in the second quarter of this year, and $37.4 billion in
the third quarter of 1997. Outflows of $1.9 billion from high-yield mutual
funds in August reversed somewhat in September, with overall cash inflows of
$259 million into high-yield funds.
MANAGEMENT STRATEGY
We invested initial proceeds into a broadly diversified cross-section of the
high-yield universe, with 77% of holdings rated B, 13.4% rated BB, and 1.1%
rated BBB. At the end of September, the Portfolio still held 15.7% of its
assets in cash, as full investment with deteriorating market conditions was
imprudent. The greatest industry concentration lies in the telecommunications
area, with a 19% exposure.
OUTLOOK
Spreads have widened in high-yield markets due to heavy new issuance and fears
of default. Default fears, however, seem premature given Moody's recently
reported trailing 12-month default rate of 2.62%, down slightly from 2.69% in
August. That number can be expected to increase during the fourth quarter,
however, since four high-yield issuers have already defaulted during the month
of October.
Given the market's current unsettled state in the wake of August's dramatic
sell-off, we expect spreads to remain at these wide levels through the end of
the year. The equity market's recent volatility makes it unlikely that spreads
will narrow meaningfully until the level of next year's economic growth becomes
clearer.
November 1998
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor High
Income Portfolio Class A and Class B Shares and the Merrill Lynch High Yield
Master II Bond Index.~
[GRAPH]
A Shares B Shares Merrill Lynch
High Yield
Master II
Bond Index
6/23/98 9525 10000 10000
7/31/98 9614 10081 10349
8/31/98 8904 9332 10586
9/30/98 8882 9305 10567
Average Annual Returns as of 9/30/98
Including Sales Charges
1-Year Since Inception+++
Class A n/a (11.19%)
Class B n/a (7.86%)
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Merrill Lynch High Yield Master II Bond Index provides a broad-based
measure of the performance of the non-investment grade U.S. domestic bond
market. The index currently captures close to $200 billion of the
outstanding debt of domestic market issuers rated below investment grade
but not in default.
+ Represents a hypothetical investment of $10,000 in Mentor High Income
Portfolio Class B Shares. A contingent deferred sales charge will be
imposed, if applicable, on Class B Shares at rates ranging from a maximum
of 4.00% of amounts redeemed during the first year following the date of
purchase to 1.00% of amounts redeemed during the six-year period following
the date of purchase. The Class B Shares reflects a redemption fee in
effect at the end of each of the stated periods. The Class B Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Represents a hypothetical investment of $10,000 in Mentor High Income
Portfolio Class A Shares, after deducting the maximum sales charge of
4.75% ($10,000 investment minus $475 sales charge = $9,525). The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
+++ Reflects operations of Mentor High Income Portfolio Class A and Class B
Shares from the date of commencement of operations on 6/23/98 through
9/30/98.
89
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 79.65%
CONSUMER DISTRIBUTION - 7.13%
Aurora Foods, Inc. Senior
Subordinated Notes,
Series D, 9.88%, 2/15/07 $ 1,000,000 $ 1,075,000
Big 5 Corporation Senior
Notes, Series B, 10.88%,
11/15/07 1,000,000 955,000
CHS Electronics, Inc. Senior
Notes, 9.88%, 4/15/05 1,000,000 925,000
Del Monte Foods Company
Senior Discount Notes,
12.50%, 12/15/07 (a) 1,500,000 870,000
Disco S.A. Notes, 9.88%,
5/15/08 (a) 1,000,000 675,000
Musicland Group, Inc. Senior
Subordinated Notes-B,
9.88%, 3/15/08 1,500,000 1,432,500
Pantry, Inc. Senior Notes,
12.50%, 11/15/00 1,148,000 1,202,530
Pantry, Inc. Senior
Subordinated Notes,
10.25%, 10/15/07 1,000,000 980,000
------------
8,115,030
------------
CONSUMER DURABLES - 9.48%
Aetna Industries, Inc. Senior
Notes, 11.88%, 10/01/06 1,500,000 1,530,000
Cluett American Corporation
Senior Subordinated Notes,
10.13%, 5/15/08 (a) 1,000,000 920,000
Consoltex Group Senior
Notes, 11.00%, 10/01/03 200,000 208,000
Decora Industries, Inc.
Secured Notes, 11.00%,
5/01/05 (a) 1,000,000 907,500
Derby Cycle Corporation
Senior Notes, 10.00%,
5/15/08 (a) 1,000,000 930,000
Galey & Lord, Inc. Senior
Subordinated Notes,
9.13%, 3/01/08 1,500,000 1,316,250
MCII Holdings Senior
Secured Discount Notes,
15.00%, 11/15/02 1,000,000 825,000
Outsourcing Services Group
Senior Subordinated Notes,
10.88%, 3/01/06 (a) 1,150,000 1,092,500
Oxford Automotive, Inc.,
10.13%, 6/15/07 1,000,000 965,000
Talon Automotive Group
Senior Subordinated Notes,
9.63%, 5/01/08 (a) 1,000,000 935,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES (CONTINUED)
Venture Holdings Trust
Senior Notes-B, 9.50%,
7/01/05 $ 1,175,000 $ 1,151,500
------------
10,780,750
------------
CONSUMER SERVICES - 14.23%
Americredit Corporation,
9.25%, 2/01/04 (a) 1,000,000 965,000
Argosy Gaming Company,
13.25%, 6/01/04 (a) 1,500,000 1,597,500
Booth Creek Ski Holdings
Senior Notes-B, 12.50%,
3/15/07 1,000,000 985,000
Capstar Broadcasting Senior
Discount Notes, 12.75%,
2/01/09 (a) 1,000,000 755,000
Carrols Corporation Senior
Notes, 11.50%, 8/15/03 1,000,000 1,045,000
Diamond Cable
Communications Senior
Discount Notes, 11.75%,
12/15/05 1,500,000 1,207,500
Globo Communicacoes
Senior Notes, 10.63%,
12/05/08 (a) 1,000,000 520,000
Grupo Televisa S.A. Senior
Discount Notes-Euro,
13.25%, 5/15/08 1,000,000 695,000
Hollywood Casino
Corporation Senior Notes,
12.75%, 11/01/03 1,000,000 1,045,000
Interep National Radio Sales,
10.00%, 7/01/08 (a) 1,000,000 980,000
Isles of Capri Casinos,
12.50%, 8/01/03 1,000,000 1,085,000
La Petite Academy LPA
Holdings-B, 10.00%,
5/15/08 1,250,000 1,212,500
Majestic Star Casino, LLC,
12.75%, 5/15/03 1,500,000 1,556,250
Northland Cable Television
Senior Subordinated Notes,
10.25%, 11/15/07 1,000,000 1,060,000
Silver Cinemas, Inc. Senior
Subordinated Notes,
10.50%, 4/15/05 (a) 1,000,000 955,000
Young American Corporation
Senior Subordinated Notes,
11.63%, 2/15/06 (a) 1,000,000 530,000
------------
16,193,750
------------
</TABLE>
90
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
ENERGY - 8.14%
Abraxas Petroleum Senior
Notes, Series D, 11.50%,
11/01/04 $ 1,000,000 $ 780,000
Dawson Production Services,
Inc. Senior Notes, 9.38%,
2/01/07 1,000,000 1,002,500
Gothic Production
Corporation, 11.13%,
5/01/05 1,000,000 760,000
Houston Exploration
Company Senior
Subordinated Notes-B,
8.63%, 1/01/08 1,000,000 960,000
Hurricane Hydrocarbons
Senior Notes, 11.75%,
11/01/04 (a) 1,000,000 560,000
Moll Industries Senior
Subordinated Notes,
10.50%, 7/01/08 (a) 1,100,000 1,023,000
Ocean Energy, Inc. Senior
Subordinated Notes-B,
8.88%, 7/15/07 1,000,000 1,010,000
Tesoro Petroleum
Corporation Senior
Subordinated Notes,
9.00%, 7/01/08 (a) 1,000,000 967,500
Universal Compression, Inc.
