1933 Act Registration No. 333-82853
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[X] Pre-Effective [ ] Post-Effective
Amendment No. 1 Amendment No.
MENTOR FUNDS
(Mentor Balanced Portfolio)
[Exact Name of Registrant as Specified in Charter]
Area Code and Telephone Number: (804)782-3648
901 East Byrd Street
Richmond, Virginia 23219
-----------------------------------
(Address of Principal Executive Offices)
Paul F. Costello, Esq.
901 East Byrd Street
Richmond, Virginia 23219
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Timothy W. Diggins, Esq. Robert N. Hickey, Esq.
Ropes & Gray Sullivan Worcester LLP
One International Plaza 1025 Connecticut Avenue, N.W.
Boston, Massachusetts 02110 Washington, D.C. 20036
Approximate date of proposed public offering: As soon as possible after
the effective date of this Registration Statement.
The Registrant has registered an indefinite amount of securities under
the Securities Act of 1933 pursuant to Section 24(f) under the Investment
Company Act of 1940 (File No. 33- 45315); accordingly, no fee is payable
herewith. Pursuant to Rule 429, this Registration Statement relates to the
aforementioned registration on Form N-1A. A Rule 24f-2 Notice for the
Registrant's fiscal year ended September 30, 1998 was filed with the Commission
on or about December 31, 1998.
The Registrant hereby amends this Registration Statement on such dates
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which
1
<PAGE>
specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until
the Registration Statement shall become effective on such date as the Commission
acting pursuant to said Section 8(a), may determine.
2
<PAGE>
The entire Registration Statement (File No. 333-82853) as filed with
the Commission on July 14, 1999, including Part A, Part B, Part C, and all other
documents contained therein, is hereby incorporated by reference in its
entirety, except for the cover page and the signature page. The purpose of this
filing is to add the Semi-annual Report of Mentor Income and Growth and Mentor
Balanced for the six month period ended March 31, 1999 as an attachment to Part
B, the Statement of Additional Information.
3
<PAGE>
Mentor Funds
----------------------
Semi-Annual Report
----------------------
March 31, 1999
[MENTOR INVESTMENT GROUP LOGO]
<PAGE>
MENTOR FUNDS
SEMI-ANNUAL REPORT
TABLE OF CONTENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Message from the Chairman and President .................. 1
Growth Portfolio ......................................... 2
Perpetual Global Portfolio ............................... 12
Capital Growth Portfolio ................................. 25
Income and Growth Portfolio .............................. 33
Balanced Portfolio ....................................... 43
Municipal Income Portfolio ............................... 53
Quality Income & Short-Duration Income Portfolios ........ 64
High Income Portfolio .................................... 81
Notes to Financial Statements ............................ 90
Shareholder Information .................................. Inside back cover
</TABLE>
<PAGE>
MENTOR FUNDS
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
MARCH 31, 1999
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
On behalf of all the associates at Mentor Investment Group, we would like to
take this opportunity to thank you for your investment in the Mentor Family of
Funds. This Semi-Annual Report reaffirms our commitment to our shareholders and
details the financial performance of these investments for the period ended
March 31, 1999.
Founded in 1970, Mentor Investment Group is an investment advisory firm with
more than $16 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 commentary that follows, Mentor's investment team presents an insightful
perspective on the markets and strategies that shaped their investment decisions
for the past fiscal year. 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 multiple management styles, portfolio
diversification is simplified. 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 fully 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 where the best place is 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 J. Ludeman /s/ Paul F. Costello
Daniel J. Ludeman Paul F. Costello
CHAIRMAN PRESIDENT
[MENTOR INVESTMENT GROUP GRAPHIC]
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.
1
<PAGE>
MENTOR GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
After an extremely strong fourth quarter of 1998, the first quarter of 1999 was
one of the most difficult we have encountered in the nearly 15 years of the
Small-Capitalization Growth Portfolio's existence. Not difficult in terms of
company fundamentals, but rather in terms of market psychology. It seemed
throughout the quarter that positive investment returns could only be achieved
by buying the largest companies or by purchasing companies with ".com" after
their names. The latter, of course, typically have no earnings streams at all.
The market largely ignored our small-cap growth companies whose unit sales grew
at double-digit rates and whose real earnings growth ranged from 25% and higher.
The narrowness of the market has been mentioned often in the financial press
recently, but a few facts and figures may be illustrative. The Russell 2000
Index has a total market capitalization of roughly $1 trillion dollars. This
seems like a fairly sizeable amount of money until one realizes that the sum of
the market capitalizations of the three largest companies in the Standard and
Poor's 500 index, Microsoft, General Electric and Wal-Mart, exceed that amount!
In fact, the 30 largest companies in the S&P 500 represent a third of the
capitalization of the 8,000 public companies. The narrowness of the market has
not been confined to size alone, although this was a very important factor in
performance in the first quarter. During the quarter, 56% of all industries in
the Russell 2000 saw market values decline by more than 10%. Indeed, 65% of all
industries underperformed the index itself. Strange as it may seem, companies in
the Russell 2000 losing money or having no income appreciated on average over
10% during the quarter while those companies with net income declined in value.
MANAGEMENT STRATEGY
We continue to believe that the company and industry diversification in our
Portfolio makes great sense. We own over 125 rapidly growing companies with
average market capitalizations of $950 million. Technology and healthcare
companies figure heavily in the make up of the Portfolio with a combined
weighting of over 40% of the assets. Consumer oriented industries such as
broadcasting and retailing are also important holdings of the Portfolio and are
sectors in which we believe earnings growth will be particularly strong this
year. We are adding to our telecommunication holdings, believing that unit
growth, particularly among the long distance and broadband companies, will be
very strong. We are reducing our weighting in the transportation industries due
to the fact that energy prices seem to have found a bottom, and at the same time
we are investigating the potential for new investments in the energy sector.
PERFORMANCE REVIEW
For the six-month period ending March 31, 1999 the Mentor Growth Portfolio A
shares returned 4.99%. The shift in investor psychology regarding
small-capitalization equities can be seen by comparing the 22.87% return for the
Portfolio in the September-December period and the -14.55% decline for the
January-March period. Over the course of the first quarter we have seen the
Portfolio's P/E multiple contract by 20%. For the six months we trailed the
10.00% return of our Russell 2000 index benchmark. This was due in part to our
lack of Internet exposure as these companies do not meet our earnings growth
requirements. Despite the first quarter decline, we
2
<PAGE>
MENTOR GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE SMALL-CAPITALIZATION GROWTH TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
are seeing some of the best fundamentals for our companies in some time. Fourth
quarter earnings growth was in excess of 40% over the previous year and positive
earnings surprises outnumbered negatives ones by nearly five to one. With its
earnings expected to grow in excess of 30%, the Portfolio is selling at 19 times
estimated 1999 earnings. Compare this to the S&P 500, which saw its earnings
contract 2% in the final quarter of the year, whose earnings growth is expected
to be in the single digits this year, and much is selling at a record level of
32 times those estimated earnings.
MARKET OUTLOOK
We do not believe that the present polarization of the market can continue
indefinitely. Several times in the past similar market conditions have evolved
in which a very small number of companies drove performance. This has typically
led to severe P/E compression among many of the smaller growth companies and
eventually to very strong outperformance by these same companies.
The longest period of underperformance of small-caps relative to large-caps was
six years and occurred during the Great Depression. Although the Portfolio has
underperformed large-caps since the second half of 1996, small-cap growth stocks
in general have now underperformed for over four years. At present, the top 50
stocks in the S&P 500 are selling at twice their long-term growth rates.
Companies in the Growth Portfolio are selling at roughly 60% of their long-term
growth rates. We remain convinced that over time, valuations revert to the mean
and earnings ultimately drive stock prices.
We believe that the present situation presents one of the more extraordinary
periods of small cap undervaluation in market history. We are unaware of any
time over the past 40 years when smaller companies have sold at greater
discounts to larger-cap stocks than at the present. We suspect that when one
looks back a few years from now, it will be clear that 1999 marked a historic
low point in small-cap valuations, particularly relative to larger-cap issues.
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class A and the Russell 2000.~
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
3/31/99 15068 15514
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception+++
Class A (27.56%) 11.32%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
++ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class A Shares, after deducting the maximum sales charge of 5.75% ($10,000
investment minus $575 sales charge = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
+++ Reflects operations of Mentor Growth Portfolio Class A Shares from the
date of issuance on 6/5/95 through 3/31/99.
3
<PAGE>
MENTOR GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class B Shares and the Russell 2000.-
Class B Russell 2000~
9/30/88 10000 10000
12/31/88 8737 8859.93
12/31/89 10252 10835.34
12/31/90 9096 8289.97
12/31/91 13667 12107.64
12/31/92 15796 14336.85
12/31/93 18260 17047.50
12/31/94 17443 16736.97
9/30/95 23042 21041.03
9/30/96 29535 23804.37
9/30/97 36817 31705.64
9/30/98 32972 28788
3/31/99 46963 31667
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year 10-Year
Class B (26.58%) 10.67% 12.20%
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 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.
~ 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.
4
<PAGE>
MENTOR GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Growth Portfolio Class Y and the Russell 2000.~
Class Y Russell 2000~
11/19/97 10000 10000
12/31/97 10021 10109
3/31/98 11314 11126
6/30/98 10500 10580
9/30/98 8301 8470
3/31/99 8721 9318
Total Returns as of 3/31/99
1-Year Since Inception++
Class Y (22.92%) (10.67%)
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The Russell 2000 is composed of the 2,000 smallest stocks in the Russell
3000 Index and represents approximately 7% of the U.S. equity market
capitalization. The Russell 3000 is composed of the 3,000 largest U.S.
companies by market capitalization and represents approximately 98% of the
U.S. market. The indexes are not adjusted for sales charges or other fees.
+ Represents a hypothetical investment of $10,000 in Mentor Growth Portfolio
Class Y Shares. These shares are not subject to any sales or contingent
deferred sales charges. The Class Y Shares' performance assumes the
reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Growth Portfolio Class Y Shares from the date
of issuance on 11/19/97 through 3/31/99.
5
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 93.84%
CAPITAL GOODS & CONSTRUCTION - 4.48%
Aviation Sales Company 98,250 $4,372,125
Communications Holdings, Inc. 62,700 2,899,875
Conrad Industries, Inc. 226,700 821,787
Denali, Inc. * 205,250 1,821,594
MotivePower Industries, Inc. 326,950 8,214,619
Rental Service Corporation * 222,700 3,897,250
----------
22,027,250
----------
CONSUMER CYCLICAL - 17.37%
Avis Rent A Car * 244,700 6,775,131
Cadmus Communications
Corporation 265,500 3,816,562
Carey International, Inc. * 170,100 2,764,125
Chancellor Media
Corporation * 64,750 3,051,344
Chattem, Inc. 175,450 5,482,812
Citadel Communications
Corporation * 77,750 2,585,188
Clear Channel Communications 45,662 3,062,208
Cox Radio, Inc. - Class A * 103,400 5,299,250
Cumulus Media - Class A * 312,300 3,669,525
Dollar General Corporation 42,716 1,452,344
Dollar Tree Stores, Inc. * 155,425 4,808,461
Entercom Communications
Corporation * 151,800 5,369,925
Family Dollar Stores 469,800 10,805,400
Lamar Advertising Company * 144,900 4,917,544
Media Arts Group, Inc. * 108,700 978,300
Papa John's International, Inc.* 165,900 7,320,337
SCP Pool Corporation * 330,075 4,621,050
SkyWest, Inc. 149,000 4,302,375
The Men's Wearhouse, Inc. 146,400 4,218,150
----------
85,300,031
----------
CONSUMER STAPLES - 4.17%
Bindley Western Industries 62,650 1,789,441
Celestial Seasonings, Inc. 103,250 2,232,781
Natrol, Inc. * 105,800 641,413
Parexel International
Corporation 129,500 2,679,031
Richfood Holdings, Inc. 188,675 4,068,305
US Foodservice * 126,500 5,882,250
Wild Oats Markets, Inc. 118,050 3,202,106
----------
20,495,327
----------
ENERGY - 2.87%
Core Laboratories N.V. 252,200 4,429,263
Global Industries, Limited 378,250 3,829,781
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ENERGY (CONTINUED)
Hanover Compressor
Company * 221,250 $5,863,125
----------
14,122,169
----------
FINANCIAL - 8.47%
CCB Financial Corporation 81,550 4,408,797
Commerce Bancorp, Inc. 92,350 3,809,438
Concord EFS, Inc. 111,716 3,079,172
Markel Corporation 55,760 10,050,740
National Commerce Bancorp 418,184 9,539,822
NOVA Corporation * 270,622 7,103,828
Pinnacle Holdings, Inc. 189,950 2,872,994
U.S. Trust Corporation 10,450 775,259
----------
41,640,050
----------
HEALTH - 18.11%
Biomatrix, Inc. * 41,600 3,244,800
Brookdale Living
Communities * 299,400 5,164,650
CareMatrix Corporation * 180,750 3,434,250
Chirex, Inc. * 93,000 2,278,500
Express Scripts, Inc. - Class A * 122,950 10,566,016
Health Management Associates,
Inc. * 78,961 962,337
Henry Schein, Inc. * 87,150 2,200,537
Mecon, Inc. * 235,400 1,647,800
Medquist, Inc. * 235,150 7,054,500
Molecular Devices
Corporation * 206,000 5,562,000
NCS Healthcare, Inc. -
Class A * 256,250 3,075,000
Omnicare, Inc. 254,010 4,842,066
Pharmaceutical Product
Development * 180,700 6,064,744
Priority Healthcare
Corporation - Class A * 28,067 1,270,032
Priority Healthcare
Corporation - Class B * 161,100 7,289,775
Province Healthcare
Company * 392,000 7,252,000
PSS World Medical, Inc. * 229,000 2,018,062
QuadraMed Corporation * 166,950 1,272,994
Serologicals Corporation * 288,050 3,906,678
Sunrise Assisted Living, Inc. * 51,750 2,357,859
United Payors & Providers, Inc. 219,900 5,071,444
Wesley Jessen Visioncare, Inc. * 90,000 2,480,625
----------
89,016,669
----------
</TABLE>
6
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY - 23.44%
ADE Corporation * 262,600 $2,494,700
Applied Micro Circuits * 89,700 3,834,675
ATMI, Inc. * 114,750 2,295,000
Axent Technologies, Inc. * 62,250 1,497,890
BEA Systems, Inc. * 101,600 1,587,500
Benchmark Electronics, Inc. * 245,940 7,378,200
Black Box Corporation * 54,400 1,686,400
C&D Technologies, Inc. 102,100 2,539,738
Cerprobe Corporation 418,900 5,340,975
Check Point Software
Technology * 33,250 1,429,750
Concord Communications,
Inc. * 38,400 2,188,800
Condor Technology Solutions * 115,000 1,092,500
CSG Systems International,
Inc. * 118,400 4,669,400
Digital Microwave
Corporation * 388,400 3,252,850
Galileo Technology Limited * 177,300 5,186,025
International Integration, Inc. * 10,000 320,000
ITC DeltaCom * 359,550 7,842,684
Medialink Worldwide, Inc. * 234,250 2,957,406
Metro Networks, Inc. * 95,350 5,244,250
Mylex Corporation * 149,750 973,375
Network Appliance, Inc. * 90,750 4,594,219
Optek Technology, Inc. * 66,400 975,250
P-Com, Inc. * 503,350 3,838,044
Parlex Corporation * 279,900 2,659,050
PCD, Inc. * 244,300 2,213,969
Peerless Systems * 379,450 3,225,325
Peregrine Systems, Inc. * 66,500 2,219,437
Photronics, Inc. * 190,700 3,551,787
Powerwave Technologies, Inc. * 181,400 5,147,225
PRI Automation, Inc. * 129,550 2,720,550
Remedy Corporation * 139,900 1,958,600
Research In Motion * 253,800 2,664,900
SCB Computer Technology,
Inc. 514,300 2,346,494
Segue Software, Inc. * 116,600 1,122,275
Sensormatic Electronics
Corporation 368,050 3,496,475
SIPEX Corporation * 113,950 1,488,472
Smith-Gardner & Associates * 80,000 1,130,000
Speedfam International, Inc. * 98,850 1,186,200
Vantive Corporation * 180,900 2,182,106
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY (CONTINUED)
Winstar Communications,
Inc. * 73,500 $ 2,671,266
-----------
115,203,762
------------
TRANSPORTATION - 5.42%
Atlantic Coast Airlines, Inc. * 236,650 6,655,781
Coach USA, Inc. * 182,650 5,022,875
Covenant Transport, Inc. -
Class A * 218,700 3,253,162
Mesaba Holdings, Inc. 491,175 6,584,815
M.S. Carriers, Inc. * 144,900 3,830,794
US Xpress Enterprises -
Class A * 110,750 1,287,469
------------
26,634,896
------------
MISCELLANEOUS - 9.51%
ABR Information Services,
Inc. * 194,950 3,387,256
Action Performance
Companies, Inc. * 114,800 3,429,650
AHL Services, Inc. * 281,300 5,766,650
Butler International, Inc. 181,550 3,335,981
Copart, Inc. * 245,050 5,084,788
Corporate Executive Board 41,100 1,073,738
Dendrite International, Inc. * 115,400 2,574,862
Global Vacation Group, Inc. * 106,000 1,258,750
Gulf Island Fabrication, Inc. 78,450 823,725
Imax Corporation * 44,400 865,800
Kulicke & Soffa Industries, Inc. 107,750 2,707,219
Outdoor Systems, Inc. * 336,489 10,094,670
Rent-Way, Inc. * 119,500 2,868,000
Select Appointments - 130,550 3,484,053
------------
46,755,142
------------
TOTAL COMMON STOCKS
(COST $414,597,391) 461,195,296
------------
</TABLE>
7
<PAGE>
MENTOR GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM INVESTMENT - 5.84%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%,
due 4/01/99, collateralized
by $28,512,021 Federal
Home Loan Mortgage
Corporation, 7.50%,
11/01/27, market value
$ 9,296,102 (cost
$28,692,449) $28,692,449 $ 28,692,449
------------
TOTAL INVESTMENTS (COST
$ 443,289,840)-99.68% 489,887,745
OTHER ASSETS LESS LIABILITIES - 0.32% 1,588,809
------------
NET ASSETS - 100.00% $491,476,554
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $281,329,944 and $258,350,078, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $443,289,840. Net unrealized appreciation aggregated
$46,597,905, of which $89,157,037 related to appreciated investment securities
and $42,559,132 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $461,195,296
Repurchase agreements 28,692,449
------------
Total investments
(cost $443,289,840) 489,887,745
Collateral for securities
loaned (Note 2) 83,131,779
Receivables
Investments sold 3,366,115
Fund shares sold 1,440,088
Dividends and interest 114,547
------------
TOTAL ASSETS 577,940,274
------------
LIABILITIES
Payables
Investments purchased $1,746,758
Securities loaned (Note 2) 83,131,779
Fund shares redeemed 1,399,468
Accrued expenses and other
liabilities 185,715
----------
TOTAL LIABILITIES 86,463,720
------------
NET ASSETS $491,476,554
============
Net Assets represented by:
(Note 2)
Additional paid-in capital $450,296,488
Accumulated undistributed
net investment loss (3,050,768)
Accumulated net realized loss
on investment transactions (2,367,071)
Net unrealized appreciation
of investments 46,597,905
------------
NET ASSETS $491,476,554
============
NET ASSET VALUE PER SHARE
Class A Shares $ 14.74
Class B Shares $ 14.24
Class Y Shares $ 14.78
OFFERING PRICE PER SHARE
Class A Shares $ 15.64
Class B Shares $ 14.24
Class Y Shares $ 14.78
SHARES OUTSTANDING
Class A Shares 6,608,296
Class B Shares 25,411,548
Class Y Shares 2,178,068
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 312,809
Interest 1,530,633
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 1,843,442
EXPENSES
Management fee (Note 4) $1,879,581
Distribution fee (Note 5) 1,518,365
Shareholder service fee (Note 5) 631,890
Transfer agent fee 379,384
Administration fee (Note 4) 268,512
Shareholder reports and
postage expenses 72,800
Custodian and accounting fees 60,193
Registration expenses 46,425
Legal fees 11,955
Audit fees 8,405
Directors' fees and expenses 6,209
Miscellaneous 10,491
----------
Total expenses 4,894,210
-----------
NET INVESTMENT LOSS (3,050,768)
-----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized loss on
investments (Note 2) (973,034)
Change in unrealized
appreciation (depreciation)
on investments 29,904,306
----------
NET GAIN ON INVESTMENTS 28,931,272
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $25,880,504
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment loss $ (3,050,768) $ (6,962,845)
Net realized gain (loss) on investments (973,034) 37,565,972
Change in unrealized appreciation (depreciation) on investments 29,904,306 (173,567,460)
-------------- --------------
Increase (decrease) in net assets resulting from operations 25,880,504 (142,964,333)
-------------- --------------
Distributions to Shareholders
From net realized gain on investments
Class A (2,988,326) (6,599,466)
Class B (15,034,514) (31,307,757)
Class Y (1,016,636) (10)
-------------- --------------
Total distributions to shareholders (19,039,476) (37,907,233)
-------------- --------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 351,383,493 313,753,597
Reinvested distributions 18,495,506 36,935,409
Cost of shares redeemed (371,504,132) (294,819,420)
-------------- --------------
Change in net assets resulting from capital share transactions (1,625,133) 55,869,586
-------------- --------------
Increase (decrease) in net assets 5,215,895 (125,001,980)
Net Assets
Beginning of period 486,260,659 611,262,639
-------------- --------------
End of period (including accumulated undistributed net investment income
(loss) of ($3,050,768) and $0, respectively) $ 491,476,554 $ 486,260,659
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.60 $ 19.94
-------- --------
Income from investment operations
Net investment loss (0.10) (0.12)
Net realized and unrealized gain (loss) on investments 0.80 (4.03)
-------- --------
Total from investment operations 0.70 (4.15)
-------- --------
Less distributions
From capital gains (0.56) (1.19)
-------- ---------
Net asset value, end of period $ 14.74 $ 14.60
======== ========
TOTAL RETURN* 4.99% (22.08%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 97,406 $ 77,720
Ratio of expenses to average net assets 1.27%(a) 1.26%
Ratio of net investment loss
to average net assets (0.57%)(a) (0.56%)
Portfolio turnover rate 52% 88%
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 (b)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.47 $ 16.08 $ 13.37
-------- -------- -----------
Income from investment operations
Net investment loss (0.17) (0.10) (0.01)
Net realized and unrealized gain (loss) on investments 4.19 4.23 2.72
-------- -------- ------------
Total from investment operations 4.02 4.13 2.71
-------- -------- ------------
Less distributions
From capital gains (2.55) (1.74) --
-------- -------- ------------
Net asset value, end of period $ 19.94 $ 18.47 $ 16.08
======== ======== ============
TOTAL RETURN* 25.81% 29.15% 20.27%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $105,033 $ 40,272 $ 20,368
Ratio of expenses to average net assets 1.28% 1.28% 1.36% (a)
Ratio of net investment loss
to average net assets (0.67%) (0.39%) (0.65%)(a)
Portfolio turnover rate 77% 105% 70%
</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.
10
<PAGE>
MENTOR GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.18 $ 19.53
----------- --------
Income from investment operations
Net investment loss (0.11) (0.23)
Net realized and unrealized gain
(loss) on investments 0.73 (3.93)
----------- --------
Total from investment operations 0.62 (4.16)
----------- --------
Less distributions
From capital gains (0.56) (1.19)
----------- --------
Net asset value, end of period $ 14.24 $ 14.18
=========== ========
TOTAL RETURN* 4.56% (22.62%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 361,878 $383,188
Ratio of expenses to average net assets 2.02% (a) 2.01%
Ratio of net investment loss
to average net assets (1.32%)(a) (1.30%)
Portfolio turnover rate 52% 88%
<CAPTION>
YEAR YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 (b) 12/31/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.29 $ 16.05 $ 12.15 $ 13.78
-------- -------- ----------- --------
Income from investment operations
Net investment loss (0.22) (0.17) (0.13) (0.15)
Net realized and unrealized gain
(loss) on investments 4.01 4.15 4.03 (0.47)
-------- -------- ----------- --------
Total from investment operations 3.79 3.98 3.90 (0.62)
-------- -------- ----------- --------
Less distributions
From capital gains (2.55) (1.74) -- (1.01)
-------- -------- ----------- --------
Net asset value, end of period $ 19.53 $ 18.29 $ 16.05 $ 12.15
======== ======== =========== ========
TOTAL RETURN* 24.66% 28.18% 32.10% (4.48%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $506,230 $ 371,578 $ 246,326 $190,126
Ratio of expenses to average net assets 2.03% 2.03% 2.08% (a) 2.01%
Ratio of net investment loss
to average net assets (1.42%) (1.13%) (1.20%)(a) (1.20%)
Portfolio turnover rate 77% 105% 70% 77%
</TABLE>
(a) Annualized.
(b) For the period from January 1, 1995 to September 30, 1995.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/3/99 ENDED
(UNAUDITED) 9/30/98 (c)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.63 $ 18.12
---------- ----------
Income from investment operations
Net investment loss (0.01) (0.02)
Net realized and unrealized gain
(loss) on investments 0.72 (3.28)
----------- ----------
Total from investment operations 0.71 (3.30)
----------- ----------
Less distributions
From capital gains (0.56) (0.19)
----------- ----------
Net asset value, end of period $ 14.78 $ 14.63
=========== ==========
TOTAL RETURN* 5.05% 18.36%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 32,193 $ 25,353
Ratio of expenses to average net assets 1.02% (a) 1.01% (a)
Ratio of net investment loss
to average net assets (0.33%)(a) (0.04%)(a)
Portfolio turnover rate 52% 88%
</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.
11
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
UK
During the period ending March 31, we initiated a process of judiciously
building exposure to the mid- and small-cap sectors of the U.K. market. This
strategy was aimed at taking advantage of the substantial valuation disparities
existing between large companies and much of the rest of the market. During the
fourth quarter of 1998 we also began a process of selective investment in
cyclical stocks. Considerations such as wage growth, employment outlook, and
greatly reduced home ownership costs suggested to us that the gloom surrounding
many consumer cyclical stocks had been overdone. We also continued to build an
exposure to selected commodity-related and economically sensitive stocks with
international activities. At period-end, we maintained our relatively positive
view of the domestic consumer market, causing us to add selectively to property,
house construction, and building materials companies.
During the six-month period we reduced our exposure to telecom stocks, feeling
that stock valuations did not fully reflect the likely negative impact on future
earnings of increasingly aggressive price competition. We also profitably
disposed of the Portfolio's major pharmaceutical holdings, taking advantage of
what we perceived as overly generous valuations.
U.S.
The intense focus on a very narrow range of ultra-large companies continued
throughout the six-month period ending March 31, with the first quarter of 1999
being the worst quarter of the last two decades in terms of market breadth.
Everything fundamentally now points to a broadenng out of the market. Among some
of the very large caps there has been a modest change in leadership away from
technology stocks towards cyclicals and commodity-related stocks. We currently
maintain an overweight position at the cyclical/commodity end of the market, and
an underweight position in technology.
A recent survey by Ibbotson of the 8,000 largest U.S. companies indicated that,
over the past year, only 1750 had seen their share price actually rise, and the
median fall was 26%. The implication of this is that, while we might see a
flattening of the S&P trajectory, there are still a lot of companies that
represent very good value. Given the added support of growing money supply, we
are relatively optimistic about the prospects for share prices generally.
EUROPE
Investments in Europe continue to focus on the peripheral states, such as
Ireland, Portugal and Spain, where low interest rates are supporting already
buoyant economies. During the first quarter of 1999, we began a shift towards
commodity-related and more cyclical stocks, in line with our view that the
global economic outlook is improving more rapidly than anticipated. Recently
this move on our part has begun to be echoed by European equity markets. We
continue to maintain an underweight position in telecommunication stocks, which
hurt our performance early in the year but has helped us more recently.
JAPAN
In Japan, early indicators of economic recovery were beginning to appear in the
final quarter of 1998. There were also very encouraging signs of genuine
corporate restructuring that offered the
12
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
prospect of significantly improved earnings in the years to come. We began to
increase the exposure of the Portfolio to Japan during the last quarter of 1998,
building to its present significantly overweight position. The Portfolio
benefited from both the Japanese equity market's strong rally and our holdings'
outperformance within that market. It should, however, be noted that our
Japanese weighting still represents a relatively modest portion of the overall
Portfolio's holdings.
ASIA
In Asia, the perception increasingly took hold that the worst of the regions'
difficulties were behind it, with interest rates declining, debt service costs
falling, the regional consumer beginning to spend again, and exports to the rest
of the world starting to pick up. Worries over possible devaluation of the
Chinese rnminbi were increasingly replaced by optimism over possible membership
in the World Trade Organisation. We began the period under review slightly
overweight in this region, and maintained this weighting as the regions' markets
picked up.
LATIN AMERICA
In Brazil the economic outlook has improved. The IMF released a further $9
billion in aid, part of which can be used for foreign exchange intervention, and
Congress passed a key element of the fiscal reform package. Better than expected
figures for inflation have enabled the Central Bank to cut rates more quickly
than expected. Each of these developments was positively received by the market.
The privatization program is set to continue with further issues in the next few
months. In short, the market has come a long way since the real's devaluation in
January. We have consequently adopted a slightly overweight position in Brazil.
MANAGEMENT STRATEGY
The principal asset allocation shift during the six months ending March 31, 1999
was to modestly reduce the Portfolio's exposure to Europe and the UK, and
increase its weighting in Japan. This increased weighting to Japan positioned
the Portfolio to benefit from the combination of a strong rally in the Japanese
equity market and a firm yen during the first quarter of 1999. Additionally, our
Japanese stock selection, with its focus on companies likely to be able to both
implement and benefit from the new found zeal for restructuring and cost
cutting, further enhanced returns.
PERFORMANCE REVIEW
The performance impact of our allocation to sectors sensitive to economic
cyclicality proved increasingly positive as the period progressed. For the
six-month period ending March 31, 1999 the Mentor Global Portfolio A shares
returned 21.52%. This compares to 25.66% for our Morgan Stanley World Index
benchmark. Realistically speaking, given the World Index's large allocation to
U.S. equities, outperformance by the Global Portfolio versus its index is likely
only once non-U.S. markets begin to outperform domestic markets.
MARKET OUTLOOK
Although commodity prices, particularly those for oil, have firmed, and
inflation in the U.S. and parts of Continental Europe have risen modestly,
worldwide excess capacity and global competition should continue to restrain the
prices of manufactured goods. The outlook for global interest rates, therefore,
remains relatively positive.
