SEMI-ANNUAL
REPORT TO
SHAREHOLDERS
JUNE 30, 1998
[LOGO]
AMERICA'S
UTILITY FUND
<PAGE>
Dear Shareholder:
Thank you for your investment in America's Utility Fund ("AUF"). Following
is a report from the AUF management team regarding both the economic picture and
the performance of your investment during the first six months of this year.
It was a period in which the highly liquid stocks of a small group of
large companies were the performance leaders. Between January and the end of
June, the Standard and Poor's index, weighted toward large-capitalization
stocks, gained an astonishing 17.7%. By comparison your fund provided a total
return of 5.2%, trailing only slightly its comparable index, the S&P Utility
Index, which reported a return of 6.9%.*
It is important to recognize, however, that your fund is a conservative
one. During a time of record highs in domestic markets and disturbing turbulence
in Asia, it may be comforting to own a conservative investment. In the present
environment money is likely to move away from speculative instruments and to
flow toward more stable investments, like your fund, that provide a relatively
safe harbor and a steady income stream. The AUF management team expects your
fund to benefit from the anticipated shift in investor sentiment.
America' Utility Fund continues to appear well-positioned to complete the
balance of the year. The managers continue to select for the portfolio the
stocks of solid, high-quality companies in both the utility and non-utility
sectors.
It is our privilege to send you the America's Utility Fund Semi-Annual
Report.
Sincerely,
/s/ Daniel J. Ludeman /s/ Paul F. Costello
- ---------------------- ---------------------
Daniel J. Ludeman Paul F. Costello
Chairman President
*The S&P Utilities Index is one of the four broad sectors in the S&P 500
Index and includes all the utility stocks in the S&P 500 Index. It is a
market-value weighted index (stock price times shares outstanding), with each
stock affecting the Index in proportion to its market value. This Index,
calculated by Standard & Poor's, is a total return index with dividends
reinvested. Investors may not invest in an index. The S&P Utilities Index is
used as the benchmark for the performance of America's Utility Fund (AUF)
because it is identified by the investment advisor as the index that most
accurately reflects the management style and portfolio composition of AUF. The
Dow Jones Industrial Average is a price-weighted index of 30
large-capitalization stocks traded on the New York stock exchange. The Dow is
computed by adding the total value of the 30 stocks and dividing by a factor
that adjusts for distortions caused by stock splits over the years. It is
considered to be a barometer of how shares of the largest U.S. companies are
performing. 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. Investors
cannot invest in the indexes.
For more information and prospectuses for America's Utility Fund, please
call us at (800) 487-3863. The prospectuses contain complete information
regarding fees, sales charges, and expenses. Please read them carefully before
investing or sending money.
<PAGE>
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Management Discussion and Analysis
by John G. Davenport, CFA and Richard L. Rice, CFA,
Portfolio Managers
During the first half of 1998, America's Utility Fund provided a total
return of 5.2% including capital appreciation and dividend income. This
performance was somewhat below the Standard & Poor's Utility Index, which
reported a 6.9% six-month total return, due to factors discussed below. The
utility sector, however, remained out of favor compared to the large stock
capitalization-weighted S&P 500 which gained a remarkable 17.7% in the period.
Fueling the S&P 500's strength (as well as the Dow Jones Industrial
Average) has been a continued high level of money flows into equity mutual funds
where portfolio managers, on average, have focused their purchases on a narrow
group of the largest, most liquid stocks. By comparison, the Russell 2000 index
of smaller-capitalization stocks rose 4.9% during the first half, creating a
performance/valuation divergence reminiscent of the early 1970's when the "nifty
fifty" phrase was coined to describe the same phenomenon. How long current
trading patterns can persist is anybody's guess, but we can observe that "nifty
fifty" valuation extremes were subsequently resolved through a market
correction. Another disturbing anecdote to recent performance trends is the
speculation surrounding internet stocks in general, many of which sell at hefty
multiples of revenues, let alone earnings which are non-existent.