Senior Discount Notes,
9.88%, 2/15/08 (a) 2,000,000 1,190,000
Vintage Petroleum Senior
Subordinated Notes,
8.63%, 2/01/09 1,000,000 1,010,000
------------
9,263,000
------------
HEALTH CARE - 0.97%
Mariner Post-Acute Network
Senior Subordinated Notes,
10.50%, 11/01/07 1,500,000 832,500
Vencor, Inc. Senior
Subordinated Notes,
9.88%, 5/01/05 (a) 350,000 276,500
------------
1,109,000
------------
PRODUCER MANUFACTURING - 8.22%
Anthony Crane Rentals,
10.38%, 8/01/08 (a) 1,000,000 940,000
Compass Aerospace
Corporation, 10.13%,
4/15/05 (a) 1,000,000 985,000
Del Webb Corporation Senior
Subordinated Debentures,
9.38%, 5/01/09 750,000 720,000
Dine S.A. de C.V., 8.75%,
10/15/07 (a) 1,000,000 720,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
PRODUCER MANUFACTURING (CONTINUED)
Hydrochemical Industrial
Service Senior Subordinated
Notes-B, 10.38%, 8/01/07 $ 1,000,000 $ 940,000
Kevco, Inc. Senior
Subordinated Notes,
10.38%, 12/01/07 1,000,000 955,000
Outboard Marine
Corporation, 10.75%,
6/01/08 (a) 1,000,000 945,000
Schuler Homes Senior Notes,
9.00%, 4/15/08 (a) 750,000 701,250
Tekni-Plex, Inc. Senior
Subordinated Notes-B,
11.25%, 4/01/07 500,000 522,500
Terex Corporation Senior
Subordinated Notes,
8.88%, 4/01/08 (a) 1,000,000 932,500
W. R. Carpenter North
America Senior
Subordinated Notes,
10.63%, 6/15/07 1,000,000 985,000
------------
9,346,250
------------
RAW MATERIALS/PRODUCTS INDUSTRIES - 4.28%
Acetex Corporation Senior
Notes, 9.75%, 10/01/03 900,000 859,500
Anchor Lamina, Inc. Senior
Subordinated Notes,
9.88%, 2/01/08 800,000 656,000
GS Technologies Operation,
Inc. Senior Notes, 12.25%,
10/01/05 875,000 748,125
Hylsa S.A. de C.V. Bonds,
9.25%, 9/15/07 (a) 1,000,000 685,000
Pioneer Americas Acquisition
Senior Notes, 9.25%,
6/15/07 1,500,000 1,230,000
Vicap S.A.Guaranteed Notes,
11.38%, 5/15/07 (a) 1,000,000 685,000
------------
4,863,625
------------
TECHNOLOGY - 3.10%
Advanced Micro Devices
Senior Notes, 11.00%,
8/01/03 2,000,000 2,030,000
DecisionOne Holdings
Discount Notes, 11.50%,
8/01/08 1,500,000 562,500
Dictaphone Corporation
Senior Subordinated Notes,
11.75%, 8/01/05 1,000,000 930,000
------------
3,522,500
------------
</TABLE>
91
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TRANSPORTATION - 4.02%
Atlas Air, Inc. Senior Notes,
10.75%, 8/01/05 $ 1,000,000 $ 985,000
American Communication
Lines, LLC Bonds, 10.25%,
6/30/08 (a) 1,000,000 990,000
Cenargo International
PLC-1st Mortgage, 9.75%,
6/15/08 (a) 1,000,000 820,000
Greyhound Lines Senior
Notes, 11.50%, 4/15/07 1,250,000 1,337,500
Pegasus Shipping Hellas
Notes-A, 11.88%, 11/15/04 500,000 435,000
-----------
4,567,500
-----------
UTILITIES - 20.08%
American Cellular
Corporation Senior Notes,
10.50%, 5/15/08 (a) 500,000 487,500
Cathay International Limited
Senior Notes, 13.00%,
4/15/08 (a) 1,000,000 600,000
CIA Transporte Energia
Notes, 9.25%, 4/01/08 (a) 1,000,000 760,000
Clearnet Communications
Senior Discount Notes,
14.75%, 12/15/05 1,500,000 1,248,750
Comcast Cellular Holdings
Senior Notes, 9.50%,
5/01/07 1,000,000 1,030,000
Crown Castle International
Corporation Senior
Discount Notes, 10.63%,
11/15/07 750,000 453,750
e.spire Communications, Inc.
Senior Discount Notes,
12.75% - 13.75%,
4/01/06 - 7/15/07 1,050,000 985,000
Esprit Telecommunications
Group PLC Senior Notes,
11.50%, 10.88% - 11.50%,
12/15/07 - 6/15/08 (a) 1,000,000 922,500
ICG Holdings, Inc. Discount
Notes, 11.63% - 13.50%,
9/15/05 - 3/15/07 1,500,000 1,103,750
Intermedia Communications
Senior Discount Notes,
8.60%, 6/01/08 525,000 527,625
Intermedia Communications
of Florida, 12.50%,
5/15/06 600,000 492,000
McLeodusa, Inc. Senior
Discount Notes, 10.50%,
3/01/07 1,250,000 912,500
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
MetroNet Communications
Senior Discount Notes,
9.95%, 6/15/08 (a) $ 1,500,000 $ 832,500
Microcell Telecommuni-
cations Senior Discount
Notes-B, 14.00%, 6/01/06 1,000,000 715,000
Millicom International
Cellular Senior Discount
Notes, 13.50%, 6/01/06 1,250,000 793,750
MJD Communications, Inc.,
9.50%, 5/01/08 (a) 750,000 753,750
Netia Holdings Senior
Discount Notes-B, 11.25%,
11/01/07 1,500,000 660,000
Optel Inc. Senior Notes,
11.50%, 7/01/08 (a) 500,000 470,000
Pinnacle Holdings, Inc. Senior
Discount Notes, 10.00%,
3/15/08 (a) 750,000 401,250
Price Communications
Wireless, Inc. Senior
Subordinated Notes,
11.75%, 7/15/07 1,000,000 1,035,000
Primus Telecommunications
Group Strips, 11.75%,
8/01/04 1,000,000 945,000
PSINet, Inc. Senior Notes,
Series B, 10.00%, 2/15/05 1,000,000 1,005,000
Rogers Cantel,
Inc.Debentures, 9.38%,
6/01/08 1,000,000 1,020,000
Satelites Mexicanos Senior
Notes, 10.13%,
11/01/04 (a) 1,000,000 685,000
SBA Communications
Corporation Senior
Discount Notes, 12.00%,
3/01/08 (a) 1,000,000 520,000
</TABLE>
92
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
Spectrasite Holdings, Inc.
Senior Discount Notes,
12.00%, 7/15/08 (a) $1,000,000 $ 480,000
Sprint Spectrum Senior Notes,
11.00%, 8/15/06 1,000,000 1,140,000
Startec Global
Communications Units,
12.00%, 5/15/08 (a) 1,000,000 870,000
Verio, Inc. Senior Notes,
10.38%, 4/01/05 (a) 1,000,000 995,000
------------
22,844,625
------------
TOTAL CORPORATE BONDS
(COST $99,855,713) 90,606,030
------------
FOREIGN GOVERNMENT - 0.75%
Republic of Korea Bond,
8.88%, 4/15/08 (cost
$938,803) 1,000,000 855,000
------------
PREFERRED STOCK - 0.80%
Rural Cellular Corporation
(cost $900,000) 10,000 910,000
------------
92,371,030
------------
SHORT TERM
INVESTMENT - 14.24%
U.S. Government Agency
Federal Home Loan Bank
5.00%, 10/01/98
(cost $16,195,000) 16,195,000 16,195,000
------------
TOTAL INVESTMENTS
(COST $117,889,516)-95.44% 108,566,030
OTHER ASSETS LESS
LIABILITIES - 4.56% 5,190,110
------------
NET ASSETS - 100.00% $113,756,140
============
</TABLE>
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $107,457,273 and $5,763,938, respectively.
