MENTOR INSTITUTIONAL
U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
--------------------------
ANNUAL REPORT
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September 30, 1997
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MENTOR INSTITUTIONAL U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
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TO OUR SHAREHOLDERS:
It is our privilege to send you the annual report for the Mentor Institutional
U.S. Government Money Market Portfolio ("the Portfolio") for the period ended
September 30, 1997.
Mentor Investment Group* provides diversified investment services to a broad
range of investors including corporations, foundations, endowments,
municipalities, public funds, and individual investors. We offer a wide variety
of investment styles to investors through both mutual funds and
separately-invested portfolios.
The Portfolio, which commenced operations on June 27, is designed to help
institutional investors and high net worth individuals manage their daily cash
needs. The objective of the Portfolio is to seek as high a rate of current
income as Mentor Investment Advisors believes to be consistent with the
preservation of capital and maintenance of liquidity.** Investments include U.S.
government securities and repurchase agreements collateralized by U.S.
government securities.
In the commentary that follows members of the cash management team present their
perspective on the markets and their investment strategy for the Portfolio.
Please review the information carefully. Should you have any questions, please
contact your consultant, or call us directly at (800) 382-0016. We welcome your
communications. On behalf of all of us at Mentor Investment Group, we thank you
for your investment in the Portfolio.
Sincerely
/s/Daniel J. Ludeman /s/Paul F. Costello
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Daniel J. Ludeman Paul F. Costello
CHAIRMAN PRESIDENT
*MENTOR INVESTMENT ADVISORS, LLC/DBA MENTOR INVESTMENT GROUP, LLC.
**WHILE THE MANAGERS SEEK TO INVEST THE PORTFOLIO IN ACCORDANCE WITH THESE HIGH
STANDARDS, THERE IS NO GUARANTEE OF INVESTMENT SUCCESS. AN INVESTMENT IN THE
PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE US GOVERNMENT AND THERE CAN
BE NO ASSURANCE THAT IT WILL MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE.
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MENTOR INSTITUTIONAL U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MANAGERS' COMMENTARY: THE CASH MANAGEMENT TEAM
SEPTEMBER 30, 1997
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The period ended September 30, 1997 marked the initial operating period for the
new Mentor Institutional U.S. Government Money Market Portfolio ("the
Portfolio"). Developed for institutional clients, this Portfolio is designed to
provide maximum safety and liquidity combined with reasonable income by
investing only in U.S. government and government agency securities, and
repurchase agreements backed by such securities.
For almost two years now the U.S. economy has been progressing at just about the
speed the Federal Reserve likes to see -- fast enough to maintain something
close to full employment, yet slow enough to avoid the turbulence of inflation.
The Portfolio's initial period of operation proved no exception, with the trend
line of economic data continuing to delineate a path of moderate growth, but
with inflation remaining almost non-existent. New job creation averaged about
200,000 per month (adjusted for the United Parcel Service strike) and retail
sales and industrial production remained good. The Producer Price Index and
Consumer Price Index, however, remained near the lowest levels in years.
Consequently, the Fed's decision at each of its three meetings during the
quarter was to leave rates unchanged. This allowed the new fund to be born
during a period of relative stability.
Through the period we have managed our funds to a target average maturity in the
40-50 day range. Although the recent flat treasury yield curve has proved
challenging, we expect to continue to maintain our average maturities in this
range. If evidence of inflation surfaces and the threat of Fed intervention
looms closer on the horizon than it appears at present, a change in our strategy
may be warranted.
Our investment process focuses heavily on looking for relative value
opportunities within a context of safety of principal and high liquidity. The
new Portfolio should be no exception, and these high standards should serve us
well in the potentially turbulent times ahead.