In contrast to the narrowing breadth and speculative characteristics of
first-half performance leaders, utility stocks registered more conservative, but
attractive returns by historical standards. America's Utility Fund performance
was held back to some extent by: (1) natural gas distribution stocks where
unseasonably warm weather penalized revenue and earnings comparisons, (2) real
estate investment trust holdings which were out of favor despite healthy
fundamental and earnings trends, and (3) an under-weighting in long distance
telephone stocks which have performed well.
Looking Ahead . . .
There appears to be a reasonable likelihood that investor sentiment may
shift toward a more conservative posture over the next several months. First,
earnings comparisons are becoming more difficult in this late stage of the
economic cycle. Revenue growth is slowing and bottom lines are no longer boosted
by cyclical profitability improvements. Secondly, pervasive recessionary
conditions (or worse) in the Far East will place additional pressure on revenue
and profit growth through import competition, associated pricing/margin
pressures and reduced sales opportunities in that region. Meanwhile, consensus
earnings growth estimates for the second half of this year and 1999 have yet to
be adjusted downward to realistic levels. Another potential catalyst for market
disappointment relates to the severity of Asia's economic imbalances (including
Japan's), the lack of near-term solutions to address them, and the uncertainty
regarding how this drama will play out.
This environment could spark renewed interest in the relative stability
and domestic orientation of utility stocks as well as other reasonably-valued
issues offering good quality and predictable growth characteristics. America's
Utility Fund is well-positioned in stocks with these attributes.
<PAGE>
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[GRAPH]
Average Annual Total Returns
for the Periods Ended June 30, 1998
One Year Since Inception (5/5/92)*
23.53% 11.87%
SEC current yield as of June 30, 1998 2.68%**
<TABLE>
<CAPTION>
5/92 6/92 12/92 6/93 12/93 6/94 12/94 6/95 12/95 6/96 12/96 6/97 12/97 3/98 6/98
<S> <C>
America's Utility
Fund*** 10,000 10,170 11,190 12,642 12,679 10,728 11,019 12,479 14,577 14,839 15,373 16,149 18,957 20,521 19,950
S&P Utilities Index~ 9,985 10,122 11,195 12,696 12,811 11,750 11,794 13,544 16,750 16,758 17,273 17,672 21,531 22,741 23,016
</TABLE>
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 the original cost. Mutual funds are not obligations
of or guaranteed by any bank and are not federally insured.
* Reflects operation of America's Utility Fund from the date of
inception 5/5/92 through 6/30/98.
** SEC current yield is calculated by dividing the net investment income
per share for the 30 days ended 6/30/98 by the offering price per
share on that date. The figure is then compounded and annualized.
*** Represents a hypothetical investment of $10,000 in America's Utility
Fund. Performance assumes the reinvestment of all dividends and
distributions.
~ The S&P Utilities Index is one of four broad sectors in the S&P 500
Index and includes all the utility stocks in the S&P 500 Index. It is
a market-value weighted index (stock price times shares outstanding),
with each stock affecting the Index in proportion to its market value.
This Index, calculated by Standard & Poor's, is a total return index
with dividends reinvested. Investors may not invest in an index. The
S&P Utilities Index is used as the benchmark for the performance of
America's Utility Fund (AUF) because it is identified by the
investment advisor as the index that most accurately reflects the
management style and portfolio composition of AUF.
This material must be preceded or accompanied by a current Prospectus for
America's Utility Fund, which contains complete information regarding fees,
sales charges, and expenses. Please read it carefully before you invest or send
money.