INCOME TAX INFORMATION
At September 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $117,889,516. Net unrealized depreciation aggregated
$9,323,486, of which $286,135, related to appreciated investment securities and
$9,609,621, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
93
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (cost
$117,889,516)(Note 2)
Investment securities $108,566,030
Cash 2,492,668
Receivables
Investments sold 485,622
Fund shares sold 3,115,774
Dividends and interest 2,576,302
Deferred expenses (Note 2) 17,486
------------
TOTAL ASSETS 117,253,882
------------
LIABILITIES
Payables
Investments purchased $ 2,981,590
Fund shares redeemed 110,985
Dividends 371,873
Accrued expenses and other
liabilities 33,294
-----------
TOTAL LIABILITIES 3,497,742
------------
NET ASSETS $113,756,140
============
Net Assets represented by: (Note 2)
Additional paid-in capital $123,540,215
Accumulated distributions
in excess of net
investment income (371,874)
Accumulated net realized
loss on investment
transactions (88,715)
Net unrealized depreciation
of investments (9,323,486)
------------
NET ASSETS $113,756,140
============
NET ASSET VALUE PER SHARE
Class A Shares $ 10.92
Class B Shares $ 10.91
OFFERING PRICE PER SHARE
Class A Shares $ 11.46(a)
Class B Shares $ 10.91
SHARES OUTSTANDING
Class A Shares 4,658,188
Class B Shares 5,762,202
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
(b) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 1998 (b)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $ 2,037,403
EXPENSES
Management fee (Note 4) $ 175,891
Distribution fee (Note 5) 68,461
Shareholder service fee
(Note 5) 62,818
Administration fee (Note 4) 24,979
Transfer agent fee 23,292
Custodian and accounting fees 16,350
Registration expenses 11,840
Shareholder reports and
postage expenses 3,449
Legal fees 753
Directors' fees and expenses 596
Audit fees 521
Miscellaneous 6,164
----------
Total expenses 395,114
Deduct
Waiver of management fee
(Note 4) (175,891)
------------
NET INVESTMENT INCOME 1,818,180
------------
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized loss on
investments (88,715)
Change in unrealized
depreciation on investments (9,323,486)
----------
NET LOSS ON INVESTMENTS (9,412,201)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (7,594,021)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
94
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 1,818,180
Net realized loss on investments (88,715)
Change in unrealized depreciation on investments (9,323,486)
-------------
Decrease in net assets resulting from operations (7,594,021)
-------------
Distributions to Shareholders
From net investment income
Class A (1,040,534)
Class B (1,178,956)
In excess of net investment income
Class A -
Class B -
-------------
Total distributions to shareholders (2,219,490)
-------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 126,286,107
Reinvested distributions 1,281,553
Shares redeemed (3,998,009)
-------------
Change in net assets resulting from capital share transactions 123,569,651
-------------
Increase in net assets 113,756,140
Net Assets
Beginning of period -
-------------
End of period (including accumulated distributions in excess
of net investment income of ($371,874) ) $ 113,756,140
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (b)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.00
----------
Income from investment operations
Net investment income 0.24
Net realized and unrealized loss on investments (1.04)
----------
Total from investment operations (0.80)
----------
Less distributions
From net investment income (0.28)
----------
Net asset value, end of period $ 10.92
==========
TOTAL RETURN* (6.75%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 50,887
Ratio of expenses to average net assets 0.60% (a)
Ratio of expenses to average net asset excluding waiver 1.30% (a)
Ratio of net investment income to average net assets 7.36% (a)
Portfolio turnover rate 27%
</TABLE>
(a) Annualized.
(b) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
95
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
9/30/98 (c)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.00
----------
Income from investment operations
Net investment income 0.22
Net realized and unrealized loss on investments ( 1.05)
----------
Total from investment operations ( 0.83)
----------
Less distributions
From net investment income ( 0.26)
----------
Net asset value, end of period $ 10.91
==========
TOTAL RETURN* ( 6.95%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 62,869
Ratio of expenses to average net assets 1.10% (a)
Ratio of expenses to average net asset excluding waiver 1.80% (a)
Ratio of net investment income to average net assets 6.87% (a)
Portfolio turnover rate 27%
</TABLE>
(a) Annualized.
(c) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
96
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
NOTE 1: ORGANIZATION
Mentor Funds is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. Mentor Funds consists of
twelve separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1998, as
follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Balanced Portfolio
("Balanced Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor High Income Portfolio
("High Income Portfolio")
Mentor U.S. Government Money Market Portfolio ("Government Portfolio")
Mentor Money Market Portfolio
("Money Market Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
These financial statements do not include Money Market Portfolio and the U.S.
Government Money Market Portfolio.
Mentor Funds currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% (4.75% for the Quality Income
Portfolio, Municipal Income Portfolio and High Income Portfolio and 1% for
Short-Duration Income Portfolio) payable at the time of purchase. Class B
shares are sold subject to a contingent deferred sales charge payable upon
redemption which decreases depending on when shares were purchased and how long
they have been held. Class Y shares are sold to institutions and high net-worth
individual investors and are not subject to any sales or contingent deferred
sales charges.
During the year, the Balanced Portfolio added two classes of shares designated
as Class A and Class Y and designated its existing class of shares as Class B.
Shareholders of the Balanced Portfolio who on September 16, 1998, held Class B
shares had such shares converted to Class Y shares having an aggregate value
equal to that of the shareholder's Class B shares prior to the conversion.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolios in the preparation of their financial statements.
The policies are in conformity with generally accepted accounting principles
which require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates,
any such differences are expected to be immaterial to the net assets of the
Portfolios.
(a) Valuation of Securities - Listed securities held by the Growth Portfolio,
Global Portfolio, Capital Growth Portfolio, Strategy Portfolio, Income and
Growth Portfolio, and Balanced Portfolio traded on national stock exchanges and
over-the-counter securities quoted on the NASDAQ National Market
97
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
System are valued at the last reported sales price or, lacking any sales, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange determined by the
advisor of the Portfolios as the primary market. Securities traded in the
over-the-counter market, other than those quoted on the NASDAQ National Market
System, are valued at the last available bid price. Short-term investments with
remaining maturities of 60 days or less are carried at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith under
procedures established by the Board of Trustees.
U.S. Government obligations held by the Income and Growth Portfolio, Balanced
Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio, and High
Income Portfolio are valued at the mean between the over-the-counter bid and
asked prices as furnished by an independent pricing service. Listed corporate
bonds, other fixed income securities, mortgage backed securities, mortgage
related, asset-backed and other related securities are valued at the prices
provided by an independent pricing service. Security valuations not available
from an independent pricing service are provided by dealers approved by the
Portfolios' Board of Trustees. In determining value, the pricing services use
information with respect to transactions in such securities, market
transactions in comparable securities, various relationships between
securities, and yield to maturity.
Municipal bonds, held by the Municipal Income Portfolio, are valued at fair
value. An independent pricing service values the Portfolio's municipal bonds
taking into consideration yield, stability, risk, quality, coupon, maturity,
type of issue, trading characteristics, special circumstances of a security or
trading market, and any other factors or market data it deems relevant in
determining valuations for normal institutional size trading units of debt
securities. The pricing service does not rely exclusively on quoted prices.
Short-term investments with remaining maturities of 60 days or less shall be
their amortized cost value unless the particular circumstances of the security
indicate otherwise.
