Mentor Money Market Portfolio
Mentor U.S. Government Money Market Portfolio
---------------
Annual Report
---------------
September 30, 1998
[MENTOR LOGO]
<PAGE>
MENTOR MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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 U.S.
Government Money Market Portfolio and the Mentor Money Market Portfolio. This
Annual Report reaffirms our commitment to our shareholders and details the
financial performance of these investments for the period ended September 30,
1998.
Founded in 1970, Mentor Investment Group is an investment advisory firm with
more than $13 billion under management. We pride ourselves on a strong heritage
of providing quality service and a variety of investment choices that help meet
our shareholders' financial objectives by offering mutual funds and
separately-invested portfolios.
In the 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 six different management styles, portfolio
diversification is simplified. By offering multiple styles, Mentor gives
investors the tools for long-term investment success through diversification
and accommodation of changing investment needs.
SERVICE -- To help serve our shareholders, Mentor has a 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 LOGO]
1
<PAGE>
MENTOR MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MANAGERS' COMMENTARY: THE CASH MANAGEMENT TEAM
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The year ended September 30, 1998 witnessed remarkable economic and financial
stability in the United States. The economy remained in a growth pattern that
was just strong enough to keep us moving ahead, yet not so strong as to raise
the risk of inflation. Consequently, despite record levels of employment and
capacity utilization, the Federal Reserve maintained interest rates at levels
which have persisted since February, 1997.
But around the world, seeds of future turmoil were being sown and as we enter
the new fiscal year, those seeds seem ready to bear a bitter fruit. It began in
Hong Kong in December, when currency problems gave rise to an economic crisis
which quickly spread throughout the region. Amid tumbling stock markets and
near-defaults on debt, Asian economies appeared to be slowing. This raised
immediate concerns that weakened demand for U.S. products in those areas would
harm U.S. production and slow U.S. growth.
The initial impact was slight, most notably a decline in interest rates as it
became increasingly unlikely that the Fed would have to raise rates. Indeed,
the Fed itself stated that policy would remain "on hold" until the situation
clarified. But gradually the impact became more noticeable, and by spring the
trade deficit had widened and companies involved in Asian trade reported
softening demand. In effect, the Asian crisis did the Fed's job for them,
taking steam out of the economy at a time when an increase in rates might
otherwise have been necessary.
By mid-summer, the Asian situation continued to worsen and concerns were
mounting for other world economies such as Russia, Europe and South America.
Concrete evidence began to surface of a slowing of the U.S. growth rate. Russia
defaulted on its international debt amid growing economic and political
instability. Most major stock markets, including the U.S., suffered severe
losses and currencies vacillated. Interest rates in the U.S. declined as our
fixed-income markets were inundated by investment assets seeking safety. In
late September a major hedge fund reported financial difficulties amid rumors
that other financial institutions were about to suffer the same fate. Finally,
on September 29th, the Federal Reserve acted to ease the developing crisis by
lowering the Fed Funds rate by 0.25%.
As of this writing, the world appears to be in a state of financial turmoil and
no one seems sure of what the ultimate impact will be. There is growing
speculation that the consequences to the U.S. could be significant, perhaps
even leading to a credit crunch and recession. It is widely anticipated that
the Fed will ease further in order to stabilize the situation.
It should be noted that we eliminated our exposure to Japanese issuers over two
years ago, and have restricted our use of other foreign obligations to a select
list of issuers. These are the highest quality countries such as Canada, Great
Britain, Germany and Switzerland. Also, as early as February of this year, we
recognized that the events then developing around the world were likely to
prevent the Federal Reserve from raising rates and could eventually require the
Fed to lower rates. Accordingly, we extended our portfolios to an average
maturity of 55-60 days, the outer end of our normal range of 30-60 days, and
maintained that position through the balance of the year. Given the strong
possibility that rates may go still lower, we intend to continue with that
strategy into the coming year. More than ever, in this time of turmoil, we
pledge continued emphasis on safety and liquidity through high credit standards
and conservative investment policies.