America's Utility Fund
Portfolio of Investments
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Market Value
Shares Common Stocks - 91.30% (Note 2)
- ---------- --------------------------------------- --------------
<S> <C> <C>
Public Utility - Electric - 43.04%
---------------------------------------
94,100 Allegheny Energy Inc. $ 2,834,763
253,800 DPL, Inc. 4,600,125
78,800 Duke Energy Corporation 4,668,900
125,000 Eastern Utilities Associates Company 3,281,250
82,000 Endesa S.A.* 1,773,250
150,600 FirstEnergy Corporation 4,630,950
67,000 FPL Group, Inc. 4,221,000
73,810 Gener S.A.* 1,347,033
77,600 GPU, Inc. 2,934,250
165,700 LG&E Energy Corporation 4,484,256
90,800 New Century Energies 4,125,725
120,600 NIPSCO Industries, Inc. 3,376,800
150,800 Northern States Power Company 4,316,650
171,400 Potomac Electric Power Company 4,295,713
89,700 SCANA Corporation 2,674,181
186,000 Southern Company 5,149,875
154,600 TECO Energy, Inc. 4,145,213
111,700 Western Resources, Inc. 4,335,356
-----------
67,195,290
-----------
Public Utility - Natural Gas - 11.03%
---------------------------------------
74,000 Enron Corporation 4,000,625
93,000 MarketSpan Corporation 2,784,188
78,000 NICOR Inc. 3,129,750
170,000 Questar Corporation 3,336,250
142,710 Sempra Energy 3,960,220
-----------
17,211,033
-----------
Telecommunications - 21.18%
---------------------------------------
130,000 Ameritech Corporation 5,833,750
126,600 Bell Atlantic Corporation 5,776,125
106,000 GTE Corporation 5,896,250
53,800 MCI Communications 3,127,125
159,000 SBC Communications 6,360,000
49,600 Sprint Corporation 3,496,800
18,545 Telefonica S.A.* 2,578,914
-----------
33,068,964
-----------
Non-Utility Securities - 16.05%
---------------------------------------
30,000 Bemis Inc. 1,226,250
15,000 Bristol Myers Squibb 1,724,063
43,000 Colonial Properties Trust 1,333,000
24,000 Emerson Electric Company 1,449,000
29,800 Federal National Mortgage Association 1,810,350
21,500 Johnson & Johnson 1,585,625
76,200 Liberty Property Trust 1,947,863
56,500 Mack-Cali Realty Corporation 1,942,188
20,300 Mobil Corporation 1,555,488
32,300 NationsBank Corporation 2,470,950
54,000 Nationwide Health 1,289,250
23,000 Realty Income Corporation 606,625
53,400 Sherwin Williams Company 1,768,875
108,600 Sysco Corporation 2,782,875
31,200 W. W. Grainger Inc. 1,554,150
-----------
25,046,552
-----------
Total Common Stocks
(cost $106,925,688) 142,521,839
-----------
</TABLE>
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<PAGE>
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America's Utility Fund
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Shares or
Principal Market Value
Amount (Note 2)
- -------------- ----------------
<S> <C> <C>
Preferred Stock - 0.33%
----------------------------------------
20,000 BankAmerica Trust (cost $500,000) $ 522,500
-------------
Corporate Bonds - 4.55%
----------------------------------------
$ 2,000,000 Appalachian Power Company, 7.38%,
8/15/02 2,042,572
1,250,000 Duke Power Company, 8.00%, 11/1/99 1,280,090
2,000,000 Texas Utilities Electric Company,
8.25%, 4/1/04 2,198,694
1,500,000 Wisconsin Public Service, 7.30%,
10/1/02 1,575,679
-------------
Total Corporate Bonds (cost
$ 6,975,043) 7,097,035
-------------
Repurchase Agreement - 3.58%
----------------------------------------
5,597,317 Goldman Sachs & Company
Dated 6/30/98, 6.00%, due 7/1/98,
collateralized by $5,472,732
Federal National Mortgage
Association, 8.50%, 2/01/28, market value
$5,715,584 (cost $5,597,317) 5,597,317
-------------
Total Investments - 99.76%
(cost $119,998,048) 155,738,691
Other Assets less Liabilities - 0.24% 369,395
-------------
Net Assets - 100.00% $ 156,108,086
=============
</TABLE>
* American Depository Receipt.
See notes to financial statements.