The US economy continues robust, and while retail price inflation has ticked up
it still remains relatively
13
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
benign. The Federal Reserve appears to have readjusted its views of the linkage
between tight labor markets and inflationary pressures. In the UK, despite the
continued challenge of sterling strength for manufacturers, there are increasing
signs of renewed buoyancy in the domestic economy. Japan appears to be bottoming
out, even if with glacial slowness. Asia is experiencing lower interest rates,
falling debt service costs, a return of consumer expenditure, and a modest
upturn in exports. In Europe, domestic demand remains buoyant, particularly in
the periphery, and the gloom surrounding the steep decline in exports and
depressed German business confidence may have been overdone. The general
improvement in the outlook for the global economy has encouraged a recent shift
of investment emphasis in all major equity markets towards economically cyclical
and commodity-related stocks.
In the light of this assessment, and barring any unforeseen shocks to global
financial markets, we remain optimistic that 1999 will continue to provide
positive investment opportunities.
14
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
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.*
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
3/31/99 21794 17554 17715
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception++
Class A (1.48%) 11.93% 11.89%
Class B 2.90% 12.38% 12.35%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* 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 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 Perpetual Global
Portfolio Class A Shares, after deducting the maximum sales charge of 5.75%
($10,000 investment minus $575 sales charges = $9,425). The Class A Shares'
performance assumes the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class A and Class
B Shares from the date of commencement of operations on 3/29/94 through
3/31/99.
15
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
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.*
MSCI World Index Class Y Shares
11/19/97 10000 10000
12/31/97 10304 10278
3/31/98 11790 11832
6/30/98 12050 11600
9/30/98 10608 10187
3/31/99 13329 12410
Total Returns as of 3/31/99
1-Year Since Inception++
Class Y Shares 4.89% 16.91%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* MSCI World Index is an arithmetic average, weighted by market value, of the
performance of approximately 1,450 securities listed on the stock exchanges
of 20 countries including the U.S., Europe, Canada, Australia, New Zealand,
and the Far East. The average company in the index has a market
capitalization of about $3.5 billion. This is a total return index with
gross dividends reinvested. MSCI World Index is not adjusted to reflect
reinvestment of dividends on securities in the index, and is not adjusted to
reflect sales loads, expenses, or other fees that the SEC requires to be
reflected in the Portfolio's performance.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual Global
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Perpetual Global Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 3/31/99.
16
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
PREFERRED STOCK - 0.04%
BRAZIL - 0.04%
Embratel Participacoes SA
(cost $76,209) 4,700,000 $ 78,379
----------
COMMON STOCKS - 96.93%
ARGENTINA - 0.09%
Perez Company SA~ 6,637 61,994
Telecom Argentina SA~ 2,100 57,619
Telefonica de Argentina SA~ 2,020 61,105
----------
180,718
----------
BELGIUM - 0.08%
Cofinimmo 1,366 168,065
----------
BRAZIL - 0.29%
CIA Paranaense Energy~ 8,500 63,750
Companhia Energetica 1,700 37,914
Electrobras - Centrais Eletricas
Brasileiras SA 2,200,000 46,181
Forca Paulista 740,000 53,504
Petroleo Brasileiro SA~ 560,000 78,008
Tele Centro Sul Participacoes
SA~ 1,100 50,806
Tele Norte Leste Participacoes
SA-* 3,800 58,425
Telecomonicacoes Brasileiras
SA~ 920 74,175
Telerj Celular SA * 980,000 36,114
Telesp Participacoes SA~* 2,000 41,250
Vale do Rio Doche- 3,650 53,205
----------
593,332
----------
CANADA - 0.58%
Canadian Natural
Resources * 27,500 473,824
MacMillan Bloedel 17,100 188,678
Newbridge Networks
Corporation * 4,000 124,000
Northern Telecom 6,100 378,962
----------
1,165,464
----------
CHILE - 0.11%
Banco Santiago SA~ 1,600 28,200
Chilectra SA- 3,450 74,587
Cia de Telecomunicaciones de
Chile SA~ 1,700 40,056
Enersis SA~ 3,000 80,438
----------
223,281
----------
CHINA - 0.20%
First Tractor 305,000 57,857
Huaneng Power
International, Inc. -
Class A~* 8,000 79,500
Pohang Iron & Steel~ 7,500 134,062
Yanzhou Coal Mining
Company - Class H 800,000 133,173
----------
404,592
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
CROATIA - 0.13%
Zagrebacka Banka 27,000 $ 260,550
----------
CZECH REPUBLIC - 0.14%
Ceske Radiokomunikace * 8,100 277,627
----------
ESTONIA - 0.24%
Eesti Telekom # 21,700 479,027
----------
FINLAND - 2.68%
Hansabank * 18,000 104,903
Huhtamaki 15,332 546,053
Metra Oyj - Class B 47,770 964,093
Nokia Oyj - Class A 15,508 2,495,488
Upm-Kymmene Oyj 47,670 1,317,065
----------
5,427,602
----------
FRANCE - 8.22%
Accor SA 3,500 868,796
Alstom SA 22,640 671,941
Atos SA 14,100 1,293,481
Axa 7,520 996,640
BQE Paribas 4,280 477,624
Casino Guichard-Perrachon 8,800 780,686
Coflexip 7,770 545,075
Colas 1,730 334,585
Compagnie de Saint - Gobain 10,645 1,688,827
Elf Aquitaine SA 8,200 1,113,311
Entrelec 10,892 410,844
Imetal 5,130 592,411
ISIS 5,460 357,687
Sanofi SA 6,111 1,028,866
Schneider 17,436 964,412
Serp Recyclage 3,039 459,178
Societe Generale D'Enterprises 12,610 593,367
Total SA - Class B 15,050 1,853,294
Usinor SA 49,160 647,439
Vivendi 3,883 955,067
----------
16,633,531
----------
GERMANY - 3.58%
AVA Allgemeine Handelsge~
sellschaft der Verbraucher AG 2,420 901,066
Daimler-Chrysler Benz 14,193 1,234,614
Deutsche Lufthansa 44,250 976,627
Metro AG 4,400 279,224
Porsche AG 655 1,615,286
Siemens AG 9,241 606,380
Veba AG 31,100 1,636,278
----------
7,249,475
----------
GREAT BRITAIN - 14.50%
Abbey National PLC 44,550 924,254
Allied Zurich PLC * 20,951 282,174
Arcadia Group PLC 55,700 186,311
Arriva PLC 35,000 219,192
Asda Group 158,000 387,138
BAA PLC 34,250 380,404
</TABLE>
17
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GREAT BRITAIN (CONTINUED)
Barclays PLC 36,500 $1,059,672
Bass PLC 35,571 482,520
BBA Group PLC 25,397 173,176
BG PLC 42,000 247,966
Blue Circle Industries 46,333 269,627
Britannic Assurance PLC 19,000 296,785
British Aerospace PLC 97,000 646,956
British Airways PLC 62,500 434,988
British-American Tobacco PLC 62,500 519,366
British Biotech PLC * 150,000 41,106
Burmah Castrol PLC 25,000 381,037
Canary Wharf Group 16,000 85,500
Carlton Communications 13,500 132,422
Celltech PLC* 25,000 161,805
Centrica PLC* 100,000 176,514
Chelsfield PLC 29,000 136,738
Coats Viyella 90,000 63,835
Debenhams PLC 44,000 335,844
Dixons Group 13,500 283,776
Emap PLC 35,200 690,555
Enterprise Oil PLC 75,000 430,102
Express Dairies PLC 48,000 88,209
Fairview Holdings 89,300 174,181
Frogmore Estates PLC 35,000 234,143
Gallaher Group PLC 40,000 234,385
Garban PLC 14,800 57,855
Glaxo Wellcome PLC 1,286 42,974
Granada Group PLC 36,000 735,846
Great Universal Stores PLC 18,000 196,293
Greenalls Group PLC 60,000 323,045
HSBC Holdings PLC 58,454 1,853,295
Iceland Group PLC 50,750 209,840
III Group PLC 51,000 514,647
Imperial Chemical Industries
PLC 40,000 356,574
Inchcape PLC 90,000 206,014
Ladbroke Group 145,412 651,645
Land Securities 16,000 211,365
Lloyds TSB Group PLC 86,000 1,310,072
Medeva PLC 80,000 159,266
Meggitt PLC 75,000 226,688
National Westminster Bank 47,250 1,096,805
Next PLC 38,626 438,658
Northern Foods PLC 93,400 167,122
Nycomed Amersham PLC 54,500 469,799
Powderject Pharmaceuticals 31,559 460,402
PowerGen PLC 26,000 286,888
Prudential Corporation PLC 45,250 592,662
Railtrack Group PLC 6,000 137,149
Rank Group PLC 61,750 225,212
Reckitt & Colman PLC 17,300 186,707
Reuters Group PLC 30,000 438,383
Rio Tinto 25,000 348,595
Rolls-Royce PLC 161,000 687,111
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GREAT BRITAIN (CONTINUED)
Sainsbury (J.) PLC 65,000 $ 400,783
Scotia Holdings * 30,000 49,569
Scottish Power PLC 22,000 192,392
Securicor PLC 39,050 348,106
Shell 85,000 573,771
Signet Group 528,500 408,932
Smith (H.W.) Group PLC 44,750 479,350
Smiths Industries PLC 23,000 336,650
Spirax-Sarco Engineering PLC 31,000 245,862
Standard Chartered 63,500 901,297
Sun Life & Provin Holdings 32,330 266,834
Tate & Lyle PLC 35,282 235,745
Telewest Communications * 48,500 211,091
Tesco PLC 134,400 359,102
TI Group PLC 27,000 174,858
Trinity PLC 39,000 330,686
United Assurance Group PLC 43,000 304,297
United News & Media PLC 48,000 454,971
United Utilities 19,000 228,944
Wolseley 12,622 95,324
----------
29,350,157
----------
GREECE - 0.19%
Alpha Credit Bank 2,600 172,817
Chipita 6,000 218,579
----------
391,396
----------
HONG KONG - 1.43%
Aeon Credit Services 608,000 109,058
Axa China Region, Limited 433,000 304,524
Cafe de Coral Holdings, Limited 450,000 126,302
Cheung Kong 40,000 304,544
Dah Sing Financial Group 100,000 246,474
Henderson Investment, Limited 200,000 124,527
HKR International, Limited 640,000 394,358
Hong Kong Telecom 108,000 213,301
Hung Hing Printing Group 181,000 60,143
Hutchison Whampoa, Limited 48,000 377,841
New World Development 133,218 262,162
Road King Infrastructure,
Limited 432,544 253,964
Swire Pacific, Limited - Class A 24,000 111,494
Wheelock & Company, Limited 3,000 2,333
----------
2,891,025
----------
INDIA - 0.14%
BSES Limited #* 8,000 78,000
Hindalco Industries, Limited # 5,000 61,125
Indian Opportunity Fund,
Limited * 11,000 118,250
Mahanagar Telephone Nigam,
Limited #* 2,000 20,200
----------
277,575
----------
INDONESIA - 0.15%
Bat Indonesia 36,000 74,913
</TABLE>
18
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INDONESIA (CONTINUED)
PT Hajaya Mandala Sampoerna 200,000 $ 164,162
PT Indofoods Sukses Mak 114,000 71,168
----------
310,243
----------
IRELAND - 2.18%
Bank of Ireland 72,465 1,509,816
CRH PLC 83,100 1,427,984
Elan Corporation PLC~* 13,250 924,187
Irish Permanent 36,580 551,341
----------
4,413,328
----------
ITALY - 3.14%
Assicurazioni Generali 15,020 601,403
Finmeccanica SPA 882,030 889,103
Grupo Editoriale L'Espresso 111,550 1,252,060
Ina SPA 304,000 918,658
Rinascente SPA 90,850 708,901
Telecom Italia Mobile 146,600 985,698
Telecom Italia SPA 94,800 1,006,759
----------
6,362,582
----------
JAPAN - 13.75%
Asahi Bank 450,000 2,369,119
Asahi Glass Company, Limited 360,000 2,607,927
Chugai Pharmaceuticals 240,000 2,765,615
DDI Corporation 550 2,594,449
Funai Electric Company,
Limited 24,000 2,213,705
Kokusai Securities Company,
Limited 220,000 2,464,726
Nichiei Company 27,000 2,413,090
Nippon Steel Corporation 1,250,000 2,558,649
Ricoh Company, Limited 270,000 2,813,377
Shin-Etsu Chemical 100,000 2,619,719
Teijin, Limited 600,000 2,415,870
----------
27,836,246
----------
KOREA - 0.23%
Atlantic Korean Company 20,000 211,400
CITC Seoul Exel @ * 2 8,750
LG Electronics # 6,400 18,400
Samsung Electric # (a) 501 21,029
Samsung Electronics #(a) 13,500 209,250
----------
468,829
----------
LUXEMBOURG - 0.24%
Benpres Holdings (a)* 95,200 251,600
Quilmes Industries SA 2,100 19,819
Tata Electric Companies 1,500 209,400
----------
480,819
----------
MALAYSIA - 0.08%
Boustead Holdings Berhad (c) 84,000 65,432
IOI Corporation (c) 100,000 49,474
Nanyang Press Berhad (c) 60,000 46,106
----------
161,012
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEXICO - 0.41%
Carso Global Telecom 7,000 $ 36,287
Cemex SA-* 5,600 47,029
Cifra SA- 71,500 110,705
DESC SA- 3,002 80,116
Fomento Economico~ 2,000 61,875
Grupo Carso SA- 6,700 54,579
Grupo Continental SA~ 15,000 42,227
Grupo Fin Bancomer 154,000 51,603
Grupo Televisa #* 1,400 43,925
Kimberly-Clark de Mexico SA~ 2,680 48,562
Telefonos de Mexico
SA - Class L~ 3,890 254,795
----------
831,703
----------
NETHERLANDS - 2.62%
Akzo Nobel 33,060 1,223,824
ING Groep NV 29,030 1,599,429
Royal Dutch Petroleum 32,738 1,740,125
Vendex International NV 30,325 731,477
----------
5,294,855
----------
PHILIPPINES - 0.06%
Bank of the Philippines Island 47,000 117,652
----------
PORTUGAL - 0.80%
BPI SGPS SA 28,060 852,488
Cimpor Cimentos de Portugal 13,920 389,100
Jeronimo Martins 12,066 428,871
----------
1,670,459
----------
SINGAPORE - 0.84%
DBS Land 100,000 147,655
GP Batteries International,
Limited 190,000 278,344
Hong Leong Finance 100,000 163,289
Marco Polo Developments,
Limited 60,000 75,738
Overseas Chinese Bank * 30,287 205,187
Overseas Chinese Bank ~
Warrants * 300,000 203,243
Overseas Union Bank, Limited 50,000 176,607
United Overseas Bank 73,000 456,514
----------
1,706,577
----------
SPAIN - 4.46%
Argentaria Corp Bancaria de
Espana SA 24,109 579,197
Autopistas Cesa 17,390 222,778
Baron de Ley * 30,000 1,102,454
Centros Comerciales Continente
SA 40,460 1,124,848
Dragados & Construcciones SA 18,700 613,532
Endesa SA 50,450 1,272,998
Prosegur CIA de Seguridad SA 116,895 1,267,897
Tabacalera SA 65,280 1,322,411
Telefonica SA 26,626 1,129,042
</TABLE>
19
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SPAIN (CONTINUED)
Viscofan Envolturas Celulosicas
SA - Warrants 29,960 $ 396,419
---------
9,031,576
---------
SWEDEN - 1.97%
BPA AB 265,000 746,361
Celsius AB - Class B 51,760 848,288
Ericsson LM - Class B 38,920 944,970
ForeningsSparbanken AB 45,740 1,074,465
Kinnevik AB 19,927 381,011
---------
3,995,095
---------
SWITZERLAND - 1.80%
Jelmoli Holding AG 785 744,538
Novartis AG 896 1,453,284
UBS AG * 4,565 1,433,983
---------
3,631,805
---------
TAIWAN - 0.20%
Formosa Growth Fund * 5,000 83,125
Taipei Fund * 20 159,500
Taiwan Semiconductor~ 5,900 134,778
---------
377,403
---------
THAILAND - 0.08%
Electricity Generating Public
Company 40,000 79,819
Thai Airways - Alien
Marketing * 50,000 75,163
---------
154,982
---------
TURKEY - 0.26%
Akbank 5,000,000 160,836
Haci Omer Sabanci~ 42,000 248,850
Turkiye IS Bankasi 2,700,000 117,612
---------
527,298
---------
UNITED STATES - 31.02%
Alcoa, Inc. 28,800 1,186,200
AlliedSignal, Inc. 16,000 787,000
Allstate Corporation 21,000 778,312
Anadarko Petroleum
Corporation 12,000 453,000
Anheuser-Busch Companies,
Inc. 7,000 533,312
Arden Realty Group, Inc. 25,000 556,250
Associates First Capital
Corporation 21,200 954,000
AT&T Corporation 10,878 868,200
Aurora Foods, Inc. * 9,800 160,475
Avon Products 14,500 682,406
BankAmerica Corporation 13,300 939,312
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
BankBoston Corporation * 18,000 $ 779,625
Bell Atlantic Corporation 5,300 273,944
Bethlehem Steel Corporation 57,000 470,727
Bristol-Myers Squibb
Company * 9,400 604,538
Cardinal Health, Inc. 8,700 574,200
Case Corporation 16,000 406,000
Chancellor Media
Corporation * 12,000 565,500
Chase Manhattan Corporation 4,700 382,169
Chevron Corporation 7,000 619,063
Citigroup, Inc. 20,700 1,322,213
Columbia/HCA Healthcare
Corporation 39,100 740,456
Compuware Corporation * 14,000 334,250
Conseco, Inc. 39,100 1,207,212
Dayton-Hudson Corporation 15,000 999,375
El Paso Energy Corporation 20,000 653,750
Enron Corporation 11,000 706,750
Federal National Mortgage
Association 10,300 713,275
Federated Department Stores,
Inc. * 37,000 1,484,625
General Electric Company 32,800 3,628,500
Global Telesystems Group,
Inc. * 5,900 330,031
Halliburton Company 17,500 673,750
HealthSouth Corporation * 65,400 690,735
Hewlett-Packard 30,600 2,075,062
Home Depot, Inc. 22,200 1,381,950
Honeywell, Inc. 10,000 758,125
Household International 15,000 684,375
Infinity Broadcasting * 15,000 386,250
Intel Corporation 6,700 798,138
International Business
Machines, Inc. 5,400 957,150
Johnson & Johnson 8,500 796,344
Lilly (Eli) & Company 6,000 509,250
Mail-Well Holdings* 19,600 262,150
MBNA Corporation 11,800 281,725
McDonald's Corporation 18,000 815,625
MCI WorldCom, Inc. * 13,400 1,186,738
McKesson HBOC, Inc. 9,000 594,000
Mead Corporation 51,000 1,568,250
Merck & Company, Inc. 9,000 721,688
Microsoft Corporation * 20,500 1,837,312
</TABLE>
20
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
Monsanto 15,500 $ 712,031
Motorola, Inc. 14,300 1,047,475
Noble Affiliates, Inc. 11,000 319,000
Ocular Sciences, Inc. * 5,000 143,438
Pharmacia & Upjohn 15,000 935,625
Philip Morris Companies, Inc. 28,000 985,250
Platinum Technology
International * 49,800 1,269,900
Procter & Gamble Company 8,500 832,469
Provident Companies, Inc. 20,000 691,250
Republic Services, Inc. * 19,000 307,562
SBC Communications, Inc. 6,200 292,175
Sears Roebuck & Company 7,700 347,944
Smurfit-Stone Container
Corporation * 27,400 529,162
Stewart Enterprises 37,000 594,312
Suiza Foods Corporation * 10,100 340,244
Sybron International
Corporation * 25,000 625,000
Symantec Corporation * 11,000 186,312
Texaco, Inc. 13,000 737,750
Time Warner, Inc. 10,000 710,625
Tosco Corporation 12,800 317,600
Travelers Property and
Casualty - Class A 9,000 321,750
Tyco International Limited 15,000 1,076,250
U.S. Foodservice * 29,600 1,376,400
Wal-Mart Stores, Inc. 14,100 1,299,844
Warner-Lambert Company 15,000 992,812
Washington Mutual, Inc. 38,500 1,573,688
Waste Management, Inc. 33,800 1,499,875
Wells Fargo Company 23,500 823,969
Xerox Corporation 4,500 240,187
-----------
62,803,186
-----------
TOTAL COMMON STOCKS
(COST $184,297,637) 196,149,066
-----------
CORPORATE BONDS - 0.19%
GREAT BRITIAN - 0.01%
Scotia Holdings, 8.50%,
3/26/02 $19,000 18,530
-----------
MALAYSIA - 0.03%
Telekom Malaysia Berhad,
4.00%, 10/03/04-(a)(b) 70,000 58,625
-----------
THAILAND - 0.15%
PTTEP International, Limited,
7.63%, 10/01/06 300,000 280,500
-----------
TOTAL CORPORATE BONDS
(COST $311,140) 357,655
-----------
TOTAL LONG-TERM
INVESTMENTS
(COST $184,684,986) 196,585,101
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM
INVESTMENT - 1.63%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%, due
4/01/99, collateralized by
Federal National Mortgage
Association $3,312,248,
7.50%, 11/01/27, market
value $3,403,335 (cost
$3,333,062) $3,333,062 $ 3,333,062
------------
TOTAL INVESTMENTS (COST
$188,574,104)-98.75% 199,918,163
OTHER ASSETS LESS
LIABILITIES - 1.25% 2,528,545
------------
NET ASSETS - 100.00% $202,446,708
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
# Global Depoistory Receipts.
@ International Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) All or a portion of these securities are restricted (i.e., securities which
may not be publicly sold without registration under the Federal Securities
Act of 1933). Dates of acquisition and costs are set forth in parentheses
after the title of the restricted securities.
(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 $162,300,760 and $140,685,888, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $188,574,104. Net unrealized appreciation aggregated
$11,344,059, of which $22,716,961 related to appreciated investment securities
and $11,372,902 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $196,585,101
Repurchase agreements 3,333,062
------------
Total investments
(cost $188,574,104) 199,918,163
Receivables
Collateral for securities
loaned (Note 2) 38,767,594
Investments sold 4,458,626
Fund shares sold 1,228,840
Dividends and interest 1,030,879
Unrealized appreciation on
forward foreign currency
exchange contracts (Note 6) 1,140
------------
TOTAL ASSETS 245,405,242
------------
LIABILITIES
Payables
Investments purchased $ 3,776,771
Securities loaned (Note 2) 38,767,594
Fund shares redeemed 261,608
Unrealized depreciation on
forward foreign currency
exchange contracts
(Note 6) 2,596
Accrued expenses and other
liabilities 149,965
----------
TOTAL LIABILITIES 42,958,534
------------
NET ASSETS $202,446,708
============
Net Assets represented by: (Note 2)
Additional paid-in capital $177,809,623
Accumulated undistributed
net investment loss (350,537)
Accumulated net realized
gain on investment
transactions 13,606,911
Net unrealized appreciation
of investments and foreign
currency related
transactions 11,380,711
------------
NET ASSETS $202,446,708
============
NET ASSET VALUE PER SHARE
Class A Shares $ 21.19
Class B Shares $ 20.25
Class Y Shares $ 21.27
OFFERING PRICE PER SHARE
Class A Shares $ 22.48(a)
Class B Shares $ 20.25
Class Y Shares $ 21.27
SHARES OUTSTANDING
Class A Shares 3,998,046
Class B Shares 5,812,536
Class Y Shares 58
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 1,405,493
Interest 256,459
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 1,661,952
EXPENSES
Management fee (Note 4) $ 945,039
Distribution fee (Note 5) 416,023
Shareholder service fee (Note 5) 226,909
Transfer agent fee 146,975
Custodian and accounting fees 122,065
Administration fee (Note 4) 90,764
Registration expenses 26,761
Shareholder reports and postage
expenses 26,262
Legal fees 4,063
Audit fees 2,856
Organizational expenses 2,712
Directors' fees and expenses 2,110
Miscellaneous 3,565
----------
Total expenses 2,016,104
-----------
NET INVESTMENT LOSS (354,152)
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN
CURRENCY RELATED TRANSACTIONS
Net realized gain on investments
and foreign currency related
transactions (Note 2) 14,279,955
Change in unrealized appreciation
(depreciation) on investments
and foreign currency related
transactions 19,653,366
----------
NET GAIN ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS 33,933,321
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $33,579,169
===========
</TABLE>
(b) Net of withholding taxes of $117,672.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment loss $ (354,152) $ (757,843)
Net realized gain on investments 14,279,955 14,799,387
Change in unrealized appreciation (depreciation) on investments 19,653,366 (25,459,714)
------------- -------------
Increase (decrease) in net assets resulting from operations 33,579,169 (11,418,170)
------------- -------------
Distributions to Shareholders
From net realized gain on investments
Class A (4,794,385) (2,382,830)
Class B (8,453,299) (4,553,653)
Class Y (85) (8)
------------- ---------------
Total distributions to shareholders (13,247,769) (6,936,491)
------------- --------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 58,623,898 78,893,773
Reinvested distributions 12,654,682 6,732,722
Shares redeemed (47,452,979) (44,567,723)
------------- --------------
Change in net assets resulting from capital share transactions 23,825,601 41,058,772
------------- --------------
Increase in net assets 44,157,001 22,704,111
Net Assets
Beginning of period 158,289,707 135,585,596
------------- --------------
End of period (including accumulated undistributed net investment income
(loss) of ($350,537) and $3,616, respectively) $ 202,446,708 $158,289,707
============= ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED 3/31/99 ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.92 $ 20.94 $ 17.86
----------- -------- --------
Income from investment operations
Net investment income (loss) (0.04) (0.03) 0.04
Net realized and unrealized gain (loss) on investments 3.90 (0.97) 3.67
----------- -------- --------
Total from investment operations 3.86 (1.00) 3.71
----------- -------- --------
Less distributions
From capital gains (1.59) (1.02) (0.63)
----------- -------- --------
Net asset value, end of period $ 21.19 $ 18.92 $ 20.94
=========== ======== ========
TOTAL RETURN* 21.52% (4.97%) 21.59%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 84,733 $ 59,012 $ 46,556
Ratio of expenses to average net assets 1.76% (a) 1.75% 1.89%
Ratio of expenses to average net asset excluding waiver 1.76% (a) 1.75% 1.89%
Ratio of net investment income (loss) to average net assets (0.07%)(a) (0.01%) 0.07%
Portfolio turnover rate 80% 162% 128%
<CAPTION>
YEAR YEAR PERIOD
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 asset excluding waiver 1.95% 2.11% 3.18% (a)
Ratio of net investment income (loss) to average net assets (0.21%) 0.26% (0.10%) (a)
Portfolio turnover rate 130% 155% 2%
</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.
23
<PAGE>
MENTOR PERPETUAL GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.21 $ 20.32
----------- --------
Income from investment operations
Net investment loss (0.06) (0.12)
Net realized and unrealized gain (loss) on
investments 3.69 (0.97)
----------- --------
Total from investment operations 3.63 (1.09)
----------- --------
Less distributions
From capital gains (1.59) (1.02)
----------- --------
Net asset value, end of period $ 20.25 $ 18.21
=========== ========
TOTAL RETURN* 21.20% (5.65%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 117,713 $ 99,277
Ratio of expenses to average net assets 2.51% (a) 2.51%
Ratio of expenses to average net asset excluding
waiver 2.51% (a) 2.51%
Ratio of net investment loss to average net assets (0.68%)(a) (0.77%)
Portfolio turnover rate 80% 162%
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94 (d)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 17.46 $ 15.67 $ 14.15 $ 14.18
-------- -------- -------- -----------
Income from investment operations
Net investment loss (0.02) (0.05) (0.05) (0.04)
Net realized and unrealized gain (loss) on
investments 3.51 2.64 1.57 0.01
-------- -------- -------- ------------
Total from investment operations 3.49 2.59 1.52 (0.03)
-------- -------- -------- ------------
Less distributions
From capital gains (0.63) (0.80) -- --
-------- -------- -------- ------------
Net asset value, end of period $ 20.32 $ 17.46 $ 15.67 $ 14.15
======== ======== ======== ============
TOTAL RETURN* 20.74% 17.39% 10.74% (0.21%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 89,030 $ 42,131 $ 12,667 $ 7,987
Ratio of expenses to average net assets 2.64% 2.70% 2.72% 2.79% (a)
Ratio of expenses to average net asset excluding
waiver 2.64% 2.70% 2.79% 3.93% (a)
Ratio of net investment loss to average net assets (0.68%) (0.91%) (0.40%) (0.82%)(a)
Portfolio turnover rate 128% 130% 155% 2%
</TABLE>
(a) Annualized.
(d) 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.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (e)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 18.96 $ 18.81
--------- ---------
Income from investment operations
Net investment income -- --
Net realized and unrealized gain on investments 3.90 0.30
---------- ----------
Total from investment operations 3.90 0.30
---------- ----------
Less distributions
From capital gains ( 1.59) ( 0.15)
---------- ----------
Net asset value, end of period $ 21.27 $ 18.96
========== ==========
TOTAL RETURN 21.83% 1.60%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 1.50% (a) 1.50% (a)
Ratio of net investment loss to average net assets (0.07%)(a) (0.02%)(a)
Portfolio turnover rate 80% 162%
</TABLE>
(a) Annualized.
(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 doesnot reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION GROWTH MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
It is now becoming increasingly apparent that the stock market may be evolving
into a once-in-a-lifetime event, one to be written and talked about long after
we are all gone. What was once a great bull market powered by strong earnings
and declining inflation expectations has become an emotionally-charged
environment where fundamental considerations are giving way to price momentum
and speculation on a historic scale.
As we have commented on repeatedly, most of the market's action has narrowed to
a fairly limited group of stocks, the mega-sized blue chip growth stocks and
Internet concepts, both of which have been in the spotlight for quite a while.
This narrowness can be illustrated innumerable ways. The number of stocks
reaching new highs is extremely low despite repeated records by the major
indexes. On the day the Dow Jones Industrial Average first closed above 10,000
only 44 New York Stock Exchange stocks hit new highs and 88 made new lows. While
the S&P 500 has returned 18% over the past twelve months, about 60% of the
stocks in the index have actually DECLINED over the same period and the largest
50 stocks in the index are up an average 47%. It is starkly clear that the
recent record breaking advances are riding on a select group.