November 1998
2
<PAGE>
MENTOR MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
BANKERS ACCEPTANCES - 5.56%
Bank of Montreal, 5.51%,
12/08/98 $1,335,740 $ 1,321,838
NationsBank Corporation,
5.45%, 7/19/99 1,000,000 955,946
-----------
TOTAL BANKERS ACCEPTANCES 2,277,784
-----------
BANK NOTES - 21.97%
Abbey National North
America, 5.88%, 12/22/98 1,000,000 1,000,663
Banc One Milwaukee
National Association,
5.55%, 1/29/99 1,000,000 999,842
Bank of NewYork, 5.66%,
6/17/99 1,000,000 999,503
FCC National Bank, 5.74%,
5/07/99 1,000,000 999,657
First Tennessee Bank National
Association, 5.65% -
5.70%, 4/15/99 - 7/09/99 2,000,000 1,999,373
Harris Trust, 5.55%,
10/13/98 2,000,000 2,000,000
Key Bank National
Association, 5.51%,
1/14/99 (b) 1,000,000 999,881
-----------
TOTAL BANK NOTES 8,998,919
-----------
CERTIFICATES OF DEPOSIT - 9.76%
Bankers Trust Delaware,
5.69%, 7/27/99 1,000,000 999,529
Canadian Imperial Bank,
5.55%, 11/02/98 2,000,000 2,000,071
Rabobank Nederland NV,
5.70%, 4/20/99 1,000,000 1,000,688
-----------
TOTAL CERTIFICATES OF DEPOSIT 4,000,288
-----------
COMMERCIAL PAPER - 36.45%
General Electric Company,
5.51%, 10/22/98 2,000,000 1,993,572
Greenwich Funding
Corporation, 5.48%,
11/09/98 (a)(c) 2,000,000 1,988,127
Mont Blanc Capital
Corporation, 5.54%,
10/22/98 (a) 2,000,000 1,993,537
Monte Rosa Capital
Corporation, 5.53%,
10/23/98 (a) 2,000,000 1,993,241
Rincon Securities Inc., 5.52%,
11/23/98 (a) 1,000,000 991,873
Special Purpose Accounts
Receivable Cooperative
Corporation, 5.56%,
10/23/98 2,000,000 1,993,204
Vehicle Services of America,
Limited, 5.52%, 11/04/98 2,000,000 1,989,573
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MARKET VALUE
<S> <C> <C>
COMMERCIAL PAPER (CONTINUED)%
Windmill Funding
Corporation, 5.55%,
10/29/98 (a) $2,000,000 $ 1,991,367
-----------
TOTAL COMMERCIAL PAPER 14,934,494
-----------
FOOD & KINDRED PRODUCTS - 2.44%
Mississippi Business Financial
Corporation (Taxable
Variable Rate Demand
Note), 5.55%, 1/01/23 (b) 1,000,000 1,000,000
-----------
HEALTH CARE - 2.44%
Catholic Health Initiatives
(Taxable Variable Rate
Demand Note), 5.30%,
12/01/27 (b) 1,000,000 1,000,000
-----------
REAL ESTATE - 2.93%
C.C.M. Properties, 5.70%,
2/01/11 (b) 1,200,000 1,200,000
-----------
U.S. GOVERNMENT AGENCIES - 4.64%
Federal National Mortgage
Association, 4.93%,
1/21/99 (b) 1,000,000 999,877
Student Loan Marketing
Association, 4.73%,
11/10/98 (b) 900,000 899,666
-----------
TOTAL U.S. GOVERNMENT
AGENCIES 1,899,543
-----------
REPURCHASE AGREEMENTS - 13.23%
Goldman Sachs & Company
Dated 9/30/98, 5.61%, due
10/01/98, collateralized by
$5,437,311 (original face
value) Federal Home Loan
Mortgage Corporation,
6.50% - 7.75%, 10/01/01 -
05/01/13, market value
$5,528,343
(cost $5,419,944) 5,419,944 5,419,944
-----------
TOTAL INVESTMENTS
(COST $40,730,972)-99.42%
40,730,972
OTHER ASSETS LESS LIABILITIES - 0.58%
239,317
-----------
NET ASSETS - 100.00% $40,970,289
===========
</TABLE>
Interest rates disclosed represent annualized yield to date of maturity, except
for floating rate securities described in (b).