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
<TABLE>
<S> <C>
Assets
Investments, at market value
(cost $119,998,048) (Note 2) $ 155,738,691
Collateral for securities loaned (Note 2) 26,682,723
Receivables
Fund shares sold 41
Dividends and interest 441,275
-------------
Total assets 182,862,730
-------------
Liabilities
Securities loaned (Note 2) 26,682,723
Accrued expenses and other liabilities 71,921
-------------
Total liabilities 26,754,644
-------------
Net Assets $ 156,108,086
=============
Net Assets represented by: (Note 2)
Additional paid-in capital $ 115,812,666
Accumulated undistributed net investment income 174,557
Accumulated net realized gain on investment
transactions 4,380,220
Net unrealized appreciation of investments 35,740,643
-------------
Net Assets $ 156,108,086
=============
Net Asset Value per Share $ 29.85
=============
Shares Outstanding 5,230,212
</TABLE>
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<PAGE>
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America's Utility Fund
Statement of Operations
Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<S> <C>
Investment income
Dividends $ 2,760,188
Interest 370,487
-----------
Total investment income 3,130,675
-----------
Expenses
Administration fee (Note 4) 306,163
Management fee (Note 3) 198,747
Shareholder service fee (Note 5) 194,196
Transfer agent fee (Note 3) 179,772
Shareholder reports and postage expenses 58,925
Legal fees 17,205
Custodian and accounting fees (Note 3) 14,951
Registration expenses 9,696
Directors' fees and expenses 2,258
Audit fees 1,868
Miscellaneous 2,752
-----------
Total expenses 986,533
-----------
Net investment income 2,144,142
-----------
Realized and unrealized gain on investments
Net realized gain on investments (Note 2) 4,386,819
Change in unrealized appreciation on investments 1,605,778
-----------
Net gain on investments 5,992,597
-----------
Net increase in net assets resulting from operations $ 8,136,739
===========
</TABLE>
See notes to financial statements.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended 6/30/98 Year Ended
(Unaudited) 12/31/97
----------------- ----------------
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment income $ 2,144,142 $ 4,921,978
Net realized gain on investments 4,386,819 5,451,642
Change in unrealized appreciation
on investments 1,605,778 20,063,982
------------- -------------
Increase in net assets resulting from
operations 8,136,739 30,437,602
------------- -------------
Distributions to Shareholders
From net investment income (1,969,585) (5,168,432)
From net realized gain on
investments (1,703,728) (4,139,573)
------------- -------------
Total distributions to shareholders (3,673,313) (9,308,005)
------------- -------------
Capital Share Transactions (Note 5)
Proceeds from sale of shares 5,915,176 12,123,469
Reinvested distributions 3,470,093 8,532,056
Shares redeemed (14,793,995) (29,147,694)
------------- -------------
Net change in net assets resulting
from capital share transactions (5,408,726) (8,492,169)
------------- -------------
Total increase in net assets (945,300) 12,637,428
Net Assets
Beginning of period 157,053,386 144,415,958
------------- -------------
End of period (including
accumulated undistributed net
investment income of $174,557
and $0, respectively) $ 156,108,086 $ 157,053,386
============= =============
</TABLE>
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Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended 6/30/98
(Unaudited)
-----------------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 29.03
--------
Income from investment operations
Net investment income 0.41
Net realized and unrealized
gain (loss) on investments 1.12
--------
Total from investment operations 1.53
--------
Less distributions from:
Net investment income (0.38)
Net realized capital gains (0.33)
----------
Total distributions (0.71)
----------
Net asset value, end of period $ 29.85
==========
Total Return* 5.24%
Ratios / Supplemental Data
Net assets, end of period (in millions) $ 156.11
Ratio of expenses to average net assets 1.25%(a)
Ratio of expenses to average net assets before expense reductions 1.25%(a)
Ratio of net investment income to average net assets 2.72%(a)
Portfolio turnover rate 8.06%
Average commission rate on portfolio transactions $ 0.0663
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 25.07 $ 24.72 $ 19.50 $ 23.54
--------- --------- -------- ---------
Income from investment operations
Net investment income 0.92 0.98 0.96 0.96
Net realized and unrealized
gain (loss) on investments 4.79 0.33 5.22 (4.04)
--------- --------- -------- ---------
Total from investment operations 5.71 1.31 6.18 (3.08)
--------- --------- -------- ---------
Less distributions from:
Net investment income (0.96) (0.96) (0.96) (0.96)
Net realized capital gains (0.79) -- -- --
---------- ---------- --------- ---------
Total distributions (1.75) (0.96) (0.96) (0.96)
---------- ---------- --------- ---------
Net asset value, end of period $ 29.03 $ 25.07 $ 24.72 $ 19.50
========== ========== ========= =========
Total Return* 23.31% 5.46% 32.30% (13.10%)
Ratios / Supplemental Data
Net assets, end of period (in millions) $ 157.05 $ 144.42 $ 162.83 $ 125.01
Ratio of expenses to average net assets 1.21 % 1.27% 1.21% 1.21%
Ratio of expenses to average net assets before expense reductions 1.30 % 1.36% 1.34% 1.33%
Ratio of net investment income to average net assets 3.46 % 3.90% 4.40% 4.66%
Portfolio turnover rate 26.47 % 24.05% 27.77% 28.85%
Average commission rate on portfolio transactions $ 0.0689 $ 0.0680
<CAPTION>
Year Ended
December 31,
-------------
1993
------------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 21.95
--------
Income from investment operations
Net investment income 0.91
Net realized and unrealized
gain (loss) on investments 2.00
--------
Total from investment operations 2.91
--------
Less distributions from:
Net investment income (0.92)
Net realized capital gains (0.40)
---------
Total distributions (1.32)
---------
Net asset value, end of period $ 23.54
=========
Total Return* 13.26%
Ratios / Supplemental Data
Net assets, end of period (in millions) $ 133.53
Ratio of expenses to average net assets 1.21%
Ratio of expenses to average net assets before expense reductions 1.41%
Ratio of net investment income to average net assets 4.19%
Portfolio turnover rate 21.20%
Average commission rate on portfolio transactions
</TABLE>
(a) Annualized.
*Total return does not include sales commissions and is not annualized.
See notes to financial statements.
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<PAGE>
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America's Utility Fund, Inc.
Notes to Financial Statements
June 30, 1998 (Unaudited)
Note 1: Organization
America's Utility Fund, Inc. (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The Fund was organized as a Maryland corporation on January 28, 1992. On
February 14, 1992 (initial investment date), the Fund sold 500,000 shares of
common stock to Dominion Resources, Inc., for $10,000,000. The Fund commenced
sales to the public on May 5, 1992.
The Fund's investment objective is to seek current income and moderate capital
growth by investing primarily in securities issued by utility companies. The
Fund's investments in utility companies may include equity securities, (common
and preferred stocks) and debt securities.
Note 2: Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its 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 Fund.
(a) Security Valuation - Investments in securities traded on a national
securities exchange 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 mean between the bid and asked prices. If a mean cannot be
determined, then the securities are valued at the best available current bid
price. 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 approved by the Board of Directors.
(b) Repurchase Agreements - It is the policy of the Fund to require that
repurchase agreement investments be fully collateralized at all times.
Procedures have been established by the Fund to monitor, on a daily basis, the
market value of each repurchase agreement's underlying securities to ensure the
existence of a proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Fund's advisor to be creditworthy pursuant to guidelines established by the
Fund's Board of Directors. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly, the
Fund could receive less than the repurchase price on the sale of collateral
securities.
(c) Federal Income Taxes - No provision for federal income taxes has been made
since it is the Fund'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.
(d) Distributions - Distributions from net investment income are declared and
paid quarterly. Distributions of capital gains, if any, are made annually.
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 of
income and gains on various investment securities held by the Fund, and other
timing differences and differing characterization of distributions made by the
Fund as a whole. As of December 31, 1997, the Fund reclassified $75,797 of
accumulated net realized gains to undistributed accumulated net investment
income primarily to reflect the treatment of short-term capital gains as
ordinary income for federal income tax purposes. This reclassification has no
impact on net investment income, realized gain/loss and net asset value of the
Fund.
(e) Dividends - Dividends to shareholders are recorded on the ex-dividend date.