There is no doubt many of today's most popular mega-cap stocks have shown
fantastic earnings growth. But in most cases these stocks have now far outpaced
their earnings as price momentum has become the driving force. The largest five
stocks in the NASDAQ composite gained an average 110% over the last 12 months
and now trade at an average 67 times trailing earnings. This valuation level
implies very little perceived risk to these companies' outlooks, despite the
inherently volatile nature of this sector. Naturally, the higher these stocks'
valuations rise, the more people seem to consider valuation irrelevant. Several
thoughtful observers including Warren Buffett, Bill Gates, and Alan Greenspan
have warned about these valuations, but most consider their rhetoric out-of-
date.
The performances, and particularly the valuations, of most Internet stocks are
beyond adequate description. We never imagined we would see this level of
speculation. Companies that were conceptualized less than two years ago and
organized less than one year ago have since gone public with multi-billion
dollar market values on minuscule revenues, income losses, and vague plans.
The enticement of apparently easy gains in the obvious stocks that continue to
go up without pause is incredible, but we know temptation is a deadly investment
platform. Many people chasing today's most popular stocks decry the notion of
temptation. They say they are buying these stocks with an eye toward the
long-term, and this view obviates short-term valuation concerns. We believe the
truth is precisely the opposite, that current demand is proportional to recent
gains, and it's the long-term view that often crystallizes the level of
speculation. For instance, if we assume the stock of America Online appreciates
20% a year over the next 10 years, a rate probably well below virtually all
current owners' expectations, and its shares outstanding increase by 5% a year
due to employee options, then it will have a market value exceeding $1.9
TRILLION. Assuming at that size the market will have priced the stock at a lower
but arguably extreme P/E ratio of 50 then America Online will need net income of
$39 billion, all in just ten years.
25
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE LARGE-CAPITALIZATION GROWTH MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
By comparison, Microsoft currently has net income of $6.6 billion. It may
happen, but it certainly seems a stretch.
MANAGEMENT STRATEGY
Fortunately, we know that long-term investment success is founded on consistent
execution of a sound fundamental discipline, not popularity contests. In fact,
we are increasingly comfortable with our current holdings. These are substantial
companies and their results are generally tracking our expectations including
average estimated earnings growth of 14-15% this quarter and year. These stocks
trade at an average P/E ratio of 21.5 times estimated 1999 earnings-per-share,
about 20% below the S&P 500's valuation, despite our belief that their outlooks
are better than average.
PERFORMANCE REVIEW
Our "quality-growth-at-a-reasonable-price" investment philosophy and strategy
are clearly out of sync with prevailing sentiment. After a few excellent years,
our recent returns have slipped behind the S&P 500. This under-performance
mostly reflects our lack of exposure to today's most popular stocks, not
fundamental disappointments in our holdings. For the six-month period ending
March 31, 1999 the Mentor Capital Growth A shares returned 19.63%, compared to
27.34% for the S&P 500.
MARKET OUTLOOK
We have no idea how the stock market will progress over the remainder of the
year. The economy appears to be in remarkably good shape with solid growth and
low inflation likely to continue. If market momentum continues along current
lines our performance will continue to compare poorly to the major averages. In
fact, it is very possible that current trends may grow even more extreme. At
some point the speculative excess building today will be quashed. We have no
idea when or what the catalyst may be, but it will certainly seem obvious when
we look back. Between now and then the market could experience some significant
volatility. Our singular goal is to get through this highly unusual period with
our discipline intact, as we know most others will not.
26
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
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.~
Class A Shares Class B Shares S&P 550
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
3/31/99 27116 27129 36430
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception+++
Class A 3.67% 20.91% 15.49%
Class B 8.01% 21.42% 15.64%
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
3/31/99.
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Capital Growth Portfolio Class Y Shares and the S&P 500.~
Class Y Shares S&P 500
11/19/97 10000 10000
12/31/97 10300 10643
3/31/98 11835 12127
6/30/98 12200 12450
9/30/98 10895 11281
3/31/99 13055 14366
Total Returns as of 3/31/99
1-Year Since Inception++
Class Y Shares 10.32% 22.87%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
~ The S&P 500 is adjusted to reflect reinvestment of dividends on securities
in the index. The S&P 500 is not adjusted to reflect sales loads, expenses,
or other fees that the SEC requires to be reflected in the Portfolio's
performance.
+ Represents a hypothetical investment of $10,000 in Mentor Capital Growth
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Capital Growth Portfolio Class Y from the
date of issuance on 11/19/97 through 3/31/99.
27
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 95.00%
BASIC MATERIALS - 4.88%
Bemis, Inc. 172,784 $ 5,367,103
Sherwin-Williams Company 736,600 20,716,875
-----------
26,083,978
-----------
CAPITAL GOODS & CONSTRUCTION - 9.45%
Emerson Electric Company 358,600 18,983,388
Illinois Tool Works 331,700 20,523,938
W. W. Grainger, Inc. 256,300 11,036,918
-----------
50,544,244
-----------
CONSUMER CYCLICAL - 13.32%
Chancellor Media
Corporation * 379,750 17,895,719
Interpublic Group
Companies, Inc. 252,800 19,686,800
Newell Rubbermaid, Inc. 501,419 23,817,383
Royal Caribbean Cruises,
Limited 252,600 9,851,400
-----------
71,251,302
-----------
CONSUMER STAPLES - 8.17%
Bristol-Myers Squibb
Company 341,500 21,962,719
Sysco Corporation 826,500 21,747,281
-----------
43,710,000
-----------
FINANCIAL - 16.74%
American Express Company 156,500 18,388,750
Federal National Mortgage
Association 219,600 15,207,300
SouthTrust Corporation 481,500 17,965,969
Washington Mutual, Inc. 483,640 19,768,785
Wells Fargo Company 519,800 18,225,487
-----------
89,556,291
-----------
HEALTH - 7.86%
Johnson & Johnson 240,600 22,541,212
Tenet Healthcare Corporation 1,031,000 19,524,563
-----------
42,065,775
-----------
TECHNOLOGY - 22.45%
Automatic Data Processing 515,000 21,308,125
Computer Sciences
Corporation 339,150 18,716,841
MCI WorldCom, Inc. 185,750 16,450,484
Sun Microsystems, Inc.* 183,350 22,907,291
SunGard Data Systems, Inc.* 550,000 22,000,000
Xerox Corporation 350,000 18,681,250
-----------
120,063,991
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION & SERVICES - 1.31%
Werner Enterprises, Inc. 446,312 $ 7,029,414
------------
UTILITY - 2.67%
MediaOne Group* 225,000 14,287,500
------------
MISCELLANEOUS - 8.15%
Tyco International Limited 295,600 21,209,300
UNUM Corporation 471,100 22,406,694
------------
43,615,994
------------
TOTAL COMMON STOCKS (COST
$451,750,680) 508,208,489
------------
SHORT-TERM INVESTMENT - 3.32%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%,
due 4/01/99 collateralized
by $28,720,000 Federal
Home Loan Mortgage
Corporation, 7.50%,
11/01/27, market value
$18,147,748 (cost
$17,773,445) $17,773,445 17,773,445
------------
TOTAL INVESTMENTS
(COST $469,524,125)-98.32% 525,981,934
OTHER ASSETS LESS LIABILITIES - 1.68% 8,960,759
------------
NET ASSETS - 100.00% $534,942,693
============
</TABLE>
* Non-income producing.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $289,346,132 and $182,295,844, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $469,524,125. Net unrealized appreciation aggregated
$56,457,809, of which $71,039,062 related to appreciated investment securities
and $14,581,253 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $508,208,489
Repurchase agreements 17,773,445
------------
Total investments
(cost $469,524,125) 525,981,934
Collateral for securities loaned
(Note 2) 22,282,979
Receivables
Investments sold 8,481,730
Fund shares sold 1,910,950
Dividends and interest 452,073
------------
TOTAL ASSETS 559,109,666
------------
LIABILITIES
Payables
Investments purchased $1,095,869
Securities loaned (Note 2) 22,282,979
Fund shares redeemed 703,600
Accrued expenses and other
liabilities 84,525
----------
TOTAL LIABILITIES 24,166,973
------------
NET ASSETS $534,942,693
============
Net Assets represented by: (Note 2)
Additional paid-in capital $463,096,410
Accumulated undistributed net
investment loss (1,003,192)
Accumulated net realized gain
on investment transactions 16,391,666
Net unrealized appreciation of
investments 56,457,809
------------
NET ASSETS $534,942,693
============
NET ASSET VALUE PER SHARE
Class A Shares $ 24.27
Class B Shares $ 22.95
Class Y Shares $ 24.34
OFFERING PRICE PER SHARE
Class A Shares $ 25.75(a)
Class B Shares $ 22.95
Class Y Shares $ 24.34
SHARES OUTSTANDING
Class A Shares 11,553,848
Class B Shares 11,088,831
Class Y Shares 54
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 2,337,247
Interest 607,297
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 2,944,544
EXPENSES
Management fee (Note 4) $1,796,157
Distribution fee (Note 5) 881,368
Shareholder service fee (Note 5) 561,297
Transfer agent fee 323,963
Administration fee (Note 4) 224,520
Shareholder reports and postage
expenses 56,547
Custodian and accounting fees 38,746
Registration expenses 32,333
Legal fees 10,583
Audit fees 7,440
Directors' fees and expenses 5,496
Miscellaneous 9,286
----------
Total expenses 3,947,736
-----------
NET INVESTMENT LOSS (1,003,192)
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments
(Note 2) 18,899,025
Change in unrealized appreciation
(depreciation) on investments 49,993,788
----------
NET GAIN ON INVESTMENTS 68,892,813
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $67,889,621
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment loss $ (1,003,192) $ (1,099,960)
Net realized gain on investments 18,899,025 45,438,253
Change in unrealized appreciation (depreciation) on investments 49,993,788 (32,273,002)
------------- -------------
Increase in net assets resulting from operations 67,889,621 12,065,291
------------- -------------
Distributions to Shareholders
From net investment income
Class A -- (29,728)
Class B -- (52,910)
From net realized gain on investments
Class A (16,354,928) (5,934,313)
Class B (23,292,331) (10,484,517)
Class Y (124) (12)
------------- -------------
Total distributions to shareholders (39,647,383) (16,501,480)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 202,131,046 220,347,636
Reinvested distributions 38,811,637 16,089,732
Shares redeemed (76,111,172) (69,421,743)
------------- -------------
Change in net assets resulting from capital share transactions 164,831,511 167,015,625
------------- -------------
Increase in net assets 193,073,749 162,579,436
Net Assets
Beginning of period 341,868,944 179,289,508
------------- -------------
End of period (including accumulated undistributed net investment income
(loss) of ($1,003,192) and $0, respectively) $ 534,942,693 $ 341,868,944
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR YEAR YEAR YEAR
ENDED 3/31/99 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88 $ 15.26
--------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income (loss) (0.08) (0.10) (0.02) 0.11 0.02 0.09
Net realized and unrealized gain (loss) on
investments 4.19 2.34 5.87 3.73 2.91 (0.30)
---------- -------- ------- ------- ------- -------
Total from investment operations 4.11 2.24 5.85 3.84 2.93 (0.21)
---------- -------- ------- ------- ------- -------
Less distributions
From net investment loss - (0.01) - - - (0.04)
From net realized capital loss (2.55) (1.94) (2.79) (0.50) (1.79) (0.13)
---------- -------- ------- ------- ------- -------
Total distributions (2.55) (1.95) (2.79) (0.50) (1.79) (0.17)
---------- -------- ------- ------- ------- -------
Net asset value, end of year $ 24.27 $ 22.71 $ 22.42 $ 19.36 $ 16.02 $ 14.88
========== ======== ======= ======= ======= =======
TOTAL RETURN* 19.66% 10.72% 34.78% 24.63% 20.18% (1.37%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 280,401 $145,117 $65,703 $31,889 $29,582 $ 21,181
Ratio of expenses to average net assets 1.36% (a) 1.34% 1.41% 1.43% 1.87% 1.70%
Ratio of net investment income (loss) to
average net assets (0.05%)(a) 0.06% 0.53% 0.51% 0.27% 0.53%
Portfolio turnover rate 42% 104% 64% 98% 157% 149%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR YEAR YEAR YEAR
ENDED 3/31/99 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80 $ 15.23
--------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income (loss) (0.06) (0.08) - (0.04) 0.25 (0.04)
Net realized and unrealized gain (loss) on
investments 3.84 2.07 5.55 3.67 2.53 (0.26)
---------- ------- ------- ------- ------- -------
Total from investment operations 3.78 1.99 5.55 3.63 2.78 (0.30)
---------- ------- ------- ------- ------- -------
Less distributions
From net investment loss - (0.01) - - - -
From capital loss (2.55) (1.94) (2.79) (0.50) (1.79) (0.13)
---------- ------- ------- ------- ------- -------
Total distributions (2.55) (1.95) (2.79) (0.50) (1.79) (0.13)
---------- ------- ------- ------- ------- -------
Net asset value, end of year $ 22.95 $ 21.72 $ 21.68 $ 18.92 $ 15.79 $ 14.80
========== ======= ======= ======= ======= =======
TOTAL RETURN* 18.97% 9.86% 33.88% 23.64% 19.26% (2.00%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 254,541 $196,751 $113,587 $68,213 $57,648 $41,106
Ratio of expenses to average net assets 2.11% (a) 2.09% 2.16% 2.18% 2.56% 2.46%
Ratio of net investment loss to average net
assets (0.80%)(a) (0.70%) (0.22%) (0.24%) (0.41%) (0.22%)
Portfolio turnover rate 42% 104% 64% 98% 157% 149%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
MENTOR CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (b)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 22.74 $ 20.81
--------- --------
Income from investment operations
Net investment income 0.16 0.02
Net realized and unrealized gain on investments 1.44 2.16
--------- --------
Total from investment operations 1.60 2.18
--------- --------
Less distributions
From net realized capital gain - (0.25)
--------- --------
Total distributions - (0.25)
--------- --------
Net asset value, end of period $ 24.34 $ 22.74
========= ========
TOTAL RETURN* 19.83% 10.56%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 1.09%(a) 1.09%(a)
Ratio of net investment income to average net assets ( 0.04%)(a) 0.38%(a)
Portfolio turnover rate 42% 104%
</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.
32
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
A number of milestones have been reached so far in 1999. The Dow Jones
Industrial Average exceeded 10,000 for the first time. The Senate refused to
oust President Clinton from office. The US economy continued its robust growth,
with few signs of inflation. After four years of consecutive 20% plus returns,
the stock market has gotten off to another good start, with the S&P500 returning
5.0% in the first quarter. The trends at play in 1998 continued to prevail, with
a narrow group of stocks led by large-capitalization growth stocks, dominating
the market. Large-capitalization technology issues, especially Internet-related
companies, and capital markets-oriented financial stocks provided the
leadership. Growth continued to outperform value.
Interest rates rose again during the first quarter of 1999 as the bond market
realigned yields in response to a somewhat stronger worldwide economic
environment. Following three easing moves by the Federal Reserve in 1998, the
bond market had established a yield curve that clearly envisioned further
aggressive easing by the Fed. The Fed has now stated that global economic and
financial situations have, for the moment, stabilized and that further lowering
of the short rate is not warranted. With little immediate hope of further
actions by the Fed to lower short-term yields, focus has moved to the strength
of the US economy. The strong economy and generally rising interest rates have
permitted both corporate and mortgage sectors to perform well. Corporate bonds
have been supported by the fact that the robust US economy means that corporate
balance sheets are strong and can easily support the current ratings of their
debt. Rising interest rates mean lower refinancing volume, a clear benefit for
mortgage-backed securities.
PORTFOLIO PERFORMANCE
For the six month period ended March 31, 1999, the Mentor Income & Growth
Portfolio A shares returned 5.73% compared to 15.74% for its 60%S&P500/40%Lehman
Brothers Aggregate Bond Index benchmark. Our value investment bias and
consequent lack of exposure to the very large growth stocks, especially in the
technology sector (with the exception of our large holding in IBM) was a major
cause of our shortfall in performance. The recent disparity between growth and
value investment performance can be seen by the difference in returns of the
Russell 1000 Growth Index, up 34.8% over the past six months, and the Russell
1000 Value Index up 18.3%.
EQUITY OUTLOOK AND STRATEGY
While still ten months short of the mark, it appears the US economy will set a
record for the longest expansion in the post-World War II era. At this stage of
the cycle, the economy is in far better shape than it was during the record
expansion of the 1960's. Inflation remains low, productivity is high,
manufacturing labor costs continue to decline, and capacity utilization is below
normal levels. The strength in the economy over the next few quarters is likely
to be greater than many are now expecting. We have increased our estimate of
real GDP growth to 3.5% for 1999.
If world economic activity improves as we think it will, the market could
broaden and reduce the significant dispersion in valuations. The Portfolio is
broadly diversified and well positioned to take advantage of the change when it
occurs. Two sectors that should be beneficiaries are industrial cyclicals and
materials. Increased shipments on lean cost structures should enable industrial
companies to show strong earnings gains. Improved demand
33
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MANAGERS' COMMENTARY: THE INCOME AND GROWTH MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
for materials could result in a quick upward move in the price for certain
commodities that would benefit the stock prices of the producers. The very
recent performance of energy-related equities is an example of the sharp and
rapid rally that can occur when a commodity price moves up from a very depressed
level.
FIXED INCOME OUTLOOK AND STRATEGY
The bond market is clearly in uncharted waters. Not in recent memory has rapid
economic growth this late in an economic expansion been accompanied by stable
and even falling inflation. We believe that the economy will continue to grow at
a reasonably rapid pace, though not as rapid as that of 1998. Furthermore,
inflation should remain low, most likely between one and two percent. The Fed
will not move toward either higher or lower rates during 1999, and as a result
bond yields will move around within the context of a Fed Funds Rate stable at
4.75%. As a result, both mortgage-backed securities and corporate bonds will in
all likelihood provide better total returns than Treasury securities. We
therefore expect to permit the Portfolio's duration to drift downward and to
de-emphasize Treasury securities in favor of the corporate and mortgage-backed
sectors.
34
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
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.+
Class A Shares Class 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
3/31/99 20068 20192 23979
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception++
Class A (2.31%) 13.58% 12.75%
Class B 1.95% 14.09% 13.09%
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 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.
** 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.
++ Reflects operations of Mentor Income and Growth Portfolio Class A and Class
B Shares from the date of commencement of operations on 5/24/93 through
3/31/99.
35
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
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.+
Class Y Shares LAGG/S&P 500
11/19/97 10000 10000
12/31/97 10217 10443
3/31/98 10860 11374
6/30/98 10750 11800
9/30/98 10660 11211
3/31/99 11289 12987
Total Returns as of 3/31/99
1-Year Since Inception++
Class Y 3.95% 9.82%
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 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.
*** 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.
++ Reflects operations of Mentor Income and Growth Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 3/31/99.
36
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 56.10%
BASIC MATERIALS - 4.99%
Air Products & Chemicals,
Inc. 98,900 $3,387,325
Alcoa, Inc. 48,000 1,977,000
AlliedSignal, Inc. 92,300 4,540,006
British Steel PLC- 108,900 2,198,419
Westvaco Corporation 68,300 1,434,300
----------
13,537,050
----------
CAPITAL GOODS & CONSTRUCTION - 4.73%
Caterpillar, Inc. 48,000 2,205,000
Cooper Industries, Inc. 47,500 2,024,687
Cooper Tire & Rubber 125,000 2,296,875
Hubbell, Inc. - Class B 89,400 3,576,000
Thomas & Betts Corporation 72,400 2,719,525
----------
12,822,087
----------
COMMERCIAL SERVICES - 2.95%
Supervalu, Inc. 143,900 2,967,938
Wallace Computer Services,
Inc. 254,500 5,042,281
----------
8,010,219
----------
CONSUMER CYCLICAL - 4.54%
AvalonBay Communities, Inc. 51,000 1,612,875
Delphi Automotive Systems 130,000 2,307,500
Ford Motor Company 74,000 4,199,500
Maytag Corporation 28,900 1,744,838
Premark International, Inc. 74,100 2,440,668
----------
12,305,381
----------
CONSUMER STAPLES - 6.33%
American Home Products
Corporation 36,100 2,355,525
Baxter International, Inc. 54,300 3,583,800
Bestfoods 49,700 2,336,158
Dimon, Inc. 228,100 869,631
Hormel Foods Corporation 118,100 4,207,312
Kimberly-Clark Corporation 28,600 1,371,013
Philip Morris Companies, Inc. 70,000 2,463,125
----------
17,186,564
----------
ENERGY - 7.01%
Baker Hughes, Inc. 193,100 4,694,744
Chevron Corporation 26,400 2,334,750
Phillips Petroleum Company 37,900 1,790,775
Repsol SA- 50,000 2,562,500
Total SA- 39,500 2,409,500
Unocal Corporation 65,800 2,422,262
USX-Marathon Group, Inc. 102,100 2,807,750
----------
19,022,281
----------
FINANCIAL - 11.74%
ACE Limited 119,300 3,720,669
CIT Group, Inc. - A 77,900 2,380,819
Citigroup, Inc. 71,900 4,592,612
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL (CONTINUED)
Federal National Mortgage
Association 58,900 $ 4,078,825
Jefferson Pilot Corporation 26,850 1,819,088
Spieker Properties, Inc. 65,000 2,291,250
U. S. Bancorp 163,800 5,579,976
UnionBanCal Corporation 56,100 1,910,906
Wachovia Corporation 39,000 3,166,312
Wilmington Trust
Corporation 40,700 2,324,988
-----------
31,865,445
-----------
HEALTH - 4.49%
Abbott Laboratories 41,000 1,919,312
Columbia/HCA Healthcare
Corporation 213,600 4,045,050
Johnson & Johnson 25,700 2,407,769
Pharmacia & Upjohn 61,000 3,804,875
-----------
12,177,006
-----------
TECHNOLOGY - 3.55%
Alcatel Alsthom SA- 75,500 1,722,344
International Business
Machines Corporation 21,800 3,864,050
Xerox Corporation 76,000 4,056,500
-----------
9,642,894
-----------
TRANSPORTATION & SERVICES - 1.28%
Union Pacific Corporation 65,000 3,473,438
-----------
UTILITIES - 4.49%
Bell Atlantic Corporation 67,700 3,499,244
DPL, Inc. 95,000 1,567,500
DQE, Inc. 43,000 1,650,125
Pinnacle West Capital 60,400 2,197,050
SBC Communications, Inc. 69,300 3,265,762
-----------
12,179,681
-----------
TOTAL COMMON STOCKS
(COST $139,059,876) 152,222,046
-----------
CORPORATE BONDS - 14.71%
INDUSTRIAL - 7.15%
Aluminum Company of
America, 5.75%, 2/01/01 $ 250,000 250,790
Archer-Daniels-Midland,
6.75%, 12/15/27 2,000,000 2,018,700
AT&T Corporation, 6.00%,
3/15/09 1,500,000 1,492,305
Computer Associates
International, 6.50%,
4/15/08 (a) 1,000,000 969,040
</TABLE>
37
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
INDUSTRIAL (CONTINUED)
Computer Science, 6.25%,
3/15/09 $1,275,000 $1,279,488
Gap, Inc., 6.90%, 9/15/07 1,000,000 1,056,980
Gillette Company, 5.75%,
10/15/05 250,000 247,218
Hershey Foods Corporation,
7.20%, 8/15/27 1,000,000 1,069,470
ICI Wilmington, Inc., 6.95%,
9/15/04 1,000,000 1,005,280
International Business
Machines Corporation,
5.50%, 1/15/09 1,500,000 1,448,175
Lucent Technologies, 6.45%,
3/15/29 1,250,000 1,222,337
Mead Corporation, 7.35%,
3/01/17 750,000 772,935
Praxair, Inc., 6.15%, 4/15/03 1,000,000 990,980
Rockwell International
Corporation, 6.70%,
1/15/28 1,500,000 1,477,260
Scripps (E. W.) Company,
6.38%, 10/15/02 1,000,000 1,014,300
Tenneco, Inc, 7.50%, 4/15/07 500,000 518,045
Williams Companies, Inc.,
6.50%, 11/15/02 1,000,000 1,008,170
Zeneca Wilmington, 7.00%,
11/15/23 1,500,000 1,562,100
----------
19,403,573
----------
FINANCIAL - 4.90%
Allmerica Financial
Corporation, 7.63%,
10/15/25 1,130,000 1,179,664
Allstate Corporation, 6.75%,
5/15/18 1,000,000 1,000,270
American General Finance,
5.88%, 7/01/00 250,000 250,942
Associates Corporation of
North America, 5.25%,
3/30/00 250,000 249,898
Bank One Texas, 6.25%,
2/15/08 1,000,000 996,690
BankAmerica Corporation,
7.88%, 12/01/02 1,000,000 1,063,990
Chase Manhattan
Corporation, 7.75%,
11/01/99 250,000 253,490
Comerica Bank, 7.13%,
12/01/13 250,000 250,702
Finova Capital Corporation,
6.39%, 10/08/02 1,000,000 1,008,440
First National Bank of
Boston, 8.00%, 9/15/04 250,000 270,345
Fleet Financial Group, 6.88%,
1/15/28 1,000,000 994,300
</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 $ 252,265
Heller Financial, 6.38%,
11/10/00 1,000,000 1,009,980
Home Savings of America,
6.00%, 11/01/00 250,000 251,200
Key Bank, NA, 5.80%,
4/01/04 1,375,000 1,369,252
MBIA Inc., 7.00%, 12/15/25 1,000,000 1,007,760
NationsBank Corporation,
7.80%, 9/15/16 1,000,000 1,099,800
Security Benefits Life
Company, 8.75%,
5/15/16 (a) 500,000 524,375
Toronto Dominion Bank,
6.13%, 11/01/08 250,000 245,828
----------
13,279,191
----------
UTILITIES - 2.66%
Duke Energy Corporation,
6.00%, 12/01/28 1,000,000 915,100
Florida Power & Light,
5.38%, 4/01/00 250,000 249,992
National Fuel Gas Company,
6.00%, 3/01/09 1,000,000 983,780
New York Telephone, 6.00%,
4/15/08 1,000,000 995,920
Northern Natural Gas,
6.75%, 9/15/08 (a) 2,000,000 2,011,540
Pacific Gas & Electric
Company, 5.93%, 10/08/03 250,000 249,465
Southwestern Public Service
Company, 6.88%, 12/01/99 250,000 252,748
System Energy Resources,
7.71%, 8/01/01 500,000 517,120
Union Electric Company,
6.75%, 10/15/99 250,000 252,353
U.S. West Capital Funding,
Inc., 6.88%, 7/15/28 785,000 796,280
----------
7,224,298
----------
TOTAL CORPORATE BONDS
(COST $40,147,348) 39,907,062
----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 26.58%
Government National
Mortgage Association
7.00%, 1/15/24 - 7/15/24 3,239,198 3,293,413
6.50%, 4/15/28 - 6/15/28 4,849,197 4,827,958
6.00%, 12/15/28 5,032,131 4,889,018
U.S. Treasury Bond,
6.25%, 8/15/23 3,000,000 3,134,130
U.S. Treasury Notes
5.63%, 11/30/00 10,400,000 10,504,312
6.25%, 6/30/02 12,000,000 12,385,200
</TABLE>
38
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
U.S. GOVERNMENT SECURITIES
AND AGENCIES (CONTINUED)
U.S. Treasury Notes
6.38%, 8/15/02 $3,000,000 $ 3,110,160
7.50%, 2/15/05 3,000,000 3,323,040
6.50%, 8/15/05 - 10/15/06 14,000,000 14,870,960
6.13%, 12/31/01 - 8/15/07 11,350,000 11,774,273
------------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $72,234,297) 72,112,464
------------
SHORT-TERM INVESTMENT - 1.33%
REPURCHASE AGREEMENT
Paine Webber, Inc.
Dated 3/31/99, 4.90% due
4/01/99, collateralized by
$2,700,000 (original face
value) U.S. Treasury Bond,
9.25%, 2/15/14, market
value $3,657,656
(cost $3,619,000) 3,619,000 3,619,000
------------
TOTAL INVESTMENTS
(COST $255,060,521)-98.72% 267,860,572
OTHER ASSETS LESS
LIABILITIES - 1.28% 3,485,013
------------
NET ASSETS - 100.00% $271,345,585
============
</TABLE>
* Non-income producing.
~ American Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $88,104,642 and $74,687,844, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $255,060,521. Net unrealized appreciation aggregated
$12,800,051, of which $24,402,582 related toappreciated investment securities
and $11,602,531 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $264,241,572
Repurchase agreements 3,619,000
------------
Total investments
(cost $255,060,521) 267,860,572
Collateral for securities loaned
(Note 2) 57,206,916
Receivables
Investments sold 2,260,145
Fund shares sold 1,054,367
Dividends and interest 1,788,988
------------
TOTAL ASSETS 330,170,988
------------
LIABILITIES
Payables
Investments purchased $ 852,634
Securities loaned (Note 2) 57,206,916
Fund shares redeemed 668,713
Accrued expenses and other
liabilities 97,140
----------
TOTAL LIABILITIES 58,825,403
------------
NET ASSETS $271,345,585
============
Net Assets represented by: (Note 2)
Additional paid-in capital $252,240,342
Accumulated undistributed
net investment income 38,706
Accumulated net realized
gain on investment
transactions 6,266,485
Net unrealized appreciation
of investments 12,800,052
------------
NET ASSETS $271,345,585
============
NET ASSET VALUE PER SHARE
Class A Shares $ 19.42
Class B Shares $ 19.40
Class Y Shares $ 19.69
OFFERING PRICE PER SHARE
Class A Shares $ 20.60(a)
Class B Shares $ 19.40
Class Y Shares $ 19.69
SHARES OUTSTANDING
Class A Shares 6,112,024
Class B Shares 7,869,390
Class Y Shares 58
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends (b) $ 1,797,684
Interest 3,300,603
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 5,098,287
EXPENSES
Management fee (Note 3) $ 984,781
Distribution fee (Note 3) 571,335
Shareholder service fee (Note 5) 328,259
Transfer agent fee (Note 3) 197,877
Administration fee (Note 4) 131,304
Custodian and accounting fees
(Note 3) 33,039
Shareholder reports and
postage expenses 30,827
Registration expenses 29,662
Legal fees 6,223
Audit fees 4,375
Directors' fees and expenses 3,232
Miscellaneous 5,462
---------
Total expenses 2,326,376
-----------
NET INVESTMENT INCOME 2,771,911
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on
investments (Note 2) 8,229,407
Change in unrealized
appreciation (depreciation)
on investments 2,100,645
---------
NET GAIN ON INVESTMENTS 10,330,052
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $13,101,963
===========
</TABLE>
(b) Net of withholding taxes of $18,656.