(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 that have been established by the Board of
Trustees unless otherwise noted.
(b) Floating Rate Securities -- The rates shown are the effective rates at
September 30, 1998.
(c) The security is deemed illiquid because it can not be resold within seven
business days from September 30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
MENTOR U.S. GOVERNMENT MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
<S> <C> <C>
U.S. GOVERNMENT AGENCIES - 52.13%
Federal Farm Credit Bank,
5.70%, 11/03/98 $ 1,000,000 $ 1,000,172
Federal Home Loan Bank,
5.01%, 10/20/98 (a) 3,000,000 2,999,955
Federal Home Loan Bank,
5.40% - 5.63%, 1/15/99 -
7/15/99 9,560,000 9,557,718
Federal Home Loan Mortgage
Corporation, 5.30% -
5.45%, 10/06/98 - 12/21/98 15,000,000 14,875,620
Federal Home Loan Mortgage
Corporation, 5.33% -
5.47%, 1/26/99 -
8/17/99 (a) 6,000,000 5,997,524
Federal National Mortgage
Association, 5.20% -
5.63%, 2/12/99 - 5/6/99 10,000,000 9,969,153
Federal National Mortgage
Association, 4.93% -
5.38%, 11/09/98 -
5/28/99 (a) 11,000,000 10,997,535
------------
TOTAL U.S. GOVERNMENT
AGENCIES 55,397,677
------------
REPURCHASE AGREEMENTS - 47.70%
Dean Witter Dated 9/30/98,
5.62%, due 10/1/98,
collateralized by various
U.S. Government securities
with total original face value
of $25,889,000, 5.49% -
7.55%, 10/06/98 - 4/15/27,
market value $25,500,152 25,000,000 25,000,000
Goldman Sachs & Company
Dated 9/30/98, 5.61%, due
10/01/98, collateralized by
$16,131,941 (original face
value) Federal Home Loan
Mortgage Corporation,
7.50%, 10/01/27, market
value $12,946,065 12,692,220 12,692,220
J.P. Morgan Securities, Inc. (b)
Dated 7/16/98, 5.56%, due
10/19/98, collateralized by
$25,970,039 (original face
value) Government
National Mortgage
Association, 8.50% -
9.00%., 6/15/16 - 10/15/27,
market value $8,217,789 8,000,000 8,000,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
<S> <C> <C>
REPURCHASE AGREEMENTS (CONTINUED)
Merrill Lynch Dated 7/13/98,
5.54%, due 10/13/98,
collateralized by
$20,347,264 (original face
value) Federal National
Mortgage Association,
10/01/24 - 12/01/25, market
value $5,100,858 $ 5,000,000 $ 5,000,000
------------
TOTAL REPURCHASE AGREEMENTS 50,692,220
------------
TOTAL INVESTMENTS
(COST $106,089,897)-99.83%
$106,089,897
OTHER ASSETS LESS LIABILITIES - 0.17%
183,141
------------
NET ASSETS - 100.00% $106,273,038
============
</TABLE>
(a) Floating Rate Securities -- The rates shown are the effective rates at
September 30, 1998.