Foreign currency amounts are translated into United States dollars as follows:
market value of investments, other assets and liabilities at the daily rate of
exchange, purchases and sales of investments, income and expenses at the rate
of exchange prevailing on the respective dates of such transactions. Net
unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
Net realized foreign currency gains and losses include foreign currency gains
and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of the Portfolio and
the amount actually received. The portion of investment gains and losses
related to foreign currency fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date is included in realized
gains and losses on security transactions.
(b) Repurchase Agreements -- It is the policy of Mentor Funds to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by Mentor Funds to monitor, on a daily basis, the market value of
each repurchase agreement's
98
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
underlying securities to ensure the existence of a proper level of collateral.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Funds' advisor to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Borrowings -- Each of the Portfolios (except for the Growth Portfolio,
Strategy Portfolio and Municipal Income Portfolio) may, under certain
circumstances, borrow money directly or through dollar-roll and reverse
repurchase agreements (arrangements in which the Portfolio sells a security for
a percentage of its market value with an agreement to buy it back on a set
date). Each Portfolio may borrow up to one-third of the value of its net
assets.
The average daily balance of reverse repurchase agreements outstanding for
Quality Income Portfolio during the year ended September 30, 1998, was
approximately $16,388,088 or $1.24 per share based on average shares
outstanding during the period at a weighted average interest rate of 5.16%. The
maximum amount of borrowings outstanding for any day during the period was
$71,061,218 (including accrued interest), as of September 17, 1998, at an
interest rate of 5.52% and was 26.09% of total assets at that date.
The average daily balance of reverse repurchase agreements outstanding for
Short-Duration Income Portfolio during the year ended September 30, 1998, was
approximately $6,026,021 or $0.72 per share based on average shares outstanding
during the period at a weighted average interest rate of 5.55%. The maximum
amount of borrowings outstanding for any day during the period was $35,037,791
(including accrued interest), as of September 3, 1998, at an interest rate of
5.55% and was 18.35% of total assets at that date.
(d) Portfolio Securities Loaned -- Each of the Portfolios (except for Municipal
Income Portfolio) is authorized by the Board of Trustees to participate in
securities lending transactions.
The Portfolios may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, Portfolios
continue to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolios record an asset and obligation for the market value
of that collateral. Cash received as collateral may be reinvested, in which
case that security is recorded as an asset of the Portfolio. Variations in the
market value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At September 30, 1998, certain Portfolios had loaned securities to brokers
which were collateralized by cash, U.S. Treasury securities and letters of
credit. Cash collateral at September 30, 1998 was reinvested in U.S. Treasury
and high quality money market instruments. Income from securities lending
activities amounted to $283,424, $50,923, $25,753, $88,906, $47,564, $702, and
$46,419, for the Growth Portfolio, Global Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio and Quality
Income Portfolio, respectively for the year ended September 30, 1998.
99
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Among the risks to a Portfolio from securities lending are that the borrower
may not provide additional collateral when required or return the securities
when due. At September 30, 1998, the value of the securities on loan and the
value of the related collateral were as follows:
<TABLE>
<CAPTION>
SECURITIES CASH SECURITIES TRI-PARTY
PORTFOLIO ON LOAN COLLATERAL COLLATERAL COLLATERAL
- ------------------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Growth $106,657,061 $115,219,699 $771,567 $ -
Global 11,714,972 12,707,641 - -
Capital Growth 14,483,537 15,562,984 - -
Strategy 58,005,353 60,165,776 215,110 -
Income and Growth 47,343,071 40,344,784 6,360 7,911,321
Balanced 2,544,039 2,639,420 - 39,456
Quality Income 3,244,448 1,605,500 - 1,687,662
- ------------------- ------------ ------------ -------- ---------
</TABLE>
(e) Dollar Roll Transactions -- Each of the Portfolios (except for the Growth,
Strategy and Municipal Income Portfolios) may engage in dollar roll
transactions with respect to mortgage-backed securities issued by GNMA, FNMA,
and FHLMC. In a dollar-roll transaction, a Portfolio sells a mortgage-backed
security to a financial institution, such as a bank or broker/dealer, and
simultaneously agrees to repurchase a substantially similar (i.e., same type,
coupon, and maturity) security from the institution at a later date at an
agreed upon price. The mortgage-backed securities that are repurchased will
bear the same interest rate as those sold, but generally will be collateralized
by different pools of mortgages with different prepayment histories.
(f) Security Transactions and Investment Income -- Security transactions for
the Portfolios are accounted for on trade date. Dividend income is recorded on
the ex-dividend date. Interest income is recorded on the accrual basis.
Interest income (except for Municipal Income Portfolio) includes interest and
discount earned (net of premium) on short-term obligations, and interest earned
on all other debt securities including original issue discount as required by
the Internal Revenue Code. Dividends to shareholders and capital gain
distributions, if any, are recorded on the ex-dividend date.
Interest income for the Municipal Income Portfolio includes interest earned net
of premium, and original issue discount as required by the Internal Revenue
Code.
(g) Federal Income Taxes -- No provision for federal income taxes has been made
since it is each Portfolio's policy to comply with the provisions applicable to
regulated investment companies under the Internal Revenue Code and to
distribute to its shareholders within the allowable time limit substantially
all taxable income and realized capital gains.
Dividends paid by the Municipal Income Portfolio representing net interest
received on tax-exempt municipal securities are not includable by shareholders
as gross income for federal income tax purposes because the Portfolio intends
to meet certain requirements of the Internal Revenue Code applicable to
regulated investment companies which will enable the Portfolio to pay
tax-exempt interest dividends. The portion of such interest, if any, earned on
private purpose municipal bonds issued after August 7, 1986, may by considered
a tax preference item to shareholders.
100
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
At September 30, 1998, capital loss carryforwards for federal tax purposes were
as follows:
<TABLE>
<CAPTION>
MUNICIPAL QUALITY
EXPIRES INCOME PORTFOLIO INCOME PORTFOLIO
- ----------- ------------------ -----------------
<S> <C> <C>
9/30/2001 $ - $ 244,512
9/30/2002 - 3,678,547
9/30/2003 317,478 7,326,035
9/30/2004 1,616,817 1,708,773
9/30/2005 - 1,325,149
9/30/2006 295,480 -
---------- -----------
$2,229,775 $14,283,016
========== ===========
</TABLE>
Such capital loss carryforwards will reduce the Portfolios' taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise relieve the Portfolios of
any liability for federal tax.
(h) When-Issued and Delayed Delivery Transactions -- The Portfolios may engage
in when-issued or delayed delivery transactions. To the extent the Portfolios
engage in such transactions, they will do so for the purpose of acquiring
portfolio securities consistent with their investment objectives and policies
and not for the purpose of investment leverage. The Portfolios will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Portfolios will maintain security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily, and begin earning interest on the
settlement date.
(i) Futures Contracts -- In order to gain exposure to or protect against
declines in security values, the Portfolios may buy and sell futures contracts.
The Portfolios may also buy or write put or call options on futures contracts.
The Portfolios may sell futures contracts to hedge against declines in the
value of portfolios securities. The Portfolios may also purchase futures
contracts to gain exposure to market changes as it may be more efficient or
cost effective than actually buying securities. The Portfolios will segregate
assets to cover its commitments under such speculative futures contracts.
Upon entering into a futures contract, the Portfolios are required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolios each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolios recognize a realized gain or loss when the
contract is closed. For the year ended September 30, 1998, Strategy Portfolio,
Municipal Income Portfolio and Short-Duration Income Portfolio had realized
losses of $1,950,741, $923,251, and $88,910, respectively, on closed futures
contracts.
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities. At September 30, 1998, Strategy Portfolio and Municipal
Income Portfolio had open positions in the following futures contracts:
101
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
NUMBER OF NOTIONAL UNREALIZED
PORTFOLIO CONTRACTS POSITION CONTRACTS EXPIRATION VALUE DEPRECIATION
- ------------------ ----------- ---------- ------------------ ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Strategy 734 Short U.S. Long Bond Dec-98 $73,400,000 ($3,871,838)
Municipal Income 90 Short Muni Bond Future Dec-98 $ 9,000,000 ($ 225,729)
- ------------------ --- ---------- ------------------ ------ ----------- ----------
</TABLE>
(j) Options - In order to produce incremental earnings or protect against
changes in the value of portfolio securities, the Portfolios may buy and sell
put and call options, write covered call options on portfolio securities and
write cash-secured put options.