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 2,771,911 $ 4,930,518
Net realized gain on investments 8,229,407 10,845,766
Change in unrealized appreciation (depreciation) on investments 2,100,645 (5,423,416)
------------- -------------
Increase in net assets resulting from operations 13,101,963 10,352,868
------------- -------------
Distributions to Shareholders
From net investment income
Class A (1,406,404) (2,350,498)
Class B (1,418,753) (2,488,039)
Class Y -- (29)
From net realized gain on investments
Class A (4,931,050) (5,325,307)
Class B (7,246,255) (8,807,307)
Class Y (54) (1)
------------- ---------------
Total distributions to shareholders (15,002,516) (18,971,181)
------------- --------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 40,262,800 101,090,596
Reinvested distributions 14,251,560 17,902,342
Shares redeemed (23,909,198) (39,059,107)
------------- --------------
Change in net assets resulting from capital share transactions 30,605,162 79,933,831
------------- --------------
Increase in net assets 28,704,609 71,315,518
Net Assets
Beginning of period 242,640,976 171,325,458
------------- --------------
End of period (including accumulated undistributed net investment income
of $38,706 and $91,952, respectively) $ 271,345,585 $242,640,976
============= ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.54 $ 20.60
--------- -------
Income from investment operations
Net investment income 0.24 0.51
Net realized and unrealized gain on investments 0.86 0.60
--------- -------
Total from investment operations 1.10 1.11
--------- -------
Less distributions
From net investment income (0.24) (0.51)
From net realized capital gain (0.98) (1.66)
--------- -------
Total distributions (1.22) (2.17)
--------- -------
Net asset value, end of period $ 19.42 $ 19.54
========= =======
TOTAL RETURN* 5.73% 5.81%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 118,711 $98,794
Ratio of expenses to average net assets 1.34%(a) 1.32%
Ratio of net investment income to average net assets 2.54%(a) 2.70%
Portfolio turnover rate 28% 40%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.16 $ 17.13 $ 15.27 $ 14.88
------- ------- ------- -------
Income from investment operations
Net investment income 0.44 0.37 0.40 0.31
Net realized and unrealized gain on investments 3.39 2.75 2.14 0.64
------- ------- ------- -------
Total from investment operations 3.83 3.12 2.54 0.95
------- ------- ------- -------
Less distributions
From net investment income (0.47) (0.35) (0.43) (0.30)
From net realized capital gain (1.92) (0.74) (0.25) (0.26)
------- ------- ------- -------
Total distributions (2.39) (1.09) (0.68) (0.56)
------- ------- ------- -------
Net asset value, end of period $ 20.60 $ 19.16 $ 17.13 $ 15.27
======= ======= ======= =======
TOTAL RETURN* 22.11% 19.13% 17.24% 6.54%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $63,509 $24,210 $19,888 $17,773
Ratio of expenses to average net assets 1.35% 1.36% 1.69% 1.75%
Ratio of net investment income to average net assets 2.63% 2.08% 2.53% 2.20%
Portfolio turnover rate 75% 72% 62% 78%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
MENTOR INCOME AND GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
3/31/99 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28 $ 14.91
-------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income 0.17 0.37 0.34 0.23 0.28 0.21
Net realized and unrealized gain on
investments 0.86 0.59 3.35 2.76 2.14 0.61
-------- ------- ------- ------- ------- -------
Total from investment operations 1.03 0.96 3.69 2.99 2.42 0.82
-------- ------- ------- ------- ------- -------
Less distributions
From net investment income (0.18) (0.36) (0.36) (0.21) (0.31) (0.19)
From net realized capital gain (0.98) (1.66) (1.92) (0.74) (0.25) (0.26)
-------- -------- -------- ------- ------- -------
Total distributions (1.16) (2.02) (2.28) (0.95) (0.56) (0.45)
-------- -------- -------- ------- ------- -------
Net asset value, end of period $ 19.40 $ 19.53 $ 20.59 $ 19.18 $ 17.14 $ 15.28
======== ======== ======== ======= ======= =======
TOTAL RETURN 5.36% 5.01% 21.24% 18.26% 16.32% 5.66%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $152,634 $143,846 $107,816 $66,548 $46,678 $43,219
Ratio of expenses to average net assets 2.08%(a) 2.07% 2.10% 2.13% 2.43% 2.44%
Ratio of net investment income to
average net assets 1.79%(a) 1.95% 1.87% 1.32% 1.78% 1.51%
Portfolio turnover rate 28% 40% 75% 72% 62% 78%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
3/31/99 PERIOD ENDED
(UNAUDITED) 9/30/98 (c)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 19.54 $ 18.75
-------- --------
Income from investment operations
Net investment income 0.24 0.54
Net realized and unrealized gain on investments 0.89 0.82
-------- --------
Total from investment operations 1.13 1.36
-------- --------
Less distributions
From net investment income -- (0.54)
From net realized capital gain (0.98) (0.03)
-------- --------
Total distributions (0.98) (0.57)
-------- --------
Net asset value, end of period $ 19.69 $ 19.54
======== ========
TOTAL RETURN 5.89% 7.29%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 1
Ratio of expenses to average net assets 1.07%(a) 1.07%(a)
Ratio of net investment income to average net assets 2.54%(a) 3.15%(a)
Portfolio turnover rate 28% 40%
</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.
42
<PAGE>
MENTOR BALANCED PORTFOLIO
MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
What was once a great bull market powered by strong earnings and declining
inflation expectations has become an emotionally-charged environment where
fundamental considerations are giving way to price momentum and speculation on a
historic scale. As we have commented on repeatedly, most of the "action" has
narrowed to a fairly limited group of stocks -- the mega-sized blue chip growth
stocks and Internet concepts, both of which have been in the spotlight for quite
a while. While the S&P 500 has returned 18% over the past twelve months, about
60% of the stocks in the index have actually DECLINED over the same period and
the largest 50 stocks in the index are up an average 47%. Several thoughtful
observers including Warren Buffett, Bill Gates, and Alan Greenspan have warned
about these valuations, but most consider their rhetoric out-of-date.
The performances, and particularly the valuations, of most Internet stocks are
beyond adequate description. We never imagined we would see this level of
speculation. Companies that were conceptualized less than two years ago and
organized less than one year ago have since gone public with multi-billion
dollar market values on minuscule revenues, income losses, and vague plans. The
enticement of apparently easy gains in the obvious stocks that continue to go up
without pause is incredible, but we know temptation is a deadly investment
platform.
Treasury rates increased sharply during the six-month period ending March 31,
1999, with the 2-year note climbing 71 basis points (0.71%) to 4.98% and the
long bond rising 66 basis points (0.66%) to 5.62%. The market sold off in
reaction to much stronger than anticipated economic growth during both the final
quarter of 1998 and the first quarter of 1999. Indeed, economic growth in the
final quarter of 1998 surged more than 6.0% on an annualized basis. Despite
turmoil in financial markets and in Brazil, the much-anticipated slowdown in
U.S. economic growth has yet to materialize and the economy has continued its
robust growth into 1999.
MANAGEMENT STRATEGY
We are increasingly comfortable with our current holdings. Our equity
investments are substantial companies with average estimated earnings growth of
14-15% this quarter and year. These stocks trade at an average P/E ratio of 21.5
times estimated 1999 earnings-per-share, about 20% below the S&P 500's
valuation, despite our belief that their outlooks are better than average.
During the first quarter economic data has painted an ever-clearer picture of a
robust U.S. economy. Consequently, we have cut back on the duration of our
fixed-income holdings to approximately neutral levels and sector allocations
have been tilted toward spread product. Mortgage-backed securities have been
particularly emphasized given their high yield and strong performance potential
in a stable to rising rate environment. The stronger economic growth also
prompted us to increase allocation to lower rated corporate bonds, including
high yield securities.
PERFORMANCE DISCUSSION
For the six-month period ending March 31, 1999 the Mentor Balanced Portfolio A
shares returned 11.93% compared to 15.74% for our 60% S&P500/40% Lehman Brothers
Aggregate Bond Index benchmark. Our "quality-growth-at-a- reasonable-price"
equity investment philosophy and
43
<PAGE>
MENTOR BALANCED PORTFOLIO
MANAGERS' COMMENTARY: THE BALANCED MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
strategy are clearly out of sync with prevailing sentiment. Our recent
under-performance mostly reflects lack of exposure to today's most popular
stocks, not fundamental disappointments in our holdings. Our asset allocation
weighting between stocks, bonds, and cash remains a conservative 52%, 46%, and
2%.
MARKET OUTLOOK
We have no idea how the stock market will progress over the remainder of the
year. The economy appears to be in remarkably good shape with solid growth and
low inflation likely to continue. It is very possible that current trends may
grow even more extreme. At some point the speculative excess building today will
be quashed. We have no idea when or what the catalyst may be, but it will
certainly seem obvious when we look back. Between now and then the market could
experience some significant volatility. Our singular goal is to get through this
highly unusual period with our discipline intact, as we know most others will
not.
Our long-term fixed-income market outlook is for continued declines in inflation
and therefore continued lower interest rates. This optimism is fueled by
structural economic changes such as the Internet that offer the potential to
substantially increase economic efficiency and reduce costs. In addition,
slowing global economic growth and excess manufacturing capacity will continue
to moderate price levels and therefore interest rates. As the summer wears on,
we expect that stumbling growth in Europe and Latin America will exert
significant pressure on the U.S. economy. This pressure on domestic economic
growth and global inflation should allow bond prices to rally. We anticipate
reducing our exposure to mortgages and corporate bonds at that time and
aggressively extending portfolio durations.
44
<PAGE>
MENTOR BALANCED PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 investment in Mentor
Balanced Portfolio Class A, Class B and Class Y Shares, the S&P 500 and the
Lehman Brothers Aggregate Bond Index.+
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class Y Shares S&P 500
<S> <C> <C> <C> <C>
6/21/94 10000 10000 10000 10000
12/31/94 9182 10108 9182 10335
6/30/95 10503 11561 10503 12055
9/30/95 10978 12085 10978 12723
9/30/96 12954 14260 12954 14505
9/30/97 16396 18048 16396 18499
9/30/98 18340 20181 18340 20462
3/31/99 20527 22429 20461 23683
</TABLE>
Average Annual Returns as of 3/31/99
Without Sales Charges
1-Year Since Inception+++
Class B 9.62% 18.54%
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception+++
Class A 3.56% 14.81%
Class B 6.15% 18.43%
Average Annual Returns as of 3/31/99
Without Sales Charges
1-Year Since Inception+++
Class Y 9.55% 18.52%
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 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.
~ 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.
* 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.
** 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 slaes charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
++ Reflects operations of Mentor Balanced Portfolio Class A, Class B and Class
Y Shares from the date of commencement of operations on 6/21/94 through
3/31/99.
45
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMMON STOCKS - 51.78%
BASIC MATERIALS - 2.76%
Bemis Company 91,062 $2,828,614
Sherwin-Williams Company 234,985 6,608,953
----------
9,437,567
----------
CAPITAL GOODS & CONSTRUCTION - 5.33%
Emerson Electric Company 116,190 6,150,808
Illinois Tool Works 109,135 6,752,728
W. W. Grainger, Inc. 122,530 5,276,448
----------
18,179,984
----------
CONSUMER CYCLICAL - 7.76%
Chancellor Media
Corporation - Class A * 129,600 6,107,400
Interpublic Group
Companies, Inc. 87,335 6,801,213
Newell-Rubbermaid, Inc. 159,594 7,580,730
Royal Caribbean Cruises
Limited 91,900 3,584,100
The Walt Disney Company 39,000 1,213,875
Tribune Company 18,300 1,197,506
----------
26,484,824
----------
CONSUMER STAPLES - 1.86%
Sysco Corporation 240,935 6,339,602
----------
FINANCIAL - 9.00%
American Express Company 36,860 4,331,050
Charter One Financial, Inc. 97,872 2,826,054
Citigroup, Inc. 45,300 2,893,537
Federal National Mortgage
Association 52,910 3,664,018
M & T Bank Corporation 2,901 1,389,579
Marsh & McLennan 14,700 1,090,556
North Fork Bancorporation 111,750 2,360,719
SouthTrust Corporation 141,500 5,279,719
Washington Mutual, Inc. 70,880 2,897,220
Wells Fargo Company 113,495 3,979,418
----------
30,711,870
----------
HEALTH - 5.95%
Bristol-Myers Squibb
Company 108,890 7,002,988
Johnson & Johnson 80,205 7,514,206
Tenet Healthcare
Corporation * 304,970 5,775,369
----------
20,292,563
----------
TECHNOLOGY - 11.89%
Automatic Data Processing 167,800 6,942,725
Computer Sciences
Corporation * 107,645 5,940,658
MCI WorldCom, Inc. * 54,585 4,834,184
Sun Microsystems, Inc. * 74,925 9,360,942
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TECHNOLOGY (CONTINUED)
SunGard Data Systems,
Inc.* 184,100 $ 7,364,000
Xerox Corporation 114,650 6,119,444
-----------
40,561,953
-----------
TRANSPORTATION & SERVICES - 0.80%
Werner Enterprises, Inc. 174,272 2,744,784
-----------
UTILITIES - 1.69%
MediaOne Group * 91,000 5,778,500
-----------
MISCELLANEOUS - 4.74%
Omnicom Group, Inc. 24,800 1,982,450
Tyco International, Inc. 104,145 7,472,404
UNUM Corporation 141,620 6,735,801
-----------
16,190,655
-----------
TOTAL COMMON STOCKS
(COST $161,484,581) 176,722,302
-----------
FIXED INCOME
SECURITIES - 40.04%
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 32.05%
Federal Home Loan Bank
4.97%, 2/01/01 $2,000,000 1,989,272
Federal National Mortgage
Association
4.63% - 6.64%,
10/15/01 - 7/02/07 1,480,000 1,463,992
Government National
Mortgage Association
6.50%, 5/15/09 89,637 91,121
U.S. Treasury Notes
4.75% - 6.63%,
2/28/02 - 11/15/08 21,992,000 22,144,232
U.S. Treasury Bonds
4.25% - 7.50%,
11/15/03 - 8/15/28 78,098,000 83,682,925
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $101,957,708) 109,371,542
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 0.87%
AFG Receivables Trust,
6.65%, 10/15/02 23,927 24,001
Capital One Master Trust
Series 1998-4, 5.43%,
1/15/07 125,000 122,957
CS First Boston, 7.18%,
2/25/18 25,000 25,108
Equifax Credit Corporation,
6.33%, 1/15/22 900,000 902,392
</TABLE>
46
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Key Auto Finance
Trust Series 1999-1,
5.63%, 7/15/03 $1,500,000 $ 1,500,288
Key Auto Finance
Trust Series 1997-2
6.10%, 11/15/00 29,219 29,245
PNC Student Loan Trust,
6.73%, 1/25/07 75,000 77,993
Union Acceptance
Corporation Series 97A,
6.48%, 5/10/04 45,000 45,486
Union Acceptance
Corporation
5.75%, 6/09/03 250,000 249,119
------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS (COST $2,978,346) 2,976,589
------------
CORPORATE BONDS - 7.12%
Associates Corporation,
6.25%, 11/01/08 1,500,000 1,508,504
Continental Airlines, Inc.,
7.46%, 4/01/15 1,711,944 1,818,085
Dayton Hudson Company,
6.65%, 8/01/28 1,700,000 1,660,278
Discover Series 1998-7,
5.60%, 5/15/06 125,000 123,545
Enron Corporation,
6.73%, 11/17/08 1,000,000 1,006,879
Ford Motor Credit
Company,
5.80%, 1/12/09 1,250,000 1,211,687
General Electric Capital
Corporation,
6.29%, 12/15/07 300,000 302,721
Georgia Power Company,
5.50% - 6.00%,
3/01/00 - 12/01/05 2,500,000 2,457,390
GTE California,
5.50%, 1/15/09 1,515,000 1,447,826
GTE North, Inc.,
5.65%, 11/15/08 1,500,000 1,450,421
Household Financial
Company,
5.88%, 2/01/09 800,000 768,552
IBM Corporation,
5.10%, 11/10/03 1,000,000 967,183
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
Merrill Lynch & Company,
6.00%, 2/17/09 $1,250,000 $ 1,208,559
National City Corporation,
5.75%, 2/01/09 800,000 769,479
National Rural Utilities,
5.50%, 1/15/05 1,300,000 1,271,409
Norwest Corporation,
6.80%, 5/15/02 60,000 61,747
Pepsi Bottling Holdings,
Inc., 5.63%, 2/17/09 1,800,000 1,735,674
PSI Energy, Inc.,
6.00%, 12/14/01 1,000,000 987,764
Safeway, Inc.,
5.75% - 6.50%,
11/15/00 - 11/15/08 1,650,000 1,670,989
SmithKline Beechum,
6.63%, 10/01/01 330,000 338,762
Sprint Capital Corporation,
6.13%, 11/15/08 1,450,000 1,427,457
Toyota Motor Credit,
5.63%, 11/13/03 100,000 99,215
------------
TOTAL CORPORATE BONDS
(COST $24,650,350) 24,294,126
------------
TOTAL FIXED INCOME
SECURITIES
(COST $129,586,404) 136,642,257
------------
SHORT-TERM
INVESTMENT - 6.14%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%,
due 4/01/99, collateralized
by $33,830,000 Federal Home
Loan Mortgage Corporation,
7.50%, 11/01/27, market
value $21,376,682
(cost $20,936,014) 20,936,014 20,936,014
------------
TOTAL INVESTMENTS
(COST $312,006,999)-97.96% 334,300,573
OTHER ASSETS LESS
LIABILITIES - 2.04% 6,992,993
------------
NET ASSETS - 100.00% $341,293,566
============
</TABLE>
* Non-income producing.
47
<PAGE>
MENTOR BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $350,988,737 and $74,148,245, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $312,006,999. Net unrealized appreciation aggregated
$22,293,574, of which $30,714,052 related to appreciated investment securities
and $8,420,478 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $313,364,559
Repurchase agreements 20,936,014
------------
Total investments
(cost $312,006,999) 334,300,573
Collateral for securities loaned
(Note 2) 87,189,594
Receivables
Investments sold 1,002,666
Fund shares sold 4,851,369
Dividends and interest 2,689,063
Variation margin (Note 2) 366,563
Other 2,495
Prepaid expense 140,000
------------
TOTAL ASSETS 430,542,323
------------
LIABILITIES
Investments purchased $1,514,077
Securities loaned (Note 2) 87,189,594
Fund shares redeemed 535,285
Accrued expenses and other
liabilities 9,801
----------
TOTAL LIABILITIES 89,248,757
------------
NET ASSETS $341,293,566
============
Net Assets represented by: (Note 2)
Additional paid-in capital $312,761,476
Accumulated undistributed
net investment loss (210,671)
Accumulated net realized
gain on investment
transactions 3,689,030
Net unrealized appreciation
of investments 25,053,731
------------
NET ASSETS $341,293,566
============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.17
Class B Shares $ 15.16
Class Y Shares $ 15.16
OFFERING PRICE PER SHARE
Class A Shares $ 16.10(a)
Class B Shares $ 15.16
Class Y Shares $ 15.16
SHARES OUTSTANDING
Class A Shares 7,538,584
Class B Shares 14,958,738
Class Y Shares 13,189
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 810,724
Interest net of premium 2,879,894
-----------
TOTAL INVESTMENT
INCOME (NOTE 2) 3,690,618
EXPENSES
Management fee (Note 4) $ 871,032
Distribution fee (Note 5) 631,992
Shareholder service fee (Note 5) 288,984
Transfer agent fee 169,791
Administration fee (Note 4) 116,138
Registration expenses 55,851
Shareholder reports and postage
expenses 52,503
Custodian and accounting fees 39,139
Legal fees 5,855
Audit fees 4,116
Directors' fees and expenses 3,041
Miscellaneous 5,139
----------
Total expenses 2,243,581
-----------
NET INVESTMENT INCOME 1,447,037
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on investments
(Note 2) 4,564,399
Change in unrealized appreciation
(depreciation) on investments 24,850,706
----------
NET GAIN ON INVESTMENTS 29,415,105
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $30,862,142
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 1,447,037 $ 110,202
Net realized gain on investments 4,564,399 822,291
Change in unrealized appreciation (depreciation) on investments 24,850,706 (583,942)
------------- ------------
Increase in net assets resulting from operations 30,862,142 348,551
------------- ------------
Distributions to Shareholders
From net investment income
Class A (630,596) --
Class B (1,044,583) --
Class Y (788) (159,807)
From net realized gain on investments
Class A (207,511) --
Class B (736,229) --
Class Y (655) (1,140,442)
------------- ------------
Total distributions to shareholders (2,620,362) (1,300,249)
------------- ------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 327,679,217 9,280,672
Reinvested distributions 2,518,683 1,300,249
Shares redeemed (29,967,087) (910,125)
------------- ------------
Change in net assets resulting from capital share transactions 300,230,813 9,670,796
------------- ------------
Increase in net assets 328,472,593 8,719,098
Net Assets
Beginning of period 12,820,973 4,101,875
------------- ------------
End of period (including accumulated undistributed net investement income
of ($210,671) and $18,259, respectively) $ 341,293,566 $ 12,820,973
============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS A SHARES (B)
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED 3/31/99 ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69 $ 17.61 $ 16.28
--------- ------- -------
Income from investment operations
Net investment income 0.04 0.47 0.43
Net realized and unrealized gain (loss) on investments 1.59 1.41 3.35
--------- ------- -------
Total from investment operations 1.63 1.88 3.78
--------- ------- -------
Less distributions
From net investment income ( 0.10) ( 0.71) ( 0.43)
From net realized capital gain ( 0.05) ( 5.09) ( 2.02)
--------- -------- --------
Total distributions ( 0.15) ( 5.80) ( 2.45)
--------- -------- --------
Net asset value, end of period $ 15.17 $ 13.69 $ 17.61
========= ======== ========
TOTAL RETURN* 11.93% 11.86% 26.09%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 114,384 $ 3,534 $ 4,102
Ratio of expenses to average net assets 1.37%(a) 0.36% 0.50%
Ratio of expenses to average net assets excluding waiver 1.37%(a) 1.56% 2.13%
Ratio of net investment income to average net assets 1.75%(a) 1.99% 2.78%
Portfolio turnover rate 35% 89% 80%
<CAPTION>
YEAR PERIOD PERIOD
ENDED ENDED ENDED
9/30/96 9/30/95 (C) 12/31/94 (D)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 14.85 $ 12.44 $ 12.50
------- --------- ---------
Income from investment operations
Net investment income 0.42 0.36 0.22
Net realized and unrealized gain (loss) on investments 2.09 2.08 ( 0.09)
------- --------- ---------
Total from investment operations 2.51 2.44 0.13
------- --------- ---------
Less distributions
From net investment income ( 0.48) ( 0.03) ( 0.19)
From net realized capital gain ( 0.60) -- --
-------- --------- ---------
Total distributions ( 1.08) ( 0.03) ( 0.19)
-------- --------- ---------
Net asset value, end of period $ 16.28 $ 14.85 $ 12.44
======== ========= =========
TOTAL RETURN* 18.00% 19.28% 1.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 3,825 $ 3,210 $ 2,911
Ratio of expenses to average net assets 0.50% 0.50%(a) 0.50%(a)
Ratio of expenses to average net assets excluding waiver 2.06% 2.12%(a) 2.72%(a)
Ratio of net investment income to average net assets 2.83% 3.26%(a) 3.32%(a)
Portfolio turnover rate 103% 65% 71%
</TABLE>
(a) Annualized.
(b) Prior to September 16, 1998, all shareholders of the Balanced Portfolio were
Class A shareholders. On September 16, 1998, shares of Class A were converted to
Class Y shares.
(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.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (E)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69 $ 13.69
-------- --------
Income from investment operations
Net investment income 0.06 --
Net realized and unrealized gain on investments 1.53 --
-------- --------
Total from investment operations 1.59 --
-------- --------
Less distributions
From net investment income ( 0.07) --
From net realized capital gain ( 0.05) --
-------- --------
Total distributions ( 0.12) --
-------- --------
Net asset value, end of period $ 15.16 $ 13.69
======== ========
TOTAL RETURN* 11.63% 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $226,710 $ 5,645
Ratio of expenses to average net assets 2.12%(a) 1.50%(a)
Ratio of expenses to average net assets excluding waiver 2.12%(a) 1.50%(a)
Ratio of net investment income to average net assets 0.99%(a) 0.42%(a)
Portfolio turnover rate 35% 89%
</TABLE>
(a) Annualized.
(e) For the period from September 16, 1998 (initial offering of Class B) to
September 30, 1998.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
MENTOR BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS Y SHARES (G)
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (F)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69 $ 13.69
-------- ---------
Income from investment operations
Net investment income 0.97 0.01
Net realized and unrealized gain (loss) on investments 0.61 ( 0.01)
-------- ---------
Total from investment operations 1.58 --
-------- ---------
Less distributions
From net investment income ( 0.06) --
From net realized capital gain ( 0.05) --
-------- ---------
Total distributions ( 0.11) --
-------- ---------
Net asset value, end of period $ 15.16 $ 13.69
======== =========
TOTAL RETURN* 11.57% 0.00%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 200 $ 3,642
Ratio of expenses to average net assets 1.12%(a) 1.10% (a)
Ratio of net investment income to average net assets 1.75%(a) 2.32% (a)
Portfolio turnover rate 35% 89%
</TABLE>
(a) Annualized.
(f) For the period from September 16, 1998 (initial offering of Class Y) to
September 30, 1998.
(g) Prior to September 16, 1998, all shareholders of the Balanced Portfolio were
Class A shareholders. On September 16, 1998, shares of Class A were converted to
Class Y shares.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMSNTS.
52
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE MUNICIPAL INCOME PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
Although most of the financial markets experienced significant volatility over
the six-month period ending March 31, 1999 the municipal market remained
relatively stable. For the majority of the six months, long-term municipal bond
yields stayed within a range of 5.20 to 5.40 percent, even as the Federal
Reserve cut interest rates and the 30-year U.S. Treasury bond reached its lowest
yield on record. In large part, this stability in tax-exempt rates can be
attributed to the municipal market's isolation from turbulence abroad. Concerns
about the financial conditions in Asia and Latin America hurt the stock and
high-yield bond markets last fall, but had little effect on municipals.
The positive domestic economic and market conditions encouraged more
municipalities to take advantage of low interest rates and issue new bonds. In
1998, we experienced the second-highest level of municipal issuance in history.
Although the volume of municipal debt increased, the credit quality of most
issuers was not compromised -- in fact, it improved as the positive economic
environment led to stronger balance sheets. As a result, we saw a larger number
of issuers financing special growth and expansion projects, as opposed to using
municipal bonds to finance their regular operations.
The proportion of higher-yielding municipal bonds also increased during the
period as the percentage of insured bonds declined slightly. Because bond
insurers tightened their underwriting criteria, more issuers came to market
without insurance. As a result, these bonds offered higher yields to compensate
investors for the increased credit risk. This benefited the Portfolio because it
allowed our experienced research staff to seek out those higher-yielding bonds
that we felt had strong underlying quality.
Toward the end of 1998, the yields on 30-year insured municipal bonds and
comparable U.S. Treasury bonds were equal -- something that rarely occurs.
Typically, investment-grade municipal bonds offer about 80 to 90 percent as much
yield as comparable Treasury bonds because their interest payments are exempt
from federal income taxes. However, as Treasury yields fell and municipal yields
remained stable during the reporting period, the yield difference between the
two types of bonds compressed and municipal yields became very attractive. Early
in 1999, investors realized the tremendous opportunities available in the
municipal market, and demand for municipals began to increase. In conjunction
with a recent slowdown in supply, this boost in municipal demand pushed the
municipal-to-Treasury yield ratio back to more traditional but still attractive
levels.
MANAGEMENT STRATEGY
During the reporting period, we focused on the insured sector of the market,
increasing our exposure to triple-A rated securities by nearly five percent.
Although the percentage of insured issuance dropped slightly, we found a good
selection of securities from which to choose. We also selectively purchased
several positions of non-rated and lower-rated securities that help support the
Portfolio's dividend.
Regarding specific sector exposure, we have become more cautious with respect to
health care and the electric utility industries. Although many health care bonds
remain attractive, the challenges imposed by managed care and changing Medicare
53
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE MUNICIPAL INCOME PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
reimbursement policies have put financial pressures on an increasing number of
medical facilities. Due to deregulation as well as problems at specific utility
plants, this sector is also experiencing some weakness. As a result, we are
modestly decreasing our exposure to both sectors.
Many purchases were bonds with maturities in the intermediate range of the yield
curve as we felt they offered the most value compared to other maturity ranges.
By purchasing securities in the 10 to 20 year maturity range rather than longer
term securities, we were able to add almost as much yield with significantly
less volatility.
We also looked for areas of the municipal marketplace where a heavy issuance
caused bond prices to be temporarily reduced. For example, smaller states often
do not have enough instate demand to absorb a large volume of new bond issuance
immediately. We took advantage of those situations to purchase bonds at what we
felt were below-market prices and then sold them when prices had risen.
PERFORMANCE REVIEW
For the six-month period ending March 31, 1999 the Mentor Municipal Income
Portfolio A shares returned 0.52% compared to 1.49% for its Lehman Brothers
Municipal Bond Index benchmark.
MARKET OUTLOOK
Strong economic performance continues to bolster the credit conditions of
municipal issuers -- a trend we expect to continue. As we mentioned earlier,
economic strength has made issuers more likely to issue debt for special
projects rather than for general operating financing. We believe that as long as
municipalities remain economically healthy, this situation is likely to
continue.
Although insured debt has been increasing in recent years, we have started to
see a reversal of this trend, as municipal bond insurers have become more
cautious. If, as anticipated, this caution continues, credit spreads may widen
as the proportion of higher-yielding uninsured bonds increases.
Inflation remains low, so we don't foresee any significant increase in interest
rates in the near term -- a favorable situation for bond prices. Because we
don't expect interest rates to rise in the near term, we believe the supply of
municipal debt will be lower than last year's, helping to restore the price
relationship between municipals and Treasuries to more traditional levels.
Finally, we see the potential for changes in traditional economic activity
toward the end of the year because of investor concerns about the Year 2000
computer problem. These temporary concerns, however, may result in attractive
investment opportunities that our research staff can explore to uncover value.