(b) The security is deemed illiquid because it can not be resold within seven
business days from September 30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
MENTOR FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MONEY MARKET U.S. GOVERNMENT
PORTFOLIO MONEY MARKET PORTFOLIO
<S> <C> <C>
ASSETS
Investments, at amortized cost (Note 2)
Investment securities $ 35,311,028 $ 55,397,677
Repurchase agreements 5,419,944 50,692,220
------------- --------------
Total investments 40,730,972 106,089,897
Receivables
Dividends and interest 270,031 585,632
Fund shares sold 167,750 54,000
Deferred expenses (Note 2) 16,210 15,375
------------- --------------
TOTAL ASSETS 41,184,963 106,744,904
------------- --------------
LIABILITIES
Dividends payable 194,865 465,840
Accrued expenses and other liabilities 19,809 6,026
------------- --------------
TOTAL LIABILITIES 214,674 471,866
------------- --------------
NET ASSETS $ 40,970,289 $ 106,273,038
============= ==============
SHARES OUTSTANDING 40,970,289 106,273,038
NET ASSET VALUE PER SHARE $ 1.00 $ 1.00
</TABLE>
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET MONEY MARKET
PORTFOLIO (A) PORTFOLIO
<S> <C> <C>
INVESTMENT INCOME
Interest (Note 2) $ 1,816,540 $ 5,164,328
----------- -----------
EXPENSES
Management fee (Note 4) 51,691 202,179
Transfer agent fee 22,291 34,490
Custodian and accounting fees 16,449 35,521
Registration expenses 8,933 18,100
Legal fees 727 1,659
Shareholder reports and postage expenses 652 1,444
Directors' fees and expenses 575 1,327
Audit fees 489 1,008
Organizational expenses - 4,100
Miscellaneous 3,480 3,440
----------- -----------
Total expenses 105,287 303,268
----------- -----------
NET INVESTMENT INCOME $ 1,711,253 $ 4,861,060
=========== ===========
</TABLE>
(a) For the period from November 19, 1997 (commencement of operations) to
September 30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
MENTOR FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY MARKET U.S. GOVERNMENT
PORTFOLIO MONEY MARKET PORTFOLIO
PERIOD ENDED YEAR ENDED PERIOD
9/30/98 (B) 9/30/98 ENDED 9/30/97 (C)
<S> <C> <C> <C>
NET INCREASE IN NET ASSETS
Operations
Net investment income $ 1,711,253 $ 4,861,060 $ 741,466
------------- -------------- ------------
Increase in net assets resulting from operations 1,711,253 4,861,060 741,466
------------- -------------- ------------
Distributions to Shareholders
From net investment income (1,711,253) (4,861,060) (741,466)
------------- -------------- ------------
Total distributions to shareholders (1,711,253) (4,861,060) (741,466)
------------- -------------- ------------
Capital Share Transactions (Note 5)
Proceeds from sale of shares 69,738,706 170,787,913 70,658,240
Reinvested distributions 1,450,841 4,466,073 612,639
Shares redeemed (30,219,258) (130,785,595) (9,466,232)
------------- -------------- ------------
Change in net assets resulting from capital share transactions 40,970,289 44,468,391 61,804,647
------------- -------------- ------------
Increase in net assets 40,970,289 44,468,391 61,804,647
Net Assets
Beginning of period - 61,804,647 -
------------- -------------- ------------
End of period $ 40,970,289 $ 106,273,038 $ 61,804,647
============= ============== ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY MARKET U.S. GOVERNMENT MONEY MARKET
PORTFOLIO PORTFOLIO
PERIOD ENDED YEAR ENDED PERIOD ENDED
9/30/98 (B) 9/30/98 9/30/97 (C)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.05 0.05 0.01
-------- -------- --------
Total from investment operations 0.05 0.05 0.01
-------- -------- --------
Less distributions
From net investment income (0.05) (0.05) (0.01)
--------- --------- ---------
Total distributions (0.05) (0.05) (0.01)
--------- --------- ---------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
========= ========= =========
TOTAL RETURN (D) 4.74% 5.42% 1.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 40,970 $ 106,273 $ 61,805
Ratio of expenses to average net assets 0.33% (a) 0.33% 0.33% (a)
Ratio of net investment income to average net assets 5.35% (a) 5.27% 5.26% (a)
</TABLE>
(a) Annualized.