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MENTOR INSTITUTIONAL U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Value
<S> <C> <C> <C>
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U.S. GOVERNMENT AGENCIES 59.73%
Federal Home Loan Bank
5.43%-5.70%, 11/14/97-9/10/98 $ 7,000,000 $ 6,964,339
Federal Home Loan Mortgage Corporation
5.47%-6.05%, 10/01/97-10/31/97 25,000,000 24,977,208
Federal National Mortgage Association
5.43%-5.63%, 12/23/97-8/14/98 5,000,000 4,973,029
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TOTAL U.S. GOVERNMENT AGENCIES 36,914,576
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REPURCHASE AGREEMENTS 40.38%
First Boston
Dated 9/30/97, 6.30%, due 10/01/97, collateralized by $9,199,396
Federal Home Loan Mortgage Corporation, 7.00%, 8/01/27, market
value $9,179,270 9,000,000 9,000,000
First Boston (a)
Dated 9/22/97, 5.53%, due 12/22/97, collateralized by $5,103,898
Federal Home Loan Mortgage Corporation, 7.00%, 8/01/27, market
value $5,099,112 5,000,000 5,000,000
Goldman, Sachs & Company
Dated 9/30/97, 6.30%, due 10/01/97, collateralized by
$13,981,827 (original face value) Federal Home Loan Mortgage
Corporation, 6.50%, 1/01/24, market value $11,179,755 10,960,544 10,960,544
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TOTAL REPURCHASE AGREEMENTS 24,960,544
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TOTAL INVESTMENTS (COST $61,875,120) 100.11% 61,875,120
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OTHER ASSETS LESS LIABILITIES (0.11%) (70,473)
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NET ASSETS 100.00% $61,804,647
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</TABLE>
(a) The repurchase agreement is deemed illiquid because it can not be resold
within seven business days from September 30, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
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MENTOR INSTITUTIONAL U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
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ASSETS
Investments, at amortized cost (Note 2)
Investment securities $36,914,576
Repurchase agreements 24,960,544
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Total Investments 61,875,120
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Dividends and interest receivable 48,613
Deferred expenses (Note 2) 19,475
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Total assets 61,943,208
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LIABILITIES
Dividends payable 128,806
Accrued expenses and other liabilities 9,755
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Total liabilities 138,561
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NET ASSETS $61,804,647
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Shares Outstanding 61,804,647
Net Asset Value per Share $ 1.00
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
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MENTOR INSTITUTIONAL U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
STATEMENT OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 1997*
<TABLE>
<S> <C>
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INVESTMENT INCOME
Interest $787,828
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Total investment income (Note 2) 787,828
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EXPENSES
Management fee (Note 4) 29,982
Shareholder reports and postage expenses 5,985
Custodian and accounting fees 3,741
Registration expenses 2,992
Transfer agent fee 2,347
Organizational expenses 1,025
Miscellaneous 290
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Total expenses 46,362
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Net investment income $741,466
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</TABLE>
* For the period from June 27, 1997 (commencement of operations) to September
30, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
5
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MENTOR INSTITUTIONAL U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED SEPTEMBER 30, 1997*
<TABLE>
<S> <C>
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NET INCREASE IN NET ASSETS
OPERATIONS
Net investment income $ 741,466
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Increase in net assets resulting from operations 741,466
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DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (741,466)
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Net decrease from distributions (741,466)
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CAPITAL SHARE TRANSACTIONS (NOTE 5)
Net change in net assets resulting from capital
share transactions 61,804,647
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Increase in net assets 61,804,647
NET ASSETS
Beginning of period -
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End of period $61,804,647
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</TABLE>
* For the period from June 27, 1997 (commencement of operations) to September
30, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
6
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MENTOR INSTITUTIONAL U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
PERIOD ENDED SEPTEMBER 30, 1997*
<TABLE>
<S> <C>
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PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.01
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Total from investment operations 0.01
LESS DISTRIBUTIONS
Distributions from net investment income (0.01)
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Total distributions (0.01)
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NET ASSET VALUE, END OF PERIOD 1.00
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Total Return 1.39%(b)
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Ratios/Supplemental Data
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Net assets, end of period (in thousands) $61,805
Ratio of expenses to average net assets 0.33%(a)
Ratio of net investment income to average net assets 5.26%(a)
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</TABLE>
(a) Annualized.
(b) Not annualized.