54
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
MARCH 31, 1999
- --------------------------------------------------------------------------------
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]
<TABLE>
<CAPTION>
4/29/92 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99
<S> <C>
Class A Shares(double dagger) 9,525 10,034 11,637 11,101 12,151 12,935 14,085 15,245 15,324
Class B Shares(dagger) 10,000 10,528 12,134 11,511 12,348 13,184 14,291 15,289 15,338
Lehman Municipal Bond Index~ 10,000 10,561 11,906 11,616 12,916 13,818 14,933 16,232 16,475
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception*
Class A (0.33%) 5.89% 6.36%
Class B 3.10% 6.38% 6.58%
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
3/31/99.
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]
<TABLE>
<CAPTION>
11/19/97 12/31/97 3/31/98 6/30/98 9/30/98 3/31/99
<S> <C>
Class Y Shares(triple dagger) 10,000 10,147 10,263 10,390 10,689 10,763
Lehman Municipal Bond Index~ 10,000 10,206 10,323 10,490 10,802 10,963
</TABLE>
Total Returns as of 3/31/99
1-Year Since Inception*
Class Y 4.87% 6.00%
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.
- The Lehman Municipal Bond Index is adjusted to reflect reinvestment of
interests on securities in the index. The Lehman Municipal Bond Index is
not adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Portfolio's performance.
+++ Represents a hypothetical investment of $10,000 in Mentor Municipal Income
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Municipal Income Portfolio Class Y Shares
from the date of issuance on 11/19/97 through 3/31/99.
55
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES - 98.38%
ALABAMA - 6.15%
Birmingham, Alabama Water
& Sewer Revenue, 4.75%,
1/01/29 $1,000,000 $ 930,030
Montgomery, Alabama Special
Care Facilities, 5.00%,
11/15/25 7,500,000 7,221,000
----------
8,151,030
----------
ARIZONA - 1.20%
Pima County, Arizona IDA,
7.25%, 7/15/10 1,430,000 1,582,939
----------
CALIFORNIA - 6.44%
Alameda Corridor
Transportation, (effective
yield-1.00%) (a), 10/01/30 2,000,000 389,360
California Statewide
Community Development
Authority, 5.63%, 10/01/34 2,070,000 2,125,662
Carson Improvement Board
Act 1915, Special
Assessment District 1992,
7.38%, 9/02/22 700,000 758,835
East Bay Municipal Utility
District, 4.75%, 6/01/21 1,915,000 1,840,009
Orange County Community
Facilities District Series A,
7.35%, 8/15/18 300,000 341,706
San Francisco City & County
Airport, 6.30%, 5/01/25 1,000,000 1,101,110
University of California
Revenue, 4.75%, 9/01/16 2,000,000 1,977,740
----------
8,534,422
----------
COLORADO - 2.61%
Colorado Housing Authority,
7.00%, 11/01/24 475,000 514,083
Denver City & County Airport
Revenue, 7.75% - 8.50%,
11/15/13 - 11/15/23 2,555,000 2,938,480
----------
3,452,563
----------
CONNECTICUT - 0.82%
Connecticut State
Development Authority,
6.15%, 4/01/35 1,000,000 1,085,430
----------
DISTRICT OF COLUMBIA - 0.66%
Metropolitan Washington,
General Airport Revenue
Series A, 6.63%, 10/01/19 800,000 876,784
----------
FLORIDA - 3.95%
Governmental Utilities
Authority Utility Revenue,
5.00%, 10/01/29 2,453,900 2,453,865
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
FLORIDA (CONTINUED)
Hillsborough County, 6.25%,
12/01/34 $1,250,000 $1,381,988
Sarasota County Health
Facilities Authority Revenue,
10.00%, 7/01/22 1,160,000 1,391,768
----------
5,227,621
----------
GEORGIA - 4.11%
Fulton County Georgia
Housing Authority, Housing
Revenue, 6.38%, 2/01/08 520,000 525,184
Fulton County Georgia Water
& Sewer Revenue, 4.75%,
1/01/28 2,350,000 2,224,769
George Smith World Congress
Center, 5.50%, 7/01/20 1,500,000 1,507,695
Monroe County Development
Authority PCRB, 6.75%,
1/01/10 1,000,000 1,174,600
----------
5,432,248
----------
ILLINOIS - 10.83%
Broadview Tax Increment
Revenue, 8.25%, 7/01/13 1,000,000 1,127,790
Chicago Capital Appreciation,
(effective yield-2.09%) (a),
7/01/16) 2,000,000 766,520
Chicago Heights Residential
Mortgage, (effective
yield-3.42%) (a), 6/01/09 3,175,000 1,558,989
Chicago School Reform Board
Series A, 5.50%, 12/01/26 2,000,000 2,125,480
Chicago State University
Revenue, 5.50%, 12/01/23 1,000,000 1,060,800
Illinois Development Finance
Authority Revenue, 5.70%,
1/01/18 1,680,000 1,822,951
Illinois Health Facilities
Authority Revenue,
5.50% - 9.50%, 11/15/19 -
10/01/22 2,250,000 2,456,200
Kane County School District
No. 129, 5.50%, 2/01/11 2,000,000 2,121,120
Metropolitan Pier &
Exposition, (effective
yield-1.44%) (a), 6/15/21 1,950,000 616,434
Saint Clair County Public
Building, (effective
yield-2.06%) (a), 12/01/16 1,650,000 670,807
----------
14,327,091
----------
</TABLE>
56
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
INDIANA - 2.55%
Fort Wayne, Indiana Hospital
Authority Revenue, 4.75%,
11/15/28 $3,250,000 $2,986,425
Indiana Transportation
Finance Authority Series A,
(effective yield-1.99%) (a),
6/01/17 1,000,000 394,230
----------
3,380,655
----------
IOWA - 0.50%
Student Loan Liquidity
Corporation, Student Loan
Revenue Series C, 6.95%,
3/01/06 625,000 664,888
----------
KANSAS - 0.74%
Wyandotte County Kansas
City Utility Revenue,
4.30%, 9/01/10 1,000,000 981,650
----------
KENTUCKY - 1.60%
Jefferson County Hospital
Revenue, 8.92%,
10/01/08 (b) 500,000 590,625
Kenton County Airport Board
Revenue, 7.50%, 2/01/20 1,400,000 1,524,936
----------
2,115,561
----------
LOUISIANA - 4.90%
Louisiana Public Facilities
Authority Revenue, Dillard
University-Louisiana,
5.00%, 2/01/28 2,750,000 2,690,215
Louisiana State University &
Agriculture and Mechanical
College, University
Revenues, 5.00%, 10/01/30 1,000,000 972,950
New Orleans, Louisiana,
4.75%, 12/01/26 3,000,000 2,821,740
----------
6,484,905
----------
MAINE - 0.72%
Maine State Housing
Authority Series C, 6.88%,
11/15/23 885,000 959,676
----------
MARYLAND - 0.67%
Baltimore Series B, 4.25%,
10/01/09 900,000 891,360
----------
MASSACHUSETTS - 1.59%
Massachusetts State Health
and Education, 6.00%,
10/01/23 1,000,000 997,450
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
MASSACHUSETTS (CONTINUED)
Massachusetts State Health
and Educational Facilities
Authority, OID Revenue
Bonds Series A, 6.88%,
4/01/22 $1,000,000 $1,106,840
----------
2,104,290
----------
MICHIGAN - 0.69%
Michigan State Hospital
Financial Authority
Revenue, 5.25%, 8/15/28 1,000,000 909,730
----------
MINNESOTA - 0.38%
Dakota County Housing &
Redevelopment Authority
Multifamily Housing
Revenue, 6.25%, 5/01/29 500,000 500,000
----------
MISSISSIPPI - 0.75%
Municipal Facility Authority
Natural Gas Project, 4.13%,
1/01/07 1,000,000 989,160
----------
MISSOURI - 1.47%
Missouri State Health &
Educational Facilities
Revenue, 5.00%, 5/15/28 1,000,000 960,690
Ozarks Tech Community
College Project, 5.00%,
3/01/19 1,000,000 986,920
----------
1,947,610
----------
NEBRASKA - 1.75%
Nebraska Investment Finance
Authority, SFM, 9.42%,
9/15/24 (b) 280,000 312,200
Nebraska Public Gas Agency,
Gas Supply System, 5.00%,
4/01/00 1,000,000 1,014,520
Omaha Nebraska Airport
Authority Revenue, 4.20%,
1/01/07 1,000,000 992,310
----------
2,319,030
----------
NEVADA - 1.87%
Clark County, 5.90%,
10/01/30 2,000,000 2,042,840
Henderson Local Improvement
District, Special Assessment
Series A, 8.50%, 11/01/12 415,000 439,755
----------
2,482,595
----------
</TABLE>
57
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
NEW JERSEY - 1.77%
East Orange County Board of
Education, (effective
rate-1.75%) (a) 2/01/20 $1,000,000 $ 348,810
New Jersey Economic
Development Authority
Revenue, 6.00%, 5/15/28 1,000,000 978,380
Ocean County Utilities
Authority, 4.00%, 1/01/08 1,040,000 1,022,975
---------
2,350,165
---------
NEW MEXICO - 1.87%
New Mexico State Hospital
Equipment Lane Council,
5.50%, 6/01/28 1,500,000 1,469,985
Santa Fe Educational Facilities
Revenue, 5.50%, 3/01/24 1,000,000 1,001,000
---------
2,470,985
---------
NEW YORK - 5.56%
Clifton Springs Hospital
Refunding & Improvement,
8.00%, 1/01/20 625,000 685,462
Metropolitan Transportation
Authority, 4.75%, 7/01/19 1,000,000 935,070
New York State Dormitory
Authority Revenue Hospital,
WYCKOFF, 5.20%,
2/15/14 1,000,000 1,013,790
New York Series H, 7.20%,
2/01/13 1,500,000 1,656,973
New York Series F - Ambac
TCRS, 5.25%, 8/01/14 2,000,000 2,074,340
Suffolk County Industrial
Development Agency
4.25%, 2/01/07 1,000,000 1,002,270
---------
7,367,905
---------
NORTH CAROLINA - 1.91%
North Carolina Eastern
Municipal Power Agency
Systems Revenue, 5.70%,
1/01/13 1,000,000 1,077,170
Sampson Area Development
Corporation, 4.70%,
6/01/14 1,500,000 1,455,565
---------
2,532,735
---------
NORTH DAKOTA - 0.74%
Devils Lake Health Care,
6.10%, 10/01/23 1,000,000 983,160
---------
OHIO - 3.91%
Batavia Local School District
Reference, 5.63%, 12/01/22 1,000,000 1,080,980
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
OHIO (CONTINUED)
Canton, Ohio Pension
Reference, 4.75%, 12/01/18 $1,000,000 $ 973,140
Cleveland, Ohio, 4.50%,
10/01/12 1,015,000 996,364
Cuyahoga County Health Care
Facilities, 5.50%, 12/01/28 1,000,000 985,530
Ohio University General
Receipts, 4.60%, 12/01/11 1,145,000 1,142,859
---------
5,178,873
---------
OKLAHOMA - 0.41%
Oklahoma City Industrial and
Cultural Facilities Trust,
6.75%, 9/15/17 540,000 546,804
---------
PENNSYLVANIA - 1.28%
Pennsylvania Economic
Development, 6.40%,
1/01/09 500,000 524,605
Philadelphia Hospital and
Higher Education Facilities,
6.50%, 11/15/08 1,075,000 1,171,008
---------
1,695,613
---------
RHODE ISLAND - 0.26%
West Warwick, Series A, GO
Bonds, 7.30%, 7/15/08 310,000 345,002
---------
TENNESSEE - 3.62%
Chattanooga, Tennessee
Health Educational &
Housing Facility, 5.00%,
12/01/28 1,500,000 1,440,555
Memphis Shelby County
Airport Authority Special
Facilities Revenue
Refunding, 7.88%, 9/01/09 1,500,000 1,654,485
Metropolitan Government,
Nashville & Davidson
County, 4.75% - 5.00%,
1/01/22 - 10/01/28 250,000 244,900
Municipal Energy
Corporation, Tennessee Gas,
4.13%, 3/01/09 1,500,000 1,455,930
---------
4,795,870
---------
TEXAS - 9.06%
Abilene Health Facilities
Development Corporation,
5.90%, 11/15/25 1,000,000 966,740
Alliance Airport Authority,
6.38%, 4/01/21 2,000,000 2,161,280
Brazos Higher Education
Authority Student Loan
Revenue, 7.10%, 11/01/04 416,000 465,462
</TABLE>
58
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL
SECURITIES (CONTINUED)
TEXAS (CONTINUED)
Brazos River Authority
Revenue, 4.90%, 10/01/15 $2,000,000 $ 2,016,940
Dallas Fort Worth
International Airport
Facility Revenue Bonds,
7.25%, 11/01/30 1,000,000 1,096,770
Houston, Texas School
District, 4.75%, 2/15/26 1,500,000 1,412,085
Lufkin Health Memorial East
Texas, 5.70%, 2/15/28 1,000,000 994,730
Matagorda County Revenue,
5.13%, 11/01/28 2,000,000 1,978,860
Texas State Department of
Housing and Community
Affairs Refunding, Series C,
10.12%, 7/02/24 (b) 750,000 907,500
-----------
12,000,367
-----------
UTAH - 2.53%
Bountiful Hospital Revenue,
9.50%, 12/15/18 230,000 294,633
Intermountain Power Agency
Power Supply, 5.00%,
7/01/19 2,500,000 2,463,800
Utah State Housing Finance
Agency, 7.20%, 1/01/27 585,000 596,998
-----------
3,355,431
-----------
WASHINGTON - 1.41%
Central Puget Sound Water
Regional Transportation,
4.75%, 2/01/28 2,000,000 1,869,000
-----------
WEST VIRGINIA - 2.96%
Harrison County, 6.75%,
8/01/24 2,000,000 2,244,180
West Virginia State Hospital
Finance Authority Revenue,
9.70%, 1/01/18 (b) 1,500,000 1,681,005
-----------
3,925,185
-----------
WISCONSIN - 4.14%
Southeast Wisconsin
Professional Baseball,
5.50%, 12/15/26 2,000,000 2,141,080
Wisconsin State Health &
Educational Facility
Authority Revenues, 4.75%
- 5.50%, 2/15/28 - 6/01/28 3,500,000 3,342,325
-----------
5,483,405
-----------
TOTAL LONG-TERM MUNICIPAL
SECURITIES (COST
$ 125,609,460) 130,301,738
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
SHORT-TERM MUNICIPAL
SECURITIES - 5.21%
MISSOURI - 1.13%
Kansas City, Missouri
Individual Development,
5.00%, 10/15/14 (c) $1,500,000 $ 1,500,000
------------
NEW YORK - 1.66%
New York State Energy
Research &
Development, 5.00%,
7/01/15 (c) 1,700,000 1,700,000
City of New York A-7,
5.00%, 10/01/22 (c) 500,000 500,000
------------
2,200,000
------------
TEXAS - 1.74%
Harris County, Texas
Health Facilities, 5.00%,
2/15/27 (c) 2,300,000 2,300,000
------------
WASHINGTON - 0.68%
Washington Health Care,
Sisters of Providence
Series I, 4.05%,
10/01/05 (c) 900,000 900,000
------------
TOTAL SHORT-TERM
MUNICIPAL SECURITIES (COST
$ 6,900,000) 6,900,000
------------
TOTAL INVESTMENTS (COST
$ 132,509,460)-103.59% 137,201,738
OTHER ASSETS LESS
LIABILITIES - (3.59%) (4,751,557)
------------
NET ASSETS - 100.00% $132,450,181
============
</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) Floating Rate Securities - The rates shown are the effective rates at
March 31, 1999.
* Certain of these securities are used as collateral for options written
contracts.
59
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $90,312,688 and $68,279,000, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $132,509,460. Net unrealized depreciation aggregated
$4,692,278, of which $5,127,601 related to appreciated investment securities and
$435,323 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value
(cost $132,509,460) (Note 2) $137,201,738
Cash 62,828
Receivables
Fund shares sold 1,859,153
Dividends and interest 2,036,819
Variation margin (Note 2) 60,938
------------
TOTAL ASSETS 141,221,476
------------
LIABILITIES
Payables
Investments purchased $7,967,465
Fund shares redeemed 317,601
Dividends 420,673
Accrued expenses and other
liabilities 65,556
----------
TOTAL LIABILITIES 8,771,295
------------
NET ASSETS $132,450,181
============
Net Assets represented by: (Note 2)
Additional paid-in capital $129,086,452
Accumulated distributions in
excess of net investment
income (329,232)
Accumulated net realized loss
on investment transactions (1,046,267)
Net unrealized appreciation
of investments 4,739,228
------------
NET ASSETS $132,450,181
============
NET ASSET VALUE PER SHARE
Class A Shares $ 15.73
Class B Shares $ 15.69
Class Y Shares $ 16.11
OFFERING PRICE PER SHARE
Class A Shares $ 16.51(a)
Class B Shares $ 15.69
Class Y Shares $ 16.11
SHARES OUTSTANDING
Class A Shares 4,558,605
Class B Shares 3,869,243
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
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $3,296,816
----------
EXPENSES
Management fee (Note 4) $ 360,928
Shareholder service fee (Note 5) 150,385
Distribution fee (Note 5) 150,302
Administration fee (Note 4) 60,155
Transfer agent fee 53,330
Registration expenses 23,924
Custodian and accounting fees 21,040
Shareholder reports and postage
expenses 11,834
Legal fees 2,909
Audit fees 2,045
Directors' fees and expenses 1,511
Miscellaneous 2,553
----------
Total expenses 840,916
----------
NET INVESTMENT INCOME 2,455,900
----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, FUTURES AND
OPTIONS CONTRACTS
Net realized gain on investments,
futures and options contracts
(Note 2) 957,780
Change in unrealized appreciation
(depreciation) on investments (2,882,930)
----------
NET LOSS ON INVESTMENTS, FUTURES
AND OPTIONS CONTRACTS (1,925,150)
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 530,750
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 2,455,900 $ 4,054,279
Net realized gain (loss) on investments, futures and options contracts 957,780 (41,138)
Change in unrealized appreciation (depreciation) on investments (2,882,930) 3,077,428
------------ -------------
Increase in net assets resulting from operations 530,750 7,090,569
------------ -------------
Distributions to Shareholders
From net investment income
Class A (1,293,015) (1,979,908)
Class B (1,142,196) (2,308,071)
Class Y -- (43)
------------ -------------
Total distributions to shareholders (2,435,211) (4,288,022)
------------ -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 30,176,197 45,477,369
Reinvested distributions 1,362,987 2,625,084
Shares redeemed (8,293,679) (13,461,719)
------------ -------------
Change in net assets resulting from capital share transactions 23,245,505 34,640,734
------------ -------------
Increase in net assets 21,341,044 37,443,281
Net Assets
Beginning of period 111,109,137 73,665,856
------------ -------------
End of period (including accumulated distributions in excess of net
investment income of ($329,232) and ($349,922), respectively) $132,450,181 $ 111,109,137
============ =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.99 $ 15.50
--------- -------
Income from investment operations
Net investment income 0.35 0.66
Net realized and unrealized gain (loss) on investments ( 0.27) 0.59
--------- -------
Total from investment operations 0.08 1.25
--------- -------
Less distributions
From net investment income ( 0.34) ( 0.76)
From net realized capital gain -- --
--------- -------
Total distributions ( 0.34) ( 0.76)
--------- -------
Net asset value, end of year $ 15.73 $ 15.99
========= =======
TOTAL RETURN* 0.52% 8.24%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 71,724 $51,757
Ratio of expenses to average net assets 1.14%(a) 1.17%
Ratio of expenses to average net asset excluding waiver 1.14%(a) 1.17%
Ratio of net investment income to average net assets 4.33%(a) 4.63%
Portfolio turnover rate 56% 62%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.04 $ 14.92 $ 14.42 $ 16.05
------- ------- ------- -------
Income from investment operations
Net investment income 0.81 0.82 0.81 0.82
Net realized and unrealized gain (loss) on investments 0.49 0.12 0.51 ( 1.54)
------- ------- ------- -------
Total from investment operations 1.30 0.94 1.32 ( 0.72)
------- ------- ------- -------
Less distributions
From net investment income ( 0.81) ( 0.82) ( 0.82) ( 0.81)
From net realized capital gain ( 0.03) -- -- ( 0.10)
------- ------- ------- -------
Total distributions ( 0.84) ( 0.82) ( 0.82) ( 0.91)
------- ------- ------- -------
Net asset value, end of year $ 15.50 $ 15.04 $ 14.92 $ 14.42
======= ======= ======= =======
TOTAL RETURN* 8.89% 6.46% 9.46% ( 4.83%)
RATIOS / SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $29,394 $17,558 $20,460 $25,056
Ratio of expenses to average net assets 1.22% 1.24% 1.43% 1.24%
Ratio of expenses to average net asset excluding waiver 1.22% 1.24% 1.43% 1.33%
Ratio of net investment income to average net assets 5.09% 5.47% 5.56% 5.43%
Portfolio turnover rate 59% 46% 43% 87%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized. See
notes to financial statements.
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
MENTOR MUNICIPAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.94 $ 15.49
--------- -------
Income from investment operations
Net investment income 0.31 1.30
Net realized and unrealized gain (loss) on investments ( 0.26) ( 0.14)
--------- -------
Total from investment operations 0.05 1.16
--------- -------
Less distributions
From net investment income ( 0.30) ( 0.71)
From net realized capital gain -- --
--------- -------
Total distributions ( 0.30) ( 0.71)
--------- -------
Net asset value, end of year $ 15.69 $ 15.94
========= =======
TOTAL RETURN* 0.32% 7.70%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 60,725 $59,351
Ratio of expenses to average net assets 1.65%(a) 1.67%
Ratio of expenses to average net asset excluding waiver 1.65%(a) 1.67%
Ratio of net investment income to average net assets 3.83%(a) 4.13%
Portfolio turnover rate 56% 62%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 15.05 $ 14.95 $ 14.43 $ 16.06
------- ------- ------- -------
Income from investment operations
Net investment income 0.71 0.75 0.74 0.74
Net realized and unrealized gain (loss) on investments 0.52 0.11 0.52 ( 1.54)
------- ------- ------- -------
Total from investment operations 1.23 0.86 1.26 ( 0.80)
------- ------- ------- -------
Less distributions
From net investment income ( 0.71) ( 0.76) ( 0.74) ( 0.73)
From net realized capital gain ( 0.08) -- -- ( 0.10)
------- ------- ------- -------
Total distributions ( 0.79) ( 0.76) ( 0.74) ( 0.83)
------- ------- ------- -------
Net asset value, end of year $ 15.49 $ 15.05 $ 14.95 $ 14.43
======= ======= ======= =======
TOTAL RETURN* 8.33% 5.87% 9.01% ( 5.34%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $44,272 $37,191 $39,493 $46,157
Ratio of expenses to average net assets 1.72% 1.74% 1.92% 1.74%
Ratio of expenses to average net asset excluding waiver 1.72% 1.74% 1.92% 1.86%
Ratio of net investment income to average net assets 4.60% 4.95% 5.07% 4.93%
Portfolio turnover rate 59% 46% 43% 87%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
3/31/99 ENDED
(UNAUDITED) 9/30/98 (B)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.00 $ 15.51
-------- --------
Income from investment operations
Net investment income 0.35 1.39
Net realized and unrealized loss on investments ( 0.24) ( 0.23)
-------- --------
Total from investment operations 0.11 1.16
-------- --------
Less distributions
From net investment income -- ( 0.67)
-------- --------
Net asset value, end of period $ 16.11 $ 16.00
======== ========
TOTAL RETURN* 0.69% 7.51%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 0.92%(a) 0.92%(a)
Ratio of net investment income to average net assets 4.33%(a) 5.66%(a)
Portfolio turnover rate 56% 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.
63
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
The six-month period ending March 31, 1999 was not kind to the bond market.
Treasury rates increased sharply, with the 2-year note climbing 71 basis points
to 4.98% and the long bond rising 66 basis points to 5.62%. The market sold off
in reaction to much stronger than anticipated economic growth during both the
final quarter of 1998 and the first quarter of 1999.
In early October of 1998, the stock market was weak, world markets were in
turmoil and fears of global deflation were rampant. The crisis in world
financial markets was prompted by Russia's default on its debt obligations, and
was exacerbated by the bankruptcy of the highly leveraged investment firm Long
Term Capital Management. Over the ensuing three-month period the Federal Reserve
lowered the Federal Funds rate 0.75% in response to these alarming market
conditions.
Economists expected U.S. economic growth in 1999 to be significantly depressed
by the severe shock that financial markets experienced during September and
October. These forecasts for slower growth garnered support in early January
when the Brazilian government was forced to devalue their currency, the real.
The sudden drop in the value of the real implied that Brazil would suffer a
fairly deep recession in 1999. In addition, the lower currency value has made
American exports too expensive for Brazilian markets.
Despite turmoil in financial markets and in Brazil, the much-anticipated
slowdown in U.S. economic growth has yet to materialize. Indeed, economic growth
in the final quarter of 1998 surged more than 6.0% on an annualized basis.
Economic indicators for the first quarter of 1999 suggest that the economy has
continued its robust growth into 1999. Some market observers are beginning to
question the aggressiveness with which the Federal Reserve reacted to the market
crisis in late 1998. These economists have gone so far as to suggest that the
Fed should reverse course and raise rates in response to a potentially
overheating American economy. The fear that the Federal Reserve may move to
increase short-term borrowing rates prompted the bond market's severe price
declines and interest rate increases during the first quarter of 1999.
MANAGEMENT STRATEGY
Portfolio durations were 5% to 10% longer than their benchmark indices at the
beginning of 1999. This long duration tilt led to strong relative performance
early in January as the bond market responded to the Brazilian devaluation.
However, as economic data painted an ever-clearer picture of a robust U.S.
economy, portfolio durations were cut back to approximately neutral levels.
Sector allocations were heavily tilted toward spread product. Mortgage backed
securities were particularly emphasized given their high yield and strong
performance potential in a stable to rising rate environment. The stronger
economic growth prompted an increased allocation to lower-rated corporate bonds,
including high yield securities. Portfolio weightings in high yield were
increased from roughly 5% to 10%.
PERFORMANCE REVIEW
Portfolio performance during the six-month period ending March 31, 1999 was
superior to index objectives. Our mortgage overweight and our lower-rated
corporate bond investments allowed our portfolios to outpace indices comprised
of treasury obligations. For the period the Mentor
64
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
Quality Income A share returned -1.16% compared to -2.76% for the Merrill Lynch
7-Year Treasury Index. The Mentor Short-Duration Income Portfolio A shares
returned 0.83% for the period compared to 0.44% for the Merrill Lynch 3-Year
Treasury Index.
MARKET OUTLOOK
Our long-term market outlook is for continued declines in inflation and
therefore continued lower interest rates. This optimism is fueled by structural
economic changes such as the Internet that offer the potential to substantially
increase economic efficiency and reduce costs. In addition, the increasing
productivity of the U.S. labor force suggests that the economy can grow faster
than previously thought without generating inflationary pressures. However,
short-term prospects for the bond market are less clear.
The long-term picture for bonds has continued to improve in recent months.
Brazil's currency devaluation has made their products extremely price
competitive with U.S. made products. Since Brazil is the dominant economy in
Latin America, their devaluation implies falling growth rates for every economy
within the region. Lower growth in Latin America has coincided with slow growth
in Europe. The introduction of a single currency across much of Europe, the
euro, has yet to ignite economic growth in the region. Indeed, the newly created
European central bank has repeatedly revised down its growth estimates for 1999,
and is currently forecasting growth of little more than 2% for the year.
Despite the good news for bonds overseas, domestic U.S. conditions continue to
put upward pressure on interest rates. The U.S. economy has repeatedly defied
predictions of an imminent slowdown. With unemployment as of March hitting 4.2%,
inflation fears are mounting. Despite these fears, most broad measures of
inflation have continued to trend downward. This combination of robust economic
growth and benign inflation is almost unprecedented. As a result, the Federal
Reserve is examining whether old models of the growth and inflation trade-off
accurately describe the new American economy.
Although the Federal Reserve is considering whether or not the U.S. has entered
a new economic era, market participants are understandably reluctant to gamble
on such theoretical notions. Without some evidence of slowing economic growth,
the bond market is likely to at best trade within a fairly narrow range around
current interest rate levels and at worst could continue to decline somewhat.
Given that no signs of a slacking in economic activity are yet apparent, we are
anticipating a range-bound market in the weeks and months ahead. In such an
environment our overweight position in mortgage backed securities and
lower-rated corporate bonds should continue to perform well.
As the summer wears on, we expect that stumbling growth in Europe and Latin
America will exert pressure on the U.S. economy. This pressure on domestic
economic growth and global inflation should allow the rally in bond prices to
continue. We anticipate significantly reducing our exposure to mortgages and
corporate bonds at that time and extending portfolio durations.
65
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
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]
<TABLE>
<CAPTION>
4/29/92 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99
<S> <C>
Class A Shares(dagger) 9,525 9,846 10,378 10,036 11,222 11,681 12,833 14,110 13,861
Class B Shares(double dagger) 10,000 10,324 10,827 10,406 11,585 11,999 13,113 14,071 13,946
Merrill Lynch 7-Year Treasury Index~ 10,000 11,041 12,345 11,721 13,533 14,043 15,388 17,815 17,324
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year 5-Year Since Inception(triple dagger)
Class A 0.76% 5.69% 4.92%
Class B 4.21% 6.18% 5.13%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
- 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 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.
++ 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.
+++ Reflects operations of Mentor Quality Income Portfolio Class A and Class B
Shares from the date of commencement of operations on 4/29/92 through
3/31/99.
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]
<TABLE>
<CAPTION>
11/19/97 12/31/97 3/31/98 6/30/98 9/30/98 3/31/99
<S> <C>
Class Y Shares* 10,000 10,038 10,144 10,378 10,869 10,758
Merrill Lynch 7-Year Treasury Index~ 10,000 10,142 10,311 10,562 11,364 11,050
</TABLE>
Total Returns as of 3/31/99
1-Year Since Inception**
Class Y 6.06% 5.69%
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.
- The Merrill Lynch 7-Year Treasury Index is adjusted to reflect reinvesment
of interest on securities in the index. Ther Merrill Lynch 7-year Treasury
Index is not adjusted to reflect sales loads, expenses, or other fees that
the SEC requries to be reflect in the Portfolio's performance.