Dividends from net investment income are declared and paid quarterly.
Distributions of capital gains, if any, are made annually.
(f) Security Transactions - The Fund records security transactions on the trade
date. Gains and losses on securities sold are determined on the first-in,
first-out (FIFO) method. Dividends to shareholders are recorded on the
ex-dividend date. Discounts and premiums on securities purchased are amortized
over the life of the respective securities.
(g) Investment Income - Dividend income is recognized on the ex-dividend date.
Interest income is recognized daily on an accrual basis and includes
amortization of premiums and discounts.
(h) Portfolio Securities Loaned - The Fund is authorized by the Board of
Directors to participate in securities lending transactions.
The Fund may receive fees for participating in lending securities transactions.
During the period that a security is out on loan, the Fund continues to receive
interest or dividends on the securities loaned. The Fund 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 Fund records an
asset and obligation for the market value of that collateral. Cash received as
collateral may be reinvested, in which case that security is recorded as an
asset of the Fund. Variations in the market value of the securities loaned
occurring during the term of the loan are reflected in the value of the Fund.
At June 30, 1998, the Fund had loaned securities to brokers which were
collateralized by cash. Income from securities lending activities amounted to
$21,649 for the six months ended June 30, 1998. The risks to the Fund from
securities lending are that the borrower may not provide additional collateral
when required or return the securities when due. At June 30, 1998, the market
value of the securities on loan and the related cash collateral were
$25,773,934, and $26,682,723, respectively.
- --------------------------------------------------------------------------------
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<PAGE>
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[EAGLE LOGO]
Notes to Financial Statements (continued)
Note 3: Investment Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were $12,425,777 $20,634,147, respectively. Net
unrealized appreciation at June 30, 1998, based on the cost of securities for
federal income tax purposes of $119,998,048 is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $36,617,438
Gross unrealized depreciation (876,795)
-----------
Net unrealized appreciation $35,740,643
===========
</TABLE>
Note 4: Administrative Services Fees and Other Transactions With Affiliates
Mentor Investment Advisors, LLC ("Mentor Advisors") serves as investment manager
to the Fund under an Investment Advisory Agreement. Pursuant to this Agreement,
Mentor Advisors receives for its services an annual investment management fee
expressed as a percentage of the average daily net assets of the Fund as
follows: 0.75% of the first $5 million of average daily net assets, 0.50% of the
next $5 million, 0.25% of the next $90 million, 0.20% of the next $100 million,
0.15% of the next $100 million and 0.10% of the average daily net assets in
excess of $300 million. Mentor Advisors is a wholly owned subsidiary of Mentor
Investment Group, LLC, ("Mentor") which is in turn a partially owned subsidiary
of Wheat First Union. EVEREN Capital Corporation owns 20% of the outstanding
interest in Mentor.
Mentor provides administrative personnel and services to the Fund under an
Administrative Services Agreement. Pursuant to the Agreement, the Fund pays
Mentor a fee at the annual rate of 0.65% of the Fund's average daily net assets,
less the amount of any management fees paid to Mentor Advisors pursuant to the
Investment Advisory Agreement.
The Fund entered into a Shareholder Services Agreement with Mentor, pursuant to
which Mentor, itself, through other financial institutions, provided shareholder
support services to the Fund and its shareholders. The Fund paid fees to Mentor
under that Agreement at an annual rate of 0.25% of the Fund's average daily net
assets.
Note 5: Capital Share Transactions
As of June 30, 1998 there were 500,000,000 shares of $0.0001 par value capital
stock authorized. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Six Months Year Ended
Ended 6/30/98 12/31/97
--------------- ---------------
<S> <C> <C>
Shares sold 199,361 468,044
Shares issued upon reinvestment
of dividends 114,192 310,707
Shares redeemed (493,350) (1,129,220)
--------- ----------
(179,797) (350,469)
========= ==========
</TABLE>
Year 2000
The Fund receives services from a number of providers which depend on the
reliable 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 effectively 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 the Fund's other major
service providers. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the Fund from this problem.