(b) For the period from November 19, 1997 (commencement of operations) to
September 30, 1998.
(c) For the period from June 27, 1997 (commencement of operations) to September
30, 1997.
(d) Not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
NOTE 1: ORGANIZATION
Mentor Funds is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. Mentor Funds consists of
twelve separate Portfolios (hereinafter each individually referred to as a
"Portfolio" or collectively as the "Portfolios") at September 30, 1998, as
follows:
Mentor Growth Portfolio ("Growth Portfolio")
Mentor Perpetual Global Portfolio ("Global Portfolio")
Mentor Capital Growth Portfolio ("Capital Growth Portfolio")
Mentor Strategy Portfolio ("Strategy Portfolio")
Mentor Income and Growth Portfolio ("Income and Growth Portfolio")
Mentor Balanced Portfolio ("Balanced Portfolio")
Mentor Municipal Income Portfolio ("Municipal Income Portfolio")
Mentor Quality Income Portfolio ("Quality Income Portfolio")
Mentor Short-Duration Income Portfolio ("Short-Duration Income Portfolio")
Mentor High Income Portfolio ("High Income Portfolio")
Mentor U.S. Government Money Market Portfolio ("Government Portfolio")
Mentor Money Market Portfolio ("Money Market Portfolio")
The assets of each Portfolio are segregated and a shareholder's interest is
limited to the Portfolio in which shares are held.
These financial statements include only the Money Market Portfolio and the
Government Portfolio.
The investment objective of the Money Market Portfolio is to seek a high rate
of current income consistent with preservation of capital and maintenance of
liquidity. The Portfolio will invest in high-quality short-term instruments
including U.S. Government securities, banker's acceptances, prime commercial
paper, fixed-income securities of corporations and other private issuers, and
money market instruments.
The Government Portfolio's investment objective is to seek a high rate of
current income consistent with preservation of capital and maintenance of
liquidity. The Portfolio invests exclusively in U.S. Treasury bills, notes and
bonds, and other obligations issued or guaranteed as to principal or interest
by the U.S. Government, its agencies, or instrumentalities, and in repurchase
agreements with respect to such obligations.
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
Portfolio.
(a) Valuation of Securities -- Securities held by the Portfolios 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 Portfolios' $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
7
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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 Fund 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 Trust to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book entry system all securities held as collateral in support of
repurchase agreement investments.
Additionally, procedures have been established by the Trust 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 Trust will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Trust'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 Trust could
receive less than the repurchase price on the sale of collateral securities.
(c) Security Transactions and Interest Income -- Security transactions for the
Portfolios 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 each Portfolios' 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 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.
(f) Distributions -- Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
NOTE 3: DIVIDENDS
Each Portfolio declares a daily dividend, equal to its net investment income
for that day. Dividends for the immediately preceding month will be paid on the
fifteenth day of each calendar month. Distributions from net realized capital
gains, if any, will be distributed annually.
NOTE 4: INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENTS
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment
advisor, receives for its services an annual investment advisory fee not to
exceed the following percentages of the average daily net assets of the
Portfolios: 0.22% of the first $500 million of the Portfolios' 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, 1998, Mentor Advisors earned advisory fees of $51,691 and
$202,179 from Money Market Portfolio and Government Portfolio, respectively.
8
<PAGE>
MENTOR FUNDS
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Mentor Advisors is a wholly-owned subsidiary of Mentor Investment Group, LLC
("Mentor") which is in turn a subsidiary of Wheat First Union ("Wheat"). EVEREN
Capital Corporation owns 20% of the outstanding interest in Mentor.