* Represents a hypothetical investment of $10,000 in Mentor Quality Income
Portfolio Class Y Shares. These shares are not subject to any sales or
contingent deferred sales charges. The Class Y Shares' performance assumes
the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Quality Income Portfolio Class Y Shares from
the date of issuance on 11/19/97 through 3/31/99.
66
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
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 Index.-
[GRAPH]
<TABLE>
<CAPTION>
6/16/95 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99
<S> <C>
Class A Shares* 9,900 9,931 10,532 11,304 12,093 12,194
Merrill Lynch 3-Year Treasury Index~ 10,000 10,139 11,038 11,571 12,732 12,788
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception**
Class A 4.28% 5.37%
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
- The Merrill Lynch 3-Year Treasury Index is adjusted to reflect reinvestment
of interest on securities in the index. It is not adjusted to reflect sales
loads, expenses, or other fees that the SEC requires to be reflected in the
Portfolio's performance. The Portfolio invests in securities other than
Treasuries.
* Represents a hypothetical investment of $10,000 in Mentor Short-Duration
Income Portfolio Class A Shares, after deducting the maximum sales charge of
1.00% ($10,000 investment minus $100 sales charges = $9,900. The Class A
Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class A from
the date of issuance on 6/16/95 through 3/31/99.
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 Index.-
[GRAPH]
<TABLE>
<CAPTION>
4/29/94 12/31/94 9/30/95 9/30/96 9/30/97 9/30/98 3/31/99
<S> <C>
Class B Shares(dagger) 10,000 10,093 10,623 11,225 12,125 12,945 13,043
Merrill Lynch 3-Year Treasury Index~ 10,000 10,075 11,051 11,709 12,600 13,053 13,924
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception(double dagger)
Class B 4.12% 5.87%
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 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
3/31/99.
67
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
MENTOR SHORT-DURATION INCOME PORTFOLIO
MANAGERS' COMMENTARY: THE ACTIVE FIXED-INCOME MANAGEMENT TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
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 Index.-
[GRAPH]
<TABLE>
<CAPTION>
11/19/97 12/31/97 3/31/98 6/30/98 9/30/98 3/31/99
<S> <C>
Class Y Shares* 10,000 10,032 10,167 10,317 10,638 10,746
Merrill Lynch 3-Year Treasury Index~ 10,000 10,081 10,239 10,413 10,875 10,923
</TABLE>
Total Returns as of 3/31/99
1-Year Since Inception**
Class Y 5.70% 5.61%
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 Y Shares. These shares are not subject to any sales
or contingent deferred sales charges. The Class Y Shares' performance
assumes the reinvestment of all dividends and distributions.
** Reflects operations of Mentor Short-Duration Income Portfolio Class Y from
the date of issuance on 11/19/97 through 3/31/99.
68
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
LONG-TERM INVESTMENTS - 134.54%
PREFERRED STOCK - 1.84%
Home Ownership, Inc.,
12/30/26 (cost $3,796,225) $4,350,000 $ 4,075,438
-----------
ASSET-BACKED SECURITIES - 20.93%
Advanta Mortgage Loan Trust
Series 1993-4 AZ, 5.55%,
3/25/10 693,663 682,548
Advanta Mortgage Loan Trust
Series 1993-3 A5, 5.55%,
1/25/25 990,524 962,672
AFG Receivables Trust Series
1997-B C, 7.00%, 2/15/03 941,241 943,079
Capital One Master Trust
Series 1998-4 A, 5.43%,
1/15/07 2,535,000 2,493,557
CS First Boston Mortgage
Series 1996-2 A6, 7.18%,
2/25/18 6,500,000 6,528,190
Discover Card Master Trust
Series 1998-7 A, 5.60%,
5/15/06 3,005,000 2,970,016
Equifax Credit Corporation of
America
Series 1998-2 A6F, 6.16%,
4/15/08 2,370,000 2,371,822
Series 1994-1 B, 5.75%,
3/15/09 1,253,328 1,251,187
Series 1999-1 A6F, 6.20%,
9/20/09 5,250,000 5,217,834
Series 1998-2 A4F, 6.33%,
1/15/22 1,800,000 1,804,784
Fifth Third Auto Grantor
Trust Series 1996-A A,
6.20%, 9/15/01 435,617 436,476
First USA Credit Card Master
Trust, 1998-9 A, 5.28%,
9/18/06 2,700,000 2,652,729
General Electric Capital
Mortgage, - 6.27%, Series
1999-HE1 A7, 4/25/29 4,000,000 3,961,951
Green Tree Home Equity,
Series 1999-A A5, 6.13%,
2/15/19 3,900,000 3,896,482
J.C. Penney Master Credit
Card Trust, Series 1998-E
A, 5.50%, 6/15/07 4,000,000 3,931,427
Key Auto Finance Trust Series
1997-2 A4, 6.15%,
10/15/01 1,500,000 1,505,792
Old Stone Credit Corporation,
Series 93-1 B1, 6.00%,
3/15/08 520,913 521,875
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
ASSET-BACKED SECURITIES (CONTINUED)
Saxon Asset Securities Series
1999-1 AF6, 6.35%,
2/25/29 $4,000,000 $ 4,012,999
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $24,821,467) 46,145,420
-----------
U.S. GOVERNMENT SECURITIES
AND AGENCIES -- 69.94%
Federal Home Loan Mortgage
Association
Series 26 C, 6.50%, 7/25/18 7,000,000 7,032,774
Series 1693 Z, 6.00%,
3/15/09, REMIC 6,301,827 6,138,331
Series 1647 B, 6.50%,
11/15/08, REMIC 2,201,275 2,204,038
Federal National Mortgage
Association Series 1993-181
O, 6.50%, 9/25/08 2,335,000 2,333,916
6.00% - 6.50%, 1/01/00 20,500,000 20,175,313
6.00%, 12/01/13 3,479,988 3,456,991
Series 1998-24 JZ, 6.50%,
5/18/28 2,028,936 2,008,577
Government National
Mortgage Association I
6.00% - 6.50%, 3/15/28 -
1/15/29 ARM 39,414,072 38,749,338
6.00% - 7.00%,
12/15/08 - 3/15/29 67,400,000 69,309,762
Government National
Mortgage Association II
6.13% - 6.88%, 4/20/22 -
12/20/22, ARM 2,765,717 2,820,511
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES (COST
$ 154,747,659) 154,229,551
-----------
CORPORATE BONDS - 19.95% FINANCIAL - 6.28% Capital One Bank, 7.15% -
7.20%, 7/19/99 -
9/15/06 4,750,000 4,780,917
CIT Group, Inc. 5.91%,
11/23/05 3,000,000 2,937,333
Ford Capital, 9.88%, 5/15/02 2,525,000 2,813,162
Household Financial
Company, 5.88%, 2/01/09 1,300,000 1,248,897
Salomon, Inc., 7.30%, 5/15/02 2,000,000 2,078,222
-----------
13,858,531
-----------
INDUSTRIAL - 13.27%
Adelphia Communications,
9.88%, 3/01/05 625,000 678,125
</TABLE>
69
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
INDUSTRIAL (CONTINUED)
Capstar Broadcasting, 9.25%,
7/01/07 $ 700,000 $ 740,250
Century Communications,
9.50%, 8/15/00 1,400,000 1,441,774
Chancellor Media
Corporation, 9.00%,
10/01/08 800,000 856,000
Charter Communications,
8.63%, 4/01/09 (a) 1,200,000 1,227,000
Clearnet Communications,
12/15/05 550,000 504,625
Comcast Cellular, 9.50%,
5/01/07 1,750,000 1,986,250
CSC Holdings, Inc., 9.88%,
5/15/06 750,000 819,375
Enron Corporation, 6.73%,
11/17/08 4,000,000 4,027,516
JCAC, Inc., 10.13%, 6/15/06 750,000 823,125
Jitney-Jingle Stores, 12.00%,
3/01/06 1,500,000 1,668,750
Lenfest Communications,
7.63%, 2/15/08 530,000 540,600
McLeodUSA, Inc., 9.25%,
7/15/07 1,400,000 1,466,500
Metromedia Fiber, 10.00%,
11/15/08 1,120,000 1,201,200
Microcell Telecomm, 14.00%,
6/01/06 420,000 343,350
Nextel Communications,
10.65%, 9/15/07 750,000 551,250
PSINet, Inc., 10.00%,
2/15/05 785,000 828,175
Randall's Food Marketings,
9.38%, 7/01/07 1,145,000 1,242,325
RBF Finance, 11.38%,
3/15/09 (a) 250,000 263,750
Rogers Cablesystems,
9.63% - 10.00%,
8/01/02 - 3/15/05 1,600,000 1,762,000
Rogers Cantel, 8.80%,
10/01/07 1,250,000 1,306,250
Safeway, Inc., 6.50%,
11/15/08 2,000,000 2,028,692
Sprint Capital Corporation,
6.13%, 11/15/08 3,000,000 2,953,358
-----------
29,260,240
-----------
UTILITY - 0.40%
CMS Energy Corporation,
6.75%, 1/15/04 900,000 885,600
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TOTAL CORPORATE BONDS
(COST $46,813,941) $44,004,371
-----------
MISCELLANEOUS - 0.47%
Platex Family Production
Corporation
8.88%, 7/15/04 (cost
$ 1,050,599) $1,000,000 1,035,000
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 17.71%
BA Mortgage Securities B1,
6.50%, 7/25/13 420,848 411,549
BA Mortgage Securities M,
6.50%, 7/25/13 649,696 642,073
Chase Mortgage Finance
Corporation
Series 1993-C B1, 7.00%,
10/25/24 2,854,534 2,858,996
General Electric Capital
Mortgage
Series 1993-18 B1, 6.00%,
2/25/09 1,827,816 1,769,918
Series 1998-13 M, 6.50%,
6/25/13 1,122,946 1,111,956
Series 1998-01 M, 6.75%,
1/25/13 716,397 715,215
Series 1998-03 M, 7.00%,
1/25/28 2,713,700 2,713,145
Norwest Asset Securities
Corporation
Series 1996-2 M, 7.00%,
9/25/11 1,706,660 1,713,853
Series 1997-18 B1, 6.75%,
12/25/27 2,574,548 2,529,457
Series 1998-22 B1, 6.25%,
9/25/28 2,146,841 2,069,647
Series 1998-22 B2, 6.25%,
9/25/28 3,109,938 2,968,642
NationsBanc Montgomery
Funding Corporation
Series 1998-5 M, 6.00%,
11/25/13 2,089,024 1,997,678
Series 1998-5 B1, 6.00,
11/25/13 974,520 919,168
Series 1998-4 B2, 6.25%,
10/25/28 2,583,242 2,428,918
Prudential Homes
Series 1996-4 B1, 6.50%,
4/25/26 871,544 848,835
Series 1996-4 M, 6.50%,
4/25/26 4,269,598 4,191,860
</TABLE>
70
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS (CONTINUED)
Prudential Homes
Series 1996-8 M, 6.75%,
6/25/26 $2,326,163 $ 2,312,068
Series 1995-7 M, 7.00%,
11/25/25 2,795,735 2,807,699
Series 1995-5 B1, 7.25%,
9/25/25 (a) 1,444,123 1,455,785
Series 1995-5 M, 7.25%,
9/25/25 2,546,471 2,584,484
------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS (COST
$ 57,268,043) 39,050,946
------------
RESIDUAL INTERESTS - 3.70%
Capital Mortgage Funding
1999-1, 10/20/22 14,088 410,616
Capital Mortgage Funding
1999-2, 10/20/23 15,369 422,935
Capital Mortgage Funding
1999-3, 11/20/23 15,928 432,212
Capital Mortgage Funding
1998-1, 1999, 1/22/27 40,016 671,630
General Mortgage Securities II
1995-1, 1998, 6/25/20 9,057 304,207
General Mortgage Securities II
1998-5, 9/20/21 28,489 628,261
General Mortgage Securities II
1997-4 1998, 5/20/22 9,802 438,928
General Mortgage Securities II
1998-6, 7/20/22 30,853 648,487
General Mortgage Securities II
1995-4, 1998, 6/25/23 6,267 339,970
General Mortgage Securities II
1997-5 1998, 7/20/23 18,194 641,663
General Mortgage Securities II
1999-1, 8/20/24 40,000 658,476
General Mortgage Securities II
1998-1, 10/20/24 21,132 590,657
General Mortgage Securities II
1998-2, 10/20/24 27,670 434,402
National Mortgage Funding
1995-4, 1998, 3/20/21 5,019 102,273
National Mortgage Funding
1998-9, 11/20/22 24,128 460,073
National Mortgage Funding
1998-10, 1/20/23 13,573 503,279
National Mortgage Funding
1998-8, 5/20/24 28,801 480,355
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
RESIDUAL INTERESTS (CONTINUED)
TOTAL RESIDUAL INTERESTS (COST
$ 8,635,785) 8,168,424
------------
TOTAL LONG-TERM INVESTMENTS
(COST $297,133,719) $296,709,150
------------
SHORT-TERM INVESTMENT - 0.21%
REPURCHASE AGREEMENT
Goldman Sachs & Company Dated 3/31/99, 4.95%, due 4/01/99, collateralized by
$445,241 Federal Home Loan Mortgage Corporation, 7.50%, 11/01/27, market
value $457,485 (cost $447,914) $ 447,914 447,914
------------
TOTAL INVESTMENTS
(COST $297,581,633)-
134.75% 297,157,064
OTHER ASSETS LESS LIABILITIES -
(34.75%) (76,639,834)
------------
NET ASSETS - 100.00% $220,517,230
============
</TABLE>
INVESTMENT ABBREVIATIONS
ARM -- Adjustable Rate Mortgage
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 $384,867,076 and $357,935,935, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $297,581,633. Net unrealized depreciation aggregated
$424,569, of which $2,019,646 related to appreciated investment securities and
$2,444,215 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
71
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
ASSET-BACKED SECURITIES - 11.60%
Advanta Home Equity Loan,
6.15%, 10/25/09 $ 617,283 $ 616,032
Advanta Mortgage Loan
Trust, 5.05%, 3/25/10 277,581 273,134
Advanta Mortgage Loan
Trust 1993-3 A3,
4.75%, 2/25/10 402,385 397,700
AFC Home Equity Loan
Trust, 6.60%, 2/25/27 1,395,483 1,394,227
AFG Receivables Trust,
6.45%, 9/15/00 (a) 145,295 145,295
7.05%, 4/15/01 (a) 239,677 239,889
7.00%, 2/15/03 (a) 705,931 707,309
AFG Receivables Trust
1997 A, 6.35%, 10/15/02 1,036,846 1,041,669
AFG Receivables Trust
1997 B, 6.20%, 2/15/2003 94,118 94,114
Capital One Master Trust
1998-4, 5.43%, 1/15/07 2,000,000 1,967,303
CS First Boston 1996-2,
6.39%, 2/25/18 675,598 673,292
7.18%, 2/25/18 4,000,000 4,017,347
Equifax Credit Corporation
1994-1 B, 5.75%, 3/15/09 398,474 397,793
Fifth Third Bank Auto
Grantor Trust, 6.20%,
9/15/01 218,032 218,462
MMCA Automobile Trust
1999-1, 5.50%, 7/15/05 3,000,000 2,993,466
Old Stone Credit Corporation
1993-2, 6.20%, 6/15/08 230,854 231,783
Olympic Automobiles
Receivables Trust 1994-B
A2, 6.85%, 6/15/01 388,097 388,097
Olympic Automobiles
Receivables Trust,
7.35%, 10/15/01 605,458 607,451
Perpetual Savings Bank
1990-1, 7.17%, 3/01/20 2,319,946 2,311,340
Union Acceptance
Corporation Auto Trust
1997 A,
6.48%, 5/10/04 430,000 434,644
Union Acceptance
Corporation,
6,70%, 6/08/03 2,020,000 2,036,827
6.45%, 7/09/03 593,504 597,274
Union Acceptance
Corporation 1998-D A3,
5.75%, 6/09/03 2,400,000 2,391,536
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $24,212,755) 24,175,984
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
U.S. GOVERNMENT SECURITIES
AND AGENCIES - 49.00%
Federal National Mortgage
Association
10.00%, 6/01/05 MBS $ 136,411 $ 141,174
6.00%, 11/01/13 - 4/01/14 37,051,196 36,750,156
9.00%, 5/01/14 ARM 4,580,657 4,626,474
7.00%, 12/15/08 ARM 24,470,286 24,844,881
6.00%, 11/15/13 1,985,917 1,977,229
6.00%, 12/15/13 -
1/15/14 ARM 7,787,433 7,753,363
6.63%, 7/20/22 3,101,843 3,173,415
6.50%, 3/15/28 ARM 2,879,888 2,866,389
6.50%, 6/15/28 MBS 2,799,999 2,786,874
Government National
Mortgage Association II
7.00%, 11/20/22 2,083,124 2,124,688
6.88%, 4/20/22 5,227,054 5,347,726
6.13%, 10/20/22-12/20/22 4,084,247 4,163,533
6.63%, 9/20/23 732,024 748,693
U.S. Treasury Bonds, 4.25%,
11/15/03 5,000,000 4,834,000
-----------
TOTAL U.S. GOVERNMENT
SECURITIES AND AGENCIES
(COST $102,541,046) 102,138,595
-----------
COLLATERALIZED MORTGAGE
OBLIGATION - 22.39%
Chase 1999-S3 B1, 6.25%,
3/25/14 401,178 387,032
Chase 1999-S3 M, 6.25%,
3/25/14 1,260,846 1,233,774
Citigroup 1992-18 A-A,
6.60%, 11/25/22 7,570,244 7,617,880
Equifax Credit Corporation,
1998-2, 6.16%, 4/15/08 1,926,750 1,928,231
1999-1 A6F, 6.20%,
9/20/09 4,750,000 4,720,897
1998-A, 6.33%, 1/15/22 1,350,000 1,353,588
First USA Credit Card Master
Trust 1998-9 1997, 5.28%,
9/18/06 2,300,000 2,259,732
Glendale Federal Bank
1990-1 A, 6.60%, 10/25/29 5,222,348 5,222,253
Green Tree Home Equity
Loan Trust 1999-4, 6.13%,
2/15/19 3,100,000 3,097,204
J.C. Penney Master Credit
Card Trust 1998-E, 5.50%,
6/15/07 3,575,000 3,513,713
Key Auto Finance Trust,
6.15%, 10/15/01 4,000,000 4,015,444
Saxon 1995-1A A1, 7.52%,
4/25/25 3,693,031 3,713,644
</TABLE>
72
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATION (CONTINUED)
Saxon Asset Securities Trust
1999-1 AF3, 6.17%, 8/25/21 $ 3,000,000 $ 2,997,277
Saxon Asset Securities Trust,
6.27%, 7/25/23 3,800,000 3,805,955
Structured Asset Securities
Corporation, 6.19%,
10/25/28 816,176 816,177
------------
TOTAL COLLATERIZED MORTGAGE
OBLIGATIONS
(COST $46,792,705) 46,682,801
------------
CORPORATE BONDS - 20.26%
Adelphia Communications,
7.50%, 1/15/04 1,000,000 996,250
Argosy Gaming Company,
13.25%, 6/01/04 (a) 1,000,000 1,132,500
Associates Corporation, NA,
7.88%, 9/30/01 1,000,000 1,051,554
Capital One Bank,
7.20%, 7/19/99 1,500,000 1,509,421
7.15%, 9/15/06 1,000,000 1,006,642
Carr-Gottstein Foods
Company, 12.00%,
11/15/05 1,500,000 1,725,000
Century Communications,
9.50%, 8/15/00 1,207,000 1,243,210
Clearnet Communications,
14.75%, 12/15/05 850,000 779,875
CMS Energy Corporation,
6.75%, 1/15/04 1,000,000 984,000
CSC Holdings, Inc., 9.88%,
5/15/06 750,000 819,375
Discover Card Master Trust I,
1998-7, 5.60%, 5/15/06 2,000,000 1,976,716
Ford Capital, 9.88%, 5/15/02 2,525,000 2,813,162
General Motors Acceptance
Corporation,
6.88%, 7/15/01 2,250,000 2,306,781
JCAC Inc., 10.13%, 6/15/06 1,250,000 1,371,875
Jitney-Jungle Stores, 12.00%,
3/01/06 1,500,000 1,668,750
Lehman, 6.20%, 1/15/02 2,000,000 1,978,146
Nextel Communications,
9.75%, 8/15/04 1,000,000 1,037,500
Playtex Products, 8.88%,
7/15/04 1,000,000 1,035,000
PSI Energy, Inc., 6.00%,
12/14/01 (a) 2,000,000 1,975,529
PSINet, Inc., 10.00%, 2/15/05 750,000 791,250
Randall's Food Marketings,
9.38%, 7/01/07 925,000 1,003,625
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
Rogers Cablesystems, 9.63%,
8/01/02 $ 1,057,000 $ 1,133,632
Rogers Cablesystems,
10.00%, 3/15/05 650,000 734,500
Salomon, Inc., 7.25%,
5/01/01 2,250,000 2,317,981
Salomon, Inc., 7.30%,
5/15/02 1,000,000 1,039,111
Shoppers Food Warehouse,
9.75%, 6/15/04 1,500,000 1,631,250
Sprint Capital Corporation,
5.70%, 11/15/03 2,155,000 2,129,921
The Money Store, 6.28%,
12/15/22 4,000,000 4,034,731
------------
TOTAL CORPORATE BONDS
(COST $42,208,731) 42,227,287
------------
RESIDUAL INTERESTS (A) - 1.29%
General Mortgage Funding II,
1997-4 1998, 5/20/22 3,267 145,339
General Mortgage Funding II,
1998-1, 10/20/24 14,088 393,771
General Mortgage Funding II,
1999-1, 8/20/24 30,000 492,850
National Mortgage Funding I,
1998-6, 1/20/23 47,266 669,012
National Mortgage Funding I,
1998-7, 7/20/23 44,360 670,734
National Mortgage Funding I,
1998-8, 5/20/24 19,201 320,236
------------
TOTAL RESIDUAL INTERESTS
(COST $2,815,666) 2,691,942
------------
SHORT-TERM
INVESTMENT - 7.93%
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 3/31/99, 4.95%,
due 4/01/99, collateralized by
$19,026,000 Federal Home Loan
Mortgage Corporation, 7.00%,
5/01/28, market value
$16,887,351
(cost $16,529,179) 16,529,179 16,529,179
------------
TOTAL INVESTMENTS
(COST $235,100,082)-112.47% 234,445,788
OTHER ASSETS LESS
LIABILITIES - (12.47%) (25,998,859)
------------
NET ASSETS - 100.00% $208,446,929
============
</TABLE>
73
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT ABBREVIATIONS
ARM - Adjustable Rate Mortgage
MBS - Mortgage Backed Securities
(a) These are securities that may be resold to "qualified institutional buyers"
under rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $447,271,432 and $361,018,924, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $235,100,082. Net unrealized depreciation aggregated
$654,294 of which $535,181 related to appreciated investment securities and
$1,189,475 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
74
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $296,709,150
Repurchase agreements 447,914
------------
Total investments
(cost $297,581,633) 297,157,064
Collateral for securities
loaned (Note 2) 341,000
Receivables
Investments sold 13,304,297
Fund shares sold 573,083
Dividends and interest 2,710,870
Other 43,892
------------
TOTAL ASSETS 314,130,206
------------
LIABILITIES
Payables
Securities loaned (Note 2) $ 341,000
Reverse repurchase
agreement 71,419,000
Investments purchased 20,334,685
Fund shares redeemed 287,986
Dividends 1,007,199
Accrued expenses and other
liabilities 223,106
----------
TOTAL LIABILITIES 93,612,976
------------
NET ASSETS $220,517,230
============
Net Assets represented by: (Note 2)
Additional paid-in capital $236,027,963
Accumulated
distributions in excess
of net investment
income (1,194,808)
Accumulated net realized
loss on investment
transactions (13,891,356)
Net unrealized
depreciation of
investments (424,569)
------------
NET ASSETS $220,517,230
============
NET ASSET VALUE PER SHARE
Class A Shares $ 13.05
Class B Shares $ 13.04
Class Y Shares $ 13.55
OFFERING PRICE PER SHARE
Class A Shares $ 13.70(a)
Class B Shares $ 13.04
Class Y Shares $ 13.55
SHARES OUTSTANDING
Class A Shares 8,450,057
Class B Shares 8,453,227
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
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (b) (Note 2) $ 7,236,750
-----------
EXPENSES
Management fee (Note 4) $ 631,092
Distribution fee (Note 5) 273,958
Shareholder service fee (Note 5) 262,954
Transfer agent fee 153,950
Administration fee (Note 4) 105,182
Registration expenses 43,688
Custodian and accounting fees 42,537
Shareholder reports and postage
expenses 31,474
Audit fees 11,021
Legal fees 7,259
Directors' fees and expenses 3,771
Miscellaneous 6,372
----------
Total expenses 1,573,258
-----------
Deduct
Waiver of management fee
(Note 4) (194,745)
-----------
NET INVESTMENT INCOME 5,858,237
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on investments
(Note 2) 402,920
Change in unrealized appreciation
(depreciation) on investments (8,898,636)
----------
NET LOSS ON INVESTMENTS (8,495,716)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $(2,637,479)
===========
</TABLE>
(b) Net of interest expense of $1,604,124 related to borrowings.
SEE NOTES TO FINANCIAL STATEMENTS.
75
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 5,858,237 $ 9,334,606
Net realized gain on investments 402,920 713,191
Change in unrealized appreciation (depreciation) on investments (8,898,636) 6,558,180
------------- -------------
Increase in net assets resulting from operations (2,637,479) 16,605,977
------------- -------------
Distributions to Shareholders
From net investment income
Class A (3,050,569) (4,831,082)
Class B (3,078,903) (5,431,749)
Class Y -- (51)
------------- -------------
Total distributions to shareholders (6,129,472) (10,262,882)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 51,165,151 106,644,051
Reinvested distributions 4,065,893 6,677,759
Shares redeemed (33,128,128) (40,705,601)
------------- -------------
Change in net assets resulting from capital share transactions 22,102,916 72,616,209
------------- -------------
Increase in net assets 13,335,965 78,959,304
Net Assets
Beginning of period 207,181,265 128,221,961
------------- -------------
End of period (including accumulated distributions in excess of net investment
income of ($1,194,808) and ($923,573), respectively) $ 220,517,230 $ 207,181,265
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.61 $ 13.18
--------- -------
Income from investment operations
Net investment income 0.39 0.79
Net realized and unrealized gain (loss) on
investments (0.55) 0.47
--------- -------
Total from investment operations (0.16) 1.26
--------- -------
Less distributions
From net investment income (0.40) (0.83)
--------- -------
Net asset value, end of year $ 13.05 $ 13.61
========= =======
TOTAL RETURN* (1.16%) 9.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 110,263 $94,279
Ratio of expenses to average net assets 1.05%(a) 1.05%
Ratio of expenses to average net asset excluding
waiver 1.14%(a) 1.18%
Ratio of net investment income to average net assets 5.83%(a) 5.73%
Portfolio turnover rate 121% 114%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 12.91 $ 13.29 $ 12.75 $ 14.04
------- ------- ------- -------
Income from investment operations
Net investment income 0.97 0.89 0.84 0.84
Net realized and unrealized gain (loss) on
investments 0.26 (0.37) 0.61 (1.30)
------- ------- ------- -------
Total from investment operations 1.23 0.52 1.45 (0.46)
------- ------- ------- -------
Less distributions
From net investment income (0.96) (0.90) (0.91) (0.83)
------- ------- ------- -------
Net asset value, end of year $ 13.18 $ 12.91 $ 13.29 $ 12.75
======= ======= ======= =======
TOTAL RETURN* 9.86% 4.09% 11.82% (3.39%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $53,176 $21,092 $24,472 $30,142
Ratio of expenses to average net assets 1.05% 1.05% 1.32% 1.38%
Ratio of expenses to average net asset excluding
waiver 1.18% 1.31% 1.36% 1.39%
Ratio of net investment income to average net assets 7.01% 6.84% 6.73% 6.33%
Portfolio turnover rate 100% 254% 368% 455%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
76
<PAGE>
MENTOR QUALITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.61 $ 13.18
--------- --------
Income from investment operations
Net investment income 0.35 0.72
Net realized and unrealized gain (loss) on
investments (0.55) 0.48
--------- --------
Total from investment operations (0.20) 1.20
--------- --------
Less distributions
From net investment income (0.37) (0.77)
--------- --------
Net asset value, end of year $ 13.04 $ 13.61
========= ========
TOTAL RETURN* (1.46%) 9.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 110,253 $112,901
Ratio of expenses to average net assets 1.55%(a) 1.55%
Ratio of expenses to average net asset excluding
waiver 1.74%(a) 1.67%
Ratio of net investment income to average net assets 5.33%(a) 5.22%
Portfolio turnover rate 121% 114%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 12.93 $ 13.31 $ 12.76 $ 14.06
------- ------- ------- -------
Income from investment operations
Net investment income 0.86 0.84 0.79 0.82
Net realized and unrealized gain (loss) on
investments 0.30 (0.38) 0.61 (1.37)
------- ------- ------- -------
Total from investment operations 1.16 0.46 1.40 (0.55)
------- ------- ------- -------
Less distributions
From net investment income (0.91) (0.84) (0.85) (0.75)
------- ------- ------- -------
Net asset value, end of year $ 13.18 $ 12.93 $ 13.31 $ 12.76
======= ======= ======= =======
TOTAL RETURN* 9.29% 3.57% 11.33% (3.97%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $75,046 $58,239 $62,155 $77,888
Ratio of expenses to average net assets 1.55% 1.55% 1.74% 1.88%
Ratio of expenses to average net asset excluding
waiver 1.68% 1.81% 1.79% 1.90%
Ratio of net investment income to average net assets 6.51% 6.36% 6.24% 6.21%
Portfolio turnover rate 100% 254% 368% 455%
</TABLE>
(a) Annualized.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (b)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 13.69 $ 13.20
-------- --------
Income from investment operations
Net investment income 0.39 0.78
Net realized and unrealized gain (loss) on investments (0.53) 0.39
-------- --------
Total from investment operations (0.14) 1.17
-------- --------
Less distributions
From net investment income -- (0.68)
-------- --------
Net asset value, end of period $ 13.55 $ 13.69
======== ========
TOTAL RETURN* (1.02%) 8.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 0.80%(a) 0.80%(a)
Ratio of expenses to average net assets exluding waiver 0.99%(a) 0.93%(a)
Ratio of net investment income to average net assets 5.83%(a) 7.09%(a)
Portfolio turnover rate 121% 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.