The Portfolios generally purchase put options or write covered call options to
hedge against adverse movements in the value of portfolio holdings. The
Portfolios may also use options for speculative purposes, although they do not
employ options for this at the present time. The Portfolios will segregate
assets to cover their obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Portfolios will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a
written put option, or the cost of the security for a purchased put or call
option is adjusted by the amount of premium received or paid. For the year
ended September 30, 1998, Municipal Income Portfolio had a net realized gain of
$10,940 on closed option contracts.
The risk in writing a call option is that the Portfolios give up the
opportunity for profit if the market price of the security increases and the
option is exercised. The risk in writing a put option is that the Portfolio may
incur a loss if the market price of the security decreases and the option is
exercised. The risk in buying an option is that the Portfolio pays a premium
whether or not the option is exercised or the counterparty is unwilling or
unable to perform. The Portfolio also has the additional risk of not being able
to enter into a closing transaction if a liquid secondary market does not
exist. The Portfolio may also write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of the
counterparty. Activity in written options for the Municipal Income Portfolio
for the year ended September 30, 1998, was as follows:
<TABLE>
<CAPTION>
PREMIUM
RECEIVED FACE VALUE
------------ ---------------
<S> <C> <C>
Options outstanding at
September 30, 1997 $ 36,693 $ 10,000,000
Options written 53,274 21,000,000
Options closed (49,292) (20,000,000)
Options expired (40,675) (11,000,000)
- ----------------------- -------- ------------
Options outstanding at
September 30, 1998 $ - $ -
- ----------------------- -------- ------------
</TABLE>
(k) Residual Interests - A derivative security is any investment that derives
its value from an underlying security, asset, or market index. Quality Income
Portfolio and Short-Duration Income Portfolio invest in mortgage security
residual interests ("residuals") which are considered derivative securities.
The Portfolios' investments in residuals have been primarily in securities
issued by proprietary mortgage trusts. While these entities have been highly
leveraged, often having indebtedness of up to 95% of their total value, the
Portfolios have not incurred any indebtedness in the course of making these
residual investments; nor have the Portfolios' assets been
102
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
pledged to secure the indebtedness of the issuing structure or the Portfolios'
investment in the residuals. In consideration of the risk associated with
investment in residual securities, it is the Portfolios' policy to limit their
exposure at the time of purchase to no more than 20% of their total assets.
(l) Interest-Rate Swap - An interest-rate swap is a contract between two
parties on a specified principal amount (referred to as the notional principal)
for a specified period. In the most common instance, a swap involves the
exchange of streams of variable and fixed-rate interest payments. During the
term of the swap, changes in the value of the swap are recognized as unrealized
gains or losses by marking-to-market the value of the swap. When the swap is
terminated, the Fund will record a realized gain or loss. At September 30,
1998, there were no open interest rate swap agreements.
(m) Deferred Expenses - Costs incurred by the Portfolios in connection with
their initial share registration and organization costs were deferred by the
Portfolios and are being amortized on a straight-line basis over a five-year
period.
(n) Distributions - Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for net operating losses, certain futures and deferral
of wash sales and equalization deficits.
The Growth Portfolio, Capital Growth Portfolio and Strategy Portfolio also
utilized earnings and profits distributed to shareholders on redemption of
shares as a part of the distributions for income tax purposes.
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly to all shareholders invested
in Municipal Income Portfolio, Quality Income Portfolio, Short-Duration Income
Portfolio and High Income Portfolio. Dividends are declared and paid annually
to all shareholders invested in the Growth Portfolio, Capital Growth Portfolio,
Strategy Portfolio, Global Portfolio and Balanced Portfolio. Dividends are
declared and paid quarterly to all shareholders invested in Income and Growth
Portfolio. Dividends will be reinvested in additional shares of the same class
and Portfolio on payment dates at the ex-dividend date net asset value without
a sales charge unless cash payments are requested by shareholders in writing to
Mentor Investment Group, LLC. Dividends of all Portfolios are paid to
shareholders of record on the record date. Capital gains realized by each
Portfolio, if any, are paid annually.
NOTE 4: INVESTMENT ADVISORY AND MANAGEMENT AND ADMINISTRATION AGREEMENTS
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment
advisor, receives for its services an annual investment advisory fee not to
exceed the following percentages of the average daily net assets of the
particular Portfolio: Growth Portfolio, 0.70%; Capital Growth Portfolio, 0.80%;
Strategy Portfolio, 0.85%; Income and Growth Portfolio, 0.75%; Balanced
Portfolio, 0.75%; Municipal Income Portfolio, 0.60%; Quality Income Portfolio,
0.60%; Short-Duration Income Portfolio, 0.50%; and High Income Portfolio,
0.70%.
Mentor Advisors pays Van Kampen American Capital Management, Inc., the
sub-advisor to Municipal Income Portfolio, an annual fee expressed as a
percentage of the Portfolio's average net assets as
103
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
follows: 0.25% of the first $60 million of the Portfolio's average net assets
and 0.20% of the Portfolio's average net assets over $60 million.
For the period from October 1, 1997 to June 30, 1998, Wellington Management
Company, LLC, the sub-advisor to the Income and Growth Portfolio, received from
the Investment Advisor an annual fee expressed as a percentage of that
Portfolio's assets as follows: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.275% on the next $150 million of the
Portfolio's average net assets, 0.225% of the next $300 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's net assets over
$500 million. Effective July 1, 1998, the sub-advisor to the Income and Growth
Portfolio received the following fees: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.250% on the next $150 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's average net
assets over $150 million.
Van Kampen American Capital Management, Inc., the sub-advisor to the High
Income Portfolio receives from the Investment Advisor an annual fee of 0.20% of
the Portfolio's average daily net assets.
No performance or incentive fees are paid to the sub-advisors. Under certain
Sub-Advisory Agreements, the particular sub-advisor may, from time to time,
voluntarily waive some or all of its sub-advisory fee charged to the Investment
Advisor and may terminate any such voluntary waiver at any time in its sole
discretion.
The Global Portfolio has entered into an Investment Advisory Agreement with
Mentor Perpetual Advisors, LLC ("Mentor Perpetual"). Mentor Perpetual is owned
equally by Mentor and Perpetual PLC, a diversified financial services holding
company. Under this agreement, Mentor Perpetual's management fee is accrued
daily and paid monthly at an annual rate of 1.10% applied to the average daily
net assets of the Portfolio up to and including $75 million and 1.00% of its
average daily net assets in excess of $75 million.