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 were as follows:
<TABLE>
<CAPTION>
MENTOR MONEY
MARKET PORTFOLIO
PERIOD ENDED
9/30/98 (a)
<S> <C>
Shares sold 69,738,706
Shares issued upon reinvestment of distributions 1,450,841
Shares redeemed (30,219,258)
-----------
Change in net assets from capital share
transactions 40,970,289
===========
</TABLE>
<TABLE>
<CAPTION>
MENTOR U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
YEAR ENDED PERIOD ENDED
9/30/98 9/30/97 (b)
<S> <C> <C>
Shares sold 170,787,913 70,658,240
Shares issued upon reinvestment
of distributions 4,466,073 612,639
Shares redeemed (130,785,595) (9,466,232)
------------ ----------
Change in net assets from capital
share transactions 44,468,391 61,804,647
============ ==========
</TABLE>
(a) For the period from November 19, 1997 (commencement of operations) to
September 30, 1998.
(b) For the period from June 27, 1997 (commencement of operations) to September
30, 1997.
YEAR 2000 (UNAUDITED)
The Portfolios receive services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer software to distinguish the year 2000 from
the year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolios from this problem.
9
<PAGE>
MENTOR FUNDS
INDEPENDENT AUDITORS' REPORT
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THE TRUSTEES AND SHAREHOLDERS
MENTOR MONEY MARKET PORTFOLIO
MENTOR U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, as of September 30, 1998 of Money
Market Portfolio and U.S. Government Money Market Portfolio, portfolios of
Mentor Funds, and the related statement of operations, statement of changes in
net assets and financial highlights for Money Market Portfolio for the period
from November 19, 1997 (commencement of operations) to September 30, 1998 and
for U.S. Government Money Market Portfolio, the related statement of operations
for the year then ended, the statements of changes in net assets and financial
highlights for the year then ended and for the period from June 27, 1997
(commencement of operations) to September 30, 1998. These financial statements
and financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1998 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Money
Market Portfolio and U.S. Government Money Market Portfolio, portfolios of
Mentor Funds, as of September 30, 1998, the results of their operations, the
changes in their net assets and financial highlights for each of the years or
periods indicated in the first paragraph above, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
November 20, 1998
10
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MENTOR FUNDS
SHAREHOLDER INFORMATION
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TRUSTEES
DANIEL J. LUDEMAN, TRUSTEE & CHAIRMAN
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
ARCH T. ALLEN III, TRUSTEE
Attorney at Law
Allen & Moore, LLP
JERRY R. BARRENTINE, TRUSTEE
President
J.R. Barrentine & Associates
ARNOLD H. DREYFUSS, TRUSTEE
Chairman
Eskimo Pie Corporation
WESTON E. EDWARDS, TRUSTEE
President
Weston Edwards & Associates
THOMAS F. KELLER, TRUSTEE
Former Dean, Fuqua School of Business
Duke University
LOUIS W. MOELCHERT, JR., TRUSTEE
Vice President for Business & Finance
University of Richmond
J. GARNETT NELSON, TRUSTEE
Consultant
Mid-Atlantic Holdings, LLC
TROY A. PEERY, JR., TRUSTEE
President
Heilig-Meyers Company
PETER J. QUINN, JR., TRUSTEE
Managing Director
Mentor Investment Group, LLC
OFFICERS
PAUL F. COSTELLO, PRESIDENT
Managing Director
Mentor Investment Group, LLC
TERRY L. PERKINS, TREASURER
Senior Vice President
Mentor Investment Group, LLC
GEOFFREY B. SALE, SECRETARY
Associate Vice President
Mentor Investment Group, LLC
MICHAEL A. WADE, ASSISTANT TREASURER
Vice President
Mentor Investment Group, LLC
This report is authorized for distribution to prospective investors only when
preceded or accompanied by a Mentor Funds prospectus, which contains complete
information about fees, sales charges and expenses. Please read it carefully
before you invest or send money.
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1998 MENTOR DISTRIBUTORS, LLC