77
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $217,916,609
Repurchase agreements 16,529,179
------------
Total investments
(cost $235,100,082) 234,445,788
Cash
Receivables 30,939
Investments sold 12,842,753
Fund shares sold 6,342,238
Dividends and interest 2,078,786
Deferred expenses (Note 2) 21,970
------------
TOTAL ASSETS 255,762,474
------------
LIABILITIES
Payables
Investments purchased $16,346,132
Reverse repurchase
agreement 29,000,000
Fund shares redeemed 1,006,854
Dividends 828,582
Accrued expenses and other
liabilities 133,977
-----------
TOTAL LIABILITIES 47,315,545
------------
NET ASSETS $208,446,929
============
Net Assets represented by: (Note 2)
Additional paid-in capital $209,980,897
Accumulated distributions in
excess of net investment
income (764,158)
Accumulated net realized loss
on investment transactions (115,517)
Net unrealized depreciation
of investments (654,293)
------------
NET ASSETS $208,446,929
============
NET ASSET VALUE PER SHARE
Class A Shares $ 12.49
Class B Shares $ 12.51
Class Y Shares $ 12.92
OFFERING PRICE PER SHARE
Class A Shares $ 12.62(a)
Class B Shares $ 12.51
Class Y Shares $ 12.92
SHARES OUTSTANDING
Class A Shares 12,368,595
Class B Shares 4,310,930
Class Y Shares 83
</TABLE>
(a) Computation of offering price: 100/99 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $5,246,726
----------
EXPENSES
Management fee (Note 4) $ 439,105
Shareholder service fee (Note 5) 219,551
Administration fee (Note 4) 88,030
Distribution fee (Note 5) 82,684
Transfer agent fee 64,278
Custodian and accounting fees 25,415
Registration expenses 24,322
Organizational expenses 12,620
Shareholder reports and postage
expenses 11,143
Legal fees 3,965
Audit fees 2,788
Directors' fees and expenses 2,059
Miscellaneous 3,479
----------
Total expenses 979,439
----------
Deduct
Waiver of administration fee
(Note 4) (88,030)
Waiver of management fee
(Note 4) (52,159)
----------
NET INVESTMENT INCOME 4,407,476
----------
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS
Net realized loss on investments
(Note 2) (102,249)
Change in unrealized appreciation
(depreciation) on investments (2,564,213)
----------
NET LOSS ON INVESTMENTS (2,666,462)
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $1,741,014
==========
</TABLE>
(a) Net of interest expense of $163,166 related to borrowings.
SEE NOTES TO FINANCIAL STATEMENTS.
78
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 YEAR ENDED
(UNAUDITED) 9/30/98
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 4,407,476 $ 5,167,036
Net realized gain (loss) on investments (102,249) 325,954
Change in unrealized appreciation (depreciation) on investments (2,564,213) 1,608,387
------------- -------------
Increase in net assets resulting from operations 1,741,014 7,101,377
------------- -------------
Distributions to Shareholders
From net investment income
Class A (3,256,831) (3,203,099)
Class B (1,402,510) (2,394,223)
Class Y -- (49)
From net realized gain on investments
Class A (110,579) --
Class B (46,577) --
------------- -------------
Total distributions to shareholders (4,816,497) (5,597,371)
------------- -------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 111,629,716 169,053,248
Reinvested distributions 3,456,128 4,352,285
Shares redeemed (50,607,871) (82,572,822)
------------- -------------
Change in net assets resulting from capital share transactions 64,477,973 90,832,711
------------- -------------
Increase in net assets 61,402,490 92,336,717
Net Assets
Beginning of period 147,044,439 54,707,722
------------- -------------
End of period (including accumulated distributions in excess of net investment income
of ($764,158) and ($512,293), respectively) $ 208,446,929 $ 147,044,439
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR YEAR PERIOD
ENDED 3/31/99 ENDED ENDED ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97 9/30/96 9/30/95 (c)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.74 $ 12.62 $ 12.50 $ 12.68 $ 12.74
-------- ------- ------- ------- --------
Income from investment operations
Net investment income 0.35 0.70 0.77 0.82 0.22
Net realized and unrealized gain (loss) on investments (0.25) 0.15 0.12 (0.23) (0.03)
-------- ------- ------- -------- --------
Total from investment operations 0.10 0.85 0.89 0.59 0.19
-------- ------- ------- -------- --------
Less distributions
From net investment income (0.35) (0.73) (0.77) (0.77) (0.25)
-------- ------- ------- -------- --------
Net asset value, end of period $ 12.49 $ 12.74 $ 12.62 $ 12.50 $ 12.68
======== ======= ======= ======== ========
TOTAL RETURN* 0.84% 6.98% 7.33% 4.80% 1.51%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $154,509 $93,135 $27,619 $ 7,450 $ 1,002
Ratio of expenses to average net assets 0.86%(a) 0.86% 0.86% 0.86% 0.71%(a)
Ratio of expenses to average net asset excluding waiver 1.02%(a) 1.14% 1.12% 1.26% 1.00%(a)
Ratio of net investment income to average net assets 5.10%(a) 5.24% 6.00% 5.90% 4.10%(a)
Portfolio turnover rate 186% 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.
79
<PAGE>
MENTOR SHORT-DURATION INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED 3/31/99 ENDED ENDED
(UNAUDITED) 9/30/98 9/30/97
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.75 $ 12.62 $ 12.50
--------- ------- -------
Income from investment operations
Net investment income 0.31 0.66 0.73
Net realized and unrealized gain (loss) on
investments (0.22) 0.16 0.12
--------- ------- -------
Total from investment operations 0.09 0.82 0.85
--------- ------- -------
Less distributions
From net investment income (0.33) (0.69) (0.73)
--------- ------- -------
Net asset value, end of period $ 12.51 $ 12.75 $ 12.62
========= ======= =======
TOTAL RETURN* 0.72% 6.68% 6.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 53,937 $53,908 $27,089
Ratio of expenses to average net assets 1.16%(a) 1.16% 1.16%
Ratio of expenses to average net asset excluding
waiver 1.32%(a) 1.44% 1.42%
Ratio of net investment income to average net assets 4.80%(a) 4.94% 5.70%
Portfolio turnover rate 186% 171% 75%
<CAPTION>
YEAR PERIOD PERIOD
ENDED ENDED ENDED
9/30/96 9/30/95 (D) 12/31/94 (e)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.67 $ 12.18 $ 12.50
------- ------- ---------
Income from investment operations
Net investment income 0.73 0.59 0.41
Net realized and unrealized gain (loss) on
investments (0.17) 0.52 (0.29)
------- ------- ---------
Total from investment operations 0.56 1.11 0.12
------- ------- ---------
Less distributions
From net investment income (0.73) (0.62) (0.44)
------- ------- ---------
Net asset value, end of period $ 12.50 $ 12.67 $ 12.18
======= ======= =========
TOTAL RETURN* 4.53% 9.22% 0.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $24,517 $19,871 $ 17,144
Ratio of expenses to average net assets 1.16% 1.20% 1.29%(a)
Ratio of expenses to average net asset excluding
waiver 1.56% 1.70% 1.29%(a)
Ratio of net investment income to average net assets 5.60% 5.04% 4.90%(a)
Portfolio turnover rate 411% 126% 166%
</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.
* Total return does not reflect sales commissions and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
CLASS Y SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (f)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.79 $ 12.57
-------- --------
Income from investment operations
Net investment income 0.33 0.67
Net realized and unrealized gain (loss) on investments (0.20) 0.16
-------- --------
Total from investment operations 0.13 0.83
-------- --------
Less distributions
From net investment income -- (0.61)
-------- --------
Net asset value, end of period $ 12.92 $ 12.79
======== ========
TOTAL RETURN* 1.02% 6.64%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 1 $ 1
Ratio of expenses to average net assets 0.61%(a) 0.61%(a)
Ratio of expenses to average net asset excluding waiver 0.77%(a) 0.87%(a)
Ratio of net investment income to average net assets 5.10%(a) 6.10%(a)
Portfolio turnover rate 186% 171%
</TABLE>
(a) Annualized.
(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.
80
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
COMMENTARY: THE MENTOR HIGH INCOME PORTFOLIO TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
MARKET REVIEW
For the six-month period ending March 31, 1999 fixed-income Treasury yields rose
across the yield curve. Two-year notes increased 71 basis points to 4.98% and
30-year rates increased 66 basis points to 5.62%. Despite the rise in Treasury
yields the quarter saw good returns for high yield. Against this rise in
interest rates, the spread between high yield debt and Treasuries declined
during the early months of 1999, dropping from 631 basis points at year-end to
579 basis points at first quarter-end, according to the Chase High Yield Index.
This leaves the spread, representing risk premium, much lower than last year's
third quarter flight to quality level, but well above historical norms.
New issuance for the first quarter of 1999 remained somewhat lower than the
first quarter of 1998. This year's new issuance of $30.1 billion compares to
$49.7 billion from last year. Inflows into the high yield market have remained
lower as well, with cash inflows of $4.3 billion for this year's first quarter,
against inflows of $8.9 billion for the same period in 1998.
MANAGEMENT STRATEGY
Significant cash flow into the Mentor High Income Portfolio increased total
assets in the Fund from approximately $207 million at the end of the fourth
quarter of 1998 to $267 million at 1999 first quarter-end. In spite of this 29%
increase in the size of Portfolio assets, we were able to continue to find many
attractive investment opportunities for the new funds. In fact, the percentage
of Portfolio assets invested in cash has actually declined from 6.6% to 6.2% so
far this year. The number of securities held increased from 152 to 167, with no
single issuer representing more than 1.5% of the total portfolio.
Over the course of the period we increased our emphasis on wider-spread paper,
thereby allowing the Portfolio to outperform as spreads compressed with
favorable economic conditions. By the end of March we had increased the single-B
component of the Portfolio to 71.2%. This increase in single-B paper serves to
make the portfolio more highly correlated to changes in the rate of growth in
gross domestic product, and less correlated to the level of Treasury yields.
We have continued to increase the Portfolio's concentration in telecommunication
and media credits, these credits have outperformed against a background of
consolidation and favorable regulatory developments. Our March 31 telecom/ media
weighting of 34.7%, however, still represents a minor underweight against the
high yield universe.
PERFORMANCE REVIEW
Corporate high yield assets performed well during the six-month period compared
to other fixed-income asset classes. This is a trend that has been in place
since the Federal Reserve lowered rates in October of last year. For the
six-month period ended March 31, 1999 the Mentor High Income Portfolio A shares
returned 6.97%, comparing favorably to a 4.64% return for its Merrill Lynch High
Yield Index benchmark.
MARKET OUTLOOK
Positive news for bonds overseas is offset by domestic U.S. conditions that
continue to put upward pressure on interest rates. The U.S. economy has
repeatedly defied predictions of an imminent slowdown. With unemployment hitting
4.2% in March, inflation fears are mounting. Despite these fears, most broad
measures of inflation have continued to trend downward.
81
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
COMMENTARY: THE MENTOR HIGH INCOME PORTFOLIO TEAM
MARCH 31, 1999
- --------------------------------------------------------------------------------
Without some new evidence of slowing economic growth, the bond market seems
likely to trade within a fairly narrow range around current interest rate
levels. In such an environment, lower-rated corporate bonds should continue to
perform well.
The outlook for high yield bonds continues to look favorable. Our forecast for
continued strong domestic growth and benign inflation provides a favorable
backdrop for the high yield market. The emerging markets, which detonated last
fall's melt down, have been star performers this year after shrugging off
Brazil's currency devaluation. While the equity markets have bounced off their
early October lows to set new records, high yield spreads have only retraced
about one half of their third quarter 1998 widening. Some potential pitfalls for
our six-month outlook would include a resurgence in inflation, the continued
escalation in default rates, or another flight-to-quality move caused by some
extraneous event.
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]
<TABLE>
<CAPTION>
6/23/98 7/31/98 8/31/98 9/30/98 3/31/99
<S> <C>
Class A Shares(double dagger) 9,525 9,614 8,904 8,882 9,876
Class B Shares(dagger) 10,000 10,081 9,332 9,305 9,919
Merrill Lynch High Yield Master II Bond Index~ 10,000 10,064 9,556 9,581 10,025
</TABLE>
Average Annual Returns as of 3/31/99
Including Sales Charges
1-Year Since Inception(triple dagger)
Class A n/a (1.60%)
Class B n/a (5.82%)
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
3/31/99.
82
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS - 93.20%
CONSUMER
DISTRIBUTION - 13.19%
Agrilink Foods, 11.88%,
11/01/08 $2,500,000 $2,693,750
Big 5 Corporation Senior Notes,
Series B, 10.88%, 11/15/07 2,000,000 2,040,000
CHS Electronics, Inc. Senior
Notes, 9.88%, 4/15/05 2,000,000 1,640,000
Community Distributors,
10.25%, 10/15/04 1,250,000 1,156,250
Del Monte Foods Company
Senior Discount Notes,
12.50%, 12/15/07 (a) 2,625,000 1,968,750
Disco S.A. Notes, 9.13% -
9.88%, 5/15/03 - 5/15/08 (a) 2,000,000 1,808,750
Fleming Companies, Inc.,
10.50%, 12/01/04 2,300,000 2,167,750
Gruma S.A. de C.V. Senior
Notes, 7.63%, 10/15/07 2,000,000 1,780,000
Jitney-Jungle Stores, 12.00%,
3/01/06 1,500,000 1,672,500
Kmart Corporation Debentures,
7.95%, 2/01/23 2,500,000 2,525,000
Luigino's Inc. Senior
Subordinated Notes, 10.00%,
2/01/06 2,500,000 2,509,375
Musicland Group, Inc. Senior
Subordinated Notes-B,
9.88%, 3/15/08 2,500,000 2,562,500
Owens & Minor, Inc., 10.88%,
6/01/06 2,000,000 2,170,000
Packaging Corporation of
America, 9.63%, 4/01/09 1,000,000 1,027,500
Pantry, Inc. Senior Subordinated
Notes, 10.25%, 10/15/07 2,500,000 2,637,500
Pathmark Stores Senior
Subordinated Notes, 9.63%,
5/01/03 2,000,000 2,065,000
Phar-Mor, Inc. Senior Notes,
11.72%, 9/11/02 1,635,000 1,684,050
Supreme International
Corporation, 12.25%,
4/01/06 2,000,000 1,990,000
----------
36,098,675
----------
CONSUMER DURABLES - 5.79%
Aetna Industries, Inc. Senior
Notes, 11.88%, 10/01/06 1,500,000 1,567,500
Cluett American Corporation
Senior Subordinated Notes,
10.13%, 5/15/08 (a) 2,000,000 1,840,000
Consoltex Group Senior Notes,
11.00%, 10/01/03 200,000 204,000
Decora Industries, Inc. Secured
Notes, 11.00%, 5/01/05 (a) 2,000,000 1,930,000
French Fragrances, Inc. Senior
Notes, 10.38%, 5/15/07 1,500,000 1,537,500
Galey & Lord, Inc. Senior
Subordinated Notes, 9.13%,
3/01/08 2,225,000 1,724,375
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES (CONTINUED)
MCII Holdings Senior Secured
Discount Notes, 12.00%,
11/15/02 1,500,000 1,297,500
Outsourcing Services Group
Senior Subordinated Notes,
10.88%, 3/01/06 (a) 1,150,000 1,121,250
Simmons Company Senior
Subordinated Notes, 10.25%,
3/15/09 500,000 519,375
Talon Automotive Group Senior
Subordinated Notes, 9.63%,
5/01/08 (a) 1,855,000 1,632,400
Venture Holdings Trust Senior
Notes, 9.75%, 4/01/04 2,500,000 2,462,500
----------
15,836,400
----------
CONSUMER SERVICES - 25.36%
American Media Operations,
11.63%, 11/15/04 2,380,000 2,576,350
AmeriCredit Corporation,
9.25%, 2/01/04 (a) 2,000,000 1,980,000
Argosy Gaming Company,
12.00%, 6/01/01 1,000,000 1,030,000
Argosy Gaming Company,
13.25%, 6/01/04 (a) 1,500,000 1,700,625
Booth Creek Ski Holdings
Senior Notes-B, 12.50%,
3/15/07 2,250,000 2,148,750
Capstar Broadcasting Senior
Discount Notes, 12.75%,
2/01/09 (a) 1,000,000 850,000
Casino America, 12.50%,
8/01/03 1,000,000 1,150,000
Centennial Cellular Senior
Subordinated Notes, 10.75%,
12/15/08 2,350,000 2,496,875
Charter Communications,
8.63%, 4/01/09 (a) 2,000,000 2,050,000
Citadel Broadcasting Company
Senior Subordinated Notes,
9.25%, 11/15/08 400,000 431,000
ContiFinancial Corporation,
7.50%, 3/15/02 2,000,000 1,560,000
CTI Holdings S.A. Senior
Notes, 11.50%, 4/15/08 $3,000,000 $1,650,000
Diamond Cable Communi-
cations Senior Discount
Notes, 11.75%, 12/15/05 1,500,000 1,331,250
Filtronic PLC Senior Notes,
10.00%, 12/01/05 2,500,000 2,612,500
Frontiervision LP Senior
Discount Notes, 11.88%,
9/15/07 2,375,000 2,075,156
Globo Communicacoes Senior
Notes, 10.63%, 12/05/08 (a) 2,000,000 1,310,000
Group Maintenance America
Senior Subordinated Notes,
9.75%, 1/15/09 500,000 512,500
</TABLE>
83
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
Grupo Televisa S.A. Senior
Discount Notes-Euro,
13.25%, 5/15/08 $ 2,335,000 $ 1,973,075
Hermes Europe Railtel Senior
Notes, 10.38%, 1/15/09 2,500,000 2,687,500
Hollywood Casino Corporation
Senior Notes, 12.75%,
11/01/03 2,000,000 2,195,000
Hollywood Park, Inc. Senior
Subordinated Notes, 9.50%,
8/01/07 2,000,000 2,030,000
Integrated Electric Services
Senior Subordinated Notes,
9.38%, 2/01/09 1,000,000 1,023,750
Intrawest Corporation Senior
Notes, 9.75%, 8/15/08 2,000,000 2,062,500
IXC Communications, Inc.
Senior Subordinated Notes,
9.00%, 4/15/08 2,000,000 2,090,000
La Petite Academy LPA
Holdings-B, 10.00%, 5/15/08 1,250,000 1,231,250
Level 3 Communications Senior
Discount Notes, 10.50%,
12/01/08 2,000,000 1,260,000
Mail-Well Corporation Senior
Subordinated Notes, 8.75%,
12/15/08 (a) 1,000,000 1,030,000
Majestic Star Casino, LLC,
12.75%, 5/15/03 1,500,000 1,665,000
Multicanal Participacoes,
12.63%, 6/18/04 1,000,000 865,000
Northland Cable Television
Senior Subordinated Notes,
10.25%, 11/15/07 700,000 749,000
NTL Incorporated Senior
Notes, 12.38%, 10/01/08 2,000,000 1,370,000
Oxford Automotive, Inc.
10.13%, 6/15/07 2,000,000 2,070,000
Premier Graphics, Inc. Senior
Notes, 11.50%, 12/01/05 2,500,000 2,462,500
Premier Parks, Inc. Senior
Discount Notes, 10.00%,
4/01/08 3,000,000 2,111,250
Sinclair Broadcast Group Senior
Subordinated Notes, 8.75% -
9.00%, 7/15/07 - 12/15/07 2,750,000 2,811,250
Splitrock Services Inc., 11.75%,
7/15/08 2,000,000 1,910,000
Splitrock Services Inc., 11.75%,
7/15/08 - Warrants 2,000 40,000
Telewest Communication PLC
Debentures, 11.00%,
10/01/07 1,500,000 1,320,000
Triton PCS, Inc., 11.63%,
5/01/08 4,000,000 2,380,000
United International Holdings
Senior Discount Notes,
10.75%, 2/15/08 3,000,000 2,055,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
Webb Corporation Senior
Subordinated Notes, 10.25%,
2/15/10 $ 2,000,000 $ 2,030,000
Young American Corporation
Senior Subordinated Notes,
11.63%, 2/15/06 (a) 1,000,000 500,000
----------
69,387,081
----------
ENERGY - 4.47%
Canadian Forest Oil Limited,
8.75%, 9/15/07 2,500,000 2,412,500
Cross Timbers Oil Company
Senior Subordinated Notes,
8.75%-9.25%, 4/01/07-
11/01/09 2,120,000 2,054,600
Gulf Canada Resources Limited
Debentures, 9.00%, 8/15/99 1,000,000 1,012,500
Houston Exploration Company
Senior Subordinated Notes-B,
8.63%, 1/01/08 1,000,000 1,000,000
Hurricane Hydrocarbons Senior
Notes, 11.75%, 11/01/04 (a) 1,000,000 460,000
Nationsrent, Inc, 10.38%,
12/15/08 2,000,000 2,100,000
Pride International, Inc., 9.38%,
5/01/07 1,000,000 980,000
Tesoro Petroleum Corporation
Senior Subordinated Notes,
9.00%, 7/01/08 (a) 1,000,000 997,500
Universal Compression, Inc.
Senior Discount Notes,
9.88%, 2/15/08 (a) 2,000,000 1,200,000
----------
12,217,100
----------
HEALTH CARE - 4.02%
Biovail Corporation
International Senior Notes,
10.88%, 11/15/05 (a) 2,600,000 2,671,500
Columbia/HCA Healthcare,
6.91%, 6/15/05 1,000,000 922,500
King Pharmaceutical, Inc.,
10.75%, 2/15/09 2,000,000 2,070,000
Mariner Post-Acute Network
Senior Subordinated Notes,
10.50%, 11/01/07 1,500,000 270,000
Oxford Health Plans Senior
Notes, 11.00%, 5/15/05 2,500,000 2,562,500
Tenet Healthcare Corporation,
8.63%, 1/15/07 2,500,000 2,500,000
----------
10,996,500
----------
PRODUCER MANUFACTURING - 12.26%
Agriculture Minerals &
Chemicals, 10.75%, 9/30/03 3,000,000 3,030,000
Cambridge Industries, Inc.,
10.25%, 7/15/07 2,000,000 1,700,000
CMI Industries Senior
Subordinated Notes, 9.50%,
10/01/03 2,760,000 2,718,600
</TABLE>
84
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
PRODUCER MANUFACTURING (CONTINUED)
Compass Aerospace
Corporation, 10.13%,
4/15/05 (a) $ 2,250,000 $2,160,000
Delta Mills, Inc., 9.63%,
9/01/07 1,500,000 1,511,250
Dine S.A. de C.V., 8.75%,
10/15/07 (a) 1,000,000 835,000
Globe Manufacturing
Corporation Senior
Subordinated Notes, 10.00%,
8/01/08 2,250,000 1,788,750
Hayes Lemmerz International
Inc., 9.13%, 7/15/07 1,500,000 1,578,750
Hydrochemical Industrial
Service Senior Subordinated
Notes-B, 10.38%, 8/01/07 1,000,000 885,000
K&F Industries Senior
Subordinated Notes, 9.25%,
10/15/07 2,000,000 2,065,000
Muzak LLC Senior
Subordinated Notes, 9.88%,
3/15/09 2,000,000 2,035,000
Pacifica Papers, Inc. Senior
Notes, 10.00%, 3/15/09 2,000,000 2,065,000
Repap New Brunswick, 9.00%,
6/01/04 2,000,000 1,950,000
Schuler Homes Senior Notes,
9.00%, 4/15/08 (a) 750,000 723,750
Tekni-Plex, Inc. Senior
Subordinated Notes-B,
11.25%, 4/01/07 2,500,000 2,737,500
Terex Corporation Senior
Subordinated Notes, 8.88%,
4/01/08 (a) 2,000,000 1,975,000
United Industries Group Senior
Subordinated Notes, 9.88%,
4/01/09 1,750,000 1,802,500
W. R. Carpenter North America
Senior Subordinated Notes,
10.63%, 6/15/07 2,000,000 1,995,000
----------
33,556,100
----------
RAW MATERIALS/PRODUCTS
INDUSTRIES - 6.86%
Acetex Corporation Senior
Notes, 9.75%, 10/01/03 2,250,000 2,126,250
Ackerley Group, 9.00%,
1/15/09 2,000,000 2,070,000
Advanced Micro Devices Senior
Notes, 11.00%, 8/01/03 2,000,000 2,080,000
AEP Industries, 9.88%,
11/15/07 1,750,000 1,802,500
Anchor Lamina, Inc. Senior
Subordinated Notes, 9.88%,
2/01/08 800,000 746,000
GS Technologies Operation, Inc.
Senior Notes, 12.25%,
10/01/05 875,000 678,125
Hylsa S.A. de C.V. Bonds,
9.25%, 9/15/07 (a) 2,000,000 1,540,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
RAW MATERIALS/PRODUCTS
INDUSTRIES (CONTINUED)
Metromedia Fiber Network
Senior Notes, 10.00%,
11/15/08 $1,000,000 $ 1,077,500
Panolam Industries
International Senior
Subordinated Notes, 11.50%,
2/15/09 1,000,000 1,030,000
Pioneer Americas Acquisition
Senior Notes, 9.25%, 6/15/07 2,450,000 2,070,250
Ucar Global Enterprises Senior
Subordinated Notes, 12.00%,
1/15/05 1,500,000 1,601,250
Vicap S.A. Guaranteed Notes,
10.25% - 11.38%, 5/15/02 -
5/15/07 (a) 2,000,000 1,940,250
----------
18,762,125
----------
TECHNOLOGY - 3.50%
Amazon.Com, Inc., 10.00%,
5/01/08 4,000,000 2,735,000
DecisionOne Holdings Discount
Notes, 11.50%, 8/01/08 1,500,000 45,000
Dictaphone Corporation Senior
Subordinated Notes, 11.75%,
8/01/05 1,000,000 730,000
Fairchild Semiconductor Senior
Subordinated Notes, 10.38%,
10/01/07 2,500,000 2,543,750
Nextel Communications Senior
Discount Notes, 9.75% -
12.00%, 8/15/04 - 11/01/08 3,500,000 3,520,000
----------
9,573,750
----------
TRANSPORTATION - 2.37%
Atlas Air, Inc. Senior Notes,
9.38% - 10.75%, 8/01/05 -
11/15/06 2,600,000 2,683,375
American Communication
Lines, LLC Bonds, 10.25%,
6/30/08 (a) 1,000,000 1,032,500
Cenargo International PLC-1st
Mortgage, 9.75%,
6/15/08 (a) 1,000,000 900,000
Greyhound Lines Senior Notes,
11.50%, 4/15/07 1,335,000 1,541,925
Pegasus Shipping Hellas
Notes-A, 11.88%, 11/15/04 500,000 330,000
----------
6,487,800
----------
UTILITIES - 15.38%
American Cellular Corporation
Senior Notes, 10.50%,
5/15/08 (a) 500,000 523,750
Cathay International Limited
Senior Notes, 13.00%,
4/15/08 (a) 1,000,000 250,000
CIA Transporte Energia Senior
Notes, 9.25%, 4/01/08 1,155,000 1,053,938
Clearnet Communications
Senior Discount Notes,
14.75%, 12/15/2005 2,500,000 2,325,000
</TABLE>
85
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
Crown Castle International
Corporation Senior Discount
Notes, 10.63%, 11/15/07 $1,500,000 $ 1,042,500
E.Spire Communications, Inc.
Senior Discount Notes,
12.75% - 13.75%,
11/01/05 - 7/15/07 2,300,000 1,912,500
ICG Holdings, Inc. Discount
Notes, 12.50%, 5/01/06 1,770,000 1,380,600
Intermedia Communications of
Florida, 12.50%, 5/15/06 3,500,000 3,045,000
McLeodusa, Inc. Senior
Discount Notes, 10.50%,
3/01/07 2,000,000 1,612,500
MetroNet Communications
Senior Discount Notes,
9.95%, 6/15/08 (a) 1,500,000 1,166,250
Microcell Telecommunications
Senior Discount Notes-B,
14.00%, 6/01/06 2,000,000 1,650,000
Millicom International Cellular
Senior Discount Notes,
13.50%, 6/01/06 2,250,000 1,687,500
Netia Holdings Senior Discount
Notes-B, 11.25%, 11/01/07 $2,500,000 $ 1,725,000
Optel, Inc. Senior Notes,
13.00%, 2/15/05 (a) 500,000 482,500
Pinnacle Holdings, Inc. Senior
Discount Notes, 10.00%,
3/15/08 (a) 2,000,000 1,215,000
Price Communications Cellular,
11.25%, 8/15/08 750,000 727,500
Price Communications Wireless,
Inc. Senior Subordinated
Notes, 11.75%, 7/15/07 2,000,000 2,210,000
Primus Telecommunications
Group Strips, 11.25% -
11.75%, 8/01/04 - 1/15/09 1,750,000 1,811,875
PSINet, Inc. Senior Notes, Series
B, 11.50%, 11/01/08 2,000,000 2,260,000
Rogers Cantel, Inc. Debentures,
9.38%, 6/01/08 2,000,000 2,200,000
Rural Cellular Corporation,
9.63% - 11.38%, 5/15/08 -
5/15/10 1,260,577 2,350,235
Satelites Mexicanos Senior
Notes, 10.13%, 11/01/04 (a) 2,000,000 1,650,000
SBA Communications
Corporation Senior Discount
Notes, 12.00%, 3/01/08 (a) 2,000,000 1,270,000
Sprint Spectrum Senior Notes,
11.00% - 12.50%, 8/15/06 2,000,000 2,067,500
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
Startec Global Communications
Units, 12.00%, 5/15/08 (a) $ 2,000,000 $ 1,830,000
Startec Global Communications
Units, 12.00%, 5/15/08 -
Warrants (a) 2,000 500
Verio, Inc. Senior Notes,
10.38% - 11.25%, 4/01/05 -
12/01/08 2,400,000 2,629,500
------------
42,079,148
------------
TOTAL CORPORATE BONDS (COST
$257,187,903) 254,994,679
------------
SHORT TERM INVESTMENT - 6.07%
U.S. Government Agency
Federal Home Loan Bank
5.00%, 4/01/99 (cost
$16,617,000) 16,617,000 16,617,000
------------
TOTAL INVESTMENTS (COST
$ 273,804,903)-99.27% 271,611,679
OTHER ASSETS LESS
LIABILITIES - 0.73% 1,989,123
------------
NET ASSETS - 100.00% $273,600,802
============
</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 $196,856,099 and $40,074,143, respectively.