For the year ended September 30, 1998, Mentor Advisors and sub-advisors, earned
and voluntarily waived the following management fees:
<TABLE>
<CAPTION>
MANAGEMENT
MANAGEMENT FEE SUB ADVISOR
FEE VOLUNTARILY FEE
PORTFOLIO EARNED WAIVED EARNED/(WAIVED)
- ----------------------- ------------ ------------- ----------------
<S> <C> <C> <C>
Growth $4,204,377 $ - $ -
Global 1,612,495 - -
Capital Growth 2,153,467 - -
Strategy 2,420,122 - -
Income and Growth 1,638,729 - 575,028
Balanced 31,721 - 20,856
Municipal Income 557,332 - 216,114
Quality Income 1,025,941 204,530 -
Short-Duration Income 504,097 180,523 -
High Income 175,891 175,891 (51,279)
- ----------------------- ---------- ------- -------
</TABLE>
Administrative personnel and services are provided by Mentor, under an
Administration Agreement, at an annual rate of 0.10% of the average daily net
assets of each Portfolio. For the year ended September 30, 1998, Mentor earned
the following administration fees:
<TABLE>
<CAPTION>
ADMINISTRATION
ADMINISTRATION FEE VOLUNTARILY
PORTFOLIO FEE EARNED WAIVED
- ----------------------- ---------------- ----------------
<S> <C> <C>
Growth $600,625 $ -
Global 153,750 -
Capital Growth 269,183 -
Strategy 284,720 -
Income and Growth 218,497 -
Balanced 4,219 4,219
Municipal Income 92,888 -
Quality Income 174,343 -
Short-Duration Income 101,237 101,237
High Income 24,979 -
- ----------------------- -------- -------
</TABLE>
104
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
The Portfolios also provide direct reimbursement to Mentor for certain legal
and compliance administration, investor relation and operation related costs
not covered under the Investment Management Agreement. For the year ended
September 30, 1998, these direct reimbursements were as follows:
<TABLE>
<CAPTION>
DIRECT
PORTFOLIO REIMBURSEMENTS
- ----------------------- ---------------
<S> <C>
Growth $26,735
Global 6,902
Capital Growth 12,494
Strategy 12,317
Income and Growth 10,079
Municipal Income 4,318
Quality Income 7,964
Short-Duration Income 5,085
- ----------------------- -------
</TABLE>
NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The Class B shares of the Portfolios have adopted a Distribution Plan (the
Plan) pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under a
Distribution Agreement between the Portfolios and Mentor Distributors, LLC
("Mentor Distributors") a wholly-owned subsidiary of BYSIS Fund Services, Inc.,
Mentor Distributors was appointed distributor of the Portfolios. To compensate
Mentor Distributors for the services it provides and for the expenses it incurs
under the Distribution Agreement, the Portfolios pay a distribution fee, which
is accrued daily and paid monthly at the annual rate of 0.75% of the
Portfolios' average daily net assets for the Growth Portfolio, Capital Growth
Portfolio, Strategy Portfolio, Income and Growth Portfolio, Balanced Portfolio
and Global Portfolio, 0.50% of the average daily net assets of the Quality
Income Portfolio, High Income Portfolio and Municipal Income Portfolio, and
0.30% of the average daily net assets for the Short-Duration Income Portfolio.
Mentor Distributors may select financial institutions, such as investment
dealers and banks to provide sales support services as agents for their clients
or customers who beneficially own Class B shares of the Portfolios. Financial
institutions will receive fees from Mentor Distributors based upon Class B
shares owned by their clients or customers.
Mentor Funds has adopted a Shareholder Servicing Plan (the "Service Plan") with
Mentor Distributors with respect to Class A and Class B shares of each
Portfolio. Under the Service Plan, financial institutions will enter into
shareholder service agreements with the Portfolios to provide administrative
support services to their customers who from time to time may be owners of
record or beneficial owners of Class A or Class B shares of one or more
Portfolios. In return for providing these support services, a financial
institution may receive payments from one or more Portfolios at a rate not
exceeding 0.25% of the average daily net assets of the Class A or Class B
shares of the particular Portfolio or Portfolios beneficially owned by the
financial institution's customers for whom it is holder of record or with whom
it has a servicing relationship.
105
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Presently, the Portfolios' class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.
Under the Distribution Plan, shareholder service fees are charged in Class A
and B and distribution fees are charged to Class B. For the year ended
September 30, 1998, distribution fees and shareholder servicing fees were as
follows:
<TABLE>
<CAPTION>
CLASS B CLASS B SHAREHOLDER SERVICE FEE
DISTRIBUTION DISTRIBUTION --------------------------- SHAREHOLDER SERVICE
PORTFOLIO FEE FEE WAVIED CLASS A CLASS B FEE WAIVED
- ----------------------- -------------- -------------- ----------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
Growth $3,638,580 $ -- $255,596 $1,233,864 $ --
Global 734,020 -- 146,546 237,827 --
Capital Growth 1,227,717 -- 283,728 389,229 --
Strategy 1,875,172 -- 77,994 633,805 --
Income and Growth 986,604 -- 222,501 323,741 --
Balanced 30,319 29,451 3,517 6,695 9,738
Municipal Income 257,381 -- 108,151 124,069 --
Quality Income 467,042 -- 195,196 232,278 --
Short-Duration Income 133,476 -- 160,078 91,969 --
High Income 68,461 -- 28,187 34,631 --
- ----------------------- ---------- ------- -------- ---------- ------
</TABLE>
NOTE 6: FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
In connection with portfolio purchases and sales of securities denominated in a
foreign currency, Global Portfolio may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time Global
Portfolio may enter into contracts to hedge certain foreign currency assets.
Contracts are recorded at market value. Realized gains and losses arising from
such transactions are included in net gain (loss) on investments and forward
foreign currency exchange contracts. The Portfolio is subject to the credit
risk that the other party will not complete the obligations of the contract. At
September 30, 1998, Global Portfolio had outstanding forward contracts as set
forth below.
<TABLE>
<CAPTION>
CONTRACTS NET UNREALIZED
TO DELIVER/ IN EXCHANGE APPRECIATION/
SETTLEMENT DATE RECEIVE VALUE FOR (DEPRECIATION)
- ----------------------------- ------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
PURCHASES
10/01/98 British Pound 34,560 $ 58,716 $ 58,925 $ (209)
10/01/98 British Pound 19,415 32,985 33,102 (117)
SALES
10/01/98 British Pound 32,471 55,166 55,362 196
10/02/98 British Pound 33,054 56,156 56,356 200
10/02/98 British Pound 36,586 62,159 62,380 221
10/30/98 French Franc 3,859,918 689,505 685,598 (3,907)
3/18/99 Hong Kong Dollar 7,928,000 1,006,040 1,000,000 (6,040)
11/30/98 Singapore Dollar 885,000 524,787 500,000 (24,787)
- -------- ------------------ --------- --------- ---------- ---------
</TABLE>
106
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Portfolio
shares were as follows:
<TABLE>
<CAPTION>
MENTOR GROWTH PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 12,016,618 $ 210,103,016 5,018,131 $ 82,270,375
Shares issued upon reinvestment of distributions 346,751 6,474,795 369,088 5,744,163
Shares redeemed (12,306,743) (213,035,017) (2,301,180) (37,823,031)
----------- -------------- ---------- -------------
Change in net assets from capital share transactions 56,626 $ 3,542,794 3,086,039 $ 50,191,507
=========== ============== ========== =============
CLASS B:
Shares sold 4,138,131 $ 73,047,883 5,392,199 $ 86,290,167
Shares issued upon reinvestment of distributions 1,667,456 30,460,604 3,348,283 51,489,284
Shares redeemed (4,698,527) (80,890,251) (3,140,076) (49,890,633)
----------- -------------- ---------- -------------
Change in net assets from capital share transactions 1,107,060 $ 22,618,236 5,600,406 $ 87,888,818
=========== ============== ========== =============
CLASS Y: (a)
Shares sold 1,786,672 $ 30,602,698 - -
Shares issued upon reinvestment of distributions 1 10 - -
Shares redeemed (53,808) (894,152) - -
----------- -------------- ---------- -------------
Change in net assets from capital share transactions 1,732,865 $ 29,708,556 - -
=========== ============== ========== =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR PERPETUAL GLOBAL PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- ------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,057,945 $ 42,154,809 1,732,413 $ 32,107,036
Shares issued upon reinvestment of distributions 113,726 2,255,270 26,897 463,738
Shares redeemed (1,275,534) (25,637,616) (270,161) (5,115,471)
---------- ------------- --------- ------------
Change in net assets from capital share transactions 896,137 $ 18,772,463 1,489,149 $ 27,455,303
========== ============= ========= ============
CLASS B:
Shares sold 1,821,588 $ 36,737,964 2,325,365 $ 42,416,589
Shares issued upon reinvestment of distributions 232,932 4,477,444 91,695 1,544,189
Shares redeemed (983,971) (18,930,107) (447,724) (8,352,236)
---------- ------------- --------- ------------
Change in net assets from capital share transactions 1,070,549 $ 22,285,301 1,969,336 $ 35,608,542
========== ============= ========= ============
CLASS Y: (a)
Shares sold 53 $ 1,000 - -
Shares issued upon reinvestment of distributions - 8 - -
Shares redeemed - - - -
---------- ------------- --------- ------------
Change in net assets from capital share transactions 53 $ 1,008 - -
========== ============= ========= ============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
107
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR CAPITAL GROWTH PORTFOLIO