* For the period from June 27, 1997 (commencement of operations) to September
30, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
7
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MENTOR INSTITUTIONAL U.S. GOVERNMENT MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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 ten
separate Portfolios (hereinafter each individually referred to as a "Portfolio"
or collectively as the "Portfolios") at September 30, 1997, as follows:
Mentor Growth Portfolio
("Growth Portfolio")
Mentor Perpetual Global Portfolio
("Global Portfolio")
Mentor Capital Growth Portfolio
("Capital Growth Portfolio")
Mentor Strategy Portfolio
("Strategy Portfolio")
Mentor Income and Growth Portfolio
("Income and Growth Portfolio")
Mentor Municipal Income Portfolio
("Municipal Income Portfolio")
Mentor Quality Income Portfolio
("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio
("Short-Duration Income Portfolio")
Mentor Balanced Portfolio
("Balanced Portfolio")
Mentor Institutional U.S. Government Money Market Portfolio
("Government Portfolio")
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 include only the Government Portfolio. The objective
of the Portfolio is to continue to seek high current income and preservation of
capital.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Portfolio 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
Portfolio.
a. Valuation of Securities
Securities held by the Portfolio are stated at amortized cost, which
approximates market value as permitted by Rule 2a-7 of the Investment Company
Act of 1940. In the event that a deviation of 1/2 of 1% or more exists between
the Portfolio's $1.00 per share net asset value calculated at amortized cost,
and the net asset value calculated by reference to market-based values, or if
there is any other deviation that the Board of Trustees believes would result in
a material dilution to shareholders or purchasers, the Board of Trustees will
promptly consider what action should be initiated. Net asset value per share is
determined each business day for the Portfolio
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MENTOR INSTITUTIONAL U.S. GOVERNMENT MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
and is calculated by dividing net asset value by the number of shares
outstanding at the end of each business day.
b. Repurchase Agreements
It is the policy of the Portfolio to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book entry system,
or to have segregated within the custodian bank's possession all securities held
as collateral in support of repurchase agreement investments. Additionally,
procedures have been established by the Portfolio to monitor, on a daily basis,
the market value of each repurchase agreement's underlying securities to ensure
the existence of a proper level of collateral.
The Portfolio will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Portfolio's adviser to be creditworthy pursuant to guidelines established by the
Trustees. Risks may arise from the potential inability of counterparties to
honor the terms of the repurchase agreement. Accordingly, the Portfolio could
receive less than the repurchase price on the sale of collateral securities.
c. Security Transactions and Interest Income
Security transactions for the Portfolio are accounted for on a trade date basis.
Interest income is recorded on the accrual basis and includes amortization of
premium and discount on investments.
d. Federal Taxes
No provision for federal income taxes has been made since it is the Portfolio's
intent 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.
e. Deferred Expenses
Costs incurred by the Portfolio in connection with its initial share
registration and organization costs were deferred by the Portfolio and are being
amortized on a straight-line basis over a five-year period.
f. 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 deferral of wash sales.
NOTE 3: DIVIDENDS
Dividends will be declared daily and paid monthly by the Portfolio. Capital
gains realized
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MENTOR INSTITUTIONAL U.S. GOVERNMENT MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
by the Portfolio, if any, will be distributed annually.
NOTE 4: INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENTS
The Portfolio has entered into an Investment Management Agreement with Mentor
Investment Advisors, LLC ("Mentor Advisors"). Mentor Advisors is a wholly-owned
subsidiary of Mentor Investment Group, LLC ("Mentor") which is in turn a
partially owned subsidiary of Wheat First Butcher Singer, Inc., ("Wheat") and
EVEREN Capital Corporation.
Mentor Advisors receives for its services an annual investment advisory fee not
to exceed the following percentages of the average daily net assets of the
Portfolio: 0.22% of the first $500 million of the Portfolio's average net
assets; 0.20% of the next $500 million; 0.175% of the next $1 billion; 0.16% of
the next $1 billion; and 0.15% of any amounts over $3 billion. For the period
ended September 30, 1997, Mentor Advisors earned advisory fees of $29,982.