INCOME TAX INFORMATION
At March 31, 1999, the aggregated cost of investment securities for federal
income tax purposes was $273,804,903. Net unrealized depreciation aggregated
$2,193,224, of which $6,150,546 related to appreciated investment securities and
$8,343,770 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
86
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $254,994,679
Repurchase agreements 16,617,000
------------
Total investments securities
(cost $273,804,903) 271,611,679
------------
Receivables
Investments sold 991,194
Fund shares sold 4,740,070
Dividends and interest 5,969,856
Deferred expenses (Note 2) 17,586
------------
TOTAL ASSETS 283,330,385
------------
LIABILITIES
Payables
Investments purchased $7,393,451
Fund shares redeemed 128,615
Dividends 2,014,498
Accrued expenses and other
liabilities 193,019
----------
TOTAL LIABILITIES 9,729,583
------------
NET ASSETS $273,600,802
============
Net Assets represented by: (Note 2)
Additional paid-in capital $280,028,597
Accumulated distributions in
excess of net investment
income (1,387,486)
Accumulated net realized loss
on investment transactions (2,847,085)
Net unrealized depreciation
of investments (2,193,224)
------------
NET ASSETS $273,600,802
============
NET ASSET VALUE PER SHARE
Class A Shares $ 11.11
Class B Shares $ 11.09
OFFERING PRICE PER SHARE
Class A Shares $ 11.66(a)
Class B Shares $ 11.09
SHARES OUTSTANDING
Class A Shares 14,968,702
Class B Shares 9,672,181
</TABLE>
(a) Computation of offering price: 100/95.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest (a) (Note 2) $ 9,734,692
-----------
EXPENSES
Management fee (Note 4) $ 683,266
Shareholder service fee (Note 5) 244,024
Distribution fee (Note 5) 216,898
Transfer agent fee 189,210
Administration fee (Note 4) 97,610
Registration expenses 62,253
Shareholder reports and postage
expenses 33,072
Custodian and accounting fees 32,590
Legal fees 9,128
Audit fees 6,417
Directors' fees and expenses 4,741
Organizational expenses 1,748
Miscellaneous 8,012
----------
Total expenses 1,588,969
-----------
Deduct
Waiver of management fee
(Note 4) (269,733)
Waiver of administration fee
(Note 4) (38,398)
-----------
NET INVESTMENT INCOME 8,453,854
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized loss on investments (2,758,369)
Change in unrealized appreciation
(depreciation) on investments 7,130,262
----------
NET GAIN ON INVESTMENTS 4,371,893
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $12,825,747
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
87
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 3/31/99 PERIOD ENDED
(UNAUDITED) 9/30/98 (a)
<S> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 8,453,854 $ 1,818,180
Net realized loss on investments (2,758,369) (88,715)
Change in unrealized appreciation (depreciation) on investments 7,130,262 (9,323,486)
------------- ------------
Increase in net assets resulting from operations 12,825,747 (7,594,021)
------------- ------------
Distributions to Shareholders
From net investment income
Class A (5,362,802) (1,040,534)
Class B (4,106,664) (1,178,956)
------------- ------------
Total distributions to shareholders (9,469,466) (2,219,490)
------------- ------------
Capital Share Transactions (Note 7)
Proceeds from sale of shares 164,826,318 126,286,107
Reinvested distributions 4,363,177 1,281,553
Shares redeemed (12,701,114) (3,998,009)
------------- ------------
Change in net assets resulting from capital share transactions 156,488,381 123,569,651
------------- ------------
Increase in net assets 159,844,662 113,756,140
Net Assets
Beginning of period 113,756,140 --
------------- ------------
End of period (including accumulated distributions in excess of net investment income
of ($1,387,486) and ($371,874), respectively) $ 273,600,802 $113,756,140
============= ============
</TABLE>
(a) For the period from June 23, 1998 (commencement of operations) to September
30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (b)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.92 $ 12.00
-------- --------
Income from investment operations
Net investment income 0.91 0.24
Net realized and unrealized loss on investments (0.17) (1.04)
-------- --------
Total from investment operations 0.74 (0.80)
-------- --------
Less distributions
From net investment income (0.55) (0.28)
-------- --------
Net asset value, end of period $ 11.11 $ 10.92
======== ========
TOTAL RETURN* 6.97% (6.75%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $166,294 $ 50,887
Ratio of expenses to average net assets 1.00%(a) 0.60%(a)
Ratio of expenses to average net asset excluding waiver 1.11%(a) 1.30%(a)
Ratio of net investment income to average net assets 9.07%(a) 7.36%(a)
Portfolio turnover rate 29% 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.
88
<PAGE>
MENTOR HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED 3/31/99 ENDED
(UNAUDITED) 9/30/98 (c)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.91 $ 12.00
-------- --------
Income from investment operations
Net investment income 0.37 0.22
Net realized and unrealized gain (loss) on investments 0.33 (1.05)
-------- --------
Total from investment operations 0.70 (0.83)
-------- --------
Less distributions
From net investment income (0.52) (0.26)
-------- --------
Net asset value, end of period $ 11.09 $ 10.91
======== ========
TOTAL RETURN* 6.60% (6.95%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $107,307 $ 62,869
Ratio of expenses to average net assets 1.50%(a) 1.10%(a)
Ratio of expenses to average net asset excluding waiver 1.61%(a) 1.80%(a)
Ratio of net investment income to average net assets 8.57%(a) 6.87%(a)
Portfolio turnover rate 29% 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.
89
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
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 March 31, 1999, as follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth 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 Money Market Portfolio
("Money Market Portfolio")
Mentor U.S. Government Money Market Portfolio ("Government Portfolio")
Mentor Tax-Exempt Money Market Portfolio ("Tax-Exempt Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
These financial statements do not include the Money Market Portfolio, Government
Portfolio and Tax-Exempt 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.
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.
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, Income and Growth Portfolio, and
90
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Balanced Portfolio traded on national stock exchanges and over-the-counter
securities quoted on the NASDAQ National Market System are valued at the last
reported sales price or, lacking any sales, at the last available bid price. In
cases where securities are traded on more than one exchange, the securities are
valued on the exchange 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
91
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
established by Mentor Funds to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence of a
proper level of collateral.
Mentor Funds will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
Mentor Funds' adviser to be creditworthy pursuant to guidelines established by
the Mentor Funds' Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
Mentor Funds could receive less than the repurchase price on the sale of
collateral securities.
(c) Borrowings - Each of the Portfolios (except for the Growth Portfolio 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 six months ended March 31, 1999, was
approximately $19,877,322 or $1.23 per share based on average shares outstanding
during the period at a weighted average interest rate of 4.57%. The maximum
amount of borrowings outstanding for any day during the period was $83,156,353
(including accrued interest), as of February 10, 1999, at an interest rate of
4.84% and was 27.46% of total assets at that date.
The average daily balance of reverse repurchase agreements outstanding for
Short-Duration Income Portfolio during the six months ended March 31, 1999, was
approximately $7,799,523 or $0.09 per share based on average shares outstanding
during the period at a weighted average interest rate of 4.35%. The maximum
amount of borrowings outstanding for any day during the period was $22,005,806
(including accrued interest), as of January 25, 1999, at an interest rate of
4.75% and was 7.31% 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 March 31, 1999, certain Portfolios had loaned securities to brokers which
were collateralized by cash, U.S. Treasury securities and letters of credits.
Cash collateral at March 31, 1999 was reinvested in U.S. Treasury and high
quality money market instruments. Income from securities lending activities
amounted to $233,048, $60,254, $28,592, $51,219, $65,533, and $14,285, for the
Growth Portfolio, Global Portfolio, Capital Growth Portfolio, Income and Growth
Portfolio, Balanced Portfolio and Quality Income
92
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Portfolio, respectively for the six months ended March 31, 1999. 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 March
31, 1999, 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 $81,699,455 $83,131,779 $510,369 -
Global 37,467,506 38,767,594 - -
Capital Growth 21,805,109 22,282,979 - -
Income and Growth 64,983,143 57,206,916 - $9,826,621
Balanced 85,449,627 87,189,594 92,520 521,991
Quality Income 332,669 341,000 - -
- ------------------- ----------- ----------- -------- ----------
</TABLE>
(e) Dollar Roll Transactions - Each of the Portfolios (except for the Growth 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,
93
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
may by considered a tax preference item to shareholders.
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 six months ended March 31, 1999, Balanced Portfolio
and Municipal Income Portfolio had net realized gains of $1,366,401 and $47,700,
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 March 31, 1999, Balanced Portfolio and Municipal
Income Portfolio had open positions in the following futures contracts:
94
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
UNREALIZED
NUMBER OF NOTIONAL APPRECIATION
PORTFOLIO CONTRACTS POSITION CONTRACTS EXPIRATION VALUE (DEPRECIATION)
- ------------------ ----------- ---------- ------------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balanced 690 Short U.S. Long Bond Jun-99 $69,000,000 ($2,760,157)
Municipal Income 130 Short Muni Bond Future Jun-99 $13,000,000 ($ 41,000)
- ------------------ --- ---------- ------------------ ------ ----------- ----------
</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 six months ended
March 31, 1999, Municipal Income Portfolio had a net realized gain of $61,690 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 Muncipal Income Portfolio for the six months ended March 31,
1999, was as follows:
<TABLE>
<CAPTION>
PREMIUM
RECEIVED FACE VALUE
------------ -------------
<S> <C> <C>
Options outstanding at
September 30, 1998 $ - -
Options written 110,880 200,000
Options closed (61,690) (100,000)
- ------------------------ ------- --------
Options outstanding at
March 31, 1999 $49,190 100,000
- ------------------------ ------- --------
</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 pledged to secure
95
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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 of March 31, 1999, there was no
open interest rate swap agreement.
(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 and Capital Growth 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 delared and paid annually to
all shareholders invested in the Growth Portfolio, Capital Growth 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 the 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") is a wholly owned subsidiary
of Mentor Investment Group, LLC ("Mentor") and its affiliates. Mentor is a
subsidiary of Wheat First Butcher Singer, Inc., which in turn is a wholly owned
subsidiary of First Union Corporation ("First Union"). First Union is a leading
financial services company; First Union has announced plans to acquire EVEREN
Capital Corporation, which currently has a minority ownership interest in
Mentor.
Mentor Advisors, the Portfolios' investment adviser, receives for its services
an annual investment advisory fee not to exceed the following percentages of the
average daily net assets of the particular
96
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Portfolio: Growth Portfolio, 0.70%; Capital Growth Portfolio, 0.80%; 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-adviser to Municipal Income Portfolio, an annual fee expressed as a
percentage of the Portfolio's average net assets as follows: 0.25% of the first
$60 million of the Portfolio's average net assets and 0.20% of the Portfolio's
average net assets over $60 million.
For the period from October 1, 1997 to June 30, 1998, Wellington Management
Company, LLC, the sub-adviser to the Income and Growth Portfolio, received from
the Investment Adviser an annual fee expressed as a percentage of that
Portfolio's assets as follows: 0.325% on the first $50 million of the
Portfolio's average net assets, 0.275% on the next $150 million of the
Portfolio's average net assets, 0.225% of the next $300 million of the
Portfolio's average net assets, and 0.200% of the Portfolio's net assets over
$500 million. 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-adviser to the High Income
Portfolio receives from the Investment Adviser an annual fee of 0.20% of the
Portfolio's average daily net assets.
No performance or incentive fees are paid to the sub-advisers. Under certain
Sub-Advisory Agreements, the particular sub-adviser may, from time to time,
voluntarily waive some or all of its sub-advisory fee charged to the Investment
Adviser and may terminate any such voluntary waiver at any time in its sole
discretion.
The Global Portfolio has entered into an Investment Advisory Agreement with
Mentor Perpetual Advisors, 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 on and 1.00% of its
average daily net assets in excess of $75 million.
For the six months ended March 31, 1999, Mentor Advisors and sub-advisers,
earned and voluntarily waived the following management fees:
<TABLE>
<CAPTION>
MANAGEMENT
MANAGEMENT FEE SUB ADVISER
FEE VOLUNTARILY FEE
PORTFOLIO EARNED WAIVED EARNED/(WAIVED)
- ------------------ ------------ ------------- ----------------
<S> <C> <C> <C>
Growth $1,879,581 - -
Global 945,039 - -
Capital Growth 1,796,157 - -
Income and
Growth 984,781 - $318,695
Balanced 871,032 - -
Municipal Income 360,928 - 135,265
Quality Income 631,092 $194,745 -
Short-Duration
Income 439,105 52,159 -
High Income 683,266 269,733 118,103
- ------------------ ---------- -------- --------
</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 six months ended
97
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
March 31, 1999, Mentor earned the following administrative fees:
<TABLE>
<CAPTION>
ADMINISTRATIVE
ADMINISTRATIVE FEE
FEE VOLUNTARILY
PORTFOLIO EARNED WAIVED
- ----------------------- ---------------- ---------------
<S> <C> <C>
Growth $268,512 -
Global 90,764 -
Capital Growth 224,520 -
Income and Growth 131,304 -
Balanced 116,138 -
Municipal Income 60,155 -
Quality Income 105,182 -
Short-Duration Income 88,030 $88,030
High Income 97,610 38,398
- ----------------------- -------- -------
</TABLE>
The Portfolios also provide direct reimbursement to Mentor for certain legal and
compliance administration, investor relation and operation related costs not
covered under the Investment Management Agreement. For the six months ended
March 31, 1999, these direct reimbursements were as follows:
<TABLE>
<CAPTION>
DIRECT
PORTFOLIO REIMBURSEMENTS
- ----------------------- ---------------
<S> <C>
Growth $16,887
Global 5,918
Capital Growth 15,307
Income and Growth 8,269
Balanced 9,752
Municipal Income 3,857
Quality Income 6,561
Short-Duration Income 6,006
- ----------------------- -------
</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,
Income and Growth Portfolio, Balanced Portfolio and Global Portfolio, 0.50% of
the average daily net assets of the Municiap Income Portfolio, Quality Income
Portfolio and High 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.
98
<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 six months ended March
31, 1999, distribution fees and shareholder servicing fees were as follows:
<TABLE>
<CAPTION>
SHAREHOLDER SERVICING FEE
CLASS B -------------------------
PORTFOLIO DISTRIBUTION FEE CLASS A CLASS B
- ----------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Growth $1,518,365 $125,769 $506,121
Global 416,023 88,235 138,674
Capital Growth 881,368 267,508 293,790
Income and Growth 571,335 137,814 190,445
Balanced 631,992 78,320 210,664
Municipal Income 150,302 75,234 75,151
Quality Income 273,958 125,975 136,979
Short-Duration Income 82,684 150,647 68,903
High Income 216,898 135,872 108,152
- ----------------------- ---------- -------- --------
</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 March
31, 1999, 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
4/01/99 British Pound 52,800 $ 85,113 $ 85,483 $ (370)
4/01/99 British Pound 92,130 148,513 149,158 (645)
4/01/99 British Pound 2,175 3,506 3,521 (15)
4/01/99 British Pound 14,584 23,509 23,611 (102)
4/01/99 British Pound 70,256 113,253 113,745 (492)
4/01/99 British Pound 24,996 40,294 40,469 (175)
4/06/99 British Pound 15,488 24,967 25,075 (108)
4/06/99 British Pound 39,804 64,164 64,443 (279)
4/06/99 British Pound 8,419 13,571 13,630 (59)
4/30/99 Eruo 213,787 230,730 230,249 481
4/01/99 Singapore Dollar 267,060 154,638 154,281 357
4/01/99 Singapore Dollar 90,042 52,137 52,017 120
4/06/99 Turkish Lira 6,092,812,500 163,324 163,675 (351)
SALES
4/01/99 British Pound 25,808 41,602 41,784 182
- ------- ------------------ ------------- -------- -------- ------
</TABLE>
99
<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
---------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
---------------------------------- ----------------------------------
SHARES DOLLAR SHARES DOLLAR
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 20,554,242 $ 317,331,063 12,016,618 $ 210,103,016
Shares issued upon reinvestment of distributions 209,824 2,939,628 346,751 6,474,795
Shares redeemed (19,478,995) (302,983,556) (12,306,743) (213,035,017)
----------- -------------- ----------- --------------
Change in net assets from capital share transactions 1,285,071 $ 17,287,135 56,626 $ 3,542,794
=========== ============== =========== ==============
CLASS B:
Shares sold 1,528,098 $ 22,897,224 4,138,130 $ 73,047,883
Shares issued upon reinvestment of distributions 1,070,622 14,539,244 1,667,456 30,460,604
Shares redeemed (4,214,789) (62,923,290) (4,698,525) (80,890,251)
----------- -------------- ----------- --------------
Change in net assets from capital share transactions (1,616,069) $ (25,486,822) 1,107,061 $ 22,618,236
=========== ============== =========== ==============
CLASS Y: (A)
Shares sold 738,165 $ 11,155,206 1,786,672 $ 30,602,698
Shares issued upon reinvestment of distributions 72,358 1,016,634 1 10
Shares redeemed (365,320) (5,597,286) (53,808) (894,152)
----------- -------------- ----------- --------------
Change in net assets from capital share transactions 445,203 $ 6,574,554 1,732,865 $ 29,708,556
=========== ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
MENTOR PERPETUAL GLOBAL PORTFOLIO
-----------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
---------------------------------- ----------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,369,455 $ 47,572,822 2,057,945 $ 42,154,809
Shares issued upon reinvestment of distributions 247,790 4,601,451 113,726 2,255,270
Shares redeemed (1,738,114) (34,619,252) (1,275,534) (25,637,616)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 879,131 $ 17,555,021 896,137 $ 18,772,463
========== ============= ========== =============
CLASS B:
Shares sold 575,905 $ 11,051,076 1,821,588 $ 36,737,964
Shares issued upon reinvestment of distributions 452,424 8,053,146 232,932 4,477,444
Shares redeemed (668,319) (12,833,727) (983,971) (18,930,107)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 360,010 $ 6,270,495 1,070,549 $ 22,285,301
========== ============= ========== =============
CLASS Y: (A)
Shares sold - $ - 53 $ 1,000
Shares issued upon reinvestment of distributions 5 85 - 8
Shares redeemed - - - -
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 5 $ 85 53 $ 1,008
========== ============= ========== =============
</TABLE>
(a) For the year ended 9/30/98 - For the period from November 19, 1997 (initial
offering of Class Y Shares) to September 30, 1998.
100
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR CAPITAL GROWTH PORTFOLIO
----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
-------------------------------- -------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 6,564,289 $ 156,453,797 5,110,051 $ 121,415,173
Shares issued upon reinvestment of distributions 741,596 16,051,578 278,288 5,833,664
Shares redeemed (2,143,545) (51,113,253) (1,926,775) (45,709,577)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 5,162,340 $ 121,392,122 3,461,564 $ 81,539,260
========== ============= ========== =============
CLASS B:
Shares sold 2,032,338 $ 45,677,249 4,375,173 $ 98,931,464
Shares issued upon reinvestment of distributions 1,106,815 22,759,934 507,715 10,256,056
Shares redeemed (1,109,805) (24,997,919) (1,063,324) (23,712,167)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 2,029,348 $ 43,439,264 3,819,564 $ 85,475,353
========== ============= ========== =============
CLASS Y: (A)
Shares sold -- $ -- 48 $ 1,000
Shares issued upon reinvestment of distributions 5 125 1 12
Shares redeemed -- -- -- --
========== ============= ========== =============
Change in net assets from capital share transactions 5 $ 125 49 $ 1,012
========== ============= ========== =============
</TABLE>
<TABLE>
<CAPTION>
MENTOR INCOME AND GROWTH PORTFOLIO
---------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
-------------------------------- ----------------------------------
SHARES DOLLARS SHARES DOLLARS
------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 1,370,480 $ 27,029,221 2,515,923 $ 49,323,113
Shares issued upon reinvestment of distributions 307,537 5,973,032 371,373 7,153,831
Shares redeemed (621,010) (12,256,523) (915,370) (18,005,450)
--------- ------------- --------- -------------
Change in net assets from capital share transactions 1,057,007 $ 20,745,730 1,971,926 $ 38,471,494
========= ============= ========= =============
CLASS B:
Shares sold 672,499 $ 13,233,579 2,642,784 $ 51,766,483
Shares issued upon reinvestment of distributions 426,951 8,278,473 559,471 10,748,481
Shares redeemed (594,987) (11,652,675) (1,074,795) (21,053,657)
--------- ------------- ---------- -------------
Change in net assets from capital share transactions 504,463 $ 9,859,377 2,127,460 $ 41,461,307
========= ============= ========== =============
CLASS Y: (A)
Shares sold -- $ -- 53 $ 1,000
Shares issued upon reinvestment of distributions 3 55 2 30
Shares redeemed -- -- -- --
--------- ------------- ---------- -------------
Change in net assets from capital share transactions 3 $ 55 55 $ 1,030
========= ============= ========== =============
</TABLE>
(a) For the year ended 9/30/98 - For the period from November 19, 1997 (initial
offering of Class Y Shares) to September 30, 1998.
101
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR BALANCED PORTFOLIO
----------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
---------------------------------- ---------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 7,357,872* $ 113,523,480 258,246 $ 3,577,935
Shares issued upon reinvestment of distributions 53,133 797,522 88,886 1,300,249
Shares redeemed (130,667) (3,234,796) (48,369) (810,000)
Conversion of Class A Shares to Class Y Shares -- -- (273,416) (3,350,117)
--------- ------------- -------- ------------
Change in net assets from capital share transactions 7,280,338 $ 111,086,206 25,347 $ 718,067
========= ============= ======== ============
CLASS B:
Shares sold 15,954,616* $ 214,154,434 412,403 $ 5,702,737
Shares issued upon reinvestment of distributions 115,470 1,719,720 -- --
Shares redeemed (1,523,742) (23,070,275) (9) (125)
---------- ------------- ----------- ------------
Change in net assets from capital share transactions 14,546,344 $ 192,803,879 412,394 $ 5,702,612
========== ============= ========== ============
CLASS Y: (A)
Shares sold 89 $ 1,303 -- $ --
Shares issued upon reinvestment of distributions 98 1,441 -- --
Shares redeemed (253,109) (3,662,016) (7,305) (100,000)
Conversion of Class A Shares to Class Y Shares -- -- 273,416 3,350,117
---------- ------------- ---------- ------------
Change in net assets from capital share transactions (252,922) $ (3,659,272) 266,111 $ 3,250,117
========== ============= ========== ============
</TABLE>
<TABLE>
<CAPTION>
MENTOR MUNICIPAL INCOME PORTFOLIO
------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
------------------------------- --------------------------------
SHARES DOLLARS SHARES DOLLARS
------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 1,504,089 $ 23,829,403 1,688,990 $ 26,509,509
Shares issued upon reinvestment of distributions 42,336 672,278 75,715 1,188,701
Shares redeemed (225,496) (3,573,184) (423,337) (6,641,364)
--------- ------------ --------- ------------
Change in net assets from capital share transactions 1,320,929 $ 20,928,497 1,341,368 $ 21,056,846
========= ============ ========= ============
CLASS B:
Shares sold 401,215 $ 6,346,794 1,208,341 $ 18,966,860
Shares issued upon reinvestment of distributions 43,605 690,709 91,662 1,436,340
Shares redeemed (298,124) (4,720,495) (436,001) (6,820,355)
--------- ------------ --------- ------------
Change in net assets from capital share transactions 146,696 $ 2,317,008 864,002 $ 13,582,845
========= ============ ========= ============
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>
(a)For the year ended 9/30/98 - For the period from November 19, 1997 (initial
offering of Class Y Shares) to September 30, 1998.
* Includes the following shares acquired from Strategy Portfolio in the
tax-free exchange into the Balanced Portfolio on 11/13/98:
Class A: 1,671,179 shares and Class B: 13,702,270 shares.
102
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR QUALITY INCOME PORTFOLIO
----------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
---------------------------------- ---------------------------------
SHARES DOLLARS SHARES DOLLARS
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 2,563,679 $ 33,699,152 4,256,782 $ 56,191,423
Shares issued upon reinvestment of distributions 143,437 1,900,220 233,015 3,077,659
Shares redeemed (1,184,191) (15,537,997) (1,597,720) (21,178,895)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 1,522,925 $ 20,061,375 2,892,077 $ 38,090,187
========== ============= ========== =============
CLASS B:
Shares sold 1,324,721 $ 17,465,999 3,811,046 $ 50,451,628
Shares issued upon reinvestment of distributions 163,492 2,165,673 272,551 3,600,049
Shares redeemed (1,332,345) (17,590,131) (1,478,885) (19,526,706)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 155,868 $ 2,041,541 2,604,712 $ 34,524,971
========== ============= ========== =============
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>
<TABLE>
<CAPTION>
MENTOR SHORT-DURATION INCOME PORTFOLIO
----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
3/31/99 9/30/98
-------------------------------- -------------------------------
SHARES DOLLAR SHARES DOLLAR
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 7,806,852 $ 97,941,814 9,921,692 $ 124,978,729
Shares issued upon reinvestment of distributions 183,533 2,308,531 200,895 2,525,409
Shares redeemed (2,935,105) (36,833,260) (4,997,458) (62,897,886)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 5,055,280 $ 63,417,085 5,125,129 $ 64,606,252
========== ============= ========== =============
CLASS B:
Shares sold 1,087,645 $ 13,687,902 3,500,465 $ 44,073,519
Shares issued upon reinvestment of distributions 91,026 1,147,597 145,226 1,826,827
Shares redeemed (1,096,207) (13,774,611) (1,563,684) (19,674,936)
---------- ------------- ---------- -------------
Change in net assets from capital share transactions 82,464 $ 1,060,888 2,082,007 $ 26,225,410
========== ============= ========== =============
CLASS Y: (A)
Shares sold -- $ -- 79 $ 1,000
Shares issued upon reinvestment of distributions -- -- 4 49
---------- ------------- ---------- -------------
Change in net assets from capital share transactions -- $ -- 83 $ 1,049
========== ============= ========== =============
</TABLE>
(a) For the year ended 9/30/98 - For the period from November 19, 1997 (initial
offering of Class Y Shares) to September 30, 1998.
103
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7: CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
MENTOR HIGH INCOME PORTFOLIO
------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
3/31/99 9/30/1998 (B)
--------------------------------- ------------------------------
SHARES DOLLAR SHARES DOLLAR
-------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold 10,801,852 $119,005,627 4,775,208 $ 56,602,255
Shares issued upon reinvestment of distributions 204,356 2,252,051 51,541 580,207
Shares redeemed (695,694) (7,699,179) (168,561) (1,889,222)
---------- ------------ --------- ------------
Change in net assets from capital share transactions 10,310,514 $113,558,499 4,658,188 $ 55,293,240
========== ============ ========= ============
CLASS B:
Shares sold 4,173,805 $ 45,820,691 5,890,307 $ 69,683,852
Shares issued upon reinvestment of distributions 192,281 2,111,126 62,441 701,346
Shares redeemed (456,107) (5,001,935) (190,546) (2,108,787)
---------- ------------ --------- ------------
Change in net assets from capital share transactions 3,909,979 $ 42,929,882 5,762,202 $ 68,276,411
========== ============ ========= ============
</TABLE>
(b) For the period from June 23, 1998 (commencement of operations) to March 31,
1999.
ADDITIONAL INFORMATION
YEAR 2000 (UNAUDITED)
The Portfolio receives 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 Portfolio
from this problem.
104
<PAGE>
MENTOR FUNDS
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
TRUSTEES
DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
ARCH T. ALLEN III, TRUSTEE
Attorney at Law
Allen & Moore, LLP
JERRY R. BARRENTINE, TRUSTEE
President
J.R. Barrentine & Associates
ARNOLD H. DREYFUSS, TRUSTEE
Former Chairman & Chief Executive Officer
Hamilton Beach/Proctor-Silex, Inc.
WESTON E. EDWARDS, TRUSTEE
President
Weston Edwards & Associates
THOMAS F. KELLER, TRUSTEE
Former Dean, Fuqua School of Business
Duke University
LOUIS W. MOELCHERT, JR., TRUSTEE
Vice President for Business & Finance
University of Richmond
J. GARNETT NELSON, TRUSTEE
Consultant
Mid-Atlantic Holdings, LLC
TROY A. PEERY, JR., TRUSTEE
Former 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 AND SECRETARY
Senior Vice President
Mentor Investment Group, LLC
MICHAEL A. WADE, ASSISTANT TREASURER
Vice President
Mentor Investment Group, LLC
This report is authorized for distribution to prospective investors only when
preceded or accompanied by a Mentor Funds prospectus, which contains complete
information about fees, sales charges and expenses. Please read it carefully
before you invest or send money.
<PAGE>
[MENTOR INVESTMENT GROUP LOGO]
RIVERFRONT PLAZA
901 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
(800) 382-0016
1999 MENTOR DISTRIBUTORS, LLC
MK 364
----------
BULK RATE
U.S. POSTAGE
PAID
RICHMOND, VIRGINIA
PERMIT NO. 1209
----------
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Pre- Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of Richmond in the State of Virginia on the 12th day of
August, 1999.
Mentor Funds
By: /s/Paul F. Costello
------------------------------
Paul F. Costello
President and Principal
Executive Officer
As required by the Securities Act of 1933, this Pre-Effective
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the 12th day of August, 1999.
<TABLE>
<CAPTION>
Signature Title
- ------------ ------
<S> <C>
*/s/Daniel J. Ludeman Chairman and Trustee (Chief
- ------------------------------ Executive Officer)
Daniel J. Ludeman
*/s/Peter J. Quinn, Jr. Trustee
- ------------------------------
Peter J. Quinn, Jr.
*/s/Arnold H. Dreyfuss Trustee
- ------------------------------
Arnold H. Dreyfuss
*/s/Thomas F. Keller Trustee
- ------------------------------
Thomas F. Keller
*/s/Louis W. Moelchert, Jr. Trustee
- ------------------------------
Louis W. Moelchert, Jr.
Trustee
- ------------------------------
Troy A. Peery, Jr.
4
<PAGE>
*/s/Arch T. Allen, III Trustee
- ------------------------------
Arch T. Allen, III
*/s/Weston E. Edwards Trustee
- ------------------------------
Weston E. Edwards
Trustee
- ------------------------------
Jerry R. Barrentine
*/s/J. Garnett Nelson Trustee
- ------------------------------
J. Garnett Nelson
/s/Paul F. Costello President
- ------------------------------
Paul F. Costello
/s/Michael A. Wade Assistant Treasurer (Principal
- ------------------------------ Financial and Accounting
Michael A. Wade Officer)
*/s/Paul F. Costello Attorney-in-fact
- ------------------------------
Paul F. Costello
</TABLE>
5