--------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
--------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 5,110,051 $ 121,415,173 1,422,449 $ 28,161,248
Shares issued upon reinvestment of distributions 278,288 5,833,664 264,769 4,552,490
Shares redeemed (1,926,775) (45,709,577) (404,403) (7,959,184)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 3,461,564 $ 81,539,260 1,282,815 $ 24,754,554
========== ============= ========= =============
CLASS B:
Shares sold 4,375,173 $ 98,931,464 1,749,992 $ 33,332,019
Shares issued upon reinvestment of distributions 507,715 10,256,056 596,606 9,983,395
Shares redeemed (1,063,324) (23,712,167) (711,342) (13,428,205)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 3,819,564 $ 85,475,353 1,635,256 $ 29,887,209
========== ============= ========= =============
CLASS Y: (a)
Shares sold 48 $ 1,000 - -
Shares issued upon reinvestment of distributions 1 12 - -
Shares redeemed - - -
---------- ------------- --------- -------------
Change in net assets from capital share transactions 49 $ 1,012 - -
========== ============= ========= =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR STRATEGY PORTFOLIO
------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
--------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 508,748 $ 7,933,524 1,695,322 $ 28,517,096
Shares issued upon reinvestment of distributions 444,548 6,836,196 91,017 1,513,610
Shares redeemed (1,529,689) (24,220,890) (742,169) (12,677,413)
---------- ------------- --------- -------------
Change in net assets from capital share transactions (576,393) ($ 9,451,170) 1,044,170 $ 17,353,293
========== ============= ========= =============
CLASS B:
Shares sold 564,916 $ 8,678,121 2,587,894 $ 43,129,553
Shares issued upon reinvestment of distributions 3,423,558 51,517,305 1,291,000 21,237,045
Shares redeemed (7,097,154) (108,934,512) (3,591,125) (60,432,366)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions (3,108,680) ($ 48,739,086) 287,769 $ 3,934,232
========== ============= ========== =============
CLASS Y: (a)
Shares sold 67 $ 1,001 - -
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 67 $ 1,001 - -
========== ============= ========== =============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
108
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR INCOME AND GROWTH PORTFOLIO
---------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,515,923 $ 49,323,113 1,945,245 $ 37,552,063
Shares issued upon reinvestment of distributions 371,373 7,153,831 179,904 3,303,336
Shares redeemed (915,370) (18,005,450) (305,497) (5,925,176)
--------- ------------- --------- -------------
Change in net assets from capital share transactions 1,971,926 $ 38,471,494 1,819,652 $ 34,930,223
========= ============= ========= =============
CLASS B:
Shares sold 2,642,784 $ 51,766,483 1,913,241 $ 36,687,335
Shares issued upon reinvestment of distributions 559,471 10,748,481 450,665 8,192,160
Shares redeemed (1,074,795) (21,053,657) (596,371) (11,526,154)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 2,127,460 $ 41,461,307 1,767,535 $ 33,353,341
========== ============= ========= =============
CLASS Y: (a)
Shares sold 53 $ 1,000 - -
Shares issued upon reinvestment of distributions 2 30 - -
Shares redeemed - - - -
---------- ------------- --------- -------------
Change in net assets from capital share transactions 55 $ 1,030 - -
========== ============= ========= =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR BALANCED PORTFOLIO
-------------------------------------------------------------
PERIOD ENDED YEAR ENDED
9/30/98 9/30/97
------------------------------ ----------------------------
SHARES DOLLARS SHARES DOLLARS
------------ --------------- ------------ -------------
<S> <C> <C> <C> <C>
CLASS A: (b)
Shares sold 258,246 $ 3,577,935 - $ -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed - - - -
------- ------------ ----------- ----------
Change in net assets from capital share transactions 258,246 $ 3,577,935 - $ -
======= ============ ========== ==========
CLASS B:
Shares sold 412,403 $ 5,702,737 - $ -
Shares issued upon reinvestment of distributions 88,886 1,300,249 37,773 558,075
Shares redeemed (48,378) (810,125) (39,915) (636,137)
Conversion of Class B Shares to Class Y Shares (273,416) (3,350,117) - -
-------- ------------ ------- ----------
Change in net assets from capital share transactions 179,495 $ 2,842,744 (2,142) $ (78,062)
======== ============ ======= ==========
CLASS Y: (b)
Shares sold - $ - - $ -
Shares issued upon reinvestment of distributions - - - -
Shares redeemed (7,305) (100,000) - -
Conversion of Class B Shares to Class Y Shares 273,416 3,350,117 - -
-------- ------------ ------- ----------
Change in net assets from capital share transactions 266,111 $ 3,250,117 - $ -
======== ============ ======= ==========
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
(b) For the period from September 16, 1998 (initial offering of Class A and
Class Y Shares) to September 30, 1998.
109
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR MUNICIPAL INCOME PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
-------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 1,688,990 $ 26,509,509 901,683 $ 13,789,961
Shares issued upon reinvestment of distributions 75,715 1,188,701 41,778 635,539
Shares redeemed (423,337) (6,641,364) (214,874) (3,272,170)
--------- ------------ -------- ------------
Change in net assets from capital share transactions 1,341,368 $ 21,056,846 728,587 $ 11,153,330
========= ============ ======== ============
CLASS B:
Shares sold 1,208,341 $ 18,966,860 782,655 $ 11,948,057
Shares issued upon reinvestment of distributions 91,662 1,436,340 83,433 1,268,808
Shares redeemed (436,001) (6,820,355) (478,013) (7,288,249)
--------- ------------ -------- ------------
Change in net assets from capital share transactions 864,002 $ 13,582,845 388,075 $ 5,928,616
========= ============ ======== ============
CLASS Y: (a)
Shares sold 64 $ 1,000 - -
Shares issued upon reinvestment of distributions 3 43 - -
Shares redeemed - - - -
--------- ------------ -------- ------------
Change in net assets from capital share transactions 67 $ 1,043 - -
========= ============ ======== ============
</TABLE>
<TABLE>
<CAPTION>
MENTOR QUALITY INCOME PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
---------------------------------- ---------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 4,256,782 $ 56,191,423 2,838,801 $ 37,052,906
Shares issued upon reinvestment of distributions 233,015 3,077,659 91,837 1,196,422
Shares redeemed (1,597,720) (21,178,895) (529,521) (6,928,329)
---------- ------------- --------- -------------
Change in net assets from capital share transactions 2,892,077 $ 38,090,187 2,401,117 $ 31,320,999
========== ============= ========= =============
CLASS B:
Shares sold 3,811,046 $ 50,451,628 2,058,671 $ 26,889,217
Shares issued upon reinvestment of distributions 272,551 3,600,049 218,332 2,847,859
Shares redeemed (1,478,885) (19,526,706) (1,089,318) (14,250,845)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 2,604,712 $ 34,524,971 1,187,685 $ 15,486,231
========== ============= ========== =============
CLASS Y: (a)
Shares sold 76 $ 1,000 - -
Shares issued upon reinvestment of distributions 4 51 - -
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 80 $ 1,051 - -
========== ============= ========== =============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
110
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR SHORT-DURATION INCOME PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED
9/30/98 9/30/97
--------------------------------- ----------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 9,921,692 $124,978,729 2,047,670 $ 25,768,187
Shares issued upon reinvestment of distributions 200,895 2,525,409 49,602 623,647
Shares redeemed (4,997,458) (62,897,886) (505,078) (6,351,983)
---------- ------------ --------- -------------
Change in net assets from capital share transactions 5,125,129 $64,606,252 1,592,194 $ 20,039,851
========== ============ ========= =============
CLASS B:
Shares sold 3,500,465 $44,073,519 1,121,483 $ 14,121,033
Shares issued upon reinvestment of distributions 145,226 1,826,827 89,996 1,131,691
Shares redeemed (1,563,684) (19,674,936) (1,027,042) (12,921,363)
---------- ------------ ---------- -------------
Change in net assets from capital share transactions 2,082,007 $26,225,410 184,437 $ 2,331,361
========== ============ ========== =============
CLASS Y: (a)
Shares sold 79 $ 1,000 - -
Shares issued upon reinvestment of distributions 4 49 - -
Shares redeemed - - - -
---------- ------------ ---------- -------------
Change in net assets from capital share transactions 83 $ 1,049 - -
========== ============ ========== =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR HIGH INCOME PORTFOLIO
------------------------------
PERIOD ENDED
9/30/98 (C)
------------------------------
SHARES DOLLARS
------------- --------------
<S> <C> <C>
CLASS A:
Shares sold 4,775,208 $ 56,602,255
Shares issued upon reinvestment of distributions 51,541 580,207
Shares redeemed (168,561) (1,889,222)
--------- ------------
Change in net assets from capital share transactions 4,658,188 $ 55,293,240
========= ============
CLASS B:
Shares sold 5,890,307 $ 69,683,852
Shares issued upon reinvestment of distributions 62,441 701,346
Shares redeemed (190,546) (2,108,787)
--------- ------------
Change in net assets from capital share transactions 5,762,202 $ 68,276,411
========= ============
</TABLE>
(a) For the period from November 19, 1997 (initial offering of Class Y Shares)
to September 30, 1998.