ACQUISITION OF ADVISOR
On August 20, 1997, Wheat entered into an Agreement and Plan of Merger
("Merger") with First Union Corporation ("First Union"), pursuant to which Wheat
would be merged into First Union. First Union is a bank holding company that as
of September 30, 1997, had assets of $144 billion. Upon consummation of the
Merger (expected to occur as early as December of this year), First Union will
become the owner of a majority of the beneficial interest in Mentor Advisors and
Mentor Perpetual Advisors, LLC ("Mentor Perpetual").
At a meeting held on October 14, 1997, the Trustees of Mentor Funds approved new
Investment Advisory, Sub-Advisory and Administration Agreements which will
replace the existing agreements. Each of the existing agreements will by its
terms terminate upon the consummation of the Merger, since the Merger will
constitute a change in control of Mentor Advisors and Mentor Perpetual for
purposes of the Investment Company Act of 1940, as amended ("1940 Act"). The
shareholders of each Portfolio at a meeting to be held on December 22, 1997,
will vote to approve the new Investment Advisory Agreements with Mentor Advisors
and Mentor Perpetual. Each new agreement is substantially identical to the
existing agreements it replaces, other than its effective and termination dates.
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MENTOR INSTITUTIONAL U.S. GOVERNMENT MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5: CAPITAL SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in capital
shares for the period June 27, 1997 (commencement of operations) to September
30, 1997 were as follows:
<TABLE>
<S> <C>
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Shares sold 70,658,240
Shares issued upon reinvestment
of distributions 612,639
Shares redeemed (9,466,232)
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Change in net assets from capital
share transactions 61,804,647
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</TABLE>
11
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MENTOR INSTITUTIONAL U.S. GOVERNMENT MONEY MARKET PORTFOLIO
INDEPENDENT AUDITORS' REPORT
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THE TRUSTEES AND SHAREHOLDERS
MENTOR INSTITUTIONAL U.S. GOVERNMENT MONEY MARKET PORTFOLIO
We have audited the accompanying statement of assets and liabilities of Mentor
Institutional U.S. Government Money Market Portfolio, a portfolio of Mentor
Funds, including the portfolio of investments, as of September 30, 1997, and the
related statement of operations, statement of changes in net assets and the
financial highlights for the period from June 27, 1997 (commencement of
operations) to September 30, 1997. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of September 30, 1997 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Mentor
Institutional U.S. Government Money Market Portfolio, as of September 30, 1997,
the results of its operations, changes in its net assets and the financial
highlights for the period from June 27, 1997 (commencement of operations) to
September 30, 1997, in conformity with generally accepted accounting principles.
Boston, Massachusetts /s/KPMG Peat Marwick LLP
November 12, 1997
12
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901 EAST BYRD STREET BULK RATE
RICHMOND, VIRGINIA 23219 U.S. POSTAGE
1-800-382-0016 PAID
PERMIT #1193
RICHMOND, VA
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MENTOR INSTITUTIONAL U.S. GOVERNMENT MONEY MARKET PORTFOLIO
SHAREHOLDER INFORMATION
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TRUSTEES
DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
ARNOLD H. DREYFUSS, TRUSTEE
Former Chairman
and Chief Executive Officer
Hamilton Beach/Proctor-Silex, Inc.
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
STANLEY F. PAULEY, JR., TRUSTEE
Chairman and Chief Executive Officer
Carpenter Company
TROY A. PEERY, JR., TRUSTEE
President
Heilig-Meyers Company
PETER J. QUINN, JR., TRUSTEE
Managing Director
Mentor Investment Group, LLC
OFFICERS
PAUL F. COSTELLO, PRESIDENT
Managing Director
Mentor Investment Group, LLC
TERRY L. PERKINS, TREASURER
Senior Vice President
Mentor Investment Group, LLC
JOHN M. IVAN, SECRETARY
Managing Director
and Assistant General Counsel
Wheat First Butcher Singer, Inc.
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 Institutional U.S. Government Money Market
Portfolio Prospectus, which contains complete information about fees, sales
charges and expenses. Please read it carefully before you invest or send money.