(c) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
NOTE 8: SUBSEQUENT EVENT
Effective November 16, 1998, the Balanced Portfolio acquired substantially all
the assets and assumed the liabilities of the Strategy Portfolio in exchange
for Class A, Class B and Class Y shares of the Balanced Portfolio. The
acquisition was accomplished by a tax-free exchange of the respective shares of
the Balanced Portfolio for the net assets of the Strategy Portfolio. The net
assets acquired amounted to $222,601,303. The aggregate net assets of the
Balanced Portfolio immediately after the acquisition were $255,551,169.
111
<PAGE>
MENTOR FUNDS
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE TRUSTEES AND SHAREHOLDERS
MENTOR FUNDS
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments of Growth Portfolio, Global Portfolio,
Capital Growth Portfolio, Strategy Portfolio, Income and Growth Portfolio,
Balanced Portfolio, Municipal Income Portfolio, Quality Income Portfolio,
Short-Duration Income Portfolio and High Income Portfolio, portfolios of Mentor
Funds as of September 30, 1998 and the related statements of operations for the
year or period then ended, the statements of changes in net assets for each of
the years or periods in the two-year period then ended and the financial
highlights for each of the years or periods in the five-year period ended
September 30, 1998 as described more fully in each of the financial highlights
of each of the funds. These financial statements and financial highlights are
the responsibility of the Funds' management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Strategy
Portfolio, Income and Growth Portfolio, Balanced Portfolio, Municipal Income
Portfolio, Quality Income Portfolio, Short-Duration Income Portfolio and High
Income Portfolio, portfolios of Mentor Funds as of September 30, 1998, the
results of their operations for the year or period then ended, the changes in
their net assets for each of the years or periods in the two-year period then
ended, and the financial highlights for each of the years or periods in the
five-year period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
November 20, 1998
112
<PAGE>
MENTOR FUNDS
ADDITIONAL INFORMATION
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
YEAR 2000 (UNAUDITED)
The Portfolios receive services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer software to distinguish the year 2000 from
the year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolios from this problem.
FEDERAL TAX STATUS OF DIVIDENDS DECLARED (UNAUDITED)
Long-term capital gain dividends paid during the period are presented below.
For federal income tax purposes, dividends from short-term capital gains are
classified as ordinary income. All net investment income dividends were
ordinary income, except for Municipal Income Portfolio that paid exempt income
dividends. The percentage of qualifying dividends eligible for the corporate
dividends received deduction are also listed below for the applicable
Portfolios.
<TABLE>
<CAPTION>
LONG-TERM TAX-EXEMPT
CAPITAL GAIN INCOME QUALIFYING
PORTFOLIO DIVIDENDS DIVIDENDS DIVIDENDS
- ----------------------- -------------- ------------ -----------
<S> <C> <C> <C>
Growth $37,907,233 $ - -
Global 3,028,816 - -
Capital Growth 9,208,016 - 21.04%
Strategy 41,130,602 - 9.69%
Income and Growth 8,656,201 - 37.12%
Municipal Income - 3,949,481 -
Balanced 893,299 - 11.33%
High Income - - -
Quality Income - - -
Short-Duration Income - - -
- ----------------------- ----------- ---------- -----
</TABLE>
Shareholders of Mentor Strategy Portfolio (the "Strategy Portfolio") considered
and acted upon the proposal listed below at a special meeting of shareholders
held on Thursday November 12, 1998. In addition, below the proposal are the
results of that vote.
1. To approve or disapprove an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of Strategy Portfolio to Mentor
Balanced Portfolio (the "Balanced Portfolio") in exchange for shares of
the Balanced Portfolio and the assumption by the Balanced Portfolio of all
of the liabilities of the Strategy Portfolio, and the distribution of such
shares to the shareholders of the Strategy Portfolio in complete
liquidation of the Strategy Portfolio:
<TABLE>
<S> <C>
Affirmative 7,281,296
Against 313,087
Abstain 331,983
</TABLE>
113
<PAGE>
MENTOR FUNDS
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
TRUSTEES
DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
ARCH T. ALLEN III, TRUSTEE
Attorney at Law
Allen & Moore, LLP
JERRY R. BARRENTINE, TRUSTEE
President
J.R. Barrentine & Associates
ARNOLD H. DREYFUSS, TRUSTEE
Chairman
Eskimo Pie Corporation
WESTON E. EDWARDS, TRUSTEE
President
Weston Edwards & Associates
THOMAS F. KELLER, TRUSTEE
Former Dean, Fuqua School of Business
Duke University
LOUIS W. MOELCHERT, JR., TRUSTEE
Vice President for Business & Finance
University of Richmond
J. GARNETT NELSON, TRUSTEE
Consultant
Mid-Atlantic Holdings, LLC
TROY A. PEERY, JR., TRUSTEE
President
Heilig-Meyers Company
PETER J. QUINN, JR., TRUSTEE
Managing Director
Mentor Investment Group, LLC
OFFICERS
PAUL F. COSTELLO, PRESIDENT
Managing Director
Mentor Investment Group, LLC
TERRY L. PERKINS, TREASURER
Senior Vice President
Mentor Investment Group, LLC
GEOFFREY B. SALE, SECRETARY
Associate Vice President
Mentor Investment Group, LLC
MICHAEL A. WADE, ASSISTANT TREASURER
Vice President
Mentor Investment Group, LLC
This report is authorized for distribution to prospective investors only when
preceded or accompanied by a Mentor Funds prospectus, which contains complete
information about fees, sales charges and expenses. Please read it carefully
before you invest or send money.
<PAGE>
[Mentor Logo] ----------------------
BULK RATE
U.S. POSTAGE
PAID
RIVERFRONT PLAZA MENTOR
901 EAST BYRD STREET ----------------------
RICHMOND, VIRGINIA 23219
(800) 382-0016
1998 MENTOR DISTRIBUTORS, LLC
MK835
